EMPIRE COMPANY POSTS Q1 RESULTS
STELLARTON, NS, Sept. 10 /CNW/ - Empire Company Limited (TSX: EMP.A) today announced financial results for its first quarter ended July 31, 2010. For the first quarter, the Company recorded earnings before capital gains and other items of $81.6 million ($1.19 per share) compared to $72.2 million ($1.05 per share) in the first quarter last year, a 13.0 percent increase and a record quarterly level for the Company. Net earnings for the first quarter were $81.6 million ($1.19 per share) compared to $89.7 million ($1.31 per share) recorded in the first quarter last year.
First Quarter Highlights
- Revenue of $4.04 billion, up $72.7 million or 1.8 percent.
- Sobeys Inc. ("Sobeys") same-store sales increased 0.3 percent.
- Earnings before capital gains and other items of $81.6 million ($1.19
per share) compared to $72.2 million ($1.05 per share) last year.
- Capital gains and other items, net of tax, of $nil versus $17.5 million
last year.
- Net earnings of $81.6 million ($1.19 per share) compared to
$89.7 million ($1.31 per share) last year.
- Net debt to capital of 20.8 percent, down from 21.8 percent at the end
of the last fiscal year and 26.3 percent at the end of Q1 last year.
"Empire's operating earnings and financial condition continued to strengthen in the first quarter of fiscal 2011 as a result of continued solid performance from Sobeys and our real estate division," stated Paul Sobey, President and CEO. "Moving forward, the focus on our core businesses is unwavering as we work together to build long-term sustainable value."
Dividend Declaration
The Board of Directors declared a quarterly dividend of 20.0 cents per share on both the Non-Voting Class A shares and the Class B common shares that will be payable on October 29, 2010 to shareholders of record on October 15, 2010. The Board also declared regular dividends on the Company's outstanding preferred shares. The dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.
CONSOLIDATED FINANCIAL OVERVIEW
Revenue
Consolidated revenue for the first quarter of fiscal 2011 was $4.04 billion compared to $3.97 billion for the same quarter last year, an increase of $72.7 million or 1.8 percent. Sobeys' revenue equalled $3.98 billion versus $3.91 billion in the first quarter last year, an increase of $68.6 million or 1.8 percent. Sobeys' first quarter same-store sales increased 0.3 percent over the same quarter last year.
Real estate revenue in the first quarter was $19.1 million, an increase of $4.0 million from the $15.1 million recorded in the first quarter last year. Residential property revenue increased by $3.7 million while commercial property revenue increased by $0.3 million from the first quarter last year.
Investments and other operations reported revenue of $47.9 million in the first quarter of fiscal 2011 compared to $47.3 million in the first quarter of last year, an increase of $0.6 million.
Operating Income
Consolidated operating income in the first quarter was $140.3 million, an increase of $10.1 million or 7.8 percent from the $130.2 million recorded in the first quarter last year.
The contributors to the change in consolidated operating income from the first quarter last year are as follows:
(i) Sobeys' operating income contribution to Empire in the first
quarter totalled $126.2 million, an increase of $4.6 million or
3.8 percent from the $121.6 million recorded in the first quarter
last year.
(ii) Residential property operating income contribution in the first
quarter was $8.1 million, an increase of $3.0 million from the
$5.1 million recorded in the first quarter last year.
(iii) Commercial property (including Crombie REIT) operating income for
the quarter was $5.0 million compared to $4.6 million in the first
quarter last fiscal year, an increase of $0.4 million. Crombie REIT
contributed $4.1 million to operating income in the first quarter
versus a $4.9 million contribution in the first quarter last year.
(iv) Investments and other operations (net of corporate expenses)
contributed operating income of $1.0 million in the first quarter
compared to $(1.1) million in the first quarter last year. Equity
accounted earnings generated from the Company's 27.6 percent
interest in Wajax Income Fund ("Wajax") amounted to $3.4 million in
the first quarter versus $2.7 million in the first quarter last
year. Operating income from other operations (net of corporate
expenses) amounted to $(2.4) million compared to $(3.8) million in
the first quarter last year.
The table below presents a summary of financial performance for the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009.
Summary Table of Consolidated Financial Results
13 Weeks Ended
-----------------------
July 31, August 1,
($ in millions, except per share information) 2010 2009
---------- -----------
Segmented revenue
Food retailing $ 3,975.3 $ 3,906.7
---------- -----------
Real estate
Residential 15.1 11.4
Commercial 4.0 3.7
---------- -----------
19.1 15.1
---------- -----------
Investments and other operations 47.9 47.3
---------- -----------
4,042.3 3,969.1
Elimination (1.1) (0.6)
---------- -----------
$ 4,041.2 $ 3,968.5
---------- -----------
---------- -----------
Segmented operating income
Food retailing $ 126.2 $ 121.6
---------- -----------
Real estate
Residential 8.1 5.1
Crombie REIT(1) 4.1 4.9
Commercial 0.9 (0.3)
---------- -----------
13.1 9.7
---------- -----------
Investments and other operations
Wajax(2) 3.4 2.7
Other investments and operations,
net of corporate expenses (2.4) (3.8)
---------- -----------
1.0 (1.1)
---------- -----------
$ 140.3 $ 130.2
---------- -----------
---------- -----------
Earnings before capital gains (losses) and
other items $ 81.6 $ 72.2
Capital gains (losses) and other items, net of
tax - 17.5
---------- -----------
Net earnings $ 81.6 $ 89.7
---------- -----------
---------- -----------
Basic earnings per share
Operating earnings $ 1.19 $ 1.05
Capital gains (losses) and other items, net of
tax - 0.26
---------- -----------
Net earnings $ 1.19 $ 1.31
---------- -----------
---------- -----------
Basic weighted average number
of shares outstanding (in millions) 68.4 68.4
---------- -----------
---------- -----------
Diluted earnings per share
Operating earnings $ 1.19 $ 1.05
Capital gains (losses) and other items, net of
tax - 0.26
---------- -----------
Net earnings $ 1.19 $ 1.31
---------- -----------
---------- -----------
Diluted weighted average number
of shares outstanding (in millions) 68.5 68.5
---------- -----------
---------- -----------
Annualized dividends per share $ 0.80 $ 0.74
---------- -----------
---------- -----------
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(1) 47.4 percent equity accounted interest in Crombie REIT.
(2) 27.6 percent equity accounted interest in Wajax.
Additional segmented information is contained in note 12 of the unaudited consolidated financial statements for the first quarter of fiscal 2011 included in this release.
Interest Expense
Interest expense in the first quarter amounted to $19.6 million, an increase of $1.4 million or 7.7 percent from the $18.2 million recorded in the first quarter last year. The increase in interest expense largely reflects higher average interest rates applicable to funded debt levels during the quarter which are principally related to the issuance by Sobeys of a new 30-year Medium Term Note ("MTN") in the amount of $150.0 million on June 7, 2010, bearing an interest rate of 6.64 percent and higher rates applicable on floating rate debt.
Consolidated funded debt was $1,291.0 million at the end of the first quarter of fiscal 2011 compared to $1,287.6 million at the end of the first quarter last year, a $3.4 million or 0.3 percent increase.
Income Taxes
The effective income tax rate for the first quarter (excluding the impact of capital gains and other items) was 28.8 percent versus 31.1 percent in the first quarter last year. The decrease in effective income tax rate is primarily related to the decline in income tax rates throughout the different tax jurisdictions.
Earnings before Capital Gains and Other Items
Empire recorded earnings before capital gains and other items in the first quarter of fiscal 2011 of $81.6 million ($1.19 per share) compared to $72.2 million ($1.05 per share) in the first quarter last year, a $9.4 million or 13.0 percent increase. The improvement in earnings before capital gains and other items over the prior year was the result of a $10.1 million increase in operating income, and a $0.7 million decrease in minority interest, partially offset by a $1.4 million increase in interest expense.
The following table presents Empire's segmented earnings before capital gains and other items by division for the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009.
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13 Weeks Ended
-----------------------------------------------
July 31, Aug. 1, ($) (%)
($ in millions) 2010 2009 Change Change
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Food retailing(1) $ 74.7 $ 69.2 $ 5.5 7.9%
Real estate 8.5 6.1 2.4 39.3%
Investments & other
operations (1.6) (3.1) 1.5 48.4%
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Consolidated $ 81.6 $ 72.2 $ 9.4 13.0%
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(1) Adjusted for the impact of depreciation and amortization related to
the privatization of Sobeys in June 2007.
Capital Gains and Other Items
The Company recorded no capital gains and other items, net of tax, in the first quarter compared to $17.5 million in the first quarter last year. The capital gains and other items, net of tax, in the first quarter last year was primarily the result of a $17.0 million tax settlement related to the fiscal 2001 sale of shares in Hannaford Bros. Co.
The table below presents capital gains and other items, net of tax, for the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009.
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13 Weeks Ended
-----------------------------------
July 31, Aug. 1, ($)
($ in millions) 2010 2009 Change
-------------------------------------------------------------------------
Gain on sale of properties, net of
tax $ - $ 0.2 $ (0.2)
Foreign exchange gains, net of tax - 0.3 (0.3)
Hannaford tax settlement - 17.0 (17.0)
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$ - $ 17.5 $ (17.5)
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Net Earnings
Consolidated net earnings in the first quarter of fiscal 2011 equalled $81.6 million ($1.19 per share) compared to $89.7 million ($1.31 per share) in the first quarter last year. The decrease in first quarter net earnings of $8.1 million or 9.0 percent is attributed to the decrease in capital gains and other items, net of tax, of $17.5 million, partially offset by the $9.4 million increase in earnings before capital gains and other items as mentioned.
The following table presents Empire's segmented net earnings for the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009.
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13 Weeks Ended
-----------------------------------------------
July 31, Aug. 1, ($) (%)
($ in millions) 2010 2009 Change Change
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Food retailing(1) $ 74.7 $ 69.2 $ 5.5 7.9%
Real estate 8.5 6.1 2.4 39.3%
Investments & other
operations (1.6) 14.4 (16.0) (111.1%)
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Consolidated $ 81.6 $ 89.7 $ (8.1) (9.0%)
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(1) Adjusted for the impact of depreciation and amortization related to
the privatization of Sobeys in June 2007.
QUARTERLY RESULTS OF OPERATIONS
The following table is a summary of selected consolidated financial information derived from the Company's unaudited interim consolidated financial statements.
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Fiscal
2011 Fiscal 2010
---------- -----------------------------------------------
($ in
millions, Q1 Q4 Q3 Q2 Q1
except per (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
share July 31, May 1, Jan. 30, Oct. 31, Aug. 1,
information) 2010 2010 2010 2009 2009
-------------------------------------------------------------------------
Revenue $ 4,041.2 $ 3,836.8 $ 3,836.2 $ 3,874.7 $ 3,968.5
Operating
income 140.3 118.5 110.3 120.7 130.2
Operating
earnings(2) 81.6 71.9 68.3 72.1 72.2
Capital gains
(losses) and
other items,
net of tax - 1.6 - (1.7) 17.5
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Net earnings $ 81.6 $ 73.5 $ 68.3 $ 70.4 $ 89.7
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Per share
information,
basic
Operating
earnings $ 1.19 $ 1.05 $ 1.00 $ 1.06 $ 1.05
Capital gains
(losses) and
other items,
net of tax - 0.02 - (0.03) 0.26
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Net earnings $ 1.19 $ 1.07 $ 1.00 $ 1.03 $ 1.31
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Basic
weighted
average
number of
shares
outstanding
(in
millions)(3) 68.4 68.4 68.4 68.4 68.4
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Per share
information,
diluted
Operating
earnings $ 1.19 $ 1.05 $ 0.99 $ 1.06 $ 1.05
Capital gains
(losses) and
other items,
net of tax - 0.02 - (0.03) 0.26
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Net earnings $ 1.19 $ 1.07 $ 0.99 $ 1.03 $ 1.31
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Diluted
weighted
average
number of
shares
outstanding
(in
millions)(3) 68.5 68.5 68.5 68.5 68.5
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Fiscal 2009(1)
-------------------------------------------------------------------------
($ in
millions, Q4 Q3 Q2
except per (13 Weeks) (13 Weeks) (13 Weeks)
share May 2, Jan. 31, Nov. 1,
information) 2009 2009 2008
-------------------------------------------------------------------------
Revenue $ 3,709.0 $ 3,800.0 $ 3,727.9
Operating
income 109.3 115.3 113.3
Operating
earnings(2) 62.9 64.8 63.1
Capital gains
(losses) and
other items,
net of tax (0.8) (3.5) 2.5
-------------------------------------------------------------------------
Net earnings $ 62.1 $ 61.3 $ 65.6
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Per share
information,
basic
Operating
earnings $ 0.96 $ 0.99 $ 0.96
Capital gains
(losses) and
other items,
net of tax (0.01) (0.05) 0.04
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Net earnings $ 0.95 $ 0.94 $ 1.00
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Basic
weighted
average
number of
shares
outstanding
(in
millions)(3) 65.9 65.6 65.6
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-------------------------------------------------------------------------
Per share
information,
diluted
Operating
earnings $ 0.95 $ 0.98 $ 0.96
Capital gains
(losses) and
other items,
net of tax (0.01) (0.05) 0.04
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Net earnings $ 0.94 $ 0.93 $ 1.00
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Diluted
weighted
average
number of
shares
outstanding
(in
millions)(3) 66.0 65.7 65.7
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-------------------------------------------------------------------------
(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and intangible
assets. Please see the section entitled "Changes in Accounting
Policies" in the fiscal 2010 annual MD&A contained in Empire's 2010
annual report.
(2) Operating earnings is earnings before capital gains (losses) and
other items.
(3) The increase in the weighted average number of shares outstanding in
fiscal 2010 and fiscal 2011 reflects an equity issue completed on
April 24, 2009 which resulted in a total of 2,713,000 shares being
issued.
Consolidated sales and operating earnings growth have been influenced by the Company's investing activities, the competitive environment, cost management initiatives, food price and general industry trends, the cyclicality of both residential and commercial real estate and by other risk factors as outlined in the fiscal 2010 annual MD&A, as contained on pages 25 - 68 of the Company's 2010 Annual Report.
The Company does experience some seasonality, as evidenced in the results presented above, in particular, during the summer months and over holiday periods.
OPERATING PERFORMANCE BY DIVISION
FOOD RETAILING
Sobeys, a wholly-owned subsidiary, conducts business through more than 1,300 retail grocery stores (corporately owned and franchised) which operate in every province across Canada under retail banners that include Sobeys, IGA extra, Thrifty Foods, IGA, Foodland, FreshCo and Price Chopper, as well as Lawtons Drug Stores.
The table below presents Sobeys' contribution to Empire's consolidated revenue, operating income and net earnings.
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Year-over-
13 Weeks Ended Year
---------------------- -----------
July 31, Aug. 1, ($)
($ in millions) 2010 2009 Change
-------------------------------------------------------------------------
Sales $ 3,975.3 $ 3,906.7 $ 68.6
Operating income(1) 126.2 121.6 4.6
Net earnings(1) 74.7 69.2 5.5
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(1) Adjusted for the impact of depreciation and amortization related to
the privatization of Sobeys in June 2007.
Sales
Food retailing division sales for the first quarter of fiscal 2011 were $3.98 billion compared to $3.91 billion for the same quarter last year, an increase of $68.6 million or 1.8 percent. During the first quarter of fiscal 2011, Sobeys' same-store sales (sales from stores in the same locations in both reporting periods) increased by 0.3 percent. Sobeys experienced increased retail price deflation in the first quarter.
The growth in Sobeys' sales continues to be a direct result of the increased retail selling square footage from new stores and enlargements, coupled with the continued implementation of sales and merchandising initiatives, improved store level execution and product and services innovation. The sales growth associated with these initiatives was partially offset by food price deflation as mentioned.
Operating Income
Sobeys recorded operating income of $127.5 million during the first quarter of fiscal 2011, a $4.6 million or 3.7 percent increase from the $122.9 million recorded in the first quarter last year. Operating income margin in the first quarter equalled 3.21 percent versus 3.15 percent in the same quarter last year. In the first quarter, Sobeys incurred approximately $4.6 million (2010 - $nil) in start up and fixed asset write-offs related to the opening of FreshCo discount stores.
After adjusting for the impact of the depreciation and amortization related to the privatization, Sobeys' operating income contribution to Empire in the first quarter of fiscal 2011 was $126.2 million (first quarter of fiscal 2010 - $121.6 million). Sobeys' operating income margin in the first quarter after adjusting for the above items equalled 3.17 percent compared to 3.11 percent in the first quarter of fiscal 2010.
Net Earnings
Sobeys recorded first quarter net earnings of $75.6 million, an increase of $5.5 million or 7.8 percent compared to the $70.1 million recorded in the first quarter last year.
After adjusting for the impact of the depreciation and amortization related to the privatization and the related tax impact, Sobeys contributed net earnings of $74.7 million to Empire for the first quarter of fiscal 2011, an increase of $5.5 million or 7.9 percent over the $69.2 million recorded in the same period last year.
REAL ESTATE
Empire's real estate operations are primarily focused on (i) ownership of retail and office properties through a 47.4 percent ownership interest in Crombie REIT and (ii) residential land development through an ownership interest in Genstar, which operates principally in Ontario and Western Canada.
It should be noted that revenue, operating income and earnings recorded in the first quarter ended July 31, 2010 were positively impacted by an increase in the ownership interest in Genstar, from 35.7 percent last fiscal year to 40.7 percent in the third quarter of fiscal 2010.
With regard to commercial real estate operations, during the first quarter our internal property development function was reorganized under Sobeys, with Sobeys acquiring 12 properties from subsidiaries of ECL Properties Limited, a wholly owned subsidiary of Empire Company Limited at their carrying value of approximately $83.0 million. This reorganization will better align our real estate development function with the interest of Sobeys. As a result of this transfer, our commercial real estate operations consist largely of our 47.4 percent interest in Crombie REIT.
Subsequent to the end of the first quarter, on August 4, 2010, Crombie REIT closed a bought-deal public offering of units at a price of $11.05 per unit. In satisfaction of its pre-emptive right with respect to the public offering, Empire subscribed for $20.5 million of Class B units of Crombie Limited Partnership (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.4 percent to 47.0 percent.
Revenue
Real estate division revenue amounted to $19.1 million for the first quarter ended July 31, 2010, a $4.0 million increase from the first quarter last year. The increase is primarily attributed to higher revenue from residential operations.
Operating Income
First quarter real estate division operating income was $13.1 million versus $9.7 million in the same quarter last year. The $3.4 million increase in real estate division operating income was largely the result of a $3.0 million increase in residential operating income due to higher sales activity. Empire's 47.4 percent interest in Crombie REIT contributed operating income of $4.1 million which was $0.8 million below the first quarter last year. Other commercial operating income increased by $1.2 million in the first quarter of fiscal 2011 compared to the same quarter last year.
The table below presents revenue, operating income, net earnings and funds from operations for the real estate division's commercial and residential operations.
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13 Weeks Ended
-----------------------------------
July 31, Aug. 1, ($)
($ in millions) 2010 2009 Change
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Revenue
Residential $ 15.1 $ 11.4 $ 3.7
Commercial 4.0 3.7 0.3
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$ 19.1 $ 15.1 $ 4.0
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Operating income
Residential $ 8.1 $ 5.1 $ 3.0
Crombie REIT(1) 4.1 4.9 (0.8)
Commercial 0.9 (0.3) 1.2
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$ 13.1 $ 9.7 $ 3.4
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Net earnings
Residential $ 5.7 $ 3.4 $ 2.3
Commercial 2.8 2.7 0.1
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$ 8.5 $ 6.1 $ 2.4
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Funds from operations(2)
Residential $ 5.7 $ 3.4 $ 2.3
Commercial 3.0 3.2 (0.2)
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$ 8.7 $ 6.6 $ 2.1
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(1) Equity accounted earnings in Crombie REIT during the period.
(2) Operating earnings plus depreciation and amortization.
Net Earnings
Real estate division net earnings contribution in the first quarter amounted to $8.5 million compared to $6.1 million last year, a $2.4 million increase. The earnings increase is largely the result of a $3.4 million increase in operating income, partially offset by a $1.2 million increase in income taxes.
Funds from Operations
Funds from operations in the first quarter of $8.7 million increased $2.1 million compared to the first quarter of last year largely due to the increase in residential real estate operating income. Trailing (last four quarters) funds from operations for the real estate division were $37.8 million, an increase of $2.1 million from the trailing (last four quarters) funds from operations of $35.7 million last quarter.
INVESTMENTS AND OTHER OPERATIONS
Empire's investments and other operations consist primarily of a 27.6 percent ownership interest in Wajax and wholly-owned Empire Theatres.
At July 31, 2010, Empire's investments, including equity accounted investments in Crombie REIT and Genstar U.S., consisted of:
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July 31, 2010 May 1, 2010
---------------------------- -----------------------------
Unreali- Unreali-
($ in Market Carrying zed Market Carrying zed
millions) Value Value Gain Value Value Gain
-------------------------------------------------------------------------
Investment
in Crombie
REIT $ 326.3 $ 6.9 $ 319.4 $ 341.3 $ 8.4 $ 332.9
Investment
in Wajax 115.3 32.6 82.7 117.9 30.8 87.1
Investment
in Genstar
U.S.(1) 18.6 18.6 - 17.6 17.6 -
Other invest-
ments(1)(2) 10.7 10.7 - 10.9 10.9 -
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$ 470.9 $ 68.8 $ 402.1 $ 487.7 $ 67.7 $ 420.0
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Aug. 1, 2009
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Unreali-
($ in Market Carrying zed
millions) Value Value Gain
-------------------------------------------------------------------------
Investment
in Crombie
REIT $ 265.5 $ 18.3 $ 247.2
Investment
in Wajax 85.8 30.9 54.9
Investment
in Genstar
U.S.(1) 12.5 12.5 -
Other invest-
ments(1)(2) 1.2 1.2 -
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$ 365.0 $ 62.9 $ 302.1
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(1) Assumes market value equals book value.
(2) Includes a $10.5 million Crombie REIT convertible unsecured
subordinated debenture (May 1, 2010 - $10.7 million, Aug.1, 2009 -
$nil).
The table below presents investments and other operations' (net of corporate expenses) financial highlights, excluding equity earnings from Crombie REIT and Genstar U.S., for the 13 weeks ended July 31, 2010 compared to the same period last year.
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13 Weeks Ended
-----------------------------------
July 31, Aug. 1, ($)
($ in millions) 2010 2009 Change
-------------------------------------------------------------------------
Revenue $ 47.9 $ 47.3 $ 0.6
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Operating income
Wajax 3.4 2.7 0.7
Other operations, net of corporate
expenses (2.4) (3.8) 1.4
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Total operating income 1.0 (1.1) 2.1
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Operating earnings (1.6) (3.1) 1.5
Capital gains and
other items, net of tax(1) - 17.5 (17.5)
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Net earnings $ (1.6) $ 14.4 $ (16.0)
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(1) First quarter fiscal 2010 capital gains and other items, net of tax,
includes $17.0 million related to the settlement of Canada Revenue
Agency tax reassessment relating to the sale of Hannaford Bros. Co.
shares in fiscal 2001.
Revenue
Investments and other operations' revenue, primarily generated by Empire Theatres, equalled $47.9 million in the first quarter ended July 31, 2010 versus $47.3 million in the first quarter last year, a $0.6 million or 1.3 percent increase.
Operating Income
Investments and other operations (net of corporate expenses) contributed operating income of $1.0 million compared to $(1.1) million in the first quarter last year. Equity accounted earnings generated from the Company's 27.6 percent interest in Wajax amounted to $3.4 million in the first quarter versus $2.7 million last year. Operating income from other operations (net of corporate expenses) improved to $(2.4) million from $(3.8) million in the first quarter last year.
Net Earnings
Investments and other operations (net of corporate expenses) contributed $(1.6) million to Empire's consolidated first quarter fiscal 2011 net earnings compared to a $14.4 million net earnings contribution in the first quarter last year. The decline is primarily attributed to recording no capital gains and other items in the first quarter compared to $17.5 million in the same quarter last year.
CONSOLIDATED FINANCIAL CONDITION
The Company's financial condition improved since the start of the fiscal year as evidenced by the capital structure and key financial condition measures in the table below.
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($ in millions, except per share and July 31, May 1, Aug. 1,
ratio calculations) 2010 2010 2009
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Shareholders' equity $ 3,023.0 $ 2,952.4 $ 2,764.7
Book value per share $ 44.10 $ 43.07 $ 40.32
Bank indebtedness $ 42.2 $ 17.8 $ 69.8
Long-term debt, including
current portion $ 1,248.8 $ 1,208.4 $ 1,217.8
Funded debt to total capital 29.9% 29.3% 31.8%
Net debt to net total capital
ratio(1) 20.8% 21.8% 26.3%
Debt to EBITDA(2) 1.6x 1.5x 1.6x
EBITDA to interest expense(2) 11.3x 11.3x 10.3x
Total assets $ 6,349.3 $ 6,248.3 $ 6,036.7
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(1) Net debt to total capital reduces funded debt by cash and cash
equivalents.
(2) Calculation uses trailing 12-month EBITDA and interest expense.
Consolidated funded debt ($1,291.0 million) increased $64.8 million since the end of the fiscal year, May 1, 2010 ($1,226.2 million) and $3.4 million since the first quarter last year ($1,287.6 million). The ratio of funded debt to total capital improved to 29.9 percent from 31.8 percent in the first quarter of last year. The 1.9 percentage point improvement is the result of higher equity levels due to growth in retained earnings.
Empire's trailing 12-month EBITDA to interest expense ratio at the end of the first quarter was 11.3 times, up from the 10.3 times at the end of the first quarter last fiscal year.
Liquidity and Capital Resources
The Company maintains the following sources of liquidity: (i) cash and cash equivalents on hand; (ii) unutilized bank credit facilities; and (iii) cash generated from operating activities. The Company anticipates that these sources of liquidity will be sufficient to meet expected cash outflows over the next year.
At July 31, 2010, consolidated cash and cash equivalents were $495.1 million versus $300.6 million at August 1, 2009 and $401.0 million at fiscal year-end, May 1, 2010.
At the end of the first quarter of fiscal 2011, on a non-consolidated basis, Empire maintained an authorized bank line for operating, general and corporate purposes of $450 million, of which approximately $221.1 million or 49.1 percent was utilized. On a consolidated basis, Empire's authorized bank credit facilities exceeded borrowings by approximately $706 million at July 31, 2010.
Empire's non-consolidated credit facility of $650 million matured on June 8, 2010. During the first quarter, on June 4, 2010, management renewed its credit facility, reducing the authorized amount to $450 million, for an additional three year term, to expire on June 30, 2013. The size of the facility was reduced due to the Company's strong cash position and improved financial condition.
Empire and its subsidiaries have provided covenants to its lenders in support of various financing facilities. All covenants were complied with for the 13 weeks ended July 31, 2010 and the 52 weeks ended May 1, 2010.
The table below highlights major cash flow components for the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009.
Major Cash Flow Components
-------------------------------------------------------------------------
13 Weeks Ended
------------------------
July 31, Aug. 1,
($ in millions) 2010 2009
-------------------------------------------------------------------------
Earnings for common shareholders $ 81.6 $ 89.7
Items not affecting cash 91.6 89.4
-------------------------------------------------------------------------
173.2 179.1
Net change in non-cash working capital (71.5) 28.8
-------------------------------------------------------------------------
Cash flows from operating activities 101.7 207.9
Cash flows used in investing activities (54.5) (103.5)
Cash flows from (used in) financing activities 46.9 (35.4)
-------------------------------------------------------------------------
Increase in cash and cash equivalents $ 94.1 $ 69.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
First quarter cash flows from operating activities equalled $101.7 million compared to $207.9 million in the comparable period last year. The decrease of $106.2 million is attributed to a decrease in the net change in non-cash working capital of $100.3 million and a decrease in net earnings of $8.1 million, partially offset by an increase in items not affecting cash of $2.2 million.
The net change in non-cash working capital of $(71.5) million in the first quarter was largely due to a change in income taxes receivable (payable) of $38.3 million, a $24.4 million decrease in accounts payable and accrued liabilities, a $13.2 million increase in inventories and an $8.7 million increase in receivables, partially offset by a decrease in prepaid expenses of $9.3 million and the impact of reclassifications on working capital totalling $3.8 million. The increase in income taxes receivable (payable) is attributed to the timing of required income tax installment payments. Accounts payable decreased $24.4 million and inventories increased $13.2 million in the current quarter due primarily to payment terms on certain inventory purchased by Sobeys at quarter end.
Investing Activities
Cash used in investing activities of $54.5 million in the first quarter decreased $49.0 million compared to cash used in investing activities of $103.5 million in the same period last year. Consolidated purchases of property and equipment totalled $85.5 million in the first quarter of fiscal 2011 compared to $94.0 million in the first quarter last year. Proceeds on disposal of property and equipment decreased $32.2 million from the first quarter last year to $25.4 million in the first quarter of fiscal 2011. Proceeds on disposal in the first quarter of last year are largely related to the sale leaseback of a retail support centre located in Milton, Ontario to a third party.
The table below outlines the number of stores Sobeys invested in during the 13 weeks ended July 31, 2010 compared to the 13 weeks ended August 1, 2009:
Sobeys' Corporate and Franchised Store
Construction Activity
-------------------------------------------------------------------------
13 Weeks Ended
------------------------
July 31, Aug. 1,
Number of Stores 2010 2009
-------------------------------------------------------------------------
Opened/Acquired/Relocated 8 14
Expanded 4 3
Rebannered/Redeveloped 11 5
Closed 5 24
-------------------------------------------------------------------------
The following table shows Sobeys' square footage changes for the 13 and 52 weeks ended July 31, 2010 by type:
Sobeys' Square Footage Changes
(in thousands)
-------------------------------------------------------------------------
July 31, July 31,
2010 2010
versus versus
May 1, Aug. 1,
Square Feet 2010 2009
-------------------------------------------------------------------------
Opened 127 619
Relocated 40 117
Acquired - 3
Expanded 24 123
Closed (41) (346)
-------------------------------------------------------------------------
Net Change 150 516
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At July 31, 2010, Sobeys' square footage totalled 28.2 million square feet, a 1.8 percent increase over the 27.7 million square feet operated at the end of the first quarter last year.
Financing Activities
Financing activities during the first quarter generated $46.9 million of cash compared to $35.4 million of cash used in the same quarter last year. The increase of $82.3 million in cash flows from financing activities when compared to the same quarter last year is primarily the result of an increase in the issuance of long-term debt of $114.9 million, partially offset by a $30.7 million increase in the repayment of long-term debt relative to the first quarter last year. The increase in long-term debt issuance primarily reflects the 30-year $150.0 million MTN issued by Sobeys on June 7, 2010.
The Company believes that its cash and cash equivalents, future operating cash flows and available credit facilities will enable the Company to fund future capital investments, pension plan contributions, working capital and ongoing business requirements. The Company believes it has sufficient funding in place to meet these requirements and other long-term obligations.
Accounting Policy Changes
The accounting policy changes are explained in note 1 to the unaudited consolidated financial statements included in this release.
International Financial Reporting Standards
On February 13, 2008, the Accounting Standards Board of Canada announced that Canadian Generally Accepted Accounting Principles ("GAAP") for publicly accountable enterprises will be replaced by International Financial Reporting Standards ("IFRS"). IFRS must be adopted for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011, with restatement of comparative periods. 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 the current and comparative information will be prepared under IFRS.
The Company is currently evaluating the potential impact of the conversion to IFRS on its financial statements. A formal project governance structure has been developed to ensure regular progress reports are provided to senior management, a structured Steering Committee, as well as the Audit Committee and Board of Directors. A detailed description of the Company's IFRS changeover plan is included in the section "Future changes in accounting standards" of the Company's fiscal 2010 annual MD&A.
The Company is in the process of assessing the impact of IFRS on the Company's budgeting process by creating working groups to analyze the impact of changes in accounting policy. The drafting of revised Company accounting policies to reflect the changes in accounting standards is also underway. The Company continues to educate staff in all areas of the business on decisions made as a result of the IFRS transition. The IFRS changeover plan is progressing as outlined in the fiscal 2010 annual MD&A.
The Company continues to assess the effect of the adoption of IFRS and the resulting changes in accounting policies. All significant accounting policy changes that have been identified are detailed in the Company's fiscal 2010 MD&A. The Company continues to review all of the proposed and ongoing projects of the International Accounting Standards Board ("IASB") to determine their impact on the Company.
The information below is provided as a progress update to the fiscal 2010 annual MD&A for the users of the financial statements relating to the possible effects of the IFRS changeover. The changes identified below should not be regarded as a complete list of changes that will result from the transition to IFRS. The update is intended to highlight areas where the Company has made significant progress. Readers are cautioned, however, that the information is subject to change.
At this time, the Company is assessing and finalizing the quantitative impacts of the opening balance sheet transitional adjustments and expects to report quantified IFRS results later in fiscal 2011. As IFRS results are quantified throughout the changeover year, the results will be reported on a timely basis.
-------------------------------------------------------------------------
Key Key Difference Between IFRS
Accounting and Canadian GAAP for the Potential Key Impacts for
Policy Company the Company
-------------------------------------------------------------------------
Investment Investment property is a new Opening balance sheet:
Property concept under IFRS that does Investment properties are
not exist under Canadian being identified as at the
GAAP. Investment properties date of transition to IFRS
are defined as properties and they will be separately
that are held to earn rentals recorded and disclosed from
and/or held for capital property and equipment in
appreciation. Investment the opening IFRS balance
properties are separately sheet. The impact is
recorded and disclosed under currently being finalized by
IFRS, while they are recorded the Company.
with property and equipment
under Canadian GAAP. The Company has opted to
utilize the cost model for
measuring investment
properties. When utilizing
the cost model, the Company
must disclose the aggregated
fair value of all investment
properties. The Company has
engaged property valuators to
obtain information for this
disclosure.
-------------------------------------------------------------------------
Impairment IAS 36, "Impairment of Grouping of assets for
of Assets" requires a company impairment purposes will be
long-lived to record an impairment loss at a lower level than under
assets when an asset is carried at Canadian GAAP. The Company
more than its recoverable has determined the CGU to be
amount through use or sale. principally at an individual
IAS 36, unlike Canadian GAAP, store or theatre.
allows a company to reverse
these impairment losses if The change in level of
there is a change in the impairment testing is
factors used to calculate the anticipated to result in an
assets' recoverable amount. increase in the write down
of assets under IFRS whereas
If it is not possible to the carrying value of assets
estimate the recoverable under Canadian GAAP was
amount of an individual previously supported by a
asset, IFRS tests asset higher, aggregated level of
groups for impairment at the testing. The write down and
independent cash-generating potential subsequent recovery
unit ("CGU") level based on of impairment loss could lead
generation of cash inflows. to income statement and
earnings volatility in future
periods.
Opening balance sheet:
Impairment testing for CGUs
where an indicator of
impairment exists has been
conducted as at the Company's
transition date. The Company
is currently finalizing the
impact this adjustment will
have on retained earnings,
property and equipment and
investment property.
-------------------------------------------------------------------------
Leases IFRS does not provide the Opening balance sheet: The
same quantitative guidelines qualitative considerations
as Canadian GAAP, but rather for the classification of
has additional qualitative leases were reviewed as at
considerations for the transition date, and no
classification of leases change in classifications
between 'operating' and has been identified.
'finance' ('capital' under
Canadian GAAP) leases.
------------------------------------------------------------
IFRS has different Opening balance sheet:
recognition principles Certain gains related to
surrounding sale leaseback historical sale leaseback
transactions where the transactions with both third
lease is classified as an and related parties are
'operating' lease and the currently being identified
transaction occurs at fair and a portion will be
market value. recognized within retained
earnings on transition to
IFRS.
-------------------------------------------------------------------------
Employee IFRS requires vested past Opening balance sheet impact:
Benefits service costs of defined There will be a one-time
benefit pension plans to be adjustment to recognize any
expensed immediately and vested past service costs at
unvested past service costs the date of transition to
to be recognized on a IFRS. The Company has engaged
straight-line basis until actuaries to calculate this
the benefits become vested. adjustment.
Under Canadian GAAP, all past
service costs are generally
amortized on a straight-line
basis over the average
remaining service period of
employees active at the date
of the amendment, or a
shorter period.
------------------------------------------------------------
IFRS requires an entity to Opening balance sheet
make an accounting policy impact: An adjustment to
choice regarding the retained earnings is
recognition of actuarial expected as a result of the
gains and losses. The three Company opting to utilize an
options that are available IFRS 1 exemption to recognize
are as follows: all unamortized actuarial
- deferred recognition gains and losses through
using a "corridor" retained earnings upon
approach; transition to IFRS. The
- immediate recognition Company has engaged actuaries
through the income to calculate this adjustment.
statement; or
- immediate recognition
through other
comprehensive income.
The Company has chosen to
recognize actuarial gains
and losses immediately
through other comprehensive
income. This policy was not
available to the Company
under Canadian GAAP.
Previously the Company
delayed recognition of
actuarial gains and losses
by utilizing a "corridor"
approach.
-------------------------------------------------------------------------
Consoli- IFRS uses a more principles- Opening balance sheet
dation based control model for impact: The control factors
- Special consolidation of SPEs. under IFRS for consolidation
Purpose Entities are to be were considered as at the
Entities consolidated if the Company transition date to IFRS.
("SPEs") has the majority of the The assessment is
risks and rewards of currently being finalized and
ownership over the subject no significant impact is
entity. The control factors expected as most VIEs under
considered include: Canadian GAAP will continue
- a majority share ownership; to be consolidated as SPEs
- ability to control the under IFRS.
Board;
- power to govern financial
and operating policies;
and
- contracted arrangements
conferring effective
control.
Under Canadian GAAP,
variable interest entities
("VIEs") are consolidated
based on their equity
investment at risk.
-------------------------------------------------------------------------
Joint Existing IAS 31, "Interests Opening balance sheet impact:
Ventures in Joint Ventures" allows Certain investments in joint
an entity to account for ventures will be accounted
jointly controlled operations for using the equity method
using proportionate rather than proportionate
consolidation or the equity consolidation method used
method. The IASB has a for Canadian GAAP. Work has
current project underway commenced to calculate the
that will require joint adjustment in the Company's
ventures to be accounted opening balance sheet,
for using the equity method, however calculations have
which is expected to be not yet been finalized.
issued in September 2010. This will result in
Under Canadian GAAP these adjustments to multiple
types of investments are line items on the balance
accounted for using sheet, however overall
proportionate consolidation. impact is not anticipated
to be significant.
-------------------------------------------------------------------------
Related-Party Transaction
On July 14, 2010, Sobeys agreed to sell and lease back 11 retail properties from Crombie REIT. Consideration received for the properties will be recorded at the exchange amount and is expected to be approximately $102.0 million, excluding closing and transaction costs. The properties to be sold comprise approximately 499,353 square feet of gross leaseable area, consisting of ten freestanding stores and one retail plaza. The transaction is expected to close in the second quarter of fiscal 2011.
Subsequent Event
On August 4, 2010, Crombie REIT closed a bought-deal public offering of units at a price of $11.05 per unit. In satisfaction of its pre-emptive right with respect to the public offering, the Company subscribed for $20.5 million of Class B units of Crombie Limited Partnership (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.4 percent to 47.0 percent.
Additional Information
Additional information about the Company has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval ("SEDAR") and is available online at www.sedar.com.
Definition of Non-GAAP Measures
Certain measures included in this news release do not have a standardized meaning under Canadian GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies. The Company includes these measures because it believes certain investors use these measures as a means of assessing Empire's financial performance.
Empire's definition of the non-GAAP terms are as follows: (i) operating earnings is net earnings before capital gains (losses) and other items; (ii) operating income or earnings before interest and taxes ("EBIT") is calculated as operating earnings before minority interest, interest expense and income taxes; (iii) earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated as EBIT plus depreciation and amortization; (iv) funded debt is all interest-bearing debt which includes bank loans, bankers' acceptances, long-term debt and debt related to assets held for sale; (v) total capital is calculated as funded debt plus equity; (vi) net debt is calculated as funded debt less cash and cash equivalents; (vii) funds from operations are calculated as operating earnings plus depreciation and amortization; (viii) same-store sales are sales from stores in the same location in both reporting periods; and (ix) free cash flow is calculated as cash flow from operating activities less property and equipment purchases.
Forward-Looking Statements
This news release contains forward-looking statements which reflect management's expectations regarding the Company's objectives, plans, goals, strategies, future growth, financial condition, results of operations, cash flows, performance, business prospects and opportunities. All statements other than statements of historical facts included in this news release, including statements regarding the Company's objectives, plans, goals, strategies, future growth, financial condition, results of operations, cash flows, performance, business prospects and opportunities, may constitute forward-looking information. Expressions such as "anticipates", "expects", "believes", "estimates", "intends", "could", "may", "plans", "predicts", "projects", "will", "would", "foresees", "remain confident that" and other similar expressions or the negative of these terms are generally indicative of forward-looking statements.
These forward looking statements include the Company's expectation that its sources of liquidity will be sufficient to meet expected cash outflows over the next year, which could be impacted by changing capital market conditions as well as uncertainties that could cause the outcome to differ significantly from expectation. These statements are based on Empire management's reasonable assumptions and beliefs in light of the information currently available to them. The forward-looking information contained in this news release is presented for the purpose of assisting the Company's security holders in understanding its financial position and results of operation as at and for the periods ended on the dates presented and the Company's strategic priorities and objectives and may not be appropriate for other purposes. By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that the Company's assumptions may not be correct and that the Company's objectives, strategic goals and priorities will not be achieved. Although the Company believes that the predictions, forecasts, expectations or conclusions reflected in the forward-looking information are reasonable, it can give no assurance that such matters will prove to have been correct. Such forward-looking information is not fact but only reflects management's estimates and expectations. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These factors include but are not limited to: changes in general industry, market and economic conditions, competition from existing and new competitors, energy prices, supply issues, inventory management, changes in demand due to seasonality of the business, interest rates, changes in laws and regulations, operating efficiencies and cost saving initiatives. In addition, these uncertainties and risks are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Management section of the annual Management Discussion and Analysis included in the Company's Annual Report.
Empire cautions that the list of important factors is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Forward-looking statements may not take into account the effect on the Company's business of transactions occurring after such statements have been made. For example, dispositions, acquisitions, asset write-downs or other changes announced or occurring after such statements are made may not be reflected in forward-looking statements. The forward-looking information in this news release reflects the Company's expectations as of September 10, 2010, and is subject to change after this date. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company other than as required by applicable securities laws.
Conference Call Invitation
The Company will hold an analyst call on Friday, September 10, 2010 beginning at 1:30 p.m. Eastern Daylight Time during which senior management will discuss the Company's financial results for the first quarter of fiscal 2011 ended July 31, 2010. To join this conference call dial 1-888-231-8191 outside of the Toronto area or 647-427-7450 from within the Toronto area. You may also listen to a live audiocast of the conference call by visiting the Company's website located at www.empireco.ca. Replay will be available by dialling 1-800-642-1687 and entering passcode 96522769 until midnight September 17, 2010, or on the Company's website for 90 days after the meeting.
About Empire
Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire's core businesses include food retailing and related real estate. With over $15 billion in annual revenue and approximately $6.3 billion in assets, Empire and its related companies employ approximately 90,000 people, including franchisees and affiliates.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in millions)
July 31 May 1 August 1
2010 2010 2009
Unaudited Audited Unaudited
---------- ---------- -----------
ASSETS
Current
Cash and cash equivalents $ 495.1 $ 401.0 $ 300.6
Receivables 345.6 336.9 308.6
Loans and other receivables 92.9 105.8 90.3
Income taxes receivable 18.8 - 28.8
Inventories (Note 3) 893.5 880.3 854.7
Prepaid expenses 60.8 70.1 68.0
---------- ---------- -----------
1,906.7 1,794.1 1,651.0
Investments, at realizable value 10.7 10.9 1.2
Investments, at equity (realizable
value $460.2; May 1, 2010 - $476.8;
August 1, 2009 - $363.8) (Note 4) 58.1 56.8 61.7
Loans and other receivables 80.2 79.2 78.6
Other assets (Note 5) 95.7 94.5 82.8
Property and equipment 2,471.6 2,548.7 2,539.6
Assets held for sale 96.7 36.5 7.4
Intangibles 456.0 455.0 442.8
Goodwill 1,173.6 1,172.6 1,171.6
---------- ---------- -----------
$ 6,349.3 $ 6,248.3 $ 6,036.7
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES
Current
Bank indebtedness $ 42.2 $ 17.8 $ 69.8
Accounts payable and accrued
liabilities 1,597.2 1,621.6 1,556.1
Income taxes payable - 19.5 -
Future income taxes 50.2 50.9 46.2
Long-term debt due within one
year (Note 6) 79.3 379.4 364.9
---------- ---------- -----------
1,768.9 2,089.2 2,037.0
Long-term debt (Note 6) 1,169.5 829.0 852.9
Employee future benefits obligation 126.9 125.1 119.9
Future income taxes 83.1 86.4 86.1
Other long-term liabilities 143.1 130.6 135.9
Minority interest 34.8 35.6 40.2
---------- ---------- -----------
3,326.3 3,295.9 3,272.0
---------- ---------- -----------
SHAREHOLDERS' EQUITY
Capital stock 325.1 325.1 324.5
Contributed surplus 3.6 3.2 2.1
Retained earnings 2,720.1 2,652.2 2,478.1
Accumulated other comprehensive
loss (Note 7) (25.8) (28.1) (40.0)
---------- ---------- -----------
3,023.0 2,952.4 2,764.7
---------- ---------- -----------
$ 6,349.3 $ 6,248.3 $ 6,036.7
---------- ---------- -----------
---------- ---------- -----------
Contingent liabilities (Note 16)
Subsequent event (Note 19)
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, $ in millions)
July 31 August 1
2010 2009
---------- -----------
Balance, beginning of period as previously
reported $ 2,652.2 $ 2,405.8
Adjustment due to implementation of new
accounting standard (Note 1) - (4.7)
---------- -----------
Balance, beginning of period as restated 2,652.2 2,401.1
Net earnings 81.6 89.7
Dividends
Common shares (13.7) (12.7)
---------- -----------
Balance, end of period $ 2,720.1 $ 2,478.1
---------- -----------
---------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, $ in millions)
July 31 August 1
2010 2009
---------- -----------
Net earnings $ 81.6 $ 89.7
---------- -----------
Other comprehensive income (loss)
Unrealized (losses) gains on available-for-sale
financial assets, net of income taxes of $nil
(2009 - $nil) (0.2) 0.1
Unrealized (losses) gains on derivatives
designated as cash flow hedges, net of income
taxes of $(0.2) (2009 - $1.2) (0.6) 2.0
Reclassification of loss on derivative
instruments designated as cash flow hedges to
earnings, net of income taxes of $0.7
(2009 - $0.8) 1.5 1.5
Share of comprehensive income (loss) of
entities accounted for using the equity method,
net of income taxes of $0.2 (2009 - $3.1) 0.8 5.5
Foreign currency translation adjustment 0.8 (0.6)
---------- -----------
2.3 8.5
---------- -----------
Comprehensive income $ 83.9 $ 98.2
---------- -----------
---------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
13 WEEKS ENDED
--------------
(Unaudited, $ in millions except per share amounts)
July 31 August 1
2010 2009
---------- -----------
Revenue $ 4,041.2 $ 3,968.5
Operating expenses
Cost of sales, selling and administrative
expenses 3,822.6 3,763.9
Depreciation and amortization 86.2 82.0
---------- -----------
132.4 122.6
Investment income (Note 8) 7.9 7.6
---------- -----------
Operating income 140.3 130.2
---------- -----------
Interest expense
Long-term debt 19.0 17.4
Short-term debt 0.6 0.8
---------- -----------
19.6 18.2
---------- -----------
120.7 112.0
Capital gains and other items (Note 9) - 0.6
---------- -----------
Earnings before income taxes and minority interest 120.7 112.6
---------- -----------
Income taxes (Note 10)
Current 39.5 18.9
Future (4.7) (1.0)
---------- -----------
34.8 17.9
---------- -----------
Earnings before minority interest 85.9 94.7
Minority interest 4.3 5.0
---------- -----------
Net earnings $ 81.6 $ 89.7
---------- -----------
---------- -----------
Earnings per share (Note 2)
Basic $ 1.19 $ 1.31
---------- -----------
---------- -----------
Diluted $ 1.19 $ 1.31
---------- -----------
---------- -----------
Weighted average number of common
shares outstanding, in millions
Basic 68.4 68.4
Diluted 68.5 68.5
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, $ in millions)
July 31 August 1
2010 2009
---------- -----------
Operating Activities
Net earnings $ 81.6 $ 89.7
Items not affecting cash (Note 11) 91.6 89.4
---------- -----------
173.2 179.1
Net change in non-cash working capital (71.5) 28.8
---------- -----------
Cash flows from operating activities 101.7 207.9
---------- -----------
Investing Activities
Net increase in investments (0.3) (35.6)
Purchase of property and equipment (85.5) (94.0)
Proceeds on disposal of property and equipment 25.4 57.6
Additions to intangibles (9.6) (7.7)
Loans and other receivables 11.9 (28.0)
Decrease in other assets 8.2 7.3
Business acquisitions (Note 15) (4.6) (3.1)
---------- -----------
Cash flows used in investing activities (54.5) (103.5)
---------- -----------
Financing Activities
Increase in bank indebtedness 24.4 23.9
Issue of long-term debt 159.5 44.6
Repayment of long-term debt (118.2) (87.5)
Minority interest (5.1) (3.7)
Common dividends (13.7) (12.7)
---------- -----------
Cash flows from (used in) financing activities 46.9 (35.4)
---------- -----------
Increase in cash and cash equivalents 94.1 69.0
Cash and cash equivalents, beginning of period 401.0 231.6
---------- -----------
Cash and cash equivalents, end of period $ 495.1 $ 300.6
---------- -----------
---------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
JULY 31, 2010
-------------
(Unaudited, $ in millions except per share amounts)
1. Summary of Significant Accounting Policies
These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of Empire Company Limited (the "Company"), all subsidiary companies, including 100 percent owned Sobeys Inc. ("Sobeys") and certain enterprises considered variable interest entities where control is achieved on a basis other than through ownership of a majority of voting rights.
Interim consolidated financial statements
These unaudited interim consolidated financial statements have been prepared in accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1751, "Interim Financial Statements". Accordingly, certain information and note disclosure normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended May 1, 2010, as set out in the 2010 Annual Report.
In the opinion of management, these unaudited interim consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. Except as otherwise noted hereunder, these unaudited interim consolidated financial statements were prepared using the same policies and methods of computation as the audited consolidated financial statements for the year ended May 1, 2010.
Accounting standards and policies adopted during fiscal 2010
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, "Goodwill and
Intangible Assets", which replaced existing Section 3062, "Goodwill
and Other Intangible Assets", and Section 3450, "Research and
Development". The new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. As a result of adopting Section 3064, Emerging Issues
Committee ("EIC") Abstract 27, "Revenues and Expenditures During the
Pre-Operating Period", no longer applies. The Company has implemented
these requirements, in compliance with transitional provisions,
effective for the first quarter of fiscal 2010 retrospectively with
restatement of the comparative periods. The initial impact under the
new standard as at May 2, 2009 was a decrease to prepaid expenses of
$6.9, a decrease to other assets of $62.4, a decrease in property and
equipment of $33.7, an increase to intangibles of $96.1, a decrease
of future tax liabilities of $2.2 as well as a reduction of retained
earnings of $4.7.
Financial Instruments - Disclosures
In June 2009, the CICA issued amendments to the existing Section
3862, "Financial Instruments - Disclosures", to more closely align
the section with those required under International Financial
Reporting Standards ("IFRS"). The amendments include enhanced
disclosure requirements relating to fair value measurements of
financial instruments and liquidity risks. These amendments apply for
annual financial statements with fiscal years ending after
September 30, 2009. The Company implemented these enhanced disclosure
requirements in compliance with transitional provisions. The new
disclosures did not have a material impact.
Future changes in accounting standards and policies
Business combinations, consolidated financial statements and non-
controlling interests
In January 2009, the CICA issued three new accounting standards which
are based on the International Accounting Standards Board's IFRS
Standard 3, "Business Combinations". Section 1582, "Business
Combinations", which replaces Section 1581 with the same title, aims
to improve the relevance, reliability and comparability of the
information provided in financial statements about business
combinations. This section is to be applied prospectively to
business combinations for which the acquisition date is on or after
January 1, 2011 and assets and liabilities that arose from business
combinations that preceded the adoption of this standard should not
be adjusted upon adoption. Section 1601, "Consolidated Financial
Statements", and Section 1602, "Non-Controlling Interests", replace
Section 1600, "Consolidated Financial Statements", and establish
standards for the preparation of consolidated financial statements
and accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business
combination. These standards apply to interim and annual consolidated
financial statements beginning on or after January 1, 2011. Earlier
adoption of all three standards is permitted as of the beginning of a
fiscal year, however if an entity chooses to early adopt, all three
standards must be adopted concurrently. The Company is currently
evaluating the impact of these new standards.
Multiple deliverable revenue arrangements
In December 2009, the CICA issued EIC 175, "Multiple Deliverable
Revenue Arrangements". EIC 175, which replaces EIC 142, "Revenue
Arrangements with Multiple Deliverables", addresses some aspects of
the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. This new standard is
effective for the Company's annual consolidated financial statements
commencing on or after January 1, 2011 with earlier adoption
permitted as of the beginning of a fiscal year. The Company is
assessing the impact of the new standard on its financial statements.
2. Earnings Per Share
Earnings applicable to common shares is comprised of the following:
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Operating earnings $ 81.6 $ 72.2
Capital gains and other items, net of income
taxes of $nil (2009 - $(16.9)) - 17.5
---------- -----------
Earnings applicable to common shares $ 81.6 $ 89.7
---------- -----------
---------- -----------
Included in income taxes of $(16.9) for the 13 weeks ended August 1, 2009 was an income tax recovery of $17.0 (see Note 10).
Earnings per share is comprised of the following:
Operating earnings $ 1.19 $ 1.05
Net capital gains and other items - 0.26
---------- -----------
Basic earnings per share $ 1.19 $ 1.31
---------- -----------
---------- -----------
Operating earnings $ 1.19 $ 1.05
Net capital gains and other items - 0.26
---------- -----------
Diluted earnings per share $ 1.19 $ 1.31
---------- -----------
---------- -----------
3. Inventories
The cost of inventories recognized as an expense during the 13 weeks ended July 31, 2010 was $3,018.2 (2009 - $2,981.2). The cost of inventories recognized as an expense during the quarter included $12.6 (2009 - $13.1) for the write-down of inventories below cost to net realizable value. There were no reversals of inventories written down previously (2009 - $nil).
4. Investments, at Equity
July 31 May 1 August 1
2010 2010 2009
---------- ---------- -----------
Wajax Income Fund (27.6% interest) $ 32.6 $ 30.8 $ 30.9
Crombie REIT (47.4% interest) 6.9 8.4 18.3
U.S. residential real estate
partnerships 18.6 17.6 12.5
---------- ---------- -----------
$ 58.1 $ 56.8 $ 61.7
---------- ---------- -----------
---------- ---------- -----------
The Company's carrying value of its investment in Wajax Income Fund is as follows:
July 31 August 1
2010 2009
---------- -----------
Balance, beginning of period $ 30.8 $ 31.0
Equity earnings 3.4 2.7
Share of comprehensive income (loss) 0.5 (0.1)
Distributions received (2.1) (2.7)
---------- -----------
Balance, end of period $ 32.6 $ 30.9
---------- -----------
---------- -----------
The Company's carrying value of its investment in Crombie REIT is as follows:
July 31 August 1
2010 2009
---------- -----------
Balance, beginning of period $ 8.4 $ (19.7)
Equity earnings 4.1 4.9
Share of comprehensive income 0.5 8.7
Distributions received (6.4) (5.6)
Deferral of gains on sale of property 0.3 -
Interest acquired in Crombie REIT - 30.0
---------- -----------
Balance, end of period $ 6.9 $ 18.3
---------- -----------
---------- -----------
On June 25, 2009, Crombie REIT closed a bought-deal public offering of units at a price of $7.80 per unit. In satisfaction of its pre-emptive right with respect to the public offering, the Company subscribed for $30.0 of Class B Units (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.9% to 47.4%.
5. Other Assets
Asset-backed commercial paper
Included in other assets is $30.0 (May 1, 2010 - $30.0) of third-party asset-backed commercial paper ("ABCP") which the Company estimates the fair value to be $21.2 (May 1, 2010 - $21.2), approximately 71 percent (May 1, 2010 - 71 percent) of the face value. On January 21, 2009, the Company derecognized the existing held to maturity assets and received restructured ABCP MAV II notes: A1 - $7.8, A2 - $17.5, B - $3.2, C - $0.9 and $0.6 of tracking notes (the "restructured notes") as designated in the Montreal Accord as well as accrued interest. The A1 and A2 notes received an A rating from the Dominion Bond Rating Service ("DBRS"). The remaining notes have not yet been rated. The restructured notes are floating rate notes with expected payouts in January 2017.
On August 11, 2009, DBRS downgraded the A2 notes from A to BBB (low) under a negative watch. The downgrade did not have a material change in the fair value of the notes. Continuing uncertainties regarding the value of assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further material change in the value of the Company's investment in ABCP which could impact the Company's future earnings. The Company believes it has sufficient credit facilities to satisfy its financial obligations as they come due and does not expect there will be a material adverse impact on its business as a result of this current third-party ABCP liquidity issue.
The Company has classified these notes as held for trading and as a result are fair valued at each reporting period. During fiscal 2009, the Company received $1.0 of interest and recorded a $4.7 pre-tax provision. The Company updated its analysis of the fair value of the restructured notes, including factors such as estimated cash flow scenarios and risk adjusted discount rates, and a pre-tax gain of $3.4 was recorded in the year ended May 1, 2010. Discount rates vary depending upon the credit rating of the restructured long-term floating rate notes. Discount rates have been estimated using Government of Canada benchmark rates plus expected spreads for similarly rated instruments with similar maturities and structure. The Company has performed a sensitivity analysis on estimated discount rates used in the fair value analysis and determined that a change of one percent would result in a pre-tax change in the fair value of these investments of approximately $1.6 (May 1, 2010 - $1.6).
6. Long-Term Debt
On May 25, 2010, Sobeys filed a short form prospectus providing for the issuance of up to $500.0 of unsecured Medium Term Notes. On June 7, 2010, Sobeys issued new Medium Term Notes of $150.0, bearing an interest rate of 6.64%, maturing June 7, 2040.
On June 4, 2010, the Company renewed its Credit Facilities which were reduced from $650.0 to $450.0, maturing on June 30, 2013.
7. Accumulated Other Comprehensive Loss
The following table provides further detail regarding the composition of accumulated other comprehensive loss:
July 31 August 1
2010 2009
---------- -----------
Balance, beginning of period $ (28.1) $ (48.5)
Other comprehensive income for the period 2.3 8.5
---------- -----------
Balance, end of period $ (25.8) $ (40.0)
---------- -----------
---------- -----------
An estimated net loss of $5.8 recorded in accumulated other comprehensive loss related to the cash flow hedges as at July 31, 2010 (August 1, 2009 - $7.2), is expected to be reclassified to net earnings during the next 12 months. Remaining amounts will be reclassified to net earnings over periods up to eight years.
8. Investment Income
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Dividend and interest income $ 0.2 $ -
Share of earnings of entities
accounted using the equity method 7.7 7.6
---------- -----------
$ 7.9 $ 7.6
---------- -----------
---------- -----------
9. Capital Gains and Other Items
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Gain on sale of property $ - $ 0.2
Foreign exchange gains - 0.4
---------- -----------
$ - $ 0.6
---------- -----------
---------- -----------
10. Income Taxes
The effective tax rate for last year's quarter ended August 1, 2009 of 15.9% differed from the combined statutory rate of 31.1% due to the settlement negotiated with Canada Revenue Agency relating to the tax treatment of gains realized on the sale of shares in Hannaford Bros. Co. in fiscal 2001. Income tax expense was reduced in the first quarter of the previous year by $17.0 as a result of that settlement.
11. Supplementary Cash Flow Information
2010 2009
(13 weeks) (13 weeks)
---------- -----------
a) Items not affecting cash
Depreciation $ 77.6 $ 73.5
Amortization of intangibles 8.6 8.5
Future income taxes (4.7) (1.0)
(Gain) loss on disposal of assets (0.3) 0.2
Amortization of other assets - (2.2)
Equity in earnings of other entities,
net of dividends received 0.8 0.7
Minority interest 4.3 5.0
Stock-based compensation 0.4 0.4
Long-term lease obligation 3.4 2.8
Employee future benefits obligation 1.8 1.5
Rationalization costs (Note 18) (0.3) -
---------- -----------
$ 91.6 $ 89.4
---------- -----------
---------- -----------
b) Other cash flow information
Interest paid $ 11.4 $ 12.3
---------- -----------
---------- -----------
Income taxes paid $ 77.8 $ 45.4
---------- -----------
---------- -----------
12. Segmented Information
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Segmented revenue
Food retailing $ 3,975.3 $ 3,906.7
---------- -----------
Real estate
Residential 15.1 11.4
Commercial 4.0 3.7
---------- -----------
19.1 15.1
---------- -----------
Investment and other operations 47.9 47.3
---------- -----------
4,042.3 3,969.1
Elimination of inter-segment (1.1) (0.6)
---------- -----------
$ 4,041.2 $ 3,968.5
---------- -----------
---------- -----------
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Segmented operating income
Food retailing $ 126.2 $ 121.6
Real estate
Residential 8.1 5.1
Crombie REIT 4.1 4.9
Commercial 0.9 (0.3)
Investment and other operations
Wajax Income Fund 3.4 2.7
Other operations, net of corporate expenses (2.4) (3.8)
---------- -----------
$ 140.3 $ 130.2
---------- -----------
---------- -----------
July 31 May 1 August 1
2010 2010 2009
---------- ---------- -----------
Identifiable assets
Food retailing (excluding goodwill) $ 4,709.3 $ 4,524.0 $ 4,332.0
Goodwill 1,132.8 1,131.8 1,130.8
---------- ---------- -----------
Food retailing 5,842.1 5,655.8 5,462.8
Real estate 230.0 315.5 293.9
Investment and other operations
(including goodwill of $40.8;
May 1, 2010 - $40.8; August 1,
2009 - $40.8) 277.2 277.0 280.0
---------- ---------- -----------
$ 6,349.3 $ 6,248.3 $ 6,036.7
---------- ---------- -----------
---------- ---------- -----------
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Depreciation and amortization
Food retailing $ 81.3 $ 76.7
Real estate 0.2 0.5
Investment and other operations 4.7 4.8
---------- -----------
$ 86.2 $ 82.0
---------- -----------
---------- -----------
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Capital expenditures
Food retailing $ 76.4 $ 72.1
Real estate 3.9 17.5
Investment and other operations 5.2 4.4
---------- -----------
$ 85.5 $ 94.0
---------- -----------
---------- -----------
13. Related-Party Transaction
On July 14, 2010, Sobeys agreed to sell and lease back 11 properties from Crombie REIT. Consideration received for the properties will be recorded at the exchange amount and is expected to be approximately $102.0, excluding closing and transaction costs. The properties to be sold comprise approximately 499,353 square feet of gross leaseable area, consisting of ten freestanding stores and one retail plaza. The transaction is expected to close during the Company's second quarter.
14. Employee Future Benefits
During the quarter ended July 31, 2010, the net employee future benefit expense was $10.1 (2009 - $10.2). The expense included costs for the Company's defined contribution pension plans, defined benefit pension plans, post-retirement benefit plans and post-employment benefit plans.
15. Business Acquisitions
Sobeys acquires franchisee and non-franchisee stores and prescription files. The results of these acquisitions have been included in the consolidated financial results of the Company since their acquisition dates, and were accounted for through the use of the purchase method.
2010 2009
(13 weeks) (13 weeks)
---------- -----------
Stores
------
Inventory $ 3.5 $ 1.0
Property and equipment - 1.7
Goodwill 1.0 0.2
Other assets 0.1 0.2
---------- -----------
$ 4.6 $ 3.1
---------- -----------
---------- -----------
16. Contingent Liabilities
In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, from time to time certain matters are reviewed and challenged by the tax authorities.
There are various claims and litigation, which the Company is involved with, arising out of the ordinary course of business operations. The Company's management does not consider the exposure to such litigation to be material, although this cannot be predicted with certainty.
17. Stock-Based Compensation
Deferred share units
Members of the Board of Directors may elect to receive all or any portion of their fees in deferred share units ("DSUs") in lieu of cash. The number of DSUs received is determined by the market value of the Company's Non-Voting Class A shares on each director's fee payment date. Additional DSUs are received as dividend equivalents. DSUs cannot be redeemed for cash until the holder is no longer a director of the Company. The redemption value of a DSU equals the market value of an Empire Company Limited Non-Voting Class A share at the time of the redemption. On an ongoing basis, the Company values the DSU obligation at the current market value of a corresponding number of Non-Voting Class A shares and records any increase in the DSU obligation as an operating expense. At July 31, 2010, there were 108,797 (August 1, 2009 - 89,565) DSUs outstanding. During the quarter, the compensation expense was $0.6 (2009 - $nil).
Stock option plan
During the first quarter, the Company granted an additional 150,464 options under the stock option plan for employees of the Company whereby options are granted to purchase Non-Voting Class A Shares. These options allow holders to purchase Non-Voting Class A Shares at $51.99 per share and expire in June 2018. The options vest over four years with 50 percent of the options vesting only if certain financial targets are attained in a given fiscal year. These options have been treated as stock-based compensation.
The compensation cost relating to the 13 weeks ended July 31, 2010 was $0.4 (2009 - $0.4) with amortization of the cost over the vesting period. The total increase in contributed surplus in relation to the stock option compensation cost was $0.4 (2009 - $0.4). The compensation cost was calculated using the Black-Scholes model with the following assumptions:
Expected life 5.25 years
Risk-free interest rate 2.416%
Expected volatility 21.1%
Dividend yield 1.54%
Phantom performance option plan
Sobeys has a Phantom Performance Option Plan for eligible employees of Sobeys. Under the plan, units are granted at the discretion of the Board based on a notional equity value of Sobeys tied to a specified formula. Upon implementation, the units had a three year vesting period with 33.3 percent of the units vesting each year. Subsequent issuances have a four year vesting period with 25.0 percent of the units vesting each year. As the notional fair value of Sobeys changes, the employees are entitled to the incremental increase in the notional equity value over a five year period. The Company recognizes a compensation expense equal to the change in notional value over the original grant value on a straight-line basis over the vesting period. After the vesting period, any change in incremental notional equity value is recognized as a compensation expense immediately. This is recorded as an accrued liability until settlement and is remeasured at each interim and annual reporting period of the Company. As at July 31, 2010, 1,760,834 (August 1, 2009 - 1,436,323) units were outstanding and for the 13 weeks ended July 31, 2010, the Company recognized $2.0 (2009 - $2.1) of compensation expense associated with this plan.
18. Business Rationalization Costs
For the 13 weeks ended July 31, 2010, severance costs of $nil have been incurred and recognized (2009 - $nil). The costs associated with the organizational change are recorded as incurred as cost of sales, selling and administrative expenses in the statement of earnings. The liability as of July 31, 2010 is $1.2 (May 1, 2010 - $1.5). Total costs incurred as a result of this change to July 31, 2010 were $24.9.
19. Subsequent Event
On August 4, 2010, Crombie REIT closed a bought-deal public offering of units at a price of $11.05 per unit. In satisfaction of its pre-emptive right with respect to the public offering, the Company subscribed for $20.5 of Class B units (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.4% to 47.0%.
20. Comparative Figures
Comparative figures have been reclassified, where necessary, to reflect the current period's presentation.
For further information: Paul V. Beesley, Executive Vice President and Chief Financial Officer, (902) 755-4440
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