T
R
O
P
E
R
L
A
U
N
N
A
9
1
0
2
S
E
D
A
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S
A
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Source of
Possibilities
2019 Annual Report
2019 at a Glance
Containerboard Packaging
49th
A Canadian leader
6th largest producer in North America
Specialty Products
A North American leader in industrial
and food packaging
A leading North American producer
of honeycomb paperboard
Tissue Papers
A leader in tissue papers production in Canada
4th largest producer in North America
Recovery
A Canadian leader in the recovery of recycled fibres
Boxboard Europe1
2nd largest producer of coated recycled boxboard in Europe
Global 100 Most Sustainable
Corporations in the World
(Corporate Knights)
6th
Canada’s top 50 corporate citizens
(Corporate Knights)
9th consecutive
year
most responsible company
and brand according to Quebecers,
as measured by the Barometer
of Responsible Consumption
$578 M
invested in property, plant &
equipment, business acquisitions
and in our management systems,
excluding right-of-use assets
3.4 M
short tons of recycled fibre saved
from landfills in North America and
Europe, for all the Corporation
$4,996 M
Sales
$547 M
OIBD2
$604 M
Adjusted OIBD2
84%
of the fibre used to make
our products is recycled
77%
of our manufacturing
waste is reused
1.73
OSHA rate
14%
reduction in our energy
consumption since 2010
50%
reduction in our greenhouse
gas emissions intensity
since 1990*
26%
reduction in our
water consumption
since 2010
1 Via our 57.95% equity ownership in Reno de Medici S.p.A. (at Dec. 31, 2019), a public Italian company.
2 Please refer to the “Forward-looking Statements” and “Supplemental Information on Non-IFRS Measures’’ sections for more details.
3 OSHA frequency rate: Number of accidents with lost time or temporary assignments or medical treatments X 200,000 hours/hours worked.
* Direct emissions, preliminary data.
Financial Snapshot
(In millions of Canadian dollars, unless otherwise noted)
2019
20187
2017
AS REPORTED
Sales
Operating income
% of sales
Operating income before depreciation and amortization (OIBD)1
% of sales
Net earnings
per share (in dollars)
Dividend per share (in dollars)
ADJUSTED1
Operating income
% of sales
Operating income before depreciation and amortization (OIBD)1
% of sales
Net earnings
per share (in dollars)
Return on assets1, 2
Return on capital employed1, 3
FINANCIAL POSITION (AS AT DECEMBER 31)
Total assets
Capital employed3
Net debt1
Net debt /adjusted OIBD1, 8
Equity attributable to shareholders
per share (in dollars)
Working capital as a % of sales6
KEY INDICATORS
Total shipments (in thousands of short tons (s.t.))4
Manufacturing capacity utilization rate5
US$/CAN$ - Average rate
4,996
258
5.2%
547
10.9%
69
$0.74
$0.24
315
6.3%
604
12.1%
96
$1.02
12.0%
5.4%
5,180
4,206
1,963
3.25x
1,489
$15.81
10.1%
3,366
92%
$0.75
4,649
228
4.9%
472
10.2%
57
$0.60
$0.16
245
5.3%
489
10.5%
79
$0.83
10.6%
4.6%
4,948
3,881
1,769
3.5x
1,506
$15.99
10.6%
3,225
93%
$0.77
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
3,638
1,522
3.6x
1,455
$15.32
10.1%
3,114
93%
$0.77
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 amount of the LTM adjusted operating income, as well as 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 equivalents. Not adjusted for discontinued operations. Including Greenpac as an associate up to Q1 2017 and on a consolidated basis starting in Q2 2017.
4 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.
5 Defined as: Manufacturing internal and external shipments/practical capacity. Excluding Specialty Products segment manufacturing activities. Starting in Q2 2017, including Greenpac.
6 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.
7 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
8 Pro-forma up to 2018 to include business acquisitions on a last twelve months basis.
Financial Highlights
Symbol: CAS
(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
1 Quarterly dividend increased from $0.04 to $0.08 per share in Q3 2019.
2 Yield assumes quarterly dividend of $0.08 per share in 2019.
94.2 million
Common shares
outstanding
as at December 31, 2019
83.9 million
Total number of common
shares traded
in 2019
$0.08
Quarterly dividend
per share1
in 2019
2.9%
Annual
dividend yield2
as at December 31, 2019
$13.45
Intraday high
in 2019
$7.55
Intraday low
in 2019
$1.06
Market capitalization
as at December 31, 2019
(in billions)
Moody’s: Ba2 (stable)
S&P: BB- (stable)
Corporate credit ratings
as at December 31, 2019
Cascades Share Price Performance
in 2019
$11.21
as at December 31, 2019
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
Jan
Feb
March
April
May
June
July
Aug
Sept
Oct
Nov
Dec
CAS–TSX – Closing price ($)
Table of
Contents
4
6
10
Message from Alain Lemaire
Executive Chairman of the Board
The Value of our Commitments
Message from Mario Plourde
President and Chief Executive Officer
Progress Through Innovation
Financial Information
Management’s Discussion and Analysis,
Management’s Report, Independent
Auditor’s Report and Consolidated
Financial Statements
130
Raw Materials and Overview
of our Results
132
Cascades Worldwide
Cascades Inc.’s 2019 Annual Information Form will
be available, upon request, from the Corporation’s head
office as of March 27, 2020.
The document will also be accessible via the Corporation’s
website (www.cascades.com) and will be filed on SEDAR
(www.sedar.com) as of this date.
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
Transfer Agent and Registrar
Computershare
Shareholders Services
1500 Robert-Bourassa 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
Investor Relations
Investor Relations
Cascades Inc.
772 Sherbrooke Street West Suite 100
Montréal, Québec H3A 1G1 Canada
Jennifer Aitken, MBA
Director, Investor Relations
investor@cascades.com
Telephone : 514-282-2697
www.cascades.com/investors
3
Source of Possibilities
Alain
Lemaire
Executive Chairman of the Board
of Directors
4
2019 Annual Report
The Value of
our Commitments
Dear Shareholders,
Recycling has been central to the Cascades business model since its inception. As a result of this foundation,
most of Cascades’ products are made with recycled materials, a fact that distinguishes the Corporation from
many other North American packaging and tissue companies. In recent years there has been growing concern
about the overall environmental impact caused by products throughout their lifecycles. Cascades’ unique
legacy of ecological expertise and its commitment to environmental stewardship firmly place it at the
forefront of its peers to meet the rising demand for sustainable packaging and tissue solutions.
Considering this evolving market framework, Cascades
is very proud to be gaining recognition for its longstan-
ding commitment to the environment. The Corporation
was recently named amongst the Global 100 Most
Sustainable Corporations in the World by Corporate
Knights in the organization’s 2020 annual analysis of
more than 7,000 companies world-wide with revenues
of over $1 billion. Significantly, Cascades was the
ONLY company within the Containers and Packaging
category to be awarded this recognition.
Environmental considerations have always been, and
always will be, a part of Cascades’ culture by choice,
and the Corporation’s ability to carry through on this
commitment is a key area of oversight for the Board of
Directors. Indeed, along with a focused and effective
long-term growth strategy, Cascades’ ability to provide
its customers with sustainable solutions will be an
important driver of lasting growth and value creation for
the Corporation, its employees, its customers, the
communities in which it operates, and its shareholders.
Environmental stewardship and
the successful
implementation of long-term growth initiatives are not
short-term endeavours. Rather, they are enduring com-
mitments that require a continuity of corporate culture
that remains flexible enough to adapt when needed. In
this regard, succession planning is both key to renewing
the Company’s future roadmap and an integral part of
good corporate governance. To this end, I would like to
express our appreciation for the work accomplished by
our two retiring directors, George Kobrynsky and
Laurence Sellyn. In addition to the benefits that their
experience and expertise in management and finance
brought to the Board, Mr. Kobrynsky and Mr. Sellyn
played a key role in the recruitment and appointment of
the directors who will be replacing them. As part of the
succession plan implemented by the Board in 2019,
their departures were timed to ensure an orderly transi-
tion of responsibilities. Accordingly, the Company is
pleased
recently added Mélanie Dunn,
Elif Lévesque and Nelson Gentiletti to the Board of
Directors. Their combined experience, expertise, values
and vision will play key roles as the Company
implements its long-term strategic vision.
to have
Cascades remains true to its roots in sustainable
development, successfully combining environmental
advocacy with value creation. The Board of Directors
looks forward to helping ensure that the Corporation
continues to follow this path and, in doing so, builds
long-term sustainable value for all our partners.
Thank you for your continued
and trust.
interest, support
Alain Lemaire
Executive Chairman of the Board of Directors
Source of Possibilities
5
Mario
Plourde
President and Chief
Executive Officer
6
2019 Annual Report
Progress Through
Innovation
Dear Shareholders and Business Partners,
Cascades has never defined itself by what other people think is possible. Throughout our 55-year history,
we have always taken pride in our ability to find innovative new ways to turn possibilities into realities.
This culture has been a driving factor in our past successes, remains an integral part of who we are today,
and will continue to be an important catalyst behind future growth.
We have
implemented significant and often
large-scale changes over the past five years within
the Corporation. Some were strategic – as in the
repositioning of our operational focus on packaging
and tissue and our exit from business segments
with less sustainable future growth potential. Others
focused on optimizing productivity, efficiency
and profitability levels – such as the extensive
investment projects undertaken to modernize our
operations and IT platforms and redesign all our
supporting functions. Others still were focused
squarely on building future growth – including the
Orchids Paper, Barcelona Cartonboard and U.S.
moulded pulp asset acquisitions, and greenfield
build projects like our state-of-the-art box plant in
New Jersey and the Greenpac Mill in Niagara Falls, NY.
These actions varied in scope, strategic rationale,
and financial and operational significance. The
common thread underlying them all, however, is
the pivotal and durable contribution that each brings
to our future potential.
Cascades’ origin stems from the belief that by
reusing and transforming recycled material into
useful products for companies and people, we could
unlock untapped benefits for the Corporation, our
employees, our shareholders, the environment and
the communities in which we operate. What was
true then remains true today, and this sustainably
focused foundation and our fundamental belief that
innovation is driven by possibility will continue to
drive Cascades’ path forward.
The Corporation’s commitment to the environment
has always encompassed not only procurement but
also our entire production process. This is reflected
in the fact that Cascades uses an average of 83%
less water than the Canadian1 paper
industry
average, and 72% less than the American2 paper
industry average, and 62% less energy than the
national1 average. In addition, all of Cascades’ raw
fibre material used in production is FSC® certified,
and at the end of the production cycle 77% of our
residual materials are repurposed for other uses
such as biomass boilers, agricultural applications,
and restoration of damaged sites, to name a few.
1 Source : Forest Products Association of Canada.
2 Source : American Forest and Paper Association.
Source of Possibilities
7
Merging our proactive engagement with the planned,
strategic steps and investments we are carrying
out to optimize our operations and market offerings
has put us firmly on the path to fulfilling what
we know to be our full potential. The record sales
and profitability levels that we generated in 2019
are testament to these efforts, and predictive
barometers of things to come. Harvesting the full
benefit from all these actions will remain our priority,
will allow us to build growth momentum going
forward, and will be a significant source of possibilities
for the Corporation and all our stakeholders.
Thank you for your continued support.
Mario Plourde
President and Chief Executive Officer
8
2019 Annual Report Sales ($M)
OIBD2 ($M)
OIBD
AJUSTED OIBD
4,996
4,649
4,321
5,000
4,750
4,500
4,250
4,000
3,750
700
600
500
400
300
200
100
0
604
547
489
472
390
393
2017
2018
2019
2017
2018
2019
Return on capital employed1
5.4%
4.6%
3.7%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Total shipments and manufacturing
capacity utilization rate (’000 s.t. and %)
3,500
3,250
3,000
2,750
2,500
2,250
100%
3,366
3,225
93%
3,114
93%
92%
95%
90%
85%
80%
2017
2018
2019
2017
2018
2019
Net debt / Adjusted OIBD2, 3
3.6 x
3.5 x
3.25 x
5.0 x
4.0 x
3.0 x
2.0 x
1.0 x
0.0 x
1 2018 results have been adjusted to reflect retrospective adjustments
of purchase price allocation. Please refer to Note 5 of the 2019
audited consolidated financial statements for more details.
2 Please refer to the “Supplemental Information on Non-IFRS Measures”
section for reconciliation of these figures.
3 Pro-forma up to 2018 to include business acquisitions on a last
twelve months basis.
2017
2018
2019
Source of Possibilities
9
Financial
Information
12
66
67
69
74
76
Management’s
Discussion and Analysis
Management’s Report
to the Shareholders
of Cascades Inc.
Independent Auditor’s
Report to the Shareholders
of Cascades Inc.
Consolidated Financial
Statements
Segmented Information
Notes to Consolidated
Financial Statements
127
Board of Directors
128
Historical Financial
Information — 10 Years
1010
2019 Annual Report
2019 Annual Report Source of Possibilities
11
Source of Possibilities 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 55 years later, Cascades is a multinational business with more than 90 operating facilities1 and 12,300 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
2019 Sales2
(in $M)
2019
Operating Income
Before Depreciation
and Amortization
(OIBD)2 (in $M)
2019 Adjusted OIBD2,4
(in $M)
2019 Adjusted OIBD
Margin (%)
26
7
18
21
1,827
1,048
492
1,509
443
92
52
64
441
108
55
86
24.1 %
10.3 %
11.2 %
5.7 %
1 Including associates and joint ventures. The Corporation also has 19 Recovery and Recycling facilities which are included in Corporate Activities.
The location of our plants4 and employees around the world are as follows:
CHANGE IN SEGMENTED INFORMATION
In 2019, the Corporation modified its internal reporting in accordance with CODM requirements and business analysis. As a result, the
Corporation modified its segmented information disclosure and restated prior periods. The Corporation's recovery and recycling activities,
previously included in the Specialty Products segment, are now included in the Corporate Activities since they support our North American
packaging and tissue papers segments and are analyzed separately.
2 Excluding associates and joint ventures not included in consolidated results. Refer to Note 8 of the 2019 audited consolidated financial statements for more information on associates and joint
ventures.
3 Via our equity ownership in Reno de Medici S.p.A., a public Italien company.
4 Excluding sales offices, distribution and transportation hubs and corporate offices. Including main associates and joint ventures.
5 Please refer to the “Supplemental Information on Non-IFRS Measures” section for a complete reconciliation.
12
1
2019 Annual Report
BUSINESS DRIVERS
Cascades’ results may be impacted by fluctuations in the following areas:
EXCHANGE RATES
On a year-over-year basis, the average value of the Canadian dollar
in 2019 decreased by 2% when compared to the US dollar and
increased by 3% compared to the euro.
ENERGY COSTS
The average price of natural gas decreased by 15% in 2019
compared to the previous year. In the case of crude oil, the average
2019 price was 13% lower than in 2018.
US$/CAN$ - Average rate
EURO€/CAN$ - Average rate
US$/CAN$ End of period rate
$
$
$
EURO€/CAN$ End of period rate
$
Natural Gas Henry Hub - US$/mmBtu $
Source: Bloomberg
2017
YEAR
Q1
Q2
Q3
Q4
2018
YEAR
Q1
Q2
Q3
Q4
0.77 $
0.80 $
0.68 $
0.66 $
3.11 $
0.79 $
0.78 $
0.64 $
0.63 $
2.98 $
0.77 $
0.76 $
0.65 $
0.65 $
2.80 $
0.77 $
0.77 $
0.66 $
0.67 $
2.91 $
0.76 $
0.73 $
0.66 $
0.64 $
3.64 $
0.77 $
0.73 $
0.65 $
0.64 $
3.09 $
0.75 $
0.75 $
0.66 $
0.67 $
3.15 $
0.75 $
0.76 $
0.67 $
0.67 $
2.64 $
0.76 $
0.76 $
0.68 $
0.69 $
2.23 $
0.76 $
0.77 $
0.68 $
0.69 $
2.50 $
2019
YEAR
0.75
0.77
0.67
0.69
2.63
RAW MATERIALS
Reference prices - uncoated recycled boxboard 1
The reference price for uncoated recycled boxboard increased by 5% in 2019
compared to 2018 due to better market conditions. The reference price remained stable
throughout the year at $730.
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
45% and 58%, respectively, in 2019 compared to 2018. The white grade recycled
paper No. 37 (sorted office papers, SOP) decreased by 34% in 2019 compared to
2018. 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, and to US$28 at the end of 2019.
1 Source: RISI, excluding mixed papers
2
13
Source of Possibilities
HISTORICAL MARKET PRICES OF MAIN PRODUCTS AND RAW MATERIALS
These indexes should only be used as trend indicators; they
may differ from our actual selling prices and purchasing
costs.
Selling prices (average)
PACKAGING PRODUCTS
Containerboard (US$/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)
Parent rolls, recycled fibres
2017
2018
2019 2019 vs 2018
Year
Q1
Q2
Q3
Q4
Year
Q1
Q2
Q3
Q4
Year Change
%
693
722
755
755
755
747
752
735
725
725
734
(13)
(2)%
592
637
670
670
670
662
650
640
630
630
638
(24)
(4)%
672
678
673
673
673
674
672
672
672
669
671
(3) —
1,031 1,072 1,072 1,072 1,072 1,072 1,117 1,117 1,117 1,115 1,117
45
4 %
645
643
680
730
730
696
730
730
730
730
730
34
5 %
(transaction)
Parent rolls, virgin fibres (transaction) 1,323 1,366 1,388 1,404 1,422 1,395 1,441 1,444 1,420 1,411 1,429
1,043 1,072 1,087 1,102 1,112 1,093 1,151 1,164 1,143 1,109 1,142
49
34
4 %
2 %
Raw materials prices (average)
RECYCLED PAPER
North America (US$/short ton)
Sorted residential papers, No. 56
(SRP - Northeast average)
Old corrugated containers, No. 11
(OCC - Northeast average)
Sorted office papers, No. 37 (SOP -
Northeast average)
Europe (euro/metric ton)
79
138
59
92
31
71
28
68
28
68
36
74
24
61
16
40
10
33
169
165
193
210
203
193
183
140
101
Recovered paper index3
142
111
99
103
107
105
96
87
71
8
30
88
49
15
41
(21)
(58)%
(33)
(45)%
128
(65)
(34)%
76
(29)
(28)%
VIRGIN PULP (US$/metric ton)
Northern bleached softwood kraft,
Canada
Bleached hardwood kraft, mixed,
Canada/US
Source: RISI and Cascades.
1,105 1,233 1,310 1,377 1,428 1,342 1,380 1,292 1,170 1,115 1,239
(103)
(8)%
958 1,077 1,125 1,192 1,213 1,152 1,180 1,100
970
893 1,036
(116)
(10)%
1 The Cascades Recycled White-Lined Chipboard Selling Price Index is based on published indexes 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 indexes 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 indexes 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.
14
3
2019 Annual Report
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 materials, 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’ 2019 manufacturing and converting external shipments and consumption quantities. It
is important to note that this table does not consider the Corporation's 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 US 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 Corporation's 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 MATERIALS2
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
350
350
740
1,440
680
2,120
1,290
1,540
130
510
2,180
1,000
170
130
1,300
3,480
160
80
240
8,900
5,100
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$/€ 0.01 change
11
11
24
46
22
68
47
(30)
(3)
(10)
(43)
(22)
(4)
(3)
(29)
(72)
(6)
(3)
(9)
(12)
(7)
(19)
—
2
1
1 Sensitivity calculated according to 2019 volumes or consumption with year-end closing exchange rate of CAN$/US$ 1.30 and CAN$/€ 1.46, excluding hedging programs and
the impact of related expenses such as discounts, commissions on sales and profit-sharing. Adjusted for the business acquisition of Orchids.
2 Based on 2019 external manufacturing and converting shipments, as well as fibre and pulp consumption. Including purchases sourced internally from our recovery and recycling operations. Adjusted
to reflect acquisitions, disposals and closures, if needed.
3 As an example, from CAN$/US$ 1.30 to CAN$/US$ 1.31 and from CAN$/€ 1.46 to CAN$/€ 1.47.
4
15
Source of Possibilities
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 2019 and 2018:
LOSS (GAIN) ON ACQUISITIONS, DISPOSALS AND OTHERS
2019
The Containerboard packaging segment recorded a $2 million gain from the sale of a building and piece of land of a closed plant. As well,
the lease on our Bear Island facility in Virginia was terminated by the lessee. As such, the Containerboard segment recorded a gain of
$10 million following the reversal of liabilities related to lease incentives to the lessee and to accrued carrying costs. In the wake of the lease
termination, the Containerboard segment recorded a loss of $4 million following the sale of some assets.
The Specialty Products segment concluded the sale of its two plants in France which converts cardboard into packaging for the paper industry
and recorded a loss of $1 million.
The Tissue Papers segment recorded a $22 million gain following the acquisition of Orchids Paper Products Company activities ("Orchids")
(please refer to the “Business Highlights” section). The Corporation also incurred, in Corporate Activities, transaction fees totaling $9 million
related to the acquisition.
The Corporate Activities segment recorded a $4 million increase in an environmental provision related to a plant closed in a previous year.
The segment also recorded a $5 million gain related to a litigation settlement from a prior-year event.
2018
The Containerboard segment completed the sale of the building and land of its Maspeth, NY plant and recorded 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 Boxboard Europe segment, in 2019, retroactively recorded a gain of $2 million in 2018 related to the acquisition of Barcelona Cartonboard
S.A.U. (see Note 5 of the Audited Consolidated Financial Statements for more details).
INVENTORY ADJUSTMENT RESULTING FROM BUSINESS COMBINATION
2019
During the year, operating results in the Tissue Papers segment were negatively impacted by $2 million. This was the result of the inventory
acquired at the acquisition of Orchids being recognized at fair value, with no profit recorded on its subsequent sale.
16
5
2019 Annual Report
IMPAIRMENT CHARGES AND RESTRUCTURING COSTS
2019
As a result of the lease termination on our Bear Island facility, as described above, the Containerboard segment recorded a $5 million impairment
charge on some assets that will not be used in the future. The segment also recorded $1 million in restructuring costs in its U.S. operations.
The Boxboard Europe segment recorded a $14 million impairment charge related to its virgin assets and other assets.
The Specialty products segment recorded $1 million of restructuring costs and a $1 million impairment charge stemming from the closure
during the third quarter of its Trois-Rivières, Québec, plant that manufactured felt backing for flooring.
The Tissue Papers segment recorded a $35 million impairment charge and $2 million of restructuring costs mostly related to underperforming
assets and the announced closure of two U.S. based plants (please refer to the"Business Highlights" section for more details). The segment
also recorded restructuring costs of $5 million related to the closure of two tissue paper machines in Ontario and changes in the segment’s
senior management.
The Corporate Activities recorded an impairment charge of $14 million on the goodwill and intangible assets of its recovery and recycling
activities. The recoverable amount was established based on the fair market value of the property, plant and equipment.
2018
In connection with the closure of the Maspeth, NY plant, 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 following the dismantling of a building related to a plant closure in a prior year.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
In 2019, the Corporation recorded an unrealized gain of $2 million, compared to an unrealized loss of $9 million in 2018, on certain derivative
financial instruments not designated for hedge accounting.
LOSS ON REPURCHASE OF LONG-TERM DEBT
In 2019, the Corporation redeemed US$400 million and $250 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 AND OPTION FAIR VALUE REVALUATION
In 2019, the Corporation recorded in “Interest expense on employee future benefits and other liabilities” an unrealized loss of $1 million on
the fair value revaluation of a one-time option granted to White Birch to purchase an interest of up to 10% in the Bear Island containerboard
mill conversion project.
In 2019, the Corporation recorded an unrealized gain of $1 million, compared to an unrealized gain of $1 million in 2018, on interest rate
swaps, that are included in financing expenses.
FOREIGN EXCHANGE GAIN ON LONG-TERM DEBT AND FINANCIAL INSTRUMENTS
In 2019, the Corporation recorded a gain of $6 million on its US$-denominated debt and related financial instruments, compared to a loss of
$4 million in 2018. This is composed of a gain of $6 million in 2019, compared to a loss of $5 million in 2018, on foreign exchange forward
contracts not designated for hedge accounting. It also included a gain of $1 million in 2018 on our US$-denominated long-term debt, net of
our net investment hedges in the U.S. and Europe and forward exchange contracts designated as hedging instruments.
FAIR VALUE REVALUATION GAIN ON INVESTMENTS
2018
The Boxboard Europe segment completed the acquisition of PAC Service S.p.A. and recorded a revaluation gain of $5 million on its previously
held interest. This item is presented in line item “Fair value revaluation gain on investments” in the consolidated statement of earnings.
6
17
Source of Possibilities
PROVISION FOR INCOME TAXES
2019
The Corporation reassessed the probability of recovering unrealized capital losses following the redemption of its US$ denominated debts,
which resulted in the recognition of tax assets totalling $12 million, of which $11 million was recorded in results.
2018
The Corporation reassessed the probability of recovering unrealized capital losses which resulted in the derecognition of tax assets totalling
$6 million.
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. This 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 the contribution of each
segment when excluding depreciation and 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 the 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.
18
7
2019 Annual Report
The reconciliation of operating income (loss) to OIBD, to adjusted operating income (loss) and to adjusted OIBD by business segment is
as follows:
Containerboard
Boxboard
Europe
Specialty
Products
Tissue Papers
Corporate
Activities
Consolidated
2019
(in millions of Canadian dollars)
Operating income (loss)
Depreciation and amortization
Operating income (loss) before depreciation and amortization
Specific items:
Loss (gain) on acquisitions, disposals and others
Inventory adjustment resulting from business acquisition
Impairment charges
Restructuring costs
Unrealized loss (gain) on derivative financial instruments
Adjusted operating income (loss) before depreciation and
amortization
Adjusted operating income (loss)
328
115
443
(8)
—
5
1
—
(2)
441
326
45
47
92
—
—
14
—
2
16
108
61
36
16
52
1
—
1
1
—
3
55
39
3
61
64
(22)
2
35
7
—
22
86
25
(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
381
89
470
(67)
—
4
3
(60)
410
321
62
37
99
(2)
—
—
—
(2)
97
60
24
11
35
—
—
(2)
—
(2)
33
22
(122)
64
(58)
—
75
—
—
75
17
(47)
(154)
50
(104)
8
—
14
—
(4)
18
(86)
(136)
Corporate
Activities
(117)
43
(74)
—
—
—
6
6
(68)
(111)
258
289
547
(21)
2
69
9
(2)
57
604
315
20181
Consolidated
228
244
472
(69)
75
2
9
17
489
245
1 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
8
19
Source of Possibilities
Net earnings, as per IFRS, are 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 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, interest expense on employee future benefits and other liabilities and loss on repurchase of
long-term debt
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
2019
20182
69
28
19
—
(9)
(6)
157
258
(21)
2
69
9
(2)
57
315
289
604
57
36
48
(5)
(11)
4
99
228
(69)
—
75
2
9
17
245
244
489
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 repurchase of long-term debt
Unrealized gain on interest rate swaps and option fair value
Foreign exchange loss (gain) on long-term debt and financial
instruments
Fair value revaluation gain on investments
Tax effect on specific items, other tax adjustments and
attributable to non-controlling interests1
Adjusted
2019
69
20182
57 $
(21)
2
69
9
(2)
14
—
(6)
—
(38)
27
96
(69) $
— $
75 $
2 $
9 $
— $
(1)
4 $
(5)
7 $
22 $
79 $
2019
0.74 $
(0.25) $
0.02
0.53 $
0.07 $
(0.02) $
0.11
— $
(0.06) $
— $
(0.12) $
0.28 $
1.02 $
20182
0.60
(0.53)
—
0.60
0.02
0.07
—
(0.01)
0.03
(0.03)
0.08
0.23
0.83
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.
2 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
20
9
2019 Annual Report
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
Dividends received, employee future benefits and others
Operating income
Depreciation and amortization
Operating income before depreciation and amortization
2019
460
(59)
(289)
27
133
11
24
(68)
2
17
258
289
547
20181
373
(12)
(244)
11
107
—
69
(77)
(9)
10
228
244
472
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
Adjusted cash flow from operating activities
Capital expenditures, other assets2 and right-of-use assets payments, net of disposals of $27 million in 2019,
compared to $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
2019
460
(59)
401
24
425
(278)
(40)
107
$
1.14 $
2018
373
(12)
361
—
361
(275)
(32)
54
0.57
Weighted average basic number of shares outstanding
93,987,980
94,570,924
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
Net debt / Adjusted OIBD ratio on a pro-forma basis3
December 31, 2019
December 31, 2018
2,022
85
11
2,118
155
1,963
604
3.25x
3.25x
1,821
55
16
1,892
123
1,769
491
3.6x
3.5x
1 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
2 Excluding increase in investments.
3 Pro-forma adjusted OIBD of $505 million for 2018 to include business acquisitions on a last twelve months basis.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
10
21
Source of Possibilities
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCIAL OVERVIEW - 2018
Results for 2018 reflected strong sales levels in the Containerboard Packaging, Tissue Papers and European Boxboard segments and
consolidated sales totaled $4,649 million in 2018, compared to $4,321 million in 2017. Business acquisitions in the Boxboard Europe and
Specialty Products segments and improvements in both sales mix and selling price in all segments had a positive impact on sales. 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 sales for the
Boxboard Europe segment, recovery and recycling activities of the Corporate Activities segment generated lower sales as a result of the
decrease in brown grade recycled fibre costs.
Operating income before depreciation and amortization (OIBD) reflected 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 was negatively impacted
by elevated costs for virgin pulp and recycled white paper grades, newly added market capacity, and higher logistics and subcontracting 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.
FINANCIAL OVERVIEW - 2019
On a consolidated basis, 2019 performance reflected solid sales levels, business acquisitions completed at the end of 2018 and throughout
2019, lower average raw material costs, stronger Tissue Papers results, favourable foreign exchange rates for our North American operations,
and strategic initiatives and investments across our platforms.
Annual consolidated sales totaled $4,996 million, an increase of $347 million or 7% compared to 2018 levels. This performance reflected
business acquisitions and beneficial foreign exchange rates for the North American operations as noted above, in addition to more favourable
average selling price and sales mix in the Tissue and Specialty Products business segments. These were partly offset by lower volumes in
all business segments, with the exception of Specialty Products, and less advantageous sales pricing and mix in the Containerboard and
European Boxboard segments, the latter of which also saw results impacted by unfavourable foreign exchange rates compared to the prior
year.
Operating income before depreciation and amortization (OIBD) increased by $75 million or 16%, to $547 million in 2019. This largely reflects
strong year-over-year improved results in the Tissue Papers segment that were driven by more favourable average selling price and sales
mix, lower raw material and energy costs, and the acquisition of Orchids activities in September 2019. Results in the Containerboard Packaging
segment benefited from lower raw material prices, beneficial exchange rates, and slightly lower energy costs, the benefits of which were
partially mitigated by slightly lower volumes, higher production costs largely related to sales mix, and a slight negative impact related to sales
pricing and mix. European Boxboard performance was supported by lower raw material and energy pricing and recent business acquisitions.
Less favourable average selling price, sales mix and foreign exchange rate had a negative impact on annual results compared to the prior
year. Results in the Specialty Products segment were above prior-year levels largely due to lower raw material pricing, benefits accrued from
acquisitions, and more favourable selling price and sales mix. Slightly higher production costs partially offset these benefits.
22
11
2019 Annual Report
CHANGE IN SEGMENTED INFORMATION
In 2019, the Corporation modified its internal reporting in accordance with CODM requirements and business analysis. As a result, the
Corporation modified its segmented information disclosure and restated prior periods. The Corporation's recovery and recycling activities,
previously included in the Specialty Products segment, are now included in the Corporate Activities since they support our North American
packaging and tissue papers segments and are analyzed separately.
The following graphics show the breakdown of sales, before corporate activities and inter-segment eliminations, operating income (loss)
before depreciation and amortization, and adjusted operating income before depreciation and amortization by business segment:
SALES BREAKDOWN1
OPERATING INCOME (LOSS) BEFORE
DEPRECIATION AND AMORTIZATION
BREAKDOWN 2,3,4
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.
In 2019, the Corporation posted net earnings of $69 million, or $0.74 per share, compared to net earnings of $57 million4, or $0.60 per share,
in 2018. On an adjusted basis, discussed in detail in the “Supplemental Information on Non-IFRS Measures” section, the Corporation generated
net earnings of $96 million during 2019, or $1.02 per share, compared to net earnings of $79 million, or $0.83 per share, in 2018. The
Corporation recorded an operating income before depreciation and amortization of $547 million during the year, compared to $472 million4
in 2018. On an adjusted basis, operating income before depreciation and amortization stood at $604 million during the year, compared to
$489 million in 2018 (see the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these amounts).
4 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
12
23
Source of Possibilities
FORWARD-LOOKING STATEMENTS
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, 2019 and 2018. Information contained herein includes any
significant developments as at February 26, 2020, 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.
24
13
2019 Annual Report
NEW IFRS STANDARD ADOPTED
The Corporation adopted IFRS 16 Leases on January 1, 2019. The new standard requires lessees to recognize a lease liability and a
corresponding right-of-use asset at the date at which the leased asset is available for use. Subsequently, lease payments are allocated
between the liability and finance cost. Right-of-use assets are depreciated over the shorter of the asset's useful life and the lease term on a
straight-line basis. The Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-
IFRS measures and tables, as allowed by the Standard.
The application of IFRS 16 Leases had the following impacts on the January 1, 2019 consolidated balance sheet:
(in millions of Canadian dollars)
Property, plant and equipment (including right-of-use assets)
Current portion of long-term debt
Long-term debt
Deferred income tax liabilities
Opening retained earnings
Balance as of
December 31, 20181
IFRS16 adjustment
January 1, 2019
adjusted balance
2,505
55
1,821
201
998
87
16
83
(3)
(9)
2,592
71
1,904
198
989
1 Including business combination purchase price retrospective adjustment (see Note 5 of the Audited Consolidated Financial Statements for more details).
The impact of adoption of IFRS16 Leases on the 2019 fourth quarter and year-to-date consolidated statement of earnings is as follows:
(in millions of Canadian dollars)
Increase in operating income before depreciation and amortization (OIBD) by segment:
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate activities
Consolidated
Increase in financing expense
Increase in depreciation and amortization
For the 3-month
period ended
December 31, 2019
3
1
1
1
1
7
1
7
2019
11
4
3
4
7
29
3
27
14
25
Source of Possibilities
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:
2017
TOTAL
Q1
Q2
Q3
20188
Q4 TOTAL
Q1
Q2
Q38
2019
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
1,401
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
342
333
675
146
821
363
331
694
155
849
377
321
698
161
859
365
305
670
167
837
1,447
1,290
2,737
629
3,366
53%
68%
56%
67%
56%
68%
56%
71%
58%
75%
57%
70%
59%
76%
59%
77%
58%
76%
58%
75%
58%
76%
93%
97% 103%
88%
87%
94%
93%
89% 100%
96%
92%
97%
92%
90%
92%
91%
93%
90%
87%
90%
93%
94%
90%
93%
88%
96%
87%
91%
91%
95%
92%
93%
94%
93%
93%
93%
92%
88%
84%
90%
91%
93%
88%
92%
14%
12%
17%
10%
9.2%
3.7%
16%
15%
14%
6%
14%
14%
15%
9%
20%
15%
21%
7%
9.5% 10.2% 10.7% 10.6% 10.6% 11.0% 11.2% 11.4% 12.0% 12.0%
20%
15%
13%
1%
20%
14%
16%
2%
18%
16%
15%
4%
20%
14%
21%
4%
20%
15%
11%
2%
20%
15%
11%
2%
20%
15%
21%
7%
3.9%
4.4%
4.7%
4.6%
4.6%
4.8%
4.9%
4.9%
5.4%
5.4%
442
455
10.1% 10.5% 10.8% 10.7% 10.6% 10.6% 10.4% 10.3% 10.3% 10.1% 10.1%
525
513
506
464
455
500
502
416
416
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. Specialty Products numbers were restated to reflect the reclassification of the Recovery and Recycling activities to the Corporate activities segment.
5 Return on capital employed is a non-IFRS measure and is defined as the after-tax 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. Including Recovery and Recycling activities in the Specialty Products segment.
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.
8 2018 fourth quarter and 2019 third quarter results have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the Audited Consolidated Financial Statements
for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
26
15
2019 Annual Report
HISTORICAL FINANCIAL INFORMATION
(in millions of Canadian dollars, unless
otherwise noted)
Sales
Packaging Products
Containerboard
Boxboard Europe
Specialty Products4
Inter-segment sales
Tissue Papers
Inter-segment sales and
Corporate Activities4
Total
Operating income (loss)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products4
Tissue Papers
Corporate Activities4
Total
Adjusted OIBD1
Packaging Products
Containerboard
Boxboard Europe
Specialty Products4
Tissue Papers
Corporate Activities4
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
20172
TOTAL
1,652
838
339
(11)
2,818
1,268
235
4,321
164
34
24
222
28
(75)
175
247
68
34
349
94
(50)
393
507
68
T1
T2
T3
20183
T4 TOTAL
T1
T2
T33
2019
T4 TOTAL
421
246
84
(3)
748
305
475
232
88
(4)
791
343
472
210
89
(4)
767
364
472
245
97
(3)
811
340
45
1,098
46
1,180
44
1,175
45
1,196
1,840
933
358
(14)
3,117
1,352
180
4,649
441
279
129
(4)
845
348
462
270
135
(3)
864
377
473
256
123
(4)
848
387
451
243
105
(3)
796
397
37
1,230
34
1,275
29
1,264
34
1,227
1,827
1,048
492
(14)
3,353
1,509
134
4,996
121
19
6
146
(2)
(32)
112
77
28
8
113
13
(21)
105
61
12
82
22
4
108
(9)
(26)
73
105
30
9
144
7
(15)
136
27
31
94
10
8
112
(11)
(23)
78
117
19
10
146
5
(14)
137
36
38
84
11
6
101
(100)
(36)
(35)
111
20
8
139
(8)
(18)
113
(67)
—
381
62
24
467
(122)
(117)
228
410
97
33
540
17
(68)
489
57
79
84
18
9
111
(8)
(31)
72
104
29
14
147
9
(21)
135
24
13
84
19
12
115
1
(34)
82
113
30
16
159
18
(21)
156
31
26
91
14
10
115
31
(41)
105
118
25
16
159
24
(22)
161
40
28
69
(6)
5
68
(21)
(48)
(1)
106
24
9
139
35
(22)
152
(26)
29
328
45
36
409
3
(154)
258
441
108
55
604
86
(86)
604
69
96
$ 5.35 $ 0.65 $ 0.28 $ 0.38 $ (0.71) $ 0.60 $ 0.26 $ 0.33 $ 0.42 $ (0.27) $ 0.74
$ 5.19 $ 0.63 $ 0.27 $ 0.37 $ (0.71) $ 0.56 $ 0.26 $ 0.32 $ 0.42 $ (0.27) $ 0.73
— $ 0.83 $ 0.14 $ 0.28 $ 0.30 $ 0.30 $ 1.02
$ 0.72 $ 0.13 $ 0.30 $ 0.40
260
1,522
69
1,534
111
1,586
92
1,573
89
1,769
361
1,769
82
1,878
124
1,861
104
2,070
91
1,963
401
1,963
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.
3 2018 fourth quarter and 2019 third quarter results have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the Audited Consolidated Financial Statements
for more details.
4 In 2019, the Recovery activities sales, OIBD and adjusted OIBD figures were reclassified from the Specialty Products segment to Corporate activities. Prior years and quarterly figures were adjusted to reflect
the current presentation.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
16
27
Source of Possibilities
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 2019 and 2018 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.
BOXBOARD EUROPE
•
On October 31, 2018, the Corporation’s subsidiary, Reno de Medici, announced the acquisition of Barcelona Cartonboard S.A.U., a
Spanish company ranked seventh in Europe for coated cartonboard production.
SPECIALTY PRODUCTS
•
•
•
On September 30, 2019, the Corporation concluded the sale of its two facilities in France that convert cardboard into packaging for the
paper industry.
On March 27, 2019, the Corporation announced that it would close its plant that manufactures felt backing for flooring, located in Trois-
Rivières, Québec. The closure occurred in early July 2019.
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 US. This acquisition doubled the Corporation's 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
•
•
On September 13, 2019, the Corporation announced the completion of the acquisition of Orchids activities. The assets include the
Barnwell, South Carolina and Pryor, Oklahoma operations. As part of the transaction, the Corporation acquired all of the outstanding
units of OPP Acquisition Mexico S. de R.L. de C.V., designated as assets held-for-sale at acquisition date, which were resold the same
day for US$14 million ($19 million).
On February 28, 2019, the Corporation announced the definitive closure of its tissue paper machines located in Whitby and Scarborough,
Ontario. The leases for these two plants expired on August 27, 2019 and were not renewed. Production ended during the second quarter.
28
17
2019 Annual Report
SIGNIFICANT FACTS AND DEVELOPMENTS
2019
The Corporation exercised its option to purchase the 20.2% interest in Greenpac Holding LLC ("Greenpac") held by the Caisse de dépôt et
placement du Québec on November 30, 2019 for an exercise price of US$93 million ($122 million). The transaction closed January 3, 2020
and increased the Corporation's, direct and indirect, ownership interest in Greenpac to 86.3%.
On November 26, 2019, the Corporation announced that it had completed its private offering of US$350 million aggregate principal amount
of 5.125% senior notes due 2026, US$300 million aggregate principal amount of 5.375% senior notes due 2028 and $175 million aggregate
principal amount of 5.125% senior notes due 2025. The net proceeds from the Notes offering were used by the Corporation to redeem all of
its outstanding $250 million aggregate principal amount of 5.50% senior notes due 2021 and US$400 million aggregate principal amount of
5.50% senior notes due 2022 and repay certain amounts outstanding under its revolving credit facility. The Corporation also paid $11 million
of premiums, and wrote off $3 million of unamortized financing costs related to these notes.
On October 30, 2019, the Corporation announced the closure of its Waterford, New York and Kingman, Arizona tissue converting facilities,
which produce a combined total volume of 9 million cases of tissue products. This volume will be transferred to the Corporation's other Tissue
Papers facilities with available capacity and the newly acquired Orchids activities (see Note 5 of the Audited Consolidated Financial Statements
for more details). The closures are expected before the end of the first quarter in 2020.
On August 9, 2019, the Corporation announced an increase of its quarterly dividend from $0.04 to $0.08 per share.
On May 31, 2019, the Corporation entered into an agreement with its lenders to extend and amend its existing $750 million revolving credit
facility. The amendment extends the term of the facility to July 2023. The financial conditions remain unchanged.
2018
On December 21, 2018, the Corporation announced that it had 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 Corporation 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, U.S. 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.
On January 31, 2018, the Corporation completed the sale of the building and land of its Maspeth plant in New York, U.S. for US$69 million
($86 million), net of transaction fees.
18
29
Source of Possibilities
FINANCIAL RESULTS FOR THE YEAR ENDED DECEMBER 31, 2019, COMPARED TO
THE YEAR ENDED DECEMBER 31, 2018
SALES
Sales increased by $347 million, or 7%, to $4,996 million in 2019, compared with $4,649 million in 2018. This reflects business acquisitions
during the period and in the fourth quarter of 2018 and higher selling prices mostly in the Tissue Papers segment. However, on a same plant
basis, lower volumes had a negative impact on sales. The 2% average depreciation of the Canadian dollar compared to the US dollar benefited
sales levels during the year, but these benefits were partly offset by the 3% appreciation of the Canadian dollar compared to the euro. Recovery
and Recycling activities generated lower sales as a result of the decrease in recycled fibre prices.
Sales by geographic segment are as follows:
The main variances in sales in 2019, compared to 2018, are shown below (in $M):
30
19
2019 Annual Report
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBD)
The Corporation generated an OIBD of $547 million in 2019, compared with $472 million1 in 2018, an increase of $75 million. Specific items2
recorded in both periods negatively impacted the OIBD variance by $40 million. Excluding specific items, the $115 million adjusted OIBD
increase is mainly explained by higher average selling prices mostly in the Tissue Papers segment, lower raw material costs, and business
acquisitions in 2019 and at the end of 2018. On the other hand, lower contribution from the Recovery and Recycling activities and lower
volumes in almost all segments had a negative impact on OIBD. The Tissue Papers and Containerboard segments benefited from higher
selling prices and a favourable mix of products sold as a higher proportion of converted products sold contributed positively to OIBD. Conversely,
the greater proportion of converted products sold in both segments had a negative variance impact on operating costs. While more expensive
to produce, these products are sold at a higher selling price and margin. Higher other operating costs also had a negative impact during 2019,
partly due to mix of products sold. Operating results for 2019 also include the beneficial impact of IFRS 16 accounting for leases, which
increased 2019 OIBD by $29 million compared to 2018.
Adjusted OIBD2 was $604 million in 2019, compared with $489 million in 2018.
The main variances in OIBD in 2019, compared to 2018, are shown below (in $M):
Adjusted OIBD
Raw materials
(OIBD)
F/X CAN$
(OIBD)
Other production costs and
mix (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 materials 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 activities 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 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
2 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
20
31
Source of Possibilities
BUSINESS SEGMENT REVIEW
PACKAGING PRODUCTS - CONTAINERBOARD
Our Industry
U.S. containerboard industry production and capacity utilization rate 1
Total U.S.containerboard production decreased by 3% in 2019, a reflection of softer
market conditions due in part to lower export demand. As a result, the industry's
capacity utilization rate decreased to 91.6% in 2019 from 96.9% in 2018.
U.S. containerboard inventories at box plants and mills 2
The average inventory level increased by 4% in 2019, 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 4.0
for the year.
U.S corrugated box industry shipments 2
Total U.S. corrugated box shipments remained stable in 2019 compared to 2018. This
reflects continued strength in the economic environment and manufacturing activity,
including e-commerce, the benefits of which were partially offset by lower export
demand levels and trade disputes.
Canadian corrugated box industry shipments 3
Canadian corrugated box shipments remained stable in 2019 after five consecutive
years of growth. This reflects the benefits of continued economic strength, combined
with negative impacts related to global trade insecurities.
Reference prices - containerboard 1
2019 reference prices for linerboard and corrugating medium decreased by 2% and
4%, respectively, compared to 2018. This was largely driven by softer market demand
related to lower export levels, as discussed above. The increase in the available supply
of products that subsequently arose led to downward pressure on pricing.
Reference prices - recovered papers (brown grade) 1
The average reference price of old corrugated containers no.11 ("OCC") decreased
by 45% in 2019 compared to 2018. This was largely due to China's restriction on
recovered paper import permits, which led to an increase in domestic supply, and
resulted in a decline in prices throughout the year.
1 Source: RISI
2 Source: Fibre Box Association
3 Source: Canadian Corrugated and Containerboard Association
32
21
2019 Annual Report
Our Performance
The main variances1 in sales and operating income before depreciation and amortization for the Containerboard Packaging segment in 2019,
compared to 2018, 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, 2019, compared to the year ended
December 31, 2018" section for more details.
The Corporation incurred certain specific items in 2019 and 2018 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
22
33
Source of Possibilities
2018
2019
Change in %
Shipments2 (’000 s.t.)
1,475
1,447
Average Selling Price
(CAN$/unit)
1,247
1,262
Sales ($M)
1,840
1,827
OIBD1 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
443
24%
441
24%
470
26%
410
22%
Operating income ($M)
(as reported)
381
321
(adjusted)1
328
326
-2%
1%
—
-1%
-6%
8%
-14%
2%
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 13.1 billion square feet in 2019
compared to 12.9 billion square feet in 2018.
3 Including sales to other partners in Greenpac.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no
restatement of comparative information, including non-IFRS measures and tables, as allowed
by the Standard (see Note 3 of the Audited Consolidated Financial Statements for more details).
Shipments decreased by 28,000 s.t., or 2%, in 2019 compared to 2018.
This reflects a 37,000 s.t. decrease in external shipments from our
containerboard mills driven by a higher mill integration rate of 58% in
2019, compared with 57% in 2018, lower market demand, and a 2%
decrease in the capacity utilization rate. Including sales to associates3,
the integration rate was 71% in 2019, compared with 72% last year. On
the converting side, shipments increased by 1%. This outperformed the
Canadian and US markets, both of which remained stable compared
to last year.
The average selling price denominated in Canadian dollars decreased
by 2% for parent rolls, and increased by 2% for converted products.
The 2% average depreciation of the Canadian dollar compared to the
US dollar favourably impacted average selling prices.
Sales decreased by $13 million, or 1%, compared to 2018. The 2%
average depreciation of the Canadian dollar added $24 million to sales,
and the favourable mix of products sold added another $8 million. These
benefits were offset by the lower average selling price, which subtracted
$11 million from sales, and lower volume, which negatively impacted
sales by $34 million.
Operating income before depreciation and amortization (OIBD)
decreased by $27 million, or 6% in 2019, compared to 2018. Excluding
specific items1 in both years, the $31 million increase in adjusted OIBD
reflects lower costs of brown recycled fibre grades, which increased
results by $89 million. The 2% average depreciation of the Canadian
dollar benefited results by $6 million, while lower energy costs added
another $4 million to results. These were partly offset by a net negative
impact of $3 million related to average selling price and sales mix, and
lower volume and higher freight costs, which subtracted $14 million and
$3 million, respectively, from OIBD. In addition, higher operational
costs, specifically chemicals, repair & maintenance, labour and
warehousing reduced OIBD by another $48 million. A greater proportion
of converted products sold also had a negative variance impact on
operating costs per ton.
The segment incurred some specific items1 in 2019 and 2018 that
affected OIBD. Adjusted OIBD1 was $441 million in 2019, compared
with $410 million in 2018.
34
23
2019 Annual Report
PACKAGING PRODUCTS - BOXBOARD EUROPE
Our Industry
European industry order inflow of coated boxboard 1
In Europe, order inflows of white-lined chipboard (WLC) increased by 1% compared to 2018, reflecting ongoing solid demand throughout 2019. Specifically, industry orders were
approximately 3.2 million tonnes in 2019. The folding boxboard (FBB) industry similarly experienced a strong year, with order inflows of approximately 2.3 million tonnes in 2019.
This represented an increase of 4%, compared to 2018.
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 2019
compared to 2018. Folding boxboard prices increased by 4% throughout the year.
Reference prices - recovered papers in Europe 2
Recovered paper prices decreased significantly in 2019 compared to 2018, following
China's restriction on recovered paper import permits. As a result, the recovered paper
reference index in Europe decreased 28% in 2019 compared to 2018, with all recycled
grades decreasing significantly.
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.
24
35
Source of Possibilities
Our Performance2
The main variances1 in sales and operating income before depreciation and amortization for the Boxboard Europe segment in 2019, compared
to 2018, 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, 2019, compared to the year ended
December 31, 2018" section for more details.
2 2018 results and have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
The Corporation incurred certain specific items in 2019 and 2018 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
36
25
2019 Annual Report
2018
2019
Change in %
Shipments2 (’000 s.t.)
1,125
1,290
Average Selling Price3
(CAN$/unit)
820
536
(euro€/unit)
773
521
Sales ($M)
933
1,048
OIBD1,4 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
92
9%
108
10%
99
11%
97
10%
Operating income4 ($M)
(as reported)
62
60
(adjusted)1
45
61
15%
-6%
-3%
12%
-7%
11%
-27%
2%
External recycled boxboard shipments increased by 175,000 s.t., or
18%, in 2019 compared to 2018. This reflects the acquisition of
Barcelona Cartonboard (please refer to the “Business Highlights”
section for more details) which totalled 175,000 s.t. reflecting stable
shipments form other recycled mills. Shipments of virgin boxboard
decreased by 10,000 s.t., or 6%, while converted products shipments
remained stable.
reflects
The average selling price decreased in both euros and Canadian dollars
year-over-year. This
the 3% average year-over-year
appreciation of the Canadian dollar compared to the euro and the higher
portion of recycled products sold following the acquisition of Barcelona
Cartonboard at the end of 2018, in addition to a less favourable
geographical mix of products sold. Compared with the prior year period,
the average selling price of recycled boxboard decreased by €21, or
4%, in 2019, while the average selling price of virgin boxboard increased
by €26, or 4%, compared to 2018.
The $115 million year-over-year increase in sales in 2019 reflects the
acquisition of Barcelona Cartonboard, which contributed $169 million.
This was offset by the 3% average year-over-year appreciation of the
Canadian dollar compared to the euro, which reduced sales by
$26 million. The lower average selling price and lower volume, on a
same plant basis, also negatively impacted sales by $24 million and
$4 million, respectively.
Operating income before depreciation and amortization decreased by
$7 million in 2019. Excluding specific items1, the $11 million increase
reflects lower raw materials prices, which added $24 million, and the
$12 million contribution from Barcelona Cartonboard. Conversely, the
lower average selling price reduced OIBD by $24 million and the 3%
average appreciation of the Canadian dollar further reduced OIBD by
$3 million.
The segment incurred some specific items1 in 2019 and 2018 that
affected OIBD. Adjusted OIBD1 was $108 million in 2019, compared
with $97 million in 2018.
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.
4 2018 results have been adjusted to reflect retrospective adjustments of
purchase price allocation. Please refer to Note 5 of the 2019 Audited Financial
Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no
restatement of comparative information, including non-IFRS measures and tables, as allowed
by the Standard (see Note 3 of the Audited Consolidated Financial Statements for more details).
26
37
Source of Possibilities
PACKAGING PRODUCTS - SPECIALTY PRODUCTS
CHANGE IN SEGMENTED INFORMATION
In 2019, the Corporation modified its internal reporting in accordance with CODM requirements and business analysis. As a result, the
Corporation modified its segmented information disclosure and restated prior periods. The Corporation's recovery and recycling activities,
previously included in the Specialty Products segment, are now included in the Corporate Activities since they support our North American
packaging and tissue papers segments and are analyzed separately.
Our Performance2
The main variances1 in sales and operating income before depreciation and amortization for the Specialty Products segment in 2019, compared
to 2018, 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, 2019, compared to the year ended
December 31, 2018" section for more details.
2 2018 results and have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the 2019 Audited Consolidated Financial Statements.
The Corporation incurred certain specific items in 2019 and 2018 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
38
27
2019 Annual Report
2018
358
35
10%
33
9%
Sales ($M)
OIBD1,2 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
2019
492
52
11%
55
11%
Operating income ($M)2
(as reported)
24
22
(adjusted)1
36
39
Change in %
37%
Shipments were positively impacted by the business acquisition of
moulded pulp assets completed in the fourth quarter of 2018. However,
European activity shipments decreased following the sale of these
activities during the year. Shipments in Consumer Product Packaging,
on a same plant basis, were also below prior year levels.
49%
67%
50%
77%
Sales increased by $134 million, or 37%, compared with 2018. This
reflects the $120 million net contribution resulting from the recently
acquired moulded pulp activities in the US, offset by the divestiture of
European activities and the closure of our vinyl backing felt mill. Higher
average selling prices in almost all sub-sectors, greater volume in
Industrial Packaging and a favourable exchange rate all contributed to
top-line growth. Volumes were slightly lower in the Consumer Product
Packaging sub-sector compared to 2018.
Operating income before depreciation and amortization (OIBD)
increased by $17 million in 2019. Higher realized spreads in almost all
sub-sectors and the acquisition of US moulded pulp activities in the
fourth quarter of 2018 positively contributed to results year-over-year.
These benefits were partly offset by higher operating and maintenance
costs.
The segment incurred some specific items1 in 2019 and 2018 that
affected OIBD. Adjusted OIBD1 reached $55 million in 2019, compared
with $33 million in 2018.
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for
reconciliation of these figures.
2 2018 results have been adjusted to reflect retrospective adjustments of
purchase price allocation. Please refer to Note 5 of the 2019 audited consolidated financial
statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no
restatement of comparative information, including non-IFRS measures and tables, as allowed
by the Standard (see Note 3 of the Audited Consolidated Financial Statements for more details).
28
39
Source of Possibilities
TISSUE PAPERS
Our Industry
U.S. tissue paper industry production (parent rolls) and capacity
utilization rate 1
Total parent roll production increased by 3% in 2019, the tenth consecutive year of
growth. The average capacity utilization rate of 93% in 2019 remained stable with the
2018 level. New capacity additions in the market were important underlying contributors
to these metrics.
U.S. tissue paper industry converted product shipments 1
In 2019, shipments for the retail and the away-from-home markets increased by 2%
and 4%, respectively, compared to 2018.
Reference prices - parent rolls 1
Reference prices - recovered papers (white grade) 1
In 2019, the reference price for recycled and virgin parent rolls increased by 4% and
2%, respectively, compared to 2018. This reflected the successful implementation of
selective price increases in the market, largely driven by rising input costs in recent
years.
The reference price of sorted office papers No.37 (“SOP”) decreased significantly by
34% in 2019 compared to 2018.
Reference prices - market pulp 1
In 2019, the reference price for NBSK and NBHK decreased by 8% and 10%,
respectively, compared to 2018, reflecting global demand supply dynamics.
1 Source: RISI
40
29
2019 Annual Report
Our Performance2
The main variances1 in sales and operating income before depreciation and amortization for the Tissue Papers segment in 2019, compared
to 2018, 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, 2019, compared to the year ended
December 31, 2018" section for more details.
2 2019 third quarter results have been adjusted to reflect retrospective adjustments of purchase price allocation. Please refer to Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
The Corporation incurred certain specific items in 2019 and 2018 that adversely or positively affected its operating results. Please refer to the “Supplemental Information for Non-IFRS Measures” section for reconciliations and details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
30
41
Source of Possibilities
2018
2019
Change in %
Shipments2 (’000 s.t.)
629
625
Average Selling Price
(CAN$/unit)
2,165
2,400
Sales ($M)
1,352
1,509
OIBD1 ($M)
(as reported)
% of sales
(adjusted)1
% of sales
(58)
(4)%
17
1%
64
4%
86
6%
Operating income (loss) ($M)
(as reported)
(122)
(47)
(adjusted)1
3
25
1%
11%
—
12%
210%
406%
102%
153%
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.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no
restatement of comparative information, including non-IFRS measures and tables, as allowed
by the Standard (see Note 3 of the Audited Consolidated Financial Statements for more details).
External manufacturing shipments decreased by 44,000 s.t., or 25%,
year-over-year in 2019. This is largely a reflection of the higher
integration rate of 76% in 2019, up notably from 70% in 2018, helped
by the closure of two paper machines in Toronto in the first half of the
year. External converting shipments increased by 30,000 s.t., or 7%,
over 2018 levels, mainly driven by new volume with key strategic
customers. The acquisition of Orchids added 18,000 s.t. to shipment
levels at the end of 2019.
The increase of 11% in the average selling price was mainly due to the
2% average depreciation of the Canadian dollar compared to the U.S.
dollar, and a more favourable sales mix of converted products. The price
increases announced in 2018 and at the beginning of 2019, in both the
Away-From-Home and Consumer Products sectors, positively
impacted the average selling price in 2019, compared to 2018.
Despite a decrease in volume in the manufacturing sector, total sales
levels increased by 12% compared to 2018. This was largely driven by
a higher average selling price and a favourable sales mix, which added
$115 million to sales on a combined basis. The 2% average depreciation
of the Canadian dollar compared to the U.S. dollar also added
$28 million to sales, while the newly acquired Orchids activities added
an additional $40 million of sales. These benefits were partially offset
by lower external volume in the manufacturing sector, which negatively
impacted sales levels by $26 million.
The significant increase in operating income before depreciation and
amortization (OIBD), is due in part to the $22 million gain recorded on
the Orchids' acquisition (see "Business Highlights" section for more
details). In addition, lower raw materials and energy costs added
$30 million and $10 million, respectively, to OIBD levels. These were
partially offset by higher outsourcing and production costs. In addition,
production costs per ton were higher year-over-year as a result of the
greater proportion of sales from converting activities. While more
expensive to produce, these products are sold at a higher selling price
and margin. The Orchids acquisition also contributed $7 million in the
last four months of the year.
The acquisition of Orchids, which was concluded on September 13,
2019, will accelerate the modernization of the Tissue platform and
improve geographic positioning and supply chain logistics.
The Oregon converting activities are generating positive trends in terms
of sales and OIBD, but have still not attained the targeted level. In 2018,
operational difficulties at the St. Helens mill negatively impacted the
ramp-up of the Oregon converting plant, as these facilities are highly
integrated. The ongoing action plan in place at the St. Helens paper
mill in Oregon is bearing fruit as it is now positively contributing to OIBD.
The segment incurred some specific items1 in 2019 and 2018 that
affected OIBD. Adjusted OIBD1 reached $86 million in 2019, compared
with $17 million in 2018.
42
31
2019 Annual Report
CORPORATE ACTIVITIES1
Corporate Activities included some specific items1 in 2019 and 2018 that affected OIBD. Adjusted OIBD1 was a loss of $86 million in 2019,
compared with a loss of $68 million in 2018. The decrease mainly comes from the $17 million decrease in OIBD coming from our Recovery
and Recycling activities, following lower recycled fibres prices.
Adjusted OIBD, excluding Recovery and Recycling activities, remained fairly stable compared to last year despite lower capitalized costs with
the end of our ERP implementation during 2018. Ongoing business process optimization initiatives are slowing down and focus is now on
stabilizing and optimizing our systems and processes.
Sales and OIBD from our recovery operations were lower in 2019 compared to last year due to the lower prices of recycled fiber materials.
Due to this situation we reviewed the carrying value of these activities and we recorded an impairment charge $14 million on the goodwill and
intangible assets as its recoverable amount was lower than its carrying amount.
STOCK-BASED COMPENSATION EXPENSE
Stock-based compensation expense recognized in the Corporate Activities amounted to $3 million in 2019, compared with $5 million in 2018.
For more details on stock-based compensation, see Note 21 of the 2019 Audited Consolidated Financial Statements.
1 In 2019, the Recovery activities sales, OIBD and adjusted OIBD figures were reclassified from the Specialty Products segment to Corporate activities. Prior years and quarterly figures were adjusted
to reflect the current presentation.
OTHER ITEMS ANALYSIS
DEPRECIATION AND AMORTIZATION
The depreciation and amortization expense increased by $45 million to $289 million in 2019, compared with $244 million in 2018. The increase
is mainly attributable to business acquisitions completed at the end of 2018 and in 2019, capital expenditure investments completed during
the last twelve months, and the adoption of IFRS 16 Leases (see Note 3 of the Audited Consolidated Financial Statements for more details).
Impairment charges recorded in 2018 partly offset this increase.
FINANCING EXPENSE AND INTEREST ON EMPLOYEE FUTURE BENEFITS AND OTHER LIABILITIES
The financing expense and interest on employee future benefits and other liabilities amounted to $143 million in 2019, compared with
$99 million in the same period of 2018, a $44 million increase. The variance is mainly attributable to the fair value revaluation recognized on
the CDPQ put option on the Corporation investment in Greenpac, which increased by $26 million compared with last year as a result of
Greenpac's improving financial performance. The adoption of IFRS 16 Leases (see Note 3 of the Audited Consolidated Financial Statements
for more details), as well as business acquisitions and capital expenditures made in 2018 increased debt levels which increased financing
expense and interest on employee future benefits and other liabilities.
The Corporation also recorded an unrealized loss of $1 million, compared with nil in 2018, on the fair value revaluation of a one-time option
granted to White Birch to purchase an interest of up to 10% in the Bear Island containerboard mill project, offset by an unrealized gain of
$1 million in 2019, compared to $1 million in 2018, on interest rate swaps, included in financing expense.
On July 12, 2019, S&P Global Ratings revised the Corporation’s outlook to “stable” from “positive” on higher leverage; the corporate rating
of BB- was reaffirmed. 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.
LOSS ON REPURCHASE OF LONG-TERM DEBT
In 2019, the Corporation redeemed US$400 million and $250 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.
32
43
Source of Possibilities
PROVISION FOR INCOME TAXES
In 2019, the Corporation recorded an income tax provision of $19 million. This compares to an income tax provision of $48 million in 2018.
(in millions of Canadian dollars)
Provision for income taxes based on the combined basic Canadian and provincial income tax rate
Adjustment for income taxes arising from the following:
Difference in statutory income tax rate of foreign operations
Prior years reassessment
Reversal of deferred tax assets on tax losses
Permanent differences
Change in deferred income tax assets relating to capital tax losses
Change in temporary differences
Other
Provision for income taxes
2019
2018
Adjusted, Note 5
31
(2)
3
—
(3)
(11)
3
(2)
(12)
19
37
(1)
2
3
(1)
8
—
—
11
48
Greenpac is a limited liability company (LLC) and partners agreed to account for it as a disregarded entity for tax purposes. Consequently,
income taxes associated with Greenpac net earnings are proportionately recorded by each partner based on its respective share in the LLC
and no income tax provision is included in Greenpac’s net earnings. As such, although Greenpac has been fully consolidated in the Corporation’s
results since the third quarter of 2017, only 71.8% of pre-tax book income is considered for tax provision purposes. Following the acquisition
of the 20.2% participation of the CDPQ in Greenpac in January 2020, 92% of pre-tax book income of Greenpac will be considered for tax
provision purposes.
The Corporation reassessed the probability of recovering unrealized capital losses following the redemption of its US$ denominated debts in
2019, which resulted in the recognition of tax assets totalling $12 million of which $11 million was recorded in the Consolidated statement of
earnings.
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 from those in 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 25.5% in 2019.
SHARE OF RESULTS OF ASSOCIATES AND JOINT VENTURES
Share of results of associates and joint ventures amounted to $9 million in 2019, compared to $11 million in 2018. Please refer to Note 8 of
the 2019 Audited Consolidated Financial Statements for more information on associates and joint ventures.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
44
33
2019 Annual Report
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operating activities generated $460 million of liquidity in 2019, compared with $373 million generated in 2018. Changes in
non-cash working capital components generated $59 million of liquidity in 2019 versus $12 million generated in 2018 as accounts receivable
were lower at the end of 2019. As at December 31, 2019, average LTM working capital as a percentage of LTM sales stood at 10.1%, compared
with 10.6% as at December 31, 2018.
Cash flow from operating activities, excluding changes in non-cash working capital components, stood at $401 million in 2019, compared with
$361 million in 2018. This cash flow measurement is relevant to the Corporation’s ability to pursue its capital expenditure program and reduce
its indebtedness.
Following the redemption of our senior notes, an interest payment normally planned for January 2020, was done in December 2019 in the
amount of $23 million.
INVESTING ACTIVITIES
Investing activities used $540 million in 2019 compared with $370 million used in 2018.
INVESTMENTS IN ASSOCIATES & JOINT VENTURES AND CHANGE IN INTANGIBLE AND OTHER ASSETS
The main items were as follows:
2019
In 2019, the Corporation invested $11 million in its ERP information technology system and other software development needed to support
our business and received $3 million from notes receivable included in other assets. The Corporation also received $1 million following the
sale of shares of one of its joint ventures.
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.
PAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT
(in millions of Canadian dollars)
Total acquisitions
Variation of acquisitions for property, plant and equipment included in “Trade and other payables”
Right-of-use assets and included in other debts and liabilities
Payments for property, plant and equipment
Proceeds from disposals of property, plant and equipment 1
Payments for property, plant and equipment net of proceeds from disposals
1 See “Business Highlights” section for more details
2019
317
(9)
(50)
258
(27)
231
2018
417
(9)
(70)
338
(85)
253
34
45
Source of Possibilities
New capital expenditure projects, excluding right-of-use assets, by segment in 2019 were as follows (in $M):
The major capital projects that were initiated, are in progress or were completed in 2019 are as follows:
CONTAINERBOARD PACKAGING
•
•
Investments in converting equipment at our plants in St. Mary’s, Ontario, Canada, and Piscataway, NJ, USA, to improve productivity
and quality.
Bear Island assets in Virginia, USA for site preparation before conversion of equipment to containerboard manufacturing (please refer
to the “Business Highlights” section for more details).
BOXBOARD EUROPE
•
Investments to improve the gas turbine and a winder at the Barcelona plant, a new paper cutter part of a new sheeting center and a
waste washing machine at the Santa Giustina plant.
TISSUE PAPERS
•
•
Investment in new converting lines at our Wagram facility in North Carolina, USA, and down payments made on the acquisition of other
converting equipment to be installed in 2020.
New warehouse in Candiac, Québec, allowing better inventory management to increase the service level and reduce warehousing costs.
As part of the Orchids acquisition, the Corporation acquired all of the outstanding units of OPP Acquisition Mexico S. de R.L. de C.V., designated
as assets held-for-sale. These were then resold on the day of the transaction for US$14 million ($19 million), all of which has been received
as at December 31, 2019. The Corporation also sold for $5 million a piece of land from a previously closed plant of the Containerboard
segment.
NET CASH ACQUIRED (PAID) IN BUSINESS COMBINATIONS
2019
On September 13, 2019, the Corporation acquired the assets of Orchids Paper Products Company (“Orchids”) for a total consideration of
$307 million, which consisted of US$235 million ($311 million) in cash, less $2 million for a purchase price adjustment and the settlement of
a net liability of $2 million with the acquiree prior to the transaction.
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 2019. The Corporation also paid
$1 million for the working capital purchase price adjustment related to the acquisition of the Coyle containerboard plants, completed in 2017.
In all, net cash consideration amounted to $100 million and the Corporation also assumed $27 million of debt related to these acquisitions.
PROCEEDS ON DISPOSALS OF A SUBSIDIARY, NET OF CASH DISPOSED
2019
The Corporation sold its participation of 90% in Cascades Europe S.A.S., which owns Cascades Rollpack, a packaging manufacturer located
in France for a total cash consideration of €7 million ($10 million) received at closing less cash disposed of €1 million ($1 million), for net
proceeds of €6 million ($9 million).
46
35
2019 Annual Report
FINANCING ACTIVITIES
Financing activities, including $23 million of dividend payments to Shareholders, debt repayment and the change in our revolving facility,
generated $121 million in 2019, compared with $25 million generated in 2018. The Corporation purchased 966,654 shares for cancellation
at an average price of $9.52 for an amount of $9 million in 2019. Dividends paid to non-controlling interests amounted to $17 million in 2019,
compared with $17 million in 2018. These payments are the result of dividends paid to the non-controlling shareholders of Greenpac and
Reno de Medici. Non-controlling interest contributed $1 million to the capital of Greenpac in 2018, representing the reinvestment of investment
tax credits received by the partners. In 2018, the Corporation also paid $1 million for the settlement of derivative financial instruments. Finally,
the Corporation received $5 million from the issuance of shares upon exercise of stock options, compared to $5 million in 2018.
On November 26, 2019, the Corporation announced that it had completed its private offering of US$350 million aggregate principal amount
of 5.125% senior notes due 2026, US$300 million aggregate principal amount of 5.375% senior notes due 2028 and $175 million aggregate
principal amount of 5.125% senior notes due 2025. The net proceeds from the Notes offering were used by the Corporation to redeem all of
its outstanding $250 million aggregate principal amount of 5.50% senior notes due 2021 and US$400 million aggregate principal amount of
5.50% senior notes due 2022 and repay certain amounts outstanding under its revolving credit facility. The Corporation also paid $11 million
of premiums, and wrote off $3 million of unamortized financing costs related to these notes.
CONSOLIDATED FINANCIAL POSITION
AS AT DECEMBER 31, 2019, 2018 AND 2017
The Corporation’s financial position and ratios are as follows:
(in millions of Canadian dollars, unless otherwise noted)
December 31, 2019
December 31, 2018 3
December 31, 2017
Cash and cash equivalents
Working capital1
As a percentage of sales2
Total assets
Total debt4
Net debt4 (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)
155
416
10.1%
5,180
2,118
1,963
1,489
177
1,666
3,629
123
455
10.6%
4,948
1,892
1,769
1,506
180
1,686
3,455
$
54.1%
15.81
$
51.2%
15.99
$
89
442
10.1%
4,427
1,611
1,522
1,455
146
1,601
3,123
48.7%
15.32
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.
3 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
4 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
36
47
Source of Possibilities
NET DEBT1 RECONCILIATION
The variances in the net debt (total debt less cash and cash equivalents) in 2019 are shown below (in millions of dollars), with the applicable
financial ratios included.
489
3.5x
Adjusted OIBD1 (last twelve months)
Net debt/Adjusted OIBD1,2
1 Please refer to the “Supplemental Information on Non-IFRS Measures” section for reconciliation of these figures.
2 Pro-forma in 2018 to include business acquisitions on a last twelve months basis.
604
3.25x
Liquidity available via the Corporation’s credit facilities and the anticipated cash flow generated by its operating activities are expected to
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 around $250 million, excluding the Bear Island project, in 2020. This amount is subject to change,
depending on the Corporation’s operating results and on general economic conditions. As at December 31, 2019, the Corporation had
$613 million (net of letters of credit in the amount of $14 million) available on its $750 million credit facility (excluding the credit facilities of our
subsidiaries Greenpac and Reno de Medici). Cash and cash equivalents as at December 31, 2019, are comprised as follows: $50 million in
the parent company and restricted subsidiaries (as defined in the credit agreement) and $105 million in unrestricted subsidiaries, mainly
Greenpac and Reno de Medici. On January 3, 2020 the Corporation paid US$93 million ($122 million) to purchase the 20.2% interest in
Greenpac Holding LLC ("Greenpac") held by the Caisse de dépôt et placement du Québec.
EMPLOYEE FUTURE BENEFITS
The Corporation’s employee future benefits assets and liabilities amounted to $474 million and $616 million respectively as at
December 31, 2019, including an amount of $103 million for post-retirement benefits other than pension plans. The pension plans include an
amount of $67 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 liabilities balances as at December 31, 2019, 23% of the Corporation
pension plans have been evaluated on December 31, 2018 (49% in 2017).
Considering the assumptions used and the asset ceiling limit, the deficit status for accounting purposes of its pension plans amounted to
$47 million as at December 31, 2019, compared to $55 million in 2018. The 2019 pension plan expense was $7 million and the cash outflow
was $8 million. Due to the investment returns in 2019 and the change in the assumptions, the expected expense for these pension plans is
$7 million in 2020. As for the cash flow requirements, these pension plans are expected to require a net contribution of approximately
$8 million in 2020. Finally, on a consolidated basis, the solvency ratio of the Corporation’s pension plans has remained stable at
approximately 100%.
48
37
2019 Annual Report
COMMENTS ON THE FOURTH QUARTER OF 2019
Sales of $1,227 million increased by $31 million, or 3%, compared with the same period last year. Specifically, Tissue sales increased by
$57 million, or 17%, a reflection of increased volumes, higher average selling price, more favourable sales mix, and the addition of Orchids
Paper assets. European Boxboard sales decreased by $2 million, or 1%, compared with the previous year, largely driven by less favourable
average selling price and mix and Canadian dollar - euro exchange rate, and slightly lower volumes, the effects of which were largely mitigated
by the business acquisition in Spain at the end of 2018. The Specialty Products segment generated an 8% or $8 million sales improvement
year-over-year, reflecting 2018 acquisitions and slightly higher volumes, the benefits of which outweighed slightly less favourable pricing and
sales mix. Lastly, sales in the Containerboard Packaging segment decreased by $21 million year-over-year due to slightly lower volume and
less favourable average selling price and sales mix year-over-year.
The Corporation generated an operating income before depreciation and amortization (OIBD) of $76 million in the fourth quarter of 2019. This
compares with the $35 million1 generated in the same period last year. This reflects impairments charges of $75 million and $34 million
recorded in the Tissue segment in the fourth quarters of 2018 and 2019, respectively, and additional impairment charges of $14 million related
to goodwill that were recorded in our Recovery operations in 2019. On a year-over-year basis, operating results benefited from more favourable
raw material prices across all four businesses, lower energy costs in all segments with the exception of Specialty Products, and business
acquisitions completed in the last twelve months. Offsetting these benefits were less favourable selling prices and mix in all segments except
Tissue, and higher production costs per ton sold in all segments largely attributable to the higher proportion of sales coming from converting
activities. Results generated by Recovery activities, accounted for in Corporate Activities, negatively impacted results in the current period
following year-over-year decreases in recycled fibre pricing. Operating results for 2019 also include the beneficial impact of IFRS 16 accounting
for leases, which increased fourth quarter 2019 OIBD by approximately $7 million.
On an adjusted basis2, fourth quarter 2019 OIBD stood at $152 million, versus $113 million in the previous year.
The main specific items, before income taxes, that impacted our fourth quarter 2019 results were:
•
•
•
•
$64 million impairment charge mainly related to certain assets in our Tissue and Boxboard Europe segments and the goodwill in
Recovery operations
$10 million loss related to the sale of certain equipment, restructuring costs and other charges following facility closures and the
Orchids acquisition
$2 million unrealized loss on financial instruments
$14 million charge on repurchase of long-term debt
For the 3-month period ended December 31, 2019, the Corporation posted a net loss of $26 million, or $0.27 per share, compared with a net
loss of $67 million1, or $0.711 per share, for the same period in 2018. On an adjusted basis1, the Corporation generated net earnings of
$29 million in the fourth quarter of 2019, or $0.30 per share, compared with a break even net earnings of $0 million, or $0.00 per share, for
the same period in 2018.
1 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
2 Please refer to the “Supplemental Information on Non-IFRS Measures” section for a complete reconciliation.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard
(see Note 3 of the Audited Consolidated Financial Statements for more details).
38
49
Source of Possibilities
The following table reconciles net earnings (loss) and net earnings (loss) 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:
Loss (gain) on acquisitions, disposals and others
Inventory adjustment resulting from business combination
Impairment charges
Restructuring costs
Unrealized loss on derivative financial instruments
Loss on repurchase of long-term debt
Unrealized gain on interest rate swaps and option fair value
Foreign exchange loss (gain) on long-term debt and financial
instruments
Tax effect on specific items, other tax adjustments and
attributable to non-controlling interests1
Adjusted
Q4 2019
(26)
Q4 20182
(67) $
Q4 2019
(0.27) $
5
2
64
3
2
14
(1)
1
(35)
55
29
(3) $
— $
75 $
2 $
4 $
— $
— $
8 $
(19) $
67 $
— $
0.04 $
0.02
0.49 $
0.02 $
0.01 $
0.11
(0.01)
0.01 $
(0.12) $
0.57 $
0.30
Q4 20182
(0.71)
(0.02)
—
0.60
0.02
0.03
—
—
0.06
0.02
0.71
—
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” on the "Supplemental Information on Non-IFRS Measures"
section for more details.
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:
Loss on acquisitions, disposals and others
Inventory adjustment resulting from business acquisition
Impairment charges
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
For the 3-month period ended December 31, 2019
69
29
98
4
—
2
1
1
8
106
77
(6)
14
8
—
—
14
—
2
16
24
10
5
4
9
—
—
—
—
—
—
9
5
(21)
18
(3)
—
2
34
2
—
38
35
17
(48)
12
(36)
1
—
14
—
(1)
14
(22)
(34)
(1)
77
76
5
2
64
3
2
76
152
75
2 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
50
39
2019 Annual Report
(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, 20182
84
27
111
(1)
—
3
(2)
—
111
84
11
11
22
(2)
—
—
—
(2)
20
9
6
3
9
—
—
(1)
—
(1)
8
5
(100)
17
(83)
—
75
—
—
75
(8)
(25)
(36)
12
(24)
—
—
—
6
6
(18)
(30)
(35)
70
35
(3)
75
2
4
78
113
43
The main variances1 in sales and operating income before depreciation and amortization in the fourth quarter of 2019, compared to the same
period of 20182, 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, 2019, compared to the year ended December
31, 2018" for more details.
2 2018 results have been adjusted to reflect retrospective adjustments of purchase price allocation. See Note 5 of the 2019 Audited Consolidated Financial Statements for more details.
On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information, including non-IFRS measures and tables, as allowed by the Standard (see
Note 3 of the Audited Consolidated Financial Statements for more details).
NEAR-TERM OUTLOOK
First quarter performance is projected to improve year-over-year, largely driven by improvements in the Tissue segment as a result of our
strategic repositioning and ongoing integration of the Orchids activities. Results in our other three segments are expected to be stable, with
pricing headwinds for these businesses expected to be offset by improved volumes and favourable raw material pricing in containerboard
and Boxboard Europe.
The Corporation is closely monitoring the global situation surrounding COVID-19, and taking proactive steps to ensure the well-being and
safety of our employees, and the continuity of our operations and businesses. Given the dynamic nature of the situation, it is not possible to
ascertain what impact, if any, there may be on our financial performance. We are taking the necessary steps to mitigate the potential
consequences that this situation may have on our manufacturing operations, supply chain and service to our customers.
40
51
Source of Possibilities
CAPITAL STOCK INFORMATION
SHARE TRADING
Cascades’ stock is traded on the Toronto Stock Exchange under the ticker symbol “CAS”. From January 1, 2019 to December 31, 2019,
Cascades' share price fluctuated between $7.84 and $13.33. During the same period, 47.1 million Cascades shares were traded on the
Toronto Stock Exchange. On December 31, 2019, Cascades shares closed at $11.21. This compares with a closing price of $10.23 on the
same closing day last year.
SHARES OUTSTANDING
As at December 31, 2019, the Corporation’s issued and outstanding capital stock consisted of 94,245,295 shares (94,163,515 as at
December 31, 2018) and 3,476,296 issued and outstanding stock options (4,409,358 as at December 31, 2018). In 2019, the Corporation
purchased 966,654 shares for cancellation, while 1,048,434 stock options were exercised, 200,354 options were granted and 84,982 stock
options were forfeited. As at February 26, 2020, issued and outstanding capital stock consisted of 94,329,849 shares and
3,530,629 stock options.
NORMAL COURSE ISSUER BID PROGRAM
The normal course issuer bid announced on March 15, 2018 enabled the Corporation to purchase for cancellation up to 1,903,282 shares
between March 19, 2018 and March 18, 2019. During that period, the Corporation purchased 1,903,200 shares for cancellation. The current
normal course issuer bid announced on March 14, 2019 enables the Corporation to purchase for cancellation up to 1,878,456 shares between
March 19, 2019 and March 18, 2020. During the period between March 19, 2019 and February 26, 2020, the Corporation purchased
424,454 shares for cancellation.
DIVIDEND POLICY
On February 26, 2020, Cascades’ Board of Directors declared a quarterly dividend of $0.08 per share to be paid on March 26, 2020, to
shareholders of record at the close of business on March 12, 2020. The quarterly dividend was increased to $0.08 per share in the second
quarter of 2019. On February 26, 2020, dividend yield was 2.9%.
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.
2017
Q4
95.0
Q1
95.0
Q2
94.6
Q3
94.2
2018
Q4
94.2
Q1
93.6
Q2
93.6
Q3
94.2
2019
Q4
94.2
$ 13.62
$ 13.33
$ 11.77
$ 12.61
$ 10.23
$
8.34
$ 10.54
$ 11.58
$ 11.21
208,984
246,940
201,563
215,882
218,696
238,606
202,448
164,371
146,157
1.2%
1.2%
1.4%
1.3%
1.6%
1.9%
1.5%
2.8%
2.9%
CASCADES’ SHARE PRICE FOR THE PERIOD FROM JANUARY 1, 2018 TO DECEMBER 31, 2019
52
41
2019 Annual Report
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, 2019:
CONTRACTUAL OBLIGATIONS
Payment due by period (in millions of Canadian dollars)
Long-term debt, including capital and interest
Operating leases
Pension plans and other post-employment benefits1
Total contractual obligations
TOTAL
2,727
72
954
3,753
LESS THAN A
YEAR
187
BETWEEN 1-5
YEARS
1,090
61
38
286
9
157
1,256
OVER 5
YEARS
1,450
2
759
2,211
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, 2019.
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, 2019, the off-balance sheet impact of
the factoring of accounts receivable amounted to $42 million (€29 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.
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 $248 million and $322 million for 2019 and 2018 respectively. Aggregate
sales to the Corporation from its joint-venture partners and other affiliates came to $87 million and $82 million for 2019 and 2018 respectively.
CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
A) NEW IFRS ADOPTED
IFRS 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.
Impact of adoption
The Corporation applied 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 operating leases under IAS 17 Leases equals the present value of
the remaining lease payments, discounted using the interest rate implicit in the lease or the Corporation’s incremental borrowing rate, as
described above. As for the underlying right-of-use asset, the Corporation elected to measure it at an amount equal to the lease liability.
The Corporation also used the following practical expedients allowed by IFRS 16:
•
•
•
•
account for leases ending in 2019 as short-term leases;
exclude initial direct costs from the measurement of the right-of-use asset;
use hindsight in determining the lease term where the contract includes extension or termination options; and
rely on previous assessment of whether a lease is onerous.
Adjustment to the consolidated opening retained earnings is related to an impairment charge of $12 million, net of a deferred income tax
recovery of $3 million, that the Corporation recorded on the right-of-use assets of CGUs whose assets are valued at fair market value.
42
53
Source of Possibilities
The application of IFRS 16 Leases had the following impacts on the January 1, 2019 consolidated balance sheet:
(in millions of Canadian dollars)
Property, plant and equipment (including right-of-use assets)
Current portion of long-term debt
Long-term debt
Deferred income tax liabilities
Retained earnings
Balance as of
December 31, 20181
IFRS16 adjustment
January 1, 2019
adjusted balance
2,505
55
1,821
201
998
87
16
83
(3)
(9)
2,592
71
1,904
198
989
1 Including business combination purchase price retrospective adjustment (see Note 5 of the Audited Consolidated Financial Statements for more details).
The reconciliation between operating lease commitments disclosed under IAS 17 at the end of 2018 and the initial impact of IFRS 16 on
January 1, 2019 consolidated balance sheet is the following:
(in millions of Canadian dollars)
Commitments disclosed as at December 31, 2018 (adjusted)
Discount
Discounted using weighted average Cascades’ incremental borrowing rate of 3.46%
Finance lease obligations recognized as at December 31, 2018
Low value and short-term exemptions
Contracts reassessed as service agreement
Change in treatment of extension and termination options
Leases with an effective date later than December 31, 2018
Other
Lease obligations recognized as at January 1, 2019
The impact of adoption of IFRS16 Leases on the consolidated statement of earnings is as follows:
(in millions of Canadian dollars)
Increase in financing expense
Increase in depreciation and amortization
Increase in operating income before depreciation and amortization
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
January 1,
2019
121
(14)
107
95
(1)
(7)
8
(6)
(2)
194
For the year ended
December 31, 2019
3
27
29
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.
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2019 Annual Report
DESCRIPTION OF SIGNIFICANT IMPAIRMENT TESTING ASSUMPTIONS (see Note 27 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 twenty 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.
E. FAIR VALUE OF BUSINESS COMBINATION
The Corporation makes a number of estimates when allocating fair values to the assets and liabilities acquired in a business acquisition. Fair
values are estimated using valuation techniques that take into account several assumptions such as production, amount and timing of earnings
and expenses, revenue growth, discount rate and capital expenditures.
44
55
Source of Possibilities
CRITICAL JUDGMENTS IN APPLYING THE CORPORATION'S ACCOUNTING POLICIES
LEASES
Significant judgments are applied in assessing whether or not a contract is or contains a lease. The Corporation assessment of its right to
obtain substantially all of the economic benefits from the use of the leased asset or of its ability to direct the use of the asset will determine if
an agreement contains a lease.
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 important information relevant to the Corporation is communicated to
the President and Chief Executive Officer and to the Vice-President and Chief Financial Officer by other people 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 and 2019 business combinations.
The design and evaluation of the operating effectiveness of the 2018 and 2019 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 DC&P of the Corporation were effective as at December 31, 2019.
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, 2019, based on the control framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 COSO Framework).
They have limited the scope of their design of DC&P and ICFR to exclude controls, policies and procedures of the Orchids Paper Products
Company (“Orchids”) business combinations. The design and evaluation of the operating effectiveness of Orchids’ DC&P and ICFR will be
completed within 365 days from the date of acquisition. Business combinations’ balance sheet and results are included in our consolidated
financial statements since the acquisition date. They constituted approximately 11.0% of total consolidated assets as of December 31, 2019,
while they represented approximately 8.5% of consolidated sales and approximately 6.8% of consolidated net earnings attributable to
Shareholders for the period ended December 31, 2019. Further details on these business combinations are disclosed in Note 5 of the
Corporation’s Audited Consolidated Financial Statements.
During the three-month period ended December 31, 2019, there were no changes in the Corporation’s ICFR that materially affected or are
reasonably likely to materially affect, the Corporation’s 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.
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45
2019 Annual Report
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
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 materials 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, 2019 is set out below:
NORTH AMERICAN ELECTRICITY HEDGING
Electricity consumption
Electricity consumption in a regulated market
% of consumption hedged in a de-regulated market (2020)
Average prices (2020-2021) (in US$ in the US and in CAD$ in Canada), per KWh)
Fair value as at December 31, 2019 (in millions of CAN$)
NORTH AMERICAN NATURAL GAS HEDGING
Natural gas consumption
% of consumption hedged (2019)
Average prices (2020 - 2024) (in US$, per mmBTU) (in CAN$, per GJ)
Fair value as at December 31, 2019 (in millions of CAN$)
UNITED STATES
CANADA
49%
46%
9%
$
0.03
0.16
51%
69%
1%
0.06
—
UNITED STATES
CANADA
58%
35%
2.75
(1.9)
42%
—
—
—
$
$
$
$
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 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, 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,
46
57
Source of Possibilities
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, as well as labour
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
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 supply chain, manufacturing capabilities, distribution activities, operating results, net earnings and financial condition
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
different regulatory schemes and political environments applicable to the Corporation’s operations in areas such as environmental and
health and safety compliance
exposure to health epidemics and pandemics such as the ongoing coronavirus outbreak and other highly communicable diseases or
viruses
Cascades has customers and operations located outside Canada. In 2019, sales outside Canada, in Canadian dollars, represented
approximately 68% of the Corporation’s consolidated sales, including 46% in the United States. In 2019, 20% of sales from Canadian operations
were made to the United States.
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 US dollar and the euro. The variation of the Canadian dollar against the US 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 US 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 US dollars and in euros, in the amounts of US$1,237 million and
€89 million, respectively, as at December 31, 2019.
Moreover, in some cases, the currency of the Corporation’s sales does not match the currency in which it incurs costs, which can negatively
affect the Corporation’s profitability. Fluctuations in exchange rates can also affect the relative competitive position of a particular facility, where
the facility faces competition from non-local producers, as well as the Corporation’s ability to successfully market its products in export markets.
As a result, if the Canadian dollar were to remain permanently strong compared to the US dollar and the euro, it could affect the profitability
of the Corporation’s facilities, which could lead Cascades to shut down facilities either temporarily or permanently, all of which could adversely
affect its business or financial results. To mitigate the risk of currency rises from future commercial transactions, recognized assets and
liabilities, and net investments in foreign operations, which are partially covered by purchases and debt, Management has implemented a
policy for managing foreign exchange risk against the relevant functional currency.
The Corporation uses various foreign exchange forward contracts and related currency option instruments to anticipate sales net of purchases,
interest expenses and debt repayment. Gains or losses from the derivative financial instruments designated as hedges are recorded under
“Other comprehensive income (loss)” and are reclassified under earnings in accordance with the hedge items.
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2019 Annual Report
Additional information on our North American foreign exchange hedging program is set out below:
NORTH AMERICAN FOREIGN EXCHANGE HEDGING 1
Sell contracts and currency options on net exposure to US$:
2020
2021
2022
Total amount (in millions of US$)
$ 30 to 53
$ 5 to 10
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, 2019 (in millions of CAN$)
1 See Note 16 of the Audited Consolidated Financial Statements for more details on financial instruments.
24% to 42%
4% to 8%
0.75
—
0.75
—
—
—
—
—
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
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
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
to achieve and maintain compliance with applicable
expect
environmental requirements.
incur ongoing capital and operating expenses
in order
to
48
59
Source of Possibilities
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. In the 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.
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, 2019, the Corporation employed approximately 12,300 employees, of whom roughly 10,600 were employees of its
Canadian and United States operations. Approximately 29% of the Corporation's Canadian and United States workforce is unionized under
32 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 32 collective bargaining agreements in North America, 3
have expired and are currently under negotiation, 4 will expire in 2020 and 5 will expire in 2021.
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.
Cascades's success depends in part upon its ability to continue to attract and retain qualified management, regulatory, technical, and sales
and marketing executives and personnel in various geographical locations. The failure to attract, integrate, motivate, and retain skilled and
qualified personnel could have a material adverse effect on the business. The Corporation competes for such personnel against numerous
companies. There can be no assurance that it will be successful in attracting or retaining such personnel and the failure to do so could have
a material adverse effect on our financial condition and results of operations.
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;
a 59.7%-owned subsidiary, Greenpac Holding LLC, a North American manufacturer of linerboard. For accounting purposes, the
percentage of ownership, including indirect ownership, stands at 86.35% (see Note 8 of the Audited Consolidated Financial Statements
for more details).
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
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49
2019 Annual Report
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 fail 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.
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
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.
50
61
Source of Possibilities
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
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.
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, 2019, it had $1,963 million in
outstanding total net debt on a consolidated basis, including capital-lease obligations. The Corporation also had $613 million available under
its revolving credit facility. On the same basis, its consolidated ratio of net debt to total equity as of December 31, 2019 was 54.1%.
The Corporation’s actual financing expense, including interest on employees' future benefits and loss on repurchase of long-term debt, was
$157 million. Cascades also has significant obligations under operating leases, as described in its audited consolidated financial statements
that are incorporated by reference herein.
On November 26, 2019 the Corporation issued $175 million aggregate principal amount of 5.125% due in 2025, US$350 million aggregate
principal amount of 5.125% due in 2026 and US$300 million aggregate principal amount of 5.375% due in 2028, totaling $1,026 million, net
of transaction fees of $13 million. The Corporation used the proceeds from this offering to fund the redemption of its US$400 million of its
5.50% unsecured senior notes due in 2022 for an amount of US$405 million ($533 million) and its $250 million of its 5.50% unsecured senior
notes due in 2021 for an amount of $254 million, including premiums of US$5 million ($7 million) and $4 million. The Corporation also wrote
off $3 million of unamortized financing costs related to these notes.
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
2019
62
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)
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)
BB+/BB-/BB- (stable)
51
2019 Annual Report
In 2019, S&P Global Ratings revised the Corporation's outlook to “stable” from “positive” on higher leverage; corporate rating of BB- was
affirmed.
During 2018, S&P Global Ratings revised the Corporation's outlook to “positive” from “stable” on improving credit measures.
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.
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
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
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.
52
63
Source of Possibilities
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
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 credit-worthy 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, other computer resources and our employees to process, transmit and store electronic data
in our daily business activities and to carry out important operational and marketing activities. Despite the implementation of security measures,
our technology systems, and those of third parties on which the Corporation relies are vulnerable to damage, disability or failure due to
64
53
2019 Annual Report
computer viruses, malware or other harmful circumstances, intentional penetration or disruption of our information technology resources by
a third party, a natural disaster, hardware or software corruption or failure or error (including a failure of security controls incorporated into or
applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel
actions (including the failure to follow our security protocols), or lost connectivity to our networked resources. A significant and extended
disruption in the functioning of these resources would result in an interruption of our operations and could damage our reputation and cause
us to lose customers, sales and revenue.
In addition, security breaches involving the systems in place or third party providers may occur, such as unauthorized access, denial of service,
computer viruses and other disruptive problems caused by hackers. This could result in the unintended public disclosure or the misappropriation
of proprietary, personal and confidential information, or in the inability to access company data (including due to ransomware), and require
us to incur significant expense to address and resolve these kinds of issues. The release of confidential information may also lead to identity
theft and related fraud, litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and
the outcome of such proceedings, which could include penalties or fines, could have a material adverse effect on Corporation's business
activities, intellectual property, operating results and financial condition. The occurrence of any of these incidents could result in adverse
publicity, loss of consumer confidence or employees, and reduced sales and profits. In addition, the costs of maintaining adequate protection
against such threats, including potentially higher insurance costs, as they develop rapidly in the future (or as legal requirements related to
data security increase) could be material. Cyber security represents a company-wide challenge and the related risks are part of the enterprise
risk management program that is presented to our audit and finance committee.
As a result of the foregoing, the Corporation may have to modify the business systems and practices with the goal of further improving data
security, which would result in increased expenditures and operating complexity. Although to date we have not experienced of any material
losses relating to cyber-attacks or other information security breaches, there can be no assurance that such losses will not be incurred in the
future. The risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats.
As cyber threats continue to evolve, the Corporation may be required to expend additional resources to continue to modify or enhance protective
measures or to investigate and remediate any security vulnerabilities.
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.
Concern over climate change may result in new or increased regional, federal and/or global legal and regulatory requirements to reduce or
mitigate the effects of greenhouse gases, or to limit or impose additional costs on commercial water use due to local water scarcity concerns.
In the event that such regulation is more stringent than current regulatory obligations or the measures that we are currently undertaking to
monitor and improve our energy efficiency and water conservation, we may experience disruptions in or significant increases in our costs of
operation and delivery and we may be required to make additional investments in facilities and equipment or relocate our facilities. In particular,
increasing regulation of fuel emissions could substantially increase the cost of energy, including fuel, required to operate our facilities or
transport and distribute our products, thereby substantially increasing the distribution and supply chain costs associated with our products.
As a result, the effects of climate change could negatively affect our business and operations.
There is also increased focus, including by governmental and non-governmental organizations, investors, customers and consumers on
environmental sustainability matters, including deforestation, land use, climate impact, water use and recyclability or recoverability of packaging,
including plastic. Our reputation could be damaged if we or others in our industry do not act, or are perceived not to act, responsibly with
respect to our impact on the environment.
54
65
Source of Possibilities
MANAGEMENT'S REPORT
TO THE SHAREHOLDERS OF CASCADES INC.
February 26, 2020
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.
/s/ Mario Plourde
MARIO PLOURDE
/s/ Allan Hogg
ALLAN HOGG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KINGSEY FALLS, CANADA
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
KINGSEY FALLS, CANADA
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2019 Annual Report
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, 2019 and 2018, 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 Standards
Board (IFRS).
What we have audited
The Corporation's consolidated financial statements comprise:
•
•
•
•
•
•
the consolidated balance sheets as at December 31, 2019 and 2018;
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.
56
67
Source of Possibilities
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.
/s/ PricewaterhouseCoopers LLP1
Montréal, Québec
February 28, 2020
1 CPA auditor, CA, public accountancy permit No. A126402
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57
2019 Annual Report
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
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
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Equity attributable to Shareholders
Non-controlling interests
Total equity
NOTE
December 31,
2019
December 31,
2018
Adjusted, Note 5
6 and 13
7 and 13
16
8
3, 9, 13 and 14
10
16
11
19
10
28
12
3, 13, 16 and 28
15
16 and 17
3, 13, 16 and 28
15
16
17
19
20
21
3 and 8
22
8
155
605
32
598
10
1,400
80
2,767
182
16
55
153
527
5,180
11
788
17
85
5
137
1,043
2,022
49
5
198
197
3,514
491
15
1,000
(17)
1,489
177
1,666
5,180
123
635
29
606
10
1,403
81
2,505
208
20
42
134
555
4,948
16
781
23
55
6
101
982
1,821
42
14
202
201
3,262
490
16
998
2
1,506
180
1,686
4,948
The accompanying notes are an integral part of these audited consolidated financial statements.
Approved by the Board of Directors
/s/ Alain Lemaire
Alain Lemaire - DIRECTOR
/s/ Georges Kobrynsky
Georges Kobrynsky - DIRECTOR
58
69
Source of Possibilities
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31 (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 $289 million (2018 — $244 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 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
23
14 and 24
24
5 and 26
27
16
14 and 28
28
13
5
8
19
8
2019
4,996
4,232
453
(21)
78
(2)
(2)
4,738
258
101
42
14
(6)
—
(9)
116
19
97
28
69
$
$
0.74
0.73
$
$
93,987,980
95,515,822
2018
Adjusted, Note 5
4,649
3,997
410
(69)
77
(2)
8
4,421
228
84
15
—
4
(5)
(11)
141
48
93
36
57
0.60
0.56
94,570,924
96,933,681
70
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2019 Annual Report
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 (in millions of Canadian dollars)
NOTE
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
Recovery of 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.
22
22
18
19
2019
97
2018
Adjusted, Note 5
93
(75)
45
1
(1)
(2)
1
(31)
(3)
1
(2)
(33)
64
14
50
96
(58)
(2)
1
6
2
45
(16)
4
(12)
33
126
46
80
60
71
Source of Possibilities
CONSOLIDATED STATEMENTS OF EQUITY
For the year ended December 31, 2019
(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
Balance - End of previous
year, as reported
Business combinations
Adjusted balance - End of
previous year
New IFRS adoption
Adjusted balance - Beginning
of year
Comprehensive income (loss)
Net earnings
Other comprehensive loss
5
3
Dividends
Issuance of common shares
upon exercise of stock
options
Redemption of common shares
Disposal of a subsidiary
Acquisition of non-controlling
interests
Balance - End of year
5
8 and
17
490
—
490
—
490
—
—
—
—
6
(5)
—
—
491
16
—
16
—
16
—
—
—
—
(1)
—
—
—
15
1,000
(2)
998
(9)
989
69
—
69
(23)
—
(4)
—
(31)
1,000
2
—
2
—
2
—
(19)
(19)
—
—
—
—
—
(17)
1,508
(2)
1,506
(9)
1,497
69
(19)
50
(23)
5
(9)
—
(31)
1,489
180
—
180
—
180
28
(14)
14
(17)
—
—
(1)
1
177
TOTAL
EQUITY
1,688
(2)
1,686
(9)
1,677
97
(33)
64
(40)
5
(9)
(1)
(30)
1,666
For the year ended December 31, 2018
Adjusted, Note 5
(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 - End of previous
year, as reported
New IFRS adoption
Adjusted Balance - Beginning
of year
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 interest
Acquisition of non-controlling
interests
Balance - End of year
492
—
492
—
—
—
—
—
—
6
(8)
—
—
490
16
—
16
—
—
—
—
—
1
(1)
—
—
—
16
982
(2)
980
57
(12)
45
—
(15)
—
—
(12)
—
—
998
(35)
2
(33)
—
35
35
—
—
—
—
—
—
—
2
1,455
—
1,455
57
23
80
—
(15)
1
5
(20)
—
—
1,506
146
—
146
36
10
46
4
(16)
—
—
—
1
(1)
180
The accompanying notes are an integral part of these audited consolidated financial statements.
TOTAL
EQUITY
1,601
—
1,601
93
33
126
4
(31)
1
5
(20)
1
(1)
1,686
72
61
2019 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (in millions of Canadian dollars)
NOTE
2019
2018
Adjusted, Note 5
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 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
Cash paid for business combinations, net of cash acquired
Proceeds on disposals of a subsidiary, net of cash disposed
Financing activities
Bank loans and advances
Change in credit facilities
Increase in term loan
Issuance of unsecured senior notes, net of related expenses
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 the year
Cash and cash equivalents - End of the year
The accompanying notes are an integral part of these audited consolidated financial statements.
14 and 28
13
5 and 26
27
19
5
8
13
8
28
8
5
26
5
5
28
13 and 28
13 and 28
13 and 28
13 and 28
13 and 28
13 and 28
20
20
5 and 8
69
143
14
289
(24)
68
(2)
(6)
19
—
(9)
28
(133)
(11)
(27)
9
(26)
401
59
460
1
(258)
27
(8)
(311)
9
(540)
(5)
39
—
1,026
(776)
6
(125)
—
5
(9)
(17)
—
(23)
121
41
(9)
123
155
57
99
—
244
(69)
77
9
4
48
(5)
(11)
36
(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
62
73
Source of Possibilities
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. In
2019, the Corporation modified its internal reporting in accordance with CODM requirements and business analysis. As a result, the Corporation
modified its segmented information disclosure and restated prior periods. The Corporation's recovery and recycling activities, previously
included in the Specialty Products segment, are now included in the Corporate Activities since they support our North American packaging
and tissue papers segments and are analyzed separately.
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.
For the years ended December 31 (in millions of Canadian dollars)
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Intersegment sales
Tissue Papers
Intersegment sales and Corporate Activities
For the years ended December 31 (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
74
63
2019
1,827
1,048
492
(14)
3,353
1,509
134
4,996
SALES
2018
1,840
933
358
(14)
3,117
1,352
180
4,649
OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION
2019
443
92
52
587
64
(104)
547
(289)
(143)
(14)
6
—
9
116
2018
Adjusted, Note 5
470
99
35
604
(58)
(74)
472
(244)
(99)
—
(4)
5
11
141
2019 Annual Report
For the years ended December 31 (in millions of Canadian dollars)
PAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT
2019
2018
Packaging Products
Containerboard
Boxboard Europe
Specialty Products
Tissue Papers
Corporate Activities
Total acquisitions
Proceeds from disposals of property, plant and equipment
Right-of-use assets 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
83
56
20
159
110
48
317
(27)
(50)
240
37
(46)
231
243
35
20
298
88
31
417
(85)
(70)
262
28
(37)
253
December 31,
2019
TOTAL ASSETS
December 31,
2018
Adjusted, Note 5
2,148
748
270
3,166
1,321
656
(47)
5,096
80
4
5,180
2,253
789
295
3,337
982
596
(52)
4,863
81
4
4,948
PROPERTY, PLANT AND EQUIPMENT
December 31,
2019
December 31,
2018
Adjusted, Note 5
931
1,482
192
162
2,767
835
1,278
197
195
2,505
GOODWILL, CUSTOMER RELATIONSHIPS AND CLIENT
LISTS, AND OTHER FINITE AND INDEFINITE USEFUL LIFE
INTANGIBLE ASSETS
December 31,
2018
December 31,
2019
Adjusted, Note 5
394
285
27
3
709
430
302
27
4
763
75
64
Source of Possibilities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts are 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 26, 2020.
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 except as described in Note 3.
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 86.35%, including indirect ownership. See Note 8 for more details.
PERCENTAGE OWNED (%)
JURISDICTION
100
100
59.7
57.95
Canada
Delaware
Delaware
Italy
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2019 Annual Report
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.
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 from changes in the level of 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 investment 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 FROM CONTRACT WITH CUSTOMERS
The revenues of the Corporation come mainly from sales 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 performance 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, volume rebates and discounts, at which time there are no conditions for the payment to become
due other than the passage of time. Accumulated experience is used to estimate and provide for discounts and returns (expected value
method), whereas volume 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 due within twelve 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.
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77
Source of Possibilities
Equity investments not subject to significant influence and held for trading are classified as FVTPL. 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.
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 twelve months and as a current asset or liability when the remaining maturity of the hedged item is less than twelve 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 payments on the receive leg and the pay leg of the hedging
derivative, are recorded on an accrual basis in net earnings.
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2019 Annual Report
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.
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
consolidated 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 earnings against the gain (loss) on the hedged item when the latter is realized (for example,
when the forecasted 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 forecasted 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 consolidated 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.
Depreciation is calculated on a straight-line basis as follows:
Between 10 and 33 years
Buildings
Between 3 and 30 years
Machinery and equipment
Automotive equipment
Between 5 and 10 years
Other property, plant and equipment Between 3 and 10 years
Right-of-use assets
Lease term
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79
Source of Possibilities
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 as well as application software. 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:
Application software
Enterprise Resource Planning (ERP)
Customer relationships and client lists
Other intangible assets with finite useful life
Between 3 and 10 years
7 years
Between 2 and 20 years
Between 2 and 20 years
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.
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.
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 in the consolidated balance
sheet under intangible assets with finite useful life and are amortized on a straight-line basis over the anticipated period of the credit facility.
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2019 Annual Report
LEASES
The Corporation recognize, in the consolidated balance sheet, a lease liability and a corresponding right-of-use asset at the date at which
the leased asset is available for use. Subsequently, lease payments are allocated between the liability and finance cost. Right-of-use assets
are depreciated over the lease term on a straight-line basis.
The lease liability equals the net present value of the lease payments discounted using the interest rate implicit in the lease or the Corporation’s
incremental borrowing rate which is determined for each lease.
Right-of-use assets are measured at cost which includes the initial lease liability amount, lease payments made at or before the lease
commencement date less lease incentives, initial direct costs and restoration costs.
The Corporation uses the low-value exception as well as the short-term exception on all categories of assets, except buildings.
The Corporation do not apply IFRS 16 to leases of intangibles assets.
In 2018, the Corporation was applying IAS 17 Leases and therefore, leases in which a significant portion of the risks and rewards of ownership
were retained by the lessor were classified as operating leases. Payments made under operating leases were charged to the consolidated
statement of earnings on a straight-line basis over the term of the lease. On the other hand, leases in which the Corporation retained substantially
all the risks and reward of ownership were classified as finance leases. Finance leases were capitalized 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 were
depreciated over the shorter of the estimated useful life of the asset or the lease term using the straight-line method.
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 in the consolidated statement of earnings.
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 earnings 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 that is created on an ongoing basis during production are provided for at their present values and charged against earnings as
the obligation arises.
Changes in the measurement of a liability relating to the decommissioning of a plant or other site preparation work resulting 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.
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.
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Source of Possibilities
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, 2019, 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 consolidated 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, 2019, 23% of the plans were evaluated on
December 31, 2018 (43% in 2017).
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”.
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.
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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
A) NEW IFRS ADOPTED
IFRS 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.
Impact of adoption
The Corporation applied 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 operating leases under IAS 17 Leases equals the present value of
the remaining lease payments, discounted using the interest rate implicit in the lease or the Corporation’s incremental borrowing rate, as
described above. As for the underlying right-of-use asset, the Corporation elected to measure it at an amount equal to the lease liability.
The Corporation also used the following practical expedients allowed by IFRS 16:
•
•
•
•
account for leases ending in 2019 as short-term leases;
exclude initial direct costs from the measurement of the right-of-use asset;
use hindsight in determining the lease term where the contract includes extension or termination options; and
rely on previous assessment of whether a lease is onerous.
Adjustment to the consolidated opening retained earnings is related to an impairment charge of $12 million, net of a deferred income tax
recovery of $3 million, that the Corporation recorded on the right-of-use assets of CGUs whose assets are valued at fair market value.
The application of IFRS 16 Leases had the following impacts on the January 1, 2019 consolidated balance sheet:
(in millions of Canadian dollars)
Property, plant and equipment (including right-of-use assets)
Current portion of long-term debt
Long-term debt
Deferred income tax liabilities
Retained earnings
Balance as of
December 31, 20181
IFRS16 adjustment
January 1, 2019
adjusted balance
2,505
55
1,821
201
998
87
16
83
(3)
(9)
2,592
71
1,904
198
989
1 Including business combination purchase price retrospective adjustment (see Note 5 for more details).
72
83
Source of Possibilities
The reconciliation between operating lease commitments disclosed under IAS 17 at the end of 2018 and the initial impact of IFRS 16 on
January 1, 2019 consolidated balance sheet is the following:
(in millions of Canadian dollars)
Commitments disclosed as at December 31, 2018 (adjusted)
Discount
Discounted using weighted average Cascades’ incremental borrowing rate of 3.46%
Finance lease obligations recognized as at December 31, 2018
Low value and short-term exemptions
Contracts reassessed as service agreement
Change in treatment of extension and termination options
Leases with an effective date later than December 31, 2018
Other
Lease obligations recognized as at January 1, 2019
The impact of adoption of IFRS16 Leases on the consolidated statement of earnings is as follows:
(in millions of Canadian dollars)
Increase in financing expense
Increase in depreciation and amortization
Increase in operating income before depreciation and amortization
NOTE 4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
January 1,
2019
121
(14)
107
95
(1)
(7)
8
(6)
(2)
194
For the year ended
December 31, 2019
3
27
29
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 27 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.
84
73
2019 Annual Report
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 twenty 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.
E. FAIR VALUE OF BUSINESS COMBINATION
The Corporation makes a number of estimates when allocating fair values to the assets and liabilities acquired in a business acquisition. Fair
values are estimated using valuation techniques that take into account several assumptions such as production, amount and timing of earnings
and expenses, revenue growth, discount rate and capital expenditures.
CRITICAL JUDGMENTS IN APPLYING THE CORPORATION'S ACCOUNTING POLICIES
LEASES
Significant judgments are applied in assessing whether or not a contract is or contains a lease. The Corporation assessment of its right to
obtain substantially all of the economic benefits from the use of the leased asset or of its ability to direct the use of the asset will determine if
an agreement contains a lease.
74
85
Source of Possibilities
NOTE 5
BUSINESS COMBINATIONS
2019
Orchids Paper Products
On September 13, 2019, the Corporation acquired the assets of Orchids Paper Products Company (“Orchids”) for a total consideration of
$307 million, which consisted of US$235 million ($311 million) in cash, less $2 million for a purchase price adjustment and the settlement of
a net liability of $2 million with the acquiree prior to the transaction. The Corporation recorded a bargain purchase gain on acquisition of the
distressed assets of $22 million before transaction fees of $9 million.
The assets include the Barnwell, South Carolina and Pryor, Oklahoma Tissue plants. As part of the transaction, the Corporation acquired all
of the outstanding units of OPP Acquisition Mexico S. de R.L. de C.V., designated as assets held-for-sale at acquisition date, which were
resold the same day for US$14 million ($19 million).
This acquisition will accelerate the modernization of the Corporation's U.S. consumer product tissue platform by strengthening our operations
and improving our geographic positioning.
The $14 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.
The purchase price allocation is preliminary as of December 31, 2019.
Assets acquired and liabilities assumed were as follows:
BUSINESS SEGMENT:
ACQUIRED COMPANIES:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Initial allocation
Adjustments
Accounts receivable
Inventories
Assets held-for-sale
Property, plant and equipment
Other assets
Total assets
Trade and other payables
Long-term debt
Deferred income tax liabilities
Net assets acquired
Bargain purchase gain on acquisition
Net cash paid
Purchase price adjustment
Settlement of liability with acquiree before the transaction
Total consideration
14
22
19
342
1
398
(13)
(7)
(17)
361
(52)
309
314
(3)
(2)
309
—
2
—
(52)
—
(50)
1
7
10
(32)
30
(2)
(3)
1
—
(2)
2019
Tissue Papers
Orchids
Adjusted preliminary
allocation
14
24
19
290
1
348
(12)
—
(7)
329
(22)
307
311
(2)
(2)
307
The acquired business, since the date of acquisition, represents sales amounting to $60 million on a stand-alone basis ($38 million on a
consolidated basis) and the contribution to net earnings attributable to Shareholders is $1 million on a stand-alone basis ($19 million on a
consolidated basis, including the gain on business combination).
86
75
2019 Annual Report
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 a cash consideration of US$38 million ($51 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.
The purchase price allocation was finalized in 2019.
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
Trademark
Total assets
Bank loans and advances
Trade and other payables
Long-term debt
Deferred income tax liabilities
Net assets acquired
Non-controlling interests
Gain on acquisition
Cash paid
Non-cash provision for working capital adjustment
Total consideration
BUSINESS SEGMENT:
ACQUIRED COMPANIES:
2018
Specialty Products
UFP, Clarion & Falcon Packaging
Preliminary allocation
Adjustments
Final allocation
10
8
48
10
—
76
(2)
(9)
(4)
(1)
60
(5)
(3)
52
51
1
52
—
1
(1)
(7)
1
(6)
—
—
—
1
(5)
1
3
(1)
—
(1)
(1)
10
9
47
3
1
70
(2)
(9)
(4)
—
55
(4)
—
51
51
—
51
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 that has been fully consolidated since then. The Corporation already had a 33.33% equity participation through its majority 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.
76
87
Source of Possibilities
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
Corporation recorded a bargain purchase gain of $2 million. 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 in 2018 for Pac Service S.p.A. and in 2019 for Barcelona Cartonboard S.A.U..
Assets acquired and liabilities assumed were as follows:
BUSINESS SEGMENT:
ACQUIRED COMPANIES:
Barcelona Cartonboard S.A.U.
2018
Boxboard Europe
Pac Service
S.p.A.
Total
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Preliminary
allocation
Adjustments Final allocation Final allocation Final allocation
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
Bargain purchase gain on acquisition
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
—
—
—
54
—
—
—
—
4
—
(1)
3
—
—
—
—
—
(1)
2
(2)
—
—
—
—
—
—
2
25
21
72
6
1
—
127
(50)
(4)
(12)
(1)
—
(4)
56
(2)
54
54
—
—
—
54
4
12
7
9
—
—
7
39
(9)
(3)
(2)
—
(1)
(1)
23
—
23
—
15
3
5
23
6
37
28
81
6
1
7
166
(59)
(7)
(14)
(1)
(1)
(5)
79
(2)
77
54
15
3
5
77
88
77
2019 Annual Report
ASSET ACQUISITION
2018
Bear Island
On July 26, 2018, the Containerboard Packaging segment acquired 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 2022. During the period prior to conversion, it was planned that White Birch would
temporarily operate the site as a newsprint mill under a twenty seven months free net lease having an estimated value of $8 million and
accounted for as deferred revenues and added to the consideration. However, in 2019, White Birch terminated the lease. See Note 26
for details.
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 at the time of acquisition had 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 twenty seven months to cover property and building
maintenance costs. This liability was reversed in the course of 2019 when White Birch terminated the lease. See Note 26 for details.
Assets acquired and liabilities assumed were as follows:
(in millions of Canadian dollars)
Fair values of identifiable assets acquired and liabilities assumed:
Property, plant and equipment
Total assets
Environmental restoration obligation
Net assets acquired
Cash paid
Purchase option fair value issued to White Birch
Favourable lease fair value
Carrying costs commitment
Total consideration
DISPOSAL
BUSINESS SEGMENT:
ACQUIRED ASSETS:
2018
Containerboard
Bear Island
77
77
(5)
72
46
13
8
5
72
2019
Cascades Europe S.A.S.
On September 30, 2019, the Corporation sold its participation of 90% in Cascades Europe S.A.S. which owns Cascades Rollpack, a cardboard
packaging converter for the paper industry, for a total consideration of €10 million ($15 million), including €7 million ($10 million) of cash
received as well as €4 million ($6 million) of long-term debt assumed and €1 million ($1 million) of cash balance disposed. A loss on disposal
of $1 million was recorded.
78
89
Source of Possibilities
Assets and liabilities at the time of disposal were as follows:
(in millions of Canadian dollars)
Assets and liabilities disposed:
Cash and cash equivalents
Accounts receivable
Inventories
Property, plant and equipment
Total assets
Trade and other payables
Long-term debt
Net assets disposed
Non-controlling interests
Loss on disposal
Total consideration received
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
Exchange differences
Balance at end of year
2019
BUSINESS SEGMENT:
Specialty Products
DISPOSAL COMPANIES:
Cascades Europe
S.A.S.
1
7
9
9
26
(8)
(6)
12
(1)
(1)
10
2018
570
34
(15)
589
46
635
2018
79
20
12
34
145
2019
61
21
13
32
127
2019
2018
15
6
(4)
—
(1)
16
7
5
(1)
4
—
15
NOTE
30
2019
543
27
(16)
554
51
605
As at December 31, 2019, trade receivables of $127 million (December 31, 2018 - $145 million) were past due but not impaired.
The aging of these trade receivables at each reporting period is as follows:
The change in the credit loss provision has been included in “Selling and administrative expenses” in the consolidated statement of earnings.
The maximum exposure to credit risk at the reporting period approximates the carrying value of each class of receivable mentioned above.
90
79
2019 Annual Report
NOTE 7
INVENTORIES
(in millions of Canadian dollars)
Finished goods
Raw materials
Supplies and spare parts
2019
302
105
191
598
2018
Adjusted, Note 5
295
132
179
606
As at December 31, 2019, finished goods, raw materials and supplies and spare parts were adjusted to net realizable value (NRV) by
$14 million, $2 million and $1 million, respectively (December 31, 2018 - $12 million, nil, and nil).
The Corporation has sold all the goods that were written down in 2018. No reversal of previously written-down inventory occurred in 2019 or
2018. The cost of raw materials and supplies and spare parts included in “Cost of sales” amounted to $1,682 million (2018 - $1,713 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
2019
13
67
80
2018
12
69
81
INVESTMENTS IN ASSOCIATES
B.
The Corporation did not hold any significant participation in associates in 2019 and 2018.
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.
2019-2018
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
80
91
Source of Possibilities
The Corporation's joint ventures information (100%), translated in millions of Canadian dollars 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
Dividends received from joint ventures
(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
Translation adjustment
Total comprehensive income
Dividends received from joint ventures
CASCADES SONOCO
US INC.
CASCADES SONOCO INC.
MARITIME PAPER
PRODUCTS LIMITED
PARTNERSHIP
2019
TENCORR HOLDINGS
CORPORATION
2
26
43
10
5
6
12
110
5
2
1
4
(2)
2
2
—
26
16
7
1
2
1
91
2
—
2
5
—
5
5
3
23
28
4
1
1
2
97
3
1
—
2
—
2
—
—
18
10
15
1
3
—
132
1
—
—
1
—
1
—
CASCADES SONOCO
US INC.
CASCADES SONOCO INC.
MARITIME PAPER
PRODUCTS LIMITED
PARTNERSHIP
2018
TENCORR HOLDINGS
CORPORATION
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
—
There is about $1 million in commitments in the joint ventures ($1 million in 2018).
92
81
2019 Annual Report
D. SUBSIDIARIES WITH NON-CONTROLLING INTERESTS
The Corporation's information for its subsidiaries with significant non-controlling interests is as follows:
(in millions of Canadian dollars, unless otherwise noted)
RENO DE MEDICI S.p.A.
GREENPAC HOLDING LLC
RENO DE MEDICI S.p.A.
GREENPAC HOLDING LLC
2019
2018
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 from (used) for financing activities
Milan, Italy
New York,
United States
Adjusted, Note 5
Milan, Italy
New York,
United States
42.05%
13.65%
42.05%
17.17%
11
125
2
59
295
—
397
—
246
39
72
94
1,048
47
14
23
95
(42)
(39)
17
48
15
36
105
3
569
11
37
9
—
167
438
38
—
100
136
(5)
(131)
18
128
1
49
315
—
428
—
257
32
76
119
933
36
20
43
80
(85)
26
18
50
15
37
109
3
589
13
33
77
—
208
429
30
—
105
123
(3)
(123)
In November 2019, the Corporation exercised its call option and repurchased the CDPQ (Caisse de dépôt et placement du Québec) 20.20%
participation in Greenpac for a consideration of $122 million. The consideration is due in January 2020 and is therefore accounted for in other
liabilities. With this additional participation, the Corporation's direct ownership in Greenpac increased to 79.9% from 59.7% whereas indirect
ownership, through our 53% participation in Containerboard Partners (Ontario) Inc., remained at 6.4%. For accounting purposes, the CDPQ
participation was accounted for as a liability because of the put option associated with it. Indeed, the option gave the participation of CDPQ
the characteristics of a liability more than equity under IFRS. With the exercise of the call option, the CDPQ put option became void and the
20.20% participation was treated as equity for accounting purposes. The combined effect of the participation buyout and designation of it as
equity decreased the minority interest share to 13.65% from 17.11%.
E. NON-SIGNIFICANT ASSOCIATES AND JOINT VENTURES
The carrying value of investments in associates and joint ventures that do not have significant impact on the Corporation is as follows:
(in millions of Canadian dollars)
Non-significant associates
Non-significant joint ventures
2019
13
18
31
2018
12
18
30
82
93
Source of Possibilities
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
2019
—
3
3
2018
(1)
3
2
The Corporation received dividends of $2 million from these associates and joint ventures as at December 31, 2019 (December 31, 2018 -
$2 million).
NOTE 9
PROPERTY, PLANT AND EQUIPMENT
(in millions of Canadian dollars)
As at January 1, 2018
Cost
Accumulated depreciation and impairment
Net book amount
Year ended December 31, 2018 (Adjusted,
Note 5)
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 (Adjusted, Note 5)
Cost
Accumulated depreciation and impairment
Net book amount
Year ended December 31, 2019
Opening net book amount
Additions
Disposals
Depreciation
Business disposal
Business combinations
IFRS 16 adjustment
Impairment charges
Others
Exchange differences
Closing net book amount
As at December 31, 2019
Cost
Accumulated depreciation and impairment
Net book amount
NOTE
LAND
BUILDINGS
MACHINERY AND
EQUIPMENT
AUTOMOTIVE
EQUIPMENT
OTHERS
RIGHT-OF-USE
ASSETS
(Note 3 and 14)
5
5
27
5
5
3
27
124
—
124
124
11
—
—
34
—
—
6
175
175
—
175
175
—
—
—
—
—
—
—
13
(7)
181
181
—
181
834
352
482
482
36
—
(33)
23
(6)
26
21
549
950
401
549
549
35
(1)
(36)
(6)
—
—
(8)
68
(18)
583
978
395
583
3,020
1,775
1,245
1,245
90
(1)
(150)
66
(67)
145
64
1,392
3,389
1,997
1,392
1,392
52
(24)
(153)
(3)
309
—
(38)
(23)
(53)
1,459
3,494
2,035
1,459
104
69
35
35
9
—
(9)
3
(1)
4
—
41
115
74
41
41
10
(1)
(11)
—
—
—
—
6
(1)
44
123
79
44
314
123
191
191
235
—
(9)
2
—
(167)
8
260
389
129
260
260
174
(3)
(14)
—
—
—
(5)
(75)
(8)
329
505
176
329
51
24
27
27
67
—
(11)
—
—
2
3
88
123
35
88
88
46
(3)
(42)
—
—
87
—
—
(5)
171
243
72
171
TOTAL
4,447
2,343
2,104
2,104
448
(1)
(212)
128
(74)
10
102
2,505
5,141
2,636
2,505
2,505
317
(32)
(256)
(9)
309
87
(51)
(11)
(92)
2,767
5,524
2,757
2,767
Other property, plant and equipment include buildings and machinery and equipment in the process of construction or installation with a book
value of $203 million (December 31, 2018 - $99 million) and deposits on purchases of machinery and equipment amounting to $2 million
(December 31, 2018 - $34 million).
In 2019, $3 million (2018 - $3 million) of interest incurred on qualifying assets was capitalized. The weighted average capitalization rate on
funds borrowed in 2019 was 5.56% (2018 - 5.52%).
94
83
2019 Annual Report
NOTE 10
GOODWILL AND OTHER INTANGIBLE ASSETS WITH FINITE AND INDEFINITE USEFUL LIFE
APPLICATION
SOFTWARE
AND ERP
CUSTOMER
RELATIONSHIPS
AND
CLIENT LISTS
NOTE
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
(in millions of Canadian dollars)
As at January 1, 2018
Cost
Accumulated amortization and impairment
Net book amount
Year ended December 31, 2018
(Adjusted, Note 5)
Opening net book amount
Additions
Business combinations
5
Amortization
Others
Exchange differences
Closing net book amount
As at December 31, 2018 (Adjusted, Note 5)
Cost
Accumulated amortization and impairment
Net book amount
Year ended December 31, 2019
Opening net book amount
27
Additions
Impairment charges
Amortization
Exchange differences
Closing net book amount
As at December 31, 2019
Cost
Accumulated amortization and impairment
Net book amount
150
56
94
94
12
2
(16)
—
1
93
158
65
93
93
8
—
(19)
(1)
81
165
84
81
208
92
116
116
—
7
(13)
—
3
113
218
105
113
113
—
—
(13)
(2)
98
216
118
98
32
30
2
2
—
—
(3)
3
—
2
34
32
2
2
2
—
(1)
—
3
36
33
3
390
178
212
212
12
9
(32)
3
4
208
410
202
208
208
10
—
(33)
(3)
182
417
235
182
523
2
521
521
—
7
—
—
20
548
551
3
548
548
—
(14)
—
(13)
521
538
17
521
7
—
7
7
—
1
—
(1)
—
7
7
—
7
7
—
(1)
—
—
6
7
1
6
530
2
528
528
—
8
—
(1)
20
555
558
3
555
555
—
(15)
—
(13)
527
545
18
527
84
95
Source of Possibilities
NOTE 11
OTHER ASSETS
(in millions of Canadian dollars)
Notes receivable from business disposals
Other investments
Other assets
Employee future benefits
Less: Current portion, included in accounts receivables
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
2019
2018
Adjusted, Note 5
18
NOTE
30
NOTE
5
1
4
23
29
57
(2)
55
2019
589
4
66
129
788
2019
50
120
1
(103)
(2)
66
3
4
21
16
44
(2)
42
2018
Adjusted, Note 5
565
4
50
162
781
2018
45
111
1
(104)
(3)
50
96
85
2019 Annual Report
NOTE 13
LONG-TERM DEBT
(in millions of Canadian dollars)
NOTE
MATURITY
2019
2018
Revolving credit facility, weighted average interest rate of 3.78% as at December 31, 2019,
consists of $108 million and US$11 million (December 31, 2018 - $4 million and
US$60 million)
13(b)
5.50% Unsecured senior notes of $250 million repurchased in 2019
5.50% Unsecured senior notes of US$400 million repurchased in 2019
5.75% Unsecured senior notes of US$200 million
5.125% Unsecured senior notes of $175 million
5.125% Unsecured senior notes of US$350 million
5.375% Unsecured senior notes of US$300 million
Term loan of US$175 million, interest rate of 3.90% as at December 31, 2019
Lease obligations of subsidiaries
Other debts of subsidiaries
Lease obligations without recourse to the Corporation
Other debts without recourse to the Corporation
13(a)
13(a)
13(a)
13(a)
13(a)
13(a)
13(d)
13(c) and 14
13(c) and 14
2023
2021
2022
2023
2025
2026
2028
2025
Less: Unamortized financing costs
Total long-term debt
Less:
Current portion of debts of subsidiaries (including lease obligations of $28 million as at
December 31, 2019)
Current portion of debts without recourse to the Corporation (including lease obligations
of $11 million as at December 31, 2019)
123
—
—
260
175
455
390
221
153
39
35
272
2,123
16
2,107
42
43
85
2,022
86
250
545
273
—
—
—
239
93
36
2
362
1,886
10
1,876
22
33
55
1,821
a. On November 26, 2019 the Corporation issued $175 million aggregate principal amount of 5.125% due in 2025, US$350 million aggregate
principal amount of 5.125% due in 2026 and US$300 million aggregate principal amount of 5.375% due in 2028, totaling $1,026 million, net
of transaction fees of $13 million. The Corporation used the proceeds from this offering to fund the redemption of its US$400 million of its
5.50% unsecured senior notes due in 2022 for an amount of US$405 million ($533 million) and its $250 million of its 5.50% unsecured senior
notes due in 2021 for an amount of $254 million, including premiums of US$5 million ($7 million) and $4 million. The Corporation also wrote
off $3 million of unamortized financing costs related to these notes.
Issuance proceeds were used as follows:
(in millions of Canadian dollars)
Debt issuance
Offering fees
Repurchase of 2021 and 2022 Notes
Premium paid on refinanced debt
Decrease of credit facility
2019
1,039
(13)
(776)
(11)
239
b. On May 31, 2019, the Corporation entered into an agreement with its lenders to extend and amend its existing $750 million revolving credit
facility. The amendment extends the term of the facility to July 2023. The financial conditions remain unchanged.
c. The Corporation adopted IFRS 16 Leases on January 1, 2019. See Note 3 for more details.
d. 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 reduces average 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.
86
97
Source of Possibilities
e. As at December 31, 2019, accounts receivable and inventories totaling approximately $785 million (December 31, 2018 - $752 million) as
well as property, plant and equipment totaling approximately $230 million (December 31, 2018 - $223 million) were pledged as collateral for
the Corporation's revolving credit facility.
f. The Corporation has leases for various items of property, plant and equipment. Lease obligations are secured, as the rights to the leased
asset revert to the lessor in the event of default. For more details on future payments, see Note 16.4 C.
NOTE 14
LEASES
a. The consolidated balance sheets include, in “Property, plant and equipment”, the amounts hereunder as right-of-use assets relating to
leases. 2018 amounts are IAS17 finance leases underlying assets which are now right-of-use assets under IFRS16 :
(in millions of Canadian dollars)
Buildings
Machinery and equipment
Automotive equipment
Net book amount
2019
109
10
52
171
2018 1
61
5
22
88
1 On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information. See Note 3 for more details.
Additions to the right-of-use assets during the 2019 financial year were $46 million.
b. The consolidated statements of earnings include the following amounts relating to leases:
(in millions of Canadian dollars)
Depreciation and amortization of right-of-use assets (included in “Cost of sales”)
2019
2018 1
Buildings
Machinery and equipment
Automotive equipment
Others
Financing expense (included in “Financing expense”)
1 On January 1, 2019, the Corporation applied IFRS 16 Leases retrospectively with no restatement of comparative information. See Note 3 for more details.
17
2
23
—
42
9
2
—
8
1
11
4
Expenses relating to short-term leases, low-value assets and variable lease payments not included in lease obligation amount to $3 million
in 2019.
c. The total cash outflow for leases in 2019 was $51 million.
d. In determining the lease term, the Corporation use critical judgments considering all facts and circumstances. For more details, see Note 4.
e. Refer to Note 16.4 C for future contractual payments of lease obligations.
98
87
2019 Annual Report
NOTE 15
PROVISIONS FOR CONTINGENCIES AND CHARGES
(in millions of Canadian dollars)
As at January 1, 2018
Additional provision
Payments
Revaluation
Business combinations and assets acquisition
5
As at December 31, 2018
Additional provision
Payments
Revaluation
Unwinding of discount
Other
Exchange differences
As at December 31, 2019
Analysis of total provisions:
(in millions of Canadian dollars)
Long-term
Current
ENVIRONMENTAL
RESTORATION
OBLIGATIONS
NOTE
ENVIRONMENTAL
COSTS
LEGAL CLAIMS
SEVERANCES
ONEROUS
CONTRACT
OTHERS
TOTAL
PROVISIONS
7
—
—
5
5
17
—
—
1
1
—
(1)
18
16
—
—
—
—
16
1
(1)
4
—
—
—
20
4
—
(1)
—
—
3
—
(1)
—
—
—
—
2
3
2
(3)
—
—
2
8
(5)
—
—
1
—
6
10
—
(2)
—
1
9
1
(2)
—
—
—
—
8
3
—
(2)
—
—
1
—
—
—
—
(1)
—
—
2019
49
5
54
43
2
(8)
5
6
48
10
(9)
5
1
—
(1)
54
2018
42
6
48
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, 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, 2019 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 has recorded an environmental reserve to address its estimated exposure for these matters.
88
99
Source of Possibilities
NOTE 16
FINANCIAL INSTRUMENTS
16.1 FAIR VALUE OF FINANCIAL INSTRUMENTS
The classification of financial instruments as at December 31, 2019 and 2018, 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
2019
2018
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
16.4
16.4
22
—
(3)
22
—
(3)
23
1
(12)
23
1
(12)
(2,107)
(2,159)
(1,876)
(1,871)
4
(10)
4
(10)
7
(24)
7
(24)
16.2 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.
16.3 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, 2019 and 2018 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
Derivative financial assets
Financial liabilities
Derivative financial liabilities
100
CARRYING AMOUNT
QUOTED PRICES IN ACTIVE
MARKETS FOR IDENTICAL
ASSETS (LEVEL1)
SIGNIFICANT
OBSERVABLE INPUTS
(LEVEL 2)
SIGNIFICANT
UNOBSERVABLE INPUTS
(LEVEL 3)
2019
—
—
—
—
26
26
(13)
(13)
—
—
—
—
26
26
(13)
(13)
89
2019 Annual Report
(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
30
31
(36)
(36)
1
—
1
—
—
—
30
30
(36)
(36)
—
—
—
—
—
16.4 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
2019
RISK
Currency risk
Price risk
Interest risk
Other risk
NOTE
SHORT-TERM
LONG-TERM
TOTAL
SHORT-TERM
LONG-TERM
TOTAL
16.4 A) (i)
16.4 A) (ii)
16.4 A) (iii)
16.4 iv)
5
4
1
—
10
—
16
—
—
16
5
20
1
—
26
(2)
(3)
(2)
(1)
(8)
(3)
(1)
(1)
—
(5)
(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
16.4 A) (i)
16.4 A) (ii)
16.4 A) (iii)
16.4 iv)
6
4
—
—
10
—
19
1
—
20
6
23
1
—
30
(18)
(2)
(1)
(1)
(22)
(12)
—
(2)
—
(14)
A. MARKET RISK
(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.
90
101
(5)
(4)
(3)
(1)
(13)
2018
TOTAL
(30)
(2)
(3)
(1)
(36)
Source of Possibilities
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 twelve months and to hedge 0% to 75% for the subsequent twenty-four
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 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 2019, approximately 20% of sales from Canadian operations were made to the United States and 14% 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, 2019 and 2018:
EXCHANGE RATE
MATURITY
NOTIONAL AMOUNT
(IN MILLIONS)
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
2019
1
—
(4)
(3)
3
—
—
—
—
—
—
Repayment of long-term debt and Net Investment Hedge
Derivatives at fair value through profit or loss and classified in
Foreign exchange loss (gain) on long-term debt:
Currency option to buy € for CAN$
Currency option instruments to sell US$ for CAN$
Cross-currency swap US$ for CAN$
1.4740
1.3290
1.3290
December 2020 € 4 to 49
July 2023 US$ 29 to 129
July 2023 US$
102
145
Net investment hedge
Cross-currency swap CAN$ for €
1.4740
December 2020 €
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 buy € for US$
Currency option instruments to sell US$ for CAN$
Currency option instruments to buy € for US$
Currency option instruments to sell US$ for CAN$
1.1215
1.3257
1.0985
1.3375
0 to 12 months €
—
0 to 12 months US$ 30 to 53
0 to 12 months € 2 to 3
13 to 36 months US$ 5 to 10
102
91
2019 Annual Report
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 sell 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$ 33 to 68
102
145
15
2
15
—
(6)
(2)
(8)
(11)
(1)
—
—
(1)
—
(3)
(5)
(24)
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 2019, 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 $2 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 2019, 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 $1 million lower following the translation of operating income of
the Corporation's European operations.
CURRENCY RISK ON TRANSLATION OF SELF-SUSTAINING FOREIGN SUBSIDIARIES
The Corporation has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk. The
Corporation may designate part of its long-term debt denominated in foreign currencies as a hedge of the net investment in self-sustaining
foreign subsidiaries. Gains or losses resulting from the translation to Canadian dollars of long-term debt denominated in foreign currencies
and designated as net investment hedges are recorded in “Accumulated other comprehensive income”, net of related income taxes.
The table below shows the effect on consolidated equity of a 10% change in the value of the Canadian dollar against the US dollar and the
euro as at December 31, 2019 and 2018. The calculation includes the effect of currency hedges of net investment in US foreign entities and
assumes that no changes occurred other than a single currency exchange rate movement.
The exposures used in the calculations are the foreign currency-denominated equity and the hedging level as at December 31, 2019 and 2018,
with the hedging instruments being the long-term debt denominated in US dollars.
92
103
Source of Possibilities
Consolidated Shareholders' equity: Currency effect before tax of a 10% change:
(in millions of Canadian dollars)
10% change in the CAN$/US$ rate
10% change in the CAN$/euro rate
BEFORE HEDGES
HEDGES
71
17
71
15
2019
NET IMPACT
—
2
BEFORE HEDGES
HEDGES
82
19
82
17
2018
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
2019
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
2020
Derivatives designated as cash flow hedges and reclassified in “Cost of sales” (effective portion)
Natural gas:
US portfolio
1 805 600 mmBtu
2020 to 2024
—
(2)
(2)
Forecasted purchases
Derivatives designated as held for trading and reclassified in “Cost of sales”
Electricity
Derivatives designated as cash flow hedges and reclassified in “Cost of sales” (effective portion)
Natural gas:
Canadian portfolio
US portfolio
QUANTITY
MATURITY
2018
FAIR VALUE (IN MILLIONS
OF CANADIAN DOLLARS)
39,420 MW
364,800 GJ
2019
2019
1,217,640 mmBtu
2019 to 2023
—
—
(1)
(1)
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, 2019 was an asset of $7 million (2018 - $8 million). Greenpac also has an agreement to purchase steam that includes
an embedded derivative with a positive fair value of $13 million as at December 31, 2019 (2018 - $15 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, 2019
and 2018. The calculation includes the effect of price hedges of these commodities and assumes that no changes occurred other than a single
change in price.
The exposures used in the calculations are the commodity consumption and the hedging level as at December 31, 2019 and 2018, with the
hedging instruments being derivative commodity contracts.
104
93
2019 Annual Report
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$1/MWh change in electricity price
50
9
12
2
—
—
2
—
50
9
10
2
49
10
12
2
—
—
2
—
49
10
10
2
1 Sensitivity calculated with an exchange rate of 1.30 CAN$/US$ for 2019 and 1.36 CAN$/US$ for 2018.
2019
2018
(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, 2019, approximately 15% (2018 - 28%) of the
Corporation's long-term debt was at variable rates.
Based on the outstanding long-term debt as at December 31, 2019, the impact on interest expense of a 1% change in rate would be
approximately $3 million (impact on net earnings is approximately $2 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 $3 million as at December 31, 2019 (December 31, 2018 - $2 million).
(iv) Loss (gain) on derivative financial instruments is as follows:
(in millions of Canadian dollars)
Unrealized loss (gain) on derivative financial instruments
Realized gain on derivative financial instruments
2019
(2)
—
(2)
2018
9
(1)
8
B. 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 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 represents the estimated credit loss. 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 collectible, it is written off against the loss allowance. 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, 2019.
94
105
Source of Possibilities
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, 2019 and 2018:
(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
Lease obligations of subsidiaries
Other debts of subsidiaries
Lease obligations without recourse to the Corporation
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
Term loan
Unsecured senior notes
Lease obligations of subsidiaries
Other debts of subsidiaries
Lease obligations without recourse to the Corporation
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
11
788
123
221
1,280
153
39
35
272
13
11
788
139
279
1,739
207
40
37
275
13
11
788
5
15
68
36
8
12
32
8
2,935
3,528
983
—
—
5
15
68
31
8
10
187
2
326
—
—
129
46
449
56
22
9
55
3
769
2019
MORE THAN
FIVE YEARS
—
—
—
203
1,154
84
2
6
1
—
1,450
2018
CARRYING
AMOUNT
CONTRACTUAL
CASH FLOWS
LESS THAN
ONE YEAR
BETWEEN
ONE AND
TWO YEARS
BETWEEN
TWO AND
FIVE YEARS
Adjusted, Note 5
MORE THAN
FIVE YEARS
16
781
86
239
1,068
93
36
2
362
36
16
781
100
305
1,244
143
43
2
363
36
16
781
4
18
59
15
6
1
37
22
—
—
4
18
60
12
8
1
34
4
—
—
92
55
1,125
27
22
—
273
10
—
—
—
214
—
89
7
—
19
—
2,719
3,033
959
141
1,604
329
As at December 31, 2019, the Corporation had unused credit facilities of $729 million (December 31, 2018 - $766 million), net of outstanding
letters of credit of $27 million (December 31, 2018 - $23 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, 2019, the off-balance sheet impact of
the factoring of accounts receivable amounted to $42 million (€29 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 2019, 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, 2019, the agreement's notional amount was 566,000 shares at a price of $12.44 (December 31, 2018
- notional amount : 566,000, shares price: $12.15). The fair value as at December 31, 2019 was a liability of $1 million (December 31, 2018
- liability: $1 million).
106
95
2019 Annual Report
NOTE 17
OTHER LIABILITIES
(in millions of Canadian dollars)
Employee future benefits
Greenpac equity holder put option
Consideration payable for the purchase of the CDPQ participation in Greenpac
Other
Less: Current portion
NOTE
18
8
2019
179
—
120
28
327
(129)
198
2018
170
76
—
35
281
(79)
202
In 2019, the balance on the line “other” includes an amount of $3 million pertaining to a call option granted by the Corporation to one of the
minority shareholder of Falcon Packaging LLC.
NOTE 18
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
Expenses recorded in consolidated statement of earnings for
Defined pension benefits
Defined contribution benefits
Post-employment benefits other than defined benefit pension plans
Consolidated other comprehensive income remeasurements for
Defined pension benefits
Post-employment benefits other than defined benefit pension plans
NOTE
18(a)
18(b)
18(a)
18(b)
2019
47
103
150
7
24
6
37
(5)
8
3
2018
55
99
154
8
22
6
36
19
(3)
16
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.
96
107
Source of Possibilities
The movement in the net defined benefit obligation and fair value of plan assets of defined benefit pension plans over the year is as follows:
(in millions of Canadian dollars)
As at January 1, 2018
Current service cost
Interest expense (income)
Impact on consolidated profit or loss
Remeasurements
Return on plan assets, excluding amounts included in interest expense
Gain from change in financial assumptions
Experience loss
Change in asset ceiling, excluding amounts included in interest expense
Impact of remeasurements on consolidated other comprehensive income (loss)
Exchange differences
Contributions
Employers
Plan participants
Benefit payments
As at December 31, 2018
Current service cost
Interest expense (income)
Impact on consolidated profit or loss
Remeasurements
Return on plan assets, excluding amounts included in interest income
Loss from change in financial assumptions
Experience loss
Change in asset ceiling, excluding amounts included in interest expense
Impact of remeasurements on consolidated other comprehensive income (loss)
Exchange differences
Contributions
Employers
Plan participants
Benefit payments
As at December 31, 2019
PRESENT VALUE
OF OBLIGATION
FAIR VALUE OF
PLAN ASSETS
508
6
16
22
—
(22)
1
—
(21)
1
—
1
(31)
480
5
17
22
—
42
1
—
43
(2)
—
1
(31)
513
(472)
—
(14)
(14)
20
—
—
—
20
(1)
(8)
(1)
31
(445)
—
(16)
(16)
(35)
—
—
—
(35)
—
(8)
(1)
31
(474)
IMPACT OF
MINIMUM
FUNDING
REQUIREMENT
(ASSET CEILING)
—
TOTAL
36
TOTAL
36
6
2
8
20
(22)
1
—
(1)
—
(8)
—
—
35
5
1
6
(35)
42
1
—
8
(2)
(8)
—
—
39
—
—
—
—
—
—
20
20
—
—
—
—
20
—
1
1
—
—
—
(13)
(13)
—
—
—
—
8
6
2
8
20
(22)
1
20
19
—
(8)
—
—
55
5
2
7
(35)
42
1
(13)
(5)
(2)
(8)
—
—
47
108
97
2019 Annual Report
The defined benefit obligation and plan assets are composed by country 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
(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
The significant actuarial assumptions are as follows:
CANADA
UNITED STATES
EUROPE
435
466
(31)
8
36
13
10
7
3
—
—
3
—
—
—
—
31
31
CANADA
UNITED STATES
EUROPE
408
438
(30)
20
35
25
9
7
2
—
—
2
2019
—
—
—
—
28
28
2019
TOTAL
445
473
(28)
8
67
47
2018
TOTAL
417
445
(28)
20
63
55
2018
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
3.10%
3.80%
3.20%
Between
2.25% and
2.75%
2.25%
2.90%
3.90%
2.90%
N/A
0.90%
1.90%
0.90%
N/A
N/A
1.75%
3.80%
3.40%
3.90%
Between
2.00% and
2.75%
2.25%
3.90%
3.30%
3.90%
N/A
1.90%
1.60%
1.90%
N/A
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 92% 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 reporting period
Male
Female
Retiring 20 years after the end of the reporting period
Male
Female
2019
21.8
24.2
22.9
25.2
2018
21.8
24.2
22.8
25.1
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.
Discount rate
Salary growth rate
Life expectancy
IMPACT ON DEFINED BENEFIT OBLIGATION
CHANGE IN ASSUMPTION
INCREASE IN ASSUMPTION
DECREASE IN ASSUMPTION
0.25%
0.25%
(3.00)%
0.40 %
3.10 %
(0.30)%
INCREASE / DECREASE BY ONE YEAR IN ASSUMPTION
3.00%
109
98
Source of Possibilities
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
Money market funds
Foreign bond mutual funds
Canadian equity mutual funds
Foreign equity mutual funds
Alternative investments funds
Other
Insured annuities
(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
4
84
28
5
33
—
—
7
—
—
7
—
—
128
—
51
—
—
—
1
7
1
42
25
76
219
219
346
—
—
—
—
—
—
—
—
—
—
—
—
—
—
LEVEL 1
LEVEL 2
LEVEL 3
5
70
24
4
28
—
5
—
—
5
—
—
108
—
52
—
—
—
6
1
35
24
66
219
219
337
—
—
—
—
—
—
—
—
—
—
—
—
—
TOTAL
4
2019
%
0.8%
135
28.5%
28
5
33
1
7
8
42
25
83
219
219
474
TOTAL
5
7.0%
17.5%
46.2%
2018
%
1.1%
122
27.4%
24
4
28
6
6
35
24
71
219
219
445
6.3%
16.0%
49.2%
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.
110
99
2019 Annual Report
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 are determined as follows:
(in millions of Canadian dollars)
Present value of unfunded obligations
Liabilities on consolidated balance sheet
CANADA
UNITED STATES
EUROPE
77
77
4
4
22
22
(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
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, 2018
Current service cost
Interest expense
Business acquisitions, disposals and closures
Impact on consolidated profit or loss
Remeasurements
Gain from change in financial assumptions
Experience loss
Impact of remeasurements on consolidated other comprehensive income (loss)
Exchange differences
Benefit payments
As at December 31, 2018
Current service cost
Interest expense
Plan changes
Impact on consolidated profit or loss
Remeasurements
Loss from change in financial assumptions
Experience loss
Impact of remeasurements on consolidated other comprehensive income (loss)
Exchange differences
Benefit payments
As at December 31, 2019
PRESENT VALUE OF
OBLIGATION
101
2
3
1
6
(4)
1
(3)
1
(6)
99
2
3
1
6
6
2
8
(2)
(8)
103
FAIR VALUE OF PLAN ASSET
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2019
TOTAL
103
103
2018
TOTAL
99
99
TOTAL
101
2
3
1
6
(4)
1
(3)
1
(6)
99
2
3
1
6
6
2
8
(2)
(8)
103
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 4.89% a year on average (2018 - 4.50%).
100
111
Source of Possibilities
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%
(2.20)%
0.60 %
2.00 %
2.50 %
0.60 %
(1.70)%
INCREASE / DECREASE BY ONE 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. Most of pension 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.
As at December 31, 2019, 66% of the plan's invested assets are in bonds. As at December 31, 2019, 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, 2019, the aggregate net surplus of the Corporation’s funded pension plans (mostly in Canada) amounted to $28 million
(a surplus of $28 million as at December 31, 2018). Current agreed expected service contributions amount to $4 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
$4 million in 2020.
The weighted average duration of the defined benefit obligation is 11 years (2018 - 12 years).
112
101
2019 Annual Report
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, 2019
ONE YEAR
TWO YEARS
32
6
38
33
6
39
BETWEEN THREE
AND FIVE YEARS
97
BETWEEN SIX
AND TEN YEARS
675
21
118
84
759
TOTAL
837
117
954
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, 2019.
NOTE 19
INCOME TAXES
a. The provision for income taxes is as follows:
(in millions of Canadian dollars)
Current taxes
Deferred taxes
2019
21
(2)
19
2018
Adjusted, Note 5
22
26
48
b. The provision for 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 tax assets on tax losses
Permanent differences
Change in deferred income tax assets relating to capital tax losses
Change in temporary differences
Other
Provision for income taxes
2019
2018
Adjusted, Note 5
31
(2)
3
—
(3)
(11)
3
(2)
(12)
19
37
(1)
2
3
(1)
8
—
—
11
48
Weighted average income tax rate for the year ended December 31, 2019 was 25.5% (2018 - 25.8%).
c. The provision for (recovery of) income taxes relating to components of consolidated other comprehensive income is as follows:
(in millions of Canadian dollars)
Foreign currency translation related to hedging activities
Cash flow hedge
Actuarial loss on post-employment benefit obligations
Recovery of income taxes
2019
2018
(1)
—
(1)
(2)
(4)
2
(4)
(6)
102
113
Source of Possibilities
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
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax on consolidated balance sheet
The movement of the deferred income tax account is as follows:
(in millions of Canadian dollars)
Balance at beginning of year
Through consolidated statement of earnings
Variance of income tax credit, net of related income tax
Through consolidated statement of comprehensive income
Through business combinations
Acquisition of non controlling interest
IFRS 16 adjustment
Others
Exchange differences
Balance at end of year
2019
2018
312
356
(44)
153
197
(44)
228
295
(67)
134
201
(67)
NOTE
2019
2018
Adjusted, Note 5
5
3
(67)
2
11
2
(7)
8
3
(2)
6
(44)
(37)
(27)
5
6
(5)
—
—
—
(9)
(67)
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
(in millions of Canadian dollars)
NOTE
RECOGNIZED
TAX BENEFIT
ARISING
FROM INCOME
TAX LOSSES
EMPLOYEE
FUTURE
BENEFITS
EXPENSE ON
RESEARCH
UNUSED TAX
CREDITS
FINANCIAL
INSTRUMENTS
AND OTHER
LIABILITIES
FOREIGN
EXCHANGE
LOSS ON
LONG-TERM
DEBT
LONG TERM
DEBT FINANCE
LEASES
OTHERS
As at January 1, 2018
Through consolidated statement
of earnings
Variance of income tax credit
Through consolidated statement
of comprehensive income
As at December 31, 2018
Through consolidated statement
of earnings
Variance of income tax credit
Through consolidated statement
of comprehensive income
Through business combinations
Acquisition of non-controlling
interest
IFRS 16 adjustment
Others
As at December 31, 2019
5
3
134
(29)
—
—
105
27
—
—
—
—
—
—
132
21
2
—
4
27
1
—
(1)
—
—
—
—
27
114
39
(2)
5
—
42
(1)
11
—
—
—
—
—
52
5
—
—
—
5
5
—
—
—
—
—
—
10
103
1
3
—
(2)
2
7
—
—
—
(1)
—
—
8
2
(6)
—
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
—
5
(6)
9
3
(1)
38
21
26
—
—
47
(2)
—
—
—
—
—
45
TOTAL
223
(6)
5
6
228
65
11
4
(6)
8
3
(1)
312
2019 Annual Report
DEFERRED INCOME TAX LIABILITIES
(in millions of Canadian dollars)
As at January 1, 2018
Through consolidated statement of earnings
Through business combinations
Exchange differences
As at December 31, 2018
Through consolidated statement of earnings
Through consolidated statement of comprehensive income
Through business combinations
Others
Exchange differences
As at December 31, 2019
PROPERTY,
PLANT AND
EQUIPMENT
FOREIGN
EXCHANGE
LOSS ON LONG-
TERM DEBT
NOTE
INTANGIBLE
ASSETS
INVESTMENTS
OTHERS
TOTAL
5
5
205
1
5
9
220
71
—
1
—
(6)
286
—
2
—
—
2
(2)
2
—
—
2
51
5
—
—
56
(7)
—
—
—
—
49
3
13
—
—
16
1
—
—
—
—
17
1
—
—
—
1
—
—
—
1
—
2
260
21
5
9
295
63
2
1
1
(6)
356
When taking into consideration the offsetting of balances within the same tax jurisdiction, the net deferred tax liability of $44 million is presented
on the consolidated balance sheet as $153 million of “Deferred income tax asset” amounts and $197 million of “Deferred income tax liabilities”.
e. The Corporation has recognized accumulated losses for income tax purposes amounting to approximately $477 million, which may be
carried forward to reduce taxable income in future years. The future tax benefit of $132 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.
NOTE 20
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
2019
(155)
11
2,107
1,963
1,666
3,629
2018
Adjusted, Note 5
(123)
16
1,876
1,769
1,686
3,455
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.
104
115
Source of Possibilities
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
(2019 - $1,782 million; 2018 - $1,549 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 (2019 - $398 million; 2018 - $321 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 May 19, 2015 and November 26, 2019.
As at December 31, 2019, the funded debt-to-capitalization ratio stood at 51.21% and the interest coverage ratio was 4.45x. 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 May 19, 2015 and November 26, 2019.
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.
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 at beginning of year
Common shares issued on exercise of stock options
Redemption of common shares
Balance at end of year
NOTE
20(d)
20(c)
NUMBER OF
COMMON SHARES
IN MILLIONS OF
CANADIAN DOLLARS
NUMBER OF
COMMON SHARES
IN MILLIONS OF
CANADIAN DOLLARS
2019
2018
94,163,515
1,048,434
(966,654)
94,245,295
490
6
(5)
491
94,987,958
714,937
(1,539,380)
94,163,515
492
6
(8)
490
C. REDEMPTION OF COMMON SHARES
In 2019, in the normal course of business, the Corporation renewed its redemption program of a maximum of 1,878,456 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, 2019 to March 18, 2020. In 2019, the Corporation redeemed 966,654 common shares under this program
for an amount of $9 million (2018 - $20 million for 1,539,380 common shares).
D. COMMON SHARE ISSUANCE
The Corporation issued 1,048,434 common shares upon the exercise of options for an amount of $5 million (2018 - $5 million for
714,937 common shares issued).
116
105
2019 Annual Report
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)
2019
69
94
96
0.74 $
0.73 $
2018
Adjusted, Note 5
57
95
97
0.60
0.56
$
$
As at December 31, 2019, 543,676 stock options have an antidilutive effect (2018 - 400,691). As of February 26, 2020, no common share
had been redeemed by the Corporation since the beginning of the 2020 financial year.
F. DETAILS OF DIVIDENDS DECLARED PER COMMON SHARE ARE AS FOLLOWS:
Dividends declared per common share (in Canadian dollars)
$
2019
0.24 $
2018
0.16
NOTE 21
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 1,741,007 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 twelve months after the first anniversary date of grant, and up to an additional 25% every twelve 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 2019 (2018 - $1 million).
Changes in the number of options outstanding as at December 31, 2019 and 2018 are as follows:
Balance at beginning of year
Granted
Exercised
Forfeited
Balance at end of year
Options vested - at end of year
NUMBER OF OPTIONS
2019
WEIGHTED AVERAGE
EXERCISE PRICE ($)
NUMBER OF OPTIONS
2018
WEIGHTED AVERAGE
EXERCISE PRICE ($)
4,409,358
200,354
(1,048,434)
(84,982)
3,476,296
3,005,435
6.45
11.97
4.43
11.96
7.24
6.46
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
The weighted average share price at the time of exercise of the options was $11.25 (2018 - $12.89).
106
117
Source of Possibilities
The following options were outstanding as at December 31, 2019:
YEAR GRANTED
NUMBER OF OPTIONS
OPTIONS OUTSTANDING
WEIGHTED AVERAGE
EXERCISE PRICE ($)
NUMBER OF OPTIONS
OPTIONS EXERCISABLE
WEIGHTED AVERAGE
EXERCISE PRICE ($)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
346,795
415,563
715,098
407,818
401,835
356,091
289,420
199,652
150,459
193,565
3,476,296
6.43
6.26
4.46
5.18
6.10
7.66
9.75
14.28
12.39
11.97
346,795
415,563
715,098
407,818
401,835
356,091
222,387
102,245
37,603
—
3,005,435
6.43
6.26
4.46
5.18
6.10
7.66
9.75
14.28
12.39
—
EXPIRATION DATE
2020
2020 - 2021
2020 - 2022
2020 - 2023
2020 - 2024
2020 - 2025
2020 - 2026
2021 - 2027
2028
2029
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 $3.17 (2018 - $3.91) 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
$
$
2019
12.03
11.97
$
$
1.5%
2.66%
6 years
35%
2018
12.57
12.39
2.3%
1.27%
6 years
32%
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, 2019, the Corporation's
contribution to the plan amounted to $1 million (2018 - $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, 2019, the Corporation had a total of 573,372 PSUs outstanding (2018 - 520,070 PSUs), for
a fair value of less than $1 million (2018 - less than $1 million). In 2019, the Corporation made no payments in relation to PSUs (2018 -
$2 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, 2019, the Corporation had a total of 607,193 DSUs outstanding (2018 -
409,757 DSUs), representing a liability of $9 million (2018 - $6 million). On January 15, 2020, the Corporation issued 78,777 DSUs.
118
107
2019 Annual Report
NOTE 22
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(in millions of Canadian dollars)
Year ended December 31, 2018
Opening net book amount
Other comprehensive income
Closing net book amount
Year ended December 31, 2019
Other comprehensive loss
Closing net book amount
NOTE 23
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
2018
2019
United States
2019
2018
2019
1,079
1,118
—
136
(13)
—
125
(12)
1,202
1,231
257
129
372
163
1,588
1,766
746
—
304
(1)
1,049
1,242
5
2,296
720
—
164
(2)
882
980
17
1,879
—
309
2
—
311
—
—
311
Italy
2018
—
313
2
—
315
—
—
315
NOTE 24
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
TRANSLATION
ADJUSTMENTS
NET CHANGES IN CASH
FLOW HEDGES
TOTAL
(30)
32
2
(17)
(15)
(3)
3
—
(2)
(2)
Other countries
2019
2018
2019
2
739
50
—
791
10
—
801
1,827
1,048
492
(14)
3,353
1,509
134
4,996
2
620
67
—
689
—
—
689
2019
1,682
812
327
525
289
597
4,232
2019
332
34
15
72
453
(33)
35
2
(19)
(17)
SALES
Total
2018
1,840
933
358
(14)
3,117
1,352
180
4,649
2018
1,713
754
302
487
244
497
3,997
2018
314
29
17
50
410
108
119
Source of Possibilities
NOTE 25
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
24
21(a)
18
18
18
2019
1,144
1
7
24
6
2018
1,068
1
8
22
6
1,182
1,105
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 26
GAIN ON ACQUISITIONS, DISPOSALS AND OTHERS
2019
11
1
5
17
(in millions of Canadian dollars)
Loss (gain) on business acquisition
and disposal
Additional liabilities and (gain) on
liabilities settlement
Loss on disposal of assets
NOTE
5
PACKAGING PRODUCTS
CONTAINER-
BOARD
BOXBOARD
EUROPE
SPECIALTY
PRODUCTS
SUB-TOTAL
TISSUE PAPERS
CORPORATE
ACTIVITIES
—
(10)
2
(8)
—
—
—
—
1
—
—
1
1
(10)
2
(7)
(22)
—
—
(22)
9
(1)
—
8
PACKAGING PRODUCTS
(in millions of Canadian dollars)
Gain on business acquisition
Gain on disposal of assets
NOTE
5
CONTAINER-
BOARD
BOXBOARD
EUROPE
SPECIALTY
PRODUCTS
SUB-TOTAL
TISSUE PAPERS
CORPORATE
ACTIVITIES
—
(67)
(67)
(2)
—
(2)
—
—
—
(2)
(67)
(69)
—
—
—
—
—
—
2018
9
1
4
14
2019
TOTAL
(12)
(11)
2
(21)
2018
Adjusted, Note 5
TOTAL
(2)
(67)
(69)
2019
The lease on our Bear Island facility in Virginia was terminated by the lessee. As such, the Containerboard segment recorded a gain of
$10 million following the reversal of liabilities related to lease incentives to the lessee and to accrued carrying costs. In the wake of the lease
termination, the Containerboard segment recorded a loss of $4 million following the sale of newsprint equipments no longer needed.
The Containerboard packaging segment recorded a gain of $2 million from the sale of a building and piece of land of a closed plant.
The Specialty Products segment concluded the sale of its France plant, which converts cardboard into packaging for the paper industry, and
recorded a loss of $1 million. See Note 5 for more details.
The Tissue Papers segment recorded a gain of $22 million following the acquisition Orchids Paper Products Company activities. The Corporate
Activities incurred $9 million in fees as part of the Orchids acquisition. See Note 5 for more details.
120
109
2019 Annual Report
An environmental provision of $4 million related to a plant sold and for which the Corporation retained environmental responsibility was
recorded by the Corporate Activities.
The Corporate Activities recorded a gain of $5 million on the settlement of litigation in compensation for a flooding that occurred years ago at
our fine paper mill in St-Jérôme, Québec, which has since been sold.
2018
The Boxboard Europe segment generated a gain of $2 million on the business combination of Barcelona Cartonboard S.A.U.. See Note 5 for
more 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.
NOTE 27
IMPAIRMENT CHARGES AND RESTRUCTURING COSTS (GAINS)
IMPAIRMENT CHARGES ON PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS WITH FINITE USEFUL LIFE AND
OTHER ASSETS
The Corporation recorded impairment charges totaling $69 million in 2019 and $75 million in 2018. 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
Spare parts
Goodwill and other intangible assets with
indefinite useful life
PACKAGING PRODUCTS
CONTAINER-
BOARD
BOXBOARD
EUROPE
SPECIALTY
PRODUCTS
SUB-TOTAL
TISSUE PAPERS
CORPORATE
ACTIVITIES
5
—
—
5
13
—
1
14
—
1
—
1
18
1
1
20
33
2
—
35
—
—
14
14
(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
—
—
—
2019
TOTAL
51
3
15
69
2018
TOTAL
74
1
75
2019
As a result of the lease termination on our Bear Island facility, described in Note 26, the Containerboard segment recorded an impairment
charge of $5 million on some assets that will not be used in the future.
The Boxboard Europe segment recorded an impairment charge of $13 million on the assets of its La Rochette mill, 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. The segment also recorded an impairment charge
of $1 million on intangible assets.
110
121
Source of Possibilities
The Specialty Products segment incurred an impairment charge of $1 million on spare parts stemming from the closure of its Trois-Rivières,
Québec, plant manufacturing felt backing for flooring.
The Tissue Papers segment recorded an impairment charge of $5 million on unused assets following the reassessment of its recoverable
amount based on estimated selling price.
The recoverable value of some equipment and spare parts of the Arizona and Waterford converting facilities, schedule to close in the first
quarter of 2020, has been reviewed by the Tissue Papers segment triggering an impairment charge of $7 million.
The Tissue Papers segment recorded impairment charges totaling $23 million on the assets of two 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.
2018
The Tissue Papers segment recorded an 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.
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 $477 million is allocated to the Containerboard segment;
• Specialty Products segment goodwill is allocated to 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 $6 million is allocated to the segment;
• Boxboard Europe segment water rights of $5 million are allocated to the segment.
Annually, the Corporation must test all of its goodwill for impairment, except if the following three conditions are met:
•
•
the assets and liabilities making up the unit have not changed significantly since the most recent recoverable amount calculation;
the most recent recoverable amount calculation resulted in an amount that exceeded the carrying amount of the unit by a substantial margin;
and
• based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount
calculation, the likelihood that a current recoverable amount determination would be less than the current carrying amount of the unit
is remote.
All three conditions were met for the Containerboard Packaging segment.
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 $192 million over its carrying amount, thus no impairment charge was necessary.
With all other variables held constant, a decrease in terminal OIBD margin of 2% would reduce the excess of $192 million to nil.
The Corporation applied the income approach in determining fair value less cost of disposal and used the following key assumptions
(level 2 inputs):
Discounting rate
Terminal exchange rate (CA$/US$)
Terminal OIBD margin
TISSUE PAPERS
10.5%
1.23
9.8%
$
The Corporate Activities recorded an impairment charge of $14 million on the goodwill and intangible assets of its recovery and recycling
activities. The recoverable amount was established based on the fair market value of the property, plant and equipment.
122
111
2019 Annual Report
RESTRUCTURING COSTS (GAINS)
Restructuring costs (gains) are detailed as follows:
(in millions of Canadian dollars)
Containerboard
Specialty Products
Tissue Papers
2019
2018
1
1
7
9
4
(2)
—
2
2019
The Containerboard segment recorded $1 million of severances costs relating to changes in some plants management team.
The Specialty Products segment recorded $1 million of restructuring costs stemming from the closure of its Trois-Rivières, Québec, plant
manufacturing felt backing for flooring.
The Tissue Papers segment recorded a $5 million of restructuring costs related to the closure of two tissue paper machines in Ontario and
changes in the segment's senior management. As well, restructuring costs of $2 million related to the forthcoming closure of the Arizona and
Waterford converting facilities were recorded.
2018
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.
112
123
Source of Possibilities
NOTE 28
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
(in millions of Canadian dollars)
Interest on long-term debt (including lease obligations interests)
Interest income
Amortization of financing costs
Other interest and banking fees
Interest expense on employee future benefits and other liabilities
NOTE
14(b)
2019
81
(3)
3
(24)
2
59
2019
91
(1)
4
7
42
143
2018
46
(9)
(26)
(5)
6
12
2018
77
—
3
4
15
99
124
113
2019 Annual Report
C. TOTAL NET DEBT FROM FINANCING ACTIVITIES
(in millions of Canadian dollars)
As at January 1, 2018
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
Cash flow
Change in cash and cash equivalents
Bank loans and advances
Change in credit facilities
Issuance of unsecured senior notes, net of
related expenses
Repurchase of unsecured senior notes
Increase in other long-term debt
Payments of other long-term debt
Non-cash changes
IFRS 16 adjustment
Business disposal
Foreign exchange loss on long-term debt and
financial instruments
Right-of-use assets 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, 2019
NOTE 29
COMMITMENTS
NOTE
CASH AND
CASH EQUIVALENT
(89)
BANK LOANS
AND ADVANCES
35
LONG-TERM DEBT
1,576
NET DEBT
1,522
5
13
13
3
5
(28)
—
—
—
—
—
—
—
—
—
(6)
(123)
(41)
—
—
—
—
—
—
—
—
—
—
—
—
—
9
(155)
—
(22)
—
—
—
—
2
—
—
—
1
16
—
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
11
—
—
(126)
235
66
(81)
25
65
70
2
44
1,876
—
—
39
1,026
(776)
6
(125)
99
(6)
(43)
50
4
3
2
(48)
2,107
(28)
(22)
(126)
235
66
(81)
27
65
70
2
39
1,769
(41)
(5)
39
1,026
(776)
6
(125)
99
(6)
(43)
50
4
3
2
(39)
1,963
Capital expenditures, intangible assets and service agreements contracted at the end of the reporting period but not yet incurred are presented
in the following table. Year ended December 31, 2018 includes operating lease agreements for various properties, vehicles, equipment and
others that are capitalized under IFRS 16 for year ended December 31, 2019.
(in millions of Canadian dollars)
No later than one year
Later than one year but no later than five years
More than five years
PROPERTY,
PLANT AND
EQUIPMENT
INTANGIBLE
ASSETS
9
3
—
12
48
—
—
48
114
2019
SERVICE
AGREEMENTS
AND
EXEMPTED
LEASES
4
6
2
12
2018
PROPERTY,
PLANT AND
EQUIPMENT
INTANGIBLE
ASSETS
OPERATING
LEASE
84
8
—
92
8
6
—
14
35
74
12
121
125
Source of Possibilities
NOTE 30
RELATED PARTY TRANSACTIONS
The Corporation entered into the following transactions with related parties:
(in millions of Canadian dollars)
For the year ended December 31, 2019
Sales to related parties
Purchases from related parties
For the year ended December 31, 2018
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
176
32
245
32
72
55
77
50
December 31,
2019
December 31,
2018
8
19
3
1
12
22
2
2
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.
126
115
2019 Annual Report
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
and recognizes the importance of independent directors. As of December 31, 2019, eleven of the fifteen Board members
were independent. They meet at least once yearly without the presence of non-independent directors or senior managers.
New Board 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
6
11
2
7
3
8
4
9
5
10
12
13
14
15
1 Alain Lemaire
Executive Chairman
of the Board
Kingsey Falls, Québec Canada
Director since 1967
Non-independent
5 Élise Pelletier
Director
Sutton, Québec Canada
Director since 2011
Independent
2 Louis Garneau
President
Louis Garneau Sports Inc.,
Saint-Augustin-de-Desmaures,
Québec Canada
Director since 1996
Independent
6 Sylvie Vachon
President and Chief
Executive Officer,
Montréal Port Authority
Longueuil, Québec Canada
Director since 2013
Independent
3 Sylvie Lemaire
Director of companies
Otterburn Park, Québec Canada
Director since 1999
Non-independent
4 Georges Kobrynsky
Director of companies
Outremont, Québec Canada
Director since 2010
Independent
7 Laurence Sellyn
Business Advisor and Consultant,
Corporate Director
Pointe-Claire, Québec Canada
Director since 2013
Independent
8 Mario Plourde
President and Chief Executive
Officer, Cascades Inc.
Kingsey Falls, Québec Canada
Director since 2014
Non-independent
9 Michelle Cormier
Operating Partner, Wynnchurch
Capital Canada
Montréal, Québec Canada
Director since 2016
Independent
10 Martin Couture
President and Chief Executive
Officer, Sanimax Inc. (Canada)
Montréal, Québec Canada
Director since 2016
Independent
11 Patrick Lemaire
President and Chief Executive
Officer, Boralex Inc.
Kingsey Falls, Québec Canada
Director since 2016
Non-independent
12 Hubert T. Lacroix
Strategic Counsel, Blake,
Cassels & Graydon LLP
Westmount, Québec Canada
Director since 2019
Independent
13 Mélanie Dunn
President and CEO, Cossette
Montréal, Québec Canada
Director since 2019
Independent
14 Nelson Gentiletti
Chief Operating and Chief Financial
Officer, Loop Industries Inc.
Kirkland, Québec Canada
Director since 2019
Independent
15 Elif Lévesque
Business Consultant
Montréal, Québec Canada
Director since 2019
Independent
127
Source of Possibilities 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 year ended 2010.
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
128
116
IFRS
2019
4,996
4,392
604
289
315
143
(6)
71
107
19
(9)
28
69
0.74
$
$
460
401
4.27
231
(311)
9
170
23
IFRS
2018
4,649
4,160
489
244
245
99
4
12
130
48
(11)
36
57
0.60
373
361
3.82
253
(100)
—
94
15
0.24
$
2.1%
0.16
1.6%
357
2,767
5,180
2,107
177
1,489
15.81
$
94.2
47.1
1,056
11.21
13.33
7.84
$
$
$
1.4%
1.0x
3.5x
4.6%
11.9%
12.1%
4.2x
7.1%
3.3x
58.7%
15.1x
0.7x
421
2,505
4,948
1,876
180
1,506
15.99
94.2
54.9
963
10.23
16.55
9.54
1.2%
0.9x
3.3x
3.9%
10.4%
10.5%
4.9x
9.1%
3.6x
55.7%
17.1x
0.6x
$
$
$
$
$
$
$
2019 Annual Report
$
$
$
$
$
$
$
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
$
$
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
(0.69)
$
(1.57)
$
0.11
$
(0.23)
$
1.03
$
$
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
2010
3,959
3,561
398
212
186
112
4
65
5
—
(15)
3
17
0.18
228
246
2.54
131
3
—
30
16
0.16
$
1.2%
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%
356
2,117
4,427
1,576
146
1,455
299
1,635
3,813
1,566
90
984
15.32
$
10.41
$
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
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
9.48
$
11.52
$
10.42
$
10.87
$
$
$
$
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
$
$
$
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
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
117
479
1,777
3,724
1,395
24
1,257
13.01
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
129
Source of Possibilities
Raw
Materials
%
1 9
~3.1 million s.t.
%
6
Fibre Consumed, Purchased
or Brokered by Cascades
in North America1
75%
Recycled fibre used
by Cascades — 75%
Pulp used by Cascades — 6%
Fibre sold externally — 19%
6 %
6 %
8 %
8 %
%
7
1
Fibre Consumed by Cascades
in North America
~2.3 million s.t.
%
9
6
Brown recycled fibre — 69%
White recycled fibre — 17%
Pulp — 8%
Groundwood recycled fibre — 6%
In Europe, Reno de Medici uses
approximately 1.3 M s.t. of additional
recycled and virgin fibres in its annual
production of boxboard2.
1 Including associates and joint ventures.
2 Via our 57.95 % equity position in Reno de Medici S.p.A.
130130
2019 Annual Report
2019 Annual Report Overview of
our Results
%
2
3 - 2
E
P
O
R
U
E
B Y SEGMENT1
E C I A L T Y
-
D U C T S
1 0 %
P
O
S
R
P
TO
EURO P E
3 - 2
2 %
F ROM
UROPE3 - 2 2 %
E
$4,996 M
U
N
I
T
E
D STATES - 4 1 %
U
N
IT
E
D STATES - 46 %
C
A
N
A
D
A
-
3
7
%
C
O
N
T
A
I
N
E
R
B
O
C
A
N
A
D
A
-
3
2
%
A
R
D
P
A
C
K
A
G
N
G
I
-
3
7
%
SALES2
TISSUE - 3 1 %
B Y SEGMENT2, 4
S P E C I A L T Y
P R O D U C T S
8 %
-
B Y MARKET4, 5
3 - 1 8 %
E
P
EU R O
$604 M
U
N
I
T
E
D S
T
ATES - 50%
3 - 16 %
PE
O
R
U
E
%
2
1
-
E
U
S
S
I
T
T
N
O
C
B Y S EGMENT2, 4
S P E C I A L T Y
P R O D U C T S - 8 %
ADJUSTED
OIBD2, 4
C
A
N
A
D
A
-
3
2
%
%
4
6
-
I
G
N
G
A
K
C
A
D P
R
A
AIN ERBO
3 - 14 %
PE
O
R
U
E
EUR O P
%
0
1
-
E
U
S
S
I
T
U
N
I
T
E
B Y M ARKET4, 5
3 - 1 6 %
E
C
A
N
A
D
A
-
3
3
%
$547 M
D
S
TATES - 51 %
B
R
E
C O N T A I N
OIBD2, 4
%
8
6
-
G
N
I
G
A
K
C
A
O A RD P
1 Before inter-segment sales and corporate activities.
2 Percentage excluding corporate activities.
3 Via our 57.95% equity ownership in Reno de Medici S.p.A.
(at December 31, 2019), a public Italian company.
4 Please refer to the “Forward-looking Statements”
and “Supplemental Information on Non-IFRS
Measures’’ sections for more details.
5 Including corporate activities.
R Edmonton, AB
C
R Calgary, AB
R Kelowna, BC
Prince George, BC R
Nanaimo, BC R
Victoria, BC R
R
Vancouver, BC
R Surrey, BC
C
Richmond, BC
Tacoma, WA C
St. Helens, OR M
Scappoose, OR C
C R Winnipeg, MB
Kingsey Falls, QC
Eau Claire, WI CM
Grand Rapids, MI C
Clarion, IA C
Aurora, IL C
C Brook, IN
Warrenton, MO C
C Kingman, AZ
Brownsville, TN C
Memphis, TN M
Rockingham, NC C M
C Kinston, NC
C Wagram, NC
CM Pryor, OK
CM Barnwell, SC
C Birmingham, AL
Grand Prairie, TX C
North America
Cascades
Worldwide1
Legend
Head Office
Containerboard
Packaging
Boxboard
Europe2
Specialty
Products
M Manufacturing facility
C
Converting facility
CM Converting and
manufacturing facility
C
Barrie
Vaughan
C
CC
R
RC
C
Etobicoke
Burlington
Mississauga
C
Guelph
R
M C
F
C
Brantford
C
St. Marys
R
Putnam
Ottawa R R
Belleville
C
Trenton
M
Scarborough
Ontario
Tissue Papers
R Recovery facility
1 Including main associates and joint ventures.
2 Via our 57.95% equity ownership in Reno de Medici S.p.A., a public Italian company.
Prince George, BC R
R Edmonton, AB
C
R Calgary, AB
Nanaimo, BC R
R
C
Vancouver, BC
R Surrey, BC
Victoria, BC R
Richmond, BC
R Kelowna, BC
Tacoma, WA C
St. Helens, OR M
Scappoose, OR C
C R Winnipeg, MB
Kingsey Falls, QC
Eau Claire, WI CM
Grand Rapids, MI C
Clarion, IA C
Aurora, IL C
C Brook, IN
Warrenton, MO C
C Kingman, AZ
Brownsville, TN C
Memphis, TN M
Rockingham, NC C M
C Kinston, NC
C Wagram, NC
CM Barnwell, SC
CM Pryor, OK
C Birmingham, AL
Grand Prairie, TX C
911
facilities across Canada,
the US and Europe
12,300
employees
in 6 countries
Production
Facilities1
Cabano
M
B Y S EGMENT
CONTAINER
TISSUE - 2 1
B Y MARKET
E U R O P E2
7
B
O
A
R
D
P
A
C
K
A
G
I
N
G
-
2
6
1
5
-
A
D
A
N
CA
7
2 -
E
P
O
R
EU
S - 18
T
C
U
SPECIA L T Y P R O D
U
NIT
E
D
S
T
A
T
E
S
-
3
3
C
O
R
P
O
R
A
T
E
A
C
T
I
V
I
T
I
E
S (
R
E
C
Y
CLING) - 19
1 Including associates and joint ventures.
2 Including our equity position in Reno
de Medici S.p.A.
M Arnsberg, DE
M Blendecques, FR
Berthierville
C
Lachute
CM
Laval
C
Vaudreuil
C
C
Montréal
CM
Candiac
C C C
Drummondville
C Saint-Césaire
R
Lachine
C
Granby
C
Victoriaville
M M
CM
C C C
Kingsey Falls
Québec
Niagara Falls, NY
M M
R
Depew, NY
R
Lancaster, NY
C
Rochester, NY
Schenectady, NY
M
C C
Mechanicville, NY
Waterford, NY
Albany, NY
R
Ransom, PA
M
Pittston, PA
C
C
Newtown, CT
La Rochette, FR M
Santa Giustina, IT M
M Ovaro, IT
C
Piscataway, NJ
M
Barcelona Cartonboard, ES
Villa Santa Lucia, IT M
Northeastern United States
Europe
T
R
O
P
E
R
L
A
U
N
N
A
9
1
0
2
S
E
D
A
C
S
A
C
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