2016 Annual Report
George Weston Limited
Footnote Legend
(1)
(2)
(3)
(4)
See Section 18, “Non-GAAP Financial Measures”, of the Company’s 2016 Management’s Discussion and Analysis.
For financial definitions and ratios refer to the Glossary beginning on page 142.
To be read in conjunction with “Forward-Looking Statements” beginning on page 4.
Certain figures have been restated as a result of the IFRS Interpretations Committee’s agenda decision on IAS 12, “Income Taxes”. See note 2 of the
Company’s 2016 audited consolidated financial statements.
Financial Highlights 1 / Report to Shareholders 2 / Management’s Discussion and Analysis 3 / Financial Results 67 /
Three Year Summary 140 / Glossary 142 / Corporate Directory 144 / Shareholder and Corporate Information 145
Financial Highlights(2)
As at or for the years ended December 31
($ millions except where otherwise indicated)
Consolidated Operating Results
Sales
Operating income
Adjusted EBITDA(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(1)
Income taxes
Adjusted income taxes(1)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(1)
Consolidated Financial Position and Cash Flows
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Capital investments
Free cash flow(1)
Total debt
Consolidated Per Common Share ($)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1) ($)
Consolidated Financial Measures and Ratios
Adjusted EBITDA margin(1)
Adjusted return on average equity attributable to common shareholders
of the Company(1)
Adjusted return on capital(1)
Reportable Operating Segments
Weston Foods
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Loblaw
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
$
$
$
$
$
$
$
$
$
$
2016
47,999
2,255
4,140
1,654
700
568
465
678
1,090
550
506
838
2,660
3,760
1,465
1,725
12,804
3.90
6.49
8.6%
12.1%
12.1%
2,268
173
296
13.1%
111
46,385
2,084
3,844
8.3%
1,543
2015(4)
46,894
1,929
3,826
1,686
681
585
418
571
830
511
467
717
2,667
3,367
1,500
1,280
13,154
3.62
5.57
8.2%
10.8%
10.6%
2,144
177
285
13.3%
94
45,394
1,593
3,541
7.8%
1,592
(i) Depreciation and amortization includes $535 million (2015 – $536 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $14 million (2015 – $11 million) of accelerated depreciation recorded by Weston
Foods, related to restructuring and other charges.
George Weston Limited 2016 Annual Report 1
Report to Shareholders(3)
George Weston Limited is committed to driving long term value creation for shareholders. This long-standing
commitment continues to be supported by the leading market positions of both operating segments, Loblaw and
Weston Foods. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel, general
merchandise, retail banking, credit card services, insurance and wireless mobile products and services and
controls one of Canada’s largest REITs. Weston Foods includes a leading fresh bakery business in Canada and
frozen, artisan bakery and biscuit businesses throughout North America. In 2016, both Loblaw and Weston Foods
continued to demonstrate their ability to execute on their strategic priorities.
In 2016, Loblaw brought their purpose of “Live Life Well” to life for customers, while delivering solid financial
results in alignment with its financial plan. Loblaw remained focused on its strategic framework to deliver best in
food experience, best in health and beauty, operational excellence and growth during 2016. Loblaw’s Retail
segment continued to drive growth in 2016 in a highly competitive environment with continued pressures of
healthcare reform. Loblaw continues to generate efficiencies and improve processes whenever possible and
achieved its $300 million synergy commitment in 2016, established when Loblaw acquired Shoppers Drug
Mart. In 2017, in a highly competitive grocery market with deflationary pressure and continued negative
pressure from healthcare reform, on a full year comparative basis, Loblaw expects to execute on its financial plan
of maintaining a stable trading environment that targets positive same-store sales and stable gross margin,
surfacing efficiencies to deliver operating leverage and returning capital to shareholders.
Weston Foods remains focused on continuing to drive financial performance within its core business, investing in
targeted areas of growth to build capacity and positioning the business for sustainable, long term growth and
profitability. In 2016, Weston Foods delivered results in line with expectations driven by volume growth and
productivity improvements as it continued to invest in the business. In 2017, Weston Foods expects to achieve
top line growth generated by incremental capacity and productivity improvements. Weston Foods expects this
growth to be offset by a challenging environment in our Canadian fresh bakery business and the impact of
continued investments in the business.
On behalf of the Board of Directors and shareholders, we thank our loyal customers for their support and our
more than 200,000 employees for their dedication and continued commitment to the Company.
[signed]
Galen G. Weston
Chairman and Chief Executive Officer
Toronto, Canada
March 1, 2017
2 George Weston Limited 2016 Annual Report
Management’s Discussion and Analysis
1.
2.
3.
4.
5.
6.
7.
8.
9.
Forward-Looking Statements
Overview
Strategic Framework
Key Financial Performance Indicators
Overall Financial Performance
Consolidated Results of Operations
5.1
5.2
Selected Annual Information
Results of Reportable Operating Segments
6.1 Weston Foods Operating Results
6.2
Loblaw Operating Results
Liquidity and Capital Resources
Cash Flows
Liquidity
Components of Total Debt
Financial Condition
Credit Ratings
Share Capital
Off-Balance Sheet Arrangements
Contractual Obligations
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
Quarterly Results of Operations
Quarterly Financial Information (Unaudited)
Fourth Quarter Results (Unaudited)
8.1
8.2
Fourth Quarter Results of Reportable Operating Segments
9.1 Weston Foods Fourth Quarter Operating Results (Unaudited)
Loblaw Fourth Quarter Operating Results (Unaudited)
9.2
10. Disclosure Controls and Procedures
11.
12.
13.
14.
15.
16.
Internal Control Over Financial Reporting
Enterprise Risks and Risk Management
12.1 Operating Risks and Risk Management
12.2 Financial Risks and Risk Management
Related Party Transactions
Critical Accounting Estimates and Judgments
Accounting Standards
15.1 Accounting Standards Implemented in 2016
15.2 Changes to Significant Accounting Policies
15.3 Changes to Accounting Estimates
Future Accounting Standards
17. Outlook
18. Non-GAAP Financial Measures
19.
Additional Information
4
5
6
7
8
8
13
16
16
17
20
20
21
22
25
25
26
28
29
30
30
32
38
38
39
41
41
41
42
48
50
51
52
52
53
53
54
56
57
66
George Weston Limited 2016 Annual Report 3
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) for George Weston Limited (“GWL” or the
“Company”) should be read in conjunction with the audited annual consolidated financial statements and the
accompanying notes on pages 67 to 139 of this Annual Report. The Company’s audited annual consolidated
financial statements and the accompanying notes for the year ended December 31, 2016 have been prepared in
accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International
Accounting Standards Board (“IASB”). The audited annual consolidated financial statements include the accounts
of the Company and other entities that the Company controls and are reported in Canadian dollars, except
where otherwise noted.
Under GAAP, certain expenses and income must be recognized that are not necessarily reflective of the
Company’s underlying operating performance. Non-GAAP financial measures exclude the impact of certain items
and are used internally when analyzing consolidated and segment underlying operating performance. These
non-GAAP financial measures are also helpful in assessing underlying operating performance on a consistent
basis. See Section 18, “Non-GAAP Financial Measures”, of this MD&A for more information on the Company’s
non-GAAP financial measures.
A glossary of terms and ratios used throughout this Annual Report can be found beginning on page 142.
The information in this MD&A is current to March 1, 2017, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
1.
This Annual Report, including this MD&A, for the Company contains forward-looking statements about the
Company’s objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows,
performance, prospects, opportunities and legal and regulatory matters. Specific forward-looking statements in
this Annual Report include, but are not limited to, statements with respect to the Company’s anticipated future
results, events and plans, synergies and other benefits associated with the acquisition of Shoppers Drug Mart
Corporation (“Shoppers Drug Mart”) and other strategic initiatives, anticipated insurance recoveries, future
liquidity, planned capital investments, and status and impact of information technology (“IT”) systems
implementation. These specific forward-looking statements are contained throughout this Annual Report
including, without limitation, in Section 3, “Strategic Framework”, Section 7, “Liquidity and Capital Resources”,
Section 17, “Outlook”, and Section 18, “Non-GAAP Financial Measures” of this MD&A. Forward-looking
statements are typically identified by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”,
“estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may”, “maintain”, “achieve”, “grow”, and “should” and
similar expressions, as they relate to the Company and its management.
Forward-looking statements reflect the Company’s current estimates, beliefs and assumptions, which are based
on management’s perception of historical trends, current conditions and expected future developments, as well
as other factors it believes are appropriate in the circumstances. The Company’s expectation of operating and
financial performance in 2017 is based on certain assumptions including assumptions about sales and volume
growth, anticipated cost savings, operating efficiencies, and continued growth from current initiatives. The
Company’s estimates, beliefs and assumptions are inherently subject to significant business, economic,
competitive and other uncertainties and contingencies regarding future events and as such, are subject to
change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be
correct.
Numerous risks and uncertainties could cause the Company’s actual results to differ materially from those
expressed, implied or projected in the forward-looking statements, including those described in Section 12,
“Enterprise Risks and Risk Management”, of this MD&A and the Company’s Annual Information Form (“AIF”) for
the year ended December 31, 2016. Such risks and uncertainties include:
•
changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public
drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
failure to effectively manage Loblaw Companies Limited's (“Loblaw”) loyalty programs;
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business, or
the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and
other known or unknown cybersecurity or data breaches;
•
•
4 George Weston Limited 2016 Annual Report
•
•
failure to realize benefits from investments in the Company’s new IT systems;
failure to effectively respond to consumer trends or heightened competition, whether from current
competitors or new entrants to the marketplace;
• public health events including those related to food and drug safety;
•
•
changes to any of the laws, rules, regulations or policies applicable to the Company's business;
failure to merchandise effectively, to execute Loblaw's e-commerce initiative or to adapt its business model
to the shifts in the retail landscape caused by digital advances;
failure to realize the anticipated benefits, including revenue growth, anticipated cost savings or operating
efficiencies, associated with the Company's investment in major initiatives that support its strategic
priorities;
changes in economic conditions, including economic recession or changes in the rate of inflation or
deflation, employment rates and household debt, interest rates, currency exchange rates and derivative or
commodity prices;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining
agreements;
•
•
•
• adverse outcomes of legal and regulatory proceedings and related matters;
•
reliance on the performance and retention of third party service providers, including those associated with
the Company’s supply chain and Loblaw’s apparel business, including issues with vendors in both advanced
and developing markets;
the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory
and to control shrink;
the inability of the Company to effectively develop and execute its strategy; and
the inability of the Company to anticipate, identify and react to consumer and retail trends.
•
•
•
This is not an exhaustive list of the factors that may affect the Company’s forward-looking statements. Other
risks and uncertainties not presently known to the Company or that the Company presently believes are not
material could also cause actual results or events to differ materially from those expressed in its forward-looking
statements. Additional risks and uncertainties are discussed in the Company’s materials filed with the Canadian
securities regulatory authorities from time to time, including without limitation, the section entitled “Operating
and Financial Risks and Risk Management” in the Company’s AIF for the year ended December 31, 2016. Readers
are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company’s
expectations only as of the date of this Annual Report. Except as required by law, the Company does not
undertake to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
2.
GWL is a Canadian public company, founded in 1882. The Company has two reportable operating segments:
Loblaw and Weston Foods, and holds cash, short term investments and an interest in Choice Properties Real
Estate Investment Trust (“Choice Properties”) of 6%. The Loblaw operating segment includes retail businesses, a
bank and Choice Properties. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel,
general merchandise, retail banking, credit card services, insurance and wireless mobile products and services.
Loblaw also holds an 83% effective interest in Choice Properties, which owns, manages and develops retail and
commercial properties across Canada. The Weston Foods operating segment includes a leading fresh bakery
business in Canada and frozen, artisan bakery and biscuit businesses throughout North America.
George Weston Limited 2016 Annual Report 5
Management’s Discussion and Analysis
STRATEGIC FRAMEWORK
3.
The Company employs various operating and financial strategies, driven by each of its reportable operating
segments.
Weston Foods’ strategy is focused on continuing to drive financial performance within its core business, investing
in targeted areas of growth to build capabilities and capacity and positioning the business for sustainable, long
term growth and profitability. As part of its strategic framework, Weston Foods will:
•
• drive growth through innovation and product development, meeting the evolving needs of consumers and
continue to drive operational excellence and realize productivity gains;
customers;
invest in assets and infrastructure to support its core business and pursue growth in targeted areas;
•
• enhance the capabilities and leadership within the organization, driving a high-performance culture; and
continue to evaluate the market for new opportunities to increase market penetration and expand its
•
presence, organically, through partnerships or acquisitions.
Loblaw’s strategic framework is anchored by its purpose of “Live Life Well” and its commitment to produce
industry leading financial results. At the core of this framework is Loblaw’s focus on the customer – by providing
the best in food experience, the best in health and beauty, operational excellence and growth.
Achieving a “best in food” experience is driven by the desire to lead in fresh selection, drive sustainable and
competitive pricing and provide customized assortments across its banners. Achieving “best in health and
beauty” is driven by Loblaw putting its pharmacy customers first, its desire to provide high quality health and
wellness products and services, a diverse and differentiated beauty offering and convenient locations and hours
of operation to meet individuals’ wellness needs.
Loblaw’s operational excellence goals include driving efficiencies throughout its businesses. This includes
product innovation, leveraging control brands across businesses and delivering continued growth in President’s
Choice Financial Services and Choice Properties.
Weston Foods and Loblaw each have their own risk profiles and operating risk management strategies. The
success of these and other plans and strategies discussed in this MD&A may be affected by risks and
uncertainties, including those described in Section 12, “Enterprise Risks and Risk Management” of this MD&A
and in the Company’s AIF for the year ended December 31, 2016.
6 George Weston Limited 2016 Annual Report
KEY FINANCIAL PERFORMANCE INDICATORS
4.
The Company has identified specific key financial performance indicators to measure the progress of short and
long term objectives. Certain key financial performance indicators are set out below:
($ millions except where otherwise indicated)
As at or for the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Free cash flow(1)
Total debt
Adjusted return on average equity attributable to common shareholders
($)
of the Company(1)
Adjusted return on capital(1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
47,999
2,255
4,140
8.6%
550
506
838
3.90
6.49
2,660
3,760
1,725
12,804
12.1%
12.1%
2015(4)
46,894
1,929
3,826
8.2%
511
467
717
3.62
5.57
2,667
3,367
1,280
13,154
10.8%
10.6%
George Weston Limited 2016 Annual Report 7
Management’s Discussion and Analysis
5.
OVERALL FINANCIAL PERFORMANCE
5.1
CONSOLIDATED RESULTS OF OPERATIONS
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other
financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings attributable to shareholders
of the Company
Net earnings available to common shareholders
of the Company
Adjusted net earnings available to common
shareholders of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1) ($)
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
47,999
2,255
4,140
8.6%
1,654
700
568
465
678
27.5%
550
506
838
3.90
6.49
$
$
$
$
$
$
$
$
$
$
$
$
$
2015(4)
46,894
1,929
3,826
8.2%
1,686
681
585
418
571
27.2%
511
467
717
3.62
5.57
$
$
$
$
$
$
$
$
$
$
$
$
$
$ Change
1,105
326
314
(32)
19
(17)
47
107
39
39
121
0.28
0.92
% Change
2.4 %
16.9 %
8.2 %
(1.9)%
2.8 %
(2.9)%
11.2 %
18.7 %
7.6 %
8.4 %
16.9 %
7.7 %
16.5 %
(i) Depreciation and amortization includes $535 million (2015 – $536 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $14 million (2015 – $11 million) of accelerated depreciation recorded by Weston
Foods, related to restructuring and other charges.
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company increased by $39 million ($0.28 per common
share) to $506 million ($3.90 per common share) compared to the same period in 2015. The increase was
primarily due to an improvement in underlying operating performance partially offset by the unfavourable year-
over-year net impact of certain adjusting items, as described below. Net earnings available to common
shareholders of the Company also included the positive contribution from the increase in the Company’s
ownership interest in Loblaw, as a result of Loblaw’s share repurchases.
• The improvement in underlying operating performance was primarily due to:
the underlying operating performance of Loblaw’s Retail segment, including the favourable impact of
a decrease in depreciation and amortization; and
the favourable impact of a decrease in adjusted net interest expense and other financing charges(1)
due to lower interest on long term debt;
partially offset by,
the unfavourable impact of an increase in the adjusted income tax rate(1) primarily due to the
increase in the Alberta statutory corporate income tax rate.
8 George Weston Limited 2016 Annual Report
• The unfavourable year-over-year net impact of certain adjusting items totaling $82 million ($0.64 per
common share) was primarily due to:
foreign currency translation of $148 million ($1.16 per common share);
asset impairments, net of recoveries, of $41 million ($0.31 per common share); and
a fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of
$20 million ($0.16 per common share);
partially offset by,
a decrease in restructuring and other related charges of $47 million ($0.36 per common share);
the favourable impact of a prior year statutory corporate income tax rate change of $40 million
($0.30 per common share); and
the favourable impact of the net impairment of Loblaw drug retail ancillary assets held for sale of
$38 million ($0.29 per common share) in 2015.
Adjusted net earnings available to common shareholders of the Company(1) were $838 million ($6.49 per
common share) in 2016 compared to $717 million ($5.57 per common share) in the same period in 2015, an
increase of $121 million ($0.92 per common share). The increase was primarily due to the improvements in
underlying operating performance and the positive contribution from the increase in the Company’s ownership
interest in Loblaw, as described above.
Sales
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Intersegment
Consolidated
2016
2,268
46,385
(654)
47,999
$
$
$
$
$
$
$
$
2015
2,144 $
45,394 $
(644)
46,894 $
$ Change
124
991
% Change
5.8 %
2.2 %
1,105
2.4 %
The Company’s 2016 consolidated sales were $47,999 million, an increase of $1,105 million compared to the
same period in 2015. The Company’s year-over-year increase in sales was impacted by each of its reportable
operating segments as follows:
• Positively by 0.3% due to sales growth of 5.8% at Weston Foods. Foreign currency translation positively
impacted sales by approximately 2.2%. Excluding the impact of foreign currency translation, sales increased
by 3.6% primarily due to an increase in volumes.
• Positively by 2.1% due to sales growth of 2.2% at Loblaw, primarily driven by Retail. Retail sales increased by
$915 million, or 2.1% compared to 2015. Food retail same-store sales growth was 1.1% and the food retail
average annual internal food price index declined and was slightly lower than the average annual national
food price inflation of 1.0% as measured by “The Consumer Price Index for Food Purchased from
Stores” (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in
Loblaw stores. Drug retail same-store sales growth was 4.0%.
George Weston Limited 2016 Annual Report 9
Management’s Discussion and Analysis
Operating Income
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Other
Consolidated
2016
173
2,084
(2)
2,255
$
$
$
$
2015
177
1,593
159
1,929
$
$
$
$
$ Change
(4)
$
491
$
% Change
(2.3)%
30.8 %
$
326
16.9 %
The Company’s 2016 operating income increased by $326 million to $2,255 million compared to the same period
in 2015. The increase was driven by the improvements in underlying operating performance of $348 million
partially offset by the unfavourable year-over-year net impact of certain adjusting items totaling $22 million, as
described below:
•
the improvements in underlying operating performance of $348 million were primarily due to the following:
the underlying operating performance of Loblaw primarily driven by its Retail segment, including the
favourable impact of a decrease in depreciation and amortization;
partially offset by,
the underlying operating performance of Weston Foods, including an increase in depreciation and
amortization;
•
the unfavourable year-over-year net impact of certain adjusting items totaling $22 million was primarily
due to:
foreign currency translation of $161 million;
asset impairments, net of recoveries, of $122 million; and
the fair value adjustment of derivatives of $26 million;
partially offset by,
a decrease in restructuring and other related charges of $117 million;
the favourable impact of the net impairment of Loblaw drug retail ancillary assets held for sale of
$116 million in 2015; and
the favourable impact of the accelerated transition of certain Loblaw’s grocery stores to more cost
effective and efficient Labour Agreements of $55 million in 2015.
Adjusted EBITDA(1)
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Consolidated
2016
296
3,844
4,140
$
$
$
$
$
$
2015
$ Change
11
303
314
285 $
3,541 $
3,826 $
% Change
3.9 %
8.6 %
8.2 %
The Company’s 2016 adjusted EBITDA(1) increased by $314 million to $4,140 million compared to the same
period in 2015. The Company’s year-over-year increase in adjusted EBITDA(1) was impacted by each of its
reportable operating segments as follows:
• Positively by 0.3% due to a growth of 3.9% in adjusted EBITDA(1) at Weston Foods. The improvement was
driven by the increase in sales and productivity improvements, partially offset by continued investments in
the business, higher input costs and new plant costs.
• Positively by 7.9% due to an increase of 8.6% in adjusted EBITDA(1) at Loblaw, primarily driven by Retail. The
improvement in Retail adjusted EBITDA(1) was primarily driven by higher sales with stable gross margins,
lower selling, general and administrative expenses (“SG&A”), the positive impact of incremental net
synergies and the favourable impact from the consolidation of franchises.
10 George Weston Limited 2016 Annual Report
Depreciation and Amortization
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Consolidated
2016
111
1,543
1,654
$
$
$
$
$
$
2015
$ Change
17
(49)
(32)
94 $
1,592 $
1,686 $
% Change
18.1 %
(3.1)%
(1.9)%
Depreciation and amortization in 2016 was $1,654 million, a decrease of $32 million compared to the same
period in 2015, and included $535 million (2015 – $536 million) of amortization of intangible assets related to
the acquisition of Shoppers Drug Mart and $14 million (2015 – $11 million) of accelerated depreciation incurred
by Weston Foods. Excluding these amounts, depreciation and amortization decreased by $34 million primarily
due to:
•
the decline in Loblaw Retail depreciation and amortization, primarily due to a change in the estimated useful
life of certain equipment and fixtures in the second quarter of 2016 and lower depreciation of older supply
chain assets;
partially offset by,
• an increase in depreciation from the consolidation of Loblaw franchises; and
• higher depreciation due to investments in capital at Weston Foods.
Net Interest Expense and Other Financing Charges
($ millions)
For the years ended December 31
Net interest expense and other financing charges
Add: Fair value adjustment of the Trust Unit liability
Fair value adjustment of the forward sale agreement for 9.6 million
Loblaw common shares
Accelerated amortization of deferred financing costs
Adjusted net interest expense and other financing charges(1)
2016
700
(79)
(53)
—
568
$
$
2015
681
(55)
(26)
(15)
585
$
$
Net interest expense and other financing charges increased by $19 million to $700 million compared to the
same period in 2015. The increase in net interest expense and other financing charges was primarily due to the
year-over-year impact of an increase in certain adjusting items totaling $36 million, itemized in the table above,
partially offset by a decrease in adjusted net interest expense and other financing charges(1) of $17 million
driven by:
•
lower interest expense on long term debt in Loblaw’s Retail segment due to the repayment of Medium Term
Notes (“MTNs”) in 2016 and redemption of Loblaw’s capital securities at par in the third quarter of 2015;
lower interest expense in Loblaw’s Financial Services segment due to the Eagle Credit Card Trust® (“Eagle”)
debt repayment; and
lower interest expense at Weston Foods due to the repayment of a $350 million MTN in the third quarter
of 2016;
partially offset by,
• an increase in interest expense on long term debt in Loblaw’s Choice Properties segment due to the issuance
•
•
of third party senior unsecured debentures.
George Weston Limited 2016 Annual Report 11
Management’s Discussion and Analysis
Income Taxes
($ millions except where otherwise indicated)
For the years ended December 31
Income taxes
Add: Tax impact of items excluded from adjusted earnings before taxes(1)(i)
Statutory corporate income tax rate change
Adjusted income taxes(1)
Effective income tax rate applicable to earnings before taxes
Adjusted income tax rate applicable to adjusted earnings before taxes(1)
$
$
$
$
2016
465
216
(3)
678
29.9%
27.5%
2015(4)
418
232
(79)
571
33.5%
27.2%
(i)
See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table included in Section 18,
“Non-GAAP Financial Measures”, of this MD&A for a complete list of items excluded from adjusted earnings before taxes(1).
The effective tax rate in 2016 was 29.9%, a decrease of 3.6% compared to the same period in 2015. The decrease
was primarily attributable to:
• a decrease in deferred tax expense resulting from a prior year charge related to the increase in the Alberta
statutory corporate income tax rate, net of an increase in deferred tax expense due to the increase in the
New Brunswick statutory corporate income tax rate in 2016, as described below;
partially offset by,
• a decrease in non-taxable foreign currency translation gains; and
• an increase in current tax as a result of a prorated increase in the Alberta statutory corporate income tax rate
enacted in 2015 and fully implemented in 2016.
The adjusted income tax rate(1) in 2016 was 27.5%, an increase of 0.3% compared to the same period in 2015.
The increase was primarily attributable to:
• an increase in current tax resulting from the prorated increase in the Alberta statutory corporate income tax
rate enacted in 2015 and fully implemented in 2016; and
• an increase in certain other non-deductible items.
In the first quarter of 2016, the Government of New Brunswick announced a 2.0% increase in the provincial
statutory corporate income tax rate from 12.0% to 14.0%. Loblaw recorded a charge of $3 million in 2016 related
to the remeasurement of its deferred tax liabilities.
In the second quarter of 2015, the government of Alberta announced an increase to the provincial corporate
income tax rate from 10.0% to 12.0% and as a result, the Company recorded a charge of $79 million related to
the remeasurement of deferred tax liabilities.
Loblaw has been reassessed by Canada Revenue Agency (“CRA”) and the Ontario Ministry of Finance on the basis
that certain income earned by Glenhuron Bank Limited (“Glenhuron”), a wholly owned Barbadian subsidiary,
should be treated, and taxed, as income in Canada. The reassessments, which were received in 2015 and 2016,
are for the 2000 to 2011 taxation years and total $351 million including interest and penalties as at the time of
reassessment. Loblaw believes it is likely that the CRA will issue reassessments for the 2012 and 2013 taxation
years on the same or similar basis. Loblaw has filed a Notice of Appeal with the Tax Court of Canada for the 2000
to 2010 taxation years and a Notice of Objection for the 2011 taxation year. No amount for any reassessments
has been provided for in the Company’s consolidated financial statements. If the CRA were to ultimately prevail
with respect to the reassessments, the outcome could have a material adverse effect on the Company’s
reputation, operations or financial condition or performance.
12 George Weston Limited 2016 Annual Report
SELECTED ANNUAL INFORMATION
5.2
The selected information presented below has been derived from and should be read in conjunction with the
annual consolidated financial statements of the Company dated December 31, 2016 and 2015. The analysis of
the data contained in the table focuses on the trends and significant events or items affecting the results of
operations and financial condition of the Company over the latest three year period.
For the years ended December 31
($ millions except where otherwise indicated)
Sales
Sales excluding 53rd week
Operating income
Operating Income excluding 53rd week
Adjusted EBITDA(1)
Adjusted EBITDA(1) excluding 53rd week
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company
excluding 53rd week(ii)
Adjusted net earnings available to common shareholders
of the Company(1)
Adjusted net earnings available to common shareholders
of the Company(1) excluding 53rd week(ii)
Net earnings per common share ($) – diluted
Diluted net earnings per common share ($) excluding 53rd week(ii)
Adjusted diluted net earnings per common share(1) ($)
Adjusted diluted net earnings per common share(1) ($)
excluding 53rd week(ii)
Dividends declared per share type ($):
Common shares
Preferred shares – Series I
Preferred shares – Series III
Preferred shares – Series IV
Preferred shares – Series V
2016
(52 weeks)
47,999
47,999
2,255
2,255
4,140
4,140
8.6%
1,654
700
568
465
678
27.5%
1,090
550
506
506
838
838
3.90
3.90
6.49
6.49
1.745
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015(4)
(52 weeks)
46,894
46,894
1,929
1,929
3,826
3,826
8.2%
1,686
681
585
418
571
27.2%
830
511
467
467
717
717
3.62
3.62
5.57
5.57
1.695
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014
(53 weeks)
43,918
43,109
973
896
3,530
3,453
8.0%
1,542
815
566
24
479
26.0%
134
126
82
53
680
651
0.64
0.41
5.30
5.08
1.675
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(i) Depreciation and amortization includes $535 million (2015 – $536 million; 2014 – $417 million) of amortization of intangible assets,
acquired with Shoppers Drug Mart, recorded by Loblaw and $14 million (2015 – $11 million; 2014 – nil) of accelerated depreciation
recorded by Weston Foods, related to restructuring and other charges.
(ii) The impact of the 53rd week on net earnings available to common shareholders of the Company is estimated based on applying the
2014 effective tax rate to the 53rd week net earnings before income taxes of $77 million, net of non-controlling interest.
George Weston Limited 2016 Annual Report 13
Management’s Discussion and Analysis
Consolidated results for the last three years were impacted by the acquisition of Shoppers Drug Mart in the
second quarter of 2014, foreign currency exchange rates, and the 53rd week in 2014.
Sales Excluding the 53rd week, the Company’s reportable operating segments had the following sales trends
over the last three years:
• Weston Foods sales have been positively impacted by volume growth and foreign currency translation in
both 2016 and 2015. The combined impact of pricing and changes in sales mix also had a positive impact on
sales in 2015.
•
Loblaw’s Retail segment has driven the growth in Loblaw sales over the last three years. Loblaw’s Retail
segment sales have continued to grow despite the pressure of an intensely competitive retail market and an
uncertain economic and regulatory environment over the last three years. Through 2014 and 2015, Loblaw
was operating in an inflationary environment in food prices. In 2016, this food price inflation trend reversed
with inflation declining each quarter and becoming deflationary in the fourth quarter. Retail segment sales
were also impacted by the consolidation of franchisees, Loblaw’s store closure plan announced in 2015 and
completed in 2016 and the acquisition of Shoppers Drug Mart.
Net earnings available to common shareholders of the Company and Diluted net earnings per common share
Consolidated net earnings available to common shareholders of the Company and diluted net earnings per
common share for the last three years were impacted by of certain adjusting items as described in Section 18,
“Non-GAAP Financial Measures”, of this MD&A and by the underlying operating performance of each of the
Company’s reportable operating segments.
Over the last three years, the Company’s underlying operating performance was impacted by the following:
•
•
the 53rd week in the fourth quarter of 2014;
improvements in underlying operating performance at Loblaw in both 2016 and 2015, driven by the Retail
segment, including positive same-store sales in both food and drug retail, the acquisition of Shoppers Drug
Mart and the positive contribution from net synergies related to the acquisition. The improvements in
underlying operating performance included a decrease in depreciation and amortization in 2016 and an
increase in depreciation and amortization in 2015;
• a decline in underlying operating performance at Weston Foods in 2016, driven by the unfavourable impact
•
of an increase in depreciation and amortization. A decline in underlying operating performance at Weston
Foods in 2015 as the increase in sales was more than offset by investments in the business, new plant costs,
higher input costs and an increase in depreciation and amortization;
lower adjusted net interest expense and other financing charges(1) in 2016 due to the repayment of MTNs at
both Loblaw and Weston Foods and higher adjusted net interest expense and other financing charges in
2015(1) primarily due to an increase in interest on long term debt at Loblaw;
increases in the adjusted income tax rate(1) in both 2016 and 2015; and
•
• an increase in GWL’s ownership interest in Loblaw in 2016 and 2015 as a result of share repurchases. GWL’s
ownership of Loblaw was approximately 47% as at the end of 2016 (2015 – approximately 46%).
14 George Weston Limited 2016 Annual Report
the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold;
Over the last three years, the impact of certain adjusting items included:
•
• amortization of intangible assets acquired with Shoppers Drug Mart;
• a charge related to inventory measurement associated with the conversion of Loblaw’s grocery stores to the
new IT systems;
• Shoppers Drug Mart acquisition-related costs;
•
•
•
restructuring and other related costs;
the impairment of Loblaw drug retail ancillary assets held for sale;
the accelerated finalization of transitioning of certain Loblaw grocery stores to more cost effective and
efficient Labour Agreements;
the impact of restructured fee arrangements with franchisees of certain franchise banners of Loblaw;
the settlement impacts of pension annuities and buy-outs;
•
•
• asset impairments, net of recoveries;
•
•
•
• provincial tax rate changes.
foreign currency translation;
the change in the fair value adjustment of the forward sale agreement for 9.6 million Loblaw shares;
the change in the fair value adjustment to the Trust Unit Liability; and
Total Assets and Long Term Financial Liabilities
As at
($ millions)
Total assets
Total long term debt
Capital securities(i)
Trust Unit liability
Total long term financial liabilities
Dec. 31, 2016
37,946
$
11,785
$
Dec. 31, 2015(4) Dec. 31, 2014(4)
$
$
38,220
12,276
$
$
635
12,420
$
552
12,828
$
$
37,564
12,726
225
494
13,445
(i)
In 2014, capital securities became due within one year and were presented in current liabilities.
In 2016, total assets decreased marginally and total long term financial liabilities decreased by 3.2% compared
to 2015. The decrease in total long term financial liabilities was primarily due to repayments of MTNs, partially
offset by debt issuances by Choice Properties to third parties and the increase in the value of the Trust Unit
liability.
In 2015, total assets increased by 1.7% and total long term financial liabilities decreased by 4.6% compared to
2014. The increase in total assets was primarily due to investments in capital at both Weston Foods and Loblaw
and the consolidation of Loblaw’s franchisees. The decrease in total long term financial liabilities was primarily
due to repayments on Loblaw’s unsecured term loan facility (“Acquisition Term Loan”) and capital securities,
partially offset by debt issuances by Choice Properties to third parties and the increase in the value of the Trust
Unit Liability.
George Weston Limited 2016 Annual Report 15
Management’s Discussion and Analysis
6.
RESULTS OF REPORTABLE OPERATING SEGMENTS
The following discussion provides details of the 2016 results of operations of each of the Company’s reportable
operating segments.
6.1 WESTON FOODS OPERATING RESULTS
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
2016
2,268
173
296
13.1%
111
$
$
$
$
$
$
$
$
2015
2,144 $
177 $
285 $
$ Change
124
(4)
11
13.3%
% Change
5.8 %
(2.3)%
3.9 %
94 $
17
18.1 %
(i) Depreciation and amortization includes $14 million (2015 – $11 million) of accelerated depreciation recorded as restructuring and
other charges.
Sales Weston Foods sales in 2016 were $2,268 million, an increase of $124 million, or 5.8%, compared to the
same period in 2015. Sales included the positive impact of foreign currency translation of approximately 2.2%.
Excluding the impact of foreign currency translation, sales increased by 3.6% primarily due to an increase in
volumes.
Operating income Weston Foods operating income in 2016 was $173 million, a decrease of $4 million compared
to the same period in 2015. The decrease was primarily due to the decline in underlying operating performance,
including the unfavourable impact of an increase in depreciation and amortization, as described below, and the
unfavourable year-over-year net impact of certain adjusting items which included:
•
partially offset by,
• a decrease in restructuring and other related charges of $9 million.
charges associated with damaged inventory and other associated costs of $10 million;
Adjusted EBITDA(1) Weston Foods adjusted EBITDA(1) in 2016 was $296 million, an increase of $11 million
compared to the same period in 2015. The increase was driven by the increase in sales and productivity
improvements, partially offset by continued investments in the business, higher input costs and new plant costs.
Weston Foods adjusted EBITDA margin(1) was 13.1% compared to 13.3% in the same period in 2015. The decline
in adjusted EBITDA margin(1) was mainly due to incremental investments in the business, new plant costs and
higher input costs.
Depreciation and Amortization Weston Foods depreciation and amortization was $111 million in 2016, an
increase of $17 million compared to the same period in 2015. Depreciation and amortization included
$14 million (2015 – $11 million) of accelerated depreciation related to the planned closures of bread, pie and
cake manufacturing facilities. Excluding these amounts, depreciation and amortization increased $14 million in
2016 due to investments in capital.
Weston Foods Other Business Matters
Restructuring Weston Foods continuously evaluates strategic and cost reduction initiatives related to its
manufacturing assets, distribution networks and administrative infrastructure with the objective of ensuring
a low cost operating structure. In 2016, Weston Foods recorded restructuring and other charges of $17 million
(2015 – $26 million), including $14 million (2015 – $11 million) of accelerated depreciation. These charges
primarily relate to restructuring plans to close manufacturing facilities in Canada and the U.S. with production
transferring to other facilities.
16 George Weston Limited 2016 Annual Report
Inventory loss In 2016, Weston Foods recorded $11 million (U.S. $9 million) related to the write-off of damaged
inventory and other associated costs in SG&A in the Company’s consolidated statement of earnings. An
insurance claim is in progress and proceeds are expected to be recorded as the claim progresses.
6.2
LOBLAW OPERATING RESULTS
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
2016
46,385
2,084
3,844
8.3%
1,543
$
$
$
$
$
$
$
$
$ Change
991
491
303
2015
45,394 $
1,593 $
3,541 $
7.8%
1,592 $
% Change
2.2 %
30.8 %
8.6 %
(49)
(3.1)%
(i) Depreciation and amortization includes $535 million (2015 – $536 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
Sales, operating income and adjusted EBITDA(1) in 2016 included the impacts of consolidated franchises, as set
out in “Loblaw Other Business Matters”.
Sales Loblaw sales for 2016 were $46,385 million, an increase of $991 million compared to the same period in
2015, primarily driven by Retail. Retail sales increased by $915 million, or 2.1% compared to the same period in
2015 and included food retail sales of $33,175 million (2015 – $32,672 million) and drug retail sales of
$12,209 million (2015 – $11,797 million). Excluding the consolidation of franchises, Retail sales increased by
$608 million primarily driven by the following factors:
•
food retail same-store sales growth was 1.5%, after excluding gas bar (0.4%). This same-store sales growth
includes the impact of retail promotional investments. Including gas bar, food retail same-store sales growth
was 1.1%. Loblaw’s food retail average annual internal food price index declined and was slightly lower than
the average annual national food price inflation of 1.0% as measured by CPI. CPI does not necessarily reflect
the effect of inflation on the specific mix of goods sold in Loblaw stores;
• drug retail same-store sales growth was 4.0%, including same-store pharmacy sales growth of 2.9% and
•
same-store front store sales growth of 5.0%;
the impact of an extra selling day on food and drug retail same-store sales growth, due to the timing of New
Year’s day, was nominal; and
• during 2016, 32 food and drug stores were opened and 37 food and drug stores were closed, resulting in an
increase in Retail net square footage of 0.3 million square feet, or 0.4%. Store closures were driven by
Loblaw’s store closure plan that was announced in 2015 and completed in 2016.
Operating income Loblaw operating income was $2,084 million, an increase of $491 million compared to the
same period in 2015, primarily driven by the improvements in underlying operating performance of $351 million
and the favourable year-over-year net impact of certain adjusting items totaling $140 million, as described
below:
•
the improvements in underlying operating performance were primarily driven by Retail including higher
sales with stable gross margins, lower SG&A, lower depreciation and amortization, the positive contribution
from incremental net synergies and the favourable impact from the consolidation of franchises; and
the favourable year-over-year net impact of certain Retail adjusting items totaling $140 million was primarily
due to:
•
the impact of the net impairment of drug retail ancillary assets held for sale of $116 million in 2015;
a decrease in restructuring and other related costs of $108 million; and
the impact of the accelerated transition of certain Loblaw grocery stores to more cost effective and
efficient Labour Agreements of $55 million in 2015;
partially offset by,
the unfavourable impact of asset impairments, net of recoveries, of $122 million.
George Weston Limited 2016 Annual Report 17
Management’s Discussion and Analysis
Adjusted EBITDA(1) Loblaw adjusted EBITDA(1) was $3,844 million, an increase of $303 million compared to the
same period in 2015, primarily driven by Retail. Retail adjusted EBITDA(1) increased $279 million driven by an
increase in gross profit, partially offset by an increase in SG&A.
• Retail gross profit percentage was 27.0% compared to 26.4% in the same period in 2015. Excluding the
consolidation of franchises, Retail gross profit percentage was 26.4%, an increase of 10 basis points
compared to 2015, primarily driven by the achievement of operational synergies and improvements in
shrink, partially offset by lower food retail margins due to promotional investments.
• Retail SG&A as a percentage of sales was 19.0%, an increase of 10 basis points compared to the same period
in 2015. Excluding the consolidation of franchises, Retail SG&A decreased $35 million and as a percentage of
sales, was 18.4%, an improvement of 30 basis points compared to the same period in 2015, driven by the
following factors:
lower store support costs;
the positive impact of Loblaw’s store closure plan announced in 2015 and completed in 2016; and
favourable year-over-year foreign exchange impacts;
partially offset by,
higher retail store costs as efficiencies achieved in retail stores were more than offset by an increase
in financial support to franchises.
Loblaw adjusted EBITDA(1) in 2016 also included the increase in Financial Services adjusted EBITDA(1) of
$15 million, primarily driven by growth in credit card receivables and higher Mobile Shop sales, and an increase
in Choice Properties adjusted EBITDA(1) of $9 million, primarily due to the expansion of the portfolio through
acquisitions and development of properties and an increase in base rent from existing properties.
Depreciation and Amortization Loblaw depreciation and amortization was $1,543 million, a decrease of
$49 million compared to the same period in 2015. The decline in depreciation and amortization was primarily
attributable to a change in the estimated useful life of certain equipment and fixtures in 2016 and lower
depreciation of older supply chain assets, partially offset by an increase in depreciation and amortization from
the consolidation of franchises. Included in depreciation and amortization was the impact of the amortization of
intangible assets acquired with Shoppers Drug Mart of $535 million (2015 – $536 million).
Loblaw Other Business Matters
Acquisition of QHR Corporation During 2016, Loblaw, through its wholly-owned subsidiary Shoppers Drug Mart,
completed the acquisition of all of the issued and outstanding common shares of QHR Corporation (“QHR”), a
publicly traded healthcare technology company. The shares of QHR were acquired for cash consideration of
approximately $167 million. The preliminary purchase price allocation, which has not yet been finalized, is
as follows:
($ millions)
Net assets acquired:
Cash and cash equivalents
Accounts receivable and Prepaid expenses
Fixed assets
Intangible assets
Goodwill
Trade payables and other liabilities
Deferred income taxes
Other liabilities
Total net assets acquired
$
$
14
2
2
72
99
(3)
(14)
(5)
167
Goodwill is attributable to synergies expected from integrating QHR into Loblaw’s existing business. The goodwill
is not deductible for tax purposes.
18 George Weston Limited 2016 Annual Report
Impairment of Ancillary Healthcare Business In the fourth quarter of 2016, a Shoppers Drug Mart ancillary
healthcare business was triggered for impairment testing due to impacts of Ontario healthcare reform
implemented in the long term care industry. Loblaw recorded a charge of $88 million related to the impairment
of fixed assets of $15 million and a customer relationship intangible asset of $73 million.
Consolidation of Franchises Loblaw has more than 500 franchise food retail stores in its network. As at year end
2016, 200 of these stores were consolidated for accounting purposes under a new, simplified franchise
agreement (“Franchise Agreement”) implemented in 2015.
Loblaw will convert franchises to the Franchise Agreement as existing agreements expire, at the end of which all
franchises will be consolidated. The following table presents the number of franchises consolidated in the fourth
quarter of 2016 and year-to-date, and the total impact of the consolidation of franchises included in the
consolidated results of the Company:
(unaudited)
($ millions except where otherwise indicated)
Number of Consolidated Franchise stores,
beginning of period
Add: Number of Consolidated Franchise stores
in the period
Number of Consolidated Franchise stores, end
of period
Sales
Operating income (loss)
Adjusted EBITDA(1)
Depreciation and amortization
Net earnings (loss) attributable to
Non-Controlling Interest
Quarters Ended
Years Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2015
$
165
35
200
99
21
27
6
28
$
43
42
85
28
(7)
(4)
3
(4)
$
85
115
200
363
(1)
20
21
7
$
85
85
56
(17)
(12)
5
(9)
Operating income included in the table above does not significantly impact net earnings available to common
shareholders of the Company as this amount is largely attributable to Non-Controlling Interests.
Loblaw expects that the estimated impact in 2017 of new and current consolidated franchises will be revenue
of approximately $680 million, adjusted EBITDA(1) of approximately $55 million, depreciation and amortization
of approximately $45 million and net earnings attributable to Non-Controlling Interests of approximately
$10 million.
Retail locations in Fort McMurray In the second quarter of 2016, 10 Loblaw retail locations in Fort McMurray
were impacted by a wildfire that caused an evacuation of the city. During the second quarter of 2016, Loblaw
recognized a charge of $12 million related to inventory losses, site clean-up and restoration costs at these
locations. As at the end of 2016, Loblaw received partial proceeds of $10 million from the insurance claim. The
insurance claim remains in progress and further proceeds are expected to be recorded as the claim progresses.
Loblaw estimates the financial impact to Loblaw’s year-to-date 2016 results from the temporary closure of these
retail locations as follows: a decrease in sales of approximately $27 million and a decrease in adjusted EBITDA(1)
of approximately $7 million. Loblaw maintains business interruption insurance and expects that certain losses
will be recoverable under this insurance coverage.
Gas Bar Network In the second quarter of 2016, Loblaw began engaging with potential buyers for the sale of its
gas bar operations. The gas bar network is comprised of approximately 200 retail fuel sites. On an annual basis,
the gas bar operations sell approximately 1,700 million litres of gas and generate sales of approximately
$1,600 million.
George Weston Limited 2016 Annual Report 19
Management’s Discussion and Analysis
Restructuring and other related charges In the fourth quarter of 2016 and year-to-date, Loblaw recorded an
additional charge related to store closures of approximately $2 million and $46 million, respectively. This amount
was primarily related to the closure of the remaining Joe Fresh retail locations in the U.S.
Drug Retail Ancillary Assets In 2015, Loblaw began actively marketing the sale of certain assets of the Shoppers
Drug Mart ancillary healthcare business and recorded asset impairments on these assets and other related
restructuring charges. In 2016, Loblaw signed agreements for the sale of a portion of these assets.
In 2016, Loblaw ceased actively marketing the remaining assets and restructured those assets as part of ongoing
operations. As a result, Loblaw recorded a charge of $4 million related to inventory impairment and reversed
$8 million of previous asset impairments and other related restructuring charges.
7.
LIQUIDITY AND CAPITAL RESOURCES
7.1
CASH FLOWS
($ millions)
For the years ended December 31
Cash and cash equivalents, beginning of period
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Effect of foreign currency exchange rate changes on
cash and cash equivalents
Cash and cash equivalents, end of period
2016
1,413
3,760
(1,324)
(2,275)
(14)
1,560
$
$
$
$
$
$
2015
1,333
$
$
3,367
(1,407) $
(1,918) $
38
1,413
$
$
Change
80
393
83
(357)
(52)
147
$
$
$
$
$
$
Cash Flows from Operating Activities The year-over-year increase in cash inflows in 2016 was $393 million,
primarily due to:
• higher cash earnings;
partially offset by,
• non-cash working capital driven by a use of cash in trade payables and other liabilities and provisions,
partially offset by cash from a decrease in accounts receivable and prepaid expenses and other assets; and
• an increase in income taxes paid.
Cash Flows used in Investing Activities The year-over-year decrease in cash outflows in 2016 was $83 million,
primarily due to a decrease in short term investments, the change in other investing activities and lower net
capital investments, partially offset by the acquisition of QHR.
The following table summarizes the Company’s capital investments by each of its reportable operating segments:
($ millions)
For the years ended December 31
Weston Foods
Loblaw
Total capital investments
2016
241
1,224
1,465
$
$
2015
259
1,241
1,500
$
$
Cash Flows used in Financing Activities The year-over-year increase in cash outflows in 2016 was $357 million,
primarily driven by Loblaw’s repurchases of common shares for cancellation, partially offset by an increase in
President’s Choice Bank’s (“PC Bank”) co-ownership interest held with the Other Independent Securitization
Trusts. In 2015, cash flows from financing activities also included Loblaw’s proceeds from the issuance of
preferred shares offset by Loblaw’s redemption of capital securities. The Company’s significant long term debt
transactions are set out in Section 7.3, “Components of Total Debt”.
20 George Weston Limited 2016 Annual Report
Free Cash Flow(1)
($ millions)
For the years ended December 31
Cash flows from operating activities
Less:
Interest paid
Fixed asset purchases
Intangible asset additions
Free cash flow(1)
2016
3,760
570
1,129
336
1,725
$
$
2015
3,367
587
1,267
233
1,280
$
$
Change
393
(17)
(138)
103
445
$
$
The year-over-year increase in free cash flow(1) in 2016 was $445 million, primarily due to higher cash flows from
operating activities and lower net capital investments.
LIQUIDITY
7.2
The Company (excluding Loblaw) expects that cash and cash equivalents, short term investments and future
operating cash flows will enable it to finance its capital investment program and fund its ongoing business
requirements, including working capital, pension plan funding requirements and financial obligations over the
next 12 months. The Company (excluding Loblaw) does not foresee any impediments in obtaining financing to
satisfy its long term obligations.
Loblaw expects that cash and cash equivalents, short term investments, future operating cash flows and the
amounts available to be drawn against committed credit facilities will enable it to finance its capital investment
program and fund its ongoing business requirements, including working capital, pension plan funding
requirements and financial obligations, over the next 12 months. Choice Properties expects to obtain long term
financing for the acquisition of accretive properties primarily through the issuance of equity and unsecured
debentures.
Loblaw and Choice Properties are required to comply with certain financial covenants for various debt
instruments. As at year end 2016 and throughout the year, Loblaw and Choice Properties were in compliance
with their respective covenants.
For details on the Company’s cash flows, see Section 7.1 “Cash Flows” of this MD&A.
Total Debt The following table presents total debt, as monitored by management:
($ millions)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives related to the above debt
Total debt
As at
Dec. 31, 2016
115
$
1,241
400
11,385
31
(368)
12,804
$
Dec. 31, 2015
143
$
1,086
1,348
10,928
30
(381)
13,154
$
Management targets credit metrics consistent with those of an investment grade profile. The Company
(excluding Loblaw) holds significant cash and cash equivalents and short term investments and as a
result monitors its leverage on a net debt basis. The Company (excluding Loblaw) has total debt of
$1,123 million (2015 – $1,420 million) and cash and cash equivalents and short term investments of
$1,016 million (2015 – $1,497 million), resulting in a $107 million net debt position (2015 – $77 million
net cash position).
George Weston Limited 2016 Annual Report 21
Management’s Discussion and Analysis
Loblaw’s management is focused on managing its capital structure on a segmented basis to ensure that each of
its operating segments is employing a capital structure that is appropriate for the industry in which it operates.
•
Loblaw targets maintaining Retail credit metrics consistent with those of investment grade retailers. Loblaw
monitors the Retail segment’s debt to adjusted EBITDA(1) ratio as a measure of the leverage being employed.
The Retail segment debt to adjusted EBITDA(1) ratio decreased compared to 2015 primarily as a result of
growth in adjusted EBITDA(1) and repayment of $525 million of MTNs that matured in the second quarter
of 2016.
• Choice Properties targets maintaining credit metrics consistent with those of investment grade Real Estate
Investment Trusts (“REIT”). Choice Properties monitors metrics relevant to the REIT industry including
targeting an appropriate debt to total assets ratio.
• PC Bank capital management objectives are to maintain a consistently strong capital position while
considering the economic risks generated by its credit card receivables portfolio and to meet all regulatory
requirements as defined by the Office of the Superintendent of Financial Institutions (“OSFI”). As at year end
2016 and throughout the year, PC Bank has met all applicable regulatory requirements.
7.3
COMPONENTS OF TOTAL DEBT
Loblaw Unsecured Term Loan Facilities In connection with the financing of the acquisition of Shoppers Drug
Mart, Loblaw obtained a $3,500 million Acquisition Term Loan. As at year end 2016, the outstanding balance on
the Acquisition Term Loan was $48 million (2015 – $48 million).
In 2015, Loblaw obtained $250 million through an unsecured term loan facility bearing interest at a rate equal to
the Bankers’ Acceptance rate plus 1.13%, maturing March 30, 2019.
Medium Term Notes and Debentures The following table summarizes the debentures issued in the years ended
as indicated:
($ millions)
Choice Properties senior unsecured debentures
– Series G(i)
– Series H(i)
– Series E
– Series F
Total debentures issued
Interest
Rate
Maturity
2016
Principal
Amount
2015
Principal
Amount
Date
3.20%
5.27%
2.30%
4.06%
March 7, 2023
$
March 7, 2046
250
100
September 14, 2020
November 24, 2025
$
$
250
200
450
$
350
(i) Offerings were made under Choice Properties’ Short Form Base Shelf Prospectus Supplement filed in the fourth quarter of 2015.
22 George Weston Limited 2016 Annual Report
The following table summarizes MTNs and debentures repaid in the years ended as indicated:
($ millions)
George Weston Limited notes
Loblaw Companies Limited notes
Shoppers Drug Mart notes
Choice Properties senior unsecured debentures – Series 5
Total MTNs and debentures repaid
Rate
3.78%
7.10%
2.01%
3.00%
Interest
2016
Maturity
Principal
Amount
350
$
Date
October 25, 2016
June 1, 2016
May 24, 2016
April 20, 2016(i)
300
225
300
$
1,175
2015
Principal
Amount
(i) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2016, Choice Properties redeemed, at par, its $200 million Series 6 3.00% senior
unsecured debentures with an original maturity date of April 20, 2017.
Committed Credit Facilities The components of the committed lines of credit available as at year end 2016 and
2015 were as follows:
($ millions)
Loblaw’s committed credit facility
Choice Properties’ committed
syndicated credit facility
Choice Properties’ committed bi-lateral
credit facility
Total committed credit facilities
As at
Dec. 31, 2016
Dec. 31, 2015
Maturity
Date
Available
Credit
Drawn
June 10, 2021
$
1,000
Available
Credit
$
1,000
Drawn
July 5, 2021
500
$
172
500
December 21, 2018
250
$
1,750
$
172
$
1,500
On December 23, 2016, Choice Properties entered into a bi-lateral $250 million senior unsecured committed
revolving credit facility with a major Canadian financial institution maturing on December 21, 2018. The credit
facility bears interest at variable rates of either: Prime rate plus 0.25% or Bankers’ Acceptance rate plus 1.25%.
Certain conditions of the credit facility are contingent on Choice Properties’ credit rating remaining at “BBB”.
Should certain conditions not be met, the credit facility would become secured against select properties.
Independent Securitization Trusts Loblaw, through PC Bank, participates in various securitization programs
that provide a source of funds for the operation of its credit card business. PC Bank maintains and monitors the
co-ownership interest in credit card receivables with independent securitization trusts, including Eagle and the
Other Independent Securitization Trusts, in accordance with its financing requirements.
The following table summarizes the amounts securitized to independent securitization trusts:
($ millions)
Securitized to independent securitization trusts:
Securitized to Eagle
Securitized to Other Independent Securitization Trusts
Total securitized to independent securitization trusts
As at
Dec. 31, 2016
Dec. 31, 2015
$
$
650
665
1,315
$
$
650
550
1,200
George Weston Limited 2016 Annual Report 23
Management’s Discussion and Analysis
The associated liability of Eagle is recorded in long term debt. The associated liabilities of credit card receivables
securitized to the Other Independent Securitization Trusts are recorded in short term debt.
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs
of PC Bank have been issued by major financial institutions. These standby letters of credit can be drawn upon in
the event of a major decline in the income flow from or in the value of the securitized credit card receivables.
Loblaw has agreed to reimburse the issuing banks for any amount drawn on the standby letters of credit. As at
year end 2016, the aggregate gross potential liability under these arrangements for the Other Independent
Securitization Trusts was $71 million (2015 – $56 million), which represented approximately 11% (2015 – 10%) of
the securitized credit card receivables amount. As at year end 2016, the aggregate gross potential liability
under these arrangements for Eagle was $36 million (2015 – $36 million), which represented approximately 9%
(2015 – 9%) of the Eagle notes outstanding issued prior to 2015.
Under its securitization programs, PC Bank is required to maintain, at all times, a credit card receivable pool
balance equal to a minimum of 107% of the outstanding securitized liability. PC Bank was in compliance with this
requirement as at year end 2016 and throughout 2016.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at year
end 2016, were $210 million (2015 – $175 million).
Independent Funding Trusts As at year end 2016, the independent funding trusts had drawn $587 million
(2015 – $529 million) from the revolving committed credit facility that is the source of funding to the
independent funding trusts. In 2016, Loblaw amended the committed credit facility agreement to increase the
size of the facility to $700 million and extended the maturity date to June 10, 2019, with all other terms and
conditions remaining substantially the same. Loblaw provides credit enhancement in the form of a standby letter
of credit for the benefit of the independent funding trusts. As at year end 2016, Loblaw has agreed to provide a
credit enhancement of $64 million (2015 – $53 million) for the benefit of the independent funding trusts
representing not less than 10% (2015 – 10%) of the principal amount of loans outstanding.
Guaranteed Investment Certificates (“GICs”) The following table summarizes PC Bank’s GIC activity, before
commissions, for the years ended as follows:
($ millions)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2016
809
239
(120)
928
$
$
2015
634
211
(36)
809
$
$
As at year end 2016, $142 million in GICs were recorded as long term debt due within one year (2015 –
$112 million).
Associate Guarantees Loblaw has arranged for its Shoppers Drug Mart licensees (“Associates”) to obtain
financing to facilitate their inventory purchases and fund their working capital requirements by providing
guarantees to various Canadian chartered banks that support Associate loans. As at year end 2016, an aggregate
amount of $488 million (2015 – $483 million) in available lines of credit was allocated to the Associates by the
various banks. As at year end 2016, Associates had drawn an aggregate amount of $115 million (2015 –
$143 million) against these available lines of credit. Any amounts drawn by the Associates are included in bank
indebtedness on the Company’s consolidated balance sheets. Loblaw guarantees the full amounts drawn by the
Associates. As recourse in the event that any payments are made under the guarantees, Loblaw holds a first-
ranking security interest on all assets of Associates, subject to certain prior-ranking statutory claims.
24 George Weston Limited 2016 Annual Report
7.4
FINANCIAL CONDITION
Adjusted return on average equity attributable to common shareholders
of the Company(1)
Adjusted return on capital(1)
As at
Dec. 31, 2016
Dec. 31, 2015(4)
12.1%
12.1%
10.8%
10.6%
Adjusted return on average equity attributable to common shareholders of the Company(1) increased as at year
end 2016 compared to year end 2015, due to Loblaw earnings growth and Loblaw’s common shares repurchased
for cancellation. Adjusted return on capital(1) increased as at year end 2016 compared to year end 2015, due to
the factors described above, as well as Loblaw’s debt reduction.
CREDIT RATINGS
7.5
In 2016, Standard & Poor’s reaffirmed credit ratings and outlook for GWL, Loblaw and Choice Properties. Also in
2016, Dominion Bond Rating Service (“DBRS”) reaffirmed credit ratings and trends for GWL, and reaffirmed
credit ratings and changed the trends to Positive from Stable for Loblaw and Choice Properties.
The following table sets out the current credit ratings of GWL:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Preferred shares
DBRS
Credit Rating
BBB
BBB
BBB
Pfd-3
Trend
Stable
Stable
Stable
Stable
The following table sets out the current credit ratings of Loblaw:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Second Preferred shares, Series B
DBRS
Credit Rating
BBB
BBB
BBB
Pfd-3
Trend
Positive
Positive
Positive
Positive
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
The following table sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Issuer rating
Senior unsecured debentures
DBRS
Credit Rating
BBB
BBB
Trend
Positive
Positive
Standard & Poor’s
Credit Rating
BBB
BBB
Outlook
Stable
n/a
George Weston Limited 2016 Annual Report 25
Management’s Discussion and Analysis
7.6
SHARE CAPITAL
Outstanding Share Capital and Capital Securities GWL’s outstanding share capital is comprised of common
shares and preferred shares. The following table details the authorized and outstanding common shares and
preferred shares as at December 31, 2016:
(number of common shares)
Common shares
Preferred shares – Series I
– Series II
– Series III
– Series IV
– Series V
Authorized
Unlimited
10,000,000
10,600,000
10,000,000
8,000,000
8,000,000
Outstanding
127,898,582
9,400,000
8,000,000
8,000,000
8,000,000
Common Share Capital Common shares issued are fully paid and have no par value. The following table
summarizes the activity in the Company’s common shares issued and outstanding for the years ended
December 31, 2016 and December 31, 2015:
(number of common shares)
Issued and outstanding, beginning of year
Issued for settlement of stock options
Purchased and cancelled
Issued and outstanding, end of year
Shares held in trusts, beginning of year
Purchased for future settlement of RSUs and PSUs
Released for settlement of RSUs and PSUs
Shares held in trusts, end of year
Issued and outstanding, net of shares held in trusts, end of year
Weighted average outstanding, net of shares held in trusts
2016
127,911,661
54,921
(68,000)
127,898,582
(272,031)
(102,006)
107,038
(266,999)
127,631,583
127,668,839
2015
127,901,231
144,386
(133,956)
127,911,661
(291,304)
(71,858)
91,131
(272,031)
127,639,630
127,675,501
As at year end 2016, a total of 1,662,855 GWL stock options were outstanding. The number of stock options
outstanding was within the Company’s guidelines as GWL may grant options for up to 6,453,726 of its common
shares. Each stock option is exercisable into one common share of GWL at the price specified in the terms of the
option agreement.
Preferred Share Capital GWL may, at its option, redeem for cash, in whole or in part, the preferred shares
Series I, Series III, Series IV and Series V outstanding on or after the redemption dates specified by the terms of
each series of preferred shares. GWL may at any time after issuance give the holders of these preferred shares
the right, at the option of the holder, to convert the holder’s preferred shares into preferred shares of a further
series designated by GWL on a share-for-share basis on a date specified by GWL.
26 George Weston Limited 2016 Annual Report
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof
are at the discretion of the Company’s Board of Directors (“Board”) which takes into account the Company’s
financial results, capital requirements, available cash flow, future prospects of the Company’s business and other
factors considered relevant from time to time. Over time, it is the Company’s intention to increase the amount of
the dividend while retaining appropriate free cash flow to finance future growth. In the second quarter of 2016
and 2015, the Board raised the quarterly common share dividend by $0.015 to $0.44 and by $0.005 to $0.425
per share, respectively. The Board declared dividends as follows:
($)
Dividends declared per share(i):
Common share
Preferred share:
Series I
Series III
Series IV
Series V
2016
1.745
1.45
1.30
1.30
1.1875
$
$
$
$
$
2015
1.695
1.45
1.30
1.30
1.1875
$
$
$
$
$
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V were paid on January 1, 2017.
Dividends declared on Preferred Shares, Series I were paid on December 15, 2016.
The following table summarizes the Company’s cash dividends declared subsequent to year end 2016:
($)
Dividends declared per share(i) – Common share
– Preferred share:
Series I
Series III
Series IV
Series V
$
0.44
0.3625
$
0.3250
$
$
0.3250
$ 0.296875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V are payable on April 1, 2017. Dividends
declared on Preferred Shares, Series I are payable on March 15, 2017.
At the time such dividends are declared, GWL identifies on its website (www.weston.ca) the designation of
eligible and ineligible dividends in accordance with the administrative position of the CRA.
Normal Course Issuer Bid (“NCIB”) Program The following table summarizes the Company’s activity under its
NCIB program:
($ millions except where otherwise indicated)
Purchased for future settlement of RSUs and PSUs (number of shares)
Purchased and cancelled (number of shares)
Cash consideration paid
Purchased and held in trusts
Purchased and cancelled
2016
102,006
68,000
2015
71,858
133,956
$
$
(11)
(8)
$
$
(7)
(14)
In 2016, GWL renewed its NCIB program to purchase on the Toronto Stock Exchange (“TSX”) or through
alternative trading systems up to 6,397,215 of its common shares, representing approximately 5% of the
common shares outstanding. In accordance with the rules and regulations of the TSX, any purchases must be at
the then market price of such shares.
George Weston Limited 2016 Annual Report 27
Management’s Discussion and Analysis
OFF-BALANCE SHEET ARRANGEMENTS
7.7
The following is a summary of the Company’s off-balance sheet arrangements. Certain significant arrangements
have also been discussed in Section 7.3, “Components of Total Debt”.
Letters of Credit Standby and documentary letters of credit are used in connection with certain obligations
mainly related to real estate transactions, benefit programs, purchase orders and performance guarantees,
securitization of PC Bank’s credit card receivables and third-party financing made available to Loblaw’s
franchisees. As at year end 2016, the aggregate gross potential liability related to the Company’s letters of credit
was approximately $771 million (2015 – $963 million).
Guarantees In addition to the letters of credit mentioned above, the Company has entered into various
guarantee arrangements including obligations to indemnify third parties in connection with leases, business
dispositions and other transactions in the normal course of the Company’s business. Additionally, Loblaw has
provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated (“MasterCard®”) for
accepting PC Bank as a card member and licensee of MasterCard®. As at year end 2016, the guarantee on behalf
of PC Bank to MasterCard® was U.S. dollars $190 million (2015 – U.S. dollars $190 million).
Glenhuron Bank Limited Surety Bond In 2015, in connection with the CRA’s reassessment of Loblaw on certain
income earned by Glenhuron, Loblaw arranged for a surety bond of $141 million (2015 – $132 million) to the
Ministry of Finance in order to dispute the reassessments.
Cash Collateralization As at year end 2016, GWL and Loblaw had agreements to cash collateralize certain
uncommitted credit facilities up to amounts of $45 million (2015 – $45 million) and $103 million (2015 –
$149 million), respectively. As at year end 2016, GWL and Loblaw had $45 million (2015 – $45 million) and
$4 million (2015 – $2 million) deposited with major financial institutions, respectively, and classified as security
deposits on the consolidated balance sheets.
28 George Weston Limited 2016 Annual Report
CONTRACTUAL OBLIGATIONS
7.8
The following table summarizes certain of the Company’s significant contractual obligations and other
obligations as at year end 2016:
Summary of Contractual Obligations
($ millions)
Total debt(i)
Foreign exchange forward
contracts
Operating leases(ii)
Contracts for purchases of
real property and capital
investment projects(iii)
Purchase obligations(iv)
Total contractual obligations
Payments due by year
2017
2,222 $
2018
1,836 $
2019
2,572 $
2020
1,687 $
2021
1,141 $
Thereafter
Total
8,096 $ 17,554
$
642
699
675
629
558
483
2,362
642
5,406
161
249
3,973 $
6
151
2,668 $
$
55
3,256 $
23
2,268 $
167
494
1,632 $ 10,466 $ 24,263
8
8
(i)
Includes short term debt, bank indebtedness, Loblaw’s certain other liabilities, and the fair value of the equity forward included in
other assets. Total debt also includes fixed interest payments on long term debt which are based on the maturing face values and
annual interest for each instrument, including GICs, long term independent securitization trusts and an independent funding trust, as
well as annual payment obligations for consolidated structured entities, mortgages and finance lease obligations. Variable interest
payments are based on the forward rates as at year end 2016.
(ii) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income.
(iii) Includes agreements for the purchase of real property and capital commitments for construction, expansion and renovation of
buildings. These agreements may contain conditions that may or may not be satisfied. If the conditions are not satisfied, it is possible
the Company will no longer have the obligation to proceed with the underlying transactions.
(iv) Includes contractual obligations of a material amount to purchase goods or services where the contract prescribes fixed or minimum
volumes to be purchased or payments to be made within a fixed period of time for a set or variable price. These are only estimates of
anticipated financial commitments under these arrangements and the amount of actual payments will vary. The purchase obligations
do not include purchase orders issued or agreements made in the ordinary course of business which are solely for goods that are
meant for resale, nor do they include any contracts which may be terminated on relatively short notice or with insignificant cost or
liability to the Company. Also excluded are purchase obligations related to commodities or commodity-like goods for which a market
for resale exists.
As at year end 2016, the Company had additional long term liabilities which included post-employment and
other long term employee benefit plan liabilities, deferred vendor allowances, deferred income tax liabilities,
Trust Unit liability, and provisions, including insurance liabilities. These long term liabilities have not been
included in the table above as the timing and amount of future payments are uncertain.
George Weston Limited 2016 Annual Report 29
Management’s Discussion and Analysis
8.
QUARTERLY RESULTS OF OPERATIONS
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
8.1
The Company’s year end is December 31. Activities are reported on a fiscal year ending on the Saturday closest
to December 31. As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week
every five to six years. Each of the years ended December 31, 2016 and December 31, 2015 contained 52 weeks.
The 52-week reporting cycle is divided into four quarters of 12 weeks each except for the third quarter, which is
16 weeks in duration. When a fiscal year contains 53 weeks, the fourth quarter is 13 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s
unaudited interim period condensed consolidated financial statements for each of the eight most recently
completed quarters.
Selected Quarterly Information (Unaudited)
($ millions except where
otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Depreciation and amortization(i)
Net earnings
Net earnings attributable to
shareholders of the Company
Net earnings available to
common shareholders of the
Company
Net earnings per common
share ($) - basic
Net earnings per common
share ($) - diluted
Adjusted diluted net earnings
per common share(1) ($)
Weston Foods sales growth(ii)
Weston Foods sales growth
excluding impact of foreign
currency translation(ii)
Average quarterly national food
price inflation (deflation)
(as measured by CPI)
Food retail same-store sales
growth
Drug retail same-store sales
growth
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2016
Total
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2015(4)
Total
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(audited)
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(audited)
$ 10,800
457
$
890
$
395
$
$ 11,075
525
$
981
$
370
$
$ 14,605
782
$
$ 1,242
497
$
$11,519
491
$
$ 1,027
392
$
$ 47,999
$ 2,255
$ 4,140
$ 1,654
$ 10,409
519
$
850
$
388
$
$ 10,851
423
$
913
$
388
$
$ 14,386
566
$
$ 1,117
509
$
$ 11,248
421
$
946
$
401
$
$ 46,894
$ 1,929
$ 3,826
$ 1,686
$
$
$
$
$
$
$
$
$
$
$
$
145
47
37
0.29
0.29
1.31
11.5%
$
$
$
$
$
$
227
143
133
1.04
1.04
1.56
6.9%
$
$
$
$
$
$
487
268
254
1.99
1.97
2.06
3.7%
231
$ 1,090
92
$
550
$
$
$
$
82
0.64
0.64
1.59
1.9 %
506
3.96
3.90
6.49
5.8%
$
$
$
$
$
$
$
$
$
$
$
$
246
167
157
1.23
1.23
1.19
12.2%
$
$
$
$
$
$
120
35
25
0.20
0.19
1.32
7.7%
248
161
147
1.15
1.15
1.65
$
$
$
$
$
$
216
148
138
1.08
1.08
1.43
$
$
$
$
$
$
830
511
467
3.66
3.62
5.57
13.1%
20.3%
13.3%
4.8%
4.3%
3.7%
2.1 %
3.6%
5.0%
2.0%
4.2%
10.0%
5.2%
4.3%
1.8%
0.2%
(2.3)%
1.0%
4.6%
3.9%
3.8%
4.1%
4.1%
2.0%
0.4%
0.8%
1.1 %
1.1%
2.0%
2.1%
1.3%
2.4%
1.9%
6.3%
4.0%
2.8%
3.4 %
4.0%
3.1%
3.8%
4.9%
5.0%
4.3%
(i) Depreciation and amortization includes amortization of intangible assets acquired with Shoppers Drug Mart recorded by Loblaw
and accelerated depreciation recorded by Weston Foods, related to restructuring and other charges.
(ii) Excludes the impact of 53rd week on sales of Weston Foods in 2014.
Impact of Trends and Seasonality on Quarterly Results Consolidated quarterly results for the last eight quarters
were impacted by the following significant items: foreign currency exchange rates, seasonality and the timing of
holidays. The impact of Weston Foods seasonality is greatest in the third and fourth quarters and least in the first
quarter. The impact of Loblaw seasonality is greatest in the fourth quarter and least in the first quarter.
30 George Weston Limited 2016 Annual Report
Sales Over the last eight quarters, consolidated sales have been impacted by each of the Company’s reportable
operating segments as follows:
• Weston Foods 2016 quarterly sales were positively impacted by foreign currency translation when compared
to the same periods in 2015, except for the fourth quarter of 2016 which had a nominal negative impact on
sales compared to the same period in 2015. Excluding the impact of foreign currency translation, quarterly
sales were positively impacted by volume growth in all four quarters.
•
Loblaw experienced inflation in food prices in 2015, with Loblaw’s average quarterly internal retail food price
index in 2015 remaining higher than or in line with the average quarterly national retail food price inflation
as measured by CPI. The trend reversed in 2016 with inflation declining each quarter and becoming
deflationary in the fourth quarter of 2016. CPI does not necessarily reflect the effect of inflation on the
specific mix of goods sold in Loblaw stores.
• Over the past eight quarters, Loblaw’s net retail square footage increased by 0.2 million square feet to
70.2 million square feet, primarily driven by new store openings, partially offset by Loblaw’s store closure
plan announced in the second quarter of 2015 and completed in the first half of 2016.
Net earnings available to common shareholders of the Company and diluted net earnings per common share
Consolidated quarterly net earnings available to common shareholders of the Company and diluted net earnings
per common share for the last eight quarters were impacted by the underlying operating performance of each of
the Company’s reportable operating segments and certain adjusting items.
The Company’s underlying operating performance for the last eight quarters included the following:
• Weston Foods year-over-year quarterly underlying operating performance during 2016 was positively
impacted by the increase in sales and productivity improvements, partially offset by continued investments
in the business;
Loblaw year-over-year quarterly underlying operating performance during 2016 reflected the improvements
in underlying operating performance of the Retail segment in all quarters of 2016;
year-over year quarterly adjusted net interest and other financing charges(1) decreased in the first, second
and fourth quarters of 2016. The net interest and other financing charges remained flat in the third quarter
of 2016; and
the year-over-year quarterly adjusted income tax rate(1) increased in the first, second and fourth quarter of
2016 and declined in the third quarter of 2016.
•
•
•
The adjusting items impacting consolidated quarterly net earnings available to common shareholders of the
Company and diluted net earnings per common share for the last eight quarters are described in Section 5.2,
“Selected Annual Information”, and Section 18, “Non-GAAP Financial Measures”, of this MD&A.
George Weston Limited 2016 Annual Report 31
Management’s Discussion and Analysis
FOURTH QUARTER RESULTS (UNAUDITED)
8.2
The following is a summary of selected unaudited consolidated financial information for the fourth quarter. The
analysis of the data contained in the table focuses on the results of operations and changes in the financial
condition and cash flows in the fourth quarter.
Selected Consolidated Information
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other
financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings attributable to shareholders
of the Company
Net earnings available to common shareholders
of the Company
Adjusted net earnings available to common shareholders
of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1) ($)
Dividends declared per share ($):
Common shares
Preferred shares – Series I
Preferred shares – Series III
Preferred shares – Series IV
Preferred shares – Series V
Quarters Ended
Dec. 31, 2016
11,519
$
491
$
1,027
$
8.9%
392
177
$
$
Dec. 31, 2015
11,248
$
421
$
946
$
8.4%
401
139
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
135
83
172
27.4%
92
82
204
0.64
1.59
0.44
0.3625
0.3250
0.3250
0.296875
$
$
$
$
$
$
$
$
$
$
$
$
$
143
66
144
27.1%
148
138
183
1.08
1.43
0.425
0.3625
0.3250
0.3250
0.296875
$ Change
271
$
70
$
81
$
$
$
$
$
$
$
$
$
$
$
(9)
38
(8)
17
28
(56)
(56)
21
(0.44)
0.16
% Change
2.4 %
16.6 %
8.6 %
(2.2)%
27.3 %
(5.6)%
25.8 %
19.4 %
(37.8)%
(40.6)%
11.5 %
(40.7)%
11.2 %
(i) Depreciation and amortization includes $124 million (2015 – $124 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $3 million (2015 – $6 million) of accelerated depreciation recorded by Weston Foods,
related to restructuring and other charges.
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company decreased by $56 million ($0.44 per common
share) to $82 million ($0.64 per common share) in the fourth quarter of 2016 compared to the same period in
2015. The decrease was primarily due to the unfavourable year-over-year net impact of certain adjusting items,
as described below, partially offset by the increase in Loblaw earnings and the positive contribution from the
increase in the Company’s ownership interest in Loblaw as a result of Loblaw’s share repurchases. The increase
in Loblaw earnings was primarily due to improvements in the underlying operating performance of its Retail
segment, including the favourable impact of a decrease in depreciation and amortization.
The unfavourable year-over-year net impact of certain adjusting items totaling $77 million ($0.60 per common
share) was primarily due to:
•
• asset impairments, net of recoveries, of $42 million ($0.32 per common share); and
foreign currency translation of $52 million ($0.40 per common share);
32 George Weston Limited 2016 Annual Report
• a fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of $39 million
($0.29 per common share);
partially offset by,
•
the favourable impact of the impairment of Loblaw’s drug retail ancillary assets held for sale in the fourth
quarter of 2015 of $37 million ($0.28 per common share); and
the favourable impact of Loblaw’s accelerated transition of certain grocery stores to more cost effective and
efficient Labour Agreements in the fourth quarter of 2015 of $18 million ($0.14 per common share).
•
Adjusted net earnings available to common shareholders of the Company(1) increased by $21 million ($0.16 per
common share) to $204 million ($1.59 per common share) in the fourth quarter of 2016 compared to the same
period in 2015, primarily due to the increase in Loblaw earnings and the positive contribution from the increase
in the Company’s ownership interest in Loblaw, as described above.
Sales
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Intersegment
Consolidated
Quarters Ended
Dec. 31, 2016
537
$
11,130
$
(148)
$
11,519
$
Dec. 31, 2015
527
$
10,865
$
(144)
$
11,248
$
$ Change
10
$
265
$
% Change
1.9%
2.4%
$
271
2.4%
Sales in the fourth quarter of 2016 were $11,519 million, an increase of $271 million compared to the same
period in 2015. The Company’s fourth quarter year-over-year increase in sales was impacted by each of its
reportable operating segments as follows:
• Positively by 0.1% due to sales growth of 1.9% at Weston Foods, primarily due to an increase in volumes.
Foreign currency translation had a nominal negative impact on sales compared to the same period in 2015.
• Positively by 2.4% due to sales growth of 2.4% at Loblaw, primarily driven by Retail. Retail sales increased by
$239 million, or 2.3%, compared to the same period in 2015. Food retail same-store sales growth was 1.1%
and Loblaw’s food retail average quarterly internal food price index declined and was slightly lower than the
average quarterly national food price deflation of 2.3% as measured by CPI. CPI does not necessarily reflect
the effect of inflation on the specific mix of goods sold in Loblaw stores. Drug retail same-store sales growth
was 3.4%.
Operating income
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Other
Consolidated
Quarters Ended
Dec. 31, 2016
38
$
447
$
6
$
491
$
Dec. 31, 2015
$
42
314
$
$
65
421
$
$ Change
(4)
$
133
$
% Change
(9.5)%
42.4 %
$
70
16.6 %
George Weston Limited 2016 Annual Report 33
Management’s Discussion and Analysis
Operating income in the fourth quarter of 2016 increased by $70 million to $491 million compared to the same
period in 2015. The increase was driven by the improvements in underlying operating performance of
$87 million, partially offset by the unfavourable year-over-year net impact of certain adjusting items totaling
$17 million, as described below:
•
the improvements in underlying operating performance of $87 million were primarily due to:
the underlying operating performance of Loblaw primarily driven by its Retail segment, including the
favourable impact of a decrease in depreciation and amortization; and
the underlying operating performance of Weston Foods, despite an increase in depreciation and
amortization;
•
the unfavourable year-over-year net impact of certain adjusting items totaling $17 million was primarily
due to:
asset impairments, net of recoveries, of $126 million; and
foreign currency translation of $59 million;
partially offset by,
the favourable impact of the impairment of Loblaw’s drug retail ancillary assets held for sale of
$112 million in the fourth quarter of 2015; and
the favourable impact of the accelerated transition of certain Loblaw’s grocery stores to more cost
effective and efficient Labour Agreements of $55 million in the fourth quarter of 2015.
Adjusted EBITDA(1)
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Consolidated
Quarters Ended
Dec. 31, 2016
73
$
954
$
1,027
$
Dec. 31, 2015
$
$
$
67 $
879 $
946 $
$ Change
6
75
81
% Change
9.0 %
8.5 %
8.6 %
Adjusted EBITDA(1) in the fourth quarter of 2016 increased by $81 million to $1,027 million compared to the
same period in 2015. The Company’s fourth quarter year-over-year increase in adjusted EBITDA(1) was impacted
by each of its reportable operating segments as follows:
• Positively by 0.6% due to an increase of 9.0% in adjusted EBITDA(1) at Weston Foods driven by the positive
impact of the increase in sales and productivity improvements, partially offset by continued investments in
the business and higher input costs.
• Positively by 7.9% due to an increase of 8.5% in adjusted EBITDA(1) at Loblaw, primarily driven by Retail. The
improvement in Retail adjusted EBITDA(1) was primarily driven by higher sales with stable gross margins,
lower SG&A and the favourable impact of the consolidation of franchises.
34 George Weston Limited 2016 Annual Report
Depreciation and Amortization
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Consolidated
Quarters Ended
Dec. 31, 2016
27
$
365
$
392
$
Dec. 31, 2015
$
$
$
25 $
376 $
401 $
$ Change
2
(11)
(9)
% Change
8.0 %
(2.9)%
(2.2)%
Depreciation and amortization was $392 million in the fourth quarter of 2016, a decrease of $9 million compared
to the same period in 2015, and included $124 million (2015 – $124 million) of amortization of intangible assets
related to the acquisition of Shoppers Drug Mart and $3 million (2015 – $6 million) of accelerated depreciation
incurred by Weston Foods. Excluding these amounts, depreciation and amortization decreased by $6 million
driven by:
•
the decline in Loblaw Retail depreciation and amortization, primarily due to a change in the estimated useful
life of certain equipment and fixtures;
partially offset by,
• higher depreciation due to investments in capital at Weston Foods.
Net Interest Expense and Other Financing Charges
(unaudited)
($ millions)
Net interest expense and other financing charges
Add: Fair value adjustment of the Trust Unit liability
Fair value adjustment of the forward sale agreement for 9.6 million
Loblaw common shares
Adjusted net interest expense and other financing charges(1)
Quarters Ended
Dec. 31, 2016
177
$
1
Dec. 31, 2015
139
$
(5)
(43)
135
$
9
143
$
In the fourth quarter of 2016, net interest expense and other financing charges increased by $38 million to
$177 million compared to the same period in 2015. The increase in net interest expense and other financing
charges was primarily due to the year-over-year impact of an increase in certain adjusting items totaling
$46 million, partially offset by a decrease in adjusted net interest expense and other financing charges(1) of
$8 million primarily due to:
•
lower interest expense in Loblaw’s Retail and Financial Services segments due to the repayment of Retail
segment MTNs in 2016 and Eagle debt in 2015, respectively; and
lower interest expense at Weston Foods due to the repayment of a $350 million MTN in the third quarter
of 2016;
partially offset by,
• higher interest expense in Loblaw’s Choice Properties segment due to the issuance of third party senior
•
unsecured debentures.
George Weston Limited 2016 Annual Report 35
Management’s Discussion and Analysis
Income Taxes
(unaudited)
($ millions except where otherwise indicated)
Income taxes
Add: Tax impact of items excluded from adjusted earnings before taxes(1)(i)
Adjusted income taxes(1)
Effective income tax rate applicable to earnings before taxes
Adjusted income tax rate applicable to adjusted earnings before taxes(1)
Quarters Ended
Dec. 31, 2016
83
$
89
172
26.4%
27.4%
$
Dec. 31, 2015
66
$
78
144
23.4%
27.1%
$
(i)
See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table included in Section 18,
“Non-GAAP Financial Measures”, of this MD&A for a complete list of items excluded from adjusted earnings before taxes(1).
The effective tax rate in the fourth quarter of 2016 was 26.4%, an increase of 3.0% compared to the same period
in 2015. The increase in the effective tax rate was primarily attributable to a decrease in non-taxable foreign
currency translation gains and an increase in certain non-deductible items.
The adjusted income tax rate(1) for the fourth quarter of 2016 was 27.4%, an increase of 0.3% compared to
the same period in 2015. The increase was primarily attributable to an increase in certain non-deductible items.
36 George Weston Limited 2016 Annual Report
Cash Flows
(unaudited)
($ millions)
Cash and cash equivalents, beginning of period
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Effect of foreign currency exchange rate changes on
cash and cash equivalents
Cash and cash equivalents, end of period
Quarters Ended
Dec. 31, 2016
1,863
$
976
$
(775)
$
(506)
$
Dec. 31, 2015
$
1,605
$
684
$
$
(268) $
$
(624) $
$
$
$
2
1,560
$
$
16
1,413
$
$
Change
258
292
(507)
118
(14)
147
Cash Flows from Operating Activities The year-over-year increase in cash inflows in the fourth quarter of 2016
was $292 million, primarily due to higher cash earnings.
Cash Flows used in Investing Activities The year-over-year increase in cash outflows in the fourth quarter of
2016 was $507 million, primarily due to the release of funds from security deposits held by Loblaw to fund the
repayment of Eagle notes in the fourth quarter of 2015, the acquisition of QHR, the change in short term
investments, and higher net capital investments.
The following table summarizes the Company’s investments by each of its reportable operating segments for the
quarters ended as indicated:
(unaudited)
($ millions)
Weston Foods
Loblaw
Total capital investments
Quarters Ended
Dec. 31, 2016
98
$
470
568
$
Dec. 31, 2015
92
$
433
525
$
Cash Flows used in Financing Activities The year-over-year decrease in cash outflows in the fourth quarter of
2016 was $118 million, primarily due to an increase in PC Bank’s co-ownership interest held with the Other
Independent Securitization Trusts.
Free Cash Flow(1)
(unaudited)
($ millions)
Cash flows from operating activities
Less:
Interest paid
Fixed asset purchases
Intangible asset additions
Free cash flow(1)
Quarters Ended
Dec. 31, 2016
976
$
103
452
116
305
$
Dec. 31, 2015
684
$
120
421
104
39
$
$
$
Change
292
(17)
31
12
266
The year-over-year increase in free cash flow(1) in the fourth quarter of 2016 was $266 million, primarily due
to higher cash flows from operating activities, partially offset by higher net capital investments.
George Weston Limited 2016 Annual Report 37
Management’s Discussion and Analysis
FOURTH QUARTER RESULTS OF REPORTABLE OPERATING SEGMENTS
9.
The following discussion provides details of the 2016 fourth quarter results of operations of each of the
Company’s reportable operating segments.
9.1 WESTON FOODS FOURTH QUARTER OPERATING RESULTS (UNAUDITED)
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Quarters Ended
Dec. 31, 2016
537
$
38
$
73
$
13.6%
27
$
Dec. 31, 2015
$
$
$
527 $
42 $
67 $
$ Change
10
(4)
6
% Change
1.9 %
(9.5)%
9.0 %
12.7%
$
25 $
2
8.0 %
(i) Depreciation and amortization includes $3 million (2015 – $6 million) of accelerated depreciation related to restructuring and other
charges.
Sales Weston Foods sales in the fourth quarter of 2016 were $537 million, an increase of $10 million, or 1.9%,
compared to the same period in 2015, primarily due to an increase in volumes. Foreign currency translation had
a nominal negative impact on sales compared to the same period in 2015.
Operating income Weston Foods operating income in the fourth quarter of 2016 was $38 million, a decrease of
$4 million, or 9.5%, compared to the same period in 2015. The decrease was due to the unfavourable year-over-
year net impact of certain adjusting items and an increase in depreciation and amortization, partially offset by an
improvement in underlying operating performance, as described below. The unfavourable year-over-year net
impact of certain adjusting items was primarily due to:
•
•
partially offset by,
•
charges associated with damaged inventory in the fourth quarter of 2016 of $5 million; and
the fair value adjustment of derivatives of $4 million;
the favourable impact of settlement charges related to pension annuities and buy-outs in the fourth quarter
of 2015 of $3 million.
Adjusted EBITDA(1) Weston Foods adjusted EBITDA(1) in the fourth quarter of 2016 was $73 million, an increase
of $6 million, or 9.0%, compared to the same period in 2015. The increase was driven by the positive impact of
the increase in sales and productivity improvements, partially offset by continued investments in the business
and higher input costs.
Adjusted EBITDA margin(1) in the fourth quarter of 2016 was 13.6% compared to 12.7% in the same period in
2015. The improvement in adjusted EBITDA margin(1) in the fourth quarter of 2016 was mainly due to the factors
impacting adjusted EBITDA(1), as described above.
Depreciation and Amortization Weston Foods depreciation and amortization was $27 million in the fourth
quarter of 2016, an increase of $2 million, compared to the same period in 2015. Depreciation and amortization
included $3 million (2015 – $6 million) in the fourth quarter of 2016 of accelerated depreciation related to the
planned closures of bread, pie and cake manufacturing facilities. Excluding these amounts, depreciation and
amortization in the fourth quarter of 2016 increased by $5 million due to investments in capital.
Weston Foods Other Business Matters
Restructuring Weston Foods recorded restructuring and other charges in the fourth quarter of 2016 of
$7 million (2015 – $8 million), including $3 million (2015 – $6 million) of accelerated depreciation. For details see
section 6.1, “Weston Foods Operating Results”, of this MD&A.
38 George Weston Limited 2016 Annual Report
Inventory loss In the fourth quarter of 2016, Weston Foods recorded $5 million (U.S. $4 million) related to the
write-off of damaged inventory and other associated costs in SG&A in the Company’s consolidated statement of
earnings. For details see section 6.1, “Weston Foods Operating Results”, of this MD&A.
9.2
LOBLAW FOURTH QUARTER OPERATING RESULTS (UNAUDITED)
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Quarters Ended
Dec. 31, 2016
11,130
$
447
$
954
$
8.6%
365
$
Dec. 31, 2015
$
$
$
10,865 $
314 $
879 $
8.1%
376 $
$
$ Change
265
133
75
% Change
2.4 %
42.4 %
8.5 %
(11)
(2.9)%
(ii) Depreciation and amortization includes $124 million (2015 – $124 million) in the fourth quarter of 2016 of amortization of intangible
assets acquired with Shoppers Drug Mart.
Sales, operating income and adjusted EBITDA(1) in the fourth quarter of 2016 included the impacts of the
consolidated franchises, as set out in “Loblaw Other Business Matters” of Section 6.2, “Loblaw Operating
Results” of this MD&A.
Sales Loblaw sales in the fourth quarter of 2016 were $11,130 million, an increase of $265 million compared
to the same period in 2015, primarily driven by Retail. Retail sales increased by $239 million, or 2.3%, compared
to the same period in 2015 and included food retail sales of $7,789 million (2015 – $7,631 million) and drug
retail sales of $3,056 million (2015 – $2,975 million). Excluding the consolidation of franchises, Retail sales
increased by $168 million primarily driven by the following factors:
•
food retail same-store sales growth was 1.1%, after excluding gas bar which had no impact in the fourth
quarter in 2016. The same-store sales growth includes the impact of retail promotional investments. Food
retail same-store sales included the favourable impact of an extra selling day in the fourth quarter of 2016,
due to the timing of New Year’s Day, of approximately 1.0%. Loblaw’s food retail average quarterly internal
food price index declined and was slightly lower than the average quarterly national food price deflation of
2.3% as measured by CPI. CPI does not necessarily reflect the effect of inflation on the specific mix of goods
sold in Loblaw stores;
• drug retail same-store sales growth was 3.4%, including same-store pharmacy sales growth of 2.5% and
same-store front store sales growth of 4.1%. Drug retail same-store sales included the favourable impact of
an extra selling day in the fourth quarter of 2016, due to the timing of New Year’s Day, of approximately
0.6%; and
• 32 food and drug stores were opened and 37 food and drug stores were closed in the last 12 months,
resulting in an increase in Retail net square footage of 0.3 million square feet, or 0.4%, primarily driven
by new store openings, partially offset by Loblaw’s store closure plan announced in 2015 and completed
in 2016.
Operating income Loblaw operating income in the fourth quarter of 2016 was $447 million, an increase of
$133 million compared to the same period in 2015, primarily driven by the improvements in underlying
operating performance of $86 million and the favourable year-over-year net impact of certain adjusting items
totaling $47 million, as described below:
•
the improvements in underlying operating performance were primarily driven by Retail including higher
sales with stable gross margins, lower SG&A, lower depreciation and amortization and the favourable impact
of the consolidation of franchises; and
the favourable year-over-year net impact of certain Retail adjusting items totaling $47 million was primarily
due to:
•
the impairment of drug retail ancillary assets held for sale in the fourth quarter of 2015 of
$112 million;
George Weston Limited 2016 Annual Report 39
Management’s Discussion and Analysis
the accelerated transition of certain Loblaw’s grocery stores to more cost effective and efficient
Labour Agreements of $55 million in the fourth quarter of 2015; and
a charge related to inventory measurement of $33 million associated with the conversion of Loblaw’s
franchised grocery stores to the new IT systems in the fourth quarter of 2015;
partially offset by,
the unfavourable impact of asset impairments, net of recoveries, of $126 million; and
the unfavourable impact of settlement charges related to pension annuities and buy-outs of
$15 million.
Adjusted EBITDA(1) Loblaw adjusted EBITDA(1) in the fourth quarter of 2016 was $954 million, an increase of
$75 million compared to the same period in 2015, primarily driven by Retail. Retail adjusted EBITDA(1) was
$889 million, an increase of $66 million driven by an increase in gross profit, partially offset by an increase
in SG&A.
• Retail gross profit percentage of 27.2% increased by 40 basis points compared to the fourth quarter of 2015.
Excluding the consolidation of franchises, Retail gross profit percentage was 26.4%, a decrease of 20 basis
points compared to the fourth quarter of 2015. The decrease in gross profit was driven by food retail
promotional investments, partially offset by improvements in drug retail margins, due to strong front store
performance, and improvements in shrink, driven by improved inventory management.
• Retail SG&A as a percentage of sales was 19.0%, a decrease of 10 basis points compared to the fourth
quarter of 2015. Excluding the consolidation of franchises, SG&A decreased $9 million and as a percentage of
sales was 18.4%, an improvement of 40 basis points compared to the fourth quarter of 2015, driven by the
following factors:
lower store support costs;
the positive impact of Loblaw’s store closure plan announced in 2015 and completed in 2016; and
favourable year-over-year foreign exchange impacts;
partially offset by,
higher retail store costs as efficiencies achieved in retail stores were more than offset by an increase
in financial support to franchises.
Loblaw adjusted EBITDA(1) in the fourth quarter of 2016 also included an increase in Financial Services adjusted
EBITDA(1) of $5 million, primarily driven by growth in credit card receivables and higher Mobile Shop sales, and
an increase in Choice Properties adjusted EBITDA(1) of $4 million, primarily due to the expansion of the portfolio
through development of properties and an increase in base rent from existing properties.
Depreciation and Amortization Loblaw’s depreciation and amortization was $365 million in the fourth
quarter of 2016, a decrease of $11 million compared to the same period in 2015. The decline in depreciation
and amortization was primarily attributable to a change in the estimated useful life of certain equipment and
fixtures in the second quarter of 2016.
Depreciation and amortization included $124 million (2015 – $124 million) in the fourth quarter of 2016 of
amortization of intangible assets acquired with Shoppers Drug Mart.
Loblaw Other Business Matters
For details see Section 6.2, “Loblaw Operating Results”, of this MD&A.
40 George Weston Limited 2016 Annual Report
DISCLOSURE CONTROLS AND PROCEDURES
10.
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to
provide reasonable assurance that all material information relating to the Company and its subsidiaries is
gathered and reported to senior management on a timely basis so that appropriate decisions can be made
regarding public disclosure.
As required by National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim
Filings” (“NI 52-109”) the Chairman, as Chief Executive Officer, and Chief Financial Officer have caused the
effectiveness of the disclosure controls and procedures to be evaluated. Based on that evaluation, they have
concluded that the design and operation of the system of disclosure controls and procedures were effective as at
December 31, 2016.
INTERNAL CONTROL OVER FINANCIAL REPORTING
11.
Management is also responsible for establishing and maintaining adequate internal controls over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with IFRS.
As required by NI 52-109, the Chairman, as Chief Executive Officer, and the Chief Financial Officer have caused
the effectiveness of the internal controls over financial reporting to be evaluated using the framework
established in ‘Internal Control - Integrated Framework (COSO Framework)’ published by The Committee of
Sponsoring Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, they have
concluded that the design and operation of the Company’s internal controls over financial reporting were
effective as at December 31, 2016.
In designing such controls, it should be recognized that due to inherent limitations, any control, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives
and may not prevent or detect misstatements. Projections of any evaluations of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Additionally, management is required to
use judgment in evaluating controls and procedures.
Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal controls
over financial reporting in the fourth quarter of 2016 that materially affected, or are reasonably likely to
materially affect the Company’s internal control over financial reporting.
ENTERPRISE RISKS AND RISK MANAGEMENT
12.
The Company is committed to maintaining a framework that ensures risk management is an integral part of its
activities. To ensure the continued growth and success of the Company, risks are identified and managed through
the Company’s Enterprise Risk Management (“ERM”) program.
ERM program The ERM program assists all areas of the business in managing risk within appropriate levels of
tolerance by bringing a systematic approach and methodology for evaluating, measuring and monitoring key risks.
The results of the ERM program and other business planning processes are used to identify emerging risks to the
Company, prioritize risk mitigation activities and develop a risk-based internal audit plan.
Risks are not eliminated through the ERM program, but rather, are identified and managed in line with the
Company’s risk appetite and within understood risk tolerances. The ERM program is designed to:
•
facilitate effective corporate governance by providing a consolidated view of risks across the Company;
• enable the Company to focus on key risks that could impact its strategic objectives in order to reduce harm
to financial performance through responsible risk management;
• ensure that the Company’s risk appetite and tolerances are defined and understood;
• promote a culture of awareness of risk management and compliance within the Company;
• assist in developing consistent risk management methodologies and tools across the Company including
methodologies for the identification, assessment, measurement and monitoring of the risks; and
• anticipate and provide early warnings of risks through key risk indicators.
George Weston Limited 2016 Annual Report 41
Management’s Discussion and Analysis
Risk appetite and governance The Board oversees the ERM program, including a review of the Company’s risks
and risk prioritization and annual approval of the ERM policy and risk appetite statement. The risk appetite
statement articulates key aspects of the Company’s businesses, values, and brands and provides directional
guidance on risk taking. Key risk indicators are used to monitor and report on risk performance and whether the
Company is operating within its risk appetite. Risk owners are assigned relevant risks by management and are
responsible for managing risk and implementing risk mitigation strategies.
ERM framework Risk identification and assessments are important elements of the Company’s ERM process and
framework. An annual ERM assessment is completed to assist in the update and identification of internal and
external risks. This assessment is carried out in parallel with strategic planning through interviews, surveys and
facilitated workshops with management and the Board to align stakeholders’ views. This assessment is
completed for each business unit and aggregated where appropriate. Risks are assessed and evaluated based on
the Company’s vulnerability to the risk and the potential impact that the underlying risks would have on the
Company’s ability to execute on its strategies and achieve its objectives.
Risk monitoring and reporting Management provides periodic updates to the Board (or a Committee of the
Board) on the status of the key risks based on significant changes from the prior update, anticipated impacts in
future periods and significant changes in key risk indicators. In addition, the long term (three year) risk levels are
assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning activities.
Any of the key risks have the potential to negatively affect the Company and its financial performance. The
Company has risk management strategies in place for key risks. However, there can be no assurance that the
risks will be mitigated or will not materialize or that events or circumstances will not occur that could adversely
affect the reputation, operations or financial condition or performance of the Company.
12.1 OPERATING RISKS AND RISK MANAGEMENT
Operating Risks The following risks are a subset of the key risks identified through the ERM program. They
should be read in conjunction with the full set of risks inherent in the Company’s business, as included in the
Company’s AIF for the year ended December 31, 2016, which is hereby incorporated by reference:
Healthcare Reform
Loyalty Programs
Cyber Security and Data Breaches
IT Systems Implementations
and Data Management
Competitive Environment
Product Safety and Public Health
Regulatory Compliance
Legal Proceedings
Merchandising, Electronic Commerce and
Disruptive Technologies
Commodity Prices
Execution of Strategic Initiatives
Consumer and Retail Customer Trends
Healthcare Reform Loblaw is reliant on prescription drug sales for a significant portion of its sales and profits.
Prescription drugs and their sales are subject to numerous federal, provincial, territorial and local laws and
regulations. Changes to these laws and regulations, or non-compliance with these laws and regulations, could
adversely affect the reputation, operations or financial performance of the Company.
Federal and provincial laws and regulations that establish public drug plans typically regulate prescription drug
coverage, patient eligibility, pharmacy reimbursement, drug product eligibility and drug pricing and may also
regulate manufacturer allowance funding that is provided to or received by pharmacies or pharmacy suppliers.
With respect to pharmacy reimbursement, such laws and regulations typically regulate the allowable drug cost
of a prescription drug product, the permitted mark-up on a prescription drug product and the professional or
dispensing fees that may be charged on prescription drug sales to patients eligible under the public drug plan.
With respect to drug product eligibility, such laws and regulations typically regulate the requirements for listing
the manufacturer’s products as a benefit or partial benefit under the applicable governmental drug plan, drug
pricing and, in the case of generic prescription drug products, the requirements for designating the product as
interchangeable with a branded prescription drug product. In addition, other federal, provincial, territorial and
42 George Weston Limited 2016 Annual Report
local laws and regulations govern the approval, packaging, labeling, sale, marketing, advertising, handling,
storage, distribution, dispensing and disposal of prescription drugs.
Sales of prescription drugs, pharmacy reimbursement and drug prices may be affected by changes to the health
care industry, including legislative or other changes that impact patient eligibility, drug product eligibility, the
allowable cost of a prescription drug product, the mark-up permitted on a prescription drug product, the amount
of professional or dispensing fees paid by third-party payers or the provision or receipt of manufacturer
allowances by pharmacies and pharmacy suppliers.
The majority of prescription drug sales are reimbursed or paid by third-party payers, such as governments,
insurers or employers. These third-party payers have pursued and continue to pursue measures to manage the
costs of their drug plans. Each provincial jurisdiction has implemented legislative and/or other measures directed
towards managing pharmacy service costs and controlling increasing drug costs incurred by public drug plans
and private payers which impact pharmacy reimbursement levels and the availability of manufacturer
allowances. Legislative measures to control drug costs include lowering of generic drug pricing, restricting or
prohibiting the provision of manufacturer allowances and placing limitations on private label prescription drug
products. Other measures that have been implemented by certain government payers include restricting the
number of interchangeable prescription drug products which are eligible for reimbursement under provincial
drug plans. Additionally, the Council of the Federation, an institution created by the provincial Premiers in 2003
to collaborate on intergovernmental relations, continues its work regarding cost reduction initiatives for
pharmaceutical products and services.
Legislation in certain provincial jurisdictions establish listing requirements that ensure that the selling price for a
prescription drug product will not be higher than any selling price established by the manufacturer for the same
prescription drug product under other provincial drug insurance programs. In some provinces, elements of the
laws and regulations that impact pharmacy reimbursement and manufacturer allowances for sales to the public
drug plans are extended by legislation to sales in the private sector. Also, private third-party payers (such as
corporate employers and their insurers) are looking or may look to benefit from any measures implemented by
government payers to reduce prescription drug costs for public plans by attempting to extend these measures to
prescription drug plans they own or manage. Accordingly, changes to pharmacy reimbursement and
manufacturer allowances for a public drug plan could also impact pharmacy reimbursement and manufacturer
allowances for private sector sales. In addition, private third-party payers could reduce pharmacy reimbursement
for prescription drugs provided to their members or could elect to reimburse members only for products
included on closed formularies or available from preferred providers.
Ongoing changes impacting pharmacy reimbursement programs, prescription drug pricing and manufacturer
allowance funding, legislative or otherwise, are expected to continue to put downward pressure on prescription
drug sales. These changes may have a material adverse effect on Loblaw’s business, sales and profitability. In
addition, Loblaw could incur significant costs in the course of complying with any changes in the regulatory
regime affecting prescription drugs. Non-compliance with any such existing or proposed laws or regulations,
particularly those that provide for the licensing and conduct of wholesalers, the licensing and conduct of
pharmacists, the regulation and ownership of pharmacies, the advertising of pharmacies and prescription
services, the provision of information concerning prescription drug products, the pricing of prescription drugs
and restrictions on manufacturer allowance funding, could result in audits, civil or regulatory proceedings, fines,
penalties, injunctions, recalls or seizures, any of which could adversely affect the reputation, operations or
financial performance of the Company.
Loyalty Programs Loblaw’s loyalty programs are a valuable offering to customers and provide a key
differentiating marketing tool for the business. The marketing, promotional and other business activities related
to possible changes to the loyalty programs must be well managed and coordinated to preserve positive
customer perception. Any failure to successfully manage either of the loyalty programs may negatively impact
Loblaw’s reputation or financial performance.
George Weston Limited 2016 Annual Report 43
Management’s Discussion and Analysis
Cyber Security and Data Breaches The Company depends on the uninterrupted operation of its IT systems,
networks and services including internal and public internet sites, data hosting and processing facilities,
cloud-based services and hardware such as point-of-sale processing at stores to operate its business.
In the ordinary course of business, the Company collects, processes, transmits and retains confidential, sensitive
and personal information including personal health and financial information (“Confidential Information”)
regarding the Company and its employees, franchisees, Associates, vendors, customers, patients, credit card
holders and loyalty program members. Some of this Confidential Information is held and managed by third party
service providers. As with other large and prominent companies, the Company is regularly subject to
cyberattacks and such attempts are occurring more frequently, are constantly evolving in nature and are
becoming more sophisticated.
The Company has implemented security measures, including employee training, monitoring and testing,
maintenance of protective systems and contingency plans, to protect and to prevent unauthorized access of
Confidential Information and to reduce the likelihood of disruptions to its IT systems. The Company also has
security processes, protocols and standards that are applicable to its third party service providers.
Despite these measures, all of the Company’s information systems, including its back-up systems and any third
party service provider systems that it employs, are vulnerable to damage, interruption, disability or failures due
to a variety of reasons, including physical theft, electronic theft, fire, power loss, computer and
telecommunication failures or other catastrophic events, as well as from internal and external security breaches,
denial of service attacks, viruses, worms and other known or unknown disruptive events.
The Company or its third party service providers may be unable to anticipate, timely identify or appropriately
respond to one or more of the rapidly evolving and increasingly sophisticated means by which computer hackers,
cyber terrorists and others may attempt to breach the Company’s security measures or those of our third party
service providers’ information systems.
As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber
threats might defeat the Company’s security measures or those of its third party service providers. Moreover,
employee error or malfeasance, faulty password management or other irregularities may result in a breach of
the Company’s or its third party service providers’ security measures, which could result in a breach of
employee, franchisee, Associate, customer, credit card holder or loyalty program member privacy or Confidential
Information.
If the Company does not allocate and effectively manage the resources necessary to build and sustain reliable IT
infrastructure, fails to timely identify or appropriately respond to cybersecurity incidents, or the Company’s or its
third party service providers’ information systems are damaged, destroyed, shut down, interrupted or cease to
function properly, the Company’s business could be disrupted and the Company could, among other things, be
subject to: transaction errors; processing inefficiencies; the loss of, or failure to attract new customers; the loss
of revenue; the loss or unauthorized access to Confidential Information or other assets; the loss of or damage to
intellectual property or trade secrets; damage to its reputation; litigation; regulatory enforcement actions;
violation of privacy, security or other laws and regulations; and remediation costs.
IT Systems Implementations and Data Management The Company continues to undertake investments in new
IT systems to improve the operating effectiveness of the organization. Failure to successfully migrate from legacy
systems to the new IT systems or a significant disruption in Loblaw’s current IT systems during the
implementation of new systems could result in a lack of accurate data to enable management to effectively
manage day-to-day operations of the business or achieve its operational objectives, causing significant
disruptions to the business and potential financial losses. The Company also depends on relevant and reliable
information to operate its business. As the volume of data being generated and reported continues to increase
across the Company, data accuracy, quality and governance are required for effective decision making.
Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to
effectively leverage or convert data from one system to another, may preclude the Company from optimizing its
44 George Weston Limited 2016 Annual Report
overall performance and could result in inefficiencies and duplication in processes, which could in turn adversely
affect the reputation, operations or financial performance of the Company. Failure to realize the anticipated
strategic benefits including revenue growth, anticipated cost savings or operating efficiencies associated with the
new IT systems could adversely affect the reputation, operations or financial performance of the Company.
Competitive Environment The retail industry in Canada is highly competitive. Weston Foods’ competitors
include multi-national food processing companies as well as national and smaller-scale bakery operations in
North America.
Loblaw competes against a wide variety of retailers including supermarket and retail drug store operators, as
well as mass merchandisers, warehouse clubs, online retailers, mail order prescription drug distributors, limited
assortment stores, discount stores, convenience stores and specialty stores. Many of these competitors now
offer a selection of food, drug and general merchandise. Others remain focused on supermarket-type
merchandise. In addition, Loblaw is subject to competitive pressures from new entrants into the marketplace
and from the expansion or renovation of existing competitors, particularly those expanding into the grocery and
retail drug markets. Loblaw’s inability to effectively predict market activity or compete effectively with its current
or future competitors could result in, among other things, reduced market share and reduced profitability. If
Loblaw is ineffective in responding to consumer trends or in executing its strategic plans, its financial
performance could be adversely affected. Loblaw closely monitors its competitors and their strategies, market
developments and market share trends.
Failure by Weston Foods or Loblaw to sustain their competitive position could adversely affect the Company’s
financial performance.
Product Safety and Public Health The Company’s products may expose it to risks associated with product safety
and defects and product handling in relation to the manufacturing, design, packaging and labeling, storage,
distribution, and display of products. The Company cannot assure that active management of these risks,
including maintaining strict and rigorous controls and processes in its manufacturing facilities and distribution
systems, will eliminate all the risks related to food and product safety. The Company could be adversely affected
in the event of a significant outbreak of food-borne illness or food safety issues including food tampering or
contamination. In addition, failure to trace or locate any contaminated or defective products or ingredients could
affect the Company’s ability to be effective in a recall situation. Loblaw is also subject to risk associated with
errors made through medication dispensing or errors related to patient services or consultation. The occurrence
of such events or incidents, as well as the failure to maintain the cleanliness and health standards at Loblaw’s
store level or the Company’s manufacturing facilities, could result in harm to customers, negative publicity or
could adversely affect the Company’s brands, reputation, operations or financial performance and could lead to
unforeseen liabilities from legal claims or otherwise.
Regulatory Compliance The Company is subject to a wide variety of laws, regulations and orders across all
countries in which it does business, including those laws involving product liability, labour and employment, anti-
trust and competition, pharmacy, food safety, intellectual property, privacy, environmental and other matters.
The Company is subject to taxation by various taxation authorities in Canada and a number of foreign
jurisdictions. Changes to any of the laws, rules, regulations or policies (collectively, “laws”) applicable to the
Company’s business, including tax laws, and laws affecting the production, processing, preparation, distribution,
packaging and labelling of food, pharmaceuticals, and general merchandise products, could adversely affect the
operations or financial condition or performance of the Company.
Failure by the Company to comply with applicable laws, regulations and orders could subject the Company to
civil or regulatory actions, investigations or proceedings, including fines, assessments, injunctions, recalls or
seizures, which in turn could adversely affect the reputation, operations or financial condition or performance of
the Company. In the course of complying with changes to laws, the Company could incur significant costs.
Changing laws or interpretations of such laws or enhanced enforcement of existing laws could restrict the
Company’s operations or profitability and thereby threaten the Company’s competitive position and ability to
efficiently conduct business.
George Weston Limited 2016 Annual Report 45
Management’s Discussion and Analysis
As part of the review undertaken by the Competition Bureau of Loblaw’s acquisition of Shoppers Drug Mart, it
expressed concerns about practices that the Company has in place with certain suppliers. In connection with this
review, the Competition Bureau has issued requests for documents from the Company and 13 suppliers of
Loblaw. Loblaw has and will continue to cooperate with the Competition Bureau in its review of these
practices. At this stage of the review, it is not possible to predict when the review will be completed or the
outcome of such review. If the Competition Bureau is not satisfied that Loblaw’s practices meet the Competition
Bureau’s objectives of maintaining competitive markets, then the Competition Bureau may pursue remedies that
could have a material adverse effect on the Company’s reputation, operations or financial condition or
performance.
The Régie de l'assurance maladie du Québec (“RAMQ”) has been investigating certain aspects of Shoppers Drug
Mart’s contractual arrangements with pharmacists and drug manufacturers. Shoppers Drug Mart has and will
continue to cooperate with RAMQ in its review of these practices. If RAMQ is not satisfied with Shoppers Drug
Mart’s practices, then RAMQ may pursue remedies that could have a material adverse effect on the Company’s
reputation, operations, or financial condition or performance.
The Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to
time, tax authorities may disagree with the positions and conclusions taken by the Company in its tax filings or
legislation could be amended or interpretations of current legislation could change, any of which events could
lead to reassessments. These reassessments could result in a material adverse effect on the Company’s
reputation, operations or financial condition or performance.
Loblaw is subject to externally imposed capital requirements from OSFI, the primary regulator of PC Bank. PC
Bank’s capital management objectives are to maintain a consistently strong capital position while considering the
economic risks generated by its credit card receivables portfolio and to meet all regulatory capital requirements
as defined by OSFI. PC Bank uses Basel III as its regulatory capital management framework which includes a
common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8%. In
addition to the regulatory capital ratios requirement, PC Bank is subject to the Basel III Leverage ratio and OSFI’s
Guideline on Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based on the
Basel III framework. PC Bank would be assessed fines and other penalties for non-compliance with these and
other regulations. In addition, failure by PC Bank to comply, understand, acknowledge and effectively respond to
applicable regulators could result in regulatory intervention and reputational damages.
Choice Properties is currently classified as a “unit trust” and a “mutual fund trust” under the Income Tax Act
(Canada). It also qualifies for the Real Estate Investment Trust Exception under the Income Tax Act (Canada) and
as such is not subject to specified investment flow through rules. There can be no assurance that the Canadian
federal income tax laws will not be changed in a manner which adversely affects Choice Properties. If Choice
Properties ceases to qualify for these and other classifications and exceptions, the taxation of Choice Properties
and unitholders, including Loblaw and certain wholly owned subsidiaries of GWL, could be materially adversely
different in certain respects, which could in turn materially adversely affect the trading price of the Units.
Legal Proceedings In the ordinary course of business, the Company is involved in and potentially subject to legal
proceedings. The proceedings may involve suppliers, customers, Associates, franchisees, regulators, tax
authorities or other persons. The potential outcome of legal proceedings and claims is uncertain and could result
in a material adverse effect on the Company’s reputation, operations or financial condition or performance.
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the
Ontario Superior Court of Justice against the Company, Loblaw and certain of its subsidiaries and others in
connection with the collapse of the Rana Plaza complex in Dhaka, Bangladesh in 2013. The claim seeks
approximately $2 billion in damages.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that has
been filed in the Ontario Superior Court of Justice by two licensed Associates, claiming various declarations and
damages resulting from Shoppers Drug Mart’s alleged breaches of the Associate Agreement, in the amount of
$500 million. The class action comprises all of Shoppers Drug Mart’s current and former licensed Associates
46 George Weston Limited 2016 Annual Report
residing in Canada, other than in Québec, who are parties to Shoppers Drug Mart’s 2002 and 2010 forms of the
Associate Agreement. On July 9, 2013, the Ontario Superior Court of Justice certified as a class proceeding
portions of the action. The Court imposed a class closing date based on the date of certification. New Associates
after July 9, 2013 are not members of the class.
Loblaw has been reassessed by CRA and the Ontario Ministry of Finance on the basis that certain income earned
by Glenhuron, a wholly owned Barbadian subsidiary, should be treated, and taxed, as income in Canada. The
reassessments, which were received in 2015 and 2016, are for the 2000 to 2011 taxation years and total
$351 million including interest and penalties as at the time of reassessment. Loblaw believes it is likely that the
CRA will issue reassessments for the 2012 and 2013 taxation years on the same or similar basis. Loblaw has filed
a Notice of Appeal with the Tax Court of Canada for the 2000 to 2010 taxation years and a Notice of Objection
for the 2011 taxation year.
Merchandising, Electronic Commerce and Disruptive Technologies The Company may have inventory that
customers do not want or need, is not reflective of current trends in customer tastes, habits or regional
preferences, is priced at a level customers are not willing to pay, is late in reaching the market or does not have
optimal commercial product placement on store shelves. In addition, the Company’s operations as they relate to
food, specifically inventory levels, sales, volume and product mix, are impacted to some degree by seasonality,
including certain holiday periods in the year. Certain of Loblaw’s health care, related professional services and
general merchandise offerings are also subject to seasonal fluctuations. If merchandising efforts are not effective
or responsive to customer demand, it could adversely affect the Company’s financial performance.
Loblaw’s electronic commerce strategy is a growing business initiative. As part of the e-commerce initiative,
customers expect innovative concepts and a positive customer experience, including a user-friendly website, safe
and reliable processing of payments and a well-executed merchandise pick up or delivery process. If systems are
damaged or cease to function properly, capital investment may be required. Loblaw is also vulnerable to various
additional uncertainties associated with e-commerce including website downtime and other technical failures,
changes in applicable federal and provincial regulations, security breaches, and consumer privacy concerns. If
these technology-based systems do not function effectively, Loblaw’s ability to grow its e-commerce business
could be adversely affected. Loblaw has increased its investment in improving the digital customer experience,
but there can be no assurances that Loblaw will be able to recover the costs incurred to date.
The retail landscape is quickly changing due to the rise of the digitally influenced shopping experience and the
emergence of disruptive technologies, such as digital payments, drones, driverless cars and robotics. In addition,
the effect of increasing digital advances could have an impact on the physical space requirements of retail
businesses. Although the importance of a retailer’s physical presence has been demonstrated, the size
requirements and locations may be subject to further disruption. Any failure to adapt the business models to
recognize and manage this shift in a timely manner could adversely affect Loblaw’s operations or financial
performance.
Commodity Prices Weston Foods’ costs are directly impacted by fluctuations in the prices of commodity linked
raw materials such as wheat flours, sugars, vegetable oils, cocoa powders and chocolate. Loblaw is also exposed
to fluctuations in the commodity prices as a result of the indirect effect of changing commodity prices on the
price of consumer products. In addition, both Weston Foods and Loblaw are exposed to increases in the prices of
energy in operating, in the case of Weston Foods, its bakeries and distribution networks, and, in the case of
Loblaw, its stores and distribution networks. Both Weston Foods and Loblaw use purchase commitments and
derivative instruments in the form of futures contracts, option contracts and forward contracts to manage their
current and anticipated exposure to fluctuations in commodity prices.
Execution of Strategic Initiatives The Company undertakes from time to time acquisitions and dispositions that
meet its strategic objectives. The Company holds significant cash and short term investments and is continuing
to evaluate strategic opportunities for the use or deployment of these funds. The use or deployment of the
funds and the execution of the Company’s capital plans could pose a risk if they do not align with the Company’s
strategic objectives or if the Company experiences integration difficulties on the acquisition of any businesses.
Weston Foods has developed a strategic plan which includes significant capital investment to position it for long
George Weston Limited 2016 Annual Report 47
Management’s Discussion and Analysis
term growth and profitability. Execution of the strategic plan requires prudent operational planning, availability
and attention of key personnel, timely implementation and effective change management. In addition, the
Company may not be able to realize upon the synergies, business opportunities and growth prospects expected
from any such investment opportunities or from the execution of the Company’s strategies. Finally, any
acquisition or divestiture activities may present unanticipated costs and managerial and operational risks,
including the diversion of management’s time and attention from day-to-day activities. If the Company’s
strategies are not effectively developed and executed, it could negatively affect the reputation, operations or
financial performance of the Company.
Consumer and Retail Customer Trends The North American bakery market continues to evolve as consumer
preferences and consumption patterns shift. As a result of evolving retail customer trends, the Company must
anticipate and meet these trends in a highly competitive environment on a timely basis. The failure of Weston
Foods to anticipate, identify and react to shifting consumer and retail customer trends and preferences through
successful innovation and enhanced manufacturing capability could adversely result in reduced demand for its
products, which could in turn affect the financial performance of the Company.
12.2
FINANCIAL RISKS AND RISK MANAGEMENT
Financial Risks The Company is exposed to a number of financial risks, including those associated with financial
instruments, which have the potential to affect its operating and financial performance. The Company uses
derivative instruments to offset certain of these risks. Policies and guidelines prohibit the use of any derivative
instrument for trading or speculative purposes. The fair value of derivative instruments is subject to changing
market conditions which could adversely affect the financial performance of the Company.
The following is a summary of the Company’s financial risks which are discussed in detail below:
Liquidity
Foreign Currency Exchange Rates
Credit
Common Share and Trust Unit Prices
Interest Rates
Liquidity Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its
equivalents in a cost effective manner to fund its obligations as they come due. The Company is exposed to
liquidity risk through, among other areas, PC Bank and its credit card business, which requires a reliable source
of funding for its credit card business. PC Bank relies on its securitization programs and the acceptance of GIC
deposits to fund the receivables of its credit cards. The Company would experience liquidity risk if it fails to
maintain appropriate levels of cash and short term investments, is unable to access sources of funding or fails to
appropriately diversify sources of funding. If any of these events were to occur, they could adversely affect the
financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term
investments, actively monitoring market conditions, and by diversifying sources of funding, including the
Company’s committed credit facilities, and maintaining a well diversified maturity profile of debt and capital
obligations.
Foreign Currency Exchange Rates The Company’s consolidated financial statements are expressed in Canadian
dollars, however a portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S. dollars
through both its net investment in foreign operations in the U.S. and its foreign subsidiaries held by Dunedin
Holdings GmbH and certain of its affiliates with a functional currency that is the same as that of the Company.
The U.S. dollar denominated net assets are translated into Canadian dollars at the foreign currency exchange
rate in effect at the balance sheet date. As a result, the Company is exposed to foreign currency translation gains
and losses. Those gains and losses arising from the translation of the U.S. dollar denominated assets of foreign
subsidiaries with a functional currency that is the same as that of the Company are included in operating income,
while translation gains and losses on the net investment in foreign operations in the U.S. are recorded in
accumulated other comprehensive income (loss).
48 George Weston Limited 2016 Annual Report
Revenues and expenses of all foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are recognized. An appreciating
U.S. dollar relative to the Canadian dollar will positively impact operating income and net earnings, while a
depreciating U.S. dollar relative to the Canadian dollar will have the opposite impact.
Weston Foods and Loblaw are also exposed to fluctuations in the prices of U.S. dollar denominated purchases
as a result of changes in U.S. dollar exchange rates. A depreciating Canadian dollar relative to the U.S. dollar will
negatively impact operating income and net earnings, while an appreciating Canadian dollar relative to the
U.S. dollar will have the opposite impact. During 2016 and 2015, Weston Foods and Loblaw entered into
derivative instruments in the form of futures contracts and forward contracts to manage their current and
anticipated exposure to fluctuations in U.S. dollar exchange rates.
Credit The Company is exposed to credit risk resulting from the possibility that counterparties could default on
their financial obligations to the Company including derivative instruments, cash and cash equivalents, short
term investments, security deposits, PC Bank’s credit card receivables, Loblaw’s franchise loans receivable,
pension assets held in the Company’s defined benefit plans, Loblaw’s accounts receivable including amounts due
from franchisees, government, prescription sales and third-party drug plans, independent accounts and amounts
owed from vendors, and other receivables from Weston Foods’ customers and suppliers. Failure to manage
credit risk could adversely affect the financial performance of the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security
deposits is reduced by policies and guidelines that require that the Company enters into transactions only with
counterparties or issuers that have a minimum long term “A-” credit rating from a recognized credit rating
agency and place minimum and maximum limits for exposures to specific counterparties and instruments.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness
of new tenants, obtaining security deposits wherever permitted by legislation, ensuring its tenant mix is
diversified and by limiting its exposure to any one tenant except Loblaw. Choice Properties establishes an
allowance for doubtful accounts that represents the estimated losses with respect to rents receivable. The
allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively
monitoring the credit card portfolio and reviewing techniques and technology that can improve the effectiveness
of the collection process. In addition, these receivables are dispersed among a large, diversified group of credit
card customers.
Loblaw’s franchise loans receivable and Loblaw’s accounts receivable including amounts due from franchisees,
governments, prescription sales covered by third-party drug plans, independent accounts and amounts owed
from vendors, and other receivables from Weston Foods’ customers and suppliers, are actively monitored on an
ongoing basis and settled on a frequent basis in accordance with the terms specified in the applicable
agreements.
Despite the mitigation strategies described above, it is possible that the Company’s financial performance could
be negatively impacted by the failure of a counterparty to fulfill its obligations.
Common Share and Trust Unit Prices Changes in the Loblaw common share price impact the Company’s net
interest expense and other financing charges. In 2001, Weston Holdings Limited (“WHL”) entered into an equity
forward sale agreement based on 9.6 million Loblaw common shares at an original forward price of $48.50 per
Loblaw common share which, under the terms of the agreement, had increased to a forward price of $109.26
(2015 – $104.98) per Loblaw common share as at year end 2016. The forward matures in 2031 and will be
settled in cash as follows: WHL will receive the forward price and will pay the market value of the underlying
Loblaw common shares at maturity. The obligation of WHL under this forward is secured by the underlying
Loblaw common shares. WHL recognizes a non-cash charge or income, which is included in consolidated net
interest expense and other financing charges, representing the fair value adjustment of WHL’s forward sale
agreement for 9.6 million shares. The fair value adjustment in the forward contract is a non-cash item resulting
George Weston Limited 2016 Annual Report 49
Management’s Discussion and Analysis
from fluctuations in the market price of the underlying Loblaw shares that WHL owns. WHL does not record any
change in the market price associated with the Loblaw common shares it owns. At maturity, if the forward price
is greater (less) than the market price, WHL will receive (pay) cash equal to the difference between the notional
value and the market value of the forward contract. Any cash paid under the forward contract could be offset by
the sale of Loblaw common shares.
The Company is exposed to market price risk from Choice Properties’ Trust Units that are held by unitholders
other than the Company. These Trust Units are presented as a liability on the Company’s consolidated balance
sheets as they are redeemable for cash at the option of the holders. The liability is recorded at fair value at each
reporting period based on the market price of Trust Units. The change in the fair value of the liability negatively
impacts net earnings when the Trust Unit price increases and positively impacts net earnings when the Trust Unit
price declines.
Interest Rates The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate
debt and from the refinancing of existing financial instruments. The Company manages interest rate risk by
monitoring the respective mix of fixed and floating rate debt and by taking action as necessary to maintain an
appropriate balance considering current market conditions, with the objective of maintaining the majority of its
debt at fixed interest rates.
RELATED PARTY TRANSACTIONS
13.
The Company’s majority shareholder is Mr. W. Galen Weston, who beneficially owns, directly and indirectly
through private companies which he controls, including Wittington Investments, Limited (“Wittington”), a total
of 80,773,740 of GWL’s common shares, representing approximately 63% (2015 – 63%) of GWL’s outstanding
common shares.
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms
and conditions. Transactions between the Company and its consolidated entities have been eliminated on
consolidation and are not disclosed below.
In 2016, the Company made rental payments to Wittington in the amount of $4 million (2015 – $4 million). As at
year end 2016 and 2015, there were no rental payments outstanding.
In 2016, inventory purchases from Associated British Foods plc, a related party by virtue of Mr. W. Galen Weston
being a director of such entity’s parent company, amounted to $40 million (2015 – $40 million). As at year end
2016, $6 million (2015 – $2 million) was included in trade payables and other liabilities relating to these
inventory purchases.
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the
acquisition of property from Loblaw. The joint venture intends to develop the acquired site into a mixed-used
property, anchored by a Loblaw food store. As at year end 2016, the joint venture did not have any operating
activity. Choice Properties uses the equity method of accounting to record its 40% interest in the joint venture,
which is included in other assets.
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related
parties. Contributions made by the Company to these plans are disclosed in the notes to the consolidated
financial statements.
Income Tax Matters From time to time, the Company and Wittington may enter into agreements to make
elections that are permitted or required under applicable income tax legislation with respect to affiliated
corporations. In 2016, these elections and accompanying agreements did not have a material impact on
the Company.
Compensation of Key Management Personnel The Company’s key management personnel is comprised of
certain members of the executive team of GWL, Loblaw, Weston Foods and Wittington, as well as members of
the Boards of GWL, Loblaw and Wittington to the extent that they have the authority and responsibility for
planning, directing and controlling the day-to-day activities of the Company.
50 George Weston Limited 2016 Annual Report
Annual compensation of key management personnel that is directly attributable to the Company was as follows:
($ millions)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2016
11
13
24
$
$
2015
14
12
26
$
$
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
14.
The preparation of the consolidated financial statements requires management to make estimates and
judgments in applying the Company’s accounting policies that affect the reported amounts and disclosures made
in the consolidated financial statements and accompanying notes.
Within the context of this MD&A, a judgment is a decision made by management in respect of the application of
an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following
an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are
used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial
statements and are based on a set of underlying data that may include management’s historical experience,
knowledge of current events and conditions and other factors that are believed to be reasonable under the
circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that
the Company believes could have the most significant impact on the amounts recognized in the consolidated
financial statements.
Basis of Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the
entities that it controls and therefore consolidates. The Company controls an entity when the Company has the
existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns.
The Company consolidates all of its wholly-owned subsidiaries. Judgment is applied in determining whether the
Company controls the entities in which it does not have ownership rights or does not have full ownership rights.
Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power
over the entity) or protective rights (protecting the Company’s interest without giving it power).
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the
Company to utilize estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates
on cost, seasonality and costs necessary to sell the inventory.
Impairment of non-financial assets (goodwill, intangible assets, fixed assets and investment properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in
determining the grouping of assets to identify their cash generating units (“CGU”) for the purposes of testing
fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs for the
level at which goodwill and intangible assets are tested for impairment. Loblaw has determined that each
location is a separate CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and
indefinite life intangible assets impairment testing, CGUs are grouped at the lowest level at which goodwill and
indefinite life intangible assets are monitored for internal management purposes. In addition, judgment is used
to determine whether a triggering event has occurred requiring an impairment test to be completed.
George Weston Limited 2016 Annual Report 51
Management’s Discussion and Analysis
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various
estimates are employed. The Company determines fair value less costs to sell using such estimates as market
rental rates for comparable properties, recoverable operating costs for leases with tenants, non-recoverable
operating costs, discount rates, capitalization rates and terminal capitalization rates. The Company determines
value in use by using estimates including projected future revenues, earnings and capital investment consistent
with strategic plans presented to GWL’s and Loblaw’s Boards. Discount rates are consistent with external industry
information reflecting the risk associated with the specific cash flows.
Franchise loans receivable and certain other financial assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable,
trade receivables and certain other financial assets relating to Loblaw’s franchise business at each balance sheet
date utilizing judgment to determine whether a triggering event has occurred requiring an impairment test to
be completed.
Key Sources of Estimation Management determines the initial fair value of Loblaw’s franchise loans and certain
other financial assets using discounted cash flow models. The process of determining these fair values requires
management to make estimates of a long term nature regarding discount rates, projected revenues and margins,
as applicable. These estimates are derived from past experience, actual operating results and budgets.
Customer Loyalty Awards Programs
Key Sources of Estimation Loblaw defers revenue equal to the fair value of the award points earned by loyalty
program members at the time of award. Loblaw determines fair value using estimates such as breakage (the
amount of points that will never be redeemed) and the estimated retail value per point on redemption. The
estimated fair value per point is based on the program reward schedule, which for the PC Points and PC Plus
programs is $1 for every 1,000 points. For the Shoppers Optimum program, the estimated fair value is
determined based on the expected weighted average redemption levels for future redemptions, including
special redemption events. Breakage rates are primarily based on historical redemption experience. The trends
in breakage are reviewed on an ongoing basis and the estimated retail value per point is adjusted based on
expected future activity.
Income and other taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes
requires management to make certain judgments regarding the tax rules in jurisdictions where the Company
performs activities. Application of judgments is required regarding the classification of transactions and in
assessing probable outcomes of claimed deductions including expectations about future operating results, the
timing and reversal of temporary differences and possible audits of income tax and other tax filings by the tax
authorities.
15.
ACCOUNTING STANDARDS
15.1 ACCOUNTING STANDARDS IMPLEMENTED IN 2016
Presentation of Financial Statements The Company implemented the amendments to IAS 1, “Presentation of
Financial Statements”, effective January 1, 2016. There was no significant impact on the Company’s consolidated
financial statements as a result of the implementation of this amendment.
52 George Weston Limited 2016 Annual Report
15.2 CHANGES TO SIGNIFICANT ACCOUNTING POLICIES
Income Taxes In November 2016, the IFRS Interpretations Committee issued its agenda decision related to
the expected manner of recovery of indefinite life intangible assets when measuring deferred income taxes in
accordance with IAS 12, “Income Taxes”, and clarified its interpretation that an indefinite life intangible asset
does not have an unlimited life and its economic benefit flows to an entity in future periods through use and not
just through future sale. Accordingly, it is appropriate to measure the associated deferred income tax liability at
the income tax rate applicable to ordinary taxable income expected to apply in the years in which the temporary
differences are expected to be recovered or settled. Loblaw’s accounting policy reflected an accepted view that
an indefinite life intangible will be recovered through its disposition and was using a capital gains tax rate to
measure deferred income taxes associated with its indefinite life intangible assets. Loblaw implemented this
guidance in the fourth quarter of 2016 on a retrospective basis as an accounting policy change in accordance
with IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”. The impact of this change was as
follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
($ millions except where otherwise indicated)
Income tax(i)
Net earnings
Other comprehensive income
Net earnings per common share ($)
Basic
Diluted
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Goodwill
Deferred income taxes
Equity
$
$
$
2015
34
(34)
(34)
(0.12)
(0.12)
$
— $
$
— $
— $
As at
$
Dec. 31, 2015
418
458
(40)
— $
— $
— $
Dec. 31, 2014
418
$
424
$
(6)
$
(i) Relates to the remeasurement of deferred income tax liabilities as a result of the Alberta statutory corporate income tax rate change
in 2015.
15.3 CHANGES TO ACCOUNTING ESTIMATES
Fixed Assets In the second quarter of 2016, Loblaw reassessed and revised the useful life of certain classes of
equipment and fixtures from eight to ten years. This revision represents a change in estimate resulting in a
current year reduction of depreciation and amortization expense, related to these assets, of approximately
$66 million compared to 2015.
George Weston Limited 2016 Annual Report 53
Management’s Discussion and Analysis
16.
FUTURE ACCOUNTING STANDARDS
The future accounting standards noted below will impact the Company’s business processes, internal controls
over financial reporting, data systems, and IT, as well as financing and compensation arrangements. As a result,
the Company has developed comprehensive project plans to guide the implementations.
IFRS 15 In 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”), replacing IAS 18,
“Revenue”, IAS 11, “Construction Contracts”, and related interpretations. IFRS 15 provides a comprehensive
framework for the recognition, measurement and disclosure of revenue from contracts with customers,
excluding contracts within the scope of the accounting standards on leases, insurance contracts and financial
instruments. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2018. IFRS 15 is to
be applied retrospectively using either the retrospective or cumulative effect method. While early adoption is
permitted, the Company will not early adopt IFRS 15.
The Company has completed a preliminary assessment of the potential impact of the adoption of IFRS 15 on its
consolidated financial statements.
The Company expects that the implementation of IFRS 15 will impact Loblaw’s allocation of revenue that is
deferred in relation to its customer loyalty award programs. Revenue is currently allocated to the customer
loyalty awards using the residual fair value method. Under IFRS 15, consideration will be allocated between the
loyalty program awards and the goods or services the awards were earned on, based on their relative stand-
alone selling prices. The Company is currently assessing the impact of this change on its consolidated financial
statements.
The Company is still assessing the impacts of IFRS 15, if any, on Loblaw’s franchise arrangements with non-
consolidated stores. The Company does not expect the implementation of IFRS 15 to otherwise have a significant
impact on its Weston Foods segment or Loblaw’s Retail, Financial Services or Choice Properties segment revenue
streams, however the detailed assessment is ongoing.
The Company has not yet determined which transition method it will apply or whether it will use the optional
exemptions or practical expedients available under the standard. The Company expects to disclose additional
detailed information, including any exemptions elected and estimated quantitative financial effects, before the
adoption of IFRS 15.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”), and related interpretations. The standard includes
revised guidance on the classification and measurement of financial assets, including impairment and a new
general hedge accounting model. IFRS 9 becomes effective for annual periods beginning on or after
January 1, 2018, and is to be applied retrospectively with the exception of the general hedging requirements
which are to be applied prospectively. While early adoption is permitted, the Company will not early adopt
IFRS 9.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 9 on its
consolidated financial statements based on its positions at December 31, 2016 and hedging relationships
designated during 2016 under IAS 39, which are discussed below.
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9
largely retains the existing requirements in IAS 39 for the classification of financial liabilities. Based on its
preliminary assessment, the Company does not believe that the new classification requirements will have a
significant impact on its consolidated financial statements.
54 George Weston Limited 2016 Annual Report
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit
loss’ (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how
changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new
impairment model will apply to financial assets measured at amortized cost or those measured at fair value
through other comprehensive income, except for investments in equity instruments, and to contract assets.
The Company expects that the ECL model will change the valuation of Loblaw’s Financial Services segment credit
losses on credit card receivables. The Company believes that impairment losses are likely to increase and
become more volatile for assets in the scope of the IFRS 9 impairment model. The Company is currently
assessing the impact of this change on its consolidated financial statements and is continuing to assess the
impact of the ECL model on its other financial assets.
General hedging IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with
the Company’s risk management objectives and strategy and to apply a more qualitative and forward-looking
approach to assessing hedge effectiveness. The Company’s preliminary assessment indicates that the types of
hedge accounting relationships that the Company currently designates should be capable of meeting the
requirements of IFRS 9 once the Company completes certain planned changes to its internal documentation
and monitoring processes.
The Company has not yet decided whether it will use the practical expedients available under the standard. The
Company expects to disclose additional detailed information, including any practical expedients and estimated
quantitative financial effects, before the adoption of IFRS 9.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” and related
interpretations. The standard introduces a single on-balance sheet recognition and measurement model for
lessees, eliminating the distinction between operating and finance leases. Lessors continue to classify leases
as finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after
January 1, 2019. For leases where the Company is the lessee it has the option of adopting a full retrospective
approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted if
IFRS 15 has been adopted, the Company will not early adopt IFRS 16.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its
consolidated financial statements.
The Company expects the adoption of IFRS 16 will have a significant impact on the Company as it will recognize
new assets and liabilities for its operating leases of property, buildings, vehicles and equipment. In addition, the
nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating
lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. No
significant impacts are expected for the Company’s finance leases or leases where the Company is the lessor.
The Company has not yet determined which transition method it will apply or whether it will use the optional
exemptions or practical expedients under the standard. The Company expects to disclose additional detailed
information, including its transition method, any practical expedients elected and estimated quantitative
financial effects, before the adoption of IFRS 16.
George Weston Limited 2016 Annual Report 55
Management’s Discussion and Analysis
17.
OUTLOOK(3)
Weston Foods expects sales growth generated by incremental capacity and productivity improvements to drive
an increase in adjusted EBITDA(1) in 2017 when compared to 2016. However, this improvement will be partially
offset by a challenging environment in our Canadian fresh bakery business and incremental investments required
to meet new more stringent regulatory requirements in food safety and labelling. The increase in adjusted
EBITDA(1) is expected to be greater in the second half of the year. Management expects to make capital
investments of approximately $250 million in 2017 related to growth, regulatory and maintenance. Depreciation
is projected to increase in 2017 when compared to 2016, and more than offset the improvement in adjusted
EBITDA(1).
Loblaw remains focused on its strategic framework, delivering the best in food, best in health and beauty,
operational excellence and growth. This framework is supported by a financial plan of maintaining a stable
trading environment that targets positive same-store sales and stable gross margin, surfacing efficiencies to
deliver operating leverage, and returning capital to shareholders. In 2017, on a full year comparative basis,
despite the current deflationary environment, Loblaw expects to:
• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery
market with continued negative pressure from healthcare reform;
• grow adjusted net earnings(1);
•
•
invest approximately $1.3 billion in capital expenditures, including $1.0 billion in its Retail segment; and
return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
For 2017, the Company expects growth in net earnings to be driven by an increase in net earnings at Loblaw, and
the positive impact of the Company’s increased ownership in Loblaw as a result of Loblaw’s share repurchases.
56 George Weston Limited 2016 Annual Report
NON-GAAP FINANCIAL MEASURES
18.
The Company uses the following non-GAAP financial measures: adjusted EBITDA and adjusted EBITDA margin,
adjusted net earnings attributable to shareholders of the Company, adjusted net earnings available to common
shareholders of the Company, adjusted diluted net earnings per common share, adjusted return on average
equity attributable to common shareholders of the Company, adjusted return on capital and free cash flow. In
addition to these items, the following measures are used by management in calculating adjusted diluted net
earnings per common share: adjusted operating income, adjusted net interest expense and other financing
charges, adjusted income taxes and adjusted income tax rate. The Company believes these non-GAAP financial
measures provide useful information to both management and investors in measuring the financial performance
and financial condition of the Company for the reasons outlined below.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and
income that must be recognized under GAAP when analyzing consolidated and segment underlying operating
performance. The excluded items are not necessarily reflective of the Company’s underlying operating
performance and make comparisons of underlying financial performance between periods difficult. From time to
time, the Company may exclude additional items if it believes doing so would result in a more effective analysis
of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring.
These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be
comparable to similarly titled measures presented by other publicly traded companies, and they should not be
construed as an alternative to other financial measures determined in accordance with GAAP.
George Weston Limited 2016 Annual Report 57
Management’s Discussion and Analysis
Adjusted EBITDA The Company believes adjusted EBITDA is useful in assessing and making decisions regarding
the underlying operating performance of the Company’s ongoing operations and in assessing the Company’s
ability to generate cash flows to fund its cash requirements, including its capital investment program.
The following table reconciles adjusted EBITDA to operating income, which is reconciled to GAAP net earnings
attributable to shareholders of the Company reported for the periods ended as indicated.
Quarters Ended
Dec. 31, 2016
Dec. 31, 2015
Weston
Foods
Loblaw Other(i)
Consolidated
Weston
Foods
Loblaw Other(i)
Consolidated
$
148
($ millions)
Net earnings attributable to shareholders
of the Company
Add impact of the following:
Non-controlling interests
Income taxes
Net interest expense and other
financing charges
Operating income
Add impact of the following:
Amortization of intangible assets acquired
with Shoppers Drug Mart
Asset impairments, net of recoveries
Restructuring and other charges
Pension annuities and buy-outs
Fair value adjustment of derivatives
Charges related to retail locations in
Fort McMurray, net of recoveries
Drug retail ancillary assets
Inventory loss
Accelerated transition of Labour Agreements
Charge related to inventory measurement
and other conversion differences
Modifications to certain franchise fee
arrangements
Foreign currency translation
$
$
38 $
447 $
6 $
124
130
2
21
(6)
(5)
7
(1)
5
92
139
83
177
491
124
130
9
21
(7)
(5)
5
$
42 $
314 $
65 $
8
3
(5)
124
4
(7)
6
(6)
112
55
33
(8)
Adjusting items
Adjusted operating income
Depreciation and amortization excluding the
impact of the above adjustments(ii)
Adjusted EBITDA
$
$
$
11 $
49 $
266 $
713
(6)
(6) $
$
(6)
271
762
24
73 $
241
954
265
1,027
$
$
$
$
6 $
48 $
313 $
627
19
67 $
252
879
(65)
(65) $
$
$
(i) Represents the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations.
(ii) Depreciation and amortization for the calculation of adjusted EBITDA excludes $124 million (2015 – $124 million) of amortization of
intangible assets, acquired with Shoppers Drug Mart, recorded by Loblaw and $3 million (2015 – $6 million) of accelerated
depreciation recorded by Weston Foods, related to restructuring and other charges.
58 George Weston Limited 2016 Annual Report
68
66
139
421
124
4
1
9
(11)
112
55
33
(8)
(65)
254
675
271
946
Years Ended
Dec. 31, 2016
Dec. 31, 2015(4)
Weston
Foods
Loblaw Other(i)
Consolidated
Weston
Foods
Loblaw Other(i)
Consolidated
$
$
550
540
465
700
$
173 $ 2,084 $
(2) $
2,255
$
177 $ 1,593 $
159 $
($ millions)
Net earnings attributable to shareholders
of the Company
Add impact of the following:
Non-controlling interests
Income taxes
Net interest expense and other
financing charges
Operating income
Add impact of the following:
Amortization of intangible assets acquired
with Shoppers Drug Mart
Asset impairments, net of recoveries
Restructuring and other charges
Pension annuities and buy-outs
Prior year tax assessment
Fair value adjustment of derivatives
Charges related to retail locations in
Fort McMurray, net of recoveries
Drug retail ancillary assets
Inventory losses
Accelerated transition of Labour Agreements
Charge related to inventory measurement
and other conversion differences
Charge related to apparel inventory
Shoppers Drug Mart divestitures loss
Modifications to certain franchise fee
arrangements
Foreign currency translation
535
135
46
23
10
5
2
(4)
17
3
(5)
11
Adjusting items
Adjusted operating income
Depreciation and amortization excluding the
impact of the above adjustments(ii)
$
$
26 $
752 $
199 $ 2,836
97
1,008
Adjusted EBITDA
$
296 $ 3,844
$
2
2 $
$
511
319
418
681
1,929
536
13
180
11
(26)
112
1
55
33
8
2
(8)
(159)
758
2,687
1,139
3,826
535
135
63
26
10
2
(4)
11
2
780
3,035
1,105
4,140
536
13
154
8
26
3
(5)
(21)
112
55
33
8
2
(8)
(159)
1
25 $
$
$
892 $ (159) $
$
202 $ 2,485
83
1,056
$
285 $ 3,541
$
(i) Represents the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations.
(ii) Depreciation and amortization for the calculation of adjusted EBITDA excludes $535 million (2015 – $536 million) of amortization of
intangible assets, acquired with Shoppers Drug Mart, recorded by Loblaw and $14 million (2015 – $11 million) of accelerated
depreciation recorded by Weston Foods, related to restructuring and other charges.
The following items impacted operating income in 2016 and 2015:
Amortization of intangible assets acquired with Shoppers Drug Mart The acquisition of Shoppers Drug Mart
in 2014 included approximately $6 billion of definite life intangible assets, which are being amortized over their
estimated useful lives. Loblaw expects to recognize annual amortization associated with the acquired intangible
assets of approximately $525 million until 2024, and decreasing thereafter.
George Weston Limited 2016 Annual Report 59
Management’s Discussion and Analysis
Asset impairments, net of recoveries At each balance sheet date, the Company assesses and, when required,
records impairments and recoveries of previous impairments related to the carrying value of its fixed assets,
investment properties and intangible assets. In 2016, this included the impairment of a Shoppers Drug Mart
ancillary healthcare business. Loblaw recorded a charge of $88 million related to the impairment of fixed assets
of $15 million and a customer relationship intangible asset of $73 million as set out in Section 6.2 “Loblaw
Operating Results - Other Retail Business Matters”.
Restructuring and other charges The Company continuously evaluates strategic and cost reduction initiatives
related to its store infrastructure, manufacturing assets, distribution networks and administrative infrastructure
with the objective of ensuring a low cost operating structure.
Pension annuities and buy-outs The Company is undertaking annuity purchases and pension buy-outs in respect
of former employees designed to reduce its defined benefit pension plan obligation and decrease future pension
volatility and risks.
Prior year tax assessment In the first quarter of 2016, the province of Ontario enacted retroactive amendments
to the Land Transfer Tax Act. The amendments were applicable to land transfer activities between related
parties that occurred on or after July 19, 1989. The amendments impacted certain land transfers between
Loblaw and Choice Properties at the time of the initial public offering, resulting in a charge to SG&A in the first
quarter of 2016.
Fair value adjustment of derivatives The Company is exposed to commodity price and U.S. dollar exchange
rate fluctuations primarily as a result of purchases of certain raw materials, fuels and utilities. In accordance
with the Company’s commodity risk management policy, the Company enters into commodity and foreign
currency derivatives to reduce the impact of price fluctuations in forecasted raw material and fuel purchases
over a specified period of time. These derivatives are not acquired for trading or speculative purposes. Pursuant
to the Company’s derivative instruments accounting policy, certain changes in fair value, which include realized
and unrealized gains and losses related to future purchases of raw materials and fuel, are recorded in
operating income. Despite the impact of accounting for these commodity and foreign currency derivatives on the
Company’s reported results, the derivatives have the economic impact of largely mitigating the associated risks
arising from price and exchange rate fluctuations in the underlying commodities and U.S. dollar commitments.
Charges related to retail locations in Fort McMurray, net of recoveries In the second quarter of 2016, 10 retail
locations in Fort McMurray were impacted by the wildfire that caused the evacuation of the city. Loblaw
recognized charges related to the inventory losses, site clean-up and other restoration costs as set out in
Section 6.2, “Loblaw Other Business Matters”, of this MD&A. During 2016, Loblaw received partial proceeds from
the insurance claim. The insurance claim remains in progress and further proceeds are expected to be recorded
as the claim progresses.
Drug retail ancillary assets In the second quarter of 2016, Loblaw ceased actively marketing the remaining
assets in certain drug retail ancillary operations that were previously marketed for sale as set out in Section 6.2,
“Loblaw Other Business Matters”, of this MD&A.
Inventory losses In the fourth quarter of 2016 and year-to-date, Weston Foods recorded $5 million
(U.S. $4 million) and $11 million (U.S. $9 million), respectively, related to the write-off of damaged inventory and
other associated costs in SG&A in the Company’s consolidated statement of earnings. An insurance claim is in
progress and proceeds are expected to be recorded as the claim progresses. Additional losses or charges
associated with this inventory will be recorded as incurred.
On August 31, 2014, a weather event in the U.S. caused significant damage to Weston Foods’ inventory stored at
a third-party warehouse. In the first quarter of 2015, a charge of $1 million (approximately U.S. $1 million) was
recorded in SG&A.
60 George Weston Limited 2016 Annual Report
Accelerated finalization of Labour Agreements Over the past five years, Loblaw has been transitioning stores to
more cost effective and efficient operating terms under Labour Agreements. In the fourth quarter of 2015,
Loblaw accelerated the finalization of these Labour Agreements for the majority of the remaining stores and
incurred a charge related to the completion of this process.
Charge related to inventory measurement and other conversion differences As of the end of 2015, Loblaw had
completed the conversion of all of its franchised grocery stores to the new IT systems that include a perpetual
inventory system. In the fourth quarter of 2015 and year-to-date, the remeasurement of inventory owned by the
franchises as a result of implementing the perpetual inventory system resulted in a decrease in inventory value
and a remeasurement charge.
Charge related to apparel inventory In 2015, Loblaw recorded a charge related to an agreement to liquidate, in
the U.S., certain older Canadian apparel inventory.
Shoppers Drug Mart divestitures loss In the first quarter of 2015, Loblaw completed the remaining divestitures
required by the Competition Bureau and recorded a divestiture loss.
Modifications to certain franchise fee arrangements Loblaw modified its fee arrangements with franchisees of
certain franchise banners. As a result of this modification, Loblaw re-evaluated the recoverable amount of
franchise-related financial instruments which resulted in the reversal of previously recorded impairments.
Foreign currency translation The Company’s consolidated financial statements are expressed in Canadian
dollars. A portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S. dollars and as a
result, the Company is exposed to foreign currency translation gains and losses. The impact of foreign currency
translation on a portion of the U.S. dollar denominated net assets, primarily cash and cash equivalents and
short term investments held by foreign operations, is recorded in SG&A and the associated tax, if any, is
recorded in income taxes. In the fourth quarter of 2016, a foreign currency translation gain of $6 million (2015 –
$65 million) was recorded in SG&A as a result of the appreciation of the U.S. dollar relative to the Canadian
dollar. An income tax expense of $1 million (2015 – $8 million) was also recorded associated with this foreign
currency translation gain. Year-to-date, a foreign currency translation loss of $2 million (2015 – gain of
$159 million) was recorded in SG&A as a result of the depreciation (2015 – appreciation) of the U.S. dollar
relative to the Canadian dollar. A nominal income tax recovery (2015 – expense of $13 million) was also recorded
associated with this foreign currency translation loss (2015 – gain).
Adjusted Net Interest Expense and Other Financing Charges The Company believes adjusted net interest
expense and other financing charges is useful in assessing the ongoing net financing costs of the Company.
The following table reconciles adjusted net interest expense and other financing charges to GAAP net interest
expense and other financing charges reported for the periods ended as indicated.
($ millions)
Net interest expense and other financing charges
Add:
Fair value adjustment of the Trust Unit liability
Fair value adjustment of the forward sale agreement for
Quarters Ended
Years Ended
Dec. 31, 2016
177
$
1
Dec. 31, 2015
139
$
(5)
Dec. 31, 2016
700
$
(79)
Dec. 31, 2015
681
$
(55)
9.6 million Loblaw common shares
(43)
Accelerated amortization of deferred financing costs
9
—
(53)
Adjusted net interest expense and other financing charges
$
135
$
143
$
568
$
(26)
(15)
585
George Weston Limited 2016 Annual Report 61
Management’s Discussion and Analysis
In addition to certain items described in the “Adjusted EBITDA” section above, the following items impacted net
interest expense and other financing charges in 2016 and 2015:
Fair value adjustment of the Trust Unit liability The Company is exposed to market price fluctuations as a result
of the Choice Properties Trust Units held by unitholders other than the Company. These Trust Units are
presented as a liability on the Company’s unaudited interim period condensed consolidated balance sheets as
they are redeemable for cash at the option of the holder, subject to certain restrictions. This liability is recorded
at fair value at each reporting date based on the market price of Trust Units at the end of each period. An
increase (decrease) in the market price of Trust Units results in a charge (income) to net interest expense and
other financing charges.
Fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares The fair value
adjustment of the forward sale agreement for 9.6 million Loblaw common shares is non-cash and is included in
net interest expense and other financing charges. The adjustment is determined by changes in the value of
the underlying Loblaw common shares. An increase (decrease) in the market price of Loblaw common shares
results in a charge (income) to net interest expense and other financing charges.
Accelerated amortization of deferred financing costs In 2015, Loblaw recorded charges related to the
accelerated amortization of deferred financing costs due to the early repayments of debt.
Adjusted Income Taxes and Adjusted Income Tax Rate The Company believes the adjusted income tax rate
applicable to adjusted earnings before taxes is useful in assessing the underlying operating performance of its
business.
The following table reconciles the effective income tax rate applicable to adjusted earnings before taxes to the
GAAP effective income tax rate applicable to earnings before taxes as reported for the periods ended as
indicated.
($ millions except where otherwise indicated)
Adjusted operating income(i)
Adjusted net interest expense and other financing charges(i)
Adjusted earnings before taxes
Income taxes
Add:
Tax impact of items excluded from adjusted earnings
before taxes(ii)
Statutory corporate income tax rate change
Adjusted income taxes
Effective income tax rate applicable to earnings before taxes
Adjusted income tax rate applicable to adjusted earnings
before taxes
Quarters Ended
Years Ended
Dec. 31, 2016
762
$
Dec. 31, 2015
675
$
Dec. 31, 2016
3,035
$
Dec. 31, 2015(4)
2,687
$
$
$
$
$
$
$
135
627
83
89
172
26.4%
27.4%
$
$
$
143
532
66
78
144
23.4%
27.1%
$
$
$
568
2,467
465
216
(3)
678
29.9%
27.5%
585
2,102
418
232
(79)
571
33.5%
27.2%
See reconciliations of adjusted operating income and adjusted net interest expense and other financing charges above.
(i)
(ii) See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table above for a complete list of
items excluded from adjusted earnings before taxes.
In addition to certain items described in the “Adjusted EBITDA” and “Adjusted Net Interest Expense and Other
Financing Charges” sections above, the following item impacted income taxes and the effective income tax rate
in 2016 and 2015:
Statutory corporate income tax rate change The Company’s deferred income tax assets and liabilities are
impacted by changes to provincial and federal statutory corporate income tax rates resulting in a charge or
benefit to earnings. The Company implements changes in the statutory corporate income tax rate in the same
period the change is substantively enacted by the legislative body.
62 George Weston Limited 2016 Annual Report
In the first quarter of 2016, the Government of New Brunswick announced a 2.0% increase in the provincial
statutory corporate income tax rate from 12.0% to 14.0%. Loblaw recorded a charge of $3 million in the first
quarter of 2016 and year-to-date related to the remeasurement of deferred tax liabilities.
In the second quarter of 2015, the Government of Alberta announced a 2.0% increase in the provincial statutory
corporate income tax rate from 10.0% to 12.0%. The Company recorded a charge of $79 million in the second
quarter of 2015 and year-to-date related to the remeasurement of deferred tax liabilities.
Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings per Common
Share The Company believes adjusted net earnings available to common shareholders and adjusted diluted net
earnings per common share are useful in assessing the Company’s underlying operating performance and in
making decisions regarding the ongoing operations of its business.
The following table reconciles net earnings attributable to shareholders of the Company to net earnings available
to common shareholders of the Company and then to adjusted net earnings available to common shareholders
of the Company reported for the periods ended as indicated.
($ millions except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Less: Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders
of the Company
Reduction in net earnings due to dilution at Loblaw
Net earnings available to common shareholders for diluted
earnings per share
Net earnings attributable to shareholders of the Company
Adjusting items (refer to the following table)
Adjusted net earnings attributable to shareholders
of the Company
Less: Prescribed dividends on preferred shares in share capital
Adjusted net earnings available to common shareholders
of the Company
Reduction in net earnings due to dilution at Loblaw
Adjusted net earnings available to common shareholders for
diluted earnings per share
Quarters Ended
Years Ended
Dec. 31, 2016
92
$
Dec. 31, 2015
148
$
Dec. 31, 2016
550
$
Dec. 31, 2015(4)
$
511
(10)
82
82
92
122
214
(10)
204
204
$
$
$
$
$
$
(10)
138
138
148
45
193
(10)
183
183
$
$
$
$
$
$
(44)
(44)
506
5
501
550
332
882
(44)
838
5
833
$
$
$
$
$
$
467
3
464
511
250
761
(44)
717
3
714
$
$
$
$
$
$
Weighted average common shares outstanding (millions)(i)
128.2
128.2
128.3
128.2
(i)
Includes impact of dilutive instruments for purposes of calculating adjusted diluted net earnings per common share.
George Weston Limited 2016 Annual Report 63
Management’s Discussion and Analysis
The following table reconciles adjusted net earnings available to common shareholders of the Company and
adjusted diluted net earnings per common share to GAAP net earnings available to common shareholders of the
Company and diluted net earnings per common share as reported for the periods ended as indicated.
Quarters Ended
Dec. 31, 2016
Dec. 31, 2015
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
$
82
$
0.64
$
138
$
1.08
41
44
4
7
(3)
(1)
2
0.33
0.34
0.03
0.05
(0.02)
(0.01)
0.02
42
2
3
5
(6)
37
18
11
(4)
32
1
(5)
122
204
$
$
0.24
0.01
(0.04)
0.95
1.59
$
$
(7)
1
(57)
45
183
$
$
$
$
0.32
0.02
0.01
0.04
(0.04)
0.28
0.14
0.09
(0.03)
(0.05)
0.01
(0.44)
0.35
1.43
($ except where otherwise indicated)
As reported
Add (deduct) impact of the following(i):
Amortization of intangible assets acquired with Shoppers
Drug Mart
Asset impairments, net of recoveries
Restructuring and other charges
Pension annuities and buy-outs
Fair value adjustment of derivatives
Charges related to retail locations in Fort McMurray, net
of recoveries
Drug retail ancillary assets
Inventory loss
Accelerated transition of Labour Agreements
Charge related to inventory measurement and other
conversion differences
Modifications to certain franchise fee arrangements
Fair value adjustment of the forward sale agreement for
9.6 million Loblaw common shares
Fair value adjustment of the Trust Unit liability
Foreign currency translation
Adjusting items
Adjusted
(i) Net of income taxes and non-controlling interests, as applicable.
64 George Weston Limited 2016 Annual Report
($ except where otherwise indicated)
As reported
Add (deduct) impact of the following(i):
Amortization of intangible assets acquired with Shoppers
Drug Mart
Asset impairments, net of recoveries
Restructuring and other charges
Pension annuities and buy-outs
Prior year tax assessment
Fair value adjustment of derivatives
Charges related to retail locations in Fort McMurray, net
of recoveries
Drug retail ancillary assets
Inventory losses
Accelerated transition of Labour Agreements
Charge related to inventory measurement and other
conversion differences
Charge related to apparel inventory
Shoppers Drug Mart divestitures loss
Modifications to certain franchise fee arrangements
Fair value adjustment of the forward sale agreement for
9.6 million Loblaw common shares
Fair value adjustment of the Trust Unit liability
Accelerated amortization of deferred financing costs
Statutory corporate income tax rate change
Foreign currency translation
Adjusting items
Adjusted
Years Ended
Dec. 31, 2016
Dec. 31, 2015(4)
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
$
506
$
3.90
$
467
$
3.62
182
46
28
10
3
(1)
1
(1)
6
1.42
0.35
0.22
0.08
0.02
(0.01)
0.01
(0.01)
0.05
39
16
1
2
332
838
$
$
0.31
0.12
0.01
0.02
2.59
6.49
$
$
$
$
179
5
75
5
1.40
0.04
0.58
0.04
(11)
(0.08)
37
1
18
11
3
1
(4)
19
11
5
41
(146)
250
717
$
$
0.28
0.01
0.14
0.09
0.02
0.01
(0.03)
0.15
0.09
0.04
0.31
(1.14)
1.95
5.57
(i) Net of income taxes and non-controlling interests, as applicable.
Free Cash Flow The Company believes free cash flow is useful in assessing the Company’s cash available for
additional financing and investing activities.
The following table reconciles free cash flow to GAAP measures reported for the periods ended as indicated.
($ millions)
Cash flows from operating activities
Less:
Interest paid
Fixed asset purchases
Intangible asset additions
Free cash flow
Quarters Ended
Years Ended
Dec. 31, 2016
976
$
Dec. 31, 2015
684
$
Dec. 31, 2016
3,760
$
Dec. 31, 2015
3,367
$
103
452
116
305
$
120
421
104
39
$
570
1,129
336
1,725
$
587
1,267
233
1,280
$
George Weston Limited 2016 Annual Report 65
Management’s Discussion and Analysis
ADDITIONAL INFORMATION
19.
Additional information about the Company, including its 2016 AIF and other disclosure documents, has been
filed electronically with the Canadian securities regulatory authorities through the System for Electronic
Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com.
This Annual Report includes selected information on Loblaw, a public company with shares trading on the TSX.
For information regarding Loblaw, readers should also refer to the materials filed by Loblaw with SEDAR from
time to time. These filings are also available on Loblaw’s website at www.loblaw.ca.
Toronto, Canada
March 1, 2017
66 George Weston Limited 2016 Annual Report
Financial Results
Management’s Statement of Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Financial Statements
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Investment Properties
Intangible Assets
Nature and Description of the Reporting Entity
Significant Accounting Policies
Critical Accounting Estimates and Judgments
Future Accounting Standards
Business Acquisitions
Net Interest Expense and Other Financing Charges
Income Taxes
Basic and Diluted Net Earnings per Common Share
Cash and Cash Equivalents, Short Term Investments and Security Deposits
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10. Accounts Receivable
Note 11. Credit Card Receivables
Note 12.
Inventories
Note 13. Assets Held for Sale
Note 14. Fixed Assets
Note 15.
Note 16.
Note 17. Goodwill
Note 18. Other Assets
Note 19. Customer Loyalty Awards Program Liability
Note 20. Provisions
Note 21. Short Term Debt
Long Term Debt
Note 22.
Note 23. Other Liabilities
Note 24. Share Capital
Note 25.
Note 26. Capital Management
Note 27. Post-Employment and Other Long Term Employee Benefits
Note 28. Share-Based Compensation
Note 29. Employee Costs
Note 30.
Leases
Note 31. Financial Instruments
Note 32. Financial Risk Management
Note 33. Contingent Liabilities
Note 34. Financial Guarantees
Note 35. Related Party Transactions
Note 36. Restructuring and Other Charges
Note 37. Segment Information
Three Year Summary
Glossary
Loblaw Capital Transactions
68
69
70
70
70
71
72
73
74
74
74
88
89
91
93
94
96
96
97
97
98
99
99
101
103
104
105
105
105
106
107
110
110
113
114
115
122
125
126
128
130
133
134
135
136
137
140
142
George Weston Limited 2016 Annual Report 67
Management’s Statement of Responsibility for Financial Reporting
The management of George Weston Limited is responsible for the preparation, presentation and integrity of the
accompanying consolidated financial statements, Management’s Discussion and Analysis and all other
information in the Annual Report. This responsibility includes the selection and consistent application of
appropriate accounting principles and methods in addition to making the judgments and estimates necessary to
prepare the consolidated financial statements in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board. It also includes ensuring that the financial information
presented elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
Management is also responsible for providing reasonable assurance that assets are safeguarded and that
relevant and reliable financial information is produced. Management is required to design a system of internal
controls and certify as to the design and operating effectiveness of internal controls over financial reporting. A
dedicated control compliance team reviews and evaluates internal controls, the results of which are shared with
management on a quarterly basis.
KPMG LLP, whose report follows, were appointed as independent auditors by a vote of the Company’s
shareholders to audit the consolidated financial statements.
The Board of Directors, acting through an Audit Committee comprised solely of directors who are independent,
is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated
financial statements and the financial control of operations. The Audit Committee recommends the independent
auditors for appointment by the shareholders. The Audit Committee meets regularly with senior and financial
management, internal auditors and the independent auditors to discuss internal controls, auditing activities and
financial reporting matters. The independent auditors and internal auditors have unrestricted access to the Audit
Committee. These consolidated financial statements and Management’s Discussion and Analysis have been
approved by the Board of Directors for inclusion in the Annual Report based on the review and recommendation
of the Audit Committee.
[signed]
Galen G. Weston
Chairman and
Chief Executive Officer
March 1, 2017
Toronto, Canada
[signed]
Richard Dufresne
Executive Vice President,
Chief Financial Officer
68 George Weston Limited 2016 Annual Report
Independent Auditors’ Report
To the Shareholders of George Weston Limited:
We have audited the accompanying consolidated financial statements of George Weston Limited, which
comprise the consolidated balance sheets as at December 31, 2016 and December 31, 2015, the consolidated
statements of earnings, comprehensive income, changes in equity and cash flows for the years then ended, and
notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, 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.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements 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 entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of George Weston Limited as at December 31, 2016 and December 31, 2015, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 1, 2017
Toronto, Canada
George Weston Limited 2016 Annual Report 69
Consolidated Statements of Earnings
For the years ended December 31
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Expenses
Cost of inventories sold (note 12)
Selling, general and administrative expenses (note 31)
Operating Income
Net Interest Expense and Other Financing Charges (note 6)
Earnings Before Income Taxes
Income Tax (note 7)
Net Earnings
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Net Earnings
Net Earnings per Common Share ($) (note 8)
Basic
Diluted
(i) Certain comparative figures have been restated (see note 2).
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the years ended December 31
(millions of Canadian dollars)
Net earnings
Other comprehensive (loss) income
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation adjustment (note 31)
Unrealized (loss) gain on cash flow hedges (note 31)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (note 27)
Other comprehensive income
Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Comprehensive Income
(i) Certain comparative figures have been restated (see note 2).
See accompanying notes to the consolidated financial statements.
70 George Weston Limited 2016 Annual Report
2016
47,999
$
2015(i)
$
46,894
34,108
11,636
45,744
2,255
700
1,555
465
1,090
550
540
1,090
3.96
3.90
$
$
$
33,667
11,298
44,965
1,929
681
1,248
418
830
511
319
830
3.66
3.62
2016
1,090
$
2015(i)
830
(20)
(1)
28
7
1,097
534
563
1,097
$
151
1
143
295
1,125
720
405
1,125
$
$
$
$
$
Consolidated Balance Sheets
As at December 31
(millions of Canadian dollars)
ASSETS
Current Assets
Cash and cash equivalents (note 9)
Short term investments (note 9)
Accounts receivable (note 10)
Credit card receivables (note 11)
Inventories (note 12)
Prepaid expenses and other assets
Assets held for sale (note 13)
Total Current Assets
Fixed Assets (note 14)
Investment Properties (note 15)
Intangible Assets (note 16)
Goodwill (note 17)
Deferred Income Taxes (note 7)
Security Deposits (note 9)
Franchise Loans Receivable (note 31)
Other Assets (note 18)
Total Assets
LIABILITIES
Current Liabilities
Bank indebtedness (note 34)
Trade payables and other liabilities
Provisions (note 20)
Income taxes payable
Short term debt (note 21)
Long term debt due within one year (note 22)
Associate interest
Total Current Liabilities
Provisions (note 20)
Long Term Debt (note 22)
Trust Unit Liability (note 31)
Deferred Income Taxes (note 7)
Other Liabilities (note 23)
Total Liabilities
EQUITY
Share Capital (note 24)
Retained Earnings
Contributed Surplus (notes 25 & 28)
Accumulated Other Comprehensive Income
Total Equity Attributable to Shareholders of the Company
Non-Controlling Interests
Total Equity
Total Liabilities and Equity
2016
2015(i)
$
$
$
$
1,560
1,011
1,284
2,926
4,559
201
40
11,581
11,534
218
8,875
4,364
201
89
233
851
37,946
115
5,356
135
341
1,241
400
243
7,831
146
11,385
635
2,370
789
23,156
1,012
6,704
(156)
204
7,764
7,026
14,790
37,946
$
$
$
$
1,413
1,166
1,478
2,790
4,517
279
71
11,714
11,352
160
9,292
4,254
156
88
329
875
38,220
143
5,381
180
73
1,086
1,348
216
8,427
157
10,928
552
2,448
818
23,330
1,008
6,422
20
231
7,681
7,209
14,890
38,220
(i) Certain comparative figures have been restated (see note 2).
Leases (note 30). Contingent liabilities (note 33). Financial guarantees (note 34). Restructuring and other charges (note 36).
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board
[signed]
Galen G. Weston
Chairman and
Chief Executive Officer
[signed]
Barbara G. Stymiest
Director
George Weston Limited 2016 Annual Report 71
Balance as at Dec. 31, 2015
Net earnings
Other comprehensive
income (loss)(ii)
Comprehensive income (loss)
Effect of share-based
compensation (notes 24 & 28)
Shares purchased and
cancelled (note 24)
Net effect of shares held in
trusts (notes 24 & 28)
Loblaw capital transactions
and dividends (notes 25 & 28)
Dividends declared
Per common share ($)
– $1.745
Per preferred share ($)
– Series I – $1.45
– Series III – $1.30
– Series IV – $1.30
– Series V – $1.1875
Balance as at Dec. 31, 2014
Net earnings
Other comprehensive
income(ii)
Comprehensive income
Effect of share-based
compensation (notes 24 & 28)
Shares purchased and
cancelled (note 24)
Net effect of shares held in
trusts (notes 24 & 28)
Loblaw capital
transactions and dividends
(notes 25 & 28)
Dividends declared
Per common share ($)
– $1.695
Per preferred share ($)
– Series I – $1.45
– Series III – $1.30
– Series IV – $1.30
– Series V – $1.1875
Consolidated Statements of Changes in Equity
(millions of Canadian dollars except
where otherwise indicated)
Common
Shares
Preferred
Shares
Total
Share
Capital
Retained
Earnings(i)
Contributed
Surplus(i)
Foreign
Currency
Translation
Adjustment
Cash
Flow
Hedges
Total
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests(i)
Total
Equity(i)
$
191 $
817 $ 1,008 $ 6,422 $
20 $
230 $
1 $
4
4
550
11
561
(1)
(8)
(4)
(223)
15
(191)
231 $ 7,209 $ 14,890
1,090
540
(26)
(26)
(1)
(1)
(27)
(27)
23
563
8
7
1,097
26
(8)
(4)
(754)
(945)
(13)
(10)
(10)
(10)
(279)
4
817 $ 1,012 $ 6,704 $
(176)
(156) $
204 $
$
(223)
(13)
(10)
(10)
(10)
(746)
(1,197)
204 $ 7,026 $ 14,790
Balance as at Dec. 31, 2016
$
4
195 $
(i) Certain comparative figures have been restated (see note 2).
(ii) Other comprehensive loss includes actuarial gains of $28 million, $11 million of which is presented above in retained earnings
and $17 million in non-controlling interests. Also included in non-controlling interests is a foreign currency translation gain of
$6 million.
(millions of Canadian dollars except
where otherwise indicated)
Common
Shares
Preferred
Shares
Total
Share
Capital
Retained
Earnings(i)
Contributed
Surplus(i)
Foreign
Currency
Translation
Adjustment
Cash
Flow
Hedges
Total
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests(i)
Total
Equity(i)
$
180 $
817 $
997 $ 6,122 $
81 $
87
$
87 $ 6,956 $ 14,243
830
319
11
11
511
65
576
(1)
(14)
(1)
(217)
(13)
(10)
(10)
(10)
(276)
143 $
143
1
1
144
144
86
405
(1)
295
1,125
12
(14)
(1)
(151)
(215)
3
(64)
(217)
(13)
(10)
(10)
(10)
(152)
(478)
231 $ 7,209 $ 14,890
(61)
20 $
230 $
1 $
Balance as at Dec. 31, 2015
$
11
191 $
11
817 $ 1,008 $ 6,422 $
(i) Certain comparative figures have been restated (see note 2).
(ii) Other comprehensive income includes actuarial gains of $143 million, $65 million of which is presented above in retained earnings
and $78 million in non-controlling interests. Also included in non-controlling interests is a foreign currency translation gain of
$8 million.
See accompanying notes to the consolidated financial statements.
72 George Weston Limited 2016 Annual Report
Consolidated Statements of Cash Flows
For the years ended December 31
(millions of Canadian dollars)
Operating Activities
Net earnings
Add:
Net interest expense and other financing charges (note 6)
Income taxes (note 7)
Depreciation and amortization
Charge related to inventory measurement and other conversion differences
Asset impairments, net of recoveries (note 14)
Foreign currency translation loss (gain) (note 31)
Change in credit card receivables (note 11)
Change in non-cash working capital
Income taxes paid
Interest received
Other
Cash Flows from Operating Activities
Investing Activities
Fixed asset purchases (note 14)
Intangible asset additions (note 16)
Acquisition of QHR, net of cash acquired (note 5)
Cash assumed on initial consolidation of franchises (note 5)
Change in short term investments
Change in security deposits
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in short term debt (note 21)
Interest paid
Redemption of Loblaw capital securities (note 25)
Long term debt – Issued (note 22)
– Retired (note 22)
Share capital – Issued (notes 24 & 28)
– Purchased and held in trusts (note 24)
– Purchased and cancelled (note 24)
Loblaw common share capital – Issued (notes 25 & 28)
– Purchased and held in trusts (note 25)
– Purchased and cancelled (note 25)
Loblaw preferred share capital – Issued (note 25)
Dividends – To common shareholders
– To preferred shareholders
– To minority shareholders
Other
Cash Flows used in Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Change in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
$
(i) Certain comparative figures have been restated (see note 2).
See accompanying notes to the consolidated financial statements.
2016
2015(i)
$
1,090
$
830
700
465
1,654
142
2
4,053
(136)
108
(345)
15
65
3,760
(1,129)
(336)
(153)
42
160
(3)
95
(1,324)
(28)
155
(570)
815
(1,399)
4
(11)
(8)
42
(90)
(708)
(221)
(44)
(232)
20
(2,275)
(14)
147
1,413
1,560
$
681
418
1,686
4
73
(159)
3,533
(160)
220
(263)
13
24
3,367
(1,267)
(233)
33
57
10
(7)
(1,407)
(19)
(15)
(587)
(225)
1,186
(1,783)
9
(7)
(14)
63
(63)
(280)
221
(162)
(36)
(229)
23
(1,918)
38
80
1,333
1,413
George Weston Limited 2016 Annual Report 73
Notes to the Consolidated Financial Statements
Note 1. Nature and Description of the Reporting Entity
George Weston Limited (“GWL” or the “Company”) is a Canadian public company incorporated in 1928, with its
registered office located at 22 St. Clair Avenue East, Toronto, Canada M4T 2S7. The Company’s parent is
Wittington Investments, Limited (“Wittington”).
The Company has two reportable operating segments, Loblaw Companies Limited (“Loblaw”) and Weston Foods.
The Company also holds cash, short term investments and an interest in Choice Properties Real Estate
Investment Trust (“Choice Properties”) of 6% (2015 – 6%). Loblaw has three reportable operating segments
including retail businesses, a bank and Choice Properties. Loblaw provides Canadians with grocery, pharmacy,
health and beauty, apparel, general merchandise, retail banking, credit card services, insurance and wireless
mobile products and services. Loblaw also holds an 83% (2015 – 83%) effective interest in Choice Properties,
which owns, manages and develops retail and commercial properties across Canada. The Weston Foods
operating segment includes a leading fresh bakery business in Canada and frozen, artisan bakery and biscuit
businesses throughout North America.
As at year end 2016, GWL’s ownership interest in Loblaw was approximately 47% (2015 – 46%). The Company
has the ability to direct the activities of Loblaw and consequently consolidates Loblaw.
Note 2. Significant Accounting Policies
Statement of Compliance The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting
Standards Board (“IASB”) and using the accounting policies described herein.
These consolidated financial statements were authorized for issuance by the Company’s Board of Directors
(“Board”) on March 1, 2017.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for
the following items that were measured at fair value:
• defined benefit pension plan assets with the obligations related to these pension plans measured at their
discounted present value as described in note 27;
• amounts recognized for cash-settled share-based compensation arrangements as described in note 28; and
•
certain financial instruments as described in note 31.
The significant accounting policies set out below have been applied consistently in the preparation of the
consolidated financial statements for all periods presented.
The consolidated financial statements are presented in Canadian dollars.
Fiscal Year The Company’s year end is December 31. Activities are reported on a fiscal year ending on the
Saturday closest to December 31.
As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week every five
to six years. Each of the years ended December 31, 2016 and December 31, 2015 contained 52 weeks. The
next 53-week year will occur in fiscal year 2020.
Basis of Consolidation The consolidated financial statements include the accounts of GWL and other entities
that the Company controls. Control exists when the Company has the existing rights that give it the current
ability to direct the activities that significantly affect the entities’ returns. The Company assesses control on an
ongoing basis. The Company’s interest in the voting share capital of its subsidiaries is 100% except for Loblaw,
which is approximately 47% (2015 – 46%). GWL’s ownership in Loblaw is impacted by changes in Loblaw’s
common share equity.
74 George Weston Limited 2016 Annual Report
Structured entities are entities controlled by the Company which were designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity. Structured entities are consolidated if, based on
an evaluation of the substance of its relationship with the Company, the Company concludes that it controls the
structured entity. Structured entities controlled by the Company were established under terms that impose strict
limitations on the decision-making powers of the structured entities’ management and that results in the
Company receiving the majority of the benefits related to the structured entities’ operations and net assets,
being exposed to the majority of risks incident to the structured entities’ activities, and retaining the majority of
the residual or ownership risks related to the structured entities or their assets.
Transactions and balances between the Company and its consolidated entities have been eliminated on
consolidation.
Non-controlling interests are recorded in the consolidated financial statements and represent the
non-controlling shareholders’ portion of the net assets and net earnings of Loblaw. Transactions with
non-controlling interests are treated as transactions with equity owners of the Company. Changes in GWL’s
ownership interest in its subsidiaries are accounted for as equity transactions.
Choice Properties’ Trust Units held by non-controlling interests are presented as a liability as the Trust Units are
redeemable for cash at the option of the holder, subject to certain restrictions.
Loblaw consolidates the Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) licensees (“Associates”) as
well as the franchisees of its food retail stores that are subject to a new, simplified franchise agreement
(“Franchise Agreement”). An Associate is a pharmacist-owner of a corporation that is licensed to operate a retail
drug store at a specific location using Shoppers Drug Mart trademarks. The consolidation of the Associates and
the new franchisees is based on the concept of control, for accounting purposes, which was determined to exist,
through agreements that govern the relationships between Loblaw and the Associates and franchisees. Loblaw
does not have any direct or indirect shareholdings in the corporations that operate the Associates. Associate
interest reflects the investment the Associates have in the net assets of their businesses. Under the terms of the
Associate Agreements, Shoppers Drug Mart agrees to purchase the assets that the Associates use in store
operations, primarily at the carrying value to the Associate, when Associate Agreements are terminated by either
party. The Associates’ corporations and the franchisees remain separate legal entities.
Business Combinations Business combinations are accounted for using the acquisition method as of the date
when control is transferred to the Company. The Company measures goodwill as the excess of the sum of the fair
value of the consideration transferred over the net identifiable assets acquired and liabilities assumed, all
measured as at the acquisition date. Transaction costs that the Company incurs in connection with a business
combination, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Net Earnings per Common Share (“EPS”) Basic EPS is calculated by dividing the net earnings available to
common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the net earnings available to common shareholders and the weighted
average number of common shares outstanding for the effects of all potential dilutive instruments.
Revenue Recognition The Company recognizes revenue when the amount can be reliably measured, when it is
probable that future economic benefits will flow to the Company and when specific criteria have been met as
described below.
Weston Foods recognizes sales upon delivery of its products to customers and acceptance of its products by
customers net of provisions for returns, discounts and allowances.
George Weston Limited 2016 Annual Report 75
Notes to the Consolidated Financial Statements
Loblaw Retail revenue includes sale of goods and services to customers through corporate stores and
consolidated franchise stores and Associates, and sales to non-consolidated franchise stores, and independent
wholesale account customers. Revenue is measured at the fair value of the consideration received or receivable,
net of estimated returns and sales incentives. Loblaw recognizes revenue at the time the sale is made or service
is delivered to its customers and at the time of delivery of inventory to its non-consolidated franchises. Revenue
also includes service fees from non-consolidated franchises, and independent wholesale account customers,
which are recognized when services are rendered.
On the initial sale of franchising arrangements, Loblaw offered products and services as part of a multiple
deliverable arrangement. Prior to the implementation of the new Franchise Agreement, the initial sales to
non-consolidated franchise stores were recorded using a relative fair value approach.
Loblaw Customer Loyalty Awards are accounted for as a separate component of the sales transaction in which
they are granted. A portion of the consideration received in a transaction that includes the issuance of an award
is deferred until the awards are ultimately redeemed. The allocation of the consideration to the award is based
on an evaluation of the award’s estimated fair value at the date of the transaction using the residual fair value
method.
Financial Services revenue includes interest income on credit card loans, service fees and other revenue related
to financial services. Interest income is recognized using the effective interest method. Service fees are
recognized when services are rendered. Other revenue is recognized periodically or according to contractual
provisions.
Choice Properties revenue includes rental revenue on base rents earned from tenants under lease agreements,
realty tax and operating cost recoveries and other incidental income, including intersegment revenue earned
from Loblaw’s Retail segment. The rental revenue is recognized on a straight-line basis over the terms of the
respective leases. Property tax and operating cost recoveries are recognized in the period that recoverable costs
are chargeable to tenants. Percentage participation rents are recognized when tenants’ specified sales targets
have been met as set out in the lease agreements.
Income Taxes Current and deferred taxes are recognized in the consolidated statements of earnings, except for
current and deferred taxes related to a business combination, or amounts charged directly to equity or other
comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax
rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of
previous years.
Deferred tax is recognized using the asset and liability method of accounting on temporary differences arising
between the financial statement carrying values of existing assets and liabilities and their respective income tax
bases. Deferred tax is measured using enacted or substantively enacted income tax rates expected to apply in
the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset is
recognized for temporary differences as well as unused tax losses and credits to the extent that it is probable
that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets and they relate to income taxes levied by the same taxation authority on the same taxable entity,
or on different taxable entities where the Company intends to settle its current tax assets and liabilities on a
net basis.
76 George Weston Limited 2016 Annual Report
Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the
timing of the reversal of the temporary difference is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to
distribute all taxable income directly earned by Choice Properties to unitholders and to deduct such distributions
for income tax purposes. Legislation relating to the federal income taxation of Specified Investment Flow
Through trusts or partnerships (“SIFT”) provides that certain distributions from a SIFT will not be deductible in
computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate that is
substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid
by a SIFT as return of capital should generally not be subject to tax.
Under the SIFT rules, the taxation regime will not apply to a real estate investment trust (“REIT”) that meets
prescribed conditions relating to the nature of its assets and revenue (the “REIT Conditions”). Choice Properties
has reviewed the SIFT rules and has assessed its interpretation and application to Choice Properties’ assets and
revenue. While there are uncertainties in the interpretation and application of the SIFT rules, Choice Properties
has determined that it meets the REIT Conditions.
Cash Equivalents Cash equivalents consist of highly liquid marketable investments with an original maturity date
of 90 days or less from the date of acquisition.
Short Term Investments Short term investments consist of marketable investments with an original maturity
date greater than 90 days and less than 365 days from the date of acquisition.
Security Deposits Security deposits consist of cash and cash equivalents and short term investments. Security
deposits also include amounts which are required to be placed with counterparties as collateral to enter into and
maintain certain outstanding letters of credit and certain financial derivative contracts.
Accounts Receivable Accounts receivable consists primarily of receivables from Loblaw’s vendors, non-
consolidated franchisees, government and third-party drug plans arising from prescription drug sales,
independent accounts and receivables from Weston Foods customers and suppliers, and are recorded net of
allowances.
Credit Card Receivables Loblaw, through President’s Choice Bank (“PC Bank”), a wholly-owned subsidiary of
Loblaw, has credit card receivables that are stated net of an allowance. Interest income is recorded in revenue
and interest expense is recorded in net interest expense and other financing charges using the effective interest
method. The effective interest rate is the rate that discounts the estimated future cash receipts through the
expected life of the credit card receivable (or, where appropriate, a shorter period) to the carrying amount.
When calculating the effective interest rate, Loblaw estimates future cash flows considering all contractual terms
of the financial instrument, but not future credit losses.
Credit card receivables are considered past due when a cardholder has not made a payment by the contractual
due date, taking into account a grace period. The amount of credit card receivables that fall within the grace
period is considered current. Credit card receivables past due but not impaired are those receivables that are
either less than 90 days past due or whose past due status is reasonably expected to be remedied. Any credit
card receivables with a payment that is contractually 180 days in arrears, or where the likelihood of collection is
considered remote, is written off.
George Weston Limited 2016 Annual Report 77
Notes to the Consolidated Financial Statements
Loblaw, through PC Bank, participates in various securitization programs that provide the primary source of
funds for the operation of its credit card business. PC Bank maintains and monitors co-ownership interest in
credit card receivables with independent securitization trusts, in accordance with its financing requirements.
PC Bank is required to absorb a portion of the related credit losses. As a result, Loblaw has not transferred all of
the risks and rewards related to these assets and continues to recognize these assets in credit card receivables.
The transferred receivables are accounted for as financing transactions. The associated liabilities secured by
these assets are included in either short term debt or long term debt based on their characteristics and are
carried at amortized cost. Loblaw provides a standby letter of credit for the benefit of the independent
securitization trusts.
Eagle Credit Card Trust® PC Bank participates in a single seller revolving co-ownership securitization program
with Eagle Credit Card Trust® (“Eagle”) and continues to service the credit card receivables on behalf of Eagle,
but does not receive any fee for its servicing obligations and has a retained interest in the securitized receivables
represented by the right to future cash flows after obligations to investors have been met. Loblaw consolidates
Eagle as a structured entity.
Other Independent Securitization Trusts The Other Independent Securitization Trusts administer multi-seller,
multi-asset securitization programs that acquire assets from various participants, including credit card
receivables from PC Bank. These trusts are managed by major Canadian chartered banks. PC Bank does not
control the trusts through voting interests and does not exercise any control over the trusts’ management,
administration or assets. The activities of these trusts are conducted on behalf of the participants and each trust
is a conduit through which funds are raised to purchase assets through the issuance of senior and subordinated
short term and medium term asset backed notes. These trusts are unconsolidated structured entities.
Franchise Loans Receivable Franchise loans receivable are comprised of amounts due from non-consolidated
franchises for loans issued through a structure involving consolidated independent funding trusts. These trusts,
which are considered structured entities, were created to provide loans to franchises to facilitate their purchase
of inventory and fixed assets. Each franchise provides security to the independent funding trust for its obligations
by way of a general security agreement. In the event that a franchise defaults on its loan and Loblaw has not,
within a specified time period, assumed the loan or the default is not otherwise remedied, the independent
funding trust would assign the loan to Loblaw and draw upon a standby letter of credit. Loblaw has agreed to
reimburse the issuing bank for any amount drawn on the standby letter of credit. The carrying amount of
franchise loan receivables approximates its fair value.
Inventories The Company values inventories at the lower of cost and net realizable value. Cost includes the costs
of purchases net of vendor allowances plus other costs, such as transportation, that are directly incurred to bring
inventories to their present location and condition. Loblaw’s retail store inventories, Loblaw’s inventories at
distribution centres and Weston Foods’ inventories are measured at weighted average cost. Shoppers Drug
Mart’s inventories are measured on a first-in first-out basis.
Loblaw estimates net realizable value as the amount that inventories are expected to be sold taking into
consideration fluctuations in retail prices due to seasonality less estimated costs necessary to make the sale.
Inventories are written down to net realizable value when the cost of inventories is estimated to be
unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously
caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase
in selling prices, the amount of the write-down previously recorded is reversed. Storage costs, indirect
administrative overhead and certain selling costs related to inventories are expensed in the period that these
costs are incurred.
78 George Weston Limited 2016 Annual Report
Vendor Allowances The Company receives allowances from certain of its vendors whose products it purchases.
These allowances are received for a variety of buying and/or merchandising activities, including vendor programs
such as volume purchase allowances, purchase discounts, listing fees and exclusivity allowances. Allowances
received from a vendor are a reduction in the cost of the vendor’s products or services, and are recognized as a
reduction in the cost of inventories sold and the related inventory in the consolidated statements of earnings
and the consolidated balance sheets, respectively, when it is probable that they will be received and the amount
of the allowance can be reliably estimated. Amounts received but not yet earned are presented in other
liabilities as deferred vendor allowances. Certain exceptions apply if the consideration is a payment for assets or
services delivered to the vendor or for reimbursement of selling costs incurred to promote the vendor’s
products. The consideration is then recognized as a reduction of the cost incurred in the consolidated statements
of earnings.
Fixed Assets Fixed assets are recognized and subsequently measured at cost less accumulated depreciation and
any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition
of the asset, including costs incurred to prepare the asset for its intended use and capitalized borrowing costs.
The commencement date for capitalization of costs occurs when the Company first incurs expenditures for the
qualifying assets and undertakes the required activities to prepare the assets for their intended use.
Borrowing costs directly attributable to the acquisition, construction or production of fixed assets, that
necessarily take a substantial period of time to prepare for their intended use and a proportionate share of
general borrowings, are capitalized to the cost of those fixed assets, based on a quarterly weighted average cost
of borrowing. All other borrowing costs are expensed as incurred and recognized in net interest expense and
other financing charges.
The cost of replacing a fixed asset component is recognized in the carrying amount if it is probable that the
future economic benefits embodied within the component will flow to the Company and the cost can be
measured reliably. The carrying amount of the replaced component is derecognized. The cost of repairs and
maintenance of fixed assets is expensed as incurred and recognized in operating income.
Gains and losses on disposal of fixed assets are determined by comparing the fair value of proceeds from
disposal with the net book value of the assets and are recognized net in operating income.
Fixed assets are depreciated on a straight-line basis over their estimated useful lives to their estimated residual
value when the assets are available for use. When significant parts of a fixed asset have different useful lives,
they are accounted for as separate components and depreciated separately. Depreciation methods, useful lives
and residual values are reviewed annually and are adjusted for prospectively, if appropriate. Estimated useful
lives are as follows:
Buildings
Equipment and fixtures
Building improvements
Leasehold improvements
Assets held under financing leases
10 to 40 years
2 to 16 years
up to 10 years
Lesser of term of the lease and useful life up to 25 years
Lesser of term of the lease(i) and useful life(ii)
(i)
If it is reasonably certain that the Company will obtain ownership by the end of the lease term, assets under finance leases would be
depreciated over the life of the asset.
(ii) Same basis as owned assets.
Non-current assets are classified as assets held for sale if their carrying amount will be recovered principally
through a sale transaction rather than through continuing use. To qualify as assets held for sale, the sale must be
highly probable, assets must be available for immediate sale in their present condition and management must be
committed to a plan to sell assets that should be expected to close within one year from the date of
classification. Assets held for sale are recognized at the lower of their carrying amount and fair value less costs to
sell and are not depreciated.
George Weston Limited 2016 Annual Report 79
Notes to the Consolidated Financial Statements
Fixed assets are reviewed at each balance sheet date to determine whether there is any indication of
impairment. Refer to the Impairment of Non-Financial Assets policy.
Investment Properties Investment properties are properties owned by Loblaw that are held to either earn rental
income, for capital appreciation, or both. Loblaw’s investment properties include single tenant properties held to
earn rental income and certain multiple tenant properties. Land and buildings leased to franchisees are not
accounted for as investment properties as these properties are related to Loblaw’s operating activities.
Investment property assets are recognized at cost less accumulated depreciation and any accumulated
impairment losses. The depreciation policies for investment properties are consistent with those described in the
significant accounting policy for fixed assets.
Investment properties are reviewed at each balance sheet date to determine whether there is any indication of
impairment. Refer to the Impairment of Non-Financial Assets policy.
Joint Ventures A joint venture is a joint arrangement whereby the parties to the arrangement have rights to the
net assets of the joint arrangement. Investments in joint ventures are accounted for using the equity method,
where the investment is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to
recognize the Company’s share of the profit or loss and other comprehensive income of the joint venture.
Goodwill Goodwill arising in a business combination is recognized as an asset at the date that control is
acquired. Goodwill is subsequently measured at cost less accumulated impairment losses. Goodwill is not
amortized but is tested for impairment on an annual basis or more frequently if there are indicators that
goodwill may be impaired as described in the Impairment of Non-Financial Assets policy.
Intangible Assets Intangible assets with finite lives are measured at cost less accumulated amortization and any
accumulated impairment losses. These intangible assets are amortized on a straight-line basis over their
estimated useful lives, ranging from three to 30 years, and are tested for impairment as described in the
Impairment of Non-Financial Assets policy. Useful lives, residual values and amortization methods for intangible
assets with finite useful lives are reviewed at least annually.
Indefinite life intangible assets are measured at cost less any accumulated impairment losses. These intangible
assets are tested for impairment on an annual basis or more frequently if there are indicators that intangible
assets may be impaired as described in the Impairment of Non-Financial Assets policy.
Impairment of Non-Financial Assets At each balance sheet date, the Company reviews the carrying amounts of
its non-financial assets, other than inventories and deferred tax assets, to determine whether there is any
indication of impairment. If any such indication exists, the asset is then tested for impairment by comparing its
recoverable amount to its carrying value. Goodwill and indefinite life intangible assets are tested for impairment
at least annually.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that
generate cash inflows from continuing use that are largely independent of cash inflows of other assets or groups
of assets. This grouping is referred to as a cash generating unit (“CGU”). Weston Foods’ manufacturing assets are
grouped together at the level of production categories which are capable of servicing their customers
independently of other production categories. Loblaw has determined that each location is a separate CGU for
purposes of impairment testing.
Corporate assets, which include head office facilities and distribution centers, do not generate separate cash
inflows. Corporate assets are tested for impairment at the minimum grouping of CGUs to which the corporate
assets can be reasonably and consistently allocated. Goodwill arising from a business combination is tested for
impairment at the minimum grouping of CGUs that are expected to benefit from the synergies of the
combination.
80 George Weston Limited 2016 Annual Report
The recoverable amount of a CGU or CGU grouping is the higher of its value in use and its fair value less costs to
sell. Value in use is based on the estimated future cash flows from the CGU or CGU grouping, discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the CGU or CGU grouping. The fair value less costs to sell is based on the best
information available to reflect the amount that could be obtained from the disposal of the CGU or CGU
grouping in an arm’s length transaction between knowledgeable and willing parties, net of estimates of the costs
of disposal.
An impairment loss is recognized if the carrying amount of a CGU or CGU grouping exceeds its recoverable
amount. For asset impairments other than goodwill, the impairment loss reduces the carrying amounts of the
non-financial assets in the CGU on a pro-rata basis. Any loss identified from goodwill impairment testing is first
applied to reduce the carrying amount of goodwill allocated to the CGU grouping, and then to reduce the
carrying amounts of the other non-financial assets in the CGU or CGU grouping on a pro-rata basis. Impairment
losses are recognized in operating income.
For assets other than goodwill, an impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. An impairment loss in respect of goodwill is not
reversed.
Bank Indebtedness Bank indebtedness is comprised of balances outstanding on bank lines of credit.
Provisions Provisions are recognized when there is a present legal or constructive obligation as a result of a past
event, it is probable that the Company will be required to settle the obligation and a reliable estimate of the
amount of the obligation can be made. The amount recognized as a provision is the present value of the best
estimate of the consideration required to settle the present obligation at the end of the reporting period, taking
into account the risks and uncertainties specific to the obligation. The unwinding of the discount rate for the
passage of time is recognized in net interest expense and other financing charges.
Financial Instruments and Derivative Financial Instruments Financial assets and liabilities are recognized when
the Company becomes party to the contractual provisions of the financial instrument. Financial instruments,
including derivatives and embedded derivatives in certain contracts, upon initial recognition are measured at
fair value and classified as either financial assets or financial liabilities at fair value through profit or loss,
held-to-maturity investments, available-for-sale financial assets, loans and receivables or other financial
liabilities. Loans and receivables and other financial liabilities are subsequently measured at cost or amortized
cost. Derivatives and non-financial derivatives must be recorded at fair value on the consolidated balance sheets.
Fair values are based on quoted market prices where available from active markets, otherwise fair values are
estimated using valuation methodologies, primarily discounted cash flows taking into account external market
inputs where possible.
Financial derivative instruments in the form of forwards and futures, as well as non-financial derivatives in the
form of futures contracts, options contracts and forward contracts, are recorded at fair value on the consolidated
balance sheets. The Company does not use derivative instruments for speculative purposes. Any embedded
derivative instruments that may be identified are separated from their host contract and recorded on the
consolidated balance sheets at fair value. Derivative instruments are recorded in current or non-current assets
and liabilities based on their remaining terms to maturity. All changes in fair values of the derivative instruments
are recorded in net earnings unless the derivative qualifies and is effective as a hedging item in a designated
hedging relationship. The Company has cash flow hedges which are used to manage exposure to fluctuations in
foreign currency exchange and interest rates. The effective portion of the change in fair value of the hedging
item is recorded in other comprehensive income. If the change in fair value of the hedging item is not completely
offset by the change in fair value of the hedged item, the ineffective portion of the hedging relationship is
recorded in net earnings. Amounts accumulated in other comprehensive income are reclassified to net earnings
when the hedged item is recognized in net earnings.
George Weston Limited 2016 Annual Report 81
Notes to the Consolidated Financial Statements
Certain non-financial derivative instruments that were entered into and continue to be held for the purpose of
the receipt or delivery of a non-financial item in accordance with the Company’s expected purchase, sale or
usage requirements are exempt from financial instrument accounting requirements (“own use exemption”). No
amounts are recorded in the consolidated financial statements related to these contracts until the associated
non-financial items are received by the Company.
Classification The following table summarizes the classification and measurement of the Company’s financial
assets and liabilities:
Asset/Liability
Cash and cash equivalents
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets
Certain long term investments
Bank indebtedness
Trade payables and other liabilities
Short term debt
Long term debt
Trust Unit liability
Certain other liabilities
Derivatives
Classification
Fair value through profit and loss(i)
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Available-for-sale
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value through profit and loss(iii)
Other liabilities
Fair value through profit and loss(iii)
Measurement
Fair value
Fair value
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Fair value(ii)
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Fair value
Financial instruments designated at fair value through profit and loss.
(i)
(ii) Measured at fair value through other comprehensive income until realized through disposal or impairment.
(iii) Financial instruments required to be classified at fair value through profit and loss.
The Company has not classified any financial assets as held-to-maturity.
Fair Value The Company measures financial assets and liabilities under the following fair value hierarchy. The
different levels have been defined as follows:
• Fair Value Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Fair Value Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Fair Value Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever
available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that
is significant to the measurement of fair value.
Transaction costs other than those related to financial instruments classified as fair value through profit or loss,
which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using
the effective interest method.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in
earnings before income taxes in the period in which they are incurred. Settlement date accounting is used to
account for the purchase and sale of financial assets. Gains or losses between the trade date and settlement
date on fair value through profit or loss financial assets are recorded in earnings before income taxes.
82 George Weston Limited 2016 Annual Report
Valuation Process The determination of the fair value of financial instruments is performed by the Company’s
treasury and financial reporting departments on a quarterly basis. There was no change in the valuation
techniques applied to financial instruments during the current year. The following table describes the valuation
techniques used in the determination of the fair values of financial instruments:
Type
Valuation Approach
Cash and Cash Equivalents, Short Term
Investments, Security Deposits, Accounts
Receivable, Credit Card Receivables, Bank
Indebtedness, Trade Payables and Other Liabilities
and Short Term Debt
Franchise Loans Receivable
Derivatives
Long Term Debt, Trust Unit Liability and certain
Other Financial Instruments
The carrying amount approximates fair value due to the short term
maturity of these instruments.
The carrying amount approximates fair value as fluctuations in the
forward interest rates would not have significant impacts on the
valuation and the provisions recorded for all impaired receivables.
Specific valuation techniques used to value derivative financial
instruments include:
Quoted market prices or dealer quotes for similar instruments;
Observable market information as well as valuations determined
by external valuators with experience in the financial markets.
The fair value is based on the present value of contractual cash flows,
discounted at the Company’s current incremental borrowing rate for
similar types of borrowing arrangements or, where applicable, quoted
market prices.
Derecognition of Financial Instruments Financial assets are derecognized when the contractual rights to receive
cash flows and benefits from the financial asset expire, or if the Company transfers the control or substantially all
the risks and rewards of ownership of the financial asset to another party. The difference between the carrying
amount of the financial asset and the sum of the consideration received and receivable is recognized in earnings
before income taxes.
Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled.
The difference between the carrying amount of the financial liability derecognized and the consideration paid
and payable is recognized in earnings before income taxes.
Impairment of Financial Assets An assessment of whether there is objective evidence that a financial asset or a
group of financial assets is impaired is performed at each balance sheet date. A financial asset or group of
financial assets is considered to be impaired if one or more loss events that have an impact on the estimated
future cash flows occur after their initial recognition and the loss can be reliably measured. If such objective
evidence has occurred, the loss is based on the difference between the carrying amount of the financial asset, or
portfolio of financial assets, and the respective estimated future cash flows discounted at the financial assets’
original effective interest rate. Impairment losses are recorded in the consolidated statements of earnings with
the carrying amount of the financial asset or group of financial assets reduced through the use of impairment
allowance accounts.
In periods subsequent to the impairment where the impairment loss has decreased, and such decrease can be
related objectively to an event occurring after the impairment was initially recognized, the previously recognized
impairment loss is reversed through the consolidated statements of earnings. The impairment reversal is limited
to the lesser of the decrease in impairment or the extent that the carrying amount of the financial asset at the
date the impairment is reversed does not exceed what the amortized cost would have been had the impairment
not been recognized, after the reversal.
George Weston Limited 2016 Annual Report 83
Notes to the Consolidated Financial Statements
Foreign Currency Translation The functional currency of the Company is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the
Company, including goodwill and fair value adjustments arising on acquisition, are translated into Canadian
dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency
exchange gains or losses are recognized in the foreign currency translation adjustment as part of other
comprehensive income. When such foreign operation is disposed of, the related foreign currency translation
reserve is recognized in net earnings as part of the gain or loss on disposal. On the partial disposal of such
foreign operation, the relevant proportion is reclassified to net earnings.
Assets and liabilities denominated in U.S. dollars but held in foreign operations that have the same functional
currency as the Company are translated into Canadian dollars at the foreign currency exchange rate in effect at
the balance sheet date. The resulting foreign currency exchange gains or losses are recognized in operating
income.
Revenues and expenses of foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are transacted.
Short Term Employee Benefits Short term employee benefits include wages, salaries, compensated absences,
profit-sharing and bonuses. Short term employee benefit obligations are measured on an undiscounted basis
and are recognized in operating income as the related service is provided or capitalized if the service rendered is
in connection with the creation of a tangible or intangible asset. A liability is recognized for the amount expected
to be paid under short term cash bonus or profit-sharing plans if the Company has a present legal or constructive
obligation to pay this amount as a result of past service provided by the employee, and the obligation can be
estimated reliably.
Defined Benefit Post-Employment Plans The Company has a number of contributory and non-contributory
defined benefit post-employment plans providing pension and other benefits to eligible employees. The defined
benefit pension plans provide a pension based on length of service and eligible pay. The other defined benefits
include health care, life insurance and dental benefits provided to eligible employees who retire at certain ages
having met certain service requirements. The Company’s net defined benefit plan obligations (assets) for each
plan are actuarially calculated by a qualified actuary at the end of each annual reporting period using the
projected unit credit method pro-rated based on service and management’s best estimate of the discount rate,
the rate of compensation increase, retirement rates, termination rates, mortality rates and expected growth rate
of health care costs. The discount rate used to value the defined benefit plan obligation for accounting purposes
is based on high quality corporate bonds denominated in the same currency with cash flows that match the
terms of the defined benefit plan obligations. Past service costs (credits) arising from plan amendments are
recognized in operating income in the year that they arise. The actuarially determined net interest costs on the
net defined benefit plan obligation are recognized in net interest expense and other financing charges.
The fair values of plan assets are deducted from the defined benefit plan obligations to arrive at the net defined
benefit plan obligations (assets). For plans that result in a net defined benefit asset, the recognized asset is
limited to the present value of economic benefits available in the form of future refunds from the plan or
reductions in future contributions to the plan (the “asset ceiling”). If it is anticipated that the Company will not
be able to recover the value of the net defined benefit asset, after considering minimum funding requirements
for future service, the net defined benefit asset is reduced to the amount of the asset ceiling. When the payment
in the future of minimum funding requirements related to past service would result in a net defined benefit
surplus or an increase in a surplus, the minimum funding requirements are recognized as a liability to the extent
that the surplus would not be fully available as a refund or a reduction in future contributions.
84 George Weston Limited 2016 Annual Report
Remeasurements including actuarial gains and losses, the effect of the asset ceiling (if applicable) and the impact
of any minimum funding requirements are recognized through other comprehensive income and subsequently
reclassified from accumulated other comprehensive income to retained earnings.
Other Long Term Employee Benefit Plans The Company offers other long term employee benefits including
contributory long term disability benefits and non-contributory continuation of health care and dental benefits
to employees who are on long term disability leave. As the amount of the long term disability benefit does not
depend on length of service, the obligation is recognized when an event occurs that gives rise to an obligation to
make payments. The accounting for other long term employee benefit plans is similar to the method used for
defined benefit plans except that all actuarial gains and losses are recognized in operating income.
Defined Contribution Plans The Company maintains a number of defined contribution pension plans for
employees in which the Company pays fixed contributions for eligible employees into a registered plan and has
no further significant obligation to pay any further amounts. The costs of benefits for defined contribution plans
are expensed as employees have rendered service.
Multi-Employer Pension Plans The Company participates in multi-employer pension plans (“MEPP”) which are
accounted for as defined contribution plans. The Company’s responsibility to make contributions to these plans
is limited to amounts established pursuant to its collective agreements. Defined benefit MEPPs are accounted for
as defined contribution plans as adequate information to account for the Company’s participation in the plans is
not available due to the size and number of contributing employers in the plans. The contributions made by the
Company to MEPPs are expensed as contributions are due.
Termination Benefits Termination benefits are recognized as an expense at the earlier of when the Company
can no longer withdraw the offer of those benefits and when the Company recognizes costs for a restructuring.
Benefits payable are discounted to their present value when the effect of the time value of money is material.
Equity-Settled Share-Based Compensation Plans Stock options, Restricted Share Units (“RSUs”), Performance
Share Units (“PSUs”), Director Deferred Share Units (“DSUs”) and Executive Deferred Share Units (“EDSUs”)
issued by the Company are settled in common shares and are accounted for as equity-settled awards.
Stock options outstanding have a seven year term to expiry, vest 20% cumulatively on each anniversary date of
the grant and are exercisable at the designated common share price, which is based on the greater of the
volume weighted average trading prices of the GWL or Loblaw common shares for either the five trading days
prior to the date of grant or the trading day immediately preceding the grant date. The fair value of each tranche
of options granted is measured separately at the grant date using a Black-Scholes option pricing model, and
includes the following assumptions:
• The expected dividend yield is estimated based on the expected annual dividend prior to the option grant
date and the closing share price as at the option grant date;
• The expected share price volatility is estimated based on the Company’s historical volatility over a period
consistent with the expected life of the options;
• The risk-free interest rate is estimated based on the Government of Canada bond yield in effect at the grant
date for a term to maturity equal to the expected life of the options; and
• The effect of expected exercise of options prior to expiry is incorporated into the weighted average expected
life of the options, which is based on historical experience and general option holder behaviour.
RSUs and PSUs vest after the end of a three year performance period. The number of PSUs that vest is based on
the achievement of specified performance measures. The fair value of each RSU and PSU granted is measured
separately at the grant date based on the market value of a GWL or Loblaw common share less the net present
value of the expected dividend stream at the date on which RSUs and PSUs are awarded to each participant.
George Weston Limited 2016 Annual Report 85
Notes to the Consolidated Financial Statements
GWL and Loblaw established trusts for each of their RSU and PSU plans to facilitate the purchase of shares for
future settlement upon vesting. Each company is the sponsor of their respective trusts and has assigned
Computershare Trust Company of Canada as the trustee. GWL and Loblaw fund the purchase of shares for
settlement and earn management fees from the trusts. The trusts are considered structured entities and are
consolidated in the Company’s financial statements with the cost of the acquired shares recorded at book value
as a reduction to share capital. Any premium on the acquisition of the shares above book value is applied to
retained earnings until the shares are issued to settle RSU and PSU obligations.
Members of GWL’s and Loblaw’s Board, who are not management, may elect to receive a portion of their annual
retainers and fees in the form of DSUs. Eligible executives of the Company may elect to defer up to 100% of the
Short Term Incentive Plan earned in any year into the EDSU plan. Dividends paid earn fractional DSUs and EDSUs,
respectively and are treated as capital transactions. DSUs and EDSUs vest upon grant.
The compensation expense for equity-settled plans is prorated over the vesting or performance period, with a
corresponding increase to contributed surplus. Forfeitures are estimated at the grant date and are revised to
reflect changes in expected or actual forfeitures.
Upon exercise of options, the amount accumulated in contributed surplus for the award plus the cash received
upon exercise is recognized as an increase in share capital. Upon settlement of RSUs and PSUs, the amount
accumulated in contributed surplus for the award is reclassified to share capital, with any premium or discount
applied to retained earnings.
Cash-Settled Share-Based Compensation Plans Unit Options, Restricted Units, Performance Units and Trustee
Deferred Units issued by Choice Properties and certain DSUs are accounted for as cash-settled awards.
The fair value of the amount payable to award recipients in respect of these cash-settled awards plan is
remeasured at each balance sheet date, and a compensation expense is recognized in selling, general and
administrative expenses (“SG&A”) over the vesting period for each tranche with a corresponding change in the
liability.
Employee Share Ownership Plan (“ESOP”) GWL’s and Loblaw’s contributions to the ESOPs are measured at cost
and recorded as compensation expense in operating income when the contribution is made. The ESOPs are
administered through a trust which purchases GWL’s and Loblaw’s common shares on the open market on behalf
of its employees.
Accounting Standards Implemented in 2016
Presentation of Financial Statements The Company implemented the amendments to IAS 1, “Presentation of
Financial Statements”, effective January 1, 2016. There was no significant impact on the Company’s consolidated
financial statements as a result of the implementation of this amendment.
86 George Weston Limited 2016 Annual Report
Changes to Significant Accounting Policies
Income Taxes In November 2016, the IFRS Interpretations Committee issued its agenda decision related to
the expected manner of recovery of indefinite life intangible assets when measuring deferred income taxes in
accordance with IAS 12, “Income Taxes”, and clarified its interpretation that an indefinite life intangible asset
does not have an unlimited life and its economic benefit flows to an entity in future periods through use and not
just through future sale. Accordingly, it is appropriate to measure the associated deferred income tax liability at
the income tax rate applicable to ordinary taxable income expected to apply in the years in which the temporary
differences are expected to be recovered or settled. Loblaw’s accounting policy reflected an accepted view that
an indefinite life intangible will be recovered through its disposition and was using a capital gains tax rate to
measure deferred income taxes associated with its indefinite life intangible assets. Loblaw implemented this
guidance in the fourth quarter of 2016 on a retrospective basis as an accounting policy change in accordance
with IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”. The impact of this change was as
follows:
Consolidated Statement of Earnings and Comprehensive Income
Increase (Decrease)
($ millions except where otherwise indicated)
Income tax(i)
Net earnings
Other comprehensive income
Net earnings per common share ($)
Basic
Diluted
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Goodwill
Deferred income taxes
Equity
$
$
$
2015
34
(34)
(34)
(0.12)
(0.12)
$
$
$
$
$
0
0
0
As at
$
Dec. 31, 2015
418
$
458
$
(40)
$
Dec. 31, 2014
418
$
424
$
(6)
$
0
0
0
(i) Relates to the remeasurement of deferred income tax liabilities as a result of the Alberta statutory corporate income tax rate change
in 2015.
Changes to Accounting Estimates
Fixed Assets In the second quarter of 2016, Loblaw reassessed and revised the useful life of certain classes of
equipment and fixtures from eight to ten years. This revision represents a change in estimate resulting in a
current year reduction of depreciation and amortization expense, related to these assets, of approximately
$66 million compared to 2015.
George Weston Limited 2016 Annual Report 87
Notes to the Consolidated Financial Statements
Note 3. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and
judgments in applying the Company’s accounting policies that affect the reported amounts and disclosures made
in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management
in respect of the application of an accounting policy, a recognized or unrecognized financial statement amount
and/or note disclosure, following an analysis of relevant information that may include estimates and
assumptions. Estimates and assumptions are used mainly in determining the measurement of balances
recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that
may include management’s historical experience, knowledge of current events and conditions and other factors
that are believed to be reasonable under the circumstances. Management continually evaluates the estimates
and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that
the Company believes could have the most significant impact on the amounts recognized in the consolidated
financial statements. The Company’s significant accounting policies are disclosed in note 2.
Basis of Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the
entities that it controls and therefore consolidates. The Company controls an entity when the Company has the
existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns.
The Company consolidates all of its wholly-owned subsidiaries. Judgment is applied in determining whether the
Company controls the entities in which it does not have ownership rights or does not have full ownership rights.
Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power
over the entity) or protective rights (protecting the Company’s interest without giving it power).
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the
Company to utilize estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates
on cost, seasonality and costs necessary to sell the inventory.
Impairment of non-financial assets (goodwill, intangible assets, fixed assets and investment properties)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in
determining the grouping of assets to identify their CGUs for the purposes of testing fixed assets for impairment.
Judgment is further required to determine appropriate groupings of CGUs for the level at which goodwill and
intangible assets are tested for impairment. Loblaw has determined that each location is a separate CGU for
purposes of fixed asset impairment testing. For the purpose of goodwill and indefinite life intangible assets
impairment testing, CGUs are grouped at the lowest level at which goodwill and indefinite life intangible assets
are monitored for internal management purposes. In addition, judgment is used to determine whether a
triggering event has occurred requiring an impairment test to be completed.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various
estimates are employed. The Company determines fair value less costs to sell using such estimates as market
rental rates for comparable properties, recoverable operating costs for leases with tenants, non-recoverable
operating costs, discount rates, capitalization rates and terminal capitalization rates. The Company determines
value in use by using estimates including projected future revenues, earnings and capital investment consistent
with strategic plans presented to GWL’s and Loblaw’s Boards. Discount rates are consistent with external industry
information reflecting the risk associated with the specific cash flows.
88 George Weston Limited 2016 Annual Report
Franchise loans receivable and certain other financial assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable,
trade receivables and certain other financial assets relating to Loblaw’s franchise business at each balance sheet
date utilizing judgment to determine whether a triggering event has occurred requiring an impairment test to
be completed.
Key Sources of Estimation Management determines the initial fair value of Loblaw’s franchise loans and certain
other financial assets using discounted cash flow models. The process of determining these fair values requires
management to make estimates of a long term nature regarding discount rates, projected revenues and margins,
as applicable. These estimates are derived from past experience, actual operating results and budgets.
Customer Loyalty Awards Programs
Key Sources of Estimation Loblaw defers revenue equal to the fair value of the award points earned by loyalty
program members at the time of award. Loblaw determines fair value using estimates such as breakage (the
amount of points that will never be redeemed) and the estimated retail value per point on redemption. The
estimated fair value per point is based on the program reward schedule, which for the PC Points and PC Plus
programs is $1 for every 1,000 points. For the Shoppers Optimum program, the estimated fair value is
determined based on the expected weighted average redemption levels for future redemptions, including
special redemption events. Breakage rates are primarily based on historical redemption experience. The trends
in breakage are reviewed on an ongoing basis and the estimated retail value per point is adjusted based on
expected future activity.
Income and other taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes
requires management to make certain judgments regarding the tax rules in jurisdictions where the Company
performs activities. Application of judgments is required regarding the classification of transactions and in
assessing probable outcomes of claimed deductions including expectations about future operating results, the
timing and reversal of temporary differences and possible audits of income tax and other tax filings by the tax
authorities.
Note 4. Future Accounting Standards
The future accounting standards noted below will impact the Company’s business processes, internal controls
over financial reporting, data systems, and information technology, as well as financing and compensation
arrangements. As a result, the Company has developed comprehensive project plans to guide the
implementations.
IFRS 15 In 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”), replacing IAS 18,
“Revenue”, IAS 11, “Construction Contracts”, and related interpretations. IFRS 15 provides a comprehensive
framework for the recognition, measurement and disclosure of revenue from contracts with customers,
excluding contracts within the scope of the accounting standards on leases, insurance contracts and financial
instruments. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2018. IFRS 15 is to
be applied retrospectively using either the retrospective or cumulative effect method. While early adoption is
permitted, the Company will not early adopt IFRS 15.
The Company has completed a preliminary assessment of the potential impact of the adoption of IFRS 15 on its
consolidated financial statements.
The Company expects that the implementation of IFRS 15 will impact Loblaw’s allocation of revenue that is
deferred in relation to its customer loyalty award programs. Revenue is currently allocated to the customer
loyalty awards using the residual fair value method. Under IFRS 15, consideration will be allocated between the
loyalty program awards and the goods or services the awards were earned on, based on their relative stand-
alone selling prices. The Company is currently assessing the impact of this change on its consolidated financial
statements.
George Weston Limited 2016 Annual Report 89
Notes to the Consolidated Financial Statements
The Company is still assessing the impacts of IFRS 15, if any, on Loblaw’s franchise arrangements with non-
consolidated stores. The Company does not expect the implementation of IFRS 15 to otherwise have a significant
impact on its Weston Foods segment or Loblaw’s Retail, Financial Services or Choice Properties segment revenue
streams, however the detailed assessment is ongoing.
The Company has not yet determined which transition method it will apply or whether it will use the optional
exemptions or practical expedients available under the standard. The Company expects to disclose additional
detailed information, including any exemptions elected and estimated quantitative financial effects, before the
adoption of IFRS 15.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”), and related interpretations. The standard includes
revised guidance on the classification and measurement of financial assets, including impairment and a new
general hedge accounting model. IFRS 9 becomes effective for annual periods beginning on or after
January 1, 2018, and is to be applied retrospectively with the exception of the general hedging requirements
which are to be applied prospectively. While early adoption is permitted, the Company will not early adopt
IFRS 9.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 9 on its
consolidated financial statements based on its positions at December 31, 2016 and hedging relationships
designated during 2016 under IAS 39, which are discussed below.
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9
largely retains the existing requirements in IAS 39 for the classification of financial liabilities. Based on its
preliminary assessment, the Company does not believe that the new classification requirements will have a
significant impact on its consolidated financial statements.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit
loss’ (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how
changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new
impairment model will apply to financial assets measured at amortized cost or those measured at fair value
through other comprehensive income, except for investments in equity instruments, and to contract assets.
The Company expects that the ECL model will change the valuation of Loblaw’s Financial Services segment credit
losses on credit card receivables. The Company believes that impairment losses are likely to increase and
become more volatile for assets in the scope of the IFRS 9 impairment model. The Company is currently
assessing the impact of this change on its consolidated financial statements and is continuing to assess the
impact of the ECL model on its other financial assets.
General hedging IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with
the Company’s risk management objectives and strategy and to apply a more qualitative and forward-looking
approach to assessing hedge effectiveness. The Company’s preliminary assessment indicates that the types of
hedge accounting relationships that the Company currently designates should be capable of meeting the
requirements of IFRS 9 once the Company completes certain planned changes to its internal documentation
and monitoring processes.
The Company has not yet decided whether it will use the practical expedients available under the standard. The
Company expects to disclose additional detailed information, including any practical expedients and estimated
quantitative financial effects, before the adoption of IFRS 9.
90 George Weston Limited 2016 Annual Report
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” and related
interpretations. The standard introduces a single on-balance sheet recognition and measurement model for
lessees, eliminating the distinction between operating and finance leases. Lessors continue to classify leases
as finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after
January 1, 2019. For leases where the Company is the lessee it has the option of adopting a full retrospective
approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted if
IFRS 15 has been adopted, the Company will not early adopt IFRS 16.
The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its
consolidated financial statements.
The Company expects the adoption of IFRS 16 will have a significant impact on the Company as it will recognize
new assets and liabilities for its operating leases of property, buildings, vehicles and equipment. In addition, the
nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating
lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. No
significant impacts are expected for the Company’s finance leases or leases where the Company is the lessor.
The Company has not yet determined which transition method it will apply or whether it will use the optional
exemptions or practical expedients under the standard. The Company expects to disclose additional detailed
information, including its transition method, any practical expedients elected and estimated quantitative
financial effects, before the adoption of IFRS 16.
Note 5. Business Acquisitions
Acquisition of QHR Corporation In 2016, Loblaw, through its wholly-owned subsidiary Shoppers Drug Mart,
completed the acquisition of all of the issued and outstanding common shares of QHR Corporation (“QHR”), a
publicly traded healthcare technology company. The shares of QHR were acquired for cash consideration of
approximately $167 million. The preliminary purchase price allocation, which has not yet been finalized, is as
follows:
($ millions)
Net assets acquired:
Cash and cash equivalents
Accounts receivable and Prepaid expenses
Fixed assets
Intangible assets
Goodwill
Trade payables and other liabilities
Deferred income taxes
Other liabilities
Total net assets acquired
$
$
14
2
2
72
99
(3)
(14)
(5)
167
Goodwill is attributable to synergies expected from integrating QHR into Loblaw’s existing business. The goodwill
is not deductible for tax purposes.
Consolidation of Franchises Loblaw accounts for the consolidation of existing franchises as business
acquisitions. During the year, Loblaw consolidated its franchises as of the date the franchisee entered into a new
simplified franchise agreement with Loblaw. The assets acquired and liabilities assumed through the
consolidation were valued at the acquisition date using fair values, which approximate the franchise carrying
values at the date of acquisition. The results of operations of the acquired franchises were included in Loblaw’s
results of operations from the date of acquisition.
George Weston Limited 2016 Annual Report 91
Notes to the Consolidated Financial Statements
The following table summarizes the amounts recognized for the assets acquired, the liabilities assumed and
the non-controlling interests recognized at the acquisition dates during the years ended as follows:
($ millions)
Net assets acquired:
Cash and cash equivalents
Inventories
Fixed assets
Trade payables and other liabilities(i)
Other liabilities(i)
Non-controlling interests
Total net assets acquired
2016
42
72
76
(67)
(107)
(16)
$
$
$
$
2015
33
46
52
(33)
(84)
(14)
(i) On consolidation, trade payables and other liabilities and other liabilities eliminate against existing accounts receivable, franchise
loans receivable and franchise investments held by Loblaw.
Other Business Acquisitions In 2016, Loblaw finalized the purchase price allocation related to the acquisition of
a grocery store in 2015. Loblaw acquired the net assets of the grocery store for total consideration of $41 million.
The final purchase price allocation was as follows:
($ millions)
Net assets acquired:
Inventories
Fixed assets
Other assets
Goodwill
Total net assets acquired
$
$
1
16
3
21
41
Goodwill is attributable to synergies expected from integrating the store into Loblaw’s existing franchise
network. The goodwill is deductible for tax purposes.
92 George Weston Limited 2016 Annual Report
Note 6. Net Interest Expense and Other Financing Charges
The components of net interest expense and other financing charges were as follows:
($ millions)
Interest expense:
Long term debt(i)
Fair value adjustment of the Trust Unit liability (note 31)
Forward sale agreement(ii)
Borrowings related to credit card receivables
Trust Unit distributions
Independent funding trusts
Post-employment and other long term employee benefits (note 27)
Dividends on capital securities
Bank indebtedness
Capitalized interest (capitalization rate 3.6% (2015 – 5.7%)) (notes 14 & 16)
Interest income:
Accretion income
Short term interest income
Security deposits
Derivative financial instruments(iii)
Net interest expense and other financing charges
2016
2015
$
$
$
$
$
536
79
30
27
33
15
12
6
(4)
734
(15)
(16)
(3)
(34)
700
$
$
$
$
$
555
55
3
37
31
14
14
8
6
(5)
718
(21)
(15)
(1)
(37)
681
(i)
(ii)
Included in 2015 is accelerated amortization of deferred financing costs of $15 million, related to the early repayment of Loblaw’s
$3.5 billion unsecured term loan facility, obtained in connection with the acquisition of Shoppers Drug Mart (see note 22).
Included a non-cash charge of $53 million (2015 – $26 million) related to the fair value adjustment of the forward sale agreement
for 9.6 million Loblaw common shares (see note 31). The fair value adjustment of the forward sale agreement is non-cash and
results from changes in the value of the underlying Loblaw common shares. At maturity, any cash paid under the forward sale
agreement could be offset by the sale of the underlying Loblaw common shares. Also included is forward accretion income
of $40 million (2015 – $40 million), and the forward fee of $17 million (2015 – $17 million), associated with the forward sale
agreement.
(iii) Represents a realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in 2016
(see note 31).
George Weston Limited 2016 Annual Report 93
Notes to the Consolidated Financial Statements
Note 7.
Income Taxes
The components of income taxes recognized in the consolidated statements of earnings were as follows:
($ millions)
Current income taxes
Current period
Adjustment in respect of prior periods
Deferred income taxes
Origination and reversal of temporary differences
Effect of change in income tax rates(ii)
Adjustment in respect of prior periods
Income taxes
2016
600
4
(152)
3
10
465
$
$
$
$
2015(i)
363
5
(23)
79
(6)
418
(i) Certain comparative figures have been restated (see note 2).
(ii)
In 2016, the Government of New Brunswick announced a 2.0% increase in the provincial statutory corporate income tax rate from
12.0% to 14.0%. Loblaw recorded a charge of $3 million related to the remeasurement of its deferred tax liabilities in 2016. In 2015,
the Government of Alberta announced a 2.0% increase in the provincial statutory corporate income tax rate from 10.0% to 12.0%.
The Company recorded a charge of $79 million related to the remeasurement of deferred tax liabilities in 2015.
Income tax expense recognized in other comprehensive income was as follows:
($ millions)
Net defined benefit plan actuarial gains (note 27)
Other comprehensive income
2016
10
10
$
$
2015
52
52
$
$
The effective income tax rates in the consolidated statements of earnings were reported at rates different than
the weighted average basic Canadian federal and provincial statutory income tax rates for the following reasons:
2016
2015(i)
27.0%
26.2%
0.2
1.4
0.2
1.0
0.1
29.9%
0.5
(1.6)
0.6
1.3
6.4
(0.1)
0.2
33.5%
Weighted average basic Canadian federal and provincial statutory
income tax rate
Net increase (decrease) resulting from:
Earnings in jurisdictions taxed at rates different from the Canadian
statutory income tax rates
Impact of foreign currency translation
Non-taxable and non-deductible amounts
Impact of fair value adjustment of Trust Unit liability
Impact of statutory income tax rate changes on deferred
income tax balances
Adjustments in respect of prior periods
Other
Effective income tax rate applicable to earnings before income taxes
(i) Certain comparative figures have been restated (see note 2).
94 George Weston Limited 2016 Annual Report
Deferred income tax assets which were not recognized on the consolidated balance sheets were as follows:
($ millions)
Deductible temporary differences
Income tax losses and credits
Unrecognized deferred income tax assets
As at
Dec. 31, 2016
48
$
103
151
$
Dec. 31, 2015
43
$
82
125
$
The income tax losses and credits expire in the years 2026 to 2036. The deductible temporary differences do not
expire under current income tax legislation. Deferred income tax assets were not recognized in respect of these
items because it is not probable that future taxable income will be available to the Company to utilize the
benefits.
Deferred income tax assets and liabilities recognized on the consolidated balance sheets were attributable to the
following:
($ millions)
Trade payables and other liabilities
Other liabilities
Fixed assets
Goodwill and intangible assets
Other assets
Non-capital losses carried forward (expiring 2030 to 2036)
Capital losses carried forward
Other
Net deferred income tax liabilities
Recorded on the consolidated balance sheets as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
(i) Certain comparative figures have been restated (see note 2).
As at
Dec. 31, 2016
63
$
320
(569)
(2,090)
55
94
24
(66)
(2,169)
$
$
$
201
(2,370)
(2,169)
$
$
$
Dec. 31, 2015(i)
$
93
339
(550)
(2,226)
63
51
23
(85)
(2,292)
156
(2,448)
(2,292)
George Weston Limited 2016 Annual Report 95
Notes to the Consolidated Financial Statements
Note 8. Basic and Diluted Net Earnings per Common Share
($ millions except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders of the Company
Reduction in net earnings due to dilution at Loblaw
Net earnings available to common shareholders for diluted earnings per share
Weighted average common shares outstanding (in millions) (note 24)
Dilutive effect of share-based compensation(ii)
Weighted average common shares outstanding(iii) (in millions)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
(in millions)
$
$
$
$
$
2016
550
(44)
506
(5)
501
127.7
0.6
128.3
3.96
3.90
$
$
$
$
$
2015(i)
511
(44)
467
(3)
464
127.7
0.5
128.2
3.66
3.62
(i) Certain comparative figures have been restated (see note 2).
(ii) Excluded from the computation of diluted net earnings per common share were 316,643 (2015 – 347,225) potentially dilutive
instruments, as they were anti-dilutive.
(iii) Includes impact of dilutive instruments for purposes of calculating diluted net earnings per common share.
Note 9. Cash and Cash Equivalents, Short Term Investments and Security Deposits
The components of cash and cash equivalents, short term investments and security deposits were as follows:
Cash and Cash Equivalents
($ millions)
Cash
Cash equivalents:
Bankers’ acceptances
Government treasury bills
Corporate commercial paper
Bank term deposits
Government agency securities
Cash and cash equivalents
Short Term Investments
($ millions)
Bankers’ acceptances
Government treasury bills
Corporate commercial paper
Government agency securities
Other
Short term investments
96 George Weston Limited 2016 Annual Report
As at
Dec. 31, 2016
684
$
Dec. 31, 2015
508
$
492
208
176
$
1,560
$
331
225
193
136
20
1,413
As at
Dec. 31, 2016
306
$
341
324
38
2
1,011
$
Dec. 31, 2015
52
$
562
222
324
6
1,166
$
Security Deposits
($ millions)
Cash
Government treasury bills
Government agency securities
Security deposits
As at
Dec. 31, 2016
49
$
40
$
89
Dec. 31, 2015
47
$
36
5
88
$
As at year end 2016, GWL and Loblaw had agreements to cash collateralize certain uncommitted credit facilities
up to amounts of $45 million (2015 – $45 million) and $103 million (2015 – $149 million), respectively. As at year
end 2016, GWL and Loblaw had $45 million (2015 – $45 million) and $4 million (2015 – $2 million) deposited
with major financial institutions, respectively, and classified as security deposits on the consolidated balance
sheets.
Note 10. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
As at
($ millions)
Accounts receivable
0 - 90 days
$
1,165 $
42 $
> 90 days
> 180 days
Dec. 31, 2016
Total
1,284
77 $
0 - 90 days
> 90 days
$
1,356 $
58 $
> 180 days
Dec. 31, 2015
Total
1,478
64 $
The following are continuities of the Company’s allowances for uncollectable accounts receivable for the years
ended December 31, 2016 and December 31, 2015:
($ millions)
Allowance, beginning of year
Net write-offs (additions)
Allowance, end of year
2016
(106)
31
(75)
$
$
2015
(99)
(7)
(106)
$
$
Credit risk associated with accounts receivable is discussed in note 32.
Note 11. Credit Card Receivables
The components of credit card receivables were as follows:
($ millions)
Gross credit card receivables
Allowance for credit card receivables
Credit card receivables
Securitized to independent securitization trusts:
Securitized to Eagle Credit Card Trust®
Securitized to Other Independent Securitization Trusts
Total securitized to independent securitization trusts
As at
Dec. 31, 2016
2,978
$
(52)
2,926
$
Dec. 31, 2015
2,844
$
(54)
2,790
$
$
$
650
665
1,315
$
$
650
550
1,200
George Weston Limited 2016 Annual Report 97
Notes to the Consolidated Financial Statements
Loblaw, through PC Bank, participates in various securitization programs that provide a source of funds for the
operation of its credit card business. PC Bank maintains and monitors the co-ownership interest in credit card
receivables with independent securitization trusts, including Eagle and the Other Independent Securitization
Trusts, in accordance with its financing requirements.
The associated liability of Eagle is recorded in long term debt (see note 22). The associated liabilities of credit
card receivables securitized to the Other Independent Securitization Trusts are recorded in short term debt
(see note 21).
Loblaw has arranged letters of credit on behalf of PC Bank, for the benefit of the Independent Securitization
Trusts (see note 34).
Under its securitization programs, PC Bank is required to maintain, at all times, a credit card receivable pool
balance equal to a minimum of 107% of the outstanding securitized liability. PC Bank was in compliance with
this requirement as at year end 2016 and throughout the year.
The following is an aging of gross credit card receivables:
As at
Dec. 31, 2016
Dec. 31, 2015
($ millions)
Gross credit card receivables
Current
$ 2,791 $
156 $
Total
31 $ 2,978
Current
$ 2,652 $
162 $
Total
30 $ 2,844
1-90 days > 90 days
past due
past due
1-90 days
past due
> 90 days
past due
The following are continuities of allowances for credit card receivables:
($ millions)
Allowance, beginning of year
Provision for losses
Recoveries
Write-offs
Allowance, end of year
2016
(54)
(120)
(19)
141
(52)
$
$
2015
(54)
(118)
(16)
134
(54)
$
$
The allowances for credit card receivables recorded in credit card receivables on the consolidated balance sheets
are maintained at a level which is considered adequate to absorb credit related losses on credit card receivables.
Note 12. Inventories
The components of inventories were as follows:
($ millions)
Raw materials and supplies
Finished goods
Inventories
As at
Dec. 31, 2016
78
$
4,481
4,559
$
Dec. 31, 2015
77
$
4,440
4,517
$
As at year end 2016, inventories included a charge of $22 million (2015 – $85 million) recorded by Loblaw for the
write-down of inventories below cost to net realizable value. The write-down was included in cost of inventories
sold in the consolidated statements of earnings. There were no reversals of previously recorded write-downs of
inventories during 2016 or 2015.
98 George Weston Limited 2016 Annual Report
Note 13. Assets Held for Sale
Loblaw classifies certain assets, primarily land and buildings, that it intends to dispose of in the next 12 months,
as assets held for sale. These assets were previously used in Loblaw’s retail business segment. In 2016, Loblaw
recorded a gain of $5 million (2015 – $1 million) from the sale of these assets. There were no impairment or
other charges recognized on these properties during 2016 or 2015.
Note 14. Fixed Assets
The following is a continuity of the cost and accumulated depreciation and impairment losses of fixed assets for
the year ended December 31, 2016:
($ millions)
Land
Buildings
Equipment
and
fixtures
Leasehold
improvements
Finance
leases -
land,
buildings,
equipment
and fixtures
Assets
under
construction
Total
Cost, beginning of year
Additions
Disposals
Transfer to investment properties
Transfer from assets under construction
Business acquisitions
Foreign exchange
Cost, end of year
Accumulated depreciation and
impairment losses, beginning of year
$
$
$
1,906 $
7
(1)
(27)
69
1,954 $
8,056 $
49
(28)
(77)
331
(4)
8,327 $
7,469 $
209
(215)
333
76
(16)
7,856 $
1,878 $
78
(29)
48
2
884 $
35
1
1,977 $
920 $
777 $ 20,970
1,160
782
(283)
(10)
(8)
(112)
(781)
79
(25)
755 $ 21,789
(5)
3 $
2,958 $
5,550 $
758 $
339 $
10 $
9,618
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer to investment properties
Foreign exchange
Accumulated depreciation and
impairment losses, end of year
Carrying amount as at:
December 31, 2016
(3)
212
24
(10)
(22)
(39)
(2)
450
43
(15)
(210)
(12)
67
4
162
16
(26)
(2)
891
87
(28)
(260)
(39)
(14)
$
3,121 $
5,806 $
910 $
410 $
8 $ 10,255
$
1,954 $
5,206 $
2,050 $
1,067 $
510 $
747 $ 11,534
George Weston Limited 2016 Annual Report 99
Notes to the Consolidated Financial Statements
The following is a continuity of the cost and accumulated depreciation and impairment losses of fixed assets for
the year ended December 31, 2015:
($ millions)
Land
Buildings
Equipment
and
fixtures
Leasehold
improvements
Finance
leases -
land,
buildings,
equipment
and fixtures
Assets
under
construction
Total
Cost, beginning of year
Additions
Disposals
Transfer to assets held for sale
Transfer to investment properties
Transfer from assets under construction
Transfer from intangible assets
Business acquisitions
Foreign exchange
Cost, end of year
Accumulated depreciation and
impairment losses, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer to investment properties
Foreign exchange
Accumulated depreciation and
impairment losses, end of year
Carrying amount as at:
December 31, 2015
$
$
$
$
$
1,828 $
2
7,649 $
1
(1)
(10)
77
(29)
402
8
1
1,906 $
9
25
8,056 $
6,874 $
157
(102)
(2)
417
1
54
70
7,469 $
1,779 $
114
(53)
818 $
103
(37)
37
1
1,878 $
884 $
3 $
2,740 $
5,054 $
631 $
211
19
(14)
(2)
(7)
11
504
42
(99)
49
161
13
(1)
(46)
295 $
58
(14)
723 $ 19,671
1,355
978
(203)
(10)
(2)
(39)
(933)
1
72
115
777 $ 20,970
19
10 $
8,733
934
74
(15)
(161)
(7)
60
3 $
2,958 $
5,550 $
758 $
339 $
10 $
9,618
1,903 $
5,098 $
1,919 $
1,120 $
545 $
767 $ 11,352
Assets Held under Finance Leases The Company leases various land and buildings and equipment and fixtures
under a number of finance lease arrangements. As at year end 2016, the net carrying amount of leased land
and buildings was $468 million (2015 – $479 million) and the net carrying amount of leased equipment and
fixtures was $42 million (2015 – $66 million).
Assets under Construction The cost of additions to properties under construction for 2016 was $782 million
(2015 – $978 million). Included in this amount were capitalized borrowing costs of $4 million (2015 – $4 million)
with a weighted average capitalization rate of 3.6% (2015 – 5.7%) (see note 6).
Security and Assets Pledged As at year end 2016, Loblaw had fixed assets with a carrying amount of
$243 million (2015 – $231 million) which were encumbered by mortgages of $78 million (2015 – $82 million)
(see note 22).
Fixed Asset Commitments As at year end 2016, the Company had entered into commitments of $167 million
(2015 – $169 million) for the construction, expansion and renovation of buildings and the purchase of real
property.
Impairment Losses and Reversals In 2016, Loblaw recorded $41 million (2015 – $18 million) of impairment
losses on fixed assets in respect of 24 CGUs (2015 – eight CGUs) in its Retail segment. The recoverable amount
was based on the greater of the CGU’s fair value less costs to sell and its value in use. Approximately 21% (2015 –
75%) of impaired CGUs had carrying values which were $14 million (2015 – $14 million) greater than their fair
value less costs to sell. The remaining 79% (2015 – 25%) of impaired CGUs had carrying values which were
$27 million (2015 – $4 million) greater than their value in use.
100 George Weston Limited 2016 Annual Report
In 2016, Loblaw recorded $13 million (2015 – $15 million) of impairment reversals on fixed assets in respect of
six CGUs (2015 – six CGUs) in its Retail segment. Impairment reversals are recorded where the recoverable
amount of the retail location exceeds its carrying amount. All CGUs (2015 – 50%) with impairment reversals had
fair value less costs to sell which were $13 million (2015 – $7 million) greater than their carrying values. No
CGUs (2015 – 50%) with impairment reversals had value in use which were greater than their carrying
values (2015 – $8 million).
When determining the value in use of a retail location, Loblaw develops a discounted cash flow model for each
CGU. The duration of the cash flow projections for individual CGUs varies based on the remaining useful life of
the significant assets within the CGU. Sales forecasts for cash flows are based on actual operating results,
operating budgets, and long term growth rates that were consistent with industry averages, all of which are
consistent with strategic plans presented to Loblaw’s Board. The estimate of the value in use of the relevant
CGUs was determined using a pre-tax discount rate of 8.0% to 8.5% at the end of 2016 (2015 – 8.0% to 8.5%).
In 2016, an ancillary healthcare business triggered for impairment testing and an impairment was identified. As a
result Loblaw recorded an impairment charge of $15 million (2015 – nil) in fixed assets.
In 2016, Loblaw incurred additional impairment losses of $13 million (2015 – $9 million) related to store
closures, renovations and conversions of retail locations. Impairment losses are recorded where the carrying
amount of the retail location exceeds its recoverable amount.
In 2015, Loblaw recorded impairment losses on its fixed assets of $23 million relating to the announced closures
of approximately 52 unprofitable retail locations across a range of banners and formats, and $24 million relating
to the anticipated sale of certain assets of the Shoppers ancillary healthcare businesses (see note 36). No
additional impairment amounts relating to these initiatives were recorded in 2016.
Note 15. Investment Properties
The following are continuities of the cost and accumulated depreciation and impairment losses of investment
properties for the years ended December 31, 2016 and December 31, 2015:
($ millions)
Cost, beginning of year
Additions
Disposals
Transfer from fixed assets
Transfer to assets held for sale
Cost, end of year
Accumulated depreciation and impairment losses, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer from fixed assets
Transfer to assets held for sale
Accumulated depreciation and impairment losses, end of year
($ millions)
Carrying amount
Fair value
2016
236
2
(19)
112
(7)
324
76
2
2
(9)
39
(4)
106
$
$
$
$
2015
255
(5)
39
(53)
236
70
3
12
(1)
(3)
7
(12)
76
$
$
$
$
As at
Dec. 31, 2016
218
$
261
$
Dec. 31, 2015
160
$
194
$
George Weston Limited 2016 Annual Report 101
Notes to the Consolidated Financial Statements
During 2016, Loblaw recognized in operating income $6 million (2015 – $7 million) of rental income and incurred
direct operating costs of $2 million (2015 – $2 million) related to its investment properties. In addition, Loblaw
recognized direct operating costs of $11 million (2015 – $3 million) related to its investment properties for which
no rental income was earned.
An external, independent valuation company, having appropriate recognized professional qualifications and
recent experience in the location and category of property being valued, provided appraisals for certain of
Loblaw’s investment properties. For the other investment properties, Loblaw determined the fair value by relying
on comparable market information.
Where available, the fair values are based on market values, being the estimated amount for which a property
could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted knowledgeably and willingly.
Where market values are not available, valuations are prepared using the income approach by considering the
estimated cash flows expected from renting out the property based on existing lease terms and where
appropriate, the ability to renegotiate the lease terms once the initial term or option term(s) expire plus the net
proceeds from a sale of the property at the end of the investment horizon.
The valuations of investment properties using the income approach include assumptions as to market rental
rates for properties of similar size and condition located within the same geographical areas, recoverable
operating costs for leases with tenants, non-recoverable operating costs, vacancy periods, tenant inducements
and capitalization rates for the purposes of determining the estimated net proceeds from the sale of the
property. As at year end 2016, the pre-tax discount rates used in the valuations for investment properties ranged
from 7.75% to 9.50% (2015 – 7.75% to 9.50%) and the terminal capitalization rates ranged from 6.75% to 8.75%
(2015 – 6.75% to 8.75%).
In 2016, Loblaw recorded impairment losses on investment properties of $2 million (2015 – $12 million) in
operating income, as the carrying amounts of the impaired properties were lower than their recoverable
amounts. Loblaw recorded no reversals of impairment losses on investment properties (2015 – $1 million) in
operating income where their fair values less costs to sell were greater than their carrying values.
102 George Weston Limited 2016 Annual Report
Note 16. Intangible Assets
The following is a continuity of the cost and accumulated amortization and impairment losses of intangible
assets for the year ended December 31, 2016:
($ millions)
Cost, beginning of year
Additions
Business acquisitions
Disposal
Cost, end of year
Accumulated amortization and impairment
losses, beginning of year
Amortization
Disposal
Impairment losses
Impact of foreign currency translation
Accumulated amortization and impairment
losses, end of year
Carrying amount as at:
December 31, 2016
Indefinite
life
intangible
assets
Definite life
internally
generated
intangible
assets
Definite
life
trademarks
and brand
names
$
3,461 $
14
20 $
25 $
$
3,475 $
20 $
25 $
Other
definite
life
intangible
assets
Software
1,852 $
312
18
(2)
2,180 $
6,044 $
10
74
(3)
6,125 $
Total
11,402
336
92
(5)
11,825
$
20 $
7 $
1,070 $
1,013 $
2,110
1
229
(2)
3
539
(1)
73
(2)
769
(3)
76
(2)
$
20 $
8 $
1,300 $
1,622 $
2,950
$
3,475
$
17 $
880 $
4,503 $
8,875
The following is a continuity of the cost and accumulated amortization and impairment losses of intangible
assets for the year ended December 31, 2015:
($ millions)
Cost, beginning of year
Additions
Business acquisitions
Disposal
Write-off cost of fully amortized assets
Transfer to fixed assets
Impact of foreign currency translation
Cost, end of year
Accumulated amortization and impairment
losses, beginning of year
Amortization
Disposal
Impairment losses
Write-off amortization of fully
amortized assets
Impact of foreign currency translation
Accumulated amortization and impairment
losses, end of year
Carrying amount as at:
December 31, 2015
Indefinite
life
intangible
assets
Definite life
internally
generated
intangible
assets
Definite
life
trademarks
and brand
names
$
3,461 $
20 $
25 $
Software
1,639 $
216
(2)
(1)
$
3,461 $
20 $
25 $
1,852 $
Other
definite
life
intangible
assets
5,989 $
17
25
(3)
(1)
17
6,044 $
Total
11,134
233
25
(5)
(1)
(1)
17
11,402
$
19 $
1
6 $
1
852 $
471 $
1,348
220
(2)
538
(1)
3
(1)
3
760
(3)
3
(1)
3
$
20 $
7 $
1,070 $
1,013 $
2,110
$
3,461
$
18 $
782 $
5,031 $
9,292
George Weston Limited 2016 Annual Report 103
Notes to the Consolidated Financial Statements
Indefinite Life Intangible Assets Indefinite life intangible assets recorded by Loblaw are comprised of brand
names, trademarks, import purchase quotas and certain liquor licenses. The brand names and trademarks are a
result of Loblaw’s acquisition of Shoppers Drug Mart and T&T Supermarket Inc. Loblaw expects to renew the
registration of the brand names, trademarks, import purchase quotas and liquor licenses at each expiry date
indefinitely, and expects these assets to generate economic benefit in perpetuity. As such, Loblaw assessed these
intangibles to have indefinite useful lives.
The Company completed its 2016 and 2015 annual impairment tests for indefinite life intangible assets and
concluded there was no impairment.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding
discount rates, growth rates and expected changes in margins. These assumptions are consistent with the
assumptions used to calculate fair value less costs to sell for goodwill (see note 17).
Software Software is comprised of software purchases and development costs. There were no capitalized
borrowing costs included in 2016 (2015 – $1 million).
Other Definite Life Intangible Assets Other definite life intangible assets recorded by Loblaw primarily consist of
prescription files, the Shoppers Optimum loyalty program and customer relationships.
In the fourth quarter of 2016, an ancillary healthcare business triggered for impairment testing and an
impairment was identified. As a result, Loblaw recorded an impairment charge of $73 million (2015 – nil) relating
to a customer relationship intangible asset for an ancillary healthcare business.
Note 17. Goodwill
The following are continuities of the cost and accumulated amortization and impairment losses of goodwill for
the years ended December 31, 2016 and December 31, 2015:
($ millions)
Cost, beginning of year
Business acquisitions (note 5)
Impact of foreign currency translation
Cost, end of year
Accumulated amortization and impairment losses, beginning of year
Impairment loss
Accumulated amortization and impairment losses, end of year
Carrying amount as at:
December 31
2016
5,316
120
(5)
5,431
1,062
5
1,067
4,364
$
$
$
$
$
$
$
$
$
$
2015(i)
5,236
50
30
5,316
1,062
—
1,062
4,254
(i) Certain comparative figures have been restated (see note 2).
The carrying amount of goodwill attributed to each CGU grouping was as follows:
($ millions)
Weston Foods
Shoppers Drug Mart
Market
Discount
T&T Supermarket Inc.
Other
Carrying amount of goodwill
104 George Weston Limited 2016 Annual Report
As at
Dec. 31, 2016
309
$
2,925
375
459
129
167
4,364
$
Dec. 31, 2015
314
$
2,808
360
459
129
184
4,254
$
The Company completed its 2016 and 2015 annual impairment tests for goodwill. Loblaw concluded that there
was an impairment loss of $5 million on a small grocery business categorized in the “Other” CGU grouping. The
fair value less costs to sell exceeded the carrying amount for all the other CGUs.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding
discount rates, growth rates and expected changes in margins. These assumptions are considered to be Level 3
in the fair value hierarchy.
The weighted average cost of capital was determined to be 7.0% (2015 – 6.0 to 7.0%) and was based on a risk-
free rate, an equity risk premium adjusted for betas of comparable publicly traded companies, an unsystematic
risk premium, an after-tax cost of debt based on corporate bond yields and the capital structure of the Company.
Cash flow projections were discounted using a rate derived from the Company’s after-tax weighted average
cost of capital. As at year end 2016, the after-tax discount rate used in the recoverable amount calculations was
7.0% (2015 – 6.5% to 9.5%). The pre-tax discount rate was 9.6% (2015 – 8.7% to 12.9%).
The Company included a minimum of three years of cash flows in its discounted cash flow model. The cash
flow forecasts were extrapolated beyond the three year period using an estimated long term growth rate of 2.0%
(2015 – 2.0%). The budgeted adjusted EBITDA(1) growth is based on the strategic plans approved by GWL’s and
Loblaw’s Boards.
Note 18. Other Assets
The components of other assets were as follows:
($ millions)
Fair value of equity forward (note 31)
Sundry investments and other receivables
Net accrued benefit plan asset (note 27)
Other
Other assets
As at
Dec. 31, 2016
368
$
79
200
204
851
$
Dec. 31, 2015
381
$
119
204
171
875
$
Note 19. Customer Loyalty Awards Program Liability
The liability associated with Loblaw’s customer loyalty awards programs (“loyalty liability”) is included in trade
payables and other liabilities. The carrying amount of the loyalty liability was as follows:
($ millions)
Loyalty liability
Note 20. Provisions
Dec. 31, 2016
229
$
Dec. 31, 2015
229
$
Provisions consist primarily of amounts recorded in respect of restructuring, self-insurance, commodity taxes,
environmental and decommissioning liabilities, onerous lease arrangements and a MEPP withdrawal liability.
The following are continuities of provisions for the years ended December 31, 2016 and December 31, 2015:
($ millions)
Provisions, beginning of year
Additions
Payments
Reversals
Impact of foreign currency translation
Provisions, end of year
2016
337
136
(165)
(23)
(4)
281
$
$
2015
233
209
(102)
(13)
10
337
$
$
George Weston Limited 2016 Annual Report 105
Notes to the Consolidated Financial Statements
($ millions)
Carrying amount of provisions recorded in:
Current provisions
Non-current provisions
Provisions
As at
Dec. 31, 2016
Dec. 31, 2015
$
$
135
146
281
$
$
180
157
337
The Company’s accrued insurance liabilities were $88 million (2015 – $85 million), of which $49 million
(2015 – $47 million) was included in non-current provisions and $39 million (2015 – $38 million) in current
provisions. Included in total accrued insurance liabilities were $27 million (2015 – $29 million) of U.S. workers’
compensation liabilities. The related cost and accrued workers’ compensation liabilities are based on actuarial
valuations which are dependent on assumptions determined by management. The discount rate used in
determining the 2016 U.S. workers’ compensation cost and liability was 2.0% (2015 – 2.0%). The total workers’
compensation liability is equal to the ultimate actuarial loss estimate less any actual losses paid to date. Any
change in the workers’ compensation liability is recognized immediately in operating income.
In 2016, the U.S. workers’ compensation cost associated with the worker’s compensation liabilities was
$6 million (2015 – $5 million).
Note 21. Short Term Debt
The components of short term debt were as follows:
($ millions)
Other Independent Securitization Trusts
Series B Debentures(i)
Short term debt
(note 11)
As at
Dec. 31, 2016
665
$
576
1,241
$
Dec. 31, 2015
550
$
536
1,086
$
(i)
Series B Debentures issued by GWL are due on demand, and pay a current weighted average interest rate of 1.38% (2015 – 1.43%).
The Series A, 7.00% (see note 22) and Series B Debentures are secured by a pledge of 9.6 million Loblaw common shares.
Other Independent Securitization Trusts The outstanding short term debt balances relate to credit card
receivables securitized to the Other Independent Securitization Trusts with recourse.
The securitization agreements between PC Bank and the Other Independent Securitization Trusts are renewed
and extended on an annual basis. The existing agreements were renewed in 2016, with their respective maturity
dates extended to 2018 and with all other terms and conditions remaining substantially the same.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at year
end 2016 were $210 million (2015 – $175 million).
106 George Weston Limited 2016 Annual Report
Note 22. Long Term Debt
The components of long term debt were as follows:
($ millions)
Loblaw Unsecured Term Loan Facility
1.13% + Bankers’ Acceptance, due 2019
1.45% + Bankers’ Acceptance, due 2019
Medium Term Notes and Debentures
George Weston Limited Notes
Series A, 7.00%, due 2031(i)
3.78%, due 2016
4.12%, due 2024
7.10%, due 2032
6.69%, due 2033
Loblaw Companies Limited Notes
7.10%, due 2016
3.75%, due 2019
5.22%, due 2020
4.86%, due 2023
6.65%, due 2027
6.45%, due 2028
6.50%, due 2029
11.40%, due 2031
Principal
Effect of coupon repurchase
6.85%, due 2032
6.54%, due 2033
8.75%, due 2033
6.05%, due 2034
6.15%, due 2035
5.90%, due 2036
6.45%, due 2039
7.00%, due 2040
5.86%, due 2043
Shoppers Drug Mart Notes
2.01%, due 2016
2.36%, due 2018
Choice Properties Debentures
Series A 3.55%, due 2018
Series B 4.90%, due 2023
Series C 3.50%, due 2021
Series D 4.29%, due 2024
Series E 2.30%, due 2020
Series F 4.06%, due 2025
Series G 3.20%, due 2023
Series H 5.27%, due 2046
Series 5 3.00%, due 2016
Series 6 3.00%, due 2017
Series 7 3.00%, due 2019
Series 8 3.60%, due 2020
Series 9 3.60%, due 2021
Series 10 3.60%, due 2022
Long Term Debt Secured by Mortgage
3.15% - 7.42%, due 2017 - 2029 (note 14)
Guaranteed Investment Certificates
1.00% - 3.25%, due 2017 - 2021
Independent Securitization Trust
2.91%, due 2018
2.23%, due 2020
Independent Funding Trusts
Finance Lease Obligations (note 30)
Choice Properties Credit Facility
Transaction costs and other
Total long term debt
Less amount due within one year
Long term debt
As at
Dec. 31, 2016
Dec. 31, 2015
$
$
$
250
48
466
200
150
100
800
350
800
100
200
175
151
(33)
200
200
200
200
200
300
200
150
55
275
400
200
250
200
250
200
250
100
200
200
300
200
300
78
928
400
250
587
607
172
(24)
11,785
400
11,385
$
250
48
466
350
200
150
100
300
800
350
800
100
200
175
151
(46)
200
200
200
200
200
300
200
150
55
225
275
400
200
250
200
250
200
300
200
200
300
200
300
82
809
400
250
529
629
(22)
12,276
1,348
10,928
$
$
(i)
The Series A, 7.00% and Series B Debentures (see note 21) are secured by a pledge of 9.6 million Loblaw common shares.
George Weston Limited 2016 Annual Report 107
Notes to the Consolidated Financial Statements
Significant long term debt transactions are described below:
Loblaw Unsecured Term Loan Facilities In 2015, Loblaw obtained $250 million through an unsecured term loan
facility bearing interest at a rate equal to the Bankers’ Acceptance rate plus 1.13%, maturing March 30, 2019.
In connection with the financing of the acquisition of Shoppers Drug Mart, Loblaw obtained a $3,500 million
unsecured term loan facility (“Acquisition Term Loan”). As at year end 2016, the outstanding balance on the
Acquisition Term Loan was $48 million (2015 – $48 million).
The Loblaw unsecured term loan facilities contain certain financial covenants (see note 26).
Medium Term Notes (“MTNs”) and Debentures The following table summarizes debentures issued in the years
ended as indicated:
($ millions)
Choice Properties senior unsecured debentures
– Series G(i)
– Series H(i)
– Series E
– Series F
Total debentures issued
Interest
Rate
Maturity
Date
2016
Principal
Amount
2015
Principal
Amount
3.20%
5.27%
March 7, 2023
$
March 7, 2046
250
100
2.30% September 14, 2020
4.06% November 24, 2025
$
$
250
200
450
$
350
(i) Offerings were made under Choice Properties’ Short Form Base Shelf Prospectus Supplement filed in the fourth quarter of 2015.
The following table summarizes MTNs and debentures repaid in the years ended as indicated:
($ millions)
George Weston Limited notes
Loblaw Companies Limited notes
Shoppers Drug Mart notes
Choice Properties senior unsecured debentures – Series 5
Total MTNs and debentures repaid
Interest
Maturity
Date
Rate
3.78% October 25, 2016
7.10%
2.01%
3.00%
June 1, 2016
May 24, 2016
April 20, 2016(i)
2015
Principal
Amount
2016
Principal
Amount
350
$
300
225
300
$
1,175
(i) Choice Properties Series 5 unsecured debentures was redeemed on March 7, 2016.
Subsequent to the end of 2016, Choice Properties redeemed, at par, its $200 million Series 6 3.00% senior
unsecured debentures with an original maturity date of April 20, 2017.
Guaranteed Investment Certificates (“GICs”) The following table summarizes PC Bank’s GIC activity, before
commissions, for the years ended as follows:
($ millions)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
108 George Weston Limited 2016 Annual Report
2016
809
239
(120)
928
$
$
2015
634
211
(36)
809
$
$
Independent Securitization Trust The notes issued by Eagle are MTNs, which are collateralized by PC Bank’s
credit card receivables (see note 11). Loblaw has arranged letters of credit for the benefit of Eagle notes issued
prior to 2015 and outstanding as at year end 2016 (see note 34).
Independent Funding Trusts As at year end 2016, the independent funding trusts had drawn $587 million
(2015 – $529 million) from the revolving committed credit facility that is the source of funding to the independent
funding trusts. In 2016, Loblaw amended the committed credit facility agreement to increase the size of the
facility to $700 million and extended the maturity date to June 10, 2019, with all other terms and conditions
remaining substantially the same. Loblaw provides credit enhancement in the form of a standby letter of credit
for the benefit of the independent funding trusts (see note 34).
Committed Credit Facilities The components of the committed lines of credit available as at year end 2016 and
2015 were as follows:
As at
Dec. 31, 2016
Dec. 31, 2015
($ millions)
Maturity
Date
Available
Credit
Drawn
Loblaw’s committed credit facility
June 10, 2021
$
1,000
Available
Credit
$
1,000
Drawn
Choice Properties’ committed
syndicated credit facility
Choice Properties’ committed bi-lateral
July 5, 2021
500
$
172
500
credit facility
December 21, 2018
250
Total committed credit facilities
$
1,750
$
172
$
1,500
On December 23, 2016, Choice Properties entered into a bi-lateral $250 million senior unsecured committed
revolving credit facility with a major Canadian financial institution maturing on December 21, 2018. The credit
facility bears interest at variable rates of either: Prime rate plus 0.25% or Bankers’ Acceptance rate plus 1.25%.
Certain conditions of the credit facility are contingent on Choice Properties’ credit rating remaining at “BBB”.
Should certain conditions not be met, the credit facility would become secured against select properties.
These facilities contain certain financial covenants (see note 26).
Long Term Debt due Within One Year The components of long term debt due within one year were as follows:
($ millions)
GWL MTN
Loblaw MTN
Shoppers Drug Mart MTN
Choice Properties debenture
Finance lease obligations
GICs
Long term debt secured by mortgage
Long term debt due within one year
As at
Dec. 31, 2016
$
$
200
53
142
5
400
Dec. 31, 2015
350
$
300
225
300
56
112
5
1,348
$
George Weston Limited 2016 Annual Report 109
Notes to the Consolidated Financial Statements
Schedule of Repayments The schedule of repayment of long term debt, based on maturity is as follows:
($ millions)
2017
2018
2019
2020
2021
Thereafter
Long Term Debt (excludes transaction costs and effect of coupon repurchases)
As at
Dec. 31, 2016
400
$
1,384
2,185
1,102
1,066
5,705
11,842
$
See note 31 for the fair value of long term debt.
Note 23. Other Liabilities
The components of other liabilities were as follows:
($ millions)
Net defined benefit plan obligation (note 27)
Other long term employee benefit obligation
Deferred lease obligation
Fair value of acquired leases
Share-based compensation liability (note 28)
Other
Other liabilities
Note 24. Share Capital
The components of share capital were as follows:
($ millions)
Common share capital
Preferred shares, Series I
Preferred shares, Series III
Preferred shares, Series IV
Preferred shares, Series V
Share capital
110 George Weston Limited 2016 Annual Report
As at
Dec. 31, 2016
381
$
116
119
77
4
92
789
$
Dec. 31, 2015
368
$
124
101
90
5
130
818
$
As at
Dec. 31, 2016
195
$
228
196
197
196
1,012
$
Dec. 31, 2015
191
$
228
196
197
196
1,008
$
Common Share Capital (authorized – unlimited) Common shares issued are fully paid and have no par value.
The following table summarizes the activity in the Company’s common shares issued and outstanding for the
years ended December 31, 2016 and December 31, 2015:
($ millions except where otherwise indicated)
Issued and outstanding, beginning of year
Issued for settlement of stock
options (note 28)
Purchased and cancelled
Issued and outstanding, end of year
Shares held in trusts, beginning of year
Purchased for future settlement
of RSUs and PSUs
Released for settlement of RSUs
and PSUs (note 28)
Shares held in trusts, end of year
Issued and outstanding, net of shares held
in trusts, end of year
Weighted average outstanding, net of shares
held in trusts
2015
Common
Share
Capital
180
11
191
2016
Common
Share
Capital
191
4
195
Number of
Common
Shares
127,911,661
54,921
(68,000)
127,898,582
(272,031)
$
$
(102,006)
107,038
(266,999)
Number of
Common
Shares
127,901,231
144,386
(133,956)
127,911,661
(291,304)
$
$
(71,858)
91,131
(272,031)
127,631,583 $
195
127,639,630 $
191
127,668,839
127,675,501
Preferred Shares, Series I (authorized – 10.0 million) GWL has 9.4 million 5.80% non-voting Preferred Shares,
Series I outstanding, with a face value of $235 million, which entitle the holder to a fixed cumulative preferred
cash dividend of $1.45 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series III (authorized – 10.0 million) GWL has 8.0 million 5.20% non-voting Preferred Shares,
Series III outstanding, with a face value of $200 million, which entitle the holder to a fixed cumulative preferred
cash dividend of $1.30 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series IV (authorized – 8.0 million) GWL has 8.0 million 5.20% non-voting Preferred Shares,
Series IV outstanding, with a face value of $200 million, which entitle the holder to a fixed cumulative preferred
cash dividend of $1.30 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
George Weston Limited 2016 Annual Report 111
Notes to the Consolidated Financial Statements
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series V (authorized – 8.0 million) GWL has 8.0 million 4.75% non-voting Preferred Shares,
Series V outstanding, with a face value of $200 million, which entitle the holder to a fixed cumulative preferred
cash dividend of $1.1875 per share per annum which will, if declared, be payable quarterly. GWL may, at its
option, redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together
with all accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof
are at the discretion of the Company’s Board which takes into account the Company’s financial results, capital
requirements, available cash flow, future prospects of the Company’s business and other factors considered
relevant from time to time. Over time, it is the Company’s intention to increase the amount of the dividend while
retaining appropriate free cash flow to finance future growth. In the second quarter of 2016 and 2015, the Board
raised the quarterly common share dividend by $0.015 to $0.44 and by $0.005 to $0.425 per share, respectively.
The Board declared dividends as follows:
($)
Dividends declared per share(i):
Common share
Preferred share:
Series I
Series III
Series IV
Series V
2016
2015
$
$
$
$
$
1.745
1.45
1.30
1.30
1.1875
$
$
$
$
$
1.695
1.45
1.30
1.30
1.1875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V were paid on January 1, 2017.
Dividends declared on Preferred Shares, Series I were paid on December 15, 2016.
The following table summarizes the Company’s cash dividends declared subsequent to year end 2016:
($)
Dividends declared per share(i) – Common share
– Preferred share:
Series I
Series III
Series IV
Series V
$
0.44
0.3625
$
0.3250
$
$
0.3250
$ 0.296875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V are payable on April 1, 2017.
Dividends declared on Preferred Shares, Series I are payable on March 15, 2017.
112 George Weston Limited 2016 Annual Report
Normal Course Issuer Bid (“NCIB”) Program The following table summarizes the Company’s activity under its
NCIB program:
($ millions except where otherwise indicated)
Purchased for future settlement of RSUs and PSUs (number of shares)
Purchased and cancelled (number of shares)
Cash consideration paid
Purchased and held in trusts
Purchased and cancelled
Premium charged to retained earnings
2016
102,006
68,000
2015
71,858
133,956
$
$
$
(11)
(8)
19
$
$
$
(7)
(14)
21
There was a nominal reduction in share capital in 2016 and 2015, as a result of the Company’s activity under its
NCIB program.
In 2016, GWL renewed its NCIB program to purchase on the Toronto Stock Exchange (“TSX”) or through
alternative trading systems up to 6,397,215 of its common shares, representing approximately 5% of the
common shares outstanding. In accordance with the rules and regulations of the TSX, any purchases must be at
the then market price of such shares.
Note 25. Loblaw Capital Transactions
Loblaw Preferred Shares In 2015, Loblaw issued 9.0 million 5.30% non-voting Second Preferred Shares,
Series B (authorized – unlimited) and redeemed all of the outstanding 9.0 million 5.95% non-voting Second
Preferred Shares, Series A. As at year end 2016, the Second Preferred Shares, Series B in the amount of
$221 million net of $4 million of after-tax issuance costs, and related cash dividends, were presented as a
component of non-controlling interests in the Company’s consolidated balance sheet. In 2016, Loblaw
declared dividends of $12 million (2015 – $7 million) related to the Second Preferred Shares, Series B.
Loblaw Common Shares The following table summarizes Loblaw’s common share activity under its share-based
compensation arrangements and NCIB program, and includes the impact on the Company’s consolidated
financial statements for the years ended as follows:
($ millions except where otherwise indicated)
Issued (number of shares)
Purchased and held in trusts (number of shares)
Purchased and cancelled (number of shares)
Cash consideration received (paid)
Share-based compensation
Purchased and held in trusts
Purchased and cancelled
Increase (decrease) in contributed surplus
Share-based compensation
Purchased and held in trusts
Purchased and cancelled
2016
1,919,776
(1,250,000)
(10,287,300)
(9,617,524)
2015
2,724,662
(971,894)
(4,336,839)
(2,584,071)
$
$
$
$
42
(90)
(708)
(756)
10
(23)
(178)
(191)
$
$
$
$
63
(63)
(280)
(280)
16
(15)
(65)
(64)
George Weston Limited 2016 Annual Report 113
Notes to the Consolidated Financial Statements
Note 26. Capital Management
In order to manage its capital structure, the Company, among other activities, may adjust the amount of
dividends paid to shareholders, purchase shares for cancellation pursuant to its NCIB program, issue new shares
or issue or repay long term debt with the objective of:
• ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and
strategic plans;
• maintaining financial capacity and flexibility through access to capital to support future development of the
business;
• minimizing the after-tax cost of its capital while taking into consideration current and future industry, market
and economic risks and conditions;
• utilizing short term funding sources to manage its working capital requirements and long term funding
•
sources to manage the long term capital investments of the business; and
targeting an appropriate leverage and capital structure for the Company and each of its reportable operating
segments.
The Company has policies in place which govern debt financing plans and risk management strategies for
liquidity, interest rates and foreign exchange. These policies outline measures and targets for managing capital,
including a range for leverage consistent with the desired credit rating. Management and the Audit Committee
regularly review the Company’s compliance with, and performance against, these policies. In addition,
management regularly reviews these policies to ensure they remain consistent with the risk tolerance acceptable
to the Company.
The following table summarizes the Company’s total capital under management:
As at
($ millions)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives related to the above debt
Total debt
Equity attributable to shareholders of the Company
Total capital under management
(i) Certain comparative figures have been restated (see note 2).
Dec. 31, 2016
115
$
1,241
400
11,385
31
(368)
12,804
7,764
20,568
$
$
Dec. 31, 2015(i)
$
143
1,086
1,348
10,928
30
(381)
13,154
7,681
20,835
$
$
Short Form Base Shelf Prospectus (“Prospectus”) In 2015, GWL filed a Prospectus allowing for the potential
issuance of up to $1.0 billion of debentures and preferred shares, or any combination thereof over a 25-month
period.
In 2015, Loblaw filed a Prospectus allowing for the potential issuance of up to $1.5 billion of debentures and
preferred shares, or any combination thereof. The Prospectus expires in 2017. In 2015, Loblaw issued
$225 million of preferred shares under this Prospectus. Loblaw intends to renew its Prospectus in 2017.
In 2015, Choice Properties filed a Prospectus allowing for the potential issuance of up to $2.0 billion of Units and
debt securities, or any combination thereof over a 25-month period.
In 2015, Eagle filed a Prospectus for the potential issuance of up to $1.0 billion of notes over a 25-month period.
114 George Weston Limited 2016 Annual Report
Covenants and Regulatory Requirements Loblaw is subject to certain key financial and non-financial covenants
under its existing credit facility, unsecured term loan facilities, certain MTNs and letters of credit. These
covenants, which include interest coverage and leverage ratios, as defined in the respective agreements, are
measured by Loblaw on a quarterly basis to ensure compliance with these agreements. As at year end 2016 and
throughout the year, Loblaw was in compliance with each of the covenants under these agreements.
Choice Properties has certain key financial and non-financial covenants under its debentures and credit facility
which include debt service ratios and leverage ratios. These ratios are measured by Choice Properties on a
quarterly basis to ensure compliance. As at year end 2016 and throughout the year, Choice Properties was in
compliance with the covenants under these agreements.
Loblaw is subject to externally imposed capital requirements from the Office of the Superintendent of Financial
Institutions (“OSFI”), the primary regulator of PC Bank. PC Bank’s capital management objectives are to maintain
a consistently strong capital position while considering the economic risks generated by its credit card
receivables portfolio and to meet all regulatory capital requirements as defined by OSFI. PC Bank uses Basel III as
its regulatory capital management framework which includes a common equity Tier 1 capital ratio of 4.5%, a
Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. In addition to the regulatory capital ratios
requirement, PC Bank is subject to the Basel III Leverage ratio. PC Bank is also subject to the OSFI’s Guideline on
Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based on the Basel III
framework, including a Liquidity Coverage Ratio (“LCR”). As at year end 2016 and throughout the year, PC Bank
has met all applicable regulatory requirements.
In addition, the Company has wholly-owned subsidiaries that engage in insurance related activities. These
subsidiaries each exceeded their minimum regulatory capital and surplus requirements as at year end 2016.
Note 27. Post-Employment and Other Long Term Employee Benefits
Post-Employment Benefits The Company sponsors a number of pension plans, including registered defined
benefit pension plans, registered defined contribution pension plans and supplemental unfunded arrangements
providing pension benefits in excess of statutory limits. Certain obligations of the Company under these
supplemental pension arrangements are secured by a standby letter of credit issued by a major Canadian
chartered bank.
GWL’s and Loblaw’s Pension Committees (“the Committees”) oversee the Company’s pension plans. The
Committees are responsible for assisting GWL’s and Loblaw’s Boards in fulfilling their general oversight
responsibilities for the plans. The Committees assist the Boards with oversight of management’s administration
of the plans, pension investment and monitoring responsibilities, and compliance with legal and regulatory
requirements.
The Company’s defined benefit pension plans are primarily funded by the Company, predominantly
non-contributory and the benefits are, in general, based on career average earnings subject to limits. The
funding is based on a solvency valuation for which the assumptions may differ from the assumptions used for
accounting purposes as detailed in this note.
The Company also offers certain other defined benefit plans other than pension plans. These other defined
benefit plans are generally not funded, are mainly non-contributory and include health care, life insurance and
dental benefits. Employees eligible for these other defined benefit plans are those who retire at certain ages
having met certain service requirements. The majority of other defined benefit plans for current and future
retirees include a limit on the total benefits payable by the Company.
The Company’s defined benefit pension plans and other defined benefit plans expose it to a number of actuarial
risks, such as longevity risk, interest rate risk and market risk.
In Canada, the Company also has a national defined contribution plan for salaried employees. All newly hired
salaried employees are only eligible to participate in this defined contribution plan.
George Weston Limited 2016 Annual Report 115
Notes to the Consolidated Financial Statements
The Company also contributes to various MEPPs, which are administered by independent boards of trustees
generally consisting of an equal number of union and employer representatives. The Company’s responsibility
to make contributions to these plans is limited by amounts established pursuant to its collective agreements.
The Company expects to make contributions in 2017 to its defined benefit and defined contribution plans and
the MEPPs in which it participates as well as make benefit payments to the beneficiaries of the supplemental
unfunded defined benefit pension plans, other defined benefit plans and other long term employee benefit
plans.
Other Long Term Employee Benefits The Company offers other long term employee benefit plans that include
long term disability benefits and continuation of health care and dental benefits while on disability.
Defined Benefit Pension Plans and Other Defined Benefit Plans
(i)
Information on the Company’s defined benefit pension plans and other defined benefit plans, in aggregate, is
summarized as follows:
As at
Dec. 31, 2016
Other
Defined
Benefit
Plans
$
$
$
$
(176)
(176)
(176)
(176)
Defined
Benefit
Pension
Plans
(1,892)
(185)
(2,077)
2,099
22
(27)
(5)
200
(205)
$
(176)
Dec. 31, 2015
Other
Defined
Benefit
Plans
$
$
$
$
(166)
(166)
(166)
(166)
Defined
Benefit
Pension
Plans
(2,281)
(184)
(2,465)
2,485
20
(18)
2
204
(202)
$
(166)
$
$
$
$
$
$
($ millions)
Present value of funded obligations
Present value of unfunded obligations
Total present value of defined benefit obligations
Fair value of plan assets
Total funded status of surpluses (obligations)
Assets not recognized due to asset ceiling
Total net defined benefit plan (obligation) surplus
Recorded on the consolidated balance sheets
as follows:
Other assets (note 18)
Other liabilities (note 23)
$
$
$
$
$
$
116 George Weston Limited 2016 Annual Report
The following are the continuities of the fair value of plan assets and the present value of the defined benefit
plan obligations:
($ millions)
Changes in the fair value of plan assets
Fair value, beginning of year
Employer contributions(i)
Employee contributions
Benefits paid
Interest income
Actuarial gains in other comprehensive
income
Settlements(ii)
Other(iii)
Fair value, end of year
Changes in the present value of the
defined benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial (gains) losses in other
comprehensive income
Settlements(ii)
Other(iii)
Balance, end of year
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2016
Total
$ 2,485
35
4
(108)
97
8
(414)
(8)
$ 2,099
166 $ 2,631
68
106
(126)
4
5
7
(7)
5
(39)
(388)
(3)
176 $ 2,253
$ 2,502
(11)
4
(109)
98
120
(122)
3
$ 2,485
$ 2,554 $
63
102
(118)
4
(42)
(111)
13
$ 2,465 $
2015
Total
$ 2,502
(11)
4
(109)
98
120
(122)
3
$ 2,485
204 $ 2,758
70
110
(125)
4
7
8
(7)
(46)
(88)
(111)
13
166 $ 2,631
$ 2,485
35
4
(108)
97
8
(414)
(8)
$ 2,099
$ 2,465 $
63
99
(119)
4
(44)
(388)
(3)
$ 2,077 $
(i) 2015 employer contributions are offset by a $50 million refund of employer contributions from the assets of one of the Company’s
supplemental plans.
(ii) Relates to annuity purchases and pension buy-outs completed.
(iii) Includes foreign exchange impact on U.S. defined benefit pension plans.
In 2016, the Company completed several annuity purchases and pension buy-outs with respect to former
employees. These activities are designed to reduce the Company’s defined benefit pension plan obligations
and decrease future risks and volatility associated with these obligations. The Company paid $414 million
(2015 – $122 million) from the impacted plans’ assets to settle $388 million (2015 – $111 million) of pension
obligations and recorded settlement charges of $26 million (2015 – $11 million) in SG&A. The settlement charges
resulted from the difference between the amount paid for the annuity purchases and pension buy-outs and the
value of the Company’s defined benefit plan obligations related to these annuity purchases and buy-outs at the
time of the settlement.
Subsequent to year end 2016, Loblaw completed an annuity purchase and paid $110 million from the impacted
plans’ assets to settle $103 million of pension obligations and recorded settlement charges of $7 million in
SG&A.
For the year ended 2016, the actual return on plan assets was $105 million (2015 – $218 million).
George Weston Limited 2016 Annual Report 117
Notes to the Consolidated Financial Statements
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants – 47% (2015 – 44%)
• Deferred plan participants – 10% (2015 – 10%)
• Retirees – 43% (2015 – 46%)
During 2017, the Company expects to contribute approximately $64 million (2016 – contributed $35 million) to
its registered defined benefit pension plans. The actual amount paid may vary from the estimate based on
actuarial valuations being completed, investment performance, volatility in discount rates, regulatory
requirements and other factors.
The net cost recognized in net earnings before income taxes for the Company’s defined benefit pension plans
and other defined benefit plans was as follows:
($ millions)
Current service cost
Interest cost on net defined benefit
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
$
63 $
5 $
plan obligations
Settlement charges(i)
Other
Net post-employment defined benefit costs
$
2
26
5
96 $
7
12 $
2016
Total
68
9
26
5
108
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
$
63 $
7 $
4
11
8
86 $
8
15 $
$
2015
Total
70
12
11
8
101
(i) Relates to annuity purchases and pension buy-outs.
The actuarial (gains) losses recognized in other comprehensive income for defined benefit plans were as follows:
($ millions)
Return on plan assets excluding amounts
included in interest income
Experience adjustments
Actuarial (gains) losses from change in
demographic assumptions
Actuarial (gains) losses from change in
financial assumptions
Change in liability arising from asset ceiling
Total net actuarial (gains) losses recognized
in other comprehensive income
before income taxes
Income tax expense (recovery) on
actuarial (gains) losses (note 7)
Actuarial (gains) losses net of income tax
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
$
$
(8)
(10)
(1)
(33) $
9
5
2016
Total
(8)
(10)
(1)
(28)
9
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2015
Total
$
(120)
(10) $
(45)
$
(120)
(55)
(22)
(10)
13
(1)
(23)
(10)
13
$
(43) $
5 $
(38)
$
(149) $
(46) $
(195)
11
(1)
10
40
12
52
expense (recovery)
$
(32) $
4 $
(28)
$
(109) $
(34) $
(143)
118 George Weston Limited 2016 Annual Report
The cumulative actuarial (gains) losses before income taxes recognized in equity for the Company’s defined
benefit plans were as follows:
($ millions)
Cumulative amount, beginning of year
Net actuarial (gains) losses recognized in
the year before income taxes
Cumulative amount, end of year
$
$
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
57 $
(57)
2016
Total
(43)
14 $
5
(52) $
(38)
(38)
Defined
Benefit
Pension
Plans
206 $
Other
Defined
Benefit
Plans
(11) $
(149)
57 $
(46)
(57) $
$
$
2015
Total
195
(195)
Composition of Plan Assets The defined benefit pension plan assets are held in trust and consisted of the
following asset categories:
($ millions except where otherwise indicated)
Equity securities
Canadian – pooled funds
– pooled funds
Foreign
Total equity securities
Debt securities
Fixed income securities – government
– corporate
Fixed income pooled funds(i)
– government
– corporate
Total debt securities
Other investments
Cash and cash equivalents
Total
As at
Dec. 31, 2016
Dec. 31, 2015
$
$
$
$
$
$
$
92
804
896
475
145
439
23
1,082
109
12
2,099
4% $
38%
42% $
23% $
7%
21%
1%
52% $
5% $
1% $
100% $
99
884
983
677
211
455
67
1,410
70
22
2,485
4%
36%
40%
27%
8%
18%
3%
56%
3%
1%
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at year end 2016 and 2015, the defined benefit pension plans did not directly include any GWL or Loblaw
securities.
All equity and debt securities and other investments are valued based on quoted prices (unadjusted) in active
markets for identical assets or liabilities or based on inputs other than quoted prices in active markets that are
observable for the asset or liability, either directly as prices or indirectly, either derived from prices or as per
agreements for contractual returns.
The Company’s asset allocation reflects a balance of interest rate sensitive investments, such as fixed income
investments, and equities, which are expected to provide higher returns over the long term. The Company’s
targeted asset allocations are actively monitored and adjusted on a plan by plan basis to align the asset mix with
the liability profiles of the plans.
George Weston Limited 2016 Annual Report 119
Notes to the Consolidated Financial Statements
Principal Actuarial Assumptions The principal actuarial assumptions used in calculating the Company’s defined
benefit plan obligations and net defined benefit plan cost for the year were as follows (expressed as weighted
averages):
Defined
Benefit
Pension
Plans
2016
Other
Defined
Benefit
Plans
4.00%
3.75%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.00%
Defined
Benefit
Pension
Plans
4.00%
3.50%
CPM-RPP2014Pub/Priv
2015
Other
Defined
Benefit
Plans
4.00%
n/a
CPM-RPP2014Pub/Priv
Generational
Generational
Generational
Generational
4.00%
4.00%
4.00%
4.00%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.50%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.50%
Generational
Generational
Generational
Generational
Defined Benefit Plan
Obligations
Discount rate
Rate of compensation
increase
Mortality table(i)
Net Defined Benefit
Plan Cost
Discount rate
Rate of compensation
increase
Mortality table(i)
n/a – not applicable
(i) Public or private sector mortality table is used depending on the prominent demographics of each plan.
The weighted average duration of the defined benefit obligations as at year end 2016 is 17.4 years
(2015 – 16.2 years).
The growth rate of health care costs, primarily drug and other medical costs, for the other defined benefit plan
obligations as at year end 2016 was estimated at 4.50% and is expected to remain at 4.50% by year end 2017
and thereafter.
120 George Weston Limited 2016 Annual Report
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2016 (expressed
as weighted averages) and the sensitivity of a 1% change in each of these assumptions on the defined benefit
plan obligations and the net defined benefit plan cost.
The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of
each key assumption have been calculated independently of any changes in other key assumptions. Actual
experience may result in changes in a number of key assumptions simultaneously. Changes in one factor may
result in changes in another, which could amplify or reduce the impact of such assumptions.
Defined Benefit Pension Plans
Other Defined Benefit Plans
Increase (Decrease)
($ millions)
Discount rate
Impact of:
1% increase
1% decrease
Expected growth rate of health care costs
Impact of:
1% increase
1% decrease
Defined
Benefit
Net
Plan
Obligations
4.00%
(333)
399
$
$
$
$
Defined
Benefit
Plan Cost(i)
4.00%
(33)
32
Defined
Benefit
Plan
Obligations
3.75%
(22)
28
4.50%
21
(17)
$
$
$
$
Net
Defined
Benefit
Plan Cost(i)
4.00%
4.50%
2
(1)
$
$
n/a
n/a
n/a
n/a
n/a – not applicable
(i) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
(ii) Multi-Employer Pension Plans
During 2016, the Company recognized an expense of $66 million (2015 – $61 million) in operating income, which
represents the contributions made in connection with MEPPs. During 2017, the Company expects to continue to
make contributions into these MEPPs.
Loblaw, together with its franchises, is the largest participating employer in the Canadian Commercial Workers
Industry Pension Plan (“CCWIPP”), with approximately 53,000 (2015 – 52,000) employees as members. Included
in the 2016 expense described above are contributions of $65 million (2015 – $59 million) to CCWIPP.
(iii) Post-Employment and Other Long Term Employee Benefit Costs
The net cost recognized in net earnings before income taxes for the Company’s post-employment and other long
term employee benefit plans was as follows:
($ millions)
Net post-employment defined benefit cost(i)
Defined contribution costs(ii)
Multi-employer pension plan costs(iii)
Total net post-employment benefit costs
Other long term employee benefit costs(iv)
Net post-employment and other long term employee benefit costs
Recorded on the consolidated statements of earnings as follows:
Operating income (note 29)
Net interest expense and other financing charges (note 6)
Net post-employment and other long term employee benefits costs
2016
108
30
66
204
25
229
217
12
229
$
$
$
$
$
2015
101
29
61
191
28
219
205
14
219
$
$
$
$
$
Includes settlement charges of $26 million (2015 – $11 million) related to annuity purchases and pension buy-outs.
(i)
(ii) Amounts represent the Company’s contributions made in connection with defined contribution plans.
(iii) Amounts represent the Company’s contributions made in connection with MEPPs.
(iv) Other long term employee benefit costs include $3 million (2015 – $2 million) of net interest expense and other financing charges.
George Weston Limited 2016 Annual Report 121
Notes to the Consolidated Financial Statements
Note 28. Share-Based Compensation
The Company’s share-based compensation arrangements include stock option plans, RSU plans, PSU plans, DSU
plans, EDSU plans and Choice Properties’ unit-based compensation plans. The Company’s costs recognized in
SG&A related to its share-based compensation arrangements in 2016 were $77 million (2015 – $85 million).
The following is the carrying amount of the Company’s share-based compensation arrangements:
($ millions)
Trade payables and other liabilities
Other liabilities (note 23)
Contributed surplus
As at
Dec. 31, 2016
10
$
4
$
133
$
Dec. 31, 2015
4
$
5
$
118
$
Details related to the share-based compensation plans of GWL and Loblaw are as follows:
Stock Option Plans GWL maintains a stock option plan for certain employees. Under this plan, GWL may grant
options for up to 6,453,726 of its common shares.
Loblaw maintains a stock option plan for certain employees. Under this plan, Loblaw may grant options for up
to 28,137,162 of its common shares.
The following is a summary of GWL’s stock option plan activity:
Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled
Outstanding options, end of year
Options exercisable, end of year
2016
Weighted
Average
Exercise
Price/Share
78.42
112.06
71.17
98.97
82.65
73.69
$
$
$
$
$
$
Options
(number
of shares)
1,532,828
218,263
(54,921)
(33,315)
1,662,855
871,302
2015
Weighted
Average
Exercise
Price/Share
71.63
100.61
61.97
61.46
78.42
71.54
$
$
$
$
$
$
Options
(number
of shares)
1,438,145
292,432
(144,386)
(53,363)
1,532,828
655,105
The following table summarizes information about GWL’s outstanding stock options:
Outstanding Options
2016
Exercisable Options
Number of
Options
Outstanding
479,782
687,015
496,058
1,662,855
Weighted
Average
Remaining
Contractual
Life (years)
2
3
6
Weighted
Average
Exercise
Price/Share
65.19
78.71
105.03
82.65
$
$
$
$
Number of
Exercisable
Options
416,774
396,267
58,261
871,302
Weighted
Average
Exercise
Price/Share
65.53
78.52
99.25
73.69
$
$
$
$
Range of Exercise Prices ($)
$59.74 - $72.36
$72.37 - $82.05
$82.06 - $118.00
During 2016, GWL issued common shares on the exercise of stock options with a weighted average market share
price of $114.14 (2015 – $109.24) per common share and received $4 million (2015 – $9 million) of cash
consideration.
122 George Weston Limited 2016 Annual Report
During 2016, GWL granted stock options with a weighted average exercise price of $112.06 (2015 – $100.61) per
common share and a fair value of $3 million (2015 – $4 million). The assumptions used to measure the grant
date fair value of the GWL options granted during the years ended under the Black-Scholes stock option
valuation model were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2016
1.5%
16.5% - 18.1%
0.6% - 1.0%
4.7 - 6.7 years
2015
1.7%
17.5% - 21.6%
0.8% - 1.4%
4.7 - 6.7 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture
rate applied as at year end 2016 was 1.3% (2015 – 2.9%).
The following is a summary of Loblaw’s stock option plan activity:
Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled
Outstanding options, end of year
Options exercisable, end of year
2016
Weighted
Average
Exercise
Price/Share
43.77
68.97
37.16
52.77
48.93
40.33
$
$
$
$
$
$
Options
(number
of shares)
7,411,405
1,285,649
(1,131,944)
(242,752)
7,322,358
3,384,188
2015
Weighted
Average
Exercise
Price/Share
38.42
63.62
36.19
44.13
43.77
37.41
$
$
$
$
$
$
Options
(number
of shares)
8,364,884
1,571,495
(1,735,959)
(789,015)
7,411,405
2,862,545
The following table summarizes information about Loblaw’s outstanding stock options:
Outstanding Options
2016
Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
2
3
6
Weighted
Average
Exercise
Price/Share
35.14
42.92
66.09
48.93
$
$
$
$
Number of
Exercisable
Options
1,561,184
1,561,547
261,457
3,384,188
Weighted
Average
Exercise
Price/Share
35.22
41.60
63.31
40.33
$
$
$
$
Number of
Options
Outstanding
2,113,736
2,599,509
2,609,113
7,322,358
Range of Exercise Prices ($)
$32.47 - $38.62
$38.63 - $51.85
$51.86 - $73.46
During 2016, Loblaw issued common shares on the exercise of stock options with a weighted average
market share price of $70.19 (2015 – $67.04) per common share and received cash consideration of $42 million
(2015 – $63 million).
George Weston Limited 2016 Annual Report 123
Notes to the Consolidated Financial Statements
During 2016, Loblaw granted stock options with a weighted average exercise price of $68.97 (2015 – $63.62) per
common share and a fair value of $13 million (2015 – $14 million). The assumptions used to measure the grant
date fair value of the Loblaw options granted during the years ended as indicated under the Black-Scholes stock
option valuation model were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2016
1.5%
17.7% - 19.0%
0.6% - 1.1%
3.8 - 6.3 years
2015
1.5%
18.3% - 20.1%
0.6% - 1.4%
3.9 - 6.3 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture
rate applied as at year end 2016 was 10.0% (2015 – 10.0%).
Restricted Share Unit Plans The following is a summary of GWL’s and Loblaw’s RSU plan activity:
(Number of Awards)
Outstanding RSUs, beginning of year
Granted
Settled
Forfeited
Reinvested
Outstanding RSUs, end of year
GWL
Loblaw
2016
202,276
69,890
(52,992)
(6,090)
2015
190,959
85,593
(68,349)
(5,927)
2016
887,792
283,962
(295,403)
(18,245)
213,084
202,276
858,106
2015
1,462,790
313,964
(802,957)
(92,213)
6,208
887,792
The fair value of GWL’s and Loblaw’s RSUs granted during 2016 was $8 million (2015 – $8 million) and $19 million
(2015 – $19 million), respectively.
Performance Share Unit Plans The following is a summary of GWL’s and Loblaw’s PSU plan activity:
(Number of Awards)
Outstanding PSUs, beginning of year
Granted
Settled
Forfeited
Outstanding PSUs, end of year
GWL
Loblaw
2016
135,025
50,654
(54,046)
(3,767)
127,866
2015
138,467
38,122
(23,947)
(17,617)
135,025
2016
1,100,356
373,844
(492,929)
(15,408)
965,863
2015
1,019,304
306,027
(80,881)
(144,094)
1,100,356
The fair value of GWL’s and Loblaw’s PSUs granted during 2016 was $4 million (2015 – $4 million) and $14 million
(2015 – $19 million), respectively.
Settlement of Awards from Shares Held in Trusts The following table summarizes GWL’s settlement of RSUs and
PSUs from shares held in trusts for the years ended as indicated:
(Number of Awards)
Settled
Released from trusts (note 24)
2016
107,038
107,038
2015
92,296
91,131
124 George Weston Limited 2016 Annual Report
During 2016, the settlement of awards from shares held in trusts resulted in an increase of $7 million
(2015 – $6 million) in retained earnings. There were nominal increases in share capital in 2016 and 2015
related to these settlements.
Director Deferred Share Unit Plans The following is a summary of GWL’s and Loblaw’s DSU plan activity:
(Number of Awards)
Outstanding DSUs, beginning of year
Granted
Reinvested
Settled
Outstanding DSUs, end of year
GWL
Loblaw
2016
190,741
18,168
2,864
(20,541)
191,232
2015
210,131
18,250
3,125
(40,765)
190,741
2016
183,722
27,784
2,773
(26,077)
188,202
2015
263,824
28,598
3,731
(112,431)
183,722
The fair value of GWL’s and Loblaw’s DSUs granted during 2016 was $2 million (2015 – $2 million) and $2 million
(2015 – $2 million), respectively.
Executive Deferred Share Unit Plans The following is a summary of GWL’s and Loblaw’s EDSU plan activity:
(Number of Awards)
Outstanding EDSUs, beginning of year
Granted
Reinvested
Settled
Outstanding EDSUs, end of year
GWL
Loblaw
2016
35,312
9,193
694
45,199
2015
28,398
6,524
565
(175)
35,312
2016
24,023
15,383
434
(4,281)
35,559
2015
22,915
5,087
381
(4,360)
24,023
The fair value of GWL’s and Loblaw’s EDSUs granted during 2016 was $1 million (2015 – $1 million) and
$1 million (2015 – nominal), respectively.
Note 29. Employee Costs
Included in operating income were the following employee costs:
($ millions)
Wages, salaries and other short term employee benefits
Post-employment benefits (note 27)
Other long term employee benefits (note 27)
Share-based compensation (note 28)
Capitalized to fixed assets
Employee costs
2016
5,702
195
22
72
(42)
5,949
$
$
2015
5,434
179
26
81
(37)
5,683
$
$
George Weston Limited 2016 Annual Report 125
Notes to the Consolidated Financial Statements
Note 30. Leases
The Company leases certain of Loblaw’s retail stores, Weston Foods’ and Loblaw’s distribution centres, corporate
offices, and other assets under operating or finance lease arrangements. Substantially all of Loblaw’s retail store
leases have renewal options for additional terms. The contingent rents under certain of Loblaw’s retail store
leases are based on a percentage of Loblaw’s Retail segment sales. The Company also has properties which are
sub-leased to third parties.
Determining whether a lease arrangement is classified as finance or operating requires judgment with respect to
the fair value of the leased asset, the economic life of the lease, the discount rate and the allocation of leasehold
interests between the land and building elements of property leases.
Operating Leases – As Lessee Future minimum lease payments relating to the Company’s operating leases are
as follows:
($ millions)
Operating lease
payments
Sub-lease income
Net operating lease
payments
$
$
2017
2018
Payments due by year
2020
2019
2021 Thereafter
Dec. 31, 2016
Dec. 31, 2015
As at
699 $
675 $
629 $
558 $
483 $
2,362
(49)
(44)
(37)
(28)
(25)
(91)
650 $
631 $
592 $
530 $
458 $
2,271
$
$
5,406
(274)
5,132
$
$
5,698
(295)
5,403
In 2016, the Company recorded operating lease expenses of $699 million (2015 – $704 million) and sub-lease
income of $51 million (2015 – $65 million) in operating income. In addition, contingent rent expense in respect
of operating leases and contingent rental income in respect of sub-leased operating leases were $2 million
(2015 – $1 million) and $4 million (2015 – $6 million), respectively, and were also recognized in operating
income.
Operating Leases – As Lessor Future minimum lease payments to be received by Loblaw relating to properties
that are leased to third parties are as follows:
($ millions)
Net operating
lease income
Payments to be received by year
As at
2017
2018
2019
2020
2021 Thereafter
Dec. 31, 2016
Dec. 31, 2015
$
135 $
120 $
99 $
82 $
68 $
222
$
726
$
609
126 George Weston Limited 2016 Annual Report
As at year end 2016, Loblaw leased certain owned land and buildings with a cost of $2,721 million (2015 –
$2,591 million) and related accumulated depreciation of $759 million (2015 – $698 million). For the year ended
2016, rental income was $138 million (2015 – $141 million) and contingent rent was $4 million (2015 –
$5 million), both of which were recognized in operating income.
Finance Leases – As Lessee Future minimum lease payments relating to Loblaw’s finance leases are as follows:
($ millions)
Finance lease
payments
Less future
finance charges
Present value
of minimum
lease payments
2017
2018
Payments due by year
2020
2019
2021 Thereafter
Dec. 31, 2016
Dec. 31, 2015
As at
$
83 $
70 $
63 $
59 $
57 $
657
$
989
$
1,060
(30)
(27)
(25)
(24)
(26)
(250)
(382)
(431)
$
53 $
43 $
38 $
35 $
31 $
407
$
607
$
629
In 2016, contingent rent recognized by Loblaw as an expense in respect of finance leases was $1 million
(2015 – $1 million).
Certain assets classified as finance leases have been sub-leased by Loblaw to third parties. Future sub-lease
income relating to these sub-lease agreements are as follows:
($ millions)
2017
2018
2019
2020
Sub-lease income
$
13 $
11 $
11 $
9 $
2021 Thereafter
27
6 $
Dec. 31, 2016
77
$
Dec. 31, 2015
98
$
Payments to be received by year
As at
In 2016, the sub-lease income earned under finance leases was $15 million (2015 – $15 million).
George Weston Limited 2016 Annual Report 127
Notes to the Consolidated Financial Statements
Note 31. Financial Instruments
The following table presents the fair values and fair value hierarchy of the Company’s financial instruments and
excludes financial instruments measured at amortized cost that are short term in nature. The carrying values of
the Company’s financial instruments approximate their fair values except for long term debt.
($ millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
As at
Dec. 31, 2016
Dec. 31, 2015
Financial assets
Cash and cash equivalents
Short term investments
Security deposits
Franchise loans receivable
Certain other assets
Derivatives included in accounts receivable
Derivatives included in prepaid expenses and
other assets
Derivatives included in other assets
Financial liabilities
Long term debt
Trust Unit liability
Certain other liabilities
Derivatives included in trade payables and
other liabilities
668
670
21
7
11
368
12,856
892
341
89
23
(1)
7
635
1,560
1,011
89
233
86
6
18
368
12,856
635
22
733
562
83
25
(6)
680
604
5
2
10
37
381
13,345
552
2
6
233
42
22
2
1,413
1,166
88
329
86
4
37
381
13,345
552
20
13
329
59
20
7
There were no transfers between the levels of the fair value hierarchy during 2016 and 2015.
During 2016, a gain of $5 million (2015 – $18 million) was recognized in operating income on financial
instruments designated as fair value through profit or loss. In addition, a net loss of $124 million (2015 –
$23 million) was recognized in earnings before income taxes on financial instruments required to be classified
as fair value through profit or loss.
Cash and Cash Equivalents, Short Term Investments and Security Deposits As at year end 2016, the Company
had cash and cash equivalents, short term investments and security deposits of $2,660 million (2015 –
$2,667 million), including U.S. dollars of $545 million (2015 – $932 million) that was held primarily by Dunedin
Holdings GmbH (“Dunedin”), a subsidiary of GWL, and certain of its affiliates (see note 9).
In 2016, a loss of $20 million (2015 – gain of $151 million) was recognized in other comprehensive income
related to the effect of foreign currency translation on the Company’s U.S. net investment in foreign operations.
In addition, in 2016, a loss of $2 million (2015 – gain of $159 million) was recorded in SG&A related to the effect
of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations that have the same functional currency as that of the Company.
Level 3 Financial Instruments
Franchise Loans Receivable and Franchise Investments in Other Assets As at year end 2016, the value of Loblaw
franchise loans receivable of $233 million (2015 – $329 million) was recorded on the consolidated balance
sheets. In 2016, Loblaw recorded an impairment loss of $1 million (2015 – $1 million) in operating income
related to these loans receivable.
As at year end 2016, the value of Loblaw franchise investments was $39 million (2015 – $54 million) and was
recorded in other assets. During 2016, Loblaw recorded a gain of $4 million (2015 – $31 million) in operating
income related to these investments.
128 George Weston Limited 2016 Annual Report
Embedded Derivatives The Level 3 financial instruments classified as fair value through profit or loss consist of
Loblaw embedded derivatives on purchase orders placed in neither Canadian dollars nor the functional currency
of the vendor. These derivatives are valued using a market approach based on the differential in exchange rates
and timing of settlement. The significant unobservable input used in the fair value measurement is the cost of
purchase orders. Significant increases (decreases) in any one of the inputs would result in a significantly higher
(lower) fair value measurement.
In 2016, a fair value gain of $5 million (2015 – loss of $3 million) was recognized in operating income related to
these derivatives. In addition, as at year end 2016, a corresponding liability of $2 million was included trade
payables and other liabilities (2015 – $7 million). A 1% increase (decrease) in foreign currency exchange rates
would result in an additional gain (loss) of $2 million in fair value.
Equity Derivative Contracts As at year end 2016, Weston Holdings Limited (“WHL”), a subsidiary of GWL, held an
outstanding equity forward sale agreement based on 9.6 million Loblaw common shares at an original forward
price of $48.50 per Loblaw common share. As at year end 2016, the forward price had increased to $109.26
(2015 – $104.98) per Loblaw common share under the terms of the agreement. In 2016, a fair value loss of
$53 million (2015 – $26 million) was recorded in net interest expense and other financing charges related to this
agreement (see note 6).
Trust Unit Liability In 2016, a fair value loss of $79 million (2015 – $55 million) was recognized in net interest
expense and other financing charges (see note 6).
Securities Investments In 2015, PC Bank purchased and designated certain long term investments as available-
for-sale financial assets, which are measured at fair value through other comprehensive income. As at year end
2016, the fair value of these investments of $23 million (2015 – $25 million) was included in other assets. During
2016, PC Bank recorded a nominal fair value loss (2015 – nominal loss) in other comprehensive income related to
these investments. These investments are considered part of the liquid securities required to be held by PC Bank
to meet its LCR standard.
Other Derivatives The Company uses bond forwards and interest rate swaps, to manage its anticipated
exposure to fluctuations in interest rates on future debt issuances. The Company also uses futures, options and
forward contracts to manage its anticipated exposure to fluctuations in commodity prices and exchange rates in
its underlying operations. The following is a summary of the fair values recognized in the consolidated balance
sheet and the net realized and unrealized gains (losses) before income taxes related to the Company’s other
derivatives:
($ millions)
Derivatives designated as cash flow hedges(i)
Foreign Exchange Forwards
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Bond Forwards(ii)
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
Net asset
(liability)
fair value
Gain/(loss)
recorded in
OCI
Dec. 31, 2016
Gain/(loss)
recorded in
operating
income
2
2
16
6
22
24
(1)
(1)
(1)
2
2
(9)
3
11
5
7
(i)
Includes bond forward agreements with a notional value of $95 million, which were settled within the year, and interest rate swap
agreements with a notional value of $200 million. In 2016, a nominal unrealized fair value gain was recorded in OCI relating to these
agreements.
(ii) Realized fair value gain of $3 million related to Choice Properties bond forward agreements settled in 2016 and recorded in net
interest expense and other financing charges (see note 6).
George Weston Limited 2016 Annual Report 129
Notes to the Consolidated Financial Statements
($ millions)
Derivatives designated as cash flow hedges
Foreign Exchange Forwards
Bond Forwards
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
Note 32. Financial Risk Management
Net asset
(liability)
fair value
Gain/(loss)
recorded in
OCI
Dec. 31, 2015
Gain/(loss)
recorded in
operating
income
4
4
43
(12)
31
35
3
(2)
1
1
1
1
65
(4)
61
62
As a result of holding and issuing financial instruments, the Company is exposed to certain risks. The following is
a description of those risks and how the exposures are managed:
Liquidity Risk Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its
equivalents in a cost effective manner to fund its obligations as they come due. The Company is exposed to
liquidity risk through, among other areas, PC Bank and its credit card business, which requires a reliable source
of funding for its credit card business. PC Bank relies on its securitization programs and the acceptance of GIC
deposits to fund the receivables of its credit cards. The Company would experience liquidity risk if it fails to
maintain appropriate levels of cash and short term investments, is unable to access sources of funding or fails to
appropriately diversify sources of funding. If any of these events were to occur, they could adversely affect the
financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term
investments, actively monitoring market conditions, and by diversifying sources of funding, including the
Company’s committed credit facilities, and maintaining a well diversified maturity profile of debt and capital
obligations.
Maturity Analysis The following are the undiscounted contractual maturities of significant financial liabilities as
at December 31, 2016:
($ millions)
Long term debt including
interest payments(i)
2017
2018
2019
2020
2021
Thereafter
Total(ii)
$
861 $
1,833 $
2,570 $
1,684 $
1,138 $
8,464 $ 16,550
Foreign exchange forward contracts
Short term debt (note 21)
Bank indebtedness
Certain other liabilities
642
1,241
115
5
3
2
3
3
642
1,241
115
16
$
2,864 $
1,836 $
2,572 $
1,687 $
1,141 $
8,464 $ 18,564
(i)
Fixed interest payments are based on the maturing face values and annual interest for each instrument, including GICs, long term
independent securitization trusts and an independent funding trust, as well as annual payment obligations for consolidated
structured entities, mortgages and finance lease obligations. Variable interest payments are based on the forward rates as at year
end 2016.
(ii) The Trust Unit liability has been excluded as this liability does not have a contractual maturity date. The Company also excluded trade
payables and other liabilities which are due within the next 12 months.
130 George Weston Limited 2016 Annual Report
Foreign Currency Exchange Rate Risk The Company’s consolidated financial statements are expressed in
Canadian dollars, however a portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S.
dollars through both its net investment in foreign operations in the U.S. and its foreign subsidiaries held by
Dunedin and certain of its affiliates with a functional currency that is the same as that of the Company. The U.S.
dollar denominated net assets are translated into Canadian dollars at the foreign currency exchange rate in effect
at the balance sheet date. As a result, the Company is exposed to foreign currency translation gains and losses.
Those gains and losses arising from the translation of the U.S. dollar denominated assets of foreign subsidiaries
with a functional currency that is the same as that of the Company are included in operating income, while
translation gains and losses on the net investment in foreign operations in the U.S. are recorded in accumulated
other comprehensive income (loss). The Company estimates that based on the U.S. net assets held by foreign
operations that have the same functional currency as that of the Company at the end of 2016, an appreciation of
the Canadian dollar of one cent relative to the U.S. dollar would result in a loss of $7 million in earnings before
income taxes.
Revenues and expenses of all foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are recognized. An appreciating
U.S. dollar relative to the Canadian dollar will positively impact operating income and net earnings, while a
depreciating U.S. dollar relative to the Canadian dollar will have the opposite impact.
Weston Foods and Loblaw are also exposed to fluctuations in the prices of U.S. dollar denominated purchases
as a result of changes in U.S. dollar exchange rates. A depreciating Canadian dollar relative to the U.S. dollar will
negatively impact operating income and net earnings, while an appreciating Canadian dollar relative to the
U.S. dollar will have the opposite impact. During 2016 and 2015, Weston Foods and Loblaw entered into
derivative instruments in the form of futures contracts and forward contracts to manage their current and
anticipated exposure to fluctuations in U.S. dollar exchange rates.
Credit Risk The Company is exposed to credit risk resulting from the possibility that counterparties could default
on their financial obligations to the Company including derivative instruments, cash and cash equivalents, short
term investments, security deposits, PC Bank’s credit card receivables, Loblaw’s franchise loans receivable,
pension assets held in the Company’s defined benefit plans, Loblaw’s accounts receivable including amounts due
from franchisees, government, prescription sales and third-party drug plans, independent accounts and amounts
owed from vendors, and other receivables from Weston Foods’ customers and suppliers. Failure to manage
credit risk could adversely affect the financial performance of the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security
deposits is reduced by policies and guidelines that require that the Company enters into transactions only with
counterparties or issuers that have a minimum long term “A-” credit rating from a recognized credit rating
agency and place minimum and maximum limits for exposures to specific counterparties and instruments.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness
of new tenants, obtaining security deposits wherever permitted by legislation, ensuring its tenant mix is
diversified and by limiting its exposure to any one tenant except Loblaw. Choice Properties establishes an
allowance for doubtful accounts that represents the estimated losses with respect to rents receivable. The
allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively
monitoring the credit card portfolio and reviewing techniques and technology that can improve the effectiveness
of the collection process. In addition, these receivables are dispersed among a large, diversified group of credit
card customers.
Loblaw’s franchise loans receivable and Loblaw’s accounts receivable including amounts due from franchisees,
governments, prescription sales covered by third-party drug plans, independent accounts and amounts owed
from vendors, and other receivables from Weston Foods’ customers and suppliers, are actively monitored on an
ongoing basis and settled on a frequent basis in accordance with the terms specified in the applicable
agreements.
George Weston Limited 2016 Annual Report 131
Notes to the Consolidated Financial Statements
The Company’s maximum exposure to credit risk as it relates to derivative instruments is approximated by the
positive fair market value of the derivatives on the consolidated balance sheets (see note 31).
Refer to notes 10 and 11 for additional information on the credit quality performance of Loblaw’s credit card
receivables and other receivables, mentioned above, of Loblaw and Weston Foods.
Common Share and Trust Unit Price Risk Changes in the Loblaw common share price impact the Company’s net
interest expense and other financing charges. The obligation of WHL under the equity forward sale agreement
based on 9.6 million Loblaw common shares, which matures in 2031, is secured by the underlying Loblaw
common shares. If the market value of the underlying Loblaw common shares exceeds the obligation of WHL
under this forward, a portion of the proceeds from a future sale of these shares may be used to satisfy the
obligation under this forward contract upon termination or maturity. At maturity, if the forward price is greater
(less) than the market price of the Loblaw common shares, WHL will receive (pay) cash equal to the difference
between the notional value and the market value of the forward contract. A one dollar increase in the market
value of the underlying shares of the equity forward, with all other variables held constant, would result in an
increase of $10 million in net interest expense and other financing charges.
The Company is exposed to market price risk from Choice Properties’ Trust Units that are held by unitholders
other than the Company. These Trust Units are presented as a liability on the Company’s consolidated balance
sheets as they are redeemable for cash at the option of the holders. The liability is recorded at fair value at each
reporting period based on the market price of Trust Units. The change in the fair value of the liability negatively
impacts net earnings when the Trust Unit price increases and positively impacts net earnings when the Trust Unit
price declines. A one dollar increase in the market value of Trust Units, with all other variables held constant,
would result in an increase of $47 million in net interest expense and other financing charges.
Interest Rate Risk The Company is exposed to interest rate risk from fluctuations in interest rates on its floating
rate debt and from the refinancing of existing financial instruments. The Company manages interest rate risk by
monitoring the respective mix of fixed and floating rate debt and by taking action as necessary to maintain an
appropriate balance considering current market conditions, with the objective of maintaining the majority of its
debt at fixed interest rates. The Company estimates that a 100 basis point increase (decrease) in short term
interest rates, with all other variables held constant, would result in a decrease (increase) of $8 million in net
interest expense and other financing charges.
Commodity Price Risk Weston Foods’ costs are directly impacted by fluctuations in the prices of commodity
linked raw materials such as wheat flours, sugars, vegetable oils, cocoa powders and chocolate. Loblaw is also
exposed to fluctuations in the commodity prices as a result of the indirect effect of changing commodity prices
on the price of consumer products. In addition, both Weston Foods and Loblaw are exposed to increases in the
prices of energy in operating, in the case of Weston Foods, its bakeries and distribution networks, and, in the
case of Loblaw, its stores and distribution networks. Both Weston Foods and Loblaw use purchase commitments
and derivative instruments in the form of futures contracts, option contracts and forward contracts to manage
their current and anticipated exposure to fluctuations in commodity prices. The Company estimates that based
on the outstanding derivative contracts held by the Company as at year end 2016, a 10% decrease in relevant
commodity prices, with all other variables held constant, would result in a net loss of $13 million in earnings
before income taxes. This amount excludes the offsetting impact of the commodity price risk inherent in the
transactions being hedged.
132 George Weston Limited 2016 Annual Report
Note 33. Contingent Liabilities
In the ordinary course of business, the Company is involved in and potentially subject to legal actions and
proceedings. In addition, the Company is subject to tax audits from various tax authorities on an ongoing basis.
As a result, from time to time, tax authorities may disagree with the positions and conclusions taken by the
Company in its tax filings or legislation could be amended or interpretations of current legislation could change,
any of which events could lead to reassessments.
It is not currently possible to predict the outcome of the Company’s legal actions and proceedings with certainty.
Based on current knowledge and in consultation with legal counsel, management considers the Company’s
exposure to such claims and litigation, tax assessments and reassessments (to the extent not covered by the
Company’s insurance policies or otherwise provided for), not to be material to the consolidated financial
statements.
However, there are a number of uncertainties involved in such matters, individually or in aggregate, and as such,
there is a possibility that the ultimate resolution of these matters may result in a material adverse effect on the
Company’s reputation, operations or financial condition or performance in future periods. The Company does
not currently have any significant accruals or provisions for its litigation matters. Management regularly assesses
its position on the adequacy of such accruals or provisions and will make any necessary adjustments.
The following is a description of the Company’s significant legal proceedings, which the Company believes are
without merit and is vigorously defending:
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the
Ontario Superior Court of Justice (“the Court”) against the Company, Loblaw and certain of its subsidiaries
and others in connection with the collapse of the Rana Plaza complex in Dhaka, Bangladesh in 2013. The claim
seeks approximately $2 billion in damages.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that
has been filed in the Court by two licensed Associates, claiming various declarations and damages resulting
from Shoppers Drug Mart’s alleged breaches of the Associate Agreement, in the amount of $500 million. The
class action comprises all of Shoppers Drug Mart’s current and former licensed Associates residing in Canada,
other than in Québec, who are parties to Shoppers Drug Mart’s 2002 and 2010 forms of the Associate
Agreement. On July 9, 2013, the Court certified as a class proceeding portions of the action. The Court
imposed a class closing date based on the date of certification. New Associates after July 9, 2013 are not
members of the class.
Loblaw was reassessed by the Canada Revenue Agency (“CRA”) and the Ontario Ministry of Finance on the basis
that certain income earned by Glenhuron Bank Limited (“Glenhuron”), a wholly owned Barbadian subsidiary,
should be treated and taxed as income in Canada. The reassessments, which were received in 2015 and 2016,
were for the 2000 to 2011 taxation years totaling $351 million including interest and penalties as at the time of
reassessment. Loblaw believes it is likely that the CRA will issue reassessments for the 2012 and 2013 taxation
years on the same or similar basis. Loblaw has filed a Notice of Appeal with the Tax Court of Canada for the 2000
to 2010 taxation years and a Notice of Objection for the 2011 taxation year.
George Weston Limited 2016 Annual Report 133
Notes to the Consolidated Financial Statements
Indemnification Provisions The Company from time to time enters into agreements in the normal course of
its business, such as service and outsourcing arrangements, lease agreements in connection with business or
asset acquisitions or dispositions, and other types of commercial agreements. These agreements by their nature
may provide for indemnification of counterparties. These indemnification provisions may be in connection with
breaches of representations and warranties or in respect of future claims for certain liabilities, including liabilities
related to tax and environmental matters. The terms of these indemnification provisions vary in duration and
may extend for an unlimited period of time. In addition, the terms of these indemnification provisions vary in
amount and certain indemnification provisions do not provide for a maximum potential indemnification amount.
Indemnity amounts are dependent on the outcome of future contingent events, the nature and likelihood of
which cannot be determined at this time. As a result, the Company is unable to reasonably estimate its total
maximum potential liability in respect of indemnification provisions. Historically, the Company has not made any
significant payments in connection with these indemnification provisions.
Note 34. Financial Guarantees
The Company established letters of credit used in connection with certain obligations mainly related to real
estate transactions, benefit programs, purchase orders and guarantees with a gross potential liability of
approximately $417 million (2015 – $551 million). In addition, Loblaw has provided to third parties the following
significant guarantees:
Associate Guarantees Loblaw has arranged for its Associates to obtain financing to facilitate their inventory
purchases and fund their working capital requirements by providing guarantees to various Canadian
chartered banks that support Associate loans. As at year end 2016, an aggregate amount of $488 million (2015 –
$483 million) in available lines of credit was allocated to the Associates by the various banks. As at year end
2016, Associates had drawn an aggregate amount of $115 million (2015 – $143 million) against these available
lines of credit. Any amounts drawn by the Associates are included in bank indebtedness on the Company’s
consolidated balance sheets. Loblaw guarantees the full amounts drawn by the Associates. As recourse in the
event that any payments are made under the guarantees, Loblaw holds a first-ranking security interest on all
assets of Associates, subject to certain prior-ranking statutory claims.
Independent Funding Trusts The full balance relating to the debt of the independent funding trusts has been
consolidated on the balance sheets of the Company (see note 22). As at year end 2016, Loblaw has agreed to
provide a credit enhancement of $64 million (2015 – $53 million) in the form of a standby letter of credit for the
benefit of the independent funding trusts representing not less than 10% (2015 – 10%) of the principal amount
of the loans outstanding. This credit enhancement allows the independent funding trusts to provide financing to
Loblaw’s franchisees. As well, each franchisee provides security to the independent funding trusts for its
obligations by way of a general security agreement. In the event that a franchisee defaults on its loan and Loblaw
has not, within a specified time period, assumed the loan, or the default is not otherwise remedied, the
independent funding trusts would assign the loan to Loblaw and draw upon this standby letter of credit. This
standby letter of credit has never been drawn upon. Loblaw has agreed to reimburse the issuing bank for any
amount drawn on the standby letter of credit.
Lease Obligations In connection with historical dispositions of certain of its assets, Loblaw has assigned leases
to third parties. Loblaw remains contingently liable for these lease obligations in the event any of the assignees
are in default of their lease obligations. The minimum rent, which does not include other lease related
expenses such as property tax and common area maintenance charges, was in aggregate, approximately
$16 million (2015 – $18 million). Additionally, Loblaw has guaranteed lease obligations of a third-party
distributor in the amount of $6 million (2015 – $7 million).
Glenhuron Bank Limited Surety Bond In 2015, in connection with the CRA’s reassessment of Loblaw on certain
income earned by Glenhuron (see note 33), Loblaw arranged for a surety bond of $141 million (2015 –
$132 million) to the Ministry of Finance in order to dispute the reassessments.
134 George Weston Limited 2016 Annual Report
Financial Services Loblaw has provided a guarantee on behalf of PC Bank to MasterCard® International
Incorporated (“MasterCard®”) for accepting PC Bank as a card member and licensee of MasterCard®
As at year
end 2016, the guarantee on behalf of PC Bank to MasterCard® was U.S. dollars $190 million (2015 – U.S. dollars
$190 million).
.
Loblaw had in place an irrevocable standby letter of credit from a major Canadian chartered bank on behalf of
one of its wholly-owned subsidiaries in the amount of $11 million (2015 – $107 million).
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs
of PC Bank have been issued by major financial institutions. These standby letters of credit can be drawn upon in
the event of a major decline in the income flow from or in the value of the securitized credit card receivables.
Loblaw has agreed to reimburse the issuing banks for any amount drawn on the standby letters of credit. The
aggregate gross potential liability under these arrangements for the Other Independent Securitization Trusts was
$71 million (2015 – $56 million), which represented approximately 11% (2015 – 10%) of the securitized credit
card receivables amount (see note 21). As at year end 2016, the aggregate gross potential liability under these
arrangements for Eagle was $36 million (2015 – $36 million), which represented approximately 9% (2015 – 9%)
of the Eagle notes outstanding issued prior to 2015 (see note 22).
Choice Properties Letters of credit to support guarantees related to its investment properties including
maintenance and development obligations to municipal authorities are issued by Choice Properties.
As at year end 2016, the aggregate gross potential liability related to these letters of credit totaled $31 million
(2015 – $28 million).
Choice Properties’ credit facilities and debentures are guaranteed by each of the General Partner, the
Partnership and any other person that becomes a subsidiary of Choice Properties (with certain exceptions). In
the case of default by Choice Properties, the Indenture Trustee will be entitled to seek redress from the
Guarantors for the guaranteed obligations in the same manner and upon the same terms that it may seek to
enforce the obligations of Choice Properties. These guarantees are intended to eliminate structural
subordination, which would otherwise arise as a consequence of Choice Properties’ assets being primarily held
in its various subsidiaries.
Note 35. Related Party Transactions
The Company’s majority shareholder is Mr. W. Galen Weston, who beneficially owns, directly and indirectly
through private companies which he controls, including Wittington, a total of 80,773,740 of GWL’s common
shares, representing approximately 63% (2015 – 63%) of GWL’s outstanding common shares.
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms
and conditions. Transactions between the Company and its consolidated entities have been eliminated on
consolidation and are not disclosed in this note.
In 2016, the Company made rental payments to Wittington in the amount of $4 million (2015 – $4 million). As at
year end 2016 and 2015, there were no rental payments outstanding.
In 2016, inventory purchases from Associated British Foods plc, a related party by virtue of Mr. W. Galen Weston
being a director of such entity’s parent company, amounted to $40 million (2015 – $40 million). As at year
end 2016, $6 million (2015 – $2 million) was included in trade payables and other liabilities relating to these
inventory purchases.
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the
acquisition of property from Loblaw. The joint venture intends to develop the acquired site into a mixed-used
property, anchored by a Loblaw food store. As at year end 2016, the joint venture did not have any operating
activity. Choice Properties uses the equity method of accounting to record its 40% interest in the joint venture,
which is included in other assets.
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related
parties. Contributions made by the Company to these plans are disclosed in note 27.
George Weston Limited 2016 Annual Report 135
Notes to the Consolidated Financial Statements
Income Tax Matters From time to time, the Company and Wittington may enter into agreements to make
elections that are permitted or required under applicable income tax legislation with respect to affiliated
corporations. In 2016, these elections and accompanying agreements did not have a material impact on
the Company.
Compensation of Key Management Personnel The Company’s key management personnel is comprised of
certain members of the executive team of GWL, Loblaw, Weston Foods and Wittington, as well as members of
the Boards of GWL, Loblaw and Wittington to the extent that they have the authority and responsibility for
planning, directing and controlling the day-to-day activities of the Company.
Annual compensation of key management personnel that is directly attributable to the Company was as follows:
($ millions)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2016
11
13
24
$
$
2015
14
12
26
$
$
Note 36. Restructuring and Other Charges
In 2015, Loblaw finalized a plan to close approximately 52 unprofitable retail locations across a range of banners
and formats. In 2016, Loblaw completed the closures of those retail locations as well as the closures of the
remaining Joe Fresh retail location in the U.S and recorded approximately $46 million (2015 – $124 million) of
restructuring and other charges pertaining to this initiative in SG&A.
In 2015, Loblaw began actively marketing the sale of certain assets of the Shoppers Drug Mart ancillary
healthcare business and recorded asset impairments on these assets and other related restructuring charges
totaling $112 million. In 2016, Loblaw signed agreements for the sale of a portion of these assets and ceased
actively marketing the remaining assets, and restructured them as part of ongoing operations. As a result,
Loblaw recorded a charge of $4 million related to inventory impairment and a net reversal of $8 million of
previous asset impairments and other related restructuring charges in 2016.
In 2016, Weston Foods recorded restructuring and other charges of $17 million (2015 – $26 million) in SG&A, of
which $14 million (2015 – $11 million) related to accelerated depreciation. These charges primarily relate to
restructuring plans to close manufacturing facilities in Canada and the U.S. with production transferring to other
facilities.
136 George Weston Limited 2016 Annual Report
Note 37. Segment Information
The Company has two reportable operating segments: Weston Foods and Loblaw. The accounting policies of the
reportable operating segments are the same as those described in the Company’s summary of significant
accounting policies (see note 2). The Company measures each reportable operating segment’s performance
based on adjusted EBITDA(i) and adjusted operating income(i). Neither reportable operating segment is reliant on
any single external customer.
($ millions)
Revenue
Operating income
Net interest expense and other
financing charges
Earnings before income tax
Operating income
Depreciation and amortization
Adjusting items(iii)
Adjusted EBITDA(i)
Depreciation and amortization(iv)
Adjusted operating income(i)
$
$
$
$
$
$
Weston
Foods
Loblaw
Other and
Intersegment(ii)
2016
Total
2,268 $ 46,385 $
(654) $ 47,999
173 $
2,084 $
(2) $
2,255
102
653
(55)
700
71 $
1,431 $
53 $
1,555
173 $
2,084 $
(2) $
111
12
296 $
97
199 $
1,543
217
3,844
1,008
2,836
2
$
$
2,255
1,654
231
4,140
1,105
3,035
$
$
$
$
$
$
Weston
Foods
Loblaw
Other and
Intersegment(ii)
2015
Total
2,144 $ 45,394 $
(644) $ 46,894
177 $
1,593 $
159 $
1,929
77
644
(40)
681
100 $
949 $
199 $
1,248
177 $
1,593 $
159 $
94
14
285 $
83
202 $
1,592
356
3,541
1,056
2,485
(159)
$
$
1,929
1,686
211
3,826
1,139
2,687
(i) Excludes certain items and is used internally by management when analyzing segment underlying operating performance.
(ii) Other and intersegment includes the following items:
• intercompany revenue elimination;
• Trust Unit distributions from Choice Properties to GWL and the elimination of the fair value adjustment of the Trust Unit liability
related to GWL’s direct investment in Choice Properties recorded in net interest expense and other financing charges; and
• the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short term
investments held by foreign operations.
(iii) The impact of certain items excluded by management includes restructuring and other charges, fixed asset and other related
impairments, net of recoveries, at Loblaw, a charge related to pension annuities and buy-outs, certain charges related to the
acquisition of Shoppers Drug Mart, the fair value adjustment of derivatives, inventory losses incurred by Weston Foods, a prior year
tax assessment at Loblaw, a charge related to Loblaw apparel inventory, a gain (2015 – charge) related to drug retail ancillary assets
at Loblaw, modifications to certain franchise fee arrangements at Loblaw, a charge related to labour agreements at Loblaw, a charge
related to the change in inventory measurement and other conversion differences at Loblaw and charges related to retail locations in
Fort McMurray, net of recoveries at Loblaw.
(iv) Excludes $535 million (2015 – $536 million) of amortization of intangible assets acquired with Shoppers Drug Mart, recorded by
Loblaw, and $14 million (2015 – $11 million) of accelerated depreciation recorded by Weston Foods, included in restructuring and
other charges.
George Weston Limited 2016 Annual Report 137
Notes to the Consolidated Financial Statements
($ millions)
Total Assets
Weston Foods
Loblaw
Other(ii)
Intersegment
Consolidated
As at
Dec. 31, 2016
Dec. 31, 2015(i)
$
$
2,670
34,596
1,004
(324)
37,946
$
$
2,470
34,517
1,502
(269)
38,220
(i) Certain comparative figures have been restated (see note 2).
(ii) Other includes cash and cash equivalents and short term investments held by foreign operations that have the same functional
currency as that of the Company and GWL’s direct investment in Choice Properties.
($ millions)
Additions to Fixed Assets and Intangible Assets
Weston Foods
Loblaw
Consolidated
2016
241
1,224
1,465
$
$
2015
259
1,241
1,500
$
$
138 George Weston Limited 2016 Annual Report
The Company operates primarily in Canada and the United States.
($ millions)
Revenue (excluding intersegment)
Canada
United States
Consolidated
($ millions)
Fixed Assets and Goodwill and Intangible Assets
Canada
United States
Consolidated
(i) Certain comparative figures have been restated (see note 2).
2016
2015
$
$
46,762
1,237
47,999
$
$
45,777
1,117
46,894
As at
Dec. 31, 2016
Dec. 31, 2015(i)
$
$
23,952
821
24,773
$
$
24,130
768
24,898
George Weston Limited 2016 Annual Report 139
Three Year Summary
CONSOLIDATED INFORMATION(i)
As at or for the years ended December 31
($ millions except where otherwise indicated)
Operating Results
Sales
Operating income
Adjusted EBITDA(iii)
Depreciation and amortization(iv)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(iii)
Income taxes
Adjusted income taxes(iii)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the
Company
Adjusted net earnings available to common shareholders of
the Company(iii)
Financial Position
Fixed assets
Goodwill and intangible assets
Total assets
Cash and cash equivalents, short term investments
and security deposits
Total debt
Total equity attributable to shareholders of the Company
Total equity
Cash Flows
Cash flows from operating activities
Capital investments
Free cash flow(iii)
Per Common Share ($)
Diluted net earnings
Adjusted diluted net earnings(iii)
Financial Measures and Ratios
Adjusted EBITDA margin (%)
Adjusted return on average equity attributable to common
(iii)
shareholders of the company (%)
Adjusted return on capital (%)
(iii)
(iii)
2016
(52 weeks)
2015(ii)
(52 weeks)
2014(ii)
(53 weeks)
47,999
2,255
4,140
1,654
700
568
465
678
1,090
550
506
838
11,534
13,239
37,946
2,660
12,804
7,764
14,790
3,760
1,465
1,725
3.90
6.49
8.6
12.1%
12.1%
46,894
1,929
3,826
1,686
681
585
418
571
830
511
467
717
11,352
13,546
38,220
2,667
13,154
7,681
14,890
3,367
1,500
1,280
3.62
5.57
8.2
10.8%
10.6%
43,918
973
3,530
1,542
815
566
24
479
134
126
82
680
10,938
13,960
37,564
2,497
13,875
7,287
14,243
2,851
1,214
1,033
0.64
5.30
8.0
11.4%
12.3%
For financial definitions and ratios refer to the Glossary beginning on page 142.
(i)
(ii) Certain comparative figures have been restated (see note 2 to the consolidated financial statements).
(iii) See non-GAAP financial measures beginning on page 57.
(iv) Includes $535 million (2015 – $536 million; 2014 – $417 million) of amortization of intangible assets, acquired with Shoppers Drug
Mart, recorded by Loblaw and $14 million (2015 – $11 million; 2014 – nil) of accelerated depreciation recorded by Weston Foods,
related to restructuring and other charges.
140 George Weston Limited 2016 Annual Report
SEGMENT INFORMATION(i)
As at or for the years ended December 31
($ millions except where otherwise indicated)
OPERATING RESULTS
Revenue
Operating income
Adjusted EBITDA(iii)
Adjusted EBITDA Margin (%)
(iii)
Depreciation and Amortization(iv)
FINANCIAL POSITION
Fixed Assets
Total Assets
CASH FLOWS
Fixed Asset Purchases and Intangible
Asset Additions
Weston Foods
Loblaw
Intersegment
Consolidated
Weston Foods
Loblaw
Other
Consolidated
Weston Foods
Loblaw
Consolidated
Weston Foods
Loblaw
Consolidated
Weston Foods
Loblaw
Consolidated
Weston Foods
Loblaw
Consolidated
Weston Foods
Loblaw
Other(v)
Intersegment
Consolidated
Weston Foods
Loblaw
Consolidated
2016
(52 weeks)
2015(ii)
(52 weeks)
2014(ii)
(53 weeks)
2,268
46,385
(654)
47,999
173
2,084
(2)
2,255
296
3,844
4,140
13.1
8.3
8.6
111
1,543
1,654
975
10,559
11,534
2,670
34,596
1,004
(324)
37,946
241
1,224
1,465
2,144
45,394
(644)
46,894
177
1,593
159
1,929
285
3,541
3,826
13.3
7.8
8.2
94
1,592
1,686
872
10,480
11,352
2,470
34,517
1,502
(269)
38,220
259
1,241
1,500
1,923
42,611
(616)
43,918
231
654
88
973
311
3,219
3,530
16.2
7.6
8.0
70
1,472
1,542
642
10,296
10,938
2,105
34,337
1,350
(228)
37,564
128
1,086
1,214
For financial definitions and ratios refer to the Glossary beginning on page 142.
(i)
(ii) Certain comparative figures have been restated (see note 2 to the consolidated financial statements).
(iii) See non-GAAP financial measures beginning on page 57.
(iv) Includes $535 million (2015 – $536 million; 2014 – $417 million) of amortization of intangible assets, acquired with Shoppers Drug
Mart, recorded by Loblaw and $14 million (2015 – $11 million; 2014 – nil) of accelerated depreciation recorded by Weston Foods,
related to restructuring and other charges.
(v) Other includes cash and cash equivalents and short term investments held by foreign operations that have the same functional
currency as that of the Company and GWL’s direct investment in Choice Properties.
George Weston Limited 2016 Annual Report 141
Glossary
Term
Adjusted diluted net earnings per
common share
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted income taxes
Adjusted income tax rate
Adjusted net earnings attributable to
shareholders of the Company
Adjusted net earnings available to common
shareholders of the Company
Adjusted net interest expense and other
financing charges
Adjusted operating income
Adjusted return on average equity
attributable to common shareholders of
the Company
Adjusted return on capital
Basic net earnings per common share
Capital
Capital under management
Capital investment
Control brand
Conversion
142 George Weston Limited 2016 Annual Report
Definition
Adjusted net earnings available to common shareholders of the Company
including the effect of all dilutive instruments divided by the weighted
average number of common shares outstanding during the period
adjusted for the impact of dilutive items (see Section 18, “Non-GAAP
Financial Measures”, of the Company’s Management’s Discussion and
Analysis).
Adjusted operating income before depreciation and amortization (see
Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Adjusted EBITDA divided by sales (see Section 18, “Non-GAAP Financial
Measures”, of the Company’s Management’s Discussion and Analysis).
Income taxes adjusted for the tax impact of items included in adjusted
operating income less adjusted net interest and other financing charges
(see Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Adjusted income taxes divided by adjusted operating income less
adjusted net interest and other financing charges (see Section 18, “Non-
GAAP Financial Measures”, of the Company’s Management’s Discussion
and Analysis).
Net earnings attributable to shareholders of the Company adjusted for
items that are not necessarily reflective of the Company’s underlying
operating performance (see Section 18, “Non-GAAP Financial Measures”,
of the Company’s Management’s Discussion and Analysis).
Adjusted net earnings attributable to shareholders of the Company less
preferred dividends (see Section 18, “Non-GAAP Financial Measures”, of
the Company’s Management’s Discussion and Analysis).
Net interest expense and other financing charges adjusted for items that
are not necessarily reflective of the Company’s ongoing net financing
costs (see Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Operating income adjusted for items that are not necessarily reflective of
the Company’s underlying operating performance (see Section 18, “Non-
GAAP Financial Measures”, of the Company’s Management’s Discussion
and Analysis).
Adjusted net earnings available to common shareholders of the Company
divided by average total equity attributable to common shareholders of
the Company (see Section 18, “Non-GAAP Financial Measures”, of the
Company’s Management’s Discussion and Analysis).
Tax-effected adjusted operating income divided by average capital (see
Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Net earnings available to common shareholders of the Company divided
by the weighted average number of common shares outstanding during
the period.
Total debt, plus total equity attributable to shareholders of the Company,
less cash and cash equivalents, short term investments and amounts held
in escrow.
Total debt plus total equity attributable to shareholders of the Company.
Fixed asset purchases and intangible asset additions.
A brand and associated trademark that is owned by Loblaw for use in
connection with its own products and services.
A store that changes from one Loblaw banner to another Loblaw banner.
Term
Diluted net earnings per common share
Free cash flow
Major expansion/contraction
Minor expansion
Net earnings attributable to shareholders of
the Company
Net earnings available to common
shareholders of the Company
New store
Operating income
Renovation
Retail debt to adjusted EBITDA
Retail gross profit
Retail sales
Retail square footage
Rolling year adjusted return on capital
Rolling year adjusted return on average
equity attributable to common shareholders
of the Company
Same-store sales
Total equity attributable to common
shareholders of the Company
Total equity attributable to shareholders
of the Company
Weighted average common shares
outstanding
Year
Definition
Net earnings available to common shareholders of the Company adjusted
for the impact of dilutive items divided by the weighted average number
of common shares outstanding during the period adjusted for the impact
of dilutive items.
Cash flows from operating activities less interest paid, fixed asset
purchases and intangible asset additions (see Section 18, “Non-GAAP
Financial Measures”, of the Company’s Management’s Discussion and
Analysis).
Expansion/contraction of a store that results in an increase/decrease in
square footage that is greater than 25% of the square footage of the store
prior to the expansion/contraction.
Expansion of a store that results in an increase in square footage that is
less than or equal to 25% of the square footage of the store prior to the
expansion.
Net earnings less non-controlling interests.
Net earnings attributable to shareholders of the Company less preferred
dividends.
A newly constructed store, acquisition, conversion or major expansion.
Net earnings before net interest expense and other financing charges and
income taxes.
A capital investment in a store resulting in no significant change to the
store square footage.
Retail segment total debt divided by Retail segment adjusted EBITDA.
Loblaw retail sales less cost of merchandise inventories sold.
Combined sales of stores owned by Loblaw’s corporate stores, franchisees
and associate-owned drug stores.
Retail square footage includes Loblaw’s corporate stores, franchised
stores and associate-owned drug stores.
Tax-effected rolling year (most recent four quarters) adjusted operating
income divided by average capital (see Section 18, “Non-GAAP Financial
Measures”, of the Company’s Management’s Discussion and Analysis).
Rolling year (most recent four quarters) adjusted net earnings available to
common shareholders of the Company divided by average total equity
attributable to common shareholders of the Company (see Section 18,
“Non-GAAP Financial Measures”, of the Company’s Management’s
Discussion and Analysis).
Retail sales from the same location for stores in operation in that location
in both periods excluding sales from a store that has undergone a major
expansion/contraction in the period.
Total equity less preferred shares outstanding and non-controlling
interests.
Total equity less non-controlling interests.
The number of common shares outstanding determined by relating the
portion of time within the period the common shares were outstanding
to the total time in that period.
The Company’s year end is December 31. Activities are reported on a
fiscal year ending on the Saturday closest to December 31, usually
52 weeks in duration but includes a 53rd week every five to six years.
Each of the years ended December 31, 2016 and December 31, 2015
contained 52 weeks.
George Weston Limited 2016 Annual Report 143
Corporate Directory
Board of Directors
Galen G. Weston, B.A., M.B.A.
Chairman and Chief Executive Officer of the
Corporation; Chairman and Chief Executive
Officer, Loblaw Companies Limited; Chairman,
Choice Properties Real Estate Investment Trust;
Chairman, President’s Choice Bank; Director,
Wittington Investments, Limited.
Gordon M. Nixon, C.M., O.Ont.(1,2)
Corporate Director; Chair, BCE Inc. and Director,
BlackRock, Inc.; former President and Chief
Executive Officer, Royal Bank of Canada;
Advisory Board, KingSett Canadian Real Estate
Income Fund L.P.; Chairman, MaRS Discovery
District; Chair, Queen’s University Capital
Campaign; Trustee, Art Gallery of Ontario.
Alannah Weston(4)
Deputy Chairman, former Creative Director,
Selfridges Group Limited; Chair, Selfridges
Group Foundation; Board member, Blue Marine
Foundation and Reta Lila Howard Foundation;
Director, Wittington Investments, Limited.
Isabelle Marcoux, B.A., LL.B.(4*)
Chair, Board of Directors, Transcontinental Inc.;
Director, Rogers Communications Inc. and
Power Corporation of Canada; Director of the
Montreal Children’s Hospital Foundation; 2016
Co-Chair of Centraide of Greater Montreal’s
campaign.
Sarabjit (Sabi) S. Marwah(1,2)
Senator with the Senate of Canada; former
Vice-Chairman and Chief Operating Officer of
The Bank of Nova Scotia; Director, Cineplex Inc.
and TELUS Corporation; Trustee and Vice-Chair,
Hospital for Sick Children; Member of the Board
of Directors, Toronto International Film Festival.
J. Robert S. Prichard, O.C., O.Ont., LL.B.,
M.B.A., LL.M., LL.D.(2*,3)
Non-Executive Chair, Torys LLP; Chair, former
President and Chief Executive Officer,
Metrolinx; Chair, Bank of Montreal; Director,
Onex Corporation and Barrick Gold
Corporation; President Emeritus, University of
Toronto; Trustee, Hospital for Sick Children.
Thomas F. Rahilly, B.A., M.A., LL.B.(2,3*,4)
Corporate Director; Retired Vice-Chairman,
RBC Capital Markets.
Robert Sawyer(1)
Corporate Director; Director, Walter Group;
former Director and President and Chief
Executive Officer, RONA Inc.; former Chief
Operating Officer of Metro Inc.
Christi Strauss(1,4)
Corporate Director; former President and Chief
Executive Officer, Cereal Partners Worldwide, a
General Mills joint venture with Nestlé.
Barbara Stymiest(1*,2,3)
Corporate Director; Director, Blackberry Limited;
Director, SunLife Financial Inc.; Director,
President’s Choice Bank; former Member, Group
Executive, Royal Bank of Canada; former Chief
Executive Officer, TMX Group Inc., Chair,
Canadian Institute for Advanced Research;
Trustee, University Health Network; Chair,
Advisory Council for the Ivey Institute for
Leadership.
(1) Audit Committee
(2) Governance, Human Resource, Nominating
and Compensation Committee
(3) Pension Committee
(4) Environmental, Health and Safety Committee
* Chair of the Committee
Corporate Officers
W. Galen Weston, O.C.
Chairman Emeritus
Allan Bifield
Deputy Chief Financial Officer
Galen G. Weston
Chairman and Chief Executive Officer
Khush Dadyburjor
Chief Strategy Officer
Richard Dufresne
Executive Vice President,
Chief Financial Officer
Robert A. Balcom
Senior Vice President,
General Counsel and Secretary
Gordon A.M. Currie
Executive Vice President,
Chief Legal Officer
Geoffrey H. Wilson
Senior Vice President,
Investor Relations,
Business Intelligence and Communications
Rashid Wasti
Executive Vice President,
Chief Talent Officer
Chantalle Butler
Vice President,
Group Controller
Nadeem Mansour
Vice President,
Internal Audit Services
John Poos
Group Head,
Pension and Benefits
John Williams
Group Treasurer
Peter Effer
Group Head, Tax
Kerry Rathbone
Assistant Secretary
144 George Weston Limited 2016 Annual Report
Shareholder and Corporate Information
Executive Office
George Weston Limited
22 St. Clair Avenue East
Toronto, Canada M4T 2S7
Tel: 416.922.2500
Fax: 416.922.4395
www.weston.ca
Stock Exchange Listing and Symbols
The Company’s common and preferred shares are listed on the Toronto
Stock Exchange and trade under the symbols: “WN”, “WN.PR.A”,
“WN.PR.C”, “WN.PR.D” and “WN.PR.E”.
Common Shares
At year end 2016, there were 127,898,582 common shares issued and
outstanding.
The average 2016 daily trading volume of the Company’s common
shares was 111,910.
Preferred Shares
As at year end 2016, there were 9,400,000 preferred shares Series I,
8,000,000 preferred shares Series III, 8,000,000 preferred shares
Series IV and 8,000,000 preferred shares Series V issued and
outstanding.
The average 2016 daily trading volume of the Company’s preferred
shares was:
Series I:
Series III:
Series IV:
Series V:
6,952
5,683
5,963
5,772
Preferred Dividend Dates
The declaration and payment of quarterly preferred dividends are made
subject to approval by the Board of Directors. The record and payment
dates for 2017 are:
Series I
Record Date
Feb. 28
May 31
Aug. 31
Nov. 30
Payment Date
March 15
June 15
Sept. 15
Dec. 15
Series III, Series IV and Series V
Record Date
March 15
June 15
Sept. 15
Dec. 15
Payment Date
April 1
July 1
Oct. 1
Jan. 1
Common Dividend Policy
The declaration and payment of dividends on the Company’s common
shares and the amount thereof are at the discretion of the Board of
Directors which takes into account the Company’s financial results,
capital requirements, available cash flow, future prospects of the
Company’s business and other factors considered relevant from time to
time. Over time, it is the Company’s intention to increase the amount of
the dividend while retaining appropriate free cash flow to finance
future growth.
Common Dividend Dates
The declaration and payment of quarterly common dividends are made
subject to approval by the Board of Directors. The anticipated record
and payment dates for 2017 are:
Record Date
March 15
June 15
Sept. 15
Dec. 15
Payment Date
April 1
July 1
Oct. 1
Jan. 1
Printing: TC Transcontinental Printing www.tcprinting.tc
Normal Course Issuer Bid
The Company has a Normal Course Issuer Bid on the Toronto Stock
Exchange.
Value of Common Shares
For capital gains purposes, the valuation day (December 22, 1971) cost
base for the Company, adjusted for the 4 for 1 stock split (effective
May 27, 1986) and the 3 for 1 stock split (effective May 8, 1998), is
$1.50 per share. The value on February 22, 1994 was $13.17 per share.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
1.800.564.6253 (Canada and U.S.A.)
Toll Free Tel:
International Tel: 514.982.7555 (direct dial)
Fax:
Toll Free Fax:
416.263.9394
1.888.453.0330
To change your address or eliminate multiple mailings,
or for other shareholder account inquiries, please contact
Computershare Investor Services Inc.
Independent Auditors
KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
Annual Meeting
The George Weston Limited Annual Meeting of Shareholders
will be held on Tuesday, May 9, 2017, at 11:00 a.m. (EST) at
The Royal Conservatory, TELUS Centre for Performance and
Learning, Koerner Hall, 273 Bloor Street West, Toronto, Ontario,
Canada.
Trademarks
George Weston Limited, Loblaw Companies Limited and their respective
subsidiaries own a number of trademarks. These trademarks are the
exclusive property of George Weston Limited, Loblaw Companies
Limited and their respective subsidiary companies. Trademarks where
used in this report are in italics.
Investor Relations
Shareholders, security analysts and investment professionals should
direct their requests to Mr. Geoffrey H. Wilson, Senior Vice President,
Investor Relations, Business Intelligence and Communications, at the
Company’s Executive Office or by e-mail at investor@weston.ca.
Additional financial information has been filed electronically with the
Canadian securities regulatory authorities in Canada through the
System for Electronic Document Analysis and Retrieval (SEDAR). The
Company holds an analyst call shortly following the release of its
quarterly results. These calls are archived in the Investor Centre section
of the Company’s website.
This Annual Report includes selected information on Loblaw Companies
Limited, a public company with shares trading on the Toronto Stock
Exchange.
Ce rapport est disponible en français.
George Weston Limited 2016 Annual Report 145
This 2016 Annual Report was printed in Canada on
Enviro 100, which contains 100% post-consumer waste
and is processed chlorine-free, using biogas energy.
www.weston.ca