Published:
Ridley Reports Financial Results for Second Quarter of Fiscal 2008
Ridley Inc. (TSX: RCL) today reported its financial results for its fiscal 2008 second quarter ended December 31, 2007. All currency amounts are stated in U.S. dollars unless otherwise noted.
For the three months ended December 31, 2007, earnings before interest, taxes, amortization and asset impairment loss (EBITA(i)) for continuing operations, were $8.5 million compared to $10.1 million last year. For the same period, Ridley reported a net earnings loss of $2.8 million after income taxes or a loss of 21 cents per share compared to net earnings income of $2.8 million or 20 cents per share last year. Ridley previously announced that, on February 5, 2008, it had reached a settlement agreement with the plaintiffs in the BSE class action lawsuits filed against Ridley and the Government of Canada in four provinces of Canada. Under the settlement agreement, Ridley will pay CAD$6 million into a plaintiffs' settlement trust fund and will effectively cap its exposure to the claims made by the plaintiffs to the CAD$6 million. The net earnings loss in the second quarter of fiscal 2008 reflects the $6.0 million claim settlement expense.
"After allowing for the class action claim settlement, Ridley performed well in the second quarter despite an increasingly difficult livestock production economy, thanks largely to good results from the U.S. side of Ridley Feed Operations and a strong earnings increase from Ridley Feed Ingredients", reported Steve VanRoekel, President and CEO of Ridley Inc.
"Gross profit results from our U.S.-based Ridley Nutritional Solutions were close to last year, but continue to be below expectations, due primarily to the exceptional drought and poor pasture conditions in the south-eastern U.S. that continue to depress block supplement volumes. Earnings results in the second quarter of fiscal 2008 on the Canadian side of Ridley Feed Operations were impacted by the severe strains that beef and hog producers on the Prairies are feeling from historically high feed prices and the strong Canadian dollar," added VanRoekel.
"Our reported EBITA in the second quarter includes a one-time charge of $1.4 million taken for the restructuring of our Canadian operations, implemented in November. This restructuring was necessary to adjust our business to the economic conditions in Canada at the moment, and we expect to see the benefits of those actions in the next quarter in lower operating expenses. Excluding those one-time costs for restructuring our Canadian operations, Ridley's EBITA in the second quarter this year would have been equivalent to the same period as last year.
Claims were filed in April 2005 against Ridley and the Government of Canada for losses allegedly incurred by Canadian cattle farmers as a result of international bans on trade in Canadian beef following the May 2003 diagnosis of Bovine Spongiform Encephalopathy in an Alberta cow. In entering into this agreement, Ridley makes no admission of liability or wrongdoing in the matter and will continue to contest any allegation that it was responsible for the plaintiffs' damages. The financial results for Ridley's second quarter of fiscal 2008 reflect a reserve of $6.0 million for this contingent liability.
"Looking ahead, we are obviously concerned about the effect that historically high feed prices are having on our customer base. The potential for sustained high prices and continuing volatility creates an uncertain environment for the entire food industry. Our attention will continue to be on meeting the changing feed and nutrition needs of our customers, while keeping a sharp focus on managing our own operating costs. We are pleased to have settled with the plaintiffs in the class action lawsuits and, when the settlement conditions are met, to have finally lifted the uncertainty of the last two years of litigation from our business," commented VanRoekel.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management Discussion and Analysis as of February 11, 2008 is based on the accompanying financial statements prepared using Canadian Generally Accepted Accounting Principles ("GAAP"). All amounts are in U.S. dollars unless otherwise stated.
Forward-Looking Information
This report contains "forward-looking" information. The forward-looking information includes statements concerning the Company's outlook for the future, as well as other statements of beliefs, plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, contemplated or implied by, such statements. These risks and uncertainties include the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations, the availability and prices of raw materials and supplies, livestock disease, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards and other regulatory requirements affecting the Company's business, adverse results from ongoing litigation and actions of domestic and foreign governments. Other risks are outlined in the Risk Management section of the MD&A included in the Company's Annual Report. Unless otherwise required by applicable securities law, the Company disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions readers not to place undue reliance upon forward-looking statements.
Claim Settlement
Ridley previously reported that it had reached a settlement agreement with the plaintiffs in the BSE class action lawsuits filed against Ridley and the Government of Canada in four provinces of Canada. Under the settlement agreement, Ridley will pay CAD $6 million into a plaintiffs' settlement trust fund and will effectively cap its exposure to the claims made by the plaintiffs to the $6 million. However, Ridley will remain a participant in the ongoing litigation as plaintiffs continue their claim against the Government of Canada. The claims were filed in April 2005 against Ridley and the Government of Canada for losses allegedly incurred by Canadian cattle farmers as a result of international bans on trade in Canadian beef following the May 2003 diagnosis of Bovine Spongiform Encephalopathy in an Alberta cow.
Counsel for the plaintiffs will apply to the Canadian courts for approval of the settlement agreement and Ridley will consent to certification of the class actions. The settlement class will then be notified of their right to opt out of the settlement. The settlement agreement will be finalized and Ridley will pay the settlement funds provided the number of class member opt-outs is below an agreed threshold. The financial results for Ridley's second quarter of fiscal 2008 reflect a reserve of $6.0 million for this contingent liability.
Second Quarter Results
The following summary data is presented to assist in understanding the
fiscal 2008 second quarter results:
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(Millions of U.S. dollars 3 Months 3 Months 6 Months 6 Months
except for EPS) Ended Ended Ended Ended
December 31 December 31 December 31 December 31
2007 2006 2007 2006
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Revenue $167.0 $144.0 $306.8 $268.4
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Net earnings from
continuing operations
(before asset impairment 3.7 4.3 6.3 6.1
loss net of income tax)
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Asset impairment loss (net
of income tax) (0.5) (2.0) (0.5) (2.0)
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Claim settlement (6.0) (6.0)
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Net earnings/(loss) from
continuing operations (2.8) 2.3 (0.2) 4.1
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Net earnings from
discontinued operations - 0.5 - 0.5
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Net earnings/(loss) (2.8) 2.8 (0.2) 4.6
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Diluted earnings/(loss)
per share (EPS) (0.21) 0.20 (0.02) 0.33
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EBITA(i) 8.5 10.1 15.4 15.8
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(i) EBITA - Operating income before amortization, asset impairment loss and
claim settlement expense. EBITA does not have a standardized meaning
prescribed by Canadian GAAP and therefore is not readily comparable to
similar measures presented by other companies. However, management
believes that this measure provides investors with useful supplemental
information.
Consolidated Financial Results
Revenue in the second quarter of fiscal 2008 increased by 16.0% to $167.0 million compared with $144.0 million in the prior year. Generally, a comparison of revenue on a dollar basis is not necessarily indicative of the strength of Ridley's business since fluctuating commodity prices may influence revenue. The revenue increase in the second quarter of 2008 is due mainly to higher commodity prices, the effect of currency exchange rates on Canadian revenues and a continuing shift in product mix towards higher value added products.
Overall tonnage sales volumes in the second quarter of the current year declined by 2.1% relative to last year. Tonnage from operations in Canada was lower as in the previous quarter this year - the result of continuing poor economic conditions for livestock producers. Sales tonnage from U.S. operations in our traditional feed markets also declined, but more as a result of the continuing evolution of our product mix from high volume, low-margin complete feeds towards higher margin products like supplements and premixes used at lower inclusion levels in livestock rations. Volume performance for feed supplement blocks was mixed with good growth in most U.S. markets on generally favourable weather conditions but markedly down in the U.S. southeast due to extreme drought conditions.
Gross profit of $25.3 million in the second quarter of fiscal 2008 was comparable with $25.6 million in the same period last year. The significant increase in revenue reported above does not produce a parallel increase in gross profits since our pricing structures are based on a normally fixed per unit margin between selling price and cost of ingredients. While volumes were lower in the second quarter of fiscal 2008, gross profits were maintained as a result of good product mix.
Net operating expenses in the second quarter of fiscal 2008 were $25.5 million, compared to $20.9 million in the prior year. The second quarter of fiscal 2008 included a claim settlement expense of $6.0 million and an asset impairment loss of $0.7 million for the closure of the Lethbridge, Alberta premix facility. The same period last year included an asset impairment loss of $3.1 million for the closure of the Lacombe, Alberta feed production facility. Excluding the claim settlement expense and asset impairment losses, net operating expenses would have been $18.8 million in fiscal 2008 and $17.7 million in F2007.
Selling, general and administrative expenses in the second quarter of fiscal 2008 were $16.6 million compared to $15.3 million in the prior year. Included in these costs was $0.7 million for restructuring of Canadian operations including severance payments. General employment costs as well as advertising and professional fees also increased in the period.
Ridley recorded an operating loss before interest and taxes in the second quarter of fiscal 2008 of $0.2 million compared to operating income of $4.8 million last year. Excluding the claim settlement expense and asset impairment losses in fiscal 2008 and 2007, Ridley would have recorded operating income of $6.5 million in fiscal 2008 and $7.9 million in fiscal 2007. Restructuring charges in Canadian operations of $1.4 million accounted for much of the remaining difference in operating income between the two quarterly periods.
Second quarter income tax provisions were $2.2 million compared to $2.1 million in the previous year. Due to the claim settlement, Canadian restructuring costs and concerns regarding the short-term level of profitability in Canada, the Company has taken a $1.6 million valuation allowance on tax loss carry-forward benefits. The Company's effective income tax rate is a combination of tax rates applied to the results of operations reported by the U.S. and Canadian entities. Income generated by U.S. entities is taxed at a higher rate than in Canada where the Canadian entities reported pre-tax losses allowing for a tax benefit but at a lower effective tax rate. Furthermore, the valuation allowance reduces tax benefits by $1.6 million. In the U.S., the Company's effective tax rates are lower due to an increase in the federal manufacturing incentive deduction.
Earnings from discontinued operations in the second quarter of fiscal 2007 of $0.5 million were the result of the wind-up of the U.K. pig breeding business. Discontinued operations had no effect upon second quarter earnings in 2008.
Net earnings for the fiscal 2008 second quarter were a loss of $2.8 million (diluted loss per share of $0.21) compared with earnings of $2.8 million (diluted earnings per share of $0.20) in fiscal 2007.
As noted in our interim financial statements, Ridley has adopted new guidelines of the Canadian Institute of Chartered Accounts (CICA) including the reporting of comprehensive income and its components. Comprehensive income (or loss) is the change in the Company's net assets that result from transactions, events and circumstances from sources other than investments by and/or distributions to the Company's shareholders. The Company's comprehensive loss in the second quarter of fiscal 2008 was $2.5 million comprised of a net loss of $2.8 million as reported above, and $0.3 million of unrealized gains on translation to U.S. currency of financial statements of related entities with foreign functional currency. Comprehensive income in the second quarter of the prior year was $1.3 million comprised of $2.8 million in net earnings as reported above less $1.5 million of unrealized losses on translation to U.S. currency of financial statements of related entities with foreign functional currency. Other changes in accounting policies noted in the Company's interim financial statements had no material effect on its financial condition.
Six Months Results
Revenue for the six months year to-date of fiscal 2008 increased by 14.3% to $306.8 million, compared with $268.4 million in fiscal 2007. The increase in revenues parallels increases in the cost of feed commodities and other raw materials for the same period. Total sales volumes measured in tons of feed were 3.7% lower in the first six months of fiscal 2008 compared to the prior year. Lower sales volumes are reflective of a continuing trend away from low-margin complete feeds towards higher value-added, low-inclusion products such as supplements and premixes. Generally soft feed demand in Canada and the U.S. as well as a slower start to the year in sales of feed supplement blocks that were sensitive to weather conditions in key regions of the U.S. also contributed to lower sales volumes in 2008.
Gross profit for the first half of fiscal 2008 was $46.3 million, compared with $46.7 million in the same period last year. The reduction in gross profit was due to lower overall tonnage volumes that were partly offset by a modest increase in overall unit margins from a more favourable product mix and reduced manufacturing overhead costs, including insurance and workers' compensation costs.
Net operating expenses in the first half of fiscal 2008 were $41.7 million, compared to $38.6 million in the previous year. As noted above in the second quarter results, operating expenses included a claim settlement expense of $6.0 million and asset impairment losses for closed facilities of $0.7 million in fiscal 2008 and $3.1 million for fiscal 2007. Fiscal 2008 also included a gain of $0.8 million on the sale of the Winnipeg, Manitoba premix facility. Additionally, operating expenses in fiscal 2008 included $0.7 million for restructuring costs in Canadian operations. Excluding these unusual items, operating expenses in the first half of fiscal 2008 would have been $35.1 million, compared to $35.4 million in the previous year.
Finance costs in the first half of fiscal 2008 were $1.4 million compared with $1.2 million in the same period of fiscal 2007, reflective of the $4.7 million increase in debt between the two periods.
The provision for income taxes in the first six months of fiscal 2008 was $3.8 million, compared with $3.3 million recorded in the same period of fiscal 2007. In the second quarter of fiscal 2008, the Company established a valuation allowance on tax loss carry-forwards which are set to expire by 2010. This increases income tax expense by $1.6 million. As previously noted, the effective income tax rate is impacted by the geographic distribution of income and losses between Canada and the United States. The Company's U.S. entities generated taxable income which is taxed at a higher rate than the Canadian statutory tax rate. The Canadian entity reported pre-tax losses to which an income tax benefit is recorded, but at a lower rate than taxes on U.S. income. Exclusive of the claim settlement and valuation allowances, the effective tax rates for the six months ending December 31, 2007 and 2006 are 40% and 45% respectively. The decrease in the overall income tax rate is attributed primarily to: (a) reduction in the Company's U.S. effective income tax rate due to an increase in manufacturing incentive deductions; and (b) income tax benefits recorded on Canadian losses are at a lower rate than U.S. income tax rates, thus increasing the combined effective tax rate.
Net earnings from discontinued operations recorded in the second quarter of fiscal 2007 relate to the settlement of legal issues arising from the sale in 2002 of Ridley's swine genetics business in the United Kingdom and recognizing future tax benefits associated with liquidating the remaining U.K. structure. These transactions and associated professional fees yielded net income from discontinued operations of $0.5 million.
Net earnings for the six months to-date in fiscal 2008 were a loss of $0.2 million (diluted loss per share of $0.02) compared with earnings of $4.6 million (diluted earnings per share of $0.33) in fiscal 2007. Year to date EBITA was $15.4 million in fiscal 2008 compared with $15.8 million in fiscal 2007.
The Company's comprehensive income in the first half of fiscal 2008 was $2.3 million comprised of a net loss of $0.2 million as reported above, and $2.5 million of unrealized gains on translation to U.S. currency of financial statements of related entities with foreign functional currency.
Comprehensive income in the first half of the prior year was $3.1 million comprised of $4.6 million in net earnings as reported above less $1.5 million of unrealized losses on translation to U.S. currency of financial statements of related entities with foreign functional currency.
Segment Results
Starting in fiscal 2008, the Company is reporting the results of its Ridley Feed Ingredients (RFI) business unit as a separate reporting segment. The prior year's segment results have been reclassified to conform to the current year reporting. RFI accounts for about 9% of Ridley's revenues and about 10% of total assets. In prior financial reports, the results of RFI were included with the results of the Ridley Feeds Operations (RFO) reporting segment.
The Ridley Feed Operations (RFO) segment consists of full-line feed production facilities operating in the United States and Canada, producing and marketing products for the core animal nutrition market. RFO revenues increased in the second quarter of fiscal 2008 over the prior year by 18.4% as a result of higher unit prices that followed from increased input costs for raw materials and, to a lesser degree, a continuing shift towards higher value added supplement products. With about one-third of RFO revenues originating in Canada, RFO's reported revenues were also higher due to the 16% average appreciation in the Canadian dollar against U.S. currency between the second quarters of fiscal 2007 and 2008. For the first six months of fiscal 2008, RFO revenues are 15.9% higher than the previous year due to higher input costs and 11% average appreciation of the Canadian dollar
Overall sales volumes of the U.S. and Canadian business units within the RFO segment were lower by 2.0% in the second quarter of fiscal 2008 compared to last year. Sales volume of U.S. based operations within RFO was lower by 0.9% in the second quarter of fiscal 2008 as a result of lower swine feed and ingredient re-sale volumes. Canadian feed volumes were lower by 4.0% in the second quarter as a result of closure of a feed production facility in Alberta in January 2007, as well as soft demand for complete feeds and supplements in the beef and broiler sectors. For the first half of fiscal 2008, RFO sales tonnage overall was lower by 4% compared to the prior year for similar reasons as reported for the second quarter of the year. Lower seasonal volumes for young calves earlier in the year and reduced swine feed volumes at our operations in the eastern U.S. accounted for the lower overall tonnage. Volumes for dairy and poultry feed improved over last year as those sectors are enjoying favourable producer economics.
RFO reported lower gross profits by 8.6% in the second quarter of fiscal 2008 compared to the prior year. Gross profits generated by the U.S. operations of RFO in the second quarter of fiscal 2008 were almost flat compared to the prior year. However, Canadian gross profits declined by more than 12% primarily as a result of competitive pressures at a specialized premix business unit. Excluding that premix unit, gross profit at the other business units in Canadian feed operations increased by 4.7% in the second quarter of fiscal 2008. For the first six months of fiscal 2008, RFO reported gross profits that were 6.5% lower than the first half of 2007. A 3.7% improvement in gross profits at U.S. operations of RFO was more than offset by a 21% reduction in gross profits at Canadian operations for the six months as the result of significantly reduced volumes of a specialized premix business unit.
For the second quarter of fiscal 2008, RFO reported operating income of $2.4 million, compared with $2.1 million in the same period of fiscal 2007. RFO operating income reflects several structural changes affecting the Canadian operations of RFO, including:
- In the second quarter of the current year, Ridley implemented a restructuring plan at its Canadian feed operations in response to lower sales volumes due to difficult market conditions and increased costs in Canada. The reduction in employed persons across most of the Canadian business units and administrative services and the write-down of obsolete inventories resulted in a charge to earnings of $1.4 million;
- Operating income from Canadian feed operations continues to reflect the reduction in earnings stemming from competitive pressures that substantially reduced volumes and income from a specialized premix business unit;
- An asset impairment loss of $0.7 million was recorded in the second quarter this year for the closure in January 2008 of a redundant premix facility in Lethbridge, Alberta;
- The sale of a redundant premix facility and a fabrication/repair shop, both located in Winnipeg, Manitoba, resulted in a one-time gain of $0.8 million in the first quarter of fiscal 2008;
- The write-down of the Lacombe, Alberta production facility in the second quarter of fiscal 2007 resulted in a $3.1 asset impairment loss and a $0.4 million charge in related restructuring costs.
RFO operating income for the first six months of fiscal 2008 was $6.0 million compared to $4.5 million in the year prior. Excluding asset gains and impairment losses, RFO would have reported operating income of $5.9 million in the first half of 2008 compared to $7.7 million in the prior year.
The Ridley Feed Ingredients (RFI) segment consists of Ridley vitamin and trace mineral premixes, small packaged specialty products, medicated and non-medicated feed additives and micro feed ingredients produced and distributed through RFI's facility in Illinois. RFI's revenues in the second quarter of fiscal 2008 increased over the previous year by 16.2%, partly due to a 6.1% increase in tonnage volume as well as price increases in response to higher cost of raw material inputs. A favourable product margin mix and good cost controls yielded an increase in RFI operating income to $1.8 million in the second quarter of fiscal 2008 from $0.8 million in the prior year. For the year to date, RFI operating income increased to $3.1 million in fiscal 2008 from $1.2 million in fiscal 2007.
Ridley Nutrition Solutions (RNS) includes the feed supplement block operations and equine nutrition business. Sales volumes of RNS in the second quarter of fiscal 2008 were 0.9% lower than the second quarter of last year. Sales of feed supplement blocks continue to be negatively impacted by exceptional drought conditions in the south-eastern region of the U.S. In other regions of the U.S., sales volumes of feed supplement blocks improved moderately over last year. For the six months year to date RNS volumes are behind last year by 3.8% mainly as a reflection of the drought and poor pasture conditions.
Gross profits contributed by RNS of $6.7 million in the second quarter of fiscal 2008 approximated the same period last year. A moderate improvement in unit margins and good control over operating costs offset the slight decline in volume. For the six months to date in fiscal 2008 RNS gross profits were $11.5 million compared to $12.0 last year. Weaker volumes relative to last year and slightly lower unit margins accounted for the reduced gross profits in the year to date.
RNS operating expenses of $3.9 million in the second quarter of fiscal 2008 were higher by $0.5 over the previous year as a result of an increase in shared services allocations and increased advertising and promotion expenses. As a result, RNS operating income of $2.8 million in the second quarter of 2008 was lower by $0.4 million from the previous year. For the year to date, RNS operating income was $4.1 million compared to $5.4 million in the previous year. Weaker gross profits and an increase in shared services allocations combined to reduce RNS operating income by 25.0% for the year to date.
Corporate expenses, excluding the claim settlement expense, were $1.3 million in the second quarter of fiscal 2008 compared to $1.4 million in the same period of fiscal 2007. For the year to date, excluding the claim settlement expense, corporate expenses are lower by $0.4 million than the prior year.
Liquidity/Capital Resources/Cash Flow
The Company's working capital and debt to equity positions are summarized
below:
December 31 June 30 December 31
Balances ($000) as of: 2007 2007 2006
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Working capital (i) 42,465 41,872 29,443
Debt 20,345 24,963 15,605
Equity 148,134 145,863 139,269
Debt to equity 13.7% 17.1% 11.2%
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(i) Working capital is defined as current assets less current liabilities,
not including claim settlement provision. Debt is defined as bank
obligations and capital leases.
In the three months between September 30 and December 31, 2007, total debt was reduced by $8.3 million to $20.3 million. The reduction in debt was facilitated by a decrease in working capital that followed from seasonal increases in accounts payable of $13.3 million and advances from dealers and producers of $7.3 million. Accounts receivable and inventory balances increased $0.9 million and $1.9 million respectively in response to seasonally higher sales volumes. Working capital as at December 31, 2007 was $42.5 million, or $13.0 million higher than the same time last year. Much of this increased working capital is due to a $10.4 million increase in inventories that reflects higher purchase costs for raw materials and commodities. (The claim settlement provision of $6.0 million was recorded as a current liability in the consolidated balance sheets but was excluded from the calculation of working capital above.)
In the second quarter of fiscal 2008, Ridley generated net cash from operating activities of $23.0 million. Of this amount, $17.8 million of cash was sourced from lower working capital requirements, excluding the claim settlement provision. By comparison, for the same period in the prior year, cash flow from earnings was $5.9 million while $14.7 million was sourced from working capital reductions, resulting in $20.6 million in net cash available from operating activities.
Capital Expenditures
Expenditures on capital assets in the second quarter of fiscal 2008 were $3.0 million compared with $1.8 million a year ago. Year-to-date expenditures of $5.6 million in fiscal 2008 include $1.4 million for implementation of new management information systems. The balance of capital expenditures was made on a variety of smaller projects for the maintenance or replacement of production, packaging and storage equipment at various facilities.
Selected Quarterly Financial Information
The following is a summary of unaudited quarterly financial information (in
millions of U.S. dollars except per share information):
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
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Revenue 2008 139.8 167.0 - -
2007 124.4 144.0 136.9 126.3
2006 120.5 138.3 131.1 115.7
Net earnings from continuing
operations (before 2008 2.6 3.7 - -
claim settlement expense and
asset impairment 2007 1.8 4.3 3.0 1.2
loss net of income tax) 2006 2.5 4.8 3.9 2.1
Net earnings/(loss) 2008 2.6 (2.8) - -
2007 1.8 2.8 3.1 1.3
2006 2.5 4.8 3.9 2.1
Diluted earnings/(loss) per
share (EPS) 2008 0.19 (0.21) - -
2007 0.13 0.20 0.22 0.10
2006 0.18 0.34 0.29 0.15
Outstanding Share Data
The Company's share capital consists of an unlimited number of common shares, with no par value. The number of shares outstanding as at December 31, 2007 and as at February 11, 2008 was 13,859,300.
Business Acquisitions
There have been no business acquisitions completed in the year to date of fiscal 2008. In the second quarter of fiscal 2008, Ridley entered into a letter of intent to acquire substantially all of the assets and assume the outstanding debt of 4 Seasons Marketing, LLC and its affiliate, Ultralyx, Inc., a manufacturer of feed supplement blocks operating a single plant in Flemingsburg, Kentucky. The transaction is expected to be completed in February 2008 for consideration of approximately $3.0 million, subject to final purchase price adjustments.
Instalments related to an acquisition in fiscal 2006 were paid in the first quarter of fiscal 2008 and 2007.
Internal Control Over Financial Reporting
The Chief Executive Officer and Chief Financial Officer have signed form 52-109F2 - Certification of Interim Filings and filed it with the appropriate securities regulators in Canada in compliance with Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings issued by the Canadian Securities Administrators. There has been no change in Ridley's internal controls over financial reporting or disclosure controls and procedures that occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, Ridley's internal control over financial reporting.
Litigation and Subsequent Event
The actions by proposed representative plaintiffs continue against the Government of Canada and Ridley Inc. They seek to certify class actions in Alberta, Saskatchewan, Ontario and Quebec to include all Canadian cattle farmers who allegedly suffered damage as a result of international bans on trade in Canadian beef and cattle following the May 2003 diagnosis of Bovine Spongiform Encephalopathy (BSE) in a cow in Alberta. The Ontario action seeks a national class to include affected cattle farmers residing in the six remaining Canadian provinces.
The proposed representative plaintiffs seek general, special, aggravated and punitive damages on behalf of themselves and each of the proposed Canadian cattle farmer class members. Full particulars of the claims are yet to be provided.
In a decision released on June 15, 2007, the Superior Court of Quebec authorized the plaintiff to institute the action as a class action in Quebec. A notice to class members in Quebec was approved by the Court and published in September. A trial date in Quebec has yet to be scheduled. None of the remaining actions have been certified to proceed to trial as a class action in any other province. In Ontario, the Court of Appeal for Ontario dismissed each of the appeals by the parties against the decision to strike the claims in a decision released June 22, 2007. A hearing of the plaintiff's motion to certify the Ontario action as a class action has yet to be scheduled.
In September 2007, Ridley Inc. and the Government of Canada filed applications with the Supreme Court of Canada seeking leave to appeal from the decision of the Court of Appeal for Ontario denying the motions of Ridley and the Government of Canada to strike the claims of the Ontario plaintiff. The Court's decision on the leave applications is expected in calendar year 2008.
The actions in Saskatchewan and Alberta are in abeyance. There has been no decision made on the merits of the actions in any province.
On February 5, 2008 Ridley reached a settlement agreement with the plaintiffs in the BSE class action lawsuits filed against Ridley and the Government of Canada in four provinces of Canada. Under the settlement agreement, Ridley will pay CAD $6 million into a plaintiffs' settlement trust fund and will effectively cap its exposure to the claims made by the plaintiffs to the $6 million. However, Ridley will remain a participant in the ongoing litigation as plaintiffs continue their claim against the Government of Canada. The claims were filed in April 2005 against Ridley and the Government of Canada for losses allegedly incurred by Canadian cattle farmers as a result of international bans on trade in Canadian beef following the May 2003 diagnosis of Bovine Spongiform Encephalopathy in an Alberta cow.
Counsel for the plaintiffs will apply to the Canadian courts for approval of the settlement agreement and Ridley will consent to certification of the class actions. The settlement class will then be notified of their right to opt out of the settlement. The settlement agreement will be finalized and Ridley will pay the settlement funds provided the number of class member opt-outs is below an agreed threshold. Ridley will continue to incur legal expenses as a result of the settlement approval process and its continuing involvement in the actions. No accruals have been made in respect of ongoing legal expenses related to the actions. Ridley will continue to fund these expenses out of earnings.
Outlook
Economic conditions for all segments of meat, milk, and egg producers in both the U.S. and Canada have become increasingly strained due primarily to historically high feed prices. This strain is especially acute in the beef and pork segments in Canada where the strong Canadian dollar is exacerbating both high feed and low beef and pork prices. The supply managed poultry and dairy sectors in Canada are less affected by the strong Canadian dollar.
While poultry and egg producers and, to a lesser extent, milk producers in the U.S. continue to enjoy relatively strong prices for their products, producers in the swine and beef cattle sectors are generally operating around break-even levels. This type of environment generally leads to pressure on margins and increased credit concerns. While these conditions will impact Ridley to some extent, our strategic position in higher-value added products and market segments, which are less sensitive to short term market volatility, and close attention to rigorous management of both credit exposures, operating expenses and overheads, will be mitigating factors. Despite continuing good prices for the U.S. cow-calf sectors, block supplement sales remain uncertain for the remainder of fiscal 2008 due to currently unfavourable pasture conditions in the south-eastern U.S. states.
Ridley Inc. (www.ridleyinc.com), headquartered in Mankato, Minnesota and Winnipeg, Manitoba, is one of North America's leading commercial animal nutrition companies. Ridley employs more than 1,000 people in the United States and Canada in the manufacture and distribution of a full range of animal nutrition products under highly regarded trade names.
Ridley's common shares are listed on The Toronto Stock Exchange (Trading symbol: RCL).
Additional information, including our Annual Information Form (AIF), is available on SEDAR at www.sedar.com.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, expressed in U.S. dollars)
RIDLEY Inc.
Three and six months ended December 31, 2007 and 2006
RIDLEY Inc.
Consolidated Balance Sheets
(Unaudited, expressed in thousands of
U.S. dollars) December 31 June 30 December 31
2007 2007 2006
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ASSETS
Current assets
Cash and short-term deposits 5,989 2,315 3,812
Accounts receivable 39,250 30,733 37,759
Inventories 54,909 50,702 44,502
Income taxes recoverable - 402 -
Prepaids and other current assets 2,632 1,452 2,674
Current portion of loans receivable 2,474 1,755 2,797
Future income tax benefit 1,058 1,623 2,240
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Total current assets 106,312 88,982 93,784
Non-current assets
Loans receivable, less current portion 962 1,872 1,377
Property, plant and equipment 93,896 93,113 91,140
Other assets 3,038 3,182 3,212
Other intangibles 3,814 3,856 3,899
Goodwill 50,983 50,062 49,007
--------------------------------------------------------------------------
Total non-current assets 152,693 152,085 148,635
--------------------------------------------------------------------------
TOTAL ASSETS 259,005 241,067 242,419
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Outstanding cheques in excess of bank
balance - 272 627
Short-term debt 5,106 3,711 4,170
Accounts payable and accrued liabilities 47,510 38,633 45,888
Advances from customers 8,649 3,116 10,833
Claim settlement provision (Note 11) 6,000 - -
Income taxes payable 2,532 1,329 2,750
Current portion of long-term debt 50 49 73
--------------------------------------------------------------------------
Total current liabilities 69,847 47,110 64,341
Long-term liabilities
Long-term debt, less current portion 15,189 21,203 11,362
Future income tax liability 21,620 22,959 23,468
Other accrued liabilities 4,215 3,932 3,979
--------------------------------------------------------------------------
Total long-term liabilities 41,024 48,094 38,809
--------------------------------------------------------------------------
Total liabilities 110,871 95,204 103,150
Shareholders' equity
Share capital 57,604 57,604 57,604
Retained earnings 76,358 76,602 72,241
Accumulated other comprehensive income
(Note 4) 14,172 11,657 9,424
--------------------------------------------------------------------------
90,530 88,259 81,665
--------------------------------------------------------------------------
Total shareholders' equity 148,134 145,863 139,269
--------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 259,005 241,067 242,419
--------------------------------------------------------------------------
--------------------------------------------------------------------------
RIDLEY Inc.
Consolidated Statements of Earnings and Retained Earnings
(Unaudited, expressed in thousands
of U.S. dollars) Three Months Ended Six Months Ended
December 31 December 31
2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenue 166,970 143,961 306,780 268,397
Cost of sales 141,642 118,324 260,466 221,677
--------------------------------------------------------------------------
Gross profit 25,328 25,637 46,314 46,720
--------------------------------------------------------------------------
Operating (income) expenses
Selling, general and administrative 16,589 15,315 31,345 30,585
Amortization of property, plant and
equipment 1,999 2,135 3,990 4,276
Gain on sale of facilities (Note 10) (22) - (829) -
Research and development 235 196 425 376
Other amortization 21 95 42 184
Asset impairment loss (Note 5) 712 3,130 712 3,130
Claim settlement (Note 11) 6,000 - 6,000 -
--------------------------------------------------------------------------
Net operating expenses 25,534 20,871 41,685 38,551
--------------------------------------------------------------------------
Operating income (loss) (206) 4,766 4,629 8,169
Finance costs (706) (608) (1,414) (1,171)
Interest income 235 249 375 399
--------------------------------------------------------------------------
Earnings (loss) before income taxes (677) 4,407 3,590 7,397
Provision for income taxes (Note 12) 2,161 2,123 3,834 3,312
--------------------------------------------------------------------------
Net earnings (loss) from continuing
operations (2,838) 2,284 (244) 4,085
Net earnings from discontinued
operations (Note 6) - 539 - 539
--------------------------------------------------------------------------
Net earnings (loss) (2,838) 2,823 (244) 4,624
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Retained earnings, beginning of
period 79,196 69,418 76,602 67,617
Current year earnings (loss) (2,838) 2,823 (244) 4,624
--------------------------------------------------------------------------
Retained earnings, end of period 76,358 72,241 76,358 72,241
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings (loss) per share from
continuing operations
- basic (0.21) 0.17 (0.02) 0.30
- diluted (0.21) 0.17 (0.02) 0.30
Net earnings (loss) per share
- basic (0.21) 0.20 (0.02) 0.33
- diluted (0.21) 0.20 (0.02) 0.33
Consolidated Statements of Comprehensive Income
(Unaudited, expressed in thousands
of U.S. dollars) Three Months Ended Six Months Ended
December 31 December 31
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net earnings (loss) (2,838) 2,823 (244) 4,624
Unrealized gains (losses) on
translation of financial statements
of related entities with foreign
functional currency to U.S. dollar
reporting currency 299 (1,535) 2,515 (1,551)
---------------------------------------------------------------------------
Other comprehensive income (loss) 299 (1,535) 2,515 (1,551)
Comprehensive income (loss) (2,539) 1,288 2,271 3,073
---------------------------------------------------------------------------
---------------------------------------------------------------------------
RIDLEY Inc.
Consolidated Statements of Cash Flows
(Unaudited, expressed in thousands Three Months Ended Six Months Ended
of U.S. dollars) December 31 December 31
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flow from operating activities
Net earnings (loss) for the period (2,838) 2,823 (244) 4,624
Add (deduct) items not affecting
cash:
Amortization of property, plant and
equipment 1,999 2,135 3,990 4,276
Future income taxes (745) (2,441) (776) (2,620)
Asset impairment loss (Note 5) 712 3,130 712 3,130
Claim settlement (Note 11) 6,000 - 6,000 -
(Gain) loss on sale of property,
plant and equipment (16) 107 (25) 167
Gain on sale of facilities (22) - (829) -
Other amortization 21 95 42 184
Other items not affecting cash 16 62 107 179
---------------------------------------------------------------------------
5,127 5,911 8,977 9,940
Net change in non-cash working
capital balances related to
operations:
Accounts receivable (919) (6,172) (7,561) (10,009)
Inventories (1,943) (2,984) (3,220) (4,215)
Prepaids and other current assets 266 207 (1,104) (1,472)
Accounts payable and accrued
liabilities 13,275 15,827 8,428 10,318
Advances from customers 7,256 6,042 5,533 4,188
Income taxes payable and recoverable (89) 1,774 1,505 3,050
---------------------------------------------------------------------------
Net cash from operating activities 22,973 20,605 12,558 11,800
---------------------------------------------------------------------------
Cash flow from investing activities
Proceeds on disposal of facilities,
property, plant and equipment 141 163 2,827 202
Purchase of property, plant and
equipment and investments (2,968) (1,835) (5,558) (4,011)
Decrease (increase) in loans
receivable, net 167 441 240 (295)
Business acquisitions (Note 7) - - (138) (138)
---------------------------------------------------------------------------
Net cash utilized for investing
activities (2,660) (1,231) (2,629) (4,242)
Cash flow from financing activities
Repayment of short- and long-term
debt (15,801) (17,237) (22,960) (21,091)
Proceeds from short- and long-term
debt 7,389 6,500 16,995 14,029
Payment of finance costs - - - (181)
Issuance of share capital - - - 169
---------------------------------------------------------------------------
Net cash utilized for financing
activities (8,412) (10,737) (5,965) (7,074)
Effect of exchange rate changes on
cash 102 42 (18) 25
Increase in cash and cash
equivalents 12,003 8,679 3,946 509
Cash and cash equivalents -
beginning of period (6,014) (5,494) 2,043 2,676
---------------------------------------------------------------------------
Cash and cash equivalents - end of
period 5,989 3,185 5,989 3,185
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash and cash equivalents
Cash and short-term deposits 5,989 3,812 5,989 3,812
Outstanding cheques in excess of
bank balance - (627) - (627)
---------------------------------------------------------------------------
5,989 3,185 5,989 3,185
---------------------------------------------------------------------------
---------------------------------------------------------------------------
RIDLEY Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(unaudited)
1. Significant accounting policies and basis of presentation
These interim unaudited consolidated financial statements are based on accounting principles and practices consistent with those used in preparation of the annual audited financial statements, with the exception of the changes in accounting policies as outlined in Note 2. These interim consolidated financial statements do not include all the disclosures normally included in the Company's annual consolidated financial statements. They should be read in conjunction with the Company's consolidated financial statements for the year ended June 30, 2007, as set out in the 2007 Annual Report. All amounts are in U.S. dollars unless otherwise stated.
2. Changes in accounting policies
The Company has adopted the following Canadian Institute of Chartered Accountants (CICA) guidelines effective for the commencement of its 2008 fiscal year:
CICA 3855 Financial instruments - recognition and measurement
This pronouncement establishes standards for recognizing and measuring financial assets and liabilities and non-financial derivatives. It requires that: a) all financial assets and liabilities be measured initially at fair value, b) all financial assets be subsequently measured at either amortized cost or fair value depending on the type of instrument and any optional designations by the Company, c) all financial liabilities be subsequently measured at amortized cost or at fair value if they are classified as held for trading purposes, and d) all derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. All changes in fair value are recorded in earnings unless cash flow hedge accounting is used in which case changes in fair value are recorded in other comprehensive income.
The Company has selected July 1, 2002 as its transition date to apply fair value accounting for all embedded derivatives. An embedded derivative is a component of a financial instrument or another contract of which the characteristics are similar to a derivative. The Company has determined that all of its embedded derivatives are exempt from fair value accounting.
CICA 3861 Financial instruments - disclosure and presentation
This pronouncement replaces handbook section 3860. It establishes standards for presentation of financial instruments and non-financial derivatives and identifies the information that should be disclosed.
CICA 1530 Comprehensive income
This pronouncement establishes reporting and disclosure of comprehensive income and its components. Comprehensive income is the change in a Company's net assets that result from transactions, events, and circumstances from sources other than investments by and/or distributions to the Company's shareholders. It includes items that would not normally be included in net earnings, such as: a) changes in the cumulative currency translation adjustments account relating to self-sustaining foreign operations, b) unrealized gains or losses on available-for-sale investments, and c) gains or losses on the effective portion of derivatives designated as cash flow hedges.
CICA 3251 Equity
This pronouncement replaces handbook section 3250 - Surplus with handbook section 3251 - Equity. It requires consistency of disclosure and presentation of equity components with the new requirements of section 1530 - Comprehensive Income.
CICA 3865 Hedges
This pronouncement establishes when and how hedge accounting may be applied. The standard replaces and expands upon Accounting Guideline 13 - Hedging Relationships, and requires hedges be designated as either fair value hedges, cash flow hedges or hedges of a net investment in a selfsustaining foreign operation. For a fair value hedge, the gain or loss on the hedging item is recognized in earnings in the period of change together with the offsetting change attributable to the hedged risk. For a cash flow hedge, as well as a hedge of a net investment in a self-sustaining foreign operation, the effective portion of the gain or loss on the hedging item is initially reported in other comprehensive income and subsequently recognized in earnings when the hedged item affects earnings.
As a result of the adoption of these standards, these additional items are now reported in the consolidated financial statements: a) comprehensive income and its components and b) accumulated comprehensive income and its components (Note 4). The comparative interim consolidated financial statements have not been restated, except for the retroactive restatement of the cumulative foreign currency translation adjustment account. All other sections have been applied prospectively in accordance with the transitional provisions.
The following table presents the carrying amount and the fair value of the Company's financial instruments. Amortized cost is calculated using the effective interest rate method. Fair value is based on quoted market prices when available. However, when financial instruments lack an available trading market, fair value is determined using management's estimates and is calculated using market factors for instruments with similar characteristics and risk profiles. These amounts represent point-in-time estimates and may not reflect fair value in the future. These calculations are subjective in nature, involve uncertainties and are a matter of significant judgement.
----------------------------------------------------------------------------
Assets (Liabilities) Assets (Liabilities)
Carried at Cost/ Carried at
Amortized Cost Fair Value
As of December 31, 2007 Carrying Value Fair Value Carrying value
----------------------------------------------------------------------------
Cash and short-term deposits 5,989 5,989 -
Accounts receivable 39,250 39,250 -
Loans receivable 3,436 3,436 -
Financial derivative
instruments - - 383
Accounts payable and accrued
liabilities (47,510) (47,510) -
Advances from customers (8,649) (8,649) -
Claim settlement provision (6,000) (6,000) -
Short-term and Long-term debt (20,345) (20,345) -
Other accrued liabilities (396) (396) -
In the three and six months ended December 31, 2007, the Company recorded a credit of $198,000 and $285,000 to cost of goods sold associated with market valuations of derivatives, respectively. In the three and six months ended December 31, 2007, the Company recorded a charge of $62,000 and $99,000 to finance costs associated with market valuations of derivatives, respectively.
Risk management
The Company manages risk and risk exposures through a combination of insurance, derivative financial instruments, a system of internal and disclosure controls and sound business practices. The Company may use certain derivative financial instruments to manage risks of fluctuation in commodity prices, interest rates and foreign exchange rates. The Company mitigates its exposure to commodity price risk through several methods, including inventory management, purchase contracts, back-to-back buying and selling, and to a lesser extent hedging on regulated futures and options markets. The Company uses interest rate swap agreements to limit exposure to increases in interest rates and fix interest rates on certain portions of long-term debt. The Company may enter into foreign currency forward and option (floor and cap) contracts to limit exposure on certain anticipated future U.S. dollar cash flows in Canadian dollar functional currency companies. The Company is exposed to credit risk from its customers primarily in relation to accounts receivable. This risk is minimized by the Company's diverse customer base. The Company regularly performs credit assessments of its customers and provides allowances for potentially uncollectible accounts receivable.
3. Seasonality and commodity variability
The Company experiences seasonal variations in revenue. Historically, revenue is strongest in the second and third fiscal quarters, when the usually cold October through March weather creates increased demand for beef feed, low moisture supplement blocks and, to a lesser degree, dairy feed. Other product lines are only marginally affected by seasonal conditions.
Commodity-based agricultural raw materials constitute a significant component of the Company's complete feed production. Fluctuating commodity prices can influence revenues and associated cost of sales as selling prices and product costs move in relation to changes in commodity prices.
4. Accumulated other comprehensive income
Three Months Ended Six Months Ended
December 31 December 31
2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
Balance, beginning of period as
previously reported 13,873 10,959 - -
Unrealized gain on translation of
financial statements of related
entities with foreign functional
currency to U.S. dollar reporting
currency - - 11,657 10,975
---------------------------------------------------------------------------
Restated balance, beginning of period 13,873 10,959 11,657 10,975
Other comprehensive income (loss) 299 (1,535) 2,515 (1,551)
---------------------------------------------------------------------------
Balance, end of period 14,172 9,424 14,172 9,424
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accumulated balances of other comprehensive income are comprised entirely of the unrealized gain on translation of financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.
5. Asset impairment loss and restructuring costs
In the second quarter of fiscal 2008 the Company recorded a $712,000 ($491,000 after tax) impairment charge from the closure of a plant in Lethbridge, Alberta. The loss of customers and sales volume at the plant led to the consolidation with another western Canadian plant.
In the second quarter of fiscal 2007 the Company recorded a $3,130,000 ($2,050,000 after tax) impairment loss related to the closure of a feed plant in western Canada.
Fair value was determined based on the net realizable value that could be obtained for assets, less costs of disposal or sale. The assets are reported under the Ridley Feed Operations Segment.
Restructuring costs of $1,449,000 were incurred and paid in the second fiscal quarter of 2008 related to a reduction in Canadian work force and the plant closure in Lethbridge, Alberta in response to lower sales volumes due to difficult market conditions and increased costs in Canada. These costs consist of: inventory obsolescence of $532,000 and severance of $200,000 recorded in cost of sales, and severance of $600,000 and other expenses of $117,000 recorded in selling, general and administrative expense.
6. Discontinued operations
In fiscal 2002, the Company sold its European swine breeding business. Subsequent to the sale, the purchaser initiated legal proceedings regarding warranty and indemnification claims. In the second quarter of fiscal 2007, the Company settled these legal claims and recorded a $528,000 charge. In the same period, the Company initiated activity to formally liquidate its remaining U.K. structure and has recognized future tax benefits of $1,138,000. The aforementioned transactions and associated professional fees reflect net income from discontinued operations of $539,000.
7. Business acquisitions
There were no business acquisitions for the year to date in fiscal 2008 or 2007. Installments related to a fiscal 2006 acquisition have been paid in the first quarters of fiscal 2008 and 2007.
8. Statement of cash flow disclosures
The following amounts were paid on account of interest and taxes:
Three Months Ended Six Months Ended
December 31 December 31
2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
Interest 796 736 1,234 1,384
Income taxes, net of refund 2,987 1,659 3,058 1,729
9. Post retirement and pension expense
The Company's recorded estimated costs related to its non-contributory pension plans, post-retirement medical plan, and defined contribution plans are as follows:
Three Months Ended Six Months Ended
December 31 December 31
2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
Non-contributory pension plan 344 319 689 638
Defined contribution plan 334 320 699 653
10. Gain on sale of facilities
Operating results of the Ridley Feed Operations segment in the first six months of fiscal 2008 include pretax gains of $829,000 related to the sale of a premix facility and a fabrication shop, both of which are located in Winnipeg, Manitoba. Net proceeds on these sales are $2,441,000.
11. Litigation and subsequent event
The Company has recorded a $6,000,000 claim settlement expense in the second quarter of fiscal 2008 related to the class action lawsuit discussed within this note.
The actions by proposed representative plaintiffs continue against the Government of Canada and Ridley Inc. They seek to certify class actions in Alberta, Saskatchewan, Ontario and Quebec to include all Canadian cattle farmers who allegedly suffered damage as a result of international bans on trade in Canadian beef and cattle following the May 2003 diagnosis of Bovine Spongiform Encephalopathy (BSE) in a cow in Alberta. The Ontario action seeks a national class to include affected cattle farmers residing in the six remaining Canadian provinces.
The proposed representative plaintiffs seek general, special, aggravated and punitive damages on behalf of themselves and each of the proposed Canadian cattle farmer class members. Full particulars of the claims are yet to be provided.
In a decision released on June 15, 2007, the Superior Court of Quebec authorized the plaintiff to institute the action as a class action in Quebec. A notice to class members in Quebec was approved by the Court and published in September. A trial date in Quebec has yet to be scheduled. None of the remaining actions have been certified to proceed to trial as a class action in any other province. In Ontario, the Court of Appeal for Ontario dismissed each of the appeals by the parties against the decision to strike the claims in a decision released June 22, 2007. A hearing of the plaintiff's motion to certify the Ontario action as a class action has yet to be scheduled.
In September 2007, Ridley Inc. and the Government of Canada filed applications with the Supreme Court of Canada seeking leave to appeal from the decision of the Court of Appeal for Ontario denying the motions of Ridley and the Government of Canada to strike the claims of the Ontario plaintiff. The Court's decision on the leave applications is expected in calendar year 2008.
The actions in Saskatchewan and Alberta are in abeyance. There has been no decision made on the merits of the actions in any province.
On February 5, 2008 Ridley reached a settlement agreement with the plaintiffs in the BSE class action lawsuits filed against Ridley and the Government of Canada in four provinces of Canada. Under the settlement agreement, Ridley will pay $6,000,000 into a plaintiffs' settlement trust fund and will effectively cap its exposure to the claims made by the plaintiffs to this amount. However, Ridley will remain a participant in the ongoing litigation as plaintiffs continue their claim against the Government of Canada. Counsel for the plaintiffs will apply to the Canadian courts for approval of the settlement agreement and Ridley will consent to certification of the class actions. The settlement class will then be notified of their right to opt out of the settlement. The settlement agreement will be finalized and Ridley will pay the settlement funds provided the number of class member opt-outs is below an agreed threshold. Ridley will continue to incur legal expenses as a result of the settlement approval process and its continuing involvement in the actions. No accruals have been made in respect of ongoing legal expenses related to the actions.
12. Income taxes
In the second quarter of fiscal 2008, the Company established a valuation allowance on tax loss carryforwards which are set to expire by 2010. This increases income tax expense by $1.6 million. Key factors in establishing this allowance are material losses in the Canadian tax entity due to the claim settlement and restructuring costs as well as uncertainty surrounding the short-term outlook for Canadian operations.
The Company's income tax expense is also impacted by the geographic distribution of income and losses. U.S. entities generated taxable income which is taxed at a higher rate than the Canadian statutory tax rate. The Canadian entity reported pre-tax losses to which an income tax benefit is recorded, but at a lower rate than taxes on U.S. income.
13. Segment information
The Company's operations are conducted in four reportable segments as: Ridley Feed Operations, Ridley Feed Ingredients, Ridley Nutrition Solutions, and Corporate. The Company reports information about its operating segments based on the way management organizes and reports the segments within the organization for making operating decisions and evaluating performance. Beginning in fiscal 2008, the Company is reporting the results of its Ridley Feed Ingredients (RFI) business unit as a separate reporting segment reflecting changes in how the Company evaluates its operations. In previous fiscal years, RFI was included as part of Ridley Feed Operations. The prior year's segment results have been reclassified to conform to the current year reporting.
Ridley Feed Operations, which consists of both the U.S. and Canadian feed operations, manufactures and distributes livestock feed to customers primarily in the prairie region of Canada and the U.S. Midwest. The products include a full range of complete feeds and supplements and are marketed through a dealership network as well as directly to agricultural producers.
Ridley Feed Ingredients manufactures and distributes vitamin and trace mineral premixes, small packaged specialty products, medicated and non-medicated feed additives and micro feed ingredients.
Ridley Nutrition Solutions, which consists of the low moisture block operations, specialty products, Sweetlix feed supplements and the equine nutrition business, manufactures and distributes low moisture blocks, specialty products, feed supplements and premium quality equine feeds.
Corporate contains no substantial revenue and is comprised of corporate costs and other activities not specific to reportable segments and is shown separately.
The Company evaluates performance based on operating income. Operating income is defined as earnings before finance costs, interest income, and income taxes.
An analysis of segment information is as follows:
RIDLEY Inc.
Segment Information Ridley Ridley Ridley
Feed Feed Nutrition
Three months ended Operations Ingredients Solutions
December 31 2007 2006 2007 2006 2007 2006
($000) ($000) ($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue
Revenue from
unafiliated customers 132,659 111,950 15,471 13,416 18,840 18,595
Intersegment revenues 1,318 1,165 12,584 10,736 9,480 7,807
---------------------------------------------------------------------------
Revenue 133,977 113,115 28,055 24,152 28,320 26,402
---------------------------------------------------------------------------
Cost of sales 117,957 95,583 25,460 22,659 21,607 19,790
---------------------------------------------------------------------------
Gross profit 16,020 17,532 2,595 1,493 6,713 6,612
Net operating expenses 13,582 15,417 763 649 3,883 3,427
---------------------------------------------------------------------------
Operating income (loss) 2,438 2,115 1,832 844 2,830 3,185
---------------------------------------------------------------------------
RIDLEY Inc.
Segment Information Corporate
and Ridley Inc.
Three months ended Eliminations Consolidated
December 31 2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue
Revenue from unafiliated
customers - - 166,970 143,961
Intersegment revenues (23,382) (19,708) - -
---------------------------------------------------------------------------
Revenue (23,382) (19,708) 166,970 143,961
---------------------------------------------------------------------------
Cost of sales (23,382) (19,708) 141,642 118,324
---------------------------------------------------------------------------
Gross profit - - 25,328 25,637
Net operating expenses 7,306 1,378 25,534 20,871
---------------------------------------------------------------------------
Operating income (loss) (7,306) (1,378) (206) 4,766
---------------------------------------------------------------------------
Ridley Ridley Ridley
Feed Feed Nutrition
Six months ended Operations Ingredients Solutions
December 31 2007 2006 2007 2006 2007 2006
($000) ($000) ($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue
Revenue from
unafiliated customers 243,899 210,187 28,230 24,144 34,651 34,066
Intersegment revenues 2,128 2,038 23,865 20,879 16,000 15,198
---------------------------------------------------------------------------
Revenue 246,027 212,225 52,095 45,023 50,651 49,264
---------------------------------------------------------------------------
Cost of sales 215,845 179,954 47,460 42,596 39,154 37,242
---------------------------------------------------------------------------
Gross profit 30,182 32,271 4,635 2,427 11,497 12,022
Net operating expenses 24,230 27,746 1,502 1,263 7,433 6,604
---------------------------------------------------------------------------
Operating income (loss) 5,952 4,525 3,133 1,164 4,064 5,418
---------------------------------------------------------------------------
Corporate
and Ridley Inc.
Six months ended Eliminations Consolidated
December 31 2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue
Revenue from unafiliated
customers - - 306,780 268,397
Intersegment revenues (41,993) (38,115) - -
---------------------------------------------------------------------------
Revenue (41,993) (38,115) 306,780 268,397
---------------------------------------------------------------------------
Cost of sales (41,993) (38,115) 260,466 221,677
---------------------------------------------------------------------------
Gross profit - - 46,314 46,720
Net operating expenses 8,520 2,938 41,685 38,551
---------------------------------------------------------------------------
Operating income (loss) (8,520) (2,938) 4,629 8,169
---------------------------------------------------------------------------
Ridley Ridley Ridley
Feed Feed Nutrition
Operations Ingredients Solutions
As of December 31 2007 2006 2007 2006 2007 2006
($000) ($000) ($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets 162,994 153,023 26,632 20,052 61,987 62,709
Property, plant and equipment 67,882 64,679 2,938 2,955 23,073 23,502
Goodwill 25,294 23,318 4,327 4,327 21,362 21,362
Corporate
and Ridley Inc.
Eliminations Consolidated
As of December 31 2007 2006 2007 2006
($000) ($000) ($000) ($000)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets 7,392 6,635 259,005 242,419
Property, plant and equipment 3 4 93,896 91,140
Goodwill - - 50,983 49,007
Three Six
Months Ended Months Ended
December 31 December 31
(Expressed in thousands of U.S. dollars) 2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue from unaffiliated customers
U.S. 125,001 109,267 231,096 203,133
Canada 41,969 34,694 75,684 65,264
---------------------------------------------------------------------------
166,970 143,961 306,780 268,397
December 31 June 30 December 31
(Expressed in thousands of U.S. dollars) 2007 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Property, plant and equipment
U.S. 68,146 66,710 66,790
Canada 25,750 26,403 24,350
---------------------------------------------------------------------------
93,896 93,113 91,140
Goodwill
U.S. 37,982 37,982 37,982
Canada 13,001 12,080 11,025
---------------------------------------------------------------------------
50,983 50,062 49,007
14. Comparative Amounts
The comparative amounts have been reclassified to conform to the current period presentation.
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Daily NewsTags: ,Agriculture:Farming, Agriculture:Livestock, Food and Beverage:Dairy, FoodandBeverage:Food, ,GA,MANKATO, MINNESOTA and WINNIPEG, MANITOBA
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