Fourth quarter dividend amounts to $0.14 per share
Year-to-date dividend totals $0.56 per shareTORONTO, Aug. 26 /CNW/ - Corby Distilleries Limited ("Corby" or the
"Company") (TSX:CDL.A, TSX:CDL.B) today reported its dividend and financial
results for the year ended June 30, 2009. The Corby Board of Directors today
also declared a dividend of $0.14 per share payable on September 30, 2009 on
Voting Class A Common Shares and Non-voting Class B Common Shares of the
Company to shareholders of record as at the close of business on September 14,
2009. All financial results are reported in Canadian dollars.
Net earnings for the quarter ended June 30, 2009 increased to $7.4
million or $0.26 per share, compared to $6.0 million or $0.21 per share during
the quarter ended June 30, 2008. The 24% increase in net earnings was mainly
the result of increased commission income (primarily due to the addition of
Absolut vodka), a decrease in advertising and promotional expenditures versus
the same period last year, and the benefit of additional sales at LCBO
locations in Ontario as a result of the threat of a labour disruption.
For the year ended June 30, 2009, operating revenues increased to $169.3
million versus $163.3 million last year. Net earnings and earnings per share
in fiscal 2009 amounted to $30.4 million and $1.07, respectively, compared to
$31.9 million and $1.12 per share, respectively during fiscal 2008. The
decline in net earnings as compared to 2008 year was due to the inclusion of
some non-recurring items in the prior year in addition to the negative impact
of foreign currency movements and the significant decline in market interest
rates.
Excluding the impact of the above items, net earnings for the year ended
June 30, 2009 would have increased by 7% as compared to the prior year,
representing a strong performance by the underlying business, especially in
light of the current economic downturn.
"I am pleased with the Company's performance during such turbulent
economic conditions. We continue to strive to further expand and grow Corby's
product portfolio in the Canadian spirits and wine markets in an effort to
increase sales and maximize earnings in future periods," noted Patrick
O'Driscoll, President and Chief Executive Officer of Corby. "We have
successfully transitioned the senior management team during the past couple of
months and we are encouraged that the Company will continue to be managed by
industry veterans focused on expanding market share and increasing shareholder
value."
Mr. Michel Bord resigned from the Board of Directors effective August 26,
2009. In addition to his current role as Deputy Managing Director,
Distribution Network, Pernod Ricard S.A., Mr. Bord previously also served as
interim Chairman and Chief Executive Officer of Pernod Ricard Americas until
his successor, Mr. Philippe Dréano, was determined. The Corby Board of
Directors appointed Mr. Dréano a director of the Company on August 26, 2009.
Mr. Dréano, a native of (France), is a graduate of the ESSEC Business School
in France and has over 19 years of industry experience in Europe and Asia with
Pernod Ricard S.A., after six years of sales and marketing experience at
Unilever Group. Prior to his current role, Mr. Dréano was Chairman and Chief
Executive Officer of Pernod Ricard Asia since 2000 after serving as Chairman
and Chief Executive Officer of Pernod Ricard Japan since 1996. "We greatly
appreciate Michel's many contributions to Corby and look forward to benefiting
from Philippe's insight and invaluable experience," said George McCarthy,
Chairman, Corby Board of Directors.
For further details, please refer to Corby's management discussion and
analysis and consolidated financial statements and accompanying notes for the
year ended June 30, 2009, prepared in accordance with Canadian generally
accepted accounting principles.
About Corby
Corby's portfolio of owned-brands includes some of the most renowned
brands in Canada, including Wiser's Canadian whiskies, Lamb's rum, Polar Ice
vodka and Seagram Coolers. Through its affiliation with Pernod Ricard, Corby
also represents leading international brands such as ABSOLUT vodka, Chivas
Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey,
Beefeater gin, Malibu and Kahlúa liqueurs, Mumm champagne, and Jacob's Creek
and Wyndham Estate wines.
The existing Voting Class A Common Shares and Non-voting Class B Common
Shares of the Company are traded on the Toronto Stock Exchange under the
symbols CDL.A and CDL.B.CORBY DISTILLERIES LIMITED
Management's Discussion and Analysis
June 30, 2009
-------------------------------------------------------------------------The following Management's Discussion and Analysis ("MD&A") dated August
26, 2009 should be read in conjunction with the audited consolidated financial
statements and accompanying notes for the year ended June 30, 2009 prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
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 August 26,
2009. Events occurring after that date could render the information contained
herein inaccurate or misleading in a material respect. Corby will provide
updates to material forward-looking statements, including in subsequent news
releases and its interim management's discussion and analyses filed with
regulatory authorities as required under applicable law. Additional
information regarding Corby, including the Company's Annual Information Form,
is available on SEDAR at www.sedar.com.
Unless otherwise indicated, all comparisons of results for the fourth
quarter of fiscal 2009 (three months ended June 30, 2009) are against results
for the fourth quarter of fiscal 2008 (three months ended June 30, 2008). All
dollar amounts are in Canadian dollars unless otherwise stated.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 Toronto Stock Exchange under the symbols "CDL.A" (voting
Class A common shares) and "CDL.B" (non-voting Class B common shares). Corby's
voting Class A common shares are majority-owned by Hiram Walker & Sons Limited
(a private company) located in Windsor, Ontario. Hiram Walker & Sons Limited
("HWSL") is a wholly-owned subsidiary of international spirits and wine
company, Pernod Ricard S.A. (a French public limited company) which is
headquartered in Paris, France. Therefore, throughout the remainder of this
MD&A, Corby refers to HWSL as its parent, and Pernod Ricard S.A. ("PR") as its
ultimate parent. Affiliated companies are those that are also subsidiaries of
PR.
The Company derives its revenues from the sale of its owned-brands, 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 Canada, it also includes sales to international markets.
International sales are primarily to the United States and United Kingdom
markets and, typically, account for less than 10% of Corby's total operating
revenue. Commission income earned from the representation of non-owned brands
is denoted as "Commissions" on the consolidated statement of earnings.
Corby's portfolio of owned-brands include some of the most renowned
brands in Canada, including Wiser's rye whiskies, Lamb's rum, Polar Ice vodka,
McGuinness liqueurs and Seagram Coolers. Through its affiliation with PR,
Corby also represents leading international brands such as Absolut vodka,
Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey,
Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek
and Wyndham Estate wines. In addition to representing PR's brands in Canada,
Corby also provides representation for certain selected unrelated third-party
brands ("Agency brands") when they fit within the Company's strategic
direction and, thus, complement Corby's existing brand portfolio.
In September 2006, PR and Corby agreed upon terms for the continuation of
production of Corby's owned brands by PR at HWSL's production facility in
Windsor, Ontario for the next ten years, expiring September 2016. Corby and PR
further agreed that Corby will manage PR's business interests in Canada,
including HWSL's production facility, during that same ten year period.
The Company sources approximately 73% of its spirits production
requirements from HWSL's production facility in Windsor, Ontario, with the
balance of Corby's spirits production being sourced from the Company's
owned-plant in Montreal, Quebec. Essentially all of Corby's cooler production
requirements are outsourced to an unrelated third-party located in Dorval,
Quebec.
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 and less profitable 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 honest 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.Significant Events
------------------Corby Announces Management Changes
Corby's Board of Directors announced on March 26, 2009 that Con
Constandis, President and Chief Executive Officer of Corby, would leave the
Company, effective July 1, 2009, to assume the role of Chairman and Chief
Executive Officer of Pernod Ricard China. On May 7, 2009, Corby announced that
Patrick O'Driscoll was appointed as President and Chief Executive Officer of
Corby effective July 1, 2009.
Mr. O'Driscoll is a native of the United Kingdom and holds a Bachelor of
Science in Environmental Biology from the University of London. He has over 25
years of industry experience in North America, Europe and Asia, both with PR
and previously International Distillers & Vintners. Mr. O'Driscoll brings
invaluable commercial and marketing experience to Corby, having served in
various executive capacities. Prior to joining Corby, he served as Chairman
and Chief Executive Officer of Malibu-Kahlúa International, an affiliate of
PR, based in New York.
On June 5, 2009, the Corby Board of Directors also announced that John
Nicodemo, Chief Financial Officer and Chief Operating Officer of Corby, would
leave the Company, effective June 30, 2009, to assume the role of Chief
Operating Officer of Pernod Ricard Korea. Thierry Pourchet has been appointed
as his successor as Vice President and Chief Financial Officer of Corby.
A native of France, Thierry Pourchet graduated from Ecole de Management
de Lyon (France). He has over 16 years of industry experience in North America
and Europe with several PR affiliates. Mr. Pourchet brings extensive financial
and operational experience to Corby, having served in various executive
capacities. Prior to joining Corby, he served as Chief Operating Officer of
Malibu-Kahlúa International, based in New York.Alberta Gaming and Liquor Commission Announces Cancellation of
Significant Increase in Provincial Mark-up Applied to Beverage Alcohol
productsOn April 7, 2009, the Alberta Gaming and Liquor Commission announced a
30% increase in the provincial mark-up applied to beverage alcohol products.
This increase, which became effective on April 8, 2009, resulted in higher
retail prices for the consumer. However, on July 7, 2009, Alberta Premier Ed
Stelmach announced the cancellation of the aforementioned increase in the
Alberta mark-up applied to beverage alcohol products.
Since the increased mark-up was only in effect for a relatively short
period of time, it is not possible to know what effect the increased retail
prices would have had on overall consumer consumption in the long-term.
However, it should be noted that sales of Corby's spirit products in Alberta
declined by 5% during the three-month period in which the increased mark-up
was in effect.
The Government of Ontario Announces its 2009 Budget
On March 26, 2009, the Government of Ontario announced its 2009 budget
which among other things, outlined proposed cuts to its corporate income tax
rates, and its intention to join a framework agreement for federal collection
of a single value-added sales tax.
Specifically, the budget proposes to cut provincial income tax rates on
manufacturing and processing businesses by 2%, beginning July 1, 2010. While
Corby's current income tax expense will benefit from these reduced rates
beginning in fiscal 2010, the Company has not yet recognized the impact of the
decreased rates on its future income tax expense as the proposed decreases
have yet to be substantively enacted.
Also beginning on July 1, 2010, the Ontario Retail Sales Tax will be
converted to a value added tax structure and combined with the federal GST to
create a federally administered single sales tax with a rate of 13%, which is
the same as the combined rate currently in effect. However, differences in
application will exist as the new single sales tax will generally use the same
rules and tax base as the federal GST. The effect of this change on Corby's
business is currently being assessed, however, it is not anticipated that it
will have a material impact on the Company's financial results.
Corby Obtains Right to Represent Absolut Vodka
On September 26, 2008, Corby entered into an agreement with its ultimate
parent company, PR. The agreement provides Corby the exclusive right to
represent the Absolut vodka brand in Canada effective October 1, 2008 for five
years to September 30, 2013. As part of this agreement, Corby also received
the exclusive right to represent the Plymouth gin and Level vodka brands. The
distribution of Absolut vodka is expected to add approximately $2.5 million
annually to Corby's commission income and about $1.2 million annually to net
earnings in the first full year.
Corby Signs Agreement to Continue Representation of Stolichnaya Vodka
On March 5, 2009, Corby entered into an agreement with S.P.I. Spirits
(Cyprus) Limited to continue representing the Stolichnaya ("Stoli") and
Moskovskya vodka brands in Canada. Under the terms of the agreement, Corby
will continue to represent Stoli and Moskovskya for an additional period of
five years.
PR Sells Tia Maria Brand
On July 27, 2009, PR announced the sale of the coffee liqueur brand Tia
Maria to an unrelated third party for 125 million Euros (equivalent to
approximately $192.5 million Canadian dollars).
Corby previously owned a 45% non-controlling interest of Tia Maria but
sold its interests to PR on September 29, 2006. The purchase and sale
agreement between Corby and PR contained a purchase price adjustment clause,
which would allow for the Company to share in any after-tax profits (as per a
defined formula in the agreement) earned by PR in the event they sold 100% of
Tia Maria within three years of buying the minority interest from Corby.
While the Tia Maria brand was sold within the three year timeframe as
outlined above, PR's net after-tax proceeds on an equivalent 45% basis are
approximately $72 million, which is less than Corby's after-tax proceeds of
$79.8 million. As a result, there will be no additional proceeds paid to Corby
as an adjustment to the original purchase price agreed to between Corby and
PR.Current Market Environment
--------------------------Recent market events and the resultant tightening of credit have reduced
available liquidity and overall economic activity. Governments around the
world have taken unprecedented actions to limit the impact of these events,
but it is still too early to assess the severity and duration of this economic
slowdown. 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 $62.7
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.The spirits business in Canada has historically been less affected by
economic slowdowns than other consumer and manufacturing businesses. However,
no business is completely immune to a slowdown in the economy. As a result,
Corby closely monitors its exposure to the following potential risks, which
could impact future profitability and cash flows, so it can be in a position
to proactively respond should any of the following materialize:- 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.
None of the above items have had a meaningful impact on Corby's
year-to-date financial position or financial results. However, the economic
slowdown is a reality both in Canada and globally, and, as such, the Company
will continue to monitor the situation closely and take proactive measures, as
necessary.
Non-GAAP Financial Measures
---------------------------Corby defines "EBITDA" as net earnings before equity earnings, foreign
exchange, interest income, income taxes, depreciation, and amortization. This
non-GAAP financial measure has been included in this MD&A as it is a measure
which management believes is useful in evaluating and measuring the Company's
operating performance. EBITDA is also a common measure used by investors,
financial analysts and rating agencies. These groups may use EBITDA and other
non-GAAP financial measures to value the Company and assess its performance.
However, EBITDA is not a measure recognized by GAAP and it does not have
a standardized meaning prescribed by GAAP. Therefore, EBITDA may not be
comparable to similar measures presented by other issuers. Investors are
cautioned that EBITDA should not be construed as an alternative to net
earnings as determined in accordance with GAAP as an indicator of performance.
A reconciliation of EBITDA to the most directly comparable GAAP measure
can be found under "Results of Operations - Fiscal 2009" in this Management's
Discussion and Analysis.Three-Year Review of Selected Financial Information
---------------------------------------------------
The following table provides a summary of certain selected consolidated
financial information for the Company. This information has been prepared in
accordance with Canadian GAAP.
-------------------------------------------------------------------------
(in millions of Canadian dollars,
except per share amounts) 2009 2008(1) 2007(1)
-------------------------------------------------------------------------
Operating revenue - net $ 169.3 $ 163.3 $ 153.6
EBITDA(2) 49.6 50.8 44.0
- EBITDA per common share 1.74 1.78 1.55
Net earnings 30.4 31.9 100.4
- Basic earnings per share 1.07 1.12 3.53
- Diluted earnings per share 1.07 1.12 3.53
Total assets 270.2 253.5 238.0
Total liabilities 33.9 31.7 34.5
Dividends paid per share 0.56 0.56 2.06
-------------------------------------------------------------------------
(1) The 2008 figures have been restated for adoption of CICA HB 3031 -
Inventories, as required by the CICA. The 2007 figures have not been
restated as the information required to calculate the restatement is
not readily available.
(2) EBITDA for the year ended June 30, 2007, excludes the gain on sale of
the Company's investment in Tia Maria Group.The Company fared relatively well in light of the economic downturn
experienced in Canada, and throughout the world. Operating revenue has
increased $15.7 million since 2007 (representing an average annual growth rate
of 5%), and was buoyed by strong performances from the Company's key brands.
In addition to a solid performance by Corby's owned-brands, the growth in
operating revenue also reflects the benefits of agreements with PR, which
provided the Company with the exclusive right to represent PR's brands in
Canada. Corby's representation of these brands accounted for $2.5 million of
the Company's operating revenue growth since 2007. Growth in operating revenue
was also derived from Corby's acquisition of the Lamb's rum international and
Seagram Coolers Canada businesses on September 29, 2006. The addition of these
businesses has combined for $1.7 million of the growth in operating revenues
since 2007.
EBITDA has increased $5.6 million since 2007 (representing an average
annual growth rate of 6%). The increase since 2007 is largely driven by the
same factors which drove operating revenue higher during that same period. The
slight decrease in EBITDA in 2009 from 2008 results can largely be attributed
to adverse foreign currency movements experienced this year versus last, as
the Canadian dollar declined sharply relative to the US dollar, thereby
increasing the Company's raw material costs in 2009.
Net earnings in 2007 included a one time gain recognized on the sale of
the Tia Maria Group to PR. After removing the effect of this one-time gain,
net earnings has increased $1.6 million since 2007 (representing an average
annual growth rate of 3%). The increase since 2007 is consistent with the
aforementioned reasons outlined in the EBITDA discussion above, with
additional downward pressure on net earnings coming from decreased interest
income on the Company's deposits in cash management pools. This was due to the
significant decline in market rates of interest over the past year directly
attributable to the global economic recession, as governments around the world
drastically reduced interest rates in the hopes of encouraging consumer
spending.
The Company continued to strengthen an already strong 2007 balance sheet
by increasing its total assets by $32.2 million over a three year span, while
total liabilities have declined by $0.6 million over that same period. Such
performance was achieved while the Company maintained consistent regular
dividend payments and continued to increase its investments in advertising and
promotional activities behind its key brands.
Significant increases in assets relate primarily to the Company having
increased deposits in cash management pools, accounts receivable and
inventories. The increase in these balances can be largely attributed to the
aforementioned growth in sales since 2007. The growth in inventories has
outpaced the increase in sales, which is the result of a specific focus to
increase lay-downs of maturing bulk whisky which is necessary to ensure that
an adequate future supply is available to support Corby's growing whisky
brands, specifically Wiser's Canadian whisky. In addition, the Company also
increased its lay-downs of maturing rum, as a result of its decision to move
Lamb's International production from a PR affiliate located in the UK, to
Corby's production facility located in Montreal, Quebec. The production move
was successfully completed in January 2009.Brand Performance Review
------------------------Corby's portfolio of owned-brands 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, Corby's mixable
liqueur brands, and Seagram Coolers. The sales performance of these key brands
significantly impacts Corby's net earnings and, therefore, understanding each
key brand is essential to understanding the Company's overall performance.
Shipment Volume and Sales Value Performance
The following chart summarizes the performance of Corby's owned-brands in
terms of both shipment volume (as measured by shipments to customers in
equivalent nine litre cases) and sales value (as measured by the change in
sales revenue). The chart below includes results for sales in both Canada and
international markets. Specifically, the brands Wiser's, Lamb's and Polar Ice
are also sold to international markets, particularly, in the US and UK.
International sales typically account for less than 10% of Corby's total
annual sales.-------------------------------------------------------------------------
BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL
SHIPMENTS
-------------------------------------------------------------------------
Three Months Ended Year Ended
------------------------------ -------------------------------
Volumes Shipment Shipment
(in 000's Jun. Jun. % Sales Jun. Jun. % Sales
of 30, 30, Volume % Value 30, 30, Volume % Value
9L cases) 2009 2008 Change Change 2009 2008 Change Change
-------------------------------------------------------------------------
Brand
Wiser's
Canadian
whisky 183 173 6% 15% 760 747 2% 9%
Lamb's
rum 133 143 (7%) (4%) 620 628 (1%) 3%
Polar Ice
vodka 92 103 (11%) 0% 396 391 1% 11%
Mixable
liqueurs 54 51 6% 5% 231 235 (2%) 0%
Seagram
Coolers 129 145 (11%) (12%) 320 388 (18%) (19%)
-------------------------------------------------------------------------
Total Key
Brands 591 615 (4%) 3% 2,327 2,389 (3%) 4%
All other
Corby-
owned
brands 133 134 (1%) 2% 568 583 (3%) 2%
-------------------------------------------------------------------------
Total 724 749 (3%) 3% 2,895 2,972 (3%) 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------As previously discussed in the "Strategies and Outlook" section of this
MD&A, the Company has implemented a 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 brand performance chart demonstrates that, overall, Corby's brands
have delivered strong value growth in both the Canadian and international
markets. This is demonstrated by the fact that sales value grew significantly
in excess of shipment volumes on both a quarter-over-quarter, and
year-over-year basis. Sales value growth was achieved through higher average
selling prices and favourable product mix, as growth in Corby's larger brands
(such as Wiser's), outweighed volume declines in brands such as Seagram
Coolers (which generally earn lower gross margins).
The decline in Corby's shipment volumes for the quarter ended June 30,
2009 was primarily attributable to lower shipments of the Seagram Coolers
brand. Consistent with the year-over-year results, the Seagram Coolers brand
continued to struggle within the highly competitive ready-to-drink segment, as
is further discussed below in the "Summary of Key Brands" section.
Excluding Seagram Coolers, shipment volumes in the final quarter were
consistent with last year. This reflects the benefit of additional sales at
LCBO locations in Ontario as a result of the threat of a labour disruption,
offset by lower sales volumes in Alberta and a change in the timing of orders
received from another liquor board.
Retail Volume and Retail Value Performance
It is of critical importance to understand the performance of Corby's
brands at the retail level in Canada. Analysis of performance at the retail
level provides insight with regards to consumers' current purchasing patterns
and trends. Retail sales data, as provided by the Association of Canadian
Distillers ("ACD"), is set out in the following chart. It should be noted that
the retail sales information depicted does not include international retail
sales of Corby owned-brands, as this information is not readily available.
International sales typically account for less than 10% of Corby's total
annual sales.-------------------------------------------------------------------------
RETAIL SALES FOR THE CANADIAN MARKET ONLY(1)
-------------------------------------------------------------------------
Three Months Ended Year Ended
------------------------------ -------------------------------
Volumes % % % %
(in 000's Jun. Jun. Retail Retail Jun. Jun. Retail Retail
of 30, 30, Volume Value 30, 30, Volume Value
9L cases) 2009 2008 Change Change 2009 2008 Change Change
-------------------------------------------------------------------------
Brand
Wiser's
Canadian
whisky 150 148 1% 3% 683 677 1% 3%
Lamb's
rum 113 117 (3%) 1% 487 500 (3%) 0%
Polar Ice
vodka 69 74 (7%) (1%) 320 309 4% 6%
Mixable
liqueurs 42 43 (2%) (3%) 206 213 (3%) (3%)
Seagram
Coolers 90 111 (19%) (14%) 317 394 (20%) (17%)
-------------------------------------------------------------------------
Total Key
Brands 464 493 (6%) 0% 2,013 2,093 (4%) 1%
All other
Corby-
owned
brands 121 127 (5%) 2% 526 549 (4%) (2%)
-------------------------------------------------------------------------
Total 585 620 (6%) 1% 2,539 2,642 (4%) 0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refers to sales at the retail store level in Canada, as provided by
the Association of Canadian Distillers.The spirits business in Canada has historically not been as affected by
economic slowdowns as other consumer and manufacturing businesses. However, no
business is completely immune to a slowdown in the economy and while consumer
purchases of spirits in Canada have continued to grow, they are doing so at a
slower pace than in previous years.
Recent trends also show a shift in consumption patterns as consumers are
purchasing fewer products from certain discretionary spirit categories, such
as liqueurs, but have continued to purchase 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 reflects this shift in consumer
consumption patterns, as evidenced by the performance of its mixable liqueurs
brands, while the Company's vodka and whisky brands continue to deliver strong
growth from both a retail volume and retail value perspective. While the
industry's rum category is showing growth as a whole, the performance of
Corby's Lamb's rum brand reflects the impact of increased competition in
certain key markets, which is discussed further in the following "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 and Canada's best selling whisky family, Wiser's
Canadian whisky, delivered a solid performance this year, as demonstrated by
2% growth in shipment volumes and a 9% increase in sales value. Sales value
growth exceeded shipment volume growth as a result of better product mix, as
the more premium Wiser's Deluxe grew at a faster pace than Wiser's Special
Blend (the entry level variant), in addition to higher average selling prices
across the brand family in both Canada and the US. The higher selling prices
were the result of strategic price increases, which were implemented over the
past year.
Wiser's continues to lead its competitive segment, with retail volumes in
Canada growing by 1% and retail value growing by 3%. In comparison, retail
volumes for the Canadian whisky category as a whole declined by 2%, with
retail value remaining relatively flat compared to the prior year. Corby's
flagship brand continues to increase its market share in Canada, continuing
the trend exhibited over the past several years.
These results reflect an aggressive advertising and promotional platform,
combined with continued support from a loyal consumer base. The Company
invested in a new media campaign entitled "Welcome to the Wiserhood" and also
launched a new variant to the Wiser's family, entitled Wiser's Small Batch.
While Wiser's Small Batch is still in the early days of the product life
cycle, early indicators are very positive.Lamb's Rum
----------Lamb's rum, one of the top selling rum families in Canada, saw its
shipment volumes for the year decline slightly against the prior year, while
during the same period experiencing an increase in sales value of 3%.
The brand is currently performing very well in the UK and Newfoundland
and Labrador markets, while experiencing competitive challenges in the Ontario
and Alberta markets. Corby management has taken action to recover market
share, such as launching new environmentally friendly packaging of Lamb's Palm
Breeze in key markets and also increasing its level of investment in the
brand's critical Newfoundland and Labrador market. Corby recently launched a
Lamb's spiced variant in the UK and Canadian markets (entitled "Lamb's Spiced"
and "Lamb's Black Sheep", respectively), as the Company looks to capitalize on
the growing consumer demand in the spiced rum segment.Polar Ice Vodka
---------------Polar Ice vodka, which is among the top three largest vodka brands in
Canada, experienced a 1% increase in shipment volumes and 11% growth from a
sales value perspective during the year ended June 30, 2009. The volume growth
was due to increased sales in the Canadian market, partially offset by a
decline in volumes sold in the US due to difficult market conditions. However,
value growth significantly exceeded volume growth, driven by the positive
impact of price increases implemented over the past year coupled with the
effect of a stronger US dollar on sales in the US market.
The Polar Ice vodka brand has effectively capitalized on the dynamism of
the vodka category in general, which is the largest spirits category in
Canada, and has managed to grow into the 3rd largest vodka in the Canadian
market. Building upon several years of strong consistent growth, retail
volumes of Polar Ice in Canada for the year grew 4%, which is consistent with
the growth rate experienced by the vodka category as a whole.Mixable Liqueurs
----------------Corby's portfolio of mixable liqueur brands consists of McGuinness
liqueurs (which is Canada's largest mixable liqueur brand family), Meaghers
liqueurs, and De Kuyper liqueurs. The recent performance of Corby's mixable
liqueur brands mirrors the challenges experienced by the overall liqueur
category in the Canadian market, as consumer purchases of these products have
declined by 4% in recent months. The liqueur segment as a whole has been
negatively impacted by the decline in consumer spending, particularly as it
relates to consumption at licensed establishments, such as bars and
restaurants.
It should be noted that shipment volumes in the final quarter benefitted
from the launch of two new liqueur products (McGuinness Exotics Blueberry and
McGuinness Exotics Pomegranate) in addition to the aforementioned increase in
LCBO sales in Ontario due to the threat of a labour disruption.
Despite the challenges in the market, Corby management is highly focused
on maintaining its leadership position in the liqueur category and, as such,
the Company is working on new initiatives to modernize and strengthen these
brands' positions in the Canadian market place.Seagram Coolers
---------------With retail volumes declining by 20% for the year ended June 30, 2009,
Seagram Coolers has clearly had disappointing results this year. This was
partially due to adverse summer weather in both 2008 and 2009 that was
experienced in the brand's key markets. However, the brand also significantly
underperformed relative to its segment and key competitors. Management is in
the process of evaluating several strategic options to improve the performance
of this brand going forward.Financial and Operating Results - Fiscal 2009
---------------------------------------------
The following table presents a summary of certain selected consolidated
financial information for the Company for the years ended June 30, 2009 and
2008:
-------------------------------------------------------------------------
(in millions of Canadian
dollars, except per share
amounts) 2009 2008(1) $ Change % Change
-------------------------------------------------------------------------
Sales $ 152.6 $ 147.9 $ 4.7 3%
Commissions(2) 21.4 20.3 1.1 5%
-------------------------------------------------------------------------
Operating revenue(2) 174.0 168.2 5.8 3%
Cost of sales 79.6 76.5 3.1 4%
Marketing, sales and
administration 44.8 40.9 3.9 10%
-------------------------------------------------------------------------
EBITDA 49.6 50.8 (1.2) (2%)
Amortization(3) 6.2 6.1 0.1 2%
-------------------------------------------------------------------------
Earnings from operations 43.4 44.7 (1.3) (3%)
Interest income 1.7 2.4 (0.7) (29%)
Foreign exchange loss (0.8) (0.3) (0.5) 167%
Gain on disposal of capital
assets 0.2 - 0.2 n/a
-------------------------------------------------------------------------
Earnings before income
taxes 44.5 46.8 (2.3) (5%)
Income taxes 14.1 14.9 (0.8) (5%)
-------------------------------------------------------------------------
Net earnings $ 30.4 $ 31.9 $ (1.5) (5%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per common share
- Basic net earnings $ 1.07 $ 1.12 $ (0.05) (5%)
- Diluted net earnings $ 1.07 $ 1.12 $ (0.05) (5%)
-------------------------------------------------------------------------
(1) The 2008 figures have been restated for adoption of CICA HB 3031 -
Inventories, as required by the CICA.
(2) Amounts are presented gross of representation rights amortization of
$4.7 (2008 - $4.9).
(3) Amounts include capital assets amortization of $1.5 (2008 - $1.2) and
representation rights amortization of $4.7 (2008 - $4.9).Overall Financial Results
Comparing Corby's overall financial results for the year ended June 30,
2009 with those of the prior year demonstrates the resilience of Corby's
business, even during times of economic decline. After excluding the impact of
some non-recurring items having occurred in 2008 (see below for further
details), Corby experienced sales growth of 3%, which reflects the benefits of
a strong and diverse brand portfolio along with a solid business strategy that
is focused on delivering value.
However, it should be noted that the comparability of net earnings has
been negatively skewed by the inclusion of some non-recurring items in the
2008 financial results, in addition to the impact of changes in foreign
exchange and interest rates compared to the prior year. The impact of all
these items is outlined below.The results of the prior year included the following non-recurring items:
- $0.9 million (impact to net earnings of $0.6 million) in commission
income which represented a one-time lump sum payment received as a
settlement in lieu of a contractually required notice period for an
Agency brand no longer represented by the Company.
- $1.1 million (impact to net earnings of $0.5 million) in non-
recurring sales of bulk whisky to Corby's parent company.
- $0.5 million in reduced income tax expense as a result of changes to
long-term federal income tax rates, as enacted by the government
during the fall of 2007.Furthermore, Corby's financial results for the year ended June 30, 2009
have been negatively impacted by the significant decline in the average value
of the Canadian dollar relative to the US dollar, in addition to the dramatic
fall in market interest rates as governments around the world continue to drop
base lending rates in hopes of stimulating consumer spending. The quantified
impacts of these two factors on Corby's financial results are discussed in
more detail below:1. The Canadian dollar depreciated 15% relative to the US dollar in
fiscal 2009 when compared to fiscal 2008. As the Company's purchases
from US based suppliers typically exceed its revenue sources to US
based customers, a decline in the Canadian dollar versus the US
dollar can have a negative impact on the Company's financial results
(and vice-versa).
The initial decline of the Canadian dollar occurred during the
Company's peak production period and, thus, had a pronounced impact
on Corby's fiscal 2009 results through higher "Cost of sales" and
"Foreign exchange loss", which mainly reflects the impact of foreign
exchange fluctuations between the date from when transactions are
entered into and the date of actual settlement, in addition to the
impact of applying current rates to foreign denominated assets and
liabilities.
Changes in foreign exchange rates negatively impacted Corby's net
earnings by approximately $1.6 million on a year-over-year comparison
basis.
2. Corby's substantial deposits in cash management pools earn income
based upon the market LIBOR interest rate. The average LIBOR rate for
the year just ended was 1.95%, as compared to 4.21% last year. This
decline in market interest rates had the effect of reducing Corby's
net earnings by approximately $0.8 million in 2009.Excluding the impact of all of the above items, net earnings for the year
ended June 30, 2009 would have increased by 7% when compared with last year.
As mentioned previously, the underlying operating results of the Company
were strong, especially in light of the current economic downturn, and are
reflective of a solid performance by Corby's spirit brands. The Company has
also managed to maintain, and in some cases, increase the level of advertising
and promotional investment behind its key brands.
Operating revenue
Operating revenue, which is comprised of sales and commissions, increased
3% when compared with last year. 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.
As previously discussed, operating revenue growth was diminished by the
aforementioned sale of bulk whisky to Corby's parent company and the lump-sum
termination settlement in the prior year. Excluding the effect of these
non-recurring transactions, operating revenue grew by 5% on a year-over-year
basis.
Based upon analysis of retail sales data provided by the ACD, Corby's key
brands performed well against the competition in many key categories. The
increased sales were driven by an increase in average selling prices,
resulting from strategic price increases implemented over the past year,
combined with improved product mix. Price increases were in-line with targeted
competitive sets, and reflect the Company's continued focus on value creation
through the premiumization of its key brands.The following table highlights the various components which comprise
commissions:
-------------------------------------------------------------------------
(in millions of Canadian
dollars) 2009 2008 $ Change % Change
-------------------------------------------------------------------------
Commission from PR brands $ 16.8 $ 14.3 $ 2.5 17%
Commission from Agency
brands 4.6 6.0 (1.4) (23%)
-------------------------------------------------------------------------
Commissions $ 21.4 $ 20.3 $ 1.1 5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------As the above chart demonstrates, Corby's commission from PR brands
increased 17% this year versus last. The increase is primarily the result of
Corby having begun to represent PR's newest brand, Absolut vodka, on October
1, 2008.
The majority of the decrease in commission from Agency brands was the
result of the Company earning a one-time lump sum of $0.9 million in the
comparative period from an Agency brand Corby ceased to represent on June 30,
2006. The lump-sum commission was in lieu of earnings Corby would have
otherwise received during the required notice period, as provided for under
the relevant representation agreement. The remaining amount of the decrease
was the result of Corby ceasing to represent other smaller brands which were
considered to be non-strategic to the Company's portfolio.
Cost of sales
Cost of sales for the year ended June 30, 2009 increased $3.1 million or
4% when compared with last year. The increase in cost of sales is mainly due
to the previously mentioned impact of the significant fluctuations in foreign
exchange rates. After excluding the impact of exchange rates, cost of sales
would have increased by 2% on a year-over-year basis, which reflects increased
input costs and inflation.
Marketing, sales and administration
Marketing, sales and administration expenses increased 10% to $44.8
million in fiscal 2009, as compared to $40.9 million last year. The increase
partially reflects higher levels of advertising and promotional activity being
invested behind the Company's key brands, as well as additional costs
associated with the recent move of the Company's head office location. The
Company also incurred additional administrative expenses in conjunction with
its representation of PR's Absolut vodka brand, which Corby began to represent
in Canada effective October 1, 2008.
The aforementioned increase in advertising and promotional spend includes
the costs associated with the production of a series of new television
commercials for the Wiser's Canadian whisky brand, entitled "Welcome to the
Wiserhood", which began airing in October, a new integrated promotion for
Lamb's rum targeted for the brand's critical Newfoundland and Labrador market,
and spend in support of the launch of new flavours for Polar Ice vodka in both
the US and Canada.
Amortization
Amortization expense includes amortization of Corby's rights to represent
PR's brands in Canada in addition to amortization of the Company's capital
assets as displayed in the following schedule:-------------------------------------------------------------------------
(in millions of Canadian
dollars) 2009 2008 $ Change % Change
-------------------------------------------------------------------------
Representation rights
amortization $ 4.7 $ 4.9 $ (0.2) (4%)
Capital assets amortization 1.5 1.2 0.3 25%
-------------------------------------------------------------------------
Amortization $ 6.2 $ 6.1 $ 0.1 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Income taxes
Corby's effective rate of income tax in 2009 of 32% (2008 - 32%) closely
approximates the Company's current statutory rate of income tax of 32% (2008 -
33%). Corporate income tax rates in Canada are generally decreasing, and Corby
expects further reduced rates in the future when the Ontario government's
recently announced corporate income tax rate reductions become effective
beginning July 1, 2010. The Ontario Government's announced rate reductions
have not been recognized in these financial statements as they have yet to
become substantively enacted.Liquidity and Capital Resources
-------------------------------Corby's sources of liquidity are its deposits in cash management pools of
$62.7 million as at June 30, 2009, and its cash generated from operating
activities. Corby's total contractual maturities are represented by its
accounts payable and accrued liabilities balances, which totaled $20.4 million
as at June 30, 2009, and are all due to be paid within one year.
The Company also has funding obligations related to its employee future
benefit plans, which include defined benefit pension plans. As at June 30,
2009, certain of the Company's defined benefit plans were in a deficit
position. Of those plans in a funded deficit position, the unfunded accrued
benefit obligation totaled $1.8 million.
The Company has identified the area of employee future benefits as a
"critical accounting estimate" in that accounting policies related to this
area include various assumptions which incorporate a high degree of judgment
and complexity. These assumptions may change in the future and may have a
material impact on the accrued benefit obligations of the Company and the cost
of these plans, which is reflected in the Company's consolidated statements of
earnings. In addition, the actual rate of return on plan assets and changes in
interest rates could result in changes in the Company's funding requirements
for its defined benefit pension plans.
As a result of the recent turmoil in capital markets, the fair value of
plan assets within these pension funds has declined. Somewhat mitigating the
impact of this market decline is the fact that the Company monitors its
pension plan assets closely and follows strict guidelines to ensure pension
fund investment portfolios are diversified in line with industry best
practices. Nonetheless, pension fund assets are not immune to market
fluctuations and as a result, the Company may be required to make additional
cash contributions in the future.
Corby's next actuarial valuation is not required to be completed until
December 31, 2010 and, therefore, the Company's contribution levels leading up
to December 31, 2010 are not expected to change by a material amount. However,
in the event that an extended period of depressed capital markets and low
interest rates were to continue, the Company could be required 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. It should be noted, however, that current pension regulations permit
special funding payments relating to deficiencies to be amortized over a
period of five to ten years, further reducing the likelihood of a material
funding change to impact Corby in any one particular fiscal year. (See Note 7
of the consolidated financial statements for more information on the Company's
employee future benefit plans).
The Company believes that its deposits in cash management pools, combined
with its historically strong operational cash flows, provide for sufficient
liquidity to fund its operations, investing activities and commitments for the
foreseeable future. The Company's cash flows from operations are subject to
fluctuation due to commodity, foreign exchange and interest rate risks. Please
refer to the "Risks and Risk Management" section of this MD&A for further
information.
The much-publicized global liquidity crisis has been tumultuous for many
companies, particularly for those entities holding short-term investments in
asset-backed commercial paper ("ABCP"). Corby does not have direct exposure to
this type of liquidity risk, as the Company does not hold any investments in
ABCP.Cash flows
-------------------------------------------------------------------------
(in millions of Canadian dollars) 2009 2008(1) Change
-------------------------------------------------------------------------
Operating activities
Net earnings, adjusted for
non-cash items $ 34.8 $ 38.3 $ (3.5)
Net change in non-cash working
capital (10.9) (7.3) (3.6)
-------------------------------------------------------------------------
23.9 31.0 (7.1)
-------------------------------------------------------------------------
Investing activities
Additions to capital assets (4.4) (3.5) (0.9)
Proceeds from disposition of capital
assets 0.6 - 0.6
Deposits in cash management pools (4.2) (11.6) 7.4
-------------------------------------------------------------------------
(8.0) (15.1) 7.1
-------------------------------------------------------------------------
Financing activities
Dividends paid (15.9) (15.9) -
-------------------------------------------------------------------------
Net change in cash $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The comparative figures have been restated for the adoption of CICA
HB Section 3031 - Inventories, as required by the CICA, as well as
for a change in accounting policy related to deposits in cash
management pools.Operating activities
Cash flows from operating activities were $23.9 million in 2009, compared
to $31.0 million in the prior year. This decline is the combined result of
having decreased net earnings, adjusted for non-cash items, along with an
increased investment in non-cash working capital balances in 2009 when
compared with 2008. Growth in accounts receivable comprised the bulk of this
investment, and was the result of several factors. The most significant
factors included an exceptionally high sales performance in June 2009 versus
June 2008, in addition to the fact that Corby's balance sheet now includes
accounts receivable balances related to its newly represented brand, Absolut
vodka, which it began representing on October 1, 2008. (See Note 13 to the
consolidated financial statements of the Company).
Investing activities
After excluding deposits in cash management pools, the Company invested
$3.8 million in the acquisition of capital assets. Capital additions were on
account of the Company relocating its head office, in addition to increased
purchases of oak barrels used in the whisky maturation process.
Deposits made to cash management pools represent cash on deposit with the
Bank of Nova Scotia via Corby's Mirror Netting Services Agreement with PR.
Corby has daily access to these funds and earns a market rate of interest from
PR on balances contained within. The change in the amount deposited into the
cash management pool is a function of the cash remaining from operations after
financing and investing activities. For more information on the cash
management pooling arrangement, refer to the "Related Party Transactions" and
"Accounting Policy Changes" sections of this MD&A.
Financing activities
Cash used for financing activities was $15.9 million and is consistent
with the amounts used last year. The payments reflect regular dividends being
paid to shareholders on a quarterly basis.Outstanding Share Data
----------------------
As at August 26, 2009, Corby had 24,274,320 Voting Class A common shares
and 4,194,536 Non-Voting Class B common shares outstanding. The Company does
not have a stock option plan, and therefore, there are no options outstanding.
Contractual Obligations
-----------------------
The following table presents a summary of the maturity periods of the
Company's contractual obligations as at June 30, 2009:
-------------------------------------------------------------------------
Obliga-
Payments Payments Payments Payments tions
due in due in with no
During 2011 2013 due after fixed
2010 and 2012 and 2014 2014 maturity Total
-------------------------------------------------------------------------
Operating lease
obligations $ 1.4 $ 2.4 $ 1.5 $ 2.9 $ - $ 8.2
Employee future
benefits - - - - 10.1 10.1
-------------------------------------------------------------------------
$ 1.4 $ 2.4 $ 1.5 $ 2.9 $ 10.1 $ 18.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------Operating lease obligations represent future minimum payments under
long-term operating leases for premises and office equipment as at June 30,
2009. Employee future benefits represent the Company's unfunded pension and
other post retirement benefit plan obligations as at June 30, 2009. Please
refer to Note 7 of the consolidated financial statements for further
information with respect to Corby's employee future benefit plans.Related Party Transactions
--------------------------Corby engages in a significant number of transactions with its parent
company, its ultimate parent and various affiliates. Specifically, Corby
renders services to its parent company, its ultimate parent, and affiliates
for the marketing and sale of beverage alcohol products in Canada.
Furthermore, Corby sub-contracts the large majority of its distilling,
maturing, storing, blending, bottling and related production activities to its
parent company. A significant portion of Corby's bookkeeping, record keeping
services, data processing and other administrative services are also
outsourced to its parent company.
The companies operate under the terms of agreements which became
effective on September 29, 2006 (excluding the agreement signed on September
26, 2008, which is described separately below). These agreements provide the
Company with the exclusive right to represent PR's brands in the Canadian
market for 15 years, as well as providing for the continuing production of
certain Corby brands by PR at its production facility in Windsor, Ontario for
10 years. Corby also manages PR's business interests in Canada, including the
Windsor production facility. Certain officers of Corby have been appointed as
directors and officers of PR's Canadian entities, as approved by Corby's Board
of Directors. All of these 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. In addition to the
aforementioned related party transactions, the Company also participated in
the following activities with related parties:
Absolut Vodka Representation Agreement
On September 26, 2008, Corby entered into an agreement with its ultimate
parent company, PR. The agreement provides Corby with the exclusive right to
represent the Absolut vodka brand in Canada effective October 1, 2008 for the
next five years. As part of this agreement, Corby also received the exclusive
right to represent the Plymouth gin and Level vodka brands. The distribution
of Absolut vodka is expected to add approximately $2.5 million annually to
Corby's commission income and about $1.2 million annually to net earnings in
the first full year. Corby has also agreed to continue to participate in the
existing cash management pooling arrangement (the Mirror Netting Service
Agreement) with PR's wholly-owned Canadian subsidiaries for the next three
years to October 1, 2011, unless earlier terminated by Corby. Further, during
the next three years to October 1, 2011, Corby will not declare any special
dividends, repurchase shares or make acquisitions or capital investments
outside the normal course of business without PR's prior approval. Corby also
agreed that, barring any unanticipated developments, regular dividends will be
paid quarterly, on the basis of an annual amount equal to the greater of 50%
of net earnings per share in the preceding fiscal year ended June 30, and
$0.56 per share.
Deposits in Cash Management Pools
As previously discussed, Corby participates in a cash management 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. As a result of Corby's participation in this agreement,
Corby's credit risk associated with its deposits in cash management pools is
determinant upon PR's credit rating. PR's credit rating as at September 26,
2008, as published by Standard & Poor's and Moody's, was BB+ and Ba1,
respectively. PR compensates Corby for the benefit it receives from having the
Company participate in the Mirror Agreement, by paying interest to Corby based
upon the 30 day LIBOR rate plus 0.40%. Corby has the right to terminate its
participation in the Mirror Agreement at any time, subject to five days
written notice.
Sales and Purchases of Bulk Whisky
During the year ended June 30, 2008, Corby sold three year-old bulk
whisky to HWSL at market prices for $1.1 million. There were no such sales
made during the year ended June 30, 2009. Furthermore, during the year ended
June 30, 2008, Corby purchased $1.4 million of three year-old bulk whisky from
HWSL, also at market prices. There were no such purchases made during the year
ended June 30, 2009. For further details related to the sale and purchase of
bulk whisky from HWSL refer to Note 14 of the consolidated financial
statements.Results of Operations - Fourth Quarter of Fiscal 2009
-----------------------------------------------------
The following table presents a summary of certain selected consolidated
financial information for the Company for the three month periods ended June
30, 2009 and 2008:
-------------------------------------------------------------------------
Three Months Ended
(in millions of Canadian ----------------------
dollars, except per share June 30, June 30,
amounts) 2009 2008(1) $ Change % Change
-------------------------------------------------------------------------
Sales $ 36.9 $ 36.4 $ 0.5 1%
Commissions(2) 5.7 4.4 1.3 30%
-------------------------------------------------------------------------
Operating revenue(2) 42.6 40.8 1.8 4%
Cost of sales 20.0 19.8 0.2 1%
Marketing, sales and
administration 10.9 11.0 (0.1) (1%)
-------------------------------------------------------------------------
EBITDA 11.7 10.0 1.7 17%
Amortization(3) 1.6 1.6 - 0%
-------------------------------------------------------------------------
Earnings from operations 10.1 8.4 1.7 20%
Interest income 0.2 0.4 (0.2) (50%)
Foreign exchange loss (0.1) (0.1) - 0%
-------------------------------------------------------------------------
Earnings before income taxes 10.2 8.7 1.5 17%
Income taxes 2.8 2.7 0.1 4%
-------------------------------------------------------------------------
Net earnings $ 7.4 $ 6.0 $ 1.4 23%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per common share
- Basic net earnings $ 0.26 $ 0.21 $ 0.05 24%
- Diluted net earnings $ 0.26 $ 0.21 $ 0.05 24%
-------------------------------------------------------------------------
(1) The 2008 figures have been restated for adoption of CICA HB 3031 -
Inventories, as required by the CICA.
(2) Amounts are presented gross of representation rights amortization of
$1.2 (2008 - $1.2).
(3) Amounts include capital assets amortization of $0.4 (2008 - $0.4) and
representation rights amortization of $1.2 (2008 - $1.2).Overall Results for the Quarter
Comparing the Company's overall financial results for the quarter versus
the same period last year, saw a significant increase in EBITDA of 17%, which
translated to an increase of 23% in net earnings. These results relate
primarily to the increased level of commissions this quarter over last, due
primarily to Corby's new representation of the Absolut vodka brand, which
commenced October 1, 2008. Also of importance to achievement of these results
was the Company's ability to maintain costs consistent with levels experienced
in the comparative quarter, in addition to a lower effective rate of income
tax.
Operating revenue
Operating revenue, consisting of sales and commissions, was $42.6 million
for the fourth quarter compared to $40.8 million in the same quarter last
year, an increase of $1.8 million or 4%. Sales increased 1%
quarter-over-quarter totalling $36.9 million, while commissions increased $1.3
million, or 30%, to $5.7 million for the three month period ended June 30,
2009.
Sales
Fourth quarter sales increased 1% when compared to the same quarter last
year. This was the result of increased average selling prices and positive mix
being partially offset by a 1% decline in quarter-over-quarter shipment
volumes of spirits, in addition to a 11% decline in shipment volumes for the
Seagram Coolers brand. The quarter-over-quarter decline in shipment volumes of
spirits, reflects lower sales volumes in Alberta and a change in the timing of
orders received from another liquor board, offset by the benefit of additional
sales at LCBO locations in Ontario as a result of the threat of a labour
disruption. The decline in shipment volumes for the Seagram Coolers brand
reflect the increased competitive environment in the segment, and is
consistent with the challenges the Company experienced with the brand
throughout 2009.
Commissions
The following table highlights the various components which comprise
commissions:-------------------------------------------------------------------------
Three Months Ended
----------------------
(in millions of Canadian June 30, June 30,
dollars) 2009 2008 $ Change % Change
-------------------------------------------------------------------------
Commission from PR brands $ 4.6 $ 3.4 $ 1.2 35%
Commission from Agency
brands 1.1 1.0 0.1 10%
-------------------------------------------------------------------------
Commissions $ 5.7 $ 4.4 $ 1.3 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Commissions from PR brands increased $1.2 million quarter-over-quarter
while commissions from Agency brands increased only slightly when compared
with the same quarter last year. As previously discussed, the increased
commission from PR brands is primarily the result of Corby having begun to
represent PR's newest brand, Absolut vodka, beginning October 1, 2008.
Cost of sales
Cost of sales was $20.0 million compared to $19.8 million for the same
quarter last year. The slight increase in costs were in-line with the
Company's fourth quarter sales, which also remained relatively consistent
quarter-over-quarter. Gross margin was 45.8%, as compared with 45.6% for the
same quarter last year.
Marketing, sales and administration
Marketing, sales and administration expenses were $10.9 million, as
compared to $11.0 million during the same quarter last year as lower
advertising and promotional expenses served to offset higher general and
administrative costs. The decrease in advertising and promotion expenses
reflect a shift in the timing of expenditures (note the increase in
advertising and promotional expenditures for the year in total) while the
increase in general and administrative costs is reflective of full year
trends.
Amortization
Amortization expense includes amortization of Corby's rights to represent
PR's brands in Canada in addition to amortization of the Company's capital
assets as displayed in the following schedule:-------------------------------------------------------------------------
Three Months Ended
----------------------
(in millions of Canadian June 30, June 30,
dollars) 2009 2008 $ Change % Change
-------------------------------------------------------------------------
Representation rights
amortization $ 1.2 $ 1.2 $ - 0%
Capital assets amortization 0.4 0.4 - 0%
-------------------------------------------------------------------------
Amortization $ 1.6 $ 1.6 $ - 0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------Interest income
Interest income is earned on Corby's deposits in cash management pools.
These deposits earn interest based on the Canadian LIBOR market rate. As a
result of the recent economic situation in Canada and in the rest of the
world, market rates of interest have been at historic lows, thus explaining
the decrease this quarter when compared to the same quarter last year.
Income taxes
Income tax expense increased only $0.1 million when compared with the
same quarter last year even though earnings before income tax increased $1.5
million over the same period. The decreased effective income tax rate was
primarily the result of a favourable change in estimate being recognized in
the quarter in combination with the Company being subject to lower corporate
income tax rates.Selected Quarterly Information
------------------------------
Summary of Quarterly Financial Results(1)
-------------------------------------------------------------------------
(in millions of
Canadian dollars,
except per share Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
amounts) 2009 2009 2009 2009 2008 2008 2008 2008
-------------------------------------------------------------------------
Operating revenue
- net $41.4 $34.0 $47.8 $46.1 $39.6 $33.0 $48.8 $41.9
EBITDA 11.7 8.8 13.4 15.7 10.0 9.7 15.9 15.2
Net earnings 7.4 5.1 8.1 9.8 6.0 6.0 10.7 9.3
EBITDA per share 0.41 0.31 0.47 0.55 0.35 0.34 0.56 0.53
Basic EPS 0.26 0.18 0.28 0.35 0.21 0.21 0.37 0.33
Diluted EPS 0.26 0.18 0.28 0.35 0.21 0.21 0.37 0.33
-------------------------------------------------------------------------
(1) 2008 quarterly results have been restated for adoption of CICA HB
3031 - Inventories, as required by the CICA.
The above chart demonstrates the seasonality of Corby's business, as sales
are typically strong 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.
Critical Accounting Estimates
-----------------------------The Company's consolidated financial statements are prepared in
accordance with Canadian GAAP, which require management to make certain
estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities and related disclosures as at the date of the
consolidated financial statements. The Company bases its estimates, judgments
and assumptions on historical experience, current trends and other factors
that management believes to be important at the time the consolidated
financial statements are prepared. The Company reviews its accounting policies
and how they are applied on a regular basis. While the Company believes that
the historical experience, current trends and other factors considered support
the preparation of its consolidated financial statements in accordance with
Canadian GAAP, actual results could differ from its estimates and such
differences could be material.
The Company's significant accounting policies are discussed in Note 1 to
the consolidated financial statements. The following accounting policies
incorporate a higher degree of judgement and/or complexity and, accordingly,
are considered to be critical accounting policies.
Goodwill and Indefinite-lived Intangible Assets
The Company records as goodwill the excess amount of the purchase price
of an acquired business over the fair value of the underlying net assets,
including intangible assets, at the date of acquisition. Indefinite-lived
intangible assets represent the value of trademarks and licenses acquired.
Goodwill and indefinite-lived intangible assets accounts for a significant
amount of the Company's total assets. These balances are evaluated for
impairment annually. The process of evaluating these items for impairment
involves the determination of fair value. Inherent in such fair value
determinations are certain judgements and estimates including, but not limited
to, projected future sales, earnings and capital investment, discount rates,
and terminal growth rates. These judgements and estimates may change in the
future due to uncertain competitive, market and general economic conditions,
or as a result of changes in the business strategies and outlook of the
Company.
An impairment loss would be recognized to the extent that the carrying
value of the goodwill or trademarks and licenses exceeds the implied fair
value. Any impairment would result in a reduction in the carrying value of
these items on the consolidated balance sheet of the Company and the
recognition of a non-cash impairment charge in net earnings. Based on the
analyses performed, the Company has not identified any impairment.
Employee Future Benefits
The cost and accrued benefit plan obligations of the Company's defined
benefit pension plans and other post-retirement benefit plan are accrued based
on actuarial valuations which are dependent upon assumptions determined by
management. These assumptions include the discount rate, the expected
long-term rate of return on plan assets, the rate of compensation increases,
retirement ages, mortality rates and the expected inflation rate of health
care costs. These assumptions are reviewed annually by the Company's
management and its actuary. These assumptions may change in the future and may
have a material impact on the accrued benefit obligations of the Company and
the cost of these plans which is reflected in the Company's consolidated
statement of earnings. In addition, the actual rate of return on plan assets
and changes in interest rates could result in changes in the Company's funding
requirements for its defined benefit pension plans. (See Note 7 of the
consolidated financial statements for detailed information regarding the major
assumptions utilized).
Income and Other Taxes
The Company accounts for income taxes using the liability method of
accounting. Under the liability method, future income tax assets and
liabilities are determined based on differences between the carrying amounts
of balance sheet items and their corresponding tax values. The determination
of the income tax provision requires management to interpret regulatory
requirements and to make certain judgements. While income, capital and
commodity tax filings are subject to audits and reassessments, management
believes that adequate provisions have been made for all income and other tax
obligations. However, changes in the interpretations or judgements may result
in an increase or decrease in the Company's income, capital or commodity tax
provisions in the future. The amount of any such increase or decrease cannot
be reasonably estimated.Accounting Standards - Implemented in 2009
------------------------------------------Deposits in Cash Management Pools
Corby reviewed its presentation of cash flow and its cash and cash
equivalent balances on its balance sheet. As a result of this review, Corby
determined that it would change its accounting policy defining cash and cash
equivalents and correspondingly reclassify its balance sheet and cash flow
presentation. The new policy classifies cash associated with the Mirror
Agreement, which was previously included in cash and cash equivalents, as
"Deposits in cash management pools" and reflects cash flows arising from
deposits in, and withdrawals from, such cash pools as cash flows from
investing activities. Although none of the agreements or conditions governing
these deposits has changed since the inception of the cash management
arrangements, Corby decided to change its presentation of such deposits to
show them as a separate investment and not as a component of cash and cash
equivalents. Corby continues to have the contractual right to withdraw these
funds or terminate these cash management arrangements upon providing five days
written notice, and Corby continues to access funds deposited in these
accounts on a daily basis.
This change in accounting policy had no impact on Corby's consolidated
statement of earnings or earnings per share figures. For more information
regarding the Mirror Agreement, please refer to the "Related Party
Transactions" section of this MD&A.
Inventories
Effective July 1, 2008 (the first day of the Company's 2009 fiscal year),
the Company implemented, on a retrospective basis with restatement, the new
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031
"Inventories", which is effective for interim and annual financial statements
for fiscal years beginning on or after January 1, 2008.
The new standard provides the Canadian equivalent to International
Financial Reporting Standard IAS 2 "Inventories". Section 3031 prescribes
measurement of inventories at the lower of cost and net realizable value. It
provides guidance on the determination of cost, including allocation of
overheads and other costs to inventories, prohibits the use of the last-in,
first-out (LIFO) method, and requires the reversal of previous write-downs
when there is a subsequent increase in the value of inventories. It also
required greater disclosure regarding inventories and cost of sales in the
notes to the consolidated financial statements.
The Company's new policy to correspond with the new inventory standard is
as follows:
Inventories are measured at the lower of cost (acquisition cost and cost
of production, including indirect production overheads) and net realizable
value. Net realizable value is the selling price less the estimated cost of
completion and sale of the inventories. Most inventories are valued using the
average cost method. The cost of long-cycle inventories is calculated using a
single method which includes distilling and ageing maturing costs but excludes
finance costs. These inventories are classified in current assets, although a
substantial part remains in inventory for more than one year before being sold
in order to undergo the ageing maturing process used for certain spirits.
As a result of the retrospective implementation of this new standard, the
cumulative impact on previously reported balances for the year ended June 30,
2008 is as follows:-------------------------------------------------------------------------
As Change in As
(stated in millions of Canadian Previously Accounting Currently
dollars, except per share amounts) Reported Policy Reported
-------------------------------------------------------------------------
Retained earnings, beginning of year $ 189.2 $ 2.4 $ 191.6
Retained earnings, end of year 205.0 2.5 207.5
Inventories 47.3 3.6 50.9
Future income tax liability 5.4 1.0 6.4
Cost of sales 75.1 1.5 76.6
Marketing, sales and administration 42.6 (1.7) 40.9
Future income tax expense 0.2 0.1 0.2
Net earnings 31.7 0.2 31.9
Earnings per share:
- Basic $ 1.11 $ 0.01 $ 1.12
- Diluted 1.11 0.01 1.12
-------------------------------------------------------------------------Financial Instruments
Effective July 1, 2008, the Company implemented new CICA Handbook Section
3862 "Financial Instruments - Disclosures" and CICA Handbook Section 3863
"Financial Instruments - Presentation", which is effective for fiscal years
beginning on or after October 1, 2007. These standards replace the existing
CICA Handbook Section 3861 "Financial Instruments - Disclosure and
Presentation". These new standards are harmonized with International Financial
Reporting Standards ("IFRS").
CICA Handbook Section 3862 requires increased disclosures regarding the
risks associated with financial instruments and how these risks are managed.
Section 3863 carries forward the presentation standards for financial
instruments and non-financial derivatives and provides additional guidance for
the classification of financial instruments, from the perspective of the
issuer, between liabilities and equity. The adoption of these new standards
did not require any changes to the Company's accounting, however required
additional disclosure in the notes to the consolidated financial statements.
Capital Disclosures
Effective July 1, 2008, the Company implemented the new CICA Handbook
Section 1535 "Capital Disclosures", which is effective for fiscal years
beginning on or after October 1, 2007. The new standard requires entities to
disclose information about their objectives, policies and processes for
managing capital, as well as their compliance with any externally imposed
capital requirements. The adoption of this standard did not require any
changes to the Company's accounting, however did require additional disclosure
in the notes to the consolidated financial statements.Future Accounting Standards
---------------------------The CICA has recently issued or proposes to issue the following new
accounting standards, however they have not yet become effective as per the
transitional guidelines contained within each standard:
International Financial Reporting Standards
In February 2008, the Accounting Standards Board of the CICA ("AcSB")
confirmed that Canadian generally accepted accounting principles ("GAAP") for
publicly accountable enterprises will be replaced by 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. The key areas
identified included inventories, employee future benefits, impairment
analysis, IFRS 1 choices, capital assets, income taxes, and financial
statement presentation and disclosure. Initial findings indicate that changes
in accounting policies will be required and are likely to materially impact
the Company's consolidated financial statements. As described in the
"Accounting Standards - Implemented in 2009" section of this MD&A, the
conversion of inventories has already been implemented in this year's
financial statements. The impact on other business activities, disclosure
controls and procedures and internal controls over financial reporting will be
assessed once the impacts of the standards as a whole are identified.
To date the Company has engaged an external advisor and established a
working team, held an IFRS training session tailored specifically to Corby for
key members of management and the Audit Committee. The IFRS team has performed
detailed assessments on certain key areas identified and continues to report
its progress and results to the Audit Committee on a quarterly basis.
The company will continue to execute the transition in accordance with
its plan, and also continue to provide training to its key employees and
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.
Goodwill and Intangible Assets
In February 2008, the Accounting Standards Board issued a new accounting
standard, Section 3064 "Goodwill and Intangible Assets", to replace current
Section 3062 "Goodwill and Other Intangible Assets". The new standard
prescribes new methods for recognizing, measuring, presenting and disclosing
goodwill and intangible assets. As this new standard is effective for fiscal
years beginning on or after October 1, 2008, Corby will implement it in the
first quarter of fiscal 2010. The Company is currently assessing the impact of
this new standard on its consolidated financial statements.Disclosure Controls and Procedures
----------------------------------The Company maintains a system of disclosure controls and procedures that
has been designed to provide reasonable assurance that information required to
be disclosed by the Company in its public filings is recorded, processed,
summarized and reported within required time periods and includes controls and
procedures designed to ensure that all relevant information is accumulated and
communicated to senior management, including the Company's Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions
regarding required disclosure.
Management, with the participation of the CEO and CFO, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in National Instrument 52-109) as at June 30, 2009 and has concluded that such
disclosure controls and procedures are effective based upon such evaluation.Internal Controls Over Financial Reporting
------------------------------------------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 controls systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be designed
effectively can provide only reasonable assurance with respect to financial
reporting and financial statement preparation.
Management, with the participation of the CEO and CFO, has evaluated the
effectiveness of the Company's internal control over financial reporting as at
June 30, 2009 and has concluded that internal control over financial reporting
is designed and operating effectively to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Canadian GAAP.
Management's assessment was based on the framework established in Internal
Control - Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission.
There were no changes in internal control over financial reporting during
the Company's most recent interim period that have materially affected, or are
reasonably likely to materially affect, the Company's internal 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 Canada is subject to government policy,
extensive regulatory requirements and significant rates of taxation at both
the federal and provincial levels. As a result, changes in the government
policy, regulatory and/or taxation environments within the beverage alcohol
industry may affect Corby's business operations, including changes in market
dynamics or changes in consumer consumption patterns.
A specific example of such a situation is the previously mentioned
increase in provincial mark-up applied to beverage alcohol products sold in
Alberta, as announced by the Alberta Gaming and Liquor Commission. However,
three months later, the Alberta Premier reversed this decision. Please see the
"Significant Events" section of this MD&A for further details.
In addition, certain Canadian whiskies are subject to an increased rate
of excise duty effective July 1, 2009. This increase is the result of
legislation passed by the federal government on May 2, 2006, which served to
increase the rate of excise duty on spirits by 5.7%. It is estimated that the
application of these higher excise duty rates will reduce Corby's annual sales
by $1.3 million, and translate to a reduction of net earnings of $0.9 million.
It is not anticipated that these higher excise rates can be passed on to
consumers through higher prices in the near term.
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 Canada is largely accomplished through
the government owned provincial liquor boards, and therefore an interruption
(e.g., labour strike) for any length of time may have a significant impact on
the Company's ability to sell its products in a particular province and or
market.
Supply chain interruptions 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
Canada.
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 manufacturer 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 United States
dollar. Partially mitigating this risk is the fact that the Company also sells
certain of its goods in the same foreign currencies. As purchases from US
based suppliers typically exceed revenues from US based customers, a decline
in the Canadian dollar versus the US dollar can have a negative impact on the
Company's financial results. In addition, and subject to competitive
conditions, changes in foreign currency rates may be passed on to consumers
through pricing over the long-term.
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 changes in the business strategies and outlook of the
Company. Given the current state of the economy, certain of the aforementioned
factors affecting the determination of fair value may be impacted, and as a
result the Company's financial results may be adversely affected.
The following chart summarizes Corby's goodwill and intangible assets and
details the amounts associated with each brand (or basket of brands) and
market:-------------------------------------------------------------------------
Value as at June 30, 2009
---------------------------------
Associated Brand Associated Market Goodwill Intangibles Total
----------------- ------------------ ---------------------------------
Various PR brands Canada $ - $ 57.3 $ 57.3
Seagram Coolers Canada 4.0 16.3 20.3
Lamb's rum United Kingdom 1.4 11.8 13.2
Meaghers and De Kuyper
liqueurs Canada 4.5 - 4.5
-------------------------------------------------------------------------
$ 9.9 $ 85.4 $ 95.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 discussion of the potential liquidity risk associated with Corby's
defined benefit pension plans, refer to the "Liquidity and Capital Resources"
section of this MD&A.CORBY DISTILLERIES LIMITED
CONSOLIDATED BALANCE SHEETS
As at June 30, 2009 and 2008
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
2009 2008(1)
-----------------------
ASSETS
Current
Deposits in cash management pools (Note 2) $ 62,726 $ 58,553
Accounts receivable 28,640 21,873
Income and other taxes recoverable 1,478 -
Inventories (Note 4) 53,987 50,876
Prepaid expenses 1,582 1,936
Future income taxes (Note 5) 551 164
-------------------------------------------------------------------------
148,964 133,402
Capital assets (Note 6) 14,553 12,010
Employee future benefits (Note 7) 11,382 8,135
Goodwill (Note 8) 9,856 9,856
Intangible assets (Note 9) 85,420 90,103
-------------------------------------------------------------------------
$ 270,175 $ 253,506
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 20,416 $ 19,248
Income and other taxes payable - 1,016
-------------------------------------------------------------------------
20,416 20,264
Employee future benefits (Note 7) 5,923 5,023
Future income taxes (Note 5) 7,605 6,425
-------------------------------------------------------------------------
33,944 31,712
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 10) 14,304 14,304
Retained earnings 221,927 207,490
-------------------------------------------------------------------------
236,231 221,794
-------------------------------------------------------------------------
$ 270,175 $ 253,506
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to Note 2 for impact of new accounting policies
See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
-------------------------------------------------------------------------
For the
Three Months Ended For the Year Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2009 2008(1) 2009 2008(1)
----------------------- -----------------------
OPERATING REVENUE
Sales $ 36,887 $ 36,398 $ 152,592 $ 147,916
Commissions (Note 9) 4,554 3,200 16,694 15,402
-------------------------------------------------------------------------
41,441 39,598 169,286 163,318
-------------------------------------------------------------------------
OPERATING COSTS
Cost of sales 19,983 19,810 79,638 76,560
Marketing, sales and
administration 10,905 11,008 44,786 40,934
Amortization 415 420 1,457 1,199
-------------------------------------------------------------------------
31,303 31,238 125,881 118,693
-------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 10,138 8,360 43,405 44,625
-------------------------------------------------------------------------
OTHER INCOME AND EXPENSES
Interest income 204 463 1,649 2,427
Foreign exchange loss (112) (129) (783) (302)
(Loss) gain on disposal
of capital assets (5) - 178 -
-------------------------------------------------------------------------
87 334 1,044 2,125
-------------------------------------------------------------------------
EARNINGS BEFORE INCOME
TAXES 10,225 8,694 44,449 46,750
-------------------------------------------------------------------------
INCOME TAXES (Note 5)
Current 2,472 2,055 13,275 14,646
Future 385 693 793 248
-------------------------------------------------------------------------
2,857 2,748 14,068 14,894
-------------------------------------------------------------------------
NET EARNINGS $ 7,368 $ 5,946 $ 30,381 $ 31,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
(Note 12) $ 0.26 $ 0.21 $ 1.07 $ 1.12
DILUTED EARNINGS PER SHARE
(Note 12) $ 0.26 $ 0.21 $ 1.07 $ 1.12
-------------------------------------------------------------------------
(1) Refer to Note 2 for impact of new accounting policies
See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the
Three Months Ended For the Year Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2009 2008(1) 2009 2008(1)
----------------------- -----------------------
NET EARNINGS $ 7,368 $ 5,946 $ 30,381 $ 31,856
OTHER COMPREHENSIVE INCOME - - - -
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 7,368 $ 5,946 $ 30,381 $ 31,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to Note 2 for impact of new accounting policies
See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the Year Ended
-----------------------
June 30, June 30,
2009 2008(1)
-----------------------
SHARE CAPITAL
Balance, beginning of year $ 14,304 $ 14,304
Transactions, net - -
-------------------------------------------------------------------------
Balance, end of year $ 14,304 $ 14,304
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year as previously
reported $ 204,961 $ 189,215
Impact of adoption of new accounting standard
(Note 2) 2,529 2,363
-------------------------------------------------------------------------
Retained earnings, beginning of year as
restated $ 207,490 $ 191,578
Net earnings 30,381 31,856
Dividends (15,944) (15,944)
-------------------------------------------------------------------------
Balance, end of year $ 221,927 $ 207,490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year $ - $ -
Other comprehensive income for the year - -
-------------------------------------------------------------------------
Balance, end of year $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to Note 2 for impact of new accounting policies
See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
For the
Three Months Ended For the Year Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2009 2008(1) 2009 2008(1)
----------------------- -----------------------
OPERATING ACTIVITIES
Net earnings $ 7,368 $ 5,946 $ 30,381 $ 31,856
Items not affecting cash
Amortization 1,585 1,638 6,140 6,086
Loss (gain) on disposal
of capital assets 5 - (178) -
Future income taxes 385 693 793 248
Employee future benefits (1,896) (1,265) (2,347) 121
-------------------------------------------------------------------------
7,447 7,012 34,789 38,311
Net change in non-cash
working capital balances
(Note 13) 1,758 (2,885) (10,850) (7,263)
-------------------------------------------------------------------------
Cash flows provided by
operating activities 9,205 4,127 23,939 31,048
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to capital assets (932) (2,436) (4,403) (3,540)
Proceeds from disposal of
capital assets 12 - 581 -
(Deposits in) draws from
cash management pools (4,299) 2,295 (4,173) (11,564)
-------------------------------------------------------------------------
Cash flows used in investing
activities (5,219) (141) (7,995) (15,104)
-------------------------------------------------------------------------
FINANCING ACTIVITY
Dividends paid (3,986) (3,986) (15,944) (15,944)
-------------------------------------------------------------------------
Cash flows used in
financing activity (3,986) (3,986) (15,944) (15,944)
-------------------------------------------------------------------------
NET CHANGE IN CASH - - - -
CASH, BEGINNING OF PERIOD - - - -
-------------------------------------------------------------------------
CASH, END OF PERIOD $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest received $ 204 $ 417 $ 1,649 $ 2,381
Income taxes paid $ 4,600 $ 3,472 $ 16,203 $ 15,512
-------------------------------------------------------------------------
(1) Refer to Note 2 for impact of new accounting policies
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND JUNE 30, 2008
(In thousands of Canadian dollars, except per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Corby Distilleries Limited is a leading Canadian manufacturer and
marketer of spirits and importer of wines. The Company derives its
revenues from the sale of its owned-brands in Canada and other
international markets, as well as earning commissions from the
representation of selected non-owned brands in the Canadian marketplace.
Revenues predominately consist of sales made to each of the provincial
liquor boards in Canada.
Corby Distilleries Limited is controlled by Hiram Walker & Sons Limited
("HWSL"), a wholly owned subsidiary of Pernod Ricard, S.A. ("PR"), a
French public limited company, which owned 51.6% of the outstanding
voting Class A Common Shares of Corby as at June 30, 2009.
Basis of Consolidation
The consolidated financial statements include the accounts of Corby
Distilleries Limited and its subsidiaries, collectively referred to as
"Corby" or the "Company". All intercompany balances and transactions are
eliminated on consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting year.
Estimates are used when accounting for items such as allowance for
uncollectible accounts receivable, inventory obsolescence, allocating the
fair value between goodwill and intangibles, amortization, employee
future benefits, income taxes, accruals and contingencies and testing
goodwill, intangible assets and long-lived assets for impairment. Changes
in those estimates could materially affect the consolidated financial
statements.
Revenue Recognition
Sales and commissions are recognized when the price is fixed or
determinable, collectability is reasonably assured, and title for goods
passes to the customer. Sales are presented net of customer and consumer
discounts and taxes. The large majority of the Company's sales are to
government controlled liquor boards. As a result, collection of accounts
receivable is reasonably assured.
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 additional information on
these balances, see Note 2, "Changes in Accounting Policies" and Note 14,
"Related Party Transactions".
Inventories
Inventories are measured at the lower of cost (acquisition cost and cost
of production, including indirect production overheads) and net
realizable value. Net realizable value is the selling price less the
estimated cost of completion and sale of the inventories. Most
inventories are valued using the average cost method. The cost of
long-cycle inventories is calculated using a single method which includes
distilling and ageing maturing costs but excludes finance costs. These
inventories are classified in current assets, although a substantial part
remains in inventory for more than one year before being sold in order to
undergo the ageing maturing process used for certain spirits.
Capital Assets
Buildings, machinery and equipment and other capital assets are recorded
at cost, net of accumulated amortization. Amortization is recorded on a
straight-line basis over the estimated useful lives of the assets as
indicated below.
Buildings 40 to 50 years
Machinery and equipment 3 to 12 years
Other capital assets 1 to 25 years
Employee Future Benefits
The Company accrues its obligations under employee benefit plans and its
related costs, net of plan assets and recognizes the cost of retirement
benefits and certain post-employment benefits over the periods in which
employees render services to the Company in return for the benefits.
Other post-employment benefits are recognized when the event that
obligates the Company occurs.
The Company has the following policies:
- The cost of pensions and other retirement benefits earned by
employees is actuarially determined using the projected benefit
method prorated on service and management's best estimate of expected
plan investment performance, salary escalation, retirement ages of
employees and expected health care costs.
- For the purpose of calculating the expected return on plan assets,
those assets are valued at fair values.
- Past service costs from plan amendments and the transitional asset
are amortized on a straight-line basis over the average remaining
service life of active members expected to receive benefits under the
plan.
- Net actuarial gains or losses are amortized based on the corridor
method. Under the corridor method, cumulative gains and losses in
excess of 10% of the greater of the accrued benefit obligation and
the market value of plan assets are amortized over the average
remaining service period of active members expected to receive
benefits under the plan.
- The measurement date of the plans' assets and obligations is
June 30, 2009.
Long-lived Assets
The Company's long-lived assets are comprised of its capital assets, and
its finite-lived intangible assets relating to Corby's long-term
representation rights. Long-lived assets are tested for impairment when
events or changes in circumstances indicate their carrying value exceeds
the sum of the undiscounted cash flows expected from their use and
eventual disposal. If estimated future undiscounted cash flows are not
sufficient to recover the carrying value of the assets, an impairment
charge is recorded for the amount by which the long-lived assets'
carrying value exceeds fair value. Fair value is determined using
appraisals, management estimates or discounted cash flow calculations.
Goodwill
Goodwill represents the excess of the purchase price of an acquired
business over the fair value of the underlying net assets, including
intangible assets, at the date of acquisition. Goodwill is deemed to have
an indefinite life and therefore is not amortized. Goodwill is tested for
impairment on an annual basis or more frequently if events or changes in
circumstances indicate that the asset might be impaired. In the event of
impairment, the excess of the carrying amount over the fair value of
these assets would be charged to earnings.
Intangible Assets
Intangible assets are comprised of long-term representation rights, and
trademarks and licenses. 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.
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.
In the event of impairment, the excess of the carrying amount over the
fair value of these assets would be charged to earnings.
Income Taxes
Income taxes are accounted for using the asset and liability method.
Under this method, future income tax assets and liabilities are
recognized for temporary differences between financial statement carrying
amounts of assets and liabilities and their respective income tax bases.
A future income tax asset or liability is estimated for each temporary
difference using substantively enacted income tax rates and laws expected
to be in effect when the asset is realized or the liability is settled. A
valuation allowance is established, if necessary, to reduce any future
income tax asset to an amount that is more likely than not to be
realized.
Foreign Currency Translation
Monetary assets and liabilities of the Company are translated at exchange
rates in effect at the balance sheet dates. Revenues and expenses are
translated at rates of exchange prevailing on the transaction dates. All
exchange gains or losses are included in earnings.
Stock Based Compensation Plans
The Company utilizes a Restricted Share Units Plan as its long-term
incentive plan. Through this Plan, restricted share units ("RSUs") will
be granted to certain officers and employees at a grant price equal to
the market closing price of the Company's Voting Class A Common Shares on
the last day prior to grant. RSUs vest at the end of a three year term
subject to the achievement of pre-determined corporate performance
targets. The related compensation expense is recognized over this period.
Unvested RSUs will attract dividend equivalent units whenever dividends
are paid on the Voting Class A Common Shares of the Company and will be
immediately reinvested into additional RSUs which will vest and become
payable at the end of the three year vesting period, subject to the same
performance conditions as the original RSU award. On the date of vesting,
the holder will be entitled to the cash value of the number of RSUs
granted, plus any RSUs received from reinvested dividend-equivalents.
RSUs do not entitle participants to acquire any rights or entitlements as
a shareholder of the Company.
Classification of Financial Instruments
Financial instruments are classified into one of the following five
categories: held for trading, held-to-maturity investments, loans and
receivables, available-for-sale financial assets, or other financial
liabilities. The classification determines the accounting treatment of
the instrument. The classification is determined by the Company when the
financial instrument is initially recorded, based on the underlying
purpose of the instrument.
Corby's financial assets and financial liabilities are classified and
measured as follows:
Financial Asset/Liability Category Measurement
-------------------------------------------------------------------------
Deposits in cash
management pools Held for trading Fair value
Accounts receivable Loans and receivables Amortized cost
Accounts payable and
accrued liabilities Other financial liabilities Amortized cost
-------------------------------------------------------------------------
Financial instruments measured at amortized cost are initially recognized
at fair value and then subsequently at amortized cost, with gains and
losses recognized in earnings in the period in which the gain or loss
occurs. Changes in fair value of financial instruments classified as held
for trading are recorded in net earnings in the period of change.
2. CHANGES IN ACCOUNTING POLICIES
Deposits in Cash Management Pools
Corby reviewed its presentation of cash flow and its cash and cash
equivalent balances on its balance sheet. As a result of this review,
Corby determined that it would change its accounting policy defining cash
and cash equivalents and correspondingly reclassify its balance sheet and
cash flow presentation. The new policy classifies cash associated with
the Mirror Agreement (referred to in Note 14), which was previously
included in cash and cash equivalents, as "Deposits in cash management
pools" and reflects cash flows arising from deposits in and withdrawals
from such cash pools as cash flows from investing activities.
Although none of the agreements or conditions governing these deposits
has changed since the inception of the cash management arrangements,
Corby has decided to change its presentation of such deposits to show
them as a separate investment and not as a component of cash and cash
equivalents. Corby continues to have the contractual right to withdraw
these funds or terminate these cash management arrangements upon
providing five days written notice, and Corby continues to access funds
deposited in these accounts on a daily basis.
For more information regarding the Mirror Agreement, please refer to Note
14 which further describes Corby's related party transactions.
Deposits in Cash Management Pools (continued)
The June 30, 2008 consolidated balance sheet has been reclassified to
conform to the current year's presentation. A summary of the effects of
the reclassification and change in accounting policy is as follows:
-------------------------------------------------------------------------
As Change in As
Previously Accounting Currently
Reported Policy Reported
-------------------------------------------------------------------------
Consolidated Balance Sheet
Cash and cash equivalents $ 58,553 $ (58,553) $ -
Deposits in cash management pools - 58,553 58,553
-------------------------------------------------------------------------
Consolidated Statement of Cash Flow
Operating Activities
Net earnings, adjusted for items not
affecting cash $ 38,378 $ (67) $ 38,311
Net change in non-cash working
capital (7,209) (54) (7,263)
-------------------------------------------------------------------------
Cash flows from operating activities 31,169 (121) 31,048
-------------------------------------------------------------------------
Investing Activities
Deposits in cash management pools - (11,564) (11,564)
-------------------------------------------------------------------------
Cash flows used in investing
activities (3,540) (15,104) (15,104)
-------------------------------------------------------------------------
Effect of exchange rate changes on
cash (121) 121 -
-------------------------------------------------------------------------
Net change in cash and cash
equivalents 11,564 (11,564) -
Cash and cash equivalents,
beginning of year 46,989 (46,989) -
-------------------------------------------------------------------------
Cash and cash equivalents, end
of year $58,553 $ (58,553) $ -
-------------------------------------------------------------------------
Inventories
Effective July 1, 2008 (the first day of the Company's 2009 fiscal year),
the Company implemented, on a retrospective basis with restatement, the
new Canadian Institute of Chartered Accountants ("CICA") Handbook Section
3031 "Inventories", which is effective for interim and annual financial
statements for fiscal years beginning on or after January 1, 2008.
The new standard provides the Canadian equivalent to International
Financial Reporting Standard IAS 2 "Inventories". Section 3031 prescribes
measurement of inventories at the lower of cost and net realizable value.
It provides guidance on the determination of cost, including allocation
of overheads and other costs to inventories, prohibits the use of the
last-in, first-out (LIFO) method, and requires the reversal of previous
write-downs when there is a subsequent increase in the value of
inventories. It also requires greater disclosure regarding inventories
and cost of sales.
As a result of the retrospective implementation of this new standard, the
impact on previously reported balances for the year ended June 30, 2008
is as follows:
As Change in As
Previously Accounting Currently
Reported Policy Reported
-------------------------------------------------------------------------
Retained earnings, beginning of year $ 189,215 $ 2,363 $ 191,578
Retained earnings, end of year 204,961 2,529 207,490
Inventories 47,302 3,574 50,876
Future income tax liability 5,380 1,045 6,425
Cost of sales 75,096 1,464 76,560
Marketing, sales and administration 42,633 (1,699) 40,934
Future income tax expense 179 69 248
Net earnings 31,690 166 31,856
Earnings per share:
- Basic $ 1.11 $ 0.01 $ 1.12
- Diluted 1.11 0.01 1.12
-------------------------------------------------------------------------
Financial Instruments
Effective July 1, 2008, the Company implemented new CICA Handbook Section
3862 "Financial Instruments - Disclosures" and CICA Handbook Section 3863
"Financial Instruments - Presentation", which is effective for fiscal
years beginning on or after October 1, 2007. These standards replace the
existing CICA Handbook Section 3861 "Financial Instruments - Disclosure
and Presentation". These new standards are harmonized with International
Financial Reporting Standards ("IFRS").
CICA Handbook Section 3862 requires increased disclosures regarding the
risks associated with financial instruments and how these risks are
managed. Section 3863 carries forward the presentation standards for
financial instruments and non-financial derivatives and provides
additional guidance for the classification of financial instruments, from
the perspective of the issuer, between liabilities and equity. The
adoption of these new standards does not require any changes to the
Company's accounting, however does require additional note disclosure,
which is included in Note 16.
Capital Disclosures
Effective July 1, 2008, the Company implemented the new CICA Handbook
Section 1535 "Capital Disclosures", which is effective for fiscal years
beginning on or after October 1, 2007. The new standard requires entities
to disclose information about their objectives, policies and processes
for managing capital, as well as their compliance with any externally
imposed capital requirements. The adoption of this standard does not
require any changes to the Company's accounting, however does require
additional note disclosure, which is included in Note 17.
3. FUTURE ACCOUNTING STANDARDS
The CICA has recently issued or proposes to issue the following new
accounting standards, however they have not yet become effective as per
the transitional guidelines contained within each standard:
International Financial Reporting Standards
In February 2008, the Accounting Standards Board ("AcSB") confirmed that
Canadian generally accepted accounting principles ("GAAP") for publicly
accountable enterprises will be replaced by 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. The key
areas identified included inventories, employee future benefits,
impairment analysis, IFRS 1 choices, capital assets, income taxes, and
financial statement presentation and disclosure. Initial findings
indicate that changes in accounting policies will be required and are
likely to materially impact the Company's consolidated financial
statements. As described in Note 2, the conversion of inventories has
already been implemented in this year's financial statements.
To date the Company has engaged an external advisor, established a
working team and held an IFRS training session tailored specifically to
Corby for key members of management and the Audit Committee. The IFRS
team has performed detailed assessments on certain of the key areas
identified and continues to report its progress and results to the Audit
Committee on a quarterly basis.
The Company will continue to execute the transition in accordance with
its plan, and also continue to provide training to its key employees. In
addition, the Company will 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.
Goodwill and Intangible Assets
In February 2008, the Accounting Standards Board issued a new accounting
standard, Section 3064 "Goodwill and Intangible Assets", to replace
current Section 3062 "Goodwill and Other Intangible Assets". The new
standard prescribes new methods for recognizing, measuring, presenting
and disclosing goodwill and intangible assets. As this new standard is
effective for fiscal years beginning on or after October 1, 2008, Corby
will implement it in the first quarter of fiscal 2010. The Company is
currently assessing the impact of this new standard on its consolidated
financial statements.
4. INVENTORIES
2009 2008
-------------------------------------------------------------------------
Raw materials $ 5,919 $ 6,026
Work-in-progress 39,180 32,296
Finished goods 8,888 12,554
-------------------------------------------------------------------------
$ 53,987 $ 50,876
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of inventory recognized as an expense and included in cost of
goods sold during the year ended June 30, 2009 was $61,877 (2008 -
$63,068). During the year, there were no significant write-downs of
inventory as a result of net realizable value being lower than cost and
no inventory write-downs recognized in previous years were reversed.
5. INCOME TAXES
The tax effects of temporary differences and loss carry forwards that
give rise to significant portions of the future income tax assets and
future income tax liabilities are presented below:
2009 2008
-------------------------------------------------------------------------
Future income tax assets
Current
Bad debt and inventory reserves $ 63 $ 107
Non-capital losses available for carry forward - 57
Restricted stock unit reserve 201 -
Tax credit carry-forward 12 -
Unrealized foreign exchange 275 -
-------------------------------------------------------------------------
$ 551 $ 164
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future income tax liabilities
Long term
Employee future benefits $ 1,225 $ 902
Capital assets 1,419 529
Inventories 877 1,045
Intangible assets and goodwill 4,084 3,949
-------------------------------------------------------------------------
$ 7,605 $ 6,425
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There are no capital loss carry forwards available for tax purposes.
The effective tax rate of 32% for the years ended June 30, 2009 and 2008
approximates the statutory tax rates of 32% and 33% for the years ended
June 30, 2009 and 2008, respectively.
6. CAPITAL ASSETS
2009 2008
-------------------------------------------------------------------------
Accum. Net Book Accum. Net Book
Cost Amort. Value Cost Amort. Value
-------------------------------------------------------------------------
Land $ 638 $ - $ 638 $ 638 $ - $ 638
Buildings 7,899 4,604 3,295 7,840 5,021 2,819
Machinery and
equipment 13,242 5,677 7,565 11,700 5,311 6,389
Other 4,280 1,225 3,055 3,167 1,003 2,164
-------------------------------------------------------------------------
$26,059 $ 11,506 $ 14,553 $ 23,345 $ 11,335 $ 12,010
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. EMPLOYEE FUTURE BENEFITS
The Company has two defined benefit plans for executives and salaried
employees, two supplementary executive retirement plans for retired and
current senior executives of the Company, and a post retirement benefit
plan covering retiree life insurance, health and dental care. Benefits
under these plans are based on years of service and compensation levels.
The latest valuations completed for these plans are dated December 31,
2007. The next required valuations must be completed with an effective
date no later than December 31, 2010.
Information about the Company's pension and other post retirement benefit
plans are, as follows:
2009 2008
-------------------------------------------------------------------------
Other Other
Pension Benefit Pension Benefit
Plans Plans Plans Plans
-------------------------------------------------------------------------
Fair value of plan assets
Fair value of plan assets,
beginning of year $ 41,896 $ - $ 42,843 $ -
Actual return on plan
assets (4,464) - 6 -
Employer contributions 4,828 700 2,765 616
Employee contributions 194 - 178 -
Benefits paid (3,266) (700) (3,896) (616)
-------------------------------------------------------------------------
Fair value of plan assets,
end of year $ 39,188 $ - $ 41,896 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accrued benefit obligation
Benefit obligation,
beginning of year $ 42,920 $ 11,782 $ 44,771 $ 11,574
Service cost 1,203 439 1,444 621
Interest cost 2,421 669 2,360 619
Employee contributions 194 - 177 -
Actuarial gain (5,685) (703) (1,936) (391)
Benefits paid (3,266) (700) (3,896) (641)
-------------------------------------------------------------------------
Accrued benefit obligation,
end of year $ 37,787 $ 11,487 $ 42,920 $ 11,782
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funded status
Funded status: plan
surplus (deficit) $ 1,401 $ (11,487) $ (1,024) $ (11,782)
Unamortized net
transition (asset)
obligation (2,136) 3,682 (2,468) 4,085
Unamortized past service
costs 777 - 856 -
Unamortized net
actuarial loss 11,340 1,882 10,771 2,674
-------------------------------------------------------------------------
Accrued benefit asset
(liability) $ 11,382 $ (5,923) $ 8,135 $ (5,023)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All pension plans other than the supplementary executive retirement plan
are in a funded deficit position. The aggregate fair value of plan assets
and accrued benefit obligation for these deficit position plans as at
June 30, 2009 is $30,695 and $32,534, respectively (2008 - $34,163 and
$37,001).
Significant actuarial assumptions adopted are, as follows:
2009 2008
-------------------------------------------------------------------------
Other Other
Pension Benefit Pension Benefit
Plans Plans Plans Plans
-------------------------------------------------------------------------
Accrued benefit obligation,
end of year
Discount rate 7.10% 7.10% 5.85% 5.85%
Compensation increase 3.50% N/A 3.50% N/A
Benefit expense, for the
year
Discount rate 5.85% 5.85% 5.50% 5.50%
Expected long term return
on assets 6.50% N/A 6.75% N/A
Compensation increase 3.50% N/A 4.00% N/A
The medical cost trend rates used was 10.0% for 2009 (2008 - 11% ), with
5.0% being the ultimate trend rate for years 2014 and thereafter. The
dental cost rates used was 5.0% for 2009 (2008 - 5%).
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects
in 2009:
Increase Decrease
-------------------------------------------------------------------------
Service and interest cost $ 79 $ (60)
Accrued benefit obligation 1,145 (956)
-------------------------------------------------------------------------
Components of the Company's pension and other post-retirement benefit
plans expense are, as follows:
2009 2008
-------------------------------------------------------------------------
Other Other
Pension Benefit Pension Benefit
Plans Plans Plans Plans
-------------------------------------------------------------------------
Service cost (including
provision for plan
expenses) $ 1,203 $ 439 $ 1,444 $ 621
Interest cost 2,421 669 2,360 619
Actual return on plan
assets 4,464 - (6) -
Actuarial loss (5,685) (703) (1,936) (391)
-------------------------------------------------------------------------
Costs arising in the period 2,403 405 1,862 849
Differences between:
Actual and expected
return on plan assets (6,687) - (2,214) -
Actuarial gain or loss
recognized for the year
and actuarial gain or
loss on accrued benefit
obligation 6,119 791 2,377 503
Amortization of plan
amendments and actual
plan amendments 80 - 80 -
Amortization of
transitional (asset)
obligation (333) 403 (333) 403
-------------------------------------------------------------------------
Net expense $ 1,582 $ 1,599 $ 1,772 $ 1,755
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Plan assets by category are, as follows:
2009 2008
-------------------------------------------------------------------------
Equity 50.9% 48.7%
Fixed income 34.9% 40.3%
Refundable taxes at Canada Revenue Agency / other 14.2% 11.0%
-------------------------------------------------------------------------
100.0% 100.0%
-------------------------------------------------------------------------
8. GOODWILL
2009 2008
-------------------------------------------------------------------------
Associated brands:
Meaghers and De Kuyper $ 4,476 $ 4,476
Seagram Coolers 3,970 3,970
Lamb's rum International (1) 1,410 1,410
-------------------------------------------------------------------------
$ 9,856 $ 9,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Relates solely to the Lamb's rum business outside of Canada.
9. INTANGIBLE ASSETS
2009 2008
-------------------------------------------------------------------------
Accumu- Accumu-
lated lated
Amorti- Net Book Amorti- Net Book
Cost zation Value Cost zation Value
-------------------------------------------------------------------------
Long-term
representation
rights $ 70,440 $ 13,070 $ 57,370 $ 70,440 $ 8,387 $ 62,053
Trademarks and
licenses 28,050 - 28,050 28,050 - 28,050
-------------------------------------------------------------------------
$ 98,490 $ 13,070 $ 85,420 $ 98,490 $ 8,387 $ 90,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company amortized $4,683 (2008 - $4,887) of long-term representation
rights into commission income during the current fiscal year.
There were no write downs of intangible assets due to impairment during
the years ended June 30, 2009 and 2008.
10. SHARE CAPITAL
2009 2008
-------------------------------------------------------------------------
Number of shares authorized:
Voting Class A Common Shares - no par value Unlimited Unlimited
Non-voting Class B Common Shares - no par
value Unlimited Unlimited
Number of shares issued and fully paid:
Voting Class A Common Shares 24,274,320 24,274,320
Non-voting Class B Common Shares 4,194,536 4,194,536
-------------------------------------------------------------------------
28,468,856 28,468,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stated value $ 14,304 $ 14,304
-------------------------------------------------------------------------
11. RESTRICTED SHARE UNITS PLAN
2009 2008
-------------------------------------------------------------------------
Weighted Weighted
Restricted Average Restricted Average
Share Grant Date Share Grant Date
Units Fair Value Units Fair Value
-------------------------------------------------------------------------
Non-vested, beginning of
year 38,931 $ 25.17 13,550 $ 24.92
Granted 34,261 19.76 24,576 25.40
Reinvested dividend
equivalent units 2,556 16.23 805 22.39
Vested - - - -
Forfeited - - - -
-------------------------------------------------------------------------
Non-vested, end of year 75,748 $ 22.42 38,931 $ 25.17
-------------------------------------------------------------------------
Compensation expense related to this plan for the year ended June 30,
2009 was $374 (2008 - $156).
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2009 2008
-------------------------------------------------------------------------
Numerator:
Net earnings $30,381 $31,856
Denominator:
Weighted average shares outstanding 28,468,856 28,468,856
-------------------------------------------------------------------------
13. CHANGES IN NON-CASH WORKING CAPITAL
2009 2008
-------------------------------------------------------------------------
Accounts receivable $ (6,767) $ 3,091
Inventories (3,111) (4,489)
Prepaid expenses 354 (923)
Income tax and other tax recoverable (1,478) -
Accounts payable and accrued liabilities 1,168 (3,357)
Income and other taxes payable (1,016) (1,585)
-------------------------------------------------------------------------
$ (10,850) $ (7,263)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS
Absolut Vodka Representation Agreement
On September 26, 2008, Corby entered into an agreement with its ultimate
parent company, PR. The agreement provides Corby the exclusive right to
represent the Absolut vodka brand in Canada effective October 1, 2008 for
the next five years to September 30, 2013. As part of this agreement,
Corby also received the exclusive right to represent the Plymouth gin and
Level vodka brands. The distribution of Absolut vodka is expected to add
approximately $2.5 million annually to Corby's commission income and
about $1.2 million annually to net earnings in the first full year. Corby
has also agreed to continue to participate in the existing cash pooling
arrangement (the Mirror Netting Service Agreement) with PR's wholly-owned
Canadian subsidiaries for the next three years to October 1, 2011, unless
earlier terminated by Corby. Further, during the next three years to
October 1, 2011, Corby will not declare any special dividends, repurchase
shares or make acquisitions or capital investments outside the normal
course of business without PR's prior approval.
Deposits in Cash Management Pools
As previously discussed in Note 2, Corby participates in a cash pooling
arrangement under a 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. As a
result of Corby's participation in this agreement, Corby's credit risk
associated with its deposits in cash management pools is determinant upon
PR's credit rating. PR's credit rating as at June 30, 2009, as published
by Standard & Poor's and Moody's, was BB+ and Ba1, respectively. PR
compensates Corby for the benefit it receives from having the Company
participate in the Mirror Agreement, by paying interest to Corby based
upon the 30 day LIBOR rate plus 0.40%. Corby earned interest income of
$1,634 from PR during the year ended June 30, 2009 (2008 - $2,313). Corby
has the right to terminate its participation in the Mirror Agreement at
any time, subject to five days written notice.
HWSL, a wholly owned subsidiary of PR, owns in excess of 50% of the
issued voting common shares of Corby and therefore, for purposes of the
chart denoted below, HWSL is considered to be the Company's parent. PR is
considered to be Corby's ultimate parent and affiliated companies are
those that are also subsidiaries of PR.
Transactions and balances with parent and affiliated companies include
the following:
-------------------------------------------------------------------------
Financial
Statement
Nature of Classifi-
Nature of Transaction Relationship cation 2009 2008
-------------------------------------------------------------------------
I The Company renders Parent company Sales, $ 807 $ 847
blending and accounts
bottling services receivable
-------------------------------------------------------------------------
II The Company sells Affiliated Sales, $ 180 $ 734
certain of its companies accounts
products for resale receivable
at an export level
-------------------------------------------------------------------------
III The Company renders Parent company, Commissions, $16,753 $14,226
services, as the Ultimate accounts
sole and exclusive receivable
representative, for Parent company
purposes of and Affiliated
marketing and sales companies
of beverage alcohol
products in Canada
-------------------------------------------------------------------------
IV The Company Parent company Cost of $24,059 $25,161
sub-contracts and an sales,
virtually all of its Affiliated inventories
distilling, blending, company and accounts
bottling, storing and payable
production activities
-------------------------------------------------------------------------
V The Company Parent company Marketing, $ 2,287 $ 2,168
sub-contracts a sales and
significant portion administration
of its bookkeeping,
record keeping
services, certain
administrative
services, related
data processing and
maintenance of data
processing activities
-------------------------------------------------------------------------
VI The Company Parent company Cost of $ 3,095 $ 2,523
purchases a portion sales,
of its inventory inventories
used in production and accounts
activities payable
-------------------------------------------------------------------------
These transactions, which are settled the following month, 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. Transactions in sections III, IV, and V above are
covered under the terms of agreements with related parties. These
agreements include a non-competition clause whereby the Company ceded its
rights to sell beverage alcohol in bulk to third parties in favour of its
parent company.
Sales and Purchases of Bulk Whisky
In addition to the transactions noted above, during 2008 Corby purchased
and sold bulk whisky from/to HWSL at market prices, which was $2.70 per
original litre of alcohol ("OLA"). Note that there were no sales or
purchases of bulk whisky in 2009. The quantities of OLA and the related
exchange amount for each type of transaction are listed in the following
chart:
2009 2008
-------------------------------------------------------------------------
(Quantities stated in 000's
of original litres of Exchange Exchange
alcohol) Quantities Amount Quantities Amount
-------------------------------------------------------------------------
Sales - $ - 407 $ 1,100
Purchases - $ - 506 $ 1,365
-------------------------------------------------------------------------
Amounts included in accounts receivable and accounts payable and accrued
liabilities with respect to Corby's affiliates, parent company, and
ultimate parent company are as follows:
2009 2008
-------------------------------------------------------------------------
Accounts receivable - related parties $ 6,647 $ 5,072
Accounts payable - related parties (6,921) (3,997)
-------------------------------------------------------------------------
Net amount (payable to) receivable from related
parties $ (274) $ 1,075
-------------------------------------------------------------------------
15. 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 Canadian whisky, Lamb's rum, Polar Ice vodka,
McGuinness liqueurs and Seagram Coolers.
Corby's Commissions segment earns commission income from the
representation of non-owned beverage alcohol brands in Canada. Corby
represents leading international brands such as Absolut vodka, Chivas
Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey,
Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's
Creek and Wyndham Estate wines.
The Commissions segment's financial results are fully reported as
"commissions" on the consolidated statement of earnings. Therefore, a
chart detailing operational results by segment has not been provided as
no additional meaningful information would result.
Geographic information regarding the Company is as follows:
2009
-------------------------------------------------------------------------
United
States
of United Rest of
Canada America Kingdom World Total
-------------------------------------------------------------------------
Operating revenue $157,789 $ 5,982 $ 5,090 $ 425 $169,286
Capital assets 14,553 - - - 14,553
Goodwill 8,446 - 1,410 - 9,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
United
States
of United Rest of
Canada America Kingdom World Total
-------------------------------------------------------------------------
Operating revenue $152,409 $ 5,372 $ 5,165 $ 372 $163,318
Capital assets 12,010 - - - 12,010
Goodwill 8,446 - 1,410 - 9,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In 2009, operating revenue to three major customers accounted for 32%,
16%, and 11%, respectively (2008 - 29%, 17%, and 13%).
16. FINANCIAL INSTRUMENTS
Corby's financial instruments consist of its deposits in cash management
pools, accounts receivable and accounts payable and accrued liabilities
balances. Corby does not use derivative financial instruments.
Fair Value of Financial Instruments
-----------------------------------
The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to settle the financial assets and financial
liabilities as at the reporting date. The fair values of deposits in cash
management pools, accounts receivable and accounts payable approximate
their carrying values given their short-term maturities.
Financial Risk Management Objectives
------------------------------------
In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company does not use derivative financial instruments to
manage these risks, as management believes the risks arising from the
Company's financial instruments to be at an already acceptably low level.
These risks are discussed in more detail below.
Credit Risk
-----------
Credit risk arises from cash held with PR via Corby's participation in
the Mirror Agreement (further described in Note 14), 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
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. With respect to Corby's deposits in PR's cash
management pools, the Company monitors PR's credit rating in the normal
course of business, and has the right to terminate its participation in
the Mirror Agreement at any time, subject to five days written notice.
Liquidity Risk
--------------
Corby's sources of liquidity are its deposits in cash management pools of
$62,726 and its cash generated by operating activities. Corby's total
contractual maturities are represented by its accounts payable and
accrued liabilities balances which totaled $20,416 as at June 30, 2009
and are all due to be paid within one year. The Company believes that its
deposits in cash management pools combined with its historically strong
and consistent operational cash flows are more than sufficient to fund
its operations, investing activities and commitments for the foreseeable
future.
Corby does not have any investments in asset-backed commercial paper
("ABCP") and therefore has no exposure to this type of liquidity risk.
Interest Rate Risk
------------------
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.
Foreign Currency Risk
---------------------
Foreign currency risk exists as the Company sources a proportion of its
production requirements in foreign currencies, specifically the United
States dollar. Partially mitigating this risk is the fact that the
Company also sells certain of its goods in the same foreign currencies.
As purchases from US based suppliers exceed revenues from US based
customers, a decline in the Canadian dollar versus the US dollar can have
a negative impact on the Company's financial results. In addition, and
subject to competitive conditions, changes in foreign currency rates may
be passed on to consumers through pricing over the long-term.
Commodity Risk
--------------
Commodity risk exists as the manufacture of Corby's products requires the
procurement of several known commodities such as grains, sugar and
natural gas. The Company strives to partially mitigate this risk through
the use of longer term procurement contracts where possible. In addition,
subject to competitive conditions, the Company may pass on commodity
price changes to consumers via pricing.
17. CAPITAL MANAGEMENT
The Company's objectives when managing capital are:
- to ensure sufficient capital exists to allow management the
flexibility to execute its strategic plans; and
- to ensure shareholders receive a reasonable return on their
investment in the form of quarterly dividends.
Management includes the following items in its definition of capital:
2009 2008
-------------------------------------------------------------------------
Share capital $ 14,304 $ 14,304
Retained earnings 221,927 207,490
-------------------------------------------------------------------------
Net capital under management $ 236,231 $ 221,794
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company is not subject to any externally imposed capital
requirements.
The Company's dividend policy, which was updated September 26, 2008,
stipulates that barring any unanticipated developments, regular dividends
will be paid quarterly, on the basis of an annual amount equal to the
greater of 50% of net earnings per share in the preceding fiscal year
ended June 30, and $0.56 per share. In addition, Corby has agreed with PR
to certain restrictions, one of which precludes the Company from
declaring any special dividends until after October 1, 2011. These
restrictions are further described in Note 14. The Company's dividend
policy prior to September 26, 2008 was to pay quarterly dividends on the
basis of an annual amount of $0.56 per share.
The Company is meeting all of its objectives and stated policies with
respect to its management of capital.
18. COMMITMENTS
Future minimum payments under operating leases for premises and equipment
for the next five years and thereafter are as follows:
-------------------------------------------------------------------------
2010 1,379
2011 1,266
2012 1,138
2013 848
2014 719
Thereafter 2,856
-------------------------------------------------------------------------
$ 8,206
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. GUARANTEES
The Company may enter into agreements that may contain features that meet
the definition of a guarantee. A guarantee is defined to be a contract
(including an indemnity) that contingently requires the Company to make
payments to the guaranteed party in certain situations.
In the ordinary course of business, the Company provides indemnification
commitments to counterparties in transactions such as leasing and service
arrangements. These indemnification agreements require the Company to
compensate the counterparties for certain amounts and costs incurred as a
result of litigation claims. The terms of the indemnification agreements
will vary based on the contract and do not provide any limit on the
maximum potential liability.
20. CONTINGENCIES
The Company is contingently liable with respect to pending litigation and
claims arising in the normal course of business. Although the ultimate
outcome of these matters is not presently determinable, at this point in
time management believes that the resolution of all such pending matters
will not have a material adverse effect on the Company's financial
position or results of operations.
21. SUBSEQUENT EVENT
On July 27, 2009, PR announced the sale of the coffee liqueur brand Tia
Maria to an unrelated third party for 125 million Euros (equivalent to
approximately $192.5 million Canadian dollars).
Corby previously owned a 45% non-controlling interest of Tia Maria but
sold its interests to PR on September 29, 2006. The purchase and sale
agreement between Corby and PR contained a purchase price adjustment
clause which would allow for the Company to share in any after-tax
profits (as per a defined formula in the agreement) earned by PR in the
event they sold 100% of Tia Maria within three years of buying the
minority interest from Corby.
While the Tia Maria brand was sold within the three year timeframe as
outlined above, PR's net after-tax proceeds on an equivalent 45% basis
are approximately $72 million, which is less than Corby's after-tax
proceeds of $79.8 million. As a result, there will be no additional
proceeds paid to Corby as an adjustment to the original purchase price
agreed to between Corby and PR.%SEDAR: 00001138E
For further information: CORBY DISTILLERIES LIMITED: Patrick O'Driscoll,
President and Chief Executive Officer; Thierry Pourchet, Vice President and
Chief Financial Officer, Tel.: (416) 479-2400; Ali Mahdavi, Spinnaker Capital
Markets Inc., Tel.: (416) 962-3300, investors@corby.ca, www.Corby.ca
