EMPIRE COMPANY REPORTS SECOND QUARTER RESULTS
STELLARTON, NS, Dec. 9 /CNW/ - Empire Company Limited (TSX: EMP.A) today announced financial results for its second quarter ended October 30, 2010. For the second quarter, the Company recorded earnings before capital gains (losses) and other items of $73.9 million ($1.08 per share) compared to $72.1 million ($1.06 per share) in the second quarter last year. Net earnings for the second quarter were $132.8 million ($1.94 per share) compared to $70.4 million ($1.03 per share) recorded in the second quarter last year. Included in net earnings in the second quarter were net capital gains (losses) and other items of $58.9 million ($0.86 per share) compared to net capital gains (losses) and other items of $(1.7) million or $(0.03) per share in the second quarter last year.
Second Quarter Highlights
- Revenue of $3.91 billion, up $37.3 million or 1.0 percent.
- Sobeys Inc. ("Sobeys") same-store sales were flat compared with Q2 last
year.
- Earnings before capital gains (losses) and other items of $73.9 million
($1.08 per share) compared to $72.1 million ($1.06 per share) last
year.
- Capital gains (losses) and other items, net of tax, of $58.9 million
versus $(1.7) million last year.
- Net earnings of $132.8 million ($1.94 per share) compared to
$70.4 million ($1.03 per share) last year.
- Net debt to capital of 17.3 percent, down from 21.8 percent at the end
of the last fiscal year and 27.5 percent at the end of Q2 last year.
"We are pleased with our second quarter and fiscal year-to-date financial results particularly given the challenges Sobeys faces with continued retail price deflation driven by intense competitive activity," stated Paul Sobey, President and CEO. "Our financial condition continues to improve and our liquidity and focus has been strengthened with the sale of our position in Wajax Income Fund during the second quarter. Moving forward, the focus on our core businesses is unwavering as we continue to work together to build long-term sustainable value."
Dividend Declaration
The Board of Directors declared a quarterly dividend of 20.0 cents per share on both the Non-Voting Class A shares and the Class B common shares that will be payable on January 31, 2011 to shareholders of record on January 14, 2011. The Board also declared regular dividends on the Company's outstanding preferred shares. The dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.
The table below presents a summary of financial performance for the 13 and 26 weeks ended October 30, 2010 compared to the 13 and 26 weeks ended October 31, 2009.
Summary Table of Consolidated Financial Results
13 Weeks Ended 26 Weeks Ended
($ in millions, ------------------------ ------------------------
except per share October 30, October 31, October 30, October 31,
information) 2010 2009 2010 2009
----------- ----------- ----------- -----------
Segmented revenue
Food retailing $ 3,853.4 $ 3,807.0 $ 7,828.7 $ 7,713.7
----------- ----------- ----------- -----------
Real estate
Residential 7.5 14.0 22.6 25.4
Commercial 3.3 4.7 7.3 8.4
----------- ----------- ----------- -----------
10.8 18.7 29.9 33.8
----------- ----------- ----------- -----------
Investments and
other operations 50.1 52.3 98.0 99.6
----------- ----------- ----------- -----------
3,914.3 3,878.0 7,956.6 7,847.1
Elimination (2.3) (3.3) (3.4) (3.9)
----------- ----------- ----------- -----------
$ 3,912.0 $ 3,874.7 $ 7,953.2 $ 7,843.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Segmented operating
income
Food retailing $ 109.5 $ 106.3 $ 235.7 $ 227.9
----------- ----------- ----------- -----------
Real estate
Residential 3.7 7.3 11.8 12.4
Crombie REIT (1) 4.4 4.9 8.5 9.8
Commercial 0.9 1.4 1.8 1.1
----------- ----------- ----------- -----------
9.0 13.6 22.1 23.3
----------- ----------- ----------- -----------
Investments and
other operations
Wajax (2) 5.3 1.9 8.7 4.6
Other investments
and operations,
net of corporate
expenses (1.1) (1.1) (3.5) (4.9)
----------- ----------- ----------- -----------
4.2 0.8 5.2 (0.3)
----------- ----------- ----------- -----------
$ 122.7 $ 120.7 $ 263.0 $ 250.9
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings before capital
gains (losses) and
other items $ 73.9 $ 72.1 $ 155.5 $ 144.3
Capital gains (losses)
and other items, net
of tax 58.9 (1.7) 58.9 15.8
----------- ----------- ----------- -----------
Net earnings $ 132.8 $ 70.4 $ 214.4 $ 160.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per
share
Operating earnings $ 1.09 $ 1.06 $ 2.28 $ 2.11
Capital gains (losses)
and other items, net
of tax 0.86 (0.03) 0.86 0.23
----------- ----------- ----------- -----------
Net earnings $ 1.95 $ 1.03 $ 3.14 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic weighted average
number of shares
outstanding (in
millions)(3) 68.1 68.4 68.2 68.4
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per
share
Operating earnings $ 1.08 $ 1.06 $ 2.27 $ 2.11
Capital gains (losses)
and other items, net
of tax 0.86 (0.03) 0.86 0.23
----------- ----------- ----------- -----------
Net earnings $ 1.94 $ 1.03 $ 3.13 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted weighted
average number of
shares outstanding (in
millions)(3) 68.3 68.5 68.4 68.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Annualized dividends
per share $ 0.80 $ 0.74
----------- -----------
----------- -----------
---------------------
(1) 46.9 percent equity accounted interest in Crombie REIT.
(2) 27.5 percent equity accounted interest in Wajax Income Fund. This
investment was sold on October 5, 2010.
(3) The decrease in the weighted average number of shares outstanding
compared to the 13 and 26 weeks ended October 31, 2009 is the result
of Empire purchasing for cancellation under its Normal Course Issuer
Bid 513,579 Non-Voting Class A shares during the second quarter of
fiscal 2011.
Additional segmented information is contained in note 14 of the unaudited consolidated financial statements for the second quarter of fiscal 2011 included in this release.
CONSOLIDATED FINANCIAL OVERVIEW
Revenue
Consolidated revenue for the second quarter was $3.91 billion compared to $3.87 billion for the same quarter last year, an increase of $37.3 million or 1.0 percent. Sobeys' revenue equalled $3.85 billion versus $3.81 billion in the second quarter last year, an increase of $46.4 million or 1.2 percent. The growth in Sobeys' sales continued 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. Sobeys continued to experience retail food price deflation and ongoing competitive activity, which partially offset the growth associated with these initiatives. Sobeys' second quarter same-store sales were flat compared to the second quarter last year.
Real estate revenue in the second quarter was $10.8 million, a decrease of $7.9 million from the $18.7 million recorded in the second quarter last year. Residential property revenue decreased $6.5 million, while commercial property revenue decreased $1.4 million from the second quarter last year.
Investments and other operations recorded revenue of $50.1 million in the second quarter compared to $52.3 million in the second quarter of last year, a decrease of $2.2 million.
Consolidated revenue for the first half of fiscal 2011 was $7.95 billion compared to $7.84 billion in the first half of fiscal 2010, an increase of $110.0 million or 1.4 percent. Revenue growth was largely driven by a $115.0 million or 1.5 percent growth in sales for the food retailing division over the comparable period last year, with same-store sales growth of 0.2 percent. Real estate division revenues decreased $3.9 million or 11.5 percent to $29.9 million in the first half of the fiscal year while revenue from investments and other operations decreased $1.6 million or 1.6 percent to $98.0 million.
Operating Income
Consolidated operating income in the second quarter was $122.7 million, an increase of $2.0 million or 1.7 percent from the $120.7 million recorded in the second quarter last year.
The contributors to the change in consolidated operating income from the second quarter last year were:
(i) Sobeys' operating income contribution to Empire in the second
quarter totalled $109.5 million, an increase of $3.2 million or 3.0
percent from the $106.3 million recorded in the second quarter last
year;
(ii) Residential property operating income contribution in the second
quarter was $3.7 million, a decrease of $3.6 million from the $7.3
million recorded in the second quarter last year;
(iii) Commercial property (including Crombie REIT) operating income for
the quarter was $5.3 million compared to $6.3 million in the second
quarter last fiscal year, a decrease of $1.0 million. Crombie REIT
contributed $4.4 million to operating income in the second quarter
versus a $4.9 million contribution in the second quarter last year;
and
(iv) Investments and other operations (net of corporate expenses)
contributed operating income of $4.2 million in the second quarter
compared to $0.8 million in the second quarter last year. Equity
accounted earnings generated from the Company's recently sold
27.5 percent interest in Wajax Income Fund ("Wajax") amounted to
$5.3 million in the second quarter versus $1.9 million in the
second quarter last year. Operating income from other operations
(net of corporate expenses) amounted to $(1.1) million, consistent
with the second quarter last year.
For the 26 weeks ended October 30, 2010, operating income equalled $263.0 million, an increase of $12.1 million or 4.8 percent from the comparable period last year. Operating income from the food retailing division increased to $235.7 million for the first half of fiscal 2011 from $227.9 million last year, an increase of $7.8 million or 3.4 percent. Real Estate operating income in the first half of fiscal 2011 decreased $1.2 million or 5.2 percent to $22.1 million from $23.3 million last year. Operating income for the first two quarters of fiscal 2011 from investments and other operations increased $5.5 million to $5.2 million from $(0.3) million in the same period last year.
Interest Expense
Interest expense in the second quarter amounted to $17.8 million, a decrease of $0.2 million or 1.1 percent from the $18.0 million recorded in the second quarter last year. The decline in interest expense largely reflects a decrease in average consolidated funded debt outstanding, partially offset by 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") and higher rates applicable on floating rate debt.
Interest expense for the 26 weeks ended October 30, 2010 was $37.4 million, an increase of $1.2 million or 3.3 percent from the same period last year. The increase in interest expense is largely due to higher average interest rates on funded debt levels, partially offset by a decrease in average funded debt outstanding during the first half of fiscal 2011 compared to the same period last year.
Consolidated funded debt was $1,189.0 million at the end of the second quarter compared to $1,284.1 million at the end of the second quarter last year, a $95.1 million or 7.4 percent decrease.
Income Taxes
The effective income tax rate for the second quarter (excluding the impact of capital gains and other items) was 26.5 percent versus 29.6 percent in the second quarter last year. The effective income tax rate for the first half of fiscal 2011 (excluding the impact of capital gains and other items) was 27.7 percent versus 30.4 percent in the first half last year.
The decrease in the effective income tax rate is primarily the result of declining income tax rates across the different tax jurisdictions in which the Company operates.
Earnings before Capital Gains (Losses) and Other Items
Empire recorded earnings before capital gains (losses) and other items for the second quarter of $73.9 million ($1.08 per share) compared to $72.1 million ($1.06 per share) recorded in the second quarter last year. The $1.8 million or 2.5 percent improvement in earnings before capital gains (losses) and other items over the prior year was the result of a $2.6 million decrease in income taxes, a $2.0 million increase in operating income and a $0.2 million decrease in interest expense, partially offset by a $3.0 million increase in minority interest expense.
The $11.2 million or 7.8 percent increase in earnings before capital gains (losses) and other items in the first half of fiscal 2011 is attributed to a $12.1 million increase in operating income and a $2.6 million decrease in income taxes, partially offset by a $1.2 million increase in interest expense and a $2.3 million increase in minority interest expense.
The following table presents Empire's segmented earnings before capital gains (losses) and other items by division for the 13 and 26 weeks ended October 30, 2010 compared to the 13 and 26 weeks ended October 31, 2009.
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
-------------------------------- -------------------------------
Oct. Oct. Oct. Oct.
($ in 30, 31, ($) (%) 30, 31, ($) (%)
millions) 2010 2009 Change Change 2010 2009 Change Change
-------------------------------------------------------------------------
Food
retail-
ing(1) $ 66.3 $ 64.9 $ 1.4 2.2% $ 141.0 $ 134.1 $ 6.9 5.1%
Real
estate 6.6 8.8 (2.2) (25.0%) 15.1 14.9 0.2 1.3%
Invest-
ments
and
other
opera-
tions 1.0 (1.6) 2.6 162.5% (0.6) (4.7) 4.1 87.2%
-------------------------------------------------------------------------
Consoli-
dated $ 73.9 $ 72.1 $ 1.8 2.5% $ 155.5 $ 144.3 $ 11.2 7.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of the impact of depreciation and amortization related to the
privatization of Sobeys.
Capital Gains (Losses) and Other Items
The Company recorded capital gains (losses) and other items, net of tax, of $58.9 million in the second quarter compared to $(1.7) million in the second quarter last year. Capital gains (losses) and other items in the second quarter of fiscal 2011 consisted primarily of a gain on the sale of Wajax of $75.8 million, partially offset by costs of $15.7 million (after-tax) related to planned Price Chopper store closures in Ontario and one-time severance costs related to the future closure of a Brantford, Ontario distribution centre. Capital gains (losses) and other items in the second quarter of last year consisted primarily of Empire's equity share of an interest rate swap which was settled by Crombie REIT during the quarter.
The Company recorded capital gains (losses) and other items, net of tax, of $58.9 million for the 26 weeks ended October 30, 2010 compared to $15.8 million recorded in the 26 weeks ended October 31, 2009. Included in capital gains (losses) and other items, net of tax, for the first half of last fiscal year was $17.0 million related to the tax settlement on the fiscal 2001 sale of shares in Hannaford Bros. Co.
The following table presents capital gains (losses) and other items, net of tax, for the 13 and 26 weeks ended October 30, 2010 compared to the 13 and 26 weeks ended October 31, 2009.
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
($ in Oct. 30, Oct. 31, ($) Oct. 30, Oct. 31, ($)
millions) 2010 2009 Change 2010 2009 Change
----------------------------------------- -------------------------------
Gain on
sale of
Wajax $ 75.8 $ - $ 75.8 $ 75.8 $ - $ 75.8
Write-
down of
real
estate (1.8) - (1.8) (1.8) - (1.8)
Store and
distribution
centre
closure
costs (15.7) - (15.7) (15.7) - (15.7)
Equity
share of
Crombie
REIT - (3.1) 3.1 - (3.1) 3.1
Hannaford
tax
settlement - - - - 17.0 (17.0)
Other
items 0.6 1.4 (0.8) 0.6 1.9 (1.3)
-------------------------------------------------------------------------
$ 58.9 $ (1.7) $ 60.6 $ 58.9 $ 15.8 $ 43.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings
Consolidated net earnings in the second quarter equalled $132.8 million ($1.94 per share) compared to $70.4 million ($1.03 per share) in the second quarter last year. The increase in net earnings of $62.4 million is attributed to the $60.6 million increase in capital gains (losses) and other items, net of tax, and the $1.8 million increase in earnings before capital gains (losses) and other items, as discussed.
Consolidated net earnings for the 26 weeks ended October 30, 2010 totalled $214.4 million ($3.13 per share) compared to the $160.1 million ($2.34 per share) reported in the same period last year. The increase in net earnings of $54.3 million is attributed to the $43.1 million increase in realized net capital gains (losses) and other items and the $11.2 million increase in earnings before capital gains (losses) and other items, as discussed.
The following table presents Empire's segmented net earnings for the 13 and 26 weeks ended October 30, 2010 compared to the 13 and 26 weeks ended October 31, 2009.
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
($ in Oct. 30, Oct. 31, ($) Oct. 30, Oct. 31, ($)
millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Food
retail-
ing(1) $ 50.6 $ 66.0 $ (15.4) $ 125.3 $ 135.2 $ (9.9)
Real
estate 5.4 5.7 (0.3) 13.9 11.8 2.1
Invest-
ments
and
other
opera-
tions 76.8 (1.3) 78.1 75.2 13.1 62.1
-------------------------------------------------------------------------
Consoli-
dated $ 132.8 $ 70.4 $ 62.4 $ 214.4 $ 160.1 $ 54.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of the impact of depreciation and amortization related to the
privatization of Sobeys.
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.
-------------------------------------------------------------------------
Fiscal 2011 Fiscal 2010
----------------------- -------------------------
($ in millions, Q2 Q1 Q4 Q3
except per (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
share infor- Oct. 30, July 31, May 1, Jan. 30,
mation) 2010 2010 2010 2010
-------------------------------------------------------------------------
Revenue $ 3,912.0 $ 4,041.2 $ 3,836.8 $ 3,836.2
Operating income 122.7 140.3 118.5 110.3
Operating
earnings (2) 73.9 81.6 71.9 68.3
Capital gains
(losses) and other
items, net of tax 58.9 - 1.6 -
-------------------------------------------------------------------------
Net earnings $ 132.8 $ 81.6 $ 73.5 $ 68.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per share
information,
basic
Operating
earnings $ 1.09 $ 1.19 $ 1.05 $ 1.00
Capital gains
(losses) and other
items, net of tax 0.86 - 0.02 -
-------------------------------------------------------------------------
Net earnings $ 1.95 $ 1.19 $ 1.07 $ 1.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted
average number
of shares
outstanding (in
millions)(3) 68.1 68.4 68.4 68.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per share
information,
diluted
Operating
earnings $ 1.08 $ 1.19 $ 1.05 $ 0.99
Capital gains
(losses) and other
items, net of
tax 0.86 - 0.02 -
-------------------------------------------------------------------------
Net earnings $ 1.94 $ 1.19 $ 1.07 $ 0.99
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted weighted
average number
of shares
outstanding (in
millions)(3) 68.3 68.5 68.5 68.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fiscal 2010 Fiscal 2009(1)
----------------------- -------------------------
($ in millions, Q2 Q1 Q4 Q3
except per (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
share infor- Oct. 31, Aug. 1, May 2, Jan. 31,
mation) 2009 2009 2009 2009
-------------------------------------------------------------------------
Revenue $ 3,874.7 $ 3,968.5 $ 3,709.0 $ 3,800.0
Operating income 120.7 130.2 109.3 115.3
Operating
earnings (2) 72.1 72.2 62.9 64.8
Capital gains
(losses) and other
items, net of tax (1.7) 17.5 (0.8) (3.5)
-------------------------------------------------------------------------
Net earnings $ 70.4 $ 89.7 $ 62.1 $ 61.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per share
information,
basic
Operating
earnings $ 1.06 $ 1.05 $ 0.96 $ 0.99
Capital gains
(losses) and other
items, net of tax (0.03) 0.26 (0.01) (0.05)
-------------------------------------------------------------------------
Net earnings $ 1.03 $ 1.31 $ 0.95 $ 0.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic weighted
average number
of shares
outstanding (in
millions)(3) 68.4 68.4 65.9 65.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per share
information,
diluted
Operating
earnings $ 1.06 $ 1.05 $ 0.95 $ 0.98
Capital gains
(losses) and other
items, net of
tax (0.03) 0.26 (0.01) (0.05)
-------------------------------------------------------------------------
Net earnings $ 1.03 $ 1.31 $ 0.94 $ 0.93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted weighted
average number
of shares
outstanding (in
millions)(3) 68.5 68.5 66.0 65.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
since fiscal 2009 reflects an equity issue completed on April 24,
2009 which resulted in a total of 2,713,000 Non-Voting Class A shares
being issued. The decrease in the weighted average number of shares
outstanding in the second quarter of fiscal 2011 reflects the
repurchase for cancellation of 513,579 Non-Voting Class A shares
under Empire's Normal Course Issuer Bid.
Consolidated sales and operating earnings growth have been influenced by the Company's investing activities, the competitive environment, 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
Empire's food retailing division is carried out through its wholly-owned subsidiary, Sobeys. Sobeys 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, and FreshCo, as well as Lawtons Drug Stores.
Sobeys' strategy is focused on delivering the best food shopping experience to its customers in the right format, right-sized stores, supported by superior customer service. The five distinct store formats deployed by Sobeys to satisfy its customers' principal shopping requirements are the full service, fresh service, convenience service, community service and price service formats. Sobeys remains focused on improving the product, service and merchandising offerings within each format by expanding and renovating its current store base, while continuing to build new stores.
The table below presents Sobeys' contribution to Empire's consolidated revenue, operating income, earnings before capital gains (losses) and other items, capital gains (losses) and other items, net of tax, and net earnings.
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
($ in Oct. 30, Oct. 31, ($) Oct. 30, Oct. 31, ($)
millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Sales $ 3,853.4 $ 3,807.0 $ 46.4 $ 7,828.7 $ 7,713.7 $ 115.0
Operating
income(1) 109.5 106.3 3.2 235.7 227.9 7.8
Earnings
before
capital
gains
(losses)
and
other
items 66.3 64.9 1.4 141.0 134.1 6.9
Capital
gains
(losses)
and
other
items,
net of
tax (15.7) 1.1 (16.8) (15.7) 1.1 (16.8)
Net
earn-
ings(1) 50.6 66.0 (15.4) 125.3 135.2 (9.9)
-------------------------------------------------------------------------
(1) Net of the impact of depreciation and amortization related to the
privatization of Sobeys.
Sales
Food retailing division sales for the second quarter were $3.85 billion compared to $3.81 billion for the same quarter last year, an increase of $46.4 million or 1.2 percent. During the second quarter, Sobeys' same-store sales were flat compared to the same quarter last year.
Fiscal year-to-date sales for the food retailing division were $7.83 billion compared to $7.71 billion last year, an increase of $115.0 million or 1.5 percent. Same-store sales grew by 0.2 percent in the first half of fiscal 2011 compared to the same period last year.
The growth in sales continues to be a direct result of 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 innovations. Sobeys continued to experience retail food price deflation in a competitive environment which partially offset the growth associated with these initiatives.
Operating Income
Sobeys' operating income contribution to Empire, which excludes the costs associated with the store and distribution centre closures in Ontario and is net of depreciation and amortization related to the privatization of Sobeys and other items, was $109.5 million in the second quarter (fiscal 2010 - $106.3 million). Sobeys' operating income margin in the second quarter after adjusting for above-noted items equalled 2.84 percent compared to 2.79 percent in the second quarter last year.
Including the $16.1 million (pre-tax) in store closure costs in Ontario and $5.4 million (pre-tax) in severance costs related to the future closure of the Brantford, Ontario distribution centre and adjusting for the impact of depreciation and amortization related to the privatization of Sobeys and other items, operating income recorded by Sobeys in the second quarter was $90.4 million, a $17.2 million decrease from the second quarter last year.
For the 26 weeks ended October 30, 2010, Sobeys' operating income contribution to Empire, which excludes the costs associated with the store and distribution centre closures in Ontario and is adjusted for depreciation and amortization related to the privatization of Sobeys and other items, was $235.7 million compared to $227.9 million last year, an increase of $7.8 million. Sobeys' operating income margin in the first half of fiscal 2011 after adjusting for above items equalled 3.01 percent compared to 2.95 percent in the same period last year.
Including the costs associated with the store and distribution centre closures in Ontario as mentioned, and adjusting for the impact of depreciation and amortization related to the privatization of Sobeys and other items, operating income recorded by Sobeys was $217.9 million, a $12.6 million decrease from the same period last year.
Sobeys will continue to focus on disciplined cost management initiatives, supply chain and retail productivity improvements and migration of best practices to continue to fund investments to drive sales and improve margins over time.
Earnings before Capital Gains (Losses) and Other Items
In the second quarter ended October 30, 2010, Sobeys contributed earnings before capital gains and other items to Empire of $66.3 million, an increase of $1.4 million or 2.2 percent compared to the second quarter last year. The improvement over the same quarter last year was the result of a $3.2 million increase in operating income contribution, a $2.0 million decrease in income tax expense, partially offset by a $3.0 million increase in minority interest and by a $0.8 million increase in interest expense.
For the 26 weeks ended October 30, 2010, Sobeys contributed earnings before capital gains and other items to Empire of $141.0 million compared to a $134.1 million contribution over the same period last year, an increase of $6.9 million or 5.1 percent. The improvement over the same quarter last year was the result of a $7.8 million increase in operating income contribution, a $3.4 million decrease in income tax expense, partially offset by a $2.0 million increase in interest expense and by a $2.3 million increase in minority interest.
Capital Gains (Losses) and Other Items
For the 13 and 26 weeks ended October 30, 2010, Sobeys contributed capital gains (losses) and other items to Empire of $(15.7) million compared to $1.1 million last year. Store closure costs in Ontario of $16.1 million pre-tax ($11.8 million after-tax) and severance costs related to the future closure of the Brantford, Ontario distribution centre of $5.4 million pre-tax ($3.9 million after-tax) account for the capital gains (losses) and other items in the second quarter and for fiscal year-to-date.
Net Earnings
Sobeys recorded second quarter net earnings of $51.5 million, a decrease of $15.4 million or 23.0 percent compared to the $66.9 million recorded in the second 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 $50.6 million to Empire for the second quarter, a decrease of $15.4 million or 23.3 percent from the $66.0 million recorded in the same period last year.
For the 26 weeks ended October 30, 2010, Sobeys recorded net earnings of $127.1 million, a decrease of $9.9 million or 7.2 percent compared to the $137.0 million recorded in the same period 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 $125.3 million to Empire for the first half of fiscal 2011, a decrease of $9.9 million or 7.3 percent from the $135.2 million recorded in the same period last year.
REAL ESTATE
Empire's real estate operations are focused primarily on (i) the ownership of retail and office properties through a 46.6 percent ownership interest in Crombie REIT, and (ii) residential land development through an ownership interest in Genstar, which operates principally in communities in Ontario and Western Canada.
It should be noted that revenue, operating income and earnings recorded in the second quarter and first half of fiscal 2011 were positively impacted by an increase in the ownership interest in Genstar, from 35.7 percent last fiscal year to 40.7 percent in third quarter of fiscal 2010.
With regard to commercial real estate operations, during the first quarter Empire's 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 better aligns 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 46.6 percent interest in Crombie REIT.
During the second 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 $20.5 million of Class B units of Crombie Limited Partnership (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.4 percent to 47.0 percent. Also during the quarter, Crombie issued 500,542 units as a portion of its Class B convertible debentures were converted to units in Crombie REIT. This conversion further reduced Empire's interest in Crombie REIT to 46.6 percent.
The table below presents revenue, operating income, net earnings and funds from operations for the real estate division's commercial operations and residential operations.
----------------------------------------- -------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
($ in Oct. 30, Oct. 31, ($) Oct. 30, Oct. 31, ($)
millions) 2010 2009 Change 2010 2009 Change
----------------------------------------- -------------------------------
Revenue
Resi-
den-
tial $ 7.5 $ 14.0 $ (6.5) $ 22.6 $ 25.4 $ (2.8)
Commer-
cial 3.3 4.7 (1.4) 7.3 8.4 (1.1)
----------------------------------------- -------------------------------
$ 10.8 $ 18.7 $ (7.9) $ 29.9 $ 33.8 $ (3.9)
----------------------------------------- -------------------------------
----------------------------------------- -------------------------------
Operating
income
Resi-
den-
tial $ 3.7 $ 7.3 $ (3.6) $ 11.8 $ 12.4 $ (0.6)
Crombie
REIT(1) 4.4 4.9 (0.5) 8.5 9.8 (1.3)
Commer-
cial 0.9 1.4 (0.5) 1.8 1.1 0.7
----------------------------------------- -------------------------------
$ 9.0 $ 13.6 $ (4.6) $ 22.1 $ 23.3 $ (1.2)
----------------------------------------- -------------------------------
----------------------------------------- -------------------------------
Net
earnings
Resi-
den-
tial
(opera-
ting
earn-
ings)
$ 2.5 $ 5.1 $ (2.6) $ 8.2 $ 8.5 $ (0.3)
Commer-
cial
(opera-
ting
earn-
ings) 4.1 3.7 0.4 6.9 6.4 0.5
Capital
losses
and
other
items,
net of
tax (1.2) (3.1) 1.9 (1.2) (3.1) 1.9
----------------------------------------- -------------------------------
$ 5.4 $ 5.7 $ (0.3) $ 13.9 $ 11.8 $ 2.1
----------------------------------------- -------------------------------
----------------------------------------- -------------------------------
Funds from
operations
Resi-
den-
tial $ 2.5 $ 5.1 $ (2.6) $ 8.2 $ 8.5 $ (0.3)
Commer-
cial 4.4 4.1 0.3 7.4 7.3 0.1
----------------------------------------- -------------------------------
$ 6.9 $ 9.2 $ (2.3) $ 15.6 $ 15.8 $ (0.2)
----------------------------------------- -------------------------------
----------------------------------------- -------------------------------
(1) Equity accounted earnings in Crombie REIT during the period.
Revenue
Real estate division revenue amounted to $10.8 million for the second quarter ended October 30, 2010, a $7.9 million decline from the second quarter last year as a result of a $6.5 million decrease in residential property revenue and a $1.4 million decrease in commercial property revenue.
For the 26 weeks ended October 30, 2010, the real estate division recorded revenues of $29.9 million, a decrease of $3.9 million from the $33.8 million recorded in the same period last year. The decline was the result of a $2.8 million decrease in residential property sales and a $1.1 million decrease in commercial property revenue.
Operating Income
Second quarter real estate division operating income was $9.0 million versus $13.6 million in the same quarter last year. The $4.6 million decrease in real estate division operating income is largely a result of a $3.6 million decrease in residential operating income due to lower lot sales. Equity accounted earnings from Crombie REIT amounted to $4.4 million in the second quarter compared to $4.9 million in the same quarter last year. Other commercial operating income decreased $0.5 million in the second quarter compared to the same quarter last year.
For the 26 weeks ended October 30, 2010, real estate division operating income was $22.1 million compared to $23.3 million, a decrease of $1.2 million. The decline was the result of a $1.3 million decrease in equity earnings from Crombie REIT and a $0.6 million decrease in residential property operating income, partially offset by a $0.7 million increase in other commercial property operating income. Equity accounted earnings from Crombie REIT amounted to $8.5 million in the first half of the fiscal year compared to $9.8 million in the same period last year. This decline was largely the result of higher interest expense.
Net Earnings
Real estate division net earnings contribution in the second quarter amounted to $5.4 million compared to $5.7 million last year, a $0.3 million decrease. The earnings decrease is the result of a $4.6 million decrease in operating income as discussed, partially offset by a $1.9 million decrease in net capital losses and other items, a $2.0 million decrease in income taxes and a decrease in interest expense of $0.4 million.
For the fiscal year-to-date the real estate division contributed net earnings of $13.9 million compared to $11.8 million last year, a $2.1 million increase. The earnings increase is the result of a $1.9 million decrease in net capital losses and other items, a $0.8 million decrease in income taxes and a decrease in interest expense of $0.6 million, partially offset by the $1.2 million decrease in operating income as discussed.
Funds from Operations
Funds from operations in the second quarter of $6.9 million decreased $2.3 million compared to the second quarter of last year due to the decline in operating earnings of $2.2 million and a $0.1 million decrease in depreciation. Trailing (last four quarters) funds from operations for the real estate division were $35.5 million, a decrease of $2.3 million or 6.1 percent from the trailing (last four quarters) funds from operations of $37.8 million reported in the first quarter of fiscal 2011.
INVESTMENTS AND OTHER OPERATIONS
The third component of Empire's business is its investments and other operations, consisting primarily of wholly-owned Empire Theatres.
At October 30, 2010, Empire's investment portfolio, including equity accounted investments in Crombie REIT and Genstar U.S., consisted of:
-------------------------------------------------------------------------
Oct. 30, 2010 May 1, 2010
-------------------------------- --------------------------------
Un- Un-
($ in Market Carrying realized Market Carrying realized
millions) Value Value Gain Value Value Gain
-------------------------------------------------------------------------
Investment
in
Crombie
REIT $ 393.6 $ 1.7 $ 391.9 $ 341.3 $ 8.4 $ 332.9
Investment
in Wajax - - - 117.9 30.8 87.1
Investment
in Genstar
U.S.(1) 23.5 23.5 - 17.6 17.6 -
Other
invest-
ments
(1)(2) 11.6 11.6 - 10.9 10.9 -
-------------------------------------------------------------------------
$ 428.7 $ 36.8 $ 391.9 $ 487.7 $ 67.7 $ 420.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2009
--------------------------------
Un-
($ in Market Carrying realized
millions) Value Value Gain
-------------------------------------------------------------------------
Investment
in
Crombie
REIT $ 304.0 $ 14.1 $ 289.9
Investment
in Wajax 85.8 30.4 55.4
Investment
in Genstar
U.S.(1) 11.9 11.9 -
Other
invest-
ments
(1)(2) 11.6 11.6 -
-------------------------------------------------------------------------
$ 413.3 $ 68.0 $ 345.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Assumes market value equals book value.
(2) Includes a $11.4 million Crombie REIT convertible unsecured
subordinated debenture (May 1, 2010 - $10.7 million, Oct. 31, 2009 -
$10.4 million).
Sale of Wajax Income Fund
On October 5, 2010, Empire sold its 27.5 percent ownership interest in Wajax for net proceeds of $121.3 million and a resulting net capital gain of $80.1 million. The net proceeds were used to reduce Empire's direct bank indebtedness and to purchase for cancellation under Empire's Normal Course Issuer Bid a total of 513,579 Non-Voting Class A shares. Empire also applied $6.0 million of the $121.3 million net proceeds from the Wajax sale for charitable donations in the second quarter.
The following table presents investments and other operations' (net of corporate expenses) financial highlights, excluding Crombie REIT and Genstar U.S. equity earnings, for the 13 and 26 weeks ended October 30, 2010 compared to the same period last year:
---------------------------------------- --------------------------------
13 Weeks Ended 26 Weeks Ended
-------------------------------- --------------------------------
($ in Oct. 30, Oct. 31, ($) Oct. 30, Oct. 31, ($)
millions) 2010 2009 Change 2010 2009 Change
---------------------------------------- --------------------------------
Revenue $ 50.1 $ 52.3 $ (2.2) $ 98.0 $ 99.6 $ (1.6)
---------------------------------------- --------------------------------
Operating
income
Wajax 5.3 1.9 3.4 8.7 4.6 4.1
Other
operations,
net of
corporate
expenses (1.1) (1.1) - (3.5) (4.9) 1.4
---------------------------------------- --------------------------------
Total
operating
income 4.2 0.8 3.4 5.2 (0.3) 5.5
---------------------------------------- --------------------------------
Operating
earnings 1.0 (1.6) 2.6 (0.6) (4.7) 4.1
Capital
gains
and
other
items,
net of
tax 75.8 0.3 75.5 75.8 17.8 58.0
---------------------------------------- --------------------------------
Net
ear-
nings $ 76.8 $ (1.3) $ 78.1 $ 75.2 $ 13.1 $ 62.1
---------------------------------------- --------------------------------
---------------------------------------- --------------------------------
Revenue
Investments and other operations' revenue, primarily generated by Empire Theatres, equaled $50.1 million in the second quarter ended October 30, 2010 versus $52.3 million in the second quarter last year, a $2.2 million or 4.2 percent decrease.
For the 26 weeks ended October 30, 2010, investments and other operations reported revenues of $98.0 million compared to $99.6 million in the same period last year, a $1.6 million or 1.6 percent decrease.
Operating Income
Investments and other operations, net of corporate expenses, contributed operating income of $4.2 million compared to $0.8 million in the second quarter last year. Equity accounted earnings generated from the Company's recently sold 27.5 percent interest in Wajax amounted to $5.3 million in the second quarter versus $1.9 million last year. Operating income from other operations, net of corporate expenses, for the second quarter was consistent with last year at $(1.1) million. The improvement in equity accounted earnings reported by Wajax is primarily due to stronger earnings performance across all its operating segments compared to the same quarter last year.
Operating income generated by investments and other operations, net of corporate expenses, during the 26 weeks ended October 30, 2010 amounted to $5.2 million compared to $(0.3) million in the same period last year. Equity earnings from Wajax increased to $8.7 million in the first half of fiscal 2011 from $4.6 million in the first half last year, an increase of $4.1 million. Operating income from other operations, net of corporate expenses, for the first half of fiscal 2011 increased $1.4 million to $(3.5) million from $(4.9) million the same period last year.
Earnings before Capital Gains (Losses) and Other Items
Investments and other operations, net of corporate expenses, contributed earnings before capital gains (losses) and other items of $1.0 million in the second quarter compared to $(1.6) million in the same quarter last year, an increase of $2.6 million. This improvement is largely attributed to equity earnings from Wajax in the quarter and a decrease in interest expense of $0.7 million at the corporate level.
Investments and other operations, net of corporate expenses, contributed earnings before capital gains (losses) and other items of $(0.6) million in the 26 weeks ended October 30, 2010 compared to $(4.7) million in the same period last year, an increase of $4.1 million. This improvement is largely attributed to increased equity earnings from Wajax, higher earnings from Empire Theatres and lower interest expense at the corporate level.
Capital Gains and Other Items
During the second quarter, investments and other operations reported capital gains and other items, net of tax, of $75.8 million compared to $0.3 million during the second quarter of fiscal 2010. Capital gains and other items, net of tax, in the second quarter are primarily related to the sale of the Company's 27.5 percent interest in Wajax. The capital gain on the sale of Wajax before income taxes was $86.8 million ($80.1 million after-tax). Empire applied $6.0 million of the $121.3 million net proceeds from the Wajax sale for charitable donations in the second quarter.
Capital gains and other items, net of tax, reported by investments and other operations for the 26 weeks ended October 30, 2010 were $75.8 million compared to $17.8 million in the same period last year. Capital gains and other items in the first half of last fiscal year are primarily related to the settlement of the tax reassessment for $17.0 million relating to the fiscal 2001 sale of shares in Hannaford Bros. Co.
Net Earnings
Investments and other operations, net of corporate expenses, contributed $76.8 million to Empire's consolidated second quarter fiscal 2011 net earnings compared to a $(1.3) million contribution in the second quarter last year. The increase is primarily attributed to the increase in capital gains and other items, net of tax, of $75.5 million.
For the fiscal year-to-date, investments and other operations, net of corporate expenses, contributed net earnings of $75.2 million compared to a $13.1 million contribution in the same period last year, an increase of $62.1 million. The increase in net earnings for the first half of fiscal 2011 is largely attributed to the $58.0 million increase in capital gains and other items, net of tax, over the same period last year.
CONSOLIDATED FINANCIAL CONDITION
The Company's financial condition has improved since the start of the fiscal year as evidenced by the capital structure and key financial condition measures in the table below.
-------------------------------------------------------------------------
($ in millions, except per share Oct. 30, May 1, Oct. 31,
and ratio calculations) 2010 2010 2009
-------------------------------------------------------------------------
Shareholders' equity $ 3,118.7 $ 2,952.4 $ 2,827.0
Book value per share $ 45.84 $ 43.07 $ 41.23
Bank indebtedness $ 13.0 $ 17.8 $ 77.4
Long-term debt, including
current portion $ 1,176.0 $ 1,208.4 $ 1,206.7
Funded debt to total capital 27.6% 29.3% 31.2%
Net debt to net total capital(1) 17.3% 21.8% 27.5%
Debt to EBITDA(2) 1.4x 1.5x 1.6x
EBITDA to interest expense(2) 11.4x 11.3x 10.8x
Total assets $ 6,367.9 $ 6,248.3 $ 6,008.5
-------------------------------------------------------------------------
(1) Net debt to total capital reduces funded debt by cash and cash
equivalents.
(2) Calculation uses trailing 12-month EBITDA and interest expense.
Shareholders' Equity
There were 33,683,919 Non-Voting Class A and 34,260,763 Class B common shares outstanding at October 30, 2010, for a total of 67,944,682 shares, a decrease of 513,579 shares from the previous fiscal year-end and the second quarter last year. The decrease is due to the purchase of 513,579 Non-Voting Class A shares for $27.7 million during the second quarter under Empire's Normal Course Issuer Bid filed with the Toronto Stock Exchange on September 15, 2010.
At October 30, 2010, Empire had 583,673 options outstanding compared to 433,209 options outstanding at October 31, 2009.
There were no Series 2 preferred shares purchased for cancellation in the first half of fiscal 2011 or fiscal 2010. The Company plans to purchase on a best efforts basis additional Series 2 preferred.
As at December 9, 2010, the Company had Non-Voting Class A and Class B common shares outstanding of 33,683,919 and 34,260,763, respectively, as well as 583,673 options to acquire in aggregate 583,673 Non-Voting Class A shares.
Dividends paid to common shareholders amounted to $13.6 million in the second quarter ($0.20 per share) versus $12.7 million ($0.185 per share) in the second quarter last fiscal year. Dividends paid for the 26 weeks ended October 30, 2010 to common shareholders amounted to $27.3 million ($0.40 per share) versus $25.4 million ($0.37 per share) paid in the first half of last year.
Liabilities
Historically, Empire has financed a significant portion of its assets through the use of long-term debt. Longer-term assets are generally financed with fixed rate, long-term debt, thereby reducing both interest rate and refinancing risk. Total long-term debt, including the current portion of long-term debt and debt related to assets held for sale, at October 30, 2010 was $1,176.0 million, representing 98.9 percent of Empire's total funded debt of $1,189.0 million.
Long-term debt by division is as follows:
-------------------------------------------------------------------------
Long-term debt (including current
portion) Oct. 30, May 1, Oct. 31,
($ in millions) 2010 2010 2009
-------------------------------------------------------------------------
Food retailing $ 1,000.4 $ 858.7 $ 864.8
Real estate 23.7 35.3 37.2
Investments and other operations 151.9 314.4 304.7
-------------------------------------------------------------------------
Total $ 1,176.0 $ 1,208.4 $ 1,206.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated funded debt has decreased $37.2 million since the start of the fiscal year, May 1, 2010 ($1,226.2 million) and by $95.1 million since the second quarter last year ($1,284.1 million). The decrease since the start of the fiscal year is due primarily to the application of proceeds from the sale of the Company's investment in Wajax Income Fund and from the sale of properties to Crombie REIT, partially offset by Sobeys' $150.0 million 30-year MTN issuance in the first quarter of fiscal 2011. The ratio of funded debt to total capital has improved by 3.6 percentage points since the second quarter last year to 27.6 percent as a result of lower funded debt levels and higher equity levels due to growth in retained earnings.
Empire's earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense ratio in the second quarter was 11.4 times, up from 10.8 times in the second quarter last year. The increase over the same quarter last year is due primarily to improvement in trailing 12-month EBITDA and a decline in the trailing 12-month interest expense.
Liquidity and Capital Resources
The Company maintains the following sources of liquidity:
- Cash and cash equivalents on hand;
- Unutilized bank credit facilities; and
- Cash generated from operating activities.
At October 30, 2010, consolidated cash and cash equivalents were $537.6 million versus $210.9 million at October 31, 2009 and $401.0 million at fiscal year-end, May 1, 2010.
At the end of the second quarter of fiscal 2011, on a non-consolidated basis, Empire directly maintained an authorized bank line for operating, general and corporate purposes of $450.0 million, of which approximately $133.3 million or 29.6 percent was utilized. Empire's non-consolidated $650 million credit facility matured on June 8, 2010. Prior to its maturity, on June 4, 2010, management renewed the credit facility for an additional three-year term, to expire on June 30, 2013. The size of the credit facility was reduced to $450.0 million due to the Company's strong cash position and improved financial condition. On a consolidated basis, Empire's authorized bank credit facilities exceeded borrowings by approximately $788 million at October 30, 2010.
The Company anticipates that the above mentioned in-place sources of liquidity will adequately meet its short-term and long-term financial requirements. The Company mitigates potential liquidity risk by ensuring its various sources of funds are diversified by term to maturity and source of credit.
Empire and its subsidiaries have provided covenants to its lenders in support of various financing facilities. All covenants were complied with for the 26 weeks ended October 30, 2010 and for the fiscal year ended May 1, 2010.
The following table highlights major cash flow components for the 13 and 26 weeks ended October 30, 2010 compared to the 13 and 26 weeks ended October 31, 2009.
Major Cash Flow Components
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------ ------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
($ in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings $ 132.8 $ 70.4 $ 214.4 $ 160.1
Items not affecting
cash 5.7 85.4 97.6 174.8
-------------------------------------------------------------------------
138.5 155.8 312.0 334.9
Net change in non-cash
working capital (15.2) (94.1) (87.0) (65.3)
-------------------------------------------------------------------------
Cash flows from operating
activities 123.3 61.7 225.0 269.6
Cash flows from (used in)
investing activities 67.5 (133.3) 13.0 (236.8)
Cash flows used in
financing activities (148.3) (18.1) (101.4) (53.5)
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents $ 42.5 $ (89.7) $ 136.6 $ (20.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
Second quarter cash flows from operating activities equalled $123.3 million compared to $61.7 million in the comparable period last year. The increase of $61.6 million is attributed to an increase in the net change in non-cash working capital of $78.9 million and an increase in net earnings of $62.4 million, partially offset by a decrease in items not affecting cash of $79.7 million.
Fiscal year-to-date cash flows from operating activities equalled $225.0 million compared to $269.6 million in the comparable period last year. The decrease of $44.6 million is attributed to a decrease in items not affecting cash of $77.2 million and a decrease in the net change in non-cash working capital of $21.7 million, partially offset by an increase in net earnings of $54.3 million.
Investing Activities
Cash flows from investing activities of $67.5 million in the second quarter compares to cash used in investing activities of $133.3 million in the same quarter last year. The change of $200.8 million is largely the result of net proceeds from the sale of the Company's investment in Wajax of $121.3 million and an increase in proceeds on disposal of property and equipment of $111.8 million, which more than offsets a $52.2 million increase in cash used for the purchase of property and equipment relative to the second quarter last year.
Consolidated purchases of property and equipment totalled $157.4 million in the second quarter of fiscal 2011 compared to $105.2 million in the second quarter last year. The increase in property and equipment purchases is primarily a result of capital additions at Sobeys. The $111.8 million increase in proceeds on disposal of property and equipment from the second quarter last year to $118.7 million was largely the result of a sale by subsidiaries of the Company of ten properties to Crombie REIT for a cash consideration of $95.5 million.
For the 26 weeks ended October 30, 2010, cash flows from investing activities totalled $13.0 million, an increase of $249.8 million from the cash flows used in investing activities of $236.8 million in the same time period last year. The following factors are largely responsible for the increase: the sale of the investment in Wajax for net proceeds of $121.3 million; a $79.6 million increase in proceeds from the disposal of property and equipment relative to the first half of last fiscal year; a change in loans and other receivables relative to last year of $71.8 million; partially offset by a $43.7 million increase in consolidated purchases of property and equipment.
The table below outlines the number of stores Sobeys invested in during the 13 and 26 weeks ended October 30, 2010 compared to 13 and 26 weeks ended October 31, 2009.
Sobeys' Corporate and Franchised Store
Construction Activity
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------ ------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
Number of Stores 2010 2009 2010 2009
----------------------------------------------- ------------------------
Opened/Acquired/Relocated 7 10 15 24
Expanded 2 2 6 5
Rebannered/Redeveloped 19 - 30 5
Closed 4 2 9 24
-------------------------------------------------------------------------
The following table shows Sobeys' square footage changes for the 13 and 52 weeks ended October 30, 2010 by type:
Sobeys' Square Footage Changes
(in thousands)
-------------------------------------------------------------------------
13 Weeks Ended 52 Weeks Ended
Square Feet Oct. 30, 2010 Oct. 30, 2010
-------------------------------------------------------------------------
Opened 107 631
Relocated - 103
Acquired - 3
Expanded 9 105
Closed (7) (332)
-------------------------------------------------------------------------
Net Change 109 510
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At October 30, 2010, Sobeys' square footage totalled 28.3 million square feet, a 1.8 percent increase over the 27.8 million square feet operated at the end of the second quarter last year.
Financing Activities
Financing activities during the second quarter used $148.3 million of cash compared to $18.1 million of cash used in financing activities in the same quarter last year. The increase of $130.2 million in cash flows used in financing activities when compared to the same quarter last year is primarily the result of an increase in the repayment of long-term debt of $61.4 million, a decrease in bank indebtedness of $29.2 million in the second quarter compared to a $7.6 million increase in the same quarter last year and an increase in cash used for the repurchase of Non-Voting Class A shares of $27.7 million.
Financing activities during the first half of fiscal 2011 used $101.4 million of cash compared to $53.5 million of cash used in financing activities in the same period last year. The increase of $47.9 million in cash flows used in financing activities when compared to the same period last year is primarily the result of an increase in the repayment of long-term debt of $92.1 million, a decrease in bank indebtedness of $4.8 million in the first half of fiscal 2011 compared to a $31.5 million increase in the same period last year and an increase in cash used for the repurchase of Non-Voting Class A shares of $27.7 million, partially offset by an increase in the issuance of long-term debt of $112.7 million.
The Company believes that its cash and cash equivalents, future operating cash flows and available credit facilities will enable the Company to fund future capital investments, pension plan contributions, working capital and ongoing business requirements.
Free Cash Flow
Free cash flow (see Non-GAAP measures section) is used to measure the change in the Company's cash available for additional investing, dividends and/or debt reduction. The following table reconciles free cash flow to GAAP cash flows used in operating activities for the 13 and 26 weeks ended October 30, 2010 and October 31, 2009.
-------------------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------ ------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
($ in millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flow from
operating activities $ 123.3 $ 61.7 $ 225.0 $ 269.6
Less: Property and
equipment purchases 157.4 105.2 242.9 199.2
-------------------------------------------------------------------------
Free cash flow $ (34.1) $ (43.5) $ (17.9) $ 70.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow in the second quarter of fiscal 2011 was $(34.1) million compared to $(43.5) million in the second quarter last year. The $9.4 million increase in free cash flow from the second quarter last fiscal year was due to an increase in cash flow from operations of $61.6 million primarily due to an increase in net earnings of $62.4 million, partially offset by a $52.2 million increase in property and equipment purchases.
Free cash flow in the first half of fiscal 2011 was $(17.9) million compared to $70.4 million in the first half of last year. The $88.3 million decline in free cash flow from the first half last year was due to a $43.7 million increase in property and equipment purchases and a decrease in cash flow from operations of $44.6 million.
Accounting Policy Changes
The accounting policy changes are explained in note 1 to the unaudited consolidated financial statements included in this release.
Transition to 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 Policies" of the Company's fiscal 2010 annual MD&A. The IFRS changeover plan is progressing as outlined, and no significant changes have been made to this plan.
The Company continues to assess the impact of IFRS on the Company's budgeting process by utilizing 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 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.
-------------------------------------------------------------------------
Key Key Difference Between IFRS Potential Key Impacts for the
Accounting and Canadian GAAP for the Company
Policy 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 and
are defined as properties they will be separately
that are held to earn recorded and disclosed from
rentals and/or held for property and equipment in the
capital appreciation. opening IFRS balance sheet.
Investment properties are The accounting policy change
separately recorded and will result in a
disclosed under IFRS, while reclassification of
they are recorded with approximately $98.0 million on
property and equipment under the opening balance sheet.
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 long- Assets" requires a company impairment purposes will be at
lived to record an impairment loss a lower level than under
assets when an asset is carried at Canadian GAAP. The Company has
more than its recoverable determined the CGU to be
amount through use or sale. principally at an individual
IAS 36, unlike Canadian store or theatre level.
GAAP, allows a company to
reverse these impairment The change in level of
losses if there is a change impairment testing is
in the factors used to anticipated to result in an
calculate the assets' increase in the write down of
recoverable amount. assets under IFRS whereas the
carrying value of assets under
If it is not possible to Canadian GAAP was previously
estimate the recoverable supported by a higher,
amount of an individual aggregated level of testing.
asset, IFRS tests asset The write down and potential
groups for impairment at the subsequent recovery of
independent cash-generating impairment loss could lead to
unit ("CGU") level based on income statement and earnings
generation of cash inflows. volatility in future periods.
Under Canadian GAAP, asset
groups are defined based on Opening balance sheet:
net cash flows. 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 but expects a decrease to
retained earnings, property
and equipment and investment
property. The company
continues to assess the
potential impact which may be
significant.
-------------------------------------------------------------------------
Leases IFRS does not provide the Opening balance sheet: The
same quantitative guidelines qualitative considerations for
as Canadian GAAP, but rather the classification of leases
has additional qualitative were reviewed as at the
considerations for transition date, and no change
classification of leases in classifications have been
between 'operating' and identified.
'finance' ('capital' under
Canadian GAAP) leases.
-------------------------------------------------------------
IFRS has different Opening balance sheet: Certain
recognition principles gains from historical sale
surrounding sale leaseback leaseback transactions have
transactions where the lease been identified and will be
is classified as an fully recognized in the
'operating' lease and the opening IFRS balance sheet.
transaction occurs at fair The adjustment will result in
market value. a decrease to other
liabilities and an increase to
retained earnings.
-------------------------------------------------------------------------
Employee IFRS requires vested past Opening balance sheet: There
Benefits service costs of defined will be a one-time adjustment
benefit pension plans to be to recognize any vested past
expensed immediately and service costs at the date of
unvested past service costs transition to IFRS. The
to be recognized on a Company has engaged actuaries
straight-line basis until to calculate this adjustment.
the benefits become vested.
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: An
make an accounting policy adjustment to retained
choice regarding the earnings is expected as a
recognition of actuarial result of the Company opting
gains and losses. The three to utilize an IFRS 1 exemption
options that are available to recognize all unamortized
are as follows: actuarial gains and losses
- deferred recognition using through retained earnings upon
a "corridor" approach; transition to IFRS. The
- immediate recognition Company has engaged actuaries
through the income to calculate this transitional
statement; or adjustment.
- 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.
-------------------------------------------------------------
IFRS calculates the asset Opening balance sheet: The
ceiling limit for defined Company has engaged actuaries
benefit plans in a different to calculate this transitional
manner from the method adjustment.
required under Canadian
GAAP, and also requires the
recognition of onerous
obligations where a defined
benefit plan has minimum
funding requirements.
-------------------------------------------------------------
The anticipated impact of
adjustments related to
Employee Future Benefits to
retained earnings is a
decrease of approximately
$68.4 million.
-------------------------------------------------------------------------
Provisions IFRS uses different Opening balance sheet: The
terminology than Canadian adjustment is expected to be a
GAAP and provides more reclassification of amounts
extensive guidance on out of trade and other
recognition of provisions payables, loans and
defined as liabilities with borrowings, and other
uncertain timing and/or liabilities to a provisions
amount, including the account, and is not expected
following: to have an effect on retained
- provisions are recognized earnings.
when it is probable (more
likely than not) that an The Company is currently
outflow of resources will finalizing the impact of the
be required to settle the adjustment.
obligation, while a higher
threshold is used under
Canadian GAAP;
- provisions will be
separately classified from
other liabilities (current
and non-current) on the
face of the balance sheet
and subject to additional
disclosure requirements;
- provisions are recognized
if either a legal
obligation or constructive
obligation exists, while
only legal obligation is
considered under Canadian
GAAP;
- a provision must be
recognized if a contract
becomes onerous where the
unavoidable costs of
meeting the obligations
under the contract exceed
the economic benefits
expected to be received
from it; and
- provisions are discounted
when impact is significant.
-------------------------------------------------------------------------
Customer IFRS requires deferred Opening balance sheet: There
Loyalty revenue recognition approach will be a one-time adjustment
Programs for customer loyalty to defer revenue recognized
programs with fair value of under Canadian GAAP. As a
the award credits to be result of the impact there
recognized as a separate will be a decrease in other
component of sales assets, an increase in trade
transaction. Under Canadian and other payables, and a
GAAP, an entity can use a total decrease to retained
deferred revenue approach earnings of approximately
or account for the program $1.4 million.
as an expense. The Company
uses the latter approach
under Canadian GAAP.
-------------------------------------------------------------------------
Consolida- IFRS uses a more principles- Opening balance sheet: The
tion - based control model for control factors under IFRS for
Special consolidation of SPEs. consolidation were considered
Purpose Entities are to be as at the transition date to
Entities consolidated if the Company IFRS specifically related to
("SPEs") has the majority of the consolidation of certain
risks and rewards of franchises. There was no
ownership over the subject change in the total number of
entity. The control factors VIE's upon transition to IFRS.
considered include:
- a majority share
ownership;
- ability to control the
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 and
their financial dependance
on Sobeys to operate.
-------------------------------------------------------------------------
Joint Existing IAS 31 "Interests Opening balance sheet: Certain
Ventures in Joint Ventures", allows of the Company's investments
an entity to account for in real estate that were
jointly controlled previously accounted for using
operations using the proportionate
proportionate consolidation consolidation method will be
or the equity method. The accounted for using the equity
IASB has a current project method under IFRS. As a result
underway that will require of this change, the opening
joint ventures to be balance sheet impact will be a
accounted for using the decrease to cash and cash
equity method, which is equivalents, inventories,
expected to be issued in prepaid expenses, loans and
December 2010. Under other receivables, property
Canadian GAAP these types of and equipment, trade and other
investments are accounted payables, and loans and
for using proportionate borrowings. Other minor
consolidation. adjustments were made to
ensure all previously equity
accounted entities are in line
with IFRS reporting
requirements. This change will
result in an increase of
$94.0 million to investments
at equity, and a reduction to
retained earnings of
$1.5 million.
-------------------------------------------------------------------------
Fair Value as Deemed Cost - IFRS 1 Election - The Company expects to elect to report certain items of property and equipment, investment property, and/or intangible assets in its opening IFRS balance sheet at a deemed cost instead of the actual cost that would be determined under IFRS. The deemed cost of an item may be either its fair value at the date of transition to IFRS or an amount determined by a previous revaluation under Canadian GAAP (as long as that amount was close to either its fair value, cost or adjusted cost). The exemption can be applied on an asset-by-asset basis, and the Company is currently evaluating individual assets for which the election may apply. The Company has engaged property valuators to obtain information on the fair values of selected assets.
Related-Party Transactions
The Company rents premises from Crombie REIT. The rental payments are at exchange amount which represents the amount negotiated between the parties as part of the lease agreement. For the 13 and 26 weeks ended October 30, 2010, the aggregate rental payments to Crombie REIT were $17.0 million and $35.7 million, respectively (2010 - $14.4 million and $33.0 million). In addition, for a period of five years commencing March 23, 2006, Crombie REIT provides administrative and management services to the Company pursuant to a management cost sharing agreement, dated March 23, 2006, between a subsidiary of Crombie REIT and ECL. The charges incurred for administrative and management services are on a cost recovery basis (billed at the cost incurred by the invoicing party). For the 13 and 26 weeks ended October 30, 2010, charges incurred for administrative and management services were $0.5 million and $0.9 million respectively (2010 - $0.4 million and $1.0 million). The Company has non-interest bearing notes payable to Crombie REIT in the amount of $6.6 million related to the subsidy payments to Crombie REIT pursuant to an omnibus subsidy agreement dated March 23, 2006 between certain subsidiaries of Crombie REIT and ECL.
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. Also during the quarter, Crombie issued 500,542 units as a portion of its Class B convertible debentures were converted to units in Crombie REIT. This conversion further reduced Empire's interest in Crombie REIT to 46.6 percent.
On September 28, 2010, subsidiaries of the Company sold ten properties to Crombie REIT for net proceeds of $95.5 million, which was fair market value. Since the sales were to an equity accounted investment, the gains on sale were not included in earnings, rather the gains (net of taxes) reduced the carrying value of the Company's equity investment in Crombie REIT.
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) 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 following items:
- The Company's belief 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, including expected
cash outflows, and its belief that it has sufficient funding in place
to meet these requirements and other long-term obligations, all of
which could be impacted by changing capital markets and economic
conditions;
- The Company's anticipation that its in place sources of liquidity will
adequately meet its short-term and long-term financial requirements
which may be impacted by uncertainty in the economy at this time;
- The Company's expectation regarding the purchase of additional Series 2
Preferred Shares for cancellation by the end of calendar 2010 could be
impacted by market conditions and availability of sellers; and
- The Company's expectations relating to the impact of the transition to
IFRS, which is subject to ongoing assessment by the Company.
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 December 9, 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 Thursday, December 9, 2010 beginning at 2:30 p.m. Eastern Standard Time during which senior management will discuss the Company's financial results for the second quarter of fiscal 2011 ended October 30, 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 27940803 until midnight December 16, 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 $6.4 billion in assets, Empire and its related companies employ approximately 90,000 people, including franchisees and affiliates.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
($ in millions)
October 30 May 1 October 31
2010 2010 2009
Unaudited Audited Unaudited
----------- ----------- -----------
ASSETS
Current
Cash and cash equivalents $ 537.6 $ 401.0 $ 210.9
Receivables 341.5 336.9 321.0
Loans and other receivables 60.6 105.8 87.5
Income taxes receivable 16.9 - 17.0
Inventories (Note 4) 946.2 880.3 891.8
Prepaid expenses 56.4 70.1 53.4
----------- ----------- -----------
1,959.2 1,794.1 1,581.6
Investments, at realizable value 11.6 10.9 11.6
Investments, at equity (realizable
value $417.1; May 1, 2010 -
$476.8; October 31, 2009 -
$401.7) (Note 5) 25.2 56.8 56.4
Loans and other receivables 77.1 79.2 78.0
Other assets (Note 6) 100.9 94.5 86.8
Property and equipment 2,536.7 2,548.7 2,554.6
Assets held for sale 24.5 36.5 20.4
Intangibles 460.1 455.0 447.5
Goodwill 1,172.6 1,172.6 1,171.6
----------- ----------- -----------
$ 6,367.9 $ 6,248.3 $ 6,008.5
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES
Current
Bank indebtedness $ 13.0 $ 17.8 $ 77.4
Accounts payable and accrued
liabilities 1,621.7 1,621.6 1,481.6
Income taxes payable - 19.5 -
Future income taxes 49.1 50.9 42.3
Long-term debt due within one
year 57.5 379.4 366.3
----------- ----------- -----------
1,741.3 2,089.2 1,967.6
Long-term debt (Note 7) 1,118.5 829.0 840.4
Employee future benefits obligation 128.6 125.1 121.5
Future income taxes 84.9 86.4 84.6
Other long-term liabilities 140.5 130.6 128.4
Minority interest 35.4 35.6 39.0
----------- ----------- -----------
3,249.2 3,295.9 3,181.5
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (Note 8) 320.4 325.1 324.5
Contributed surplus 4.0 3.2 2.4
Retained earnings 2,816.3 2,652.2 2,535.8
Accumulated other comprehensive
loss (Note 9) (22.0) (28.1) (35.7)
----------- ----------- -----------
3,118.7 2,952.4 2,827.0
----------- ----------- -----------
$ 6,367.9 $ 6,248.3 $ 6,008.5
----------- ----------- -----------
----------- ----------- -----------
Contingent liabilities (Note 18)
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
26 WEEKS ENDED
--------------
(Unaudited, $ in millions)
October 30 October 31
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 214.4 160.1
Dividends
Common shares (27.3) (25.4)
Premium on common shares purchased for
cancellation (Note 8) (23.0) -
----------- -----------
Balance, end of period $ 2,816.3 $ 2,535.8
----------- -----------
----------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
PERIODS ENDED
-------------
(Unaudited, $ in millions)
October 30 October 31 October 30 October 31
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Net earnings $ 132.8 $ 70.4 $ 214.4 $ 160.1
----------- ----------- ----------- -----------
Other comprehensive
income
Unrealized gains on
available-for-sale
financial assets,
net of income taxes
of $0.1; $0.1;
$0.1; $0.1 0.8 0.3 0.6 0.4
Unrealized gains on
derivatives
designated as cash
flow hedges, net of
income taxes of
$0.6; $1.0; $0.4;
$2.2 1.6 2.2 1.0 4.2
Reclassification of
loss on derivative
instruments
designated as cash
flow hedges to
earnings, net of
income taxes of
$0.6; $0.7; $1.3;
$1.5 1.4 1.5 2.9 3.0
Share of
comprehensive
income of entities
accounted for using
the equity method,
net of income taxes
of $0.2; $0.7; $0.4;
$3.8 0.6 1.3 1.4 6.8
Foreign currency
translation
adjustment (0.6) (1.0) 0.2 (1.6)
----------- ----------- ----------- -----------
3.8 4.3 6.1 12.8
----------- ----------- ----------- -----------
Comprehensive income $ 136.6 $ 74.7 $ 220.5 $ 172.9
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
PERIODS ENDED
-------------
(Unaudited, $ in millions, except per share amounts)
October 30 October 31 October 30 October 31
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Revenue $ 3,912.0 $ 3,874.7 $ 7,953.2 $ 7,843.2
Operating expenses
Cost of sales,
selling and
administrative
expenses 3,710.5 3,675.2 7,533.1 7,439.1
Depreciation and
amortization 89.2 85.8 175.4 167.8
----------- ----------- ----------- -----------
112.3 113.7 244.7 236.3
Investment income
(Note 10) 10.4 7.0 18.3 14.6
----------- ----------- ----------- -----------
Operating income 122.7 120.7 263.0 250.9
----------- ----------- ----------- -----------
Interest expense
Long-term debt 16.6 16.8 35.6 34.2
Short-term debt 1.2 1.2 1.8 2.0
----------- ----------- ----------- -----------
17.8 18.0 37.4 36.2
----------- ----------- ----------- -----------
104.9 102.7 225.6 214.7
Capital gains (losses)
and other items
(Note 11) 57.3 (3.0) 57.3 (2.4)
----------- ----------- ----------- -----------
Earnings before income
taxes and minority
interest 162.2 99.7 282.9 212.3
----------- ----------- ----------- -----------
Income taxes (Note 12)
Current 31.2 38.9 70.7 57.8
Future (5.0) (9.8) (9.7) (10.8)
----------- ----------- ----------- -----------
26.2 29.1 61.0 47.0
----------- ----------- ----------- -----------
Earnings before
minority interest 136.0 70.6 221.9 165.3
Minority interest 3.2 0.2 7.5 5.2
----------- ----------- ----------- -----------
Net earnings $ 132.8 $ 70.4 $ 214.4 $ 160.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share
(Note 3)
Basic $ 1.95 $ 1.03 $ 3.14 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 1.94 $ 1.03 $ 3.13 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average
number of common
shares outstanding,
in millions (Note 8)
Basic 68.1 68.4 68.2 68.4
Diluted 68.3 68.5 68.4 68.5
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
PERIODS ENDED
-------------
(Unaudited, $ in millions)
October 30 October 31 October 30 October 31
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Operating Activities
Net earnings $ 132.8 $ 70.4 $ 214.4 $ 160.1
Items not affecting
cash (Note 13) 5.7 85.4 97.6 174.8
----------- ----------- ----------- -----------
138.5 155.8 312.0 334.9
Net change in
non-cash working
capital (15.2) (94.1) (87.0) (65.3)
----------- ----------- ----------- -----------
Cash flows from
operating activities 123.3 61.7 225.0 269.6
----------- ----------- ----------- -----------
Investing Activities
Net increase in
investments (25.5) (10.4) (25.8) (46.0)
Net proceeds from
sale of Wajax
(Note 2) 121.3 - 121.3 -
Purchase of property
and equipment (157.4) (105.2) (242.9) (199.2)
Proceeds on disposal
of property and
equipment 118.7 6.9 144.1 64.5
Additions to
intangibles (11.0) (6.9) (20.6) (14.6)
Loans and other
receivables 35.5 3.6 47.4 (24.4)
(Increase) decrease
in other assets (10.0) (9.9) (1.8) (2.6)
Business
acquisitions
(Note 17) (4.1) (11.4) (8.7) (14.5)
----------- ----------- ----------- -----------
Cash flows from
(used in) investing
activities 67.5 (133.3) 13.0 (236.8)
----------- ----------- ----------- -----------
Financing Activities
(Decrease) increase
in bank indebtedness (29.2) 7.6 (4.8) 31.5
Issue of long-term
debt 19.7 21.9 179.2 66.5
Repayment of
long-term debt (94.9) (33.5) (213.1) (121.0)
Minority interest (2.6) (1.4) (7.7) (5.1)
Repurchase of
Non-Voting Class A
shares (Note 8) (27.7) - (27.7) -
Common dividends (13.6) (12.7) (27.3) (25.4)
----------- ----------- ----------- -----------
Cash flows used in
financing activities (148.3) (18.1) (101.4) (53.5)
----------- ----------- ----------- -----------
Increase (decrease)
in cash and cash
equivalents 42.5 (89.7) 136.6 (20.7)
Cash and cash
equivalents,
beginning of period 495.1 300.6 401.0 231.6
----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period $ 537.6 $ 210.9 $ 537.6 $ 210.9
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to the unaudited interim consolidated financial statements.
EMPIRE COMPANY LIMITED
----------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
OCTOBER 30, 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. Unless 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 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 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 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. Sale of Wajax Income Fund
On October 5, 2010, ECL Western Holdings Limited (a wholly owned subsidiary of the Company) sold its 27.5% ownership interest in Wajax Income Fund ("Wajax"). Through a secondary offering, the Company sold a total of 4.58 million Wajax units for net proceeds of $121.3. Details of the sale is as follows:
Net proceeds $ 121.3
Book value 34.5
------------
Capital gain before income taxes 86.8
Income taxes 6.7
------------
Net capital gain $ 80.1
------------
------------
3. Earnings Per Share
Earnings applicable to common shares is comprised of the following:
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Operating earnings $ 73.9 $ 72.1 $ 155.5 $ 144.3
Capital gains
(losses) and other
items, net of
income taxes of
$(1.6); $(1.3);
$(1.6); $(18.2) 58.9 (1.7) 58.9 15.8
----------- ----------- ----------- -----------
Earnings applicable
to common shares $ 132.8 $ 70.4 $ 214.4 $ 160.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Included in income taxes of $(18.2) for the 26 weeks ended October 31,
2009 was an income tax recovery of $17.0 (see Note 12).
Earnings per share is comprised of the following:
Operating earnings $ 1.09 $ 1.06 $ 2.28 $ 2.11
Net capital gains
(losses) and other
items 0.86 (0.03) 0.86 0.23
----------- ----------- ----------- -----------
Basic earnings per
share $ 1.95 $ 1.03 $ 3.14 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating earnings $ 1.08 $ 1.06 $ 2.27 $ 2.11
Net capital gains
(losses) and other
items 0.86 (0.03) 0.86 0.23
----------- ----------- ----------- -----------
Diluted earnings
per share $ 1.94 $ 1.03 $ 3.13 $ 2.34
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
4. Inventories
The cost of inventories recognized as an expense during the 13 and 26 weeks ended October 30, 2010 was $2,904.1 and $5,922.3 respectively (2009 - $2,909.4 and $5,890.6). The Company has recorded $14.6 (2009 - $12.9) as an expense for the write down below cost to net realizable value for inventories on hand as at October 30, 2010.
5. Investments, at Equity
October 30 May 1 October 31
2010 2010 2009
----------- ----------- -----------
Wajax Income Fund (27.5%
interest) $ - $ 30.8 $ 30.4
Crombie REIT (46.9% interest) 1.7 8.4 14.1
U.S. residential real estate
partnerships 23.5 17.6 11.9
----------- ----------- -----------
$ 25.2 $ 56.8 $ 56.4
----------- ----------- -----------
----------- ----------- -----------
The Company's carrying value of its investment in Wajax is as follows:
October 30 October 31
2010 2009
------------ ------------
Balance, beginning of period $ 30.8 $ 31.0
Equity earnings 8.7 4.6
Share of comprehensive income (loss) 0.9 (0.1)
Distributions received (5.9) (5.1)
Sale of interest in Wajax (34.5) -
------------ ------------
Balance, end of period $ - $ 30.4
------------ ------------
------------ ------------
The Company's carrying value of its investment in Crombie REIT is as
follows:
October 30 October 31
2010 2009
------------ ------------
Balance, beginning of period $ 8.4 $ (19.7)
Equity earnings
Continuing operations 8.5 9.8
Other expenses - (4.7)
Share of comprehensive income 1.0 10.7
Distributions received (13.0) (12.0)
Deferral of gains on sale of property (24.6) -
Interest acquired in Crombie REIT 20.5 30.0
Dilution gain 0.9 -
------------ ------------
Balance, end of period $ 1.7 $ 14.1
------------ ------------
------------ ------------
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 46.9%.
6. 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 September 21, 2010, DBRS upgraded the A1 notes from A to A (high). On August 11, 2009, DBRS downgraded the A2 notes from A to BBB (low) under a negative watch. The negative watch was removed on February 9, 2010. 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 $1.7 (May 1, 2010 - $1.6).
7. Long-Term Debt
On June 1, 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.
8. Capital Stock
During the second quarter, the Company purchased for cancellation 513,579 Non-Voting Class A shares. The purchase price was $27.7 of which $23.0 of the purchase price (representing the premium on common shares purchased for cancellation) was charged to retained earnings.
9. Accumulated Other Comprehensive Loss
The following table provides further detail regarding the composition of accumulated other comprehensive loss:
October 30 May 1 October 31
2010 2010 2009
----------- ----------- -----------
Balance , beginning of period $ (28.1) $ (48.5) $ (48.5)
Other comprehensive income for
the period 6.1 20.4 12.8
----------- ----------- -----------
Balance , end of period $ (22.0) $ (28.1) $ (35.7)
----------- ----------- -----------
----------- ----------- -----------
An estimated net loss of $4.1 recorded in accumulated other comprehensive loss related to the cash flow hedges as at October 30, 2010 (October 31, 2009 - $5.9), 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.
10. Investment Income
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Dividend and interest
income $ 0.2 $ 0.2 $ 0.4 $ 0.2
Share of earnings of
entities accounted
using the equity
method 10.2 6.8 17.9 14.4
----------- ----------- ----------- -----------
$ 10.4 $ 7.0 $ 18.3 $ 14.6
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
11. Capital Gains (Losses) and Other Items
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Gain on sale of Wajax
(Note 2) $ 86.8 $ - $ 86.8 $ -
Donation of Wajax units (6.0) - (6.0) -
Store and distribution
centre closure costs (21.5) - (21.5) -
Reduction of book
value of real estate
assets (2.7) - (2.7) -
Gain (loss) on sale
of property 0.7 (0.1) 0.7 0.1
Equity share of
Crombie REIT's other
expenses - (4.7) - (4.7)
Change in fair value
of Canadian third-
party asset-backed
commercial paper
(Note 6) - 1.3 - 1.3
Foreign exchange
gains - 0.5 - 0.9
----------- ----------- ----------- -----------
$ 57.3 $ (3.0) $ 57.3 $ (2.4)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
During the 13 weeks ended October 30, 2010, Sobeys recorded $16.1 in pre-tax costs associated with the Price Chopper banner in Ontario due to pending store closures and $5.4 in pre-tax severance costs related to the future closure of the Brantford, Ontario distribution centre.
The Company recorded an impairment charge of $2.7 to reduce the carrying value of one commercial property to estimated fair value, reflecting the changing market condition of that particular property.
12. Income Taxes
The Company's effective income tax rate for the 13 and 26 weeks ended October 30, 2010 is lower than the previous year primarily due to reduced tax rates applicable to the tax treatment of capital gains on the sale of Wajax (Note 2).
The effective income tax rate for the 26 weeks ended October 31, 2009 of 22.1% differed from the combined statutory rate of 30.4% 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 by $17.0 as a result of that settlement.
13. Supplementary Cash Flow Information
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
a) Items not
affecting cash
Depreciation $ 79.7 $ 78.3 $ 157.3 $ 151.8
Amortization of
intangibles 9.5 7.5 18.1 16.0
Future income taxes (5.0) (9.8) (9.7) (10.8)
Gain on disposal of
assets (1.4) (1.7) (1.7) (1.5)
Amortization of
other assets - 2.5 - 0.3
Equity in earnings
of other entities,
net of dividends
received 0.2 6.7 1.0 7.4
Provision on
asset-backed
commercial paper - (1.3) - (1.3)
Minority interest 3.2 0.2 7.5 5.2
Stock-based
compensation 0.4 0.3 0.8 0.7
Long-term lease
obligation 1.5 1.1 4.9 3.9
Employee future
benefits obligation 1.7 1.6 3.5 3.1
Gain on sale of Wajax (86.8) - (86.8) -
Reduction of book
value of real
estate assets 2.7 - 2.7 -
----------- ----------- ----------- -----------
$ 5.7 $ 85.4 $ 97.6 $ 174.8
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
b) Other cash flow
information
Interest paid $ 20.3 $ 21.9 $ 31.7 $ 34.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income taxes paid $ 32.5 $ 28.0 $ 110.3 $ 73.4
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
14. Segmented Information
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Segmented revenue
Food retailing $ 3,853.4 $ 3,807.0 $ 7,828.7 $ 7,713.7
----------- ----------- ----------- -----------
Real estate
Residential 7.5 14.0 22.6 25.4
Commercial 3.3 4.7 7.3 8.4
----------- ----------- ----------- -----------
10.8 18.7 29.9 33.8
----------- ----------- ----------- -----------
Investment and other
operations 50.1 52.3 98.0 99.6
----------- ----------- ----------- -----------
3,914.3 3,878.0 7,956.6 7,847.1
Elimination of
inter-segment (2.3) (3.3) (3.4) (3.9)
----------- ----------- ----------- -----------
$ 3,912.0 $ 3,874.7 $ 7,953.2 $ 7,843.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Segmented operating
income
Food retailing $ 109.5 $ 106.3 $ 235.7 $ 227.9
Real estate
Residential 3.7 7.3 11.8 12.4
Crombie REIT 4.4 4.9 8.5 9.8
Commercial 0.9 1.4 1.8 1.1
Investment and other
operations
Wajax 5.3 1.9 8.7 4.6
Other operations,
net of corporate
expenses (1.1) (1.1) (3.5) (4.9)
----------- ----------- ----------- -----------
$ 122.7 $ 120.7 $ 263.0 $ 250.9
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
October 30 May 1 October 31
2010 2010 2009
----------- ----------- -----------
Identifiable assets
Food retailing (excluding
goodwill) $ 4,775.7 $ 4,524.0 $ 4,292.6
Goodwill 1,131.8 1,131.8 1,130.8
----------- ----------- -----------
Food retailing 5,907.5 5,655.8 5,423.4
Real estate 208.3 315.5 295.9
Investment and other operations
(including goodwill of $40.8;
May 1, 2010 - $40.8; October
31, 2009 - $40.8) 252.1 277.0 289.2
----------- ----------- -----------
$ 6,367.9 $ 6,248.3 $ 6,008.5
----------- ----------- -----------
----------- ----------- -----------
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Depreciation and
amortization
Food retailing $ 84.2 $ 80.5 $ 165.5 $ 157.2
Real estate 0.3 0.4 0.5 0.9
Investment and other
operations 4.7 4.9 9.4 9.7
----------- ----------- ----------- -----------
$ 89.2 $ 85.8 $ 175.4 $ 167.8
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
2010 2009 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Capital expenditures
Food retailing $ 142.1 $ 89.9 $ 218.5 $ 162.0
Real estate 5.6 12.9 9.5 30.4
Investment and other
operations 9.7 2.4 14.9 6.8
----------- ----------- ----------- -----------
$ 157.4 $ 105.2 $ 242.9 $ 199.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
15. Related-Party Transactions
Related-party transactions are with Crombie REIT. The Company holds a 46.9 percent ownership interest and accounts for its investment using the equity method.
During the second quarter, subsidiaries of the Company sold ten properties to Crombie REIT for net proceeds of $95.5, which was fair market value. Since the sales were to an equity accounted investment, the gains on sale were not included in earnings, rather the gains (net of income taxes) reduced the carrying value of the Company's equity investment in Crombie REIT.
16. Employee Future Benefits
During the 13 and 26 weeks ended October 30, 2010, the net employee future benefit expense was $10.0 and $20.1 respectively (2009 - $10.3 and $20.5). 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.
17. 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 2010 2009
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
----------- ----------- ----------- -----------
Stores
------
Inventory $ 2.4 $ 2.2 $ 5.9 $ 3.2
Property and
equipment - 1.3 - 3.0
Intangibles 1.5 3.7 2.5 3.7
Goodwill - - - 0.2
Other assets
(liabilities) 0.2 (1.6) 0.3 (1.4)
----------- ----------- ----------- -----------
Cash consideration $ 4.1 $ 5.6 $ 8.7 $ 8.7
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Prescription files
------------------
Intangibles $ - $ 5.8 $ - $ 5.8
----------- ----------- ----------- -----------
Cash consideration $ - $ 5.8 $ - $ 5.8
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
18. 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.
19. 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 October 30, 2010, there were 113,605 (October 31, 2009 - 95,372) DSUs outstanding. During the second quarter and first half of the current fiscal year, the compensation expense was $0.5 and $1.1 respectively (2009 - $0.4 and $0.4).
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 and 26 weeks ended October 30, 2010 was $0.4 and $0.8 respectively (2009 - $0.3 and $0.7) with amortization of the cost over the vesting period. The total increase in contributed surplus in relation to the stock option compensation cost was $0.8 (2009 - $0.7). 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 October 30, 2010, 1,778,936 (October 31, 2009 - 1,411,994) units were outstanding and for the 13 and 26 weeks ended October 30, 2010, the Company recognized $3.0 and $5.0 respectively (2009 - $3.9 and $6.0) of compensation expense associated with this plan.
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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