Maple Leaf Reports 2004 Second Quarter Financial Results
TORONTO, Jul 22, 2004 (BUSINESS WIRE) -- Maple Leaf Foods Inc. (TSX:MFI) today reported its financial results for the second quarter ended June 30, 2004.
"Our strong second quarter results reflect very good performance in both our protein and bakery operations," said Michael McCain, President and Chief Executive Officer, "High consumer demand for meat products, good early results from Schneider Foods, and rising hog prices all contributed to improved margins in our protein value chain operations. Our bakery business increased earnings through effectively offsetting rising input costs and benefited from our leadership in whole grain and premium bread categories. We are very pleased with our progress so far in 2004, as we continue our focus on increasing profitability and integrating the Schneider Foods acquisition."
Sales for the second quarter of $1.7 billion increased from $1.3 billion last year, due primarily to the inclusion of results from Schneider Foods, which was acquired on April 5, 2004. Excluding Schneider Foods, sales increased 6%. Sales for the first six months of 2004 were $2.9 billion compared to $2.5 billion last year.
Net earnings for the second quarter of 2004 were $26.3 million ($0.22 per share) compared to $1.8 million ($0.01 per share) last year. Year-to-date earnings were $45.6 million ($0.38 per share) compared to $7.8 million ($0.05 per share) last year.
Operating Review
Earnings from operations for the quarter increased to $64.7 million from $22.8 million last year, benefiting from strong performance in all major segments of the Company's business and the Schneider Foods contribution. Protein Value Chain operating earnings increased to $43.7 million from $5.0 million last year, while Bakery Group earnings increased to $20.5 million from $13.8 million last year. Year-to-date, earnings from operations before restructuring costs doubled to $112.7 million from $56.0 million last year.
Comparisons of earnings from operations exclude restructuring costs in 2003. Management believes that this is the most appropriate basis on which to evaluate operating results, as restructuring costs are not representative of ongoing operating earnings. Earnings comparisons are also affected by income related to sale of poultry production quota in both years and a gain related to the wind up of a pension plan last year, all of which are more fully explained in previous quarterly reports and the 2003 Annual Financial Statements. The following table reflects earnings from operations by business group before these items, and forms the basis for discussion in this news release
Earnings from operations before restructuring costs
($ millions) Second Quarter Year-to-Date
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Protein Value Chain 2004 2003 2004 2003
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Meat Products Group 12.6 (10.6) 22.6 (6.3)
Agribusiness Group 31.1 15.6 47.2 25.9
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Total Protein Value Chain 43.7 5.0 69.8 19.6
Bakery Products Group 20.5 13.8 38.3 27.1
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64.2 18.8 108.1 46.7
Sale of production quota 0.5 0.5 4.6 1.1
Pension wind-up gain - 3.5 - 8.2
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$64.7 $22.8 $112.7 $56.0
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Meat Products Group (branded value-added prepared meat products; fresh, frozen and branded value-added pork products; fresh, frozen and branded value-added chicken and turkey products, and global food marketing, distribution and trading)
Meat Product Group sales for the second quarter increased to $1.1 billion from $719 million last year, while year-to-date sales of $1.8 billion compared to $1.4 billion last year. The increase reflects the contribution of Schneider Foods for almost the entire quarter, higher volumes and prices, and the success of new product innovation.
Earnings from operations increased to $12.6 million from an operating loss of $10.6 million in 2003. Although impacted by higher raw material prices, earnings from Schneider Foods contributed strongly to the Meat Products Group, and the transaction was accretive to earnings per share for the quarter. Operating earnings for the first six months were $22.6 million compared to an operating loss of $6.3 million last year.
The increase in operating earnings was due to improved operating performance and favourable protein markets that positively affected the Company's poultry, international and pork operations. Poultry earnings continued their upward momentum in the second quarter, benefiting from high demand and the Company's strong brand positioning in the premium poultry market. Improved operating performance at the further processed operations in Atlantic Canada and in the pork business also increased earnings, despite a small decline in North American pork processor margins. The consumer foods operations benefited from strong sales and the success of new product innovation, although overall profitability was affected by higher raw material costs. Price increases implemented in the second quarter will help to offset this impact going forward. The integration of Schneider Foods is progressing well, with activities this year primarily focused on establishing common systems and processes.
Agribusiness Group (research, development and supply of quality livestock nutrition products and services,- pet food,- swine production; and animal by-products recycling)
Agribusiness Group sales for the second quarter were $243.3 million compared to $231.2 million last year, while year-to-date sales were $455.4 million compared to $454.2 million last year. Operating earnings in the second quarter increased 99% to $31.1 million from $15.6 million last year, and year-to-date operating earnings increased to $47.2 million from $25.9 million last year.
Hog prices in the second quarter were 29% higher than last year, which together with strong rendering results drove increased operating earnings in the Agribusiness Group. The Company had effective ownership of approximately 21% of the hogs that it processed at the end of the quarter.
In the second quarter, the Company announced plans to expand biodiesel production at its rendering plant in Montreal, Quebec from four million to 35 million litres annually. The facility will convert tallow and other rendered materials into a high quality, environmentally friendly diesel fuel alternative, and will be commissioned by the spring of 2005.
Bakery Products Group (comprised of Maple Leaf's 84.7% ownership in Canada Bread Company, Ltd., a leading producer of fresh and frozen par-baked bakery products, and fresh pasta and sauces)
Bakery Products Group sales for the second quarter rose to $330.5 million compared to $314.1 million last year, supported by increased sales in both fresh and frozen bakery operations. Year-to-date, sales of $634.5 million compared to $621.6 million last year. Earnings from operations for the second quarter increased 49% to $20.5 million from $13.8 million last year, while earnings for the first six months were $38.3 million compared to $27.1 million last year.
As stated above, the Bakery operations improved operating earnings by $6.7 million quarter-over-quarter. Of this improvement, $2.6 million was due to the impact last year of a strike in the Fresh Bakery operations. Price increases initiated in early 2004 to offset rising input costs have also restored margins to more normalized levels. The performance of the Atlantic Canada bakeries contributed to improved profitability, as new management continued to make excellent progress in resolving operating issues. The U.K. Bakeries operation also increased its profitability in the quarter and expansion is underway at two bakeries to meet future demand.
Sales growth in the frozen par-baked operations was impacted by a work stoppage involving several large U.S retail customers. Business is gradually recovering and the Company expects par-baked sales to return to normal growth rates.
The impact of low carbohydrate diets was mitigated through increased sales of whole grain and premium bread categories and through new product innovation. In the white bread category, Dempster's Stays Fresh continued to increase market share by delivering a value-added benefit to consumers. A new line of reduced carbohydrate and whole grain frozen par-baked products was launched in the second quarter, further positioning the Company to meet a range of consumer needs.
Cash Flow and Financing
Interest expense for the quarter of $21.3 million increased from $16.7 million last year due to increased debt arising from the Schneider Foods acquisition. This effect was partially offset by lower interest rates.
Cash flow from operating activities for the second quarter increased to $25.4 million from $1.9 million last year, reflecting sharply increased earnings. While strong demand for protein products positively affected the Company's earnings, it also increased the cost of raw material and sales values, resulting in higher investments in working capital.
In second half of 2004, management will assess the impact of the acquisition of Schneider Foods on the Company's credit ratios and financial position, taking into account both recent earnings and the Schneider Foods contribution to cash flows, and will put in place new long-term debt and, possibly, equity financing, sufficient to ensure that the Company maintains debt ratios that provide access to investment grade debt financing.
Other Matters
The Company declared a dividend of $0.04 per share payable on September 30, 2004 to shareholders of record on September 10, 2004.
Maple Leaf Foods Inc. is a leading Canadian food processing company committed to delivering quality food products to consumers around the world. Headquartered in Toronto, Canada, the Company employs approximately 23,000 people at its operations across Canada and in the United States, Europe and Asia.
An investor presentation related to the Company's first quarter financial results is available at www.mapleleaf.com and can be found under Investor Relations on the Quarterly Results page. A conference call will be held at 2:30 p.m. (EST) on July 22, 2004 to review Maple Leaf Foods' financial results for the second quarter ended June 30, 2004. To participate in the call, please dial in to 1-416-405-9328 or 800-387-6216. For those unable to participate, playback will be made available an hour after the event at 1-416-695-5800 / 800- 408-3053 (Pass code 33077223#).
A webcast presentation of the second quarter financial results will be available at http://firstcallevents.com/service/aiwz4O4882369qfl2.html at 2:30 p.m. EST and via a link on the Company's website at www.mapleleaf.com http://www.mapleleaf.com. An archived replay of the webcast will be available following the call at each of the above links.
This release contains forward-looking statements and information, which may include statements concerning the company's outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. The forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. These risks and uncertainties include availability and prices of livestock, raw materials and supplies, livestock costs, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards, adverse results from ongoing litigation and actions of domestic and foreign governments. Maple Leaf assumes no obligation to publicly update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein do not materialize. Refer to the Company's annual report, management information circular, annual information form and other filings with the Ontario Securities Commission and Toronto Stock Exchange for further information on risks and uncertainties that could cause actual results to differ materially from forward-looking statements.
Maple Leaf Foods Inc.
Consolidated Balance Sheets
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In thousands of Canadian dollars As at As at
June 30, December 31,
2004 2003 2003
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(Unaudited)(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 74,598 $ 77,937 $ 38,908
Accounts receivable (Note 2) 333,412 254,410 242,306
Inventories 404,886 276,029 259,758
Future tax asset 5,856 9,017 4,854
Prepaid expenses and other assets 18,627 20,903 9,355
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837,379 638,296 555,181
Investments in associated companies 78,650 68,422 58,189
Property and equipment 980,736 770,512 802,332
Other long-term assets 194,270 175,424 171,262
Future tax asset 31,307 16,866 29,906
Goodwill and other intangible assets 852,026 509,162 531,851
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$2,974,368 $2,178,682 $2,148,721
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
charges $ 610,075 $ 481,627 $ 501,997
Income and other taxes payable 11,977 24,628 12,212
Current portion of long-term debt 82,146 9,780 4,959
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704,198 516,035 519,168
Long-term debt 1,222,609 775,791 730,627
Future tax liability 39,358 44,689 50,397
Other long-term liabilities 147,665 43,839 35,274
Minority interest 77,249 77,374 70,068
Shareholders' equity 783,289 720,954 743,187
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$2,974,368 $2,178,682 $2,148,721
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The accompanying notes to the consolidated financial statements are
an integral part of this statement.
Maple Leaf Foods Inc.
Consolidated Statements of Earnings
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In thousands of
Canadian dollars,
except per share Quarter Ended Six Months Ended
amounts (Unaudited) June 30, June 30,
2004 2003 2004 2003
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Sales $1,689,490 $1,264,000 $2,884,221 $2,515,464
Earnings from
operations before
restructuring costs 64,686 22,779 112,688 56,027
Restructuring costs - - - (7,422)
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Earnings from
operations 64,686 22,779 112,688 48,605
Other income (Note 3) 701 290 1,797 602
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Earnings before interest
and income taxes 65,387 23,069 114,485 49,207
Interest expense 21,287 16,715 38,013 32,891
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Earnings before
income taxes 44,100 6,354 76,472 16,316
Income taxes 15,391 2,367 26,689 5,694
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Earnings before minority
interest 28,709 3,987 49,783 10,622
Minority interest 2,455 2,188 4,198 2,841
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Net earnings for the
period $ 26,254 $ 1,799 $ 45,585 $ 7,781
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Earnings per share (basic
and diluted) (Note 4) $ 0.22 $ 0.01 $ 0.38 $ 0.05
Dividends per share
declared 0.04 0.04 0.08 0.08
Weighted average number of
shares (millions) 113.2 113.0 113.2 113.0
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
Maple Leaf Foods Inc.
Consolidated Statements of Retained Earnings
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In thousands of Canadian dollars, Six Months Ended June 30,
except per share amounts (Unaudited) 2004 2003
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Retained earnings, beginning of
period $ 74,982 $ 63,758
Net earnings for the period 45,585 7,781
Dividends declared ($0.08 per share;
2003: $0.08 per share) (9,057) (9,041)
Convertible debenture charge (2,435) (2,422)
Premium on repurchase of share
capital - (899)
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Retained earnings, end of period $ 109,075 $ 59,177
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The accompanying notes to the consolidated financial statements are
an integral part of this statement.
Maple Leaf Foods Inc.
Consolidated Statements of Cash Flows
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In thousands of Canadian dollars Quarter Ended Six Months Ended
(Unaudited) June 30, June 30,
2004 2003 2004 2003
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CASH PROVIDED BY (USED IN):
Operating activities
Net earnings for the period $ 26,254 $ 1,799 $ 45,585 $ 7,781
Add (deduct) items not affecting
cash:
Depreciation 34,783 24,476 61,087 49,161
Stock based compensation (Note 7) 840 49 1,465 61
Minority interest 2,455 2,188 4,198 2,841
Future income taxes 5,881 555 11,837 1,374
Increase in pension asset (6,471) (6,683) (11,558) (14,233)
Undistributed earnings of
associated companies (1,948) (440) (1,505) (33)
(Gain) loss on sale of property
and equipment (191) 281 (1,240) 149
Gain on sale of investments (20) - (20) -
Other 1,332 (5,157) (1,750) (6,842)
Change in other long-term
receivables (5,144) 37 (5,799) 96
Change in non-cash operating
working capital (32,395)(15,234) (52,882)(105,488)
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25,376 1,871 49,418 (65,133)
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Financing activities
Dividends paid (4,529) (4,516) (9,057) (9,041)
Dividends paid to minority
interest (233) (407) (467) (1,071)
Increase in long-term debt 413,895 50,410 422,895 125,523
Decrease in long-term debt (522) (835) (3,557) (10,789)
Convertible debenture interest
paid (1,369) (1,369) (2,739) (2,739)
Increase in share capital 394 857 671 2,146
Shares repurchased for
cancellation - (629) - (1,829)
Other 461 464 924 928
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408,097 43,975 408,670 103,128
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Investing activities
Additions to property and
equipment (41,379)(37,273) (62,494) (57,525)
Proceeds from sale of property
and equipment 5,182 66 8,856 512
Purchase of net assets of
businesses (Note 5) (370,561)(51,000)(370,561) (51,000)
Change in other investments, net (231) (1,433) 284 (8,893)
Other 2,029 (278) 1,517 (18)
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(404,960)(89,918)(422,398)(116,924)
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Increase (decrease) in cash and
cash equivalents 28,513(44,072) 35,690 (78,929)
Cash and cash equivalents,
beginning of period 46,085 122,009 38,908 156,866
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Cash and cash equivalents, end of
period 74,598 77,937 74,598 77,937
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The accompanying notes to the consolidated financial statements
are an integral part of this statement.
Maple Leaf Foods Inc.
Segmented Financial Information
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In thousands of Canadian Quarter Ended Six Months Ended
dollars (Unaudited) June 30, June 30,
2004 2003 2004 2003
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Sales
Meat Products Group $1,115,672 $ 718,689 $1,794,305 $1,439,657
Agribusiness Group 243,317 231,190 455,442 454,185
Bakery Products Group 330,501 314,121 634,474 621,622
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$1,689,490 $1,264,000 $2,884,221 $2,515,464
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Earnings from operations,
before restructuring
costs (1)
Meat Products Group $ 12,602 $ (7,133) $ 22,587 $ 1,942
Agribusiness Group 31,545 16,139 51,820 27,034
Bakery Products Group 20,539 13,773 38,281 27,051
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$ 64,686 $ 22,779 $ 112,688 $ 56,027
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Capital expenditures
Meat Products Group $ 19,216 $ 10,899 $ 25,917 $ 20,518
Agribusiness Group 7,830 11,857 10,568 16,417
Bakery Products Group 14,333 14,517 26,009 20,590
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$ 41,379 $ 37,273 $ 62,494 $ 57,525
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Depreciation
Meat Products Group $ 18,949 $ 10,030 $ 29,439 $ 20,343
Agribusiness Group 5,187 4,634 10,254 9,127
Bakery Products Group 10,647 9,812 21,394 19,691
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$ 34,783 $ 24,476 $ 61,087 $ 49,161
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In thousands of Canadian As at As at
dollars June 30, December 31,
2004 2003 2003
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(Unaudited) (Unaudited)
Total assets
Meat Products Group $1,424,480 $ 706,193 $ 666,489
Agribusiness Group 585,475 547,039 555,693
Bakery Products Group 711,166 716,295 716,463
Non-allocated assets 253,247 209,155 210,076
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$2,974,368 $2,178,682 $2,148,721
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The accompanying notes to the consolidated financial statements are an integral part of this statement.
(1) Prior to 2004, the Company included cost of production contracts with hog producers in the Meat Products Group. Management considers it more appropriate to include these impacts in the Agribusiness Group operating results. Therefore, 2003 segmented operating earnings before restructuring costs have been restated to reflect this change in presentation and make them comparable with 2004.
Maple Leaf Foods Inc.
Notes to Consolidated Financial Statements
(For the quarters ended June 30, 2004 and June 30, 2003)
(Tabular amounts in thousands of Canadian dollars except share amounts)
1. Significant Accounting Policies
The unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2003. These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as were applied in the consolidated financial statements for the year ended December 31, 2003.
a) Hedging Relationships
As discussed in note 2(m)(i) of the annual consolidated financial statements for the year ended December 31, 2003, the Company is in compliance with CICA Accounting Guideline 13 relating to hedging.
b) Accounting for Asset Retirement Obligations
The application of new accounting standard, Section 3110, "Accounting for Asset Retirement Obligations" as disclosed in note 2(m)(ii) of the annual consolidated financial statements for the year ended December 31, 2003, did not have a material impact on the financial statements of the Company.
c) Comparative Figures
Certain 2003 comparative figures have been reclassified to conform with the financial statement presentation adopted in 2004.
2. Accounts Receivable
Under revolving securitization programs, the Company has sold, with limited recourse, certain of its trade accounts receivable to financial institutions. The Company retains servicing responsibilities and assumes limited recourse obligations for delinquent receivables. At June 30, 2004, trade accounts receivable amounting to $205.4 million (June 30, 2003: $179.4 million; December 31, 2003: 186.8 million) had been sold under these programs.
3. Other Income
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Quarter Six months
Ended June 30, Ended June 30,
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2004 2003 2004 2003
Income from associated
companies $ 500 $ 122 $ 488 $ 40
Gain (loss) on sale of
property and equipment 191 (281) 1,240 (149)
Rental income 94 99 196 156
Gain on disposal of investments 20 - 20 -
Gain (loss) on real estate
operations (104) 350 (147) 515
Other - - - 40
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$ 701 $ 290 $ 1,797 $ 602
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4. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share.
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Quarter Six months
Ended June 30, Ended June 30,
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2004 2003 2004 2003
Numerator:
Net earnings 26,254 1,799 45,585 7,781
Convertible
debenture charge (1,219) (1,209) (2,435) (2,422)
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Earnings available to
common shareholders $ 25,035 $ 590 $ 43,150 $ 5,359
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Weighted average number of
shares (millions) 113.2 113.0 113.2 113.0
Earnings per share
(basic and diluted) $0.22 $0.01 $0.38 $0.05
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5. Acquisitions
On April 5, 2004 the Company completed the acquisition of Schneider Corporation ("Schneider Foods") for $499 million.
The company has not yet completed the determination of the fair values of the individual assets and liabilities acquired, or its restructuring and integration plans for the operations acquired. As at June 30, 2004, the only significant items that have been assigned preliminary fair values are accrued pension benefit liabilities and accrued post-retirement benefit liabilities. Accordingly, the allocation of the purchase costs to the assets and liabilities acquired is preliminary and will change. The goodwill resulting from the above transaction is included in the total assets of the Meat Products Group.
Details of the net assets acquired are as follows:
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2004
Net working capital $ 86,512
Investments 20,380
Property and equipment 179,792
Goodwill 283,986
Other intangibles 33,117
Indebtedness - short term (41,970)
Long-term debt (101,067)
Future income taxes 25,232
Accrued pension benefit liabilities (78,200)
Accrued post-retirement benefit liabilities (35,484)
Minority interest (1,737)
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Total purchase costs $ 370,561
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The acquisition was funded by a combination of existing unused credit facilities, a new short-term bank facility and the assumption of existing debt of Schneider Foods.
The Company entered into a Credit Agreement with a syndicate of banks on March 1, 2004. The amount of the syndicated facility provides for an amount up to $205 million for the purpose of financing part of the purchase price and any required repayments of existing Schneider indebtedness. The facility has a maturity date of April 5, 2005 and bears interest based on bankers' acceptance rates for Canadian dollar loans and LIBOR for U.S. dollar loans.
In addition to the bank financing, the Company has entered into a Financing Agreement with The Ontario Teachers' Pension Plan Board (OTPPB). This agreement provides the Company with a standby commitment from OTPPB to purchase, at the Company's option, up to $150 million of treasury shares at any time until its expiry on April 15, 2005. Pricing of the shares under this arrangement would be at a 6% discount to the market-trading price of the Company's common shares prior to an issue.
In the latter part of 2004, management will assess the impact of the acquisition on the Company's credit ratios and financial position, taking into account both recent earnings and the Schneider Foods contribution to cash flows, and will put in place new long-term debt and, possibly, equity financing, sufficient to ensure that the Company maintains debt ratios that provide access to investment grade debt financing.
6. Derivatives
In the ordinary course of business, the Company enters into derivative financial instruments to reduce underlying fair value and cash flow risks associated with foreign currency, interest rates and commodity prices. If the Company had not entered into these contracts, operating earnings for the second quarter 2004 would have been higher by $2.9 million (year-to-date $3.2 million) and interest expense for the second quarter 2004 would have been lower by $4.1 million (year-to-date $8.0 million).
The new short-term bank facilities used to finance the Schneider Foods acquisition (see Note 5) bear interest at floating market rates. The Company plans to re-finance these bank facilities with new long term debt and possibly equity financing. During the quarter, the Company entered into a series of interest rate and cross currency swaps to hedge the interest rate on the anticipated new debt issue. The swaps were issued for notional amounts of $50.0 million and US$185.0 million, have terms of seven and ten years and fixed interest rates that range between 5.99% and 6.67%. As at June 30, 2004 these swaps had a market value loss of $2.3 million.
7. Stock-based Compensation
During the second quarter of 2004, the Company granted 127,600 stock options at a weighted average price per share of $11.64 (2003: 62,000 stock options granted at a weighted average price per share of $10.59). The fair value of the options issued in a quarter is determined using the Black-Scholes option pricing model with the following weighted average assumptions:
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Quarter Ended June 30, 2004
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Expected option life 4.4 years
Risk-free interest rate 4.2%
Expected annual volatility 34.7%
Dividend yield 1.35%
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The estimated fair value of the options issued during the second quarter of 2004 was $0.4 million (2003: $0.2 million). This value is amortized to income over the vesting period of the related options.
The stock compensation charge to earnings during the quarter ended June 30, 2004 is $0.8 million. Year to date $1.5 million has been charged to earnings. For the first 6 months of 2003, the impact of stock compensation charges to earnings was not significant.
8. Pensions
As discussed in note 17 of the annual consolidated financial statements for the year ended December 31, 2003, in aggregate, the assets of the company's defined benefit pension plans exceeded liabilities in the amount of $290.9 million. As disclosed in Note 5, the Company acquired a pension liability pursuant to the acquisition of Schneider Foods. After aggregating the financial position of all its defined benefit pension plans, plan assets exceed liabilities by approximately $213 million in aggregate.
During the quarter, the Company included in earnings $1.8 million related to net benefit plan income including post-retirement benefit costs (2003: $4.4 million). For the first 6 months of 2004, the Company recorded $4.7 million in net benefit plan income (2003: $9.9 million).
9. Supplemental Information
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Quarter Ended June 30, Six months Ended June 30,
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2004 2004
Cash taxes paid $ 6,164 $ 21,418
Cash interest paid 26,714 40,411
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SOURCE: Maple Leaf Foods Inc.
Maple Leaf Foods Inc. Lynda Kuhn Vice-President, Public & Investor Relations (416) 926-2026 www.mapleleaf.com
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