MAPLE
LEAF
FOODS
ANNUAL REPORT 2010
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2 Maple leaf foods Inc.
CONTENTS
1 At a glance
Financial highlights
2
3
Segmented operating results
4 Message from the chairman
5 Message to shareholders
15 Management’s discussion and analysis
54
Independent auditors’ report
55 Consolidated balance sheets
56 Consolidated statements of earnings
57 Consolidated statements of comprehensive income
57 Consolidated statements of retained earnings
58 Consolidated statements of cash flows
59 Notes to the consolidated financial statements
89 Corporate governance and board of directors
92
93 Corporate information
Senior management and officers
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Maple leaf foods Inc.
1
at a
Glance
Maple leaf foods is one of canada’s leading consumer
packaged food companies, specializing in fresh and
prepared meats, meals and bakery products. We have three
of the top 20 canadian retail brands as well as leading
market positions in north american frozen par-baked bread
and specialty bakery products in the united Kingdom.
Maple leaf foods operates three core businesses:
Our Meat Products Group comprises the
two leading Canadian brands in fresh
and prepared meats, Maple Leaf and
Schneiders, as well as Maple Leaf Prime
Naturally fresh, seasoned and prepared
chicken and a number of leading sub-
brands. Products include prepared meats
such as bacon, ham, sausages, and sliced
and deli meats including a new Natural
Selections sliced meats line, containing
no added preservatives and simple
ingredients. We also make ready-to-cook
and ready-to-serve meals, and value-
added fresh pork, poultry and turkey.
These products are marketed primarily
in Canada, the U.S., Mexico and Japan.
Our Bakery Products Group operates in
Canada, the United States and the United
Kingdom. The Canadian fresh bakery
business owns Dempster’s, the #1 national
brand of fresh bread, and produces
nutritious fresh bakery products such
as whole wheat, organic and multi-grain
breads, rolls and artisan breads. We also
own Olivieri Foods, which is the leading
brand of fresh pasta and sauce products.
The frozen bakery business is a major
North American producer and distributor
of frozen unbaked, par-baked and fully-
baked bread products for retail and
foodservice customers. Our U.K. business
is a leading producer of specialty
products, producing bagels, croissants,
and crusty and artisan breads.
Our Agribusiness Group provides raw
material and essential services to Maple
Leaf’s fresh and prepared meats facilities.
This includes raising hogs to provide
approximately 16% of the supply required
for our primary processing. Maple Leaf
is also Canada’s largest recycler of animal
by-products, converting waste into
value-added products such as feed
supplements and fertilizers and is a
significant producer of clean-burning
commercial biofuels.
Maple Leaf Foods has 21,000 employees
worldwide and operates approximately
85 plants across North America and the
United Kingdom.
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2 Maple leaf foods Inc.
financial highlights
for years ended december 31
(In millions of Canadian dollars, except share information)
CONSOLIDATED RESULTS
sales
adjusted operating earnings(i)
net earnings (loss) from continuing operations
net earnings, as reported(ii)
Return on assets employed(iii)
FINANCIAL pOSITION
net assets employed(iv)
shareholders’ equity
net borrowings
pER ShARE
net earnings (loss) from continuing operations
adjusted net earnings from continuing operations (i)
net earnings, as reported(ii)
dividends
Book value
NUmbER OF ShARES (mILLIONS)
Weighted average
outstanding at december 31
2010
2009
2008
2007
2006
4,968
222
26
26
6.8%
2,347
1,217
902
0.19
0.76
0.19
0.16
8.69
5,222
196
52
52
5.9%
2,416
1,189
1,016
0.40
0.57
0.40
0.16
8.69
5,243
5,210
5,325
128
(37)
(37)
3.4%
2,348
1,143
1,023
(0.29)
0.29
(0.29)
0.16
8.84
199
(23)
195
6.7%
173
(20)
5
5.6%
2,267
1,149
855
2,479
994
1,213
(0.18)
(0.16)
0.51
1.53
0.16
8.87
135.6
140.0
129.8
136.8
126.7
129.3
127.3
129.6
0.38
0.04
0.16
7.82
127.5
127.1
40.4%
Refer to non-GAAP measures on page 49 of Management’s Discussion & Analysis for definition.
(i)
(ii) Includes results of discontinued operations.
(iii) After tax, but before interest, calculated on average month-end net assets employed. Excludes one-time direct product recall costs, restructuring and
other related costs.
(iv) Total assets, less cash, future tax assets and non-interest bearing liabilities.
4%
32%
11.8%
14.1%
64%
74.1%
5.7%
9.2%
52.5%
32.6%
22.9%
42%
SALES
bY GROUp
64.0%
32.0%
4.0%
meat PRODUCtS
bakeRy PRODUCtS
aGRIbUSINeSS
DOmESTIC VS.
INTERNATIONAL SALES
TOTAL ASSETS
bY GROUp
ADjUSTED OpERATING
EARNINGS(i)
74.1%
14.1%
11.8%
DOmeStIC
U.S.
OtHeR
INteRNatIONal
52.5%
32.6%
9.2%
5.7%
meat PRODUCtS
bakeRy PRODUCtS
aGRIbUSINeSS
NON-allOCateD
40.4%
42.0%
22.9%
(5.3)%
meat PRODUCtS
bakeRy PRODUCtS
aGRIbUSINeSS
NON-allOCateD
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Maple leaf foods Inc.
3
segmented operating results
Protein Group
(In millions of Canadian dollars)
MEAT PRODUCTS GROUP
sales
earnings from operations before restructuring and other related costs
Total assets
AGRibUSinESS GROUP
sales
earnings from operations before restructuring and other related costs
Total assets
TOTAL PROTEin GROUP
sales
earnings from operations before restructuring and other related costs
Total assets
2010
2009
% change
3,181
90
1,573
199
51
277
3,381
141
1,850
3,310
55
1,653
206
48
287
3,516
103
1,940
(4)%
62%
(5)%
(3)%
6%
(4)%
(4)%
36%
(5)%
Operating Groups
Protein Group: The Meat Products Group comprises value-added prepared meats; chilled meal entrees and lunch kits; and value-added fresh pork, poultry and turkey
products. The Agribusiness Group includes hog production and animal by-products recycling.
Bakery Products Group
(In millions of Canadian dollars)
TOTAL bAkERy PRODUCTS GROUP
sales
earnings from operations before restructuring and other related costs
Total assets
2010
2009
% change
1,587
93
977
1,705
102
955
(7)%
(9)%
2%
The Bakery Products Group is comprised of Maple Leaf’s 90.0% ownership in Canada Bread Company, Limited (“Canada Bread”), a producer of fresh and frozen
value-added bakery products, and specialty pasta and sauces.
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4 Maple leaf foods Inc.
message
from
the chairman
Dear fellow shareholders:
In September 2010 the Board of
Directors of Maple Leaf Foods approved
a comprehensive plan that we believe
will create significant near- and longer-
term value. This plan is the culmination
of two years of thorough planning
and analysis. It builds on Maple Leaf’s
success over the past decade in
consolidating leading market positions
in the Canadian value-added meat and
bakery industries and is designed to
ensure we are competitive with a parity
Canadian dollar. In short, it defines the
Company’s long-term success and
maximizes sustainable return to
shareholders.
It’s still early days, but so far all signs
are positive. Management has delivered
seven consecutive quarters of improving
financial results since the tragic events
of 2008 and the plan’s early-stage
initiatives are well underway and
on track.
The Board will continue to monitor
Management’s execution against the
plan and will consider each major
capital investment on its merits and
according to the progress made against
our targets as we move through the plan.
Strong governance is an important
factor in ensuring the Company
delivers on its earnings targets and
commitments to shareholders. In 2010,
there were a number of substantive
changes to the composition of our
shareholder base and of our Board of
Directors. As a result, the Board initiated
a review of governance processes and
structure to ensure the Board reflects
these changes.
As part of this process, James Hankinson
and Claude Lamoureux of the Corporate
Governance Committee, met with many
of our large shareholders to hear their
views on our value creation plan and
governance process. In early January, we
retained a global search firm to identify
a strong candidate for independent
director to stand for nomination at the
2010 Annual General Meeting.
More recently, we also appointed
Gregory Boland, CEO of West Face
Capital, which currently holds an
11.4% ownership position in Maple Leaf,
to the Board of Directors. Mr. Boland’s
appointment helps ensure Maple Leaf
will continue to benefit from the
perspective and experience of a
significant shareholder.
This type of positive renewal has
been active and ongoing at the
Maple Leaf Board for the past several
years. Since 2007, we have recruited
three new independent directors –
including Geoffrey Beattie, John Bragg
and Claude Lamoureux – bringing
considerable new skills and perspectives
to the Board.
The directors also have direct access
and involvement with leaders in
the business, both through their
participation at Board meetings and
through an innovative program called
Board Connect, with each director
spending a day a year in one of the
Company’s businesses, where they
get direct insights into our Company
and engagement with our people.
This initiative has been recognized as
a pioneering effort to give directors
greater understanding of the business at
a deeper level, and unfettered access to
operating management and their teams.
I would like to thank our Board of
Directors, who in the past year have
demonstrated continued passion and
conviction to do what is right for Maple
Leaf Foods. Our Board faced its most
active year in 2010 in managing the
changes to the shareholder base and
in approving the strategy that sets the
course for the foreseeable future. As
a result, we entered 2011 with a clear
and united focus on the path to deliver
sustained value for shareholders.
The directors and officers of Maple
Leaf Foods hold approximately 2.4% of
the Company’s shares, not including
either McCain Capital Corporation’s
31.3% ownership stake or West Face
Capital’s 11.4%. Taken together,
approximately 45% of the Company’s
shares are held by members of the
Board and/or Management and their
affiliates. This is a significant ownership
stake that ties our interests to those
of our shareholders and solidifies our
commitment to realize the full earnings
potential of this Company.
Sincerely,
g. Wallace f . m ccain, c. c.
CHAIrMAn
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Maple leaf foods Inc.
5
MeSSage TO
SHaReHOLDeRS
Maple Leaf Foods reported increased margins and earnings in fiscal 2010, despite rapid
rises in costs of both grains and meat proteins. These results reflect the significant
positive momentum that is building in our Company.
To Our Fellow Shareholders:
We enter 2011 with one of the strongest
portfolios of food brands and products
in Canada, a clear and compelling
plan for future success, and seven
consecutive quarters of improving
results behind us. This plan will see us
significantly improve profitability and
competitiveness by eliminating costs
and investing in scale and technology.
It is achievable, measureable and
affordable. It includes cost reduction
initiatives that are well within our
control and ability to execute, and is
already showing results.
Our entire Management team is
committed to executing on this plan and
delivering on the promise of creating
value for Maple Leaf Foods and its
shareholders. Specifically, we expect
the plan to deliver 75% margin growth
by 2015.
Across our organization, we are
continuing to set global standards of
excellence in food safety. We have been
recognized as one of Canada’s leading
corporate cultures. We are investing
in product innovation and marketing
to grow market share and build on our
brand leadership. And we hold fast to
our Maple Leaf Leadership Values as the
touchstone for everything we do.
SUMMaRY FinanCiaL HigHLigHTS
2010
2009
sales
Return on net assets (Rona)
adjusted operating earnings(i)
adjusted net earnings per share from continuing operations(i)
operating cash flow from continuing operations
capital expenditures
debt to eBITda ratio
share price performance relative to s&p food Index
$5.0b
6.8%
$5.2b
5.9%
$222.0m
$0.76
$283.7m
$162m
2.5×
(16.4)%
$196.1m
$0.57
$89.2m
$163m
2.9×
(10.4)%
(i)
Refer to non-GAAP measures on page 49 of Management’s Discussion & Analysis for definition.
2010 FinanCiaL HigHLigHTS
Adjusted Earnings Per Share increased
33% in 2010 compared to 2009 due to
continued better performance in the
Meat Products Group. We benefited from
robust poultry and pork markets and
improved manufacturing efficiencies.
While margins increased in the
prepared meats business due to the
success of many initiatives to reduce
costs and increase net pricing, earnings
were affected by lower volumes as
consumers adjusted to higher price
levels. In the Bakery Products Group,
stronger results in the fresh bakery
business were more than offset by lower
earnings in the frozen and U.K. bakery
operations. A number of initiatives are
underway in both these businesses to
increase earnings and are expected to
contribute positively in 2011.
We completed several debt refinancings,
on competitive rates and terms,
including a US$355 million private
placement refinancing, a $170 million
committed three-year accounts
receivable securitization, and a Canadian
private debt financing for $90 million,
all of which increased the average
maturity of the Company’s debt to
4.2 years. Maple Leaf’s ability to finance
on favourable terms is a reflection of the
investment community’s confidence in
our business and Maple Leaf’s value
creation plan. With the existing
revolving credit facility maturing on
May 31, 2011, the Company is currently
negotiating a longer-term replacement
facility.
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6 Maple leaf foods Inc.
1.
ExECuting on
a ClEar and
ComprEhEnsivE plan
for CrEating valuE
The culmination of this
effort is a detailed strategic
blueprint for delivering
significant and sustainable
value to our shareholders,
now and over the next
five years, by significantly
reducing our cost structure.
We have built leading brands and market shares
through over 30 acquisitions in the past decade.
While the challenges of the past few years, most
notably the rise in the Canadian dollar, have
impeded our ability to realize the earnings potential
that comes with these competitive strengths, the
underlying value of the investments is enduring.
Adjusting our business model and our
performance to a new normal of parity
currency with the United States is a
journey – a challenging one; but an
exciting and rewarding one. Our Board
and Management have spent the past
two years evaluating a wide range of
strategic alternatives for maximizing
shareholder value and plotting the best
course forward for Maple Leaf Foods.
This process saw us visit over 20 leading
plants around the world; perform a
detailed, line-by-line assessment of
potential savings by individual product
category; engage over 60 internal
and external experts; conduct over
20 different reviews by our senior
Management team; and undertake six
separate Board reviews of our strategic
direction. We have done our homework!
The culmination of this effort is
a detailed strategic blueprint for
delivering significant and sustainable
value to our shareholders, now and
over the next five years, by significantly
reducing our cost structure. It is a plan
that was built from the bottom up and
evaluated in the context of our peers’
performance in the food industry, which
typically deliver EBITDA margins in the
10% to 15% range. It is a plan rooted in
specific cost reductions, not aspirational
growth targets. Our plan will see
Maple Leaf deliver margins of 9.5%
by 2012 and 12.5% margins by 2015,
compared to 7.3% in 2010, and returns
on assets well in excess of the
Company’s cost of capital.
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Maple leaf foods Inc.
7
TremendoUs
GroWTh in
shareholder
valUe
> 75% eBiTda margin increase – based
largely on cost take-out
Protein eBitDA
Benefits from growth/innovation
are incremental
BAkery eBitDA
totAl eBitDA
2010 actual
2012
2015
6.8%
9.2%
7.3%
8.5%
11.5%
9.5%
12.5%
12.5%
12.5%
The plan is clear and comprehensive
We will drive profitability and increase
our long-term competitiveness and
lower our cost structure by reducing the
complexity of our supply chains and by
investing in scale and technology.
Scale and technology investments
were neither necessary nor affordable
when the Canadian dollar was at $0.65
compared to the U.S. dollar. Today, they
are achievable and mandatory. This
requires fully integrating our current
manufacturing base of over 85 plants,
and consolidating production at fewer,
larger, dedicated plants.
Scale is essential to competing and
winning in the North American
food industry. We are seeing the
advantages flowing to our North
American competitors that have made
this investment. Through our analysis
and planning, we know precisely what
scale will mean for Maple Leaf – a 15% to
25% reduction in manufacturing costs
and a 60% improvement in productivity.
Aggregating our category volumes
into large, single, high-technology sites
using the latest in materials handling,
robotics and packaging will create real
and lasting change in the profitability
and competitiveness of our business.
While the magnitude of the task is
significant, the scope of initiatives is
not new to the Maple Leaf management
team. We have a deep and successful
track record of executing complex
initiatives, including those of similar
size and nature as planned in our five-
year blueprint. Of course, we are also
mindful of risks – mostly centred on
the demands of completing this work
all concurrently and in relatively short
time frames. This is where our well-
seasoned execution disciplines will
pay dividends.
We are making excellent progress –
ahead of schedule and under budget – on
the construction of our new “mega-scale”
bakery in southern Ontario. Once
completed in mid-2011, it will be the
largest and most efficient bakery of its
kind in North America. This new bakery
will reduce overhead costs, increase
productivity and advance our capacity
to support new product innovation.
The benefit of these capital investments
will be further enhanced by the work
already underway to simplify our
product lines and reduce complexity.
In our prepared meats business, we
have launched a major initiative to
substantially reduce the over 4,000
different types of prepared meat
We are making excellent
progress – ahead of schedule
and under budget – on the
construction of our new
“mega-scale” bakery in
southern Ontario.
Once completed in mid-2011,
it will be the largest and most
efficient bakery of its kind in
North America.
products in our system, a legacy of our
numerous acquisitions and a regional
supply chain network. In many cases
the differences are minor – a slight
difference in product size or packaging
specifications. In some cases there will
be a reduction in overlapping regional
brands. We began to realize early
benefits from this work late in 2010
and simplification across other major
categories will continue through 2011.
Making fewer, higher volume products
is also a prerequisite to ensuring we
gain cost efficiencies from scale plants.
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8 Maple leaf foods Inc.
INCREMENTAL
INVESTMENT
Five-year historical average
annual expenditures approximately
$185 million
Base
Strategic
5-year average
(2005–2009)
500
400
300
200
100
(In millions of Canadian dollars)
PrePAred meAtS network
SAP
PrePAred meAtS network
HAmilton BAkery
SAP
$355
$145
$175
SAP
HAmilton BAkery
$62
$100
$130
PrePAred meAtS
network
$195
$100
2010
2011
2012
2013
The plan targets a 75%
improvement in EBITDA
margins by 2015. More
specifically, we are
targeting margins of 9.5%
by 2012 and 12.5% by 2015.
The plan is measurable
The plan targets a 75% improvement
in EBITDA margins by 2015. More
specifically, we are targeting margins
of 9.5% by 2012 and 12.5% by 2015. This
includes taking margins in our business
from 7.3% in 2010 to 12.5% over the next
five years. The EBITDA metric is not our
primary measure of success; rather it is
our measure of comparative operating
performance. Ultimately this strategy
will deliver the return on net assets
shareholders require, well above our cost
of capital, to create value.
The plan is affordable
We are adhering to a very disciplined
approach. In the first two years of the
plan, we expect to achieve significant
cost savings through complexity
reduction and the early benefits of
near-term plant consolidations without
major capital investments. We have
committed to maintaining an
investment-grade credit rating through
the life of the plan, with a target of
3.0× debt to EBITDA or lower. At year-
end 2010 this ratio was 2.5×.
It’s also important to view the costs
and benefits of this plan against the
alternative. That’s because if we weren’t
investing in new scale and technology,
we would have to invest more money
in older plants to keep them running.
The result is an incremental new
spend of roughly $550 million from
2010 through 2013 to achieve a state-
of-the-art manufacturing network over
what it would cost just to maintain the
status quo.
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Maple leaf foods Inc.
9
2.
creAting vAlue
nOw And Over
the lOnger term
One of the most important characteristics of our journey
is its balance of near- and longer-term initiatives. Between
now and 2012, we will focus on reducing product and
manufacturing complexity, specific cost-saving initiatives,
optimizing our pricing, and continuing the successful
implementation of our new SAP system.
From 2012 to the end of 2013, we
will concentrate on the more capital
intensive phase of the plan including
building scale in our facilities and
investing in modern, cost-saving
technology, in addition to implementing
a shared services structure to reduce
overhead costs.
We are seeing positive results now. In
November, we completed the sale of
our pork processing facility in Ontario
and announced the closure of our
prepared meats facility in Nova Scotia.
Early in 2011 we announced the closure
of a small frozen bakery in Quebec, a
small bakery in the U.K. and a prepared
meats plant in British Columbia. These
closures allow us to aggregate volumes
at other plants and reduce costs. We
are on track to commission our new
Ontario bakery later this year, and begin
consolidating production from three
smaller facilities. We also completed
the sale of our fresh sandwich business,
which allows us to focus on growth in
our core bakery businesses.
We are making excellent progress on
the implementation of our new SAP
system that will integrate our operations
into one world-class systems platform.
We completed 37 installations by the
end of January 2011, including our
corporate functions, our frozen bakery,
the poultry business and the first in
fresh bakery. We have a very disciplined
approach to implementing SAP,
designed to minimize risk through
starting in our smaller operations and
the non customer-facing side of our
business first, allowing us to gain
experience and insights from ongoing
implementations. So far it’s been a
winning strategy. The entire conversion
is expected to be substantially complete
in 2013.
“ This is one of the
most aggressive and
successful enterprise-wide
implementations of SAP we
have seen for a company
of the size and complexity
of Maple Leaf Foods. The
implementation has been
planned and executed
with precision and careful
assessment and support of
business requirements.”
SAP
CJ22144 Front_E.indd 9
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10 Maple leaf foods Inc.
3.
DELIVERING
STRONG
AND IMPROVED
PERFORMANCE
BAKERY PRODUCTS GROUP
Over the past 15 years, we have
built Canada’s largest fresh bakery
business, the leading specialty bakery
business in the U.K., one of the largest
frozen bakery businesses in North
America, and a growing fresh pasta
and sauce business.
Today, our bakery business is an integral
part of our overall operations and has
enabled us to respond to growing
demand from Canadian food retailers
and foodservice providers for a broader
range of integrated product solutions.
2010 was a year of challenges in our
frozen and U.K. bakery operations that
impacted our overall performance. Our
frozen bakery operations provide frozen,
partially or fully-baked artisan and
premium breads and rolls to retail and
food service customers across North
America. Sales volumes and earnings
declined due to some transitory changes
by some key customers. Performance in
this business began to improve toward
the end of the year and we expect
improved results in 2011.
Our operations in the United Kingdom
produce premium specialty products,
and the deeper impact of the recession
Here is a summary of our financial performance in the Bakery Products Group:
TOTAL BAKERY PRODUCTS GROUP
(In millions of Canadian dollars)
2010
2009
2008
2007
2006
sales
adjusted operating earnings(i)
Total assets
$ 1,587.5 $ 1,705.1 $ 1,705.9 $ 1,510.6 $ 1,333.7
100.9
810.9
83.0
1,003.7
102.2
955.5
93.2
976.9
119.3
823.1
(i)
Refer to non-GAAP measures on page 49 of Management’s Discussion & Analysis for definition.
in the U.K. has challenged this business.
We are responding by lowering costs
through consolidating volumes,
manufacturing and SG&A cost
reductions. We are also increasing our
marketing through increased promotion
of the New York Bakery brand in
the U.K. to drive growth in the bagel
category. Through a relatively small
investment we have built this business
from a start-up to a market leader over
the past decade. Prior to the financial
recession of 2008, the business was very
profitable and it will be successful again.
For Maple Leaf in total, the U.K. bakery
is a footprint for future growth outside
North America, which is essential,
long term.
Our fresh bakery business, the largest
segment of the Bakery Products Group,
increased its earnings in 2010. This is an
excellent business and Canada’s leading
provider of nutritious, value-added
products under marquee brand names
including Dempster’s, POM and Ben’s.
The focus in this business is an identical
blueprint as our strategic plan for the
protein operations – realize efficiency
gains through simplification, build scale
in our bakery network, and increase
top-line performance through growth in
current and new categories. Last year we
launched a project to standardize the
sizes of pans used for baking breads
and rolls…again numerous acquisitions
had created a lot of variability, resulting
in complexity and added costs. By early
2012 we will reduce pan sizes from 33
today to 10, with 80% of our volume in
three sizes. The new bakery facility in
Ontario will significantly reduce overhead
costs and provide additional capacity
to support new product innovation.
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Maple leaf foods Inc.
11
PREPaREd MEaTs FacIlITIEs
sHIFTING VOlUME
INTO MORE
PROdUcTIVE PlaNTs
average Plant size:
2.2×
(millions of kgs/annum)
2.2×
+
lEVERaGING NEw
TEcHNOlOGy aNd
PROcEssEs
such as:
• high speed automated
lines
• improved food safety
technology
• superior support
functions via saP
=
IMPROVEd
PROdUcTIVITy aNd
HIGHER skIll lEVEl
Production per person:
1.6×
(kgs/person)
1.6×
EXISTING END-STATE
EXISTING END-STATE
PROTEIN GROUP
since 2005 our Protein Group has
withstood considerable adversity.
In our pork operations, we undertook
a major restructuring to consolidate
operations, improve efficiency,
reduce currency risk and increase our
competitiveness on a global level.
This was the first focus of effort in the
journey of adjusting to the new currency
environment because of the immediate
impact of the stronger currency on this
segment of our business. Our team has
done an excellent job and we are now
seeing increased earnings that flow
directly from the success of this initiative.
In our prepared meats business, where
restructuring efforts were put on hold
during the product recall in 2008, we
have a similar opportunity to
substantially increase earnings by
consolidating our operations and
investing in fewer large-scale, modern
plants. Scale and efficiency are some of
the biggest determinants of profitability
in the prepared meats business.
Here is a summary of our financial performance in our Protein Group:
TOTal PROTEIN GROUP
(In millions of Canadian dollars)
sales
adjusted operating earnings(i)
Total assets
2010
2009
2008
2007
2006
$ 3,380.6 $ 3,516.5 $ 3,536.7 $ 3,699.0 $ 3,991.6
71.9
2,254.0
103.5
1,940.4
87.5
1,863.2
140.5
1,849.9
59.6
1,976.7
(i)
Refer to non-GAAP measures on page 49 of Management’s Discussion & Analysis for definition.
In 2010, our Protein Group, which
includes both the Meat Products
Group and Agribusiness Group results,
delivered significantly higher earnings,
benefiting from strong performance in
our fresh pork and poultry operations.
In our prepared meats business, we
implemented price increases that
increased margins, but lower volumes
reduced earnings compared to the
prior year. Our Management team is
focused on improving results through a
combination of price increases to offset
raw material costs, manufacturing cost
reductions, and sales and marketing
strategies that strengthen category
management and build consumer
demand.
Our Agribusiness Group provides
essential services to our meat facilities,
including a supply of high-quality
hogs and recycling of by-products into
commercial agricultural and biodiesel
products. These operations benefited
from higher hog prices and reduced feed
costs in 2010.
CJ22144 Front_E.indd 11
11-03-08 9:15 PM
12 Maple leaf foods Inc.
4.
GROWING
THE TOP LINE
Great food companies need to stay in front of consumer
trends, innovate constantly, and drive market share growth
through ongoing investment in brands and marketing. These
activities are essential to maintaining our leading position in
the market and rewarding our shareholders longer term.
In 2010 we invested in growing the
Maple Leaf brand, launching a series
of advertisements that focused on our
commitment to quality and fresh, trusted
ingredients. In addition, we introduced
breakthrough new products like Maple
Leaf Natural Selections, which was
recently chosen by consumers as one of
Canada’s best new products of the year,
and Prime Chicken Strips that address
consumers’ increasing need for healthier,
more nutritious products that are simple
to prepare.
In fresh bakery we extended our
leadership in whole grain products and
extended our brand strength into new
segments like pitas, naans and rye
bread. In frozen bakery we introduced
big winners like cheese bagels. Under
the Olivieri brand we continued to
build our fresh pasta leadership with
new forms and flavours. In the U.K. we
successfully re-launched our New York
Bakery bagel brand with new improved
products, packaging and a highly
effective marketing campaign that drove
significant volume and margin growth
in this category.
We believe in the need to strongly
invest in consumer marketing and
new product innovation across our
businesses that is fuelled by deep
consumer insights. Done well, it will
further build consumer and customer
preference for our products and strong
and enduring consumer relationships
with each of our leading brands. Maple
Leaf Foods has three of Canada’s top
brands. Building on this well-earned
position with new products that taste
great, deliver good nutrition and value is
a pact we have with consumers,
customers and ultimately our
shareholders.
CJ22144 Front_E.indd 12
11-03-08 5:44 PM
Maple leaf foods Inc.
13
We also made good progress in 2010 in
reducing the environmental impact of
our operations. In Ontario, where most
of our plants are located, we achieved a
93% waste diversion rate. In the United
Kingdom, our operations achieved a
remarkable increase in landfill diversion
from 62% in 2009 to 93% in 2010.
We completed the full clean-up and
recycling of all our electronic wastes
in Ontario, sending more than 10 tonnes
of electronic wastes to an ISO 14001
certified recycler. We will expand
this initiative nationally in 2011. We
implemented additional heat recovery
at our three plants that consume the
most fuel. We are proud that our new
Hamilton bakery is being constructed
to LEED standards and our office
building in Mississauga was awarded
LEED Gold Certification, one of only a
few commercial buildings to achieve this
standard in Ontario.
Looking FoRWaRD
As always, we are grateful to our people
for their hard work and dedication, and
to the millions of consumers that put
their loyalty and faith in our products
every day. And we place enormous
importance on the relationships we have
and earn every day with our customers.
Our business must be cost competitive
if we are to deliver maximum value
to our shareholders. That is a strategic
imperative at Maple Leaf. We have a
clear and comprehensive plan in place
to realize this, a plan that is achievable,
affordable and already producing
improvements in our profitability
and competitiveness. We have the
foundation in our brands, market shares
and people to deliver strong return to
shareholders. We are implementing
the plan – with discipline and focus – to
deliver on this promise.
Sincerely,
Michael h. Mccain
PReSIdent And
chIeF executIve OFFIceR
Michael h. Vels
executIve vIce-PReSIdent
And chIeF FInAncIAL OFFIceR
RichaRd a . lan
chIeF OPeRAtInG OFFIceR
FOOd GROuP
J. scott Mccain
PReSIdent And
chIeF OPeRAtInG OFFIceR
AGRIbuSIneSS GROuP
Doing What’s Right
Keeping our people and food safe
is a fundamental part of our culture.
We made excellent progress last year
in implementing our new food safety
strategy, including:
• Further enhanced our plant sanitation
programs, including sanitation
effectiveness audits and weekly
sanitation talks
• Reduced Listeria risk in all our
ready-to-eat meat products through
reformulation with bacterial growth
inhibitors approved by Health Canada
in late 2008
• Attained “A” rating with certification
to Global Food Safety Initiative
standard at all 19 facilities audited;
with a goal to have all facilities
certified by the end of 2012
• Implemented training programs to
increase knowledge and responsibility
for food safety excellence across
Maple Leaf Foods
2010 marked our ninth consecutive
year of continuous improvement in
reportable injury frequency and an
overall improvement of 20% across all
Maple Leaf operations, an achievement
that is among the best in the industry.
We track and communicate our
workplace safety record monthly, and we
are proud that we have built a culture that
prioritizes the health and safety of our
people with continued excellent results.
Recognizing our responsibility as a
major food company to respond to
issues of food security and hunger, we
distributed thousands of pounds of meat
and bakery products to people in need
last year. We also invested to support
grassroots initiatives globally in
countries devastated by extreme
poverty, food shortages and resulting
health issues. Our annual Community
Day raised funds to support youth
leadership involved in community-based
food security projects. The passion of
our people for reaching out and using
their talents to achieve positive social
change is simply inspiring!
CJ22144 Front_E.indd 13
11-03-08 5:45 PM
FINANCIAL
REVIEW
2010
February 24, 2011
Management’s Discussion and Analysis (“MD&A”) provides
management’s perspective on the results of operations and
financial condition for Maple Leaf Foods Inc.
It should be read in conjunction with the audited annual financial
statements and notes presented in this report.
CJ22144 MDA_E.indd 14
11-03-10 2:10 PM
Maple leaf foods Inc.
15
management’s discussion and analysis
february 24, 2011
The Business
Maple leaf foods Inc. (“Maple leaf foods” or the “company”) is a leading canadian-based value-added meat, meals and
bakery company committed to delivering quality food products to consumers around the world. Headquartered in Toronto,
canada, the company employs approximately 21,000 people at its operations across canada and in the United states,
europe and asia.
OperaTing s egmenTs
The company’s results are organized into three segments: Meat products Group, agribusiness Group and Bakery products Group.
The Meat products Group includes value-added prepared meats, chilled meal entrees and lunch kits; and value-added fresh
pork, poultry and turkey products.
The agribusiness Group includes hog production and animal by-products recycling.
The combination of the company’s Meat products Group and agribusiness Group comprises the protein Group, which
reflects the results of producing and marketing animal protein-based products.
The Bakery products Group is comprised of Maple leaf’s 90.0% ownership in canada Bread company, limited (“canada
Bread”), a producer of fresh and frozen value-added bakery products, and specialty pasta and sauces.
Financial Overview
In 2010, adjusted operating earnings increased to $222.0 million from $196.1 million in 2009, and adjusted earnings per
share increased to $0.76 compared to $0.57 in the prior year. net earnings decreased to $25.8 million in 2010 from $52.1 million
in 2009. net earnings in 2010 included $81.1 million of costs related to restructuring activities (2009: $31.1 million) and a
charge of $24.9 million (2009: $nil) related to changes in fair value of interest rate swaps not designated in a formal hedging
relationship. Basic earnings per share decreased to $0.19 per share from $0.40 per share in the prior year. all amounts are
reported in canadian dollars except as otherwise specified.
Note: Adjusted Operating Earnings measures are defined as earnings from operations before restructuring and other related costs, other income and the impact
of the change in fair value of non-designated interest rate swaps. Adjusted Earnings per Share (“Adjusted EPS”) measures are defined as basic earnings per
share adjusted for the impact of restructuring and other related costs and the impact of the change in fair value of non-designated interest rate swaps, net of
tax and non-controlling interest. Please refer to the section entitled Non-GAAP Financial Measures starting on page 49 of this Management’s Discussion and
Analysis for description and reconciliation of all non-GAAP measures.
The company’s adjusted operating earnings increased in 2010 compared to 2009 due to improved performance in the Meat
products Group, primarily resulting from stronger markets and lower operating costs in the company’s poultry operations.
Meat products Group earnings also benefited from robust north american pork markets towards the end of the year that
generated strong results from the company’s scale pork processing facility in Brandon, Manitoba. Higher poultry and pork
results were partly offset by rapidly rising input costs and lower sales volumes that impacted results from the company’s
prepared meats business. In the Bakery products Group, lower sales volumes in the U.K. and north american frozen
businesses resulted in reduced earnings; however, lower commodity costs and a stronger canadian dollar partly offset the
impact of lower volume.
CJ22144 MDA_EP15.indd 15
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16 Maple leaf foods Inc.
management’s discussion and analysis
Selected Financial inFormation
The following table summarizes selected financial information for the three years ended december 31:
(millions of dollars except Earnings per Share (“EPS”) figures)
2010
2009
2008
sales
adjusted operating earnings (i)
eBITda(i)
eBITda %(i)
net earnings (loss)
adjusted earnings per share (eps)(i)
Basic eps
diluted eps
Total assets
net debt(i)
Return on net assets (Rona)(i)
cash provided by operating activities
cash dividends per share
$ 4,968.1
$
$
$
$
$
$
222.0
364.0
7.3%
25.8
0.76
0.19
0.19
$ 2,996.8
$
$
$
902
6.8%
283.7
0.16
$
$
$
$
$
$
$
$
$
$
$
5,221.6
$ 5,242.6
196.1
349.2
6.7%
52.1
0.57
0.40
0.39
3,057
1,016
5.9%
89.2
0.16
$
$
$
$
$
$
$
$
$
$
128.4
302.5
5.8%
(36.9)
0.29
(0.29)
(0.29)
3,452
1,023
3.4%
195.5
0.16
(i) Refer to the section entitled Non-GAAP Financial Measures starting on page 49 of this document.
diScuSSion oF FactorS impacting the company’S operationS and reSultS
Fluctuating input prices
changes in input prices across the food business were a significant driver of business performance for both the company and
the food industry in 2010. average prices of several key commodities used in the company’s products, including fresh pork,
hogs and crude oil, increased substantially. In order to maintain margins in its consumer packaged goods businesses,
Management increased the prices of the company’s products, focused on operational improvements and cost management
and in certain instances purchased commodities on a forward fixed price basis.
Increases in the fresh pork complex were significant as the average prices of bellies, hams and trims rose more than 50%
during 2010. These increases in fresh raw material costs placed pressure on margins in the prepared meats business, and
increased pricing was effected to mitigate the impact.
during 2010, the company’s fresh pork processing operations benefited from higher commodity prices and demand for
protein. as the price of live hogs did not increase at the same rate as fresh meat, primary pork processing margins were on
average higher than last year.
Hog producers in north america benefited from significantly higher market prices in 2010. However, the benefit of higher
market prices was partly offset by a stronger canadian dollar compared to the average rate of 2009, which reduced the value
of canadian hogs.
Wheat, dairy and fuel constitute significant input costs to the company’s bakery operations. Wheat prices remained flat in
the first six months of 2010 but increased by approximately 75% in the second half of the year. The impact of higher wheat costs
was managed through forward contracts that provided some protection against the increases. The stronger canadian dollar
in 2010 compared to 2009 somewhat reduced prices paid for U.s. dollar-denominated flour. dairy costs, butter in particular,
increased significantly in 2010 and required higher prices in the U.K. and canada to offset the effect of the higher costs.
CJ22144 MDA_E.indd 16
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Maple leaf foods Inc.
17
management’s discussion and analysis
The following table outlines the change in key commodity indicators that have impacted the company’s business and
financial results:
pork cutout (Usd per cwt)(ii)
composite primal values (Usd per cwt)(ii)
Belly
Ham
Trim
Market price per hog (cad per hog)(ii)
Market price per hog (Usd per hog)(ii)
poultry market price (Usd per kg)(iii)
poultry live cost (Usd per kg)(iii)
Wheat (Usd per bushel)(iv)
corn (Usd per bushel)(iv)
soybeans (Usd per bushel)(iv)
oil (Usd per barrel)(iv)
At December 31(i)
Annual Averages
2010
2010
77.78
$
81.10
$
93.94
65.79
70.08
130.76
130.44
3.30
1.41
8.82
6.29
13.94
91.38
$
$
$
$
$
$
$
$
$
$
$
106.38
73.00
77.94
140.36
136.27
3.32
1.39
6.23
4.27
12.87
79.48
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2009
58.04
76.61
46.28
42.61
119.58
104.42
3.28
1.45
6.06
3.76
10.20
61.95
change
39.7% $
50.7% $
57.7% $
82.9% $
17.4% $
30.5% $
1.3% $
(4.0)% $
2.8% $
13.6% $
26.2% $
28.3% $
2008
69.24
77.06
59.37
57.50
123.51
116.17
3.01
1.42
10.37
5.31
12.35
99.67
(i) Spot prices for the week ended January 1, 2011 based on CME (Ontario hogs) or WCB (Western Canada hogs) (Source: USDA)
(ii) Five-day average of CME or WCB (Source: USDA)
(iii) Market price (Source: Express Market Inc.) and Live Cost (Source: Chicken Farmers of Ontario)
(iv) Daily close prices (Sources: Bloomberg, CBOT, Minneapolis Wheat Exchange)
Impact of Currency
The canadian dollar strengthened 10.4% on average in 2010 compared to 2009. In general, a stronger canadian dollar
compresses margins in the company’s primary pork processing operations, and to a lesser extent in the rendering operations,
to the extent that revenues from export products are reduced. conversely, it decreases the cost of raw materials and ingredients
in the domestic branded and private label prepared meats and fresh bakery businesses. The branded packaged goods
businesses have an ability over time to react to changes in input costs through price management, cost reduction or
investment in value-added products. However, over the medium term, a stronger canadian dollar also reduces the relative
competitiveness of the domestic canadian packaged goods operation as imports of goods from the United states become
more competitive and impact the margins in the company’s domestic markets. The company is not able to mitigate these
impacts through price changes, and must seek to reduce its costs and improve productivity at least to the level of its
competitors in the United states.
fluctuations in fresh meat prices, and in particular higher fresh pork values, result in higher input costs for the company’s
prepared meats business. The extent of these increases in 2010 was partially offset by a stronger canadian dollar as it
decreased the cost of ingredients priced in U.s. dollars; but on an overall basis, the canadian packaged meats operations were
impacted by higher costs that had to be passed on to the market in higher prices.
The stronger canadian dollar in 2010 reduced earnings from the company’s primary pork processing export sales. With the
completion of the sale of the primary processing facility in Burlington, ontario, and the consequent reduction in the number
of hogs processed, the company’s ongoing exposure to currency-affected exports has been reduced, but not eliminated.
Hog production operations are exposed to the U.s. dollar, as the sales value of hogs is pegged to the U.s. dollar. a stronger
canadian dollar in 2010 decreased the selling price of canadian hogs compared to the prior year; however as almost all of the
company’s hogs are transferred to its pork operations in Brandon, Manitoba, this resulted in an offsetting reduction to the
price of hogs in Brandon.
CJ22144 MDA_E.indd 17
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18 Maple leaf foods Inc.
management’s discussion and analysis
The following table outlines the change in currency rates that have affected the company’s business and financial results:
U.s. dollar / canadian dollar
Japanese yen / canadian dollar
(i) Source: Bank of Canada daily closing rates
At December 31(i)
Annual Averages
2010
1.01
81.57
$
$
2010
0.97
85.24
$
$
2009
change
$
$
0.88
82.24
10.4% $
3.6% $
2008
0.94
97.96
Value Creation Plan
In the fall of 2010 the Board of directors approved a comprehensive plan aimed at building significant and sustainable
shareholder value both in the near and long-term. The plan includes specific and executable steps that have been developed
through a comprehensive assessment of the company’s operational strengths and competitive gaps.
Management has determined that a productivity gap exists between Maple leaf foods and larger, U.s. consumer packaged
goods companies. furthermore, the productivity gap is primarily due to the number of sub-scale plants within the prepared
meats network that lack the efficiency and improved technology that can be employed in larger facilities. Management has
concluded that there is significant opportunity to capitalize on the scale of the company in the domestic canadian market
place by producing its volume in a smaller number of larger facilities, allowing the company to earn margins consistent with
larger U.s. processors. These changes will also protect the company from a long-term erosion of competitiveness as compared
to U.s. competitors who may seek to enter the canadian market.
Executing a Clear Plan to Create Value
Management has a clear and comprehensive strategy to build significant and sustainable value by:
•
•
•
Significantly reducing costs and improving productivity and competitiveness by consolidating existing plants and
investing in new technologies
Funding capital requirements from operating cash flows, maintaining an investment-grade balance sheet and improving
the company’s leverage ratio
Executing against a manageable risk profile – the cost reduction opportunities result from investment in scale and
technologies that are widely used today in U.s. and european food companies.
The plan is segmented into near- and longer-term initiatives – both of which will contribute to the achievement of a more
competitive cost structure, significant margin expansion and higher levels of growth.
In the near term (2010–2012), the Company is:
• Implementing price increases and normalizing promotional spending
• Taking significant costs out of the supply chain by reducing the number of product formulations and sizes
• Executing disciplined category management that leverages the Company’s deep customer relationships
• Consolidating legacy information systems into one integrated SAP platform.
CJ22144 MDA_E.indd 18
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Maple leaf foods Inc.
19
management’s discussion and analysis
over the longer-term (2012–2015), the company plans to:
•
Invest in scale and technology to establish a low cost competitive plant network and close the gap to U.S. peers in the
consumer packaged goods sector
• Realize the benefits of scale from a new fresh bakery facility in Hamilton, Ontario, which will be commissioned in July 2011
• Construct a world-class prepared meats facility, commencing in 2012
•
Fully realize the benefits of SAP, by reducing selling, general and administrative costs, and providing better business
insight and increased efficiencies
• Accelerate growth through product innovation and brand leadership.
Substantial Productivity Improvements Expected
The plan is expected to drive substantial improvements in productivity as volume will be moved into more efficient plants
and new technologies and processes will be leveraged. Management intends to invest in technologies that increase
throughput, automate processes that are currently manual, convert batch processes into continuous flows and decrease
movement and handling of product, energy use and water consumption. As production is consolidated, the Company’s
average plant will more than double in size.
Driving Growth through Innovation
Along with cost reduction, the Company is also increasing its focus on innovation and sales growth. Innovation and
marketing will target higher growth consumer trends such as health and wellness, convenience and changing demographics.
For example, Natural Selections deli meats was launched in early 2010 and represented the first national brand to deliver all
natural sliced meats. Since it was launched, Natural Selections has grown the Company’s market share in deli meats by more
than 35%, and all products rank in the top 5% of the category. Management will build on this success in other prepared meat
categories. Management is equally committed to driving ongoing top-line and bottom-line growth through both cost
reduction and product innovation.
Disciplined Approach to Investment
The strategic capital expenditures required to deliver the plan are expected to occur from 2010 through 2013. The pace of the
program and ongoing investments are being balanced with margin improvement. The plan involves several initiatives, many
overlapping, yielding benefits in the near and longer term. Management has developed significant expertise in sequencing
plant expansions and start-ups, most recently the double-shifting of the Brandon pork processing facility and the expansion
of the Winnipeg ham processing plant. Management has planned this capital program such that certain portions may be
accelerated to take advantage of opportunities or divided into smaller segments to reduce complexity and risk. Management
intends to fund the investments in this plan from internal cash flow and existing debt capacity without issuing equity, and is
committed to maintaining an investment-grade balance sheet.
Several significant, strategic capital projects have been identified as part of this plan. The remainder of the base capital
includes profit enhancing investment as well as maintenance capital. The most significant elements of strategic capital in the
plan include:
•
•
•
$62 million spent in 2010, primarily to support the new fresh bakery construction, SAP implementation and network
improvements in prepared meats. This figure is approximately $18 million less than previously estimated for 2010 mostly
due to timing of investment in the new fresh bakery. Management anticipates that the majority of these deferred
expenditures will occur in 2011.
Approximately $145 million planned for 2011 will complete the new bakery, support SAP implementation and several near-term
efficiency improvements in both prepared meats and bakery.
Approximately $355 million is expected to be invested in 2012, a large component of which supports construction of a new
scale prepared meats plant, as well as capacity and efficiency improvements. The SAP-related expenditures in 2012 are
expected to be significantly smaller as the program nears completion.
• Approximately $195 million in 2013 relates primarily to the construction of the prepared meats plant.
CJ22144 MDA_E.indd 19
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20 Maple leaf foods Inc.
management’s discussion and analysis
The company’s base capital expenditures are expected to range from $100 million to $175 million through this period, but
may vary significantly depending on the pace of strategic capital expenditures. specific capital investments and returns
continue to be analyzed and remain subject to confirmation of engineering configurations and return on investment.
Management is committed to continuously seeking opportunities to reduce capital and increase returns. The following table
summarizes actual and estimated base and strategic capital for 2010 to 2013 as described above:
($ millions)
Base
strategic
Total
2010 actual
2011
2012
2013
$
$
$
100
62
162
$
$
$
175
145
320
$
$
$
130
355
485
$
$
$
100
195
295
Key Financial Milestones
Management has estimated that the company will earn a consolidated eBITda margin of 9.5% in 2012 and 12.5% in 2015,
following completion of the components of the strategic plan. as a result of these improvements, the company’s return on
net assets (“Rona”) is expected to be in excess of 11.5% by 2015.
following are eBITda margin targets that the company has set for its operating groups for each of 2012 and 2015.
protein Group
Bakery products Group
Total
2010 actual
2012
2015
6.8%
9.2%
7.3%
8.5%
11.5%
9.5%
12.5%
12.5%
12.5%
Value Creation Plan – 2010 Progress
The company made progress in a number of areas of its value creation plan in 2010 including:
•
•
•
•
•
Construction of a scale bakery facility in Hamilton, Ontario commenced in August 2010, and by the end of 2010 the building
was mostly enclosed and equipment installation had begun. The project is on target to begin production of bakery products
in July 2011, and Management expects to have completed the transfer of production from and closure of one of its three
bakeries by the end of 2011, with the remaining products transitioning from the two other bakeries through 2012, with
completion in 2013.
Prices were increased across the prepared meats and bakery businesses to protect margins, with substantially all 2010 cost
increases covered by increases in prices by the end of the year.
The closure of the prepared meats facilities in Berwick, Nova Scotia and in Surrey, British Columbia were announced in
november 2010 and february 2011, with planned closures at the end of april 2011 and september 2011, respectively. These
closures represent initial milestones in the transformation of the company’s prepared meats manufacturing network as
they reduce production in small, sub-scale facilities.
A croissant production line was transferred to consolidate production in an existing low cost facility in Maidstone, U.K.,
and the Company plans to close a bakery facility in Cumbria, U.K. in the first quarter of 2011. In early 2011 the Company
also announced plans to close a sub-scale frozen bakery facility in laval, Quebec and transfer production to other bakeries
where there is available capacity.
Early benefits from product and formulation simplification in the prepared meats business were realized. Management’s
aim is to reduce complexity and costs by standardizing product formulations, sizes and specifications as well as
rationalizing low volume products. These efforts to simplify production are a critical step in the company’s network
optimization plans as they will allow the company to achieve the full benefits from a scale facility.
CJ22144 MDA_E.indd 20
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Maple leaf foods Inc. 21
management’s discussion and analysis
The company also completed the sale of the Burlington pork processing facility in november 2010. This sale of this facility
represents the final major milestone in the transformation of the company’s primary pork processing operations.
Systems Conversion
In January 2009, the company began an initiative to consolidate all of its information technology systems onto a single
platform, in order to standardize processes, reduce costs and enable a shared services platform. Management selected sap
software as its new platform and has since taken a rapid, yet carefully designed, approach to implementation. since the first
installation in March 2009, the company has completed 37 sap installations with two business units fully deployed by the
end of 2010. successful execution has been enabled by changing existing businesses to standardized sap processes,
significant limitation of any software modifications, and rigorous master data controls. although Management is satisfied
with progress to date and the performance of the installed programs, the entire program will take longer than initially
forecasted, and now expects that the sap installation should be substantially completed in 2013, as opposed to the original
estimate of the first quarter of 2012. This estimate continues to presume an aggressive pace of implementations, and may
change depending on actual expense and risk profiles of individual implementations.
The following table summarizes the implementation schedule of the entire project:
2009
2010
2011
2012
2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
corporate office
U.s. frozen Bakery
fresh Bakery
Meat products Group
agribusiness Group
U.K. frozen Bakery Group
OPERATING REVIEW
The following table summarizes sales by business segment for the three years ended december 31:
sales ($ millions)
Meat products Group
agribusiness Group
Protein Group
Bakery Products Group
Total sales
2010
2009
change
2008
$
3,181.1
$
3,310.4
(3.9)% $
3,303.7
199.5
206.1
(3.2)%
233.0
$ 3,380.6
$
3,516.5
(3.9)% $
3,536.7
1,587.5
1,705.1
(6.9)%
1,705.9
$ 4,968.1
$
5,221.6
(4.9)% $
5,242.6
CJ22144 MDA_E.indd 21
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22 Maple leaf foods Inc.
management’s discussion and analysis
The following table summarizes adjusted operating earnings by business segment for the three years ended december 31:
($ millions)
Meat products Group
agribusiness Group
Protein Group
Bakery Products Group
non-allocated costs(i)
$
$
2010
89.7
$
50.8
140.5
$
93.2
(11.7)
2009
55.4
48.0
103.4
102.2
(9.5)
adjusted operating earnings
$
222.0
$
196.1
change
2008
61.9% $
5.9%
35.9% $
(8.8)%
23.2%
13.2% $
29.5
30.1
59.6
83.0
(14.2)
128.4
(i)
Non-allocated costs comprise costs related to systems conversion and certain consulting fees. Management believes that not allocating these costs provides
a more comparable assessment of segmented operating results.
Meat Products Group
Includes value-added prepared meats, chilled meal entrees and lunch kits; and fresh pork, poultry and turkey products sold to
retail, foodservice, industrial and convenience channels. Includes leading Canadian brands such as Maple Leaf ®, Schneiders®
and many leading sub-brands.
Meat products Group sales decreased 3.9% to $3,181.1 million in 2010 from $3,310.4 million in the prior year. The most
significant effects on sales from the prior year were the sale of the company’s Burlington, ontario primary pork processing
operation in november 2010 and the exit of a non-core business line in 2009, which combined to reduce sales by 3.1%. 2010
sales related to the Burlington facility were approximately $270.0 million. excluding these exited businesses and an extra
week in the fourth quarter of 2009, sales of the underlying business increased by 1.0%. Improved pricing, due to higher
market prices in fresh pork, increased net pricing in prepared meats, and improved sales mix combined to increase sales
by approximately 6.4%, partly offset by volume declines that reduced sales by approximately 4.0%. The balance of the
decrease in sales was due to the impact of a stronger canadian dollar on fresh pork prices.
adjusted operating earnings in the Meat products Group for the year increased 61.9% to $89.7 million in 2010 compared to
$55.4 million last year due to strong performance in primary poultry and pork processing operations and higher margins in
prepared meats, partly offset by lower volumes. Higher earnings in the company’s fresh poultry operations were driven by
improved market conditions and lower costs due to productivity improvements. In 2010, reduced prepared meats earnings
resulting from rising raw materials and lower volumes were partly offset by the mitigating impact of improved processing
margins in primary pork processing. The results of the company’s pork operations improved due to higher meat values, but
were partly offset by higher hog prices and weaker export margins.
prepared meats earnings declined due to significant increases in raw material meat costs and timing lags in passing these
cost increases on through increased pricing. Volumes were impacted in the short-term as consumers continued to adjust to
new price points. However, improved net pricing, favourable foreign exchange impacts on purchases, cost containment
initiatives and lower plant costs all contributed to offset raw material impacts and increase margins.
CJ22144 MDA_E.indd 22
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Maple leaf foods Inc. 23
management’s discussion and analysis
Agribusiness Group
Consists of Canadian hog production and animal by-product recycling operations.
sales in the agribusiness Group decreased 3.2% to $199.5 million in 2010 from $206.1 million last year. lower volumes,
predominantly in core rendering, and the impact of an extra week in the fourth quarter of 2009 more than offset higher
sales values.
adjusted operating earnings in 2010 for the agribusiness Group increased by 5.9% to $50.8 million from $48.0 million last
year, driven by stronger performance in hog production that was only partly offset by lower results in by-product recycling.
Hog production results increased compared to last year due to significantly higher north american hog prices and lower feed
costs, combined with favourable forward purchases of feed grains. These improvements were partly offset by the unfavourable
impact of a stronger canadian dollar on the sales value of hogs, lower gains on hedging activity and lower government
support compared to the prior year. 2010 earnings included $2.7 million of government support to compensate hog producers
for losses in prior years compared to $9.2 million in 2009. The company raised 815,000 hogs in 2010, compared to 897,000
hogs in 2009.
Results in by-products recycling were lower than last year due to higher raw material costs and lower volumes in core
rendering, the impact of a stronger canadian dollar on prices and reduced eco-energy credits received from the canadian
government. Improved biodiesel pricing and operational efficiencies partly offset these results.
Bakery Products Group
Includes fresh and frozen bakery products, including breads, rolls, bagels, specialty and artisan breads, sweet goods, prepared
sandwiches, and fresh pasta and sauces sold to retail, foodservice and convenience channels. It includes national brands such
as Dempster’s®, Tenderflake®, Olivieri® and New York Bakery Co®, and many leading regional brands.
sales in the Bakery products Group decreased 6.9% to $1,587.5 million in 2010, compared to $1,705.1 million in the prior year.
excluding the impacts of an extra week in the fourth quarter of 2009 and currency translation on U.K. and U.s. sales from a
stronger canadian dollar, sales decreased 2.7%, predominantly as a result of lower volumes in the U.K. and U.s. operations.
In the U.K., sales volumes continued to be impacted by lower demand for specialty bakery products and reduced promotional
activity. In the first quarter of 2011, a significant promotion of the company’s bagel brand in the U.K. was launched to
strengthen growth in the bagel category. In north america, lower frozen bakery sales volumes resulted from changes
implemented by certain retail customers earlier in 2010. some progress was made in the fourth quarter of 2010 in securing
new business and strengthening volumes.
adjusted operating earnings in the Bakery products Group decreased to $93.2 million compared to $102.2 million in the prior
year. Reduced earnings were primarily due to lower sales volumes. partially offsetting the impact of the volume decline was
margin expansion, driven by lower commodity costs and the favourable impacts of a stronger canadian dollar on U.s.
dollar-based wheat and ingredient purchases. Increased distribution costs and labour inflation mitigated growth in margins.
Benefits from pricing activity were offset by increased promotional investment to protect market shares in a competitive
canadian retail environment.
Management continues to focus on reducing costs and consolidating volumes into fewer bakeries. In 2010, a croissant
production line was transferred to an existing low cost scale facility in Maidstone, U.K., a move that consolidates the majority
of croissant production into one site and reduces manufacturing costs. The company also announced in early 2011 it will
close a sub-scale plant in laval, Quebec and transfer production to its other bakeries where there is available capacity and
divest a small bakery facility in cumbria, U.K.
on february 18, 2011, the company announced that it had completed the sale of its fresh sandwich business for $8.0 million,
subject to post-closing adjustments.
CJ22144 MDA_E.indd 23
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24 Maple leaf foods Inc.
management’s discussion and analysis
Non-allocated Costs
non-allocated costs were $11.7 million in 2010 compared to $9.5 million last year. 2010 costs were comprised of fees related to
research and benchmarking studies that formed the basis of the company’s value creation plan, consulting fees related to the
implementation of sap and legal and consulting fees relating to the company’s board renewal program and the change in its
shareholder base. Management believes that not allocating these costs provides a more comparable assessment of the
company’s operating results.
GROSS MARGIN
overall, gross margin increased to $739.2 million from $734.2 million in the prior year primarily driven by improvement in the
Meat products and agribusiness segments. as a percentage of sales, gross margin increased to 14.9% from 14.1% in 2009.
Improved gross margin in the protein Group reflected strong results in primary poultry and pork operations and hog
production. lower sales volumes, increased distribution costs and labour inflation reduced total gross margin in the Bakery
products Group; however, the combination of lower prices for commodities and the impact of a stronger canadian dollar
partly offset these impacts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
selling, general and administrative expenses decreased by 3.9% to $517.2 million in 2010 from $538.1 million in the prior year.
as a percentage of sales, 2010 and 2009 were largely consistent, at 10.4% and 10.3%, respectively. The decrease in total
expenses was driven by administrative cost control and lower pension expenses. partly offsetting these lower costs were
higher expenses in the Bakery products Group in 2010, driven by increased advertising and promotional spending to support
brands and product innovation including the launch of a significant promotional campaign in fresh bakery with hockey
player sidney crosby as the brand ambassador of dempster’s® to promote the benefits of breads, healthy eating and good
nutrition, and the launch of dempster’s® rye bread line in ontario.
OTHER INCOME
other income for 2010 was $0.2 million. other income in the prior year was $3.6 million, mostly related to insurance proceeds
received for business interruption losses in the U.K. bakery operations.
RESTRUCTURING AND OTHER RELATED COSTS
details of restructuring and other related costs for the years ended december 2010 are as follows:
($ millions)
Impairment / sale of Burlington facility
protein Group restructuring
Impairment / disposal of hog genetic business
Impairment / disposal of ontario & alberta hog production assets
and impairment of long-lived hog production assets
Retention payments
Bakery products Group restructuring and plant closures
systems conversion
Total restructuring and other related costs
cash incurred and to be incurred
non-cash
2010
35.7
28.3
–
–
–
15.5
1.7
81.1
34.7
46.4
81.1
$
$
$
$
2009
–
22.3
–
2.1
–
4.3
2.4
31.1
26.5
4.6
31.1
$
$
$
$
2008
–
25.1
5.0
6.8
2.7
10.5
15.2
65.3
20.1
45.2
65.3
$
$
$
$
CJ22144 MDA_E.indd 24
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Maple leaf foods Inc. 25
management’s discussion and analysis
during 2010, the company recorded restructuring and other related costs of $81.1 million ($61.2 million after-tax). of this,
$32.9 million was an asset impairment charge related to the company’s Burlington facility and $2.8 million of severance and
other cash costs related to the sale of the facility. $28.3 million was recorded for restructuring charges in the Meat products
Group, including severance and asset write-downs related to the closure of the Berwick facility in nova scotia and costs
related to the optimization of the prepared meats manufacturing network. The company’s bakery business incurred
$15.5 million in restructuring costs, which included $10.4 million in asset write-downs, severance and retention costs related
to plans to replace three current bakeries in the Toronto area with one facility in Hamilton. The balance of the restructuring
costs was ongoing costs incurred in connection with previously announced restructuring initiatives of the company.
during 2009, the company recorded restructuring and other related costs of $31.1 million ($22.8 million after-tax). of these
costs, $22.1 million related to severance and lease termination costs in the company’s further processed protein operations.
The company’s bakery business announced the consolidation of its pasta and sandwich operations and recorded $3.5 million
which included severances and a write-down of $1.2 million related to the discontinuance of the Martel brand name. The
balance of the restructuring costs was ongoing costs incurred in connection with previously announced restructuring initiatives
of the company.
during 2010, the company announced a value creation plan that includes rationalization of its supply chains and manufacturing
facilities in the protein and Bakery packaged goods businesses. These plans will result in facility closures and related severance,
asset write-down and decommissioning charges. Management estimated that total cash restructuring costs associated with the
plan will approximate $100.0 million. Management anticipates there will also be non-cash restructuring charges associated with
this rationalization which have not been quantified at this stage.
CHANGE IN FAIR VALUE OF NON-DESIGNATED INTEREST RATE SWAPS
during the year, the company recorded a loss of $24.9 million ($18.2 million after-tax) due to the change in the fair value of
non-designated interest rate swaps. In the second quarter of 2010, the company entered into $590.0 million of interest rate
swaps. swaps totalling $330.0 million started on april 28, 2010 and have an expiry date of april 28, 2015 with an average
interest rate of 3.34%. swaps totalling $260.0 million will start on december 8, 2011 and have an expiry date of december 8,
2015 with an average interest rate of 4.18%. These swaps effectively fix the interest rates for five years at an average rate of
3.71% on $590.0 million of the company’s outstanding debt. The structure of the company’s outstanding debt does not allow
for these swaps to be accounted for using hedge accounting, therefore the swaps cannot be designated in a formal hedging
relationship for accounting purposes. accordingly, the company is required to mark these swaps to market at each
accounting period end, and such mark-to-market gains or losses flow through net earnings. These short-term non-cash
earnings impacts do not reflect the economic effect of the swaps, which is to fix interest rates over the next five years.
Management expects that future earnings will be impacted by these adjustments until the expiry of the swaps, or until they
can be designated in a hedging relationship at a future time.
The effect on the fair value of the interest rate swaps of a parallel shift in the yield curve is as follows:
($ thousands)
change in fair value
50 bps Increase
$
11,414
50 bps decrease
$
(11,693)
subsequent to year-end, the company entered into swaps to offset $330.0 million of existing interest rate swaps with an
expiry date of april 28, 2015. The offsetting interest rate swaps were executed as new fixed rate private placement debt,
finalized in the fourth quarter, reduced the company’s expected floating rate debt requirements by $355.0 million dollars.
Under the offsetting interest rate swaps, the company receives an average fixed rate of 2.52% and pays a floating rate of
interest on a notional amount of $330.0 million. These offsetting interest rate swaps effectively neutralize the mark-to-market
income volatility on the notional amount of $330.0 million created by the existing interest rate swaps. details of the fixed
rate private placement debt are provided in note 10 of the consolidated financial statements.
CJ22144 MDA_E.indd 25
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26 Maple leaf foods Inc.
management’s discussion and analysis
The effect on the fair value of the interest rate swaps of a parallel shift in the yield curve which includes the impact of the
$330.0 million swaps entered subsequent to year-end is as follows:
($ thousands)
change in fair value
INTEREST EXPENSE
50 bps Increase
$
4,829
50 bps decrease
$
(5,070)
Interest expense for the year decreased to $66.4 million compared to $81.2 million last year due to lower short-term interest
rates and lower average debt balances throughout the year. The company’s average borrowing rate for 2010 was 4.8%
(2009: 5.1%). as at december 31, 2010, 89.0% of indebtedness was fixed and not exposed to interest fluctuations (2009: 57.0%).
INCOME TAXES
Income tax expense decreased to $17.8 million from $27.3 million in 2009 and the company’s effective tax rate increased from
31.3% in 2009 to 35.7% in 2010.
a reconciliation between statutory tax rates and the company’s effective tax rate is provided in note 20 of the consolidated
financial statements. following is a discussion of certain reconciling amounts:
•
•
•
During the year, the Company recorded restructuring and other related costs of $81.1 million (2009: $31.1 million) that had a
tax effect of $19.9 million (2009: $8.3 million), at an effective tax rate of 24.6%. The lower tax rate was primarily driven by
lower tax rates applied to deductions expected to be claimed in future years.
During the third quarter of 2006, the Company recorded a tax expense of $21.2 million to write down future tax assets
related to its U.s. frozen bakery business. The total valuation allowance recorded on the losses related to the U.s. frozen
bakery business is $22.5 million as of the end of 2010.
During the year, the Company recorded an income tax reduction of $1.5 million relating to a prior acquisition in its fresh
bakery business.
The company’s income tax rate varies and could increase or decrease based on the amounts of taxable income derived and
from which source, any amendments to tax laws and income tax rates, and changes in assumptions and estimates used for tax
assets or liabilities.
PENSION EXPENSE
pension expense for the year was $15.8 million compared to $17.8 million in 2009. components of pension expense are
provided in note 21 of the consolidated financial statements.
The company operates both defined contribution and defined benefit plans. The assets of the defined benefit plans are
invested primarily in foreign and domestic fixed income and equity securities that are subject to fluctuations in market prices.
discount rates used to measure plan liabilities are based on long-term market interest rates. fluctuations in these market
prices and rates can impact pension expense and funding requirements. In 2010, the company’s defined benefit pension
plans averaged a gain of approximately 9.9% compared to 17.4% in 2009. long-term market interest rates decreased impacting
the discount rate used to measure the plan liabilities.
The company’s contributions are funded through cash flows generated from operations. Management anticipates that future
cash flows from operations will be sufficient to fund expected future contributions. contributions to defined benefit plans
during 2010 were $12.8 million (2009: $11.0 million).
CJ22144 MDA_E.indd 26
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Maple leaf foods Inc. 27
management’s discussion and analysis
TRANSACTIONS WITH RELATED PARTIES
during the year, the company recorded sales to Mccain foods limited of $3.6 million (2009: $3.3 million) in the normal
course of business and at market prices. Mccain foods limited is partly owned by Mccain capital corporation, a 31.3%
shareholder in Maple leaf foods Inc.
The company paid $4.9 million (2009: $4.6 million) for services in the normal course of business to day & Ross
Transportation Group, a subsidiary of Mccain foods limited.
GOVERNMENT INCENTIVES
during the year, the company recorded incentive payments from the canadian government of $2.7 million (2009: $9.1 million)
to compensate hog producers for losses in prior periods, and $7.3 million (2009: $12.6 million) from the canadian government
as part of its policy to support the development of renewable energies. These incentives were recorded as reductions of cost of
goods sold in the consolidated statement of earnings. furthermore, the company received an interest free loan of $2.0 million
from the canadian government related to the construction of a new bakery in Hamilton, ontario. The loan is repayable over a
period of five years beginning in 2012.
ACQUISITIONS AND DIVESTITURES
In the fourth quarter of 2010, assets held for sale at december 31, 2009 that related to the company’s Burlington, ontario pork
processing facility were sold. details of the assets held for sale are provided in note 6 of the consolidated financial statements.
on January 29, 2008, the company acquired the shares of aliments Martel Inc. (“Martel”), a manufacturer and distributor of
sandwiches, meals and sweet goods based in Quebec for an initial purchase price of $44.6 million plus contingent consideration
of up to $22.6 million, based on financial performance over three years post-acquisition. during the first quarter of 2009, the
company finalized the purchase equation, allocating $15.4 million to the identifiable net tangible assets of Martel at the
acquisition date and $29.2 million to goodwill and intangible assets. The acquired intangible assets included $1.5 million
allocated to trademarks that are being amortized on a straight-line basis over 10 years and $1.7 million allocated to customer
relationships that are being amortized on a straight-line basis over 20 years. no amounts have been paid to the vendors in
respect of contingent consideration.
on January 14, 2008, the company purchased the assets of central By-products (“cBp”), a rendering business located near
london, ontario for $18.1 million. during the first quarter of 2009, the company finalized the purchase price equation and
allocated $6.0 million to the net identifiable assets of cBp at the acquisition date and $12.1 million to goodwill.
subsequent to december 31, 2010 the company announced the following events:
•
The closure of a prepared meats facility located in Surrey, British Columbia, to be closed on September 30, 2011. The
company expects that closure costs, including severance, decommissioning and accelerated depreciation, will amount to
approximately $12.1 million before tax, $4.6 million of which will be cash expenditures.
• The completion of the sale of its fresh bakery’s sandwich business on February 18, 2011.
INVESTMENTS IN CANADA BREAD COMPANY, LIMITED
during the second quarter of 2010, the company purchased 56,700 shares of canada Bread company, limited (“canada
Bread”) for cash consideration of $2.7 million. This purchase increases the company’s ownership interest in canada Bread
from 89.8% to 90.0%. The company allocated $1.7 million of the purchase price to the net identifiable assets of canada Bread at
the acquisition date and $1.0 million to goodwill. The company has not yet finalized the purchase equation for this acquisition.
on July 17, 2008, the company purchased 458,000 shares of canada Bread for cash consideration of $32.6 million, increasing
the company’s ownership interest in canada Bread from 88.0% to 89.8%. during the second quarter of 2009, the company
finalized the purchase equation for these purchases, allocating $11.4 million of the purchase price to the net tangible assets of
canada Bread at the acquisition date, $1.1 million to intangible assets and $20.1 million to goodwill.
CJ22144 MDA_E.indd 27
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28 Maple leaf foods Inc.
management’s discussion and analysis
OTHER MATTERS
on february 23, 2011 Maple leaf foods Inc. declared a dividend of $0.04 per share payable on March 31, 2011 to shareholders
of record at the close of business on March 10, 2011. Unless indicated otherwise by the company in writing at or before the
time the dividend is paid, these dividends will not be considered an eligible dividend for the purposes of the “enhanced
dividend Tax credit system”.
It is currently anticipated that the full amount of the dividends to be paid in the first and second quarters of 2011 and a
portion of the dividends to be paid in the third quarter will not be considered an eligible dividend for the purposes of the
“enhanced dividend Tax credit system”. a portion of the dividend in the third quarter and the dividend for the fourth
quarter are expected to be considered an eligible dividend for the purposes of the “enhanced dividend Tax credit system”.
CAPITAL RESOURCES
The food industry segments in which the company operates are generally characterized by high sales volume and rapid
turnover of inventories and accounts receivable. In general, accounts receivable and inventories are readily convertible
into cash. Investment in working capital is affected by fluctuations in the prices of raw materials, seasonal and other
market-related fluctuations. for example, although an increase or decrease in pork or grain commodity prices may not affect
margins, they can have a material effect on investment in working capital, primarily inventory and accounts receivable. due
to its diversity of operations, the company has in the past consistently generated a strong base level of operating cash flow,
even in periods of higher commodity prices and restructuring of its operations. These operating cash flows provide a base of
underlying liquidity that the company supplements with credit facilities to provide longer-term funding and to finance
fluctuations in working capital levels.
during 2010, the company completed an agreement with a syndicate of banks, including the majority of the banks in its
existing revolving credit facility, to augment the company’s primary revolving credit facility with a $250.0 million short-term
bank lending facility. The short-term bank facility matures concurrently with the company’s primary revolving credit facility,
on May 31, 2011.
subsequent to year-end, following the issuance of new long-term debt in december 2010, the company terminated the
$250.0 million short-term lending facility. There were no drawings on the facility on termination.
The company has $551.4 million of debt, including related cross-currency swaps, maturing in 2011. The maturities include the
company’s main revolving debt facility in May 2011 and a bond repayment in december 2011. negotiations regarding the
replacement of the credit facility are currently underway and the company expects the refinancing to be complete by May 2011.
The following table summarizes available and drawn debt facilities at december 31:
($ millions)
credit facilities
Maple leaf foods Inc.
subsidiaries
Total Available
drawn amount
Maple leaf foods Inc.
subsidiaries
letters of credit
Total Drawn
% drawn
2010
2009
$
1,702.9
$
1,539.1
78.6
85.6
$
1,781.5
$
1,624.7
$
903.4
$
994.1
48.6
124.9
50.9
140.5
$
1,076.9
$
1,185.5
60.4%
73.0%
CJ22144 MDA_E.indd 28
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Maple leaf foods Inc. 29
management’s discussion and analysis
To access competitively priced financing, and to further diversify its funding sources, the company operates two accounts
receivable financing facilities under which it sells certain accounts receivable to an entity owned by a financial institution.
during 2010, the company entered into a three-year, committed accounts receivable securitization facility to access
competitively priced financing, and to further diversify its funding sources. This program replaced the existing accounts
receivable financing facilities. Under the new facility, the company sells certain accounts receivable, with limited recourse,
to an entity owned by an international financial institution with a long-term debt rating of aaa. The receivables are sold
at a discount to face value based on prevailing money market rates. at year-end, the company had $292.9 million (2009:
$174.8 million under the former facilities) of trade accounts receivable serviced under this facility. In return for the sale of
its trade receivables, the company received cash of $156.2 million and notes receivable in the amount of $136.7 million.
The program is subject to certain restrictions and requires the maintenance of certain debt ratios. The company was in
compliance with all of the requirements of the program during 2010. These facilities are accounted for as an off-balance sheet
transaction under canadian Gaap and will continue to be accounted for in the same manner under IfRs effective January 1, 2011.
Where cost effective to do so, the company may finance automobiles, manufacturing equipment, computers and office
equipment with operating lease facilities.
CAPITAL EXPENDITURES
capital expenditures for 2010 were $162.3 million, consistent with 2009 spend of $162.9 million.
a significant portion of the strategic investment made by the company in 2010 was related to the implementation of
sap, which is replacing and harmonizing the company’s systems across all its businesses. since beginning this
enterprise-wide implementation, the company has completed 37 sap installations across the company, with two business
units now fully deployed.
The second major contributor to strategic spend in 2010 was the company’s investment in the construction of its new
large-scale fresh bakery facility in Hamilton, ontario. construction of a scale bakery facility in Hamilton, ontario commenced
in august 2010, and by the end of 2010 the building was mostly closed in and equipment installation had begun. The project
is on target to begin production of bakery product in July 2011, and Management expects to have completed the transfer of
production from and closure of one of its three bakeries near Toronto, ontario, by the end of 2011, with the remaining
products from the two other bakeries by early 2013.
other projects were undertaken by the company during 2010 related to profit enhancement and supply chain optimization.
overall, the company’s investment in property and equipment in 2010 was lower than originally planned, largely driven by
timing shifts in spend related to strategic initiatives, mostly due to timing of investment in the new fresh bakery.
Management anticipates that the majority of these deferred expenditures will occur in 2011.
CASH FLOW AND FINANCING
Total debt, net of cash balances, as at december 31, 2010 was $901.8 million, compared to $1,015.6 million as at december 31,
2009. The decrease in debt for the year is due to cash flow from operations and the impact of changes in foreign exchange
rates on U.s. dollar-denominated debt, offset by investment in property and equipment.
Cash Flow from Operating Activities
cash flow from continuing operations for the year was $283.7 million compared to $89.2 million last year. cash generated
from operating activities was higher mainly due to lower working capital levels in 2010 as the company continues to manage
the working capital balances, negative changes to the fair value of non-designated interest rate swaps and an increase in
impairments and accelerated depreciation charges included in restructuring and other related costs.
CJ22144 MDA_E.indd 29
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30 Maple leaf foods Inc.
management’s discussion and analysis
Cash Flow from Financing Activities
cash flow from financing activities was an outflow of $164.5 million for the year ended december 31, 2010 compared to an
outflow of $283.0 million in the prior year. The change is mainly due to the repayment of maturing debt in 2009 that was not
refinanced during the same year. The company refinanced the 2009 and 2010 maturities throughout 2010.
In april 2010 and May 2010, the company issued notes payable of $75.0 million, bearing interest at 6.08% per annum and
notes payable of $15.0 million, bearing interest at 5.76% per annum, respectively. The notes payable are due in april 2015.
during the fourth quarter of 2010, the company issued or agreed to issue notes payable in tranches of canadian and
U.s. dollar denominations totalling approximately $355.0 million. proceeds totalling $37.0 million were received on
december 16, 2010 and the remaining proceeds were received on January 4, 2011. Maturities of the notes range from 2015
to 2021.
The notes are unsecured and were issued to institutional investors in canada and the United states. The company effectively
converted the U.s. dollar-denominated notes (Us$213 million) into canadian dollar-denominated debt of cad$215 million
through the use of cross-currency interest rate swaps. The average canadian interest rate for the entire financing after taking
account of the cross-currency swaps is 5.99%.
The company’s debt facilities are subject to certain restrictions and require the maintenance of certain debt and cash flow
ratios. The company was in compliance with all of the requirements of its lending agreements during 2010. at the end of the
year, net debt to eBITda excluding the change in fair value of non-designated interest rate swaps was 2.5x (2009: 2.9x) and
net debt to eBITda including the change in fair value of non-designated interest rate swaps was 2.7x (2009: 2.9x).
Cash Flow from Investing Activities
cash flow from investing activities was an outflow of $160.1 million compared to an outflow of $137.8 million in the prior
period, principally due to investments in property and equipment of $162.3 million (2009: $162.9 million), partly offset by
proceeds on the sale of property and equipment in 2009 that did not occur in 2010.
CONTRACTUAL OBLIGATIONS
The following table provides information about certain of the company’s significant contractual obligations as at
december 31, 2010:
payments due by fiscal year:
($ millions)
long-term debt
cross-currency swaps related to
Total
2011
2012
2013
2014
2015
after
2015
$ 885.9
$ 496.8
$
6.0
$
5.7
$ 208.6
$
103.5
$
65.3
long-term debt
96.1
54.6
–
–
37.6
–
3.9
contractual obligations including leases
344.1
68.6
$ 1,326.1
$ 620.0
$
55.1
61.1
$
45.7
51.4
36.8
29.3
108.6
$ 283.0
$
132.8
$
177.8
$ 982.0
$ 551.4
$
6.0
$
5.7
$ 246.2
$
103.5
$
69.2
Management is of the opinion that its cash flow and sources of financing provide the company with sufficient resources
to finance ongoing business requirements and its planned capital expenditure program for at least the next 12 months.
additional details concerning financing are set out in the notes to the consolidated financial statements.
CJ22144 MDA_E.indd 30
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Maple leaf foods Inc.
31
management’s discussion and analysis
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES(i)
Through the normal course of business the company is exposed to financial and market risks that have the potential to affect
its operating results. In order to manage these risks the company operates under risk management policies and guidelines
which govern the hedging of price and market risk in the foreign exchange, interest rate and commodity markets as well as
funding and investing activities.
The company engages in hedging to manage price and market risk associated with core operating exposures, and does not
engage in significant trading activity of a speculative nature.
The company’s Risk Management committee meets frequently to discuss current market conditions, review current hedging
programs and trading activity, and approve any new hedging or trading strategies.
In order to limit the impact of market price fluctuations on operating results, the majority of core hedging programs are
designated as hedging relationships and managed as part of the company’s hedging accounting portfolio.
Capital
The company’s objective is to maintain a cost effective capital structure that supports its long-term growth strategy and
maximizes operating flexibility. In allocating capital to investments to support its earnings goals, the company establishes
internal hurdle return rates for capital initiatives. capital projects are generally financed with senior debt and internal cash flows.
The company uses leverage in its capital structure to reduce the cost of capital. The company’s goal is to maintain its
primary credit ratios and leverage at levels that are designed to provide continued access to investment-grade credit pricing
and terms. The company measures its credit profile using a number of metrics, primarily net debt to eBITda and eBITda to
interest expense.
In addition to senior debt and equity, the company may use operating leases and limited recourse accounts receivable
securitization programs as additional sources of financing.
The company has maintained a stable dividend distribution that is based on the sustainable net earnings base. from time to
time, the company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under
its Restricted share Unit plan, an equity compensation program established in 2006. The company did not purchase any
shares in 2010.
for the year ended december 31, 2010, total equity increased by $28.3 million to $1,217.4 million. during the same period, total
debt net of cash and cash equivalents decreased by $113.9 million to $901.8 million.
Credit Risk
credit risk refers to the risk of losses due to failure of the company’s customers and counterparties to meet their
payment obligations.
In the normal course of business, the company is exposed to credit risk from its customers, substantially all of which are in the
grocery and foodservice markets. The company performs ongoing credit evaluations of new and existing customers’ financial
condition and reviews the collectability of its trade accounts receivable and other receivables in order to mitigate any possible
credit losses. as at december 31, 2010 approximately $8.2 million (2009: $12.5 million) of the company’s accounts receivable
were greater than 60 days past due. The company maintains an allowance for doubtful accounts that represents its estimate
of uncollectible amounts. The components of this allowance include a provision related to specific losses estimated on
individually significant exposures and a provision based on historical trends of collections. as at december 31, 2010, the
company has recorded an allowance for doubtful accounts of $6.8 million (2009: $10.2 million). average accounts receivable days
sales outstanding for the year is consistent with historic trends. There are no significant impaired accounts receivable that have
not been provided for in the allowance for doubtful accounts. The company believes that the allowance for uncollectible
accounts sufficiently covers any credit risk related to past due or impaired accounts receivable balances.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the credit quality of
the company’s major customers, as well as the large number and geographic dispersion of smaller customers. The company
does, however, conduct a significant amount of business with a small number of large grocery retailers. The company’s five
largest customers comprise approximately 39.8% of consolidated pre-securitized accounts receivable at december 31, 2010
(2009: 42.7%) and the two largest customers comprise approximately 20.4% (2009: 21.2%) of consolidated sales.
(i)
For a comprehensive discussion on the Company’s risk management practices and derivative exposures, please refer to the Financial Instruments note in
the Financial Statements.
CJ22144 MDA_E.indd 31
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32 Maple leaf foods Inc.
management’s discussion and analysis
The company is exposed to credit risk on its cash and cash equivalents (comprising primarily deposits and short-term
placements with canadian chartered banks) and non-exchange-traded derivatives contracts. The company mitigates this
credit risk by only dealing with counterparties that are major international financial institutions with long-term debt ratings
of single a or better.
The company’s maximum exposure to credit risk at the balance sheet date consists primarily of the carrying value of
non-derivative financial assets and non-exchange-traded derivatives with positive fair values.
Liquidity Risk
liquidity risk is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities.
The company manages liquidity risk by monitoring forecasted and actual cash flows, reducing reliance on any single source
of credit, maintaining sufficient undrawn committed credit facilities and managing the maturity profiles of financial assets
and financial liabilities to minimize re-financing risk.
as at december 31, 2010, the company had available undrawn committed credit of $683.7 million under the terms of its
principal banking arrangements. These banking arrangements, which mature in May 2011, are subject to certain covenants
and other restrictions.
Market Risk
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will
fluctuate due to changes in market interest rates. The company does from time to time enter into interest rate swaps to
manage its current and anticipated market exposure, and to achieve an overall desired borrowing rate.
The company’s interest rate risk arises from short- and long-term borrowings issued at fixed rates that create fair value
interest rate risk, and variable rate borrowings that create cash flow interest rate risk. The company actively monitors
the market to ensure that the desired overall funding rate, as well as the targeted proportionate fixed to variable debt
mix is achieved.
as at december 31, 2010, 89% of the company’s outstanding debt was not exposed to interest rate movements (2009: 57%).
Foreign Exchange Risk
foreign exchange risk refers to the risk that the value of financial instruments or cash flows associated with the instruments
will fluctuate due to changes in foreign exchange rates. The company enters into currency derivative agreements to manage
its current and anticipated exposures in the foreign exchange markets.
The company’s foreign exchange risk arises primarily from transactions in currencies other than canadian dollars. The
primary currencies that the company is exposed to are the U.s. dollar through U.s.-denominated sales and borrowings, and
the British pound and Japanese yen.
The company uses cross-currency interest rate swaps to mitigate its exposure to changes in exchange rates related to
U.s. dollar-denominated debt. These swaps are used primarily to effectively convert fixed-rate U.s. dollar-denominated notes
payable to fixed-rate notes denominated in canadian dollars, and are accounted for as cash flow hedges.
The company uses foreign exchange forward contracts to manage exposures arising from product sales in the U.s. and Japan.
all forward contracts in U.s. dollars and Japanese yen that are designated as hedges within the company’s hedge accounting
portfolio are accounted for as cash flow hedges.
Commodity Price Risk
The company is directly exposed to price fluctuations in commodities such as wheat, live hogs, fuel costs and the purchase of
other agricultural commodities used as raw materials such as feed grains and wheat. In order to minimize the impact of these
price fluctuations on the company’s operating results, the company may use fixed price contracts with suppliers,
exchange-traded futures and options, and over the counter derivatives products.
derivatives designated as a hedge of an anticipated or forecasted transaction are accounted for either as cash flow or fair
value hedges, and managed within the company’s hedge accounting portfolio.
The company applies the “normal purchase” classification in canadian Gaap to certain contracts that are entered into for
the purpose of procuring commodities to be used in production.
CJ22144 MDA_E.indd 32
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Maple leaf foods Inc. 33
management’s discussion and analysis
SEASONALITY
The company is sufficiently large and diversified that seasonal factors within each operation and business tend to offset each
other and in isolation do not have a material impact on the company’s consolidated earnings. for example, pork processing
margins tend to be higher in the last half of the year when hog prices historically decline, and as a result, earnings from hog
production operations tend to be lower. strong demand for grilled meat products positively affects the fresh and processed
meats operations in the summer, while back-to-school promotions support increased sales of bakery, sliced meats and lunch
items in the fall. Higher demand for turkey and ham products occurs in the spring and fourth quarter holiday seasons.
SHARE CAPITAL AND DIVIDENDS
during the second quarter of 2009, the company amended its articles to change its authorized capital by creating an
unlimited number of preference shares issuable in one or more series. no preference shares have been issued.
during 2010, a major shareholder converted 22,000,000 non-voting common shares to common shares, and in the fourth
quarter of 2010, 2,947,367 common share purchase warrants were exercised resulting in the issuance of 2,947,367 common
shares. as at december 31, 2010, there were 140,044,089 voting common shares issued and outstanding (2009: 114,774,802)
and no non-voting common shares issued and outstanding (2009: 22,000,000). following the exercise of warrants in the
fourth quarter, there are no further warrants outstanding and unexercised.
In each of the quarters of 2010, the company declared and paid cash dividends of $0.04 per common share (voting and
non-voting). This represents a total dividend of $0.16 per common share (voting and non-voting) and aggregate dividend
payments of $21.7 million (2009: $20.9 million).
PRIVATE EQUITY UNIT PLACEMENT
on december 16, 2008 the company completed the issuance, on a private placement basis, of 7,368,421 units at a price of
$9.50 per unit for aggregate gross proceeds of $70 million. each unit consisted of one subscription receipt for common shares
and 0.4 common share purchase warrant. each subscription receipt entitled the holder to receive one common share of the
company on august 4, 2009 or, at the election of the company, the return in cash of $9.50 per subscription receipt. each
whole common share purchase warrant is exercisable into one common share of the company until december 16, 2010 at a
price of $9.50 per common share. The net proceeds after issuance costs were used for general corporate purposes.
on august 4, 2009, the company issued 7,368,421 common shares in satisfaction of the subscription receipts that were issued
on december 16, 2008. This decision, made by an independent committee of the Board of directors, reflected the company’s
approach to ensuring that it maintains an appropriate mix of equity and debt in its capital structure and that these levels are
maintained over time.
on december 14, 2010, the above common share purchase warrants were exercised into common shares of the company.
The company received net proceeds of $28.0 million on the exercise of the warrants.
ENVIRONMENT
Maple leaf is committed to maintaining high standards of environmental responsibility and positive relationships in the
communities where it operates. each of its businesses operates within the framework of an environmental policy entitled
“our environmental commitment” that is approved by the Board of directors’ environment, Health and safety committee.
The company’s environmental program is monitored on a regular basis by the committee, including compliance with
regulatory requirements, the use of internal environmental specialists and independent, external environmental experts. In
2010, the company completed deployment of its environmental excellence program at more than 90% of its manufacturing
facilities. This program establishes a standard environmental management system across the company’s various business
interests. The company continues to invest in environmental infrastructure related to water, waste and air emissions to
ensure that environmental standards continue to be met or exceeded, while implementing procedures to reduce the impact of
operations on the environment. expenditures related to current environmental requirements are not expected to have a
material effect on the financial position or earnings of the company. However, there can be no assurance that certain events
will not occur that will cause expenditures related to the environment to be significant and have a material adverse effect on
the company’s financial condition or results of operations. such events could include, but not be limited to additional
environmental regulation or the occurrence of an adverse event at one of the company’s locations.
CJ22144 MDA_E.indd 33
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34 Maple leaf foods Inc.
management’s discussion and analysis
as a large food company there are health, environmental and social issues that go beyond short-term profitability that
Management believes must shape its business if the company is to realize a sustainable future. on the environmental front,
the company is undertaking multiple initiatives in conjunction with key customers to reduce packaging, track greenhouse gas
emissions and the mileage it takes to produce and deliver food products. Increasingly sound environmental practices are
becoming a key component of maintaining a competitive advantage. In 2009, the company completed a comprehensive
planning process to establish its environmental sustainability priorities and develop longer-term environmental objectives.
While this process was briefly delayed due to product recall activities, priorities such as greenhouse gas and energy
management, water conservation, waste reduction, packaging and supply chain environmental sustainability were established.
SUMMARY OF QUARTERLY RESULTS
following is a summary of unaudited quarterly financial information (in thousands of dollars except per share information):
first
Quarter
second
Quarter
Third
Quarter
fourth
Quarter
Total
2010 $
2009
2008
1,191,507 $
1,279,299
1,203,263
1,271,366 $
1,320,803
1,355,301
1,293,211 $ 1,212,035 $ 4,968,119
5,221,602
1,324,903
1,296,597
5,242,602
1,339,704
1,344,334
$
$
$
$
$
$
$
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
$
$
$
$
$
$
$
8,754
2,871
(10)
8,754
2,871
(10)
0.06
0.02
0.00
0.09
0.05
0.04
0.06
0.02
0.00
0.06
0.02
0.00
0.06
0.02
0.00
2,967
4,899
(9,353)
2,967
4,899
(9,353)
$
(16,078) $
22,457
(12,919)
$
(16,078) $
22,457
(12,919)
30,179 $
21,920
(14,575)
30,179 $
21,920
(14,575)
25,822
52,147
(36,857)
25,822
52,147
(36,857)
0.02
0.04
(0.07)
0.17
0.12
(0.01)
0.02
0.04
(0.07)
0.02
0.04
(0.07)
0.02
0.04
(0.07)
$
(0.12) $
0.17
(0.10)
$
0.23
0.21
0.13
$
$
(0.12) $
$
$
0.17
(0.10)
(0.12) $
0.17
(0.10)
(0.12) $
0.17
(0.10)
0.22 $
0.16
(0.12)
0.27 $
0.19
0.12
0.22 $
0.16
(0.12)
0.21 $
0.16
(0.12)
0.21 $
0.16
(0.12)
0.19
0.40
(0.29)
0.76
0.57
0.29
0.19
0.40
(0.29)
0.19
0.39
(0.29)
0.19
0.39
(0.29)
sales
net earnings (loss) from continuing
operations
net earnings (loss)
earnings per share
Basic from continuing operations(i)
adjusted eps from continuing
operations(i)(ii)
Total Basic(i)
diluted from continuing operations(i)
Total diluted(i)
(i) May not add due to rounding.
(ii) Refer to Non-GAAP Measures starting on page 49.
CJ22144 MDA_E.indd 34
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Maple leaf foods Inc. 35
management’s discussion and analysis
Quarterly sales and net earnings in 2010 were impacted by the following significant items:
•
•
•
•
•
•
•
•
•
the appreciation of the Canadian dollar relative to the U.S. dollar and the British pound reduced the sales value of fresh
pork and frozen bakery products sold in the U.S. and the U.K.
lower sales volumes in prepared meats as consumers adjust to new price levels following price adjustments implemented
in the second and third quarters of 2010
the exit of a non-core business line in prepared meats at the end of 2009
lower sales volumes of frozen bakery products in the U.S. and the U.K.
better poultry results due to higher market prices and improved operations although market impacts were less favourable
in the fourth quarter
improved results in hog production operations reflecting stronger hog market prices and better feed costs
lower earnings in primary pork processing operations due to the unfavourable impact of a stronger Canadian dollar and
weaker export markets
a pre-tax loss of $24.9 million ($18.2 million after-tax) due to the change in fair value of non-designated interest rate swaps
pre-tax charges of $81.1 million ($61.2 million after-tax) due to restructuring and other related costs. The majority of these
costs related to the write-down of Burlington pork plant assets and severances related to the prospective closure of three
Ontario bakeries or incurred with respect to the Company’s network optimization initiatives.
Quarterly sales and net earnings in 2009 were impacted by the following significant items:
•
•
•
•
•
strategic divestiture of hog production operations in 2008
price increases implemented in 2008 in response to escalating input costs in the Bakery Products Group
a product recall that occurred in the prepared meats business in August 2008 and the progress made in the recovery
throughout 2009
normalization of bakery margins in 2009 due mostly to the combination of prior year price increases and the decline in
commodity costs
the benefits realized from the restructure of hog production and primary pork processing as the Company largely
completed its three-year strategy to refocus its operations on value-added meat, meals and bakery businesses
•
increased earnings in the poultry operations due to better markets and lower operating costs
For an explanation and analysis of quarterly results, refer to Management’s Discussion & Analysis for each of the respective
quarterly periods filed on SEDAR and also available on the Company’s website at www.mapleleaf.ca.
CJ22144 MDA_E.indd 35
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36 Maple leaf foods Inc.
management’s discussion and analysis
Summary of 2010 Fourth Quarter Results
following is a summary of sales by business segment:
($ thousands)
Meat products Group
agribusiness Group
Protein Group
Bakery Products Group
sales
following is a summary of adjusted operating earnings by business segment:
($ thousands)
Meat products Group
agribusiness Group
Protein Group
Bakery Products Group
non-allocated costs(i)
adjusted operating earnings
fourth Quarter
2010
2009
$ 762,561
$ 842,175
56,167
$ 818,728
393,307
$ 1,212,035
50,686
$ 892,861
432,042
$ 1,324,903
fourth Quarter
2010
2009
$
39,513
$
24,244
14,731
14,505
$
54,244
$
38,749
22,296
(5,097)
21,896
(2,805)
$
71,443
$
57,840
(i) Non-allocated costs comprise costs related to systems conversion and consulting fees. Management believes that not allocating these costs provides a more
comparable assessment of segmented operating results.
sales for the fourth quarter decreased 8.5% to $1,212.0 million compared to $1,324.9 million last year. excluding the impacts of an
extra week in the fourth quarter of 2009, the divestiture of the Burlington pork facility and the exit of a non-core business line,
sales increased by approximately 2.6% in the quarter. favourable pricing, largely in primary pork processing, and improved sales
mix driven by prepared meats and U.K. bakery operations, had the combined effect of increasing total sales by approximately
6.0%, however this was offset by lower volumes and unfavourable currency translation on sales in the U.s. and U.K. due to the
strong canadian dollar. Volumes in prepared meats declined in the quarter as consumers continue to adjust to new points that
resulted from feature price increases taken in 2010.
adjusted operating earnings in the quarter increased by 23.5% to $71.4 million compared to $57.8 million last year, due to
material earnings growth in the Meat products Group. performance in the Bakery products Group was slightly ahead of last
year, while the earnings in the agribusiness Group were consistent with prior year.
strong earnings performance in primary pork processing operations contributed to the positive results of the Meat products
Group, despite substantial raw material increases and lower volumes in prepared meats. favourable hog market conditions in
north america and improved pricing contributed to the strong performance in pork processing. Margins in the prepared
meats business continued to be pressured by further increases in raw material meat costs; however, improved net pricing and
lower plant costs mitigated this impact.
net earnings increased by 37.7% to $30.2 million or $0.22 basic earnings per share in the fourth quarter of 2010 compared to
net earnings of $21.9 million or $0.16 basic earnings per share last year.
CJ22144 MDA_E.indd 36
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Maple leaf foods Inc. 37
management’s discussion and analysis
RISK FACTORS
The company operates in the food processing and agricultural business, and is therefore subject to risks and uncertainties
related to this business that may have adverse effects on the company’s results of operations and financial condition. The
following risk factors should be considered carefully. These risk factors and other risks and uncertainties not currently known
to the company, or that the company currently considers immaterial, could materially and adversely affect the company’s
future operating results and could cause actual events to differ materially from those described in forward-looking information
(including any financial outlooks) relating to the company.
Risks Related to the Business of Maple Leaf
Implementing the Company’s Comprehensive Value Creation Plan
The company’s value creation plan announced in october 2010 is complex, lengthy and transformational. although the
company has experience implementing complex projects and plans, there can be no assurance that the company will be
successful in executing the value creation plan and achieving its expected benefits. as with any complex project or plan,
events will transpire outside the company’s control that were not anticipated or expected when the value creation plan was
launched such as changes in the competitive landscape, changes in foreign exchange rates and other unforeseen events. If the
value creation plan is unsuccessful or implemented or executed incorrectly or if the benefits of the plan are not fully achieved,
it could have a material adverse effect on the company’s financial condition and results of operations.
In particular, the value creation plan entails the construction of two large-scale facilities, one of which is currently in progress.
The construction and start-up of new plants presents a number of risks including: errors in the assessment of labour rates and
other operating costs, cost overruns in construction, delays in completion of the project, disruptions to service levels during
the construction period, loss of reputation with customers and adverse impacts on the quality of the company’s products. as
a result of the construction of these two facilities, the company’s operations will be more concentrated in a fewer number
of facilities resulting in the risk that any unforeseen disruption in such facilities could have a greater effect on the operations
of the company as whole. In addition, as part of the value creation plan, the company has announced the closure of some
existing plants. It is likely that additional existing plants will also be closed. The closure of existing plants carries risks such as
inaccurate assessments of the costs of decommissioning, disruptions in service during closure and errors in the estimates of
residual value of the assets. In addition, to facilitate the plan, the company may decide to divest portions of its business. There
is no guarantee that any such divestiture will not result in a material impact to the company’s operations. altogether, these
risks could result in a material adverse impact to the company’s financial condition and results of operations.
The value creation plan requires strategic capital expenditures (over and above base or maintenance capital) which are
currently estimated to be approximately $775 million between 2010 and 2013 inclusive. While the pace of spending will be
balanced with margin improvement, with interim margin targets achieved before committing to new levels of capital
investment, and while the company believes it has the underlying cash flow and balance sheet strength required to support
the capital investments with no incremental requirement for new capital from shareholders, there can be no assurance that
the capital required to implement the plan will be available as and when required or on commercially reasonable or
acceptable terms.
Systems Conversion and Standardization
The company regularly implements process improvement initiatives to simplify and harmonize its systems and processes to
optimize performance. The company is currently undertaking an initiative to replace its information systems with sap, an
integrated enterprise-wide computing system. The company has dedicated considerable resources to the implementation of
sap and carefully designed an implementation plan to reduce operational disruptions. However, there can be no guarantee that
the implementation will not disrupt the company’s operations, or be completed within the identified period of time and budget.
In addition, there cannot be any guarantee that the implementation will improve current processes or operating results. any of
these failures could have a material adverse impact on the company’s financial condition and results of operations.
CJ22144 MDA_E.indd 37
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38 Maple leaf foods Inc.
management’s discussion and analysis
Food Safety and Consumer Health
The company is subject to risks that affect the food industry in general, including risks posed by food spoilage, accidental
contamination, product tampering, consumer product liability, and the potential costs and disruptions of a product recall.
The company’s products are susceptible to contamination by disease-producing organisms, or pathogens, such as E. Coli,
Salmonella and Listeria. There is a risk that these pathogens, as a result of food processing, could be present in the company’s
products. The company actively manages these risks by maintaining strict and rigorous controls and processes in its
manufacturing facilities and distribution systems and by maintaining prudent levels of insurance. However, the company
cannot assure that such systems, even when working effectively, will eliminate the risks related to food safety. The company
could be required to recall certain of its products in the event of contamination or adverse test results, similar to the recall in
2008, or as precautionary measures, similar to the recalls in 2009. any product contamination could subject the company to
product liability claims, adverse publicity and government scrutiny, investigation or intervention, resulting in increased costs
and decreased sales. any of these events could have a material adverse impact on the company’s financial condition and
results of operations.
Leverage and Availability of Capital
The ability of the company to secure short- and long-term financing on terms acceptable to the company is critical to grow
and fund its business and manage its liquidity. In particular, at various stages in the implementation of the value creation
plan, the company may require significant amounts of capital. The ability to secure such additional capital on commercially
reasonable and acceptable terms will in part determine the success or failure of the company’s value creation plan. as a result,
the failure or inability of the company to secure short- and long-term financing in the future on terms that are commercially
reasonable and acceptable to the company could have a significant impact on the company’s financial condition and results
of operations. In addition, a downgrade in the company’s credit quality would likely increase the company’s borrowing costs
for both short-term and long-term debt, which could have a material adverse impact on the company’s financial condition and
results of operations. even if the company does successfully raise additional capital when needed, if it issues equity securities,
investors will be diluted, and if it raises additional debt, it will be further leveraged and could be subject to restrictive
covenants such as restrictions on paying dividends.
Business Acquisitions and Capital Expansion Projects
While the company’s focus has shifted from acquisitions to integration of existing operations and supply chain optimization,
the company may continue to review opportunities for strategic growth through acquisitions in the future. These acquisitions
may involve large transactions or realignment of existing investments, and present financial, managerial and operational
challenges, which if not successfully overcome may reduce the company’s profitability. These risks include the diversion of
Management attention from existing core businesses, difficulties integrating or separating personnel and financial and other
systems, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value
made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported
earnings, potential loss of customers or key employees of acquired businesses, and indemnities and potential disputes with
the buyers or sellers. any of these activities could materially adversely affect the company’s financial condition and results
of operations.
Pension Plan Assets and Liabilities
In the normal course of business, the company provides post-retirement pension benefits to its employees under both
defined contribution and defined benefit pension plan arrangements. The funded status of the plans significantly affects the
net periodic benefit costs of the company’s pension plans and the ongoing funding requirements of those plans. among
other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of
plan assets can affect the level of plan funding, cause volatility in the net periodic pension cost and increase the company’s
future funding requirements. furthermore, the company has merged and is in the process of merging a number of its defined
benefit pension plans. The funding status of the individual plans depends in part on whether the mergers are approved.
failure by the regulators to approve the mergers could also result in an increase to the company’s funding requirements. any
increase in pension expense or funding requirements could have a material adverse impact on the company’s financial
condition and results of operations.
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Maple leaf foods Inc. 39
management’s discussion and analysis
Hog and Pork Market Cyclicality
The company’s results of operations and financial condition are partially dependent upon the cost and supply of hogs and
the selling prices for fresh meat products, both of which are influenced by constantly changing market forces of supply and
demand over which the company has little or no control. These prices for the most part are denominated in or related to U.s.
dollars which add further variability due to fluctuations in exchange rates. The north american primary pork processing
markets are highly competitive, with major and regional companies competing in each market. The market prices for pork
products regularly experience periods of supply and demand imbalance, and are sensitive to changes in industry processing
capacity. other factors that can influence the supply and market price of live hogs include fluctuations in the size of herds
maintained by north american hog suppliers, environmental and conservation regulations, economic conditions, the relative
cost of feed for hogs, weather and livestock diseases. There can be no assurance that all or part of any such increased costs
experienced by the company from time to time can be passed along to consumers of the company’s products directly or in a
timely manner. as a result, there is no assurance that the occurrence of these events will not have a material adverse effect on
the company’s financial condition and results of operations.
Livestock
The company’s operations and the demand for the company’s products can be significantly affected by outbreaks of disease
among livestock, or attributed to livestock whether it occurs within the company’s production operations or in the operations
of third parties.
The company monitors herd health status and has strict bio-security procedures and employee training programs
throughout its hog production system. However, there is no guarantee these processes will not fail. In addition, not all
livestock procured by the company may be subject to these processes, as the majority of hog and poultry livestock processed
by the company is purchased from independent third parties. In addition to risks associated with maintaining the health of
the company’s livestock, any outbreak of disease elsewhere in the world could reduce consumer confidence in the meat
products affected by the particular disease and generate adverse publicity. accordingly, there can be no assurance that an
outbreak of animal disease in canada will not have a material adverse effect on the company’s financial condition and results
of operations.
Maple leaf has developed a comprehensive internal contingency plan for dealing with animal disease occurrences or a more
broad-based pandemic and has taken steps to support the canadian government in enhancing both the country’s prevention
measures and preparedness plans. There can be no assurance, however, that these prevention measures or plans will be
successful in minimizing or containing the impact of an outbreak of animal disease and that such outbreak will not have a
material adverse effect on the company’s financial condition and results of operations.
Foreign Currencies
a significant amount of the company’s revenues and costs are either denominated in or directly linked to other currencies
(primarily U.s. dollars and Japanese yen). In periods when the canadian dollar has appreciated both rapidly and materially
against these foreign currencies, revenues linked to U.s. dollars or Japanese yen are immediately reduced while the company’s
ability to change prices or realize natural hedges may lag the immediate currency change. The effect of such sudden changes in
exchange rates can have a significant immediate impact on the company’s earnings. due to the diversity of the company’s
operations, normal fluctuations in other currencies do not generally have a material impact on the company’s profitability in
the short-term due to either natural hedges and offsetting currency exposures (for example, when revenues and costs are both
linked to other currencies) or the ability in the near-term to change prices of its products to offset adverse currency movements.
However, as the company competes in international markets, and faces competition in its domestic markets from U.s.
competitors, significant changes in the canadian to U.s. dollar exchange rate can have, and have had, significant effects on the
company’s relative competitiveness in its domestic and international markets which can have, and have had, significant effects
on the company’s financial condition and results of operations. financial results from operations in the United Kingdom are
recorded in the British pound, however, consolidated financial results are reported in canadian dollars. as a result, earnings and
financial position are affected by foreign exchange fluctuations through translation risk. Translation risk is the risk that
financial statements for a particular period, or at a certain date, depend on the prevailing exchange rate of the British pound
against the canadian dollar.
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40 Maple leaf foods Inc.
management’s discussion and analysis
Commodities
The company is a purchaser of, and its business is dependent on, certain commodities such as wheat, feed grains, livestock
and energy (oil-based fuel, natural gas and electricity), in the course of normal operations. commodity prices are subject to
fluctuation and such fluctuations are sometimes severe. The company may use commodity futures and options for hedging
purposes to reduce the effect of changing prices in the short-term but such hedges may not be successful in mitigating this
commodity price risk. on a longer-term basis, the company attempts to manage the risk of increases in commodities and
other input costs by increasing the prices it charges to its customers, however, no assurance can be given that customers will
continue to purchase the company’s products if prices rise. any fluctuations in commodity prices that the company is unable
to properly hedge or mitigate could have a material adverse effect on the company’s financial condition and results of
operations.
International Trade
The company exports significant amounts of its products to customers outside canada and certain of its inputs are affected
by global commodity prices. The company’s international operations are subject to inherent risks, including change in the
free flow of food products between countries, fluctuations in currency values, discriminatory fiscal policies, unexpected
changes in local regulations and laws and the uncertainty of enforcement of remedies in foreign jurisdictions. In addition,
foreign jurisdictions could impose tariffs, quotas, trade barriers and other similar restrictions on the company’s international
sales and subsidize competing agricultural products. all of these risks could result in increased costs or decreased revenues,
either of which could have a material adverse effect on the company’s financial condition and results of operations.
Regulation
The company’s operations are subject to extensive regulation by government agencies in the countries in which it operates,
including the canadian food Inspection agency, the Ministry of agriculture in canada, provincial Ministries of the environment
in canada and the United states department of agriculture. These agencies regulate the processing, packaging, storage,
distribution, advertising and labelling of the company’s products, including food safety standards. The company’s
manufacturing facilities and products are subject to inspection by federal, provincial and local authorities. The company strives
to maintain material compliance with all laws and regulations and maintains all material permits and licenses relating to its
operations. nevertheless, there can be no assurance that the company is in compliance with such laws and regulations or that
it will be able to comply with such laws and regulations in the future. failure by the company to comply with applicable laws
and regulations could subject the company to civil remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions, which could have a material adverse effect on the company’s financial condition and results of
operations. Various governments throughout the world are considering regulatory proposals relating to genetically modified
organisms, drug residues or food ingredients, food safety and market and environmental regulation that, if adopted, may
increase the company’s costs. There can be no assurance that additional regulation will not be enacted. In fact, new
regulations and standards were enacted to address the risks associated with certain pathogens in response to the company’s
august 2008 recall of ready-to-eat meat products. If any of these or other proposals or regulations are enacted, the company
could experience a disruption in the supply or distribution of its products, increased operating costs and significant additional
cost for capital improvements. The company may be unable to pass on the cost increases associated with such increased
regulatory burden to its customers without incurring volume loss as a result of higher prices. any of these events could have a
material adverse effect on the company’s financial condition and results of operations.
Legal Matters
In the normal course of its operations, the company becomes involved in various legal actions relating to its commercial
relationships, employment matters and product liabilities. The company believes that the resolution of these claims will not have
a material effect on the company, based in part on the availability of insurance. However, the final outcome with respect to actions
outstanding, pending or with respect to future claims cannot be predicted with certainty. furthermore, even if any action is settled
within insurance limits, this can result in increases to the company’s insurance premiums. Therefore there can be no assurance
that their resolution will not have a material adverse effect on the company’s financial condition or results of operations.
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Maple leaf foods Inc. 41
management’s discussion and analysis
Consumer Trends
success of the company depends in part on the company’s ability to respond to market trends and produce innovative
products that anticipate and respond to the changing tastes and dietary habits of consumers. from time to time, certain
products are deemed more or less healthy and this can impact consumer buying patterns. The company’s failure to
anticipate, identify or react to these changes or to innovate could result in declining demand and prices for the company’s
products, which in turn could have a material adverse effect on the company’s financial condition and results of operations.
Environmental Regulation
The company’s operations are subject to extensive environmental laws and regulations pertaining to the discharge of
materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or
otherwise relating to protection of the environment. failure to comply could have serious consequences, such as criminal as
well as civil penalties, liability for damages, and negative publicity for the company. no assurances can be given that
additional environmental issues relating to presently known matters or identified sites or to other matters or sites will not
require additional expenditures, or that requirements applicable to the company will not be altered in ways that will require
the company to incur significant additional costs. In addition, certain of the company’s facilities have been in operation for
many years and, over time, the company and other prior operators of such facilities may have generated and disposed of
waste which is or may be considered to be hazardous. future discovery of previously unknown contamination of property
underlying or in the vicinity of the company’s present or former properties or manufacturing facilities and/or waste disposal
sites could require the company to incur material unforeseen expenses. occurrences of any such events could have a
material adverse effect on the company’s financial condition and results of operations.
Consolidating Customer Environment
as the retail grocery and foodservice trades continue to consolidate and customers grow larger and more sophisticated,
the company is required to adjust to changes in purchasing practices and changing customer requirements, as failure to
do so could result in losing sales volumes and market share. The company’s net sales and profitability could also be affected
by deterioration in the financial condition of, or other adverse developments in the relationship with, one or more of its
major customers. any of these events could have a material adverse effect on the company’s financial condition and results
of operations.
Competitive Industry Environment
The food industry is intensely competitive. competition is based on product availability, product quality, price, effective
promotions and the ability to target changing consumer preferences. The company experiences price pressure from time to
time as a result of competitors’ promotional efforts. Increased competition could result in reduced sales, margins, profits and
market share, all of which could have a material adverse effect on the company’s financial condition and results of operations.
Employment Matters
The company and its subsidiaries have approximately 21,000 full- and part-time employees, which include salaried and union
employees, many of whom are covered by collective agreements. These employees are located in various jurisdictions around
the world, each such jurisdiction having differing employment laws and practices and differing liabilities for employment
violations, which may result in punitive or extraordinary damages. While the company maintains systems and procedures
to comply with the applicable requirements, there is a risk that failures or lapses by individual managers could result in a
violation or cause of action that could have a material adverse effect on the company’s financial condition and results of
operations. furthermore, if a collective agreement covering a significant number of employees or involving certain key
employees were to expire leading to a work stoppage, there can be no assurance that such work stoppage would not have a
material adverse effect on the company’s financial condition and results of operations.
Direct Store Delivery Disruptions
a significant portion of the company’s fresh bakery products are distributed through direct store delivery systems using
independent distributors. although appropriate contractual arrangements are in place with these distributors, a negative
change in the company’s relations with them, changes in regulations or an adverse ruling by regulatory agencies regarding
the company’s independent distributorship program or claims against the company for the actions of the independent
distributors could have a material adverse effect on the company’s financial condition and results of operations.
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42 Maple leaf foods Inc.
management’s discussion and analysis
CRITICAL ACCOUNTING ESTIMATES
The preparation of the company’s consolidated financial statements requires Management to make certain estimates and
assumptions. The estimates and assumptions are based on the company’s experience combined with Management’s
understanding of facts and circumstances at the time. These estimates may differ from actual results, and certain estimates are
considered critical as they are both important to reflect the company’s financial position and results of operations and require
significant or complex judgement on the part of Management. The following is a summary of certain accounting estimates or
policies considered to be critical and that require significant or complex judgement by the Management of the company.
Goodwill and Intangible Assets Valuation
Goodwill is tested for impairment annually in the second quarter and otherwise as required if events occur that indicate that
it is more likely than not that the carrying value of a reporting unit has been impaired. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit’s carrying amount to its fair value. The company determines the fair
value of its reporting units for accounting purposes based on a capitalization of earnings approach, corroborated by other
techniques such as comparison to market values. The estimates of earnings used in the evaluation of goodwill are consistent
with plans and estimates that are presented annually to the Board of directors. Indefinite life intangibles are tested for
impairment annually in the fourth quarter and, also as required, if events occur that indicate it is more likely than not that the
carrying value has been impaired. The fair value of indefinite life intangibles is determined based on a “royalty savings
approach”, that is a discounted cash flow method. The estimates of fair value include projected future sales, terminal growth
rates, royalty rates and discount rates. The impairment tests for indefinite life intangible assets and goodwill were performed
in 2010 and no impairment was identified.
Reserve for Doubtful Accounts
The company establishes an appropriate provision for uncollectible or doubtful accounts. estimates of recoverable amounts
are based on Management’s best estimate of a customer’s ability to settle its obligations, and actual amounts received may be
affected by various factors, including industry conditions and changes in individual customer financial condition. To the
extent that actual losses on uncollectible accounts differ from those estimated in the company’s provision, both accounts
receivable and operating earnings will be affected.
Provisions for Inventory
Management makes estimates as to the future customer demand for our products when establishing the appropriate
provisions for inventory. In making these estimates, Management considers product life of inventory and the profitability
of recent sales of inventory. In many cases, product sold by the company turns quickly and inventory values are lower, thus
reducing the risk of material misstatement in realizable value. However, in the fresh and prepared meats businesses, code
dates are very important in the determination of realizable value, and inventory values are significant. Management ensures
that systems are in place to highlight and properly value inventory that may be approaching best before code dates. To the
extent that actual losses on inventory differ from those estimated, both inventory and operating earnings will be affected.
Trade Merchandise Allowances and Other Trade Discounts
The company provides for estimated payments to customers based on various trade programs and contracts that in many
cases include payments that are contingent upon attainment of specified sales volumes. significant estimates used to
determine these liabilities include the projected level of volume sales for the relevant period and the historical promotional
expenditure rate compared to contracted rates. as such arrangements are complex and there are a significant number of
customers and products affected, Management has systems and processes in place to estimate and value provisions incurred
to value these obligations. To the extent that payments on trade discounts differ from estimates of the related liability, both
accrued liabilities and operating earnings will be affected.
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Maple leaf foods Inc. 43
management’s discussion and analysis
Employee Benefit Plans
The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit
method prorated on service and Management’s best estimate of expected plan investment performance, salary escalation,
retirement ages of employees and expected heath care costs. discount rates used in actuarial calculations are based on
long-term interest rates and can have a material effect on the amount of plan liabilities. Management employs external
experts to advise them when deciding upon the appropriate estimates to use to value employee benefit plan obligations and
expenses. significant actuarial assumptions adopted in measuring the company’s accrued benefit obligations and benefit
plan expenses are as follows:
discount rate used to calculate net benefit plan expense
discount rate used to calculate year-end benefit obligation
expected long-term rate of return on plan assets
Rate of compensation increase
2010
2009
5.75%
5.00%
7.25%
3.50%
6.50%
5.75%
7.25%
3.50%
The effect on the following items of a 1% increase and decrease in health care costs, assuming no change in benefit levels, is
as follows:
($ millions)
end-of-year obligation
aggregate of 2010 current service cost and interest cost
1% Increase
1% decrease
$ 3.5
$ 0.2
$ (3.9)
$ (0.3)
Taxes
provisions for income taxes are based on domestic and international statutory income tax rates and tax planning opportunities
available to the company in the jurisdictions in which it operates. significant judgement is required in determining income
tax provisions and evaluating the need for valuation allowances, if applicable. The calculation of current and future income
tax balances, as well as any related valuation allowances as applicable, requires Management to make estimates regarding the
carrying values of assets and liabilities that include estimates of future cash flows and earnings related to such assets and
liabilities, the interpretation of income tax legislation in the jurisdictions in which the company operates, and the timing of
reversal of temporary differences. The company establishes additional provisions for income taxes when, despite Management’s
opinion that tax positions are fully supportable, there is sufficient complexity or uncertainty in the application of legislation
that certain tax positions may be reassessed by tax authorities. The company adjusts these additional accruals in light of
changing facts and circumstances.
Reserves for Restructuring and Other Related Costs
The company evaluates accruals related to restructuring and other related costs at each reporting date to ensure these
accruals are still appropriate. as the company has been involved in a significant amount of transformation and restructuring
of businesses and assets in the past several years, these provisions and accruals can be significant and are prepared using
estimates of the costs of future activities. In certain instances, Management may determine that these accruals are no longer
required because of efficiencies in carrying out restructuring and other related activities. In certain circumstances, Management
may determine that certain accruals are insufficient as new events occur or as additional information is obtained. These costs
and provisions are separately identified and disclosed in the company’s financial statements.
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44 Maple leaf foods Inc.
management’s discussion and analysis
CHANGES IN ACCOUNTING POLICIES
effective January 1, 2009, the company adopted emerging Issues committee abstract 173, “credit Risk and the fair Value of
financial assets and financial liabilities” (“eIc 173”). eIc 173 requires the company to consider its own credit risk and the
credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative
instruments. The adoption of eIc 173, which was adopted on a retrospective basis without restatement of prior periods did
not have a material impact on the company’s financial statements.
In 2008, the canadian Institute of chartered accountants (“cIca”) issued Handbook section 3064, “Goodwill and Intangible
assets” (“cIca 3064”). cIca 3064, which replaces section 3062, “Goodwill and other Intangible assets”, and section 3450,
“Research and development costs”, establishes standards for the recognition, measurement and disclosure of goodwill and
intangible assets. The company adopted this standard on a retrospective basis on January 1, 2009. The adoption of the new
standard did not have a material impact on the company’s financial statements.
In June 2009, the cIca amended section 3862, “financial Instruments – disclosures”, to include additional disclosure
requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require
a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. each level is
based on the transparency of the inputs used to measure the fair values of assets and liabilities:
level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.
level 2 – inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly
or indirectly.
level 3 – one or more significant inputs used in a valuation technique are unobservable in determining fair values of
the instruments.
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. The company has complied with the new disclosure requirements beginning in 2009 and this
disclosure is presented in note 12 of the consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2009, the cIca issued Handbook section 1582, “Business combinations” (“cIca 1582”). cIca 1582 requires
that all assets and liabilities of an acquired business will be recorded at fair value on the acquisition date and is consistent
with International financial Reporting standards (“IfRs”). obligations for contingent considerations and contingencies will
also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed
as incurred and that restructuring charges will be expensed in the periods after the acquisition date. The section applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period on or after January 1, 2011.
In January 2009, the cIca issued Handbook section 1601, “consolidations” (“cIca 1601”), and section 1602, “non-controlling
Interests” (“cIca 1602”). cIca 1601 establishes standards for the preparation of consolidated financial statements. cIca 1602
establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements
subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011.
In february 2008, the cIca announced that canadian public companies will be required to prepare their financial statements
in accordance with International financial Reporting standards (“IfRs”) for fiscal years beginning on or after January 1, 2011.
The company will issue its financial statements in the first quarter of 2011 in accordance with IfRs including comparative
data for 2010.
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Maple leaf foods Inc. 45
management’s discussion and analysis
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
The company’s disclosure controls and procedures are designed to provide reasonable assurance that material information
relating to the company, including its consolidated subsidiaries, is made known to Management in a timely manner so that
information required to be disclosed by the company under securities legislation is recorded, processed, summarized and
reported within the time periods specified in applicable securities legislation.
The company’s Management, under the direction and supervision of the company’s chief executive officer and chief
financial officer, are also responsible for establishing and maintaining internal control over financial reporting. These
controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with canadian Gaap.
The company’s chief executive officer and chief financial officer have evaluated, or caused to be evaluated under their
supervision, the effectiveness of the company’s internal control over financial reporting and disclosure controls and procedures
as at december 31, 2010 and have concluded that such controls and procedures are effective.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
for fiscal years beginning on or after January 1, 2011, canadian public companies will be required to prepare their financial
statements in accordance with International financial Reporting standards (“IfRs”). While IfRs uses a conceptual
framework similar to canadian Gaap, there are significant differences in accounting policies that must be evaluated. IfRs
will also require more disclosures than canadian Gaap. The company will issue its financial statements in the first quarter
of 2011 in accordance with IfRs including comparative data for 2010.
In order to meet the requirement of transition to IfRs, in 2008, the company established an enterprise-wide project team and
project plan. The IfRs project philosophy is to align with current accounting practices and policies, where possible, and to
minimize the impact of any changes to the business or reporting to shareholders. Regular reporting of the progress on the
IfRs conversion project is provided to senior Management and the audit committee of the Board of directors.
The company’s IfRs conversion project plan is comprised of three main phases: initial diagnostic assessment, design and
implementation. The company has completed the initial assessment and design phases of the plan and has identified and
documented the key accounting and disclosure differences between canadian Gaap and IfRs. The implementation phase
of the project is ongoing and will continue until the company issues its first IfRs financial statements for the quarter ended
March 31, 2011. substantial progress has been made in the implementation phase of the project as described below and in the
company’s Md&a for prior periods. The IfRs conversion project is on schedule and Management expects that the project
will be completed in time to enable the company to issue IfRs-compliant financial statements for the first quarter of 2011
as required.
a summary of key accounting differences and IfRs 1 elections was provided in the company’s annual Md&a for the year
ended december 31, 2009 as well as policy alternatives under IfRs, including certain exemptions and elections available on
transition under IfRs 1. outlined below are the IfRs 1 elections that the company expects to make on transition to IfRs and
the impact of these elections.
IFRS 1 Optional Exemptions
Business Combinations
IfRs 1 provides an exemption that allows an entity to elect not to retrospectively restate business combinations prior to
January 1, 2010 (the “Transition date”) in accordance with IfRs 3, “Business combinations”. The company elected not to
retrospectively restate those business combinations that occurred prior to the Transition date.
Fair Value as Deemed Cost
IfRs 1 allows an entity to elect to measure property and equipment at fair value in the opening IfRs balance sheet. fair value
would then become the deemed cost of the item. alternatively, an entity can retrospectively apply the historical cost model
in Ias 16, “property, plant and equipment”, to arrive at the carrying value of property, plant and equipment on the Transition
date. The company has elected to retroactively apply the historical cost model for property and equipment for IfRs purposes
on the Transition date.
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46 Maple leaf foods Inc.
management’s discussion and analysis
Employee Benefits
In accordance with Ias 19, “employee Benefits”, an entity may elect to use a “corridor” approach that leaves some actuarial
gains and losses unrecognized. Retrospective application of this approach requires an entity to split the cumulative actuarial
gains and losses from the inception of the plan until the date of transition to IfRs into a recognized portion and an unrecognized
portion. alternatively, an entity may elect to recognize all cumulative actuarial gains and losses at the date of transition to IfRs,
even if it uses the corridor approach for later actuarial gains and losses, recognized after the Transition date. The company
elected to recognize all cumulative actuarial gains and losses that existed at the Transition date in retained earnings for all
of the company’s employee benefit plans. This will result in a decrease in total shareholders’ equity.
Cumulative Translation Differences
Retrospective application of IfRs would require the company to determine cumulative currency translation differences in
accordance with Ias 21, “The effects of changes in foreign exchange Rates”, from the date a foreign subsidiary or associate
was formed or acquired. IfRs 1 allows an entity to elect not to calculate the translation difference retrospectively. Where this
election is made, the cumulative translation balance for all foreign operations is set to zero at the Transition date. The
company elected not to retrospectively calculate the cumulative translation balances and all of these balances will be reset to
zero on the Transition date. There is no impact to total shareholders’ equity as a result of this election.
Share-Based Payment Transactions
IfRs 1 allows an entity to elect to be exempt from retrospectively applying the requirements of IfRs 2, “share-Based
payments” for awards that are vested or settled prior to the Transition date. There are several differences between IfRs 2
and canadian Gaap. for example, when a share-based award vests in installments over the vesting period (graded vesting),
IfRs 2 requires each installment to be accounted for as a separate arrangement. canadian Gaap allows an entity to treat the
entire award as a pool, determine fair value using the average life of the instruments and then recognize the compensation
expense on a straight-line basis over the vesting period. since the company recorded share-based payment transactions in
this manner, retrospective application of IfRs 2 would require the company to revalue all of its prior share-based payment
transactions. Therefore, the company elected to apply this exemption. There is no impact to total shareholders’ equity as a
result of this exemption.
Decommissioning Liabilities Included in the Cost of Property, Plant and Equipment
IfRs 1 allows an entity to elect not to retrospectively apply the requirements of IfRIc 1, “changes in existing decommissioning,
Restoration and similar liabilities”. The company elected not to retrospectively recognize changes to these liabilities under
IfRIc 1 that may have occurred prior to the Transition date.
Borrowing Costs
Ias 23, “Borrowing costs”, requires an entity to capitalize borrowing costs relating to qualifying assets. Under IfRs 1, an entity
may elect to apply the transitional provisions of Ias 23, which allow an entity to choose the date to apply the capitalization
of borrowing costs relating to all qualifying assets as either the Transition date or an earlier date. The company elected to
apply the transitional provisions of Ias 23 and will choose the Transition date as the date to commence the capitalization of
borrowing costs to all qualifying assets.
IFRS 1 Mandatory Exemptions
Hedge Accounting
Hedge accounting may only be applied prospectively from the Transition date to transactions that meet the hedge
accounting criteria in Ias 39, “financial Instruments – Recognition and Measurement”, at that date. Hedging relationships
cannot be designated retrospectively and the supporting documentation cannot be created retrospectively. The company
designated all hedges appropriately under IfRs on the Transition date.
The company has determined that some of its commodity hedging activities will not qualify for hedge accounting under
IfRs. on the Transition date, this will result in a debit to retained earnings and a credit to accumulated other comprehensive
loss of $0.7 million with no impact to total shareholders’ equity.
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Maple leaf foods Inc. 47
management’s discussion and analysis
Non-controlling Interests
an entity must apply the requirements of Ias 27, “consolidated and separate financial statements”, which relate to
non-controlling interests prospectively from the Transition date. The company does not expect an impact related
to this exemption.
Estimates
estimates previously determined under canadian Gaap cannot be revised due to the application of IfRs except where
necessary to reflect differences in accounting policies.
Key Accounting Differences between Canadian GAAP and IFRS
changes in accounting policies upon adoption of IfRs are likely, but at this time the company cannot quantify the total or
net impact that the future adoption of IfRs will have on its consolidated financial statements and operating performance
measures. The International accounting standards Board has significant ongoing projects that could affect the ultimate
differences between canadian Gaap and IfRs and the impact on the company’s consolidated financial statements. outlined
below are the key areas where changes in accounting policy are expected that may affect the company’s consolidated
financial statements.
Securitization Programs
IfRs has different requirements than canadian Gaap to allow off-balance sheet treatment of accounts receivable
securitization programs. on october 27, 2010, the company finalized new accounts receivable securitization agreements that
do qualify for de-recognition under IfRs and is effective as of that date. accounts receivable that were sold under previous
securitization agreements will be recorded on the balance sheet for the restated 2010 comparative periods.
Biological Assets
Under IfRs, livestock is considered a separate asset class called biological assets, which must be carried at fair value, less
costs to sell. The company has finalized the transitional impact as of the Transition date, which results in a decrease in
inventory of $52.0 million, an increase in biological assets of $42.9 million, an increase in deferred tax assets of $2.3 million
and a decrease in retained earnings of $6.8 million. This change will result in periodic revaluation of the company’s biological
assets to fair value less costs to sell. The company is not able to estimate the impact of this change on future financial results.
Employee Benefits
Ias 19, “employee Benefits”, requires past service costs of defined benefit pension plans to be expensed on an accelerated
basis, with vested past service costs expensed immediately and unvested past service costs recognized on a straight-line
basis until the benefits become vested. Under canadian Gaap, past service costs are generally amortized on a straight-line
basis over the average remaining service period of employees active at the date of the amendment.
Ias 19 also requires an entity to make an accounting policy choice regarding the recognition of actuarial gains and losses.
The three options that are available are as follows: delayed recognition using a “corridor” approach; immediate recognition
through the income statement; and, immediate recognition through other comprehensive income.
Under IfRs 1, the company elected to recognize all cumulative actuarial gains and losses that existed at the Transition date
in opening retained earnings for all of its employee benefit plans. The expected transitional impact of this adjustment is a
decrease in other long-term assets of $161.1 million, a decrease in deferred tax liabilities of $41.2 million and a decrease in
retained earnings of $119.9 million. The company also finalized its accounting policy for pensions and post-retirement benefits
and the impact of IfRIc 14, “The limit on a defined Benefit asset, Minimum funding Requirements and their Interaction”.
The company’s chosen accounting policy will recognize gains and losses immediately through other comprehensive income.
The impact of IfRIc 14, is that $36.3 million of pension plan assets will not be recognized due to the asset ceiling requirements
of the interpretation and there is an additional liability of $20.6 million due to the minimum funding requirements under the
interpretation. These two adjustments result in a pre-tax charge to retained earnings on transition of $56.9 million. The
company is not able to estimate the impact of this change on future financial results.
CJ22144 MDA_E.indd 47
11-03-06 5:09 PM
48 Maple leaf foods Inc.
management’s discussion and analysis
Borrowing Costs
Ias 23, “Borrowing costs”, requires the capitalization of borrowing costs directly attributable to the acquisition, construction
or production of a qualifying asset as part of the cost of that asset. Under canadian Gaap, the company’s accounting policy is
to expense these borrowing costs as incurred. The impact of this change will be a periodic reduction in interest expense during
periods where significant capital projects are underway. The company has determined there will not be an adjustment on
transition to IfRs. The company is not able to estimate the impact of this change on future financial results.
Business Combinations
IfRs 3, “Business combinations”, does not allow the accrual of restructuring provisions pursuant to an acquisition. on the
Transition date any existing restructuring accruals that were the result of an acquisition will be written off through retained
earnings. The company has finalized the transitional impact as of the Transition date which results in a decrease in accrued
liabilities of $0.9 million, a decrease in deferred tax asset of $0.2 million and an increase in retained earnings of $0.7 million.
Income Taxes
Ias 12, “Income Taxes”, requires a balance sheet liability approach in assessing future income taxes very similar to cIca
Handbook section 3465 with some noticeable differences. Under Ias 12, deferred tax assets or liabilities are recognized for
the differences in tax bases on inter-company transfers. deferred taxes are calculated using the purchaser’s tax rate and any
current taxes payable/recoverable of the seller are recognized and not deferred. other than recording the tax effect of the
various other transitional adjustments and the reclassification of certain tax balances, the company does not expect to record
any significant tax-related adjustments on the transition to IfRs. The company is not able to estimate the impact of this
change on future financial results.
Cumulative Translation Differences
Under IfRs 1, the company will elect not to retrospectively calculate its cumulative translation balances, and all of these
balances will be reset to zero on the Transition date. The company has finalized the transitional impact as of the Transition
date, which results in an increase in accumulated other comprehensive loss of $48.1 million and a corresponding decrease in
retained earnings with no impact on total shareholders’ equity.
Share-Based Payment Transactions
When a share-based award vests in installments over the vesting period (graded vesting), IfRs requires each installment to
be accounted for as a separate arrangement. canadian Gaap allows an entity to treat the entire award as a pool, determine
fair value using the average life of the instruments and then recognize the compensation expense on a straight-line basis
over the vesting period. certain of the company’s historical share-based awards would have had a different quantification
and amortization of compensation expense related to this difference. The company has finalized the transitional impact
of this difference, which resulted in an increase in contributed surplus of $4.1 million and a decrease in retained earnings of
$4.1 million resulting in no impact on total shareholders’ equity.
Property and Equipment
IfRs has more specific guidance than canadian Gaap on the capitalization and componentization of assets, requiring that
significant asset components with different useful lives than the main asset be recorded and depreciated separately. as a
result of this difference, the company determined that certain assets should have separately capitalized components under
IfRs. The retrospective application of this standard resulted in a pre-tax decrease of $6.9 million in total shareholders’ equity
due to revised depreciation rates.
Impairment of Assets
canadian Gaap generally uses a two-step approach to impairment testing, first comparing asset carrying values with
undiscounted future cash flows to determine whether impairment exists, and then measuring any impairment by comparing
asset carrying values with their fair values. Ias 36, “Impairment of assets”, uses a one-step approach to determine if impairment
exists and for measuring that impairment, by comparing asset carrying values to the higher of fair value less costs to sell and
value in use (determined using discounted future cash flows). This can potentially result in asset impairments, where the
carrying values of assets were previously supported under canadian Gaap on an undiscounted cash flow basis, but would not
be supported on a discounted cash flow basis.
CJ22144 MDA_E.indd 48
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Maple leaf foods Inc. 49
management’s discussion and analysis
additionally, for the purposes of asset impairment testing, canadian Gaap requires assets to be grouped at the lowest level
for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. IfRs requires that
assets be tested for impairment at the level of the cash generating unit (or groups of cash generating units for the purposes of
testing goodwill impairment), which is the lowest level of assets that generate largely independent cash inflows. In many
cases, this requirement will result in a lower level grouping of assets, which could result in the identification of impairment
under IfRs for assets that were not considered impaired under canadian Gaap. The company has estimated that an
impairment adjustment on certain assets will decrease retained earnings by $80.0 million to $100.0 million before taxes on
the Transition date subject to finalization of the determination of cash generating units.
This summary of expected areas of significance should not be regarded as a complete list of adjustments that will result from
the transition to IfRs. It is intended to highlight those areas that have been completed and are most significant. The
company has completed the determination of the accounting adjustments necessary on the transition to IfRs based on
current IfRs pronouncements in existence at december 31, 2010.
Non-GAAP Financial Measures
The company uses the following non-Gaap measures: adjusted operating earnings, adjusted eps, eBITda, net debt
and Return on net assets (“Rona”). Management believes that these non-Gaap measures provide useful information to
investors in measuring the financial performance of the company for the reasons outlined below. These measures do not
have a standardized meaning prescribed by canadian Gaap and therefore they may not be comparable to similarly titled
measures presented by other publicly traded companies and should not be construed as an alternative to other financial
measures determined in accordance with canadian Gaap.
Adjusted Operating Earnings
The following table reconciles adjusted operating earnings to net earnings as reported under canadian Gaap in the audited
consolidated statements of earnings for the three years ended december 31, 2010. Management believes this is the most
appropriate basis upon which to evaluate operating results, as restructuring and other related costs, other income (expense)
and the change in fair value of non-designated interest rate swaps are not representative of operating results.
Meat
Products Agribusiness
Group
Group
2010
Bakery
Products
Group
net earnings
non-controlling interest
Income tax
earnings from operations before income taxes
Interest expense
change in the fair value of non-designated interest
rate swaps
earnings from operations before income taxes,
interest expense and the change in fair value of
Non-
allocated
Costs Consolidated
$
25,822
6,193
17,766
49,781
66,386
24,922
non-designated interest rate swaps
$
26,692
$
50,158
$
77,715
$
(13,476) $
141,089
Restructuring and other related costs
other income (loss)
64,001
(992)
(22)
698
15,548
(57)
1,581
189
81,108
(162)
adjusted operating earnings
$
89,701
$
50,834
$
93,206
$
(11,706) $ 222,035
CJ22144 MDA_E.indd 49
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50 Maple leaf foods Inc.
management’s discussion and analysis
Meat
products agribusiness
Group
Group
2009
Bakery
products
Group
non-
allocated
costs consolidated
$
52,147
net earnings
non-controlling interest
Income tax
earnings from operations before income taxes
Interest expense
change in the fair value of non-designated interest
rate swaps
earnings from operations before income taxes,
interest expense and the change in fair value of
net earnings
non-controlling interest
Income tax
earnings from operations before income taxes
Interest expense
change in the fair value of non-designated interest
rate swaps
earnings from operations before income taxes,
interest expense and the change in fair value of
non-designated interest rate swaps
$
33,159
$
46,891
$
99,399
$
(10,870)
$
168,579
Restructuring and other related costs
other income (loss)
22,298
(69)
2,026
(894)
4,908
(2,152)
1,913
(498)
31,145
(3,613)
adjusted operating earnings
$
55,388
$
48,023
$
102,155
$
(9,455)
$
196,111
Meat
products agribusiness
Group
Group
2008
Bakery
products
Group
non-
allocated
costs consolidated
$
(36,857)
7,902
27,296
87,345
81,234
–
7,211
(8,538)
(38,184)
88,651
–
non-designated interest rate swaps
$
(25,166)
$
20,523
$
87,192
$
(32,082)
$
50,467
product recall, restructuring and other related costs
59,832
other income (loss)
(5,211)
14,286
(4,677)
10,491
(14,704)
18,203
(272)
102,812
(24,864)
adjusted operating earnings
$
29,455
$
30,132
$
82,979
$
(14,151)
$
128,415
CJ22144 MDA_E.indd 50
11-03-08 6:09 PM
Maple leaf foods Inc.
51
management’s discussion and analysis
Adjusted Earnings per Share
The following table reconciles adjusted earnings per share to basic earnings per share as reported under canadian Gaap in
the audited consolidated statements of earnings for the three years ended december 31, 2010. Management believes this is
the most appropriate basis on which to evaluate financial results as restructuring and other related costs and the change in
the fair value of non-designated interest rate swaps are not representative of operational results.
($ per share)
2010
2009
2008
Basic earnings per share
one-time direct product recall costs (i)
Restructuring and other related costs(ii)
change in the fair value of non-designated interest rate swaps (iii)
adjusted earnings per share
$
0.19
$
–
0.45
0.12
0.76
$
$
0.40
–
0.17
–
0.57
$
(0.29)
0.22
0.36
–
$
0.29
(i) Includes per share impact of one-time direct product recall costs incurred in 2008, net of tax and non-controlling interest.
(ii) Includes per share impact of restructuring and other related costs, net of tax and non-controlling interest.
(iii) Includes per share impact of the change in fair value of non-designated interest rate swaps, net of tax.
Earnings before Interest, Tax, Depreciation and Amortization
The following table reconciles earnings from operations before restructuring and other related costs, change in the fair value
of non-designated interest rate swaps, interest, income taxes, and depreciation and intangible asset amortization (“eBITda”)
to net earnings as reported under canadian Gaap in the audited consolidated statements of earnings for the years ended as
indicated below. Management believes eBITda is useful in assessing the performance of the company’s ongoing operations
and its ability to generate cash flows to fund its cash requirements, including the company’s capital investment program.
($ thousands)
net earnings
non-controlling interest
Income taxes
earnings from operations before income taxes
Interest expense
Restructuring and other related costs
change in the fair value of non-designated interest rate swaps
depreciation and amortization
eBITda
2010
2009
2008
$
25,822
$
52,147
$
(36,857)
6,193
17,766
49,781
66,386
81,108
24,922
141,785
7,902
27,296
87,345
81,234
31,145
–
149,489
7,211
(8,538)
(38,184)
88,651
102,812
–
149,219
$ 363,982
$
349,213
$ 302,498
Net Debt
The following table reconciles net debt used in net debt to eBITda ratios reflected on page 30 to amounts reported under
Gaap in the consolidated balance sheet as at each of the three years ended december 31, 2010.
The company calculates net debt as long-term debt and bank indebtedness, less cash and cash equivalents. Management
believes this measure is useful in assessing the amount of financial leverage employed.
CJ22144 MDA_E.indd 51
11-03-06 5:09 PM
52 Maple leaf foods Inc.
management’s discussion and analysis
($ thousands)
Bank indebtedness
current portion of long-term debt
long-term debt
sub-total
cash and cash equivalents
Net debt
2010
2009
2008
$
15,858
$
4,247
$
8,894
496,835
389,078
206,147
834,557
$ 901,771
$ 1,044,951
179,244
1,200,244
$ 1,388,382
–
(29,316)
(365,518)
$ 901,771
$ 1,015,635
$ 1,022,864
Return on Net Assets
Return on net assets (“Rona”) is calculated by dividing tax-effected earnings from operations before restructuring and
other related costs, the change in fair value of non-designated interest rate swaps and interest by average monthly net assets.
net assets are defined as total assets less cash, future tax assets and non-interest bearing liabilities. Management believes
that Rona is an appropriate basis upon which to evaluate long-term financial performance.
Forward-Looking Statements
This document contains, and the company’s oral and written public communications often contain, forward-looking
statements that are based on current expectations, estimates, forecasts and projections about the industries in which the
company operates and beliefs and assumptions made by the Management of the company. such statements include, but are
not limited to, statements with respect to objectives and goals, as well as statements with respect to beliefs, plans, objectives,
expectations, anticipations, estimates and intentions. specific forward-looking statements in this document include, but are
not limited to, statements with respect to improving business trends in 2011, expectations regarding actions to reduce costs,
restore and/or promote volumes and/or increase prices, improve efficiencies, the expected use of cash balances, source of
funds for ongoing business requirements, capital investments and debt repayment, expectations regarding sufficiency of the
allowance for uncollectible accounts and the potential impact of the adoption of IfRs. Words such as “expect”, “anticipate”,
“intend”, “attempt”, “may”, “will”, “plan”, “believe”, “seek”, “estimate”, and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not guarantees of future performance and
involve assumptions and risks and uncertainties that are difficult to predict.
In addition, these statements and expectations concerning the performance of the company’s business in general are based
on a number of factors and assumptions including, but not limited to: the condition of the canadian, United states, United
Kingdom and Japanese economies; the rate of exchange of the canadian dollar to the U.s. dollar, British pound and the
Japanese yen; the availability and prices of raw materials, energy and supplies; product pricing; the availability of insurance;
the competitive environment and related market conditions; improvement of operating efficiencies whether as a result of the
protein business transformation or otherwise; continued access to capital; the cost of compliance with environmental and
health standards; no adverse results from ongoing litigation; no unexpected actions of domestic and foreign governments; and
the general assumption that none of the risks identified below or elsewhere in this document will materialize. all of these
assumptions have been derived from information currently available to the company including information obtained by the
company from third-party sources. These assumptions may prove to be incorrect in whole or in part. In addition, actual
results may differ materially from those expressed, implied or forecasted in such forward-looking statements, which reflect
the company’s expectations only as of the date hereof.
CJ22144 MDA_E.indd 52
11-03-08 6:11 PM
Maple leaf foods Inc. 53
management’s discussion and analysis
factors that could cause actual results or outcomes to differ materially from the results expressed or implied by
forward-looking statements include, among other things:
• the risks associated with implementing and executing the protein business transformation;
• the risks associated with changes in the Company’s shared systems and processes;
• the risks posed by food contamination, consumer liability and product recalls;
• the risks associated with the Company’s outstanding indebtedness;
•
the impact on pension expense and funding requirements of fluctuations in the market prices of fixed income and equity
securities and changes in interest rates;
• the risks associated with acquisitions and capital expansion projects;
• the cyclical nature of the cost and supply of hogs and the competitive nature of the pork market generally;
• the risks related to the health status of livestock;
• the impact of a pandemic on the Company’s operations;
• the Company’s exposure to currency exchange risks;
•
the ability of the Company to hedge against the effect of commodity price changes through the use of commodity futures
and options;
• the impact of international events on commodity prices and the free flow of goods;
• the risks associated with a consolidating retail environment;
• the risks posed by compliance with extensive government regulation;
• the risks posed by the adoption of the International Financial Reporting Standards;
• the risks posed by litigation;
• the impact of changes in consumer tastes and buying patterns;
• the impact of extensive environmental regulation and potential environmental liabilities;
•
the risks associated with complying with differing employment laws and practices globally and the potential for work
stoppages due to non-renewal of collective agreements;
• the risks associated with the Company’s independent distributors; and
• the risks posed by competition.
The Company cautions the reader that the foregoing list of factors is not exhaustive. These factors are discussed in more detail
under the heading “Risk Factors” presented previously in this document. The reader should review such section in detail. The
company does not intend to, and the company disclaims any obligation to, update any forward-looking statements, whether
written or oral, or whether as a result of new information, future events or otherwise except as required by law.
Additional information concerning the Company, including the Company’s Annual Information Form, is available on SEDAR
at www.sedar.com.
Maple Leaf Foods Inc. (“Maple Leaf” or the “Company”) is a leading Canadian value-added meat, meals and bakery company
committed to delivering quality food products to consumers around the world. Headquartered in Toronto, Canada, the
company employs approximately 21,000 people at its operations across canada and in the United states, europe and asia.
CJ22144 MDA_E.indd 53
11-03-06 5:09 PM
independent auditors’ report
To the Shareholders
We have audited the accompanying consolidated financial statements of Maple Leaf Foods Inc., which comprise the
consolidated balance sheets as at December 31, 2010 and December 31, 2009 and the consolidated statements of earnings,
comprehensive income, retained earnings, 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 Canadian generally accepted accounting principles, 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.
Auditor’s 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 an 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 opinions.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position
of Maple Leaf Foods Inc. as at December 31, 2010 and December 31, 2009, and its consolidated results of its operations and its
consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 24, 2011
CJ22144 Financl_E.indd 54
11-03-08 6:14 PM
Maple leaf foods Inc. 55
2010
2009
$
–
$
29,316
84,117
136,663
319,263
29,957
6,229
14,766
–
$ 590,995
1,037,428
333,833
20,737
850,382
163,420
–
189,221
–
331,781
18,067
4,301
15,328
29,224
$ 617,238
1,059,694
328,063
22,116
857,278
137,239
35,836
$ 2,996,795
$ 3,057,464
$
15,858
$
4,247
521,746
496,835
63,465
–
477,071
206,147
37,837
12,111
$ 1,097,904
$ 737,413
389,078
15,289
192,311
84,836
834,557
27,851
187,523
81,070
1,217,377
$ 2,996,795
1,189,050
$ 3,057,464
consolidated Balance sheets
as at december 31
(In thousands of Canadian dollars)
ASSETS
Current assets
cash and cash equivalents
accounts receivable (note 3)
notes receivable (note 3)
Inventories (note 4)
Income and other taxes recoverable
future tax asset (note 20)
prepaid expenses and other assets
assets held for sale (note 6)
property and equipment (note 5)
other long-term assets (note 7)
future tax asset (note 20)
Goodwill (note 8)
other intangible assets (note 9)
assets held for sale (note 6)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness
accounts payable and accrued charges
current portion of long-term debt (note 10)
other current liabilities
liabilities held for sale (note 6)
long-term debt (note 10)
future tax liability (note 20)
other long-term liabilities (note 11)
non-controlling interest
shareholders’ equity (note 14)
contingencies and commitments (note 23)
see accompanying notes to the consolidated financial statements
on behalf of the Board:
MiChael h. M CCain
dIrector
Diane M CGarry
dIrector
CJ22144 Financl_E.indd 55
11-03-06 5:17 PM
56 Maple leaf foods Inc.
consolidated statements of earnings
Years ended december 31
(In thousands of Canadian dollars, except share amounts)
sales
cost of goods sold
Gross margin
selling, general and administrative expenses
earnings from operations before the following:
Restructuring and other related costs (note 13)
change in fair value of non-designated interest rate swaps
other income (note 18)
earnings from operations before interest and income taxes
Interest expense (note 19)
earnings from operations before income taxes
Income taxes (note 20)
earnings from operations before non-controlling interest
non-controlling interest
net earnings
Basic earnings per share (note 17)
diluted earnings per share (note 17)
Weighted average number of shares (millions)
See accompanying Notes to the Consolidated Financial Statements
2010
2009
$ 4,968,119
4,228,928
$ 739,191
517,156
$ 5,221,602
4,487,378
$ 734,224
538,113
$ 222,035
$ 196,111
(81,108)
(24,922)
162
(31,145)
–
3,613
$
116,167
$ 168,579
66,386
81,234
$
49,781
$
87,345
17,766
27,296
$
32,015
$ 60,049
$
$
$
6,193
25,822
0.19
0.19
135.6
$
$
$
7,902
52,147
0.40
0.39
129.8
CJ22144 Financl_E.indd 56
11-03-06 5:17 PM
Maple leaf foods Inc. 57
consolidated statements of comprehensive Income
Years ended december 31
(In thousands of Canadian dollars)
net earnings for the year
other comprehensive loss (note 15)
change in accumulated foreign currency translation adjustment
change in unrealized loss on cash flow hedges
comprehensive income
2010
2009
$
25,822
$
52,147
(20,310)
(4,026)
(24,336)
1,486
$
$
(15,644)
12,871
(2,773)
49,374
$
$
consolidated statements of Retained earnings
Years ended december 31
(In thousands of Canadian dollars)
Retained earnings, beginning of year
net earnings for the year
adoption of new accounting standard (note 2(p)(i))
dividends declared ($0.16 per share; 2009: $0.16 per share)
premium on shares issued from Restricted share Unit Trust
Retained earnings, end of year
See accompanying Notes to the Consolidated Financial Statements
2010
2009
$ 344,839
$ 314,649
25,822
–
(21,677)
(2,665)
52,147
(207)
(20,913)
(837)
$ 346,319
$ 344,839
CJ22144 Financl_E.indd 57
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58 Maple leaf foods Inc.
consolidated statements of cash flows
Years ended december 31
(In thousands of Canadian dollars)
CASH PROVIDED BY (USED IN)
Operating activities
net earnings
add (deduct) items not affecting cash
depreciation and amortization
stock-based compensation (note 16)
non-controlling interest
future income taxes
loss (gain) on sale of property and equipment
Gain on sale of investments
amortization of terminated interest rate swaps
change in fair value of non-designated interest rate swaps
change in fair value of derivative financial instruments
change in other long-term receivables
decrease (increase) in net pension asset
change in provision for restructuring and other related costs
other
change in non-cash operating working capital
cash provided by operating activities
Financing activities
dividends paid
dividends paid to non-controlling interest
Increase in long-term debt
decrease in long-term debt
proceeds on issuance of share capital (note 14)
purchase of treasury stock (note 14)
Increase in financing costs
other
cash used in financing activities
Investing activities
additions to property and equipment
proceeds from disposal of property and equipment
proceeds from sale of investments
purchase of canada Bread shares (note 22)
other
cash used in investing activities
Decrease in cash and cash equivalents
cash and cash equivalents, beginning of year
cash and cash equivalents (bank indebtedness), end of year
Net cash and cash equivalents is comprised of:
cash and cash equivalents
Bank indebtedness
net cash and cash equivalents (bank indebtedness), end of year
See accompanying Notes to the Consolidated Financial Statements
2010
2009
$
25,822
$
52,147
141,785
17,725
6,193
(12,264)
(217)
–
2,010
24,922
1,372
–
(1,077)
60,823
(2,729)
19,303
$ 283,668
(21,677)
(747)
129,078
(297,842)
31,287
(496)
(2,656)
(1,437)
$ (164,490)
(162,304)
4,610
140
(2,690)
139
$ (160,105)
(40,927)
25,069
(15,858)
$
–
(15,858)
(15,858)
$
149,489
18,400
7,902
(7,390)
1,137
(501)
2,106
–
(13,373)
90
962
15,046
(7,828)
(128,981)
$ 89,206
(20,913)
(672)
–
(262,795)
1,480
(3,190)
–
3,110
$ (282,980)
(162,893)
23,717
1,540
–
(145)
$ (137,781)
(331,555)
356,624
$ 25,069
29,316
(4,247)
25,069
$
CJ22144 Financl_E.indd 58
11-03-06 5:17 PM
Maple leaf foods Inc. 59
notes to the consolidated financial statements
(Tabular amounts in thousands of canadian dollars, except share amounts)
Years ended december 31, 2010 and 2009
1. THE COMPANY
Maple leaf foods Inc. (“Maple leaf foods” or the “company”) is a leading canadian-based value-added meat, meals and
bakery company, serving wholesale, retail and foodservice customers across north america and internationally. The
company’s results are organized into three segments: Meat products Group, agribusiness Group and Bakery products Group.
2. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of the company, which are in accordance with canadian Generally
accepted accounting principles (“Gaap”).
(a) Principles of consolidation
The consolidated financial statements include the accounts of the company and its subsidiaries. Investments in associated
companies over which the company exercises significant influence, are accounted for by the equity method. Variable Interest
entities (“VIes”), as defined by accounting Guideline 15 – “consolidation of Variable Interest entities” are consolidated by the
company when it is determined that the company will, as the primary beneficiary, absorb the majority of the VIes’ expected
losses and/or expected residual returns. Investments in equity securities of entities over which the company does not exert
significant influence are accounted for at cost or at fair value depending on whether such investments are publicly traded.
(b) Use of estimates
The preparation of periodic financial statements necessarily involves the use of estimates. estimates are used when
accounting for items and matters such as allowances for uncollectible accounts, sales of receivables, inventory obsolescence,
depreciation and amortization, asset valuations, impairment assessments, fair value determinations, employee benefits,
pensions, taxes and any corresponding valuation allowances, restructuring and other related costs, stock-based compensation
and contingencies. should the underlying assumptions change, the actual amounts could differ from those estimates.
(c) Translation of foreign currencies
The accounts of the company are presented in canadian dollars. The financial statements of foreign subsidiaries whose unit
of measure is not the canadian dollar are translated into canadian dollars using the exchange rate in effect at the year-end
for assets and liabilities and the average exchange rates for the period for revenue, expenses and cash flows. exchange gains
or losses on translation of foreign subsidiaries are included in accumulated other comprehensive income, a component of
shareholders’ equity until realized.
(d) Revenue recognition
The majority of the company’s revenue is derived from the sale of product to retail and foodservice customers as well as the
sale of rendering products and by-products. The company recognizes revenues from product sales at the fair value of the
consideration received or receivable, net of estimated returns and an estimate of sales incentives provided to customers.
Revenue is recognized when the customer takes ownership of the product, title has transferred, all the risks and rewards
of ownership have transferred to the customer, recovery of the consideration is probable, the company has satisfied its
performance obligations under the arrangement, and has no ongoing involvement with the sold product. The value of sales
incentives provided to customers is estimated using historical trends and is recognized at the time of sale as a reduction
of revenue. sales incentives include various rebate and promotional programs provided to the company’s customers.
These rebates are primarily based on achievement of specified volume or growth in volume levels. In subsequent periods,
the company monitors the progress of customers related to sales incentive programs and makes any required adjustments
to both revenue and sales incentive accruals.
except for fresh bread, the company generally does not accept returns of spoiled products from customers. To account for
spoiled products, in certain cases customers are provided with allowances to cover any damage or spoilage, and such
allowances are deducted from sales at the time of revenue recognition. In the case of fresh bread, customer returns are
deducted from sales to that customer.
CJ22144 Financl_E.indd 59
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60 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
(e) Financial instruments
The Company’s financial assets and financial liabilities are classified as held-for-trading, available-for-sale, held-to-maturity,
loans and receivables or other financial liabilities. The classification depends on the purpose for which the financial
instruments were acquired and their characteristics. Held-for-trading is the required classification for all derivative financial
instruments unless they are specifically designated within an effective hedge relationship. Held-for-trading financial
instruments are measured at fair value with changes in fair value recognized in net earnings in the period in which they arise.
available-for-sale financial assets are measured at fair value with changes in fair value recognized in other comprehensive
income in the period in which they arise. Held-to-maturity financial assets, loans and receivables and other financial liabilities
are initially recorded at fair value and are subsequently measured at amortized cost.
(f) Hedge accounting
The Company uses derivatives and other non-derivative financial instruments to manage exposures to fluctuations in interest
rates, foreign exchange rates and commodity prices.
at the inception of a hedging relationship, the Company designates and formally documents the relationship between the
hedging instrument and the hedged item, the risk management objective and the strategy for undertaking the hedge. The
documentation identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the
type of hedging instrument used and how effectiveness will be assessed.
The Company also formally assesses, both at inception and at least quarterly thereafter, whether or not the derivatives that
are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the fair
values or cash flows of the hedged items. If a hedge relationship becomes ineffective, it no longer qualifies for hedge
accounting and any subsequent change in the fair value of the hedging instrument is recognized in earnings.
When hedge accounting is appropriate, the hedging relationship is designated as a cash flow hedge, a fair value hedge or a
hedge of foreign currency exposure of a net investment in a self-sustaining foreign operation.
In a cash flow hedge, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other
comprehensive income until the hedged item affects net earnings. The Company uses cash flow hedges primarily to convert
fixed-rate U.S. dollar-denominated notes payable to fixed-rate notes denominated in Canadian dollars. The Company also
uses cash flow hedges to mitigate the risk from variable cash flows associated with forecasted foreign currency-denominated
cash flows and forecasted purchases and sales of various commodities.
In a fair value hedge, the change in fair value of the hedging derivative is offset in the consolidated statement of earnings by
the change in fair value of the hedged item relating to the hedged risk.
In a net investment hedge, the change in fair value of the hedging instruments is recorded, to the extent effective, directly in
other comprehensive income. These amounts are recognized in income when the corresponding cumulative translation
adjustments from self-sustaining foreign operations are recognized in income. The Company has designated certain U.S.
dollar-denominated notes payable as net investment hedges of U.S. operations.
Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statement of earnings. When
either a fair value hedge or cash flow hedge is discontinued, any cumulative adjustment to either the hedged item or other
comprehensive income is recognized in earnings as the hedged item affects earnings, or when the hedged item is derecognized.
If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value, with any
gains or losses recorded in earnings, without any offset from the hedged item.
Changes in the fair value of derivatives that do not qualify for hedge accounting are carried at fair value in the consolidated
balance sheets, and subsequent changes in their fair value are recorded in the consolidated statements of earnings.
(g) Inventories
Inventories are valued at the lower of cost and net realizable value, with cost being determined substantially on a first-in,
first-out basis. Included in the cost of inventory are direct product costs, direct labour and an allocation of variable and fixed
manufacturing overhead including depreciation.
CJ22144 Financl_E.indd 60
11-03-06 5:17 PM
Maple leaF FoodS INC. 61
Notes to the Consolidated Financial Statements
(h) Impairment or disposal of long-lived assets
The Company reviews long-lived assets or asset groups held and used including property and equipment and other
intangible assets subject to amortization for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying
amount of the asset to the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the
asset or asset group. an impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair
value of the asset or asset group. long-lived assets are classified as held-for-sale when certain criteria are met and a sale is
expected to be completed within one year. The assets to be disposed of are separately presented in the balance sheet and
reported at the lower of their carrying amount or fair value, less costs to sell, and are no longer depreciated.
(i) Property and equipment
property and equipment are recorded at cost including, where applicable, interest capitalized during the construction or
development period. Construction in process assets are capitalized during construction and depreciation commences when
the asset is available for use. depreciation is calculated using the straight-line basis, which is based on the expected useful
life of the assets as follows:
Buildings
Machinery and equipment
15 – 40 years
3 – 10 years
(j) Financing costs
Costs incurred to obtain long-term debt financing are amortized over the term of such debt and the amount amortized is
included in interest expense for the year.
(k) Goodwill and other intangible assets
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts
allocated to identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date
of the business combination to the Company’s reporting units that are expected to benefit from the synergies of the business
combination. The Company assigns value to certain acquired identifiable intangible assets, primarily brands, customer
relationships, poultry production quota and delivery routes.
The Company has both definite life and indefinite life intangible assets. definite life intangibles are amortized on a
straight-line basis over their estimated useful lives.
Trademarks
Customer relationship intangibles
Software
10 years
20 – 25 years
3 – 10 years
Goodwill is not amortized and is tested for impairment annually in the second quarter and otherwise as required if events
occur that indicate that it is more likely than not that the carrying value of a reporting unit has been impaired. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Indefinite life
intangibles are tested for impairment annually in the fourth quarter and, as required, if events occur that indicate it is more
likely than not the carrying value has been impaired. The impairment tests for indefinite life intangible assets and goodwill
were performed in 2010 and 2009 and no impairments were identified.
(l) Income taxes
The Company uses the asset and liability method of accounting for income taxes. accordingly, future tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. In addition, the effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the year that includes the enactment or substantive enactment date. a valuation allowance is
recognized against future tax assets when it is more likely than not that all or some part of the asset will not be realized.
CJ22144 Financl_E.indd 61
11-03-06 5:17 PM
62 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
(m) Employee benefit plans
The Company accrues obligations and costs in respect of employee benefit plans. The cost of pensions and other retirement
benefits earned by employees is actuarially determined using the projected benefit method prorated on service and
Management’s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and
expected health care costs. Changes in these assumptions could affect future pension expense. For the purpose of calculating
the expected return on plan assets, those assets are valued at fair value. past service costs arising from plan amendments are
amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment.
actuarial gains and losses in excess of 10% of the greater of the actuarial liabilities and the fair value of assets at the
beginning of the year and all gains and losses due to changes in plan provisions are amortized on a straight-line basis over
the expected average remaining service period of the active plan members. When a restructuring of a benefit plan gives rise
to both a curtailment and settlement of obligations, the curtailment is accounted for prior to the settlement.
(n) Stock-based compensation
The Company applies the fair value method of accounting for its stock-based compensation. The fair value at grant date of
stock options (“options”) is estimated using the Black-Scholes option-pricing model. The fair value of restricted stock units
(“RSUs”) is measured based on the fair value of the underlying shares on the grant date. Compensation cost is recognized on
a straight-line basis over the expected vesting period of the stock-based compensation. The Company estimates forfeitures at
the grant date and revises the estimate as necessary if subsequent information indicates that actual forfeitures differ
significantly from the original estimate.
(o) Statement of cash flows
Cash and cash equivalents are defined as cash and short-term securities with maturities less than 90 days at the date of
acquisition, less bank indebtedness.
(p) Accounting changes
(i)
effective January 1, 2009, the Company adopted emerging Issues Committee abstract 173, “Credit Risk and the Fair
Value of Financial assets and Financial liabilities” (“eIC 173”). eIC 173 requires the Company to consider its own credit
risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities,
including derivative instruments. The adoption of eIC 173, which was adopted on a retrospective basis without
restatement of prior periods, did not have a material impact on the Company’s financial statements.
(ii) In 2008, the Canadian Institute of Chartered accountants (“CICa”) issued Handbook Section 3064, “Goodwill and
Intangible assets” (“CICa 3064”). CICa 3064, which replaces Section 3062, “Goodwill and other Intangible assets”, and
Section 3450, “Research and development Costs”, establishes standards for the recognition, measurement and disclosure
of goodwill and intangible assets. The Company adopted this standard on a retrospective basis on January 1, 2009. The
adoption of the new standard did not have a material impact on the Company’s financial statements.
(iii) In June 2009, the CICa amended Section 3862, “Financial Instruments – disclosures”, to include additional disclosure
requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments
require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements.
each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities:
level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.
level 2 – inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly
or indirectly.
level 3 – one or more significant inputs used in a valuation technique are unobservable in determining fair values of
the instruments.
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. The Company has complied with the new disclosure requirements beginning in 2009 and
this disclosure is presented in Note 12.
CJ22144 Financl_E.indd 62
11-03-06 5:17 PM
Maple leaF FoodS INC. 63
Notes to the Consolidated Financial Statements
(q) Recent accounting pronouncements
In January 2009, the CICa issued Handbook Section 1582, “Business Combinations” (“CICa 1582”). CICa 1582 requires that
all assets and liabilities of an acquired business be recorded at fair value on the acquisition date and is consistent with
International Financial Reporting Standards (“IFRS”). obligations for contingent considerations and contingencies will also
be recorded at fair value at the acquisition date. The standard also requires that acquisition-related costs be expensed as
incurred and that restructuring charges be expensed in the periods in which they are incurred after the acquisition date. The
Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period on or after January 1, 2011.
In January 2009, the CICa issued Handbook Section 1601, “Consolidations” (“CICa 1601”), and Section 1602, “Non-
controlling Interests” (“CICa 1602”). CICa 1601 establishes standards for the preparation of consolidated financial
statements. CICa 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. These standards apply to interim and annual consolidated
financial statements relating to fiscal years beginning on or after January 1, 2011.
In February 2008, the CICa announced that Canadian public companies will be required to prepare their financial statements
in accordance with International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011.
The Company will issue its financial statements in the first quarter of 2011 in accordance with IFRS including comparative
data for 2010.
(r) Comparative figures
Certain 2009 comparative figures have been reclassified to conform to the financial statement presentation adopted in 2010.
3. ACCOUNTS RECEIVABLE
Trade receivables (a)
less: allowance for bad debts
Net trade receivables
other receivables
2010
2009
$
37,433
$ 166,422
(6,764)
(10,204)
$
30,669
$ 156,218
53,448
33,003
$
84,117
$ 189,221
(a) during 2010, the Company entered into a new revolving securitization program that replaced the existing accounts
receivable financing facilities. at december 31, 2010, the Company has sold certain of its trade accounts receivable to
an entity owned by a financial institution. The Company retains servicing responsibilities and retains a limited recourse
obligation for delinquent receivables. at december 31, 2010, trade accounts receivable being serviced under this program
amounted to $292.9 million (2009: $174.8 million under the former facilities). In return for the sale of its trade receivables,
the Company received cash of $156.2 million (2009: $174.8 million under former facilities) and notes receivable in the
amount of $136.7 million (2009: nil). The notes receivable are non-interest bearing and are due on the monthly accounts
receivable settlement dates.
CJ22144 Financl_E.indd 63
11-03-06 5:17 PM
64 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
4. INVENTORIES
Raw materials
Work in process
Finished goods
packaging
Spare parts
5. PROPERTY AND EQUIPMENT
land
Building
Machinery and equipment
Construction in progress
Total property and equipment
land
Building
Machinery and equipment
Construction in progress
Total property and equipment
2010
2009
$
45,872
$ 49,617
50,662
158,074
25,380
39,275
52,836
166,988
25,067
37,273
$ 319,263
$ 331,781
2010
Cost
Accumulated
Depreciation
$
59,507
$
–
704,385
(299,182)
1,581,643
(1,103,456)
94,531
–
Net Book
Value
$ 59,507
405,203
478,187
94,531
$ 2,440,066
$ (1,402,638)
$ 1,037,428
2009
Cost
accumulated
depreciation
Net Book
Value
$
60,501
$
–
$ 60,501
672,956
(255,378)
417,578
1,532,193
(1,045,185)
487,008
94,607
–
94,607
$ 2,360,257
$ (1,300,563)
$ 1,059,694
depreciation expense included in earnings for the current year was $139.5 million (2009: $147.2 million). details of asset
impairments are discussed in Note 13.
CJ22144 Financl_E.indd 64
11-03-06 5:17 PM
Maple leaF FoodS INC. 65
Notes to the Consolidated Financial Statements
6. ASSETS HELD FOR SALE
assets and related liabilities held for sale in 2009 are those relating to the Company’s Burlington, ontario pork processing
facility, which was sold in the fourth quarter of 2010. The facility’s assets held for sale, and liabilities related thereto, are
comprised of the following:
as at december 31
Assets held for sale
accounts receivable
Inventories
property and equipment
Classified as:
Current
long-term
Liabilities related to assets held for sale
accounts payable and accrued charges
7. OTHER LONG-TERM ASSETS
deferred pension asset (Note 21)
other
8. GOODWILL
Balance, beginning of period
acquisitions
Finalization of prior purchase equations
Reversal of acquisition-related accruals (net of tax)
effect of changes in foreign exchange rates
Balance, end of period
2009
$
11,096
18,128
35,836
$ 65,060
$
29,224
35,836
$ 65,060
$
12,111
2010
2009
$ 327,407
$ 322,656
6,426
5,407
$ 333,833
$ 328,063
2010
2009
$ 857,278
$ 876,261
1,010
–
–
(7,906)
–
(689)
(8,112)
(10,182)
$ 850,382
$ 857,278
CJ22144 Financl_E.indd 65
11-03-06 5:17 PM
66 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
9. OTHER INTANGIBLE ASSETS
Brands
Poultry
Customer
Quota Relationships
Software
Other
Total
2010
Cost
Balance december 31, 2009 $
59,591
$
28,567
$
14,440
$
40,230
$
1,545
$
144,373
additions
disposals
effect of changes in foreign
exchange rates
–
–
(25)
–
–
–
–
–
(1,074)
30,389
–
30,389
–
–
(254)
(254)
–
(1,099)
Balance December 31, 2010
$
59,566
$
28,567
$
13,366
$
70,619
$
1,291
$
173,409
Amortization and impairment
Balance december 31, 2009 $
4,933
$
amortization
Impairments
effect of changes in foreign
exchange rates
639
–
(2)
Balance December 31, 2010
$
5,570
$
–
–
–
–
–
$
1,497
$
704
$
545
623
(106)
1,156
–
–
$
2,559
$
1,860
$
–
–
–
–
–
$
7,134
2,340
623
(108)
$
9,989
Net carrying value
December 31, 2010
Cost
$
53,996
$
28,567
$
10,807
$
68,759
$
1,291
$
163,420
Brands
poultry
Customer
Quota Relationships
Software
other
Total
2009
Balance december 31, 2008
$
57,053
$
28,567
$
13,341
$
–
$
2,047
$
101,008
additions
disposals
effect of changes in foreign
exchange rates
2,629
–
(91)
–
–
–
1,700
–
(601)
40,230
–
–
–
(502)
44,559
(502)
–
(692)
Balance december 31, 2009
$
59,591
$
28,567
$
14,440
$
40,230
$
1,545
$
144,373
Amortization and impairment
Balance december 31, 2008
$
2,788
$
amortization
Impairments
effect of changes in foreign
exchange rates
933
1,212
–
Balance december 31, 2009
$
4,933
$
Net carrying value
–
–
–
–
–
$
863
673
–
(39)
$
–
$
704
–
–
$
1,497
$
704
$
–
–
–
–
–
$
3,651
2,310
1,212
(39)
$
7,134
december 31, 2009
$
54,658
$
28,567
$
12,943
$
39,526
$
1,545
$
137,239
Intangible asset impairments relate to restructuring in the Bakery Products Group (Note 13).
CJ22144 Financl_E.indd 66
11-03-06 5:17 PM
Maple leaF FoodS INC. 67
Notes to the Consolidated Financial Statements
10. LONG-TERM DEBT
Notes payable:
– due 2010 (US$75.0 million and Cad$115.0 million) (a)
$
– due 2010 (Cad$2.6 million) (d)
– due 2011 (US$207.0 million) (b)
– due 2011 to 2016 (Cad$34.8 million) (d)
– due 2014 (US$98.0 million and Cad$105.0 million) (b)
– due 2015 (Cad$90.0 million) (c)
– due 2015 (Cad$7.0 million) (e)
– due 2016 (US$7.0 million and Cad$20.0 million) (b)
– due 2020 (Cad$30.0 million) (e)
Revolving term facility (f)
other (g)
less: Current portion
2010
2009
–
–
205,892
37,684
201,549
89,067
7,000
26,775
29,823
$ 193,810
2,704
216,775
43,078
206,610
–
–
27,122
–
285,000
345,000
3,123
5,605
$ 885,913
$ 1,040,704
496,835
206,147
$ 389,078
$ 834,557
(a) In april 2000, the Company issued notes payable due april 2010. The notes payable include a Canadian dollar-denominated
tranche for Cad$115.0 million, bearing interest at 7.7% per annum, and a U.S. dollar-denominated tranche for US$75.0 million,
bearing interest at 8.5% per annum. Through the use of cross-currency interest rate swaps, the Company hedged the U.S. dollar
tranche into Canadian dollar-denominated debt, at an effective fixed interest rate of 7.7% per annum. In april 2010, the
Company repaid the notes payable in full and settled the related cross-currency interest rate swap. at december 31, 2009, fair
value of the swap liability was $32.4 million.
(b) In december 2004, the Company issued $500.0 million of notes payable. The notes were issued in tranches of U.S. and
Canadian dollar-denominations, with maturity dates from seven to 12 years and bearing interest at fixed annual
coupon rates.
details of the five tranches are as follows:
principal
US$207.0 million
US$98.0 million
Cad$105.0 million
US$7.0 million
Cad$20.0 million
Maturity date
annual Coupon
2011
2014
2014
2016
2016
5.2%
5.6%
6.1%
5.8%
6.2%
Interest is payable semi-annually. Through the use of cross-currency interest rate swaps, the Company hedged: US$177.0 million
of debt maturing in 2011 into Canadian dollar-denominated debt bearing interest at an annual fixed rate of 5.4%, US$98.0 million
of debt maturing in 2014 into Canadian dollar-denominated debt bearing interest at an annual fixed rate of 6.0%, and US$2.0 million
of debt maturing in 2016 into Canadian dollar-denominated debt bearing interest at an annual fixed rate of 6.1%. at december 31,
2010, the fair value of the swap liabilities were $94.6 million based on year-end exchange rates (2009: $86.7 million).
(c) In april 2010 and May 2010, the Company issued Cad$75.0 million of notes payable, bearing interest at 6.08% per annum
and Cad$15.0 million of notes payable, bearing interest at 5.76% per annum, respectively. The notes payable are due in
april 2015.
CJ22144 Financl_E.indd 67
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68 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
(d) With the acquisition of Schneider Corporation in april 2004, the Company assumed liabilities outstanding in respect of
debentures previously issued by Schneider Corporation. In april 2004, the debentures provided for principal payments
totalling $13.1 million and $60.0 million, bearing interest at fixed annual rates of 10.0% and 7.5%, respectively. The
debentures require annual principal repayments over the term of the bonds that have final maturity dates of September
2010 and october 2016, respectively. These debentures were recorded at their fair value on the acquisition closing date.
The difference between the acquisition date fair value and the face value of the bonds is amortized over the remaining life
of the debentures on an effective yield basis. In September 2010, the Company repaid the 2010 debenture in full. on
december 31, 2010, the remaining book value was $37.7 million for the 2016 debenture (2009: $43.1 million) and the
remaining principal payments outstanding was $34.8 million (2009: $39.3 million).
(e) In december 2010, the Company issued or agreed to issue notes payable in tranches of U.S. and Canadian dollar-
denominations, with maturity dates from five to 11 years and bearing interest at fixed annual coupon rates. The Company
received proceeds of Cad$37.0 million in december 2010 and the remaining proceeds in January 2011.
details of the five tranches are as follows:
principal
Cad$7.0 million
Cad$30.0 million
Cad$102.5 million
US$213.0 million
Maturity date
annual Coupon
2015
2020
2021
2021
4.9%
5.9%
5.9%
5.2%
Interest is payable semi-annually. Through the use of cross-currency interest rate swaps, the Company hedged US$213.0
million of debt maturing in 2021 into Canadian dollar-denominated debt bearing interest at an annual fixed rate of 6.1%. at
december 31, 2010, the fair value of the swap liabilities were $12.2 million based on year-end exchange rates.
(f) The Company has an unsecured revolving debt facility with a principal amount of $870.0 million. The maturity date of the
facility is May 31, 2011. This facility can be drawn in Canadian dollars, U.S. dollars, or British pounds, and bears interest
based on bankers’ acceptance rates for Canadian dollar loans and lIBoR for U.S. dollar and British pound loans. as at
december 31, 2010, $400.8 million of the revolving facility was utilized (2009: $476.6 million), of which $115.8 million was
in respect of letters of credit and trade finance (2009: $131.6 million).
(g) during 2010, the Company completed an agreement with a syndicate of banks, including the majority of the banks in
its existing revolving credit facility, to augment the Company’s primary revolving credit facility with a $250.0 million
short-term bank lending facility maturing May 31, 2011. The facility was terminated subsequent to year-end (Note 27).
(h) The Company has other various lending facilities, with interest rates ranging from non-interest bearing to 7.1% per
annum. These facilities are repayable over various terms from 2011 to 2016. as at december 31, 2010, $12.2 million
(2009: $14.5 million) was outstanding, of which $9.1 million (2009: $8.9 million) was in respect of letters of credit.
The Company’s estimated blended average effective cost of borrowing for 2010 was approximately 4.8% (2009: 5.1%) after
taking into account the impact of interest rate hedges.
Required repayments of long-term debt are as follows:
2011
2012
2013
2014
2015
Thereafter
Total long-term debt
$ 496,835
5,945
5,735
208,597
103,518
65,283
$ 885,913
CJ22144 Financl_E.indd 68
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Maple leaF FoodS INC. 69
Notes to the Consolidated Financial Statements
11. OTHER LONG-TERM LIABILITIES
derivative instruments (Note 12)
pension liabilities (Note 21)
post-retirement benefits (Note 21)
other
2010
2009
$
71,676
$
77,328
34,275
66,706
19,654
31,067
65,062
14,066
$
192,311
$ 187,523
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
Capital
The Company’s objective is to maintain a cost effective capital structure that supports its long-term growth strategy and
maximizes operating flexibility. In allocating capital to investments to support its earnings goals, the Company establishes
internal hurdle return rates for capital initiatives. Capital projects are generally financed with senior debt and internal
cash flows.
The Company uses leverage in its capital structure to reduce the cost of capital. The Company’s goal is to maintain its
primary credit ratios and leverage at levels that are designed to provide continued access to investment-grade credit pricing
and terms. The Company measures its credit profile using a number of metrics, primarily net debt to earnings before interest,
income taxes, depreciation, amortization, restructuring and other related costs. The Company’s various credit facilities, all of
which are unsecured, are subject to certain financial covenants. as at december 31, 2010, the Company was in compliance with
all of these covenants.
In addition to senior debt and equity, the Company may use operating leases and limited recourse accounts receivable
securitization programs as additional sources of financing.
The Company has maintained a stable dividend distribution that is based on a sustainable net earnings base. From time to
time, the Company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under
its Restricted Share Unit plan.
For the year ended december 31, 2010, total equity increased by $28.3 million to $1,217.4 million. during the same period, total
debt net of cash and cash equivalents decreased by $113.9 million to $901.8 million.
Financial Instruments
The Company’s financial assets and liabilities are classified into the following categories:
Cash and cash equivalents
accounts receivable
Notes receivable
Bank indebtedness
accounts payable and accrued liabilities
long-term debt
derivative instruments(i)
Held-for-trading
loans and receivables
loans and receivables
other financial liabilities
other financial liabilities
other financial liabilities
Held-for-trading
(i) These derivative instruments may be designated as cash flow hedges or as fair value hedges as appropriate.
CJ22144 Financl_E.indd 69
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70 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
The fair value of financial assets and liabilities classified as loans and receivables and other financial liabilities (excluding
long-term debt) approximate their carrying value due to their short-term nature. Financial assets and liabilities classified as
held-for-trading and all derivative financial instruments are recorded at fair value. The fair value of long-term debt as at
december 31, 2010 was $924.9 million as compared to its carrying value of $885.9 million on the consolidated balance sheet.
The fair value of the Company’s long-term debt was estimated based on discounted future cash flows using current rates for
similar financial instruments subject to similar risks and maturities. The fair values of the Company’s interest rate and foreign
exchange derivative financial instruments were estimated using current market measures for interest rates and foreign
exchange rates. Commodity futures and options contracts are exchange-traded and fair value is determined based on
exchange prices.
The risks associated with the Company’s financial instruments and policies for managing these risks are detailed below.
Credit Risk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counterparties to meet their
payment obligations.
In the normal course of business, the Company is exposed to credit risk from its customers. The Company performs
ongoing credit evaluations of new and existing customers’ financial condition and reviews the collectibility of its trade
and other receivables in order to mitigate any possible credit losses. as at december 31, 2010 approximately $8.2 million
(2009: $12.5 million) of the Company’s accounts receivable were greater than 60 days past due. The Company maintains an
allowance for doubtful accounts that represents its estimate of uncollectible amounts. The components of this allowance
include a provision related to specific losses estimated on individually significant exposures and a general provision based
on historical trends of collections. as at december 31, 2010, the Company has recorded an allowance for doubtful accounts of
$6.8 million (2009: $10.2 million). average accounts receivable days sales outstanding for the year is consistent with historic
trends. There are no significant impaired accounts receivable that have not been provided for in the allowance for doubtful
accounts. The Company believes that the allowance for doubtful accounts sufficiently covers any credit risk related to past
due or impaired accounts receivable balances.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high
credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller
customers. The Company does, however, conduct a significant amount of business with a small number of large grocery
retailers. The Company’s five largest customers comprise approximately 39.8% (2009: 42.7%) of consolidated pre-securitized
accounts receivable at december 31, 2010 and the two largest customers comprise approximately 20.4% (2009: 21.2%) of
consolidated sales.
The Company is exposed to credit risk on its cash and cash equivalents (comprising primarily deposits and short-term
placements with Canadian chartered banks) and non-exchange-traded derivatives contracts. The Company mitigates this
credit risk by only dealing with counterparties that are major international financial institutions with long-term debt ratings
of single a or better.
The Company’s maximum exposure to credit risk at the balance sheet date consisted primarily of the carrying value of
non-derivative financial assets and non-exchange-traded derivatives with positive fair values.
CJ22144 Financl_E.indd 70
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Maple leaF FoodS INC.
71
Notes to the Consolidated Financial Statements
Liquidity Risk
liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
The contractual undiscounted principal cash flows payable in respect of financial liabilities as at the balance sheet date were
as follows:
as at december 31, 2010
Financial liabilities
Bank indebtedness
accounts payable and accrued charges
long-term debt
Cross-currency interest rate swaps
Total
due within due between due between due after
3 years
1 year 1 and 2 years 2 and 3 years
Total
$
15,858
$
521,746
496,835
54,645
–
–
5,945
–
$
$
–
–
–
–
$ 15,858
521,746
5,735
377,398
885,913
–
41,461
96,106
$ 1,089,084
$
5,945
$
5,735
$ 418,859
$ 1,519,623
The Company manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single
source of credit, maintaining sufficient undrawn committed credit facilities and managing the maturity profiles of financial
assets and financial liabilities to minimize re-financing risk.
as at december 31, 2010, the Company had available undrawn committed credit of $683.7 million under the terms of its
principal banking arrangements. These banking arrangements, which mature in 2011, are subject to certain covenants and
other restrictions.
Market Risk
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will
fluctuate due to changes in market interest rates.
The Company’s interest rate risk arises from long-term borrowings issued at fixed rates that create fair value interest rate risk
and variable rate borrowings that create cash flow interest rate risk. In addition, the Company’s cash balances are typically
invested in short-term interest bearing assets.
at december 31, 2010, the Company had variable rate debt of $294.3 million with a weighted average interest rate of 3.0%
(2009: $350.1 million with a weighted average of 1.5%). In addition, the Company is exposed to floating interest rates on its
accounts receivable securitization programs. as at december 31, 2010, the amount sold pursuant to these programs was
$155.5 million at a weighted average interest rate of 2.4% (2009: $174.8 million with a weighted average rate of 2.4%).
The Company manages its interest rate risk exposure by using a mix of fixed and variable rate debt and periodically using
interest rate derivatives to achieve the desired proportion of variable to fixed-rate debt.
as at december 31, 2010, 89% of the Company’s outstanding debt and revolving accounts receivable securitization program
were not exposed to interest rate movements (2009: 57%).
Foreign Exchange Risk
Foreign exchange risk refers to the risk that the value of financial instruments or cash flows associated with the instruments
will fluctuate due to changes in foreign exchange rates.
The Company’s foreign exchange risk arises primarily from transactions in currencies other than Canadian dollars, U.S.
dollar-denominated borrowings and investments in foreign operations.
The Company uses cross-currency interest rate swaps to mitigate its exposure to changes in exchange rates related to U.S.
dollar-denominated debt. These swaps are used primarily to effectively convert fixed-rate U.S. dollar-denominated notes
payable to fixed-rate notes denominated in Canadian dollars and are accounted for as cash flow hedges.
CJ22144 Financl_E.indd 71
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72 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
The following table summarizes the notional amounts and interest rates of the Company’s interest rate swaps and
cross-currency interest rate swaps, all of which are designated as a hedging instrument in a hedging relationship:
(In thousands of currency units)
Maturity
2011
2014
2021
Notional
amount
Receive
rate(i)
Notional
amount
US$
177,000
100,000
213,000
Cad$
231,025
138,000
215,366
5.2%
5.6%
5.2%
pay
rate(i)
5.4%
6.0%
6.1%
(i)
The Receive rate is the annualized rate that is applied to the notional amount of the derivative and paid by the counterparty to the Company. The Pay rate
is the annualized rate that is applied to the notional amount of the derivative and paid by the Company to the counterparty.
a portion of the Company’s U.S. dollar-denominated notes payable is not swapped into Canadian dollars and is designated as
a net investment hedge of its U.S. operations. at december 31, 2010, this amount of notes payable designated as a hedge of
the Company’s net investment in U.S. operations was US$35.0 million (december 31, 2009: US$35.0 million). Foreign
exchange gains and losses on the designated notes payable are recorded in shareholders’ equity in the foreign currency
translation component of accumulated other comprehensive income and offset translation adjustments on the underlying net
assets of the U.S. operations, which are also recorded in accumulated other comprehensive income. The gain on the net
investment hedge recorded in other comprehensive loss for the year ended december 31, 2010 was $1.9 million before taxes
(2009: gain of $24.8 million).
The Company uses foreign exchange forward contracts to manage foreign exchange transaction exposures. The primary
currencies to which the Company is exposed are the U.S. dollar and the Japanese yen. Qualifying foreign currency forward
contracts are accounted for as cash flow hedges. as of december 31, 2010, $142.8 million of anticipated foreign currency-
denominated sales have been hedged with underlying foreign exchange forward contracts settling at various dates beginning
January 2011. The aggregate fair value of these forward contracts was a gain of $2.2 million at december 31, 2010 (2009: gain
of $2.9 million) and was recorded in other current assets.
at december 31, 2010, the Company had fixed-rate debt of $599.4 million with a weighted average interest rate of 5.7%. Changes
in market interest rates cause the fair value of long-term debt with fixed interest rates to fluctuate but do not affect net earnings,
as the Company’s debt is carried at amortized cost and the carrying value does not change as interest rates change.
Similar to fixed-rate debt, the fair value of the Company’s fixed-pay cross-currency interest rate swaps fluctuates with changes
in market interest rates but the associated cash flows do not change and earnings are not affected. The fair value of the
Company’s cross-currency interest rate swaps designated as cash flow hedges are primarily driven by changes in foreign
exchange rates rather than changes in interest rates.
For cross-currency interest rate swaps designated as cash flow or fair value hedges of foreign exchange risk, changes in
the fair values of the hedged item and the hedging instruments attributable to foreign exchange rate movements offset
completely in the income statement in the same period. as a consequence, these financial instruments are not exposed to
foreign exchange risks and do not affect net earnings.
It is estimated that, all else constant, a hypothetical 10% change in the value of the Canadian dollar against all relevant currencies
would result in a change in the fair value of the Company’s foreign exchange forward contracts of $18.7 million, an offsetting
change in net earnings of $3.2 million and a corresponding change in other comprehensive income of $9.6 million.
Commodity Price Risk
The Company is exposed to price risk related to commodities such as live hogs, fuel costs and purchases of certain other
agricultural commodities used as raw materials including feed grains and wheat. The Company may use fixed price contracts
with suppliers as well as exchange-traded futures and options to manage its exposure to price fluctuations.
CJ22144 Financl_E.indd 72
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Maple leaF FoodS INC.
73
Notes to the Consolidated Financial Statements
derivatives designated as a hedge of an anticipated or forecasted transaction are accounted for as cash flow hedges. Changes
in the fair value of the hedging derivatives are recorded in other comprehensive income to the extent the hedge is effective in
mitigating the exposure to the related anticipated transaction, and subsequently reclassified to earnings to offset the impact
of the hedged items when they affect earnings.
The Company also uses futures to minimize the price risk assumed under forward priced contracts with suppliers. The futures
contracts are designated and accounted for as fair value hedges.
The Company applies the normal purchases classification to certain contracts that are entered into for the purpose of procuring
commodities to be used in production.
It is estimated that, all else constant, a hypothetical 10% change in market prices of the underlying commodities would result
in a change in the fair value of underlying outstanding derivative contracts of $9.2 million, a corresponding change in net
earnings of $0.7 million and a corresponding change in other comprehensive income of $5.6 million. These amounts exclude
the offsetting impact of the commodity price risk inherent in the transactions being hedged.
The fair values and notional amounts of derivative financial instruments are shown below:
2010
2009
Notional
Amount
Fair Value
Asset Liability
Notional
amount
Fair Value
asset
liability
Cash flow hedges
Cross-currency interest rate swaps
US $ 490,000 $
– $ 106,761 US $ 352,000 $
– $ 114,012
Foreign exchange forward contracts(i)
142,750
2,215
119,033
2,905
Commodity futures contracts(i)
18,528
460
21,538
–
736
Fair value hedges
Commodity futures contracts(i)
$ 60,437 $
– $ 2,869
$ 18,903 $
– $
417
Derivatives not designated in a formal
hedging relationship
Interest rate swaps
Foreign exchange forward contracts(i)
Commodity futures contracts(i)
Total
Current
Non-current
Total
$ 590,000 $
– $ 24,922
$
– $
– $
87,100
620
42,408
–
–
129
119,306
10,985
845
36
–
–
–
$ 2,835 $ 135,141
$ 2,835 $ 63,465
–
71,676
$
$
3,786 $ 115,165
3,786 $ 37,837
–
77,328
$ 2,835 $ 135,141
$
3,786 $ 115,165
(i) Notional amounts are stated at the contractual Canadian dollar equivalent.
derivatives not designated in a formal hedging relationship are classified as held-for-trading. Net gains or losses on financial
instruments held-for-trading consist of realized and unrealized gains or losses on derivatives which were de-designated or
were otherwise not in a formal hedge relationship.
For the years ended december 31, 2010 and 2009, the amount of hedge ineffectiveness recognized in earnings was not material.
Non-designated Interest Rate Swaps
during the second quarter, the Company executed $590.0 million of interest rate swaps. Swaps totalling $330.0 million
started on april 28, 2010 and have an expiry date of april 28, 2015 with an average interest rate of 3.34%. Swaps totalling
$260.0 million start on december 8, 2011 and have an expiry date of december 8, 2015 with an average interest rate of 4.18%.
These swaps are not currently designated in a formal hedging relationship. For the year ended december 31, 2010, the change
in fair value recorded in net earnings was a loss of $24.9 million.
CJ22144 Financl_E.indd 73
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74 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
Fair Value Hierarchy
assets and liabilities carried at fair value must be classified using a three-level hierarchy that reflects the significance and
transparency of the inputs used in making the fair value measurements. The table below sets out fair value measurements of
financial instruments using the fair value hierarchy (Note 2(p)(ii)).
assets:
Foreign exchange forward contracts
liabilities:
Commodity futures contracts
Interest rate swaps
level 1
level 2
level 3
Total
$
$
–
–
$
$
2,835
2,835
$ 3,458
$
–
–
131,683
$ 3,458
$ 131,683
$
$
$
$
–
–
–
–
–
$ 2,835
$ 2,835
$ 3,458
131,683
$ 135,141
There were no transfers between levels during the year ended december 31, 2010.
13. RESTRUCTURING AND OTHER RELATED COSTS
during 2010, the Company recorded restructuring and other related costs of $81.1 million ($61.2 million after-tax). of this
pre-tax amount, $32.9 million related to an asset impairment charge on the Company’s Burlington, ontario pork processing
facility. a further $13.1 million related to severances and asset write-downs due to the planned closure of a prepared meats
facility in Berwick, Nova Scotia. The Company’s bakery business also incurred $9.6 million in severance and retention costs
related to the planned replacement of three bakeries in the Toronto area with one facility in Hamilton, ontario. The balance
of the restructuring costs comprises ongoing costs incurred in connection with previously announced restructuring
initiatives of the Company.
during 2009, the Company recorded restructuring and other related costs of $31.1 million ($22.8 million after-tax). of these
amounts, $22.1 million related to severance and lease termination costs in the Company’s further processed protein operations.
The Company’s bakery business announced the consolidation of its pasta and sandwich operations and recorded $3.5 million
that included severances and a write-down of $1.2 million related to the discontinuance of a brand name. The balance of the
restructuring costs was incurred in connection with the ongoing restructuring initiatives of the Company.
CJ22144 Financl_E.indd 74
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Maple leaF FoodS INC.
75
Notes to the Consolidated Financial Statements
The following table provides a summary of costs recognized and cash payments made in respect of the above-mentioned
restructuring and other related costs and the corresponding liability as at december 31, 2010, all on a pre-tax basis:
asset
impairment
and
accelerated
Severance
Site closing
depreciation Retention
pension
Total
Balance at december 31, 2008
$
4,737
$
5,252
$
–
$
225
$
Charges
Cash payments
Non-cash items
15,399
(8,722)
–
11,098
(7,237)
–
4,648
–
(4,648)
–
(140)
–
Balance at december 31, 2009
$
11,414
$
9,113
$
–
$
85
$
–
–
–
–
–
$ 10,214
31,145
(16,099)
(4,648)
$ 20,612
Charges
Cash payments
Non-cash items
25,808
(10,462)
–
8,543
(9,799)
45,575
–
–
(45,575)
384
(24)
–
798
81,108
–
(20,285)
(798)
(46,373)
Balance at December 31, 2010
$ 26,760
$
7,857
$
–
$
445
$
–
$ 35,062
14. SHAREHOLDERS’ EQUITY
Shareholders’ equity consists of the following:
Share capital(i), (ii)
Retained earnings
Contributed surplus(i)
accumulated other comprehensive loss (Note 15)
Treasury stock(iii)
2010
2009
$ 902,942
346,319
56,734
(78,540)
(10,078)
$ 869,485
344,839
53,429
(54,204)
(24,499)
$ 1,217,377
$ 1,189,050
(i)
On December 16, 2008, the Company issued 7,368,421 units, each unit consisting of one subscription receipt and 0.4 of a common share purchase warrant for
net proceeds of $69.1 million. Each whole warrant entitled the holder to purchase one common share at any time until December 16, 2010 at a price of $9.50
per common share. For each subscription receipt, the holder was entitled to receive one common share of the Company on August 4, 2009, or, at the Com-
pany’s election, $9.50 in cash. The Company allocated $66.9 million of the proceeds to the subscription receipts and $2.2 million was recorded in contributed
surplus related to the warrants.
On August 4, 2009, the Company settled the subscription receipts through the issuance of 7,368,421 shares of the Company. As a result, the $66.9 million
recorded as subscription receipts was added to share capital.
The 2,947,367 common share purchase warrants issued on December 16, 2008 were exercised on December 14, 2010. As a result, the net proceeds of $28.0
million ($9.50 per share) and the $2.2 million value of the warrants which had been recorded in contributed surplus were added to share capital.
(ii) On June 30, 2010 and August 23, 2010, a shareholder converted 11,700,000 and 10,300,000 non-voting common shares to common shares, respectively. On
December 31, 2010 there were 140,044,089 (2009: 114,774,802) voting common shares issued and outstanding and nil (2009: 22,000,000) non-voting common
shares issued and outstanding.
(iii) Treasury stock consists of shares held in a trust established for the purpose of settling future grants under the Restricted Share Unit Plan. During the year,
1,173,647 common shares (2009: 1,063,810) were issued from the trust. In the current year, the Company also repurchased 55,100 common shares (2009:
358,000) through the trust for cash consideration of $0.5 million (2009: $3.2 million).
CJ22144 Financl_E.indd 75
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76 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
on June 2, 2009, the Company filed articles of amendment to increase its authorized capital by creating an unlimited
number of preference shares issuable in one or more series. No preference shares have been issued.
details of share transactions relating to both voting and non-voting shares during the years are as follows:
Balance, december 31, 2008
Issued for settlement on exercise of subscription receipts
Issued for settlement of RSUs and exercise of options (Note 16)
Balance, december 31, 2009
Issued for settlement of RSUs and exercise of options (Note 16)
Issued for settlement on exercise of warrants
Balance, December 31, 2010
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
accumulated other comprehensive loss consists of the following:
Years ended december 31,
Balance at the beginning of the year – net (i)
adoption of new accounting standard(ii)
adjusted balance at the beginning of the year
Change in accumulated foreign currency translation adjustment – net (i)
Change in unrealized loss on cash flow hedges – net (iii)
other comprehensive loss for the year
Balance at end of year
Number of
shares
Share
capital
129,258,681
$ 800,734
7,368,421
147,700
66,936
1,815
136,774,802
$ 869,485
321,920
2,947,367
3,301
30,156
140,044,089
$ 902,942
2010
2009
$
(54,204)
$
(52,331)
–
900
$
(54,204)
$
(51,431)
(20,310)
(4,026)
$
$
(24,336)
(78,540)
(15,644)
12,871
$
(2,773)
$ (54,204)
(i)
Balance at the beginning of the current year is net of tax of $0.8 million (2009: net of tax of $7.3 million). The change in accumulated foreign currency
translation adjustment is net of tax of $0.2 million for 2010 (2009: $6.5 million).
(ii) Effective January 1, 2009, the Company adopted Emerging Issues Committee Abstract 173, “Credit Risk and the Fair Value of Financial Assets and
Financial Liabilities” (“EIC 173”). EIC 173 requires the Company to consider its own credit risk and the credit risk of the counterparty in determining the fair
value of financial assets and financial liabilities, including derivative instruments.
(iii) Change in unrealized derivative loss on cash flow hedges is net of tax of $1.1 million for 2010 (2009: $6.8 million).
The Company estimates that $0.5 million of net unrealized derivative losses included in other comprehensive loss will be
reclassified into net earnings within the next 12 months. The actual amount of this reclassification will be impacted by future
changes in the fair value of financial instruments designated as cash flow hedges and the actual amount reclassified could
differ from this estimated amount. during the year, a loss of approximately $1.8 million, net of tax of $0.8 million (2009: $0.3
million, net of tax of $0.1 million) was released to net earnings from accumulated other comprehensive loss, which is included
in the net change for the year.
CJ22144 Financl_E.indd 76
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Maple leaF FoodS INC.
77
Notes to the Consolidated Financial Statements
The ending balance of accumulated other comprehensive loss comprises accumulated unrealized foreign currency translation
losses of $68.4 million, net of tax of $0.6 million (2009: $48.1 million, net of tax of $0.8 million) and unrealized losses on cash
flow hedges of $10.1 million, net of tax of $3.6 million (2009: $6.1 million, net of tax of $2.5 million).
16. STOCK-BASED COMPENSATION
Under the Maple leaf Foods Share Incentive plan as at december 31, 2010, the Company may grant options to its employees
and employees of its subsidiaries to purchase up to 7,487,514 shares of common stock and may grant Restricted Share Units
(RSUs) entitling employees to receive up to 1,597,980 common shares. options and RSUs are granted from time to time by the
Board of directors on the recommendation of the Human Resources and Compensation Committee. The vesting conditions
are specified by the Board of directors and may include continued service of the employee with the Company and/or other
criteria based on measures of the Company’s performance.
Stock Options
a summary of the status of the Company’s outstanding stock options as at december 31, 2010 and 2009, and changes during
these years are presented below:
outstanding, beginning of year
exercised
expired and terminated
outstanding, end of year
options currently exercisable
2010
2009
Weighted
average
exercise
price
options
outstanding
Weighted
average
exercise
price
Options
outstanding
2,805,250
$
13.02
4,449,450
$
(321,000)
(1,501,150)
983,100
900,100
$
$
10.30
(141,500)
12.73
14.13
14.21
(1,502,700)
2,805,250
2,190,950
$
$
13.29
10.46
14.06
13.02
12.12
all outstanding share options vest and become exercisable over a period not exceeding six years (time vesting) from the date
of grant and/or upon the achievement of specified performance targets (based on return on net assets, earnings, share price
or total stock return relative to an index). The options have a term of between seven and 10 years.
The number of options outstanding at december 31, 2010, including details on time and performance vesting conditions of
the options, is as follows:
options outstanding
options currently
exercisable
options subject to
time vesting
Range of
exercise
prices
Number
outstanding
Weighted
average
exercise
price
Weighted
average
remaining
term
Number
(in years) exercisable
Weighted
average
exercise
price
Number
outstanding
Weighted
average
exercise
price
$11.64 to $13.50
$14.56 to $16.88
$11.64 to $16.88
667,000
316,100
983,100
$
$
13.07
16.36
14.13
0.9
1.7
1.1
584,000
316,100
900,100
$
$
13.05
16.36
14.21
83,000
–
83,000
$
$
13.24
–
13.24
The fair value of options issued was determined using the Black-Scholes option pricing model and is being amortized to income
over the vesting period of the related options. as at december 31, 2009, the fair value of options has been fully amortized.
CJ22144 Financl_E.indd 77
11-03-06 5:17 PM
78 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
Restricted Stock Units
The Company has two plans under which RSUs may be granted to employees. The awards under the Share Incentive plan
(adopted in 2004) are satisfied by the issuance of treasury shares on maturity, while the awards granted under the Restricted Share
Unit plan (adopted in 2006) are satisfied by shares to be purchased on the open market by a trust established for that purpose.
In both plans, RSUs are subject to time vesting and performance vesting based on the achievement of specified stock
performance targets relative to a North american index of food stocks. Under the 2004 plan, one common share in the capital
of the Company will be issued to the holder on vesting. all outstanding RSUs under the 2004 plan vest over a period of
between three and five years from the date of grant. Under the 2006 plan, between 0.5 and 1.5 common shares in the capital of
the Company can be distributed for each RSU as a result of the performance of the Company against the target levels required
for vesting. all outstanding RSUs under the 2006 plan vest over a period of three years from the date of grant.
a summary of the status of the Company’s RSU plan as at december 31, 2010 and 2009, and changes during these years, are
presented below:
outstanding, beginning of year
Granted
Issued
expired and terminated
outstanding, end of year
2010
2009
Weighted
average
fair value at
grant
Weighted
average
fair value at
grant
RSUs
outstanding
RSUs
outstanding
6,357,430
$
2,131,272
(1,174,317)
(928,950)
10.11
11.39
11.58
5,983,990
$
2,509,400
(1,070,010)
14.80
(1,065,950)
6,385,435
$
9.58
6,357,430
$
11.51
8.91
13.01
12.19
10.11
The fair value of RSUs granted in 2010 on the date of grant was $19.1 million (2009: $17.1 million), after taking account of
forfeiture due to performance, and is amortized to income on a pro rata basis over the vesting periods of the related RSUs.
The amortization of the fair value of all RSUs in 2010 is $17.7 million (2009: $18.4 million).
The fair value of the total RSUs granted in the year is based on the following weighted average assumptions:
expected RSU life (in years)
Forfeiture rate
discount rate
dividend yield
2010
3.0
15.0%
1.4%
1.7%
2009
3.0
15.0%
1.3%
1.6%
CJ22144 Financl_E.indd 78
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Maple leaF FoodS INC. 79
Notes to the Consolidated Financial Statements
17. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share (“epS”):
Years ended december 31
Basic
Stock options(i)
diluted
2010
Weighted
Average
Net Number of
2009
Weighted
average
Net Number of
Earnings
Shares(ii)
EPS earnings
Shares(ii)
epS
$ 25,822
135.6
$ 0.19 $
52,147
129.8 $
0.40
–
25,822
3.5
139.1
–
–
0.19
52,147
2.5
132.3
(0.01)
0.39
(i) Excludes the effect of approximately 3.8 million options, restricted share units and warrants (2009: 9.6 million) to purchase common shares that are anti-dilutive.
(ii) In millions.
18. OTHER INCOME (EXPENSE)
Gain (loss) on sale of property and equipment
Recovery from insurance claims
Rental income
other
19. INTEREST EXPENSE
Interest expense on long-term debt
other interest expense, net
2010
217
–
509
(564)
162
$
$
2009
$
(1,137)
3,328
475
947
$
3,613
2010
2009
$
61,293
$
75,779
5,093
5,455
$
66,386
$
81,234
CJ22144 Financl_E.indd 79
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80 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
20. INCOME TAXES
Income tax expense varies from the amount that would be computed by applying the combined federal and provincial
statutory income tax rates as a result of the following:
2010
2009
Income tax expense according to combined statutory rate of 30.2% (2009: 31.4%)
$
15,038
$
27,423
Increase (decrease) in income taxes resulting from:
Statutory rate changes
difference between current rates and future enacted rates
Tax benefits related to prior acquisitions
Rate differences in other jurisdictions
Manufacturing and processing credit
Non-taxable (gains) losses
Stock-based compensation
dividends not taxable
Non-deductible expenses
Valuation allowance on U.S. tax losses
other
131
3,065
(1,500)
(562)
(500)
710
–
–
158
2,405
(1,179)
(2,135)
430
–
(930)
(450)
(121)
35
(2)
1,384
896
766
$
17,766
$
27,296
CJ22144 Financl_E.indd 80
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Maple leaF FoodS INC.
81
Notes to the Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities
at december 31 are presented below:
Future tax assets:
losses carried forward
accrued liabilities
Tax on intra-subsidiary asset transfer
other
Valuation allowance
Cash basis farming
Future tax liabilities:
property and equipment
pension asset
Goodwill and other intangible assets
Unrealized foreign exchange gain on long-term debt
other
Cash basis farming
Classified in the consolidated financial statements as:
Future tax asset – current
Future tax asset – non-current
Future tax liability – non-current
Net future tax asset (liability)
2010
2009
$
122,283
$ 122,892
22,546
18,588
15,315
(29,309)
–
20,970
19,552
12,221
(32,537)
381
$ 149,423
$ 143,479
$
32,268
$ 38,799
69,668
24,428
606
10,552
224
68,737
22,219
875
14,283
–
$
137,746
$ 144,913
$
6,229
$
4,301
20,737
(15,289)
22,116
(27,851)
$
11,677
$
(1,434)
In accordance with CICa Handbook Section 3465, “accounting for Income Taxes”, the Company reviews all available positive
and negative evidence to evaluate the recoverability of future tax assets. This includes a review of the Company’s cumulative
losses in recent years, the carry forward period related to the tax losses, and the tax planning strategies available to the
Company. Upon applying these accounting rules to the Company’s accumulated tax losses in the U.S. frozen bakery business,
there continues to be sufficient uncertainty surrounding the timing and amount of losses that will be utilized. accordingly, the
Company has recorded a valuation allowance of $22.5 million (US$22.6 million) as at december 31, 2010 (2009: $24.1 million
(US$23.0 million)) with respect to accumulated tax losses in the U.S.
CJ22144 Financl_E.indd 81
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82 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
21. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
Information about the Company’s defined benefit plans as at december 31, in aggregate, is as follows:
other post-
retirement
benefits
Total
pensions
other post-
retirement
benefits
2010
Total
Total
pensions
2009
Total
accrued benefit obligation:
Balance, beginning of year
$
76,310
$ 1,023,068
$ 1,099,378
$
67,733
$
933,863
$ 1,001,596
Current service cost
Interest cost
Benefits paid
actuarial (gains) losses
employee contributions
plan amendments
Special termination benefits
Curtailments
664
4,321
(3,347)
(3,930)
–
–
–
–
17,809
57,794
(71,589)
106,152
4,184
1,733
350
(50)
18,473
62,115
(74,936)
102,222
4,184
1,733
350
(50)
533
4,328
(3,176)
6,892
–
–
–
12,412
59,200
12,945
63,528
(79,357)
(82,533)
92,900
4,050
99,792
4,050
–
–
–
–
Balance, end of year
$
74,018
$ 1,139,451
$ 1,213,469
$
76,310
$ 1,023,068
$ 1,099,378
plan assets:
Fair value, beginning of year $
actual return on plan assets
employer contributions
employee contributions
–
–
3,347
-
$ 1,159,730
$ 1,159,730
$
97,746
9,496
4,184
97,746
12,843
4,184
–
–
3,176
–
$ 1,077,892
$
1,077,892
167,443
7,806
4,050
167,443
10,982
4,050
Benefits paid
(3,347)
(71,589)
(74,936)
(3,176)
(79,357)
(82,533)
asset transfer to Company
defined contribution plan
Fair value, end of year
$
Funded status – plan
–
–
(18,859)
(18,859)
$ 1,180,708
$ 1,180,708
$
–
–
(18,104)
(18,104)
$ 1,159,730
$ 1,159,730
surplus (deficit)
$
(74,018)
$
41,257
$
(32,761)
$
(76,310)
$
136,662
$
60,352
Unamortized transition amount
–
(78,686)
(78,686)
Unamortized actuarial losses
3,965
Unamortized prior service costs
other
–
–
316,920
12,358
320,885
12,358
(238)
(238)
–
8,072
–
–
(96,216)
237,408
11,852
(191)
(96,216)
245,480
11,852
(191)
accrued benefit asset (liability),
end of year
$
(70,053)
$
291,611(i) $ 221,558
$
(68,238)
$
289,515(i) $
221,277
(i) Includes three defined benefit plans with accrued benefit liabilities of $22.9 million (2009: $21.5 million).
CJ22144 Financl_E.indd 82
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Maple leaF FoodS INC. 83
Notes to the Consolidated Financial Statements
amounts recognized in the consolidated balance sheet consist of:
other long-term assets
accounts payable and accrued charges
other long-term liabilities
pension benefit expense:
Current service cost – defined benefit
Current service cost – defined contribution
Interest cost
actual return on plan assets
difference between actual and expected return
actuarial losses recognized
difference between actual and recognized actuarial gains in the year
amortization of transitional amount
difference between amortization of prior service costs and actual plan amendments
in the year
plan amendments
Curtailment loss
Contractual termination benefits
Net benefit plan expense
2010
2009
$ 327,407
$ 322,656
4,868
100,981
5,250
96,129
2010
2009
$
17,809
$
12,412
27,275
57,794
(97,746)
16,864
106,152
(96,732)
(17,530)
(648)
1,733
448
350
28,185
59,200
(167,443)
92,175
92,900
(82,233)
(18,398)
984
–
–
–
$
15,769
$
17,782
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations and net benefit plan
expense are as follows:
discount rate used to calculate net benefit plan expense
discount rate used to calculate year-end benefit obligation
expected long-term rate of return on plan assets
Rate of compensation increase
2010
2009
5.75%
5.00%
7.25%
3.50%
6.50%
5.75%
7.25%
3.50%
CJ22144 Financl_E.indd 83
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84 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
other post-retirement benefits expense:
Current service cost
Interest cost
actuarial losses (gains) recognized
difference between actual and expected actuarial (gains) losses
Impact of 1% change in health care cost trend:
effect on end-of-year obligation
aggregate of 2010 current service cost and interest cost
Measurement dates:
2010 expense
Balance sheet
2010
664
4,321
(3,930)
4,107
5,162
$
$
2009
$
533
4,328
6,892
(6,967)
$
4,786
1% Increase
1% decrease
$
3,510
$
(3,879)
241
(271)
december 31, 2009
december 31, 2010
The pension assets were invested in the following asset categories at december 31, 2010 and december 31, 2009:
asset category:
equity securities
debt securities
2010
2009
59%
41%
100%
56%
44%
100%
22. ACQUISITIONS AND DIVESTITURES
(a) during the second quarter of 2010, the Company purchased 56,700 shares of Canada Bread Company, limited (“Canada
Bread”) for cash consideration of $2.7 million. This purchase increased the Company’s ownership interest in Canada Bread
from 89.8% to 90.0%. The Company allocated $1.0 million to goodwill and $1.7 million of the purchase price to the net
identifiable assets of Canada Bread at the acquisition date by reducing its non-controlling interest. The Company has not
yet finalized the purchase equation for this acquisition.
on July 17, 2008, the Company purchased 458,000 shares in Canada Bread Company, limited (“Canada Bread”) for cash
consideration of $32.6 million, increasing the Company’s ownership interest in Canada Bread from 88.0% to 89.8%. during
the second quarter of 2009, the Company finalized the purchase equation for these purchases, allocating $11.4 million of
the purchase price to the net tangible assets of Canada Bread at the acquisition date, $1.1 million to intangible assets and
$20.1 million to goodwill.
CJ22144 Financl_E.indd 84
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Maple leaF FoodS INC. 85
Notes to the Consolidated Financial Statements
(b) on January 29, 2008, the Company acquired the shares of aliments Martel Inc. (“Martel”), a manufacturer and distributor
of sandwiches, meals and sweet goods based in Quebec for an initial purchase price of $44.6 million plus contingent
consideration of up to $22.6 million, based on financial performance over three years post-acquisition. during the first
quarter of 2009, the Company finalized the purchase equation, allocating $15.4 million to the identifiable net tangible
assets of Martel at the acquisition date and $29.2 million to goodwill and intangible assets. The acquired intangible
assets included $1.5 million allocated to trademarks that were being amortized on a straight-line basis over 10 years and
$1.7 million allocated to customer relationships that are being amortized on a straight-line basis over 20 years. No amounts
have been paid to the vendors in respect of contingent consideration.
(c) on January 14, 2008, the Company purchased the assets of Central By-products (“CBp”), a rendering business located near
london, ontario for $18.1 million. during the first quarter of 2009, the Company finalized the purchase price equation and
allocated $6.0 million to the net identifiable assets of CBp at the acquisition date and $12.1 million to goodwill.
details of net assets acquired and purchase adjustments made in 2010 and 2009 are as follows:
2010
2009
Net working capital
Future taxes
property and equipment
Intangible assets
Goodwill
other long-term liabilities
Non-controlling interest
Total purchase cost
$
–
–
–
–
1,010
–
1,680
$
2,690
$
$
(624)
233
(2,445)
4,329
(689)
(481)
–
323
23. CONTINGENCIES AND COMMITMENTS
(a) The Company has been named as defendant in several legal actions and is subject to various risks and contingencies
arising in the normal course of business. Management is of the opinion that the outcome of these uncertainties will not
have a material adverse effect on the Company’s financial position.
(b) In the normal course of business, the Company and its subsidiaries enter into sales commitments with customers, and
purchase commitments with suppliers. These commitments are for varying terms and can provide for fixed or variable
prices. With respect to certain of its contracts, the Company has the right to acquire at fair value, and the suppliers have
the right to sell back to the Company, certain assets that have an estimated fair value of $12.1 million (2009: $12.3 million).
The Company believes that these contracts serve to reduce risk, and does not anticipate that losses will be incurred on
these contracts.
(c) The Company has operating lease, rent and other commitments that require minimum annual payments as follows:
2011
2012
2013
2014
2015
Thereafter
$ 68,650
55,145
45,677
36,800
29,257
108,615
$ 344,144
CJ22144 Financl_E.indd 85
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86 Maple leaF Food S INC.
Notes to the Consolidated Financial Statements
24. SUPPLEMENTAL CASH FLOW INFORMATION
Net interest paid
Net income taxes paid
25. RELATED PARTY TRANSACTION
2010
2009
$
63,384
$
76,841
39,298
28,037
on december 16, 2008, the Company issued 7,368,421 equity units each consisting of one subscription receipt and 0.4 common
share purchase warrants for net proceeds of $69.1 million. ontario Teachers pension plan Board, a related shareholder,
subscribed for 5,484,784 units and McCain Capital Corporation, a related shareholder, subscribed for 1,694,737 units. The
subscription receipts were settled on august 4, 2009, and the warrants were exercised on december 14, 2010 (Note 14).
during the year, the Company recorded sales to McCain Foods limited of $3.6 million (2009: $3.3 million) in the normal
course of business and at market prices. McCain Foods limited is partly owned by McCain Capital Corporation; a 31.3%
shareholder in Maple leaf Foods Inc.
The Company paid $4.9 million (2009: $4.6 million) for services in the normal course of business and at market prices to
day & Ross Transportation Group, a subsidiary of McCain Foods limited.
26. GOVERNMENT INCENTIVES
during the year, the Company recorded incentive payments from the Canadian government of $2.7 million (2009: $9.1 million)
to compensate hog producers for losses in prior periods, and $7.3 million (2009: $12.6 million) from the Canadian government
as part of its policy to support the development of renewable energies. The Company received other incentives totalling
$0.4 million (2009: $0.1 million). These incentives were recorded as reductions of cost of goods sold in the consolidated
statement of earnings. Furthermore, the Company received an interest-free loan of $2.0 million from the Canadian government
related to the construction of a new bakery in Hamilton, ontario. The loan is repayable over a period of five years beginning 2012.
27. SUBSEQUENT EVENT
Subsequent to year-end, the Company terminated a $250.0 million short-term lending facility. There were no drawings on the
facility on termination.
Subsequent to year-end, the Company entered into interest rate swaps to offset $330.0 million of existing interest rate swaps
with an expiry date of april 28, 2015. The offsetting swaps were executed as the fixed rate private placement debt, which
closed in the fourth quarter, reduced the Company’s expected floating rate debt requirements by $355.0 million dollars. Under
the offsetting interest rate swaps, the Company receives an average fixed rate of 2.52% and pays a floating rate of interest on a
notional amount of $330.0 million. These offsetting interest rate swaps effectively neutralize the mark-to-market income
volatility on the notional amount of $330.0 million created by the original interest rate swaps.
on January 4, 2011, the Company received proceeds of Cad$102.5 million and US$213.0 million pursuant to the issuance of
notes payable that were finalized in december 2010.
on February 18, 2011, the Company completed the sale of its fresh bakery sandwich business for $8.0 million, subject to post
closing adjustments.
on February 23, 2011, the Company declared a dividend of $0.04 per share, payable on March 31, 2011 to shareholders of
record as of March 10, 2011.
28. SEGMENTED FINANCIAL INFORMATION
The Company’s operations are classified into the following three primary business segments which have been used for the
operating segment disclosures for all years presented:
(a) The Meat products Group comprises value-added processed packaged meats; chilled meal entrees and lunch kits;
value-added pork, poultry and turkey products.
(b) The agribusiness Group includes the Company’s swine production and animal by-products recycling operations.
(c) The Bakery products Group comprises the Company’s 90.0% ownership in Canada Bread, a producer of fresh and frozen
par-baked bakery products including breads, rolls, bagels, artisan and sweet goods, sandwiches and fresh pasta and sauces.
CJ22144 Financl_E.indd 86
11-03-06 5:17 PM
Maple leaF FoodS INC. 87
Notes to the Consolidated Financial Statements
Sales
Meat products Group
agribusiness Group
Bakery products Group
earnings from operations before restructuring and other related costs, change in fair
value of non-designated interest rate swaps and other income
Meat products Group
agribusiness Group
Bakery products Group
Non-allocated costs
Capital expenditures
Meat products Group
agribusiness Group
Bakery products Group
depreciation and amortization
Meat products Group
agribusiness Group
Bakery products Group
Total assets
Meat products Group
agribusiness Group
Bakery products Group
Non-allocated assets
Goodwill
Meat products Group
agribusiness Group
Bakery products Group
2010
2009
$ 3,181,134
199,498
1,587,487
$ 4,968,119
$ 3,310,393
206,064
1,705,145
$ 5,221,602
$
89,701
$
55,388
50,834
93,206
(11,706)
48,023
102,155
(9,455)
$ 222,035
$ 196,111
$
66,423
$
86,770
16,978
78,903
13,048
63,075
$ 162,304
$ 162,893
$
71,933
$
76,077
16,447
53,405
16,508
56,904
$
141,785
$ 149,489
$ 1,572,940
$ 1,653,389
276,913
976,897
170,045
287,057
955,469
161,549
$ 2,996,795
$ 3,057,464
$ 442,123
$ 442,943
14,142
394,117
$ 850,382
14,136
400,199
$ 857,278
CJ22144 Financl_E.indd 87
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88 Maple leaF FoodS INC.
Notes to the Consolidated Financial Statements
Information about geographic areas
during the year, total revenues from customers outside Canada were $1,284.9 million (2009: $1,308.6 million). of this amount
$700.5 million (2009: $667.6 million) was attributed to sales made in the United States and $153.2 million (2009: $196.2 million)
attributed to sales made in the United Kingdom.
property and equipment located outside of Canada were $127.0 million (2009: $134.8 million). of this amount $72.3 million
(2009: $74.0 million) was related to property and equipment located in the United States and $31.8 million (2009: $32.3 million)
related to property and equipment located in the United Kingdom.
Goodwill attributed to operations located outside Canada is $122.8 million (2009: $130.8 million). of this amount $55.1 million
(2009: $57.4 million) is goodwill attributed to operations in the United States and $67.7 million (2009: $73.4 million) is goodwill
attributed to operations located in the United Kingdom.
Information about major customers
during the year, the Company reported sales to one customer representing 11.7% (2009: 11.6%) of total sales. These sales are
reported in both the Meat products and Bakery products Groups. No other sales were made to any one customer in excess of
10.0% of total sales.
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Maple leaf foods Inc. 89
corporate governance and board of directors
Corporate GovernanCe
board of dire Ctors
The Board of directors and Management of the company
are committed to maintaining a high standard of corporate
governance. The Board has responsibility for the overall
stewardship of the company and discharges such
responsibility by reviewing, discussing and approving the
company’s strategic planning and organizational structure
and supervising management with a view to preserving
and enhancing the underlying value of the company.
Management of the business within this process and
structure is the responsibility of the chief executive officer
and senior Management.
The Board has adopted guidelines to assist it in meeting
its corporate governance responsibilities. The role of
the Board, the chief executive officer, the chairman,
lead director and the individual committees are clearly
delineated. Together with the chairman, lead director
and the corporate Governance committee, the Board
assesses its processes and practices regularly to ensure its
governance objectives are met.
Composition of the board of dire Ctors
The Board is comprised of experienced directors with a
diversity of relevant skills and competencies. The Board
of directors has assessed each of the company’s 10 non-
management directors to be independent.
a more comprehensive analysis of the company’s
approach to corporate governance matters is included
in the Management proxy circular for the april 28, 2011
annual meeting of shareholders.
W. Geoffrey beattie
President and CEO, The Woodbridge Company
(Investment company)
Mr. Beattie, 51, is the chief executive officer of The
Woodbridge company limited (1998), the Thomson
family’s principal holding company, deputy chairman of
Thomson Reuters and chairman of cTVglobemedia Inc.
Mr. Beattie is a director of The Royal Bank of canada and
General electric company. Mr. Beattie is also a trustee of
the University Health network.
dIRecToR sInce: 2008
Gregory a. boland
President & CEO, West Face Capital Inc.
(Investment manager)
Mr. Boland, 47, is the president and chief executive officer
of West face capital Inc., a Toronto based investment
manager, a position he has held since 2007. previously, he
managed portfolios for enterprise capital Management.
prior to joining enterprise capital Management in 1998, he
was Vice-president and partner in proprietary investments
at RBc dominion securities. Mr. Boland is a director of
ace aviation Inc. and silverBirch energy corporation.
dIRecToR sInce: 2011
John L. bragg, o.C.
Chairman, President and Co-CEO, Oxford Frozen Foods
(Food manufacturing)
Mr. Bragg, 70, founded oxford frozen foods, an
international frozen foods supplier, in 1968 and Bragg
communications, canada’s fifth largest cable television
provider and a major Maritimes Internet and wireline
telephone service provider, in 1970. Mr. Bragg is an
officer of the order of canada. Mr. Bragg was appointed a
canadian Business Hall of fame laureate in 2003, and was
one of the original four members inducted into the nova
scotia Business Hall of fame in 1993.
dIRecToR sInce: 2008
purdy Crawford, C.C.
Counsel, Osler, Hoskin & Harcourt
(Law firm)
Mr. crawford, 79, is a director of several canadian
companies. from 1986 to 1995 he was ceo of Imasco, and
from 1995 to 2000 he was the non-executive chairman of
Imasco limited and cT financial services. Mr. crawford is
a companion of the order of canada and a member of the
canadian Business Hall of fame.
dIRecToR sInce: 1995
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90 Maple leaf foods Inc.
corporate governance and board of directors
Jeffrey Gandz
Professor, Managing Director – Program Design, Richard
Ivey School of Business, University of Western Ontario
dr. Gandz, 66, has been a consultant for many canadian
and multinational corporations and government ministries
and is the author of several books, many articles and
government reports on a variety of subjects, including
leadership and organizational effectiveness.
dIrector sInce: 1999
James F. Hankinson
Corporate Director
Mr. Hankinson, 67, is a director of several canadian
companies. Mr. Hankinson served as president and chief
executive officer of ontario power Generation from
2005 until his retirement in 2009. He was president and
chief operating officer of canadian pacific limited until
1995, and president and chief executive officer of new
Brunswick power corporation until 2002.
dIrector sInce: 1995
Chaviva M. Hošek, O.C.
President and Chief Executive Officer, The Canadian
Institute for Advanced Research (Research Institute)
dr. Hošek, 64, received her ph.d. from Harvard University
in 1973 and spent 13 years at the University of toronto as
professor of english literature. she was appointed an
officer of the order of canada in 2006. Her career included
being director of policy and research for prime Minister
Jean chretien and ontario’s Minister of Housing. she is
trustee of the central european University, director of
Great-West lifeco Inc. and numerous volunteer boards of
charitable organizations, including Mount sinai Hospital
and the trudeau foundation.
dIrector sInce: 2002
Claude R. Lamoureux, O.C.
Corporate Director
Mr. lamoureux, 68, was chief executive officer of the
ontario teachers’ pension plan until his retirement in 2007.
He was appointed to the position in 1990, when the ontario
government established the new independent corporation
to replace the ontario teachers’ superannuation fund.
an actuary by profession, Mr. lamoureux joined teachers’
from Metropolitan life, where he had a successful career
in their new York and ottawa offices. Mr. lamoureux is an
officer of the order of canada.
dIrector sInce: 2008
G. Wallace F. McCain, C.C.
Chairman, Maple Leaf Foods Inc.
Mr. Mccain, 80, was appointed chairman following the
acquisition of the company in april 1995. Mr. Mccain co-
founded Mccain foods limited in 1956 which has grown
to become one of the largest frozen food companies in the
world. Mr. Mccain was president and co-chief executive
officer of Mccain foods limited until 1994 and is currently
its Vice-chairman and director of other associated
companies within the Mccain foods Group. Mr. Mccain is
a companion of the order of canada.
dIrector sInce: 1995
J. Scott McCain
President and Chief Operating Officer, Agribusiness Group,
Maple Leaf Foods Inc.
Before joining Maple leaf foods Inc. in april 1995, Mr.
Mccain was Vice-president for production of Mccain
foods limited in canada, a company he joined in 1978
and where he held progressively senior positions in
manufacturing and operations. He is a director of canada
Bread company, limited and Mccain capital corporation.
Mr. Mccain, 54, is a director of Mccain foods Group.
dIrector sInce: 1995
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Maple leaf foods Inc. 91
corporate governance and board of directors
Michael H. McCain
President and Chief Executive Officer,
Maple Leaf Foods Inc.
Mr. Mccain, 52, joined Maple leaf foods Inc. in april
1995 as president and chief operating officer and was
appointed its chief executive officer in 1999. prior to
joining Maple leaf foods, Mr. Mccain spent 16 years
with Mccain foods limited in canada and the United
states. He is the chairman and director of canada Bread
company, limited, a director of Mccain foods Group ltd.,
the american Meat Institute, and Royal Bank of canada.
He is a past director of american frozen food Institute
and Bombardier Inc.
dIRectoR sInce: 1995
Diane E. McGarry
Corporate Director
Ms. McGarry, 61, has over 30 years’ experience with Xerox
including five years in canada as chairman, president and
chief executive officer of Xerox canada from 1993 to 1998.
prior to retiring in 2005, Ms. McGarry held the position of
chief Marketing officer, Xerox corporation.
dIRectoR sInce: 2005
Gordon Ritchie
Principal Advisor, Hill & Knowlton Canada (Government
and public relations company)
Mr. Ritchie, 67, is chief executive officer of strategico Inc.
and has been a director of a number of leading canadian
corporations. Mr. Ritchie had 22 years of distinguished
public service. as ambassador for trade negotiations,
Mr. Ritchie was one of the principal architects of the
canada/United states free trade agreement.
dIRectoR sInce: 1995
Note: Ages of the Board of Directors provided as at March 2011.
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92 Maple leaf foods Inc.
senior management and officers
COMMITTEES OF THE
BOARD OF DIRECTORS
STANDING COMMITTEES:
AuDIT COMMITTEE
d.e. McGarry, chair
J.l. Bragg
J.f. Hankinson
c.R. lamoureux
CORPORATE GOVERNANCE
COMMITTEE
J.f. Hankinson, chairman
W.G. Beattie
G.a. Boland
p. crawford
c.M. Hošek
ENVIRONMENT, HEALTH
AND SAFETY COMMITTEE
J. Gandz, chairman
J.l. Bragg
c.M. Hošek
d.e. McGarry
G. Ritchie
HuMAN RESOuRCES AND
COMPENSATION COMMITTEE
G. Ritchie, chairman
W.G. Beattie
G.a. Boland
p. crawford
J. Gandz
c.R. lamoureux
CORPORATE COuNCIL
G. Wallace F. McCain
Chairman
Michael H. McCain
President and Chief Executive Officer
J. Scott McCain
President and Chief Operating
Officer, Agribusiness Group
Richard A. Lan
Chief Operating Officer,
Food Group
Michael H. Vels
Executive Vice-President
and Chief Financial Officer
Douglas W. Dodds
Chief Strategy Officer
Les Dakens
Senior Vice-President and
Chief Human Resources Officer
Gary Maksymetz
President, Maple Leaf
Consumer Foods
Rory A. McAlpine
Vice-President, Government and
Industry Relations
Barry McLean
President, Fresh Bakery
Réal Ménard
President, Frozen Bakery
Bruce Y. Miyashita
Vice-President, Six Sigma
Deborah K. Simpson
senior Vice-President, Finance
Peter C. Smith
Vice-President, Corporate
Engineering
Simon Wookey
President, Fresh Prepared Foods
Rocco Cappuccitti
Senior Vice-President, Transactions &
Administration
and Corporate Secretary
Richard Young
Executive Vice-President,
Transformation, Maple Leaf
Consumer Foods
OTHER CORPORATE OFFICERS
J. Nicholas Boland
Vice-President, Finance Projects
Catherine Brennan
Vice-President and Treasurer
Glen L. Gratton
Vice-President, Maple Leaf
Agri-Farms
Jeffrey W. McDowell
Vice-President, Cold Springs Farm
Dianne Singer
Assistant Corporate Secretary
Lynda J. Kuhn
Senior Vice-President,
Communications
ExECuTIVE COuNCIL
(Includes members of the Corporate
Council and Senior Operating
Management as follows)
Peter Baker
President, Maple Leaf Bakery UK
Kevin P. Golding
President, Rothsay and Maple Leaf
Agri-Farms
Stephen Graham
Chief Marketing Officer
Randall D. Huffman
Chief Food Safety Officer
E. Jeffrey Hutchinson
Chief Information Officer
Bill Kaldis
Vice-President, Logistics
CJ22144 Financl_E.indd 92
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Maple leaf foods Inc. 93
corporate information
Capital StoCk
ShareholDer inquirie S
The company’s authorized capital consists of an
unlimited number of voting common and an unlimited
number of non-voting common shares. at december 31,
2010, 140,044,089 voting common shares were issued and
outstanding, for a total of 140,044,089 outstanding shares.
There were 767 shareholders of record of which 725 were
registered in canada, holding 87.52% of the issued
voting shares.
ownerShip
The company’s major shareholder is Mccain capital
corporation holding 43,890,784 voting shares
representing 31.34% of the total issued and outstanding
shares. The remainder of the issued and outstanding
shares are publicly held.
Corporate offiCe
Maple leaf foods Inc.
30 st. clair avenue West
suite 1500
Toronto, ontario, canada M4V 3a2
Tel: (416) 926-2000
fax: (416) 926-2018
Website: www.mapleleaf.com
annual Meeting
The annual meeting of shareholders of Maple leaf foods
Inc. will be held on Thursday, april 28, 2011 at 11:00 a.m.
at the Metro Toronto convention centre, north Building,
255 front street West, Toronto, ontario.
DiviDenDS
The declaration and payment of quarterly dividends
are made at the discretion of the Board of directors.
anticipated payment dates in 2011: March 31, June 30,
september 30 and december 30.
Inquiries regarding dividends, change of address, transfer
requirements or lost certificates should be directed to the
company’s transfer agent:
computershare Investor services Inc.
100 University avenue, 9th floor
Toronto, ontario, canada M5J 2Y1
Tel: (514) 982-7555
or 1-800-564-6253 (Toll-free north america)
or service@computershare.com
CoMpany inforM ation
for public and investment analysis inquiries, please
contact our senior Vice-president, communications at
(416) 926-2000.
for copies of annual and quarterly reports, annual
information form and other disclosure documents,
please contact our senior Vice-president, Transactions
& administration and corporate secretary at
(416) 926-2000.
tranSfer a gent anD regiS trar
computershare Investor services Inc.
100 University avenue, 9th floor
Toronto, ontario, canada M5J 2Y1
Tel: (514) 982-7555
or 1-800-564-6253 (Toll-free north america)
or service@computershare.com
auDitorS
KpMG llp
Toronto, ontario
StoCk e xChange liS tingS anD StoCk Sy Mbol
The company’s voting common shares are listed on
The Toronto stock exchange and trade under the
symbol “MfI”.
rapport annuel
si vous désirez recevoir un exemplaire de la version
française de ce rapport, veuillez écrire à l’adresse
suivante : secrétaire de la société, les aliments
Maple leaf Inc., 30 st. clair avenue West, Bureau 1500,
Toronto, ontario M4V 3a2.
CJ22144 Financl_E.indd 93
11-03-06 5:17 PM
Maple leaf foods Inc.
30 St. Clair Avenue West, Suite 1500
Toronto, Ontario, Canada m4v 3A2
www.mapleleaf.com
CJ22144 Financl_E.indd 94
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