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creating new possibilities
2018 annual report
cascades
cascades
2018
AT A GLANCE
$462 M
invested in property, plant and
equipment, business acquisitions
and in our management systems
SALES
$4,649 M
# 1
RECYCLED FIBRE
COLLECTOR IN CANADA
OIBD2
$474 M
ADJUSTED OIBD2
$489 M
creating new possibilities
2018 annual report
Our MISSION is to improve the well-being of people, communities and the planet
by providing sustainable and innovative solutions that create value.
WE CARE.
WE INNOVATE.
WE CREATE VALUE.
Our VISION is to be a key contributor to our customers’ success by
leading the way for sustainable packaging, hygiene and recovery solutions.
CONTAINERBOARD
PACKAGING
A Canadian leader
largest producer in North America
5th
SPECIALTY
PRODUCTS
A North American leader in industrial
and food packaging products1
TISSUE
PAPERS
A Canadian leader
largest producer in North America
5th
3.4 M
SHORT TONS OF RECYCLED FIBRE
DIVERTED FROM LANDFILLS
BOXBOARD
EUROPE4
2nd largest producer of coated
recycled boxboard in Europe
11,780
EMPLOYEES IN 6 COUNTRIES
963
FACILITIES ACROSS CANADA,
THE UNITED STATES AND EUROPE
1 Through our joint venture Cascades Sonoco.
2 Please refer to the “Forward-looking Statements”
and “Supplemental Information on Non-IFRS
Measures’’ sections for more details.
3 Including main associates and joint ventures.
4 Via our 57.95% equity ownership in Reno de
Medici S.p.A., an Italian public company traded
on the Milan and Madrid stock exchanges.
5 OSHA frequency rate: Number of accidents
with lost time or temporary assignments
or medical treatments X 200,000 hours/hours
worked.
OSHA RATE
1.95
financial snapshot
financial snapshot
(In millions of Canadian dollars, unless otherwise noted)
SALES (AS REPORTED)
Operating income
% of sales
Operating income before depreciation and amortization (OIBD)1
% of sales
Net earnings
per common share (in dollars)
Dividend per share (in dollars)
ADJUSTED1
Operating income
% of sales
Operating income before depreciation and amortization (OIBD)1
% of sales
Net earnings
per common share (in dollars)
Return on assets1, 2
Return on capital employed1, 3
FINANCIAL POSITION (AS AT DECEMBER 31)
Total assets
Capital employed3
Net debt1
Net debt /adjusted OIBD1, 4
Equity attributable to shareholders
per common share (in dollars)
Working capital as a % of sales7
KEY INDICATORS
Total shipments (in thousands of short tons (s.t.))5
Manufacturing capacity utilization rate6
US$/CAN$ - Average exchange rate
2018
4,649
230
4.9%
474
10.2%
59
$0.62
$0.16
245
5.3%
489
10.5%
79
$0.83
10.6%
4.6%
4,951
3,881
1,769
3.5 x
1,508
$16.01
10.6%
3,225
93%
$0.77
2017
4,321
175
4.0%
390
9.0%
507
$5.35
$0.16
178
4.1%
393
9.1%
68
$0.72
9.2%
3.7%
4,427
3,646
1,522
3.6 x
1,455
$15.32
10.1%
3,114
93%
$0.77
2016
4,001
221
5.5%
413
10.3%
135
$1.42
$0.16
211
5.3%
403
10.1%
114
$1.21
10.8%
5.2%
3,848
3,142
1,532
3.8 x
984
$10.41
10.6%
2,812
92%
$0.75
1 See “Forward-looking Statements” and “Supplemental Information on Non-IFRS Measures” sections for more details.
2 Return on assets is a non-IFRS measure defined as the last twelve months’ (“LTM”) adjusted OIBD/LTM quarterly average of total assets less cash and cash equivalents. Not adjusted
for discontinued operations. Starting in Q2 2017, including Greenpac on a consolidated basis.
3 Return on capital employed is a non-IFRS measure and is defined as the after-tax (30%) amount of the LTM adjusted operating income, including our share of core associates and joint
ventures, divided by the LTM quarterly average of capital employed. Capital employed is defined as the quarterly average of total assets less trade and other payables and cash and cash equiva-
lents. Not adjusted for discontinued operations. Including Greenpac as an associate up to Q1 2017 and on a consolidated basis starting in Q2 2017.
4 Ratio including business combinations on a pro-forma basis to include the last twelve months.
5 Shipments do not take into account the elimination of business sector inter-segment shipments. Starting in Q2 2017, including Greenpac. Shipments from our Specialty Products segment
are not presented as they use different units of measure.
6 Defined as: Manufacturing internal and external shipments/practical capacity. Excluding discontinued operations and Specialty Products segment manufacturing activities. Starting in Q2 2017,
including Greenpac.
7 Working capital includes accounts receivable (excluding the short-term portion of other assets) plus inventories less trade and other payables. Percentage of sales = Average LTM working
capital/LTM sales. It includes or excludes significant business acquisitions and disposals. Starting in Q2 2017, including Greenpac.
financial highlights
financial highlights
94.2 MILLION
COMMON SHARES
OUTSTANDING
as at December 31, 2018
100.5 MILLION
TOTAL NUMBER OF COMMON
SHARES TRADED
in 2018
$0.04
QUARTERLY DIVIDEND
PER SHARE
in 2018
1.6%
ANNUAL
DIVIDEND YIELD
as at December 31, 2018
$16.69
INTRADAY HIGH
in 2018
$9.15
INTRADAY LOW
in 2018
$963.292 MILLION
MARKET CAPITALIZATION
as at December 31, 2018
Moody’s: ba2 (stable)
S&P: BB- (POSITIVE)
CORPORATE CREDIT RATINGS
as at December 31, 2018
$10.23
as at December 31, 2018
SYMBOL: CAS−TSX
(ON THE TORONTO STOCK EXCHANGE)
S&P / TSX INDICES
- COMPOSITE
- SMALL CAP
- DIVIDEND
- CLEAN TECHNOLOGY
- COMPOSITE CANADA REVENUE EXPOSURE
BMO INDICES
- SMALL CAP
- SMALL CAP QUÉBEC
CASCADES’ SHARE PRICE EVOLUTION
IN 2018
$19.00
$18.00
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
Jan
Feb
March
April
May
June
July
Aug
Sept
Oct
Nov
Dec
CAS–TSX – Closing price ($)
table of contents
table of contents
4
6
MESSAGE FROM THE EXECUTIVE
CHAIRMAN OF THE BOARD: ALAIN LEMAIRE
NEW OPPORTUNITIES, GREAT SUSTAINABILITY
MESSAGE FROM THE PRESIDENT AND
CHIEF EXECUTIVE OFFICER: MARIO PLOURDE
SEIZING KEY OPPORTUNITIES FOR GROWTH
10 FINANCIAL INFORMATION
MANAGEMENT’S DISCUSSION AND ANALYSIS,
MANAGEMENT’S REPORT, INDEPENDENT
AUDITOR’S REPORT AND CONSOLIDATED
FINANCIAL STATEMENTS
128 RAW MATERIALS AND DISTRIBUTION
OF OUR RESULTS
130 CASCADES WORLDWIDE
The annual general shareholders’ meeting will be held on Thursday,
May 9, 2019, at 11 a.m. EDT at the Centrexpo Cogeco Drummondville,
located at 550 Saint-Amant, Drummondville, Québec.
Cascades Inc.’s 2018 Annual Information Form will be available,
upon request, from the Corporation’s head office as of March 28, 2019.
This report is also available on our website at: www.cascades.com.
On peut se procurer la version française du présent rapport annuel
en s’adressant au siège social de la Société à l’adresse suivante :
Secrétaire corporatif
Cascades inc.
404, boulevard Marie-Victorin
Kingsey Falls (Québec)
J0A 1B0 Canada
INVESTOR RELATIONS
For more information, please contact:
Investor Relations
Cascades Inc.
772 Sherbrooke Street West
Suite 100
Montréal, Québec
H3A 1G1 Canada
Telephone: 514-282-2697
Fax: 514-282-2624
www.cascades.com/investors
Jennifer Aitken, MBA
Director, Investor Relations
jennifer_aitken@cascades.com
TRANSFER AGENT
AND REGISTRAR
Computershare
Shareholders Services
1500 Robert-Bourasse Boulevard
Suite 700
Montréal, Québec
H3A 3S8 Canada
Telephone: 514-982-7555
Toll-free (Canada): 1-800-564-6253
Fax: 514-982-7635
service@computershare.com
HEAD OFFICE
Cascades Inc.
404 Marie-Victorin Blvd.
Kingsey Falls, Québec
J0A 1B0 Canada
Telephone: 819-363-5100
Fax: 819-363-5155
03
03
Executive Chairman of the Board
alain lemaire
alain lemaire
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
04
04
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
Commitment
NEW OPPORTUNITIES,
GREAT SUSTAINABILITY
Dear fellow shareholders,
Throughout history, companies have been formed from an idea, a discovery or a technological
breakthrough. Those that have withstood the test of time are the ones that have successfully
adapted their early roots to changing market dynamics, built and nurtured a strong corporate
culture and expanded strategic and competitive advantages.
The origin of Cascades can be traced to one unused paper mill
located in Kingsey Falls, in Québec, and the profound conviction
that recovering, recycling and reusing should be something we
all do. This notion of sustainable development was well ahead of
its time, and to this day remains the nucleus of the Company’s
culture alongside a deep commitment to its employees, and a
drive to provide its customers with innovative solutions and
value-added service.
To support the successful renewal of its corporate culture,
Cascades has equipped itself to adapt when needed, while
remaining firmly anchored by its founding principles. This is
driven by the conviction that cultural continuity and effective
succession planning go hand in hand. Both are focused on the
future, the successful implementation of a long-term strategic
vision, consistent messaging and collaboration with all of
the company’s stakeholders, and good corporate governance
practices.
To this end, succession planning touches all levels of the
Company, from operations to mid-tier corporate roles, to senior
management positions up to and including directors at the
Board level. Establishing and maintaining entrepreneurial,
engaged and competent team members at every level is both an
important competitive advantage and the enduring bedrock that
helps convert Cascades’ long-term strategic vision into reality.
CULTURAL CONTINUITY
AND EFFECTIVE SUCCESSION
PLANNING GO HAND IN HAND.
Charged with oversight, it is incumbent on the Board of Directors
to ensure that Cascades’ succession plans are proactive, focused
and effective. In addition to a fresh perspective, strategic thinking,
and informed guidance, the Board reviews the roadmap set out
by the Company’s management team. Together, these efforts rein-
force the Company’s organizational culture, support the conti-
nuity and sustainability of corporate performance, and fuel the
engine for meaningful value creation over the long term.
Like all companies, Cascades’ culture has evolved with time. This
renewal has been successful largely because the essential
fabric of the Corporation’s culture continues to be refreshed with
individuals possessing the right levels of competency, integrity
and engagement. The Board, along with Cascades’ management
team, is focused on continuing to foster a positive culture that
supports the roadmap necessary for the future success of the
Company and every one of our employees.
On behalf of myself and the Board of Directors, thank you
for your ongoing support, interest and trust.
Alain Lemaire
Executive Chairman of the Board of Directors of Cascades
05
05
President and Chief Executive Officer
Mario plourde
Mario plourde
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
06
06
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
Opportunities
SEIZING KEY OPPORTUNITIES
FOR GROWTH
Dear fellow shareholders,
Transformation takes time when done right, and we have made excellent progress in our
multi-year strategic plan. We have work left to do, however, and to truly understand where
Cascades is headed and the motivation behind our capital investment plans, you need look
no further than our history. Cascades has always been entrepreneurial at heart, opportunis-
tic by choice and production oriented by nature. Moreover, much of the Company’s growth
over our 50-year history has been achieved by acquiring and revamping older assets. This
approach served us very well for many decades and shaped the strong foundation we have
in place today.
The needs of our customers and partners, as well as our
competitive realities, have evolved significantly over time, and
our assets have required investment and modernization to
remain competitive and meet changing market dynamics.
We cannot predict the volatility of our markets. We can, however,
continue to ensure that our operations are well equipped
to optimize performance during the business cycles. On this
front, I am certain of our path.
Historically, our investment approach was one that saw capital
spread over a myriad of smaller-scale projects that generated
incremental benefits across our asset base. Today, with our
simpler, more streamlined business model, we are making
considerably larger investments that are fewer in number,
more meaningful in scope, and designed to deliver important
benefits in terms of the long-term performance and competiti-
vity of our operations.
WE ARE MAKING CONSIDERABLY LARGER
INVESTMENTS THAT ARE FEWER IN
NUMBER, MORE MEANINGFUL IN SCOPE,
AND DESIGNED TO DELIVER IMPORTANT
BENEFITS IN TERMS OF LONG-TERM
PERFORMANCE.
An excellent illustration of the strategic, larger-scale invest-
ment approach we are now applying is the capital we began
deploying in our containerboard platform a decade ago. It was
a contrarian move considering the challenging economic envi-
ronment of 2008-2009. That said, where others saw risk we
saw opportunity, and in 2011 we announced plans to build
the Greenpac Mill in Niagara Falls, NY. Five years after its 2013
opening, this facility has become a cornerstone of our contai-
nerboard platform, generating first quartile margins. The suc-
cess of this project can be viewed as a blueprint for the level
of operational agility and long-term competitive positioning we
are intent on delivering with our strategic and transformative
investment plans going forward.
07
07
Which brings me to the investments we are currently making
in our tissue operations. Some would question why we are
choosing to invest now, at a time when the industry is under
significant pressure due to important capacity additions, ele-
vated input costs and a consolidating customer base. The
short answer is that we need to. The more substantive answer
is that we have a long-term horizon, not a short-term view, and
these investments aim to re-equip our tissue platform with
modern and competitive assets that will be better able
to capture value when more normal market conditions return
to the tissue sector.
I am very proud of how our employees have embraced
the daily challenges they faced as we rolled out our new
business processes and more focused operational approach,
and I am very encouraged by what we accomplished in 2018.
With our multi-year ERP implementation largely complete, the
lion’s share of these hurdles are now behind us, and we are
focused on optimization and internal appropriation of these
tools. Importantly, recent initiatives contributed to the record
adjusted OIBD generated by our operations in 2018, and
we expect additional benefits will continue to be monetized
in the future.
When I look back at the substantial internal changes we have
completed over recent years, the strategic investments made,
and the powerful business process systems we now have
in place, I am very confident for the future of Cascades. Cen-
tral to this optimism are our more than 11,000 employees,
who are the driving force behind Cascades. I would like to
thank them for their commitment, and their daily dedication to
Cascades’ continued success and prosperity.
We will be hosting our Annual General Meeting on Thursday,
May 9th. I invite you to join me, along with senior manage-
ment, our directors and employee shareholders as we discuss
our business and our vision for the future.
Thank you for your continued support.
MARIO PLOURDE
President and Chief Executive Officer
We advanced our strategic growth plans on several fronts in
2018. Containerboard Packaging acquired the Bear Island, VA
facility with a view to converting the paper machine to produce
recycled containerboard, and launched production at the
newly completed Piscataway, NJ converting facility ahead of
schedule. Our Tissue Paper business announced a significant
investment at the Wagram, NC converting facility, the first
step in the revitalization of this segment’s converting assets.
Lastly, Specialty Packaging expanded its platform with
the acquisition of moulded pulp operations in the US which
its consumer products business, while
will strengthen
our European Boxboard operations extended
their
operational
the acquisition of
Barcelona Cartonboard SAU.
into Spain with
reach
Without question, the fluctuation of our share price over the
year is of concern to us. Our investment projects have been
designed with the aim of positioning our business groups in
their target markets. We are confident that these projects will
contribute to the creation of sustainable value for the long
term, which will inevitably be reflected in the stock price in the
future. Paramount to this is maximizing our operational excel-
lence, nurturing beneficial relationships with our customers
and our employees over time, building on our commitment to
sustainability, and providing added value via innovative pro-
ducts. The investments we are making will strengthen our posi-
tion in all these respects.
08
08
489
474
413
403
390
393
SALES (M$)
OIBD1 (M$)
4,649
4,321
4,750
4,500
4,250
4,000
3,750
4,001
500
400
300
200
100
0
2016
2017
2018
2016
2017
2018
RETURN ON CAPITAL EMPLOYED1
OIBD
ADJUSTED OIBD
TOTAL SHIPMENTS AND MANUFACTURING CAPACITY
UTILIZATION RATE (’000 s.t. and %)
5.2%
4.6%
3.7%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
3,250
3,000
2,750
2,500
2,250
3,225
100%
3,114
93%
93%
2,812
92%
95%
90%
85%
80%
75%
2016
2017
2018
2016
2017
2018
NET DEBT / ADJUSTED OIBD2
3.8x
3.6x2
3.5x2
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x
2016
2017
2018
1 Please refer to the “Forward-looking Statements” and “Supplemental Information on Non-IFRS Measures” sections for more details.
2 Ratio including business combinations on a pro-forma basis to include the last twelve months.
09
09
11
79
28
63
80
64
66
MANAGEMENT’S
DISCUSSION AND ANALYSIS
MANAGEMENT’S
DISCUSSION AND ANALYSIS
MANAGEMENT’S REPORT
MANAGEMENT’S REPORT
TO THE SHAREHOLDERS
OF CASCADES INC.
TO THE SHAREHOLDERS
OF CASCADES INC.
INDEPENDENT AUDITOR’S
INDEPENDENT AUDITOR’S
REPORT TO THE SHAREHOLDERS
OF CASCADES INC.
REPORT TO THE SHAREHOLDERS
OF CASCADES INC.
financial
financial
financial
financial
f ina nci al
financial
financial
financial
financial
CONSOLIDATED FINANCIAL
STATEMENTS
CONSOLIDATED FINANCIAL
STATEMENTS
140 HISTORICAL FINANCIAL
INFORMATION — 10 YEARS
126 HISTORICAL FINANCIAL
INFORMATION — 10 YEARS
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
86 SEGMENTED INFORMATION
71 SEGMENTED INFORMATION
125 BOARD OF DIRECTORS
139 BOARD OF DIRECTORS
010
010
89
73
81
financial
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financial
fin anc i al
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financial
OUR BUSINESS
Cascades Inc. is a paper and packaging company that produces, converts and sells packaging and tissue products composed primarily of
recycled fibres. Established in 1964 in Kingsey Falls, Québec, the Corporation was founded by the Lemaire brothers, who saw the economic
and social potential of building a company focused primarily on the sustainable development principles of reusing, recovering and recycling.
More than 50 years later, Cascades is a multinational business with close to 100 operating facilities1 and more than 11,700 employees across
Canada, the United States and Europe. The Corporation currently operates four business segments:
(Business segments)
PACKAGING PRODUCTS
Containerboard
Boxboard Europe3
Specialty Products
TISSUE PAPERS
Number of
Facilities1
2018 Sales2
(in M$)
2018 Operating income
before depreciation
and amortization
(OIBD)2 (in M$)
2018 Adjusted OIBD2,5
(in M$)
2018 Adjusted OIBD
Margin (%)
27
8
40
21
1,840
933
659
1,352
470
97
46
(58)
410
97
40
17
22%
10%
6%
1%
The location of our plants4 and employees around the world are as follows:
1 Including associates and joint ventures.
2 Excluding associates and joint ventures not included in consolidated results. Refer to Note 8 of the 2018 audited consolidated financial statements for more information on associates and joint
ventures.
3 Via our 57,95% equity ownership in Reno de Medici S.p.A., a public company traded on the Milan and Madrid stock exchanges.
4 Excluding sales offices, distribution and transportation hubs and corporate offices. Including main associates and joint ventures.
5 Please refer to the “Supplemental Information on Non-IFRS Measures” section for a complete reconciliation.
1
11
11
BUSINESS DRIVERS
Cascades' results may be impacted by fluctuations in the following:
EXCHANGE RATES
On a year-over-year basis, the average value of the Canadian dollar
in 2018 remained stable when compared to the US dollar and
decreased by 4% compared to the euro.
ENERGY COSTS
The average price of natural gas decreased by 1% in 2018
compared to the previous year. In the case of crude oil, the average
2018 price was 31% higher than in 2017.
2016
TOTAL
Q1
Q2
Q3
Q4
2017
TOTAL
Q1
Q2
Q3
Q4
0.75 $
0.76 $
0.74 $
0.80 $
0.79 $
0.77 $
0.79 $
0.77 $
0.77 $
0.76 $
0.74 $
0.75 $
0.77 $
0.80 $
0.80 $
0.80 $
0.78 $
0.76 $
0.77 $
0.73 $
0.68 $
0.71 $
0.68 $
0.68 $
0.67 $
0.68 $
0.64 $
0.65 $
0.66 $
0.66 $
2018
TOTAL
0.77
0.73
0.65
0.71 $
0.70 $
0.68 $
0.68 $
0.66 $
0.66 $
0.63 $
0.65 $
0.67 $
0.64 $
0.64
2.46 $
3.32 $
3.18 $
3.00 $
2.93 $
3.11 $
2.98 $
2.80 $
2.91 $
3.64 $
3.09
US$/CAN$ - Average rate
US$/CAN$ End of period rate
EURO€/CAN$ - Average rate
EURO€/CAN$ End of period
rate
Natural Gas Henry Hub - US$/
mmBtu
Source: Bloomberg
$
$
$
$
$
12
12
2
HISTORICAL MARKET PRICES OF MAIN PRODUCTS AND RAW MATERIAL
These indices should only be used as trend indicators; they may
differ from our actual selling prices and purchasing costs.
2016
Year
Q1
Q2
Q3
Q4
Year
Q1
Q2
Q3
Q4
Year
Change
%
2017
2018
2018 vs 2017
Selling prices (average)
PACKAGING PRODUCTS
Containerboard (US$/short ton)
Linerboard 42-lb. unbleached kraft,
Eastern US (open market)
Corrugating medium 26-lb.
semichemical, Eastern US
(open market)
Boxboard Europe (euro/metric ton)
Recycled white-lined chipboard (WLC)
index1
Virgin coated duplex boxboard (FBB)
index2
Specialty Products (US$/short ton)
Uncoated recycled boxboard - 20-pt.
bending chip (series B)
TISSUE PAPERS (US$/short ton)
625
655
705
705
705
693
722
755
755
755
747
54
8 %
520
540
590
617
620
592
637
670
670
670
662
70
11 %
656
649
680
680
680
672
678
673
673
673
674
1,045
1,031
1,031
1,031
1,031
1,031
1,072
1,072
1,072
1,072
1,072
2
41
— %
4 %
605
622
660
660
640
645
643
680
730
730
696
51
8 %
Parent rolls, recycled fibres (transaction)
1,013
1,023
1,040
1,053
1,057
1,043
1,072
1,087
1,102
1,112
1,093
Parent rolls, virgin fibres (transaction)
1,280
1,297
1,320
1,334
1,339
1,323
1,366
1,388
1,404
1,422
1,395
50
72
5 %
5 %
Raw material prices (average)
RECYCLED PAPER
North America (US$/short ton)
Sorted residential papers, No. 56 (SRP -
Northeast average)
Old corrugated containers, No. 11
(OCC - Northeast average)
Sorted office papers, No. 37 (SOP -
Northeast average)
Europe (euro/metric ton)
69
93
92
76
86
142
148
162
63
99
79
138
59
92
31
71
28
68
28
68
36
74
(43)
(50)%
(64)
(40)%
150
173
172
170
160
169
165
193
210
203
193
24
14 %
Recovered paper index3
127
147
138
147
135
142
111
99
103
106
105
(37)
(25)%
VIRGIN PULP (US$/metric ton)
Northern bleached softwood kraft,
Canada
Bleached hardwood kraft, mixed,
Canada/US
Source: RISI and Cascades.
978
1,033
1,093
1,110
1,183
1,105
1,233
1,310
1,377
1,428
1,342
237
21 %
847
853
942
985
1,052
958
1,077
1,125
1,192
1,213
1,152
194
20 %
1 The Cascades Recycled White-Lined Chipboard Selling Price Index is based on published indices and represents an approximation of Cascades' recycled-grade selling prices in Europe. It is weighted
by country and has been rebalanced as at January 1, 2018.
2 The Cascades Virgin Coated Duplex Boxboard Selling Price Index is based on published indices and represents an approximation of Cascades' virgin-grade selling prices in Europe. It is weighted
by country and has been rebalanced as at January 1, 2018.
3 The Cascades Recovered Paper Index is based on published indices and represents an approximation of Cascades' recovered paper purchase prices in Europe. It is weighted by country, based on
the recycled fibre supply mix, and has been rebalanced as at January 1, 2018.
3
13
13
SENSITIVITY TABLE1
The following table provides a quantitative estimate of the impact that potential changes in the prices of our main products, the costs of certain
raw material, energy and the exchange rates may have on Cascades’ annual OIBD, assuming, for each price change, that all other variables
remain constant. Estimates are based on Cascades’ 2018 manufacturing and converting external shipments and consumption quantities. It
is important to note that this table does not consider the Corporations' use of hedging instruments for risk management. These hedging policies
and portfolios (see the “Risk Factors” section) should also be considered in order to fully analyze the Corporation’s sensitivity to the highlighted
factors.
Potential indirect sensitivity to the CAN$/US$ exchange rate is not considered in this table. Some of Cascades’ selling prices and raw material
costs in Canada are based on U.S. dollar reference prices and costs that are then converted into Canadian dollars. Consequently, fluctuations
in the exchange rate may have a direct impact on the value of sales and purchases of Canadian facilities in Canada. However, because it is
difficult to measure the precise impact of this fluctuation, we do not take it into consideration in the following table. The impact of the exchange
rate on the working capital items and cash positions denominated in currencies other than CAN$ at the Corporations' Canadian units is also
excluded. Fluctuations in foreign exchange rates may also impact the translation of the results of our non-Canadian units into CAN$.
SHIPMENTS/CONSUMPTION
('000 SHORT TONS, '000
MMBTU FOR NATURAL GAS)
INCREASE
OIBD IMPACT
(IN MILLIONS OF CAN$)
SELLING PRICE (MANUFACTURING AND CONVERTING)2
North America
Containerboard Packaging
Linerboard 42-lb. unbleached kraft, Eastern US
Corrugating medium 26-lb. semichemical, Eastern US
Converting products
Tissue Papers
Europe
Boxboard
RAW MATERIAL2
Recycled Papers
North America
Brown grades (OCC and others)
Groundwood grades (SRP and others)
White grades (SOP and others)
Europe
Brown grades (OCC and others)
Groundwood grades (SRP and others)
White grades (SOP and others)
Virgin pulp
North America
Europe
Natural gas
North America
Europe
Exchange rate3
Sales less purchases in US$ from Canadian operations
U.S. subsidiaries translation
European subsidiaries translation
370
370
740
1,480
630
2,110
1,370
1,570
120
470
2,160
970
170
130
1,270
3,430
160
80
240
8,600
5,400
14,000
US$25/s.t.
US$25/s.t.
US$25/s.t.
US$25/s.t.
€25/s.t.
US$15/s.t.
US$15/s.t.
US$15/s.t.
€15/s.t.
€15/s.t.
€15/s.t.
US$30/s.t.
€30/s.t.
US1.00/mmBtu
€1.00/mmBtu
CAN$/US$ 0.01 change
CAN$/US$ 0.01 change
CAN$/€ 0.01 change
13
13
25
51
21
72
54
(32)
(2)
(10)
(44)
(23)
(4)
(3)
(30)
(74)
(7)
(4)
(11)
(12)
(8)
(20)
1
2
1
1 Sensitivity calculated according to 2018 volumes or consumption with year-end closing exchange rate of CAN$/US$ 1.36 and CAN$/€ 1.56, excluding hedging programs and
the impact of related expenses such as discounts, commissions on sales and profit-sharing.
2 Based on 2018 external manufacturing and converting shipments, as well as fibre and pulp consumption. Including purchases sourced internally from our recovery and recycling operations.Adjusted
to reflect acquisitions, disposals and closures, if needed.
3 As an example, from CAN$/US$ 1.36 to CAN$/US$ 1.37 and from CAN$/€ 1.56 to CAN$/€ 1.57.
14
14
4
SUPPLEMENTAL INFORMATION ON NON-IFRS MEASURES
SPECIFIC ITEMS
The Corporation incurs some specific items that adversely or positively affect its operating results. We believe it is useful for readers to be
aware of these items, as they provide additional information to measure performance, compare the Corporation's results between periods,
and assess operating results and liquidity, notwithstanding these specific items. Management believes these specific items are not necessarily
reflective of the Corporation's underlying business operations in measuring and comparing its performance and analyzing future trends. Our
definition of specific items may differ from those of other corporations, and some of them may arise in the future and may reduce the Corporation's
available cash.
They include, but are not limited to, charges for (reversals of) impairment of assets, restructuring gains or costs, loss on refinancing and
repurchase of long-term debt, some deferred tax asset provisions or reversals, premiums paid on long-term debt refinancing, gains or losses
on the acquisition or sale of a business unit, gains or losses on the share of results of associates and joint ventures, unrealized gains or losses
on derivative financial instruments that do not qualify for hedge accounting, unrealized gains or losses on interest rate swaps, foreign exchange
gains or losses on long-term debt and financial instruments, specific items of discontinued operations and other significant items of an unusual,
non-cash or non-recurring nature.
SPECIFIC ITEMS INCLUDED IN OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND
NET EARNINGS
The Corporation incurred the following specific items in 2018 and 2017:
GAIN ON ACQUISITIONS, DISPOSALS AND OTHERS
2018
The Containerboard Packaging segment completed the sale of the building and land of its Maspeth plant in NY, USA, and generated a gain
of $66 million, net of asset retirement obligations of $2 million. The closure was completed during the year and the segment recorded a
$1 million gain following the sale of some equipment.
The Specialty Products segment recorded a gain of $4 million on the acquisition of two moulded pulp plants and a packaging distributor.
2017
The Containerboard Packaging segment sold a piece of land in Ontario, Canada and recorded a gain of $7 million.
The Corporate Activities realized a $1 million gain from the sale of some assets.
INVENTORY ADJUSTMENT RESULTING FROM BUSINESS COMBINATION
2017
During the year, operating results in the Containerboard Packaging segment were negatively impacted by $2 million. This was the result of
the inventory acquired at the time of the Greenpac consolidation being recognized at fair value, with no profit recorded on its subsequent sale.
IMPAIRMENT CHARGES (REVERSALS) AND RESTRUCTURING COSTS (GAINS)
2018
Related to the closure of the Maspeth plant in NY, USA, mentioned above, the Containerboard Packaging segment recorded a $3 million
charge related to closure provisions and severances, and incurred a $1 million charge related to severances for the closure of two sheet
plants in Ontario announced on August 28, 2018.
The Specialty Products segment recorded a gain of $2 million from the dismantling of a building of a plant closed in the previous years.
The Tissue Papers segment reviewed the recoverable value of a few plants and recorded impairment charges of $75 million on assets following
sustained production inefficiencies.
5
15
15
2017
The Containerboard Packaging segment announced the closure of its New York converting plant and recorded severance expenses totaling
$2 million (please refer to the “Significant Facts and Developments” section for more details) and recorded an impairment charge of $11 million
on deferred revenues related to a management agreement of Greenpac since the beginning of the mill construction and recorded in “Other
assets”. Following the acquisition and consolidation of Greenpac, expected future cash flows related to this asset did not materialize on a
consolidated basis.
The Boxboard Europe segment recorded severance costs of $1 million following the restructuring of its sales activities.
The Tissue Papers segment incurred a $2 million impairment charge from the reevaluation of some unused assets and incurred $2 million of
restructuring costs following the review of provisions related to the transfer of the converting operations of the Toronto plant to other Tissue
segment sites announced in 2016.
The Corporate Activities recorded a $2 million reversal of impairment following the collection of a note receivable that had been written off in
previous years. As well, Corporate Activities recorded a severance cost of $1 million following the closure of a sales division.
DERIVATIVE FINANCIAL INSTRUMENTS
In 2018, the Corporation recorded an unrealized loss of $9 million, compared to an unrealized gain of $8 million in 2017, on certain derivative
financial instruments not designated for hedge accounting.
LOSS ON REPURCHASE OF LONG-TERM DEBT
In 2017, the Corporation purchased US$200 million of its unsecured senior notes and recorded early repurchase premiums of $11 million and
wrote off $3 million of unamortized financing costs related to these notes.
INTEREST RATE SWAPS
In 2018, the Corporation recorded an unrealized gain of $1 million, compared to an unrealized gain of $2 million in 2017, on interest rate
swaps, that are included in financing expenses.
FOREIGN EXCHANGE GAIN ON LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
In 2018, the Corporation recorded a loss of $4 million on its US$-denominated debt and related financial instruments, compared to a gain of
$23 million in 2017. This is composed of a gain of $1 million in 2018, compared to a gain of $11 million in 2017, on our US$-denominated
long-term debt, net of our net investment hedges in the U.S. and Europe and forward exchange contracts designated as hedging instruments,
if any. It also includes a loss of $5 million during the year, compared to a gain of $12 million in 2017, on foreign exchange forward contracts
not designated for hedge accounting.
FAIR VALUE REVALUATION GAIN ON INVESTMENTS AND SHARE OF RESULTS OF ASSOCIATES AND JOINT VENTURES
2018
The Boxboard Europe segment completed the acquisition of PAC Service S.p.A. and recorded a revaluation gain of $5 million on its previously
held interest. This item is presented in line item “Fair value revaluation gain on investments” in the consolidated statement of earnings.
2017
Containerboard
On April 4, 2017, Cascades and its partners in Greenpac Holding LLC (Greenpac) agreed to modify the equity holders' agreement. These
modifications enable Cascades to direct decisions about relevant activities. Therefore, from an accounting standpoint, Cascades now has
control over Greenpac, which triggers its deemed acquisition and thus fully consolidates Greenpac since April 4, 2017. The Corporation
recorded a revaluation gain on previously held interest of $156 million during the year. Consequently to the acquisition, accumulated other
comprehensive loss components of Greenpac totaling $4 million and included in our consolidated balance sheet prior to the acquisition were
reclassified to net earnings. These two items are presented in line item “Fair value revaluation gain on investments” in the consolidated
statement of earnings.
The Corporation also recorded its share of $3 million on an unrealized gain on certain derivative financial instruments not designated for
hedge accounting prior to the acquisition of Greenpac.
Boralex
On January 18, 2017, Boralex issued common shares to partly finance the acquisition of the interest of Enercon Canada Inc. in the Niagara
Region Wind Farm. As a result, the Corporation's participation in Boralex decreased to 17.37%, which resulted in a dilution gain of $15 million
and is included in line item “Share of results of associates and joint ventures” in the consolidated statement of earnings.
16
16
6
On March 10, 2017, Boralex announced the appointment of a new Chairman of the Board. This change in Board composition combined with
the decrease of our participation discussed above triggered the loss of significant influence of the Corporation over Boralex. Therefore, our
investment in Boralex was no longer classified as an associate and considered an available-for-sale financial asset, which is classified in
“Other assets.” Consequently, our investment in Boralex was reevaluated at fair value on March 10, 2017, and we recorded a gain of $155 million.
At the same time, accumulated other comprehensive loss components of Boralex totaling $10 million and included in our consolidated balance
sheet were released to net earnings. These two items are presented in line item “Fair value revaluation gain on investments” in the consolidated
statement of earnings. Subsequent fair value revaluation of this investment was recorded in accumulated other comprehensive income.
On July 27, 2017, Cascades announced the sale of all of its shares in Boralex to the Caisse de Dépôt et Placement du Québec for an amount
of $288 million. The increase in fair value of $18 million from March 10 to July 27, 2017 recorded in accumulated other comprehensive income,
materialized during the year and the Corporation recorded a gain of $18 million in line item “Fair value revaluation gain on investments” in
the consolidated statement of earnings.
PROVISION FOR INCOME TAXES
2018
During the year, the Corporation reassessed the probability of recovering unrealized capital losses, resulting in the derecognition of tax assets
totalling $8 million.
2017
Following the US tax reform adopted in December 2017, the Corporation revalued the net deferred tax liability of its entities in the USA and
recorded a gain of $57 million.
The income tax provision on the Boralex revaluation gain was calculated at the rate of capital gains. Also, consequently with the sale of its
participation in Boralex in July 2017, the Corporation has reassessed the probability of recovering unrealized capital losses on long-term debt
due to foreign exchange fluctuations. As a result, $6 million of tax assets was derecognized and recorded in the statement of earnings.
In conjunction with the acquisition of Greenpac, the Corporation recorded an income tax recovery of $70 million representing deferred income
taxes on its investment prior to the acquisition on April 4, 2017. Also, there was no income tax provision recorded on the gain of $156 million
generated by the business combination of Greenpac since it is included in the fair value of assets and liabilities acquired as described in Note
5 of the 2018 audited consolidated financial statements.
RECONCILIATION OF NON-IFRS MEASURES
To provide more information for evaluating the Corporation's performance, the financial information included in this analysis contains certain
data that are not performance measures under IFRS (“non-IFRS measures”), which are also calculated on an adjusted basis to exclude
specific items. We believe that providing certain key performance measures and non-IFRS measures is useful to both management and
investors, as they provide additional information to measure the performance and financial position of the Corporation. It also increases the
transparency and clarity of the financial information. The following non-IFRS measures are used in our financial disclosures:
•
•
•
•
•
•
•
Operating income before depreciation and amortization (OIBD): Used to assess operating performance and contribution of each segment
when excluding depreciation & amortization. OIBD is widely used by investors as a measure of a corporation's ability to incur and service
debt and as an evaluation metric.
Adjusted OIBD: Used to assess operating performance and contribution of each segment on a comparable basis.
Adjusted operating income: Used to assess operating performance of each segment on a comparable basis.
Adjusted net earnings: Used to assess the Corporation's consolidated financial performance on a comparable basis.
Adjusted free cash flow: Used to assess the Corporation's capacity to generate cash flows to meet financial obligations and/or discretionary
items such as share repurchase, dividend increase and strategic investments.
Net debt to adjusted OIBD ratio: Used to measure the Corporation's credit performance and evaluate financial leverage.
Net debt to adjusted OIBD ratio on a pro-forma basis: Used to measure the Corporation's credit performance and evaluate the financial
leverage on a comparable basis including significant business acquisitions and excluding significant business disposals, if any.
Non-IFRS measures are mainly derived from the consolidated financial statements, but do not have meanings prescribed by IFRS. These
measures have limitations as an analytical tool and should not be considered on their own or as a substitute for an analysis of our results as
reported under IFRS. In addition, our definitions of non-IFRS measures may differ from those of other corporations. Any such modification or
reformulation may be significant.
7
17
17
The reconciliation of operating income (loss) to OIBD, to adjusted operating income (loss) and to adjusted OIBD by business segment is
as follows:
(in millions of Canadian dollars)
Operating income (loss)
Depreciation and amortization
Operating income (loss) before depreciation and amortization
Specific items:
Gain on acquisitions, disposals and others
Impairment charges
Restructuring costs (gain)
Unrealized loss on derivative financial instruments
Adjusted operating income (loss) before depreciation and
amortization
Adjusted operating income (loss)
Containerboard
Boxboard
Europe
Specialty
Products
Tissue Papers
Corporate
Activities
Consolidated
2018
381
89
470
(67)
—
4
3
(60)
410
321
60
37
97
—
—
—
—
—
97
60
24
22
46
(4)
—
(2)
—
(6)
40
18
(122)
64
(58)
—
75
—
—
75
17
(47)
(113)
32
(81)
—
—
—
6
6
(75)
(107)
230
244
474
(71)
75
2
9
15
489
245
2017
(in millions of Canadian dollars)
Operating income (loss)
Depreciation and amortization
Operating income (loss) before depreciation and amortization
Specific items :
Gain on acquisitions, disposals and others
Inventory adjustment resulting from business combination
Impairment charges (reversals)
Restructuring costs
Unrealized loss (gain) on derivative financial instruments
Adjusted operating income (loss) before depreciation and
amortization
Adjusted operating income (loss)
Containerboard
Boxboard
Europe
Specialty
Products
Tissue Papers
Corporate
Activities
Consolidated
164
74
238
(7)
2
11
2
1
9
247
173
34
33
67
—
—
—
1
—
1
68
35
46
21
67
—
—
—
—
—
—
67
46
28
62
90
—
—
2
2
—
4
94
32
(97)
25
(72)
(1)
—
(2)
1
(9)
(11)
(83)
(108)
175
215
390
(8)
2
11
6
(8)
3
393
178
18
18
8
Net earnings, as per IFRS, is reconciled below with operating income, adjusted operating income and adjusted operating income before
depreciation and amortization:
(in millions of Canadian dollars)
Net earnings attributable to Shareholders for the year
Net earnings attributable to non-controlling interests
Provision for (recovery of) income taxes
Fair value revaluation gain on investments
Share of results of associates and joint ventures
Foreign exchange loss (gain) on long-term debt and financial instruments
Financing expense and interest expense on employee future benefits and other liabilities
Operating income
Specific items:
Gain on acquisitions, disposals and others
Inventory adjustment resulting from business combination
Impairment charges
Restructuring costs
Unrealized loss (gain) on derivative financial instruments
Adjusted operating income
Depreciation and amortization
Adjusted operating income before depreciation and amortization
2018
59
35
49
(5)
(11)
4
99
230
(71)
—
75
2
9
15
245
244
489
2017
507
15
(81)
(315)
(39)
(23)
111
175
(8)
2
11
6
(8)
3
178
215
393
The following table reconciles net earnings and net earnings per share, as per IFRS, with adjusted net earnings and adjusted net earnings
per share:
NET EARNINGS
NET EARNINGS PER SHARE1
(in millions of Canadian dollars, except amount per share)
As per IFRS
Specific items:
Gain on acquisitions, disposals and others
Inventory adjustment resulting from business combination
Impairment charges
Restructuring costs
Unrealized loss (gain) on derivative financial instruments
Loss on refinancing of long-term debt
Unrealized gain on interest rate swaps
Foreign exchange loss (gain) on long-term debt and financial
instruments
Fair value revaluation gain on investments
Share of results of associates and joint ventures
Tax effect on specific items, other tax adjustments and
attributable to non-controlling interests1
Adjusted
2018
59
(71)
—
75
2
9
—
(1)
4
(5)
—
7
20
79
2017
507 $
(8) $
2
11 $
6 $
(8) $
14
(2) $
(23) $
(315) $
(18)
(98) $
(439) $
68 $
2018
0.62 $
(0.55) $
— $
0.60 $
0.02 $
0.07 $
— $
(0.01) $
0.03 $
(0.03) $
— $
0.08 $
0.21 $
0.83 $
2017
5.35
(0.06)
0.01
0.08
0.05
(0.07)
0.10
(0.01)
(0.21)
(3.85)
(0.15)
(0.52)
(4.63)
0.72
1 Specific amounts per share are calculated on an after-tax basis and are net of the portion attributable to non-controlling interests. Per share amounts in line item “Tax effect on specific items, other tax
adjustments and attributable to non-controlling interests” only include the effect of tax adjustments. Please refer to “Provision for income taxes” above in this section for more details.
9
19
19
The following table reconciles cash flow from operating activities with operating income and operating income before depreciation
and amortization:
(in millions of Canadian dollars)
Cash flow from operating activities
Changes in non-cash working capital components
Depreciation and amortization
Net income taxes paid
Net financing expense paid
Premium paid on long-term debt refinancing
Gain on acquisitions, disposals and others
Impairment charges and restructuring costs
Unrealized gain (loss) on derivative financial instruments
Dividend received, employee future benefits and others
Operating income
Depreciation and amortization
Operating income before depreciation and amortization
2018
373
(12)
(244)
11
107
—
71
(77)
(9)
10
230
244
474
2017
173
87
(215)
10
99
11
8
(11)
8
5
175
215
390
The following table reconciles cash flow from operating activities with cash flow from operating activities (excluding changes in non-cash
working capital components) and adjusted cash flow from operating activities. It also reconciles adjusted cash flow from operating activities
to adjusted free cash flow, which is also calculated on a per share basis:
(in millions of Canadian dollars, except amount per share or as otherwise mentioned)
Cash flow from operating activities
Changes in non-cash working capital components
Cash flow from operating activities (excluding changes in non-cash working capital components)
Specific items, net of current income taxes if applicable:
Restructuring costs
Premium paid on long-term debt refinancing
Adjusted cash flow from operating activities
Capital expenditures, other assets1 and capital lease payments, net of disposals of
$85 million in 2018
Dividends paid to the Corporation's Shareholders and to non-controlling interests
Adjusted free cash flow
Adjusted free cash flow per share
Weighted average basic number of shares outstanding
1 Excluding increase in investments
2018
373
(12)
361
—
—
361
(276)
(31)
54
$
0.57 $
2017
173
87
260
6
11
277
(205)
(20)
52
0.56
94,570,924
94,680,598
The following table reconciles total debt and net debt with the ratio of net debt to adjusted operating income before depreciation and amortization
(adjusted OIBD):
(in millions of Canadian dollars)
Long-term debt
Current portion of long-term debt
Bank loans and advances
Total debt
Less: Cash and cash equivalents
Net debt
Adjusted OIBD (last twelve months)
Net debt / Adjusted OIBD ratio
Net debt / Adjusted OIBD ratio on a pro-forma basis1
1 Pro-forma adjusted OIBD of $505 million for 2018 and $422 million for 2017 to include business acquisitions on a last twelve months basis.
20
20
10
December 31, 2018
December 31, 2017
1,821
55
16
1,892
123
1,769
489
3.6
3.5
1,517
59
35
1,611
89
1,522
393
3.9
3.6
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCIAL OVERVIEW - 2017
Results for the year reflected strong sales driven by year-over-year increases in shipments for the Boxboard Europe segment and higher
average selling prices from all three packaging segments on a same plant basis. Beginning in the second quarter, the consolidation of Greenpac
benefited both sales and operating income levels. However, a sharp increase in raw material costs impacted the performance of all our
segments, the effects of which were partially offset by the corresponding stronger results generated by our Recovery and Recycling activities.
Results from our Tissue segment included costs related to the start-up of the new converting plant on the West Coast of the US, as well as
additional costs related to new branding and repositioning efforts of its product lines. Increased capacity in the Tissue market also had a
negative impact on shipments. Finally, ERP implementation and business process optimization initiatives at the corporate level also required
a higher level of resources during 2017 compared to 2016.
FINANCIAL OVERVIEW - 2018
Results for the year 2018 reflect strong sales levels in the Containerboard Packaging, Tissue Papers and European Boxboard segments. On
a consolidated basis, sales increased by $328 million to reach $4,649 million in 2018, compared to $4,321 million in 2017. This reflects
business acquisitions in the Boxboard Europe and Specialty Products segments, and improvements in both sales mix and selling price in all
segments. Excluding acquisitions, volumes were below prior-year levels in all three packaging businesses, however these were offset to a
large degree by a notable volume increase generated by the Tissue segment. While a more favourable exchange rate contributed to stronger
results for Europe Boxboard, the Specialty Products' recovery sub-segment generated lower sales as a result of the decrease in brown grade
recycled fibre costs.
Operating income before depreciation and amortization (OIBD) reflects strong results in both the Containerboard Packaging and European
Boxboard business segments. This was offset by lower results from the Tissue Papers segment, where performance continued to be negatively
impacted by elevated costs for virgin pulp and recycled white paper grades, newly added market capacity, and higher logistics and sub-
contracting costs, in addition to production inefficiencies in some units. Results in the Specialty Products segment were below prior-year levels
largely due to the negative impact of lower brown recycled fibre pricing on the performance of the recovery sub-segment, in addition to higher
production costs. Finally, Corporate Activities cost levels decreased year-over-year, as efforts in 2018 were migrated toward optimizing the
ERP and business process initiatives that were implemented in 2017.
The following graphics show the breakdown of sales, before inter-segment eliminations, operating income before depreciation and amortization
(loss) and adjusted operating income before depreciation and amortization by business segment:
SALES BREAKDOWN1
OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION
BREAKDOWN2,3
ADJUSTED OPERATING INCOME
BEFORE DEPRECIATION AND
AMORTIZATION BREAKDOWN2,3
Containerboard Packaging
Tissue papers
Boxboard Europe
Specialty Products
1 Excluding inter-segment sales and Corporate activities.
2 Excluding Corporate activities.
3 Please refer to the “Supplemental Information on Non-IFRS Measures” section for a complete reconciliation.
11
21
21
For 2018, the Corporation posted net earnings of $59 million, or $0.62 per share, compared to net earnings of $507 million, or $5.35 per share
in 2017. On an adjusted basis, discussed in detail in the “Supplemental Information on Non-IFRS Measures” section, the Corporation generated
net earnings of $79 million during 2018, or $0.83 per share, compared to net earnings of $68 million or $0.72 per share in 2017. The Corporation
recorded an operating income before depreciation and amortization of $474 million during the year, compared to $390 million in 2017. On an
adjusted basis, operating income before depreciation and amortization stood at $489 million during the year, compared to $393 million in
2017 (see the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these amounts).
The $4.73 decrease in net earnings per share in 2018, compared to 2017, can be explained by the following factors:
(in Canadian dollars)
Change in specific items (see reconciliation in the ''Supplemental Information on Non-IFRS Measures'' section)
Change in net earnings from operating activities normalized at a 26% income tax rate
Change in tax provision - Other items
Change in share of results of associates and joint ventures
Change in non-controlling interest
Decrease in net earnings per share
FORWARD-LOOKING STATEMENTS
$
$
$
$
$
$
(4.84)
0.52
0.04
(0.24)
(0.21)
(4.73)
The following document is the quarterly financial report and Management’s Discussion and Analysis (“MD&A”) of the operating results and
financial position of Cascades Inc. (“Cascades” or “the Corporation”), and should be read in conjunction with the Corporation's consolidated
financial statements and accompanying notes for the years ended December 31, 2018 and 2017. Information contained herein includes any
significant developments as at February 27, 2019, the date on which the MD&A was approved by the Corporation’s Board of Directors. For
additional information, readers are referred to the Corporation’s Annual Information Form (“AIF”), which is published separately. Additional
information relating to the Corporation is also available on SEDAR at www.sedar.com.
The financial information contained herein, including tabular amounts, is expressed in Canadian dollars, unless otherwise specified, and is
prepared in accordance with International Financial Reporting Standards (IFRS), unless otherwise specified. Unless otherwise specified or
if required by context, the terms “we”, “our” and “us” refer to Cascades Inc. and all of its subsidiaries, joint ventures and associates.
This MD&A is intended to provide readers with information that Management believes is necessary for an understanding of Cascades' current
results and to assess the Corporation's future prospects. Consequently, certain statements herein, including statements regarding future
results and performance, are forward-looking statements within the meaning of securities legislation, based on current expectations. The
accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially
from those projected, including, but not limited to, the effect of general economic conditions, decreases in demand for the Corporation's
products, prices and availability of raw material, changes in relative values of certain currencies, fluctuations in selling prices, and adverse
changes in general market and industry conditions. Cascades disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.
This MD&A also includes price indices, as well as variance and sensitivity analysis that are intended to provide the reader with a better
understanding of the trends with respect to our business activities. These items are based on the best estimates available to the Corporation.
22
22
12
KEY PERFORMANCE INDICATORS
We use several key performance indicators to monitor our action plan and analyze the progress we are making toward achieving our long-
term objectives. These include the following:
2016
TOTAL
Q1
Q2
Q3
2017
Q4 TOTAL
Q1
Q2
Q3
2018
Q4 TOTAL
OPERATIONAL
Total shipments (in '000 s.t.)1
Packaging Products
Containerboard
Boxboard Europe
Tissue Papers
Total
Integration rate2
Containerboard
Tissue Papers
Manufacturing capacity
utilization rate3
Packaging Products
Containerboard
Boxboard Europe
Tissue Papers
Consolidated total
FINANCIAL
Return on assets4
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Consolidated return on assets
Return on capital employed5
Working capital6
In millions of $, at end of period
As a percentage of sales7
1,138
1,066
2,204
608
2,812
285
296
581
139
720
375
283
658
151
809
369
271
640
157
797
372
270
642
146
788
1,401
1,120
2,521
593
3,114
352
298
650
149
799
385
276
661
163
824
370
259
629
164
793
368
292
660
149
809
1,475
1,125
2,600
625
3,225
53%
68%
51%
71%
51%
69%
55%
67%
52%
66%
53%
68%
56%
67%
56%
68%
56%
71%
58%
75%
57%
70%
93%
96%
92% 102%
86%
88%
96%
92%
94%
98%
89%
95%
91%
94%
90%
92%
92%
93%
84%
91%
93%
97% 103%
88%
87%
94%
93%
89% 100%
96%
92%
97%
17%
10%
20%
16%
10.8%
5.2%
16%
10%
20%
15%
9.8%
4.5%
14%
10%
21%
14%
9.1%
3.9%
13%
11%
19%
12%
8.9%
3.7%
14%
12%
18%
10%
9.2%
3.7%
14%
12%
18%
10%
9.2%
3.7%
14%
14%
15%
9%
16%
15%
12%
6%
9.5% 10.2% 10.7% 10.6% 10.6%
4.6%
4.7%
3.9%
4.4%
4.6%
309
10.6% 10.2%
385
429
9.9%
442
474
9.9% 10.1% 10.1% 10.5% 10.8% 10.7% 10.6% 10.6%
513
442
455
464
506
455
92%
90%
92%
91%
18%
16%
11%
4%
93%
90%
87%
90%
20%
15%
10%
2%
93%
94%
90%
93%
20%
15%
10%
2%
1 Shipments do not take into account the elimination of business sector inter-segment shipments. Starting in Q2 2017, including Greenpac. Shipments from our Specialty Products segment are not presented
as they use different units of measure.
2 Defined as: Percentage of manufacturing shipments transferred to our converting operations. Starting in Q2 2017, including Greenpac and its sales to its partners which are mostly under contractual agreements.
3 Defined as: Manufacturing internal and external shipments/practical capacity. Excluding Specialty Products segment manufacturing activities. Starting in Q2 2017, including Greenpac.
4 Return on assets is a non-IFRS measure defined as the last twelve months' (“LTM”) adjusted OIBD/LTM quarterly average of total assets less cash and cash equivalents. Including Greenpac on a consolidated
basis starting in Q2 2017.
5 Return on capital employed is a non-IFRS measure and is defined as the after-tax (30%) amount of the LTM adjusted operating income, including our share of core associates and joint ventures, divided by
the LTM quarterly average of capital employed. Capital employed is defined as the quarterly total average assets less trade and other payables and cash and cash equivalents. Including Greenpac as an
associate up to Q1 2017 and on a consolidated basis starting in Q2 2017.
6 Working capital includes accounts receivable (excluding the short-term portion of other assets) plus inventories less trade and other payables. Starting in Q2 2017, including Greenpac.
7 Percentage of sales = Average LTM working capital/LTM sales. It includes or excludes significant business acquisitions and disposals. Starting in Q2 2017, including Greenpac.
13
23
23
HISTORICAL FINANCIAL INFORMATION
(in millions of Canadian dollars, unless
otherwise noted)
Sales
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Inter-segment sales
Tissue Papers
Inter-segment sales and
Corporate activities
Total
Operating income (loss)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate activities
Total
Adjusted OIBD1
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate activities
Total
Net earnings (loss)
Adjusted1
Net earnings (loss) per share
(in dollars)
Basic
Diluted
Basic, adjusted1
Cash flow from operating
activities (excluding
changes in non-cash
working capital
components)
Net debt1
2016
TOTAL
1,370
796
620
(61)
2,725
1,305
(29)
4,001
158
19
51
228
75
(82)
221
216
53
65
334
150
(81)
403
135
114
Q1
Q22
Q3
Q4
346
211
173
(22)
708
306
428
213
188
(27)
802
338
438
202
181
(32)
789
323
440
212
161
(24)
789
301
(8)
1,006
(10)
1,130
(9)
1,103
(8)
1,082
33
5
13
51
8
(28)
31
45
14
18
77
23
(25)
75
161
12
30
13
14
57
17
(26)
48
56
21
20
97
35
(25)
107
256
24
50
5
10
65
9
(23)
51
72
14
15
101
24
(19)
106
33
19
51
11
9
71
(6)
(20)
45
74
19
14
107
12
(14)
105
57
13
2017
TOTAL
1,652
838
703
(105)
3,088
1,268
(35)
4,321
164
34
46
244
28
(97)
175
247
68
67
382
94
(83)
393
507
68
Q1
Q2
Q3
2018
Q4 TOTAL
421
246
159
(24)
802
305
475
232
164
(23)
848
343
472
210
164
(21)
825
364
472
245
172
(21)
868
340
(9)
1,098
(11)
1,180
(14)
1,175
(12)
1,196
121
19
2
142
(2)
(28)
112
77
28
7
112
13
(20)
105
61
12
82
22
4
108
(9)
(26)
73
105
30
9
144
7
(17)
134
27
29
94
10
9
113
(11)
(24)
78
117
19
14
150
5
(18)
137
36
38
84
9
9
102
(100)
(35)
(33)
111
20
10
141
(8)
(20)
113
(65)
—
1,840
933
659
(89)
3,343
1,352
(46)
4,649
381
60
24
465
(122)
(113)
230
410
97
40
547
17
(75)
489
59
79
$
$
$
1.42 $
1.39 $
1.21 $
1.70 $
1.66 $
0.13 $
2.70 $ 0.35 $
2.61 $ 0.34 $
0.25 $ 0.20 $
0.60 $
0.58 $
0.14 $
5.35 $
5.19 $
0.72 $
0.65 $
0.63 $
0.13 $
0.28 $
0.27 $
0.30 $
0.38 $ (0.69) $
0.37 $ (0.69) $
— $
0.40 $
0.62
0.58
0.83
316
1,532
33
1,617
89
1,780
61
1,469
77
1,522
260
1,522
69
1,534
111
1,586
92
1,573
89
1,769
361
1,769
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
2 Including Greenpac on a consolidated basis starting in Q2 2017. The purchase price allocation of Greenpac was finalized during the third quarter of 2017. The preliminary estimated deemed consideration of
$371 million was revised to $304 million. This change impacted the calculation of the gain on the deemed disposal of the previously held interest and goodwill allocated in the purchase price determination for
an amount of $67 million. Adjustments to the preliminary purchase price allocation were recorded retrospectively to the acquisition date as required by IFRS 3. Net earnings per share disclosed in the second
quarter were consequently adjusted to $2.70 per share from $3.41 per share.
24
24
14
BUSINESS HIGHLIGHTS
From time to time, the Corporation enters into transactions to optimize its asset base and streamline its cost structure. The following transactions
should be taken into consideration when reviewing the overall and segmented analysis of the Corporation's 2018 and 2017 results.
BUSINESS START UP, ACQUISITION, DISPOSAL AND CLOSURE
CONTAINERBOARD PACKAGING
•
•
•
•
On August 28, 2018, the Corporation announced plans to close two corrugated sheet plants located in Barrie and Peterborough, Ontario,
Canada, as part of its ongoing efforts to reorganize and optimize its corrugated packaging platform in Ontario. The two plants were closed
on November 30, 2018.
In May 2018, the Corporation started operating its new containerboard converting plant located in Piscataway, NJ, USA. The facility is
ramping up as planned while we continue the consolidation of our packaging activities in the Northeastern United States.
On December 4, 2017, the Corporation announced that it had acquired three converting plants from the Coyle Group in Ontario, Canada,
to strengthen its position in the containerboard packaging sector.
On April 5, 2017, the Corporation announced that results from the Greenpac Mill LLC (Greenpac) would be consolidated with those of
the Corporation beginning April 4, 2017.
BOXBOARD EUROPE
•
•
On October 31, 2018, the Corporation's subsidiary, Reno de Medici, announced the closing of the 100% acquisition of Barcelona
Cartonboard S.A.U., a Spanish company ranked seventh in Europe for coated cartonboard production.
On January 1, 2018, the Corporation, through its 57.8% equity ownership in Reno de Medici S.p.A. at that time, acquired 66.67% of
PAC Service S.p.A. (PAC Service), a boxboard converter for the packaging, publishing, cosmetics and food industries. The Corporation
already had a 33.33% equity participation in PAC Service before the transaction.
SPECIALTY PRODUCTS
•
On December 6, 2018, the Corporation acquired the Urban Forest Products and Clarion Packaging plants respectively located in Brook,
Indiana, and Clarion, Iowa ; two of the top three egg-producing states in the U.S, which will allow us to double our production capacity
of ecological packaging manufactured in moulded pulp. The Corporation also acquired a majority interest in Falcon Packaging, a leader
in the distribution of egg packaging.
TISSUE PAPERS
•
In the beginning of 2017, the Corporation successfully began production at its new tissue converting facility in Scappoose, Oregon, that
houses three new state-of-the-art converting lines. The plant manufactures virgin and recycled bathroom tissue products and paper hand
towels for the Cascades Pro brand (Away-from-Home market). The plant is supplied by the Corporation's tissue paper plant located
12 kilometres away in St. Helens.
15
25
25
SIGNIFICANT FACTS AND DEVELOPMENTS
•
•
•
•
•
•
•
On December 21, 2018, the Corporation announced that it has increased its authorized credit facility to approximately CAN$1 billion to
incorporate the addition of a US$175 million seven-year term loan. The term loan provides the Company with increased financial flexibility
and will reduce financing costs.
On July 26, 2018, the Corporation announced the acquisition of the White Birch Bear Island manufacturing facility in Virginia, USA, for
a cash consideration of US$34 million ($45 million). The newsprint paper machine presently located on the site will be reconfigured to
produce high quality recycled lightweight linerboard and medium for the North American market, subject to the approval of the board of
directors. The new machine is expected to have an annual production capacity of 400,000 tons. As presently contemplated, the conversion
would require an estimated investment of between US$275 million and US$300 million, with production expected to begin in 2021.
Additional details of the project will be provided once the project plans have been finalized and approved.
On June 29, 2018, the Corporation entered into an agreement with its lenders to extend and amend its existing $750 million credit facility.
The amendment extends the term of the facility to July 2022. The financial conditions remain unchanged.
On January 31, 2018, the Corporation completed the sale of the building and land of its Maspeth plant in New York, USA, for US$69 million
($86 million), net of transaction fees1.
On December 12, 2017, the Corporation announced the results of tender offers and proceeded with the purchase of US$150 million of
its 5.50% unsecured senior notes due 2022 and US$50 million of its 5.75% unsecured senior notes due 2023.
On March 21, 2017, the Corporation acquired 23% of Containerboard Partners (Ontario) Inc. for a consideration of US$12 million
($16 million). This company is a member of Greenpac Holding LLC, of which it owns 12.1%. On November 30, 2017, the Corporation
acquired an additional 30% of Containerboard Partners (Ontario) Inc. for a consideration of $19 million. These transactions add an indirect
participation of 6.4% in Greenpac Holding LLC bringing total ownership to 66.1%.
On July 27, 2017, the Corporation announced the sale of its 17.3% equity holding in Boralex to the Caisse de Dépôt et Placement du
Québec for $288 million.
1 Please refer to Note 24 of the 2018 audited consolidated financial statements for more details.
16
26
26
FINANCIAL RESULTS FOR THE YEAR ENDED DECEMBER 31, 2018, COMPARED TO
THE YEAR ENDED DECEMBER 31, 2017
SALES
Sales increased by $328 million, or 8%, to reach $4,649 million in 2018, compared to $4,321 million in 2017. The increase was mainly due
to higher average selling prices in all segments and the 4% average depreciation of the Canadian dollar compared to the euro. The acquisition
of Greenpac in the second quarter last year, the addition of three containerboard converting plants in Ontario at the end of 2017, the early
2018 acquisition of PAC Service and late 2018 acquisition of Barcelona Cartonboard in Europe, and the moulded pulp U.S. acquisition in the
Specialty products segment also contributed to the sales increase as did higher volume in the Tissue papers segment. Partially offsetting
these benefits were lower sales from our Recovery and Recycling activities, attributable to lower pricing of recycled brown grades, as well as
lower volumes on a same plant basis for the Boxboard Europe and Containerboard segments.
Sales by geographic segment are as follows:
The main variances in sales in 2018, compared to 2017, are shown below (in $M):
1 For variance analysis purposes, adjusted to include Greenpac in Q1-2017 on a pro-forma basis.
17
27
27
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBD)
The Corporation generated OIBD of $474 million in 2018, compared to $390 million in 2017, an increase of $84 million. Excluding specific
items, the improvement was mainly driven by higher sales and lower brown recycled fibre costs for our Containerboard Packaging and
Boxboard Europe segments. However, higher prices of virgin pulp and white recycled fibre grades negatively impacted the results of the
Tissue Papers segment. Lower contribution from Recovery and Recycling activities, increased energy costs mainly in Boxboard Europe, and
higher freight costs in all North American segments also negatively impacted OIBD.
Adjusted operating income before depreciation and amortization1 was $489 million in 2018 compared to $393 million in 2017.
The main variances in operating income before depreciation and amortization in 2018, compared to 2017, are shown below (in $M):
Adjusted OIBD
Raw material
(OIBD)
F/X CAN$
(OIBD)
Other production costs
(OIBD)
Recovery and Recycling
activities (Sales and OIBD)
Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
The impacts of these estimated costs are based on production costs per unit shipped externally or inter-segment, which are affected
by yield, product mix changes, inbound freight costs and purchase and transfer prices. In addition to market pulp and recycled fibre,
these costs include purchases of external boards and parent rolls for the converting sector, and other raw material such as plastic
and wood chips.
The estimated impact of the exchange rate is based on the Corporation's Canadian export sales less purchases, denominated in
US$, that are impacted by exchange rate fluctuations and by the translation of our non-Canadian subsidiaries OIBD into CAN$. It
also includes the impact of exchange rate fluctuations on the Corporation's Canadian units in currency other than the CAN$ working
capital items and cash positions, as well as our hedging transactions. It excludes indirect sensitivity (please refer to the “Sensitivity
Table” section for further details).
These costs include the impact of variable and fixed costs based on production costs per unit shipped externally, which are affected
by downtime, efficiency and product mix changes.
While this sub-segment is integrated within the other segments of the Corporation, any variation in the results of Recovery and
Recycling of the Specialty Products segment are presented separately and on a global basis in the charts.
The analysis of variances in segment operating income before depreciation and amortization appears within each business segment review
(please refer to the “Business Segment Review” section for more details).
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
2 For variance analysis purposes, adjusted to include Greenpac in Q1-2017 on a pro-forma basis.
18
28
28
BUSINESS SEGMENT REVIEW
PACKAGING PRODUCTS - CONTAINERBOARD
Our Industry
U.S. containerboard industry production and capacity utilization rate 1
Total U.S.containerboard production increased slightly by 2% in 2018, due to
favourable market conditions in part driven by e-commerce. The industry's capacity
utilization rate decreased to 96.9% in 2018 from 97.6% in 2017.
U.S. containerboard inventories at box plants and mills 2
The average inventory level increased by 5% in 2018, as sales to export markets
experienced some downward pressure in the second half of the year, leading to higher
domestic inventory levels. The number of weeks of supply in inventory averaged 3.9
for the year.
U.S corrugated box industry shipments 2
Total U.S. corrugated box shipments increased by 2% in 2018 compared to 2017. This
reflects continued strength in the economic environment and manufacturing activity,
and the growing importance of e-commerce.
Canadian corrugated box industry shipments 3
Canadian corrugated box shipments increased for a fifth consecutive year. Favourable
market conditions explain the 4% year-over-year increase in 2018 compared to 2017.
Reference prices - containerboard 1
Following the implementation of a price increase in October 2016, containerboard
producers successfully implemented an additional US$50 per short ton price increase
on linerboard and corrugating medium prices in April, 2017, following strong supply
and demand fundamentals and e-commerce trends. This was followed by a
subsequent US$30 per short ton corrugating medium price increase later in the year.
In March 2018, an additional price increase of US$50 per short ton on linerboard and
corrugating medium was implemented. As a result, 2018 reference prices for linerboard
and corrugating medium increased by 8% and 12%, respectively, compared to 2017.
Reference prices - recovered papers (brown grade) 1
The average reference price of old corrugated containers no.11 ("OCC") decreased
by 46% in 2018 compared to 2017. In the first quarter of 2017, index prices surged
due to strong domestic and foreign demand. This was followed by a sharp decrease
in index prices in October following China's restriction on recovered paper import
permits, which led to an increase in domestic supply, and resulted in a sharp decline
in prices during 2018.
1 Source: RISI
2 Source: Fibre Box Association
3 Source: Canadian Corrugated and Containerboard Association
19
29
29
Our Performance
The main variances1 in sales and operating income before depreciation and amortization for the Containerboard Packaging segment in 2018,
compared to 2017, are shown below:
1 For definitions of certain sales and operating income before depreciation and amortization (OIBD) variation categories, please refer to the "Financial results for the year ended December 31, 2018, compared to the year ended December
31, 2017" for more details.
2 For variance analysis purposes, adjusted to include Greenpac in Q1 2017 on a pro-forma basis.
The Corporation incurred certain specific items in 2018 and 2017 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
20
30
30
2017
As reported
2018
Change in %
Shipments1 ('000 s.t.)
1,401
1,475
Average Selling Price
(CAN$/unit)
1,179
1,247
Sales ($M)
1,652
1,840
OIBD1 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
470
26%
410
22%
238
14%
247
15%
Operating income ($M)
(as reported)
164
173
(adjusted)1
381
321
5%
6%
—
11%
97%
66%
132%
86%
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for
reconciliation of these figures.
2 Shipments do not take into account the elimination of business sector
inter-segment shipments. Including 12.9 billion square feet in 2018 compared to
12.5 billion square feet in 2017.
3 Up to Q1 2017, the Corporation's interest in Greenpac was recorded under the
equity method. All transactions were therefore accounted for as external.
4 Including sales to other partners in Greenpac.
Shipments increased by 74,000 s.t., or 5%, in 2018. This reflects a
46,000 s.t. increase in external shipments from our containerboard
mills. The inclusion of Greenpac for the full year in 2018 compared to
only nine months in 2017 contributed to this increase. However, this
was partly offset by lower production in several mills in the first two
months of 2018 due to mechanical issues which were resolved by the
end of the first quarter. Additional machine downtime decreased
shipments by approximately 15,000 s.t. compared to last year. On the
converting side, shipments increased by 4%, which includes the three
Ontario sheet plants acquired in the fourth quarter of 2017.
Mills external shipments decreased by 49,000 s.t., or 6%, in 2018,
when including Greenpac on a pro-forma basis, for the full year in 2017.
The mill integration rate4 reached 57% in 2018, up from 53% in 2017,
reflecting higher integration. Including sales to associates, the
integration rate was 76% compared to 64% last year.
The higher selling price denominated in Canadian dollars reflects
increases of $73 per s.t., or 10%, for parent rolls, and $73 per s.t., or
5%, for converted products.
Sales increased by $188 million, or 11%, with the 2017 business
acquisitions (including Greenpac) completed in the prior year
contributing $132 million in 2018. When including Greenpac for the full
year in both periods, sales increased by $119 million, or 7%, compared
to last year. The higher average selling price and a favourable mix of
products sold added $111 million to sales. The lower volumes negatively
impacted sales by $54 million.
Operating income before depreciation and amortization (OIBD)
increased by $232 million, or 97% during the year, compared to last
year. This increase includes a gain of $66 million on the sale of our NY
facility assets in the first quarter of 2018. Including Greenpac on a pro-
forma basis in both periods, the remainder of the increase is mainly
explained by the $111 million positive impact from the higher average
selling price and more favourable mix. Prices of brown recycled fibre
grades decreased, adding $118 million to OIBD. These favourable
impacts were partly offset by higher freight costs and by lower
comparable volume that subtracted, respectively, $23 million and
$19 million from OIBD. Higher energy costs negatively impacted results
by $4 million. In addition, operational costs subtracted another
$42 million from OIBD. Specifically, additional labour and warehousing
costs related to inventory management, as well as some manufacturing
production inefficiencies negatively impacted results. Other variances
added $4 million to OIBD.
The segment incurred some specific items1 in 2018 and 2017 that
affected OIBD. Adjusted OIBD1 reached $410 million in 2018, compared
to $247 million in 2017.
Finally, the Corporation's results for the first quarter of 2017 included
its share of results of its then associate Greenpac3 Mill (59.7%) prior to
the consolidation announced on April 5, 2017. In the first quarter of
2017, our share of results of Greenpac stood at $7 million.
21
31
31
PACKAGING PRODUCTS - BOXBOARD EUROPE
Our Industry
European industry order inflow of coated boxboard 1
In Europe, order inflows of white-lined chipboard reflected ongoing solid demand throughout 2018, but decreased by 3% from the very strong levels in 2017. Specifically, industry
orders were approximately 3.2 million tonnes in 2018. The folding boxboard industry similarly experienced a strong year, with order inflows of approximately 2.3 million tonnes
in 2018. This represented an increase of approximately 1%, and followed the very strong 11% increase in 2017.
Coated recycled boxboard industry's order inflow from Europe
(White-lined chipboard (WLC) - 5-week weekly moving average)
Coated virgin boxboard industry's order inflow from Europe
(Folding boxboard (FBB) - 5-week weekly moving average)
Reference prices - boxboard in Europe 2
White-lined chipboard prices remained stable in Western European countries in 2018
compared to 2017. Folding boxboard prices increased by 4% throughout the year.
Reference prices - recovered papers in Europe 2
Recovered paper prices strongly decreased in 2018 compared to 2017, following
China's restriction on recovered paper import permits. As a result, the recovered paper
reference index in Europe decreased 26% in 2018 compared to 2017, primarily due
to the significant decreases in brown grades.
1 Source: CEPI Cartonboard
2 Source: RISI
3 The Cascades recycled white-lined chipboard selling prices index represents an approximation of Cascades’ recycled grade selling prices in Europe. It is weighted by country. For each country, we
use an average of PPI Europe prices for white-lined chipboard.
4 The Cascades virgin coated duplex boxboard selling prices index represents an approximation of Cascades’ virgin grade selling prices in Europe. It is weighted by country. For each country, we use
an average of PPI Europe prices for coated duplex boxboard.
5 The recovered paper index represents an approximation of Cascades’ recovered paper purchase prices in Europe. It is weighted by country. For each country, we use an average of PPI Europe
prices for recovered papers. This index should only be used as a trend indicator and may differ from our actual purchasing costs and our purchase mix.
32
32
22
Our Performance
The main variances1 in sales and operating income before depreciation and amortization for the Boxboard Europe segment in 2018, compared
to 2017, are shown below:
1 For definitions of certain sales and operating income before depreciation and amortization (OIBD) variation categories, please refer to the "Financial results for the year ended December 31, 2018, compared to the year ended December
31, 2017" for more details.
The Corporation incurred certain specific items in 2018 and 2017 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
23
33
33
2017
2018
Change in %
Shipments2 ('000 s.t.)
1,120
1,125
Average Selling Price3
(CAN$/unit)
748
511
(euro€/unit)
820
536
Sales ($M)
838
933
OIBD1 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
97
10%
97
10%
67
8%
68
8%
Operating income ($M)
(as reported)
34
35
(adjusted)1
60
60
—
10%
5%
11%
45%
43%
76%
71%
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for
reconciliation of these figures.
2 Shipments do not take into account the elimination of business sector
inter-segment shipments.
3 Average selling price is a weighted average of virgin, recycled and converted boxboard
shipments only.
External recycled boxboard shipments decreased by 14,000 s.t., or 1%,
in 2018 compared to 2017. This reflects lower volumes and an increased
integration level with the recently acquired PAC Service. On the other
hand, the acquisition of Barcelona Cartonboard positively impacted
shipments for 31,000 s.t. while the addition of PAC service contributed
another 23,000 s.t. (please refer to "Business Highlights" section for
more details). Shipments of virgin boxboard decreased by 4,000 s.t.,
or 3%.
reflects
The average selling price increased in both euro and Canadian dollars
year-over-year. This
the 4% average year-over-year
depreciation of the Canadian dollar compared to the euro, in addition
to sales price increases that were implemented for several products
and the higher priced shipments from PAC Service. Compared to 2017,
the average 2018 selling price of recycled boxboard activities increased
by €15, or 3%, while the average selling price of virgin boxboard
activities increased by €33, or 5%.
The increase in sales reflects the year-over-year 4% average
depreciation of the Canadian dollar against the euro and the higher
average selling price which, respectively, added $39 million and
$28 million to sales. As well, the first quarter acquisition of PAC Service
and subsequent fourth quarter acquisition of Barcelona Cartonboard
contributed $57 million to sales in 2018. Conversely, lower volumes, on
a same plant basis, reduced sales by $29 million.
Operating income before depreciation and amortization (OIBD)
increased by $30 million year-over-year in 2018. This reflects lower raw
material prices, which added $21 million, and the higher average selling
price, which contributed $28 million. The weaker Canadian dollar also
benefited OIBD by $6 million. Conversely, higher natural gas prices
partly offset the increases, subtracting $18 million from OIBD.
The segment incurred a specific item1 in 2017 that affected its OIBD.
Adjusted OIBD1 was $97 million in 2018, compared to $68 million in
2017.
34
34
24
PACKAGING PRODUCTS - SPECIALTY PRODUCTS
Our Industry
Reference prices - uncoated recycled boxboard 1
The reference price for uncoated recycled boxboard increased by 8% in 2018
compared to 2017 due to better market conditions, which resulted in a series of price
increases throughout the year.
Reference prices - fibre costs in North America 1
The brown grade recycled paper No. 11 (old corrugated containers, OCC) and the
recycled paper No. 56 (sorted residential papers, SRP) index prices decreased by
46% and 54%, respectively, in 2018 compared to 2017. The white grade recycled
paper No. 37 (sorted office papers, SOP) increased by 14% in 2018 compared to 2017.
Following China's ban on recovered paper import permits in the last quarter of 2017,
the old corrugated containers index price gradually declined from US$100 at the end
of 2017 to US$68 at the end of 2018. Sorted office papers index prices increased due
to lower levels of available recycled office paper.
Chinese imports of recycled fibre 1
Total Chinese imports fell by 18%1 in 2018 compared to 2017 following the ban on recovered paper import permits by the Chinese government in the last quarter of 2017. On a
more detailed basis, both old corrugated container and old newspapers imports were impacted, registering decreases of 14% and 31% respectively.
Total Chinese imports of recycled papers - all grades
Major grades imported by China
1 Source: RISI, excluding mixed papers
25
35
35
Our Performance
The main variances1 in sales and operating income before depreciation and amortization for the Specialty Products segment in 2018, compared
to 2017, are shown below:
1 For definitions of certain sales and operating income before depreciation and amortization (OIBD) variation categories, please refer to the "Financial results for the year ended December 31, 2018, compared to the year ended December
31, 2017" for more details.
The Corporation incurred certain specific items in 2018 and 2017 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
36
36
26
2017
703
67
10%
67
10%
Sales ($M)
OIBD1 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
2018
659
46
7%
40
6%
Operating income ($M)
(as reported)
46
46
(adjusted)1
24
18
Change in %
-6%
-31%
-40%
-48%
-61%
Shipments decreased in all of our sub-sectors in 2018. More specifically,
shipments decreased in our Recovery and Recycling2 activities mainly
due to the impact of Chinese imports restrictions on the flow of recovered
paper. On the other hand, shipments increased in the last month of the
year following business acquisition (please refer to "Business
Highlights" section for more details).
Sales decreased by $44 million, or 6%, compared to the prior yearly
period. This was mainly due to the $62 million lower contribution from
the Recovery and Recycling activities caused by the decrease in
recycled paper prices and lower volume. In addition, lower sales volume
in our packaging activities subtracted $9 million. This was partially offset
by higher average selling prices in our Industrial Packaging sub-sector
reflecting URB price increases and a favourable product mix as well as
additional sales from business acquisition. These factors added an
additional $27 million.
Operating income before depreciation and amortization (OIBD)
decreased by $21 million in 2018, due primarily to the $26 million
decrease in our Recovery and Recycling activities2 that stems from
lower realized spreads (between average selling prices and raw
material costs). OIBD levels in other sub-sectors were $1 million lower
than 2017, as a result of lower sales volume and higher operating costs,
partly offset by higher
Industrial
Packaging activities.
realized spreads
in our
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for
reconciliation of these figures.
2 Recovery and Recycling activities: Given the level of integration of this sub-segment within
the other segments of the Corporation, variances in results are presented excluding the
impact of this segment. The variations of this segment are presented separately on a
global basis.
The segment incurred some specific items1 in 2018 that affected OIBD.
Adjusted OIBD1 reached $67 million in 2018, compared to $40 million
in 2017.
27
37
37
TISSUE PAPERS
Our Industry
U.S. tissue paper industry production (parent rolls) and capacity
utilization rate 1
Total parent roll production increased by 2% for a fourth consecutive year in 2018. The
average capacity utilization rate remained stable at 93% in 2018 compared to 2017.
New capacity additions in the market are the main factor for these metrics.
U.S. tissue paper industry converted product shipments 1
In 2018, shipments for the retail and the away-from-home markets increased by 2%
and 3%, respectively, compared to 2017.
U.S. producer price index - annual changes in converted tissue
prices 2
In the U.S., prices for retail toilet tissue followed a upward trend in 2018. Prices for
retail paper towels remained relatively stable throughout the year. Prices for industrial
paper towels were very volatile and followed a downward trend in 2018, suggesting
aggressive marketing and pricing strategies.
Reference prices - parent rolls 1
In 2018, the reference price for both recycled and virgin parent rolls increased by 5%
compared to 2017, mostly due to rising input costs.
Reference prices - recovered papers (white grade) 1
The reference price of sorted office papers No.37 (“SOP”) was very volatile in 2018,
fluctuating between US$160 and US$210, closing at US$195. The average price stood
at US$193 in 2018, a 14% increase compared to 2017.
Reference prices - market pulp 1
In 2018, the reference price for NBSK and NBHK both rose by 21% and 20%,
respectively, in 2018 compared to 2017 due to solid demand globally.
1 Source: RISI
2 Source: U.S. Bureau of Labor Statistics
38
38
28
Our Performance
The main variances1 in sales and operating income (loss) before depreciation and amortization for the Tissue Papers segment in 2018,
compared to 2017, are shown below:
1 For definitions of certain sales and operating income before depreciation and amortization (OIBD) variation categories, please refer to the "Financial results for the year ended December 31, 2018, compared to the year ended December
31, 2017" for more details.
The Corporation incurred certain specific items in 2018 and 2017 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
29
39
39
2017
2018
Change in %
Shipments2 ('000 s.t.)
625
593
Average Selling Price
(CAN$/unit)
2,138
2,165
Sales ($M)
1,268
1,352
OIBD ($M)
(as reported)
% of sales
(adjusted)1
% of sales
(58)
(4)%
17
1%
90
7%
94
7%
Operating income (loss) ($M)
(as reported)
28
32
(adjusted)1
(122)
(47)
5%
1%
—
7%
-164%
-82%
-536%
-247%
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section
for reconciliation of these figures.
2 Shipments do not take into account the elimination of business sector inter-segment
shipments.
External manufacturing shipments increased by 3,000 s.t., or 2%, year-
over-year in 2018. This was mainly due to increased market demand,
inventory level reduction strategies and product diversification. The
integration rate also increased from 68% to 70% in 2018 reflecting
higher total production. External converting shipments increased by
29,000 s.t., or 7%, compared to last year, mainly driven by the Away-
from-Home and retail sub-segments.
The 1% increase in the average Canadian dollar selling price was
positively impacted by price increases in all markets.
The 7% increase in sales compared to last year, was largely driven by
an increase in volume, higher selling prices and a favourable sales mix
of parent rolls to converted products.
The decrease in operating income before depreciation and amortization
is mainly attributable to a significant increase in virgin fibre and recycled
white grade paper costs, as well as higher logistics and energy costs.
Higher freight costs are the result of tight transportation market
conditions but also of additional product transfers following the
interruption of operations in our North Carolina facility caused by
Hurricane Florence and a fire that occurred in the fourth quarter. These
incidents had major volume impacts which forced us to supply our
customers from our other facilities further away. In addition, a third-party
gas pipeline failure on the West Coast in October led to higher energy
costs. These were partially offset by higher volume, which had a positive
impact on overall operational cost levels due to better cost absorption
and price increases as already mentioned above.
OIBD of the Oregon converting activities improved compared to last
year but is still not at the level expected. We are seeing positive trends
in terms of sales, which has a positive impact compared to last year.
Unfortunately, operational difficulties at our St. Helens mill are having
a negative impact on the ramp up of our Oregon converting plant, as
these facilities are highly integrated. An action plan is ongoing to mitigate
the situation and we are already seeing positive impacts.
The segment incurred some specific items1 in 2018 and in 2017 that
affected its OIBD. Adjusted OIBD1 reached $17 million in 2018,
compared to $94 million in 2017.
40
40
30
CORPORATE ACTIVITIES
Operating loss before depreciation and amortization in 2018 includes an unrealized loss of $6 million on financial instruments. This compares
to an unrealized gain of $9 million in 2017. In 2017, a gain of $1 million on the sale of assets is also included in operating loss before depreciation
and amortization.
Also in 2017, Corporate Activities recorded a $2 million reversal of impairment following the collection of a note receivable that had been
written off in previous years. As well, Corporate Activities recorded a severance cost of $1 million following the closure of a sales division.
As planned, activities related to our ERP system implementation and business process optimization are slowing as targets continue to be
realized. As such, costs related to these activities decreased year-over-year and efforts are now focused on stabilization and optimization.
STOCK-BASED COMPENSATION EXPENSE
Share-based compensation expense recognized in Corporate Activities amounted to $5 million in both 2018 and 2017. For more details on
stock-based compensation, please refer to Note 19 of the 2018 audited consolidated financial statements.
OTHER ITEMS ANALYSIS
DEPRECIATION AND AMORTIZATION
The depreciation and amortization expense increased by $29 million to $244 million in 2018, compared to $215 million in 2017. The increase
is mainly attributable to business acquisitions, the start-ups of the Oregon tissue and New Jersey containerboard converting facilities and the
completion of the ERP system implementation in 2017.
FINANCING EXPENSE AND INTEREST ON EMPLOYEE FUTURE BENEFITS
The financing expense and interest on employee future benefits and other liabilities amounted to $99 million in 2018, compared to $111 million
in 2017, a decrease of $12 million. In 2017, the Corporation recorded $11 million of premiums and wrote off $3 million of capitalized financing
fees following the purchase of US$200 million of unsecured senior notes. Excluding these items, financing expenses increased by $2 million.
Additional financing expense from business acquisitions and capital expenditures completed in 2017 and in 2018 was offset by the impact of
the sale of our Boralex stake in 2017, the redemption of US$200 million of unsecured senior notes completed in late 2017 and higher capitalized
interest related to major projects completed during the year. In addition, financing expense also increased in 2018 by $4 million for the
recognition to expense of the fair value variation of the Greenpac equity holder put option (see Note 5 of the 2018 audited consolidated
financial statements).
During 2018, S&P Global Ratings revised the Corporation's outlook to “positive” from “stable” on improving credit measures; our corporate
rating of BB- was affirmed.
PROVISION FOR (RECOVERY OF) INCOME TAXES
In 2018, the Corporation recorded an income tax provision of $49 million. This compares to an income tax recovery of $81 million in the same
period of 2017.
(in millions of Canadian dollars)
Provision for income taxes based on the combined basic Canadian and provincial income tax rate
Adjustment for income taxes arising from the following:
Difference in statutory income tax rate of foreign operations
Prior years reassessment
Reversal of deferred income tax liabilities related to our previously held investment in Greenpac
Permanent difference on revaluation of previously held equity interest - Greenpac associate
Non-taxable portion of capital gain on revaluation of previously held equity interest - Boralex associate
Change in future income taxes resulting from enacted tax rate change
NOTE
5
5
8
Unrealized capital gain on long-term debt
Reversal of deferred tax assets on tax losses
Permanent differences
Change in deferred income tax assets relating to capital tax loss
Provision for (recovery of) income taxes
31
2018
38
(1)
2
—
—
—
—
—
3
(1)
8
11
49
2017
117
10
3
(70)
(57)
(24)
(57)
(3)
—
(6)
6
(198)
(81)
41
41
In 2017, in conjunction with the acquisition of Greenpac, the Corporation recorded an income tax recovery of $70 million representing deferred
income taxes on its investment prior to the acquisition on April 4, 2017. Also, there was no income tax provision recorded on the gain of
$156 million generated by the business combination of Greenpac, since it is included in the fair value of assets and liabilities acquired as
described in Note 5 of the 2018 audited consolidated financial statements.
Following the US tax reform adopted in December 2017, the Corporation revalued the net deferred tax liability of its US entities and recorded
a gain of $57 million.
The income tax provision on the Boralex revaluation gain was calculated at the rate of capital gains. Also, consequently with the sale of its
participation in Boralex in July 2017, the Corporation has reassessed the probability of recovering unrealized capital losses on long-term debt
due to foreign exchange fluctuations. The tax provision or recovery on foreign exchange gains or losses on long-term debt and related financial
instruments in addition to some share of results of Canadian associates and joint ventures is calculated at the rate of capital gains. The
decrease in the US federal tax rate from 35% to 21% at the end of 2017 had a positive impact on tax expense in 2018 compared to last year.
The Corporation's share of results from its US-based joint ventures and associates, which were mostly composed of its share of results from
Greenpac through the first quarter of 2017, is taxed at the same rate as the Corporation’s statutory tax rate. Moreover, as Greenpac is a
limited liability company (LLC), partners agreed to account for it as a disregarded entity for tax purposes. Consequently, income taxes associated
with Greenpac net earnings are proportionately recorded by each partner based on its respective share in the LLC, and no income tax provision
is included in Greenpac's net earnings. As such, although Greenpac has been fully consolidated in the Corporation's results since the second
quarter of 2017, only 71.8% of pre-tax book income is considered for tax provision purposes.
The effective tax rate and income taxes are affected by the results of certain subsidiaries and joint ventures located in countries where the
income tax rates are different compared to Canada, notably the United States, France and Italy. The normal effective tax rate is expected to
be in the range of 26% to 28%. The weighted-average applicable tax rate was 25.8% in 2018.
SHARE OF RESULTS OF ASSOCIATES AND JOINT VENTURES
Until March 10, 2017, the share of results of associates and joint ventures included our 17.37% interest in Boralex Inc. (“Boralex”), a Canadian
public corporation. Boralex is a producer of electricity whose core business is the development and operation of power stations that generate
renewable energy, with operations in the Northeastern United States, Canada and France.
On January 18, 2017, Boralex issued common shares to partly finance the acquisition of the interest of Enercon Canada Inc. in the Niagara
Region Wind Farm. As a result, the Corporation's participation in Boralex decreased to 17.37%. This resulted in a dilution gain of $15 million,
which is included in line item “Share of results of associates and joint ventures” in the consolidated statement of earnings.
On March 10, 2017, Boralex announced the appointment of a new Chairman of the Board. This change in the Board composition combined
with the decrease of our participation discussed above triggered the loss of significant influence of the Corporation over Boralex. Therefore,
our investment in Boralex was no longer classified as an associate and was considered as an available-for-sale financial asset, which was
classified in “Other assets.” Consequently, our investment in Boralex was revaluated at fair value on March 10, 2017 and we recorded a gain
of $155 million. At the same time, accumulated other comprehensive loss components of Boralex, totaling $10 million and included in our
consolidated balance sheet, were released to net earnings. These two items are presented in line item “Fair value revaluation gain on
investments” in the consolidated statement of earnings.
On April 5, 2017, the Corporation announced the inclusion of Greenpac's results on a consolidated basis starting on April 4, 2017. The
transaction resulted in a gain of $156 million on the revaluation of previously held interests. As a result of the acquisition, accumulated other
comprehensive loss components of Greenpac, totaling $4 million and included in our consolidated balance sheet prior to the acquisition, were
reclassified to net earnings. These two items are presented in line item “Fair value revaluation gain on investments” in the consolidated
statement of earnings (please refer to Note 5 of the 2017 audited consolidated financial statements for more details).
On July 27, 2017, Cascades announced the sale of all of its shares in Boralex to the Caisse de Dépôt et Placement du Québec for an amount
of $288 million. The increase in fair value of $18 million from March 10 to July 27, 2017, recorded in accumulated other comprehensive income
materialized and the Corporation recorded a gain of $18 million during the year in line item “Fair value revaluation gain on investments” in the
consolidated statement of earnings.
In the first quarter of 2017, prior to the consolidation of Greenpac announced in the third quarter of 2017 (please refer to the “Business
Highlights” section for more details), the Corporation recorded its 59.7% share of the Greenpac Mill results as an associate. As such, contribution
to earnings before income taxes stood at $7 million. No provision for income taxes was included in our Greenpac share of results, as it is a
disregarded entity for tax purposes (see the “Provision for income taxes” section above for more details).
For more information on specific items, please refer to the “Supplemental Information on Non-IFRS Measures” section.
32
42
42
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities generated $373 million of liquidity in 2018, compared to $173 million generated in 2017. Changes in non-
cash working capital components generated $12 million of liquidity in 2018, versus $87 million used in 2017.
In 2018, excluding the impact of business acquisitions, lower trade receivables at the end of the year generated higher liquidity than last year
but were offset by the increase in inventory value in all business segments. In 2017, higher inventory levels in our Containerboard and Tissue
segments in addition to higher accounts receivable due to higher sales following business combinations and higher selling prices, as well as
lower trade and other payables are the main factors leading to the use of liquidity.
As at December 31, 2018, average LTM working capital as a percentage of LTM sales stood at 10.6%, compared to 10.1% as at December
31, 2017.
Cash flow from operating activities, excluding changes in non-cash working capital components, stood at $361 million in 2018, compared to
$260 million in 2017. This cash flow measurement is relevant to the Corporation's ability to pursue its capital expenditure program and reduce
its indebtedness.
INVESTING ACTIVITIES
Investing activities used $370 million in 2018, compared to $70 million generated in 2017, which included the proceeds from the disposal of
our investment in Boralex for $288 million. Payments for property, plant and equipment totaled $338 million in 2018, including the purchase
of the White Birch Bear Island assets in Virginia, USA (please refer to the “Significant facts and developments” section for more details),
compared to $193 million in 2017. Proceeds from disposals of property, plant and equipment stood at $85 million in 2018, including the sale
of the building and land of our containerboard plant in Maspeth, NY, USA (please refer to the “Significant facts and developments” section for
more details), compared to $15 million in 2017.
PAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT
Payments for property, plant and equipment in 2018 were $338 million, compared to $193 million in 2017. However, new capital expenditure
projects, including capital leases, amounted to $417 million in 2018, compared to $207 million in 2017. The variance in the amounts is related
to purchases of property, plant and equipment, included in “Trade and Other Payables”, and other debts as well as capital lease acquisitions.
New capital expenditure projects by segment in 2018 were as follows (in M$):
33
43
43
The major capital projects that were initiated, are in progress or were completed in 2018 are as follows:
CONTAINERBOARD PACKAGING
•
•
Investments for the construction of a new containerboard packaging plant in Piscataway, NJ, USA (please refer to the “Significant Facts
and Developments” section for more details) and for other strategic initiatives. Project costs include a non-cash amount of $56 million
for the capital lease of the building.
Purchase of the assets of White Birch (Bear Island) in Virginia, USA (please refer to the “Significant Facts and Developments” section
for more details).
SPECIALTY PRODUCTS
•
Investment for a new printing press at our Flexible Packaging plant located in Mississauga, Ontario, Canada.
TISSUE PAPERS
•
Down payments made on the acquisition of new modern converting equipments.
INVESTMENTS IN ASSOCIATES & JOINT VENTURES AND CHANGE IN INTANGIBLE
AND OTHER ASSETS
The main items were as follows:
2018
During the year, the Corporation invested $15 million for its ERP technology system and other softwares. Also during the period, the Corporation
paid a $2 million purchase price adjustment related to the acquisition of a joint-venture participation in 2017 and invested $2 million in the
development of new products. Finally, we received $3 million related to a notes receivable for a plant sold in previous years.
2017
The Corporation sold its investment in Boralex for an amount of $288 million (please refer to the “Significant Facts and Developments” section
for more details).
At the end of the first quarter, the Corporation announced the acquisition of a minority stake in Containerboard Partners (Ontario) Inc., which
owns 12% of Greenpac, for a consideration of US$12 million ($16 million). This transaction increased the Corporation's total participation in
Greenpac by 2.8% to 62.5% at that time via the acquired additional indirect ownership.
The Corporation invested $23 million in intangible and other assets related to our ERP information technology system and additional softwares
needed to support our business process optimization.
Effective January 1, 2018, the Corporation, through its equity ownership in Reno de Medici S.p.A., acquired 66.67% of PAC Service S.p.A.,
a boxboard converter for the packaging, publishing, cosmetics and food industries. The Corporation already had a 33.33% equity participation.
The consideration for the acquisition of the remaining 66.67% shares consisted of cash totaling €10 million ($15 million) and was deposited
on December 19, 2017 and recorded in other assets.
NET CASH ACQUIRED (PAID) IN BUSINESS COMBINATIONS
2018
During the year, the Corporation paid $54 million for the acquisition of Barcelona Cartonboard S.A.U., in the Boxboard Europe segment, and
$51 million for the acquisition of Urban Forest Products and Clarion Packaging, two moulded pulp plants, in the Specialty products segment.
As well, the Corporation acquired $4 million in cash through the business combination of PAC Service and $2 million from the acquisition of
Barcelona Cartonboard S.A.U., as described in Note 5 of the audited consolidated financial statements of 2018. The Corporation also paid
$1 million for the working capital purchase price adjustment of its Coyle containerboard plants acquisition completed in 2017.
All in all, net cash consideration amounted to $100 million and the Corporation also assumed $27 million of debt related to these acquisitions.
2017
During the year, the Corporation acquired $34 million from the business combination of Greenpac and paid $25 million for the acquisition of
the Coyle Group, in Ontario, in the containerboard segment.
44
44
34
FINANCING ACTIVITIES
Financing activities, including $15 million of dividends paid to the Corporation's Shareholders, debt repayment and the change in our revolving
facility generated $25 million in liquidity during 2018, compared to $218 million used in 2017.
Cascades issued 714,937 shares at an average price of $7.00 as a result of the exercise of stock options in 2018, representing an aggregate
amount of $5 million. As well, the Corporation purchased 1,539,380 shares for cancellation at an average price of $13.12 for an amount of
$20 million.
During the year, the Corporation also paid $1 million for the settlement of derivative financial instruments on long-term debt, compared to
$12 million in 2017. Dividends paid to non-controlling interests amounted to $17 million in 2018 compared to $5 million in 2017. These payments
are the results of dividends paid to the non-controlling shareholders of Greenpac and/or Reno de Medici. Non-controlling interests also
contributed $1 million to the capital of Greenpac during the year, representing the reinvestment of investment tax credits received by the
partners.
On December 4, 2017, the Corporation announced the acquisition of an additional 30% interest in Containerboard Partners (Ontario) Inc. for
a consideration of US$15 million ($19 million). This transaction increased the Corporation's total participation in Greenpac by 3.6% to 66.1%.
Containerboard Partners is now fully consolidated in our financial statements.
On December 12, 2017, the Corporation repurchased US$150 million of its 5.50% unsecured senior notes due in 2022 for an amount of
$193 million and US$50 million of its 5.75% unsecured senior notes due in 2023 for an amount of $64 million.
35
45
45
CONSOLIDATED FINANCIAL POSITION
AS AT DECEMBER 31, 2018, 2017 AND 2016
The Corporation's financial position and ratios are as follows:
(in millions of Canadian dollars, unless otherwise noted)
December 31, 2018
December 31, 2017
December 31, 2016
Cash and cash equivalents
Working capital1
As a percentage of sales2
Bank loans and advances
Current portion of long-term debt
Long-term debt
Total debt
Net debt (total debt less cash and cash equivalents)
Equity attributable to Shareholders
Non-controlling interests
Total equity
Total equity and net debt
Ratio of net debt/(total equity and net debt)
Shareholders' equity per share (in dollars)
123
455
10.6%
16
55
1,821
1,892
1,769
1,508
180
1,688
3,457
89
442
10.1%
35
59
1,517
1,611
1,522
1,455
146
1,601
3,123
$
51.2%
16.01
$
48.7%
15.32
$
62
309
10.6%
28
36
1,530
1,594
1,532
984
90
1,074
2,606
58.8%
10.41
1 Working capital includes accounts receivable (excluding the short-term portion of other assets) plus inventories less trade and other payables.
2 Percentage of sales = Average LTM working capital/LTM sales. It includes or excludes significant business acquisitions and disposals, respectively, of the last twelve months.
NET DEBT1 RECONCILIATION
The variances in the net debt (total debt less cash and cash equivalents) in 2018 are shown below (in millions of dollars), with the applicable
financial ratios included.
393
3.6
Adjusted OIBD1 (last twelve months)
Net debt/Adjusted OIBD1,2
489
3.5
Liquidity available via the Corporation's credit facilities, along with the expected cash flow generated by its operating activities, will provide
sufficient funds to meet our financial obligations and to fulfill our capital expenditure program for at least the next twelve months. Net capital
expenditures are expected to be in a range of $330-$400 million in 2019. This amount is subject to change, depending on the Corporation’s
operating results and on general economic conditions. As at December 31, 2018, the Corporation had $651 million (net of letters of credit in
the amount of $13 million) available on its $750 million credit facility (excluding our subsidiaries Greenpac and Reno de Medici's credit facilities).
Cash and cash equivalents as at December 31, 2018, are composed as follows: $23 million in the Parent Company, and $100 million in
Greenpac and Reno de Medici.
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
2 Adjusted OIBD (last twelve months) including business combinations of 2017 and 2018 on a pro-forma basis.
36
46
46
EMPLOYEE FUTURE BENEFITS
The Corporation’s employee future benefits assets and liabilities amounted to $445 million and $579 million respectively as at
December 31, 2018, including an amount of $99 million for post-retirement benefits other than pension plans. The pension plans include an
amount of $63 million, which does not require any funding by the Corporation until it is paid to the employees. This amount is not expected
to increase, as the Corporation has reviewed its benefits program to phase out some of them for future retirees.
With regard to pension plans, the Corporation’s risk is limited, since all defined benefit pension plans are closed to new employees and less
than 10% of its active employees are subject to those pension plans, while the remaining employees are part of the Corporation’s defined-
contribution plans, such as group RRSPs or 401(k). Based on their balances as at December 31, 2018, 49% of the Corporation pension plans
have been evaluated on December 31, 2017 (44% in 2016). Where applicable, we used the measurement relief allowed by law in order to
reduce the impact of its increased current contributions.
Considering the assumptions used and the asset ceiling limit, the deficit status for accounting purposes of its pension plans amounted to
$55 million as at December 31, 2018, compared to $36 million in 2017. The 2018 pension plan expense was $8 million and the cash outflow
was $8 million. Due to the investment returns in 2018 and the change in the assumptions, the expected expense for these pension plans is
$7 million in 2019. As for the cash flow requirements, these pension plans are expected to require a net contribution of approximately
$8 million in 2019. Finally, on a consolidated basis, the solvency ratio of the Corporation’s pension plans has remained stable at approximately
100%.
COMMENTS ON THE FOURTH QUARTER OF 2018
Sales of $1,196 million increased by $114 million or 11% compared to the same period last year. This was driven by a 13% increase in the
Tissue segment reflecting volume improvements, and a more favourable sales mix, exchange rate and average selling price during the period.
A 7% increase in the Containerboard Packaging group similarly benefited sales, and was driven by higher selling prices and the acquisition
of converting facilities in Ontario at the end of 2017. Sales generated by the European Boxboard segment were up by 16% compared to the
prior year, reflecting higher shipments, acquisitions in the last twelve months, and a more favourable Canadian dollar - euro exchange rate.
Finally, fourth quarter sales in the Specialty Products segment improved 7% from prior year levels, as the benefits of the recent acquisition
and slight improvements in selling price and sales mix were slightly offset by lower sales in recovery activities following the year-over-year
decrease in brown recycled fibres prices.
The Corporation generated an operating income before depreciation and amortization (OIBD) of $37 million in the fourth quarter of 2018. This
compared to the $104 million generated in the comparable period last year. In addition to the $75 million impairment charge recorded in the
Tissue segment during the period, the variance reflects higher production costs in all segments, higher energy costs in European Boxboard
and Tissue, slightly lower volume in both Containerboard and Boxboard Europe (excluding acquisitions), and a lower contribution from recovery
operations within the Specialty Products segment related to changes in raw material pricing. These were offset by improvements generated
from higher selling prices and more favourable sales mix in all business segments, and business acquisitions in the last twelve months.
Operating income before depreciation and amortization similarly benefited from favourable raw material prices on a net basis, as the beneficial
impact of lower OCC pricing on Containerboard results outweighed the significant consequence of higher year-over-year white recycled fibre
and pulp pricing on Tissue segment results.
On an adjusted basis1, fourth quarter OIBD stood at $113 million, versus $105 million in the prior year.
The specific items, before income taxes, that impacted our fourth quarter 2018 results were:
•
•
•
•
a $75 million impairment charge related to revaluation of certain assets in our Tissue papers segment (OIBD and net loss)
a $8 million foreign exchange loss on long-term debt and financial instruments (net loss)
a $4 million unrealized loss on financial instruments (OIBD and net loss)
a $3 million gain on other items (OIBD and net loss)
For the three-month period ended December 31, 2018, the Corporation posted a net loss of $65 million, or $0.69 per share, compared to net
earnings of $57 million, or $0.60 per share, in the same period of 2017. On an adjusted basis1, the Corporation generated break even net
earnings in the fourth quarter of 2018, or $0.00 per share, compared to net earnings of $13 million, or $0.14 per share, in the same period of
2017.
37
47
47
The reconciliation of operating income (loss) to OIBD, to adjusted operating income (loss) and to adjusted OIBD by business segment is
as follows:
(in millions of Canadian dollars)
Operating income (loss)
Depreciation and amortization
Operating income (loss) before depreciation and amortization
Specific items:
Gain on acquisitions, disposals and others
Impairment charges
Restructuring costs (reversals)
Unrealized loss (gain) on derivative financial instruments
Adjusted operating income (loss) before depreciation and
amortization
Adjusted operating income (loss)
Containerboard
Boxboard
Europe
Specialty
Products
Tissue Papers
Corporate
Activities
Consolidated
For the 3-month period ended December 31, 2018
84
27
111
(1)
—
3
(2)
—
111
84
9
11
20
—
—
—
—
—
20
9
9
6
15
(4)
—
(1)
—
(5)
10
4
(100)
17
(83)
—
75
—
—
75
(8)
(25)
(35)
9
(26)
—
—
—
6
6
(20)
(29)
(33)
70
37
(5)
75
2
4
76
113
43
(in millions of Canadian dollars)
Operating income (loss)
Depreciation and amortization
Operating income (loss) before depreciation and amortization
Specific items:
Impairment reversal
Restructuring costs
Unrealized loss on derivative financial instruments
Adjusted operating income (loss) before depreciation and
amortization
Adjusted operating income (loss)
Containerboard
Boxboard
Europe
Specialty
Products
Tissue Papers
Corporate
Activities
Consolidated
For the 3-month period ended December 31, 2017
51
22
73
—
—
1
1
74
52
11
8
19
—
—
—
—
19
11
9
5
14
—
—
—
—
14
9
(6)
18
12
—
—
—
—
12
(6)
(20)
6
(14)
(2)
1
1
—
(14)
(20)
45
59
104
(2)
1
2
1
105
46
The main variances1 in sales and operating income before depreciation and amortization in the fourth quarter of 2018, compared to the same
period of 2017, are shown below:
1 For definitions of certain sales and operating income before depreciation and amortization (OIBD) variation categories, please refer to the "Financial results for the year ended December 31, 2018, compared to the year ended December
31, 2017" for more details.
48
48
38
NEAR-TERM OUTLOOK
We expect stable near-term performance from the Containerboard segment, with lower raw material pricing providing some counterbalance
to seasonally softer demand levels and a slight decrease in medium selling prices. Given the sound economic metrics in North America, our
near-term outlook for this segment remains positive. The outlook for Tissue is not as robust in the near-term. While recent decreases in raw
material pricing and the continued implementation of announced price increases in some product sub-segments are positive for this business,
any resulting benefits are being counterbalanced by difficult industry-wide market dynamics and operational challenges at our St. Helens mill,
in Oregon. As such, we expect financial performance will remain under pressure. Management is focused on the resolution of these issues,
and is currently implementing the actions required - in addition to the modernization efforts already underway - to successfully realign the
tissue segment's operational performance with targeted profitability levels. In Europe, in addition to acquisitions completed in 2018, macro-
economic and political factors support a moderately positive near term outlook. Specifically, demand softness is expected to be counterbalanced
by favourable raw material pricing, expectations of slightly lower energy costs, and the implementation of price increases in virgin boxboard,
offset by pricing pressure in the recycled boxboard business.
On a broader company-wide scale, focus is centered on implementing the 2019 investment program, currently estimated to be $330 million
to $400 million contingent on economic conditions, optimizing operational performance across all segments, and completing analysis of the
Bear Island containerboard project in Virginia. Cascades' longer-term goals remain grounded on maximizing the financial and strategic
returns generated by capital allocation decisions, diligently managing balance sheet and leverage, and positioning business platforms for
long term success and sustainable value creation.
CAPITAL STOCK INFORMATION
SHARE TRADING
Cascades' stock is traded on the Toronto Stock Exchange under the ticker symbol “CAS”. From January 1, 2018 to December 31, 2018,
Cascades' share price fluctuated between $9.54 and $16.55. During the same period, 54.9 million Cascades shares were traded on the
Toronto Stock Exchange. On December 31, 2018, Cascades shares closed at $10.23. This compares to a closing price of $13.62 on the last
day of 2017.
SHARES OUTSTANDING
As at December 31, 2018, the Corporation's issued and outstanding capital stock consisted of 94,163,515 shares (94,987,958 as at
December 31, 2017), and 4,409,358 issued and outstanding stock options (4,990,120 as at December 31, 2017). In 2018, the Corporation
purchased 1,539,380 shares for cancellation, while 714,937 stock options were exercised, 175,749 stock options were granted and 41,574
stock options were forfeited. As at February 27, 2019, issued and outstanding capital stock consisted of 94,173,515 shares and
4,391,798 stock options.
NORMAL COURSE ISSUER BID PROGRAM
The current normal course issuer bid enables the Corporation to purchase for cancellation up to 1,903,282 shares between March 19, 2018
and March 18, 2019. During the period from March 19, 2018 to February 27, 2019, the Corporation purchased 1,361,000 shares for cancellation.
DIVIDEND POLICY
On February 27, 2019, Cascades' Board of Directors declared a quarterly dividend of $0.04 per share to be paid on March 28, 2019, to
shareholders of record at the close of business on March 13, 2019. This $0.04 per share dividend is in line with the previous quarter and the
same quarter last year. On February 27, 2019, dividend yield was 1.6%.
TSX Ticker: CAS
Shares outstanding (in millions) 1
Closing price 1
Average daily volume 2
Dividend yield 1
1 On the last day of the quarter.
2 Average daily volume on the Toronto Stock Exchange.
2016
Q4
94.5
Q1
94.7
Q2
94.7
Q3
94.7
2017
Q4
95.0
Q1
95.0
Q2
94.6
Q3
94.2
2018
Q4
94.2
$
12.10
$
13.71
$
17.69
$
14.96
$
13.62
$
13.33
$
11.77
$
12.61
$
10.23
118,554
182,011
362,191
214,545
208,984
246,940
201,563
215,882
218,696
1.3%
1.2%
0.9%
1.1%
1.2%
1.2%
1.4%
1.3%
1.6%
39
49
49
CASCADES' SHARE PRICE FOR THE PERIOD FROM JANUARY 1, 2017 TO DECEMBER 31, 2018
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Corporation’s principal contractual obligations and commercial commitments relate to outstanding debt, operating leases and obligations
for its pension and post-employment benefit plans. The following table summarizes these obligations as at December 31, 2018:
CONTRACTUAL OBLIGATIONS
Payment due by period (in millions of Canadian dollars)
Long-term debt and capital-leases, including capital and interest
Operating leases
Pension plans and other post-employment benefits1
Total contractual obligations
TOTAL
2,200
117
1,002
3,319
LESS THAN A
YEAR
139
BETWEEN 1-5
YEARS
1,731
38
36
213
66
160
1,957
OVER 5
YEARS
330
13
806
1,149
1 These amounts represent all the benefits payable to current members during the following years and thereafter without limitations. The majority of benefit payments are payable from trustee-administered
funds. The difference will come from future investment returns expected on plan assets and future contributions that will be made by the Corporation for services rendered after December 31, 2018.
FACTORING OF ACCOUNTS RECEIVABLE
The Corporation sells its accounts receivable from one of its European subsidiaries through a factoring contract with a financial institution.
The Corporation uses factoring of receivables as a source of financing by reducing its working capital requirements. When the receivables
are sold, the Corporation removes them from the balance sheet, recognizes the amount received as the consideration for the transfer and
records a loss on factoring which is included in Financing expense. As at December 31, 2018, the off-balance sheet impact of the factoring
of receivables amounted to $50 million (€32 million). The Corporation expects to continue to sell receivables on an ongoing basis. Should it
decide to discontinue this contract, its working capital and bank debt requirements would increase.
TRANSACTIONS WITH RELATED PARTIES
The Corporation has also entered into various agreements with its joint-venture partners, significantly influenced companies and entities that
are affiliated with one or more of its directors for the supply of raw material including recycled paper, virgin pulp and energy, as well as the
supply of unconverted and converted products, and other agreements entered into in the normal course of business. Aggregate sales by the
Corporation to its joint-venture partners and other affiliates totaled $322 million and $295 million for 2018 and 2017 respectively. Aggregate
sales to the Corporation from its joint-venture partners and other affiliates came to $82 million and $117 million for 2018 and 2017 respectively.
50
50
40
CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
In 2018, the Corporation changed the classification of some Corporate Activities expenses totaling $59 million (2017 - $62 million). Those
costs were previously presented under “Selling and administrative expenses” and are now presented under “Cost of sales” since they are
necessary for bringing finished goods to their present location and condition.
A) NEW IFRS ADOPTED
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 establishes a comprehensive framework for determining how much and when revenue is recognized. It replaces all previous revenue
recognition standards, including IAS 18 Revenue, and related interpretations such as IFRIC 13 Customer Loyalty Programs.
Impact of adoption
The Corporation adopted IFRS 15 using the full retrospective application. The adoption of this standard did not result in any adjustment in
the amounts previously recognized in the consolidated balance sheet, as contract costs were already recognized under other assets and
depreciated over the contract term, while contract liabilities, consisting primarily of volume rebates provision, were already accrued using the
most likely amount methodology. As well, the timing in the recognition of sales was not impacted by the new standard, as our previous revenue
recognition policy already included control indicators defined in IFRS 15. Consequently, neither the consolidated statement of earnings,
consolidated statement of comprehensive income, consolidated statement of equity nor consolidated statement of cash flows were adjusted.
The only impact on the consolidated balance sheet pertains to the classification of contract liabilities, which can no longer be netted against
“Accounts receivable” under IFRS 15. Contract liabilities, composed of volume rebates, are now presented on the line item “Trade and other
payables”. As at December 31, 2018, contract liabilities balance was at $50 million (2017 - 45 million). As well, to comply with IFRS 15
disclosure requirements, Note 21 ''Revenue'' was added whereas Note 12 ''Trade and Other Payables was modified''.
IFRS 9 FINANCIAL INSTRUMENTS
IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial
items. This standard replaces IAS 39 Financial Instruments : Recognition and Measurement.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates
the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale.
The following table presents the initial IAS 39 classification and the new IFRS 9 classification for all financial instruments held by the Corporation
as at January 1, 2018.
Financial assets and liabilities
Cash and cash equivalents
Accounts receivable
Equity investments
Financial instruments used for hedging
Other current and non current financial assets
Bank loans and advances
Trade and other payables
Revolving credit facility
Unsecured senior notes
IAS 39 classification
IFRS 9 classification
Loans and receivables (amortized cost)
Loans and receivables (amortized cost)
Amortized cost
Amortized cost
Available for sale (FVOCI)
FV — hedging instrument (FVOCI)
FVTPL
Other financial liabilities (amortized cost)
Other financial liabilities (amortized cost)
Other liabilities (amortized cost)
Other liabilities (amortized cost)
FVTPL
FV — hedging instrument (FVOCI)
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
Other current and non current financial liabilities
FVTPL
As allowed by IFRS 9, the Corporation adopted the simplified expected credit loss model for trade receivables.
Impact of adoption
The change in the fair value of our equity investment in shares can no longer be recognized through other comprehensive income. As described
above, equity investment must now be classified as FVTPL. Consequently, the balance of $2 million previously recorded in other comprehensive
income was reclassified to retained earnings as at January 1, 2018.
41
51
51
B) RECENT IFRS PRONOUNCEMENT NOT YET ADOPTED
IIFRS 16 LEASES
In January 2016, the IASB released IFRS 16 Leases, which supersedes IAS 17 Leases, and the related interpretations on leases: IFRIC 4
Determining whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives and SIC 27 Evaluating the Substance of
Transactions in the Legal Form of a Lease. The standard is effective for annual periods beginning on or after January 1, 2019. The new
standard requires lessees to recognize a lease liability reflecting future lease payments and a “right-of-use asset” for virtually all leases
contracts, and record it on the balance sheet, except with respect to lease contracts that meet limited exception criteria, such as when the
underlying asset is of low value or the maturity of the lease is short term. Depreciation expense on the "right-of-use asset" and interest expense
on the lease liability will replace the operating lease expense.
The Corporation will apply IFRS 16 Leases retrospectively with no restatement of comparative information as allowed by the Standard. At the
date of initial application, lease liability for leases previously classified as an operating lease under IAS 17 Leases equals the present value
of the remaining lease payments, discounted using the Corporation's incremental borrowing rate. As for the underlying "right-of-use asset",
the Corporation will elect to measure it at an amount equal to the lease liability. Therefore, the application of IFRS 16 Leases will not result
in any adjustment to the opening retained earnings except for units whose assets are valued at fair market value following an impairment
provision. When applying IFRS 16, the Corporation will use the low value exception as well as the short term exception on all categories of
assets but buildings as allowed by IFRS 16. The Corporation is finalizing the calculation of the additional lease liabilities and underlying "right-
of-use assets" resulting from the adoption of the Standard.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities in the financial statements and disclosure of contingencies at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. On a regular basis and with the information available, Management reviews its estimates,
including those related to environmental costs, employee future benefits, collectability of accounts receivable, financial instruments,
contingencies, income taxes, useful life and residual value of property, plant and equipment and impairment of property, plant and equipment
and intangible assets. Actual results could differ from those estimates. When adjustments become necessary, they are reported in earnings
in the period in which they occur.
A. IMPAIRMENT OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL
In determining the recoverable amount of an asset or a cash generating unit (CGU), the Corporation uses several key assumptions based
on external information on the industry when available, including estimated production levels, selling prices, volume, raw material costs, foreign
exchange rates, growth rates, discounting rates and capital spending.
The Corporation believes its assumptions are reasonable. Based on available information at the assessment date, however, these assumptions
involve a high degree of judgment and complexity. Management believes that the following assumptions are the most susceptible to change
and therefore could impact the valuation of the assets in the next year.
DESCRIPTION OF SIGNIFICANT IMPAIRMENT TESTING ASSUMPTIONS (see Note 25 of consolidated financial statements)
REVENUES, OPERATING INCOME BEFORE DEPRECIATION (OIBD) MARGINS, CASH FLOWS AND GROWTH RATES
The assumptions used were based on the Corporation's internal budget. Revenues, OIBD margins and cash flows were projected for a period
of five years and a perpetual long-term growth rate was applied thereafter. In arriving at its forecasts, the Corporation considers past experience,
economic trends such as gross domestic product growth and inflation, as well as industry and market trends.
DISCOUNT RATES
The Corporation assumed a discount rate in order to calculate the present value of its projected cash flows. The discount rate represents a
weighted average cost of capital (WACC) for comparable companies operating in similar industries of the applicable CGU, group of CGUs or
reportable segment based on publicly available information.
52
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42
FOREIGN EXCHANGE RATES
When estimating the fair value less cost of disposal, foreign exchange rates are determined using the financial institution's average forecast
for the first two years of forecasting. For the following three years, the Corporation uses the last five years' historical average of the foreign
exchange rate. Terminal rate is based on historical data of the last 20 years and adjusted to reflect Management's best estimate.
SHIPMENTS
The assumptions used are based on the Corporation's internal budget for the next year and are usually held constant for the forecast period.
In arriving at its budgeted shipments, the Corporation considers past experience, economic trends as well as industry and market trends.
Considering the sensitivity of the key assumptions used, there is measurement uncertainty since adverse changes in one or a combination
of the Corporation's key assumptions could cause a significant change in the carrying amounts of these assets.
B. INCOME TAXES
The Corporation is required to estimate the income taxes in each jurisdiction in which it operates. This includes estimating a value for existing
tax losses based on the Corporation's assessment of its ability to use them against future taxable income before they expire. If the Corporation's
assessment of its ability to use the tax losses proves inaccurate in the future, more or less of the tax losses might be recognized as assets,
which would increase or decrease the income tax expense and, consequently, affect the Corporation's results in the relevant year.
C. EMPLOYEE BENEFITS
The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of
high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating
the terms of the related pension liability.
The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro-
rated on years of service and Management's best estimate of expected plan investment performance, salary escalations, retirement ages of
employees and expected health care costs. The accrued benefit obligation is evaluated using the market interest rate at the evaluation date.
Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed annually.
D. GOODWILL, INTANGIBLE ASSETS AND BUSINESS COMBINATIONS
Goodwill and client lists have arisen as a result of business combinations. The acquisition method, which also requires significant estimates
and judgments, is used to account for these business combinations. As part of the allocation process in a business combination, estimated
fair values are assigned to the net assets acquired. These estimates are based on forecasts of future cash flows, estimates of economic
fluctuations and an estimated discount rate. The excess of the purchase price over the estimated fair value of the net assets acquired is then
assigned to goodwill. In the event that actual net assets fair values are different from estimates, the amounts allocated to the net assets could
differ from what is currently reported. This would then have a direct impact on the carrying value of goodwill. Differences in estimated fair
values would also have an impact on the amortization of definite life intangibles.
CRITICAL JUDGMENTS IN APPLYING THE CORPORATION'S ACCOUNTING POLICIES
SUBSIDIARIES AND EQUITY ACCOUNTED INVESTMENTS
Significant judgment is applied in assessing whether certain investment structures result in control, joint control or significant influence over
the operations of the investment. Management's assessment of control, joint control or significant influence over an investment will determine
the accounting treatment for the investment. The Corporation has a 59.7% direct interest in Greenpac. Greenpac's Shareholders agreement
required a majority of 80% for all decision-making related to relevant activities. Consequently, the Corporation did not have power over relevant
activities of Greenpac and its participation was accounted for as an associate. On April 4, 2017, Cascades and its partners in Greenpac
Holding LLC (Greenpac) agreed to modify the equity holders' agreement. These modifications enable Cascades to direct decisions about
relevant activities. Therefore, from an accounting standpoint, Cascades now has control over Greenpac, which triggered its deemed acquisition
and thus fully consolidates Greenpac since April 4, 2017. Please refer to Notes 5 and 8 of the consolidated financial statements for more
details.
43
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53
CONTROLS AND PROCEDURES
EVALUATION OF THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES, AND INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Corporation's President and Chief Executive Officer, and its Vice-President and Chief Financial Officer have designed, or caused to be
designed under their supervision, disclosure controls and procedures (DC&P), and internal controls over financial reporting (ICFR) as defined
in National Instrument 52-109, “Certification of Disclosure in Issuer's Annual and Interim Filings”.
The DC&P have been designed to provide reasonable assurance that material information relating to the Corporation is made known to the
President and Chief Executive Officer, and the Vice-President and Chief Financial Officer by others, and that information required to be
disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by the Corporation under securities legislation
is recorded, processed, summarized and reported within the time periods specified in securities legislation. They have limited the scope of
their design of DC&P and ICFR to exclude controls, policies and procedures of the Corporation's 2018 business combinations. The design
and evaluation of the operating effectiveness of the 2018 business combinations' DC&P and ICFR will be completed within 365 days from
the date of acquisition. The President and Chief Executive Officer and the Vice-President and Chief Financial Officer have concluded, based
on their evaluation, that the Corporation's DC&P were effective as at December 31, 2018.
Business combinations' balance sheet and results are included in our consolidated financial statements since the combination date. They
constituted approximately 3.1% of total consolidated assets as of December 31, 2018 while they represented approximately 1.6% of
consolidated sales and approximately 1.7% of consolidated net earnings attributable to Shareholders for the year ended December 31, 2018.
Further details on these business combinations are disclosed in Note 5 of the Corporation’s audited consolidated financial statements.
The ICFR have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with IFRS. The President and Chief Executive Officer, and the Vice-President and Chief Financial Officer have
assessed the effectiveness of the ICFR as at December 31, 2018, based on the control framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 COSO Framework). Based on this assessment, they have concluded that the Corporation’s
ICFR were effective as at December 31, 2018 and expect to certify the Corporation’s annual filings with the U.S. Securities and Exchange
Commission on Form 40-F, as required by the United States Sarbanes-Oxley Act.
During the quarter ended December 31, 2018, there were no changes to the Corporation's ICFR that materially affected, or are reasonably
likely to materially affect, its ICFR.
RISK FACTORS
As part of its ongoing business operations, the Corporation is exposed to certain market risks, including risks ensuing from changes in selling
prices for its principal products, costs of raw material, interest rates and foreign currency exchange rates, all of which impact the Corporation’s
financial position, operating results and cash flows. The Corporation manages its exposure to these and other market risks through regular
operating and financing activities and, on a limited basis, through the use of derivative financial instruments. We use these derivative financial
instruments as risk management tools, not for speculative investment purposes. The following is a discussion of key areas of business risks
and uncertainties that we have identified, and our mitigating strategies. The risk areas below are listed in no particular order, as risks are
evaluated based on both severity and probability. Readers are cautioned that the following is not an exhaustive list of all the risks we are
exposed to, nor will our mitigation strategies eliminate all risks listed.
a) The markets for some of the Corporation’s products tend to be cyclical in nature and prices for some of its products, as well as
raw material and energy costs, may fluctuate significantly, which can adversely affect its business, operating results, profitability
and financial position.
The markets for some of the Corporation’s products, particularly containerboard and boxboard, are cyclical. As a result, prices for these types
of products and for its two principal raw material, recycled paper and virgin fibre, have fluctuated significantly in the past and will likely continue
to fluctuate significantly in the future, principally due to market imbalances between supply and demand. Demand is heavily influenced by the
strength of the global economy and the countries or regions in which Cascades does business, particularly Canada and the United States,
the Corporation’s two primary markets. Demand is also influenced by fluctuations in inventory levels held by customers and consumer
preferences. Supply depends primarily on industry capacity and capacity utilization rates. In periods of economic weakness, reduced spending
by consumers and businesses results in decreased demand, which can potentially cause downward price pressure. Industry participants may
also, at times, add new capacity or increase capacity utilization rates, potentially causing supply to exceed demand and exerting downward
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price pressure. Depending on market conditions and related demand, Cascades may have to take market-related downtime. In addition, the
Corporation may not be able to maintain current prices or implement additional price increases in the future. If Cascades is unable to do so,
its revenues, profitability and cash flows could be adversely affected. In addition, other participants may introduce new capacity or increase
capacity utilization rates, which could also adversely affect the Corporation’s business, operating results and financial position. Prices for
recycled and virgin fibre also fluctuate considerably. The costs of these material present a potential risk to the Corporation’s profit margins,
in the event that it is unable to pass along price increases to its customers on a timely basis. Although changes in the price of recycled fibre
generally correlate with changes in the price of products made from recycled paper, this may not always be the case. If Cascades were unable
to implement increases in the selling prices for its products to compensate for increases in the price of recycled or virgin fibre, the Corporation’s
profitability and cash flows would be adversely affected. In addition, Cascades uses energy, mainly natural gas and fuel oil, to generate steam,
which it then uses in the production process and to operate machinery. Energy prices, particularly for natural gas and fuel oil, have continued
to remain very volatile. Cascades continues to evaluate its energy costs and consider ways to factor energy costs into its pricing. However,
should energy prices increase, the Corporation’s production costs, competitive position and operating results would be adversely affected. A
substantial increase in energy costs would adversely affect the Corporation’s operating results and could have broader market implications
that could further adversely affect the Corporation’s business or financial results.
To mitigate price risk, our strategies include the use of various derivative financial instrument transactions, whereby it sets the price for notional
quantities of old corrugated containers, electricity and natural gas.
Additional information on our North American electricity and natural gas hedging programs as at December 31, 2018 is set out below:
NORTH AMERICAN ELECTRICITY HEDGING
Electricity consumption
Electricity consumption in a regulated market
% of consumption hedged in a de-regulated market (2019)
Average prices (2019) (in US$, per KWh)
Fair value as at December 31, 2018 (in millions of CAN$)
NORTH AMERICAN NATURAL GAS HEDGING
Natural gas consumption
% of consumption hedged (2019)
Average prices (2019 - 2023) (in US$, per mmBTU) (in CAN$, per GJ)
Fair value as at December 31, 2018 (in millions of CAN$)
UNITED STATES
CANADA
50%
45%
9%
0.03
—
50%
61%
—
—
—
UNITED STATES
CANADA
49%
29%
$
2.79
(1)
51%
8%
3.60
—
$
$
$
$
b) Cascades faces significant competition and some of its competitors may have greater cost advantages or be able to achieve
greater economies of scale, or be able to better withstand periods of declining prices and adverse operating conditions, which
could negatively affect the Corporation’s market share and profitability.
The markets for the Corporation’s products are highly competitive. In some of the markets in which Cascades competes, such as tissue
papers, it competes with a small number of other producers. In some businesses, such as the containerboard industry, competition tends to
be global. In others, such as the tissue industry, competition tends to be regional. In the Corporation’s packaging products segment, it also
faces competition from alternative packaging materials, such as vinyl, plastic and Styrofoam, which can lead to excess capacity, decreased
demand and pricing pressures. Competition in the Corporation’s markets is primarily based on price, as well as customer service and the
quality, breadth and performance characteristics of its products. The Corporation’s ability to compete successfully depends on a variety of
factors, including:
•
•
•
its ability to maintain high plant efficiency, operating rates and lower manufacturing costs
the availability, quality and cost of raw material, particularly recycled and virgin fibre, labour, and
the cost of energy.
Some of the Corporation’s competitors may, at times, have lower fibre, energy and labour costs, and less restrictive environmental and
governmental regulations to comply with than Cascades. For example, fully integrated manufacturers, or those whose requirements for pulp
or other fibre are met fully from their internal sources, may have some competitive advantages over manufacturers that are not fully integrated,
such as Cascades, in periods of relatively high raw material pricing, in that the former are able to ensure a steady source of these raw material
at costs that may be lower than prices in the prevailing market. In contrast, competitors that are less integrated than Cascades may have cost
advantages in periods of relatively low pulp or fibre prices because they may be able to purchase pulp or fibre at prices lower than the costs
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the Corporation incurs in the production process. Other competitors may be larger in size or scope than Cascades, which may allow them to
achieve greater economies of scale on a global basis or to better withstand periods of declining prices and adverse operating conditions. In
addition, there has been an increasing trend among the Corporation’s customers towards consolidation. With fewer customers in the market
for the Corporation’s products, the strength of its negotiating position with these customers could be weakened, which could have an adverse
effect on its pricing, margins and profitability.
To mitigate competition risk, Cascades’ targets are to offer quality products that meet customers’ needs at competitive prices and to provide
good customer service.
c) Because of the Corporation’s international operations, it faces political, social and exchange rate risks that can negatively affect
its business, operating results, profitability and financial condition.
Cascades has customers and operations located outside Canada. In 2018, sales outside Canada, in Canadian dollars, represented
approximately 62% of the Corporation’s consolidated sales, including 40% in the United States. In 2018, 22% of sales from Canadian operations
were made to the United States.
The Corporation’s international operations present it with a number of risks and challenges, including:
•
•
•
effective product marketing in other countries
tariffs and other trade barriers, and
different regulatory schemes and political environments applicable to the Corporation’s operations in areas such as environmental
and health and safety compliance.
In addition, the Corporation’s consolidated financial statements are reported in Canadian dollars, while a portion of its sales is made in other
currencies, primarily the U.S. dollar and the euro. The variation of the Canadian dollar against the U.S. dollar may adversely or positively
affect the Corporation’s reported operating results and financial condition. This has a direct impact on export prices and also contributes to
the impact on Canadian dollar prices in Canada, because several of the Corporation’s product lines are priced in U.S. dollars. As well, a
substantial portion of the Corporation’s debt is also denominated in currencies other than the Canadian dollar. The Corporation has senior
notes outstanding and also some borrowings under its credit facility that are denominated in U.S. dollars and in euros, in the amounts of
US$1,045 million and €97 million respectively as at December 31, 2018.
Moreover, in some cases, the currency of the Corporation’s sales does not match the currency in which it incurs costs, which can negatively
affect the Corporation’s profitability. Fluctuations in exchange rates can also affect the relative competitive position of a particular facility, where
the facility faces competition from non-local producers, as well as the Corporation’s ability to successfully market its products in export markets.
As a result, if the Canadian dollar were to remain permanently strong compared to the U.S. dollar and the euro, it could affect the profitability
of the Corporation’s facilities, which could lead Cascades to shut down facilities either temporarily or permanently, all of which could adversely
affect its business or financial results. To mitigate the risk of currency rises from future commercial transactions, recognized assets and
liabilities, and net investments in foreign operations, which are partially covered by purchases and debt, Management has implemented a
policy for managing foreign exchange risk against the relevant functional currency.
The Corporation uses various foreign exchange forward contracts and related currency option instruments to anticipate sales net of purchases,
interest expenses and debt repayment. Gains or losses from the derivative financial instruments designated as hedges are recorded under
“Other comprehensive income (loss)” and are reclassified under earnings in accordance with the hedge items.
Additional information on our North American foreign exchange hedging program is set out below:
NORTH AMERICAN FOREIGN EXCHANGE HEDGING 1
Sell contracts and currency options on net exposure to US$:
Total amount (in millions of US$)
Estimated % of sales, net of expenses from Canadian operations (excluding subsidiaries with non-
controlling interests)
Average rate (US$/CAN$)
Fair value as at December 31, 2018 (in millions of CAN$)
1 See Note 27 of the audited consolidated financial statements for more details on financial instruments.
2019
2020
2021
$ 48 to 65
$ 40 to 68
$ 5 to 15
44% to 60%
37% to 63%
5% to 14%
$
0.75
(2)
0.76
— $
0.75
(3)
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d) The Corporation’s operations are subject to comprehensive environmental regulations and involve expenditures that may be
material in relation to its operating cash flow.
The Corporation is subject to environmental laws and regulations imposed by the various governments and regulatory authorities in all countries
in which it operates. These environmental laws and regulations impose stringent standards on the Corporation regarding, among other things:
•
•
•
•
•
air emissions
water discharges
use and handling of hazardous materials
use, handling and disposal of waste, and
remediation of environmental contamination.
The Corporation is also subject to the U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)
as well as to other applicable legislation in the United States, Canada and Europe that holds companies accountable for the investigation and
remediation of hazardous substances. The Corporation’s European subsidiaries and some of our Québec plants are also subject to an
emissions market, aimed at reducing worldwide CO2 emissions. Each unit has been allocated emission rights (“CO2 quota”). On a calendar-
year basis, the Corporation must buy the necessary credits to cover its deficit, on the open market, if its emissions are higher than quota.
The Corporation’s failure to comply with applicable environmental laws, regulations or permit requirements may result in civil or criminal fines,
penalties or enforcement actions. These may include regulatory or judicial orders enjoining or curtailing operations, or requiring corrective
measures, the installation of pollution control equipment or remedial actions, any of which could entail significant expenditures. It is difficult
to predict the future development of such laws and regulations, or their impact on future earnings and operations, but these laws and regulations
may require capital expenditures to ensure compliance. In addition, amendments to, or more stringent implementation of, current laws and
regulations governing the Corporation’s operations could have a material adverse effect on its business, operating results or financial position.
Furthermore, although Cascades generally tries to plan for capital expenditures relating to environmental and health and safety compliance
on an annual basis, actual capital expenditures may exceed those estimates. In such an event, Cascades may be forced to curtail other capital
expenditures or other activities. In addition, the enforcement of existing environmental laws and regulations has become increasingly strict.
The Corporation may discover currently unknown environmental problems or conditions in relation to its past or present operations, or may
face unforeseen environmental liabilities in the future.
These conditions and liabilities may:
•
•
require site remediation or other costs to maintain compliance or correct violations of environmental laws and regulations, or
result in governmental or private claims for damage to persons, property or the environment.
Either of these possibilities could have a material adverse effect on the Corporation’s financial condition or operating results.
Cascades may be subject to strict liability and, under specific circumstances, joint and several (solidary) liability for the investigation and
remediation of soil, surface and groundwater contamination, including contamination caused by other parties on properties that it owns or
operates, and on properties where the Corporation or its predecessors have arranged for the disposal of regulated materials. As a result, the
Corporation is involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The
Corporation may become involved in additional proceedings in the future, the total amount of future costs and other environmental liabilities
of which could be material.
To date, the Corporation is in compliance, in all material respects, with all applicable environmental legislation or regulations. However, we
expect to incur ongoing capital and operating expenses in order to achieve and maintain compliance with applicable environmental
requirements.
EMISSIONS MARKET
The Corporation is exposed to the emissions trading market and has to hold carbon credits equivalent to its emissions. Depending on
circumstances, the Corporation may have to buy credits on the market or could sell some in the future. At short or medium term, these
transactions would have no significant effect on the financial position of the Corporation and it is not anticipated that this will change in the
future.
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e) Cascades may be subject to losses that might not be covered in whole or in part by its insurance coverage.
Cascades carries comprehensive liability, fire and extended coverage insurance on most of its facilities, with policy specifications and insured
limits customarily carried in its industry for similar properties. In addition, some types of losses, such as losses resulting from wars, acts of
terrorism or natural disasters, are generally not insured because they are either uninsurable or not economically practical. Moreover, insurers
have recently become more reluctant to insure against these types of events. Should an uninsured loss or a loss in excess of insured limits
occur, Cascades could lose capital invested in that property, as well as the anticipated future revenues derived from the manufacturing activities
conducted on that property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property.
Any such loss could adversely affect its business, operating results or financial condition.
To mitigate the risk subject to insurance coverage, the Corporation reviews its strategy annually with the Board of Directors and is seeking
different alternatives to achieve more efficient forms of insurance coverage at the lowest costs possible.
f) Labour disputes could have a material adverse effect on the Corporation’s cost structure and ability to run its mills and plants.
As at December 31, 2018, the Corporation employed approximately 11,700 employees, of whom roughly 9,900 were employees of its Canadian
and United States operations. Approximately 28% of the Corporation's Canadian and United States workforce is unionized under 29 separate
collective bargaining agreements. In addition, in Europe, some of the Corporation's operations are subject to national industry collective
bargaining agreements that are renewed on an annual basis. The Corporation’s inability to negotiate acceptable contracts with these unions
upon expiration of an existing contract could result in strikes or work stoppages by the affected workers, and increased operating costs as a
result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike or another form of work stoppage,
Cascades could experience a significant disruption in operations or higher labour costs, which could have a material adverse effect on its
business, financial condition, operating results and cash flow. Of the 29 collective bargaining agreements in North America, 4 are expired and
are currently under negotiation, 8 will expire in 2019 and 4 will expire in 2020.
The Corporation generally begins the negotiation process several months before agreements are due to expire and is currently in the process
of negotiating with the unions where the agreements have expired or will soon expire. However, Cascades may not be successful in negotiating
new agreements on satisfactory terms, if at all.
g) Cascades may make investments in entities that it does not control and may not receive dividends or returns from those
investments in a timely fashion or at all.
Cascades has established joint ventures, made investments in associates and acquired significant participation in subsidiaries in order to
increase its vertical integration, enhance customer service and increase efficiency in its marketing and distribution in the United States and
other markets. The Corporation’s principal joint ventures, associates and significant participations in subsidiaries are:
•
two 50%-owned joint ventures with Sonoco Products Corporation, of which one is in Canada (two plants) and one in the United States
(two plants), that produce specialty paper packaging products such as headers, rolls and wrappers;
a 57.95%-owned subsidiary, Reno de Medici S.p.A. (RDM), a European manufacturer of recycled boxboard; and
a 66.1%-owned subsidiary, Greenpac Holding LLC, a North American manufacturer of linerboard (including indirect ownership).
•
•
Apart from RDM and Greenpac, Cascades does not have effective control over these entities. The Corporation’s inability to control entities
in which it invests may affect its ability to receive distributions from these entities or to fully implement its business plan. The incurrence of
debt or entrance into other agreements by an entity not under the Corporation’s control may result in restrictions or prohibitions on that entity’s
ability to pay distributions to the Corporation. Even where these entities are not restricted by contract or by law from paying dividends or
making distributions to Cascades, the Corporation may not be able to influence the payout or timing of these dividends or distributions. In
addition, if any of the other investors in a non-controlled entity fails to observe their commitments, the entity may not be able to operate
according to its business plan or Cascades may be required to increase its level of commitment. If any of these events were to transpire, the
Corporation’s business, operating results, financial condition and ability to make payments on the notes could be adversely affected.
In addition, the Corporation has entered into various shareholder agreements relating to its joint ventures and equity investments. Some of
these agreements contain “shotgun” provisions, which provide that if one Shareholder offers to buy all the shares owned by the other parties
to the agreement, the other parties must either accept the offer or purchase all the shares owned by the offering Shareholder at the same
price and conditions. Some of the agreements also stipulate that, in the event that a Shareholder is subject to bankruptcy proceedings or
otherwise defaults on any indebtedness, the non-defaulting parties to that agreement are entitled to invoke the “shotgun” provision or sell
their shares to a third party. The Corporation’s ability to purchase the other Shareholders’ interests in these joint ventures if they were to
exercise these “shotgun” provisions could be limited by the covenants in the Corporation’s credit facility and the indenture. In addition, Cascades
may not have sufficient funds to accept the offer or the ability to raise adequate financing should the need arise, which could result in the
Corporation having to sell its interests in these entities or otherwise alter its business plan.
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h) Acquisitions have been, and are expected to continue to be a substantial part of the Corporation’s growth strategy, which could
expose the Corporation to difficulties in integrating the acquired operation, diversion of management time and resources, and
unforeseen liabilities, among other business risks.
Acquisitions have been a significant part of the Corporation’s growth strategy. Cascades expects to continue to selectively seek strategic
acquisitions in the future. The Corporation’s ability to consummate and to effectively integrate any future acquisitions on terms that are
favourable to it may be limited by the number of attractive acquisition targets, internal demands on its resources and, to the extent necessary,
its ability to obtain financing on satisfactory terms, if at all. Acquisitions may expose the Corporation to additional risks, including:
•
•
•
•
•
•
difficulty in integrating and managing newly acquired operations and in improving their operating efficiency
difficulty in maintaining uniform standards, controls, procedures and policies across all of the Corporation’s businesses
entry into markets in which Cascades has little or no direct prior experience
the Corporation’s ability to retain key employees of the acquired corporation
disruptions to the Corporation’s ongoing business, and
diversion of Management's time and resources.
In addition, future acquisitions could result in Cascades' incurring additional debt to finance the acquisition or possibly assuming additional
debt as part of it, as well as costs, contingent liabilities and amortization expenses. The Corporation may also incur costs and divert
Management's attention from potential acquisitions that are never consummated. For acquisitions Cascades does consummate, expected
synergies may not materialize. The Corporation’s failure to effectively address any of these issues could adversely affect its operating results,
financial condition and ability to service debt, including its outstanding senior notes.
Although Cascades generally performs a due diligence investigation of the businesses or assets that it acquires and anticipates continuing
to do so for future acquisitions, the acquired business or assets may have liabilities that Cascades fails or is unable to uncover during its due
diligence investigation and for which the Corporation, as a successor owner, may be responsible. When feasible, the Corporation seeks to
minimize the impact of these types of potential liabilities by obtaining indemnities and warranties from the seller, which may in some instances
be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully
cover the liabilities because of their limited scope, amount or duration, or the financial resources of the indemnitor or warrantor, or for other
reasons.
i) The Corporation undertakes impairment tests, which could result in a write-down of the value of assets and, as a result, have a
material adverse effect.
IFRS requires that Cascades regularly undertake impairment tests of long-lived assets and goodwill to determine whether a write-down of
such assets is required. A write-down of asset value as a result of impairment tests would result in a non-cash charge that reduces the
Corporation’s reported earnings. Furthermore, a reduction in the Corporation’s asset value could have a material adverse effect on the
Corporation’s compliance with total debt-to-capitalization tests under its current credit facilities and, as a result, limit its ability to access further
debt capital.
j) Certain Cascades insiders collectively own a substantial percentage of the Corporation’s shares.
Messrs. Bernard, Laurent and Alain Lemaire (“the Lemaires”) collectively own a substantive percentage of the shares of the Corporation, and
there may be situations in which their interests and the interests of other holders of shares do not align. Because the Corporation’s remaining
shares are widely held, the Lemaires may be effectively able to:
•
•
•
elect all of the Corporation’s directors and, as a result, control matters requiring Board approval
control matters submitted to a Shareholder vote, including mergers, acquisitions and consolidations with third parties, and the sale of all
or substantially all of the Corporation’s assets, and
otherwise control or influence the Corporation’s business direction and policies.
In addition, the Lemaires may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance
the value of their equity investment, even though the transactions might involve increased risk to the holders of the shares.
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k) If Cascades is not successful in retaining or replacing its key personnel, including its Chief Executive Officer, its Vice-President
and Chief Financial Officer, its Chief Legal Officer and Corporate Secretary and its Executive Chairman of the Board and co-founder
Alain Lemaire, the Corporation's business, financial condition or operating results could be adversely affected.
Although Cascades believes that its key personnel will remain active in the business and that Cascades will continue to be able to attract and
retain other talented personnel and replace key personnel should the need arise, competition in recruiting replacement personnel could be
significant. Cascades does not carry key-man insurance on the members of its senior management.
l) Risks relating to the Corporation’s indebtedness and liquidity.
The significant amount of the Corporation’s debt could adversely affect its financial health and prevent it from fulfilling its obligations
under its outstanding indebtedness. The Corporation has a significant amount of debt. As at December 31, 2018, it had $1,769 million in
outstanding total net debt on a consolidated basis, including capital-lease obligations. The Corporation also had $651 million available under
its revolving credit facility. On the same basis, its consolidated ratio of net debt to total equity as of December 31, 2017 was 51.2%.
The Corporation’s actual financing expense, including interest on employees' future benefits and loss on repurchase of long-term debt, was
$99 million. Cascades also has significant obligations under operating leases, as described in its audited consolidated financial statements
that are incorporated by reference herein.
On December 21, 2018, the Corporation announced that it has increased its authorized credit facility to approximately CAN$1 billion to
incorporate the addition of a US$175 million seven-year term loan. The term loan provides the Company with increased financial flexibility
and will reduce financing costs.
On December 12, 2017, the Corporation announced the results of tender offers and proceeded with the purchase of US$150 million of its
5.50% unsecured senior notes due 2022 and US$50 million of its 5.75% unsecured senior notes due 2023.
On June 1, 2017, the Corporation entered into an agreement with its lenders to extend and amend its existing $750 million credit facility. The
amendment extends the term of the facility to July 2021. The financial conditions remain essentially unchanged.
The Corporation has outstanding senior notes rated by Moody’s Investor Service (“Moody’s”) and Standard & Poor’s (“S&P”).
The following table reflects the Corporation’s secured debt rating/corporate rating/unsecured debt rating as at the date on which this MD&A
was approved by the Board of Directors, and the evolution of these ratings compared to past years:
Credit rating (outlook)
2004
2005 - 2006
2007
2008
2009 - 2010
2011
2012
2013
2014
2015
2016
2017
2018
MOODY'S
Ba1/Ba2/Ba3 (stable)
Ba1/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (negative)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
Baa3/Ba2/Ba3 (stable)
STANDARD & POOR'S
BBB-/BB+/BB+ (negative)
BB+/BB/BB- (negative)
BBB-/BB/BB- (stable)
BB+/BB-/B+ (negative)
BB+/BB-/B+ (stable)
BB+/BB-/B+ (positive)
BB+/BB-/B+ (negative)
BB/B+/B (stable)
BB/B+/B+ (stable)
BB/B+/B+ (stable)
BB+/BB-/BB- (stable)
BB+/BB-/BB- (stable)
BB+/BB-/BB- (positive)
During 2018, S&P Global Ratings revised the Corporation's outlook to “positive” from “stable” on improving credit measures; corporate rating
of BB- was affirmed.
This facility is in place with a core group of highly rated international banks. The Corporation may decide to enter into certain derivative
instruments to reduce interest rates and foreign exchange exposure.
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The Corporation’s leverage could have major consequences for holders of its shares. For example, it could:
• make it more difficult for the Corporation to satisfy its obligations with respect to its indebtedness
•
increase the Corporation’s vulnerability to competitive pressures and to general adverse economic or market conditions, and require it
to dedicate a substantial portion of its cash flow from operations to servicing debt, reducing the availability of its cash flow to fund working
capital, capital expenditures, acquisitions and other general corporate purposes
limit its flexibility in planning for, or reacting to, changes in its business and industry, and
limit its ability to obtain additional sources of financing.
•
•
Cascades may incur additional debt in the future, which would intensify the risks it now faces as a result of its leverage as described
above. Even though we are substantially leveraged, we and our subsidiaries will be able to incur substantial additional indebtedness in the
future. Although our credit facility and the indentures governing the notes restrict us and our restricted subsidiaries from incurring additional
debt, these restrictions are subject to important exceptions and qualifications. If we or our subsidiaries incur additional debt, the risks that we
and they now face as a result of our leverage could intensify.
The Corporation’s operations are substantially restricted by the terms of its debt, which could limit its ability to plan for or react to
market conditions, or to meet its capital needs. The Corporation’s credit facilities and the indenture governing its senior notes include a
number of significant restrictive covenants. These covenants restrict, among other things, the Corporation’s ability to:
borrow money
pay dividends on stock or redeem stock or subordinated debt
•
•
• make investments
•
•
•
•
•
•
•
•
sell assets, including capital stock in subsidiaries
guarantee other indebtedness
enter into agreements that restrict dividends or other distributions from restricted subsidiaries
enter into transactions with affiliates
create or assume liens
enter into sale and leaseback transactions
engage in mergers or consolidations, and
enter into a sale of all or substantially all of our assets.
These covenants could limit the Corporation’s ability to plan for or react to market conditions, or to meet its capital needs. The Corporation’s
current credit facility contains other, more restrictive covenants, including financial covenants that require it to achieve certain financial and
operating results, and maintain compliance with specified financial ratios. The Corporation’s ability to comply with these covenants and
requirements may be affected by events beyond its control, and it may have to curtail some of its operations and growth plans to maintain
compliance. The restrictive covenants contained in the Corporation’s senior note indenture, along with the Corporation’s credit facility, do not
apply to its subsidiaries with non-controlling interests.
The Corporation’s failure to comply with the covenants contained in its credit facility or its senior note indenture, including as a
result of events beyond its control or due to other factors, could result in an event of default that could cause accelerated repayment
of the debt. If Cascades is not able to comply with the covenants and other requirements contained in the indenture, its credit facility or its
other debt instruments, an event of default under the relevant debt instrument could occur. If an event of default does occur, it could trigger
a default under its other debt instruments, Cascades could be prohibited from accessing additional borrowings and the holders of the defaulted
debt could declare amounts outstanding with respect to that debt, which would then be immediately due and payable. The Corporation’s
assets and cash flow may not be sufficient to fully repay borrowings under its outstanding debt instruments. In addition, the Corporation may
not be able to re-finance or re-structure the payments on the applicable debt. Even if the Corporation were able to secure additional financing,
it might not be available on favourable terms. A significant or prolonged downtime in general business and difficult economic conditions may
affect the Corporation’s ability to comply with its covenants, and could require it to take actions to reduce its debt or to act in a manner contrary
to its current business objectives.
m) Cascades is a holding corporation and depends on its subsidiaries to generate sufficient cash flow to meet its debt service
obligations.
Cascades is structured as a holding corporation and its only significant assets are the capital stock or other equity interests in its subsidiaries,
joint ventures and minority investments. As a holding corporation, Cascades conducts substantially all of its business through these entities.
Consequently, the Corporation’s cash flow and ability to service its debt obligations are dependent on the earnings of its subsidiaries, joint
ventures and minority investments, and the distribution of those earnings to Cascades, or on loans, advances or other payments made by
these entities to Cascades. The ability of these entities to pay dividends or make other payments or advances to Cascades will depend on
their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their debt. In
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the case of the Corporation’s joint ventures, associates and minority investments, Cascades may not exercise sufficient control to cause
distributions to itself. Although its credit facility and the indenture, respectively, limit the ability of its restricted subsidiaries to enter into consensual
restrictions on their ability to pay dividends and make other payments to the Corporation, these limitations do not apply to its joint ventures,
associates or minority investments. The limitations are also subject to important exceptions and qualifications.
The ability of the Corporation’s subsidiaries to generate cash flow from operations that is sufficient to allow the Corporation to make scheduled
payments on its debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive
and business factors, many of which are outside of the Corporation’s control. If the Corporation’s subsidiaries do not generate sufficient cash
flow from operations to satisfy the Corporation’s debt obligations, Cascades may have to undertake alternative financing plans, such as re-
financing or re-structuring its debt, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. Re-financing
may not be possible, and assets may not be able to be sold, or, if they are sold, Cascades may not realize sufficient amounts from those
sales. Additional financing may not be available on acceptable terms, if at all, or the Corporation may be prohibited from incurring it, if available,
under the terms of its various debt instruments in effect at the time. The Corporation’s inability to generate sufficient cash flow to satisfy its
debt obligations, or to re-finance its obligations on commercially reasonable terms, would have an adverse effect on its business, financial
condition and operating results. The earnings of the Corporation’s operating subsidiaries and the amount that they are able to distribute to
the Corporation as dividends or otherwise may not be adequate for the Corporation to service its debt obligations.
n) Risks related to the shares.
The market price of the shares may fluctuate, and purchasers may not be able to re-sell the shares at or above the purchase price.
The market price of the shares may fluctuate due to a variety of factors relative to the Corporation’s business, including announcements of
new developments, fluctuations in the Corporation’s operating results, sales of the shares in the marketplace, failure to meet analysts’
expectations, general conditions in all of our segments or the worldwide economy. In recent years, the shares, the stock of other companies
operating in the same sectors and the stock market in general have experienced significant price fluctuations, which have been unrelated to
the operating performance of the affected companies. There can be no assurance that the market price of the shares will not continue to
experience significant fluctuations in the future, including fluctuations that are unrelated to the Corporation’s performance.
o) Cash-flow and fair-value interest rate risks.
As the Corporation has no significant interest-bearing assets, its earnings and operating cash flows are substantially independent of changes
in market interest rates.
The Corporation’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Corporation to a cash-
flow interest rate risk. Borrowings issued at a fixed rate expose the Corporation to a fair-value interest rate risk.
p) Credit risk.
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions. The
Corporation reduces this risk by dealing with creditworthy financial institutions.
The Corporation is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Corporation’s credit
policies include the analysis of a customer’s financial position and a regular review of its credit limits. The Corporation also believes that no
particular concentration of credit risks exists due to the geographic diversity of its customers and the procedures in place for managing
commercial risks. Derivative financial instruments include an element of credit risk, should the counterparty be unable to meet its obligations.
q) Cyber security
The Corporation relies on information technology to process, transmit and store electronic data in its daily business activities. Any potential
information technology security incident as a result of malicious misbehavior or involuntary in nature could have negative repercussions on
business activities, intellectual property, operating results and financial position of the Corporation. Cyber security represents a Company-
wide challenge and the related risks are part of the corporate risk management program that is presented to the Audit and Finance committee
of the Corporation. To limit Corporation exposure to incidents that may affect confidentiality, integrity and availability of information, the
Corporation has put in place control measures that are based on industry best practices.
r) Climate change
The Corporation operates plants and delivers products to clients in locations that may be subject to climate stress events such as sea-level
rise and increased storm frequency or intensity. Caused by climate change or not, the occurrence of one or more natural disasters, such as
hurricanes, fires or floods, could cause considerable damage to our buildings, disrupt operations, increase operating costs such as freight
and energy and have a negative impact on sales. Climate changes could require higher remediation and insurance costs for the Corporation.
62
62
52
MANAGEMENT'S REPORT
TO THE SHAREHOLDERS OF CASCADES INC.
February 27, 2019
The accompanying consolidated financial statements are the responsibility of the management of Cascades Inc., and have been reviewed
by the Audit and Finance Committee, and approved by the Board of Directors.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board and include certain estimates that reflect Management’s best judgment.
The Management of the Corporation is also responsible for all other information included in this Annual Report and for ensuring that this
information is consistent with the Corporation’s consolidated financial statements and business activities.
The Management of the Corporation is responsible for the design, establishment and maintenance of appropriate internal controls and
procedures for financial reporting, to ensure that financial statements for external purposes are fairly presented in conformity with IFRS. Such
internal control systems are designed to provide reasonable assurance on the reliability of the financial information and the safeguarding of
assets.
Independent auditor and internal auditors have free and independent access to the Audit and Finance Committee, which comprises outside
independent directors. The Audit and Finance Committee, which meets regularly throughout the year with members of management and the
external and internal auditors, reviews the consolidated financial statements and recommends their approval to the Board of Directors.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, whose report is provided below.
Mario Plourde
President and Chief Executive Officer - Kingsey Falls, Canada
Allan Hogg
Vice-President and Chief Financial Officer - Kingsey Falls, Canada
53
63
63
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF CASCADES INC.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Cascades
Inc. and its subsidiaries, (together, the Corporation) as at December 31, 2018 and 2017, and its financial performance and its cash flows for
the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standard
Board (IFRS).
What we have audited
The Corporation's consolidated financial statements comprise:
•
•
•
•
•
•
the consolidated balance sheets as at December 31, 2018 and 2017;
the consolidated statements of earnings for the years then ended;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Corporation in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management's Discussion and Analysis, which we
obtained prior to the date of this auditor's report and the information, other than the consolidated financial statements and our auditor's report
thereon, included in the annual report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or
any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and,
in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When
we read the information, other than the consolidated financial statements and our auditor's report thereon, included in the annual report, if we
conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.
Responsibilities of management and those charged with governance for the consolidated financial
statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and
for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Corporation's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Corporation or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Corporation’s financial reporting process.
64
64
54
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Corporation’s
ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Corporation to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Corporation
to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Jean-François Lecours.
Montréal, Québec
March 5, 2019
1 CPA auditor, CA, public accountancy permit No. A126402
55
65
65
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Current income tax assets
Inventories
Current portion of financial assets
Assets held for sale
Long-term assets
Investments in associates and joint ventures
Property, plant and equipment
Intangible assets with finite useful life
Financial assets
Other assets
Deferred income tax assets
Goodwill and other intangible assets with indefinite useful life
Liabilities and Equity
Current liabilities
Bank loans and advances
Trade and other payables
Current income tax liabilities
Current portion of long-term debt
Current portion of provisions for contingencies and charges
Current portion of financial liabilities and other liabilities
Long-term liabilities
Long-term debt
Provisions for contingencies and charges
Financial liabilities
Other liabilities
Deferred income tax liabilities
Equity attributable to Shareholders
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interests
Total equity
NOTE
December 31,
2018
December 31,
2017
3, 6 and 14
7 and 14
27
24
8
9 and 14
10
27
5, 11 and 29
17
5 and 10
26
3 and 12
14, 26 and 27
13
15 and 27
14, 26 and 27
13
27
5 and 15
17
18
19
3
3 and 20
8
123
635
29
605
10
—
1,402
81
2,506
211
20
42
134
555
4,951
16
782
23
55
6
101
983
1,821
42
14
202
201
3,263
490
16
1,000
2
1,508
180
1,688
4,951
89
608
18
523
9
13
1,260
78
2,104
212
23
73
149
528
4,427
35
683
6
59
7
101
891
1,517
36
18
178
186
2,826
492
16
982
(35)
1,455
146
1,601
4,427
The accompanying notes are an integral part of these audited consolidated financial statements.
Approved by the Board of Directors
Alain Lemaire
66
66
Georges Kobrynsky
56
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions of Canadian dollars, except per common share amounts and number of common shares)
Sales
Cost of sales and expenses
Cost of sales (including depreciation and amortization of $244 million (2017 — $215 million))
Selling and administrative expenses
Gain on acquisitions, disposals and others
Impairment charges and restructuring costs
Foreign exchange gain
Loss (gain) on derivative financial instruments
Operating income
Financing expense
Interest expense on employee future benefits and other liabilities
Loss on repurchase of long-term debt
Foreign exchange loss (gain) on long-term debt and financial instruments
Fair value revaluation gain on investments
Share of results of associates and joint ventures
Earnings before income taxes
Provision for (recovery of) income taxes
Net earnings including non-controlling interests for the year
Net earnings attributable to non-controlling interests
Net earnings attributable to Shareholders for the year
Net earnings per common share
Basic
Diluted
Weighted average basic number of common shares outstanding
Weighted average number of diluted common shares
The accompanying notes are an integral part of these audited consolidated financial statements.
NOTE
21
3 and 22
3 and 22
5 and 24
25
27
26
26
14, 26 and 27
5 and 8
8
17
8
$
$
2018
4,649
3,997
410
(71)
77
(2)
8
4,419
230
84
15
—
4
(5)
(11)
143
49
94
35
59
0.62
0.58
$
$
94,570,924
96,933,681
2017
4,321
3,770
378
(8)
17
(5)
(6)
4,146
175
86
11
14
(23)
(315)
(39)
441
(81)
522
15
507
5.35
5.19
94,680,598
97,598,900
57
67
67
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of Canadian dollars)
Net earnings including non-controlling interests for the year
Other comprehensive income (loss)
Items that may be reclassified subsequently to earnings
Translation adjustments
Change in foreign currency translation of foreign subsidiaries
Change in foreign currency translation related to net investment hedging activities
Cash flow hedges
Change in fair value of foreign exchange forward contracts
Change in fair value of interest rate swaps
Change in fair value of commodity derivative financial instruments
Equity investment
Share of other comprehensive income of associates
Recovery of (provision for) income taxes
Items that are not released to earnings
Actuarial loss on employee future benefits
Recovery of income taxes
Other comprehensive income (loss)
Comprehensive income including non-controlling interests for the year
Comprehensive income attributable to non-controlling interests for the year
Comprehensive income attributable to Shareholders for the year
The accompanying notes are an integral part of these audited consolidated financial statements.
NOTE
20
20
3 and 8
5 and 8
16
17
2018
94
2017
522
96
(58)
(2)
1
6
—
—
2
45
(16)
4
(12)
33
127
45
82
(43)
33
1
—
1
(1)
21
(13)
(1)
(13)
3
(10)
(11)
511
18
493
68
68
58
CONSOLIDATED STATEMENTS OF EQUITY
For the year ended December 31, 2018
(in millions of Canadian
dollars)
NOTE
CAPITAL
STOCK
CONTRIBUTED
SURPLUS
RETAINED
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
TOTAL EQUITY
ATTRIBUTABLE TO
SHAREHOLDERS
NON-
CONTROLLING
INTERESTS
3
5
Balance - Beginning of year
Adoption of new accounting
standard
Adjusted Balance -
Beginning of period
Comprehensive income (loss)
Net earnings
Other comprehensive
income (loss)
Business combinations
Dividends
Stock options expense
Issuance of common shares
upon exercise of stock
options
Redemption of common
shares
Capital contribution from a
non-controlling interests
Acquisition of non-controlling
interests
Dividends paid to non-
controlling interests
Balance - End of year
(in millions of Canadian
dollars)
Balance - Beginning of year
Comprehensive income (loss)
Net earnings
Other comprehensive
income (loss)
Business combinations
5
Dividends
Stock options expense
Issuance of common shares
upon exercise of stock
options
Partial disposal of a subsidiary
to non-controlling interests
Acquisition of non-controlling
interests
Dividends paid to non-
controlling interests
Balance - End of year
CAPITAL
STOCK
CONTRIBUTED
SURPLUS
RETAINED
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS
TOTAL EQUITY
ATTRIBUTABLE TO
SHAREHOLDERS
NON-
CONTROLLING
INTERESTS
For the year ended December 31, 2017
492
—
492
—
—
—
—
—
—
6
(8)
—
—
—
490
16
—
16
—
—
—
—
—
1
(1)
—
—
—
—
16
982
(2)
980
59
(12)
47
—
(15)
—
—
(12)
—
—
—
1,000
(35)
2
(33)
—
35
35
—
—
—
—
—
—
—
—
2
1,455
—
1,455
59
23
82
—
(15)
1
5
(20)
—
—
—
1,508
146
—
146
35
10
45
5
—
—
—
—
1
(1)
(16)
180
487
—
—
—
—
—
—
5
—
—
—
492
(31)
—
(4)
(4)
—
—
—
—
—
—
—
(35)
984
507
(14)
493
—
(15)
1
4
(1)
(11)
—
1,455
90
15
3
18
57
—
—
—
1
(15)
(5)
146
16
—
—
—
—
—
1
(1)
—
—
—
16
512
507
(10)
497
—
(15)
—
—
(1)
(11)
—
982
59
TOTAL
EQUITY
1,601
—
1,601
94
33
127
5
(15)
1
5
(20)
1
(1)
(16)
1,688
TOTAL
EQUITY
1,074
522
(11)
511
57
(15)
1
4
—
(26)
(5)
1,601
69
69
The accompanying notes are an integral part of these audited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
Operating activities
Net earnings attributable to Shareholders for the year
Adjustments for:
Financing expense and interest expense on employee future benefits and other liabilities
Loss on repurchase of long-term debt
Depreciation and amortization
Gain on acquisitions, disposals and others
Impairment charges and restructuring costs
Unrealized loss (gain) on derivative financial instruments
Foreign exchange loss (gain) on long-term debt and financial instruments
Provision for (recovery of) income taxes
Fair value revaluation gain on investments
Share of results of associates and joint ventures
Net earnings attributable to non-controlling interests
Net financing expense paid
Premium paid on long-term debt repurchase
Net income taxes paid
Dividends received
Employee future benefits and others
Changes in non-cash working capital components
Investing activities
Investments in associates and joint ventures
Payments for property, plant and equipment
Proceeds from disposals of property, plant and equipment
Change in intangible and other assets
Net cash acquired (paid) in business combinations
Financing activities
Bank loans and advances
Change in credit facilities
Increase in term loan
Repurchase of unsecured senior notes
Increase in other long-term debt
Payments of other long-term debt
Settlement of derivative financial instruments
Issuance of common shares upon exercise of stock options
Redemption of common shares
Dividends paid to non-controlling interests and acquisition of non-controlling interests
Capital contribution from non-controlling interests
Dividends paid to the Corporation’s Shareholders
Change in cash and cash equivalents during the year
Currency translation on cash and cash equivalents
Cash and cash equivalents - Beginning of year
Cash and cash equivalents - End of year
The accompanying notes are an integral part of these audited consolidated financial statements.
60
70
70
NOTE
2018
2017
26
14, 26 and 27
5 and 24
25
17
5 and 8
14
8
26
8
5 and 9
24
8 and 10
5
14 and 26
14, 26 and 27
18
18
5 and 8
59
99
—
244
(71)
77
9
4
49
(5)
(11)
35
(107)
—
(11)
6
(16)
361
12
373
(2)
(338)
85
(15)
(100)
(370)
(22)
(126)
235
—
66
(81)
(1)
5
(20)
(17)
1
(15)
25
28
6
89
123
507
97
14
215
(8)
11
(8)
(23)
(81)
(315)
(39)
15
(99)
(11)
(10)
12
(17)
260
(87)
173
(17)
(193)
15
256
9
70
8
114
—
(257)
11
(47)
(12)
4
—
(24)
—
(15)
(218)
25
2
62
89
SEGMENTED INFORMATION
The Corporation analyzes the performance of its operating segments based on their operating income before depreciation and amortization,
which is not a measure of performance under International Financial Reporting Standards (IFRS); however, the chief operating
decision-maker (CODM) uses this performance measure to assess the operating performance of each reportable segment. Earnings for each
segment are prepared on the same basis as those of the Corporation. Intersegment operations are recorded on the same basis as sales to
third parties, which are at fair market value. The accounting policies of the reportable segments are the same as the Corporation's accounting
policies described in Note 2.
The Corporation's operating segments are reported in a manner consistent with the internal reporting provided to the CODM. The Chief
Executive Officer has authority for resource allocation and management of the Corporation's performance, and is therefore the CODM.
The Corporation's operations are managed in four segments: Containerboard, Boxboard Europe and Specialty Products (which constitutes
the Corporation's Packaging Products), and Tissue Papers.
(in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Intersegment sales
Tissue Papers
Intersegment sales and Corporate Activities
(in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate Activities
Operating income before depreciation and amortization
Depreciation and amortization
Financing expense and interest expense on employee future benefits and other liabilities
Loss on repurchase of long-term debt
Foreign exchange gain (loss) on long-term debt and financial instruments
Fair value revaluation gain on investments
Share of results of associates and joint ventures
Earnings before income taxes
2018
1,840
933
659
(89)
3,343
1,352
(46)
4,649
SALES
2017
1,652
838
703
(105)
3,088
1,268
(35)
4,321
OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION
2018
2017
470
97
46
613
(58)
(81)
474
(244)
(99)
—
(4)
5
11
143
238
67
67
372
90
(72)
390
(215)
(97)
(14)
23
315
39
441
61
71
71
(in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate Activities
Total acquisitions
Proceeds from disposals of property, plant and equipment
Capital lease acquisitions and included in other debts and liabilities
Acquisitions for property, plant and equipment included in “Trade and other payables”
Beginning of year
End of year
Payments for property, plant and equipment net of proceeds from disposals
(in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate Activities
Intersegment eliminations
Investments in associates and joint ventures
Other investments
Information by geographic segment is as follows:
(in millions of Canadian dollars)
Canada
United States
Italy
Other countries
(in millions of Canadian dollars)
Canada
United States
Italy
Other countries
72
72
62
PAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT
2018
2017
243
35
34
312
88
17
417
(85)
(70)
262
28
(37)
253
65
27
32
124
64
19
207
(15)
(11)
181
25
(28)
178
December 31,
2018
TOTAL ASSETS
December 31,
2017
2,253
786
473
3,512
982
428
(56)
4,866
81
4
4,951
2,016
609
386
3,011
940
460
(68)
4,343
78
6
4,427
PROPERTY, PLANT AND EQUIPMENT
December 31,
2018
December 31,
2017
835
1,279
197
195
2,506
837
970
183
114
2,104
GOODWILL, CUSTOMER RELATIONSHIPS AND CLIENT
LISTS, AND OTHER FINITE AND INDEFINITE USEFUL LIFE
INTANGIBLE ASSETS
December 31,
2017
December 31,
2018
430
308
27
1
766
449
278
13
—
740
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions of Canadian dollars, except per common share and option amounts and number of common shares and options)
NOTE 1
GENERAL INFORMATION
Cascades Inc. and its subsidiaries (together “Cascades” or the “Corporation”) produce, convert and market packaging and tissue products
composed mainly of recycled fibres. Cascades Inc. is incorporated and domiciled in Québec, Canada. The address of its registered office is
404, Marie-Victorin Boulevard, Kingsey Falls. Its shares are listed on the Toronto Stock Exchange.
The Board of Directors approved the consolidated financial statements on February 27, 2019.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting principles (GAAP) as set forth
in Part I of the Chartered Professional Accountants of Canada (CPA Canada) Handbook – Accounting, which incorporates IFRS as issued
by the International Accounting Standards Board. The key accounting policies applied in the preparation of these consolidated financial
statements are described below. These policies have been consistently applied to all years presented, unless otherwise stated.
BASIS OF MEASUREMENT
The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial
assets and liabilities, including derivative instruments, which are measured at fair value.
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the Corporation, which include:
A. SUBSIDIARIES
Subsidiaries are all entities over which the Corporation has control, where control is defined as the power to direct decisions about relevant
activities. The Corporation does not have any interest in a structured entity. The existence and effect of potential voting rights that are exercisable
or convertible are considered when assessing whether the Corporation controls another entity. Subsidiaries are fully consolidated from the
date on which control is transferred to the Corporation. They are deconsolidated from the date on which control ceases. Accounting policies
of subsidiaries have been changed, where necessary, to ensure consistency with the policies adopted by the Corporation. The purchase
method of accounting is used to account for the acquisition of subsidiaries by the Corporation. Results of operations are consolidated
commencing on the date of acquisition. The purchase consideration is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange. The transaction costs directly attributable to the acquisition are expensed.
Identifiable assets acquired, as well as liabilities and contingent liabilities assumed in a business combination, are measured initially at their
fair values at the acquisition date, irrespective of the extent of any non-controlling interests. The excess of the purchase consideration over
the fair value of the Corporation's share of the identifiable net assets acquired is recorded as goodwill. If the purchase consideration is less
than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of earnings.
Intercompany transactions, balances and unrealized gains on transactions between subsidiaries are eliminated.
The following are the principal subsidiaries of the Corporation:
Cascades Canada ULC
Cascades USA Inc.
Greenpac Holding LLC 1
Reno de Medici S.p.A. (RDM)
1 For accounting purposes, percentage stands at 82.83%, including indirect ownership. See Notes 5 and 8 B. for more details.
PERCENTAGE OWNED (%)
JURISDICTION
100
100
59.7
57.95
Canada
Delaware
Delaware
Italy
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B. TRANSACTIONS AND CHANGE IN OWNERSHIP
Acquisitions or disposals of equity interests in subsidiaries that do not result in the Corporation obtaining or losing control are treated as equity
transactions. When the Corporation obtains or loses control, the revaluation of the previously held interest or the non-controlling interests that
results in gains or losses for the Corporation is recognized in the consolidated statement of earnings.
C. ASSOCIATES
Associates are all entities over which the Corporation has significant influence but not control, generally accompanying a shareholding of
between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized
at cost. The Corporation's investment from associates includes goodwill identified on acquisition, net of any accumulated impairment loss.
Unrealized gains on transactions between the Corporation and its associates are eliminated to the extent of the Corporation's interest in the
associates. Accounting policies of associates have been adjusted where necessary to ensure consistency with the policies adopted by the
Corporation. Dilution gains and losses arising in investments in associates are recognized in the consolidated statement of earnings.
The Corporation assesses, at each year-end, whether there is any objective evidence that its interest in associates is impaired. If impaired,
the carrying value of the Corporation's share of the underlying assets of associates is written down to its estimated recoverable amount (being
the higher of fair value less cost of disposal or value in use) and charged to the consolidated statement of earnings.
D. JOINT VENTURES
A joint venture is an entity in which the Corporation holds a long-term interest and for which it shares joint control over decisions regarding
relevant activities. The Corporation reports its interests in joint ventures using the equity method. Accounting policies of joint ventures have
been adjusted where necessary to ensure consistency with the policies adopted by the Corporation.
REVENUE RECOGNITION
The revenues of the Corporation come mainly from the sale of packaging and tissue products that are recognized at a point in time. Sales of
goods in the consolidated statement of earnings are recognized by the Corporation when control of the goods has been transferred, being
when the goods are delivered to customers and when all obligations have been fulfilled.
The amounts recognized as sales of goods represent the fair values of the considerations received or receivable from third parties on the
sales of goods to customers, net of returns, rebates and discounts, at which time there are no conditions for the payment to become due
other than the passage of time. Historical experience is used to estimate and provide for discounts and returns (expected value method),
whereas volumes discounts are assessed based on anticipated annual sales (most likely amount method). The transaction price is not adjusted
for the time value of money since all sales are cashed within 12 months.
FINANCIAL INSTRUMENTS AND HEDGING RELATIONSHIPS
Financial assets and financial liabilities are recognized when the Corporation becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheet when there is a legally
enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability
simultaneously.
CLASSIFICATION
On initial recognition, the Corporation determines the financial instruments classification as per the following categories:
•
•
instruments measured at amortized cost;
instruments measured at fair value through other comprehensive income (FVOCI) or through net income (FVTPL).
The financial instruments' classification under IFRS 9 is based on the business model in which a financial asset is managed and on its
contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial instrument in the scope of the standard
are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at FVTPL:
•
•
it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Equity investments held for trading are classified as FVTPL. For all other equity investments that are not held for trading, the Corporation, on
initial recognition, may irrevocably elect to present subsequent changes in the investment's fair value in other comprehensive income (OCI).
This election is made on an investment-by-investment basis.
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Financial liabilities are measured at amortized cost unless they must be measured at FVTPL (such as derivatives) or if the Corporation elects
to measure them at FVTPL.
EVALUATION
Financial instruments at amortized cost
Financial instruments at amortized cost are initially measured at fair value, and subsequently at amortized cost, using the effective interest
method, less any impairment loss. Interest income, foreign exchange gains and losses and impairment are recognized in the consolidated
statement of earnings.
Financial instruments at fair value
Financial instruments are initially and subsequently measured at fair value and transaction costs are accounted for in the consolidated statement
of earnings. When the Corporation elects to measure a financial liability at FVTPL, gains or losses related to the Corporation's own credit risk
are accounted for in the consolidated statement of earnings.
IMPAIRMENT
Since January 1, 2018, the Corporation prospectively estimates the expected credit losses associated with the debt instruments accounted
for at amortized cost or FVOCI. The impairment methodology used depends on whether there is a significant increase in the credit risk or not.
For trade receivables, the Corporation measures loss allowances at an amount equal to lifetime expected credit loss (ECL) as allowed by
IFRS 9 under the simplified method.
DERECOGNITION
Financial assets
The Corporation derecognizes a financial asset when, and only when, the contractual rights to the cash flows from the financial asset have
expired or when contractual rights to the cash flows have been transferred.
Financial liabilities
The Corporation derecognizes a financial liability when, and only when, it is extinguished, meaning when the obligation specified in the contract
is discharged, canceled or expired. The difference between the carrying amount of the extinguished financial liability and the consideration
paid or payable, including non-cash assets transferred or liabilities assumed, is recognized in the consolidated statement of earnings.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently
remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a
hedging instrument, and, if so, the nature of the item being hedged. The Corporation designates certain derivative financial instruments as
either:
i) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge);
ii) hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or
iii) hedges of a net investment in a foreign operation (net investment hedge).
The Corporation formally documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as
well as its risk management objectives and strategy for undertaking various hedging transactions. The Corporation also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
The full fair value of a hedging derivative is classified as a long-term asset or liability when the remaining maturity of the hedged item is more
than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives
are classified as current assets or liabilities.
A. FAIR VALUE HEDGE
The periodic change in fair value of the hedging derivative is recorded in net earnings. The periodic change in the cumulative gain or loss on
the hedged item is recorded as an adjustment to its carrying amount on the balance sheet and is also recorded in net earnings. Hedging
ineffectiveness is automatically recorded to net earnings as the difference between the above amounts recorded in net earnings. Realized
gains and losses on the hedging item, resulting from the difference between the interest payments on the receive leg and the pay leg of the
hedging derivative, are recorded on an accrual basis in net earnings as interest income or expense.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective
interest method is used is amortized to profit or loss over the period to maturity using a recalculated effective interest rate.
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B. CASH FLOW HEDGE
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the
statement of other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated
statement of earnings.
Amounts accumulated in equity are reclassified to profit or loss against the gain (loss) on the hedged item when the latter is realized (for
example, when the forecast sale that is hedged takes place).
When a hedging instrument expires or is sold or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the consolidated
statement of earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is
immediately transferred to the consolidated statement of earnings.
C. NET INVESTMENT HEDGE
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument
relating to the effective portion of the hedge is recognized in the statement of other comprehensive income. The gain or loss relating to the
ineffective portion is recognized immediately in the consolidated statement of earnings. Gains and losses accumulated in equity are included
in the consolidated statement of earnings when the foreign operation is partially disposed of or sold.
The Corporation also uses cross-currency interest rate swaps to manage the currency fluctuations risk associated with forecasted cash flows
in foreign currency. These cross-currency interest rate swaps are designated as a foreign exchange hedge of its net investment in foreign
operations. The portion of the gains and losses arising from the translation of those derivatives that are determined to be an effective hedge
is recognized in other comprehensive income, counterbalancing gains and losses arising from the translation of the Corporation's net investment
in its foreign operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, bank balances and short-term liquid investments with original maturities of three months
or less.
ACCOUNTS RECEIVABLE
Accounts receivable are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method,
less a loss allowance that is based on expected collectability.
INVENTORIES
Inventories of finished goods are valued at the lower of cost, which is established using the average production cost, and net realizable value.
Inventories of raw materials as well as supplies and spare parts are valued at the lower of cost and replacement value, which is the best
available measure of their net realizable value. Cost for both raw materials and supplies and spare parts is determined using the average
cost. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the
estimated costs necessary to make the sale.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are recorded at cost less accumulated depreciation and net impairment losses, including capitalized interest
incurred during the construction period of qualifying property, plant and equipment. Repairs and maintenance costs are charged to the
consolidated statement of earnings during the period in which they are incurred. Residual values, method of depreciation and useful lives of
the assets are reviewed annually and adjusted if appropriate.
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Depreciation is calculated on a straight-line basis as follows:
Buildings
Machinery and equipment
Automotive equipment
Other property, plant and equipment Between 3 and 10 years
Between 10 and 33 years
Between 3 and 30 years
Between 5 and 10 years
GRANTS AND INVESTMENT TAX CREDITS
Grants and investment tax credits for property, plant and equipment are accounted for using the cost reduction method and are amortized to
earnings as a reduction of depreciation, using the same basis as that used to depreciate the related property, plant and equipment.
BORROWING COSTS
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take
a substantial period of time to get ready for their intended use, are added to the cost of those assets until all the activities necessary to prepare
the asset for its intended use are complete. All other borrowing costs are recognized in the consolidated statement of earnings in the period
in which they are incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of customer relationships and client lists, application software and favourable leases. They are recorded
at cost less accumulated amortization and impairment losses and amortized on a straight-line basis over the estimated useful lives as follows:
Customer relationships and client lists
Other intangible assets with finite useful life
Application software
Enterprise Resource Planning (ERP)
Favourable leases
Between 2 and 20 years
Between 2 and 20 years
Between 3 and 10 years
7 years
Term of the lease
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
IMPAIRMENT
A. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS WITH FINITE USEFUL LIFE
At the end of each reporting period, the Corporation assesses whether there is an indicator that the carrying amount of an asset or a group
of assets may be higher than its recoverable amount which is described in section C hereunder. For that purpose, assets are grouped at the
lowest levels for which there are separately identifiable cash inflows (cash generating units (CGUs)). If there is any indication that an individual
asset may be impaired, the recoverable amount shall be estimated for the individual asset.
When the recoverable amount is lower than the carrying amount, the carrying amount is reduced to the recoverable amount. Impairment
losses are recorded immediately in the consolidated statement of earnings in the line item Impairment charges and restructuring costs.
Impairment losses are evaluated for potential reversals when events or changes in circumstances warrant such consideration. The revalued
carrying value is the lower of the estimated recoverable amount and the carrying amount that would have been determined had no impairment
loss been recognized and depreciation had been taken previously on the asset or CGU. A reversal of impairment loss is recorded directly in
the consolidated statement of earnings in the line item “Impairment charges and restructuring costs”.
B. GOODWILL AND OTHER INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIFE
Goodwill and other intangible assets with an indefinite useful life are recognized at cost less any accumulated impairment losses. They have
an indefinite useful life due to their permanent nature since they are acquired rights or not subject to wear and tear. They are reviewed for
impairment annually on December 31 or when an event or a circumstance occurs and indicates that the value could be permanently impaired.
Goodwill is allocated to CGUs for the purpose of impairment testing based on the level at which Management monitors it, which is not higher
than an operating segment. The allocation is made to CGUs that are expected to benefit from the business combination in which the goodwill
and other intangible assets with an indefinite useful life arose. Impairment loss on goodwill is not reversed.
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C. RECOVERABLE AMOUNTS
A recoverable amount is the higher of fair value less cost of disposal and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a discount rate that reflects current market assessment of the time value of money and the
risks specific to the asset or CGU. When determining fair value less cost of disposal, the Corporation considers if there is a market price for
the asset being evaluated. Otherwise, the Corporation uses the income approach.
LEASES
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases are charged to the consolidated statement of earnings on a straight-line basis over the term of the
lease.
The Corporation leases certain property, plant and equipment. Leases of property, plant and equipment for which the Corporation has
substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease's commencement
at the lower of the fair value of the leased property or the present value of the minimum lease payments. Property, plant and equipment
acquired under a finance lease are depreciated over the shorter of the estimated useful life of the asset or the lease term using the straight-
line method. Each lease payment is allocated between the liability and the financing expense so as to achieve a constant rate on the finance
balance outstanding. The corresponding rental obligations, net of financing expense, are included in long-term debt.
PROVISIONS FOR CONTINGENCIES AND CHARGES
Provisions for contingencies include mainly legal and other claims. A provision is recognized when the Corporation has a legal or constructive
obligation as a result of a past event and it is probable that settlement of the obligation will require a financial payment or cause a financial
loss, and a reliable estimate of the amount of the obligation can be made.
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recorded
in the consolidated balance sheet as a separate asset, but only if it is virtually certain that the reimbursement will be received.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that
reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to
the passage of time is recognized as a financing expense.
ENVIRONMENTAL RESTORATION OBLIGATIONS AND ENVIRONMENTAL COSTS
An obligation to incur restoration and environmental costs arises when environmental disturbance is caused by the development or ongoing
production of a plant or landfill site. Such costs arising from the installation of a plant and other site preparation work are provided for and
capitalized at the start of each project, or as soon as the obligation to incur such costs arises. Decommissioning costs are recorded at the
estimated amount at which the obligation could be settled at the consolidated balance sheet date, and are charged against profit over the life
of the operation, through the depreciation of the asset and the unwinding of the discount on the provision. The discount rate is the pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the liability. Costs for restoring subsequent
site damage which is created on an ongoing basis during production are provided for at their present values and charged against profit as
the obligation arises.
Changes in the measurement of a liability relating to the decommissioning of a plant or other site preparation work that result from changes
in the estimated timing or amount of the cash flow or a change in the discount rate are added to or deducted from the cost of the related asset
in the current year. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in the
consolidated statement of earnings. If the asset value is increased and there is an indication that the revised carrying value is not recoverable,
an impairment test is performed in accordance with the accounting policy for impairment testing.
LONG-TERM DEBT
Long-term debt is recognized initially at fair value, net of financing costs incurred. Long-term debt is subsequently carried at amortized cost;
any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of
earnings over the period of the term of the debt using the effective interest method.
Financing costs paid on establishment of the revolving credit facility are recognized as deferred financing costs and amortized on a straight-
line basis over the anticipated period of the credit facility.
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EMPLOYEE BENEFITS
The Corporation offers funded and unfunded defined benefit pension plans, defined contribution pension plans and group registered retirement
savings plans (RRSPs) that provide retirement benefit payments for most of its employees. The defined benefit pension plans are usually
contributory and are based on the number of years of service and, in most cases, the average salaries or compensation at the end of a career.
Retirement benefits are not adjusted based on inflation. The Corporation also offers its employees some post-employment benefit plans, such
as a retirement allowance, group life insurance and medical and dental plans. However, these benefits, other than pension plans, are not
funded. Furthermore, the medical and dental plans upon retirement are being phased out and are no longer offered to the majority of new
retirees and the retirement allowance is not offered to those who do not meet certain criteria.
The liability recognized in the consolidated balance sheet in respect of defined benefit pension plans is the present value of the defined benefit
obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated at least every three
years by independent actuaries using the projected unit credit method and updated regularly by Management for any material transactions
and changes in circumstances, including changes in market prices and interest rates up to the end of the reporting period.
As well, when an asset is recorded for a pension plan, its carrying value cannot be greater than the future economic benefit that the Corporation
will get from the asset. The future economic benefit includes the suspension of contribution if the pension plan provisions allow for it under
the minimum funding requirements. When there is a minimum funding requirement, it can increase the liability recorded. All special contributions
legally required to fund a plan deficit are considered. For plans for which an actuarial evaluation is required as at December 31, 2018, a
schedule of contributions is estimated to establish the minimum funding requirement. For other plans, we have used contributions from the
most recent actuarial report.
Actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are
recorded in the statement of other comprehensive income and recognized immediately in retained earnings without recycling to the consolidated
statement of earnings. Past service costs are recognized immediately in the consolidated statement of earnings.
When restructuring a plan results in a curtailment and settlement occurring at the same time, the curtailment is accounted for before the
settlement.
Interest costs on pension and other post-employment benefits are recognized in the consolidated statement of earnings as Interest expense
on employee future benefits. The measurement date of employee future benefit plans is December 31 of each year. An actuarial evaluation
is performed at least every three years. Based on their balances as at December 31, 2018, 58% of the plans were evaluated on
December 31, 2017 (36% in 2016).
INCOME TAXES
The Corporation uses the liability method to recognize deferred income taxes. According to this method, deferred income taxes are determined
using the difference between the accounting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured
using enacted or substantively enacted tax rates at the consolidated balance sheet date that are expected to apply when the deferred income
taxes are expected to be recovered or settled. Deferred income tax assets are recognized when it is probable that the asset will be realized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the
same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
FOREIGN CURRENCY TRANSLATION
Items included in the financial statements of each of the Corporation's entities are measured using the currency of the primary economic
environment in which the business unit operates (the “functional currency”). The consolidated financial statements are presented in Canadian
dollars, which is Cascades' functional currency.
A. FOREIGN CURRENCY TRANSACTIONS
Transactions denominated in currencies other than the business unit's functional currency are recorded at the rate of exchange prevailing at
the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the
consolidated balance sheet date. Unrealized gains and losses on translation of monetary assets and liabilities are reflected in the consolidated
statement of earnings.
B. FOREIGN OPERATIONS
The assets and liabilities of foreign operations are translated into Canadian dollars at the exchange rate prevailing at the consolidated balance
sheet date. Revenues and expenses are translated at the average monthly exchange rate. Translation gains or losses are deferred and
included in “Accumulated other comprehensive income”.
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SHARE-BASED PAYMENTS
The Corporation uses the fair value method of accounting for stock-based compensation awards granted to officers and key employees. This
method consists in recording expenses to earnings based on the vesting period of each tranche of options granted. The fair value of each
tranche is calculated based on the Black-Scholes option pricing model. This model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. When stock options are exercised, any considerations paid by employees,
as well as the related stock-based compensation, are credited to capital stock.
DIVIDEND DISTRIBUTION
Dividend distribution to the Corporation's Shareholders is recognized as a liability in the consolidated financial statements in the period in
which the dividends are approved by the Corporation's Board of Directors.
EARNINGS PER COMMON SHARE
Basic earnings per common share are determined using the weighted average number of common shares outstanding during the period.
Diluted earnings per common share are determined by adjusting the weighted average number of common shares outstanding for dilutive
instruments, which are primarily stock options, using the treasury stock method to evaluate the dilutive effect of stock options. Under this
method, instruments with a dilutive effect, which is when the average market price of a share for the period exceeds the exercise price, are
considered to have been exercised at the beginning of the period and the proceeds received are considered to have been used to redeem
common shares of the Corporation at the average market price for the period.
NOTE 3
CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
In 2018, the Corporation changed the classification of some Corporate Activities expenses totaling $59 million (2017 - $62 million). Those
costs were previously presented under “Selling and administrative expenses” and are now presented under “Cost of sales” since they are
necessary for bringing finished goods to their present location and condition.
A) NEW IFRS ADOPTED
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 establishes a comprehensive framework for determining how much and when revenue is recognized. It replaces all previous revenue
recognition standards, including IAS 18 Revenue, and related interpretations such as IFRIC 13 Customer Loyalty Programs.
Impact of adoption
The Corporation adopted IFRS 15 using the full retrospective application. The adoption of this standard did not result in any adjustment in
the amounts previously recognized in the consolidated balance sheet, as contract costs were already recognized under other assets and
depreciated over the contract term, while contract liabilities, consisting primarily of volume rebates provision, were already accrued using the
most likely amount methodology. As well, the timing in the recognition of sales was not impacted by the new standard, as our previous revenue
recognition policy already included control indicators defined in IFRS 15. Consequently, neither the consolidated statement of earnings,
consolidated statement of comprehensive income, consolidated statement of equity nor consolidated statement of cash flows were adjusted.
The only impact on the consolidated balance sheet pertains to the classification of contract liabilities, which can no longer be netted against
“Accounts receivable” under IFRS 15. Contract liabilities, composed of volume rebates, are now presented on the line item “Trade and other
payables”. As at December 31, 2018, contract liabilities balance was at $50 million (2017 - $45 million). As well, to comply with IFRS 15
disclosure requirements, Note 21 ''Revenue'' was added whereas Note 12 ''Trade and Other Payables was modified''.
IFRS 9 FINANCIAL INSTRUMENTS
IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial
items. This standard replaces IAS 39 Financial Instruments : Recognition and Measurement.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates
the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale.
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The following table presents the initial IAS 39 classification and the new IFRS 9 classification for all financial instruments held by the Corporation
as at January 1, 2018.
Financial assets and liabilities
Cash and cash equivalents
Accounts receivable
Equity investments
Financial instruments used for hedging
Other current and non current financial assets
Bank loans and advances
Trade and other payables
Revolving credit facility
Unsecured senior notes
IAS 39 classification
IFRS 9 classification
Loans and receivables (amortized cost)
Loans and receivables (amortized cost)
Amortized cost
Amortized cost
Available for sale (FVOCI)
FV — hedging instrument (FVOCI)
FVTPL
Other financial liabilities (amortized cost)
Other financial liabilities (amortized cost)
Other liabilities (amortized cost)
Other liabilities (amortized cost)
FVTPL
FV — hedging instrument (FVOCI)
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
Other current and non current financial liabilities
FVTPL
As allowed by IFRS 9, the Corporation adopted the simplified expected credit loss model for trade receivables.
Impact of adoption
The change in the fair value of our equity investment in shares can no longer be recognized through other comprehensive income. As described
above, equity investment must now be classified as FVTPL. Consequently, the balance of $2 million previously recorded in other comprehensive
income was reclassified to retained earnings as at January 1, 2018.
B) RECENT IFRS PRONOUNCEMENT NOT YET ADOPTED
IIFRS 16 LEASES
In January 2016, the IASB released IFRS 16 Leases, which supersedes IAS 17 Leases, and the related interpretations on leases: IFRIC 4
Determining whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives and SIC 27 Evaluating the Substance of
Transactions in the Legal Form of a Lease. The standard is effective for annual periods beginning on or after January 1, 2019. The new
standard requires lessees to recognize a lease liability reflecting future lease payments and a “right-of-use asset” for virtually all leases
contracts, and record it on the balance sheet, except with respect to lease contracts that meet limited exception criteria, such as when the
underlying asset is of low value or the maturity of the lease is short term. Depreciation expense on the "right-of-use asset" and interest expense
on the lease liability will replace the operating lease expense.
The Corporation will apply IFRS 16 Leases retrospectively with no restatement of comparative information as allowed by the Standard. At the
date of initial application, lease liability for leases previously classified as an operating lease under IAS 17 Leases equals the present value
of the remaining lease payments, discounted using the Corporation's incremental borrowing rate. As for the underlying "right-of-use asset",
the Corporation will elect to measure it at an amount equal to the lease liability. Therefore, the application of IFRS 16 Leases will not result
in any adjustment to the opening retained earnings except for units whose assets are valued at fair market value following an impairment
provision. When applying IFRS 16, the Corporation will use the low value exception as well as the short term exception on all categories of
assets but buildings as allowed by IFRS 16. The Corporation is finalizing the calculation of the additional lease liabilities and underlying "right-
of-use assets" resulting from the adoption of the Standard.
NOTE 4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities in the financial statements and disclosure of contingencies at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. On a regular basis and with the information available, Management reviews its estimates,
including those related to environmental costs, employee future benefits, collectability of accounts receivable, financial instruments,
contingencies, income taxes, useful life and residual value of property, plant and equipment and impairment of property, plant and equipment
71
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81
and intangible assets. Actual results could differ from those estimates. When adjustments become necessary, they are reported in earnings
in the period in which they occur.
A. IMPAIRMENT OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL
In determining the recoverable amount of an asset or a cash generating unit (CGU), the Corporation uses several key assumptions based
on external information on the industry when available, including estimated production levels, selling prices, volume, raw material costs, foreign
exchange rates, growth rates, discounting rates and capital spending.
The Corporation believes its assumptions are reasonable. Based on available information at the assessment date, however, these assumptions
involve a high degree of judgment and complexity. Management believes that the following assumptions are the most susceptible to change
and therefore could impact the valuation of the assets in the next year.
DESCRIPTION OF SIGNIFICANT IMPAIRMENT TESTING ASSUMPTIONS (see Note 25 of consolidated financial statements)
REVENUES, OPERATING INCOME BEFORE DEPRECIATION (OIBD) MARGINS, CASH FLOWS AND GROWTH RATES
The assumptions used were based on the Corporation's internal budget. Revenues, OIBD margins and cash flows were projected for a period
of five years and a perpetual long-term growth rate was applied thereafter. In arriving at its forecasts, the Corporation considers past experience,
economic trends such as gross domestic product growth and inflation, as well as industry and market trends.
DISCOUNT RATES
The Corporation assumed a discount rate in order to calculate the present value of its projected cash flows. The discount rate represents a
weighted average cost of capital (WACC) for comparable companies operating in similar industries of the applicable CGU, group of CGUs or
reportable segment based on publicly available information.
FOREIGN EXCHANGE RATES
When estimating the fair value less cost of disposal, foreign exchange rates are determined using the financial institution's average forecast
for the first two years of forecasting. For the following three years, the Corporation uses the last five years' historical average of the foreign
exchange rate. Terminal rate is based on historical data of the last 20 years and adjusted to reflect Management's best estimate.
SHIPMENTS
The assumptions used are based on the Corporation's internal budget for the next year and are usually held constant for the forecast period.
In arriving at its budgeted shipments, the Corporation considers past experience, economic trends as well as industry and market trends.
Considering the sensitivity of the key assumptions used, there is measurement uncertainty since adverse changes in one or a combination
of the Corporation's key assumptions could cause a significant change in the carrying amounts of these assets.
B. INCOME TAXES
The Corporation is required to estimate the income taxes in each jurisdiction in which it operates. This includes estimating a value for existing
tax losses based on the Corporation's assessment of its ability to use them against future taxable income before they expire. If the Corporation's
assessment of its ability to use the tax losses proves inaccurate in the future, more or less of the tax losses might be recognized as assets,
which would increase or decrease the income tax expense and, consequently, affect the Corporation's results in the relevant year.
C. EMPLOYEE BENEFITS
The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of
high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating
the terms of the related pension liability.
The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro-
rated on years of service and Management's best estimate of expected plan investment performance, salary escalations, retirement ages of
employees and expected health care costs. The accrued benefit obligation is evaluated using the market interest rate at the evaluation date.
Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed annually.
D. GOODWILL, INTANGIBLE ASSETS AND BUSINESS COMBINATIONS
Goodwill and client lists have arisen as a result of business combinations. The acquisition method, which also requires significant estimates
and judgments, is used to account for these business combinations. As part of the allocation process in a business combination, estimated
fair values are assigned to the net assets acquired. These estimates are based on forecasts of future cash flows, estimates of economic
fluctuations and an estimated discount rate. The excess of the purchase price over the estimated fair value of the net assets acquired is then
assigned to goodwill. In the event that actual net assets fair values are different from estimates, the amounts allocated to the net assets could
82
82
72
differ from what is currently reported. This would then have a direct impact on the carrying value of goodwill. Differences in estimated fair
values would also have an impact on the amortization of definite life intangibles.
CRITICAL JUDGMENTS IN APPLYING THE CORPORATION'S ACCOUNTING POLICIES
SUBSIDIARIES AND EQUITY ACCOUNTED INVESTMENTS
Significant judgment is applied in assessing whether certain investment structures result in control, joint control or significant influence over
the operations of the investment. Management's assessment of control, joint control or significant influence over an investment will determine
the accounting treatment for the investment. The Corporation has a 59.7% direct interest in Greenpac. Greenpac's Shareholders agreement
required a majority of 80% for all decision-making related to relevant activities. Consequently, the Corporation did not have power over relevant
activities of Greenpac and its participation was accounted for as an associate. On April 4, 2017, Cascades and its partners in Greenpac
Holding LLC (Greenpac) agreed to modify the equity holders' agreement. These modifications enable Cascades to direct decisions about
relevant activities. Therefore, from an accounting standpoint, Cascades now has control over Greenpac, which triggered its deemed acquisition
and thus fully consolidates Greenpac since April 4, 2017. Please refer to Notes 5 and 8 of the consolidated financial statements for more
details.
NOTE 5
BUSINESS COMBINATIONS AND ASSET ACQUISITION
2018
Urban Forest Products LLC, Clarion Packaging LLC and Falcon Packaging LLC
On December 6, 2018, the Corporation acquired all the assets of Urban Forest Products LLC (UFP) and Clarion Packaging LLC (Clarion)
respectively located in Brook, Indiana and Clarion, Iowa. Both plants manufacture molded pulp protective packaging that primarily serves the
egg and quick service restaurant industries. Concurrently, the Specialty Products segment also acquired 75% of the membership units of
Falcon Packaging LLC, a leader in the distribution of egg and other packaging located in Ohio, Iowa and Georgia. These acquisitions are in
line with the Corporation's objective to expand molded pulp activities, which produce a recycled, recyclable, compostable and biodegradable
packaging product that offers highly interesting opportunities against a backdrop of expanding interest in the circular economy. Total
consideration for the business acquisition was $58 million and consisted of US$38 million ($51 million) in cash, a non-cash provision of
$1 million and assumed debts of $6 million. These acquisitions were treated as a single business combination since the substance of the
transaction was the acquisition of integrated businesses.
The $10 million fair value of accounts receivables is equal to gross contractual cash flows, which were all expected to be collected at the time
of the acquisition.
73
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83
The purchase price allocation is preliminary as of December 31, 2018. Assets acquired and liabilities assumed were as follows:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Accounts receivable
Inventories
Property, plant and equipment
Client list
Total assets
Bank loan
Trade and other payables
Long-term debt
Deferred income tax liabilities
Net assets acquired
Non-controlling interests
Gain on business combination (net of income taxes of $1 million)
Cash paid
Non-cash provision for working capital adjustment
Total consideration
BUSINESS SEGMENT:
2018
SPECIALTY
PRODUCTS
ACQUIRED COMPANIES:
UFP, Clarion
& Falcon Packaging
10
8
48
10
76
(2)
(9)
(4)
(1)
60
(5)
(3)
52
51
1
52
The acquired business, since the date of acquisition, represents sales amounting to $11 million on a stand-alone basis ($11 million on a
consolidated basis) and the contribution to net earnings attributable to Shareholders is nil on a stand-alone basis ($3 million on a consolidated
basis including the gain on business combination, net of income tax). Had the acquisition occurred on January 1, 2018, consolidated sales
would have been $4,773 million and net earnings attributable to Shareholders would have been $59 million including the gain on business
acquisition, net of income tax.
PAC Service S.p.A.
On January 1, 2018, the Corporation acquired PAC Service S.p.A., a boxboard converter for the packaging, publishing, cosmetics and food
industries and has been fully consolidated since then. The Corporation already had a 33.33% equity participation through its 58% equity
ownership in Reno de Medici S.p.A. in the Boxboard Europe segment. The consideration for the acquisition of the remaining 66.67% shares
consisted of cash totaling €10 million ($15 million) and was deposited on December 19, 2017. The excess of consideration over the net fair
value of the assets acquired and the liabilities assumed resulted in a non-deductible goodwill of $7 million and has been allocated to the
Boxboard Europe segment cash generating unit (CGU). The transaction is expected to create synergies, since Reno de Medici is already a
strategic supplier of PAC Service.
Barcelona Cartonboard S.A.U.
On October 31, 2018, the Corporation acquired Barcelona Cartonboard S.A.U., a paperboard manufacturer on the Iberian Peninsula. The
consideration for the acquisition consisted of cash totaling €36 million ($54 million) and €10 million ($14 million) of net debt assumed. The
excess of the consideration over the net fair value of the assets acquired and the liabilities assumed resulted in a non-deductible goodwill of
$1 million and has been allocated to the Boxboard Europe segment.The acquisition will allow Reno de Medici to strengthen its presence in
a well-known market, to optimize its products portfolio and to further improve the level of service to current customers and new ones, as the
Barcelona plant is located near some of the major European converters.
The $37 million fair value of total accounts receivables acquired is equal to the gross contractual cash flows, which were all expected to be
collected at the time of the acquisition.
The purchase price allocation was finalized during the second quarter of 2018 for Pac Service S.p.A. and the one for Barcelona Cartonboard
S.A.U. is preliminary as of December, 31, 2018.
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Assets acquired and liabilities assumed were as follows:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
BUSINESS SEGMENT:
ACQUIRED
COMPANIES:
BARCELONA
CARTONBOARD
S.A.U.
2018
BOXBOARD EUROPE
PAC SERVICE S.p.A.
TOTAL
Cash and cash equivalents
Accounts receivable
Inventories
Property, plant and equipment
Other intangible assets with finite useful life
Other assets
Goodwill
Total assets
Trade and other payables
Current portion of long-term debt
Long-term debt
Provision for contingencies and charges
Employee future benefits
Deferred income tax liabilities
Net assets acquired
Cash paid in 2018
Cash paid in 2017 (included in other assets as at December 31, 2017)
Previously held interest
Revaluation gain on previously held interest on January 1, 2018
Total consideration
2
25
21
72
2
1
1
124
(50)
(4)
(12)
(1)
—
(3)
54
54
—
—
—
54
4
12
7
9
—
—
7
39
(9)
(3)
(2)
—
(1)
(1)
23
—
15
3
5
23
6
37
28
81
2
1
8
163
(59)
(7)
(14)
(1)
(1)
(4)
77
54
15
3
5
77
The acquisition of PAC Service S.p.A, since the date of acquisition, represents sales amounting to $33 million on a stand-alone basis
($23 million on a consolidated basis) and the contribution to net earnings attributable to Shareholders is $1 million on a stand-alone basis
($1 million on a consolidated basis) whereas the Barcelona acquisition, since the date of acquisition, generated sales amounting to $33 million
on a stand-alone basis ($33 million on a consolidated basis) and a contribution to net earnings attributable to Shareholders of nil on a stand-
alone basis (nil on a consolidated basis). Had the Barcelona acquisition occurred on January 1, 2018, consolidated sales would have been
$4,816 million and net earnings attributable to Shareholders would have been $60 million.
2017
Coyle containerboard converting plants
On November 30, 2017, the Containerboard Packaging segment purchased, from the Coyle family, three converting plants located in Ontario
and specialized in the manufacturing of boxes and specialty products. Total consideration was $30 million and consisted of $25 million in
cash, $1 million for working capital purchase price adjustment and $4 million of assumed debts. The excess of the consideration paid over
the net fair value of the assets acquired resulted in a tax-deductible goodwill of $3 million and has been allocated to the Containerboard
Packaging segment CGU. The transaction is expected to create synergies since a significant portion of their procurement is realized through
our newly acquired Tencorr joint venture, which has a supply agreement with Greenpac.
The $12 million fair value of accounts receivables is equal to gross contractual cash flows, which were all expected to be collected at the time
of acquisition.
The purchase price was finalized during the first quarter of 2018 and the Corporation paid working capital purchase price adjustment of
$1 million. There were no significant changes recorded to the preliminary amounts reported.
75
85
85
Assets acquired and liabilities assumed were as follows:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Accounts receivable
Inventories
Property, plant and equipment
Intangible assets with finite useful life (client list)
Goodwill
Total assets
Trade and other payables
Current portion of long-term debt
Long-term debt
Net assets acquired
Cash paid in 2017
Working capital purchase price adjustment paid in 2018
Total consideration
BUSINESS SEGMENT:
2017
CONTAINERBOARD
PACKAGING
ACQUIRED COMPANY:
Coyle Plants
12
1
10
7
4
34
(4)
(1)
(3)
26
25
1
26
Greenpac Holding LLC
On April 4, 2017, Cascades and its partners in Greenpac Holding LLC (Greenpac) agreed to modify the Limited Partnership Agreement. These
modifications enable Cascades to direct decisions about relevant activities. Therefore, from an accounting standpoint, Cascades has control
over Greenpac, which triggered its deemed acquisition and thus fully consolidates Greenpac since April 4, 2017.
There were no cash considerations for the acquisition and there was no change of participation of each partner in Greenpac. Consideration
transferred for the acquisition was the fair value of Cascades' investment in Greenpac based on the income approach, less net liabilities with
acquiree, which settled as a result of the transaction. The excess of the consideration over the net fair value of the assets acquired and the
liabilities assumed resulted in a non-deductible goodwill of $190 million and has been allocated to the Containerboard Packaging segment
CGU. The consolidation enables Cascades to better reflect its presence in the North American containerboard market.
One of the partners in Greenpac has a put option whereby the partner can require other partners or Greenpac itself to repurchase its shares
at a price including a predetermined return on its investment. Under IFRS, this option gives the equity participation of this partner the
characteristics of liability more than equity. As such, this partner's participation is classified in the current portion of other liabilities at an initial
fair value of $85 million at the acquisition date.
For accounting purposes, the Corporation's share of Greenpac stands at 82.83% as at December 31, 2017 (78.3% for the period of April 4
to November 30, 2017), while legal ownership is 59.7%. The Corporation records income taxes on 71.8% of Greenpac's profit before taxes,
as it is a flow-through entity for tax purposes (62.5% for the period of April 4 to November 30, 2017). See Note 8 for details.
The change in control provides for the revaluation of the previously held interest to its fair market value. As such, a gain of $156 million was
recognized in the consolidated statement of earnings in the second quarter. Also, consequent to the acquisition, our share of accumulated
other comprehensive loss components of Greenpac totaling $4 million and included in Cascades' consolidated balance sheet prior to the
acquisition was reclassified to net earnings. These two items are presented in line item “Fair value revaluation gain on investments” in the
consolidated statement of earnings.
The Corporation has reversed its deferred income tax liability related to its Greenpac investment and recorded an income tax recovery of
$70 million. The investment in Greenpac is considered as the consideration transferred for the Greenpac acquisition and, as a result, is
accounted for as a deemed disposal for tax accounting purposes.
The $20 million fair value of accounts receivables is equal to gross contractual cash flows, which were all expected to be collected at the time
of acquisition.
The purchase price allocation of Greenpac was finalized during the third quarter of 2017.
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Assets acquired and liabilities assumed were as follows:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts receivable
Inventories
Current portion of financial assets
Property, plant and equipment
Financial assets
Intangible assets with finite useful life (client list)
Goodwill
Total assets
Trade and other payables
Current portion of long-term debt
Current portion of financial liabilities and other liabilities
Long-term debt
Financial liabilities
Deferred income tax liabilities
Net assets acquired
Non-controlling interests
Total non-cash consideration
Previously held interest
Revaluation gain on previously held interest on April 4, 2017
Settlement of net liabilities with acquiree before the transaction
BUSINESS SEGMENT:
2017
CONTAINERBOARD
PACKAGING
ACQUIRED COMPANY:
Greenpac Holding LLC
34
20
23
4
512
16
39
190
838
(39)
(15)
(90)
(238)
(4)
(91)
361
(57)
304
187
156
(39)
304
On November 30, 2017, the Corporation increased its participation in Containerboard Partners (Ontario) Inc. from 23% to 53% through the
acquisition of 90 common shares for a cash consideration of US$15 million ($19 million). The transaction increases the Corporation's indirect
ownership in Greenpac to 6.4% from 3.6%. Since there are no activities in Containerboard Partners (Ontario) Inc. other than its investment
in Greenpac, the transaction is accounted as the acquisition of a non-controlling interest.
ASSET AQUISITION
2018
Bear Island
On July 26, 2018, the Containerboard Packaging segment acquired the White Birch's Bear Island manufacturing facility in Virginia, USA for
a cash consideration of US$35 million ($46 million) (including transaction fees). Upon the approval of the Corporation's Board, the newsprint
paper machine presently located on the site will be reconfigured to produce high-quality recycled lightweight linerboard and medium for the
North American market. Production is expected to begin in 2021. During the period prior to conversion, White Birch will temporarily operate
the site as a newsprint mill under a 27-month free net lease having an estimated value of $8 million and accounted for as deferred revenues
and added to the consideration.
As part of the agreement, the Corporation granted to White Birch a one-time option to purchase an interest of up to 10% in the Bear Island
containerboard mill project provided that the mill conversion project is approved by the Corporation's Board of Directors and can be exercised
in the twelve month period beginning July 26, 2020. The option has an estimated value of $13 million and is added to the assets' purchase price.
The transaction is accounted for as an asset acquisition as it does not meet the definition of a business combination. The acquired facility
includes landfills for which the Corporation recorded an asset retirement obligation amounting to $5 million. Finally, as part of the agreement,
the Corporation committed to pay White Birch US$4 million ($5 million) in the next 27 months to cover property and building maintenance costs.
77
87
87
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Property, plant and equipment
Total assets
Asset retirement obligation
Net assets acquired
Cash paid
Purchase option fair value issued to White Birch
Favourable lease fair value
Carrying costs commitment
Total consideration
NOTE 6
ACCOUNTS RECEIVABLE
(in millions of Canadian dollars)
Accounts receivable - Trade
Receivables from related parties
Less: loss allowance
Trade receivables - net
Other
(in millions of Canadian dollars)
Past due 1-30 days
Past due 31-60 days
Past due 61-90 days
Past due 91 days and over
Movements in the Corporation's loss allowance are as follows:
(in millions of Canadian dollars)
Balance at beginning of year
Provision for doubtful accounts, net of unused beginning balance
Receivables written off during the year as uncollectable
Other
Balance at end of year
NOTE
29
2018
570
34
(15)
589
46
635
2018
BUSINESS SEGMENT:
CONTAINERBOARD
ACQUIRED ASSETS :
Bear Island
77
77
(5)
72
46
13
8
5
72
2017
526
35
(7)
554
54
608
2017
73
30
10
30
143
2018
79
20
12
34
145
2018
2017
7
5
(1)
4
15
6
2
(1)
—
7
As at December 31, 2018, trade receivables of $145 million (December 31, 2017 - $143 million) were past due but not impaired.
The aging of these trade receivables at each reporting date is as follows:
The change in the provision for doubtful accounts has been included in “Selling and administrative expenses” in the consolidated statement
of earnings.
The maximum exposure to credit risk at the reporting date approximates the carrying value of each class of receivable mentioned above.
88
88
78
NOTE 7
INVENTORIES
(in millions of Canadian dollars)
Finished goods
Raw materials
Supplies and spare parts
2018
294
132
179
605
2017
249
124
150
523
As at December 31, 2018, finished goods, raw materials and supplies and spare parts were adjusted to net realizable value (NRV) by
$12 million, nil and nil, respectively (December 31, 2017 - $8 million, $1 million, and nil).
The Corporation has sold all the goods that were written down in 2018. No reversal of previously written-down inventory occurred in 2018 or
2017. The cost of raw materials and supplies and spare parts included in “Cost of sales” amounted to $1,713 million (2017 - $1,776 million).
NOTE 8
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
A.
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES ARE DETAILED AS FOLLOWS:
(in millions of Canadian dollars)
Investments in associates
Investments in joint ventures
2018
12
69
81
2017
16
62
78
Investments in associates and joint ventures as at December 31, 2018, include goodwill of $3 million (December 31, 2017 - $3 million).
INVESTMENTS IN ASSOCIATES
B.
Hereunder are the principal associates of the Corporation in 2017. The Corporation did not hold any significant participation in associates in
2018.
Boralex
On January 18, 2017, Boralex issued common shares to partly finance the acquisition of the interest of Enercon Canada Inc. in the Niagara
Region Wind Farm. As a result, the Corporation's participation in Boralex decreased to 17.37%, which resulted in a dilution gain of $15 million
and is included in line item “Share of results of associates and joint ventures” in the consolidated statement of earnings.
On March 10, 2017, Boralex announced the appointment of a new Chairman of the Board. This change in the Board composition combined
with the decrease of our participation discussed above triggered the loss of significant influence of the Corporation over Boralex. Starting
March 10, 2017, the investment in Boralex was no longer classified as an associate and was considered as an available-for-sale financial
asset. Consequently, the Corporation's investment in Boralex was re-evaluated at fair value on March 10, 2017, and a gain of $155 million was
recorded. At the same time, accumulated other comprehensive loss components of Boralex totaling $10 million and included in our consolidated
balance sheet were reclassified to net earnings. These two items are presented in line item “Fair value revaluation gain on investments” in the
consolidated statement of earnings. Subsequent fair value revaluation of this investment is recorded in ”Accumulated other
comprehensive income”.
On July 27, 2017, the Corporation announced the sale of all of its shares in Boralex to the Caisse de Dépôt et Placement du Québec for an
amount of $288 million. The increase in fair value of $18 million from March 10 to July 27, 2017, recorded in “Accumulated other comprehensive
income” materialized, and the Corporation recorded a gain of $18 million in the third quarter in line item “Fair value revaluation gain on
investments” in the consolidated statement of earnings. The Corporation also received $2 million of dividends while Boralex was considered
an available-for-sale financial assets.
Greenpac Holding LLC
On April 4, 2017, the Corporation gained control over its associate Greenpac, which triggered its acquisition for accounting purposes. See
Note 5 for more details.
79
89
89
On March 21, 2017, the Corporation acquired 23% of Containerboard Partners (Ontario) Inc. for a consideration of US$12 million ($16 million).
This company is a member of Greenpac Holding LLC, of which it owns 12.1%. On November 30, 2017, the Corporation acquired an additional
30% of Containerboard Partners (Ontario) for a consideration of $19 million. These transactions add an indirect participation of 6.4% in Greenpac
Holding LLC, bringing total legal ownership to 66.1%. However, in line with the deemed acquisition of Greenpac discussed above, the portion
of our Containerboard Partners (Ontario) share of results pertaining to Greenpac is reversed for consolidation purposes.
The Corporation's financial information from its principal associates (100%), translated in millions of Canadian dollars if required, is as follows:
2017
(in millions of Canadian dollars)
Condensed statements of earnings
Sales
Depreciation and amortization
Financing expense
Provision for income taxes
Net earnings
Other comprehensive income (loss)
Translation adjustment
Cash flow hedges
Total comprehensive income (loss)
Condensed cash flow
Dividends received from associates
BORALEX INC.
GREENPAC HOLDING LLC
(results up to April 4, 2017)
(results up to March 10, 2017)
96
31
19
6
13
1
(1)
—
13
2
99
7
3
—
9
—
1
1
10
—
INVESTMENT IN JOINT VENTURES
C.
The following are the principal joint ventures of the Corporation and the Corporation's percentage of equity owned:
Cascades Sonoco US Inc.1
Cascades Sonoco inc.1
Maritime Paper Products Limited Partnership (MPPLP) 2
Tencorr Holdings Corporation 3
1 Joint ventures producing specialty paper packaging products such as headers, rolls and wrappers.
2 MPPLP is a Canadian corporation converting containerboard.
3 Tencorr Holdings Corporation operates as a supplier of corrugated sheet stock.
2018-2017
PERCENTAGE EQUITY
OWNED (%)
PRINCIPAL ESTABLISHMENT
Birmingham, Alabama and Tacoma, Washington,
United States
50
50 Kingsey Falls and Berthierville, Québec, Canada
40
33.3
Dartmouth, Nova Scotia, Canada
Brampton, Ontario, Canada
Tencorr Holdings Corporation
On November 30, 2017, the Corporation acquired 33.3% of the outstanding shares of Tencorr Holdings Corporation (Tencorr), a corrugated
sheets manufacturer, for a consideration of $5 million, of which $2 million was paid in 2018. Tencorr is classified as a joint venture and, accordingly
our share of results is recorded using the equity method.
90
90
80
The Corporation's joint ventures information (100%), translated in millions of Canadian dollar if required, is as follows:
(in millions of Canadian dollars)
Condensed balance sheet
Cash and cash equivalents
Current assets (other than cash and cash equivalents and current financial
assets)
Long-term assets (other than long-term financial assets)
Current liabilities (other than current financial liabilities)
Current financial liabilities
Long-term liabilities (other than long-term financial liabilities)
Long-term financial liabilities
Condensed statement of earnings
Sales
Depreciation and amortization
Financing expense
Provision for income taxes
Net earnings
Other comprehensive income (loss)
Translation adjustment
Total comprehensive income
Condensed cash flow
Dividends received from joint ventures
(in millions of Canadian dollars)
Condensed balance sheet
Current assets (other than cash and cash equivalents and current financial
assets)
Long-term assets (other than long-term financial assets)
Current liabilities (other than current financial liabilities)
Current financial liabilities
Long-term liabilities (other than long-term financial liabilities)
Long-term financial liabilities
Condensed statement of earnings
Sales
Depreciation and amortization
Financing expense
Provision for income taxes
Net earnings
Other comprehensive income (loss)
Translation adjustment
Total comprehensive income
Condensed cash flow
Dividends received from joint ventures
CASCADES SONOCO
US INC.
CASCADES SONOCO INC.
MARITIME PAPER
PRODUCTS LIMITED
PARTNERSHIP
TENCORR HOLDINGS
CORPORATION
2018
1
32
38
10
4
6
14
119
2
1
2
6
3
9
2
1
32
15
10
1
3
—
97
2
—
2
6
—
6
2
—
26
29
5
1
—
3
—
20
10
15
3
3
—
108
137
2
—
—
3
—
3
—
1
—
1
1
—
1
—
2017
CASCADES SONOCO
US INC.
CASCADES SONOCO INC.
MARITIME PAPER
PRODUCTS LIMITED
PARTNERSHIP
TENCORR HOLDINGS
CORPORATION
30
31
10
2
4
14
119
2
1
1
8
(2)
6
4
28
17
6
1
3
3
96
2
—
1
4
—
4
1
25
28
4
1
—
4
20
12
14
5
—
1
102
111
2
—
—
7
—
7
1
2
—
—
1
—
1
—
91
91
There is about $1 million in commitments in the joint ventures.
81
D. SUBSIDIARIES WITH NON-CONTROLLING INTERESTS
The Corporation's information for its subsidiaries with significant non-controlling interests is as follows:
2018
(in millions of Canadian dollars, unless otherwise noted)
RENO DE MEDICI S.p.A.
GREENPAC HOLDING LLC
RENO DE MEDICI S.p.A.
2017
GREENPAC HOLDING LLC
(since April 4, 2017)
Milan, Italy
New York,
United States
Milan, Italy
New York,
United States
42.05%
17.17%
42.18%
17.17%
Principal establishment
Percentage of shares held by non-controlling interests (accounting
basis)
Net earnings attributable to non-controlling interests
Non-controlling interests accumulated at the end of the year
Dividends paid to non-controlling interests
Condensed balance sheet
Cash and cash equivalents
Current assets (other than cash and cash equivalents and current financial
assets)
Current financial assets
Long-term assets (other than long-term financial assets)
Long-term financial assets
Current liabilities (other than current financial liabilities)
Current financial liabilities
Long-term liabilities (other than long-term financial liabilities)
Long-term financial liabilities
Condensed statement of earnings
Sales
Depreciation and amortization
Provision for income taxes
Net earnings
Condensed cash flow
Cash flows from operating activities
Cash flows used for investing activities
Cash flows used for financing activities
18
127
1
49
315
—
425
—
257
32
76
119
933
36
20
42
80
(85)
26
18
50
15
37
109
3
589
13
33
77
—
208
429
30
—
105
123
(3)
(123)
9
105
1
29
254
—
335
—
195
30
72
67
838
33
9
21
49
(48)
(17)
E. NON-SIGNIFICANT ASSOCIATES AND JOINT VENTURES
The carrying value of investments in associates and joint ventures that are not significant for the Corporation is as follows:
(in millions of Canadian dollars)
Non-significant associates
Non-significant joint ventures
The shares of results of non-significant associates and joint ventures for the Corporation are as follows:
(in millions of Canadian dollars)
Non-significant associates
Non-significant joint ventures
2018
12
18
30
2018
(1)
3
2
The Corporation received dividends of $2 million from these associates and joint ventures as at December 31, 2018 (December 31, 2017 -
$2 million).
92
92
82
5
42
4
38
100
3
568
14
31
106
—
209
278
22
—
21
39
(3)
(30)
2017
16
16
32
2017
1
3
4
NOTE 9
PROPERTY, PLANT AND EQUIPMENT
(in millions of Canadian dollars)
As at January 1, 2017
Cost
Accumulated depreciation and impairment
Net book amount
Year ended December 31, 2017
Opening net book amount
Additions
Disposals
Depreciation
Business combinations
Assets held for sale
Impairment charges
Others
Exchange differences
Closing net book amount
As at December 31, 2017
Cost
Accumulated depreciation and impairment
Net book amount
Year ended December 31, 2018
Opening net book amount
Additions and asset acquisition
Disposals
Depreciation
Business combinations
Impairment charges
Others
Exchange differences
Closing net book amount
As at December 31, 2018
Cost
Accumulated depreciation and impairment
Net book amount
NOTE
LAND
BUILDINGS
MACHINERY AND
EQUIPMENT
AUTOMOTIVE
EQUIPMENT
OTHERS
TOTAL
5
24
25
5
5
25
110
—
110
110
11
(3)
—
7
(1)
—
(1)
1
124
124
—
124
124
11
—
—
34
—
—
6
175
175
—
175
740
353
387
387
6
(2)
(31)
90
(8)
—
55
(11)
486
841
355
486
486
92
—
(35)
23
(6)
26
23
609
1,015
406
609
2,553
1,642
911
911
24
(1)
(132)
397
—
—
77
(29)
1,247
3,026
1,779
1,247
1,247
91
(1)
(150)
67
(67)
145
64
1,396
3,398
2,002
1,396
126
71
55
55
18
(1)
(15)
1
—
—
(1)
(1)
56
142
86
56
56
18
—
(17)
3
(1)
4
1
64
164
100
64
299
127
172
172
148
(1)
(11)
27
(4)
(2)
(131)
(7)
191
314
123
191
191
236
—
(10)
2
—
(165)
8
262
391
129
262
3,828
2,193
1,635
1,635
207
(8)
(189)
522
(13)
(2)
(1)
(47)
2,104
4,447
2,343
2,104
2,104
448
(1)
(212)
129
(74)
10
102
2,506
5,143
2,637
2,506
Other property, plant and equipment include buildings and machinery and equipment in the process of construction or installation with a book
value of $99 million (December 31, 2017 - $81 million) and deposits on purchases of machinery and equipment amounting to $34 million
(December 31, 2017 - $18 million). The carrying value of finance-lease assets is $88 million (December 31, 2017 - $31 million).
In 2018, $3 million (2017 - $2 million) of interest incurred on qualifying assets was capitalized. The weighted average capitalization rate on
funds borrowed in 2018 was 5.52% (2017 - 5.56%).
83
93
93
NOTE 10
GOODWILL AND OTHER INTANGIBLE ASSETS WITH FINITE AND INDEFINITE USEFUL LIFE
APPLICATION
SOFTWARE AND
ERP
NOTE
CUSTOMER
RELATIONSHIPS
AND CLIENT
LISTS
OTHER
INTANGIBLE
ASSETS WITH
FINITE USEFUL
LIFE
TOTAL
INTANGIBLE
ASSETS WITH
FINITE USEFUL
LIFE
OTHER
INTANGIBLE
ASSETS WITH
INDEFINITE
USEFUL LIFE
TOTAL
INTANGIBLE
ASSETS WITH
INDEFINITE
USEFUL LIFE
GOODWILL
5
5
126
43
83
83
24
—
(13)
—
94
150
56
94
94
12
2
(16)
—
1
93
158
65
93
171
87
84
84
—
46
(11)
(3)
116
208
92
116
116
—
10
(13)
—
3
116
221
105
116
35
31
4
4
—
—
(2)
—
2
32
30
2
2
—
—
(3)
3
—
2
34
32
2
332
161
171
171
24
46
(26)
(3)
212
390
178
212
212
12
12
(32)
3
4
211
413
202
211
349
5
344
344
—
194
—
(17)
521
523
2
521
521
—
8
—
—
20
549
552
3
549
7
1
6
6
—
—
—
1
7
7
—
7
7
—
—
—
(1)
—
6
7
1
6
356
6
350
350
—
194
—
(16)
528
530
2
528
528
—
8
—
(1)
20
555
559
4
555
(in millions of Canadian dollars)
As at January 1, 2017
Cost
Accumulated amortization and impairment
Net book amount
Year ended December 31, 2017
Opening net book amount
Additions
Business combinations
Amortization
Exchange differences
Closing net book amount
As at December 31, 2017
Cost
Accumulated amortization and impairment
Net book amount
Year ended December 31, 2018
Opening net book amount
Additions
Business combinations
Amortization
Others
Exchange differences
Closing net book amount
As at December 31, 2018
Cost
Accumulated amortization and impairment
Net book amount
NOTE 11
OTHER ASSETS
(in millions of Canadian dollars)
Notes receivable from business disposals
Other investments
Other assets
Employee future benefits
NOTE
2018
2017
16
3
4
21
16
44
(2)
42
6
6
30
37
79
(6)
73
Less: Current portion, included in accounts receivables
In December 2017, the Corporation deposited €10 million ($15 million) for the acquisition of PAC Service S.p.A in the Boxboard Europe
segment. See Note 5 for more details.
94
94
84
NOTE 12
TRADE AND OTHER PAYABLES
(in millions of Canadian dollars)
Trade payables
Payables to related parties
Provisions for volume rebates
Accrued expenses
Movements in the Corporation's provision for volume rebates are as follows:
(in millions of Canadian dollars)
Balance at beginning of year
Provision for volume rebates, net of unused beginning balance
Business combinations
Volume rebates payments
Exchange differences
Balance at end of year
NOTE 13
PROVISIONS FOR CONTINGENCIES AND CHARGES
NOTE
29
3
NOTE
5
2018
566
4
50
162
782
2018
45
111
1
(104)
(3)
50
2017
488
7
45
143
683
2017
35
102
—
(93)
1
45
ENVIRONMENTAL
RESTORATION
OBLIGATIONS
NOTE
ENVIRONMENTAL
COSTS
LEGAL CLAIMS
SEVERANCES
ONEROUS
CONTRACT
OTHERS
TOTAL
PROVISIONS
(in millions of Canadian dollars)
As at January 1, 2017
Additional provision
Payments
Other
As at December 31, 2017
Additional provision
Payments
Revaluation
Business combinations and assets acquisition
5
As at December 31, 2018
Analysis of total provisions:
(in millions of Canadian dollars)
Long-term
Current
8
(1)
—
—
7
—
—
5
5
17
16
—
—
—
16
—
—
—
—
16
3
2
(1)
—
4
—
(1)
—
—
3
3
5
(5)
—
3
2
(3)
—
—
2
7
2
(2)
3
10
—
(2)
—
1
9
6
—
(3)
—
3
—
(2)
—
—
1
2018
42
6
48
43
8
(11)
3
43
2
(8)
5
6
48
2017
36
7
43
ENVIRONMENTAL RESTORATION
The Corporation uses some landfill sites. A provision has been recognized at fair value for the costs to be incurred for the restoration of
these sites.
ENVIRONMENTAL COSTS
An environmental provision is recorded when the Corporation has an obligation caused by its ongoing or abandoned operations.
LEGAL CLAIMS
In the normal course of operations, the Corporation is party to various legal actions and contingencies related to contract disputes and
labour issues.
85
95
95
In the normal course of operations, the Corporation is party to various legal actions and contingencies, mostly related to contract disputes,
environmental and product warranty claims, and labour issues. While the final outcome with respect to legal actions outstanding or pending
as at December 31, 2018 cannot be predicted with certainty, it is Management's opinion that the outcome will not have a material adverse
effect on the Corporation's consolidated financial position, the results of its operations or its cash flows.
The Corporation is currently working with representatives of the Ontario Ministry of the Environment (MOE) - Northern Region and Environment
Canada - Great Lakes Sustainability Fund in Toronto regarding its potential responsibility for an environmental impact identified at its former
Thunder Bay facility. Both authorities have requested that the Corporation look into a site management plan relating to the sediment quality
adjacent to Thunder Bay's lagoon. Several meetings have been held during the past years with the MOE and Environment Canada, and a
management plan based on sediment dredging has been proposed by a third party consultant. Both governments are looking at this proposal
with stakeholders to agree on this remediation action plan that would likely be implemented in the coming years.
The Corporation is also in discussions with representatives of the MOE regarding its potential responsibility for an environmental impact
identified at Thunder Bay. This facility was sold to Thunder Bay Fine Papers Inc. (Fine Papers) in 2007. Fine Papers has since sold the facility
to Superior Fine Papers Inc. (Superior), which recently sold it to Wilderness North. The MOE has requested that the Corporation, together
with the former owner Fine Papers and Superior, submit a closure plan for the Waste Disposal Site and a decommissioning plan for the closure
and long-term monitoring of the Sewage Works (the Plans). Although the Corporation recognizes that there may be an outflow of resources
embodying future economic benefits in settlement of a possible obligation, it is not possible at this time to estimate the Corporation's obligation,
since Superior has not submitted all of the Plans and related costs to allow the Corporation to perform an evaluation, nor does the Corporation
have access to the site. The Corporation is pursuing all available legal remedies to resolve the situation. In any event, Management does not
consider the Corporation's potential obligation to be material.
The Corporation has recorded an environmental reserve to address its estimated exposure for these matters.
NOTE 14
LONG-TERM DEBT
(in millions of Canadian dollars)
NOTE
MATURITY
2018
2017
Revolving credit facility, weighted average interest rate of 4.53% as at December 31, 2018, consists
of $4 million and US$60 million (December 31, 2017 - $5 million and US$151 million)
5.50% Unsecured senior notes of $250 million
5.50% Unsecured senior notes of US$400 million
5.75% Unsecured senior notes of US$200 million
Term loan of US$175 million, interest rate of 4.61% as at December 31, 2018
Other debts of subsidiaries
Other debts without recourse to the Corporation
14(b)
14(c)
14(c)
14(a)
2022
2021
2022
2023
2025
Less: Unamortized financing costs
Total long-term debt
Less:
Current portion of debts of subsidiaries
Current portion of debts without recourse to the Corporation
86
250
545
273
239
129
364
1,886
10
1,876
15
40
55
1,821
195
250
503
252
—
66
320
1,586
10
1,576
14
45
59
1,517
a. On December 21, 2018, the Corporation secured a US$175 million seven-year variable interest term loan. The financial conditions and
covenants of the Company's existing credit facility are unchanged, and no additional assets were required as security. The term loan, which
can be repaid at any time, provides the Corporation with increased financial flexibility and will reduce financing costs. As such, the term loan
proceeds have been used to repay certain of the Company's outstanding borrowings under its existing credit facility. Fees amounting to
US$1 million ($1 million) were incurred to conclude the agreement.
b. On June 29, 2018, the Corporation entered into an agreement with its lenders to extend and amend its existing $750 million credit facility.
The amendment extends the term of the facility to July 2022. The financial conditions remain unchanged.
96
96
86
c. On December 12, 2017, the Corporation repurchased US$150 million of its 5.50% unsecured senior notes due in 2022 for an amount of
US$156 million ($201 million) and US$50 million of its 5.75% unsecured senior notes due in 2023 for an amount of US$52 million
($67 million), including premiums of US$6 million ($8 million) and US$2 million ($3 million). The Corporation also wrote off $3 million of
unamortized financing costs related to these notes.
d. As at December 31, 2018, accounts receivable and inventories totaling approximately $752 million (December 31, 2017 - $748 million) as
well as property, plant and equipment totaling approximately $223 million (December 31, 2017 - $237 million) were pledged as collateral for
the Corporation's revolving credit facility.
e. The Corporation has finance leases for various items of property, plant and equipment. Renewals and purchase options are specific to the
entity that holds the lease. Lease liabilities are effectively secured, as the rights to the leased asset revert to the lessor in the event of default.
Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows:
(in millions of Canadian dollars)
Within one year
Later than one year but no later than five years
More than five years
Total minimum lease payments
Less: amounts representing finance charges
Present value of minimum lease payments
NOTE 15
OTHER LIABILITIES
(in millions of Canadian dollars)
Employee future benefits
Greenpac equity holder put option (see Note 5 for more details)
Other
Less: Current portion
MINIMUM PAYMENTS
2018
PRESENT VALUE OF
PAYMENTS
MINIMUM PAYMENTS
2017
PRESENT VALUE OF
PAYMENTS
16
40
89
145
50
95
11
23
61
95
—
95
NOTE
16
11
22
6
39
6
33
2018
170
76
35
281
(79)
202
9
18
6
33
—
33
2017
174
80
6
260
(82)
178
87
97
97
NOTE 16
EMPLOYEE FUTURE BENEFITS
The Corporation operates various post-employment plans, including both defined benefit and defined contribution pension plans and post-
employment benefit plans, such as retirement allowance, group life insurance and medical and dental plans. The table below outlines where
the Corporation’s post-employment amounts and activity are included in the consolidated financial statements.
(in millions of Canadian dollars)
Consolidated balance sheet obligations for
Defined pension benefits
Post-employment benefits other than defined benefit pension plans
Net long-term liabilities on consolidated balance sheet
Income statement charge for
Defined pension benefits
Defined contribution benefits
Post-employment benefits other than defined benefit pension plans
Remeasurements for
Defined pension benefits
Post-employment benefits other than defined benefit pension plans
NOTE
16(a)
16(b)
16(a)
16(b)
2018
55
99
154
8
22
6
36
19
(3)
16
2017
36
101
137
7
21
4
32
14
(1)
13
A. DEFINED BENEFIT PENSION PLANS
The Corporation offers funded and unfunded defined benefit pension plans, defined contribution pension plans and group RRSPs that provide
retirement benefit payments for most of its employees. The defined benefit pension plans are usually contributory and are based on the
number of years of service and, in most cases, the average salaries or compensation at the end of a career. Retirement benefits are not
partially adjusted based on inflation.
The majority of benefit payments are payable from trustee administered funds; however, for the unfunded plans, the Corporation meets the
benefit payment obligation as it falls due. Plan assets held in trusts are governed by local regulations and practices in each country. Responsibility
for governance of the plans - overseeing all aspects of the plans, including investment decisions and contribution schedules - lies with the
Corporation. The Corporation has established Investment Committees to assist in the management of the plans and has also appointed
experienced, independent professional experts such as investments managers, investment consultants, actuaries and custodians.
98
98
88
IMPACT OF
MINIMUM
FUNDING
REQUIREMENT
(ASSET CEILING)
—
TOTAL
22
TOTAL
22
The movement in the net defined benefit obligation and fair value of plan assets of pension plans over the year is as follows:
(in millions of Canadian dollars)
As at January 1, 2017
Current service cost
Interest expense (income)
Impact on profit or loss
Remeasurements
Return on plan assets, excluding amounts included in interest expense (income)
Loss from change in demographic assumptions
Loss from change in financial assumptions
Experience loss
Impact of remeasurements on other comprehensive income
Exchange differences
Contributions
Employers
Plan participants
Benefit payments
As at December 31, 2017
Current service cost
Interest expense (income)
Impact on profit or loss
Remeasurements
Return on plan assets, excluding amounts included in interest expense (income)
Gain from change in financial assumptions
Experience loss
Change in asset ceiling, excluding amounts included in interest expense
Impact of remeasurements on other comprehensive income
Exchange differences
Contributions
Employers
Plan participants
Benefit payments
As at December 31, 2018
PRESENT VALUE
OF OBLIGATION
FAIR VALUE OF
PLAN ASSETS
482
5
17
22
—
2
14
12
28
1
—
2
(27)
508
6
16
22
—
(22)
1
—
(21)
1
—
1
(31)
480
(460)
—
(15)
(15)
(14)
—
—
—
(14)
—
(8)
(2)
27
(472)
—
(14)
(14)
20
—
—
—
20
(1)
(8)
(1)
31
(445)
5
2
7
(14)
2
14
12
14
1
(8)
—
—
36
6
2
8
20
(22)
1
—
(1)
—
(8)
—
—
35
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20
20
—
—
—
—
20
The defined benefit obligation and plan assets are composed by country and by sector as follows:
(in millions of Canadian dollars)
Present value of funded obligations
Fair value of plan assets
Deficit (surplus) of funded plans
Impact of minimum funding requirement (asset ceiling)
Present value of unfunded obligations
Liabilities on consolidated balance sheet
CANADA
UNITED STATES
EUROPE
408
438
(30)
20
35
25
9
7
2
—
—
2
—
—
—
—
28
28
5
2
7
(14)
2
14
12
14
1
(8)
—
—
36
6
2
8
20
(22)
1
20
19
—
(8)
—
—
55
2018
TOTAL
417
445
(28)
20
63
55
89
99
99
(in millions of Canadian dollars)
Present value of funded obligations
Fair value of plan assets
Deficit (surplus) of funded plans
Impact of minimum funding requirement (asset ceiling)
Present value of unfunded obligations
Liabilities (assets) on consolidated balance sheet
CONTAINERBOARD
381
412
(31)
20
8
(3)
BOXBOARD
EUROPE
—
SPECIALTY
PRODUCTS
—
—
—
—
28
28
—
—
—
1
1
TISSUE PAPERS
CORPORATE
35
32
3
—
2
5
1
1
—
—
24
24
(in millions of Canadian dollars)
Present value of funded obligations
Fair value of plan assets
Deficit (surplus) of funded plans
Present value of unfunded obligations
Liabilities on consolidated balance sheet
CANADA
UNITED STATES
EUROPE
433
466
(33)
37
4
10
6
4
—
4
—
—
—
28
28
(in millions of Canadian dollars)
Present value of funded obligations
Fair value of plan assets
Deficit (surplus) of funded plans
Present value of unfunded obligations
Liabilities (assets) on consolidated balance sheet
CONTAINERBOARD
405
437
(32)
8
(24)
The significant actuarial assumptions are as follows:
TISSUE PAPERS
CORPORATE
37
34
3
2
5
1
1
—
25
25
BOXBOARD
EUROPE
—
SPECIALTY
PRODUCTS
—
—
—
28
28
—
—
2
2
2018
2018
TOTAL
417
445
(28)
20
63
55
2017
TOTAL
443
472
(29)
65
36
2017
TOTAL
443
472
(29)
65
36
2017
Discount rate obligation (ending period)
Discount rate obligation (beginning period)
Discount rate (current service cost)
Salary growth rate
Inflation rate
CANADA
UNITED STATES
EUROPE
CANADA
UNITED STATES
EUROPE
3.80%
3.40%
3.90%
Between
2.00% and
2.75%
3.90%
3.30%
3.90%
N/A
1.90%
1.60%
1.90%
N/A
3.40%
3.70%
3.50%
Between
2.00% and
2.75%
3.31%
3.73%
3.73%
N/A
1.60%
1.90%
1.90%
N/A
2.25%
N/A
1.75%
2.25%
N/A
1.75%
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in each
territory. For Canadian pension plans, which represent 87% of all pension plans, these assumptions translate into an average life expectancy
in years for a pensioner retiring at age 65:
Retiring at the end of the year
Male
Female
Retiring 20 years after the end of the reporting year
Male
Female
2018
21.8
24.2
22.8
25.1
2017
21.7
24.1
22.8
25.1
100
100
90
The sensitivity of the Canadian defined benefit obligation to changes in assumptions is set out below. The effects on each plan of a change
in an assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented.
IMPACT ON DEFINED BENEFIT OBLIGATION
CHANGE IN ASSUMPTION
INCREASE IN ASSUMPTION
DECREASE IN ASSUMPTION
0.25%
0.25%
(2.80)%
0.30 %
2.90 %
(0.30)%
INCREASE / DECREASE BY 1 YEAR IN ASSUMPTION
Discount rate
Salary growth rate
Life expectancy
Plan assets, which are funding the Corporation’s defined pension plans, are comprised as follows:
(in millions of Canadian dollars)
Cash and short-term investments
Bonds
Canadian bonds
Shares
Canadian shares
Foreign shares
Mutual funds
Foreign bond mutual funds
Canadian equity mutual funds
Foreign equity mutual funds
Alternative investments funds
Other
Insured annuities
LEVEL 1
LEVEL 2
LEVEL 3
5
70
24
4
28
—
5
—
—
5
—
—
108
—
52
—
—
—
6
1
35
24
66
219
219
337
—
—
—
—
—
—
—
—
—
—
—
—
—
3.00 %
2018
%
1.1 %
TOTAL
5
122
27.4 %
24
4
28
6
6
35
24
71
219
219
445
6.3 %
16.0 %
49.2 %
91
101
101
(in millions of Canadian dollars)
Cash and short-term investments
Bonds
Canadian bonds
Shares
Canadian shares
Foreign shares
Mutual funds
Foreign bond mutual funds
Canadian equity mutual funds
Foreign equity mutual funds
Alternative investments funds
Other
Insured annuities
LEVEL 1
LEVEL 2
LEVEL 3
5
92
34
6
40
—
7
—
—
7
—
—
144
—
81
—
—
—
6
1
54
22
83
164
164
328
—
—
—
—
—
—
—
—
—
—
—
—
—
TOTAL
5
2017
%
1.1 %
173
36.7 %
34
6
40
6
8
54
22
90
164
164
472
8.5 %
19.1 %
34.6 %
The plan assets include shares of the Corporation for an amount of less than $1 million. These shares were bought by one of the asset
managers. Annual benefit annuities of an approximate value of $219 million are pledged by insurance contracts.
B. POST-EMPLOYMENT BENEFITS OTHER THAN DEFINED BENEFIT PENSION PLANS
The Corporation also offers its employees some post-employment benefit plans, such as retirement allowance, group life insurance and
medical and dental plans. However, these benefits, other than pension plans, are not funded. Furthermore, the medical and dental plans upon
retirement are being phased out and are no longer offered to the majority of new retirees, and the retirement allowance is not offered to the
majority of employees hired after 2002.
The amounts recognized in the consolidated balance sheet composed by country and by sector are determined as follows:
(in millions of Canadian dollars)
Present value of unfunded obligations
Liabilities on consolidated balance sheet
CANADA
UNITED STATES
EUROPE
71
71
4
4
24
24
(in millions of Canadian dollars)
CONTAINERBOARD
Present value of unfunded obligations
Liabilities on consolidated balance sheet
36
36
BOXBOARD
EUROPE
24
24
SPECIALTY
PRODUCTS
6
6
TISSUE PAPERS
CORPORATE
12
12
21
21
(in millions of Canadian dollars)
Present value of unfunded obligations
Liabilities on consolidated balance sheet
CANADA
UNITED STATES
EUROPE
73
73
4
4
24
24
(in millions of Canadian dollars)
CONTAINERBOARD
Present value of unfunded obligations
Liabilities on consolidated balance sheet
38
38
92
BOXBOARD
EUROPE
24
24
SPECIALTY
PRODUCTS
6
6
TISSUE PAPERS
CORPORATE
12
12
21
21
2018
TOTAL
99
99
2018
TOTAL
99
99
2017
TOTAL
101
101
2017
TOTAL
101
101
102
102
The movement in the net defined benefit obligation for post-employment benefits over the year is as follows:
(in millions of Canadian dollars)
As at January 1, 2017
Current service cost
Interest expense
Curtailments
Impact on profit or loss
Remeasurements
Loss from change in financial assumptions
Experience gains
Impact of remeasurements on other comprehensive income
Exchange differences
Contributions and premiums paid by the employer
Benefit payments
As at December 31, 2017
Current service cost
Interest expense
Business acquisitions, disposals and closures
Impact on profit or loss
Remeasurements
Gain from change in financial assumptions
Experience loss
Impact of remeasurements on other comprehensive income
Exchange differences
Benefit payments
As at December 31, 2018
PRESENT VALUE OF
OBLIGATION
106
2
3
(1)
4
1
(2)
(1)
1
—
(9)
101
2
3
1
6
(4)
1
(3)
1
(6)
99
FAIR VALUE OF PLAN ASSET
—
—
—
—
—
—
—
—
—
(9)
9
—
—
—
—
—
—
—
—
—
—
—
TOTAL
106
2
3
(1)
4
1
(2)
(1)
1
(9)
—
101
2
3
1
6
(4)
1
(3)
1
(6)
99
The method of accounting, assumptions relating to discount rate and life expectancy, and the frequency of valuations for post-employment
benefits are similar to those used for defined benefit pension plans, with the addition of actuarial assumptions relating to the long-term increase
in health care costs of 4.50% a year (2017 - 4.50%).
The sensitivity of the defined benefit obligation to changes in assumptions is set out below. The effects on each plan of a change in an
assumption are weighted proportionately to the total plan obligations to determine the total impact for each assumption presented.
Discount rate
Salary growth rate
Health care cost increase
Life expectancy
IMPACT ON OBLIGATION FOR POST-EMPLOYMENT BENEFITS
CHANGE IN ASSUMPTION
INCREASE IN ASSUMPTION
DECREASE IN ASSUMPTION
0.25%
0.25%
1.00%
(2.10)%
0.50 %
1.40 %
2.10 %
(0.40)%
(1.10)%
INCREASE / DECREASE BY 1 YEAR IN ASSUMPTION
0.80 %
C. RISKS AND OTHER CONSIDERATIONS RELATIVE TO POST-EMPLOYMENT BENEFITS
Through its defined benefit plans, the Corporation is exposed to a number of risks, the most significant of which are detailed below.
Asset volatility
The plan liabilities are calculated using a discount rate set with reference to corporate bond yields and if plan assets underperform this yield,
it will create an experience loss. Both the Canadian and U.S. plans hold a proportion of equities, which are expected to outperform corporate
bonds in the long term while contributing volatility and risk in the short term.
The Corporation intends to reduce the level of investment risk by investing more in assets that better match the liabilities when the financial
situation of the plans improves and/or the rate of return on bonds used for solvency valuations increases.
93
103
103
As at December 31, 2018, 67% of the plan's invested assets are in bonds. As at December 31, 2018, the total value of insured annuities is
$219 million.
However, the Corporation believes that due to the long-term nature of the plan liabilities and the strength of the supporting group, a level of
continuing equity investment is an appropriate element of the Corporation’s long-term strategy to manage the plans efficiently. Plan assets
are diversified, so the failure of an individual stock would not have a big impact on the plan assets taken as a whole. The pension plans do
not face a significant currency risk.
Changes in bond yields
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’
bond holdings, particularly for plans in a good financial position that have a greater proportion of bonds.
Inflation risk
The benefits paid are not indexed. Only future benefits for active members are based on salaries. Therefore, this risk is not significant.
Life expectancy
The majority of the plans’ obligations are to provide benefits for the member's lifetime, so increases in life expectancy will result in an increase
in the plans’ liabilities.
Each sensitivity analysis disclosed in this note is based on changing one assumption while holding all other assumptions constant. In practice,
this is unlikely to occur and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit
obligation to variations in significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated using
the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the consolidated
balance sheet.
As at December 31, 2018, the aggregate net surplus of the Corporation’s funded pension plans (mostly in Canada) amounted to $28 million
(a surplus of $29 million as at December 31, 2017). Current agreed expected service contributions amount to $8 million and will be made in
the normal course of business. As for the cash flow requirement, these pension plans are expected to require a net contribution of approximately
$8 million in 2019.
The weighted average duration of the defined benefit obligation is 12 years (2017 - 11 years).
Expected maturity analysis of undiscounted pension and other post-employment benefits:
(in millions of Canadian dollars)
Pension benefits
Post-employment benefits other than defined benefit pension plans
As at December 31, 2018
LESS THAN A
YEAR
31
BETWEEN ONE
AND TWO YEARS
32
BETWEEN TWO
AND FIVE YEARS
96
5
36
8
40
24
120
OVER FIVE
YEARS
707
99
806
TOTAL
866
136
1,002
These amounts represent all the benefits payable to current members during the following years and thereafter without limitations. The majority
of benefit payments are payable from trustee administered funds. The difference will come from future investment returns expected on plan
assets and future contributions that will be made by the Corporation for services rendered after December 31, 2018.
104
104
94
NOTE 17
INCOME TAXES
a. The provision for (recovery of) income taxes is as follows:
(in millions of Canadian dollars)
Current taxes
Deferred taxes
2018
22
27
49
2017
10
(91)
(81)
b. The provision for (recovery of) income taxes based on the effective income tax rate differs from the provision for income taxes based on
the combined basic rate for the following reasons:
(in millions of Canadian dollars)
Provision for income taxes based on the combined basic Canadian and provincial income tax rate
Adjustment for income taxes arising from the following:
Difference in statutory income tax rate of foreign operations
Prior years reassessment
Reversal of deferred income tax liabilities related to our previously held investment in Greenpac
Permanent difference on revaluation of previously held equity interest - Greenpac associate
Non-taxable portion of capital gain on revaluation of previously held equity interest - Boralex associate
Change in future income taxes resulting from enacted tax rate change
NOTE
5
5
8
Unrealized capital gain on long-term debt
Reversal of deferred tax assets on tax losses
Permanent differences
Change in deferred income tax assets relating to capital tax loss
Provision for (recovery of) income taxes
2018
38
(1)
2
—
—
—
—
—
3
(1)
8
11
49
2017
117
10
3
(70)
(57)
(24)
(57)
(3)
—
(6)
6
(198)
(81)
Weighted average income tax rate for the year ended December 31, 2018 was 25.8% (2017 - 28.6%).
In conjunction with the acquisition of Greenpac, the Corporation recorded an income tax recovery of $70 million representing deferred income
taxes on its investment prior to the acquisition on April 4, 2017. Also, there was no income tax provision recorded on the gain of $156 million
generated by the business combination of Greenpac, since it is included in the fair value of assets and liabilities acquired, as described in
Note 5.
The income tax provision on the Boralex revaluation gain was calculated at the rate of capital gains. Also, consequently with the sale of its
participation in Boralex in July 2017, the Corporation has reassessed the probability of recovering unrealized capital losses on long-term debt
due to foreign exchange fluctuations.
Under the Tax Cuts and Jobs Act, which was substantially enacted on December 22, 2017, the U.S. statutory federal income tax rate was
reduced to 21% from the previous rate of 35%. The impact of the change in tax rate resulted in a reduction of $57 million of the net deferred
tax liability position for the year ended December 31, 2017.
c. The provision for (recovery of) income taxes relating to components of other comprehensive income is as follows:
(in millions of Canadian dollars)
Foreign currency translation related to hedging activities
Cash flow hedge
Included in share of other comprehensive income of associates
Actuarial loss on post-employment benefit obligations
Provision for (recovery of) income taxes
2018
2017
(4)
2
—
(4)
(6)
4
—
3
(3)
4
95
105
105
d. The analysis of deferred tax assets and deferred tax liabilities, without taking into consideration the offsetting of balances within the
same tax jurisdiction, is as follows:
(in millions of Canadian dollars)
Deferred income tax assets:
Deferred income tax assets to be recovered after more than twelve months
Deferred income tax liabilities:
Deferred income tax liabilities to be used after more than twelve months
The movement of the deferred income tax account is as follows:
(in millions of Canadian dollars)
As at January 1
Through statement of earnings
Variance of income tax credit, net of related income tax
Through statement of comprehensive income
Through business combinations
Others
Exchange differences
As at December 31
2018
2017
228
295
(67)
223
260
(37)
NOTE
2018
2017
5
(37)
(27)
5
6
(5)
—
(9)
(67)
(40)
91
4
(4)
(91)
(7)
10
(37)
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within
the same tax jurisdiction, is as follows:
DEFERRED INCOME TAX ASSET
RECOGNIZED TAX
BENEFIT ARISING
FROM INCOME
TAX LOSSES
EMPLOYEE
FUTURE
BENEFITS
EXPENSE ON
RESEARCH
UNUSED TAX
CREDITS
FINANCIAL
INSTRUMENTS
FOREIGN
EXCHANGE LOSS
ON LONG-TERM
DEBT
OTHERS
TOTAL
41
(6)
4
—
39
(2)
5
—
42
5
(5)
—
1
1
3
—
(2)
2
19
(12)
—
(5)
2
(6)
—
4
—
16
5
—
—
21
26
—
—
47
279
(59)
4
(1)
223
(6)
5
6
228
159
(25)
—
—
134
(29)
—
—
105
24
(6)
—
3
21
2
—
4
27
15
(10)
—
—
5
—
—
—
5
96
(in millions of Canadian dollars)
As at January 1, 2017
Through statement of earnings
Variance of income tax credit
Through statement of
comprehensive income
As at December 31, 2017
Through statement of earnings
Variance of income tax credit
Through statement of
comprehensive income
As at December 31, 2018
106
106
DEFERRED INCOME TAX LIABILITIES
(in millions of Canadian dollars)
As at January 1, 2017
Through statement of earnings
Included in share of other comprehensive income of
associates
Through business combinations
Others
Exchange differences
As at December 31, 2017
Through statement of earnings
Through business combinations
Exchange differences
As at December 31, 2018
PROPERTY,
PLANT AND
EQUIPMENT
FOREIGN
EXCHANGE LOSS
ON LONG-TERM
DEBT
NOTE
INTANGIBLE
ASSETS
INVESTMENTS
OTHERS
180
(51)
—
80
5
(9)
205
1
5
9
220
—
—
—
—
—
—
2
—
—
2
53
(14)
—
11
2
(1)
51
5
—
—
56
85
(85)
3
—
—
—
3
13
—
—
16
1
—
—
—
—
—
1
—
—
—
1
5
5
TOTAL
319
(150)
3
91
7
(10)
260
21
5
9
295
When taking into consideration the offsetting of balances within the same tax jurisdiction, the net deferred tax liability of $67 million is presented
on the consolidated balance sheet as $134 million of “Deferred income tax asset” amounts and $201 million of “Deferred income tax liabilities”.
e. The Corporation has recognized accumulated losses for income tax purposes amounting to approximately $408 million, which may be
carried forward to reduce taxable income in future years. The future tax benefit of $105 million resulting from the deferral of these losses
has been recognized in the accounts as a deferred income tax asset. Deferred income tax assets are recognized for tax loss carry forward
to the extent that the realization of the related tax benefits through future taxable profits is probable. Income tax losses as at
December 31, 2018 are detailed as follows:
(in millions of Canadian dollars)
Canada
United States
RECOGNIZED TAX LOSSES
MATURITY
2026
2027
2034
2035
2036
2037
2038
2033
2034
2035
2037
8
14
28
62
53
5
147
317
8
3
12
68
91
408
97
107
107
NOTE 18
CAPITAL STOCK
A. CAPITAL MANAGEMENT
Capital is defined as long-term debt, bank loans and advances net of cash and cash equivalents and Shareholders' equity, which includes
capital stock.
(in millions of Canadian dollars)
Cash and cash equivalents
Bank loans and advances
Long-term debt, including current portion
Total equity
Total capital
2018
(123)
16
1,876
1,769
1,688
3,457
2017
(89)
35
1,576
1,522
1,601
3,123
The Corporation's objectives when managing capital are:
•
•
•
•
to safeguard the Corporation's ability to continue as a going concern in order to provide returns to Shareholders;
to maintain an optimal capital structure and reduce the cost of capital;
to make proper capital investments that are significant to ensure that the Corporation remains competitive; and
to redeem common shares based on an annual redemption program.
The Corporation sets the amount of capital in proportion to risk. The Corporation manages its capital structure and makes adjustments to it
in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital
structure, the Corporation may adjust the amount of dividends paid to Shareholders, return capital to Shareholders, issue new shares and
acquire or sell assets to improve its financial performance and flexibility.
The Corporation monitors capital on a monthly and quarterly basis based on different financial ratios and non-financial performance indicators.
Also, the Corporation must conform to certain financial ratios under its various credit agreements. These ratios are calculated on an adjusted
consolidated basis of restricted subsidiaries only. These are a maximum ratio of funded debt to capitalization of 65% and a minimum interest
coverage ratio of 2.25x. The Corporation must also comply with a consolidated interest coverage ratio to incur additional debt. Funded debt
is defined as liabilities as per the consolidated balance sheet, including guarantees and liens granted in respect of funded debt of another
person but excluding other long-term liabilities, trade accounts payable, obligations under operating leases and other accrued obligations
(2018 - $1,549 million; 2017 - $1,307 million). The capitalization ratio is calculated as “Shareholders' equity” as shown in the consolidated
balance sheet plus the funded debt. Shareholders' equity is adjusted to add back the effect of IFRS adjustments as at December 31, 2010,
in the amount of $208 million. The interest coverage ratio is defined as operating income before depreciation and amortization (OIBD) to
financing expense. The OIBD is defined as net earnings of the last four quarters plus financing expense, income taxes, amortization and
depreciation, expense for stock options and dividends received from a person who is not a credit party (2018 - $321 million; 2017 -
$296 million). Excluded from net earnings are the share of results of equity investments and gains or losses from non-recurring items. Financing
expense is calculated as interest and financial charges determined in accordance with IFRS plus any capitalized interest, but excluding the
amortization of deferred financing costs, up-front and financing costs and unrealized gains or losses arising from hedging agreements. It also
excludes any gains or losses on the translation of long-term debt denominated in a foreign currency. The consolidated interest coverage ratio
to incur additional debt is calculated as defined in the Senior notes indentures dated June 19, 2014 and May 19, 2015.
As at December 31, 2018, the funded debt-to-capitalization ratio stood at 47.44% and the interest coverage ratio was 4.43x. The Corporation
is in compliance with the ratio requirements of its lenders.
The Corporation's credit facility is subject to terms and conditions for loans of this nature, including limits on incurring additional indebtedness
and granting liens or selling assets without the consent of the lenders.
The unsecured senior notes are subject to customary covenants restricting the Corporation's ability to, among other things, incur additional
debt, pay dividends and make other restricted payments as defined in the Indentures dated June 19, 2014 and May 19, 2015.
The Corporation historically invests between $150 million and $250 million annually on purchases of property, plant and equipment, excluding
major strategic projects. These amounts are carefully reviewed during the course of the year in relation to operating results and strategic
actions approved by the Board of Directors. These investments, combined with annual maintenance, enhance the stability of the Corporation's
business units and improve cost competitiveness through new technology and improved process procedures.
108
108
98
The Corporation has an annual share redemption program in place to redeem its outstanding common shares when the market price is judged
appropriate by Management. In addition to limitations on the normal course issuer bid, the Corporation's ability to redeem common shares is
limited by its senior notes indenture.
ISSUED AND OUTSTANDING
B.
The authorized capital stock of the Corporation consists of an unlimited number of common shares without nominal value and an unlimited
number of Class A and B shares issuable in series without nominal value. Over the past two years, the common shares have fluctuated as
follows:
Balance - beginning of year
Common shares issued on exercise of stock options
Redemption of common shares
Balance - end of year
NOTE
18(d)
18(c)
NUMBER OF COMMON
SHARES
IN MILLIONS OF CANADIAN
DOLLARS
NUMBER OF COMMON
SHARES
IN MILLIONS OF CANADIAN
DOLLARS
2018
2017
94,987,958
714,937
(1,539,380)
94,163,515
492
6
(8)
490
94,526,516
461,442
—
94,987,958
487
5
—
492
C. REDEMPTION OF COMMON SHARES
In 2018, in the normal course of business, the Corporation renewed its redemption program of a maximum of 1,903,282 common shares with
the Toronto Stock Exchange, said shares representing approximately 2% of issued and outstanding common shares. The redemption
authorization is valid from March 19, 2018 to March 18, 2019. In 2018, the Corporation redeemed 1,539,380 common shares under this
program for an amount of $20 million (2017 - nil common share).
D. COMMON SHARE ISSUANCE
The Corporation issued 714,937 common shares upon the exercise of options for an amount of $5 million (2017 - $4 million for 461,442 common
shares issued).
E. NET EARNINGS PER COMMON SHARE
The basic and diluted net earnings per common share are calculated as follows:
Net earnings available to common shareholders (in millions of Canadian dollars)
Weighted average number of basic common shares outstanding (in millions)
Weighted average number of diluted common shares outstanding (in millions)
Basic net earnings per common share (in Canadian dollars)
Diluted net earnings per common share (in Canadian dollars)
2018
59
95
97
0.62 $
0.58 $
2017
507
95
98
5.35
5.19
$
$
As at December 31, 2018, 400,691 stock options have an antidilutive effect (2017 - 240,880). As of February 27, 2019, no common share
had been redeemed by the Corporation since the beginning of the financial year.
F. DETAILS OF DIVIDENDS DECLARED PER COMMON SHARE ARE AS FOLLOWS
Dividends declared per common share
$
2018
0.16 $
2017
0.16
99
109
109
NOTE 19
STOCK-BASED COMPENSATION
a. Under the terms of a share option plan adopted on December 15, 1998, amended on March 15, 2013, and approved by Shareholders on
May 8, 2013, a remaining balance of 1,856,379 common shares is specifically reserved for issuance to officers and key employees of the
Corporation. Each option will expire at a date not to exceed 10 years following the grant date of the option. The exercise price of an option
shall not be lower than the market value of the share at the date of grant, determined as the average of the closing price of the share on
the Toronto Stock Exchange on the five trading days preceding the date of grant. The terms for exercising the options are 25% of the number
of shares under option within 12 months after the first anniversary date of grant, and up to an additional 25% every 12 months after the
second, third and fourth anniversaries of grant date. Options cannot be exercised if the market value of the share at exercise date is lower
than the book value at the date of grant. Options exercised are settled in shares. The stock-based compensation cost related to these
options amounted to $1 million in 2018 (2017 - $1 million).
Changes in the number of options outstanding as at December 31, 2018 and 2017 are as follows:
Beginning of year
Granted
Exercised
Forfeited
End of year
Options vested - end of year
NUMBER OF OPTIONS
2018
WEIGHTED AVERAGE
EXERCISE PRICE ($)
NUMBER OF OPTIONS
2017
WEIGHTED AVERAGE
EXERCISE PRICE ($)
4,990,120
175,749
(714,937)
(41,574)
4,409,358
3,807,511
6.35
12.39
7.00
10.79
6.45
5.66
5,216,063
240,880
(461,442)
(5,381)
4,990,120
4,170,259
6.16
14.28
8.28
9.75
6.35
5.63
The weighted average share price at the time of exercise of the options was $12.89 (2017 - $14.23).
The following options were outstanding as at December 31, 2018:
YEAR GRANTED
NUMBER OF OPTIONS
OPTIONS OUTSTANDING
WEIGHTED AVERAGE
EXERCISE PRICE ($)
NUMBER OF OPTIONS
OPTIONS EXERCISABLE
WEIGHTED AVERAGE
EXERCISE PRICE ($)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
782,017
438,124
489,997
792,125
410,282
407,599
368,421
320,102
226,720
173,971
4,409,358
3.92
6.43
6.26
4.46
5.18
6.10
7.66
9.75
14.28
12.39
782,017
438,124
489,997
792,125
410,282
407,599
271,267
159,433
56,667
—
3,807,511
3.92
6.43
6.26
4.46
5.18
6.10
7.66
9.75
14.28
—
EXPIRATION DATE
2019
2020
2020 - 2021
2020 - 2022
2020 - 2023
2020 - 2024
2020 - 2025
2020 - 2026
2027
2028
FAIR VALUE OF THE SHARE OPTIONS GRANTED
Options were priced using the Black-Scholes option pricing model. Expected volatility is based on the historical share price volatility over the
past six years. The following weighted average assumptions were used to estimate the fair value of $3.91 (2017 - $4.22) as at the date of
grant of each option issued to employees:
Grant date share price
Exercise price
Risk-free interest rate
Expected dividend yield
Expected life of options
Expected volatility
110
110
$
$
2018
12.57
12.39
$
$
2.3%
1.27%
6 years
32%
2017
14.26
14.28
1.77%
1.12%
6 years
32%
100
b. The Corporation offers its Canadian employees a share purchase plan for its common shares. Employees can voluntarily contribute up to
a maximum of 5% of their salary and, if certain conditions are met, the Corporation will contribute 25% of the employee's contribution to
the plan.
The shares are purchased on the market on a predetermined date each month. For the year ended December 31, 2018, the Corporation's
contribution to the plan amounted to $1 million (2017 - $1 million).
c. The Corporation has a Performance Share Unit (PSU) Plan for the benefit of officers and key employees, allowing them to receive a portion
of their annual compensation in the form of PSUs. A PSU is a notional unit equivalent in value to the Corporation's common share. Periodically,
the number of PSUs forming part of the award shall be adjusted depending upon the three-year average return on capital employed of the
Corporation (ROCE). Such adjusted number shall be obtained by multiplying the number of PSUs forming part of the award by the applicable
multiplier based on the ROCE level. Participants are entitled to receive the payment of their PSUs in the form of cash based on the average
price of the Corporation's common shares as traded on the open market during the five days before the vesting date.
The PSUs vest over a period of two years starting on the award date. The expense and the related liability are recorded during the vesting
period. The liability is adjusted periodically to reflect any variation in the market value of the common shares, the expected average ROCE
and the passage of time. As at December 31, 2018, the Corporation had a total of 520,070 PSUs outstanding (2017 - 581,785 PSUs), for
a fair value of less than $1 million (2017- $1 million). In 2018, the Corporation made payments totaling $2 million in relation to PSUs (2017 -
$7 million).
d. The Corporation has a Deferred Share Unit Plan for the benefit of its external directors, officers and key employees, allowing them to receive
all or a portion of their annual compensation in the form of Deferred Share Units (DSUs). A DSU is a notional unit equivalent in value to the
Corporation's common share. Upon resignation from the Board of Directors, participants are entitled to receive the payment of their cumulated
DSUs in the form of cash based on the average price of the Corporation's common shares as traded on the open market during the five
days before the date of the participant's resignation.
The DSU expense and the related liability are recorded at the grant date. The liability is adjusted periodically to reflect any variation in the
market value of the common shares. As at December 31, 2018, the Corporation had a total of 409,757 DSUs outstanding (2017 -
247,276 DSUs), representing a long-term liability of $6 million (2017 - $4 million). On January 15, 2019, the Corporation issued 61,030 DSUs .
NOTE 20
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(in millions of Canadian dollars)
2018
2017
Foreign currency translation, net of hedging activities and related income tax of $16 million (December 31, 2017 -
$12 million)
Unrealized gain (loss) arising from foreign exchange forward contracts designated as cash flow hedges, net of related
income taxes of nil (December 31, 2017 - nil)
Unrealized loss arising from commodity derivative financial instruments designated as cash flow hedges, net of related
income taxes of nil (December 31, 2017 - $2 million)
Unrealized gain arising from interest rate swaps designated as cash flow hedges, net of related income taxes of nil
(December 31, 2017 - nil)
Unrealized loss on available-for-sale financial assets, net of related income taxes of nil (December 31, 2017 - nil)
2
(1)
—
1
—
2
(30)
1
(4)
—
(2)
(35)
101
111
111
NOTE 21
REVENUE
Information by geographic segment is as follows:
(in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Intersegment sales
Tissue Papers
Intersegment sales and
Corporate Activities
Canada
2017
2018
United States
2018
2017
2018
1,118
1,089
—
356
(84)
1,390
372
(34)
1,728
—
394
(104)
1,379
335
(30)
1,684
720
—
234
(5)
949
980
558
—
246
(1)
803
933
(12)
1,917
(11)
1,725
—
313
2
—
315
—
—
315
Italy
2017
—
279
2
—
281
—
(5)
276
NOTE 22
COST OF SALES BY NATURE
(in millions of Canadian dollars)
Raw materials
Wages and employee benefits expenses
Energy
Delivery
Depreciation and amortization
Other
SELLING AND ADMINISTRATIVE EXPENSES BY NATURE
(in millions of Canadian dollars)
Wages and employee benefits expenses
Information technology
Publicity and marketing
Other
NOTE 23
EMPLOYEE BENEFITS EXPENSES
(in millions of Canadian dollars)
Wages and employee benefits expenses
Share options granted to directors and employees
Pension costs - defined benefit plans
Pension costs - defined contribution plans
Post-employment benefits other than defined benefit pension plans
NOTE
22
19(a)
16
16
16
Other countries
2018
2017
2018
SALES
Total
2017
2
620
67
—
689
—
—
689
5
559
61
—
625
—
11
636
2018
1,713
754
302
487
244
497
3,997
2018
314
29
17
50
410
2018
1,068
1
8
22
6
1,105
1,840
1,652
933
659
(89)
3,343
1,352
(46)
4,649
838
703
(105)
3,088
1,268
(35)
4,321
2017
1,776
689
259
356
215
475
3,770
2017
287
24
16
51
378
2017
976
1
7
21
4
1,009
112
112
102
KEY MANAGEMENT COMPENSATION
Key management includes the members of the Board of Directors, Presidents and Vice Presidents of the Corporation. The compensation
paid or payable to key management for their services is shown below:
(in millions of Canadian dollars)
Salaries and other short-term benefits
Post-employment benefits
Share-based payments
NOTE 24
GAIN ON ACQUISITIONS, DISPOSALS AND OTHERS
(in millions of Canadian dollars)
Gain on business acquisition
Gain on disposal of assets
2018
9
1
4
14
2018
(4)
(67)
2017
11
1
6
18
2017
—
(8)
2018
The Specialty Products segment generated a gain of $4 million on the business combination of Urban Forest Products LLC, Clarion Packaging
LLC and Falcon Packaging LLC. See note 5 for details.
The Containerboard segment completed the sale of the building and land of its plant located in Maspeth, New York, USA for US$69 million
($86 million) net of transaction fees of US$3 million ($4 million). An amount of US$4 million ($5 million) was put in escrow and will be released
to the Corporation in the third quarter of 2020 if certain conditions are met. Since the conditions are not under the Corporation's control, the
gain on this amount is deferred until the conditions are met. The transaction resulted in a gain of $66 million, net of asset retirement obligation
costs of $2 million. In the wake of the sale of the plant, the Containerboard segment also sold equipments for US$2 million ($2 million) which
generated a gain of $1 million.
2017
The Containerboard Packaging segment sold a piece of land in Ontario, Canada, and recorded a gain of $7 million.
The Corporate Activities realized a $1 million gain from the sale of some assets.
103
113
113
NOTE 25
IMPAIRMENT CHARGES (REVERSALS) AND RESTRUCTURING COSTS (GAINS)
A.
IMPAIRMENT CHARGES (REVERSALS) ON PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS WITH FINITE USEFUL
LIFE AND OTHER ASSETS
The Corporation recorded impairment charges totaling $75 million in 2018 and $11 million in 2017. The recoverable amount of CGUs was
determined using a fair value less cost of disposal sell model based on the income approach, unless otherwise indicated. Level 2 inputs are
used to measure fair value. Impairments are detailed as follows:
(in millions of Canadian dollars)
Property, plant and equipment
Intangible assets with finite useful life and
other assets
PACKAGING PRODUCTS
CONTAINER-
BOARD
BOXBOARD
EUROPE
SPECIALTY
PRODUCTS
SUB-TOTAL
TISSUE PAPERS
CORPORATE
ACTIVITIES
—
—
—
—
—
—
—
—
—
—
—
—
74
1
75
—
—
—
PACKAGING PRODUCTS
CONTAINER-
BOARD
BOXBOARD
EUROPE
SPECIALTY
PRODUCTS
SUB-TOTAL
TISSUE PAPERS
CORPORATE
ACTIVITIES
—
11
11
—
—
—
—
—
—
—
11
11
2
—
2
—
(2)
(2)
(in millions of Canadian dollars)
Property, plant and equipment
Intangible assets with finite useful life and
other assets
2018
2018
TOTAL
74
1
75
2017
TOTAL
2
9
11
The Tissue Papers segment recorded impairment charges totaling $75 million on the assets of four CGUs, as their recoverable amount was
lower than their carrying amount. Sustained production inefficiencies led to insufficient profitability to support the carrying value of the
assets. Recoverable amount of the assets was based on their fair value less cost of disposal.
2017
The Containerboard Packaging segment recorded an impairment charge of $11 million on deferred revenues related to the management
agreement of Greenpac since the beginning of the mill construction, which was recorded in “Other assets”. Following the acquisition and
consolidation of Greenpac described in Note 5, expected future cash flows related to this asset did not materialize on a consolidated basis.
The Tissue Papers segment incurred a $2 million impairment charge on unused assets following the reassessment of its recoverable amount
based on estimated selling price of the assets.
The Corporate Activities recorded a $2 million reversal of impairment following the collection of a note receivable that had been written off in
previous years.
B. GOODWILL AND OTHER INDEFINITE USEFUL LIFE INTANGIBLE ASSETS
Allocation of goodwill and other indefinite useful life intangible assets is as follows:
• Containerboard Packaging segment goodwill of $489 million is allocated to the Containerboard segment;
• Specialty Products segment goodwill is allocated to all recovery and recycling sub-segment for $13 million and the partitioning activities
sub-segment for $3 million;
• Tissue Papers segment goodwill of $36 million is allocated to the Tissue Papers segment;
• Boxboard Europe segment goodwill of $8 million is allocated to the segment;
• Water rights of $6 million are allocated to the Boxboard Europe segment.
Annually, the Corporation must test all of its goodwill for impairment.
114
114
104
The Corporation tested its Containerboard Packaging segment goodwill for impairment. As a result of this impairment test, the Corporation
concluded that the recoverable amount of the segment was in excess of $1,676 million over its carrying amount, thus no impairment charge
was necessary. With all other variables held constant, a decrease of 13% in the terminal OIBD margin would reduce the excess of
$1,676 million to nil whereas a rise in the discounting rate of 11% would also reduce the excess to nil.
The Corporation also tested for impairment the goodwill allocated to the recovery and recycling sub-segment. The impairment test resulted in
the recoverable amount of the sub-segment being $19 million over its carrying amount, thus no impairment charge was necessary. With all
other variables held constant, a decrease of 1% in the terminal OIBD margin would reduce to nil the excess of $19 million whereas a rise in
the discounting rate of 1% would also reduce the excess to nil.
The Corporation tested its Tissue Papers segment goodwill for impairment. As a result of this impairment test, the Corporation concluded that
the recoverable amount of the segment was in excess of $114 million over its carrying amount, thus no impairment charge was necessary.
With all other variables held constant, a decrease in terminal OIBD margin of 1% would reduce the excess of $114 million to nil.
The Corporation applied the income approach in determining fair value less cost of disposal and used the following key assumptions
(level 2 inputs):
Discounting rate
Terminal exchange rate (CA$/US$)
Terminal OIBD margin
C. RESTRUCTURING COSTS (GAINS)
Restructuring costs (gains) are detailed as follows:
(in millions of Canadian dollars)
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate Activities
2018
CONTAINERBOARD PACKAGING
SPECIALTY PRODUCTS
TISSUE PAPERS
$
9.5%
1.24
$
16.2%
9.5%
1.24
$
5.4%
10.5%
1.24
9.2%
2018
2017
4
—
(2)
—
—
2
2
1
—
2
1
6
The Containerboard Packaging segment ceased activities at its Maspeth plant. A withdrawal liability from the multi-employer pension plan of
$2 million was recorded following the departure of the last employees. As well, costs totaling $1 million were incurred to remit the building to
the new owner.
The Containerboard Packaging segment incurred a $1 million charge related to severances for the closure in December 2018 of two sheets
plants in Ontario.
The Specialty Products segment recorded a gain of $2 million from the dismantling of a building of a plant closed in the previous years.
2017
The Containerboard Packaging segment recorded severance expenses totaling $2 million following the announcement of its New York converting
plant closure scheduled and realized in 2018.
The Boxboard Europe segment recorded severances costs of $1 million following the restructuring of its sales activities.
The Tissue Papers segment incurred $2 million of restructuring costs following the review of provisions related to the transfer of the converting
operations of the Toronto plant to other Tissue segment sites announced in 2016.
The Corporate Activities recorded a severance cost of $1 million following the closure of a sales division.
105
115
115
NOTE 26
ADDITIONAL INFORMATION
A. CHANGES IN NON-CASH WORKING CAPITAL COMPONENTS ARE DETAILED AS FOLLOWS:
(in millions of Canadian dollars)
Accounts receivable
Current income tax assets
Inventories
Trade and other payables
Current income tax liabilities
B. FINANCING EXPENSE AND INTEREST EXPENSE ON EMPLOYEE FUTURE BENEFITS
2018
2017
46
(9)
(26)
(5)
6
12
11
—
(46)
(51)
(1)
(87)
2018
2017
77
—
3
4
15
99
83
(3)
3
3
11
97
CASH AND CASH
EQUIVALENT
(62)
BANK LOANS AND
ADVANCES
28
LONG-TERM DEBT
1,566
NET DEBT
1,532
(25)
—
—
—
—
—
—
—
—
—
—
—
(2)
(89)
(28)
—
—
—
—
—
—
—
—
—
(6)
(123)
106
—
8
—
—
—
—
—
—
—
—
—
—
(1)
35
—
(22)
—
—
—
—
2
—
—
—
1
16
—
—
114
(257)
11
(47)
257
(62)
11
2
3
(1)
(21)
1,576
—
—
(126)
235
66
(81)
25
65
70
2
44
(25)
8
114
(257)
11
(47)
257
(62)
11
2
3
(1)
(24)
1,522
(28)
(22)
(126)
235
66
(81)
27
65
70
2
39
1,876
1,769
(in millions of Canadian dollars)
Interest on long-term debt
Interest income
Amortization of financing costs
Other interest and banking fees
Interest expense on employee future benefits and other liabilities
C. TOTAL LIABILITIES FROM FINANCING ACTIVITIES
(in millions of Canadian dollars)
As at January 1, 2017
Cash flow
Change in cash and cash equivalents
Bank loans and advances
Change in credit facilities
Repurchase of unsecured senior notes
Increase in other long-term debt
Payments of other long-term debt
Non-cash changes
Business combinations
Foreign exchange loss on long-term debt and financial
instruments
Capital lease acquisitions and included in other debts and
liabilities
Amortization of financing costs
Write off of unamortized financing costs following repurchase of
unsecured senior notes
Other
Exchange differences
As at December 31, 2017
Cash flow
Change in cash and cash equivalents
Bank loans and advances
Change in credit facilities
Increase in term loan
Increase in other long-term debt
Payments of other long-term debt
Non-cash changes
Business combinations
Foreign exchange loss on long-term debt and financial
instruments
Capital lease acquisitions and included in other debts and
liabilities
Amortization of financing costs
Exchange differences
As at December 31, 2018
116
116
NOTE 27
FINANCIAL INSTRUMENTS
27.1 FAIR VALUE OF FINANCIAL INSTRUMENTS
The classification of financial instruments as at December 31, 2018 and 2017, along with the respective carrying amounts and fair values, is
as follows:
(in millions of Canadian dollars)
NOTE
CARRYING AMOUNT
FAIR VALUE
CARRYING AMOUNT
FAIR VALUE
2018
2017
Financial assets at fair value through profit or
loss
Derivatives
Equity investments
Financial liabilities at fair value through profit or
loss
Derivatives
Financial liabilities at amortized cost
Long-term debt
Derivatives designated as hedge
Asset derivatives
Liability derivatives
26.4
26.4
23
1
(12)
23
1
(12)
27
1
(4)
27
1
(4)
(1,876)
(1,871)
(1,576)
(1,626)
7
(24)
7
(24)
4
(33)
4
(33)
27.2 DETERMINING THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount of consideration that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants as at the measurement date.
(i) The fair value of cash and cash equivalents, accounts receivable, notes receivable, bank loans and advances, trade and other payables
and provisions approximate their carrying amounts due to their relatively short maturities.
(ii) The fair value of investment in shares is based on observable market data and is quoted on the Toronto Stock Exchange and classified
as level 1.
(iii) The fair value of long-term debt and some other liabilities is based on observable market data and on the calculation of discounted cash
flows. Discount rates were determined based on local government bond yields adjusted for the risks specific to each of the borrowings
and for the credit market liquidity conditions and are classified as levels 1 and 3.
27.3 HIERARCHY OF FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
The following table presents information about the Corporation's financial assets and financial liabilities measured at fair value on a recurring
basis as at December 31, 2018 and 2017 and indicates the fair value hierarchy of the Corporation's valuation techniques to determine such
fair value. Three levels of inputs that may be used to measure fair value are:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar
assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
Level 3 - Inputs that are generally unobservable and typically reflect Management's estimates of assumptions that market participants would
use in pricing the asset or liability.
(in millions of Canadian dollars)
Financial assets
Equity investments
Derivative financial assets
Financial liabilities
Derivative financial liabilities
CARRYING AMOUNT
QUOTED PRICES IN ACTIVE
MARKETS FOR IDENTICAL
ASSETS (LEVEL1)
SIGNIFICANT
OBSERVABLE INPUTS
(LEVEL 2)
SIGNIFICANT
UNOBSERVABLE INPUTS
(LEVEL 3)
2018
1
—
1
—
—
—
30
30
(36)
(36)
—
—
—
—
—
1
30
31
(36)
(36)
107
117
117
(in millions of Canadian dollars)
Financial assets
Equity investments
Derivative financial assets
Financial liabilities
Derivative financial liabilities
CARRYING AMOUNT
QUOTED PRICES IN ACTIVE
MARKETS FOR IDENTICAL
ASSETS (LEVEL1)
SIGNIFICANT
OBSERVABLE INPUTS
(LEVEL 2)
SIGNIFICANT
UNOBSERVABLE INPUTS
(LEVEL 3)
2017
1
31
32
(37)
(37)
1
—
1
—
—
—
31
31
(37)
(37)
—
—
—
—
—
27.4 FINANCIAL RISK MANAGEMENT
The Corporation's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow
interest rate risk and price risk), credit risk and liquidity risk. The Corporation's overall risk management program focuses on the unpredictability
of the financial market and seeks to minimize potential adverse effects on the Corporation's financial performance. The Corporation uses
derivative financial instruments to hedge certain risk exposures.
Risk management is carried out by a central treasury department and a management committee acting under policies approved by the Board
of Directors. They identify, evaluate and hedge financial risks in close cooperation with the business units. The Board provides guidance for
overall risk management, covering specific areas, such as foreign exchange risk, interest rate risk and credit risk, use of derivative financial
instruments and non-derivative financial instruments, and investment of excess liquidity.
Summary
(in millions of Canadian dollars)
ASSETS
LIABILITIES
RISK
Currency risk
Price risk
Interest risk
Other risk
NOTE
SHORT-TERM
LONG-TERM
TOTAL
SHORT-TERM
LONG-TERM
26.4 A) (i)
26.4 A) (ii)
26.4 A) (iii)
26.4 iv)
6
4
—
—
10
—
19
1
—
20
6
23
1
—
30
(18)
(2)
(1)
(1)
(22)
(12)
—
(2)
—
(14)
(in millions of Canadian dollars)
ASSETS
LIABILITIES
2018
TOTAL
(30)
(2)
(3)
(1)
(36)
2017
RISK
Currency risk
Price risk
Interest risk
A. MARKET RISK
NOTE
SHORT-TERM
LONG-TERM
TOTAL
SHORT-TERM
LONG-TERM
TOTAL
26.4 A) (i)
26.4 A) (ii)
26.4 A) (iii)
5
4
—
9
1
21
—
22
6
25
—
31
(10)
(7)
(2)
(19)
(15)
(1)
(2)
(18)
(25)
(8)
(4)
(37)
(i) Currency risk
The Corporation operates internationally and is exposed to foreign exchange risks arising from various currencies as a result of its export of
goods produced in Canada, the United States, France, Italy, Spain and Germany. Foreign exchange risk arises from future commercial
transactions, recognized assets and liabilities, and net investments in foreign operations. These risks are partially covered by purchases and
debt.
The Corporation manages the foreign exchange exposure by entering into various foreign exchange forward contracts and currency option
instruments related to anticipated sales, purchases, interest expense and repayment of long-term debt. Management has implemented a
policy for managing foreign exchange risk against its functional currency. The Corporation's risk management policy is to hedge 25% to 90%
of anticipated cash flows in each major foreign currency for the next 12 months and to hedge 0% to 75% for the subsequent 24 months. The
Corporation may designate these foreign exchange forward contracts as a cash flow hedge of future anticipated sales, cost of sales, interest
expense and repayment of long-term debt denominated in foreign currencies. Gains or losses from these derivative financial instruments
designated as hedges are recorded in “Accumulated other comprehensive income” net of related income taxes and are reclassified to earnings
118
118
108
as adjustments to sales, cost of sales, interest expense or foreign exchange loss (gain) on long-term debt in the period in which the respective
hedged item affected earnings.
In 2018, approximately 22% of sales from Canadian operations were made to the United States and 13% of sales from European operations
were made in countries whose currencies were other than the euro.
The following table summarizes the Corporation's commitments to buy and sell foreign currencies as at December 31, 2018 and 2017:
EXCHANGE RATE
MATURITY
NOTIONAL AMOUNT (IN
MILLIONS)
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
2018
Repayment of long-term debt
Derivatives at fair value through profit or loss and classified in
Foreign exchange loss (gain) on long-term debt:
Currency option sold to buy US$ for CAN$
Currency option instruments to sell US$ for CAN$
Cross-currency swap US$ for CAN$
1.0225
1.3290
1.3290
January 2020 US$
200
July 2023 US$ 21 to 132
July 2023 US$
Net investment hedge
Cross-currency swap CAN$ for €
1.4824
December 2019 €
Forecasted sales and purchases
Derivatives at fair value through profit or loss and classified in
Loss on derivative financial instruments:
Foreign exchange forward contracts to sell US$ for CAN$
Foreign exchange forward contracts to buy € for US$
Foreign exchange forward contracts to sell US$ for CAN$
Currency option instruments to sell US$ for CAN$
Currency option instruments to buy € for US$
Currency option instruments to sell US$ for CAN$
1.3087
1.1653
1.3188
1.3395
1.0985
1.3269
0 to 12 months US$
0 to 12 months €
13 to 36 months US$
0 to 12 months US$ 33 to 50
0 to 12 months €
7
13 to 36 months US$ 30 to 68
102
145
15
2
15
—
(6)
(2)
(8)
(11)
(1)
—
—
(1)
—
(3)
(5)
(24)
During the year, the Corporation paid $1 million related to the settlement of a portion of its 2020 derivatives related to repayment of long-term
debt.
109
119
119
Repayment of long-term debt
Derivatives at fair value through profit or loss and classified in
Foreign exchange loss (gain) on long-term debt:
Foreign exchange forward contracts to buy US$ for CAN$
Currency option sold to sell US$ for CAN$
Currency option sold to sell US$ for CAN$
Cross-currency swap US$ for CAN$
Net investment hedge
Cross-currency swap CAN$ for €
Forecasted sales
Derivatives at fair value through profit or loss and classified in
Loss on derivative financial instruments:
Foreign exchange forward contracts to buy US$ for CAN$
Foreign exchange forward contracts to buy US$ for CAN$
Currency option instruments to sell US$ for CAN$
Currency option instruments to sell US$ for CAN$
EXCHANGE RATE
MATURITY
NOTIONAL AMOUNT (IN
MILLIONS)
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
2017
1.06
1.15
1.0225
1.33
January 2020 US$
January 2020 US$
January 2020 US$
July 2023 US$
1.4263
December 2018 €
1.3260
1.3260
1.3171
1.3214
0 to 12 months US$
13 to 24 months US$
0 to 12 months US$ 48 to 70
13 to 36 months US$ 43 to 80
50
100
200
102
95
10
5
9
(11)
(1)
(12)
(15)
(6)
1
—
2
—
3
(18)
In 2017, the Corporation offset $9 million in derivative assets against $11 million in derivative liabilities as we intend to settle the derivatives
on a net basis with one counterparty. During the year, the Corporation also paid $12 million related to the settlement of a portion of its 2017
derivatives related to repayment of long-term debt.
The fair values of foreign exchange forward contracts and currency options are determined using the discounted value of the difference
between the value of the contract at expiry, calculated using the contracted exchange rate and the exchange rate the financial institution would
use if it renegotiated the same contract under the same conditions as at the consolidated balance sheet date. The discount rates are adjusted
for the credit risk of the Corporation or of the counterparty, as applicable. When determining credit risk adjustments, the Corporation considers
master netting agreements, if applicable.
In 2018, if the Canadian dollar had strengthened by $0.01 against the US dollar on average for the year with all other variables held constant,
operating income before depreciation and amortization for the year would have been approximately $3 million lower. This is based on the net
exposure of total US sales less US purchases of the Corporation's Canadian operations and operating income before depreciation and
amortization of the Corporation's US operations, but excludes the effect of this change on the denominated working capital components. The
interest expense would have remained relatively stable.
In 2018, if the Canadian dollar had strengthened by $0.02 against the euro with all other variables held constant, operating income before
depreciation and amortization for the year would have been approximately $1 million lower following the translation of operating income of
the Corporation's European operations.
CURRENCY RISK ON TRANSLATION OF SELF-SUSTAINING FOREIGN SUBSIDIARIES
The Corporation has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk. The
Corporation may designate part of its long-term debt denominated in foreign currencies as a hedge of the net investment in self-sustaining
foreign subsidiaries. Gains or losses resulting from the translation to Canadian dollars of long-term debt denominated in foreign currencies
and designated as net investment hedges are recorded in “Accumulated other comprehensive income”, net of related income taxes.
The table below shows the effect on consolidated equity of a 10% change in the value of the Canadian dollar against the US dollar and the
euro as at December 31, 2018 and 2017. The calculation includes the effect of currency hedges of net investment in US foreign entities and
assumes that no changes occurred other than a single currency exchange rate movement.
The exposures used in the calculations are the foreign currency-denominated equity and the hedging level as at December 31, 2018 and
2017, with the hedging instruments being the long-term debt denominated in US dollars.
120
120
110
Consolidated Shareholders' equity: Currency effect before tax of a 10% change:
(in millions of Canadian dollars)
10% change in the CAN$/US$ rate
10% change in the CAN$/euro rate
BEFORE HEDGES
HEDGES
82
19
82
17
2018
NET IMPACT
—
2
BEFORE HEDGES
HEDGES
75
16
75
14
2017
NET IMPACT
—
2
(ii) Price risk
The Corporation is exposed to commodity price risk on old corrugated containers, commercial pulp, electricity and natural gas. The Corporation
uses derivative commodity contracts to help manage its production costs. The Corporation may designate these derivatives as cash flow
hedges of anticipated purchases of raw material and energy. Gains or losses from these derivative financial instruments designated as hedges
are recorded in “Accumulated other comprehensive income” net of related income taxes and are reclassified to earnings as adjustments to
“Cost of sales” in the same period, as the respective hedged item affects earnings.
The fair value of these contracts is as follows:
QUANTITY
MATURITY
2018
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
Forecasted purchases
Derivatives designated as held for trading and reclassified in “Cost of sales”
Electricity
39,420 MW
2019
Derivatives designated as cash flow hedges and reclassified in “Cost of sales” (effective
portion)
Natural gas:
Canadian portfolio
US portfolio
364,800 GJ
2019
1,217,640 mmBtu
2019 to 2023
—
—
(1)
(1)
QUANTITY
MATURITY
2017
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
Forecasted purchases
Derivatives designated as held for trading and reclassified in “Cost of sales”
Electricity
197,100 MW
2018 to 2019
Derivatives designated as cash flow hedges and reclassified in “Cost of sales” (effective
portion)
Natural gas:
Canadian portfolio
US portfolio
3,095,029 GJ
4,847,660 mmBtu
2018 to 2022
2018 to 2023
(1)
(5)
(1)
(7)
In 2013, the Corporation entered into an agreement to purchase steam. The agreement includes an embedded derivative and the fair value
as at December 31, 2018 was an asset of $8 million (2017 - $8 million). Greenpac also has an agreement to purchase steam that includes
an embedded derivative with a positive fair value of $15 million as at December 31, 2018 (2017 - $16 million).
The fair value of derivative financial instruments other than options is established utilizing a discounted future expected cash flows method.
Future expected cash flows are determined by reference to the forward price or rate prevailing on the assessment date of the underlying
financial index (exchange or interest rate or commodity price) according to the contractual terms of the instrument. Future expected cash
flows are discounted at an interest rate reflecting both the maturity of each flow and the credit risk of the party to the contract for which it
represents a liability (subject to the application of relevant credit support enhancements). The fair value of derivative financial instruments
that represent options is established utilizing similar methods that reflect the impact of the potential volatility of the financial index underlying
the option on future expected cash flows.
The table below shows the effect of changes in the price of old corrugated containers, natural gas and electricity as at December 31, 2018
and 2017. The calculation includes the effect of price hedges of these commodities and assumes that no changes occurred other than a single
change in price.
111
121
121
The exposures used in the calculations are the commodity consumption and the hedging level as at December 31, 2018 and 2017, with the
hedging instruments being derivative commodity contracts.
Consolidated commodity consumption: Price change effect before tax:
(in millions of Canadian dollars1)
BEFORE HEDGES
HEDGES
NET IMPACT
BEFORE HEDGES
HEDGES
NET IMPACT
US$15/s.t. change in brown grades recycled paper price
US$30/s.t. change in commercial pulp price
US$1/mmBTU. change in natural gas price
US$1/MWh change in electricity price
49
10
12
2
—
—
2
—
49
10
10
2
44
9
10
2
—
—
5
—
44
9
5
2
1 Sensitivity calculated with an exchange rate of 1.36 CAN$/US$ for 2018 and 1.26 CAN$/US$ for 2017.
2018
2017
(iii) Interest rate risk
The Corporation has no significant interest-bearing assets.
The Corporation's interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Corporation to cash
flow interest rate risk. Borrowings issued at fixed rates expose the Corporation to fair value interest rate risk.
When appropriate, the Corporation analyzes its interest rate risk exposure. Various scenarios are simulated taking into consideration
refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Corporation calculates the impact
on earnings of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. The scenarios are run
only for liabilities that represent the major interest-bearing positions. As at December 31, 2018, approximately 28% (2017 - 29%) of the
Corporation's long-term debt was at variable rates.
Based on the outstanding long-term debt as at December 31, 2018, the impact on interest expense of a 1% change in rate would be
approximately $5 million (impact on net earnings is approximately $4 million).
The Corporation holds interest rate swaps through RDM and Greenpac. RDM swaps are contracted to fix the interest rate on a notional amount
of €59 million and are maturing from 2020 to 2024. Greenpac swaps are contracted to fix the interest rate on a notional amount of US$66
million maturing in 2020. Some of these swaps have decreasing notional amount to match expected debt level. Fair value of these agreements
is a liability of $2 million as at December 31, 2018 (December 31, 2017 - $3 million).
(iv) Loss (gain) on derivative financial instruments is as follows:
(in millions of Canadian dollars)
Unrealized loss (gain) on derivative financial instruments
Realized loss (gain) on derivative financial instruments
B. CREDIT RISK
2018
9
(1)
8
2017
(8)
2
(6)
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions. The
Corporation reduces this risk by dealing with credit-worthy financial institutions.
The Corporation is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Corporation's credit
policies include the analysis of the financial position of its customers and the regular review of their credit limits. In addition, the Corporation
believes there is no particular concentration of credit risk due to the geographic diversity of customers and the procedures for the management
of commercial risks. Derivative financial instruments include an element of credit risk should the counterparty be unable to meet its obligations.
Trade receivables are recognized initially at fair value and are subsequently measured at amortized cost using the effective interest method,
less loss allowance. An allowance for doubtful accounts of trade receivables is established when there is objective evidence that the Corporation
will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter into bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators
that the trade receivable is impaired. Each trade receivable balance is evaluated separately to identify impairment. The amount of the allowance
for doubtful accounts is the difference between the asset's carrying amount and the present value of estimated cash flows. The carrying
amount of the asset is reduced through the use of an allowance account and the amount of the loss is recorded in the consolidated statement
of earnings in “Selling and administrative expenses”. When a trade receivable is not collectable, it is written off against the loss allowance.
122
122
112
Subsequent recoveries of amounts previously written off are credited against “Selling and administrative expenses” in the consolidated
statement of earnings.
Loans and notes receivables from business disposals are recognized at fair value. There is no past due amount as at December 31, 2018.
C. LIQUIDITY RISK
Liquidity risk is the risk that the Corporation will not be able to meet its obligations as they fall due. The following are the contractual maturities
of financial liabilities as at December 31, 2018 and 2017:
(in millions of Canadian dollars)
Non-derivative financial liabilities:
Bank loans and advances
Trade and other payables
Revolving credit facility
Term loan
Unsecured senior notes
Other debts of subsidiaries
Other debts without recourse to the Corporation
Derivative financial liabilities
(in millions of Canadian dollars)
Non-derivative financial liabilities:
Bank loans and advances
Trade and other payables
Revolving credit facility
Unsecured senior notes
Other debts of subsidiaries
Other debts without recourse to the Corporation
Derivative financial liabilities
CARRYING
AMOUNT
CONTRACTUAL
CASH FLOWS
LESS THAN ONE
YEAR
BETWEEN ONE
AND TWO
YEARS
BETWEEN TWO
AND FIVE
YEARS
MORE THAN FIVE
YEARS
2018
16
782
86
239
16
782
100
305
1,068
1,244
129
364
36
186
365
36
16
782
4
18
59
21
37
22
—
—
4
18
60
20
34
4
2,720
3,034
959
140
—
—
92
55
1,125
49
274
10
1,605
—
—
—
214
—
96
20
—
330
2017
CARRYING
AMOUNT
CONTRACTUAL
CASH FLOWS
LESS THAN ONE
YEAR
BETWEEN ONE
AND TWO
YEARS
BETWEEN TWO
AND FIVE
YEARS
MORE THAN FIVE
YEARS
35
638
195
35
638
218
1,004
1,284
66
321
37
77
329
37
2,296
2,618
35
638
7
56
16
44
19
815
—
—
6
56
13
41
2
—
—
205
906
31
230
4
118
1,376
—
—
—
266
17
14
12
309
As at December 31, 2018, the Corporation had unused credit facilities of $766 million (December 31, 2017 - $651 million), net of outstanding
letters of credit of $23 million (December 31, 2017 - $24 million).
D. OTHER RISK
FACTORING OF ACCOUNTS RECEIVABLE
The Corporation sells its accounts receivable from one of its European subsidiaries through a factoring contract with a financial institution.
The Corporation uses factoring of accounts receivable as a source of financing by reducing its working capital requirements. When the accounts
receivable are sold, the Corporation removes them from the balance sheet, recognizes the amount received as the consideration for the
transfer and records a loss on factoring, which is included in “Financing expense”. As at December 31, 2018, the off-balance sheet impact of
the factoring of accounts receivable amounted to $50 million (€32 million). The Corporation expects to continue to sell accounts receivable
on an ongoing basis. Should it decide to discontinue this contract, its working capital and bank debt requirements would increase.
STOCK-BASED COMPENSATION
In 2018, the Corporation entered into an agreement to hedge the share price volatility related to its Deferred Share Units and Performance
Share Unit plans. As at December 31, 2018, the agreement's notional amount was 566,000 shares at a price of $12,15. The fair value as at
December 31, 2018 was a liability of $1 million.
113
123
123
NOTE 28
COMMITMENTS
a. The Corporation leases various properties, vehicles, equipment and others under non-cancellable operating lease agreements.
Future minimum payments under operating leases are as follows:
(in millions of Canadian dollars)
No later than one year
Later than one year but no later than five years
More than five years
b. Capital and raw materials commitments
2018
38
66
13
117
2017
31
40
5
76
Capital expenditures and raw material contracted at the end of the reporting date but not yet incurred are as follows:
(in millions of Canadian dollars)
No later than one year
Later than one year but no later than five years
More than five years
NOTE 29
RELATED PARTY TRANSACTIONS
PROPERTY,
PLANT AND
EQUIPMENT
84
8
—
92
2018
INTANGIBLE
ASSETS
8
6
—
14
PROPERTY,
PLANT AND
EQUIPMENT
51
—
—
51
2017
INTANGIBLE
ASSETS
8
14
—
22
The Corporation entered into the following transactions with related parties:
(in millions of Canadian dollars)
2018
Sales to related parties
Purchases from related parties
2017
Sales to related parties
Purchases from related parties
These transactions occurred in the normal course of operations and are measured at fair value.
The following balances were outstanding at the end of the reporting period:
(in millions of Canadian dollars)
Receivables from related parties
Joint ventures
Associates
Payables to related parties
Joint ventures
Associates
JOINT VENTURES
ASSOCIATES
245
32
210
27
77
50
85
90
December 31,
2018
December 31,
2017
12
22
2
2
13
22
3
4
The receivables from related parties arise mainly from sale transactions. The receivables are unsecured in nature and bear no interest. There
are no provision held against receivables from related parties. The payables to related parties arise mainly from purchase transactions. The
payables bear no interest.
124
124
114
BOARD OF DIRECTORS
Cascades’ Board of Directors (BoD) and management believe that quality corporate governance helps ensure that the Corporation
is run efficiently and that investor confidence is maintained. In order to stay the course in this regard, Cascades regularly reviews its
governance practices to remain in compliance with applicable legislation and to improve efficiency.
The composition of the Board of Directors must be carefully determined since its responsibilities include ensuring good corporate
governance, among other things. Cascades draws on the expertise of a highly experienced team of directors while recognizing the
importance of independent directors. As of December 31, 2018, eight of the twelve Board members were independent. They meet at
least once yearly with no related directors or senior managers present. New BoD members are also offered an orientation
and training program, to familiarize themselves with Cascades’ activities as well as the issues and challenges it faces.
1
5
9
2
6
10
3
7
11
4
8
12
1
Alain Lemaire
Executive Chairman
of the Board
Kingsey Falls, Québec Canada
Director since 1967
Non-Independent
2
Louis Garneau
President
Louis Garneau Sports Inc.
Saint-Augustin-de-Desmaures
Québec Canada
Director since 1996
Independent
3
Sylvie Lemaire
Director of companies
Otterburn Park, Québec Canada
Director since 1999
Non-Independent
4
David McAusland
Partner
McCarthy Tétrault
Baie d’Urfé, Québec Canada
Director since 2003
Independent
5
Georges Kobrynsky
Director of companies
Outremont, Québec Canada
Director since 2010
Independent
6
Élise Pelletier
Director
Sutton, Québec Canada
Director since 2011
Independent
7
Sylvie Vachon
President and Chief
Executive Officer of
The Montréal Port Authority
Longueuil, Québec Canada
Director since 2013
Independent
8
Laurence Sellyn
Business Advisor and Consultant,
Corporate Director
Pointe-Claire, Québec Canada
Director since 2013
Independent
9
Mario Plourde
President and Chief Executive
Officer of Cascades Inc.
Kingsey Falls, Québec Canada
Director since 2014
Non-Independent
10
Michelle Cormier
Associate, Wynnchurch
Capital Canada
Montréal, Québec Canada
Director since 2016
Independent
11
Martin Couture
President and Chief Executive
Officer, Sanimax Inc. (Canada)
Montréal, Québec Canada
Director since 2016
Independent
12
Patrick Lemaire
President and Chief Executive
Officer, Boralex Inc.
Kingsey Falls, Québec Canada
Director since 2016
Non-Independent
0125
0125
HISTORICAL FINANCIAL INFORMATION - 10 YEARS
For the years ended December 31,
(in millions of Canadian dollars, except per common share amounts and ratios) (unaudited)
Financial information is not adjusted to reclassify the impact of discontinued operations, if any, and IFRS for years ended prior to 2011.
Highlights - Consolidated Results
Sales
Cost of sales and expenses
Adjusted operating income before depreciation and amortization (OIBD adjusted)
Depreciation and amortization
Adjusted operating income
Financing expense and interest expense on employee future benefits
Foreign exchange loss (gain) on long-term debt and financial instruments
Specific items
Provision for (recovery of) income taxes
Share of results of associates and joint ventures
Net earnings (loss) attributable to non-controlling interests
Net earnings (loss)
Net earnings (loss) per common share
Highlights - Consolidated Cash Flow
Cash flow generated by operating activities
Cash flow from operations
per common share
Payments for property, plant and equipment net of proceeds from disposals
Business combinations and cash from a joint venture
Proceed from business disposals
Net change in long-term debt
Dividends on common shares
per common share
Dividend yield
Highlights - Consolidated Balance Sheet (As at December 31)
Current assets less current liabilities
Property, plant & equipment
Total assets
Total long-term debt
Non-controlling interests
Shareholders' equity
per common share
Stock Market Highlights
Shares issued and outstanding (in millions)
Trading volume (in millions)
Market capitalization
Closing price
High
Low
Key Financial Ratios
Net earnings (loss)/sales
Sales/total assets*
Total assets/average Shareholders' equity*
Return on Shareholder's equity*
Return on total assets (OIBD/average total assets)*
OIBD/sales
OIBD/interest
Current assets less current liabilities/sales*
Net debt/OIBD*
Total debt/total debt + Shareholders' equity
Price to earnings
Price to book value
126
126
115
IFRS
2018
4,649
4,160
489
244
245
99
4
10
132
49
(11)
35
59
0.62
$
$
373
361
3.82
253
(100)
—
94
15
0.16
$
1.6%
419
2,506
4,951
1,876
180
1,508
16.01
$
94.2
54.9
963
10.23
16.55
9.54
$
$
$
1.3%
0.9x
3.3x
4.0%
10.4%
10.5%
4.9x
9.0%
3.6x
55.6%
16.5x
0.6x
IFRS
2017
4,321
3,928
393
215
178
97
(23)
(298)
402
(81)
(39)
15
507
5.35
173
260
2.75
178
9
—
179
15
0.16
1.2%
356
2,117
4,427
1,576
146
1,455
15.32
95.0
57.5
1,294
13.62
18.20
11.43
11.7%
1.0x
3.6x
41.6%
9.5%
9.1%
4.1x
8.2%
3.9x
52.5%
2.5x
0.9x
$
$
$
$
$
$
$
$
$
$
$
$
$
$
IFRS
2016
4,001
3,598
403
192
211
93
(22)
(10)
150
45
(32)
2
135
1.42
372
316
3.34
177
16
—
153
15
$
$
IFRS
2015
3,885
3,462
423
190
233
97
91
99
(54)
39
(37)
9
(65)
IFRS
2014
3,953
3,595
358
183
175
108
30
191
(154)
(11)
—
4
(147)
IFRS
2013
3,849
3,497
352
182
170
115
(2)
28
29
12
3
3
11
IFRS
2012
3,645
3,341
304
199
105
115
(8)
33
(35)
(4)
(2)
(7)
(22)
IFRS
2011
3,760
3,517
243
186
57
100
(4)
(148)
109
27
(14)
(3)
99
2010
3,959
3,561
398
212
186
112
4
65
5
—
(15)
3
17
(0.69)
$
(1.57)
$
0.11
$
(0.23)
$
1.03
$
0.18
$
$
270
307
3.25
156
—
(40)
100
15
$
250
251
2.67
172
—
(36)
88
15
$
232
226
2.41
136
—
—
(30)
15
$
199
154
1.64
141
14
—
(54)
15
$
115
121
1.26
110
60
(292)
143
15
$
228
246
2.54
131
3
—
30
16
2009
3,877
3,412
465
218
247
118
31
33
65
23
(17)
(1)
60
0.61
355
303
3.10
171
69
—
59
16
0.16
$
1.3%
0.16
$
1.3 %
0.16
$
2.3 %
0.16
$
2.3%
0.16
$
3.9 %
0.16
$
3.6%
0.16
$
2.4%
0.16
1.8%
299
1,635
3,813
1,566
90
984
10.41
$
94.5
43.5
1,144
12.10
13.67
7.72
$
$
$
3.4%
1.0x
4.1x
14.6%
10.5%
10.1%
4.3x
7.5%
3.8x
61.8%
8.5x
1.2x
398
1,625
3,848
1,744
96
867
9.10
95.3
39.7
1,211
12.71
13.00
6.49
$
$
$
$
(1.7)%
1.0x
4.4x
(7.4)%
11.2 %
10.9 %
4.4x
10.2 %
4.1x
67.3 %
N/A
1.4x
308
1,592
3,673
1,596
110
893
414
1,684
3,831
1,579
113
1,081
295
1,659
3,694
1,475
116
978
400
1,703
3,728
1,407
136
1,029
479
1,777
3,724
1,395
24
1,257
9.48
$
11.52
$
10.42
$
10.87
$
13.01
$
$
$
$
93.9
20.2
385
4.10
5.18
3.85
(0.6)%
1.0x
3.7x
(2.2)%
8.2 %
8.3 %
2.6x
8.1 %
5.0x
61.4 %
N/A
0.4x
$
$
$
94.6
33.8
419
4.43
7.75
3.51
2.6%
1.0x
3.3x
8.7%
6.5%
6.5%
2.4x
10.6%
6.1x
59.3%
4.3x
0.4x
$
$
$
96.6
57.7
647
6.70
9.80
5.71
0.4%
1.1x
2.9x
1.3%
10.6%
10.1%
3.6x
12.1%
3.6x
53.7%
37.2x
0.5x
94.2
45.0
661
7.02
7.60
5.64
$
$
$
(3.7)%
1.1x
3.7x
(14.9)%
9.5 %
9.1 %
3.3x
7.8 %
4.5x
64.8 %
N/A
0.7x
$
$
$
93.9
25.2
646
6.88
6.92
4.07
0.3%
1.0x
3.7x
1.1%
9.4%
9.1%
3.1x
10.8%
4.6x
60.2%
62.5x
0.6x
116
484
1,912
3,792
1,469
21
1,304
13.41
97.2
79.8
869
8.94
9.10
1.70
1.5%
1.0x
3.0x
4.7%
11.9%
12.0%
3.9x
12.5%
3.3x
54.3%
14.7x
0.7x
127
127
raw materials
raw materials
~3.2 Million s.t.
29%
%
6
9%
9%
5 %
North American FibRE: purchased
and collected by Cascades
%
5
6
Recycled fibre used by Cascades — 65%
Pulp used by Cascades — 6%
Fibre sold externally — 29%
Fibre Consumed by Cascades
in North america
%
8
1
~2.3 Million s.t.
%
8
6
Brown recycled fibre — 68%
White recycled fibre — 18%
Pulp — 9%
Groundwood recycled fibre — 5%
In Europe, we use approximately 1.3 M s.t.
of additional recycled and virgin fibres
in our annual production of boxboard.
0128
0128
DISTRIBUTION
DISTRIBUTION
OF OUR RESULTS
TissuE - 28 %
B Y SEGMENT1
%
2
3 - 2
europe
TO
F ROM
1 %
3 - 2
europe
u
n
i
t
e
d
s
t
$4,649
million
co
n
t
ai
n
C
a
n
a
d
a
-
3
7
%
e
r
b
o
a
r
d
p
a
c
k
a
g
i
n
g
-
3
8
%
c
a
n
a
d
a
-
4
5%
sales
S
p
e
c
i
a
l
t
y
P
r
o
u
n
i
t
e
a
t
es - 34%
d states - 41%
d
u
cts - 14%
EU R O P E 3
-
%
0
2
B Y S EGMENT2,4
t i ssuE
3 %
B Y MARKET4,5
t
y
-
s
l
t
c i a
c
u
8 %
e
d
p
o
S
P r
%
0
3 - 2
europe
3 - 20%
E
P
O
R
U
E
$489 million
u
n
i
t
e
d states - 37%
t
n
o
c
B Y S EGMENT2,4
( 1 1 %)
-
E
u
s
Ti s
specialty
products - 8%
C
a
n
a
d
a
-
4
3
%
adjusted oibd4
%
4
g - 8
a i n e r b oard packagin
1 Before inter-segment sales and corporate activities.
2 Percentage excluding corporate activities.
3 Including our 57.95% equity ownership in Reno de Medici
S.p.A., an Italian public company traded on the Milan
and Madrid stock exchanges.
4 Please refer to the “Forward-looking Statements”
and “Supplemental Information on Non-IFRS Measures’’
sections for more details.
5 Including corporate activities.
%
3 - 18
E
P
O
R
U
E
$474 million
a i n
c o n t
%
5
8
-
g
gin
e r b oard packa
oibd2,4
Prince George, BC
Edmonton, AB
Nanaimo, BC
Victoria, BC
Vancouver, BC
Surrey, BC
C
Richmond, BC
C
Calgary, AB
Kelowna, BC
Tacoma, WA
C
St. Helens, OR
Scappoose, OR
M
C
C
Winnipeg, MB
Kingsey Falls, QC
Eau Claire, WI
CM
Grand Rapids, MI
C
Clarion, IA
M
Aurora, IL
C
M
Brook, IN
Warrenton, MO
C
C
Kingman, AZ
Brownsville, TN
Memphis, TN
M
C
Rockingham, NC
C
M
C
C
Kinston, NC
Wagram, NC
C
Grand Prairie, TX
C
Birmingham, AL
Lachute
Laval
Vaudreuil
NORTH AMERICA
CASCADES
WORLDWIDE1
LEGEND
Head Office
Containerboard
Packaging
Boxboard
Europe2
Specialty
Products
M Manufacturing facility
C Converting facility
CM Converting and
manufacturing facility
Tissue Papers
R Recovery facility
Ottawa
Belleville
C
Trenton
M
Scarborough
Whitby
C
M
Etobicoke
M
C
Barrie
C
Vaughan
C
CC
C
Burlington
Mississauga
C
St. Marys
Guelph
C M
C
Putnam
Brantford
ONTARIO
1 Including main associates and joint ventures.
2 Via our 57.95% equity ownership in Reno de Medici S.p.A., an Italian public company traded on the Milan and Madrid stock exchanges.
Cabano
M
96 production
facilities1
B Y SEGMENT
container
b
o
a
r
d
p
a
c
k
a
g
i
n
g
-
2
7
2 - 8
europe
4
5
-
a
d
a
n
Ca
1
tissuE paper s - 2
B Y MARKET
1 0
-
2
e
p
o
e u r
U
ni
t
e
d
S
t
a
t
e
s
-
3
2
S
p
e
cialty Products - 40
M
Trois-Rivières
Berthierville
C
C
C
C
Drummondville
C
C
M
M
Victoriaville
CM
C
C
C
Kingsey Falls
C
Montréal
Candiac
C
CM
Lachine
Lachute
CM
Laval
Vaudreuil
C
QUÉBEC
C
Saint-Césaire
C
Granby
1 Including associates and joint ventures.
2 Including our 57.95% equity ownership in Reno de Medici S.p.A.,
an Italian public company traded on the Milan and Madrid
stock exchanges.
M
Arnsberg, DE
M
Blendecques, FR
Châtenois, FR
C
Saulcy-sur-Meurthe, FR
C
Santa Giustina, IT
M
M
Ovaro, IT
La Rochette, FR
M
C
Barcelona Cartonboard, ES
M
Villa Santa Lucia, IT
Niagara Falls, NY
M M
Rochester, NY
Depew, NY
Lancaster, NY
C
Schenectady, NY
C
Mechanicville, NY
M
C
Albany, NY
Waterford, NY
Ransom, PA
C
Pittston, PA
M
C
Newtown, CT
C
Piscataway, NJ
NORTHEASTERN
UNITED STATES
EUROPE
sales
adjusted oibd4
T
R
O
P
E
R
L
A
U
N
N
A
8
1
0
2
S
E
D
A
C
S
A
C
oibd2,4
cascades.com
FSC
Printed on Rolland EnviroTM Satin, 60 lb. Text and Rolland EnviroTM Print, 80 lb. The cover is certified Processed Chlorine Free and is made from 100% post-consumer
fibre. All papers are certified FSC® and EcoLogo and are made using renewable biogas energy.
Production: Communications Department of Cascades — Design: absolu — Prepress and printing: Impart Litho
Photography: Brühmüller photographe
Printed in Canada