Yahoo Finance

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis dated as at May 6, 2015 and the accompanying interim consolidated financial statements for the three and nine months ended March 31, 2015 have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) which incorporate International Financial Reporting Standards (IFRS).

RESULTS OF OPERATIONS

The following summary is presented to assist in understanding the third quarter and year-to-date results of fiscal 2015.

Consolidated Third Quarter Results

For the three months ended March 31, 2015, consolidated revenue was $161.0 million compared to $147.6 million in the same period last year. A comparison of revenue is not necessarily indicative of the strength of Ridley's business because revenue is influenced by fluctuating commodity prices. The increase in revenue of $13.4 million (9.1%) in the third quarter was the result of an 11.6% increase in overall tonnage volumes partly offset by a decrease in average unit prices reflecting generally lower feed ingredient prices from last year.

Consolidated gross profit in the third quarter of fiscal 2015 was $28.8 million compared to $23.4 million in the same period last year. Gross profit is a key measure of the performance of Ridley's business and generally reflects the margin of net sales revenue over ingredient cost, less manufacturing expenses. The major driver of the 22.8% increase in gross profit in the third quarter this year was the 11.6% increase in overall tonnage volumes combined with higher unit margins due to a more favourable product mix. For much of last year and continuing in the current year, livestock and poultry producers have benefited from the combination of high prices for their meat, milk and egg products and lower trending costs for corn and other commodities. In this positive economic environment for producers, demand has been sustained for higher value-added animal nutrition products.

Direct production costs and manufacturing overheads, which are included in gross profits, increased by 9.5% in the third quarter over last year, largely in line with increased tonnage volumes as reflected in labor related expenses.

Operating expenses, which include administration, sales and marketing, technical services, and research and development costs, were $13.3 million in the third quarter compared to $12.9 million last year. The increase of $0.4 million (3.4%) in operating expenses this year is primarily related to employee benefits expense and performance-related incentive accruals.

Operating income is defined as net income before share of net income of associate, finance expense, finance income and income tax expense. Operating income increased by $4.9 million (46.6%) to $15.5 million in the third quarter of fiscal 2015.

Ridley owns a non-controlling interest in Masterfeeds LP ("Masterfeeds"), an animal nutrition business in Canada formed as a limited partnership with Ag Processing Inc. Ridley's share of the earnings of Masterfeeds is reported as share of net income of associate, which in the third quarter of fiscal 2015 was $1.3 million, including a $0.6 million gain from insurance proceeds related to claims for fire damage at a Masterfeeds facility in Humboldt, Saskatchewan that occurred in 2013.

Adjusted EBIT is comprised of operating income and share of net income of associate before exceptions. For the three months ended March 31, 2015, adjusted EBIT was $16.7 million compared to $10.9 million for the same period last year. The increase in adjusted EBIT of $5.8 million (52.8%) reflects the $4.9 million increase in operating income and the $0.9 million increase in share of net income of Masterfeeds. Adjusted EBITDA is comprised of operating income and share of net income of associate before depreciation, amortization and exceptions. For the third quarter of fiscal 2015, adjusted EBITDA was $18.6 million compared to $12.8 million for the same period last year, an increase of $5.8 million (45.0%) over last year.

Net income (net of income tax expense) for the third quarter of fiscal 2015 was $10.6 million ($0.83 per share) compared to $8.0 million ($0.62 per share) in the same period last year.

Consolidated Nine Months Results

For the nine months ended March 31, 2015, consolidated revenue was $467.5 million compared to $434.0 million in the same period last year. The increase in revenue of $33.5 million (7.7%) was the result of a 9.6% increase in overall tonnage volume partly offset by a decrease in average unit prices reflecting generally lower feed ingredient prices from last year.

Consolidated gross profit for the nine months ended March 31, 2015 was $76.9 million compared to $65.1 million last year. The increase in gross profits of $11.9 million (18.2%) was largely the result of the increase in overall tonnage volume and higher average unit margins due to a more favourable product mix.

Direct production costs and manufacturing overheads, which are included in gross profits, increased by 8.4% in the first nine months of fiscal 2015 in line with the increase in tonnage volume as reflected in labor related expenses and employee incentive accruals.

Operating expenses, which include administration, sales and marketing, technical services, and research and development costs, were $40.6 million in the nine months ended March 31, 2015, a $2.5 million (6.6%) increase over last year. The increase in operating expenses was primarily related to increased wage and salary expenses and accruals for performance-related incentives. Earnings exceptions last year, which are also included in operating expenses and were related to the closure and sale of two manufacturing facilities in fiscal 2014, had the effect of reducing operating expenses last year by $0.2 million.

Operating income increased by $9.3 million (34.7%) to $36.3 million in the first nine months of fiscal 2015.

Ridley's share of the net income of its associate, Masterfeeds, for the first nine months of this year was $3.3 million, of which $1.1 million was a gain from insurance proceeds related to claims for fire damage at a Masterfeeds facility in Humboldt, Saskatchewan that occurred in 2013.

Adjusted EBIT for the first nine months of fiscal 2015 increased to $39.6 million from $27.5 million last year. The increase in EBIT of $12.1 million (44.0%) was primarily comprised of the $9.3 million increase in operating income this year, and the $2.5 million increase in Ridley's share of the net income of Masterfeeds. Adjusted EBITDA was $45.1 million compared to $32.9 million for the same period last year, an increase of $12.2 million (36.9%).

Net income for the nine months ended March 31, 2015 was $25.8 million (earnings per share of $2.01) compared to $18.3 million (earnings per share of $1.43) in the same period last year.

Comprehensive Income

Comprehensive income is the change in net assets that results from transactions, events and circumstances from sources other than investments by and/or distributions to shareholders. Accumulated other comprehensive income (loss) is comprised entirely of unrealized gains and losses on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Comprehensive income for the third quarter of fiscal 2015 was $8.4 million which was comprised of net income of $10.6 million, as reported above, less unrealized losses of $2.2 million on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency. Comprehensive income for the nine months ended March 31, 2015 was $21.5 million, which was comprised of net income of $25.8 million, as reported above, less unrealized losses of $4.3 million on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Reconciliation of Non-GAAP Financial Measures

Ridley reports its financial results according to IFRS that have been incorporated into the CPA Canada Handbook. However, Ridley has included in this management discussion and analysis certain non-IFRS financial measures and ratios that it believes provide useful information in measuring the financial performance and financial condition of Ridley. These measures and ratios do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other public companies, nor should they be construed as an alternative to other financial measures described by IFRS.

Starting in the second quarter of fiscal 2015, Ridley includes the share of net income or loss of associate in its presentation of adjusted EBITDA, a non-IFRS measure, to reflect the material and continuing contribution of Masterfeeds to Ridley's performance.

The following table presents a reconciliation of adjusted EBIT and adjusted EBITDA to net income, the most closely comparable GAAP measure to adjusted EBIT and adjusted EBITDA:

SEGMENT RESULTS

The following is a summary of consolidated operating income (loss) of the reporting segments of the Company's operations for the third quarter and nine months year-to-date of fiscal 2015 and 2014. "Corporate" in this presentation includes the consolidating elimination of intersegment sales.

U.S. Feed Operations (USFO)

The USFO segment consists of twenty full-line production facilities, operating in the United States as Hubbard Feeds. USFO plants derive most of their business from manufacturing and marketing a broad range of complete feeds, supplements and premixes to meat, milk and egg producers, as well as owners of equine and companion animals, located mostly in the Midwestern United States.

Tonnage volume increased by 10.4% in the third quarter of fiscal 2015 compared to last year and by 8.2% for the nine months year-to-date. Volume this year has benefited significantly from strong producer economics in the beef, dairy and swine sectors and solid sales management performance.

Gross profits in the third quarter this year were $13.4 million compared to $11.7 million in the same period last year. The $1.7 million increase in gross profits reflects increased sales volumes partly offset by lower average unit margins. For the year-to-date, gross profits were higher by $5.3 million over last year.

Operating expenses increased by $0.3 million in the third quarter this year, mainly the result of increased wage and salary expenses and performance-related incentive expense. For similar reasons, year-to-date operating expenses increased by $1.7 million.

Operating income for the third quarter of fiscal 2015 was $5.2 million, an increase of $1.5 million over last year. Year-to-date operating income was $13.7 million compared to $10.1 million for the same period last year.

Ridley Feed Ingredients (RFI)

The RFI segment manufactures and distributes vitamin and trace mineral premixes, small packaged specialty products, medicated and non-medicated feed additives, and micro feed ingredients to customers throughout North America from its production facility in Mendota, Illinois.

Revenue in the third quarter of fiscal 2015 increased by $1.7 million or 5.3% over the same period last year as a result of sales growth in value-added manufactured products and toll milled products. Year-to-date revenues increased by 13.5% reflecting strong producer economics in most sectors of livestock and poultry production.

Gross profit increased by $0.5 million in the third quarter over last year, mainly the result of increased volume and improved product mix. Gross profit of $8.4 million for the nine months year-to-date increased $2.5 million from last year.

Operating expenses increased over last year by $0.1 million in the third quarter and by $0.2 million for the nine months year-to-date.

Operating income for the third quarter was $1.6 million, an increase of $0.4 million over last year reflecting the increase in gross profit for the period. Year-to-date operating income was $4.9 million compared to $2.6 million last year.

Ridley Block Operations (RBO)

The RBO segment manufactures and markets a complete range of block supplements, including low moisture, pressed, compressed, composite and poured blocks, as well as minerals and dried molasses, from eight U.S. facilities.

RBO's tonnage volume in the third quarter of fiscal 2015 increased by 18.8% over last year on strong customer demand driven by a favourable economic environment in the beef sector. For similar reasons, year-to-date volume increased by 12.7%.

Gross profits in the third quarter increased by $3.1 million or 32.9% over last year reflecting increased sales volumes. Direct production costs and manufacturing overheads, which are included in gross profits, increased by 17.7% in the third quarter, generally in line with higher tonnage volumes in the period, as reflected in labor related costs. For the nine months year-to-date, gross profits increased by $4.1 million (16.1%) over last year.

Operating expenses in the third quarter of fiscal 2015 increased by $0.3 million (10.1%) from last year, partly the result of increased accruals for performance-related incentives. Operating expenses for the nine months year-to-date increased by $0.7 million (7.6%), mainly due to increased wage and salary expenses and performance incentives.

Operating income in the third quarter increased by $2.8 million (42.6%) over last year and by $3.5 million (20.5%) for the nine months year-to-date.

CASH FLOW

For the third quarter of fiscal 2015, cash generated from operations net of investing activities was $6.8 million compared to $9.2 million in the same three-month period last year. Cash flows were lower in the quarter compared to last year by $2.5 million reflecting a $1.9 million increase in capital expenditures, primarily related to expansion projects at the Company's Mendota, Illinois and Flemingsburg, Kentucky facilities, and increased working capital balances, mainly in the timing of supplier payments. For the nine months year-to-date, cash generated from operations net of investing activities increased to $23.9 million compared to $20.0 million last year.

The following is a summary of cash generated or utilized by business operations, net of capital expenditures on property, plant and equipment and intangible assets.

Capital Expenditures

Capital expenditures on property, plant and equipment, and intangible assets (software) in the third quarter of fiscal 2015 were $3.1 million, compared to $1.2 million in the same period a year ago. Increased capital expenditures this year reflect two facility expansion projects currently in progress. RBO is constructing a new $8.0 million feed supplement block manufacturing facility adjacent to its existing facility in Flemingsburg. RFI has commenced construction of a $4.5 million addition to its facility in Mendota. Both projects are expected to be completed in fiscal 2016. Total capital expenditures year-to-date were $10.1 million compared to $4.9 million last year.

LIQUIDITY AND CAPITAL RESOURCES

Ridley's net working capital and debt-to-equity positions are summarized below.

Net working capital balances increased by $1.5 million in the three months between December 31, 2014 and March 31, 2015. The increase in working capital was the result of a reduction in accounts payable and accrued liabilities balances by $5.0 million from the prior period, due to timing of payments to suppliers, and an increase in inventory balances of $2.6 million, partly offset by a reduction in accounts receivable of $3.2 million. Compared to the same point in time a year ago, net working capital balances were lower this year by $6.7 million, mainly the result of increased income taxes payable, and increased accounts payable balances due to timing of payments to suppliers.

Net cash surplus of $4.8 million as at March 31, 2015 was comprised of $6.0 million of cash and short-term deposits less $1.2 million in outstanding cheques. The Company's borrowing limit under its loan agreement with U.S. Bank was unchanged at $50.0 million as at March 31, 2015.

Outstanding Share Data

The Company's share capital consists of an unlimited number of common shares authorized with no par value. On December 11, 2014, the Company received approval from The Toronto Stock Exchange (the "TSX") to initiate a normal course issuer bid ("NCIB") for the Company's shares through the facilities of the TSX. The shares repurchase program permits the Company to purchase for cancellation up to 639,499 of its common shares over the twelve-month period ending December 15, 2015. As at May 6, 2015, the Company had not repurchased any shares under the current NCIB. The number of shares outstanding as at March 31, 2015 and as at May 6, 2015 was 12,789,978.

Investment in Masterfeeds LP

Masterfeeds is a Canadian-based animal nutrition business formed as a limited partnership by Ridley and Ag Processing Inc. Ridley owns a non-controlling equity interest in Masterfeeds, reported as an investment in associate, which was $17.6 million as at March 31, 2015. In fiscal 2013 and 2014 Ridley reported the results of its former Canadian operations as net income from discontinued operations.

On December 18, 2013 a fire at the Humboldt, Saskatchewan feed plant owned and operated by Masterfeeds caused significant damage to the building and equipment forcing the facility to close while repairs are made. The cost of repairs is expected to be substantially covered by insurance. The facility operated on a limited basis in the third quarter this year. Repair work on the facility is expected to be completed in the fourth quarter of fiscal 2015.

ACQUISITION AGREEMENT WITH ALLTECH

On April 23, 2015, the Company announced that it had entered into a definitive agreement with Alltech, Inc. ("Alltech") that provides for the acquisition of Ridley by Alltech for CAD $40.75 per share. The total consideration payable to the Company's shareholders is approximately CAD $521 million.

The acquisition will be effected pursuant to a court-approved plan of arrangement under the Corporations Act (Manitoba), pursuant to which Alltech will acquire all of the outstanding common shares of the Company for CAD $40.75 in cash per common share, subject to the terms and conditions of the Arrangement Agreement. Fairfax Financial Holdings Limited, which holds approximately 78% of the outstanding common shares of the Company, has entered into an irrevocable voting support agreement and agreed to vote its common shares in favour of the Arrangement. The transaction is expected to close in the fiscal fourth quarter of 2015, subject to certain customary conditions, including court approval and relevant regulatory approvals. The Arrangement will also be subject to the approval of at least 66 2/3% of the votes cast at a special meeting of Ridley shareholders to be called to consider the Arrangement.

The Company's Board of Directors, acting on the recommendation of a Special Committee of the Board of Directors and after receiving legal and financial advice, has determined that the Arrangement is in the best interests of Ridley and resolved to recommend that Ridley's minority shareholders vote in favour of the Arrangement. Blair Franklin Capital Partners Inc. has provided an opinion to the Special Committee of the Board of Directors that the consideration of CAD $40.75 per share is fair, from a financial point of view, to the shareholders of Ridley (other than Fairfax). Blair Franklin's opinion will be included in the information circular to be sent to Ridley shareholders in connection with the shareholders meeting to be held to approve the Arrangement.

The Company will likely incur certain one-time fees and expenses for professional and legal services related to this transaction in the fourth quarter of fiscal 2015.

The terms and conditions of the Arrangement will be disclosed in more detail in the Company's information circular, which will be filed and mailed to shareholders in May, 2015. A copy of the Arrangement Agreement and Voting Support Agreement may be obtained from SEDAR (www.sedar.com).

SELECTED QUARTERLY FINANCIAL INFORMATION

SEASONALITY AND COMMODITY VARIABILITY

The Company experiences seasonal variations in revenue. Historically, revenue is strongest in the second and third fiscal quarters when colder weather from October to March typically increases demand for beef cattle feed. Other product lines are only marginally affected by seasonal conditions. Certain of the raw materials comprising the Company's products incorporate commodity-based products and the by-products of commodity processing. Fluctuating commodity prices may therefore influence revenues and associated cost of sales as the Company's selling prices are adjusted to reflect current raw materials markets.

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Chief Executive Officer and Chief Financial Officer have each signed form "52-109F2 - Certification of Interim Filings" and filed it with the appropriate securities regulators in Canada in compliance with National 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.

FORWARD-LOOKING INFORMATION

This report contains forward-looking information. The forward-looking information includes statements concerning Ridley'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 Ridley's business, adverse results from ongoing litigation, and actions of domestic and foreign governments. Other risks are outlined in the Risk Management section of Management's Discussion and Analysis included in Ridley's Annual Report. Unless otherwise required by applicable securities law, Ridley disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. Ridley cautions readers not to place undue reliance upon forward-looking statements.

OUTLOOK

The major external drivers of Ridley's animal nutrition business are the prevailing economic conditions for producers of meat, milk and egg products, as well as market dynamics for feed ingredients purchased by producers or used as raw materials in the production of feed products, and weather related factors that affect the availability and quality of pastures and forages for livestock. The current economic environment has been generally favourable for livestock and poultry producers. Market prices for meat, milk and egg products are currently high by historical standards. Most feed grains and basic ingredient prices are currently lower relative to last year, which is beneficial for producers' cost of production. However, there are considerable challenges in anticipating the future direction of economic conditions for livestock and poultry producers. The potential for volatility in feed ingredient prices will remain an important driver for Ridley's results in 2015. In the face of external uncertainties, Ridley continues to improve its cost competitiveness and customer service through initiatives to improve operating efficiencies, implementation of lean manufacturing techniques and focus on meeting the demand for value-added animal nutrition products.

Ridley Inc., headquartered in Mankato, Minnesota, is one of North America's leading commercial animal nutrition companies. Ridley employs more than 700 people in the manufacture, sales and marketing 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 the notes to the interim financial statements and Ridley's Annual Information Form ("AIF"), are available at www.sedar.com. Visit our website at www.ridleyinc.com.

Refer to accompanying notes to the interim consolidated financial statements. Certain prior period figures have been reclassified to conform to presentation in the current period - See Note 17.

Approved by the Board of Directors

Refer to accompanying notes to the interim consolidated financial statements.

Accumulated other comprehensive income (loss) is comprised entirely of the unrealized loss on translation of financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Refer to accompanying notes to the interim consolidated financial statements.

Refer to accompanying notes to the interim consolidated financial statements. Certain prior period figures have been reclassified to conform to presentation in the current period - See Note 17.