Interim Management s Discussion & Analysis Second quarter ended June 28, 2014 The following Management s Discussion and Analysis ( MD&A ) presents the results, financial position and cash flows of Lassonde Industries Inc. and should be read in conjunction with its unaudited interim condensed consolidated financial statements ( interim consolidated financial statements ) and accompanying notes. In addition to containing an analysis of the second quarter ended June 28, 2014, this MD&A reports on items deemed significant that have taken place from June 28, 2014 up to and including August 8, 2014, which is the date on which this MD&A was approved by the Company s Board of Directors. The financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards ( IFRS ). Additional information, including the Annual Information Form and certifications of filings for the second quarter of 2014, is available on the SEDAR website at www.sedar.com. Unless otherwise indicated, the reporting currency for figures in this document is the Canadian dollar. Forward-Looking Statements and Use of Estimates Any statement contained in this report that does not constitute a historical fact may be deemed a forward-looking statement. Verbs such as "believe," "expect," "estimate" and other similar expressions, in addition to the negative forms of these terms or any variations thereof, appearing in this report generally indicate forward-looking statements. These forward-looking statements do not provide guarantees as to the future performance of Lassonde Industries Inc. and are subject to risks, both known and unknown, as well as uncertainties that may cause the outlook, profitability and actual results of Lassonde Industries Inc. to differ significantly from the profitability or future results stated or implied by these statements. Detailed information on risks and uncertainties is provided in the Uncertainties and Principal Risk Factors section of the MD&A for the year ended December 31, 2013. In preparing interim consolidated financial statements in accordance with IFRS, management must exercise judgment when applying accounting policies and use assumptions and estimates that have an impact on the amounts of assets, liabilities, revenues and expenses reported and on the contingent liabilities and contingent assets information provided. Page 1
The main assumptions and estimates used by management are as follows: Measurements of revenues from product sales; Measurements of assets; Fair value measurements of financial instruments classified in Level 3; Purchase price allocations for business combinations; Measurements of defined benefit assets and liabilities; and Measurements of the quarterly effective tax rate. Because the use of assumptions and estimates is inherent to the financial reporting process, the actual results of items subject to assumptions and estimates could differ from these assumptions and estimates. Corporate Profile Lassonde Industries Inc. develops, manufactures and markets a wide range of ready-to-drink fruit and vegetable juices and drinks. The Company is the second largest producer of store brand fruit juices and drinks in the United States and a major producer of cranberry sauces. Furthermore, the Company develops, manufactures and markets specialty food products such as fondue broths and sauces, soups, sauces and gravies, packaged corn-on-the-cob, bruschetta toppings, tapenades, pestos and sauces for pasta and pizza. It also imports selected wines from several countries of origin for packaging and marketing purposes and also produces apple cider and wine-based beverages. The Company produces superior quality products through the efforts of over 2,000 people working in 14 plants across Canada and the United States. The shares of Lassonde Industries Inc. are listed on the Toronto Stock Exchange. The Company has four principal operating subsidiaries: A. Lassonde Inc., Clement Pappas and Company, Inc. ( CPC ), Lassonde Specialties Inc., and Arista Wines Inc. It is active in two market segments: the retail segment and the food service segment. Retail sales account for approximately 84% of total annual sales and consist of sales to food retailers and wholesalers such as supermarket chains, independent grocers, superstores, warehouse clubs, and major pharmacy chains. Food service sales account for approximately 16% of total annual sales and consist of sales to restaurants, hotels, hospitals, schools and wholesalers serving these institutions. The Company s national brands are sold in various packages under several proprietary trademarks, including Antico, Arte Nova, Bistro Mundo, Bombay, Canton, Dublin s Pub, Everfresh, Fairlee, Flavür, Fruité, Grown Right, misangrina, Mont-Rouge, Oasis, Orange Maison, Pomme de Coeur, Rich n Ready, Rougemont, Ruby Kist, Sunlike, Tropical Grove as well as under trademarks for which the Company is a licensed user such as Allen s, Canadian Club, Del Monte, Graves, Mitchell s, Nature s Best, Old South and Tetley. On an annual basis, the Company s sales are geographically broken down as follows: approximately 55% of the Company s sales are in Canada, 44% in the United States and 1% in other countries. Page 2
The Company is involved in apple and cranberry processing and packages corn-on-the-cob. These processing activities take place mainly from August to November. Processing the harvested crops increases inventory levels during the last quarter of the year. Overall Performance The Company s sales totalled $272.4 million in the second quarter of 2014, up $13.8 million or 5.4% from $258.6 million in sales during the same period of 2013. This increase was primarily driven by an increase in the sales of private labels and by a favourable foreign exchange impact, partly offset by a decrease in the sales volume of national brands. The Company s operating profit for the second quarter of 2014 stood at $21.9 million, up $2.4 million from operating profit of $19.5 million in the same quarter last year. This increase was mostly due to an improvement in the profitability of CPC s private label products and to a decrease in selling and administrative expenses, partly offset by an unfavourable impact on the Company s cost of sales of lower production volumes in Canada. The Company s financial expenses went from $4.6 million in the second quarter of 2013 to $4.1 million this quarter. This decrease was mostly attributable to a $1.6 million decrease in interest expense arising from a change in the interest rates applicable to CPC s term loan as of July 2013 and a reduction in indebtedness. This decrease was partly offset by a less favourable change in the fair value of the financial liability related to retractable financial instruments. A $0.4 million decrease in this liability was recognized in the second quarter of 2014 whereas a $1.6 million decrease had been reported in the second quarter of 2013. Other (gains) losses went from a $0.8 million gain in the second quarter of 2013 to a $0.9 million loss in 2014. The 2013 second-quarter gain was mainly due to $0.5 million in foreign exchange gains and to a $0.2 million gain related to a change in the fair value of interest rate swaps. The $0.9 million loss in the second quarter of 2014 was mainly due to $0.4 million in foreign exchange losses and to a $0.4 million loss related to a settlement at fair value of a derivative financial instrument. Profit before income taxes totalled $16.9 million for the second quarter of 2014, up $1.3 million from $15.6 million in the same quarter of 2013. An income tax expense at an effective rate of 28.6% (23.7% in 2013) brought the 2014 second-quarter profit to $12.0 million, up $0.1 million from $11.9 million in the same quarter last year. Profit attributable to the Company s shareholders was $11.2 million, resulting in basic and diluted earnings per share of $1.61 for the second quarter of 2014. In the second quarter of 2013, profit attributable to the Company s shareholders had totalled $11.4 million, resulting in basic and diluted earnings per share of $1.63. Cash flows from operating activities generated $1.6 million in cash during the second quarter of 2014, while they had generated $38.1 million in cash during the same period last year. Page 3
Financing and investing activities used $16.4 million and $4.2 million, respectively, in cash during the second quarter of 2014, whereas they had used $34.4 million and $9.3 million for the same period of fiscal 2013. At the end of the second quarter of 2014, the Company reported a cash and cash equivalents balance of $17.4 million and a bank overdraft of $12.2 million compared to a cash and cash equivalents balance of $1.3 million and a bank overdraft of $4.6 million at the end of the second quarter of 2013. Quarterly Financial Information Consolidated Income Data (in thousands of dollars) Second quarters ended June 28, 2014 June 29, 2013 Sales $ 272,403 $ 258,550 Cost of sales 197,653 185,474 Selling and administrative expenses 52,896 53,581 (Gains) losses on capital assets 3 5 250,552 239,060 Operating profit 21,851 19,490 Financial expenses 4,115 4,596 Other (gains) losses 859 (752) Profit before income taxes 16,877 15,646 Income tax expense 4,829 3,701 Profit 12,048 11,945 Attributable to: Company s shareholders 11,228 11,385 Non-controlling interest 820 560 Basic and diluted earnings per share (in $) $ 1.61 $ 1.63 Weighted average number of shares outstanding (in thousands) 6,988 6,988 In the second quarter of 2014, sales totalled $272.4 million, up $13.8 million (5.4%) from sales of $258.6 million in the second quarter of 2013. This increase was mainly due to the combined impact of the following items: (i) a $14.5 million increase in sales of private label products, (ii) an $8.3 million favourable foreign exchange impact, (iii) a $7.2 million decrease in the sales volume of national brands, (iv) sales price fluctuations that had a $1.0 million unfavourable impact on sales of national brands, (v) an increase in slotting fees that had an unfavourable impact of $0.7 million, and (vi) an unfavourable change in the sales mix that contributed to a Page 4
$0.1 million decrease in sales. For the first six months of 2014, sales totalled $516.6 million, up 3.5% from $499.1 million in the first six months of 2013. Cost of sales went from $185.5 million in the second quarter of 2013 to $197.7 million in the same quarter of 2014, up $12.2 million. When compared to the 5.4% increase in sales, this 6.6% increase in cost of sales essentially reflects the unfavourable impact of lower production volumes in Canada on the unit cost of products, an unfavourable sales mix and an unfavourable foreign exchange impact, partly offset by the lower cost of certain raw materials. For the first six months of 2014, cost of sales stood at $374.8 million, up 3.0% from $363.8 million in the first six months of 2013. Selling and administrative expenses went from $53.6 million in the second quarter of 2013 to $52.9 million in the second quarter of 2014, down $0.7 million. This decrease was mainly due to lower salary expenses partly offset by an unfavourable foreign exchange impact and by $0.7 million in expenses related to the acquisition of Apple & Eve, LLC ( A&E ) (See the Events After the Reporting Date section on page 16). For the first six months of the year, selling and administrative expenses stood at $105.7 million, up 3.6% from $102.0 million in the first six months of 2013. The Company s operating profit for the second quarter of 2014 totalled $21.9 million, up $2.4 million from $19.5 million in the same quarter last year. Operating profit for the first six months of 2014 stood at $36.2 million, up $2.9 million from $33.3 million at the end of the first six months of 2013. The Company s financial expenses went from $4.6 million in the second quarter of 2013 to $4.1 million this quarter. This decrease was mostly attributable to a $1.6 million decrease in interest expense arising from a change in the interest rates applicable to CPC s term loan as of July 2013 and a reduction in indebtedness. This decrease was partly offset by a less favourable change in the fair value of the financial liability related to retractable financial instruments. A $0.4 million decrease in this liability was recognized in the second quarter of 2014 whereas a $1.6 million decrease had been reported in the second quarter of 2013. Note that the 2014 decrease is related to the Company s repurchase of 9,000 CPC shares, whereas the 2013 decrease arose from a repurchase of 20,000 shares. The 2013 share repurchase resulted in a reduction and, with respect to the 2014 repurchase, the elimination of the financial liability related to retractable financial instruments. For the first six months, financial expenses went from $11.0 million in 2013 to $9.4 million this fiscal year. Other (gains) losses went from a $0.8 million gain in the second quarter of 2013 to a $0.9 million loss in 2014. The 2013 second-quarter gain was mainly due to $0.5 million in foreign exchange gains and to a $0.2 million gain related to a change in the fair value of interest rate swaps. The $0.9 million loss in the second quarter of 2014 was mainly due to $0.4 million in foreign exchange losses and to a $0.4 million loss related to a settlement at fair value of a derivative financial instrument. For the first six months, the Other (gains) losses item was a $0.3 million gain in 2014 compared to a $1.0 million gain in 2013. Page 5
Profit before income taxes stood at $16.9 million for the second quarter of 2014, up $1.3 million from $15.6 million in the same quarter of 2013. For the first six months of 2014, profit before income taxes stood at $27.1 million, up $3.7 million from $23.4 million in the first six months of 2013. Income tax expense went from $3.7 million in the second quarter of 2013 to $4.8 million in the second quarter of 2014. The effective income tax rate of 28.6% for the second quarter of 2014 is higher than the rate of 23.7% in the same quarter of 2013. This higher tax rate reflects an unfavourable geographic mix of statutory tax rates. Income tax expense for the first six months of 2014 stood at $7.7 million, up $2.1 million from $5.6 million in the first six months of 2013. Profit for the second quarter of 2014 was $12.0 million, up $0.1 million from profit of $11.9 million in the second quarter of last year. For the first six months of 2014, profit totalled $19.4 million versus profit of $17.8 million in the first six months of 2013. Profit attributable to the Company s shareholders totalled $11.2 million, resulting in basic and diluted earnings per share of $1.61 in the second quarter of 2014. In the second quarter of 2013, profit attributable to the Company s shareholders had totalled $11.4 million, resulting in basic and diluted earnings per share of $1.63. For the first six months of 2014, profit attributable to the Company s shareholders totalled $18.3 million, resulting in basic and diluted earnings per share of $2.62 and, in the same six-month period of 2013, profit had totalled $17.2 million, resulting in basic and diluted earnings per share of $2.47. Interim Results (in thousands of dollars) Q2 2014 $ Q1 2014 $ Q4 2013 $ Q3 2013 $ Q2 2013 $ Q1 2013 $ Q4 2012 $ (1) (1) Figures restated following the adoption, on January 1, 2013, of the amended version of IAS 19. (2) For the definition, see the Financial Measures Not in Accordance with IFRS section of this MD&A. Q3 2012 $ (1) Sales 272,403 244,232 283,512 257,569 258,550 240,578 277,325 255,084 Operating profit 21,851 14,307 27,662 22,148 19,490 13,830 29,200 22,657 Profit attributable to the Company s shareholders 11,228 7,092 16,548 11,151 11,385 5,851 17,587 10,377 Basic and diluted earnings per share (in $) 1.61 1.01 2.37 1.60 1.63 0.84 2.52 1.49 Ajusted EBITDA (2) 29,428 22,239 36,425 30,233 27,401 21,638 37,279 30,651 Third quarter of 2012: Third-quarter sales totalled $255.1 million in 2012, up $44.3 million (21.0%) from sales of $210.8 million in the third quarter of 2011. CPC s sales accounted for $108.6 million of the Company s sales in the third quarter of 2012. For the period of August 13, 2011 to October 1, 2011, CPC s sales had amounted to $63.6 million. Excluding the impact of CPC s sales, the Company s third-quarter sales were down $0.7 million or 0.5% from the same quarter of 2011. This decrease was mainly due to a $0.8 million decrease in sales of private label products. The Company's operating profit for the third quarter of 2012 totalled $22.7 million, up $8.9 million from $13.8 million in the same quarter of 2011. CPC's Page 6
operating profit was $10.1 million during the quarter ended September 29, 2012. For the period of August 13, 2011 to October 1, 2011, CPC's operating profit had totalled $1.0 million but it included $6.8 million in acquisition-related costs. Excluding the impact of the CPC acquisition, third-quarter operating profit was down $0.3 million year over year mainly due to lower sales. Profit attributable to the Company s shareholders was $10.4 million for the third quarter of 2012, up $2.2 million from the same quarter in 2011. Fourth quarter of 2012: Fourth-quarter sales totalled $277.3 million versus $269.6 million in 2011, a year-over-year increase of $7.7 million (2.9%) that is explained by the combined impact of the following factors: (i) a $5.7 million increase in sales of private label products, (ii) price increases that had a $5.6 million favourable impact on sales of national brands, and (iii) a $4.0 million unfavourable foreign exchange impact. The Company s operating profit for the fourth quarter of 2012 totalled $29.2 million, up $4.2 million from operating profit of $25.0 million in the same quarter of 2011. This increase was mainly due to higher sales. Profit attributable to the Company s shareholders totalled $17.6 million, up $4.4 million from the same quarter of 2011. First quarter of 2013: Sales totalled $240.6 million in the first quarter of 2013, up $7.2 million or 3.1% from $233.4 million in the first quarter of 2012. This increase was primarily driven by higher private label sales and higher sales volumes for national brands. The Company s operating profit for the first quarter of 2013 stood at $13.8 million, up $0.5 million from operating profit of $13.3 million in the same quarter last year. This increase was mainly due to additional margins generated by sales growth. Profit attributable to the Company s shareholders totalled $5.9 million, resulting in basic and diluted earnings per share of $0.84 in the first quarter of 2013. In the first quarter of 2012, profit attributable to the Company s shareholders had totalled $5.7 million, resulting in basic and diluted earnings per share of $0.81. Second quarter of 2013: Sales totalled $258.6 million in the second quarter of 2013, up $2.2 million or 0.8% from $256.4 million in the second quarter of 2012. This increase was primarily driven by higher private label sales partly offset by lower sales volumes for national brands. The Company s operating profit for the second quarter of 2013 stood at $19.5 million, down $1.2 million or 6.0% from operating profit of $20.7 million in the same quarter last year. Excluding the recognition in 2012 of a $1.5 million gain on the disposal of property, plant and equipment, operating profit would have been up $0.3 million or 1.1% from the second quarter of 2012. Profit attributable to the Company s shareholders totalled $11.4 million, resulting in basic and diluted earnings per share of $1.63 in the second quarter of 2013. In the second quarter of 2012, profit attributable to the Company s shareholders had totalled $10.6 million, resulting in basic and diluted earnings per share of $1.51. Third quarter of 2013: Sales totalled $257.6 million in the third quarter of 2013, up $2.5 million or 1.0% from $255.1 million in the same period of 2012. This increase was primarily driven by a favourable foreign exchange impact partly offset by an unfavourable sales mix and lower private label sales attributable to the shift of cranberry sauce sales to the fourth quarter of 2013. The Company s operating profit for the third quarter of 2013 stood at $22.1 million, down $0.6 million or 2.2% from operating profit of $22.7 million in the same quarter last year. This Page 7
decrease was partly due to charges resulting from production shutdowns while new equipment was installed and to a slight increase in selling and administrative expenses. Profit attributable to the Company s shareholders was $11.2 million, resulting in basic and diluted earnings per share of $1.60 for the third quarter of 2013. In the third quarter of 2012, profit attributable to the Company s shareholders totalled $10.4 million, resulting in basic and diluted earnings per share of $1.49. Fourth quarter of 2013: The Company s sales totalled $283.5 million in the fourth quarter of 2013, up $6.2 million or 2.2% from $277.3 million in the same period of 2012. This increase was primarily driven by a favourable foreign exchange impact and a favourable sales mix, partly offset by higher trade spending. The Company s operating profit for the fourth quarter of 2013 totalled $27.7 million, down $1.5 million or 5.3% from operating profit of $29.2 million in the fourth quarter of 2012. This decrease was due, among other factors, to a higher cost of raw materials partly offset by a slight decrease in selling and administrative expenses. Profit attributable to the Company s shareholders was $16.5 million, resulting in basic and diluted earnings per share of $2.37 for the fourth quarter of 2013. In the fourth quarter of 2012, profit attributable to the Company s shareholders had totalled $17.6 million, resulting in basic and diluted earnings per share of $2.52. First quarter of 2014: The Company s sales totalled $244.2 million in the first quarter of 2014, up $3.6 million or 1.5% from $240.6 million in the same period of 2013. This increase was primarily driven by a favourable foreign exchange impact partly offset by a slight decrease in the sales volume of national brands. The Company s operating profit for the first quarter of 2014 stood at $14.3 million, up $0.5 million or 3.4% from operating profit of $13.8 million in the same quarter last year. This increase was mostly due to an improvement in the profitability of CPC s private label products, partly offset by increases in selling and administrative expenses attributable to organizational adjustments. Profit attributable to the Company s shareholders was $7.1 million, resulting in basic and diluted earnings per share of $1.01 for the first quarter of 2014. In the first quarter of 2013, profit attributable to the Company s shareholders had totalled $5.9 million, resulting in basic and diluted earnings per share of $0.84. Financial and Cash Position Financial Position Data (in thousands of dollars, except shareholders equity / total assets ratio) As at June 28, 2014 As at December 31, 2013 Total assets $ 802,686 $ 796,849 Shareholders equity 369,755 362,073 Shareholders equity / total assets 46.1 % 45.4 % Total debt (1) $ 251,227 $ 261,976 (1) Including long-term debt, the current portion of long-term debt and bank indebtedness, when applicable. Participating loans and retractable financial instruments are not included in total debt. Page 8
When comparing consolidated statement of financial position items, readers must consider the conversion rate applicable to closing balances denominated in foreign currency, which went from $1.0636 CAD per USD as at December 31, 2013 to $1.0661 CAD per USD as at June 28, 2014. The following table presents the impact of exchange rate changes on the affected consolidated statement of financial position items. (in millions of dollars) As at June 28, 2014 As at December 31, 2013 Increase (decrease) Foreign exchange impact Variance, excluding foreign exchange impact Accounts receivable $ 105.6 $ 97.3 $ (0.4) $ 8.7 Inventories 158.6 146.3 (0.1) 12.4 Property, plant and equipment 246.2 248.4 0.3 (2.5) Other intangible assets 123.1 128.1 0.4 (5.4) Goodwill 134.0 133.7 0.3 - Accounts payable and accrued liabilities 125.6 118.7 (0.3) 7.2 Long-term debt, including the current portion $ 251.2 $ 262.0 $ 0.8 $ (11.6) As at June 28, 2014, the Company had total assets of $802.7 million, up 0.7% from $796.8 million as at December 31, 2013. At the end of the second quarter of 2014, the Company s working capital stood at $131.6 million for a ratio of 1.80:1 compared to $133.4 million and a ratio of 1.92:1 as at December 31, 2013. As at June 28, 2014, current assets totalled $295.5 million versus $278.1 million as at December 31, 2013. Cash and cash equivalents stood at $17.4 million as at June 28, 2014 compared to $13.5 million as at December 31, 2013. Accounts receivable totalled $105.6 million as at June 28, 2014 compared to $97.3 million as at December 31, 2013. Excluding the foreign exchange impact, accounts receivable increased by $8.7 million. This increase is mostly explained by (i) a $12.2 million increase in trade accounts receivable stemming, in part, from large orders delivered to a U.S. government agency, (ii) a $2.6 million decrease in discounts receivable from suppliers partly due to changes in the terms and conditions of a supply contract, and (iii) a $1.0 million decrease in other receivables. Inventories went from $146.3 million as at December 31, 2013 to $158.6 million as at June 28, 2014. Excluding the foreign exchange impact, inventories increased by $12.4 million, mainly due to large orders from a U.S. government agency for which some deliveries are scheduled for early in the third quarter and to advanced purchases of certain concentrates in order to secure prices. Page 9
Other current assets went from $14.6 million as at December 31, 2013 to $10.9 million as at June 28, 2014. This $3.7 million decrease was mainly due to a $2.9 million decrease in sales tax receivable and a $0.8 million decrease in prepaid expenses. As at June 28, 2014, the fair value of derivative instruments recorded as current assets was $2.6 million compared to $6.4 million as at December 31, 2013. This statement of financial position item reflects the favourable variances between the rates on the foreign exchange forward contracts held by the Company to cover its foreign currency requirements for the 12 months following its reporting dates and the exchange rates on those dates. Property, plant and equipment went from $248.4 million as at December 31, 2013 to $246.2 million as at June 28, 2014. Excluding the foreign exchange impact, property, plant and equipment decreased by $2.5 million. The Company purchased $7.6 million in property, plant and equipment, while the depreciation expense was $10.1 million. Other intangible assets went from $128.1 million as at December 31, 2013 to $123.1 million as at June 28, 2014. Excluding the foreign exchange impact, other intangible assets decreased by $5.4 million. The Company purchased less than $0.1 million of intangible assets, while the amortization expense was $5.4 million. The net defined benefit asset went from $7.3 million as at December 31, 2013 to $2.7 million as at June 28, 2014, a $4.6 million decrease that reflects a $2.9 million actuarial loss and $1.7 million in expenses accrued for these plans. Current liabilities stood at $164.0 million as at June 28, 2014 compared to $144.7 million at the end of fiscal 2013. Bank overdraft stood at $12.2 million as at June 28, 2014 compared to $0.8 million as at December 31, 2013. Accounts payable and accrued liabilities went from $118.7 million as at December 31, 2013 to $125.6 million as at June 28, 2014. Excluding the foreign exchange impact, accounts payable and accrued liabilities increased by $7.2 million. This increase was largely due to (i) an $11.0 million increase in trade payables and accrued expenses related to higher inventories of raw materials and supplies, (ii) a $2.8 million decrease in the Salaries, deductions at source and accrued vacation payable item, (iii) a $0.8 million decrease in trade marketing costs payable and (iv) a $0.2 million decrease in other liabilities. Other current liabilities went from $17.7 million as at December 31, 2013 to $6.4 million as at June 28, 2014. The $11.3 million decrease came mainly from an $11.8 million settlement of a retractable financial instrument in June 2014. The fair value of derivative instruments recorded as current liabilities went from $1.3 million as at December 31, 2013 to $3.6 million as at June 28, 2014. This statement of financial position item reflects the fair value of payments related to the interest rate swaps on CPC s long-term debt due within 12 months following the Company s reporting dates and the unfavourable variances between the rates on the foreign exchange forward contracts held by the Company Page 10
to cover its foreign currency requirements for the 12 months following its reporting dates and the exchange rates on those dates. Long-term debt, including the current portion, totalled $251.2 million as at June 28, 2014 compared to $262.0 million as at December 31, 2013. Excluding the foreign exchange impact, long-term debt decreased by $11.6 million. This decrease stems mainly from a $17.8 million repayment on CPC s term loan partly offset by $5.1 million drawn on operating lines of credit. Since being acquired by the Company, CPC has repaid US$96.1 million of its long-term debt, which is non-recourse to Lassonde Industries Inc. and its Canadian subsidiaries. Deferred tax liabilities went from $29.4 million as at December 31, 2013 to $28.9 million as at June 28, 2014. This $0.5 million decrease is mostly explained by the fiscal impact of a remeasurement at fair value of foreign exchange forward contracts partly offset by the tax amortization of goodwill. The shareholders equity attributable to the Company s shareholders was $349.3 million as at June 28, 2014, up $6.8 million from $342.5 million as at December 31, 2013. The foreign currency translation reserve increased by $0.2 million and the hedging reserve decreased by $4.3 million. Retained earnings increased by $10.9 million to total $287.7 million at the end of the second quarter of 2014. This increase mainly reflects the $18.3 million in profit attributable to the Company s shareholders for the first six months of 2014 less $5.5 million in dividends paid and the recognition of a $2.1 million actuarial loss, net of tax, in comprehensive income. The non-controlling interest went from $19.6 million as at December 31, 2013 to $20.5 million as at June 28, 2014. This amount represents a minority interest s share in CPC s comprehensive income. Analysis of Consolidated Cash Flows (in thousands of dollars) Second quarters ended June 28, 2014 June 29, 2013 First six months ended June 28, 2014 June 29, 2013 Operating activities $ 1,662 $ 38,098 $ 30,338 $ 26,674 Financing activities (16,350) (34,385) (30,358 ) (38,403 ) Investing activities (4,171) (9,261) (7,790 ) (13,752 ) Increase (decrease) in cash and cash equivalents (18,859) (5,548) (7,810 ) (25,481) Cash and cash equivalents at beginning 23,866 2,199 12,636 22,186 Impact of exchange rate changes on cash and cash equivalents 160 (23) 341 (77) Cash and cash equivalents at end $ 5,167 $ (3,372 ) $ 5,167 $ (3,372) Page 11
During the second quarter of 2014, cash flows generated by operating activities totalled $1.7 million whereas they had totalled $38.1 million during the second quarter of 2013. This $36.4 million downward change was mainly due to: (i) a change in non-cash operating working capital items that used $21.7 million in cash in the second quarter of 2014 compared to $16.2 million in cash inflows in the same period last year, for a total change of $37.9 million. This change is essentially attributable to (a) a change in trade accounts receivable that used $11.6 million during the second quarter of 2014 whereas they had generated $12.3 million in the second quarter of 2013, largely due to the timing of cash receipts related to a large order and (b) a change in inventories that used $14.7 million during the second quarter of 2014 compared to $0.2 million in cash inflows generated in the second quarter of 2013. The following items also contributed to the decrease in cash flows from operating activities: (i) a $0.4 million decrease in earnings before interest, taxes, depreciation and amortization, (ii) a $0.2 million downward change in the Cost of the defined benefit plans recognized in profit or loss, net of contributions and (iii) a $1.4 million decrease in income tax paid. However, this $36.4 million downward change was partly offset by (i) a $1.5 million increase in non-cash expenses recognized in profit or loss and related to changes in the fair value of financial instruments, (ii) a $1.7 million decrease in interest paid, and (iii) a $0.3 million decrease in settlements of derivative intruments. For the first six months of 2014, cash flows from operating activities totalled $30.3 million, up $3.6 million from the same period in 2013. This increase was mainly due to (i) a $1.2 million increase in earnings before interest, taxes, depreciation and amortization, (ii) a $1.2 million increase in non-cash expenses recognized in profit or loss and related to changes in the fair value of financial instruments, (iii) a $3.1 million upward change in the Cost of the defined benefit plans recognized in profit or loss, net of contributions mainly attributable to higher funding of the defined benefit pension plans in the first quarter of 2013, (iv) a $0.7 million increase in income tax received, (v) a $3.0 million decrease in interest paid, (vi) $0.7 million less in settlements of derivative instruments compared to 2013. However, this $3.6 million upward change was offset by a change in non-cash operating working capital items that used $3.8 million more cash in the first six months of 2014 compared to the same period last year. This change is essentially attributable to (a) a change in accounts payable and accrued liabilities that had generated $7.4 million for the first six months of 2014 compared to a $21.4 million use of cash for the same period last year mainly due to the timing of disbursements and (b) a change in trade accounts receivable that used $8.7 million for the first six months of 2014 whereas they generated $12.5 million for the same period last year. The following items also contributed to the downward change in cash flows from operating activities: (i) a $0.4 million downward change in Unrealized foreign exchange (gains) losses and (ii) a $2.1 million decrease in income tax paid. Financing activities used $16.4 million in the second quarter of 2014, whereas they had used $34.4 million during the same quarter of 2013. This $18.0 million decrease in cash outflows was mainly due to (i) a $4.4 million cash inflow from revolving credit facilities in the second quarter of 2014 compared to a $2.8 million repayment in the second quarter of 2013 and (ii) an $11.8 million settlement of retractable financial instruments in June 2014 compared to a $21.4 million settlement of retractable financial instruments in May 2013. For the first six months of 2014, financing activities used $30.4 million, whereas these activities had used Page 12
$38.4 million in the first six months of 2013. This $8.0 million decrease in cash outflows was mainly due to (i) a $5.0 million cash inflow from revolving credit facilities in 2014 compared to $1.4 million in 2013 and (ii) an $11.8 million settlement of retractable financial instruments in June 2014 compared to a $21.4 million settlement of retractable financial instruments in May 2013. These items were partly offset by $4.8 million in additional long-term debt repayments. Investing activities used $4.2 million in the second quarter of 2014, whereas they had used $9.3 million in the same quarter last year. The $5.1 million variance was due to fewer acquisitions of property, plant and equipment in the second quarter of 2014 than in the same quarter last year. For the first six months of 2014, investing activities used $7.8 million compared to $13.8 million for the same period of fiscal 2013. The $6.0 million variance was due to fewer acquisitions of property, plant and equipment in 2014 compared to the same period last year. Financial Measures Not in Accordance with IFRS Non-IFRS financial measures have no standardized meaning prescribed under IFRS. They are therefore unlikely to be comparable with measures of the same type presented by other issuers. Working Capital and Working Capital Ratio The Company uses working capital as a financial measure to assess whether it has sufficient current assets to cover current liabilities. Working capital is equal to current assets minus current liabilities, whereas the working capital ratio is obtained by dividing current assets by current liabilities. Calculation of working capital and working capital ratio (in thousands of dollars, except the working capital ratio) As at June 28, 2014 As at December 31, 2013 Current assets $ 295,525 $ 278,131 Current liabilities 163,968 144,716 Working capital $ 131,557 $ 133,415 Working capital ratio 1.80:1 1.92:1 Page 13
Shareholders Equity to Total Assets The Company uses the shareholders equity to total assets financial measure to determine the shareholders investment as a proportion of the Company s total assets. To calculate the shareholders equity to total assets ratio, the shareholders equity presented on the condensed consolidated statement of financial position is divided by total assets. Shareholders equity to total assets (in thousands of dollars, except the shareholders equity / total assets ratio) As at June 28, 2014 As at December 31, 2013 Shareholders equity $ 369,755 $ 362,073 Total assets 802,686 796,849 Shareholders equity / total assets ratio 46.1 % 45.4 % Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization Adjusted earnings before interest, taxes, depreciation and amortization ( Adjusted EBITDA ) is a financial measure used by the Company and investors to assess its capacity to generate future cash flows from operating activities and pay financial expenses. Adjusted EBITDA consists of operating profit, the depreciation and amortization shown in the condensed consolidated statements of cash flows and (Gains) losses on capital assets, if applicable. Calculation of Adjusted EBITDA (in thousands of dollars) Second quarters ended June 28, June 29, 2014 2013 First six months ended June 28, June 29, 2014 2013 Operating profit $ 21,851 $ 19,490 $ 36,158 $ 33,320 Depreciation and amortization 7,574 7,906 15,512 15,714 (Gains) losses on disposals of capital assets 3 5 (3) 5 EBITDA $ 29,428 $ 27,401 $ 51,667 $ 49,039 Depreciation and amortization expense went from $7.9 million in the second quarter of 2013 to $7.6 million in the second quarter of 2014. This $0.3 million decrease is explained by a $0.6 million lower expense arising mainly from the review of depreciation methods performed at the end of fiscal 2013 partly offset by a $0.3 million unfavourable foreign exchange impact. For the first six months, depreciation and amortization expense went from $15.7 million in 2013 to $15.5 million in 2014. Page 14
Accounting Policies and Future Accounting Changes The interim consolidated financial statements were prepared using the same accounting policies as those described in Note 2 to the consolidated financial statements for the year ended December 31, 2013. The future accounting changes are presented in Note 4 to the consolidated financial statements for the year ended December 31, 2013, whereas those added after the publication of annual financial statements are presented in Note 17 to the interim consolidated financial statements. The interim consolidated financial statements do not include all of the notes required in the annual consolidated financial statements. Disclosure Controls and Procedures The Company s Chief Executive Officer and the Executive Vice-President and Chief Financial Officer are responsible for setting and maintaining disclosure controls and procedures, as set out in National Instrument 52-109 issued by the Canadian Securities Administrators. Assisting them in this responsibility is the Disclosure Committee, which consists of key management personnel. The Disclosure Committee must be kept fully informed of any significant information relating to the Company so that it can evaluate said information, determine its importance, and decide on timely disclosure of a press release, where applicable. Management regularly reviews disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud. The Company s Chief Executive Officer and the Executive Vice-President and Chief Financial Officer have concluded that the design of the disclosure controls and procedures ( DC&P ) as at June 28, 2014 provide reasonable assurance that significant information relevant to the Company, including that of its subsidiaries, is reported to them during the preparation of disclosure documents. Internal Control Over Financial Reporting ( ICFR ) Management is responsible for establishing and maintaining adequate internal control over financial reporting in order to provide reasonable assurance as to the reliability of the financial information and reasonable assurance that the financial statements were prepared, for financial reporting purposes, in accordance with IFRS. All internal control systems have inherent limitations and therefore internal controls over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud. Under the supervision of the Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, the Company has conducted an evaluation of the design of the Company s internal control over financial reporting as at June 28, 2014, based on the framework issued by the Committee of Sponsoring Organizations ( COSO ) of the Treadway Commission. Page 15
For the six-month period ended June 28, 2014, there have been no changes to the internal controls over financial reporting that would have materially affected or been likely to have materially affected the Company s internal control over financial reporting. Share Repurchase Plan During the first six months of 2013 and 2014, the Company did not repurchase any Class A subordinate voting shares. Since the end of the second quarter of 2014 and until August 6, 2014, the Company did not repurchase any Class A subordinate voting shares. Off-Statement-of-Financial-Position Arrangements As at June 28, 2014, the Company had letters of credit outstanding totalling $1.4 million. Commitments are presented in Note 27 to the audited consolidated financial statements for the year ended December 31, 2013. Increase in the Equity Interest of CPC On June 27, 2014, through one of its subsidiaries, the Company acquired Clement David Pappas s 6.0% interest in Pappas Lassonde Holdings, Inc. ( PLH ), which owns 100% of CPC s share capital. The total purchase price of the acquired shares, recorded as a settlement of retractable financial instruments, totalled $11.8 million (US$11.1 million) and was paid out of the Company s working capital. The shares thus acquired have raised the Company s interest in PLH and its CPC subsidiary from 84.0% to 90.0%. The remaining 10.0% interest is owned by members of the Lassonde family. At the close of the transaction, the Company adjusted the non-controlling interest in the Condensed Consolidated Statement of Shareholders Equity to reflect the impact of this transaction. Events After the Reporting Period Business combination On July 25, 2014, the Company completed, through CPC, the acquisition of Apple & Eve, LLC (A&E) of Port Washington, New York, for a total cash consideration of US$147.6 million, paid at the close of the transaction subject to adjustments for working capital and other items. The Company owns a 90% stake in A&E, and the members of the Lassonde family own the remaining 10% interest. At the close of the transaction, an amount of US$151.5 million was paid to settle the A&E acquisition cost and related charges. It was financed as follows: (i) borrowings by CPC totalling US$76.5 million, comprised of US$75.0 million resulting from an increase in its term loan and Page 16
US$1.5 million from its revolving operating credit facility and (ii) US$48.7 million from the Company s Canadian operating credit facility, (iii) US$18.8 million from the Company s cash and cash equivalents and (iv) US$7.5 million in equity coming from members of the Lassonde family. Founded in 1975 by the Crane family, A&E specializes in the commercialization of healthy and innovative juice products. The Company offers more than one hundred different juice products sold under brand names Apple & Eve and Northland. A&E s products are sold in supermarkets, superstores, warehouse clubs, natural food stores, schools and convenience stores across the United States. For the 12-month period ending May 31, 2014, A&E had sales of approximately US$180 million and adjusted EBITDA of roughly US$15 million. The Company will recognize this acquisition using the acquisition method in accordance with the provisions of IFRS 3. Therefore, the interim consolidated financial statements for the third quarter of 2014 will include the results of A&E from July 25, 2014 to September 27, 2014 and certain transaction fees related to the acquisition. Note 16.1 to the interim consolidated financial statements for the second quarter of 2014 contains additional information about the acquisition. Long-term debt On July 3, 2014, upon the signing of the A&E acquisition agreement, CPC s term loan agreement was amended such that it could use the clause entitling it to borrow an additional US$75.0 million. Note 16.2 to the interim consolidated financial statements for the second quarter of 2014 contains additional information on long-term debt. Outlook Sluggish growth in demand for juice and fruit beverages is continuing to impact the sales volumes of North American producers in this sector. Increased competition in the Canadian market has an impact on prices as well as on sales volumes of the Company s national brands. Moreover, Lassonde Industries Inc. is not seeing any signs that competitive activity will diminish over the next two quarters. However, the Company believes that it will be able to maintain slight sales growth due to the strong performance of its private label products as well as to the favourable exchange impact from its U.S. dollar sales. Lassonde Industries Inc. adjusted its method of operation and its level of spending to maintain its competitive position and to safeguard its profitability. It also acquired A&E to increase its North American market presence for national brands. The Company expects this acquisition to have significant impact on its activities. To help measure this impact, it should be remembered that A&E recorded sales of approximately US$180 million for the 12-month period ending May 31, 2014 and an adjusted EBITDA of approximately US$15 million. From a tax perspective, it is also important to note that goodwill and other intangible assets generated by the A&E acquisition will be deductible on a straight-line basis over a 15-year period. Page 17
Barring any major external shocks and excluding future sales from A&E, the Company remains optimistic about its ability to slightly increase its consolidated sales in 2014 compared to those of 2013. As for sourcing, the Company is seeing orange concentrate prices stabilizing at levels higher than last year and apple concentrate prices stabilizing at levels approximating historical averages. The conversion rate on the Company s U.S.-dollar purchases should have an unfavourable impact on results in fiscal 2014 compared to those of fiscal 2013. This unfavourable impact should be largely offset by the favourable impact of exchange rate movements on the conversion of CPC s financial statements in Canadian dollars. Foreign exchange forward contracts will help the Company to stabilize, to some extent, the impact of currency fluctuations on its results over the next six months. Financial expenses for the last two quarters of 2014 will also be affected by the A&E acquisition since the Company s debt levels rose by just over $130 million following this acquisition. Interest rates applicable to the Company s Canadian and U.S. debt remain unchanged following the acquisition. Additional Information As at June 28, 2014, the issued and outstanding capital stock of the Company consisted of 3,235,300 Class A subordinate voting shares and 3,752,620 Class B multiple voting shares. This Management s Discussion and Analysis was prepared as of August 8, 2014 and is available on the Lassonde Industries Inc. website. Readers will also find this MD&A, the Annual Information Form, additional documents, press releases, and more information about the Company on the SEDAR website at www.sedar.com. Dividends In accordance with its dividend policy, the Company s Board of Directors today declared a quarterly dividend of $0.40 per share, payable on September 15, 2014 to all registered holders of Class A and Class B shares on August 20, 2014. On an annualized basis, this dividend represents approximately 25% of the 2013 profit attributable to the Company s shareholders. This dividend is an eligible dividend. August 8, 2014 Page 18