Maple Leaf Foods Annual Report 2013

FY2013 Annual Report · Maple Leaf Foods

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maple leaf foods INC.

Annual Report
2013

We WIll Be
poIsed foR
GRoWTH WITH
THe veRy
BesT asseTs,
leadING
maRkeT
sHaRes aNd
uNmaTCHed
sTReNGTH IN
INNovaTIoN.

fINaNCIal HIGHlIGHTs

For years ended December 31
(In millions of Canadian dollars, except share information)

Consolidated results
Sales
Adjusted Operating Earnings(iv)
Net earnings (loss) from continuing operations
Net earnings(v)
Return on Net Assets(iv) (vi)

Financial position
Net Assets Employed(vi) (vii)
Shareholders’ equity(vi)
Net Debt(iv)

Per share
Adjusted Earnings per Share(v)
Net earnings (loss) from continuing operations(v)
Net earnings(v)
Dividends
Book value(vi)

Number of shares (millions)
Weighted average
Outstanding at December 31

2013(i)

2012(i) (ii)

2011(i) (ii)

2010(i)

2009(i) (iii)

4,406
(12)
(59)
496
(0.2)%

4,552
172
42
89
9.4%

2,101
891
1,171

0.47
0.25
0.64
0.16
6.36

2,124
1,581
452

(0.51)
(0.48)
3.55
0.16
11.27

139.9
140.3

4,579
130
(7)
59
9.7%

1,907
865
984

0.34
(0.08)
0.43
0.16
6.18

4,709
146
(21)
29
8.6%

1,966
924
902

0.31
(0.20)
0.22
0.16
6.60

135.6
140.0

4,958
117
(2)
52
5.9%

2,416
1,189
1,016

0.10
(0.07)
0.40
0.16
8.69

129.8
136.8

139.4
140.0

138.7
140.0

(i) Unless otherwise noted, all figures have been restated to exclude the results of the Rothsay and Olivieri businesses, which have been classified as discontinued

operations. Refer to Note 22 of the audited consolidated financial statements for further information.

(ii) 2012 and 2011 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee Benefits (“IAS 19”). Refer to

Note 32 of the audited consolidated financial statements for further information.

(iii) 2009 figures are presented based on results previously reported under Canadian GAAP, effective on or before January 1, 2010.
(iv) Refer to the Non-IFRS Measures on page 34 of the Company’s 2013 Management’s Discussion and Analysis.
(v) Attributable to common shareholders.
(vi) 2009–2012 figures have not been restated for the sales of the Rothsay and Olivieri businesses in the fourth quarter of 2013.
(vii) Defined as total assets, less cash, deferred tax assets and non-interest bearing liabilities.

seGmeNTed opeRaTING ResulTs

Protein Group
(In millions of Canadian dollars)

Meat Products Group
Sales
Adjusted Operating Earnings
Total assets

Agribusiness Group
Sales
Adjusted Operating Earnings
Total assets

Total Protein Group
Sales(iii)
Adjusted Operating Earnings(iii)
Total assets(iii)

2
0
1
3
F
i
n
a
n
c
i
a
l

H
g
h

l
i

g
h
t
s
t

2013(i)

2012(i) (ii)

% Change

2,924
(86)
1,824

29
(38)
196

2,953
(124)
2,019

3,047
98
1,617

27
(15)
275

3,073
83
1,893

(4.0)%
(187.6)%
12.8%

8.9%
147.6%
(28.9)%

(3.9)%
(250.1)%
6.7%

Business Segments
The Meat Products Group consists of value-added prepared meats, lunch kits, protein snacks, and value-added fresh pork, poultry and turkey products.
The Agribusiness Group includes Canadian hog production operations that primarily supply the Meat Products Group with livestock.

(i) Unless otherwise noted, all figures have been restated to exclude the results of the Rothsay business, which has been classified as a discontinued operation.

Refer to Note 22 of the audited consolidated financial statements for further information.

(ii) 2012 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee Benefits (“IAS 19”). Refer to Note 32 of

the audited consolidated financial statements for further information.

(iii) Numbers may not add due to rounding.

Bakery Products Group
(In millions of Canadian dollars)

Bakery Products Group
Sales
Adjusted Operating Earnings
Total assets

2013(i)

2012(i) (ii)

% Change

1,454
114
1,170

1,479
96
1,005

(1.7)%
17.9%
16.3%

The Bakery Products Group is comprised of Maple Leaf Foods’ 90.0% ownership in Canada Bread Company, Limited (“Canada Bread”), a producer of fresh and
frozen value-added bakery products.

(i) Unless otherwise noted, all figures have been restated to exclude the results of the Olivieri business, which has been classified as a discontinued operation.

Refer to Note 22 of the audited consolidated financial statements for further information.

(ii) 2012 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee Benefits (“IAS 19”). Refer to Note 32 of

the audited consolidated financial statements for further information.

Maple Leaf Foods has leading Canadian
brands and market shares, driven by a
relentless focus on innovation.

maple leaf foods
IN THIS REPORT

Maple Leaf Foods is in the final phase
of implementing a comprehensive
strategy to step-change productivity
and profitability.

ii | A Conversation
with Management
In this interview, President and CEO
Michael H. McCain explains Maple Leaf
Foods’ performance in 2013 and how the
transformation that was launched in 2007
is expected to deliver substantially higher
earnings by 2015 and a solid return to
shareholders.

vi | Message from
the Chairman
One of the Board’s primary duties is to
oversee the development and successful
implementation of the Company’s strategy,
and in 2013 this occupied a very large part
of our agenda.

vii | Corporate Governance
and Board of Directors

The Maple Leaf Foods Board is comprised of experienced
directors with diverse skills and competencies.

viii | Senior Management and Officers

Maple Leaf Foods has deep management bench strength –
it’s the key to our success.

01 | Financial Review
Comprehensive information on operating
and financial performance, including an
in-depth analysis of our performance and
the factors that shaped the year within the
Management’s Discussion and Analysis.

01 | Management’s Discussion
and Analysis

40 | Independent Auditors’ Report

41 | Audited Consolidated Financial
Statements

93 | Corporate Information

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

a CoNveRsaTIoN
WITH MANAGEMENT

Michael H. McCain
President and Chief Executive Officer

Q&A In this interview, President and CEO Michael H. McCain

(“MHM”) discusses priorities for 2014 and how the initiatives
underway are expected to deliver substantially higher earnings
and a solid return to shareholders.

Maple Leaf Foods’ 2013 results were well
below expectations. What happened?

MHM: The story for the year was unusually volatile
commodity markets colliding with the cost of change. Pork
processor spreads in North America were among the worst
in decades, as the increase in hog costs outpaced pork
prices. Global pork markets were also unstable, particularly
in Japan, where a decline in the Japanese yen compressed
margins. It is important to note, the impact was less from the
actual currency or commodity shifts and more from global
market conditions which impaired our ability to increase
prices to fully offset these challenges. These commodity and
currency headwinds reduced Adjusted Operating Earnings by
approximately $70 million in the year.

At the same time, we were in the middle of no less than
five simultaneous operational start-ups overlaid by three
significant transactions, including the sale of our rendering
and pasta operations and the potential sale of our Bakery
Products Group. Plant start-ups are unpredictable and difficult
in the best of times. One is tough; five simultaneously is
exponentially more so. It is fair to say that in the middle of
such intense change, we were not performing at the top of
our game. The direct impact on Adjusted Operating Earnings
for the year from the prepared meats network transition was

approximately $50 million. While frustrating in the short
term, 2013 was clearly an anomaly. These are transitory
challenges, and I am very proud of how our team is managing
through them.

How will Maple Leaf Foods bridge the gap
between 2013 results and the 2015 Adjusted
EBITDA margin target?

MHM: Over the past two years, we have been immersed in
change – installing SAP, streamlining thousands of products
in our portfolio, and constructing new plants. By the very end
of 2013, this change was at a peak. We were in the process of
commissioning the new plants, while continuing to operate
the old ones, as we gradually shifted production. For a transition
period, we are covering the additional cost of having nearly
$500 million worth of new assets in start-up mode, side by side
with older ones still in place.

The most significant contributor to margin expansion will be
completing the prepared meats network transition; 2014 is the
home stretch, with the finish line in sight. First, we must make
sure the new plants are running as expected, then transfer
production from the older, high cost plants to the new, low
cost facilities and, finally, shut the old ones down.

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

The vast majority of our 2015 margin
target will be achieved through lower
costs and increased productivity.

The start-ups that we launched in 2013 are making good
progress. We have one new plant to fully commission in 2014:
our Heritage facility in Hamilton, Ontario. While it is the
largest prepared meats plant in our network, it is using well-
established technologies and we are drawing from a skilled
labour pool at our existing wiener plant, which will close as
production transfers. Because we can see the finish line and
the cost savings – most of which is just shutting down the “old
capacity” – we have strong confidence in what this will do for
our margins in 2015 and beyond.

The vast majority of our 2015 margin target will be achieved
through lower costs and increased productivity. With the
new plants now built and in start-up mode, we have a clear
line of sight on these cost reductions as we close down the
higher cost old capacity in 2014. This will eliminate significant
overhead, with technologies and scale in the new facilities
increasing productivity per person by an estimated 1.7 times.
The great thing about really efficient plants is that they
transform your whole business and almost everything else
becomes easier.

What is your margin target?

MHM: We expect to deliver an Adjusted EBITDA margin of
10% in 2015. This compares to a Protein Adjusted EBITDA
margin of 4.9% in 2010 (excluding the Rothsay business,
which was sold in 2013) when we commenced our prepared
meats strategy. We do not expect the sale of our Bakery
Products Group to have a material impact on our Adjusted
EBITDA margin target.

How much of the margin expansion is driven
by cost reduction and how much by growth in
the base business?

MHM: Our margin targets are based on benchmarking
margins that our peers in the North American packaged foods
business are delivering, as well as a bottom-up assessment
of strategies to increase our margins through cost reduction
and to increase the value of our sales mix through innovation,
pricing, category expansion and brand building.

What Return on Net Assets (“RONA”) will you
deliver if you meet 2015 margin targets?

MHM: We expect our RONA to exceed 11.5%.

Why are you selling the Bakery Products
Group when it is performing so well?

MHM: Our bakery portfolio is at a crossroads. This is a
very good business with material opportunities to further
accelerate growth and earnings. We spent over a year
developing a comprehensive strategy to realize this value
potential, which would take focus and capital to execute.
The question for the Board and Management was whether
Maple Leaf Foods was best served by investing the time and
resources to capture this value, or by selling the business and
focusing our resources on expanding our leadership in the
consumer packaged meats sector. The resulting decision was
about charting the best path forward for Maple Leaf Foods and
maximizing value for our shareholders.

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

iii

a CoNveRsaTIoN
WITH MANAGEMENT

We are constantly
examining our portfolio
to find ways to optimize
our performance and
return on capital deployed.

Won’t a sale of the Bakery Products Group
result in more earnings volatility in the
remaining Company?

MHM: Being in both the protein and bakery sectors does
provide some offsets and less exposure to any one sector.
However, upon completing our prepared meats strategy,
we expect the Protein Group will be significantly more
profitable, with more stable earnings. Although the underlying
commodity influences will be largely the same, they will be
mitigated by a much stronger, higher margin earnings base.

What will Maple Leaf Foods do with proceeds
from the sale?

MHM: On closing the transaction, gross proceeds to
Maple Leaf Foods, excluding any dividends received,
will be approximately $1.65 billion, less associated costs
of $160 million. The independent Directors of the Board will
recommend the optimal use of proceeds to benefit both
the Company and its shareholders. This will include some
combination of paying down debt, supporting growth in our
consumer prepared meats business, and returning capital
to shareholders.

Maple Leaf Foods has divested of a number
of businesses during the year. What is
driving this?

MHM: We are constantly examining our portfolio to find ways
to optimize our performance and return on capital deployed.
We divested our turkey assets because we could maintain a

high-quality raw material supply without owning production.
We divested our potato processing, rendering, and pasta
businesses because they were non-core and a sale delivered
far greater value for Maple Leaf Foods, resulting in aggregate
net proceeds of approximately $800 million.

The decision to seek value creation alternatives for our
Bakery Products Group was very different. This was an
exploration of two viable, but different visions for Maple Leaf
Foods – a multi-line integrated food company or a mono-line
protein company – both capable of competing globally and
expanding our footprint around the world. We examined those
alternatives against the backdrop of our available financial and
management resources, as well as the risks and opportunities
inherent in any growth strategy. We believe the decision
to sell the Bakery Products Group maximizes value for both
Maple Leaf Foods and our shareholders.

What’s the biggest risk to financial
performance in 2014?

MHM: From my perspective, it is managing the start-up curve
at our Heritage plant in Hamilton. We are executing a phased
approach, gradually shifting production to minimize risk. The
first phase, which involves commissioning wiener production,
began in early 2014. The second phase – ramping up the
sliced meats lines – commences in the second quarter of 2014.
While starting up any new plant is a challenging, complex
undertaking, we have a very detailed approach and mitigation
strategies in place. There are incremental costs associated
with this commissioning and we have budgeted for them. Our
focus is to stay well within these expected costs.

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

We are charting the best path
forward for Maple Leaf Foods
and maximizing value for
our shareholders.

Is the Company’s prepared meats network
transition on track to be completed by 2015?

MHM: The transition is on track to be completed by 2015,
but it’s a very complicated network shift with many moving
parts and interdependencies. The key for us is managing the
timeline. We are planning to close five prepared meats plants
this year, consolidating production into three technology-
driven scale facilities. We are on a very tight schedule and
things need to unfold as planned. There is a sharp start-up
curve at the new Heritage plant in Hamilton, Ontario.
Getting this new facility fully commissioned and operating at
appropriate production levels is the core driver to our ability to
close plants this year. Commissioning a new plant takes time
and is rarely smooth or predictable. We have a lot of dedicated
resources to support this. We have very detailed work plans
in place to mitigate risk. If we veer from the schedule, the
transition would jog by a quarter, not a year.

How is the base business performing in
the midst of all this change?

MHM: Our prepared meats volume was impacted last year by
some of the start-up challenges, particularly at our Winnipeg
and Saskatoon plants. This was a regrettable but short-term
issue. Meanwhile, we continued to increase our retail branded
market shares across many of our core categories, driven
by strong sales, innovation and marketing. Operational
performance in our meat plants has shown some stress cracks,
largely because we are focused on the start-ups. This has
understandably diffused talent, focus and energy; as I said,
we were not operating at the top of our game last year. The
prepared meats business also experienced significant margin
compression late in the year, due to a combination of higher
input costs and supply chain inefficiencies related to the
network transition.

We are very pleased by how our fresh bakery business
performed. This business bore additional costs in 2012 as we
continued to commission our new Ontario bakery, shifted
production and closed three sub-scale bakeries, the last
occurring in early 2013. Our Bakery Products Group benefited
from these investments, along with strong performance in
the North American frozen and U.K. businesses, achieving an
Adjusted EBITDA margin of 11.6% for the year.

What will Maple Leaf Foods look like
post 2015?

MHM: We will be a focused consumer packaged meats
company with the best assets in our industry, leading
Canadian brands and market shares, unmatched strength in
innovation and customer service, and a supply chain that is
low cost, highly efficient and technology enabled. We’ll have
ticked all the boxes for competitiveness. As we migrate out of
this period of change and restructuring, we will turn our focus
to top-line growth as well as earnings expansion. We will have
a very strong balance sheet, with significant financial flexibility.
There is great potential to fuel growth through innovation in
existing categories, expansion into adjacent categories to fill
in any gaps in our portfolio, and finally, acquisitions to broaden
our geographic footprint outside Canada. Our values will
continue to underpin everything we do, as we increasingly
integrate corporate social responsibility and sustainability into
our decisions and how we operate.

We have experienced many years of change as we transformed
our Company to be sustainably more profitable. It’s taken a lot
of effort, toil and resilience by our people. We are all looking
forward to moving ahead with greater stability and a focus on
growth, reinforced by the hard work behind us.

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

messaGe fRom
THE CHAIRMAN

David L. Emerson
Chairman

One of the Board’s primary duties is to oversee the development and successful implementation
of the Company’s strategy, and in 2013 this occupied a very large part of our agenda.

Continued commitment to the successful execution of
Maple Leaf Foods’ value creation and capital expenditure
program remained a top priority for the Board as we monitored
progress on the prepared meats network transformation. The
Board is confident that this strategy will generate significant
value, although near-term commodity markets and transition
costs have required some course corrections in pursuit of the
2015 Adjusted EBITDA margin target.

Tighter focus was a key theme as the Company and the
Board considered longer-term plans to create value for
Maple Leaf Foods and our shareholders. The Board supported
Management’s recommendation to divest of its turkey farming
operations, its rendering and biodiesel business (Rothsay),
and its fresh pasta and sauce business (Olivieri), as part of the
strategy to focus on profitable growth and innovation within
Maple Leaf Foods’ prepared meats businesses.

During the year, the Board also oversaw a comprehensive
review of opportunities to accelerate profitable growth in
the Company’s Bakery Products Group. Before approving
any plans to pursue these opportunities, the Board decided
that the Company should explore all strategic alternatives to
maximize value, including a potential sale of the Company’s
90% interest in Canada Bread.

The Board established a committee of independent Directors
to oversee the process, supported by legal and financial
advisors. The mandate was to ensure the best possible decision
for the Company and all shareholders.

After an active and wide-reaching process, the decision to
sell the Company’s shares in Canada Bread was announced
in February 2014. Subject to regulatory approvals, the
transaction is expected to close in the second quarter of 2014.
The independent committee will recommend the optimal use
of proceeds to benefit both the Company and its shareholders.
This decision to divest the Bakery Products Group defines
Maple Leaf Foods’ future as a focused consumer packaged
meats company, dedicated to leadership in Canada and
expansion beyond our borders.

I am confident that this path will reward shareholders and
strengthen Maple Leaf Foods’ position as one of Canada’s
great food companies.

I thank my colleagues on the Board and the employees of
Maple Leaf Foods for their hard work and dedication during a
year of significant change, as together we shape the future of
this great Company.

Sincerely,

David L. Emerson
Chairman

vi
06

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT
MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

CoRpoRaTe GoveRNaNCe aNd BoaRd of dIReCToRs

Corporate Governance
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 roles of the Board,
the Chief Executive Officer, the Chairman and the individual committees are clearly delineated. Together with the Chairman
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 Directors
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 eight 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 May 1, 2014 annual meeting of shareholders.

Jeffrey Gandz
Professor Emeritus, Director and Consultant

Michael H. McCain
President and Chief Executive Officer,
Maple Leaf Foods Inc.

Claude R. lamoureux, o.C.
Corporate Director

J. Scott McCain
President and Chief Operating Officer,
Agribusiness Group, Maple Leaf Foods Inc.

Diane e. McGarry
Corporate Director

James p. olson
Corporate Director

Board of Directors
W. Geoffrey Beattie
Chief Executive Officer, Generation Capital
(Investment management firm)

Gregory A. Boland
President and Chief Executive Officer,
West Face Capital Inc.
(Investment manager)

John l. Bragg, o.C.
Chairman, President and Co-Chief Executive
Officer, Oxford Frozen Foods
(Food manufacturing)

the Honourable David l. emerson
Chairman, Emerson Services Ltd.
(Privately held professional services
company)

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

vii

Other Corporate Officers
J. nicholas Boland
Vice-President, Investor Relations

Stephen l. elmer
Vice-President and Corporate Controller

Glen l. Gratton
Vice-President, Maple Leaf Agri-Farms

Jeremy p. Roberts
Vice-President and Treasurer

Dianne Singer
Assistant Corporate Secretary

seNIoR maNaGemeNT aNd offICeRs

Committees of the
Board of Directors
STANDiNG CoMMiTTeeS

Ian V. Henry
Senior Vice-President and
Chief Human Resources Officer

Audit Committee

D.e. McGarry, Chair
J.l. Bragg
C.R. lamoureux
J.p. olson

Corporate Governance Committee

J. Gandz, Chairman
W.G. Beattie
G.A. Boland
D.l. emerson

Environment, Health and
Safety Committee

J.l. Bragg, Chairman
D.l. emerson
J. Gandz
D.e. McGarry

Human Resources and
Compensation Committee

J.p. olson, Chairman
W.G. Beattie
G.A. Boland
C.R. lamoureux

Corporate Council
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

Rocco Cappuccitti
Senior Vice-President and Corporate Secretary

lynda Kuhn
Senior Vice-President, Communications

Executive Council
(Includes members of the Corporate
Council and Senior Operating Management
as follows)

Kenneth G. Campbell
Senior Vice-President, Manufacturing

Daniel J. Curtin
President, Canada Bread Frozen Bakery

Stephen Graham
Chief Marketing Officer

Randall D. Huffman
Chief Food Safety Officer and
Senior Vice-President, Quality and Six Sigma

Clifford Irwin
President, Maple Leaf Bakery U.K.

Bill Kaldis
Senior Vice-President, Purchasing
and Logistics

Gary Maksymetz
President, Maple Leaf Consumer Foods

Rory A. McAlpine
Vice-President, Government and
Industry Relations

Barry Mclean
President, Canada Bread Fresh Bakery

Deborah K. Simpson
President, Maple Leaf Business Services

peter C. Smith
Vice-President, Corporate Engineering

Richard Young
Executive Vice-President, Transformation,
Maple Leaf Consumer Foods

viii

MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

FEBRUARY 26, 2014

THE BUSINESS

(“Maple Leaf Foods” or the
Maple Leaf Foods Inc.
“Company”) is a leading Canadian value-added meat,
meals, and bakery company committed to delivering
quality food products to consumers around the world.
the Company
Headquartered in Toronto, Canada,
employs approximately 18,000 people at its operations
across Canada, as well as in the U.S., Europe, and Asia.

OPERATING SEGMENTS

The Company’s
results are organized into three
segments: Meat Products Group, Agribusiness Group,
and Bakery Products Group.

value-added
The Meat Products Group includes
prepared meats, lunch kits, protein snacks, and value-
added fresh pork, poultry, and turkey products.

The Agribusiness Group includes Canadian hog
production operations that primarily supplies the Meat
Products Group with livestock.

The combination of
the Company’s Meat Products
Group and Agribusiness Group comprises the Protein
Group.

The Bakery Products Group is comprised of Maple Leaf
Foods’ 90.0% ownership in Canada Bread Company,
Limited (“Canada Bread”), a producer of
fresh and
frozen value-added bakery products.

FINANCIAL OVERVIEW

In 2013, sales(i) decreased 3.2% to $4,406.4 million
compared to $4,551.8 million in 2012. After adjusting for
the impact of divestitures and currency fluctuations,
sales decreased 1.6% as lower volumes more than offset
higher selling prices and an improved product mix.

Adjusted Operating Earnings(i)(ii) decreased to a loss of
$12.3 million from Adjusted Operating Earnings of
$172.0 million last year due to lower earnings in the
Protein Group that were partly offset by stronger Bakery
Products Group results. Adjusted Earnings per Share(i)(iii)
was a loss of $0.51 in 2013 compared to Adjusted
Earnings per Share of $0.47 in 2012.

Net loss from continuing operations(i) was $58.5 million
(loss of $0.48 per basic share attributable to common
shareholders)
in 2013 compared to net earnings from
continuing operations of $42.0 million ($0.25 per basic
share attributable to common shareholders) in 2012.

items are excluded from the discussions of
Several
they are not
underlying earnings performance as
representative of ongoing operational activities. Refer to
the section entitled Non-IFRS Financial Measures on
page 34 of this Management Discussion and Analysis for
a description and reconciliation of all non-IFRS financial
measures.

Notes:

(i)

(ii)

(iii)

2012 figures have been restated for the classification of the
Rothsay and Olivieri businesses as discontinued operations,
and for the impact of adopting the revised International
Accounting Standard 19 Employee Benefits (“IAS 19”). Refer
to Notes 22 and 32, respectively, in the audited consolidated
financial statements.

Adjusted Operating Earnings, a non-IFRS measure, is used
by Management to evaluate financial operating results. It is
defined as earnings before income taxes adjusted for items
that are not
considered representative of on-going
operational activities of the business, and items where the
economic impact of the transactions will be reflected in
earnings in future periods when the underlying asset is sold
or transferred. Please refer to the section entitled Non-IFRS
Financial Measures starting on page 34.

Adjusted Earnings per Share, a non-IFRS measure, is used by
Management
to evaluate on-going financial operating
results. It is defined as basic earnings per share attributable
to common shareholders, and is adjusted for all items that
are not considered representative of on-going operational
activities of the business, and items where the economic
impact of the transactions will be reflected in earnings in
future periods when the underlying asset
is sold or
transferred. Please refer to the section entitled Non-IFRS
Financial Measures starting on page 34.

RECENT DEVELOPMENTS

On February 12, 2014, the Company announced that
Grupo Bimbo, S.A.B. de C.V. of Mexico (“Grupo Bimbo”)
had agreed to acquire all of the issued and outstanding
common shares of Canada Bread by way of a statutory
the Business Corporations Act
arrangement under
(Ontario) (the “Arrangement”). Under the terms of the
Arrangement, Grupo Bimbo has agreed to acquire each
common share of Canada Bread for $72.00 per share in
cash or $1.83 billion in aggregate pursuant to the terms
of an arrangement agreement dated February 11, 2014,
between Canada Bread and Grupo Bimbo (the
“Arrangement Agreement”). Maple Leaf currently owns
approximately 90% of the outstanding shares of Canada
Bread and has agreed to vote all of such shares in favour
of the transaction.

the terms of

Under
the Arrangement Agreement,
Canada Bread is permitted to continue to pay quarterly
dividends of up to $0.75 per common share until the

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

closing of
the actual
the transaction (pro-rated for
number of days in the quarter in which the transaction
closes). The Arrangement will require the approval of at
least 66 2⁄ 3% of the votes cast by the shareholders of
Canada Bread at a special meeting of shareholders
expected to take place in early April 2014. Maple Leaf
has entered into a voting support agreement with Grupo
Bimbo pursuant to which Maple Leaf has agreed to vote
all of its common shares of Canada Bread in favour of
the Arrangement at such meeting.

The Arrangement is also subject to receipt of court
approval, regulatory approvals (including Competition
Act (Canada) and Investment Canada Act approvals and
in the United States), and
Hart Scott Rodino approval
to the
other customary closing conditions. Subject
satisfaction or waiver of
to the
Arrangement, the transaction is expected to close in the
second quarter of 2014. Upon completion of the sale,
the Company will no longer be consolidating the results
and related balance sheet of Canada Bread.

the conditions

committee

the
that
A special
independent directors of Maple Leaf was established to
oversee the strategic review process and recommend
the optimal use of proceeds arising from completion of

included all of

the Arrangement to benefit both Maple Leaf and its
shareholders, which will
include some combination of
debt repayment, supporting growth in its consumer
packaged meats business, and return to shareholders.
Following consideration of the alternatives, the board of
directors of Maple Leaf intends that the return to Maple
Leaf shareholders of any available proceeds from the
sale of Canada Bread within three years of the closing
date of the Canada Bread transaction would be made
pursuant
to one or more issuer bids. The timing,
structure, price, and other terms of each issuer bid will
be determined by
In
addition, and in order to protect the interests of minority
shareholders, any such issuer bid will comply with the
terms of Multilateral
61-101, will be
conducted pursuant to a “Dutch Auction” and will be
subject to a minimum deposit condition that more than
50% of the Maple Leaf shareholders other than McCain
Capital Inc. accept the issuer bid. If it is determined that
any one or more issuer bids could result in material
adverse consequences
its
shareholders, the board of directors would consider
alternative means of returning proceeds to shareholders
that would be intended to have the same effect.

the independent directors.

to Maple Leaf and/or

Instrument

SELECTED FINANCIAL INFORMATION

The following table summarizes selected financial information for the three years ended December 31:

($ millions except earnings per share)

Sales
Adjusted Operating Earnings (i)
Adjusted EBITDA (i)
Adjusted EBITDA % (i)
Net earnings (loss) from continuing operations

Adjusted Earnings per Share (i)
Basic earnings (loss) per share from continuing operations
Diluted earnings (loss) per share from continuing operations

Total assets
Net Debt (i)
Total long-term liabilities
Return on Net Assets (“RONA”) (i)
Cash provided by operating activities
Cash dividends per share

2013

2012 (ii)

2011 (ii)

$ 4,406.4
$
(12.3)
$ 124.1
2.8%
(58.5)

$
$
$

(0.51)
(0.48)
(0.48)

$ 3,599.1
$ 451.7
$ 990.6
(0.2)%
$ 260.1
0.16
$

$ 4,551.8
$ 172.0
$ 294.6
6.5%
42.0

$
$
$

0.47
0.25
0.24

$ 3,243.7
$ 1,171.3
$ 1,742.7
9.4%
$ 218.1
0.16
$

$ 4,578.8
$ 130.0
$ 247.4
5.4%
(7.3)

$
$
$

0.34
(0.08)
(0.08)

$ 2,965.5
$ 984.0
$ 1,421.6
9.7%
$ 244.8
0.16
$

(i)

(ii)

Refer to the section entitled Non-IFRS Financial Measures starting on page 34 of this document.

With the exception of RONA, 2012 and 2011 figures have been restated for the classification of the Rothsay and Olivieri businesses as
discontinued operations for the impact of adopting the revised International Accounting Standard 19 Employee Benefits (“IAS 19”).
Refer to Notes 22 and 32, respectively, in the audited consolidated financial statements.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

DISCUSSION OF FACTORS IMPACTING
THE COMPANY’S OPERATIONS AND
RESULTS

Value Creation Plan

In 2011,
the Company began the execution of a
comprehensive plan that was designated to significantly
increase profitability and competitiveness through cost
reduction and productivity enhancement. The Value
Creation Plan (the “Plan”) was based on extensive
research to benchmark operating costs and margins
large North American food companies and
against
identified
increase
opportunities
profitability and margins through changes in supply
chain, information systems, and pricing strategies.

significant

and

that

production

in Hamilton, Ontario

The Plan focuses on lowering costs in the prepared
meats business through reducing product complexity,
closing less efficient manufacturing and distribution
operations
and
consolidating
distribution into a smaller number of efficient scale
facilities or “centres of excellence”. In the Bakery Group,
cost reductions are related to a new, more efficient fresh
bakery
consolidated
production from three smaller bakeries. Increasing the
the
effectiveness of pricing strategies
Company is also expected to contribute to margin
expansion. These and other initiatives are expected to
result
in Adjusted Earnings Before Interest, Tax,
Depreciation and Amortization (“Adjusted EBITDA”)
margins of 10.8% in 2015, including 10.0% in the Protein
Group and 12.3% in the Bakery Group. Upon completion
of
in
Canada Bread, the Adjusted EBITDA margin target will
be 10.0%, consistent with the current Protein Group
target.

the Company’s interest

the proposed sale of

throughout

Value Creation Initiatives – Progress to Date

Complexity Reduction

sizes

product

standardize

formulations,

Since 2011, the Company has benefited from initiatives
to
and
specifications, and eliminate lower volume, lower value
product
lines in prepared meats. These complexity
reduction initiatives, which are now substantially
complete, generated immediate financial
returns by
creating longer, more efficient production runs and less
distribution complexity and are essential to realize the
benefits when production is transferred to larger, scale
facilities.

Early Closure of Prepared Meats Plants

During 2011, the Company completed the closure of two
prepared meats facilities: a manufacturing facility in
Berwick, Nova Scotia, was closed in April 2011 and sold

MANAGEMENT’S DISCUSSION AND ANALYSIS

was

Columbia,

in June 2011; and a manufacturing facility in Surrey,
British
in
September 2011. The production from these plants was
transferred to existing facilities. These early value
creation initiatives have been accretive to earnings
since 2011.

closed

sold

and

New Ontario Fresh Bakery Plant

In 2012,
the Company commissioned a new, more
efficient fresh bakery in Hamilton, Ontario. In early 2012,
two of three bakeries in the Greater Toronto Area were
closed and production was transferred to the Hamilton
bakery. Closure of the third Ontario bakery occurred
during the second quarter of 2013. The consolidation of
production into this facility has resulted in operating
efficiencies, primarily driven by reduced overhead costs.
Further improvements are expected during 2014 as the
production lines gain optimum efficiencies.

SAP Implementation

the Company largely completed its SAP
In 2013,
implementation. As a result, all of
the Company’s
businesses now operate on SAP, with increased controls
and capabilities. The installations have been successful,
with minimal disruption to the business.

Optimizing Pricing and Promotions

strategies. This

The Company is supporting margin through increasing
the effectiveness of its pricing, promotions, and category
management
includes: managing
inflationary costs through appropriate price increases;
reducing the percentage of products sold on promotion;
optimizing return from in-store promotional activities;
and increasing the value of
its selling mix through
innovation, brand building, and effective category
management. These initiatives contributed to margin
growth in the prepared meats business in 2011 and 2012.
During 2013, the prepared meats business benefited
from a strong innovation pipeline and continued to
increase sales of new, higher margin products. However,
margins contracted during the year as a result of higher
raw material costs, as well as transitional costs and
supply chain disruptions associated with implementing
the Plan, which are discussed below in more detail.

Prepared Meats Network Consolidation

The Company’s prepared meats network was built from
numerous acquisitions. While this strategy consolidated
capacity in the industry and established leading market
shares for the Company, it resulted in the acquisition of
a number of older, inefficient plants. By the end of 2014
the Company expects to consolidate prepared meats
production from eight of
these facilities to three
expanded plants and one new facility in Hamilton,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

Ontario. Of these eight smaller plants, two were closed
during 2011 and a third in early 2013. The remaining five
plants in Kitchener, Ontario; Hamilton, Ontario; Toronto,
Ontario; Moncton, New Brunswick; and Winnipeg,
Manitoba, are expected to be closed by the end of 2014.

total

investment

significantly

capital
is

investments will

estimated to be

related to network
The
approximately
enhancements
$620 million. Upon completion, the Company believes that
these capital
increase
productivity and reduce overhead costs and provide a
strong platform for growth. As at the end of 2013, the
Company had invested approximately $480 million in its
prepared meats network of this, approximately $350 million
related to the new 402,000 square foot scale plant in
Hamilton, Ontario, that will focus on production of wieners
and deli meats. Commissioning of this facility commenced
near the end of 2013, and construction is expected to be
completed during the
2014.
Approximately $130 million was invested in expanding and
upgrading three other existing facilities in Saskatoon,
and Brampton,
Saskatchewan, Winnipeg, Manitoba,
Ontario. The Saskatoon facility specializes in production of
cooked smoked sausages and meat snacks; the Winnipeg
plant consolidates value-added ham and bacon processing;
and the Brampton location focuses on the production of
boxed meats and fresh and frozen sausages.

second quarter

During 2013, the Company was executing five major
start-ups simultaneously,
including commissioning the
facilities discussed above as well as a new distribution
centre servicing Central and Eastern Canada. This
intense phase of network transition resulted in costs of
approximately $50 million related to start-up costs,
incremental resources to support these activities, and
duplicative overhead as the Company continued to
operate legacy facilities parallel with new ones. These
costs were higher
than the Company originally
expected, largely due to the start-up of the Saskatoon
and Winnipeg plants.

Increasing Productivity and Distribution Efficiencies

The rationalization of sub-scale plants and the investments
in new technologies are expected to enable significant
increases in manufacturing productivity and reduced
overhead costs. Improvements to the distribution network
are also being made to reduce costs and improve
efficiencies, involving the consolidation of operations from
third-party
five company-owned and a number of
distribution centres into two large distribution centres by
the end of 2014. The Company’s existing distribution
centre located in Saskatoon, Saskatchewan, serves as a
Western Canadian hub. In 2012, the Company completed
the closure of the Coquitlam, British Columbia distribution
centre after consolidating volume into the Saskatoon
facility. A new 282,000 square foot distribution centre in
Puslinch, Ontario, which is operated by a third-party
logistics provider, serves as the Eastern distribution hub.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

transfer of

During the year, the Company completed the closure and
volume
two company-owned Ontario
distribution centres as well as several third-party centres
into the Puslinch facility. The closure of the remaining
third-party and company-owned distribution centres is
expected to be completed in 2014.

A Simpler, Scale Prepared Meats Supply Network

In all, Maple Leaf Foods is planning a net reduction of 10
manufacturing and distribution facilities in its prepared
meats business. By the end of 2013, three plants and
three distribution centres had already been closed, while
the Company’s new distribution centre in Ontario was
operational and three expanded manufacturing facilities
were operating at various stages of commissioning.

The Company expects to realize savings from multiple
sources across the organization when the execution plan
is complete by 2015. The majority of savings are
expected to come from:

(cid:129) Enhanced throughput and productivity from larger

scale and new technologies;

(cid:129) Improved product yield, reduced waste and better

packaging;

(cid:129) Lower total overhead and reduced labour; and

(cid:129) Reduced shipping costs.

interest

the Company’s

in Canada Bread,

The benefits of this strategy are expected to result in
Adjusted EBITDA(i) margins of 10.8% in 2015, including
10.0% in the Protein Group and 12.3% in the Bakery
Product Group. Upon completion of the proposed sale
of
the
Adjusted EBITDA margin target will be 10.0%, consistent
with the current Protein Group target. For 2013, the
Company’s Adjusted EBITDA margin was 2.8% (-1.6% in
the Protein Group and 11.6% in the Bakery Group).
Results in the Protein Group were adversely impacted by
and
challenging
transitional costs associated with implementing the Plan.
These factors are discussed in further detail
in the
“Operating Review” section of this document.

commodity market

conditions

Capital Investment Plan and Leverage Ratios

Between 2010 and 2015, the Company expects to invest
approximately $820 million in the Plan. This includes
$620.0 million supporting its prepared meats network, of
which $480.0 million has been spent
to date,
$110.0 million spent to construct the fresh bakery in
Hamilton, Ontario, and $90 million spent to implement
SAP.

Management estimates that $140.0 million of net capital
expenditures will be spent on the Plan in 2014, entirely
related to completion of the prepared meats network.
The Company
approximately
expects
$43 million of restructuring charges will be incurred in
2014, $28 million of which relate to future cash outflows.

also

that

Total capital expenditures for 2013 were originally
estimated to be $425 million. In the second quarter of
2013,
to
approximately $375 million. Actual capital expenditures
were $385.4 million,
including $278.0 million on the
prepared meats network.

the Company

estimate

reduced

its

In 2013, the Company’s ratio of Net Debt to Adjusted
EBITDA was 3.6x, which is above Management’s

MANAGEMENT’S DISCUSSION AND ANALYSIS

long-term target of 3.0x. This was due to higher capital
expenditures and lower earnings, partly mitigated by the
sales of the Company’s Rothsay and Olivieri businesses
in the fourth quarter. The ratio is expected to decrease
in the second half of 2014 as the Company completes
the execution of
the Plan and the anticipated
profitability improvements materialize. During 2014,
Management estimates that total capital spending will
be approximately $255 million, including $140 million on
the prepared meats network, $75 million of base
expenditures in the Protein Group, and $40 million of
base capital expenditures in the Bakery Group. This
estimate will be updated following the successful
completion of the Company’s sale of its 90.0% interest in
Canada Bread, which is expected to close in the second
quarter of 2014.

Fluctuating Input Prices

The following table outlines the change in key commodity prices that affected the Company’s business and financial
results:

Pork cutout (US$ per cwt) (ii)(v)
Composite primal values (US$ per cwt) (ii)(v)

Belly
Ham
Trim

Market price per cwt (CAD per cwt) (ii)
Market price per cwt (US$ per cwt) (ii)
Poultry meat market price (CAD per kg) (iii)
Poultry live bird cost (CAD per kg) (iii)
Wheat (US$ per bushel) (iv)
Corn (US$ per bushel) (iv)
Soybeans (US$ per bushel) (iv)
Oil (US$ per barrel) (iv)

As at
December 31,

Annual averages

2013 (i)

2013

2012

Change

2011

$ 85.13

$ 92.86

$ 88.55

4.9%

$ 97.73

$ 101.82
$ 75.11
$ 62.00
$ 84.44
$ 79.49
3.17
$
1.59
$
6.35
$
$
4.22
$ 13.32
$ 98.17

$ 145.67
$ 76.62
$ 69.55
$ 92.33
$ 89.64
3.51
$
1.69
$
7.70
$
$
5.80
$ 14.06
$ 97.91

$ 121.82
$ 73.12
$ 66.01
$ 85.38
$ 85.42
3.52
$
1.66
$
8.67
$
$
6.95
$ 14.68
$ 94.11

19.6%
4.8%
5.4%
8.1%
4.9%
(0.3%)
2.0%
(11.2%)
(16.5%)
(4.2%)
4.0%

$ 127.48
$ 83.23
$ 88.26
$ 89.12
$ 90.10
3.31
$
1.60
$
9.07
$
$
6.80
$ 13.17
$ 94.88

(i)

(ii)

(iii)

(iv)

(v)

Spot prices for the week ended December 31, 2013 based on CME (Ontario hogs) or WCB (Western Canada hogs) (Source: USDA).

Five-day average of CME or WCB (Source: USDA).

Market price (Source: Express Market Inc.) and Live Cost (Source: Chicken Farmers of Ontario).

Daily close prices (Sources: Bloomberg, CBOT, Minneapolis Wheat Exchange).

2012 and 2011 figures are re-stated to reflect the USDA changing to a mandatory reporting system.

The 2012 record drought in the U.S. Midwest had a
significant impact on commodity prices in 2013. Higher
feed costs, lower contribution from hedging programs,
and more hogs under management resulted in larger
losses in the Company’s hog production business.
Although corn prices declined significantly in the second
half of the year, the natural hog growing cycle results in a
delay before lower feed costs are recognized in the

Company’s income statement. As a result, the benefit
associated with lower corn costs is expected to be
recognized in the first half of 2014. During the year,
primary pork processing margins in North America also
continued to remain at levels similar to 2012, which are
significantly below the long-term average. Earnings in
the prepared meats business were compressed due to
increases in raw material costs, particularly bellies, hams,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

and trims, which outpaced pricing.
In the Bakery
Products Group, the Company faced higher wheat costs,
also as a result of the 2012 drought, and implemented
price increases to address these rising raw material
costs. In the third quarter of 2013, prices for wheat and

corn began to decline. However, due to the Company’s
forward buying programs and the animal growing cycles
in agricultural operations, the majority of the benefits
associated with lower commodity costs are not expected
to be realized until 2014.

Impact of Currency

The following table outlines the changes in currency rates that have affected the Company’s business and financial
results:

U.S. dollar / Canadian dollar (i)
U.K. pounds sterling / Canadian dollar (i)
Japanese yen / Canadian dollar (i)

(i)

Source: Bank of Canada daily noon rates

During 2013, the Japanese yen declined in value relative
to the Canadian dollar on average by 18.5%, driven by
monetary policy changes implemented by the central
Bank of Japan. In general, a decline in the Japanese yen
compresses export margins to Japan in the Company’s
primary pork processing business. While the Company
generally seeks to pass through price increases to offset
the impact of a decline in the yen, this was difficult in
2013 as
the Japanese marketplace became more
competitive due to lower global exports to other major
international markets, in particular Russia and China. As
a result, the decline of the Japanese yen negatively
impacted earnings by approximately $27 million during
the year compared to 2012.

As at
December 31,
2013

Annual averages

2013

2012

Change

2011

$ 1.06
$ 1.76
¥ 98.91

$ 1.03
$ 1.61
¥ 94.64

$ 1.00
$ 1.58
¥ 79.86

3.0%
1.7%
18.5%

$ 1.01
$ 1.59
¥ 80.68

pork

primary

processing

Company’s
operations.
Conversely, a weaker Canadian dollar increases the cost
of
raw materials and ingredients in the domestic
prepared meats and fresh bakery businesses. The
branded packaged goods businesses are able to react
to changes in input costs over time through pricing, cost
reduction or investment in value-added products. Over
the longer-term, a weaker Canadian dollar also increases
the relative competitiveness of the domestic Canadian
packaged goods operation, as imports of competing
products from the U.S. become less competitive. Overall
in 2013,
the weaker Canadian dollar
relative to the U.S. dollar did not have a material impact
on earnings.

the impact of

The Canadian dollar weakened relative to the U.S. dollar
In general, a weaker
by 3.0% on average in 2013.
in the
Canadian dollar expands export margins

The Canadian dollar weakened relative to the British
pound on average by 1.7% in 2013; this did not have a
material impact on the Company’s results.

OPERATING REVIEW

The following table summarizes sales by business segment for the three years ended December 31:

($ millions)

Meat Products Group
Agribusiness Group (i)

Protein Group
Bakery Products Group (i)

Total Sales

2013

2012

Change

2011

$ 2,923.9
29.0

$ 2,952.9
1,453.6

$ 3,046.6
26.6

$ 3,073.3
1,478.6

-4.0%
8.9%

-3.9%
-1.7%

$ 3,042.7
38.1

$ 3,080.8
1,498.0

$ 4,406.4

$ 4,551.8

-3.2%

$ 4,578.8

(i)

Figures exclude the results of the Rothsay and Olivieri businesses in the Agribusiness Group and Bakery Products Group respectively.
Rothsay and Olivieri results are reported as discontinued operations as disclosed in Note 22 of the Company’s 2013 audited
consolidated financial statements.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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 (ii)

Protein Group
Bakery Products Group (ii)
Non-allocated Costs in Adjusted Operating Earnings (iii)

Adjusted Operating Earnings

2013

2012 (i)

Change

2011 (i)

$ (86.2)
(38.3)

$ (124.5)
113.7
(1.5)

$ 98.4
(15.5)

$ 82.9
96.4
(7.3)

-187.6%
147.6%

-250.1%
17.9%
-79.5%

$ 70.7
(5.7)

$ 65.05
70.1
(5.2)

$ (12.3)

$ 172.0

-107.1%

$ 130.0

(i)

(ii)

(iii)

2012 and 2011 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee
Benefits (“IAS 19”). Refer to Note 32 in the audited consolidated financial statements.

Non-allocated costs comprise expenses not separately identifiable to business segment groups, and do not form part of the measures
used by the Company when assessing the segments’ operating results.

Meat Products Group

Includes value-added prepared meats,
lunch kits,
protein snacks, and value-added fresh pork, poultry,
foodservice,
and turkey products sold to retail,
Includes
and convenience channels.
industrial,
leading Canadian brands such as Maple Leaf®,
Schneiders®, and many leading sub-brands.

Sales for 2013 decreased 4.0% to $2,923.9 million, or
2.1% after adjusting for the impact of divesting the
Company’s potato processing operations and poultry
agricultural operations, and the impact of
foreign
exchange. The decrease was primarily due to the impact
of lower volumes in the fresh pork and prepared meats
businesses. Partly offsetting this was the benefit of
higher commodity prices in fresh pork, price increases in
the fresh poultry and prepared meats businesses, and
higher fresh poultry volumes.

Adjusted Operating Earnings in 2013 decreased to a loss
of $86.2 million from Adjusted Operating Earnings of
$98.4 million last year, due to the factors discussed
below.

During 2013, the Company entered a peak phase of
executing its prepared meats strategy, designed to
establish a low cost supply chain and achieve structural
margin expansion. Earnings were significantly impacted
by the cost of commissioning five new facilities, resulting
in transitional costs of approximately $50 million during
the year (2012: approximately $12 million). In addition to
transitional costs, the Company also experienced other
manufacturing and distribution inefficiencies associated
in parallel until
with operating legacy
production and distribution are transferred and these
older facilities close in 2014.

facilities

Margins in the prepared meats business were also
compressed by higher raw material and other input
costs, as well as inflationary costs that were not fully
offset by pricing. Volumes also declined largely due to
an 8% decline in the first quarter, although branded
retail volumes strengthened for the remainder of the
year.

Earnings in primary pork processing were negatively
affected by lower export margins primarily due to a
weaker Japanese yen,
lower volumes, and declining
values for by-product sales. These factors were partly
offset by an improvement in North American processing
spreads and lower selling, general, and administrative
costs. Earnings in fresh poultry declined due to lower
primary processing spreads and inflationary costs that
were partly offset by higher earnings from value-added
channels.

The sale of the Company’s potato processing operations
in January 2013 reduced Adjusted Operating Earnings
by approximately $13 million compared to last year.

Agribusiness Group

Includes Canadian hog production operations that
primarily supply the Meat Products Group with
livestock.

2013 sales
increased 8.9% to $29.0 million from
$26.6 million in 2012 due to higher hog volumes partly
offset by lower pricing on toll feed sales.

Adjusted Operating Earnings declined to a loss of
$38.3 million from a loss of $15.5 million last year due to
lower contributions from hedging programs, higher feed
costs, and higher selling, general, and administrative
expenses, partly offset by an increase in the market price
for hogs.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

Bakery Products Group

and artisan breads

Includes fresh and frozen bakery products, including
frozen par-baked products,
breads, rolls, bagels,
sold to retail,
specialty
foodservice and convenience channels.
It includes
national brands such as Dempster’s®, Tenderflake®,
New York Bakery Co™, and many leading regional
brands.

Sales decreased 1.7% to $1,453.6 million or 0.8% after
adjusting for discontinued categories in the U.K. and the
impact of currency translation on sales in the U.S. and
U.K. Lower sales volumes in the fresh and North
American frozen bakery businesses were only partly
offset by stronger volumes in the U.K. business and
higher pricing across all the businesses.

Adjusted Operating Earnings for 2013 increased 17.9%
to $113.7 million from $96.4 million last year. Earnings
improvements were driven by the North American frozen
and U.K. bakery businesses, partly offset by a small
decline in fresh bakery business earnings.

In the North American frozen bakery business, earnings
improved due to operating efficiencies and higher
pricing that more than offset inflationary costs and lower
volumes. The U.K. bakery business benefited primarily
from higher volumes and pricing, despite higher raw
material and other input costs. The impact of lower
volumes in the fresh bakery business were largely offset
by lower operating costs resulting from operating
bakery,
efficiencies
simplification
and
reorganization of the distribution network. Lower selling,
general, and administrative expenses also contributed to
restructuring
earnings,
initiatives. The benefit of earlier price increases was
offset by higher raw material and inflationary costs.

the Hamilton, Ontario
product

largely resulting from earlier

portfolio,

the

Non-allocated Costs

In 2013,
the costs included in Adjusted Operating
Earnings and not allocated to segmented operating
earnings was $1.5 million (2012: $7.3 million). The lower
expenses in 2013 compared to 2012 relate to lower
spending on SAP implementation and consulting fees.
Non-allocated amounts that were excluded from the
computation of Adjusted Operating Earnings comprised
of a gain of $13.5 million due to changes in the fair value
loss of $3.4 million) and a
of biological assets (2012:
$0.3 million unrealized gain on commodity futures
contracts (2012: loss of $3.3 million).

The changes in the fair value of biological assets and
losses on commodity futures
unrealized gains or
contracts have been excluded from Adjusted Operating
Earnings as the economic impact of the transactions will
be reflected in earnings in future periods when the
underlying asset is sold or transferred.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

SALE OF ROTHSAY AND OLIVIERI
BUSINESSES
During the fourth quarter, the Company sold its Rothsay
by-product recycling business and Olivieri fresh pasta
business
for net proceeds of $628.5 million and
$116.3 million, respectively. The operating results and
these two businesses have been
gain on sale of
classified as discontinued operations and prior year
amounts
have been presented as discontinued
operations on a comparable basis. The Rothsay business
was previously reported in the Agribusiness Group and
the Olivieri business was previously reported in the
Bakery Products Group. Earnings per
share from
discontinued operations were $4.03 for the year ended
December 31, 2013 (2012: $0.39). Included in the 2013
figure was a net gain on sale of the businesses of $3.69
per share.

the Company’s

LONG-TERM EBITDA MARGIN TARGETS
third quarter Management’s
In
Discussion & Analysis, Management provided restated
2015 Adjusted EBITDA margin targets to reflect the sale
of the Rothsay business. These targets, which were
the Bakery
the Protein Group, 12.3% for
10.0% for
Products Group, and 10.8% for the Company, remain
unchanged following the sale of the Olivieri business.
Upon completion of
the
Company’s interest
the Adjusted
EBITDA margin target will be 10.0%, consistent with the
current Protein Group target.

the proposed sale of

in Canada Bread,

GROSS MARGIN
Gross margin in 2013 declined to $485.8 million (11.0%
of sales) compared to $673.6 million (14.8% of sales) in
2012, primarily due to the Protein Group. Margin
compression in the prepared meats business was caused
by transitional costs related to execution of network
transformation initiatives, unfavourable production and
distribution variances at legacy plants, and higher raw
material and inflationary costs not fully offset by pricing.
Gross margins in primary pork and poultry processing
unfavourable market
declined primarily due
conditions, including the impact of a weaker Japanese
yen on pork exports, declining prices for pork by-
product sales, and lower poultry processing margins. In
the hog production business, margins declined due to
lower contributions from hedging programs. Partly
offsetting these reductions was a $17.0 million increase
in the fair value of biological assets, driven entirely by
the increase in market value of hog production livestock,
as well as a $3.6 million increase in the fair value of
unrealized mark-to-market
contracts,
primarily attributable to future sales contracts for hogs.
Improved margins in the Bakery Products Group were
largely driven by operating efficiencies at the fresh and

commodity

North American frozen bakery businesses and higher
pricing across the segment that more than offset rising
raw material and inflationary costs.

The changes in the fair value of biological assets and
unrealized gains or
losses on commodity futures
contracts have been excluded from Adjusted Operating
Earnings as the economic impact of the transactions will
be reflected in earnings in future periods when the
underlying asset is sold or transferred.

SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES

respectively.

Selling, general, and administrative expenses decreased
by 4.8% to $484.2 million in 2013, compared to
$508.4 million in 2012, representing 11.0% and 11.2% of
sales
primarily
attributable to lower spending in the Bakery Products
Group, resulting from earlier restructuring initiatives, as
well as
stock compensation expense. Also
contributing to the reduction were SAP implementation
costs and consulting fees in 2012 that did not re-occur.

decrease was

lower

The

OTHER INCOME / EXPENSE

income for 2013 was $78.0 million (2012:
Other
$8.6 million) and primarily consisted of a $67.6 million
gain on disposal of assets and liabilities held for sale,

MANAGEMENT’S DISCUSSION AND ANALYSIS

interest

primarily related to the sale of the Company’s potato
processing operations in the first quarter of 2013 and the
sale of certain assets within the turkey agricultural
operations in the third quarter of 2013. Other items
included a $4.7 million gain related to the de-
designation of
rate swaps from a hedge
accounting relationship as a result of the Company’s
the Rothsay business, a
decision to dispose of
$4.0 million gain due to a pension curtailment related to
the Rothsay business, a $3.2 million gain related to
ineffective hedging, $2.5 million of property tax rebates,
$2.3 million of gains on the sale of property, plant, and
equipment, and $4.8 million in recoveries from insurance
claims. These gains were partly offset by $8.0 million of
impairment charges related to the write-down of assets
that were sold in the U.K. and on poultry quota, and
legal and professional fees of $2.6 million associated
with the proposed sale of the Company’s interest in
Canada Bread.

Certain items in other income are excluded from the
calculation of Adjusted EBITDA and Adjusted Earnings
per Share as they are not considered representative of
on-going operational activities of the business. Other
income used in the calculation of Adjusted EBITDA and
Adjusted Earnings per Share for
the year 2013 is
$7.4 million, and largely consists of insurance proceeds
of $4.8 million and a property tax rebate of $2.5 million.

RESTRUCTURING AND OTHER RELATED COSTS

($ thousands)

MEATS PRODUCTS GROUP
Management structure changes

Severance
Pension
Site closing and other costs
Asset impairment and accelerated depreciation

Strategic value creation initiatives

Severance
Site closing and other costs
Asset impairment and accelerated depreciation
Retention
Pension

Plant closure
Severance
Retention
Pension
Asset impairment and accelerated depreciation

Total Meats Products Group

2013

2012

$ 2,737
–
344
154

$ 6,509
330
7
–

$ 3,235

$ 6,846

$ 23,484
476
25,353
20,347
–

$ 3,475
(1,843)
24,423
–
290

$ 69,660

$ 26,345

111
–
460
–

571

$ 1,793
506
569
379

$ 3,247

$ 73,466

$ 36,438

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

($ thousands)

BAKERY PRODUCTS GROUP
Management structure changes

Severance
Site closing and other costs
Retention

Bakery closures
Severance
Site closing and other costs
Asset impairment and accelerated depreciation
Retention
Pension

Total Bakery Products Group

NON-ALLOCATED
Management structure changes

Severance

Total restructuring and other related costs

Amounts in the table above are net of reversals.

2013

2012

$ 8,703
–
88

$ 8,791

$ 2,171
5,456
1,376
573
(414)

69
146
–

215

$ 1,205
3,630
5,310
443
270

$ 9,162

$ 10,858

$ 17,953

$ 11,073

$ 1,745

–

$ 93,164

$ 47,511

A brief description of the projects is as follows:

two bakeries in Toronto, Ontario; a bakery in Delta,
British Columbia; and two distribution centres in Québec.

Management Structure Changes

The Company has recorded restructuring and other
related costs pertaining to organizational delayering and
changes to its management structure.

Strategic Value Creation Initiatives

costs

changes

The Company’s Meat Products Group has recorded
its
restructuring
manufacturing and distribution network as part of
implementing its Value Creation Plan, a comprehensive
strategy to step-change productivity and profitability in
its Meat business by closing inefficient plants and
consolidating production into efficient
scale, high
technology facilities.

Plant Closure

The Company’s Meat Products Group has recorded
restructuring costs related to the closure of a plant
located in Ayr, Ontario.

Bakery Closures

During the year, the Company’s Bakery Products Group
recorded charges in connection with the closure of
bakeries in: Grand Falls, New Brunswick; Edmonton,
Alberta; Toronto, Ontario; and Shawinigan, Québec.

During the year ended December 31, 2012,
the
Company’s Bakery Products Group recorded charges in
connection with the closure of two bakeries in the U.K;

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Impairment

During the year, the Company recorded $0.6 million
(2012: $0.4 million) of impairment of fixed assets through
restructuring and other related costs and recognized
reversals of impairments of $nil (2012: $0.2 million) also
through restructuring and other related costs.

INTEREST EXPENSE AND OTHER
FINANCING COSTS
Interest expense for 2013 was $69.8 million compared to
$71.7 million in 2012. The change was due to increased
capitalization of borrowing costs, partially offset by the
impact of higher average debt balances. The Company’s
average borrowing rate for 2013 was 5.7% (2012: 5.7%).
As at December 31, 2013, 62.7% of indebtedness was
rate fluctuations,
fixed and not exposed to interest
compared to 70.1% in the previous year. During the
fourth quarter, the Company applied a portion of the
Rothsay sale proceeds to reduce borrowings under the
revolving credit facility and also effectively unwound
$260 million of associated pay-fixed interest rate swaps
by entering into an offsetting interest swap, effectively
decreasing the proportion of fixed interest rate debt.

INCOME TAXES
The Company’s
income tax expense relating to
continuing operations for 2013 resulted in an effective
tax rate of 28.1%, (2012: 32.3%). The lower effective tax

rate in 2013 is primarily the result of the lower rates of
tax applicable to the gains on the sales of the potato
processing operations, and Ontario turkey agricultural
operations; and the proportion of earnings and losses in
different tax jurisdictions. For 2013, the effective tax
rates used in the computation of Adjusted Earnings per
Share are 25.8% (2012: 24.8%) on restructuring charges
and 15.3% (2012: 25.8%) on items included in other
income not considered representative of ongoing
operations. The lower tax rate on items included in other
income not considered representative of ongoing
operations is due to similar reasons as stated above. The
higher tax rate on restructuring charges in 2013 is a
result of
in different
jurisdictions.

the proportion of charges

TRANSACTIONS WITH RELATED PARTIES

The Company has a 90.0% controlling interest in Canada
Bread, a publicly traded subsidiary that is consolidated
into the Company’s results. Transactions between the
Company and its consolidated entities have been
eliminated on consolidation.

the

The Company sponsors a number of defined benefit and
defined contribution plans as described in Note 10 of
the audited consolidated financial statements. During
2013,
million
(2012: $1.1 million) from the defined benefit pension
plans for the reimbursement of expenses incurred by the
Company to provide services to these plans. In 2013, the
Company’s
plans were
to
$40.9 million (2012: $42.5 million).

contributions

Company

received

these

$1.0

Key management personnel are those persons having
authority and responsibility for planning, directing, and
controlling the activities of the Company and/or its
subsidiary, directly or indirectly, including any external
director of the Company and/or its subsidiary.

Remuneration of key management personnel of the
Company is comprised of the following expenses:

($ thousands)

2013

2012

Short-term employee benefits
Salaries, bonuses, and fees
Company car allowance
Other benefits

Total short-term employee benefits
Post-employment benefits
Share-based benefits

$ 12,779
466
3,462

$ 16,707
1,560
10,983

$ 13,388
474
1,135

$ 14,997
1,555
18,553

Total remuneration

$ 29,250

$ 35,105

During 2013, key management personnel of
the
Company exercised 162,000 share options granted
under the Maple Leaf Foods Share Incentive Plan for an
amount of $1.8 million (2012: $nil).

MANAGEMENT’S DISCUSSION AND ANALYSIS

GOVERNMENT INCENTIVES

in earnings

the Company

recorded government
During 2013,
totalling $7.5 million (2012:
incentives
$10.1 million). Of
this amount, $5.0 million (2012:
$7.8 million) related to incentives from the Canadian
government to support the development of renewable
energies related to the Rothsay by-product recycling
business, which has been presented in discontinued
operations. The Company also received $2.0 million
(2012: $nil) related to incentives from the government of
Manitoba supporting an employment and training
program. The Company also recorded other incentives
totalling $0.5 million (2012: $0.8 million). In addition, the
Company recorded $1.5 million from the Province of
Ontario in AgriStability benefits during 2012.

the Company recorded a
Additionally, during 2013,
$2.0 million interest-
free loan from the Canadian
government related to the purchase of equipment for its
recently commissioned bakery in Hamilton, Ontario. The
loan is repayable over a period of seven years.

During 2012,
the Company recorded a $4.4 million
interest-free loan from the Canadian government related
to improvements and cost reduction in primary pork
processing. The loan is repayable over a period of
10 years beginning in 2013. The benefit of the below-
market
is treated as a government
incentive and has been capitalized to the assets
associated with the project and is recognised in earnings
over their useful life as a reduction of depreciation.

interest

rate of

ACQUISITIONS AND DIVESTITURES

During the fourth quarter of 2013, the Company sold
substantially all of the net assets of its Olivieri fresh pasta
business to Catelli Foods Corporation for net proceeds
of $116.3 million, which resulted in a pre-tax gain of
$79.4 million.

During the fourth quarter of 2013, the Company sold
substantially all of the net assets of its Rothsay business
to Darling International
for net proceeds of
$628.5 million, which resulted in a pre-tax gain of
$526.5 million.

Inc.

During the fourth quarter of 2013, the Company sold a
fresh bakery in Toronto, Ontario that was closed in June
2013 for gross proceeds of $12.4 million, resulting in a
pre-tax gain of $11.4 million.

In the third quarter of 2013, the Company sold certain
assets within its Ontario turkey agricultural operations for
gross proceeds of $46.3 million, resulting in a pre-tax
gain of $9.7 million. These assets were classified as
assets held for sale on the June 30, 2013 consolidated
balance sheet.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

During the third quarter of 2013, the Company sold the
final assets of a poultry farm and related production
quota in Brooks, Alberta, originally purchased on
February 1, 2012, and immediately classified it as assets
held for sale. The Company purchased the operations
and production quotas for a cash purchase price of
$31.1 million. The acquisition was accounted for as a
business combination. In 2012, the Company sold $8.0
million of the production quotas which resulted in a pre-
tax gain of $0.5 million. In the second quarter of 2013,
the Company sold assets for proceeds of $8.3 million. In
the third quarter of 2013,
the Company sold the
remaining assets for proceeds of $12.9 million, which
resulted in a 2013 pre-tax loss of $nil.

During the third quarter of 2013, the Company sold an
investment property located in Aurora, Ontario,
for
$1.8 million, which resulted in a pre-tax gain of
$1.0 million.

During the second quarter of 2013, the Company sold an
investment property
for
$2.0 million, which resulted in a pre-tax gain of
$0.2 million. The investment property was classified as
held for sale on the December 31, 2012 consolidated
balance sheet.

located in Ayr, Ontario,

On January 4, 2013, the Company sold all the assets
related to its Lethbridge, Alberta, potato processing
facility to Cavendish Farms Corporation for proceeds of
$58.1 million resulting in a pre-tax gain of $45.4 million
($38.7 million after-tax) recorded in other income. The
assets related to the potato processing operation were
classified as
sale on the Company’s
December 31, 2012 consolidated balance sheet.

held for

On November 27, 2012, the Company acquired specific
assets and liabilities held by Paradigm Farms Ltd.
(“Paradigm”), a privately held entity engaged in hog
production, related to the purchase of the business of
Puratone. The purchase price was $2.2 million, and the
Company settled the transaction in cash.

INVESTMENT IN CANADA BREAD

There were no changes in the Company’s investment in
Canada Bread during 2012 and 2013.

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

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

accounts

receivable

In general,

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, the pricing change can have a material
in working capital, primarily
effect on investment
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
its operations. These operating cash
restructuring of
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.

credit

facility

revolving

committed

is intended to meet

the Company increased its
On October 31, 2012,
by
existing
to $1.05 billion, and extended the
$250.0 million,
maturity of
the facility by one year. This facility is
unsecured and bears interest based on short-term
interest rates. The facility, which matures on May 16,
2016,
the Company’s funding
requirements for general corporate purposes, and to
provide appropriate levels of liquidity. Due to the sale of
Rothsay, the Company has $251.1 million of this credit
facility
repayment
purposes until no later than January 2015. Further details
are available in Note 14 in the audited consolidated
financial statements.

restricted exclusively

for debt

The following table summarizes the Company’s debt
and available and drawn credit facilities at December 31:

($ millions)

2013

2012

Credit facilities, including AR

securitization
Maple Leaf Foods Inc.
Subsidiaries

Total available

Drawn amount

Maple Leaf Foods Inc.
Subsidiaries
Letters of credit

Total drawn

% drawn

($ millions)

Other Debt

Maple Leaf Foods Inc.
Subsidiaries

Total

$ 1,172.7
122.1

$ 1,180.5
112.3

$ 1,294.8

$ 1,292.8

$ 357.7
61.7
108.3

$ 680.0
54.6
122.5

$ 527.7

$ 857.1

40.8%

66.3%

2013

2012

$ 701.7
2.9

$ 705.2
1.7

$ 704.6

$ 706.9

The Company repaid debentures with outstanding
principal of $24.9 million in October 2013 originally due
amount paid was
in October
$28.2 million including accrued interest of $0.9 million.
The Company also repaid other debt amounting to
$1.3 million during 2013.

2016. The total

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 2013. As at December 31, 2013, Net Debt to
Adjusted EBITDA was 3.6x (2012(i): 3.1x).

The Company is subject to certain covenants under its
principal banking arrangements currently in place. There
can be no assurance that ratios under the Company’s
debt facilities will not be exceeded, which could result in
an acceleration of all of the Company’s debt and the
requirement that replacement funding be secured.

To access competitively priced financing and to further
diversify its funding sources, the Company operates two
three-year committed accounts receivable securitization
facilities. Under the facilities, the Company sells certain
accounts receivable, with very limited recourse, to an
entity owned by an international financial institution with
a long-term AA-debt rating. The receivables are sold at a
discount
to face value based on prevailing money
market rates. At the end of 2013, the Company had
$166.4 million (2012: $287.3 million) of trade accounts
receivable serviced under these facilities. In return for
the sale of its trade receivables, the Company received
cash of $50.9 million (2012: $162.8 million) and notes
receivable in the amount of $115.5 million (2012:
receipts and
$124.5 million). Due to the timing of
disbursements, the Company may, from time to time,
record a
receivable or payable related to the
securitization facility. As at December 31, 2013, the
Company recorded a payable in the amount of $105.5
million (2012: receivable of $1.0 million). The maximum
cash proceeds available to the Company under these
the
programs
securitization
with
substantially the same terms and conditions, with an
expiry date of September 2016.

is $170.0 million. During the year,

agreements

renewed

were

These securitization facilities are subject
to certain
restrictions and require the maintenance of certain
covenants. The Company was in compliance with all of
the requirements of the facilities during 2013. These
facilities were accounted for as an off-balance sheet
facilities were
transaction
the
terminated,
securitized amounts on the consolidated balance sheet
and consider alternative financing if required.

under
the Company would recognize

these

IFRS.

The weighted average term of the Company’s debt is
3.5 years.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Where cost effective to do so, the Company may finance
automobiles, manufacturing equipment, computers and
office equipment with operating or other lease facilities.
The 12-month trailing Adjusted EBITDA used in the
(i)
computation of Net Debt to Adjusted EBITDA for 2012 includes
the results from the Rothsay and Olivieri businesses, as the
transactions to sell these businesses did not occur until 2013.

CAPITAL EXPENDITURES

Capital expenditures for 2013 were $385.4 million
compared to $306.3 million in 2012, an increase of
25.8%. The increase in capital expenditures reflects
spending on the Plan. As higher
higher overall
investments
network
prepared meats
transformation were only partly offset by lower spending
on the implementation of SAP and construction of the
fresh bakery in Hamilton, Ontario.

the

Base capital expenditures increased due to construction
of additional bagel production capacity in the U.K.
bakery business, partly offset by lower spending at other
business units, in part due to the sale of the Rothsay and
Olivieri businesses during the fourth quarter of 2013.

its

for

Company

currently
the full

capital
estimates
The
expenditures
year of 2014 will be
approximately $255 million, including $140 million on the
prepared meats network transformation, $75 million of
base capital expenditures in the Protein Group, and
$40 million of base capital expenditures in the Bakery
Products Group. This estimate will be updated following
the successful completion of the Company’s sale of its
90.0% interest in Canada Bread, which is expected to
close in the second quarter of 2014. The decrease
compared to 2013 reflects lower spend on the prepared
meats transformation as this project nears completion,
partly offset by higher base capital.

CASH FLOW

Total debt, net of cash balances, was $451.7 million at
the end of 2013, compared to $1,171.3 million as at
December 31, 2012. The decrease in debt for the year is
primarily due to the proceeds from the sale of the
Rothsay and Olivieri businesses during the fourth quarter
of 2013.

Cash Flow from Operating Activities

Cash provided by operations increased to $260.1 million
compared to $218.1 million in 2012, primarily due to
lower working capital, partially offset by lower cash
earnings.

Cash Flow from Financing Activities

Cash used in financing activities was $320.1 million for
2013 compared to cash provided of $236.0 million in
2012. The change was primarily due to repayment of

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

debt from the proceeds of the sale of the Rothsay
business during the fourth quarter of 2013.

Cash Flow from Investing Activities

Cash provided by investing activities was $520.0 million
for 2013 compared to cash used of $375.5 million in

2012. The change was driven by proceeds from the sale
of the Rothsay and Olivieri businesses during the fourth
quarter of 2013, proceeds from assets held-for-sale sold
during the year, and an acquisition of a business in 2012
that did not reoccur. This was partly offset by higher
capital expenditures.

CONTRACTUAL OBLIGATIONS
The following table provides information about certain of the Company’s significant contractual obligations as at
December 31, 2013. This table presents the undiscounted principal cash flows payable in respect of financial liabilities.

Payments due by fiscal year:

($ thousands)

Financial liabilities

Bank indebtedness
Accounts payable and accruals
Long-term debt (i)
Foreign exchange contracts
Commodity futures contracts
Interest rate swaps (i) (ii)
Other liabilities
Cross-currency interest rate swap

Commitments

Due within
1 year

Due between
1 and 2 years

Due between
2 and 3 years

Due after
3 years

December 31, 2013

4,408
649,554
209,780
3,041
2,828
–
2,952
31,643

–
–
97,187
–
–
3,573
2,534
–

–
–
283,126
–
–
–
911
–

–
–
363,899
–
–
15,191
851
–

Total

4,408
649,554
953,992
3,041
2,828
18,764
7,248
31,643

$ 904,206

$ 103,294

$ 284,037

$ 379,941

$ 1,671,478

Contractual obligations including operating leases (iii)

62,792

55,771

46,957

157,443

322,963

Total

(i)

(ii)

Does not include contractual interest payments.
Total of fair value of cross-currency interest rate swaps in a liability position.

$ 966,998

$ 159,065

$ 330,994

$ 537,384

$ 1,994,441

As at December 31, 2013 the Company had entered into
construction contracts of $158.4 million relating to the
prepared meats network transformation project (2012:
$428.4 million).

Management is of the opinion that its cash flow, cash on
hand, 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 Note 14 and
Note
audited consolidated financial
statements. In order to limit the impact of market price
fluctuations on operating results, the majority of core
hedging programs are designated as hedging related
relationships and managed as part of the Company
hedge accounting portfolio.

18 of

the

FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT ACTIVITIES
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

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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.

Financial Instruments
The Company’s
classified into the following categories:

financial assets and liabilities are

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.

The fair values and notional amounts of derivative financial instruments at December 31 are shown below:

MANAGEMENT’S DISCUSSION AND ANALYSIS

($ thousands)

Cash flow hedges

Cross-currency interest rate swaps
Foreign exchange contracts (ii)
Commodity futures contracts (ii)
Interest Rate Swaps

Fair value hedges

Commodity futures contracts (ii)

Derivatives not designated in a formal

hedging relationship
Interest rate swaps
Foreign exchange contracts (ii)
Commodity futures contracts (ii)

Total

Current
Non-current

2013

2012

Notional
amount (i)

Fair value

Asset

Liability

Notional
amount (i)

Fair value

Asset

Liability

US$ 313,000
225,714
16,509
–

$ 5,903
–
–
–

$ 31,643
2,854
240
–

US$ 313,000
77,509
14,620
260,000

38,747

381

–

1,180,000
134,814
494,445

–
–
3,965

$ 18,764
187
2,588

$ 10,249

$ 56,276

$ 8,366
1,883

$ 43,548
12,728

$ 10,249

$ 56,276

24,411

660,000
104,507
272,502

–
238
14
–

$ 46,128
–
–
22,434

–

–
246
1,062

$ 6,151
–
–

$ 1,560

$ 74,803

$ 1,560
–

$ 12,771
62,032

$ 1,560

$ 74,803

Total

(i)

(ii)

Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent.

Derivatives are short-term and will impact profit or loss at various dates within the next 12 months.

The fair value of financial assets and liabilities classified
liabilities
as loans and receivables and other financial
(excluding long-term debt) approximate their carrying
value due to their short-term nature.
Financial assets and liabilities classified as held for
trading are recorded at fair value. 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.

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 hedging relationship.

For the year ended December 31, 2013, the pre-tax
amount of hedge ineffectiveness recognized in earnings
was a gain of $3.2 million (2012: $nil), primarily related to
the Company’s designated interest rate swaps.

The table below sets out fair value measurements of financial instruments using the fair value hierarchy:

($ thousands)

Assets:

Foreign exchange forward contracts
Commodity futures contracts
Interest rate swaps

Liabilities:

Foreign exchange forward contracts
Commodity futures contracts
Interest rate swaps

Level 1

Level 2

Level 3

Total

–
4,346
–

–
–
5,903

$ 4,346

$ 5,903

–
2,828
–

3,041
–
50,407

$ 2,828

$ 53,448

–
–
–

–

–
–
–

–

–
4,346
5,903

$ 10,249

$ 3,041
2,828
50,407

$ 56,276

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

requires

There were no transfers between levels during the year
ended December 31, 2013. Determination of fair value
the use of
and the resulting hierarchy
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. For financial instruments
that are recognized at fair value on a recurring basis, the
Company determines whether transfers have occurred
between levels
re-assessing
categorization at the end of each reporting period.

in the hierarchy by

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
credit pricing and terms. The
investment-grade
Company measures its credit profile using a number of
metrics, some of which are non-IFRS measures; primarily
Net Debt to Adjusted EBITDA and Adjusted EBITDA to
net interest expense.

In addition to senior debt and equity, the Company uses
operating and other leases and very limited recourse
accounts
as
additional sources of financing.

securitization

receivable

programs

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 Share Incentive Plan;
an equity compensation program established in 2006.
The Company purchased nil shares in 2013 in respect of
awards under the equity compensation program (2012:
0.8 million).

For the year ended December 31, 2013, total equity
increased by $684.0 million to $1,642.0 million, largely
due to higher net earnings and changes in actuarial
gains recognized in other comprehensive income, partly
offset by dividends declared. During the same period,
total debt net of cash and cash equivalents decreased by
$719.6 million to $451.7 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.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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 sectors. The
Company performs ongoing credit evaluations of new
and existing customers’ financial condition and reviews
the collectibility of its trade accounts receivable and
other receivables in order to mitigate any possible credit
losses. As at December 31, 2013 approximately
$0.2 million (2012: $0.4 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. This allowance includes a provision related to
specific losses estimated on individual exposures. As at
December 31, 2013, the Company has recorded an
allowance for doubtful accounts of $0.1 million (2012:
$0.2 million). 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, the large number and geographic dispersion
of smaller customers, and the operation of the accounts
receivable securitization facility as mentioned previously.
The Company does, however, conduct a significant
amount of business with a small number of large grocery
retailers. The Company’s
customers
comprised approximately
21.1% (2012: 21.5%) of
consolidated sales.

two largest

The Company is exposed to credit risk on its notes
receivable from a financial
institution that holds an
equity interest in an unconsolidated structured entity as
the audited consolidated
described in Note 25 of
financial statements. Management believes that
this
credit risk is limited by the long-term AA- debt rating
held by the counterparty.

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
financial
institutions with long-term debt ratings of A or higher.

international

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.

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, 2013, the Company had available
undrawn committed credit of $701.2 million (2012:
$389.2 million) under the terms of its principal banking
arrangements. Of
this amount, $251.1 million is
restricted exclusively for debt repayment purposes until
no
banking
arrangements, which mature in 2016, are subject to
certain covenants and other restrictions.

January

These

2015.

later

than

Market Risk

Interest Rate Risk

Interest rate risk refers to the risk that the value of a
instrument or cash flows associated with the
financial
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 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. 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.

swaps

designated

the Company entered into
On December 8, 2011,
interest
rate swaps totalling $260.0 million expiring
December 8, 2017. Effective December 13, 2012, the
Company
hedging
these
instruments in a hedging relationship to partially reduce
the impact of changes in interest costs attributable to
variability in market interest rates. Due to a change in the
Company’s projected future cash flows, as a result of the
decision to divest its Rothsay business, the Company has
discontinued hedge accounting for these swaps. This
resulted in a reclassification of $4.7 million from
accumulated other comprehensive income to other
income in the third quarter of 2013.

As at December 31, 2013, 62.7% of the Company’s
rate
outstanding debt was not exposed to interest

MANAGEMENT’S DISCUSSION AND ANALYSIS

movements (2012: 70.1%). During the fourth quarter, the
Company applied a portion of
the Rothsay sale
proceeds to reduce borrowings under the revolving
credit facility, but also effectively unwound $260 million
of associated pay-fixed interest rate swaps by entering
into an offsetting interest swap, effectively decreasing
the proportion of fixed interest rate debt.

Foreign Exchange Risk

Foreign exchange risk refers to the risk that the value of
financial instruments or cash flows associated with the
fluctuate due to changes in foreign
instruments will
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 to which the Company is
exposed are the U.S. dollar (through U.S.-denominated
the British pound, and the
sales and borrowings),
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 and
options contracts to manage exposures arising from
product sales in the U.S. and Japan. Qualifying 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. 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.

Derivatives designated as a hedge of an anticipated or
forecasted transaction are accounted for either as cash
flow or fair value hedges and are managed within the
Company’s hedge accounting portfolio.

applies

The Company
“normal purchases”
classification to certain contracts that are entered into
for the purpose of procuring commodities to be used in
production.

the

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

For a comprehensive discussion on the Company’s risk
management practices and derivative exposures, please
refer to Note 18 in the audited consolidated financial
statements.

CHANGE IN FAIR VALUE OF NON-
DESIGNATED INTEREST RATE SWAPS

During the year ended December 31, 2013, the Company
recorded a gain of $2.0 million ($1.5 million after-tax) due
to changes in the fair value of interest rate swaps.

recorded a gain of
During 2012,
$7.3 million ($5.4 million after-tax) due to changes in the
fair value of interest rate swaps.

the Company

During 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 3.3%. The remaining swaps totalling
$260.0 million which started on December 8, 2011 with
an average interest rate of 4.2% and were extended and
designated in a formal hedging relationship in 2011 have
been de-designated during the current
year as
previously described. During the fourth quarter of 2013,
the
the Company entered into swaps
$260.0 million of de-designated interest rate swaps with
an expiry of December 8, 2017. Under the offsetting
interest rate swaps, the Company receives an average
fixed rate of 1.8% and pays a floating rate of interest on
a notional amount of $260.0 million. These offsetting
interest rate swaps effectively neutralize the mark-to-
market
income volatility on the notional amount of
$260.0 million created by the existing interest rate swaps
with an expiry date of December 8, 2017.

to offset

During the first quarter of 2011, 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 of 2010, and reduced the Company’s expected
floating rate debt requirements by $355.0 million. Under
the offsetting interest rate swaps, the Company receives
an average fixed rate of 2.5% 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 with an expiry date of April 28, 2015.

The Company currently has no net-exposure to non-
designated interest rate swaps.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

SHARE CAPITAL AND DIVIDENDS
there were 140,256,389
As at December 31, 2013,
issued and outstanding
voting common
(2012: 140,044,089). As at February 14, 2014,
there
were 140,313,489 voting common shares issued and
outstanding.
In each of the quarters of 2013, the Company declared
and paid cash dividends of $0.04 per voting common
share, representing a total annual dividend of $0.16 per
voting common share and aggregate dividend payments
of $22.4 million (2012: $22.2 million).

OTHER MATTERS
On February 26, 2014 the Company declared a dividend
of $0.04 per
share payable March 31, 2014 to
shareholders of record at the close of business on
March 7, 2014. Unless indicated otherwise by the
Company in writing on or before the time the dividend is
paid,
the dividend will be considered an Eligible
Dividend for the purposes of the “Enhanced Dividend
Tax Credit System”.

the Company

EMPLOYEE BENEFIT PLANS
The cost of pensions and other post-retirement benefits
earned by employees is actuarially determined using the
projected unit credit method calculated on service and
Management’s best estimate of
salary escalation,
retirement ages of employees and expected health care
costs. Management employs external experts to advise it
when deciding upon the appropriate estimates to use to
value employee benefit plan obligations and expenses.
These estimates are determined at the beginning of
each year and re-evaluated if changes in estimates and
there may be a
indicate that
market conditions
significant effect on the Company’s financial statements.
During 2013,
recorded a gain of
$274.0 million through other comprehensive income
related to the re-measurement of plan assets and
liabilities. This included $114.0 million related to returns
on plan assets
rate,
$122.2 million related to changes in liability assumptions,
primarily an increase in the discount rate, and a further
$37.8 million in experience adjustments on the plan
obligation. The adjustment
resulted in the
creation of a deferred tax liability of $70.6 million.
During 2012, the Company recorded a loss of $82.7 million
through other comprehensive income related to the re-
measurement of plan assets and liabilities. This included a
$54.4 million gain related to returns on plan assets in
excess of the discount rate, a $131.0 million loss related to
changes in liability assumptions, primarily a decrease in the
discount rate, a further $9.5 million loss on changes in
demographic assumptions, and a $3.4 million gain in
experience adjustments on the plan obligation. The
adjustment further resulted in the creation of a deferred
tax asset of $21.3 million.

in excess of

the discount

further

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
can impact pension expense and funding
rates
requirements.
return before
In 2013, the investment
expenses on the Company’s defined benefit pension
plan assets was 14.6% compared to 10.0% in 2012. Long-
term market interest rates decreased,
impacting the
discount rate used to measure the plan liabilities.

generated

The Company’s contributions are funded through cash
flows
from operations. Management
anticipates that future cash flows from operations will be
to fund expected future contributions.
sufficient
Contributions to defined benefit plans during 2013 were
$20.5 million (2012: $22.8 million).

The Company expects to contribute $ 46.2 million to the
pension plans in 2014, inclusive of defined contribution
and multi-employer plans.

SUBSEQUENT EVENTS

On February 12, 2014, the Company announced that
Grupo Bimbo, S.A.B. de C.V. of Mexico (“Grupo Bimbo”)
had agreed to acquire all of the issued and outstanding

MANAGEMENT’S DISCUSSION AND ANALYSIS

common shares of Canada Bread by way of a statutory
arrangement under
the Business Corporations Act
(Ontario) (the “Arrangement”). Under the terms of the
Arrangement, Grupo Bimbo has agreed to acquire each
common share of Canada Bread for $72.00 per share in
cash. Maple Leaf expects to receive net proceeds of
approximately $1.65 billion for its 90% interest in Canada
Bread. The Arrangement will require the approval of at
least 66 2⁄ 3% of the votes cast by the shareholders of
Canada Bread at a special meeting of shareholders
expected to take place in early April 2014. Maple Leaf
has entered into a voting support agreement with Grupo
Bimbo pursuant to which the Company has agreed to
vote all of its common shares of Canada Bread in favour
of the Arrangement at such meeting. The Company is
not able to estimate the ultimate gain on disposition
given the uncertainty surrounding the timing of the close
of this proposed transaction. Subsequent to the sale, the
Company will no longer be consolidating the results and
related balance sheet of Canada Bread Company,
Limited. The Arrangement is subject to receipt of court
regulatory approvals, and other customary
approval,
closing conditions, and is expected to close in the
second quarter of 2014.

On February 19, 2014, the company sold an investment
property located in the Toronto area, which was
classified as an asset held for sale in the year end
consolidated financial statements, for gross proceeds of
$6.4 million.

SUMMARY OF QUARTERLY RESULTS
The following is a summary of unaudited quarterly financial information (in thousands of dollars except per share
information) for each quarter in the last three fiscal years:

Sales (ii)

Net earnings (loss) from continuing

operations (ii)

Net earnings (loss) (i)(ii)

Earnings (loss) per share from
continuing operations (ii)

Basic (i)(iii)

Diluted (i)(iii)

Adjusted EPS (i)(iii)(iv)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total

$ 1,035,707
1,088,968
1,075,806

$ 1,133,428
1,174,923
1,153,047

$ 1,130,328
1,157,262
1,181,242

$ 1,106,985
1,130,675
1,168,683

$ 4,406,448
4,551,828
4,578,778

(28,944)
(19,385)
(9,702)

(14,742)
(5,775)
4,690

(0.21)
(0.14)
(0.07)

(0.16)
(0.04)
0.04

(14,474)
9,477
(2,764)

9
25,988
18,724

(0.12)
0.05
(0.03)

(0.08)
0.11
0.10

(676)
10,921
16,872

15,521
26,043
37,150

(14,449)
40,954
(11,663)

(58,543)
41,967
(7,258)

$ 511,375
50,306
3,338

$ 512,163
96,562
63,902

(0.02)
0.06
0.10

(0.01)
0.13
0.15

(0.13)
0.28
(0.09)

(0.13)
0.27
(0.09)

(0.25)
0.27
0.06

(0.48)
0.25
(0.08)

(0.48)
0.24
(0.08)

(0.51)
0.47
0.34

2013
2012
2011

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

Earnings (loss) per share (ii)

Basic (i)(iii)

Diluted (i)(iii)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2013
2012
2011

(0.11)
(0.04)
0.03

(0.11)
(0.04)
0.04

(0.02)
0.17
0.12

(0.02)
0.16
0.12

0.09
0.17
0.25

0.09
0.16
0.24

3.58
0.35
0.02

3.58
0.34
0.02

Total

3.55
0.64
0.43

3.55
0.63
0.41

(i)

(ii)

(iii)

(iv)

Net earnings, earnings per share and Adjusted Earnings per Share are based on amounts attributable to common shareholders.

2012 and 2011 figures have been restated for the classification of the Rothsay and Olivieri businesses as a discontinued operation, and
for the impact of adopting the revised International Accounting Standard 19 Employee Benefits (“IAS 19”). Refer to Note 22 and
Note 32, respectively, of the Company’s 2013 audited consolidated financial statements.

May not add due to rounding.

Refer to non-IFRS Financial Measures starting on page 34.

Quarterly sales in 2013 were affected by the following
significant items:

(cid:129) lower sales volume in the prepared meats business in
the first quarter, that improved for the remainder of
the year;

(cid:129) lower sales volumes in the pork, fresh bakery, and

North American frozen bakery businesses;

(cid:129) price increases implemented during 2013 at

the
prepared meats, fresh bakery, U.K. bakery, and North
American frozen bakery businesses;

(cid:129) favourable sales mix in the prepared meats business;

(cid:129) divestiture of

the Company’s potato processing

facility in the first quarter of 2013;

(cid:129) impact of a weaker Japanese yen on fresh pork export

sales;

(cid:129) higher volumes in the U.K. bakery business;

(cid:129) higher

raw material and inflationary costs in the

prepared meats business;

(cid:129) lower sales volume in the prepared meats business in
the first quarter, that improved for the remainder of
the year;

(cid:129) lower sales volumes in the pork, and fresh bakery

businesses;

(cid:129) higher volumes in the U.K. bakery business;

(cid:129) impact of a weaker Japanese yen on fresh pork export

margins;

(cid:129) transitional costs associated with implementing the
including
the prepared meats business,
inefficiencies
legacy facilities

Plan at
manufacturing
distribution
associated with operating parallel
scheduled to close in 2014;

and

(cid:129) lower contributions from hedging programs in the

(cid:129) exiting fresh and in-store bakery bread production in

hog production business;

the U.K. in March 2012;

(cid:129) exiting speciality bread production in the U.K. in the

second quarter of 2013;

(cid:129) higher market pricing for pork products; and

(cid:129) divestiture of

the Company’s poultry agricultural

operations in the third quarter of 2013.

Quarterly net earnings in 2013 were affected by the
following significant items:

(cid:129) gains on sales of the Company’s Rothsay and Olivieri

businesses in the fourth quarter of 2013;

(cid:129) adverse market conditions that reduced margins in
primary pork and poultry processing, and hog
production;

(cid:129) improved operating efficiencies in the fresh bakery
business, including lower waste, the contribution of
the new Hamilton fresh bakery, simplification of the
product portfolio,
the
distribution network;

and reorganization

(cid:129) improved operating efficiencies
American frozen bakery business;

the North

(cid:129) duplicative overhead costs related to the Company’s
new fresh bakery in Hamilton, Ontario for the first and
second quarters of 2013, after which the third Toronto
bakery was closed and production transferred;

(cid:129) higher
Group;

inflationary costs in the Bakery Products

(cid:129) price increases implemented during 2013 at

the
prepared meats, fresh bakery, U.K. bakery, and North
American frozen bakery businesses;

(cid:129) changes in fair value of non-designated interest rate
and gains/losses on
assets

swaps, biological
commodity futures contracts;

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

(cid:129) closure of the Walsall, U.K.

facility in March 2012
related to the exit of certain bread categories in the
U.K.;

(cid:129) lower selling, general, and administrative expenses;

(cid:129) exiting specialty bread production in the U.K. in the

second quarter of 2013;

(cid:129) restructuring and other related costs;

(cid:129) divestiture of

the Company’s potato processing

facility during the first quarter of 2013;

(cid:129) divestiture of the Company’s Rothsay business during

the fourth quarter of 2013;

(cid:129) impairment recorded on a U.K. bakery that was sold

in the second quarter of 2013;

(cid:129) impairment on poultry quota assets that were sold in

the second quarter of 2013;

(cid:129) sale of a poultry farm and related production quotas

in the third quarter of 2013;

(cid:129) sale of the turkey agricultural operations in the third

quarter of 2013;

(cid:129) gain related to the de-designation of interest rate
swaps from a hedge accounting relationship in the
third quarter of 2013;

(cid:129) gain due to a pension curtailment related to the
discontinued operations of the Rothsay business in
the third quarter of 2013;

(cid:129) recoveries from insurance claims;

(cid:129) sale of an investment property in Aurora, Ontario in

the third quarter of 2013;

(cid:129) sale of a previously closed fresh bakery in Toronto,

Ontario in the fourth quarter of 2013; and

(cid:129) recognition of

legal and other professional

fees

associated with acquisitions and divestitures.

Quarterly sales in 2012 were affected by the following
significant items:

(cid:129) price increases implemented during 2011 and 2012;

(cid:129) lower sales volumes in the Company’s fresh bakery

business;

(cid:129) weaker Canadian dollar that increased the value of

fresh pork exports;

(cid:129) lower sales volume of fresh pork;

(cid:129) sale of the fresh sandwich product line by the Bakery

Products Group at the beginning of 2011; and

(cid:129) exiting fresh and in-store bakery bread production in

the U.K.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarterly net earnings in 2012 were affected by the
following significant items:

(cid:129) significant declines

in industry pork processing
margins in North America, which were partially offset
by favourable domestic sales contracts and improved
international margins;

(cid:129) lower sales volumes in the Company’s fresh bakery

business;

(cid:129) higher sales volumes and improved sales mix in the

prepared meats business;

(cid:129) higher volumes and improved pricing of value-added

products in the poultry business;

(cid:129) benefits from the implementation of the Plan;

(cid:129) lower

results in hog production and by-product
recycling due to higher feed and input costs and a
decline in market values;

(cid:129) inventory write-down in the fresh pasta business

during the first quarter of 2012;

(cid:129) duplicative overhead costs related to the Company’s

new fresh bakery in Hamilton, Ontario;

(cid:129) closure of the Walsall, U.K.

facility in March 2012
related to the exit of certain bread categories in the
U.K.;

(cid:129) lower

selling,

administrative,

and

general

management costs;

(cid:129) restructuring and other related costs;

(cid:129) changes in fair value of non-designated interest rate
losses on

swaps, biological assets and (gains)
commodity futures contracts;

(cid:129) receipt of an insurance claim related to a fire;

(cid:129) settlement of a legal suit in the second quarter of
fresh sandwich

2012 related to the Company’s
product line which was sold in 2011;

(cid:129) gain on business combination in the fourth quarter of
2012 from the acquisition of hog farms, and
associated legal costs; and

(cid:129) a reassessment of environmental remediation costs in
the fourth quarter of 2012 on prepared meats facilities
marked for closure.

For an explanation and analysis of quarterly results, refer
to Management’s Discussion and Analysis for each of the
respective quarterly periods filed on SEDAR and also
available
at
www.mapleleaffoods.com.

Company’s

website

the

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

SUMMARY OF 2013 FOURTH QUARTER
RESULTS

The following is a summary of sales by business
segment:

($ Thousands)

(Unaudited)

Fourth Quarter

2013

2012

Change

Meat Products Group $ 742,739
4,585
Agribusiness Group (i)

$ 751,362
8,973

(1.1)%
(48.9)%

$ 747,324

$ 760,335

(1.7)%

Protein Group
Bakery Products

Group (i)

Total Sales

$ 1,106,985

$ 1,130,675

359,661

370,340

(2.9)%

(2.1)%

(i)

2013 and 2012 figures exclude the results of the Rothsay and
Olivieri businesses in the Agribusiness Group and Bakery
Products Group, respectively. Rothsay and Olivieri results are
reported as discontinued operations as disclosed in Note 22
of
the Company’s 2013 audited consolidated financial
statements.

The following is a summary of Adjusted Operating
Earnings by business segment:

($ thousands)

(Unaudited)

Meat Products Group
Agribusiness Group (ii)

Protein Group
Bakery Products Group (ii)
Non-allocated Costs in
Adjusted Operating
Earnings (iii)

Adjusted Operating

Fourth Quarter

2013

2012 (i)

Change

$ (42,625)
(10,003)

$ (52,628)
30,912

$ 42,585
(4,826)

$ 37,759
33,139

(200.2)%
107.3%

(239.4)%
(6.7)%

–

(901)

(100.0)%

Earnings

$ (21,716)

$ 69,997

(131.0)%

(i)

(ii)

(iii)

2012 Adjusted Operating Earnings have been restated for
the impact of adopting the revised International Accounting
Standard 19 Employee Benefits (“IAS 19”), as disclosed in
Note 32 of
the Company’s 2013 audited consolidated
financial statements.

2013 and 2012 figures exclude the results of the Rothsay and
Olivieri businesses in the Agribusiness Group and Bakery
Products Group respectively. Rothsay and Olivieri results are
reported as discontinued operations as disclosed in Note 22
of
the Company’s 2013 audited consolidated financial
statements.

Non-allocated costs comprise expenses not separately
identifiable to business segment groups, and do not form
part of the measures used by the Company when assessing
the segments’ operating results.

Sales of $1,107.0 million for the fourth quarter declined
2.1% from last year, or 0.7% after adjusting for the
impacts of divestitures and foreign exchange, due to
lower volumes which were partly offset by higher pricing.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Adjusted Operating Earnings for
the fourth quarter
decreased to a loss of $21.7 million compared to
Adjusted Operating Earnings of $70.0 million last year,
primarily due to lower earnings in the Protein Group.

supply

The Company is in a peak phase of completing its
prepared meats strategy, designed to establish a low
chain and achieve structural margin
cost
expansion. Earnings were significantly impacted by the
cost of commissioning five new facilities, resulting in
transitional costs of approximately $15 million during the
quarter (2012: approximately $4 million). Start-up costs at
the newly expanded facilities in Winnipeg, Manitoba,
and Saskatoon, Saskatchewan, decreased compared to
the third quarter of 2013; however, this was offset by
higher overhead costs associated with commissioning
the newly constructed plant in Hamilton, Ontario. The
and
Company
distribution inefficiencies associated with operating
legacy plants
fully
transferred to newer, more efficient facilities in 2014.

in parallel until production is

experienced manufacturing

also

Margins in the prepared meats business were also
compressed by higher raw material and other input
costs, as well as inflationary costs that were not fully
offset by pricing. Selling, general, and administrative
costs were higher than last year, due to Comparatively
lower variable compensation expense last year. During
the fourth quarter of 2012, the prepared meats business
recognized $5.9 million in provision reversals related to
re-assessments of environmental remediation costs on
facilities planned for closure that did not re-occur in
2013. Higher volumes in the fourth quarter of 2013,
particularly in the branded retail category, partly offset
the above reductions to earnings.

Earnings in primary pork processing were negatively
affected by lower export margins, primarily due to the
Japanese market, lower volumes, and declining values
for by-product sales. These reductions were partly offset
in North American processing
by an improvement
spreads and lower selling, general, and administrative
costs. Earnings in fresh poultry declined due to lower
primary processing spreads and inflationary costs that
were only partly offset by higher earnings from value-
the Company’s potato
added sales. The sale of
processing operations in January 2013 reduced fourth
quarter Adjusted Operating Earnings in the Meat
Products Group by approximately $3 million compared
to last year.

In the hog production business, earnings decreased
primarily due to lower contributions
from hedging
programs, which more than offset higher market prices for
hogs. Feed costs were consistent with the prior year.

In the Bakery Products Group,
fresh bakery
earnings were partly offset by stronger earnings in the
U.K. bakery business.

lower

Lower volumes in the fresh bakery business were only
partly offset by increased efficiencies at
the new
Hamilton, Ontario bakery, simplification of the product
portfolio, and the reorganization of
the distribution
network, all of which contributed to lower operating
costs. The benefits of earlier price increases were offset
by higher trade spend and inflationary costs in the
quarter. North American frozen bakery business earnings
decreased modestly,
lower
volumes, and higher selling, general, and administrative
expenses
operating
improvements. The U.K. bakery business benefited from
higher pricing and lower operating and selling, general,
and administrative expenses, which more than offset
higher raw material and inflationary costs.

were mostly

inflationary

costs,

offset

loss from continuing operations for

Net
the fourth
quarter was $14.4 million (loss of $0.13 per basic share
attributable to common shareholders) compared to net
earnings from continuing operations of $41.0 million
($0.28 per basic
share attributable to common
shareholders) last year. Adjusted Earnings per Share in
the fourth quarter of 2013 was a loss of $0.25 compared
to Adjusted Earnings per Share of $0.27 last year.

SEASONALITY

The Company is sufficiently large and diversified that
seasonal
factors within each operation and business
tend to offset each other; therefore, in isolation, they do
impact on the Company’s
not have a material
consolidated earnings. For example,
in general, 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
the fresh and processed meats
positively affects
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.

ENVIRONMENT

Maple Leaf Foods 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 and the use of internal
environmental specialists and independent, external
environmental experts. In 2013, the Company worked in
partnership with various levels of government to ensure

MANAGEMENT’S DISCUSSION AND ANALYSIS

standards

to invest

that all environmental permits were obtained for the
various projects in the Plan and assure a high level of
environmental protection for future plant operations. It
has kept the community informed about progress on its
new prepared meats plant in Hamilton, Ontario, through
community open houses. The Company
regular
continues
infrastructure
in environmental
related to water, waste, and air emissions to ensure that
environmental
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
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.

condition or

financial

are

large

there

food company,

As
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, as well as 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.

centre

in 2013 the
its sustainability initiatives,
As part of
Company achieved LEED® Gold certification for its new
bakery in Hamilton, Ontario, which opened in 201l. This
adds to the LEED® Gold certification already received at
its office
in
and product development
Mississauga, Ontario. LEED® stands for Leadership in
Energy and Environmental Design and is widely
recognized as a green building standard. The Company
is also pursuing LEED® certification for its new meat
processing plant in Hamilton, Ontario. Construction for
this plant began in 2012 and is expected to be fully
commissioned in 2014, at which time the LEED®
verification process is expected to begin. The Company
approved a set of metrics for measuring progress on
sustainability for key focus areas such as energy and
water
gas
management, manufacturing waste reduction and
sustainable packaging. These metrics are focused on
achieving a set of medium and long term environmental
sustainability targets that were also approved in 2013.

consumption

greenhouse

reduction,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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, along with
other risks and uncertainties not currently known to the
Company, or
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.

that

Risks Associated with the Acquisition of the
Company’s interest in Canada Bread by Grupo
Bimbo

On February 12, 2014, and as previously noted, the
Company announced that Grupo Bimbo had agreed to
acquire all of
the issued and outstanding common
shares of Canada Bread pursuant to the Arrangement
Agreement. The transaction is expected to close in the
second quarter of 2014. The Arrangement, however, is
subject to the requirement to obtain various approvals
and the satisfaction of certain closing conditions. There
can be no assurance these approvals will be obtained or
that these conditions will be satisfied within the time
frame contemplated or at all. If these approvals are not
obtained in a timely manner, or at all, or the conditions
to closing are not satisfied, the Arrangement may not
proceed.
If the Arrangement does not proceed, the
Company’s business, results of operations, and share
price may be materially and adversely affected.

If
the Arrangement does proceed and Maple Leaf
disposes of its interest in Canada Bread, Maple Leaf’s
business will thereafter be concentrated solely in the
protein business, which may increase the volatility of
earnings. Loss of the bakery business may impact certain
synergies
that exist between the prepared meats
business and the bakery business, including purchasing
power for raw materials. Each of these factors may have
a material adverse effect on the Company’s financial
condition and results of operations.

Furthermore, although the board of directors has
determined the mechanism by which the proceeds of
the disposition will be returned to shareholders, if any,
events subsequent to the date hereof may affect the use
including the timing in
of proceeds by Maple Leaf

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

respect thereof. There can be no assurance that upon
repayment of debt and investment in the prepared
meats business that there will be any proceeds left for
distribution to shareholders. This may have a material
adverse effect on the Company’s share price.

Risks Related to the Business of Maple Leaf
Foods

Implementing the Plan

The 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 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 Plan was
launched. These include: changes in the competitive
landscape; changes in foreign exchange rates; and other
the Plan is unsuccessful or
unforeseen events.
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 Plan entails the construction of two
large-scale facilities, one of which is in commercial
production while the other is in progress. The Company
has also reconfigured its distribution systems into a few
larger distribution centres. 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; failure to achieve operating cost efficiencies; 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;
loss of volumes in realignment of product
lines; duplicate costs associated with operating a parallel
supply chain until legacy facilities are closed down; and
competitive pressures resulting in loss of sales during
transition periods. As a result of these initiatives, the
Company’s operations will be more concentrated in
fewer facilities resulting in the risk that any unforeseen
disruption in such facilities could have a greater effect on
the operations of the Company as a whole. In addition,
as part of the 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.
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.

to facilitate the Plan,

In addition,

Altogether, these risks could result in a material adverse
impact to the Company’s financial condition and results
of operations.

The Plan requires strategic capital expenditures (over
and above base or maintenance capital), which are
currently estimated to be approximately $140 million in
2014. 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.

Leverage and Availability of Capital

to certain covenants under

The ability of the Company to secure short-term 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 Plan, the Company has required,
and will continue to 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 Plan. The
Company is subject
its
principal banking arrangements currently in place. There
can be no assurance that ratios under the Company’s
debt facilities will not be exceeded, which could result in
an acceleration of all of the Company’s debt and the
requirement that replacement funding be secured. The
failure or inability of the Company to secure short-term
and long-term financing in the future on terms that are
and acceptable to the
commercially
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 or pledge of assets.

reasonable

Systems Conversion, Standardization and Common
Systems

regularly

Company

implements

The
process
improvement initiatives to simplify and harmonize its
systems and processes to optimize performance and
reduce the risk of errors in financial reporting. The
Company has largely completed an initiative to replace
information systems with SAP, an integrated
its

MANAGEMENT’S DISCUSSION AND ANALYSIS

enterprise-wide computing system. However,
there
cannot be any guarantee that the implementation will
improve current processes or operating results or reduce
the risk of errors in financial reporting. Any of these
failures could have a material adverse impact on the
Company’s financial condition and results of operations.

Food Safety and Consumer Health

food processing, could be present

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
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 other recalls initiated in the past. There is also a risk
that not all of the product subject to the recall will be
the recall will not be
that
properly identified, or
successful or not be enacted in a timely manner. Any
product contamination could subject the Company to
and
product
government
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.

investigation or

publicity

scrutiny,

adverse

liability

claims,

Business Acquisitions, Divestitures, and Capital
Expansion Projects

challenges, which,

While the Company’s focus has been integration of
existing operations and supply chain optimization, the
Company continues to review opportunities for strategic
growth through acquisitions. These acquisitions may
involve large transactions or realignment of existing
financial, managerial and
investments, and present
operational
successfully
overcome, may reduce the Company’s profitability.
These risks include:
the diversion of Management’s
attention from existing core businesses; difficulties
integrating or separating personnel, financial, and other
business
systems;
existing
relationships with suppliers and customers;
inaccurate
estimates of
return on acquisitions or
investments; inaccurate estimates of fair value made in

the rate of

adverse

if not

effects

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

the accounting for acquisitions and amortization of
acquired intangible assets, which would reduce future
loss of customers or key
reported earnings; potential
employees of acquired businesses; and indemnities and
potential disputes with the buyers or sellers. Any of
these items could materially adversely affect
the
Company’s financial condition and results of operations.

The Company may, from time to time, determine that
certain aspects of its operations are not required to be
owned to support its core business operations and may
seek to sell an operation if it believes it can realize
sufficient value from its sale. The sale may divert
Management’s attention from existing core businesses
during the sale process, create difficulties in separating
personnel,
financial, and other systems, and cause
adverse effects on existing business relationships with
these items could
suppliers and customers. Any of
materially adversely affect
the Company’s financial
condition and result in a reduction of earnings beyond
the earnings of any operation to be sold. During 2013,
the company sold its Rothsay by-products recycling
business, its Olivieri fresh pasta business, as well as its
potato processing operations. The execution of these
impact on the
transactions did not have a material
Company’s earnings beyond the earnings of
the
operations and businesses that were sold.

Pension Plan Assets and Liabilities

those plans. Among other

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
factors,
changes in interest rates, mortality rates, early retirement
rates, and the market value of plan assets can affect the
level of plan funding,
increase the Company’s future
funding requirements, and cause volatility in the net
periodic pension cost as well as the Company’s financial
results. 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.

Hog and Pork Market Cyclicality and Supply

The Company’s results of operations and financial
condition are partially dependent upon the cost and
supply of hogs as well as the selling prices for fresh meat

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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 adds 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. The factors described above may also
impact the supply of hogs available for processing at the
Company’s pork processing plants by negatively
impacting the financial
the various
strength of
independent
farming operations upon which the
Company relies to meet its requirements for hogs.

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
it occurs within the Company’s
livestock whether
production operations or
third
in the operations of
parties.

and

throughout

procedures

In addition, not all

The Company monitors herd health status and has strict
bio-security
training
employee
programs
its hog production system.
However, there is no guarantee these processes will not
livestock procured by the
fail.
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 or elsewhere will not have a
material adverse effect on the Company’s financial
condition and results of operations.

Maple Leaf Foods has developed a comprehensive
internal contingency plan for dealing with animal disease
occurrences and/or a more broad-based pandemic. It
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

its products

A significant amount of the Company’s revenues and
costs are either denominated in or directly linked to
other currencies (primarily U.S. dollars, British pounds,
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
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
from
operations in the U.K. and U.S. are recorded in the
British pound and U.S. dollar
respectively; 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 and U.S. dollar against
the Canadian dollar.
Accordingly,
these exchange rate fluctuations could
have a material adverse effect on the Company’s
financial condition and results of operations.

results

Commodities

The Company is a purchaser of, and its business is
dependent on, certain commodities in the course of
normal operations, such as wheat, feed grains, livestock,
and energy (oil-based fuel, natural gas, and electricity).
Commodity prices are subject to fluctuation and such
fluctuations are sometimes severe. The Company may

MANAGEMENT’S DISCUSSION AND ANALYSIS

futures and options

use commodity
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 and may, in some
circumstances, subject
the Company to loss. 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 customer;
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

fiscal policies;

significant amounts of

discriminatory
in local

international operations are subject

The Company exports
its
products to customers outside of Canada and certain of
its inputs are affected by global commodity prices. The
Company’s
to
inherent risks, including: change in the free flow of food
fluctuations in currency
products between countries;
values;
unexpected
regulations and laws; and the
changes
remedies in foreign
uncertainty of enforcement of
jurisdictions.
foreign jurisdictions could
impose tariffs, quotas, trade barriers, and other similar
restrictions on the Company’s international sales, as well
as 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.

In addition,

Regulation

advertising,

the Environment

storage, distribution,

The Company’s operations are subject
to extensive
regulation by government agencies in the countries in
the Canadian Food
including:
which it operates,
the Ministry of Agriculture in
Inspection Agency;
Canada; provincial Ministries of
in
Canada;
and the United States Department of
Agriculture. These agencies regulate the processing,
and
packaging,
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 compliance with all laws and regulations and
maintains all permits and licenses
relating to its
operations. Nevertheless, there can be no assurance that
the Company is in compliance with such laws and
regulations, has all necessary permits and licenses, and
will be able to comply with such laws and regulations,
permits and licenses in the future. Failure by the
Company
and
regulations and permits and licenses could subject the

to comply with

applicable

laws

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

throughout

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
the world are
considering regulatory proposals relating to genetically
modified organisms, drug residues in 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
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.

regulations are enacted,

Legal Matters

In the normal course of its operations, the Company
becomes involved in various legal actions relating to its
commercial relationships, employment matters, product
in addition to other things. The Company
liabilities,
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.
settled within
Furthermore, even if any action is
insurance limits,
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.

this can result

Consumer Trends

that

Success of
the Company depends in part on the
Company’s ability to respond to market trends and
produce innovative products
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.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Environmental Regulation

The Company’s operations are subject
to extensive
laws and regulations pertaining to the
environmental
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
require the Company to incur significant
that will
In addition, certain facilities of the
additional costs.
Company 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
the
of property underlying or
Company’s
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.

in the vicinity of
properties
former

present

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. 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
adverse
the
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.

condition

financial

other

of,

Competitive Industry Environment

The food industry is intensely competitive.
In many
product categories in which the Company operates
there are low barriers to entry. 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
and markets
efforts
characterized by low capacity utilization.
Increased
competition could result
in reduced sales, margins,
profits, and market share, all of which could have a

and in product

Other post-
retirement
benefits

Total

4.50%

0.25% decrease
0.25% increase

$ 37,353
$ (36,205)

$ 1,481
$ (1,444)

$ 38,834
$ (37,649)

3.50%

0.50% increase

$ 3,452

N/A

$ 3,452

UP 94 Generational
Mortality Table

Increase of 1 year in
expected lifespan of
plan participants

$ 37,058

$ 1,829

$ 38,887

Provisions for income taxes are based on domestic and
international statutory income tax rates and the amount
of
income earned in the jurisdictions in which the
Company operates. Significant judgement is required in
determining income tax provisions and the recoverability
of deferred tax assets. The calculation of current and
deferred income tax balances 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
the
jurisdictions in which the Company operates, and the
timing of
temporary differences. The
Company establishes additional provisions for income
taxes when, despite Management’s opinion that the
Company’s 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. To
the extent that these adjustments differ from original
estimates, future deferred tax assets and liabilities, net

reversal of

legislation

income

tax

earnings, and comprehensive income (loss) will be
affected.

Provisions

The Company evaluates all provisions at each reporting
date. These provisions can be significant and are
prepared using estimates of the costs of future activities.
In certain instances, Management may determine that
these provisions are no longer required or that certain
provisions are insufficient as new events occur or as
additional
information is obtained. Provisions are
separately identified and disclosed in the Company’s
consolidated financial statements. Changes to these
estimates may affect the value of provisions, net earnings,
and comprehensive income (loss) in future periods.

Stock-Based Compensation

The Company uses estimates including, but not limited
to, estimates of
share price volatility,
dividends, expected life of the award, risk-free interest
rates, and Company performance in the calculation of
for certain stock-based
the liability and expenses

forfeitures,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

incentive plans. These estimates are based on previous
experience and may change throughout the life of an
incentive plan. Such changes could impact the carrying
value of contributed surplus, liabilities, net earnings, and
comprehensive income (loss).

Some of the Company’s stock-based payment plans are
settable in either cash or equity instruments at the
option of the Company. Management uses judgement in
determining the appropriate accounting treatment for
these plans, based on expectations and historical
settlement decisions. Changes to accounting treatment
impact
based on Management’s
judgement may
contributed surplus,
liabilities and net earnings and
comprehensive income (loss).

Depreciation and Amortization

The Company’s property and equipment and definite
life intangible assets are depreciated and amortized on a
straight-line basis, taking into account the estimated
useful lives of the assets and residual values. Changes to
these estimates may affect the carrying value of these
assets,
inventories, net earnings and comprehensive
income (loss) in future periods.

ACCOUNTING STANDARDS ADOPTED
DURING THE PERIOD

Financial Assets and Liabilities

During the year ended December 31, 2013,
the
Company adopted certain amendments to IFRS 7
Financial
Instruments: Disclosures on a retrospective
basis. These amendments contain new disclosure
requirements for financial assets and liabilities that are
offset in the statement of financial position and subject
to master netting arrangements or similar arrangements.
As the Company is not offsetting financial instruments
and does not have relevant offsetting arrangements, the
retrospective adoption of these amendments to IFRS 7
did not have any impact on the disclosures of the
Company.

Consolidated Financial Statements

that

addresses

During the year ended December 31, 2013,
the
Company adopted IFRS 10 Consolidated Financial
Statements on a retrospective basis. IFRS 10 replaces
portions of IAS 27 Consolidated and Separate Financial
Statements
and
supersedes SIC-12 Consolidation – Special Purpose
Entities (“SPE”) in its entirety. IFRS 10 provides a single
model to be applied in the analysis of control of all
investees, including entities that currently are SPEs in the
scope of SIC-12.
the consolidation
In addition,
procedures specified in IFRS 10 are carried forward,
substantially unmodified, from IAS 27. The adoption of

consolidation,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

IFRS 10 did not have any impact on the Company’s
financial statements.

–

Controlled

Joint Arrangements
During the year ended December 31, 2013,
the
Company adopted IFRS 11 Joint Arrangements. IFRS 11
supersedes IAS 31 Interest in Joint Ventures and SIC-13
Non-Monetary
Entities
Jointly
Contributions by Venturers. Through an assessment of
the rights and obligations in an arrangement, IFRS 11
joint
establishes principles to determine the type of
joint
arrangement, which are classified as either
operations or joint ventures, and provides guidance for
financial reporting activities required by the entities that
have an interest in arrangements which are controlled
jointly. Investments in joint ventures are required to be
accounted for using the equity method. The adoption of
IFRS 11 did not have any impact on the Company.

Disclosure of Interests in Other Entities
the
During the year ended December 31, 2013,
Company adopted IFRS 12 Disclosure of Interests in
Other Entities. IFRS 12 contains disclosure requirements
for companies that have interests in subsidiaries, joint
arrangements,
unconsolidated
structured entities. Additional disclosures required as a
result of the adoption of IFRS 12 are included in Note 25
of the audited consolidated financial statements.

associates,

and

Fair Value Measurement
the
During the year ended December 31, 2013,
Company adopted IFRS 13 Fair Value Measurement on a
IFRS 13 replaces the fair value
prospective basis.
measurement guidance contained in individual
IFRSs
with a single source of fair value measurement guidance.
The standard also establishes a framework for measuring
fair value and sets out disclosure requirements for fair
value measurements. The adoption of IFRS 13 did not
have a material impact on the fair value measurements
carried out by the Company. Additional disclosures
required as a result of the adoption of IFRS 13 are
included in Notes 6, 9, 10, and 18 of the audited
consolidated financial statements.

Presentation of Financial Statements
During the year ended December 31, 2013,
the
Company adopted amendments to IAS 1 Presentation of
Financial Statements: Presentation of
Items of Other
Comprehensive Income on a retrospective basis. The
amendment requires that a company present separately
the items of other comprehensive income that may be
reclassified to profit or loss in the future from those that
would never be reclassified to profit or loss. Additional
disclosures required as a result of the adoption of IAS 1
are presented in the consolidated statements of
comprehensive income and had no impact on the
financial results of the Company.

Employee Benefits

Levies

MANAGEMENT’S DISCUSSION AND ANALYSIS

During the year ended December 31, 2013,
the
Company adopted the revised IAS 19 Employee Benefits
on a retrospective basis with restatement. The revised
standard requires that the calculation of expected return
on assets and interest cost be replaced with a net
interest charge calculated based on the discount rate as
at the beginning of the year multiplied by the net
position of the plan. The revised standard also requires
that administrative fees of the plan be expensed by the
Company as incurred rather
than included in the
expected return. The impact of the adoption of revised
IAS 19 is further explained in Note 32 and the required
additional disclosures are included in Note 10. The
standard also has other amendments clarifying the
the
termination benefits,
timing of
adoption of which had no impact on the Company.

recognition of

Recoverable Amount Disclosures for Non-
Financial Assets

During the year ended December 31, 2013,
the
Company adopted amendments to IAS 36 Impairment of
Assets on a retrospective basis. The amendment
reverses the unintended requirement in IFRS 13 Fair
Value Measurement to disclose the recoverable amounts
of all cash generating units to which significant goodwill
or indefinite-life intangible assets have been allocated.
Under
is
required to be disclosed only when an impairment loss
has been recognized or reversed. The adoption of these
amendments did not have a material
impact to the
disclosures made by the Company.

the recoverable amount

the amendments,

RECENT ACCOUNTING
PRONOUNCEMENTS NOT YET ADOPTED

Financial Assets and Liabilities

after

January

In December 2011, the IASB published amendments to
IAS 32 Financial Instruments: Presentation. The effective
date for the amendments to IAS 32 is annual periods
beginning on or
2014. These
amendments are to be applied retrospectively. The
amendments to IAS 32 clarify when an entity has a
legally enforceable right to off-set as well as clarify, when
a settlement mechanism provides for net settlement, or
gross settlement that is equivalent to net settlement.
The Company intends to adopt the amendments to IAS
32 in its financial statements for the annual period
beginning January 1, 2014. The impact of the adoption
of amendments to IAS 32 is not expected to be material
to the financial statements.

In May 2013, the IASB issued IFRIC 21 Levies. This IFRIC
is effective for annual periods commencing on or after
January 1, 2014 and is to be applied retrospectively. The
IFRIC is applicable to all levies other than outflows that
are within the scope of other standards and fines or
legislation. The
for breaches of
other penalties
interpretation clarifies that an entity recognises a liability
for a levy when the activity that triggers payments, as
identified by the relevant
legislation, occurs. The
Company intends to adopt IFRIC 21 in its financial
statements for the annual period beginning January 1,
2014. The Company is currently assessing the impact of
the adoption of IFRIC 21.

Employee Benefits

In November 2013, the IASB published amendments to
IAS 19 Employee Benefits. The effective date for these
amendments is annual periods beginning on or after
July 1, 2014. These amendments are to be applied
IAS 19 requires an entity to consider
retrospectively.
third parties when
contributions from employees or
accounting for defined benefit plans.
IAS 19 requires
such contributions that are linked to service to be
attributed to periods of service as a negative benefit.
The amendments to IAS 19 provide a practical expedient
for simplifying the accounting in certain situations. If the
amount of contributions is independent of the number
of years of service, an entity is permitted to recognise
such contributions as a reduction in the service cost in
the period in which the service is rendered, instead of
allocating the contributions to the period’s service. The
Company intends to adopt the amendments to IAS 19 in
its financial statements for the annual period beginning
January 1, 2015. The extent of
the
adoption of amendments to IAS 19 has not yet been
determined.

the impact of

Financial Instruments – Recognition and
Measurement

financial assets.

In November 2009, the IASB issued IFRS 9, Financial
Instruments (IFRS 9 (2009)) and in October 2010, the IASB
published amendments to IFRS 9 (IFRS 9 (2010)). IFRS 9
(2009) introduces new requirements for the classification
IFRS 9 (2010)
and measurement of
relating to financial
introduces additional changes
the IASB published
liabilities.
In November 2013,
amendments to IFRS 9 Financial
IFRS 7
Financial Instruments: Disclosures, and IAS 39 Financial
Instruments: Disclosures (collectively, “IFRS 9 (2013)”) to
include a new general hedge accounting model, and
allow the adoption of the treatment of fair value changes
due to a Company’s own credit risk on financial liabilities
designated at fair value through profit or loss. Special
the
transitional

requirements have been set

Instruments,

for

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

application of the new general hedging model. This
amendment removes the January 1, 2015, effective date.
The new mandatory effective date is expected to be
determined once the classification and measurement
and impairment phases of IFRS 9 are finalized. Although
no effective date has been issued for this standard, early
adoption is permitted. The Company does not intend to
adopt IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013) in its
financial statements for the annual period beginning on
January 1, 2014. Once the IASB has issued an effective
date for the standard, the Company will determine a
date of adoption. The extent of the impact of adoption
of IFRS 9 (2009), IFRS 9 (2010) and IFRS 9 (2013) has not
yet been determined.

Novation of Derivatives and Continuation of
Hedge Accounting

In June 2013, the IASB issued “Novation of Derivatives
and Continuation of Hedge Accounting” (Amendments
to IAS 39 Financial
Instruments: Recognition and
Measurement). The amendments add a limited exception
to IAS 39, to provide relief from discontinuing an existing
hedging relationship when novation that was not
contemplated in the original hedging documentation
meets specific criteria. The amendments are effective for
annual periods beginning on or after January 1, 2014.
The Company intends to adopt the amendments in its
financial statements for the annual period beginning
January 1, 2014. The extent of the impact of the adoption
of the amendments has not yet been determined.

Annual Improvements to IFRS (2010 – 2012) and
(2011 – 2013) cycles

In December 2013,
the IASB issued narrow-scope
amendments to a total of nine standards as part of its
annual improvements process. Amendments were made
to clarify items including the definition of vesting
conditions in IFRS 2 Share-Based Payment, disclosures
on the aggregation of operating segments in IFRS 8
short-term
Operating Segments, measurement of
receivables and payables under
IFRS 13 Fair Value
related party in IAS 24
Measurement, definition of
Related Party Disclosures and Other Amendments.
Special
for
certain of these amendments. Most amendments will
apply prospectively for annual periods beginning on or
after July 1, 2014, earlier application is permitted. The
Company intends to adopt these amendments in its
financial statements for the annual period beginning
January 1, 2015. The extent of the impact of adoption of
the amendments has not yet been determined.

requirements have been set

transitional

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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
and
consolidated
communicated to Management in a timely manner so
information required to be disclosed by the
that
Company under
recorded,
processed, summarized and reported within the time
periods specified in applicable securities legislation.

legislation is

accumulated

subsidiaries,

securities

The Company’s Management, under the direction and
supervision of the Company’s Chief Executive Officer
is also responsible for
and Chief Financial Officer,
establishing and maintaining internal control over
financial
reporting. These controls are designed to
provide reasonable assurance regarding the reliability of
financial
financial
reporting and the preparation of
statements for external purposes in accordance with
IFRS.

controls

and procedures

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
at
December 31, 2013, and have concluded that such
controls and procedures are effective. There have been
no changes in the Company’s internal control over
reporting that occurred during the period
financial
beginning on January
1, 2013, and ended on
December 31, 2013, that have materially affected, or are
reasonably likely to materially affect, the Company’s
internal control over financial reporting. The Company
utilized the Committee of Sponsoring original
internal
control framework (“COSO 1992”).

the Company adopted the
On January 1, 2014,
Committee of Sponsoring Organizations new internal
control
(“COSO 2013”), which is not
expected to have a material impact on the Company’s
internal controls over financial reporting and disclosure
controls and procedures.

framework

NON-IFRS FINANCIAL MEASURES

The Company uses the following non-IFRS measures:
Adjusted Operating Earnings, Adjusted Earnings per
Share, Adjusted EBITDA, Net Debt and Return on Net
Assets (“RONA”). Management believes that these non-
IFRS 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 IFRS 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 IFRS.

Adjusted Operating Earnings

Adjusted Operating Earnings, a non-IFRS measure,
is
used by Management to evaluate financial operating
It is defined as earnings before income taxes
results.
adjusted
considered
that
representative of on-going operational activities of the

items

not

are

for

MANAGEMENT’S DISCUSSION AND ANALYSIS

business and items where the economic impact of the
transactions will be reflected in earnings in future
periods when the underlying asset is sold or transferred.
The table below provides a reconciliation of net earnings
as reported under IFRS in the audited consolidated
statements of earnings to Adjusted Operating Earnings
for
indicated below.
this basis is the most
Management believes that
appropriate on which to evaluate operating results, as
they are representative of the on-going operations of
the Company.

then ended, as

the years

($ thousands)

Net earnings (loss) from continuing operations
Income taxes

Earnings (loss) before income taxes from continuing

operations
Interest expense
Change in the fair value of non-designated interest rate swaps
Other (income) expense
Restructuring and other related costs

Earnings (loss) from Continuing Operations (i)
Decrease (increase) in fair value of biological assets (ii)
Unrealized (gains) / losses on commodity futures contracts (iii)

December 31, 2013

Meat
Products
Group

Agribusiness

Bakery
Products

Group (i)

Unallocated
costs

(47,745)
73,466

$ (86,192)
–
–

(1,036)
–

(6,255)
17,953

(22,959)
1,745

$ (38,258) $ 113,699
–
–

–
–

$ 12,355
(13,540)
(315)

Consolidated

$ (58,543)
(22,842)

$ (81,385)
69,842
(2,022)
(77,995)
93,164

$ 1,604
(13,540)
(315)

Adjusted Operating Earnings

$ (86,192)

$ (38,258) $ 113,699

$ (1,500)

$ (12,251)

(i)

(ii)

(iii)

Figures exclude the results of the Rothsay and Olivieri businesses, which are reported as discontinued operations. Refer to Note 22 of
the Company’s 2013 audited consolidated financial statements.

Refer to Note 6 of the Company’s 2013 audited consolidated financial statements for further details regarding biological assets.

Unrealized gains/losses on commodity futures contracts are reported within cost of goods sold on the Company’s 2013 audited
consolidated financial statements.

($ thousands)

Net earnings (loss) from continuing operations
Income taxes

Earnings (loss) before income taxes from continuing operations
Interest expense
Change in the fair value of non-designated interest rate swaps
Other (income) expense
Restructuring and other related costs

Earnings (loss) from Continuing Operations (ii)
Decrease (increase) in fair value of biological assets (iii)
Unrealized (gains) / losses on commodity futures contracts (iv)

December 31, 2012 (i)

Meat
Products
Group

Agribusiness

Bakery
Products

Group (ii)

Unallocated
costs

Consolidated

(2,323)
36,438

$ 98,367
–
–

(4,294)
–

$ (15,453)
–
–

(1,635)
11,073

$ 96,410
–
–

(388)
–

$ (14,071)
3,436
3,330

$ 41,967
20,005

$ 61,972
71,707
(7,297)
(8,640)
47,511

$ 165,253
3,436
3,330

Adjusted Operating Earnings

$ 98,367

$ (15,453)

$ 96,410

$ (7,305)

$ 172,019

(i)

(ii)

(iii)

(iv)

2012 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee Benefits
(“IAS 19”), as disclosed in Note 32 of the Company’s 2013 audited consolidated financial statements.

Figures exclude the results of the Rothsay and Olivieri businesses, which are reported as discontinued operations. Refer to Note 22 of
the Company’s 2013 audited consolidated financial statements.

Refer to Note 6 of the Company’s 2013 audited consolidated financial statements for further details regarding biological assets.

Unrealized gains/losses on commodity futures contracts are reported within cost of goods sold on the Company’s 2013 audited
consolidated financial statements.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

($ thousands)

Net earnings (loss) from continuing operations
Income taxes

Earnings (loss) from Continuing Operations (ii)
Decrease (increase) in fair value of biological assets (iii)
Unrealized (gains) / losses on commodity futures contracts (iv)

Adjusted Operating Earnings

(8,547)
31,130

$ 70,710
–
–

$ 70,710

December 31, 2011 (i)

Meat
Products
Group

Agribusiness
Group (ii)

Bakery
Products
Group (ii)

Unallocated
costs

Consolidated

(7,258)
(10,733)

$ (17,990)
70,736
10,960
(9,547)
79,777

$ 133,936
1,027
(4,981)

(178)
–

$ (5,664)
–
–

(409)
46,338

$ 70,096
–
–

(413)
2,309

$ (1,206)
1,027
(4,981)

$ (5,664)

$ 70,096

$ (5,160)

$ 129,982

(i)

(ii)

(iii)

(iv)

2011 figures have been restated for the impact of adopting International Accounting Standard 19 Employee Benefits (“IAS 19”). Refer
to Note 32 of the audited consolidated financial statements for information regarding implementation of this accounting standard.

Figures exclude the results of the Rothsay and Olivieri businesses, which are reported as discontinued operations. Refer to Note 22 of
the Company’s 2013 audited consolidated financial statements.

Refer to Note 6 of the Company’s 2013 audited consolidated financial statements for further details regarding biological assets.

Unrealized gains/losses on commodity futures contracts are reported within cost of goods sold.

Adjusted Earnings per Share

Adjusted Earnings per Share, a non-IFRS measure,
is
used by Management to evaluate on-going financial
It is defined as basic earnings per
operating results.
is
share attributable to common shareholders.
adjusted
considered
that
representative of on-going operational activities of the
business and items where the economic impact of the
transactions will be reflected in earnings in future

items

not

are

for

sold or
periods when the underlying asset
transferred. The table below provides a reconciliation of
basic earnings per share as reported under IFRS in the
audited consolidated statements of earnings for the
years then ended to Adjusted Earnings per Share.
Management believes this basis is the most appropriate
results as they are
on which to evaluate financial
representative of
the
Company.

the on-going operations of

($ per share)

Basic earnings (loss) per share from continuing operations
Restructuring and other related costs (ii)
Items included in other income not considered representative of on-going operations (iii)
Change in the fair value of non-designated interest rate swaps (iv)
Change in the fair value of unrealized (gains) losses on commodity futures contracts (iv)
Change in the fair value of biological assets (iv)

Adjusted Earnings per Share (v)

December 31,

2013

2012 (i)

2011 (i)

$ (0.48)
0.49
(0.43)
(0.01)
–
(0.07)

$ 0.25
0.25
(0.02)
(0.04)
0.02
0.02

$ (0.08)
0.41
(0.02)
0.06
(0.03)
0.01

$ (0.51)

$ 0.47

$ 0.34

(i)

(ii)

(iii)

(iv)

(v)

2012 and 2011 figures have been restated for the classification of the Rothsay and Olivieri businesses as a discontinued operation, as
disclosed in Note 22 of the Company’s audited consolidated financial statements, and have been restated for the impact of adopting
the revised International Accounting Standard 19 Employee Benefits (“IAS 19”), as disclosed in Note 32 of the Company’s audited
consolidated financial statements.

Includes per share impact of restructuring and other related costs, net of tax and non-controlling interest.

Includes gains/losses associated with non-operational activities, including gains/losses related to restructuring activities, business
combinations, discontinued operations, assets held for sale, and hedge ineffectiveness recognized in earnings, all net of tax.

Includes per share impact of the change in fair value of non-designated interest rate swaps, unrealized (gains) losses on commodity
futures contracts and the change in fair value of biological assets, net of tax.

May not add due to rounding.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Adjusted Earnings Before Interest, Tax,
Depreciation, and Amortization

from
Adjusted EBITDA is calculated as earnings
operations and before interest and income taxes plus
depreciation and intangible asset amortization (adjusted
for items that are not considered representative of on-
going operational activities of the business) and items
where the economic impact of the transactions will be
reflected in earnings
in future periods when the
underlying asset is sold or transferred. The following
table provides a reconciliation of net earnings as
IFRS in the audited consolidated
reported under
statements of earnings for the years then ended to
Adjusted EBITDA. Management believes Adjusted
EBITDA is useful
in assessing the performance of the
Company’s on-going operations and its ability to
generate cash flows to fund its cash requirements,
including the Company’s capital investment program.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Debt

The following table reconciles Net Debt used in net debt
to Adjusted EBITDA ratios reflected on page 13 to
amounts
audited
consolidated balance sheets as at the years ended as
indicated below.

reported under

IFRS

the

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.

December 31,

($ thousands)

2013

2012

2011

Bank indebtedness
Current portion of
long-term debt

Long-term debt

4,408

48,243

$ 36,404

209,780
744,212

6,573
1,206,945

5,618
941,956

December 31,

Sub-total

$ 958,400

$ 1,261,761

$ 983,978

($ thousands)

2013

2012 (i)

2011 (i)

Net earnings (loss) from
continuing operations

Income taxes

Earnings (loss) before income

taxes from continuing
operations
Interest expense
Items included in other income

not representative of
on-going operations (ii)

Restructuring and other

$ (58,543) $ 41,967 $ (7,258)
(10,733)

(22,842)

20,005

$ (81,385) $ 61,972 $ (17,991)
70,736

69,842

71,707

(70,626)

(3,354)

(4,128)

related costs

93,164

47,511

79,777

Change in the fair value of

non-designated interest rate
swaps, biological assets and
unrealized (gains) losses on
commodity futures contracts
Depreciation and amortization

(15,878)
128,963

(531)
117,313

7,006
111,961

Adjusted EBITDA

$ 124,080 $ 294,618 $ 247,361

(i)

(ii)

2012 and 2011 figures have been restated for
the
classification of the Rothsay and Olivieri businesses as a
discontinued operation, as disclosed in Note 22 of the
Company’s audited consolidated financial statements, and
have been restated for the impact of adopting the revised
International Accounting Standard 19 Employee Benefits
(“IAS 19”), as disclosed in Note 32 of the Company’s audited
consolidated financial statements.

associated with non-operational
Includes gains/losses
activities,
including gains/losses related to restructuring
activities, business combinations, discontinued operations,
and assets held for sale.

Cash and cash
equivalents

(506,670)

(90,414)

–

Net Debt

$ 451,730

$ 1,171,347

$ 983,978

Return on Net Assets

considered representative of

Return on Net Assets is calculated by dividing tax-
effected earnings from operations (adjusted for items
the
which are not
underlying operations of
the business) by average
monthly net assets. Net assets are defined as total assets
less cash, deferred 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 information” within the meaning of applicable
securities law. These statements are based on current
expectations, estimates, forecasts, and projections about
the industries in which the Company operates, as well as
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, in addition to statements with respect to beliefs,
plans, objectives, expectations, anticipations, estimates,
and intentions. Specific forward-looking information in
this document includes, but is not limited to, statements
with respect to: the expected timing of the completion
of the sale of shares of Canada Bread to Grupo Bimbo
(there can be no assurances that any transaction will be
completed); the anticipated benefits, timing, actions,
costs, and investments associated with the Plan;

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS

regarding improving efficiencies;

expectations regarding Net Debt
to EBITDA ratios
during the implementation of the Plan; expectations
regarding the use of derivatives, futures and options;
the
expectations
expected use of cash balances; source of
funds for
ongoing business requirements; capital investments and
debt
repayment; expectations regarding acquisitions
and divestitures; the timing of new plant openings and
old plant closures, job losses and LEED® certification;
expectations regarding the impact of new accounting
standards; expectations regarding sufficiency of
the
allowance for uncollectible accounts; and expectations
regarding pension plan performance and future pension
plan liabilities and contributions. Words
such as
“expect”, “anticipate”, “intend”, “may”, “will”, “plan”,
“believe”, “seek”, “estimate”, and variations of such
words and similar expressions are intended to identify
such forward-looking information. These statements are
not guarantees of
future performance and involve
assumptions and risks and uncertainties that are difficult
to predict.

these

addition,

statements

In
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, U.S., U.K., and Japanese economies;
the rate of exchange of the Canadian dollar to the U.S.
dollar, the 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 Plan or otherwise; continued
access
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
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 information, which reflect the
Company’s expectations only as of the date hereof.

the Company,

the cost of

to capital;

available

Factors that could cause actual results or outcomes to
differ materially from the results expressed, implied, or
forecasted by
forward-looking information include,
among other things:

(cid:129) risks associated with the acquisition of Canada Bread

by Grupo Bimbo;

(cid:129) risks associated with implementing and executing the

Plan;

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

(cid:129) risks associated with the availability of capital and the

Company’s outstanding indebtedness;

(cid:129) risks associated with changes in the Company’s

systems and processes;

(cid:129) risks posed by food contamination, consumer liability,

and product recalls;

(cid:129) risks associated with acquisitions, divestitures, and

capital expansion projects;

(cid:129) impact

pension

funding
requirements of fluctuations in the market prices of
fixed income and equity securities and changes in
interest rates;

expense

and

(cid:129) cyclical nature of the cost and supply of hogs and the

competitive nature of the pork market generally;

(cid:129) risks related to the health status of livestock;

(cid:129) impact of a pandemic on the Company’s operations;

(cid:129) the Company’s exposure to currency exchange risks;

(cid:129) ability of the Company to hedge against the effect of
through the use of

commodity price changes
commodity futures and options;

(cid:129) impact of changes in the market value of

the

biological assets and hedging instruments;

(cid:129) impact of international events on commodity prices

and the free flow of goods;

(cid:129) risks posed by compliance with extensive government

regulation;

(cid:129) risks posed by litigation;

(cid:129) impact of changes in consumer tastes and buying

patterns;

(cid:129) impact of extensive environmental
potential environmental liabilities;

regulation and

(cid:129) risks

associated with

consolidating

retail

environment;

(cid:129) risks posed by competition;

(cid:129) risks

associated with complying with differing
employment laws and practices globally, the potential
for work stoppages due to non-renewal of collective
agreements, and recruiting and retaining qualified
personnel;

(cid:129) risks associated with the Company’s independent

distributors;

(cid:129) risks associated with pricing the Company’s products;

(cid:129) risks associated with managing the Company’s supply

chain; and

(cid:129) risks associated with failing to identify and manage

the strategic risks facing the Company.

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.

statements

Some of
the forward-looking information may be
considered to be financial outlooks for purposes of
legislation including, but not
applicable securities
concerning future EBITDA
limited to,
margins; capital expenditures; cash costs; and non-cash
restructuring charges. These financial outlooks are
presented to allow the Company to benchmark the
results of the Plan. These financial outlooks may not be
appropriate for other purposes and readers should not
assume they will be achieved.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Company does not intend to, and the Company
disclaims any obligation to, update any forward-looking
information, whether written or oral, or whether as a
result of new information, future events or otherwise,
except as required by law.

information

Additional
concerning the Company,
including the Company’s Annual Information Form, will
be available on SEDAR at www.sedar.com.

Maple Leaf Foods Inc.
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 18,000 people at its
operations across Canada and in the United States,
Europe and Asia.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

INDEPENDANT AUDITORS’ REPORT

Independent Auditors’ Report

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
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 evaluating the overall
presentation of the consolidated financial statements.

as well

for

We believe that the audit evidence we have obtained in
our audits is sufficient and appropriate to provide a basis
for our audit opinion.

Opinion

In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated
financial position of Maple Leaf Foods Inc. as at
December 31, 2013, December 31, 2012, and January 1,
its consolidated financial performance, and its
2012,
the years then ended
consolidated cash flows for
December 31, 2013, and December 31, 2012,
in
accordance with International Financial Reporting
Standards.

Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada

February 26, 2014

To the Shareholders of Maple Leaf Foods Incorporated:

We have audited the accompanying consolidated
financial statements of Maple Leaf Foods Inc., which are
comprised of the consolidated balance sheets as at
December 31, 2013, December 31, 2012, and January 1,
2012,
earnings,
consolidated statements of
comprehensive income, changes in total equity and cash
flows for the years then ended, and notes, comprising a
summary of significant accounting policies and other
explanatory information.

the

Management’s Responsibility for the Consolidated
Financial Statements

Management is responsible for the preparation and fair
presentation of these consolidated financial statements
in accordance with International Financial Reporting
Standards, and for such internal control as management
determines is necessary to enable the preparation of
consolidated financial statements that are free from
material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian
generally accepted auditing standards. These standards
require that we comply with ethical requirements and
to obtain reasonable
plan and perform the audit
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
statements. The procedures
consolidated financial
including the
selected depend on our
assessment of the risks of material misstatement of the

judgement,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Consolidated Balance Sheets

(In thousands of Canadian dollars)

ASSETS
Current assets

Cash and cash equivalents
Accounts receivable (Note 4)
Notes receivable (Note 25)
Inventories (Note 5)
Biological assets (Note 6)
Income taxes and other taxes recoverable
Assets held for sale (Note 7)
Prepaid expenses and other assets

Property and equipment (Note 8)
Investment property (Note 9)
Employee benefits (Note 10)
Deferred tax asset (Note 21)
Goodwill (Note 11)
Intangible assets (Note 12)
Other long-term assets
Total assets

LIABILITIES AND EQUITY
Current liabilities

Bank indebtedness (Note 14)
Accounts payable and accruals
Provisions (Note 13)
Current portion of long-term debt (Note 14)
Other current liabilities

Long-term debt (Note 14)
Employee benefits (Note 10)
Provisions (Note 13)
Other long-term liabilities (Note 15)
Deferred tax liability (Note 21)
Total liabilities

Shareholders’ equity
Share capital (Note 16)
Retained earnings (deficit)
Contributed surplus
Accumulated other comprehensive loss (Note 16)
Treasury stock
Total shareholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity

CONSOLIDATED BALANCE SHEETS

As at December 31,
2013

As at December 31,
2012

As at January 1,
2012

(Restated)
(Note 32)

$ 506,670
111,034
115,514
287,786
95,740
43,300
5,206
17,921
$ 1,183,171
1,323,318
12,865
117,615
26,119
720,798
198,578
16,628
$ 3,599,092

4,408
649,554
54,853
209,780
47,927
$ 966,522
744,212
174,503
19,603
28,744
23,516
$ 1,957,100

$ 905,216
602,717
79,139
(4,593)
(1,350)
$ 1,581,129
60,863
$ 1,641,992
$ 3,599,092

90,414
117,533
124,457
301,804
78,127
41,527
37,087
12,590
$ 803,539
1,212,177
11,979
107,831
132,558
753,156
208,793
13,663
$ 3,243,696

48,243
446,911
26,335
6,573
14,961
$ 543,023
1,206,945
420,933
25,800
80,084
8,912
$ 2,285,697

$ 902,810
(72,701)
75,913
(13,263)
(1,845)
$ 890,914
67,085
$ 957,999
$ 3,243,696

–
133,504
123,545
293,231
49,265
43,789
–
24,688
$ 668,022
1,067,246
11,232
133,942
127,456
753,739
191,896
11,926
$ 2,965,459

36,404
507,059
44,255
5,618
20,409
$ 613,745
941,956
350,853
28,936
88,153
11,703
$ 2,035,346

$ 902,810
(78,674)
64,327
(17,042)
(6,347)
$ 865,074
65,039
$ 930,113
$ 2,965,459

Commitments and contingencies (Note 26)
Subsequent events (Note 31)
See accompanying Notes to the Consolidated Financial Statements

On behalf of the Board:

MICHAEL H. MCCAIN
Director

DIANE MCGARRY
Director

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF EARNINGS

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 continuing operations before the following:
Restructuring and other related costs (Note 17)
Change in fair value of non-designated interest rate swaps
Other income (expense) (Note 19)

Earnings (loss) before interest expense, other financing costs, and income taxes from

continuing operations

Interest expense and other financing costs (Note 20)

Earnings (loss) before income taxes from continuing operations
Income taxes (Note 21)

Net earnings (loss) from continuing operations
Net earnings and gain on disposal of discontinued operations (Note 22)

Net earnings

Attributed to:
Common shareholders
Non-controlling interest

Earnings (loss) per share attributable to common shareholders (Note 23)
Basic earnings per share
Diluted earnings per share
Basic earnings (loss) per share from continuing operations
Diluted earnings (loss) per share from continuing operations

Weighted average number of shares (millions)

See accompanying Notes to the Consolidated Financial Statements

2013

2012

(Restated)
(Note 22, 32)

$ 4,551,828
3,878,219

$ 673,609
508,356

$ 165,253
(47,511)
7,297
8,640

$ 133,679
71,707

$
$
$
$

61,972
20,005

41,967
54,595

96,562

89,416
7,146

96,562

0.64
0.63
0.25
0.24

139.4

$ 4,406,448
3,920,652

$ 485,796
484,192

1,604
(93,164)
2,022
77,995

(11,543)
69,842

(81,385)
(22,842)

(58,543)
570,706

$ 512,163

$ 496,310
15,853

$ 512,163

$
$
$
$

3.55
3.55
(0.48)
(0.48)

139.9

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Consolidated Statements of Comprehensive Income

Years ended December 31,

(In thousands of Canadian dollars)

Net earnings
Other comprehensive income (loss)
Items that will not be reclassified to profit or loss:

Change in actuarial gains and losses (Net of tax of $70.6 million; 2012: ($21.3) million)

Total items that will not be reclassified to profit or loss

Items that are or may be reclassified subsequently to profit or loss:

Change in accumulated foreign currency translation adjustment (Net of tax of $nil; 2012: $nil)
Change in unrealized gains and losses on cash flow hedges (Net of tax of $(0.2) million;
2012: $1.6 million)

Total items that are or may be reclassified subsequently to profit or loss

Comprehensive income

Attributed to:
Common shareholders
Non-controlling interest

See accompanying Notes to the Consolidated Financial Statements

2013

2012

(Restated)
(Note 32)

$ 512,163

$ 96,562

$ 203,365

$ (61,591)

$ 203,365

$ (61,591)

$ 10,728

$ (1,730)

(546)

5,251

$ 10,182

$ 3,521

$ 213,547
$ 725,710

$ (58,070)
$ 38,492

$ 706,515
$ 19,195

$ 31,981
$ 6,511

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

Consolidated Statements of Changes in Total Equity

Attributable to Common Shareholders

Share
capital

Retained
earnings
(deficit)

Contributed
surplus

Total
accumulated
other
comprehensive

loss Treasury stock

Non-
controlling
interest

Total
equity

$ 902,810
–
–

$ (72,701)
496,310
201,535

$ 75,913
–
–

$ (13,263)
–
8,670

$ (1,845) $ 67,085 $ 957,999
512,163
213,547

15,853
3,342

–
–

–

(22,427)

–

–
2,406
–

–

–
–

–
–
–

–

–
–

12,604
–
(495)

(14,391)

3,508
2,000

–

–
–
–

–

–
–

–

(25,417)

(47,844)

–
–
495

–

–
–

–
–
–

–

–
–

12,604
2,406
–

(14,391)

3,508
2,000

(In thousands of Canadian dollars)

Balance at December 31, 2012

(Restated) (Note 32)
Net earnings
Other comprehensive income
Dividends declared ($0.16 per

share)

Stock-based compensation

expense

Exercise of stock options
Issuance of treasury stock
Cash settlement of stock
compensation (Note 24)

Modification of stock
compensation plan

Other

Balance at December 31, 2013

$ 905,216

$ 602,717

$ 79,139

$ (4,593)

$ (1,350) $ 60,863 $ 1,641,992

Attributable to Common Shareholders

Share
capital

Retained
deficit

Contributed
surplus

Total
accumulated
other
comprehensive

loss Treasury stock

Non-
controlling
interest

Balance at January 1, 2012

(Restated) (Note 32)
Net earnings
Other comprehensive income

(loss)

Dividends declared ($0.16 per

share)

Stock-based compensation

expense

Issuance of treasury stock
Repurchase of treasury stock
Acquisition of business
Other

$ 902,810
–

$ (78,674)
89,416

$ 64,327
–

$ (17,042)
–

–

–
–
–
–
–

(61,214)

(22,229)

–
–
–
–
–

–

24,711
(13,525)
–
–
400

3,779

–

–
–
–
–
–

Total
equity

(Restated)
(Note 32)

930,113
96,562

$ (6,347) $ 65,039 $

7,146

–

(635)

(58,070)

(4,473)

(26,702)

–
13,525
(9,023)
–
–

–
–
–
(82)
90

24,711
–
(9,023)
(82)
490

Balance at December 31, 2012

$ 902,810

(72,701)

$ 75,913

$ (13,263)

$ (1,845) $ 67,085 $

957,999

See accompanying Notes to the Consolidated Financial Statements

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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:

Change in fair value of biological assets
Depreciation and amortization
Stock-based compensation
Deferred income taxes
Income tax current
Interest expense
Gain on sale of property and equipment (Note 19)
Gain on sale of business (Note 22)
Gain on sale of assets held for sale (Note 19)
Gain on sale of investment property (Note 19)
Gain on business combination (Note 30)
Change in fair value of non-designated interest rate swaps
Change in fair value of derivative financial instruments
Impairment of assets (net of reversals) (Note 19)

Increase in pension liability
Net income taxes paid
Interest paid
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
Net increase (decrease) in long-term debt
Purchase of treasury stock
Exercise of stock options
Cash settlement of stock compensation
Increase in financing costs
Other

Cash provided by (used in) financing activities

Investing activities

Additions to long-term assets
Acquisition of business (Note 30)
Capitalization of interest expense
Proceeds from sale of long-term assets
Proceeds from sale of business
Proceeds from sale of assets held for sale

Cash provided by (used in) investing activities

Increase in cash and cash equivalents
Net cash and cash equivalents, beginning of period

Net cash and cash equivalents, end of period

Net cash and cash equivalents is comprised of:
Cash and cash equivalents
Bank indebtedness

Net cash and cash equivalents, end of period

CONSOLIDATED STATEMENTS OF CASH FLOWS

2013

2012

(Restated)
(Note 32)

$ 512,163

$ 96,562

(13,540)
141,818
12,604
52,847
23,443
68,496
(2,320)
(605,901)
(67,640)
(323)
985
(2,022)
117
5,837
15,789
(28,537)
(62,949)
55,497
(13,194)
166,955

3,436
132,739
24,711
9,967
28,922
71,685
(624)
–
(459)
–
(5,330)
(7,297)
3,107
–
13,282
(21,861)
(69,896)
13,179
(9,427)
(64,616)

$ 260,125

$ 218,080

$ (22,427)
(5,084)
(279,178)
–
2,406
(14,391)
(1,388)
–

$ (22,229)
(3,710)
272,546
(9,023)
–
–
–
(1,619)

$ (320,062)

$ 235,965

$ (361,155)
(922)
(15,980)
12,094
744,811
141,180

$ (306,334)
(77,690)
(6,901)
7,481
–
7,974

$ 520,028

$ (375,470)

$ 460,091
42,171

$ 78,575
(36,404)

$ 502,262

$ 42,171

$ 506,670
(4,408)

$ 90,414
(48,243)

$ 502,262

$ 42,171

See accompanying Notes to the Consolidated Financial Statements

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Notes to the Consolidated Financial Statements

(Tabular amounts in thousands of Canadian dollars, unless otherwise indicated)
Years ended December 31, 2013 and 2012

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
the Company’s
and internationally. The address of
registered office is Suite 1500, 30 St. Clair Avenue West,
Toronto, Ontario, M4V 3A2, Canada. The consolidated
financial statements of the Company as at and for the
year ended December 31, 2013, include the accounts of
the Company and its subsidiaries. The principle activities
and composition of the Company are further described
in Note 25. The Company’s results are organized into
three segments: Meat Products Group, Agribusiness
Group, and Bakery Products Group.

2. BASIS OF PREPARATION

(a) Statement of Compliance

The consolidated financial
statements have been
prepared in accordance with International Financial
Reporting Standards
the
(“IFRS”)
International Accounting Standards Board (“IASB”) and
using the accounting policies described herein.

issued by

The consolidated financial statements were authorized
for issue by the Board of Directors on February 26, 2014.

(b) Basis of Measurement

The consolidated financial
statements have been
prepared on the historical cost basis, except for certain
financial instruments, biological assets, defined benefit
plan assets and liabilities associated with certain stock-
based compensation,
fair value.
Liabilities associated with employee benefits are stated
at actuarially determined present values.

that are stated at

The consolidated financial statements are presented in
Canadian dollars, which is the Company’s functional
currency.

(d) Use of Estimates and Judgements

liabilities,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

judgements

and critical

significant areas of estimation
Information about
applying
uncertainty
accounting policies,
that have the most significant
effects on the amounts recognized in the consolidated
financial statements, are included both below and in the
statement notes relating to items subject to significant
estimation uncertainty and critical judgements.

Long-Lived Assets Valuation

The Company performs impairment testing annually for
goodwill and intangible assets and, when circumstances
indicate that there may be impairment, for other long-
lived assets. Management
is involved in
determining if there are circumstances indicating that
testing for impairment is required, and in identifying
their Cash Generating Units (“CGUs”) for the purpose of
impairment testing.

judgement

involves Management

judgement

Measurement of Fair Values

A number of the Company’s accounting policies and
disclosures require the measurement of fair values, for
both financial and non-financial assets and liabilities.

When the measurement of
fair values cannot be
determined, based on quoted prices in active markets,
fair value is measured using valuation techniques and
models. The inputs to these models are taken from
observable markets where possible but, where this is not
feasible, a degree of
required in
establishing fair values. Changes in assumptions about
these inputs to these models could affect the reported
fair value of the Company’s financial and non-financial
assets and liabilities.

judgement

When measuring fair value of an asset or liability, the
far as
Company uses market observable data as
possible. To the extent that these estimates differ from
those realized,
liability, net
earnings, and/or comprehensive income (loss) will be
affected in future periods.

the measured asset or

Information about the valuation techniques and inputs
used in determining the fair value of various assets and
liabilities are disclosed in Notes 6, 9, 18, and 24.

Nature of Interests in Other Entities

Management applies significant judgement in assessing
the nature of its interest in an unconsolidated structured
entity. The Company does not hold any equity interest in
the structured entity and based on the terms of the
agreements under which the entity is established, the
Company receives none of the returns related to their
operations and is exposed to limited recourse with
respect to losses.

Further information about the unconsolidated structured
entity is disclosed in Note 25.

Valuation of Inventory

inventory.

Management makes estimates of the future customer
demand for products when establishing appropriate
provisions for
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 on-hand values are lower, thus reducing the
risk of material misstatement. However, code or “best
before” dates are very important in the determination of
realizable value of inventory. Management ensures that
systems are in place to highlight and properly value
inventory that may be approaching code dates. To the
extent that actual losses on inventory differ from those
and
net
estimated,
comprehensive income (loss) will be affected in future
periods.

inventory,

earnings

(loss),

Biological Assets

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

it may

recognition,

depreciation and impairment losses. Although a reliable
measure of fair value may not be available at the point of
subsequently become
initial
available.
In such circumstances, biological assets are
measured at fair value less costs to sell from the point at
which the reliable measure of
fair value becomes
available. Gains and losses that arise on measuring
biological assets at fair value less costs to sell are
recognized in the statement of earnings in the period in
which they arise. Costs to sell include all costs that would
be necessary to sell the biological assets, including costs
necessary to get the biological assets to market.

Trade Merchandise Allowances and Other Trade
Discounts

that

Employee Benefit Plans

rates. Discount

Income Taxes

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company

reversal of
establishes

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
temporary
operates, and the timing of
differences.
additional
provisions for income taxes when, despite Management’s
the Company’s tax positions are fully
opinion that
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. To the extent that these adjustments differ
from original estimates, future deferred tax assets and
liabilities, net earnings, and comprehensive income (loss)
will be affected.

Provisions

The Company evaluates all provisions at each reporting
date. These provisions can be significant and are
prepared using estimates of the costs of future activities.
In certain instances, Management may determine that
these provisions are no longer required or that certain
provisions are insufficient as new events occur or as
additional
information is obtained. Provisions are
separately identified and disclosed in the Company’s
consolidated financial statements. Changes to these
the value of provisions, net
estimates may affect
earnings, and comprehensive income (loss)
in future
periods.

Stock-based Compensation

forfeitures,

The Company uses estimates including, but not limited
share price volatility,
to, estimates of
dividends, expected life of the award, risk-free interest
rates, and Company performance in the calculation of
the liability and expenses
for certain stock-based
incentive plans. These estimates are based on previous
experience and may change throughout the life of an
incentive plan. Such changes could impact the carrying
value of contributed surplus, liabilities, net earnings, and
comprehensive income (loss).

Some of the Company’s stock-based payment plans are
settled in either cash or equity instruments at the option
of
in
the Company. Management uses judgement
determining the appropriate accounting treatment for
these plans, based on expectations and historical
settlement decisions. Changes to accounting treatment
based on management’s
impact
judgement may
contributed surplus,
liabilities and net earnings and
comprehensive income (loss).

Depreciation and Amortization

useful lives of the assets and residual values. Changes to
these estimates may affect the carrying value of these
inventories, net earnings and comprehensive
assets,
income (loss) in future periods.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been
applied consistently to all periods presented in these
consolidated financial statements.

(a) Principles of Consolidation

These consolidated financial statements include the
accounts of the Company and its subsidiaries from the
date that control commences until the date that control
ceases. Control exists when the Company is exposed to
or has rights to variable returns from its involvement with
the entity and has the ability to affect those returns
through its power over
the entity. Non-controlling
interest represents the portion of a subsidiary’s net
earnings and net assets that are attributable to shares of
such a subsidiary not held by the Company. Acquisitions
of non-controlling interests are accounted for as
transactions with equity holders in their capacity as
equity holders; therefore, no goodwill is recognized as a
result of such transactions.

All intercompany accounts and transactions have been
eliminated on consolidation.

(b) Business Combinations and Goodwill

Business combinations are accounted for using the
acquisition method at the acquisition date, which is the
date that control
In
assessing control, the Company takes into consideration
potential voting rights that are currently exercisable.

is transferred to the Company.

Goodwill is measured as the excess of the sum of the fair
value of the consideration transferred, the amount of any
non-controlling interests in the acquiree, and the fair
value of the Company’s previously held equity interest in
the acquiree (if any) over the net of the acquisition-date
amounts of the identifiable assets acquired and the
liabilities assumed. If the excess is negative, a purchase
gain is recognized immediately in earnings. Transaction
costs, other than those associated with the issue of debt
or equity, are recognized in earnings as incurred.

Goodwill is not amortized and is tested for impairment
annually in October and as required if events occur that
carrying amount may not be
indicate that
recoverable.
is tested at the
CGU group level by comparing the carrying amount to
the
its
methodology applied in Note 3(k).

Impairment of goodwill

recoverable

consistent

amount,

with

its

The Company’s property and equipment and definite
life intangible assets are depreciated and amortized on a
straight-line basis, taking into account the estimated

Non-controlling interests that are present ownership
interests at the acquisition date, and entitle their holders
to a proportionate share of the entity’s net assets in the

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

identifiable

event of liquidation, are initially measured either at fair
value or at the non-controlling interests’ proportionate
the acquired
share of
the recognized amounts of
business’s
of
The
measurement basis
is made on a transaction-by-
transaction basis depending on individual factors of the
transaction. Other types of non-controlling interest are
measured at fair value or, when applicable, on the basis
specified in the applicable IFRS.

assets.

choice

the acquisition date.

Any contingent consideration payable is measured at fair
value at
the contingent
consideration is classified as equity, then it is not re-
measured and settlement is accounted for in equity.
Otherwise, subsequent changes in the fair value of the
contingent consideration are recognized in earnings.

the items

combination

occurs,
for

the Company

When the initial accounting for a business combination is
incomplete by the end of the reporting period in which
the
reports
provisional amounts
for which the
accounting is incomplete. These provisional amounts are
adjusted during the measurement period, which does
not exceed one year
from the acquisition date, or
additional assets or liabilities are recognized, to reflect
new information obtained about facts and circumstances
that existed at the acquisition date that, if known, would
have affected the amounts recognized at that date.

The Company measures certain financial and non-
financial assets and liabilities at
fair value at each
balance sheet date. In addition, fair value measurements
are disclosed for certain financial and non-financial
assets and liabilities.

Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants
the
measurement date.
In estimating the fair value of an
asset or a liability, the Company takes into account the
if market
characteristics of
the asset or
into
participants would take those characteristics
account when pricing the asset or
the
measurement date. Fair value for measurement and
disclosure purposes is determined on such a basis,
except for share-based payment transactions,
leasing
transactions,
that have some
and measurements
similarities to fair value but are not fair value, such as net
realizable value or value in use.

liability at

liability

Assets and liabilities, for which fair value is measured or
disclosed in the financial statements, are classified using
a three-level
reflects the
fair value hierarchy that
significance and transparency of the inputs used in
making the fair value measurements. Each level is based
on the following:

Level 1 – inputs are unadjusted quoted prices of
identical assets or liabilities in active markets

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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
in
determining fair values of the asset or liability

unobservable

technique

are

Determination of fair value and the resulting hierarchy
requires the use of observable market data whenever
available. The classification of an asset or liability in the
hierarchy is based upon the lowest level of input that is
significant to the measurement of fair value.

(d) Non-current Assets (or Disposal Groups) Held for

Sale and Discontinued Operations

The Company classifies non-current assets and disposal
groups as held for sale if their carrying amounts will be
recovered principally through a sale transaction rather
than through continuing use. The criteria for held for sale
classification is regarded as met when a sale is highly
probable, the asset or disposal group is available for
immediate
and
management
is committed to the sale, which is
expected to be completed within one year from the date
of classification. Non-current assets and disposal groups
classified as held for sale are measured at the lower of
their carrying amount and fair value less costs to sell.
Non-current assets are not depreciated once classified
as held for sale.

condition,

present

sale

its

reporting purposes. Classification

the
A discontinued operation is a component of
Company’s business which can be clearly distinguished
from the rest of the Company, both operationally and for
financial
a
discontinued operation occurs at the earlier of disposal
or when the operation meets the criteria to be classified
as held for sale. When an operation is classified as a
discontinued operation, the comparative statements of
earnings and comprehensive income are re-presented as
if the operation has been discontinued from the start of
the comparative year. Discontinued operations are
excluded from the results of continuing operations and
are presented as a single amount net of tax as net
earnings from discontinued operations in the statements
of earnings.

(e) Translation of Foreign Currencies

the Company are presented in
The accounts of
Canadian dollars. Transactions in foreign currencies are
translated at the actual rates of exchange. Monetary
assets and liabilities denominated in foreign currencies
at the reporting date are translated to the Canadian
that date. Foreign
dollar at
exchange differences
are
translation
recognized in net earnings, except for financial assets
and liabilities designated as hedges of
the net
investment in foreign operations or qualifying cash flow

the exchange rate for

arising on

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

hedges, which are recognized in other comprehensive
income. Non-monetary assets and liabilities that are
measured at historical cost are translated using the
exchange rate at the date of the transaction.

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 period-end for assets and liabilities, and the
average exchange rates for the period for revenue,
expenses, and cash flows. Foreign exchange differences
arising on translation are recognized in accumulated
other comprehensive income in total equity.

When a foreign operation is disposed of in its entirety or
partially such that control, significant influence or joint
control is lost, the cumulative amount in the translation
reserve related to that foreign operation is reclassified to
profit or loss as part of the gain or loss on disposal. If the
Company disposes of part of its interest in a subsidiary
but retains control, then the relevant proportion of the
cumulative amount
is reattributed to non-controlling
interest. When the Company disposes of only part of an
associate or
joint venture while retaining significant
influence or joint control, the relevant proportion of the
cumulative amount is reclassified to profit or loss.

Foreign exchange gains and losses arising from a
receivable or payable to a foreign operation,
the
settlement of which is neither planned nor likely to occur
in the foreseeable future and which in substance is
considered to form part of the net investment in the
foreign
other
comprehensive income in the cumulate foreign currency
translation differences.

operations,

recognized

are

(f) Financial Instruments

The Company’s financial assets and financial liabilities,
upon initial recognition, are measured at fair value and
are classified as held for trading, loans and receivables,
liabilities. The classification depends
or other financial
on the purpose for which the financial instruments were
acquired and their characteristics. Held for trading is the
required classification
financial
for
instruments unless they are specifically designated
within an effective hedge relationship. Held for trading
financial instruments not designated within an effective
hedging relationship are measured at fair value with
changes
in fair value recognized in consolidated
statements of earnings in the period in which such
changes arise. Loans and receivables and other financial
liabilities are initially recorded at fair value and are
subsequently measured at amortized cost.

all derivative

Financial assets are assessed at each reporting date to
determine whether there is any objective evidence of
impairment. A financial asset
is considered to be
impaired if objective evidence indicates that one or
more events have had a negative effect on the estimated

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

future cash flows of that asset, with impairment losses
recognized in the consolidated statements of earnings.
loss
If,
decreases,
is
reversed to the extent of the impairment.

the previously recognized impairment

in a subsequent period,

the impairment

Transaction costs, other than those related to financial
instruments classified as fair value through profit or loss,
which are expensed as incurred, are capitalized to the
carrying amount of the instrument and amortized using
the effective interest method.

(g) Hedge Accounting

The Company uses derivatives and other non-derivative
financial
to
fluctuations in interest rates, foreign exchange rates, and
commodity prices.

to manage its exposures

instruments

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 its 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
is recorded, to the extent it is
hedging instrument
effective,
the
hedged item affects net earnings. In a fair value hedge,
the change in fair value of the hedging derivative is
offset in the consolidated statements of earnings by the
change in fair value of the hedged item relating to the
hedged risk.

in other comprehensive income until

In a net investment hedge, the change in fair value of the
hedging instrument is recorded, to the extent effective,
directly in other comprehensive income. These amounts
are recognized in earnings when the corresponding
accumulated other comprehensive income (loss) from
self-sustaining foreign operations
recognized in
earnings. 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 statements
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 net earnings, as the hedged item affects
net earnings, or when the hedged item is derecognized.
the
If a designated hedge is no longer effective,
associated derivative instrument is subsequently carried
at fair value through net earnings without any offset from
the hedged item.

Derivatives that do not qualify for hedge accounting are
carried at fair value on the consolidated balance sheets,
and subsequent changes in their fair value are recorded
in the consolidated statements of earnings (loss).

(h) Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash
balances, demand deposits, and investments with an
original maturity at the date of purchase of three months
or less.

(i)

Inventories

being

Inventories are valued at the lower of cost and net
cost
realizable
determined
value, with
substantially on a first-in,
first-out basis. The cost of
inventory includes direct product costs, direct labour,
and an allocation of variable and fixed manufacturing
overhead, including depreciation. When circumstances
that previously caused inventories to have a write-down
below cost no longer exist, or when there is clear
evidence of an increase in the net realizable value, the
amount of a write-down previously recorded is reversed
through cost of goods sold.

(j) Biological Assets

valuation,

the purposes of

Biological assets consist of live hogs, poultry, and eggs.
For
these assets are
categorized as either parent stock or commercial stock.
Parent stock represents animals held and bred for the
purpose of generating commercial stock and to replace
parent stock nearing the end of its productive cycle.
Commercial stock is held for the purposes of further
processing or eventual sale, at which point it becomes
inventory. The fair
stock is
livestock of
determined based on market prices of
similar age, breed, and generic merit, less costs to sell
the assets,
including estimated costs necessary to
transport the assets to market. Where reliable market
prices of parent stock are not available, they are valued
accumulated depreciation and any
at
accumulated impairment losses. No active liquid market
exists for parent stock as they are rarely sold. Hog parent
stock is depreciated on a straight-line basis over three

value of commercial

cost

less

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

years, whereas poultry parent stock is depreciated on a
straight-line basis over six to eight months.

Biological assets are transferred into inventory at fair
value less costs to sell at the point of delivery.

(k)

Impairment or Disposal of Long-lived Assets

assets

subject

to
events

amortization,
changes
or

The Company reviews long-lived assets or asset groups
held and used, including property and equipment and
for
intangible
recoverability whenever
in
circumstances indicate that their carrying amount may
not be recoverable. Asset groups referred to as CGUs
include an allocation of corporate assets and are
reviewed at their lowest level for which identifiable cash
inflows are largely independent of cash inflows of other
assets or groups of assets. The recoverable amount is
the greater of its value in use and its fair value less cost
to sell.

Value in use is based on estimates of discounted future
cash flows expected to be recovered from a CGU
through its use. Management develops its cash flow
projections based on past performance and its
expectations
business
developments. Once calculated, the estimated future
pre-tax cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks
specific to the asset.

future market

and

Fair value less cost to sell is the amount obtainable from
the sale of an asset or CGU in an arm’s length
transaction between knowledgeable, willing parties, less
the costs of disposal. Costs of disposal are incremental
costs directly attributable to the disposal of an asset or
CGU, excluding finance costs and income tax expense.

An impairment loss is recognized in the consolidated
statements of earnings when the carrying amount of any
asset or its CGU exceeds its estimated recoverable
amount.
Impairment losses recognized in respect of
CGUs are allocated, first to reduce the carrying amount
of any goodwill allocated to the CGU, and then to
reduce the carrying amount of the other assets in the
CGU on a pro rata basis.

losses

long-lived

Impairment
assets
recognized in prior periods are assessed at each
reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is
reversed if there has been a change in the estimates
used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying
amount
that would have been determined, net of
depreciation and amortization, if no previous impairment
loss had been recognized.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(l) Property and Equipment

the

during

capitalized

construction

Property and equipment, with the exception of land, is
recorded at cost less accumulated depreciation and any
accumulated impairment losses. Land is carried at cost
and not depreciated. For qualifying assets, cost includes
interest
or
development period. Construction-in-process assets are
capitalized during construction
and depreciation
commences when the asset
is available for use.
Depreciation related to assets used in production is
sold.
recorded in inventory and cost of goods
is
Depreciation related to non-production assets
recorded through selling, general, and administrative
expense, and calculated on a straight-line basis, after
taking into account residual values, over the following
expected useful lives of the assets:

Buildings, including other components
Machinery and equipment

15-40 years
3-10 years

When parts of an item of property and equipment have
different useful lives, those components are accounted
for as separate items of property and equipment.

(m) Investment Property

Investment property is comprised of properties owned
by the Company that are held to either earn rental
income or
for capital appreciation; or both. The
Company’s investment properties include land and
buildings.

less
Investment properties are recorded at
accumulated
accumulated
depreciation
impairment losses, with the exception of land which is
less any accumulated impairment
recorded at cost
losses. The depreciation policies
investment
properties are consistent with those for buildings.

cost

and

any

for

(n)

Intangible Assets

assets

include

computer

Intangible
software,
trademarks, customer relationships, poultry production
quota, and delivery routes. Definite life intangible assets
are measured at cost less accumulated amortization and
any net accumulated impairment losses. Amortization is
recognized in the consolidated statements of earnings
on a straight-line basis over their estimated useful lives
as follows:

Trademarks
Computer software
Customer relationships

10 years
3-10 years
20-25 years

Indefinite life intangibles including trademarks, poultry
production quota, and delivery routes are tested for

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

impairment annually in the fourth quarter and otherwise
as required if events occur that indicate that the carrying
value may not be recoverable.

Upon recognition of an intangible asset, the Company
determines if the asset has a definite or indefinite life. In
making this determination, the Company considers the
expected use, expiry of agreements, the nature of the
asset, and whether the value of the asset decreases over
time.

(o) Employee Benefit Plans

The Company provides post-employment benefits
through defined benefit and defined contribution plans.

Defined Benefit Plans

salary escalation,

retirement benefits earned by employees

The Company accrues obligations and costs in respect of
employee defined benefit plans. The cost of pensions and
other
is
actuarially determined using the projected unit credit
method prorated on service and Management’s best
estimate of
retirement ages of
employees, mortality rates, and expected health care
costs. Changes in these assumptions could affect future
pension expense. The fair value of plan assets is used as
the basis of calculating the expected return on plan assets.
The discount rate used to value the defined benefit
obligation is based on high quality corporate bonds in the
same currency in which the benefits are expected to be
paid and with terms to maturity that, on average, match
the terms of the defined benefit obligations.

in accumulated other

Actuarial gains and losses due to changes in defined
benefit plan assets and obligations are recognized
comprehensive
immediately
income (loss). When a restructuring of a benefit plan
gives
rise to both curtailment and settlement of
obligations, the curtailment is accounted for prior to or
in conjunction with the settlement.

When the calculation results in a net benefit asset, the
recognized asset
limited to the total of any
unrecognized past service costs and the present value of
economic benefits available in the form of future refunds
from the plan or reductions in future contributions to the
plan (the “asset ceiling”).
In order to calculate the
present value of economic benefits, consideration is
given to minimum funding requirements that apply to
the plan. Where it is anticipated that the Company will
not be able to recover the value of the net defined
benefit asset, after considering minimum funding
requirements for future services, the net defined benefit
asset is reduced to the amount of the asset ceiling. The
impact of
recognized in
the
comprehensive income (loss).

ceiling is

asset

When future payment of minimum funding requirements
related to past service would result in a net defined
benefit asset “surplus” or an increase in a surplus, the
minimum funding requirements are recognized as a
liability, to the extent that the surplus would not be fully
available as a refund or a reduction in future
contributions. Re-measurement of
is
recognized in other comprehensive income (loss) in the
period in which the re-measurement occurs.

liability

this

Defined Contribution Plans

to
The Company’s obligations
employee defined contribution pension plans are
recognized in the consolidated statement of earnings in
the periods during which services are rendered by
employees.

contributions

for

Multi-Employer Plans

The Company participates in multi-employer pension
plans which are accounted for as defined contribution
plans. The Company does not administer these plans as
the administration and the investment of these assets
are controlled by a board of trustees consisting of union
and
Company’s
representatives.
responsibility to make contributions to these plans is
established
bargaining
to
agreements. The contributions made by the Company to
the multi-employer plans are expensed when due.

employer

collective

pursuant

The

(p) Stock-Based Compensation

the

the fair

underlying shares on

The Company applies
value method of
accounting for stock-based compensation. The fair value
at grant date of stock options is estimated using the
Black-Scholes option-pricing model. The fair value of
restricted stock units (“RSUs”),
including performance
share units (“PSUs”), is measured based on the fair value
of
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 the number of
units expected to vest at the grant date and revises the
information
if
estimate as necessary
indicates that the actual number of units vesting differs
significantly from the original estimate. The fair value of
deferred share units (“DSUs”) is measured based on the
fair value of the underlying shares at each reporting
date.

subsequent

The Company has stock compensation plans which are
able to be settled in either cash or equity instruments at
the option of the Company. Each grant is accounted for
based on the expected settlement method at the time of
issue. The expectation is re-evaluated at the end of each
reporting period.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(q) Provisions

Provisions are liabilities of the Company for which the
is uncertain. A
amount and/or timing of settlement
provision is recognized in the consolidated financial
statements when the Company has a present legal or
constructive obligation as a result of a past event, and it
is probable that an outflow of economic benefits will be
required to settle the obligation. If the effect is material,
provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current
market assessments of the time value of money and,
when appropriate, the risks specific to the liability.

(r) Revenue Recognition

The majority of the Company’s revenue is derived from
the sale of product to retail and foodservice customers,
rendering products and by-
as well as the sale of
products
customers.
to industrial and agricultural
The Company recognizes revenue 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
the
have transferred to the customer,
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 are
estimated using historical trends and are recognized at
the time of
revenue.
a
reduction of
Sales
include rebate and promotional
programs provided to the Company’s customers. These
rebates are based on achievement of specified volume
agreed
or growth in volume levels
In subsequent periods,
promotional activities.
the
the performance of customers
Company monitors
against agreed upon obligations
related to sales
incentive programs and makes any adjustments to both
revenue and sales incentive accruals as required.

recovery of

and other

incentives

sale as

Except for fresh bread, the Company generally does not
accept returns of spoiled products from customers. For
in
product that may not be returned, the Company,
certain cases, provides customers with allowances to
cover any damage or spoilage, and such allowances are
deducted from sales at the time of revenue recognition.
returns are
In the case of
deducted from revenue.

fresh bread, customer

(s) Borrowing Costs

Borrowing costs are primarily comprised of interest on
the Company’s
indebtedness. Borrowing costs are
capitalized when they are attributable to the acquisition,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

construction, or production of a qualifying asset. The
Company defines qualifying assets as any asset that
its
requires more than six months to prepare for
intended use. Borrowing costs attributable to qualifying
assets are calculated using the Company’s average
borrowing cost excluding the costs associated with the
de-recognition
under
accounts
securitization programs. Borrowing costs that are not
attributable to a qualifying asset are expensed in the
period in which they are incurred and reported within
interest expense in the consolidated statements of
earnings.

receivables

(t) Government Incentives

Government incentives are not recognized until there is
reasonable assurance that they will be received and the
Company will be in compliance with any conditions
associated with
that
compensate the Company for expenses or losses are
recognized in earnings with the same classification as
the related expense or loss in the same periods in which
the expenses or losses are recognized.

incentives.

Incentives

the

incentives

Government
received with the primary
condition that the Company should purchase, construct,
or otherwise acquire non-current assets are recognized
as a deduction from the associated asset on the balance
sheet. The incentive is recognized in earnings over the
useful
life of the asset as a reduction of the related
depreciation expense.

are

that

incentives

Government
as
compensation for expenses or losses already incurred, or
for the purpose of giving immediate financial support to
the Company with no future related costs, are
recognized in earnings in the period in which they
become receivable.

receivable

The benefit of a government loan at a below-market rate
of interest is treated as a government incentive, and is
measured as the difference between proceeds received
and the fair value of the loan based on prevailing market
interest rates.

(u)

Income Taxes

Income tax

Income tax expense is comprised of current and
deferred tax.
recognized in the
consolidated statement of earnings, except to the extent
items
relates to a business combination, or
that
recognized directly in equity or in other comprehensive
income (loss).

Current tax expense represents the amount of income
taxes payable, in respect of the taxable profit for the
period, based on tax law that is enacted or substantially
enacted at
the reporting date, and is adjusted for
changes in estimates of tax expense recognized in prior
periods. A current tax liability or asset is recognized for

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

income tax payable, or paid but recoverable in respect
of all periods to date.

The Company uses the asset and liability method of
accounting for income taxes. Accordingly, deferred tax
assets and liabilities are recognized for the deferred tax
consequences attributable to differences between the
financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred 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 deferred tax assets and liabilities
of a change in tax rates is recognized in both net
earnings and comprehensive income (loss) in the period
in which the enactment or substantive enactment takes
place. A deferred tax asset is recognized for unused tax
losses,
temporary
and
differences, to the extent that it is probable that future
taxable income will be available to utilize such amounts.
Deferred tax assets are reviewed at each reporting date
and are adjusted to the extent that it is no longer
probable that the related tax benefits will be realized.

deductible

credits,

tax

Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation
authority and the Company intends to settle its current
tax assets and liabilities on a net basis.

Deferred tax is provided on temporary differences
arising on investments in subsidiaries, except where the
timing of the reversal of the temporary difference is
controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable
future.

(v) Accounting Standards Adopted During the

Period

Financial Assets and Liabilities

Consolidated Financial Statements

During the year ended December 31, 2013,
the
Company adopted IFRS 10 Consolidated Financial
Statements on a retrospective basis. IFRS 10 replaces

that

addresses

consolidation,

portions of IAS 27 Consolidated and Separate Financial
Statements
and
supersedes SIC-12 Consolidation – Special Purpose
Entities (“SPE”) in its entirety. IFRS 10 provides a single
model to be applied in the analysis of control of all
investees, including entities that currently are SPEs in the
scope of SIC-12.
the consolidation
In addition,
procedures specified in IFRS 10 are carried forward,
substantially unmodified, from IAS 27. The adoption of
IFRS 10 did not have any impact on the Company’s
financial statements.

Joint Arrangements

–

Controlled

During the year ended December 31, 2013,
the
Company adopted IFRS 11 Joint Arrangements. IFRS 11
supersedes IAS 31 Interest in Joint Ventures and SIC-13
Jointly
Non-Monetary
Entities
Contributions by Venturers. Through an assessment of
the rights and obligations in an arrangement, IFRS 11
joint
establishes principles to determine the type of
joint
arrangement, which are classified as either
operations or joint ventures, and provides guidance for
financial reporting activities required by the entities that
have an interest in arrangements which are controlled
jointly. Investments in joint ventures are required to be
accounted for using the equity method. The adoption of
IFRS 11 did not have any impact on the Company.

Disclosure of Interests in Other Entities

During the year ended December 31, 2013,
the
Company adopted IFRS 12 Disclosure of Interests in
Other Entities. IFRS 12 contains disclosure requirements
for companies that have interests in subsidiaries, joint
unconsolidated
arrangements,
structured entities. Additional disclosures required as a
result of the adoption of IFRS 12 are included in Note 25.

associates,

and

Fair Value Measurement

During the year ended December 31, 2013,
the
Company adopted IFRS 13 Fair Value Measurement on a
IFRS 13 replaces the fair value
prospective basis.
IFRSs
measurement guidance contained in individual
with a single source of fair value measurement guidance.
The standard also establishes a framework for measuring
fair value and sets out disclosure requirements for fair
value measurements. The adoption of IFRS 13 did not
have a material impact on the fair value measurements
carried out by the Company. Additional disclosures
required as a result of the adoption of IFRS 13 are
included in Notes 6, 9, 10, and 18.

Presentation of Financial Statements

During the year ended December 31, 2013,
the
Company adopted amendments to IAS 1 Presentation of

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements: Presentation of
Items of Other
Comprehensive Income on a retrospective basis. The
amendment requires that a company present separately
the items of other comprehensive income that may be
reclassified to profit or loss in the future from those that
would never be reclassified to profit or loss. Additional
disclosures required as a result of the adoption of IAS 1
are presented in the consolidated statements of
comprehensive income and had no impact on the
financial results of the Company.

Employee Benefits

During the year ended December 31, 2013,
the
Company adopted the revised IAS 19 Employee Benefits
on a retrospective basis with restatement. The revised
standard requires that the calculation of expected return
on assets and interest cost be replaced with a net
interest charge calculated based on the discount rate as
at the beginning of the year multiplied by the net
position of the plan. The revised standard also requires
that administrative fees of the plan be expensed by the
Company as incurred rather
than included in the
expected return. The impact of the adoption of revised
IAS 19 is further explained in Note 32 and the required
additional disclosures are included in Note 10. The
standard also has other amendments clarifying the
timing of
the
termination benefits,
adoption of which had no impact on the Company.

recognition of

Recoverable Amount Disclosures for Non-Financial
Assets

the recoverable amount

the amendments,

(w) Recent Accounting Pronouncements Not Yet

Adopted

Financial Assets and Liabilities

In December 2011, the IASB published amendments to
IAS 32 Financial Instruments: Presentation. The effective
date for the amendments to IAS 32 is annual periods
2014. These
beginning on or
amendments are to be applied retrospectively. The
amendments to IAS 32 clarify when an entity has a
legally enforceable right to off-set as well as clarify, when

January

after

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

a settlement mechanism provides for net settlement, or
gross settlement that is equivalent to net settlement.
The Company intends to adopt the amendments to IAS
32 in its financial statements for the annual period
beginning January 1, 2014. The impact of the adoption
of amendments to IAS 32 is not expected to be material
to the financial statements.

Levies

In May 2013, the IASB issued IFRIC 21 Levies. This IFRIC
is effective for annual periods commencing on or after
January 1, 2014 and is to be applied retrospectively. The
IFRIC is applicable to all levies other than outflows that
are within the scope of other standards and fines or
other penalties
legislation. The
for breaches of
interpretation clarifies that an entity recognises a liability
for a levy when the activity that triggers payments, as
identified by the relevant
legislation, occurs. The
Company intends to adopt IFRIC 21 in its financial
statements for the annual period beginning January 1,
2014. The Company is currently assessing the impact of
the adoption of IFRIC 21.

Employee Benefits

In November 2013, the IASB published amendments to
IAS 19 Employee Benefits. The effective date for these
amendments is annual periods beginning on or after
July 1, 2014. These amendments are to be applied
IAS 19 requires an entity to consider
retrospectively.
third parties when
contributions from employees or
accounting for defined benefit plans.
IAS 19 requires
such contributions that are linked to service to be
attributed to periods of service as a negative benefit.
The amendments to IAS 19 provide a practical expedient
for simplifying the accounting in certain situations. If the
amount of contributions is independent of the number
of years of service, an entity is permitted to recognise
such contributions as a reduction in the service cost in
the period in which the service is rendered, instead of
allocating the contributions to the period’s service. The
Company intends to adopt the amendments to IAS 19 in
its financial statements for the annual period beginning
the
January 1, 2015. The extent of
adoption of amendments to IAS 19 has not yet been
determined.

the impact of

Financial Instruments – Recognition and
Measurement

financial assets.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

for

Instruments,

requirements have been set

amendments to IFRS 9 Financial
IFRS 7
Financial Instruments: Disclosures, and IAS 39 Financial
Instruments: Disclosures (collectively, “IFRS 9 (2013)”) to
include a new general hedge accounting model, and
allow the adoption of the treatment of fair value changes
due to a company’s own credit risk on financial liabilities
designated at fair value through profit or loss. Special
the
transitional
application of the new general hedging model. This
amendment
removes the January 1, 2015, effective
date. The new mandatory effective date is expected to
be determined once the classification and measurement
and impairment phases of IFRS 9 are finalized. Although
no effective date has been issued for this standard, early
adoption is permitted. The Company does not intend to
adopt IFRS 9 (2009), IFRS 9 (2010), and IFRS 9 (2013) in its
financial statements for the annual period beginning on
January 1, 2014. Once the IASB has issued an effective
date for the standard, the Company will determine a
date of adoption. The extent of the impact of adoption
of IFRS 9 (2009), IFRS 9 (2010), and IFRS 9 (2013) has not
yet been determined.

Novation of Derivatives and Continuation of Hedge
Accounting

The

add a

contemplated

In June 2013, the IASB issued “Novation of Derivatives
and Continuation of Hedge Accounting” (Amendments
Instruments: Recognition and
to IAS 39 Financial
Measurement).
limited
amendments
exception to IAS 39, to provide relief from discontinuing
an existing hedging relationship when novation that was
not
hedging
documentation meets specific criteria. The amendments
are effective for annual periods beginning on or after
January 1, 2014. The Company intends to adopt the
amendments in its financial statements for the annual
period beginning January 1, 2014. The extent of the
impact of the adoption of the amendments has not yet
been determined.

original

the

Annual Improvements to IFRS (2010 – 2012) and
(2011 – 2013) cycles

the IASB issued narrow-scope
In December 2013,
amendments to a total of nine standards as part of its
annual improvements process. Amendments were made
to clarify items including the definition of vesting
conditions in IFRS 2 Share-based payment, disclosures
on the aggregation of operating segments in IFRS 8
Operating Segments, measurement of
short-term
receivables and payables under
IFRS 13 Fair Value
related party in IAS 24
Measurement, definition of
other
and
Related
amendments. Special
requirements have
been set
these amendments. Most
amendments will apply prospectively for annual periods
beginning on or after July 1, 2014, earlier application is

Disclosures
transitional

for certain of

Party

permitted. The Company intends
these
amendments in its financial statements for the annual
period beginning January 1, 2015. The extent of the
impact of adoption of the amendments has not yet been
determined.

to adopt

4. ACCOUNTS RECEIVABLE

Components of Accounts Receivable are as follows:

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

$ 37,173

$ 55,954

$ 81,477

Trade receivables
Less: Allowance for

doubtful accounts

(80)

(204)

(5,789)

Net trade

receivables

$ 37,093

$ 55,750

$ 75,688

Other receivables:
Commodity
taxes

Interest rate

swap

Government
Insurance
Other

27,727

34,561

26,141

8,446
14,727
1,664
21,377

7,855
3,209
1,500
14,658

8,204
5,684
1,850
15,937

$ 111,034

$ 117,533

$ 133,504

The aging of trade receivables is as follows:

As at
December 31,
2013

As at
December 31,
2012

Current
Past due 0-30 days
Past due 31-60 days
Past due 61-90 days
Past due > 90 days

$ 31,273
5,600
84
–
216

$ 37,173

$ 54,547
976
39
119
273

As at
January 1,
2012

$ 72,232
7,938
534
434
339

$ 55,954

$ 81,477

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company maintains an allowance for doubtful
accounts that represents its estimate of the uncollectible
losses estimated on
amounts based on specific
individual exposures.

The Company recorded an amount receivable from the
securitization facilities of $1.0 million on December 31,
2012 (January 1, 2012: $25.3 million net payable to the
facilities) netted against the notes receivable balance.
These amounts should not have been presented on a
net basis. These balances have been reclassified in the
comparative figures. The Company has determined that
these amounts were not material to its consolidated
statements for any prior interim or annual periods.

The Company has sold certain of its trade accounts
receivable under revolving securitization programs as
described in Note 25.

INVENTORIES

As at
December 31,
2013

As at
December 31,
2012

Raw materials
Work in process
Finished goods
Packaging
Spare parts

$ 39,302
18,662
166,407
22,582
40,833

$ 41,901
18,811
176,707
22,736
41,649

As at
January 1,
2012

$ 46,247
16,805
166,251
24,580
39,348

$ 287,786

$ 301,804

$ 293,231

During the year,
inventory in the amount of $3,401.1
million (2012: $3,490.0 million) was expensed through
cost of goods sold. There were no reversals of previous
write-downs recognized.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. BIOLOGICAL ASSETS

Balance at December 31, 2012
Additions and purchases
Depreciation
Change in fair value – realized
Change in fair value – unrealized
Further processing and sales
Transfers to assets held for sale

Hog stock

Poultry stock

Commercial

Parent

Commercial

Parent

Total

50,081
254,661
–
3,123
10,580
(245,100)
–

$ 16,144
6,720
(5,116)
–
–
–
–

$ 5,757
52,828
–
(163)
–
(52,545)
(2,765)

$ 6,145
3,557
(5,183)
–
–
–
(2,984)

$ 78,127
317,766
(10,299)
2,960
10,580
(297,645)
(5,749)

Balance at December 31, 2013

73,345

$ 17,748

$ 3,112

$ 1,535

$ 95,740

Balance at January 1, 2012
Additions and purchases
Additions due to business acquisitions
Depreciation
Change in fair value – realized
Change in fair value – unrealized
Further processing and sales

Hog stock

Poultry stock

Commercial (i)

Parent

Commercial (i)

Parent

Total

31,613
138,856
17,255
–
(274)
(3,125)
(134,244)

$ 8,149
4,090
7,410
(3,505)
–
–
–

4,623
52,412
–
–
(518)
481
(51,241)

$ 4,880
7,975
–
(6,710)
–
–
–

$ 49,265
203,333
24,665
(10,215)
(792)
(2,644)
(185,485)

Balance at December 31, 2012

50,081

$ 16,144

5,757

$ 6,145

$ 78,127

(i)

Amounts have been adjusted to conform to the current year’s presentation, as the result of the adoption of IFRS 13 Fair Value
Measurement.

Hog stock is comprised of approximately 0.7 million
animals as of December 31, 2013 (December 31, 2012:
0.6 million; January 1, 2012: 0.3 million). During the year,
substantially all hog stock was transferred to the
Company’s primary processing operations.

Poultry stock is comprised of approximately 6.5 million
eggs and 0.2 million birds as of December 31, 2013
(2012: 6.1 million eggs and 0.6 million birds; January 1,
2012: 6.2 million eggs and 0.5 million birds). During the
year, substantially all poultry stock was transferred to the
Company’s primary processing operations.

The change in fair value of commercial hog and poultry
stock for the year was a gain of $13.5 million as at
December 31, 2013 (2012: loss of $3.4 million) recorded
in cost of sales. The fair value measures of commercial
hog stock have been categorized as Level 3 fair value
based on inputs to the valuation techniques used. There
were no transfers between levels during the year ended
December 31, 2013.

The Company uses the market comparison approach to
determine the fair value of its commercial hog stock. The
valuation model is based on the market price of hog stock
of similar age, weight, breed, and genetic make-up. The
model is based on the U.S. dollar market price per cut
weight and adjusted for foreign exchange, conversion
to kilograms, and specific significant
from pounds

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

unobservable inputs, including a quality index adjustment
and a market conversion factor, as defined below.

The quality index adjustment
is a value adjustment
based on the relative quality of a processed hog based
on the lean yield (being the ratio between muscle and
fat content) and total weight. Quality adjustments range
from 7.1% to 7.8%. A higher (lower) quality adjustment
percentage will result in an increase (decrease) to the fair
market value of the commercial hog stock.

The market conversion factor is a market adjustment
used to discount the formula from a U.S. market price to
a Canadian pricing model. The market conversion factor
experiences minimal fluctuation. A higher (lower) market
conversion factor will result in an increase (decrease) to
the fair market value of the commercial hog stock.

The Company has established environmental policies
and procedures which comply with local environmental
and other laws. Management performs regular reviews
to identify environmental risks and to ensure that the
systems in place are adequate to manage those risks.

The Company’s biological asset operations can be
affected by outbreaks of disease among livestock. To
mitigate this risk, the Company monitors herd health
strict bio-security procedures and
status and has
employee training programs throughout
its livestock
production operation.

7. ASSETS HELD FOR SALE

Assets held for sale

Inventories
Property and equipment
Investment properties
Intangible assets

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As at December 31, 2013

As at December 31, 2012

Investment
Properties

Total

Poultry farm

–
–
5,206
–

–
2,560
–
20,432

Potato
processing
facility

$ 6,148
6,528
–
–

Investment
Properties

Total

–
–
1,419
–

$ 6,148
9,088
1,419
20,432

$ 5,206

$ 22,992

$ 12,676

$ 1,419

$ 37,087

There were no assets held for sale as at January 1, 2012.

Turkey Agricultural Operations

A brief description of the assets and liabilities held for
sale is as follows:

Sale of Businesses

During the year, certain assets and liabilities of the
animal by-product recycling operations (“Rothsay”) and
the fresh pasta and sauce business (“Olivieri”) were
transferred to assets held for sale and were subsequently
de-recognized upon the sale in the fourth quarter. Refer
to Note 22 for further details.

Investment Properties

The Company intends to dispose of various investment
properties it no longer utilises. Investment properties are
included in non-allocated assets. During the year, the
Company sold various investment properties for total
proceeds of $15.7 million, resulting in a pre-tax gain of
$12.6 million.

Assets related to the Company’s turkey agricultural
operations in Thamesford, Ontario were classified as
held for sale during the year. The sale of these assets
was completed during the third quarter,
for net
proceeds of $46.3 million, resulting in a pre-tax gain of
$9.7 million. Prior to their disposal, the assets of the
turkey agricultural operations were included in the Meats
Products Group for segmented reporting.

Poultry Farm

These assets related to a poultry farm and related
production quotas
in Brooks, Alberta, originally
purchased on February 1, 2012, and immediately
classified as assets held for sale. During the year, the
Company sold the poultry farm assets for proceeds of
$21.1 million, resulting in a $nil pre-tax gain. Prior to its
disposal, the poultry farm assets were included in the
Meat Products Group for segmented reporting.

Potato Processing Facility

The assets related to the Company’s potato processing
facility in Lethbridge, Alberta, were classified as held for
sale on December 31, 2012, and the sale of these assets
to Cavendish Farms Corporation was completed on
January 4, 2013, for proceeds of $58.1 million, resulting
in a pre-tax gain of $45.4 million. Prior to its disposal, the
assets of the potato processing facility were included in
the Meat Products Group for segmented reporting.

Further details on the gain from disposal of assets held
for sale is described in Note 19.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. PROPERTY AND EQUIPMENT

Cost

Balance at December 31, 2012

Additions (i)
Disposal of business
Disposals
Transfers from under construction
Transfers to investment properties
Interest capitalized
Foreign currency translation
Other

Land

Buildings

Machinery and
equipment

Under
construction

$ 75,289
–
(4,756)
(2,793)
2,385
(3,173)
–
269
432

$ 729,168
272
(46,534)
(23,065)
173,813
(19,519)
120
3,867
1,358

$ 1,619,862
12,414
(202,601)
(87,542)
146,380
–
587
13,660
(1,063)

$ 272,529
358,016
(15,398)
(47)
(322,578)
–
14,501
1,902
(327)

Total

$ 2,696,848
370,702
(269,289)
(113,447)
–
(22,692)
15,208
19,698
400

Balance at December 31, 2013

$ 67,653

$ 819,480

$ 1,501,697

$ 308,598

$ 2,697,428

Accumulated depreciation

Balance at December 31, 2012

Depreciation
Disposal of business
Disposals
Impairment
Reversal of impairment
Restructuring related write-downs
Transfers to investment properties
Foreign currency translation
Other

Balance at December 31, 2013

–
–
–
–
–
–
–
–
–
–

–

$ 330,074
19,088
(24,176)
(14,732)
–
(1,388)
15,242
(13,972)
1,173
17

$ 1,154,597
109,469
(139,606)
(84,091)
3,044
–
9,837
–
9,626
(92)

$ 311,326

$ 1,062,784

–
–
–
–
–
–
–
–
–
–

–

$ 1,484,671
128,557
(163,782)
(98,823)
3,044
(1,388)
25,079
(13,972)
10,799
(75)

$ 1,374,110

Net at December 31, 2013

$ 67,653

$ 508,154

$ 438,913

$ 308,598

$ 1,323,318

(i)

Includes a change in accruals of $24.2 million.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Cost

Balance at January 1, 2012

Additions
Acquisitions of business
Transfers to assets held for sale
Restructuring related write-downs
Transfers from under construction
Transfers to investment properties
Interest capitalized
Foreign currency translation
Other

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Land

Buildings

Machinery and
equipment

Under
construction

$ 61,464
13,302
5,229
(249)
(1,048)
–
(1,036)
403
(15)
(2,761)

$ 697,024
24,403
18,914
(4,904)
(6,547)
5,473
(6,432)
1,868
(403)
(228)

$ 1,571,184
92,307
4,852
(22,069)
(60,475)
27,609
–
2,800
(1,965)
5,619

$ 161,560
149,101
52
–
–
(33,082)
–
–
38
(5,140)

Total

$ 2,491,232
279,113
29,047
(27,222)
(68,070)
–
(7,468)
5,071
(2,345)
(2,510)

Balance at December 31, 2012

$ 75,289

$ 729,168

$ 1,619,862

$ 272,529

$ 2,696,848

Accumulated depreciation

Balance at January 1, 2012

Additions
Transfers to assets held for sale
Disposals
Transfers to investment properties
Foreign currency translation
Other

Balance at December 31, 2012

–
–
–
–
–
–
–

–

$ 300,256
21,871
(552)
6,683
(4,344)
(188)
6,348

$ 1,123,730
101,248
(17,583)
(41,395)
–
(1,757)
(9,646)

$ 330,074

$ 1,154,597

–
–
–
–
–
–
–

–

$ 1,423,986
123,119
(18,135)
(34,712)
(4,344)
(1,945)
(3,298)

$ 1,484,671

Net at December 31, 2012

$ 75,289

$ 399,094

$ 465,265

$ 272,529

$ 1,212,177

Borrowing Costs

During the year, borrowing costs of $15.2 million were
capitalized (2012: $5.1 million), using an average
capitalization rate of 5.4% (2012: 5.5%).

INVESTMENT PROPERTY

Investment property is comprised of surplus land and
buildings primarily resulting from restructuring activities.

rental

During the year, the Company earned $0.2 million (2012:
$0.3 million) of
revenue from investment
properties and recorded operating costs related to
investment properties of $2.7 million (2012: $2.1 million).
Rental revenue and related operating costs are recorded
in other income unless these amounts were anticipated
under a restructuring plan,
in which case they are
recorded against a related restructuring provision, to the
extent that one exists, with any excess then recorded in
other income.

The fair value of the Company’s investment properties
was $30.5 million at December 31, 2013, (December 31,
2012: $33.8 million; January 1, 2012: $27.6 million) and is
determined using the market comparable approach,
which reflects recent
transaction prices for similar
properties and are categorized as a Level 3 in the fair
value hierarchy.
the
properties, the highest and best use of the properties is
for
or
in manufacturing
redevelopment, which differs from the current use as idle
these
properties. The difference in use arises as
properties have become surplus land and buildings,
primarily resulting from restructuring activities, and are
therefore no longer utilized in the Company’s ongoing
operations.

In estimating the fair value of

operations

utilization

In 2013, the Company obtained external appraisals or
opinions of value for a total of $10.5 million of the
Company’s investment properties (December 31, 2012:
the other
$nil; January 1, 2012: $14.0 million). For
investment properties, the Company determined the fair
value based on comparable market information.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The continuity of investment property for the years ended December 31, 2013 and 2012 is as follows:

Land

Buildings

Total

$ 6,099
3,173
(2,864)
(196)
88

$ 22,993
19,519
(10,709)
(2,044)
57

$ 29,092
22,692
(13,573)
(2,240)
145

$ 6,300

$29,816

$36,116

–
–
–
–
–
1,124
7

$ 17,113
13,972
(8,367)
184
(1,212)
383
47

$ 17,113
13,972
(8,367)
184
(1,212)
1,507
54

$ 1,131

$22,120

$23,251

$ 5,169

$ 7,696

$12,865

Land

Buildings

Total

$ 5,680
1,036
(485)
(123)
–
(9)

$ 22,105
6,432
(4,351)
(1,145)
22
(70)

$ 27,785
7,468
(4,836)
(1,268)
22
(79)

$ 6,099

$ 22,993

$ 29,092

–
–
–
–
–
–

–

$ 16,553
4,344
(3,417)
333
(698)
(2)

$ 17,113

$ 6,099

$ 5,880

$ 11,979

Cost

Balance at December 31, 2012

Transfers from property and equipment
Reclassification to assets held for sale
Disposals
Foreign currency translation

Balance at December 31, 2013

Accumulated depreciation

Balance at December 31, 2012

Transfers from property and equipment
Reclassification to assets held for sale
Depreciation
Disposals
Impairment
Foreign currency translation

Balance at December 31, 2013

Net at December 31, 2013

Cost

Balance at January 1, 2012

Transfers from property and equipment
Reclassification to assets held for sale
Disposals
Other
Foreign currency translation

Balance at December 31, 2012

Accumulated depreciation

Balance at January 1, 2012

Transfers from property and equipment
Reclassification to assets held for sale
Depreciation
Disposals
Foreign currency translation

Balance at December 31, 2012

Net at December 31, 2012

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

10. EMPLOYEE BENEFITS

The Company sponsors several defined benefit pension
plans for Canadian employees which are either final
salary plans, career salary plans, service based plans, or a
combination thereof. The Company also sponsors a final
salary defined benefit pension plan in the U.K. in which
membership is closed. These defined benefit plans
require contributions to be made to a separately
administered fund. Certain retired employees are
covered under a post-retirement benefit plan, which
reimburses certain medical costs and provides life
insurance coverage.

The Canadian plans are governed by the pension laws of
the province in which the respective plan is registered.
The U.K. plan is governed by the employment laws of
the U.K.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company’s pension funding policy is to contribute
amounts sufficient, at minimum, to meet local statutory
the Company’s defined
funding requirements. For
benefit pension plans,
local regulatory bodies either
define minimum funding requirements or approve
funding plans submitted by the Company. From time to
time the Company may make additional discretionary
contributions taking into account actuarial assessments
and other factors. The contributions that have been
made to support ongoing plan obligations have been
recorded in the respective asset or liability accounts on
our consolidated balance sheet. Actuarial valuations for
the Company’s defined benefit pension plans are
completed based on the regulations in place in the
jurisdictions where the plans operate.

Information about the Company’s defined benefit plans as at December 31, in aggregate, is as follows:

Accrued benefit obligation:

Balance, beginning of year
Current service cost
Interest cost
Benefits paid from plan assets
Benefits paid directly from the Company
Actuarial (gains) losses – experience
Actuarial (gains) losses – demographic

experience

Actuarial (gains) losses – financial

assumptions

Employee contributions
Special termination benefits
Curtailments
Settlements

Other post-
retirement
benefits

Total
pension

Other post-
retirement
benefits

2013
Total

Total
pension

(Restated)
(Note 32)

2012
Total

(Restated)
(Note 32)

$ 84,924
232
3,113
–
(3,309)
(22,938)

$ 1,356,759
21,668
50,434
(78,067)
(1,713)
(14,871)

$ 1,441,683
21,900
53,547
(78,067)
(5,022)
(37,809)

$ 78,278
645
3,458
–
(3,217)
(937)

$ 1,236,999
19,773
55,209
(75,391)
(1,816)
(2,425)

$ 1,315,277
20,418
58,667
(75,391)
(5,033)
(3,362)

–

805

8,742

9,547

(4,560)
–
–
–
–

(117,594)
4,633
2,547
(5,182)
(17,274)

(122,154)
4,633
2,547
(5,182)
(17,274)

7,002
–
–
(1,110)
–

123,964
4,515
2,080
(1,780)
(13,111)

130,966
4,515
2,080
(2,890)
(13,111)

Balance, end of year

$ 57,462

$ 1,201,340

$ 1,258,802

$ 84,924

$ 1,356,759

$ 1,441,683

Unfunded
Funded (i)

Total obligation

$ 57,462
–

31,055
1,170,285

88,517
1,170,285

$ 84,924
–

31,243
1,325,516

$ 116,167
1,325,516

$ 57,462

$ 1,201,340

$ 1,258,802

$ 84,924

$ 1,356,759

$ 1,441,683

(i)

Includes wholly and partially funded plans

Plan Assets

Fair value, beginning of year

Interest income
Actuarial gains (ii)

Employer contributions
Employee contributions
Benefits paid
Administrative costs
Settlements

Fair value, end of year

Other

–
–
–
–
–
–
–
–

–

$ 1,130,060
41,350
114,018
15,526
4,633
(78,067)
(4,593)
(19,752)

$ 1,203,175

(1,261) $

(1,261)

–
–
–
–
–
–
–
–

–

$ 1,099,993
48,392
54,420
17,744
4,515
(75,391)
(5,580)
(14,033)

$ 1,130,060

(1,479)

Accrued benefit asset (liability), end of year

$ (57,462) $

574

(56,888)

$ (84,924) $ (228,178)

$ (313,102)

(ii)

Return on plan assets greater (less) than discount rate

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amounts recognized in the consolidated balance sheet
consist of:

The significant actuarial assumptions adopted in
measuring the Company’s accrued benefit obligations
and net benefit plan expense are as follows:

Weighted average discount rate

used to calculate the net benefit
plan expense

Weighted average discount rate

used to calculate year end benefit
obligation

Rate of compensation increase
Medical cost trend rates

Plan assets comprise of:

2013

2012

3.75%

4.50%

4.50%
3.50%
5.50%

3.75%
3.50%
6.00%

Equity securities
Debt securities
Other investments and

cash

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

62%
36%

100%

60%
37%

100%

59%
38%

100%

Of the equity securities 30% are a level 1 on the fair
value hierarchy, with the remainder being level 2. All of
the debt securities are a level 2, on the fair value
hierarchy.

Other post-
retirement
benefits

$ 1,481
$ (1,444)

N/A

$ 1,829

Total

$ 38,834
$ (37,649)

$ 3,452

$ 38,887

Actuarial Assumption

Period end Discount rate

Rate of salary increase

Mortality

Measurement dates:

2013 expense
Balance sheet

December 31, 2012
December 31, 2013

The average expected maturity of
the pension
obligations is 12.7 years (December 31, 2012: 12.6 years,
January 1, 2012: 13.8 years).

The Company expects to contribute $46.2 million to
pension plans in 2014, inclusive of defined contribution
plans and multi-employer plans.

Governance and Risk Management

The Company administers its pension plans through its
Board of Directors. The Company’s Board of Directors
has established a governance structure and delegated to
the Audit Committee and the Pension Investment
Advisory Committee all aspects of the investment of the
funds. The Company’s Board of Directors has delegated
to the Pension Policy and Administration Committee the
authority to make amendments to the documents that
govern the pension plans of an administrative or
compliance nature, that relate to collective bargaining
agreements entered into by the Company or that have a
minimal financial impact on the plans.

In fulfilling their responsibilities, the Audit Committee
and the Pension Investment Advisory Committee may
delegate functions or responsibilities to, or otherwise
utilize employees of the Company where appropriate.
The Audit Committee and the Pension Investment
Advisory Committee may rely on independent experts
for certain aspects of the funds’ operations. The Audit
Committee or
Investment Advisory
Committee, as appropriate,
retain responsibility and
utilize suitable personnel for such activities and monitor
the activities undertaken by the selected personnel.

the Pension

The Supplemental Retirement Plan for the Managers of
Multi-Marques Inc. is registered in Québec, Canada, and
therefore, operates under the regulations established by
the Régis des rentes du Québec. As required by the
the plan is administered by the Multi-
regulations,
Marques Pension Committee and is responsible for all
aspects of the operations of the Multi-Marques Plan. The
Multi-Marques Pension Committee has delegated certain
aspects of its responsibilities and powers, regarding the
operations of the Multi-Marques Plan, to the Company.

the constraints set out

The plan assets are invested primarily in well diversified
pooled funds that meet
in
legislation of the jurisdictions in which the plans operate.
in investment
Further diversification criteria set out
funds’ governing documents require the division of
investments between equities and fixed income. There
are no significant concentration of risks.

Multi-Employer Plans

The Company contributes
to both the Canadian
Commercial Workers Industry Pension Plan and the
Bakery and Confectionery Union and Industry Canada
Pension Fund, which are multi-employer defined benefit
plans for employees who are members of the United
Food and Commercial Workers Union and the Canadian
Bakery and Confectionary Union, respectively. These are
large-scale plans for union workers of multiple companies
across Canada and the U.S. Adequate information to
account for these contributions as a defined benefit plan
in the Company’s statements is not available due to the
size and number of contributing employers in the plan.
Included in pension benefit expense is $6.0 million (2012:
$5.1 million) related to payments into these plans. The
Company expects to contribute $5.7 million into these
plans for the 2014 year.

11. GOODWILL

The continuity of goodwill
December 31, 2013 and 2012 is as follows:

for

the years ended

Cost

Opening balance

Acquisitions (Note 30)
Disposals
Foreign currency translation

Balance

Impairment losses

Opening balance
Impairment
Foreign currency translation

Balance

December 31,
2013

December 31,
2012

$ 851,659
–
(33,647)
8,028

$ 826,040

$ (98,503)
(356)
(6,383)

$(105,242)

$ 850,922
470
–
267

$ 851,659

$ (97,183)
–
(1,320)

$ (98,503)

Net carrying amounts

$ 720,798

$ 753,156

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the purposes of annual impairment testing, goodwill
is allocated to the following groups of CGUs, being the
groups expected to benefit from the synergies of the
business combinations in which the goodwill arose:

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

$ 428,236

$ 442,925

$ 442,336

–

13,845

CGU Groups

Meat products
By-product

recycling (i)
Canadian Fresh

Bakery

173,839

North American
Frozen Bakery

Fresh Pasta (i)

118,723
–

117,077
5,470

118,249
5,470

$ 720,798

$ 753,156

$ 753,739

(i)

The goodwill related to the by-product recycling operations
(“Rothsay”) and Fresh Pasta (“Olivieri”) were disposed of
during the year ended December 31, 2013. Refer to Note 22
for further details.

impairment

Annual
testing involves determining the
recoverable amount of each CGU group to which
goodwill is allocated, and comparing this to the carrying
value of the group. The measure of the recoverable
amount of each CGU group was calculated based on fair
value less costs to sell. Fair value is determined based on
anticipated net proceeds for CGU groups that are held
for disposal.
information
available, fair value was determined by discounting the
future cash flows generated from the continuing use of
the group. The calculation of the fair value based on
discounting the future cash flows was based on the
following key assumptions:

there was no market

(cid:129) Cash flows were projected based on the Company’s
long-term business plan. Cash flows for a further
perpetual period were extrapolated using the growth
rates listed below. These rates do not exceed the
long-term average growth rate for the countries in
which the segments operate. The Company’s cash

12. INTANGIBLE ASSETS

Indefinite life
Definite life

Total intangible assets

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

flow projections include estimated benefits from the
implementation of the Company’s Strategic Value
Creation Initiatives, as discussed in Note 17. Material
differences in these estimates could have a significant
impact on the determination of
the recoverable
amount.

(cid:129) The business plan contains forecasts up to, and
including, the year 2015, and was based on past
experience of actual operating results in conjuncture
with anticipated future growth opportunities. While
the forecast does assume some base business
expansion, largely related to innovation, the primary
engine of growth is strategic in nature and is
consistent with the projects and expectations as
articulated in the Company’s strategic plan.

(cid:129) Discount rates as shown in the table below were
applied in determining the recoverable amount of
each CGU group. The discount rate was estimated
based on past experience and the weighted average
cost of capital of the Company and other competitors
in the industry.

Discount Rate

Growth Rate

CGU Group

2013

2012

2013

Meat products
By-product recycling (i)
Canadian Fresh

14.2%
N/A

13.7%
8.8%

2.3%
N/A

2012

2.2%
2.2%

Bakery

10.6%

10.7%

2.3%

2.2%

North American
Frozen Bakery

Fresh Pasta (i)

9.8%
N/A

8.6%
9.1%

2.6%
N/A

2.5%
2.2%

(i)

The recoverable amount for the by-product recycling and
Fresh Pasta CGU Groups were determined based on
anticipated
Therefore,
determination of discount
rate and growth rate for
discounting future cash flows was not required.

proceeds

disposal.

net

The values assigned to the key assumptions represent
future trends in the
Management’s assessment of
industries in which the CGU groups operate and are
based on both external and internal sources and
historical trend data.

As at December 31,
2013

As at December 31,
2012

As at January 1,
2012

$ 71,676
126,902

$ 198,578

$ 81,335
127,458

$ 208,793

$ 81,569
110,327

$ 191,896

Cost

Balance at December 31, 2012

Additions
Capitalization of interest
Transfers
Other
Effect of movement in exchange rates

Software in
use

$ 102,889
–
–
18,631
1,599
–

Software
in process

$ 28,228
12,280
772
(18,631)
(686)
–

Balance at December 31, 2013

$ 123,119

$ 21,963

$ 14,035
12,034
–
913
–

$ 26,982

–
–
–
–
–

–

$ 96,137

$ 21,963

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Definite Life

Trademarks

Customer
relationships

$ 8,215
–
–
–
–
5

$ 8,220

$ 7,468
567
–
–
–

$ 8,035

$ 185

$ 13,143
–
–
–
–
900

Total

$ 152,475
12,280
772
–
913
905

$ 14,043

$ 167,345

$ 3,514
476
1,255
–
181

$ 25,017
13,077
1,255
913
181

$ 5,426

$ 40,443

$ 8,617

$ 126,902

Indefinite Life

Trademarks

$ 52,282
–
–
(1,335)

Delivery
routes

846
2,403
–
(2,673)

Quota

Total

$ 28,207
–
(8,054)
–

$ 81,335
2,403
(8,054)
(4,008)

$ 50,947

576

$ 20,153

$ 71,676

Definite Llife

Software
in use

Software
in process

Trademarks

Customer
relationships

$ 40,959
–
–
61,930
–

$ 63,597
24,731
1,830
(61,930)
–

$ 8,220
–
–
–
(5)

$ 12,948
–
–
–
195

Total

$ 125,724
24,731
1,830
–
190

$ 102,889

$ 28,228

$ 8,215

$ 13,143

$ 152,475

5,589
8,446

$ 14,035

–
–

–

$ 6,777
691

$ 3,031
483

$ 15,397
9,620

$ 7,468

$ 3,514

$ 25,017

$ 88,854

$ 28,228

$ 747

$ 9,629

$ 127,458

Indefinite Life

Delivery
routes

$ 924
2,490
–
–
(2,568)

Quota

Total

$ 28,363
–
28,100
(28,100)
(156)

$ 81,569
2,490
28,100
(28,100)
(2,724)

Trademarks

$ 52,282
–
–
–
–

$ 52,282

$ 846

$ 28,207

$ 81,335

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Amortization and impairment losses

Balance at December 31, 2012

Amortization
Impairment loss
Other
Effect of movement in exchange rates

Balance at December 31, 2013

Net at December 31, 2013

Carrying amount

Balance at December 31, 2012

Additions
Transfer to assets held for sale
Disposals

Balance at December 31, 2013

Cost

Balance at January 1, 2012

Additions
Capitalization of interest
Transfers
Effect of movement in exchange rates

Balance at December 31, 2012

Amortization and impairment losses

Balance at January 1, 2012

Amortization

Balance at December 31, 2012

Net at December 31, 2012

Carrying amount

Balance at January 1, 2012

Additions
Acquisition of business
Transfer to assets held for sale
Disposals

Balance at December 31, 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Amortization

Amortization is recorded through cost of goods sold or
selling, general, and administrative expenses depending
on the nature of the asset.

Borrowing Costs

During the year borrowing costs of $0.8 million (2012:
$1.8 million) were capitalized using an average
capitalization rate of 5.4% (2012: 5.5%).

Indefinite Life Intangibles

The following table summarizes the indefinite life
intangible assets by CGU group:

CGU Groups

Meat Products
Fresh Bakery

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

$ 66,853
4,823

$ 71,676

$ 74,908
6,427

$ 75,063
6,506

$ 81,335

$ 81,569

goodwill, as described in Note 11, involves determining
the recoverable amount of each indefinite life intangible
to the carrying value. The
asset and comparing it
recoverable values of
the Company’s indefinite life
intangible assets are determined as follows:

Trademarks

The recoverable value of trademarks is calculated using
the royalty savings approach, which involves present
valuing the royalties earned by similar trademarks. The
key assumptions used in this determination are:

Royalty rate range
Growth rate range
Discount rate

Quotas

2013

2012

0.5 - 2.0%
1.0 - 2.0%
10.0%

0.5 - 2.0%
1.0 - 4.0%
10.0%

The recoverable value of quotas is determined based on
recent sales of similar quota, as this is an active market
and reliable information is readily available.

The Company performs annual impairment testing on its
impairment
indefinite life intangible assets. Annual
testing for
testing, consistent with the impairment

Delivery Routes

The recoverable value of delivery routes is determined
based on discounted projected cash flows.

13. PROVISIONS

Balance at December 31, 2012

Charges
Reversals
Cash payments
Non-cash items
Foreign currency translation

Balance at December 31, 2013

Current
Non-current

Total at December 31, 2013

Balance at January 1, 2012 (ii)

Charges
Reversals
Cash payments
Non-cash items

Balance at December 31, 2012

Current
Non-current

Total at December 31, 2012

Legal

$ 741
–
(43)
(137)
–
–

Environ-
mental

Lease
make-good

$ 16,071
–
(3,148)
(314)
–
(6)

$ 6,098
83
(1,769)
–
–
324

Restructuring
and other

related costs (i)

$ 29,225
74,393
(7,365)
(37,667)
(2,231)
201

Total

$ 52,135
74,476
(12,325)
(38,118)
(2,231)
519

$ 561

$ 12,603

$ 4,736

$ 56,556

$ 74,456

Legal

$ 909
538
(335)
(167)
(204)

$ 741

Environ-
mental

Lease
make-good

$ 22,480
482
(6,274)
(255)
(362)

$ 16,071

$ 5,849
174
–
–
75

$ 6,098

Restructuring
and other

related costs (i)

$ 43,953
24,030
(6,631)
(34,331)
2,204

$ 29,225

$ 54,853
19,603

$ 74,456

Total

$ 73,191
25,224
(13,240)
(34,753)
1,713

$ 52,135

$ 26,335
25,800

$ 52,135

(i)

(ii)

For additional information on restructuring and other related costs, see the table below.
The January 1, 2012, balance included $44.3 million of current provisions, and $28.9 million of non-current provisions

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

The following tables provide a summary of provisions recorded in respect of restructuring and other related costs as at
December 31, 2013 and 2012 all on a pre-tax basis:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Balance at December 31, 2012

Charges
Reversals
Cash payments
Non-cash items
Foreign currency translation

Severance

$ 14,996
44,480
(5,529)
(26,421)
612
(314)

Site closing
and other
cash costs

$ 11,490
7,792
(769)
(6,244)
(660)
515

Retention

Pension

561
22,075
(1,067)
(5,002)
41
–

$ 2,178
46
–
–
(2,224)
–

Restructuring
and other
related
costs

$ 29,225
74,393
(7,365)
(37,667)
(2,231)
201

Balance at December 31, 2013

$ 27,824

$ 12,124

$ 16,608

–

$ 56,556

Balance at January 1, 2012

Charges
Reversals
Cash payments
Non-cash items
Other

Site closing
and other
cash costs

$ 16,813
4,464
(2,524)
(8,442)
1,485
(306)

Severance

$ 25,692
17,006
(3,955)
(24,691)
–
944

Retention

Pension

$ 1,448
1,101
(152)
(1,198)
–
(638)

–
1,459
–
–
719
–

Balance at December 31, 2012

$ 14,996

$ 11,490

$ 561

$ 2,178

14. BANK INDEBTEDNESS AND LONG-TERM DEBT

Restructuring
and other
related costs

$ 43,953
24,030
(6,631)
(34,331)
2,204
–

$ 29,225

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

Bank indebtedness (a), (b)

Notes payable:

due 2011 to 2016 (CAD$24.9 million) (c)
due 2014 (US$98.0 million and CAD$105.0 million) (d)
due 2015 (CAD$90.0 million) (e)
due 2015 (CAD$7.0 million) (f)
due 2016 (US$7.0 million and CAD$20.0 million) (d)
due 2020 (CAD$30.0 million) (f)
due 2021 (US$213.0 million and CAD$102.5 million) (f)

Revolving term facility (a)
Other (g)

Less: Current portion

Long-term debt

The notes payable and the revolving term facility require
the maintenance
at
December 31, 2013, the Company was in compliance
with all of these covenants.

covenants. As

certain

(a) On October 31, 2012, the Company increased its
existing committed revolving credit
facility by
$250.0 million to $1.05 billion and extended the
term by one year to May 16, 2016. The facility was
increased using the same syndicate of Canadian,

48,243

$ 36,404

4,408

–
208,894
89,330
7,000
27,228
29,689
327,399
255,000
9,452

26,270
202,069
89,488
7,000
26,778
29,814
312,715
510,000
9,384

$ 953,992
209,780

$ 1,213,518
6,573

$ 32,029
203,883
89,270
7,000
26,942
29,777
316,868
240,000
1,805

$ 947,574
5,618

$ 744,212

$ 1,206,945

$ 941,956

institutions. The facility can
U.S., and international
be drawn in Canadian or U.S. dollars and bears
interest payable monthly, based on Banker’s
Acceptance and Prime rates for Canadian dollar
loans and LIBOR for U.S. dollar
loans. As at
December 31, 2013, Canadian dollar loans of $255.0
million
$510.0 million;
January 1, 2012: $240.0 million) were drawn and
letters of credit of $93.8 million (December 31, 2012:
$111.3 million; January 1, 2012: $131.5 million) were

(December

2012:

31,

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

available

swing-line.

outstanding. In addition, within the facility, there is a
$70.0 million
at
December 31, 2013, there were no overdraft loans
drawn on the swing-line (December 31, 2012:
$39.5 million; January 1, 2012: $49.0 million,
classified as bank indebtedness). Total utilization
under
the facility at December 31, 2013, was
$348.8 million (December 31, 2012: $660.8 million;
January 1, 2012: $420.5 million). Due to the sale of
its
Rothsay, the Company has $251.1 million of
credit
for debt
repayment purposes until no later than January
the
2015. The facility will be used to meet
Company’s
for general
funding requirements
corporate purposes, and to provide appropriate
levels of
liquidity. The lending covenants in the
facility are largely consistent with the Company’s
existing credit arrangements.

restricted exclusively

facility

(December 31, 2012: £nil

(b) The Company has a demand operating line of credit
bearing interest at LIBOR of £5.0 million ($8.8
million) to provide short-term funding for its U.K.
operations. As at December 31, 2013, £2.5 million
($4.4 million)
($nil);
January 1, 2012: £2.0 million ($3.2 million)) was
outstanding on the line of credit and has been
classified as bank indebtedness. The Company has
an overdraft operating facility bearing interest at the
Bank of England Base Rate of £5.0 million
($8.8 million). As at December 31, 2013, £2.0 million
(December 31, 2012: £2.1 million
($3.6 million)
($3.3 million);
£4.4 million
2012:
($6.8 million)) was outstanding on the overdraft
operating facility and reduced the Company’s cash
and cash equivalents. The Company also has
additional on demand operating facilities of
$40.0 million available in Canada and US$10.0
million in the U.S. ($10.7 million) bearing interest at
Prime rates. As at December 31, 2013, $nil
(December 31, 2012: $20.0 million; January 1, 2012:
$20.0 million) was outstanding and reduced the
Company’s cash and cash equivalents. All of these
facilities are uncommitted.

January

(c)

the acquisition of

the
In April 2004 as part of
Schneider Corporation,
the Company assumed
liabilities outstanding in respect of debentures
previously issued by the Schneider Corporation. The
debentures provided for principal payments totaling
$13.1 million and $60.0 million, bearing interest at
fixed annual rates of 10.0% and 7.5%, respectively.
The
principal
required
repayments over the term of the bonds and had a
final maturity date of October 2016. 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

annual

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

debentures on an effective yield basis. In October
2013, the Company repaid the remaining principal
balance of the debentures, including a make-whole
premium, for a total of $28.2 million resulting in a
$1.4 million loss on early retirement of debt, which
was recorded in interest expense as other financing
costs.

(d)

In December 2004, the Company issued $500.0
million of notes payable. The notes were issued in
five tranches of U.S.
and Canadian dollar-
denominations, with maturity dates from 2011 to
2016 and bearing interest at fixed annual coupon
rates.

In December 2011, the Company repaid US$207.0
million of notes payable, bearing interest at
5.2% per annum. Through the use of cross-currency
interest
the Company effectively
converted US$177.0 million of these notes payable
into Canadian dollar-denominated debt bearing
interest at an annual fixed rate of 5.4%. The cross-
currency swaps were settled in December 2011.

rate swaps,

Details of the remaining four tranches are as follows:

Principal

Maturity Date

Annual Coupon

US$98.0 million
CAD$105.0 million
US$7.0 million
CAD$20.0 million

2014
2014
2016
2016

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$98.0 million of debt maturing in 2014
into Canadian dollar-denominated debt bearing
interest at an annual fixed rate of 6.0%; as well as
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,
2013, the fair value of the swap liabilities were $31.6
million (December 31, 2012: $40.1 million; January 1,
2012: $38.6 million) based on year end exchange
rates.

In April 2010 and May 2010, the Company issued
$75.0 million of notes payable, bearing interest at
6.08% per annum and $15.0 million of notes
payable, bearing interest at 5.76% per annum,
respectively. The notes payable have a maturity
date of April 2015.

the Company issued notes
In December 2010,
payable in tranches of U.S.
and Canadian
dollar-denominations, with maturity dates from 2015
to 2021 and bearing interest at fixed annual coupon
of
rates.
CAD$37.0 million
and
US$213.0 million and CAD$102.5 million in January
2011.

received proceeds

The Company

in December

2010

(e)

(f)

Details of the four tranches are as follows:

15. OTHER LONG-TERM LIABILITIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Principal

Maturity Date

Annual Coupon

CAD$7.0 million
CAD$30.0 million
CAD$102.5 million
US$213.0 million

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 with
interest at an annual
fixed rate of 6.1%. At
December 31, 2013, the fair value of the swap assets
swap
were $5.9 million (December 31, 2012:
liabilities $6.0 million; January 1, 2012:
swap
liabilities $8.9 million) based on year end exchange
rates.

(g) The Company has other various lending facilities,
with interest rates ranging from non-interest bearing
to 2.9% per annum. These facilities are repayable
over various terms from 2014 to 2022. As at
December 31, 2013, $23.9 million (December 31,
2012: $20.6 million; January 1, 2012: $11.6 million)
was outstanding, of which $14.5 million (December
31, 2012: $11.2 million; January 1, 2012: $9.8 million)
was in respect to letters of credit. All of these
facilities are committed except for the letters of
credit.

(h) The Company’s estimated average effective cost of
borrowing for 2013 was approximately 5.7% (2012:
5.7%) after taking into account the impact of interest
rate hedges. The weighted average term of the
Company’s debt is 3.5 years (2012: 4.0 years).

Required repayments of
follows:

long-term debt are as

2014
2015
2016
2017
2018
Thereafter

Total long-term debt

$ 209,780
97,187
283,126
808
572
362,519

$ 953,992

Derivative

instruments (Note 18)

Other

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

$ 12,728
16,016

$ 62,032
18,052

$ 70,722
17,431

$ 28,744

$ 80,084

$ 88,153

16. CAPITAL AND OTHER COMPONENTS OF

EQUITY

Share Capital

(thousands of shares)

2013

2012

2013

2012

Common shares

Treasury stock

On issue at
January 1
Distributions

under stock
compensation
plans

Exercise of share

options
Purchase of

139,885

139,517

159

527

1,168

(45)

(1,168)

212

–

800

treasury stock

–

(800)

Balance at

December 31

140,142

139,885

114

159

Common Shares

The authorized share capital consists of an unlimited
number of common shares, an unlimited number of
non-voting common shares, and an unlimited number of
preference shares. These shares have no par value.

The holders of common shares are entitled to receive
dividends as declared from time to time, and are entitled
to one vote per share at meetings of the Company.

Treasury Stock

in order

Treasury Stock is comprised of shares purchased by a
trust
the
Company’s Share Incentive Plan, as described in
Note 24.

to satisfy the requirements of

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Loss Attributable to Common Shareholders

Balance at December 31, 2012

Other comprehensive income (loss)
Transferred to retained earnings (deficit)

Foreign
currency
translation
adjustments (i)

Unrealized
gain (loss)
on cash flow
hedges (i)

Change in
actuarial
gains and
(losses) (ii)

Total
accumulated
other
comprehensive
income (loss)

$ (8,976)
9,245
–

$ (4,287)
(575)
–

–
201,535
(201,535)

$ (13,263)
210,205
(201,535)

Balance at December 31, 2013

269

$ (4,862)

–

$ (4,593)

Foreign
currency
translation
adjustments (i)

Unrealized
gain (loss)
on cash flow
hedges (i)

Change in
actuarial
gains and
(losses) (ii)

(Restated)
(Note 32)
$
–
(61,214)
61,214

Total
accumulated
other
comprehensive
income (loss)

(Restated)
(Note 32)
$ (17,042)
(57,435)
61,214

$ (13,263)

$ (7,443)
(1,533)
–

$ (8,976)

$ (9,599)
5,312
–

$ (4,287)

–

17. RESTRUCTURING AND OTHER RELATED COSTS

MEAT PRODUCTS GROUP
Management structure changes

Severance
Pension
Site closing and other costs
Asset impairment and accelerated

depreciation

Strategic value creation initiatives

Severance
Site closing and other costs
Asset impairment and accelerated

depreciation

Retention
Pension

Plant closure
Severance
Retention
Pension
Asset impairment and accelerated

depreciation

2013

2012

$ 2,737
–
344

$ 6,509
330
7

154

–

$ 3,235

$ 6,846

$ 23,484
476

$ 3,475
(1,843)

25,353
20,347
–

24,423
–
290

$ 69,660

$ 26,345

111
–
460

$ 1,793
506
569

–

379

571

$ 3,247

Total Meat Products Group

$ 73,466

$ 36,438

Balance at January 1, 2012

Other comprehensive income (loss)
Transferred to retained deficit

Balance at December 31, 2012

(i)

(ii)

Items that may be subsequently reclassified to profit or loss.

Items that will not be reclassified to profit or loss.

The change in accumulated foreign currency translation
adjustments attributable to common shareholders
includes tax of $nil for the year ended December 31,
2013 (2012: $nil).

The change in unrealized loss on cash flow hedges
attributable to common shareholders
tax
recovery of $0.2 million for the year ended December 31,
2013 (2012: expense of $1.6 million).

includes

The change in actuarial gains and losses attributable to
common shareholders includes tax of $69.9 million (2012:
recovery of $21.2 million).

loss

included

accumulated

that $0.6 million of

the
The Company estimates
unrealized
other
comprehensive income (loss) will be reclassified into net
earnings (loss) within the next 12 months. The actual
amount of this reclassification will be impacted by future
changes in the fair value of
instruments
designated as cash flow hedges and the actual amount
reclassified could differ from this estimated amount.
During the year ended December 31, 2013, a loss of
approximately $0.5 million, net of tax of $0.2 million
(2012:
loss of approximately $1.0 million, net of tax
recoveries of $0.3 million), was released to earnings from
accumulated other comprehensive loss and is included
in the net change for the period.

financial

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

BAKERY PRODUCTS GROUP
Management structure changes

Severance
Site closing and other costs
Retention

Bakery closures
Severance
Site closing and other costs
Asset impairment and accelerated

depreciation

Retention
Pension

2013

2012

$ 8,703
–
88

$ 8,791

69
146
–

215

$ 2,171
5,456

$ 1,205
3,630

1,376
573
(414)

5,310
443
270

$ 9,162

$ 10,858

During the year ended December 31, 2012,
the
Company’s Bakery Products Group recorded charges in
connection with the closure of two bakeries in the U.K.;
two bakeries in Toronto, Ontario; a bakery in Delta,
British Columbia; and two distribution centres
in
Québec.

Impairment

During the year, the Company recorded $0.6 million
(2012: $0.4 million) of impairment of fixed assets through
restructuring and other related costs and recognized
impairments of $nil million (2012: $0.2
reversals of
million) also through restructuring and other related
costs.

18. FINANCIAL INSTRUMENTS AND RISK

MANAGEMENT ACTIVITIES

Total Bakery Products Group

$ 17,953

$ 11,073

Capital

NON-ALLOCATED
Management structure changes

Severance

$ 1,745

–

Total restructuring and other related

costs

$ 93,164

$ 47,511

Amounts in the table above are net of reversals.

A brief description of the projects is as follows:

Management Structure Changes

The Company has recorded restructuring and other
related costs pertaining to organizational delayering and
changes to its management structure.

Strategic Value Creation Initiatives

costs

changes

The Company’s Meat Products Group has recorded
restructuring
its
manufacturing and distribution network as part of
implementing its Value Creation Plan, a comprehensive
strategy to step-change productivity and profitability in
its Meat business by closing inefficient plants and
scale, high
consolidating production into efficient
technology facilities.

Plant Closure

The Company’s Meat Products Group has recorded
restructuring costs related to the closure of a plant
located in Ayr, Ontario.

Bakery Closures

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, some of which are
non-IFRS measures, primarily long-term debt and bank
indebtedness, less cash and cash equivalents (“net debt”)
income taxes,
to adjusted earnings before interest,
depreciation, amortization, restructuring, and other related
costs (“Adjusted EBITDA”), and interest coverage.

The following ratios are used by the Company to
monitor its capital:

2013

2012

Interest coverage (Adjusted EBITDA to net

interest expense)

Leverage ratio (Net debt to Adjusted

EBITDA)

1.8 x

3.6 x

(Restated)
(Note 32)

5.3 x

3.1 x

The Company’s various credit facilities, all of which are
unsecured, are subject to certain financial covenants. As
at December 31, 2013, the Company was in compliance
with all of these covenants.

In addition to senior debt and equity, the Company uses
leases and very limited recourse accounts receivable
securitization programs
sources of
as
financing.

additional

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 Share Incentive Plan.

Financial Instruments

The Company’s
classified into the following categories:

financial assets and liabilities are

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.

The fair values and notional amounts of derivative financial instruments at December 31 are shown below:

2013

2012

Notional
amount (i)

Fair value

Asset

Liability

Notional
amount (ii)

Fair value

Asset

Liability

Cash flow hedges

Cross-currency interest rate swaps
Foreign exchange contracts (ii)
Commodity futures contracts (ii)
Interest rate swaps

Fair value hedges

Commodity futures contracts (ii)

Derivatives not designated in a formal hedging

relationship
Interest rate swaps
Foreign exchange contracts (ii)
Commodity futures contracts (ii)

US$ 313,000
225,714
16,509
–

$ 5,903 $ 31,643
2,854
240
–

–
–
–

US$ 313,000
77,509
14,620
260,000

38,747

381 $

–

24,411

1,180,000
134,814
494,445

– $ 18,764
187
–
2,588
3,965

660,000
104,507
272,502

–
238
14
–

$ 46,128
–
–
22,434

–

–
246
1,062

$ 6,151
–
–

$ 1,560

$ 74,803

$ 1,560
–

$ 12,771
62,032

$ 1,560

$ 74,803

$ 10,249

$ 56,276

$ 8,366 $ 43,548
12,728

1,883

$ 10,249

$ 56,276

Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent.

Derivatives are short-term and will impact profit or loss at various dates within the next 12 months.

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.

The fair value of long-term debt as at December 31,
2013, was $1,035.2 million (December 31, 2012:
$1,293.4 million; January 1, 2012: $993.0 million) as
compared to its carrying value of $954.0 million
(December 31, 2012: $1,213.5 million; January 1, 2012:
$947.6 million) on the consolidated balance sheet. The
long-term debt was
fair value of

the Company’s

estimated based on discounted future cash flows using
current rates for similar financial instruments subject to
similar risks and maturities.

Financial assets and liabilities classified as held for
trading are recorded at fair value. 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.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

Total

Current
Non-current

Total

(i)

(ii)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The table below sets out fair value measurements of financial instruments using the fair value hierarchy:

Assets:

Foreign exchange forward contracts
Commodity futures contracts
Interest rate swaps

Liabilities:

Foreign exchange forward contracts
Commodity futures contracts
Interest rate swaps

requires

in the hierarchy by

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.

financial

and reviews

the Company is
In the normal course of business,
exposed to credit risk from its customers. The Company
performs ongoing credit evaluations of new and existing
customers’
the
condition,
collectibility of its trade and other receivables in order to
mitigate any possible credit losses. As at December 31,
2013 approximately $0.2 million (December 31, 2012:
the
$0.4 million; January 1, 2012: $0.8 million) of
Company’s accounts
than
60 days past due. The Company maintains an allowance
for doubtful accounts that represents its estimate of
uncollectible amounts. This allowance includes a
provision related to specific losses estimated on
individually significant exposures. As at December 31,

receivable were greater

Level 1

Level 2

Level 3

Total

–
4,346
–

–
–
5,903

$ 4,346

$ 5,903

–
2,828
–

3,041
–
50,407

$ 2,828

$ 53,448

$ –
–
–

$ –

$ –
–
–

$ –

–
4,346
5,903

$ 10,249

$ 3,041
2,828
50,407

$ 56,276

2013,
the Company has recorded an allowance for
doubtful accounts of $0.1 million (December 31, 2012:
$0.2 million; January 1, 2012: $5.8 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
the allowance for doubtful
Company believes that
accounts sufficiently covers any credit risk related to past
due or impaired accounts receivable balances.

Management believes concentrations of credit risk, with
is limited due to the
respect to accounts receivable,
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
two largest customers as at December 31, 2013,
comprise of approximately 21.1% (2012: 21.5%) of
consolidated sales.

The Company is exposed to credit risk on its notes
receivable from a financial
institution that holds an
equity interest in an unconsolidated structured entity as
described in Note 25. Management believes that this
credit risk is limited due to the long-term AA- debt
rating held by this counterparty.

international

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

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:

Financial liabilities

Bank indebtedness
Accounts payable and accruals
Long-term debt (i)
Foreign exchange contracts
Commodity futures contracts
Interest rate swaps (i), (ii)
Cross-currency interest rate swaps (i), (ii)
Other liabilities

Due within
1 year

Due between
1 and 2 years

Due between
2 and 3 years

Due after
3 years

December 31, 2013

4,408
649,554
209,780
3,041
2,828
–
31,643
2,952

–
–
97,187
–
–
3,573
–
2,534

–
–
283,126
–
–
–
–
911

–
–
363,899
–
–
15,191
–
851

Total

4,408
649,554
953,992
3,041
2,828
18,764
31,643
7,248

$ 904,206

$ 103,294

$ 284,037

$ 379,941

$ 1,671,478

Total

(i)

(ii)

Does not include contractual interest payments

Total fair value of cross-currency interest rate swaps in a liability position

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, 2013, the Company had available
undrawn committed credit of $701.2 million (December
31, 2012: $389.2 million; January 1, 2012: $379.5 million)
under the terms of its principal banking arrangements.
Of this amount, $251.1 million is restricted exclusively for
debt repayment purposes until no later than January
2015, as described in Note 14. These banking
arrangements, which mature in 2016, 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
instrument or cash flows associated with the
financial
instrument will
fluctuate due to changes in market
interest rates.

At December 31, 2013, the Company had variable rate
debt of $259.4 million with a weighted average interest

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

rate of 3.5% (December 31, 2012: $510.1 million with a
weighted average interest rate of 3.1%; January 1, 2012:
$243.2 million with a weighted average of 3.5%).
In
addition, the Company is exposed to floating interest
rates on its accounts receivable securitization programs.
As at December 31, 2013, the amount of cash received
pursuant to these programs was $156.5 million at a
weighted average interest rate of 2.1% (December 31,
2012: $161.8 million at a weighted average interest rate
of 2.0%; January 1, 2012: $155.8 million with a weighted
average rate of 2.1%). The maximum amount available to
the Company under these programs is $170.0 million
(December 31, 2012: $170.0 million; January 1, 2012:
$170.0 million).

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.

swaps

designated

the Company entered into
On December 8, 2011,
interest
rate swaps totalling $260.0 million expiring
December 8, 2017. Effective December 13, 2012, the
Company
hedging
these
instruments in a hedging relationship to partially reduce
the impact of changes in interest costs attributable to
variability in market interest rates. Due to a change in the
Company’s projected future cash flows, as a result of the
decision to divest
its animal by-products recycling
the Company has discontinued hedge
operations,
accounting for
resulted in a
these swaps. This
reclassification of $4.7 million from accumulated other
comprehensive
on
September 30, 2013.

income

other

As at December 31, 2013, 62.7% (December 31, 2012:
70.1%; January 1, 2012: 87.4%) of
the Company’s
outstanding debt and revolving accounts receivable
securitization program were not exposed to interest rate
movements.

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 following table summarizes the notional amounts
the Company’s cross-currency
and interest
interest rate swaps, all of which are designated as a
hedging instrument in a hedging relationship:

rates of

(thousands of
currency units)
Maturity

2014
2021

(i)

Notional
amount

US$
100,000
213,000

Receive

rate (i)

5.6%
5.2%

Notional
amount

CAD$
138,000
220,150

Pay
rate (i)

6.0%
6.1%

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, 2013, the amount of notes
payable designated as a hedge of the Company’s net
investment
in U.S. operations was US$5.0 million
(December 31, 2012: US$5.0 million; January 1, 2012:
US$5.0 million). Foreign exchange gains and losses on
the designated notes payable are recorded in
shareholders’ equity in the foreign currency translation
adjustment
other
comprehensive
translation
adjustments on the underlying net assets of the U.S.
operations, which are also recorded in accumulated
other comprehensive income (loss). The loss on the net

component
income

accumulated

of
and

offset

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

investment hedge recorded in other comprehensive
income (loss) for the year ended December 31, 2013, was
$0.4 million before taxes (2012: gain of $0.1 million).

31,

The Company uses foreign exchange forward contracts
to manage foreign exchange transaction exposures. The
primary currencies to which the Company is exposed to
are the U.S. dollar and the Japanese yen. Qualifying
foreign currency forward contracts are accounted for as
2013,
cash flow hedges. As of December
$225.7 million
currency-
foreign
anticipated
denominated sales and purchases have been hedged
with underlying foreign exchange forward contracts
settling at various dates beginning January 2014. The
aggregate fair value of these forward contracts was a
loss of $2.9 million at December 31, 2013 (December 31,
2012: gain of $0.2 million; January 1, 2012: gain of
$2.6 million) that was recorded in accumulated other
comprehensive income with an offsetting amount
recorded in other current liabilities (December 31, 2012:
prepaid expenses and other assets; January 1, 2012:
prepaid expenses and other assets). The Company also
holds foreign exchange contracts for $134.8 million
related to anticipated foreign currency-denominated
sales and purchases that are not held in a qualifying
hedge relationship.

At December 31, 2013, the Company had fixed-rate debt
of $699.0 million (December 31, 2012: $703.4 million;
January 1, 2012: $707.5 million) with a weighted average
notional 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.

the fair value of

to fixed-rate debt,

Similar
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 hedges of foreign exchange risk, changes in
the fair values of the hedging instruments attributable to
foreign exchange rate movements are deferred in other
comprehensive income, and subsequently released into
net earnings as appropriate to offset completely the
foreign currency gain or loss on the hedged item; also
recognized in net earnings in the same period. As a
instruments are not
consequence,
exposed to foreign exchange risks and do not affect net
earnings.

these financial

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

It
is estimated that, all else constant, an adverse
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 $17.5 million, with an
offsetting change in net earnings of $0.7 million and in
other comprehensive income (loss) of $16.8 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.

The Company uses futures to minimize the price risk
assumed under forward priced contracts with suppliers.
This includes futures contracts that are designated and
accounted for as fair value hedges as well as non-
designated instruments.

The Company also uses futures to minimize the price risk
of anticipated or
forecasted transactions which are
accounted for as cash flow hedges.

Changes in the fair value of the cash flow 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 aggregate fair value of these futures contracts was a
loss of $0.2 million as at December 31, 2013
(December 31, 2012: $nil; January 1, 2012: $0.4 million)
that was recorded in accumulated other comprehensive
income with an offsetting amount recorded in other
current liabilities.

is estimated that, all else constant, an adverse
It
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 $15.1 million, with an offsetting change in net
earnings of a loss of $12.6 million and in other current
liabilities a loss of $3.6 million. These amounts exclude
the offsetting impact of
the commodity price risk
inherent in the transactions being hedged.

Non-Designated Interest Rate Swaps

During 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 3.3%. The remaining swaps totalling
$260.0 million, started on December 8, 2011, with an
average interest rate of 4.2% and were extended and
designated in a formal hedging relationship in 2011.
These swaps have been de-designated during the
current year as previously described. During the fourth
quarter of 2013, the Company entered into swaps to
offset the $260.0 million of de-designated interest rate
swaps with an expiry of December 8, 2017. Under the
offsetting interest rate swaps, the Company receives an
average fixed rate of 1.8% and pays a floating rate of
interest on a notional amount of $260.0 million. These
offsetting interest rate swaps effectively neutralize the
mark-to-market income volatility on the notional amount
of $260.0 million created by the existing interest rate
swaps with an expiry date of December 8, 2017.

During the first quarter of 2011, 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 of 2010,
reduced the Company’s expected
floating rate debt requirements by $355.0 million. Under
the offsetting interest rate swaps, the Company receives
an average fixed rate of 2.5% 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 with an expiry date of April 28, 2015.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

19. OTHER INCOME (EXPENSE)

Gain on sale of investment properties
Adjustment of prior gain on acquisition (Note 30)
Gain on business combinations
Recovery from insurance claims
Legal settlements
Gain on sale of property and equipment
Gain on sale of assets and liabilities held for sale (i)
Net investment property (expenses) income
Ineffective hedges
De-designation of interest rate swaps
Impairment of assets (ii)
Reversal of impairment of assets (ii)
Pension curtailment on sale of business
Legal and other fees on acquisition and disposal
Property tax rebate
Other

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2013

2012

(Restated)
(Note 22)
–
$
–
5,330
3,100
1,400
557
459
(1,803)
52
–
–
–
–
(1,976)
–
1,521

323
(985)
–
4,803
–
2,320
67,640
(2,534)
3,239
4,748
(7,985)
2,148
4,040
(2,616)
2,455
399

$ 77,995

$ 8,640

(i) Gain on sale of assets and liabilities held for sale

Gain (loss) on sale of assets and liabilities held for sale recorded by the Company related to the following:

Potato processing facility
Investment properties held for sale
Turkey agricultural operations
Poultry farm

Total

Year ended December 31, 2013

Year ended December 31, 2012

Net proceeds

Gain (loss)

Net proceeds

Gain (loss)

$ 58,067
15,701
46,278
21,134

$ 45,388
12,591
9,696
(35)

$ 141,180

$ 67,640

–
–
–
7,974

$ 7,974

–
–
–
459

$ 459

A description of the asset groups is provided in Note 7.

(ii)

Impairments and reversals of impairments

Impairments and reversals recorded by the Company related to the following:

Impairments:

Property and equipment
Investment properties
Assets held for sale
Intangibles
Goodwill

Total impairments

Reversal of impairments:
Investment properties
Property and equipment

Total reversal of impairments

2013

2012

$ 3,044
1,507
1,823
1,255
356

$ 7,985

$ (760)
(1,388)

$ (2,148)

$ –
–
–
–
–

$ –

$ –
–

$ –

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. INTEREST EXPENSE AND OTHER FINANCING COSTS

Interest expense on long-term debt
Interest on bankers acceptance and prime loans
Interest expense on interest rate swaps
Interest income on interest rate swaps
Net interest expense on non-designated interest rate swaps
Interest expense on securitized receivables
Amortization of deferred finance charges
Other interest charges
Interest capitalized (Note 8, 12)
Other financing costs (Note 14)

21. INCOME TAXES

The components of income tax expense from continuing operations were as follows:

Current tax expense

Current year
Adjustment for prior periods

Deferred tax expense

Origination and reversal of temporary differences
Change in tax rates

Total income tax expense

Reconciliation of Effective Tax Rate

2013

2012

(Restated)
(Note 22)
$ 39,672
14,228
21,319
(16,778)
10,114
3,151
3,286
3,616
(6,901)
–

$ 42,659
18,785
21,319
(17,421)
8,059
3,106
3,788
4,139
(15,980)
1,388

$ 69,842

$ 71,707

2013

2012

(Restated)
(Note 22, 32)

$ 21,460
(144)

$ 28,904
18

$ 21,316

$ 28,922

$ (45,820)
1,662

$ (8,978)
61

$ (44,158)

$ (8,917)

$ (22,842)

$ 20,005

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:

Income tax expense (recovery) according to combined statutory rate of 26.5% (2012: 26.4%)
Increase (decrease) in income tax resulting from:

Deferred tax expense relating to changes in tax rates
Tax rate differences in other jurisdictions
Manufacturing and processing credit
Share-based compensation adjustments
Non-taxable gains
Non-deductible expenses
Unrecognized income tax benefit of losses
Other

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

2013

2012

(Restated)
(Note 22, 32)

$ (21,582)

$ 16,382

985
275
653
3,698
(8,702)
2,460
–
(629)

61
(165)
(378)
2,400
(57)
1,125
1,824
(1,187)

$ (22,842)

$ 20,005

Income Tax Recognized in Other Comprehensive Income (Loss)

Derivative instruments
Pension adjustments

Deferred Tax Assets and Liabilities

Recognized Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following:

Deferred tax assets:

Tax losses carried forward
Accrued liabilities
Employee benefits
Other

Deferred tax liabilities:

Property and equipment
Cash basis farming
Employee benefits
Goodwill and other intangible assets
Other

Classified in the consolidated financial statements as:

Deferred tax asset – non-current
Deferred tax liability – non-current

Recognized Deferred Tax Assets
The Company has recognized deferred tax assets in the
amount of approximately $28.5 million (December 31,
2012: $88.7 million; January 1, 2012: $92.0 million),
relating primarily to tax losses carried forward by
subsidiaries in the U.K. and Canada. These deferred tax
assets are based on the Company’s estimate that the
relevant subsidiaries will earn sufficient taxable profits to
fully utilize these tax losses in the appropriate carry over
periods.

Unrecognized Deferred Tax Assets
The Company has unrecognized deferred tax assets in
the amount of approximately $39.0 million (December
31, 2012: $37.1 million; January 1, 2012: $34.8 million),
relating primarily to tax losses carried forward in the U.S.
and Canada. These tax losses carried forward consist
primarily of net operating losses (“NOLs”) relating to a

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2013

2012

(Restated)
(Note 32)

(196)
70,616

1,612
(21,311)

$70,420

$ (19,699)

As at
December 31,
2013

As at
December 31,
2012

As at
January 1,
2012

$ 28,454
39,813
–
1,568

$ 88,698
31,442
63,123
8,769

$ 91,964
34,449
42,517
13,634

$ 69,835

$ 192,032

$ 182,564

$ 46,694
3,862
4,152
10,213
2,311

$ 67,232

$ 35,934
12,600
–
14,925
4,927

$ 47,289
–
–
14,684
4,838

$ 68,386

$ 66,811

$ 26,119
(23,516)

$ 132,558
(8,912)

$ 127,456
(11,703)

$ 2,603

$ 123,646

$ 115,753

U.S subsidiary and a capital loss of a subsidiary of the
Company. The amount of NOLs
is approximately
$105.9 million (December 31, 2012: $102.1 million;
January 1, 2012: $98.6 million). These NOLs expire in the
the
years from 2023 to 2032. The capital
subsidiary of the Company is approximately $39.6 million
(2012: $50.0 million; 2011: $49.9 million). This capital loss
does not expire.

loss of

Unrecognized Deferred Tax Liabilities
Deferred tax is not
recognized on the unremitted
earnings of subsidiaries and other investments, as the
Company is in a position to control the reversal of the
temporary difference and it
is probable that such
differences will not reverse in the foreseeable future. The
unrecognized temporary difference at December 31,
2013 for the Company’s subsidiaries was $60.1 million
(December 31, 2012: $48.7 million; January 1, 2012:
$54.9 million).

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22. DISCONTINUED OPERATIONS

On November 25, 2013, the Company sold substantially
all of the net assets of its Olivieri fresh pasta and sauce
business
the Bakery
Products Group, to Catelli Foods Corporation for net
proceeds of approximately $116.3 million, resulting in a
pre-tax gain of $79.4 million.

(“Olivieri”), a component of

the net assets of

On October 28, 2013, the Company sold substantially all
of
its Rothsay animal by-product
recycling operations (“Rothsay”), a component of the
Agribusiness group, to Darling International Inc. for net
proceeds of $628.5 million, resulting in a pre-tax gain of
$526.5 million.

At December 31, 2013, the Olivieri and Rothsay operations have been classified as discontinued operations on the
Statements of Earnings (Loss). The comparative consolidated statements of earnings (loss) have been restated to show
the discontinued operations separately from continuing operations, as detailed below:

Years ended December 31,

Sales
Cost of goods sold

Gross margin
Selling, general, and administrative expenses

Operating Earnings before the following:
Gain on disposal of discontinued operations
Other income (expense)

Earnings before interest and income taxes from
discontinued operations
Interest expense (income)

Earnings before income taxes from discontinued

Olivieri

$ 78,407
64,749

$ 13,658
11,327

$ 2,331
79,424
–

2013

Rothsay

$ 206,194
138,959

$ 67,235
5,674

$ 61,561
526,477
87

2012

Total

Olivieri

Rothsay

Total

$ 284,601
203,708

80,893
17,001

$ 63,892
605,901
87

$ 88,631
77,856

$ 10,775
13,175

$ (2,400)
–
–

$ 232,551
148,950

$ 83,601
8,335

$ 75,266
–
591

$ 321,182
226,806

94,376
21,510

$ 72,866
–
591

$ 81,755
–

$ 588,125
42

$ 669,880
42

$ (2,400)
(15)

$ 75,857
(7)

$ 73,457
(22)

operations
Income taxes

$ 81,755
11,699

$ 588,083
87,433

$ 669,838
99,132

$ (2,385)
(613)

$ 75,864
19,497

$ 73,479
18,884

Net earnings (loss) from discontinued operations

$ 70,056

$ 500,650

$ 570,706

$ (1,772)

$ 56,367

$ 54,595

$ 62,805
$ 7,251

$ 500,650
–
$

$ 563,455
7,251

$ (1,369)
(403)
$

$ 56,367
–
$

$ 54,998
(403)

$ 70,056

$ 500,650

$ 570,706

$ (1,772)

$ 56,367

$ 54,595

Attributed to:
Common shareholders
Non-controlling interest

Earnings per share from discontinued operations
attributable to common shareholders (Note 23)

Basic earnings per share from discontinued

operations

Diluted earnings per share from discontinued

operations

Weighted average number of shares (millions)

There are no amounts included in other comprehensive
income relating to the disposal groups for the years
ended December 31, 2013, or December 31, 2012.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

4.03

139.9

0.39

139.4

In order to accurately represent the continuing and
discontinuing operations sales and cost of goods sold,
certain intercompany eliminations have been reversed in
the amounts presented above and in the statement of
earnings (loss) for all periods presented.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The net cash flows provided by (used in) the discontinued operations for the year ended December 31, 2013, are as
follows:

Years ended December 31,

Olivieri

Rothsay

Total

Olivieri

Rothsay

Total

2013

2012

Operating
Financing
Investing

Net cash flows

4,143
–
115,578

$ 67,601
–
616,268

$ 71,744
–
731,846

$ 1,355
–
(5,694)

$ 62,686
(23)
(13,213)

$ 64,041
(23)
(18,907)

$ 119,721

$ 683,869

$ 803,590

$ (4,339)

$ 49,450

$ 45,111

23. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share amounts are calculated by
dividing the net earnings (loss) attributable to common
shareholders of the Company by the weighted average
number of shares issued during the year.

Diluted earnings (loss) per share amounts are calculated
by dividing the net earnings attributable to common
shareholders of the Company by the weighted average
number of shares issued during the year adjusted for the
effects of potentially dilutive stock options.

The following table sets forth the calculation of basic and diluted earnings (loss) per share (“EPS”):

2013

Attributable to Common Shareholders

Years ended December 31,

Basic

Continuing operations
Discontinued operations

Potential Shares (i)
Diluted

Continuing operations
Discontinued operations

Net
earnings
(loss)

$ (67,145)
563,455

$ 496,310

$ (67,145)
563,455

Weighted
average
number of

shares (ii)

EPS

$ (0.48)
4.03

$ 3.55
–

139.9
139.9

139.9
–

139.9
139.9

2012 (iii)

Weighted
average
number of

shares (ii)

EPS

139.4
139.4

139.4
3.3

$ 0.25
0.39

$ 0.64
(0.01)

Net
earnings

$ 34,418
54,998

$ 89,416

$ (0.48)
4.03

$ 34,418
54,998

142.7
142.7

$ 0.24
0.39

Excludes the effect of approximately 6.4 million options and restricted share units (2012: 2.9 million) to purchase common shares that
are anti-dilutive.

$ 496,310

139.9

$ 3.55

$ 89,416

142.7

$ 0.63

In millions.

Restated, see Note 22 and Note 32.

(i)

(ii)

(iii)

24. SHARE-BASED PAYMENT

to its employees and employees of

Under the Maple Leaf Foods Share Incentive Plan in
effect as at December 31, 2013, the Company may grant
options
its
subsidiaries to purchase shares of common stock and
may grant Restricted Share Units
and
Performance Share Units (“PSUs”) entitling employees to
receive common shares. Options, RSUs, and PSUs are
granted from time to time by the Board of Directors on
Resources
the

recommendation

the Human

(“RSUs”)

Compensation Committee. The vesting conditions are
specified by the Board of Directors and may include the
continued service of the employee with the Company
and/or other criteria based on measures of
the
Company’s performance.

Under the Company’s Share Purchase and Deferred
Share Unit Plan (“DSU Plan”), eligible Directors may
elect to receive their retainer and fees in the form of
Deferred Share Units (“DSUs”) or as common shares of
the Company.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

A summary of the status of the Company’s outstanding stock options as at years ended December 31, 2013 and 2012,
and changes during these years are presented below:

Outstanding, beginning of year
Granted
Exercised
Forfeited
Expired

Outstanding, end of year

Options currently exercisable

2013

2012

Options
outstanding

2,601,000
2,345,500
(212,300)
(50,400)
(4,000)

Weighted
average
exercise
price

$ 11.36
11.85
11.36
11.72
13.50

Options
outstanding

2,925,600
–
–
(35,000)
(289,600)

4,679,800

$ 11.60

2,601,000

1,519,100

$ 11.36

869,700

Weighted
average
exercise
price

$ 11.36
–
–
11.36
16.36

$ 11.36

$ 11.37

All outstanding share options vest and become exercisable over a period not exceeding five 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 seven years.

The number of options outstanding at December 31, 2013, is as follows:

Range of exercise prices

$ 11.36 to $ 11.85

Options outstanding

Weighted
average
exercise
price

Weighted
average
remaining
vesting
term (in years)

Number
outstanding

Options currently
exercisable

Options subject to time
vesting

Number
exercisable

Weighted
average
exercise price

Number
outstanding

Weighted
average
exercise price

4,679,800

$ 11.60

2.4 1,519,100

$ 11.36 3,160,700

$ 11.72

The number of options outstanding at December 31, 2012, is as follows:

Range of exercise prices

$ 11.36 to $ 13.50

Options outstanding

Weighted
average
exercise
price

Weighted
average
remaining
vesting
term (in years)

Number
outstanding

Options currently
exercisable

Options subject to time
vesting

Number
exercisable

Weighted
average
exercise price

Number
outstanding

Weighted
average
exercise price

2,601,000

$ 11.36

5.7

869,700

$ 11.37

1,731,300

$ 11.36

At grant date, each option series is measured for fair value based on the Black-Scholes formula. Expected volatility is
estimated by considering historic average share price volatility. The inputs used in this model for the options granted
during the year ended December 31, 2013 (none in 2012) are as follows:

Share price at grant date
Exercise price
Expected volatility (i)
Option life (ii)
Expected dividends
Risk-free interest rate (iii)

(i)

(ii)

(iii)

Weighted average volatility.

Expected weighted average life.

Based on Government of Canada bonds.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

$
$

2013

11.82
11.85
26.53%
4.5 years
1.35%
1.42%

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The fair value of options granted during the year was
$5.1 million (2012: $nil) and is amortized to income on a
graded basis over the vesting periods of the related
options. Amortization charges relating to current and
prior year options were $4.6 million (2012: $3.3 million).

Restricted Stock Units
The Company has one plan under which RSUs may be
granted to employees. The awards granted under the
Restricted Share Unit Plan (adopted in 2006) are satisfied
either by shares to be purchased on the open market by
a trust established for that purpose, or cash based on
the time of vesting.

The RSUs are subject to time vesting and performance
vesting. The performance vesting is based on the

achievement of specified stock performance targets
relative to a North American index of food stocks or on
Company performance relative to predetermined
targets. Under the 2006 Plan for units granted prior to
2011, between 0.5 and 1.5 common shares in the capital
of the Company can be distributed to each RSU as a
result of the performance of the Company against the
target levels required for vesting. For units granted in
2011 one common share of
the Company may be
distributed to each RSU, these units vest strictly over
time. The 2011 grant also included a grant of PSUs.
These PSUs provide the holder with up to two RSUs
targets. All
based
outstanding RSUs under the 2006 Plan vest over a period
of one and a half to three years from the date of grant.

on Company

performance

A summary of the status of the Company’s RSU plans (including PSUs) as at December 31, 2013 and 2012, and changes
during these years, is presented below:

Outstanding, beginning of year
Granted
Exercised
Forfeited
Expired

Outstanding, end of year

Of the RSUs exercised during 2013 the Company settled
909,300 units in cash rather than equity instruments. The
Company had accounted for these as equity-settled
stock-based compensation and this payment has been
recorded directly through equity. The remainder of the
Company’s outstanding RSUs are accounted for as
equity-settled.

The fair value of RSUs (including PSUs) granted in 2013
was $13.7 million (2012: $ 0.3 million) and is amortized
into earnings on a graded basis over the vesting periods
of
the related RSUs. Amortization charges in 2013,
relating to current and prior year RSUs, were $7.6 million
(2012: $21.4 million).

The key assumptions used in the valuation of fair value of
RSUs granted during the year include the following:

Expected RSU life (in years)
Forfeiture rate
Risk-free discount rate

2013

2012

3.3
8.6%
1.2%

2.9
14.6%
1.0%

Share Purchase and Deferred Share Unit Plan

If an eligible Director elects to receive his or her retainer
and fees as common shares of the Corporation, the

2013

2012

RSUs
outstanding

3,587,172
1,318,450
(982,775)
(194,072)
(982,775)

2,746,000

Weighted
average
fair value
at grant

$ 11.23
11.35
11.39
11.22
11.39

$ 11.17

RSUs
outstanding

6,062,622
28,550
(1,163,610)
(99,600)
(1,240,790)

3,587,172

Weighted
average
fair value
at grant

$ 10.30
11.30
8.91
10.38
8.92

$ 11.23

Company purchases shares at market rates on behalf of
the participating Directors.

Prior to 2013, if an eligible Director elected to receive his
or her fees and retainer in the form of DSUs, each DSU
had a value equal to the market value of one common
share of the Company at the time the DSU is credited to
the Director. DSUs attract dividends in the form of
additional DSUs at
the same rate as dividends on
common shares of the Company. The value of each DSU
is measured at each reporting date and is equivalent to
the market value of a common share of the Company at
the reporting date.

and

Unit

Deferred

During the year, the Company adopted a new Share
Purchase
Plan
(the “2013 DSU Plan”, which replaced the Company’s
existing Share Purchase and Deferred Share Unit Plan
(the “2002 DSU Plan”). The 2002 DSU Plan only allows
for DSUs to be satisfied in cash, which the 2013 DSU Plan
allows the Company the flexibility to satisfy DSUs in
common shares, either
issued from treasury or
purchased by the Company on the open market. DSUs
outstanding under the 2002 DSU Plan will be governed
by the terms of the 2002 DSU Plan, unless a participant
elected in writing that his or her DSUs outstanding under
the 2002 DSU Plan are to be governed by the 2013 DSU
Plan.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company’s outstanding DSUs as at December 31, 2013 and 2012, and changes during
these years is presented below:

Units outstanding

Outstanding, beginning of year
Additions: granted
Additions: dividend reinvestment
Exercised
Transfer between plans

Outstanding, end of year

2013 (2013 Plan)

2013 (2002 Plan)

2012

–
30,163
2,542
–
284,300

317,005

441,531
50,148
1,570
(180,329)
(284,300)

364,234
108,810
5,848
(37,361)
–

28,620

441,531

Value of liability at December 31 (i)

–

485

5,286

(i)

Value of liability is only applicable to the 2002 plan.

25. COMPOSITION OF THE COMPANY

Subsidiary

The consolidated financial statements of the Company
include a 90.0% controlling interest (2012: 90.0%)
in
Canada Bread Company, Limited (“Canada Bread” or
the “Subsidiary”). Canada Bread is a publicly traded
company incorporated in Canada with wholly owned
that
operations across North America and the U.K.

manufacture and distribute fresh and frozen bakery
products.

Any material related party transactions outside of the
ordinary course of business between the Subsidiary and
the Company are subject to approval by the Board of
Directors
Company’s
Management has no unilateral right to transfer cash or
other assets from the Subsidiary to Maple Leaf Foods.

Canada

Bread.

The

The financial information before inter-company eliminations of Canada Bread is provided below:

As at December 31,

Cash
Other current assets
Non-current assets

Total assets

Bank Indebtedness
Other current liabilities
Non-current liabilities

Total liabilities

Total shareholders’ equity

Year ended December 31,

Sales from continuing operations
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings
Other comprehensive income (loss)

Total comprehensive income

Attributed to non-controling interest:
Net earnings
Total comprehensive income

Year ended December 31,

Operating activities
Financing activities
Investing activities

Increase in cash and equivalents

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

2013

2012

$ 325,062
139,509
674,077

90,415
161,236
718,340

1,138,648

$ 969,991

4,408
432,543
79,364

–
199,263
85,207

$ 516,315

$ 284,470

$ 622,333

$ 685,521

2013

2012

$ 1,453,586
85,043
72,513

$ 1,479,243
75,514
(4,034)

157,556
33,424

$ 190,980

15,756
19,098

71,480
(6,363)

65,117

7,148
6,511

2013

2012

$ 188,976
(51,145)
92,408

$ 109,107
(36,494)
(38,268)

$ 230,239

34,345

The following is a continuity of non-controlling interests:

Canada
Bread

Other minority
interests

Balance at December 31, 2012
Net earnings
Other comprehensive income
Dividends declared

Balance at December 31, 2013

Balance at January 1, 2012
Net earnings
Other comprehensive loss
Dividends declared
Acquisition of business
Other

Balance at December 31, 2012

The Company’s financial
controlling
Consolidated Statements of Changes in Total Equity.

results attributed to non-
the
detailed
further

interest

Unconsolidated Structured Entity

The Company has sold certain of its trade accounts
receivable to an unconsolidated structured entity owned
by a financial institution, under revolving securitization
servicing
Company
The
programs.
responsibilities for
these receivables. The structured
entity finances the purchase of these receivables by
issuing senior debt
to the financial
institution, short-term mezzanine notes back to the
Company, and an equity interest held by the financial
institution.

instruments

retains

At December 31, 2013, trade accounts receivable being
serviced under these programs amounted to $166.4
million (December 31, 2012: $287.3 million; January 1,
2012: $254.3 million). In return for the sale of its trade
receivables, the Company will receive cash of $50.9
million (December 31, 2012: $162.8 million; January 1,
2012: $130.8 million) and notes receivable in the amount
of $115.5 million (December 31, 2012: $124.5 million;
January 1, 2012: $123.5 million). The notes receivable are
non-interest bearing and are adjusted on the settlement
dates of the securitized accounts receivable. Due to the
timing of receipts and disbursements, the Company
may, from time to time, also record a receivable or
payable related to the securitization facility. As at
December 31, 2013, the Company recorded net payable
amounting to $105.5 million (December 31, 2012:
$1.0 million receivable; January 1, 2012: $25.3 million net
payable) in accounts payable and accruals.

The Company’s maximum exposure to loss due to its
involvement with a structured entity is equal to the

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

$ 67,169
15,756
3,342
(25,417)

$ 60,850

2013

$ 67,085
15,853
3,342
(25,417)

$(84)
97
–
–

$ 13

$ 60,863

Canada
Bread

Other minority
interests

$ 65,039
7,148
(635)
(4,473)
–
90

$ 67,169

$ –
(2)
–
–
(82)
–

$ (84)

2012

$ 65,039
7,146
(635)
(4,473)
(82)
90

$ 67,085

the interest

in the notes
current carrying value of
receivable due from the structured entity. The maximum
potential
loss that could be borne by subordinated
interests in the structured entity is a $2.0 million equity
interest (2012: $0.7 million).

The Company has not recognized any income or losses
with its interest in an unconsolidated structured entity for
the year ended December 31, 2013.

During the year, the securitization agreements were
renewed with substantially
the same terms and
conditions, with an expiry date of September 2016.

26. COMMITMENTS AND CONTINGENCIES

(a) The Company has been named as a 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)

and purchase

In the normal course of business, the Company and
its subsidiaries enter into sales commitments with
customers,
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
provided letters of credit to guarantee third party
obligations in the amount of $5.2 million (2012: $4.9
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 entered into a number of
construction contracts as a part of its Value Creation
Plan related to the construction of new and

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

expansion
Contract
commitments at the end of 2013 were $158.4 million
(2012: $428.4 million).

facilities.

existing

(d) The Company has operating lease, rent, and other
require minimum annual

commitments
that
payments as follows:

2014
2015
2016
2017
2018
Thereafter

62,792
55,771
46,957
32,960
23,786
100,697

$ 322,963

During the year ended December 31, 2013, an
amount of $45.7 million was recognized as an
expense in earnings in respect of operating leases
(2012: $54.2 million).

27. RELATED PARTY TRANSACTIONS

The Company has a 90.0% controlling interest in Canada
Bread Company, Limited (“Canada Bread”), a publicly
traded subsidiary
consolidated into the
is
Company’s results. Transactions between the Company
and its consolidated entities have been eliminated on
consolidation.

that

The Company sponsors a number of defined benefit and
defined contribution plans as described in Note 10.
During 2013, the Company received $1.0 million (2012:
$1.1 million) from the defined benefit pension plans for
the reimbursement of expenses
the
Company to provide services to these plans. In 2013, the
Company’s contributions to these plans were $40.9
million (2012: $42.5 million).

incurred by

Remuneration of key management personnel of the
Company is comprised of the following expenses:

Short-term employee benefits
Salaries, bonuses, and fees
Company car allowance
Other benefits

Total short-term employee benefits

Post-employment benefits
Share-based benefits

2013

2012

$ 12,779
466
3,462

$ 16,707
1,560
10,983

$ 13,388
474
1,135

$ 14,997
1,555
18,553

Total remuneration

$ 29,250

$ 35,105

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

During 2013, key management personnel of
the
Company exercised 162,000 share options granted
under Maple Leaf Foods Share Incentive Plan for an
amount of $1.8 million (2012: $nil).

28. GOVERNMENT INCENTIVES

in earnings

the Company

related to incentives

recorded government
During 2013,
incentives
totalling $7.5 million (2012:
$10.1 million). Of this amount, $5.0 million (2012: $7.8
million)
from the Canadian
government to support the development of renewable
energies related to the Rothsay by-product recycling
business, which has been presented in discontinued
operations. The Company also received $2.0 million
(2012: $nil) related to incentives from the Government of
Manitoba supporting an employment and training
program. The Company also recorded other incentives
totalling $0.5 million (2012: $0.8 million). In addition, the
Company recorded $1.5 million from the Province of
Ontario in AgriStability benefits during 2012.

Additionally, during 2013, the Company recorded a $2.0
million interest-free loan from the Canadian government
related to the purchase of equipment for its recently
commissioned bakery in Hamilton, Ontario. The loan is
repayable over a period of seven years.

interest

rate of

29. SEGMENTED FINANCIAL INFORMATION

Reportable Segmented Information

The Company has
three reportable segments, as
described below, which are groupings of the Company’s
CGUs. These segments offer different products, have
separate management structures, and have their own
marketing strategies and brands. The Company’s
Management regularly reviews internal reports for these
segments. The following describes the operations of
each segment:

(a) The Meat Products Group is comprised of value-
added processed packaged meats; chilled meal
entrees and lunch kits; primary pork and poultry
processing.

(b) The Agribusiness Group is comprised of

the
Company’s hog production and animal by-products
animal by-product
recycling operations.
the
during
sold
recycling

The
operations were

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

year and have been presented as discontinued
operations for the year ended December 31, 2013.
Refer to Note 22 for further details.

(c) The Bakery Products Group is comprised of the
Company’s 90.0% (2012: 90.0%) ownership in
Canada Bread Company, Limited, a producer of
fresh and frozen par-baked bakery products
including breads, rolls, bagels, artisan and sweet
goods, and fresh pasta and sauces. The fresh pasta
and sauce business was sold during the year and
has been classified as discontinued operations for
the year ended December 31, 2013. Refer to Note
22 for further details. The Company also exited the
artisan and sweet goods categories during 2013.

(d) Non-allocated costs is comprised of expenses not
separately identifiable to business segment groups
and are not part of the measures used by the
Company when assessing the segment’s operating
results. These costs
include general expenses
related to systems implementation, consulting fees
related to the Company’s Board renewal program,
research involving the Company’s Value Creation
Plan, changes in fair value of biological assets, and
unrealized gains or losses on commodity contracts.

separately

Non-allocated assets is comprised of corporate
identifiable to business
assets not
segment groups. These include, but are not limited
to, corporate property and equipment, software,
investment properties, and tax balances.

Sales

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)

Total sales
Sales from discontinued operations (Note 22)

Sales from continuing operations

Earnings before restructuring and other related costs and other income

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)
Non-allocated earnings

Total earnings before restructuring and other related costs and other income
Earnings before restructuring and other related costs and other income from discontinued

operations (Note 22)

Earnings before restructuring and other related costs and other income from continuing

operations

Capital expenditures

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)

Depreciation and amortization

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)

Years ended December 31,

2013

2012

(Restated)
(Note 22, 32)

$ 2,923,857
235,199
1,531,993

$ 3,046,633
259,181
1,567,196

$ 4,691,049
(284,601)

$ 4,873,010
(321,182)

$ 4,406,448

$ 4,551,828

(86,192)
23,303
116,030
12,355

98,367
59,813
94,010
(14,071)

65,496

$ 238,119

(63,892)

(72,866)

1,604

$ 165,253

$ 318,995
17,917
48,473

$ 234,663
16,361
55,310

$ 385,385

$ 306,334

69,111
14,748
57,959

61,260
15,980
55,499

$ 141,818

$ 132,739

(i)

The results of discontinued operations from the animal by-product recycling operations and Fresh Pasta and Sauces businesses
were included in the total results of the Agribusiness Group and Bakery Products Group respectively.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Total assets

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)
Non-allocated assets

Goodwill

Meat Products Group
Agribusiness Group (i)
Bakery Products Group (i)

As at December 31,
2013

As at December 31,
2012

As at January 1,
2012

$ 1,823,866
195,537
1,169,669
410,020

$ 1,617,413
275,167
1,005,432
345,684

$ 1,482,741
224,108
944,032
314,578

$ 3,599,092

$ 3,243,696

$ 2,965,459

$ 428,236
–
292,562

$ 442,925
13,845
296,386

$ 442,336
13,845
297,558

$ 720,798

$ 753,156

$ 753,739

(i)

The prior year results of the Agribusiness Group and Bakery Products Group include assets and goodwill from the animal by-product
recycling operations and Fresh Pasta and Sauces businesses respectively.

Information About Geographic Areas

Property and equipment and investment property
located outside Canada was $112.9 million (December
31, 2012: $98.6 million; January 1, 2012: $105.9 million).
Of this amount, $57.6 million (December 31, 2012: $59.1
million; January 1, 2012: $65.0 million) was located in the
U.S. and $55.0 million (December 31, 2012: $39.2 million;
January 1, 2012: $40.7 million) was located in the U.K.

located outside
Goodwill attributed to operations
Canada
31,
(December
2012: $58.5 million; January 1, 2012: $59.5 million) which
is all attributed to operations in the U.S.

million

$61.9

was

Revenues earned outside Canada were $978.4 million
(2012: $1,112.8 million). Of this amount $435.9 million
(2012: $524.8 million) was earned in the U.S., $236.1
million (2012: $266.0 million) was earned in Japan, and
$137.9 million (2012: $128.8 million) was earned in the
U.K. Revenue by geographic area is determined based
on the shipping location.

Information About Major Customers

During the year, the Company reported sales to one
customer representing 11.0% (2012: 11.4%) of total sales
and another representing 10.1% (2012: 10.1%) of total
sales. These revenues are reported in both the Meat
Products Group and Bakery Products Group. No other
sales were made to any one customer that represented
in excess of 10% of total sales.

30. BUSINESS COMBINATIONS

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

$2.2 million and the Company settled the transaction in
cash.

On December 14, 2012, the Company acquired specific
assets and liabilities held by The Puratone Corporation,
Pembina Valley Pigs Ltd., and Niverville Swine Breeders
Ltd.,
(collectively “Puratone”), privately held entities
engaged in hog production. The net assets recognized
in the December 31, 2012 financial statements were
based on a provisional assessment of the fair value while
the Company negotiated the final purchase price and
finalized the valuation of
the assets and liabilities
acquired. The valuation was completed in March 2013
and the Company agreed on a final acquisition purchase
price of $45.4 million, an increase of $0.9 million from the
provisional amount of $44.5 million recorded for the year
ended December 31, 2012. The Company settled the
transaction in cash. The acquisition date fair value of the
net
identifiable assets remains consistent with the
provisional value.

The acquisitions of Paradigm and Puratone have been
accounted for as business combinations and resulted in
a final combined gain of $4.3 million ($3.1 million net of
tax), compared to a provisional combined gain of $5.3
million ($4.1 million net of tax) recorded in other income
for the year ended December 31, 2012. The decrease in
the combined gain of $1.0 million relates entirely to
Puratone, with no change in the estimate for Paradigm.
The decrease in the gain is primarily due to the change
in negotiated purchase price. The gain on the business
combinations was the result of acquiring Paradigm and
Puratone at a price that was less than the fair values
assigned to the assets and liabilities acquired.

Transaction costs of $1.1 million associated with the
acquisitions have been excluded from the consideration
paid and have been recognized as an expense in other
income (expense)
for the year ended December 31,
2012.

The assets acquired and liabilities recognised at the date
of acquisition are as follows:

Current assets

Accounts receivable
Inventory
Biological assets
Prepaid expenses
and other assets
Non-current assets

Property and
equipment
Other long-term

assets

Current liabilties

Bank indebtedness
Other payables
Current portion of
long-term debt

Non-current
liabilities
Long-term debt
Other long-term

liabilties

Puratone Fair Value
December 14, 2012

Paradigm Fair Value
November 27, 2012

366
4,182
23,698

467

–
55
967

–

24,471

2,016

305

(217)
(1,570)

(204)

(634)

(1,764)

$ 49,100

–

–
(55)

–

$ 2,983

On February 1, 2012, the Company acquired the assets
including chicken production quota units held by Bon
Accord Poultry Ranch Ltd., Brooks Poultry Ranch Ltd.,
Fraser Ridge Poultry Farm Ltd., and other private
individuals
the “Poultry Farm”). The
purchase price was $31.1 million, and the Company
settled the transaction in cash. The transaction was
accounted for as a business combination, and resulted in
goodwill of $0.5 million.

(collectively

The assets purchased comprise the following:

Property and equipment
Indefinite life intangible assets

Fair value
February 1, 2012

$ 2,560
28,100

$ 30,660

31. SUBSEQUENT EVENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

arrangement under
the Business Corporations Act
(Ontario) (the “Arrangement”). Under the terms of the
Arrangement, Grupo Bimbo has agreed to acquire each
common share of Canada Bread for $72.00 per share in
cash. Maple Leaf expects to receive net proceeds of
approximately $1.65 billion for its 90% interest in Canada
Bread. The Arrangement will require the approval of at
least 66 2⁄ 3% of the votes cast by the shareholders of
Canada Bread at a special meeting of shareholders
expected to take place in early April 2014. Maple Leaf
has entered into a voting support agreement with Grupo
Bimbo pursuant to which the Company has agreed to
vote all of its common shares of Canada Bread in favour
of the Arrangement at such meeting. The Company is
not able to estimate the ultimate gain on disposition
given the uncertainty surrounding the timing of the close
of this proposed transaction. Subsequent to the sale, the
Company will no longer be consolidating the results and
related balance sheet of Canada Bread Company,
Limited. The Arrangement is subject to receipt of court
approval,
regulatory approvals, and other customary
closing conditions, and is expected to close in the
second quarter of 2014.

On February 19, 2014, the Company sold an investment
property located in the Toronto area, which was
classified as an asset held for sale in the year end
consolidated financial statements, for gross proceeds of
$6.4 million.

32. IMPACT OF ADOPTION OF NEW ACCOUNTING

STANDARDS DURING THE PERIOD

revised IAS 19,

Beginning January 1, 2013, the Company adopted the
revised IAS 19 Employee Benefits, on a retrospective
the
basis with restatement. Under
Company is required to calculate the expected return on
assets of the pension plan and its related interest costs
based on the current discount rate multiplied by the net
position of the plan. The revised standard also requires
that administrative fees of the plan be expensed by the
Company as incurred rather
than included in the
expected return.

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The impact of adoption is as follows:

Impact on Consolidated Statements of Earnings (Loss)

Year ended December 31,

Selling, general, and administrative expenses (i)
Income taxes
Net earnings
Attributable to:

Common shareholders
Non-controlling interest

Increase (decrease) in earnings per share attributable to common shareholders

Basic earnings per share
Diluted earnings per share (ii)

Weighted average number of shares (millions)

2013

2012

$ 37,673
(9,738)
(27,935)

$ 35,152
(9,000)
(26,152)

$ (27,647)
(288)

$ (25,880)
(272)

$
$

(0.20)
(0.20)

139.9

$
$

(0.19)
(0.18)

139.4

(i)

(ii)

Increase of selling, general, and administrative expenses includes a total of $33.1 million increase (2012: $ 29.6 million) in pension
expenses and $4.6 million increase (2012: $5.6 million) in pension administrative fees due to adoption of revised IAS 19 during the year.

Restated diluted earnings per share is calculated based on 139.9 million (2012: 142.7 million) of weighted average number of shares.

Impact on Consolidated Statements of Comprehensive Income (Loss)

Year ended December 31,

Net earnings
Change in actuarial loss

Comprehensive income (loss)

2013

2012

$ (27,935)
27,935

$ (26,152)
26,152

–

The adoption of revised IAS 19 did not have an impact
consolidated balance sheets,
on the Company’s

consolidated statement of changes in total equity, and
consolidated statements of cash flows for 2013 and 2012.

The following is a reconciliation of the 2012 restatement:

Consolidated Statements of Earnings

Year ended December 31, 2012

Selling, general and administrative expenses
Income taxes
Net earnings

Attributable to:

Common shareholders
Non-controlling interest

Earnings per share attributable to common shareholders

Basic earnings per share
Diluted earnings per share

Weighted average number of shares (millions)

As previously
reported

Discontinued

Operations (i)

Impact of
IAS 19R

As restated

$ 494,714
47,889
122,714

$ 115,296
7,418

0.83
0.81

139.4

(Note 22)
$ (21,510)
(18,884)
–

$ 35,152
(9,000)
(26,152)

$ 508,356
20,005
96,562

–
–

–

$ (25,880)
(272)

$ 89,416
7,146

(0.19)
(0.18)

–

0.64
0.63

139.4

(i)

The adoption of revised IAS 19 did not have any impact on the net earnings from discontinued operations for the years ended
December 31, 2013 and 2012.

Consolidated Statements of Comprehensive Income (Loss)

Year ended December 31, 2012

Net earnings
Change in actuarial loss
Comprehensive income (loss)

MAPLE LEAF FOODS INC.

2013 ANNUAL REPORT

As previously
reported

$ 122,714
(87,743)
38,492

Impact of
IAS 19R

$ (26,152)
26,152
–

As restated

$ 96,562
(61,591)
38,492

CoRpoRaTe INfoRmaTIoN

Capital Stock
The Company’s authorized capital consists
of an unlimited number of voting common
shares, an unlimited number of non-voting
common shares and an unlimited number
of preferred shares issuable in series. At
December 31, 2013, 140,256,389 voting
common shares were issued and outstanding,
for a total of 140,256,389 outstanding shares.
There were 782 shareholders of record of
which 745 were registered in Canada, holding
98.87% of the issued voting shares.

Ownership
As at December 31, 2013, the Company’s
largest shareholder is McCain Capital Inc.,
holding 45,998,783 voting shares
representing 32.8% of the total issued
and outstanding shares. Michael H. McCain
beneficially owns and controls 100% of
McCain Capital Inc. and has beneficial
ownership or control of 45,998,783
common shares or 32.8% of the common
shares. West Face Capital Inc. holds
15,894,413 voting shares representing
11.33% 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
www.mapleleaffoods.com

Annual Meeting
The annual meeting of shareholders
of Maple Leaf Foods Inc. will be held on
Thursday, May 1, 2014 at 11:00 a.m.
at the MaRS Discovery District,
101 College Street, Toronto, Ontario, Canada.

Dividends
The declaration and payment of quarterly
dividends are made at the discretion
of the Board of Directors. Anticipated
payment dates in 2014: March 31, June 30,
September 30 and December 31.

Shareholder Inquiries
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
North Tower, Toronto, Ontario,
Canada M5J 2Y1
Tel: (514) 982-7555
or 1-800-564-6253
(toll-free North America)
or service@computershare.com

Company Information
For Investor Relations, please call
(416) 926-2005.

For copies of annual and quarterly reports,
the annual information form and other
disclosure documents, please contact
our Senior Vice-President and Corporate
Secretary at (416) 926-2000.

Transfer Agent
and Registrar
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
North Tower, 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, Canada

Stock Exchange Listings
and Stock Symbol
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, Canada M4V 3A2.

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MAPLE LEAF FOODS INC. | 2013 ANNUAL REPORT

Maple Leaf Foods’ values underpin everything we do.

We are guided by strong corporate values and the determination to build a
sustainable, leading consumer packaged meats company.

To learn more about Maple Leaf Foods’ commitment to sustainability, please visit our website.

www.mapleleaffoods.com/sustainability

Maple Leaf Foods Inc.
30 St. Clair Avenue West, Suite 1500
Toronto, Ontario, Canada M4V 3A2
www.mapleleaffoods.com