Annual Report to Shareholders
For the Year Ended
December 31, 2020
TSX: MFI
www.mapleleaffoods.com
Investor Contact: Mike Rawle
905-285-5732
Media Contact: Janet Riley
905-285-1515
Maple Leaf Foods Reports Fourth Quarter and Full Year 2020 Financial Results
Execution against strategic agenda drives further Meat Protein Group Adjusted EBITDA Margin expansion to 12.6%, marking the
fifth consecutive quarter of year over year expansion
Mississauga, Ontario, February 25, 2021 - Maple Leaf Foods Inc. (“Maple Leaf Foods” or the "Company") (TSX: MFI) today
reported its financial results for the fourth quarter and full year ended December 31, 2020.
“We began this unprecedented year with raw optimism from our business momentum, only to pivot in reaction to a global crisis,"
said Michael H. McCain, the Company's President and CEO. "Our people and our strategies were tested and they excelled,
demonstrating skill, speed, agility, and clear prioritization of action in protecting our people first while supporting all our
stakeholders."
Our fourth quarter capped off a record performance year, with strong top-line gains coupled with solid Adjusted EBITDA Margin
expansion. We have repositioned our portfolio towards two high-growth categories now representing 20% of our annual sales
generating a compounded growth rate in excess of 25% over the last three years," continued Mr. McCain. “Momentum softened
in Plant Protein, with solid improvement in the core line-up offset by soft fresh and foodservice performance. We remain
confident in our long-term position supported by innovation and brand investment. Society underwent incredible dislocation this
year and our people bravely met the challenge."
Fourth Quarter 2020 Highlights
•
Total Company sales grew 11.1% to $1,129.2 million, with an Adjusted Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA")(i) Margin of 9.7%, up from 7.4% last year.
• Meat Protein Group sales grew 11.3% driven by continued execution of strategies in sustainable meats and brand
renovation, as well as the impact of an extra week in 2020. Adjusted EBITDA Margin was 12.6%, up 120 basis points
("bps") from last year, representing a fifth consecutive quarter of year over year expansion.
•
Plant Protein Group sales grew 5.5% or 6.7% excluding foreign exchange impacts, below expectations due to soft
demand in certain retail products and foodservice activity. Selling, general and administrative ("SG&A") expenses were
$32.5 million, in-line with expectations.
• Gross costs associated with COVID-19 were approximately $15 million. These were partially offset by reductions in
discretionary spend, resulting in a net impact of approximately $13 million to total Company Adjusted EBITDA.
• Net earnings were $25.4 million, an increase of 45.2% from $17.5 million last year.
2020 Highlights and 2021 Outlook
•
Total Company sales grew 9.2% to $4,303.7 million, with an Adjusted EBITDA Margin of 9.2%, up 110 bps from 8.1%
last year.
• Meat Protein Group results were in-line with expectations with sales growth of 9.0% and an Adjusted EBITDA Margin of
12.4%, up 200 bps from 10.4% last year. Growth was driven by successful execution again its strategies, which more
than offset significant operating costs associated with mitigating COVID-19 risks.
•
Plant Protein Group sales grew 19.5% or 18.1% excluding foreign exchange impacts, driven by softer growth in the
second half of 2020. SG&A expenses totaled $144.0 million, with investments focused on advertising, promotion and
marketing to build awareness, as well as support brand renovation and new product innovation.
• Capital expenditures were $490.7 million and consisted predominantly of Construction Capital(i) of $333.8 million, the
majority of which was related to ongoing construction of the London, Ontario poultry facility.
• Outlook for 2021: Continued pursuit of profitable growth in the Meat Protein Group, with strong sales growth coupled
with Adjusted EBITDA Margin expansion towards the 2022 target of 14-16%. Plant Protein Group sales growth is
expected to be broadly in-line with the 30% strategic target, supported by SG&A expense investments similar to 2020.
(i)
Refer to the section titled Non-IFRS Financial Measures in this news release.
1
Three
months
ended
December 31,
Twelve
months
ended
December 31,
2019
Change
2020
2019
Change
Financial Highlights
Measure(i)
(Unaudited)
Sales
Net Earnings
Basic
Earnings
per Share
Adjusted
Operating
Adjusted Earnings
Earnings(ii)
Share(ii)
per
Adjusted
EBITDA -
Meat
Protein
Sales -
Plant Protein Group
Free
Cash Flow(ii)
2020
1,129.2
25.4
0.20
59.2
0.30
136.5
52.5
(97.5)
$
$
$
$
$
$
$
$
Group(ii)
$
$
$
$
$
$
$
$
1,016.0
11.1 %
17.5
0.14
28.4
0.12
45.1 %
42.9 %
108.5 %
150.0 %
110.2
23.9 %
49.7
(3.6)
5.5 %
(iii)
nm
Capital(ii)
Construction
Net Debt(ii)
(i) All financial measures in millions of dollars except Basic and Adjusted Earnings per Share.
(ii) Refer to the section titled Non-IFRS Financial Measures in this news release.
(iii) Not meaningful.
Fourth Quarter 2020
$
$
$
$
$
$
$
$
$
$
4,303.7
113.3
0.92
207.9
1.02
508.5
210.8
(119.3)
440.6
(645.1)
$
$
$
$
$
$
$
$
$
$
3,941.5
9.2 %
74.6
0.60
51.8 %
53.3 %
145.4
43.0 %
0.68
50.0 %
393.2
176.4
(0.6)
29.3 %
19.5 %
(iii)
nm
106.8
312.5 %
(442.0)
46.0 %
Sales for the fourth quarter increased 11.1% to $1,129.2 million compared to $1,016.0 million last year. Sales growth was
driven by strong growth in both the Meat and Plant Protein Groups. An extra week in the fourth quarter of 2020 also
contributed to sales growth.
Net Earnings for the fourth quarter of 2020 were $25.4 million ($0.20 per basic share) compared to $17.5 million ($0.14 per
basic share) last year. Strong commercial performance in the Meat Protein Group more than offset incremental costs related to
COVID-19 and an increase in variable compensation. Results were also impacted by a higher loss from non-cash fair value
changes in biological assets and derivative contracts and non-recurring other expenses, which are excluded from the
calculation of Adjusted Operating Earnings.
Adjusted Operating Earnings for the fourth quarter of 2020 were $59.2 million compared to $28.4 million. The increase in
Adjusted Operating Earnings reflects strong commercial performance in meat protein, driven by favourable sales mix,
continued growth in sustainable meats and pricing actions taken to mitigate inflation and other structural cost increases.
Results also benefited from lower SG&A investments in Plant Protein.
Full Year 2020
Sales for 2020 were $4,303.7 million compared to $3,941.5 million last year, an increase of 9.2%, driven by strong growth in
both the Meat and Plant Protein Groups. An extra week in the fourth quarter of 2020 also contributed to sales growth.
Net earnings for 2020 were $113.3 million ($0.92 per basic share) compared to $74.6 million ($0.60 per basic share) last year.
Strong commercial performance in the Meat Protein Group more than offset incremental costs related to COVID-19, strategic
investments in the Plant Protein Group, as well as a non-recurring favourable resolution of an income tax audit last year.
Results were also positively impacted by a higher gain from non-cash fair value changes in biological assets and derivative
contracts and higher non-recurring other expenses, which are excluded in the calculation of Adjusted Operating Earnings
below.
Adjusted Operating Earnings for 2020 were $207.9 million compared to $145.4 million last year, and Adjusted Earnings per
Share for 2020 were $1.02 compared to $0.68 last year.
For further discussion on key metrics and a discussion of results by operating segment, refer to the section titled Operating
Review.
Note: Several items are excluded from the discussions of underlying earnings performance as they are not representative of ongoing
operational activities. Refer to the section entitled Non-IFRS Financial Measures at the end of this news release for a description and
reconciliation of all non-IFRS financial measures.
Response to COVID-19
As an essential service, Maple Leaf Foods is focused on protecting the health and well-being of its people, maintaining
business continuity, and broadening its social outreach. To manage through this unprecedented environment, the Company
has taken a number of measures in its business and operating practices that include heightened safety policies and
procedures, and close communication and collaboration with public health authorities. These measures increased the
Company’s cost structure due to higher labour, personal protective equipment, sanitation and other expenses associated with
the pandemic. The health and safety of our people is paramount while ensuring the security of our food supply.
Overall, the Company believes its proactive and comprehensive efforts should mitigate operational impacts. As the COVID-19
situation evolves, Maple Leaf Foods will continue to adapt and adopt best practices that prioritize the health and safety of its
2
employees and the stability of the food supply. As part of Maple Leaf Foods’ broader social responsibility, the Company has
provided extensive support to front-line staff, emergency food relief efforts and health care providers.
Maple Leaf Foods’ purpose and long-term strategy remain unchanged. In 2020 gross costs associated with COVID-19 were
approximately $58 million, primarily related to labour bonus payments, personal protective equipment, incremental sanitation,
screening and testing protocols, support for the Company's hog producers, donations to support front-line healthcare workers,
emergency food relief efforts and other preventative measures. This was partially offset by reductions in discretionary spend,
resulting in a net impact of approximately $42 million to total Company Adjusted EBITDA.
Continuing COVID-19 structural costs have been incorporated in the Company's 2021 operating plan.
Operating Review
During the year ended December 31, 2020, the Company had two reportable segments. These segments offer different
products, with separate organizational structures, brands, financial and marketing strategies. The Company's chief operating
decision makers regularly review internal reports for these businesses: performance of the Meat Protein Group is based on
revenue growth, Adjusted Operating Earnings and Adjusted EBITDA, while the performance of the Plant Protein Group is
based predominantly on revenue growth rates, gross margin optimization and controlling investment levels, which generate
high revenue growth rates.
Fourth Quarter 2020
The following table summarizes the Company's sales, gross profit, SG&A expenses, Adjusted Operating Earnings, Adjusted
EBITDA, and Adjusted EBITDA Margin by operating segment for the twelve months ended December 31, 2020 and
December 31, 2019:
Three months ended December 31, 2020
Three months ended December 31, 2019
($ millions)(i)
(Unaudited)
Sales
Gross profit
Selling, general and administrative
expenses
Adjusted Operating Earnings(iii)
Adjusted EBITDA(iii)
Adjusted EBITDA margin(iii)
(i)
Totals may not add due to rounding.
$ 1,080.3
$
$
$
$
185.7
94.2
91.5
136.5
52.5
0.3
32.5
(32.3)
(28.7)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Meat
Protein
Group
Total
(3.6) $ 1,129.2 $
970.3
(5.7) $
180.3 $
150.5
Plant
Protein
Group
49.7
7.2
Non-
Allocated(ii)
Total
(4.1) $ 1,016.0
3.0 $
160.8
— $
126.8 $
84.0
45.3
— $
129.3
— $
59.2 $
66.5
1.3 $
109.1 $
110.2
(38.1)
(34.9)
— $
28.4
— $
75.3
12.6 %
(54.7)%
N/A
9.7 %
11.4 %
(70.3)%
N/A
7.4 %
(ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, changes in the fair value of biological
assets and derivatives, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and
are not part of the measures used by the Company when assessing a segment’s operating results.
(iii) Refer to the section titled Non-IFRS Financial Measures in this news release.
Meat Protein Group
The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, snack kits, value-added
fresh pork and poultry products that are sold to retail, foodservice and industrial channels, and agricultural operations in pork
and poultry. The Meat Protein Group includes leading brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®,
Greenfield Natural Meat Co.®, Swift® and other leading regional brands.
Sales for the fourth quarter increased 11.3% to $1,080.3 million compared to $970.3 million last year. Sales growth was driven
by a favourable mix-shift towards sustainable meats and branded products in Canada, strong double-digit growth in
sustainable meats in the U.S., pricing actions implemented to mitigate inflation and other structural cost increases and an extra
week in the fourth quarter of 2020. Stronger demand in the retail channel as a result of COVID-19 was offset by lower volume
in foodservice.
Gross profit for the fourth quarter of 2020 was $185.7 million (gross margin of 17.2%) compared to $150.5 million (gross
margin of 15.5%) last year. Strong commercial and operational performance, including favourable mix, continued expansion of
sustainable meats and pricing action implemented during the quarter to mitigate inflation and other structural cost increases all
contributed to higher gross profit in the quarter. This performance was partially offset by increased costs in response to
COVID-19 to safeguard the Company's employees and maintain production. Costs associated with COVID-19 consisted of
personal protective equipment, incremental sanitation, screening and testing protocols and other preventative measures.
SG&A expenses for the fourth quarter of 2020 were $94.2 million (8.7% of sales), compared to $84.0 million (8.7% of sales)
last year. The increase in SG&A expenses is primarily related to an increase in variable compensation. As a percentage of
sales, SG&A expenses were flat compared to last year.
3
Adjusted Operating Earnings for the fourth quarter of 2020 were $91.5 million compared to $66.5 million last year, driven by
factors noted above.
Adjusted EBITDA Margin for the fourth quarter was 12.6% compared to 11.4% last year, consistent with factors noted above.
Plant Protein Group
The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein, and vegan cheese
products sold to retail, foodservice and industrial channels. The Plant Protein Group includes the leading brands Lightlife® and
Field Roast™.
Sales for the fourth quarter were $52.5 million compared to $49.7 million last year, representing growth of 5.5% or 6.7% after
excluding the impact of foreign exchange. Sales growth was driven by an extra week in the fourth quarter of 2020 as well as
pricing actions implemented to mitigate inflation and structural cost increases.
Gross profit for the fourth quarter of 2020 was $0.3 million (gross margin of 0.5%) compared to $7.2 million (gross margin of
14.4%) last year. The decrease in gross profit was attributed to inefficiencies associated with start-up production and other
costs related to support high growth, as well as expenses associated with COVID-19, including increased labour expenses,
personal protective equipment, screening and testing, and other preventative measures.
SG&A expenses for the fourth quarter of 2020 were $32.5 million (61.9% of sales), compared to $45.3 million (91.1% of sales)
last year. The decrease in SG&A expenses was driven by lapping of heightened investment in advertising and promotional
expenses incurred in the fourth quarter of 2019, partially offset by increased expenses related to organizational capacity.
Adjusted Operating Earnings for the fourth quarter of 2020 were a loss of $32.3 million compared to a loss of $38.1 million last
year. The increase in Adjusted Operating Earnings is mainly driven by a decrease in SG&A expenses as noted above.
Full Year 2020
The following table summarizes the Company's sales, gross profit, SG&A expenses, Adjusted Operating Earnings, Adjusted
EBITDA, and Adjusted EBITDA Margin by operating segment for the year ended December 31, 2020 and December 31, 2019.
2020
2019
($
millions)(i)
Sales
Gross profit
Selling,
expenses
general
and administrative
Adjusted
Operating
Earnings(iii)
Adjusted EBITDA(iii)
Adjusted
EBITDA
margin(iii)
Meat
Protein
Group
Plant
Protein
Non-
Group Allocated(ii)
Total
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
$
$
$
$
$
4,116.5
210.8
(23.6)
$
4,303.7
680.3
18.3
4.5
$
703.1
346.6
144.0
333.6
(125.7)
508.5
(111.4)
—
—
0.8
$
$
$
490.7
207.9
397.9
$
$
$
$
$
3,778.0
176.4
568.0
35.0
338.7
229.3
393.2
119.0
(84.0)
(71.6)
(12.9)
(12.1)
—
—
(0.4)
$
$
$
$
$
Total
3,941.5
591.0
457.7
145.4
321.2
12.4 %
(52.8)%
N/A
9.2 %
10.4 %
(40.6)%
N/A
8.1 %
(i)
Totals may not add due to rounding.
(ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, changes in the fair value of biological
assets and derivatives, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and
are not part of the measures used by the Company when assessing a segment’s operating results.
(iii) Refer to the section titled Non-IFRS Financial Measures in this news release.
Meat Protein Group
Sales for 2020 increased 9.0% to $4,116.5 million compared to $3,778.0 million last year. Sales growth was driven by a
favourable mix-shift towards sustainable meats and branded products, growth in exports to Asian markets, and pricing actions
implemented to mitigate inflation and other structural cost increases. Strong demand in the retail channel was offset by lower
volume in foodservice as a result of COVID-19. An extra week in the fourth quarter of 2020 also contributed to sales growth.
Gross profit for 2020 was $680.3 million (gross margin of 16.5%) compared to $568.0 million (gross margin of 15.0%) last
year. Gross profit performance benefited from a favourable product and channel mix attributed to expansion of sustainable
meats and other branded products, in addition to growth in exports to Asian markets. Partially offsetting strong commercial and
plant operating performance were increased costs in response to COVID-19 to safeguard the Company's employees and
maintain production. Costs associated with COVID-19 consisted of labour bonus payments, personal protective equipment,
incremental sanitation, screening and testing protocols and other preventative measures.
SG&A expenses for 2020 were $346.6 million (8.4% of sales) compared to $338.7 million (9.0% of sales) last year. Reductions
in discretionary spend such as travel, conferences and training, as well as advertising and promotions, were more than offset
by an increase in variable compensation.
Adjusted Operating Earnings for 2020 were $333.6 million compared to $229.3 million last year, driven by factors noted above.
Adjusted EBITDA Margin was 12.4% compared to 10.4% last year, consistent with the factors noted above.
4
Plant Protein Group
Sales for 2020 were $210.8 million compared to $176.4 million last year, representing growth of 19.5%, or 18.1% after
excluding the impacts of foreign exchange. Growth was driven by expanded distribution of new products, continued volume
increases in its existing portfolio, and pricing actions implemented to mitigate inflation and other structural cost increases. An
extra week in the fourth quarter of 2020 also contributed to sales growth.
Gross profit for 2020 was $18.3 million (gross margin of 8.7%) compared to $35.0 million (gross margin of 19.8%) last year.
The decrease in gross profit was attributed to higher supply chain costs, expenses associated with the Company's response to
COVID-19 to safeguard its employees and maintain production, and increased trade expenditures. Costs associated with
COVID-19 consisted of increased labour expenses, personal protective equipment, screening and testing, and other
preventative measures.
SG&A expenses for 2020 were $144.0 million (68.3% of sales) compared to $119.0 million (67.4% of sales) last year. The
increase in SG&A expenses reflected the evolution of the Company's plant protein strategy to drive sales growth and secure
market share in a rapidly growing market. Supporting this strategy, significant investment in advertising, promotion and
marketing was incurred during the year to enhance awareness, renovate and relaunch brands, introduce new products and
expand distribution. In addition, the Company invested to broaden organizational capacity and its pipeline of new product
innovation.
Adjusted Operating Earnings for 2020 were a loss of $125.7 million compared to a loss of $84.0 million last year. The decline
in Adjusted Operating Earnings is consistent with the factors noted above.
Other Matters
On February 24, 2021, the Board of Directors approved a quarterly dividend of $0.18 per share (up from $0.16 per share in
each quarter of 2020), $0.72 per share on an annual basis, payable March 31, 2021 to shareholders of record at the close of
business March 8, 2021. Unless indicated otherwise by the Company at 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”.
Conference Call
A conference call will be held at 8:00 a.m. ET on February 25, 2021, to review Maple Leaf Foods’ fourth quarter financial
results. To participate in the call, please dial 416-764-8650 or 1-888-664-6383. For those unable to participate, playback will be
made available an hour after the event at 416-764-8677 or 1-888-390-0541 (Passcode: 633647#).
A webcast of the fourth quarter conference call will also be available at:
https://www.mapleleaffoods.com/investors/events/
The Company’s 2020 audited annual consolidated financial statements and related Management’s Discussion and Analysis
are available on the Company’s website.
An investor presentation related to the Company’s fourth quarter financial results is available at www.mapleleaffoods.com and
can be found under Presentations and Webcasts on the Investors page.
2021 Outlook
Throughout the COVID-19 pandemic, Maple Leaf Foods has remained focused on protecting its employees and ensuring
continuity of its supply chain. As a result, the current environment does increase certain operating costs and potential for short-
term processing disruptions to protect the health and safety of plant personnel. Continuing COVID-19 structural costs have
been incorporated in the Company's 2021 operating plan.
Maple Leaf Foods expects to achieve the following in 2021:
Meat Protein Group - Driving Profitable Growth
• Mid-to-high single digit sales growth on a 52-week comparable basis, driven by continued momentum in sustainable
meats, leveraging brand renovation, and growth into the U.S. market.
•
Adjusted EBITDA margin expansion, progressing towards the 2022 target of 14% -16%, driven by mix-shift benefits in
prepared meats resulting from growth in sustainable meats and brand renovation, as well as operational efficiencies,
while assuming pork complex conditions in-line with the 5-year average.
Plant Protein Group - Investing for Growth
•
Sales growth for the year to be broadly in-line with the strategic target of 30%, excluding any impact from fluctuations
in foreign exchange. Growth is expected to be driven by continued momentum in the core product line, improved
velocities and distribution in the fresh line and resurgence in foodservice activity following the abatement of
COVID-19 restrictions.
• Gross margin is expected to be volatile in the near-term, as benefits from structural improvements in the supply chain
may be impacted by investment opportunities to drive sales growth in a rapidly evolving market, as well as ongoing
effects of COVID-19.
5
•
SG&A expenses broadly in-line with 2020 levels, excluding any impact from fluctuations in foreign exchange, while
declining as a percentage of sales as the Company leverages investments in advertising, promotion and marketing to
elevate the Lightlife® and Field Roast™ brand renovations, drive innovation and build scale in the business.
Capital
•
The Company currently estimates its capital expenditures for the full year of 2021 will be in the range of $550 million
to $650 million, approximately 75% of which to be comprised of Construction Capital. A significant portion of the
Construction Capital is related to the London, Ontario poultry facility and other projects to add capacity and improve
efficiency in our prepared meats business.
• Construction Capital also includes the intended acquisition and build-out of a plant protein facility in Indianapolis,
Indiana, as announced on January 11, 2021. This 118,000 square foot facility will enable the Company to meet the
growing demand for tempeh in a capital efficient manner.
Factors that could have an impact on our business, which we cannot estimate or control due to the COVID-19 pandemic,
include:
•
•
•
•
Volatility in the pork and poultry commodity and foreign exchange markets.
The balance between retail and foodservice demand.
Potential future production disruptions or shutdowns.
The duration of government measures, including social distancing.
In addition to financial and operational priorities, Maple Leaf Foods believes that shared value and operating its business for
the benefit of all stakeholders is crucial. The Company’s guiding pillars to be the “Most Sustainable Protein Company on Earth”
include Better Food, Better Care, Better Communities, Better Planet and are core to how Maple Leaf Foods conducts itself. To
that end, the Company’s priorities include:
•
•
•
•
Better Food - leading the real food movement and transitioning key brands to 100.0% “raised without antibiotics”.
Better Care -
management to open housing systems by 2021.
further advancement of animal care, including progress towards transitioning all sows under
Better Communities - investing approximately 1% of pre-tax profit to advance sustainable food security.
Better Planet - continuing to amplify its commitment to carbon neutrality, while focusing on eliminating waste in any
resources it consumes, including food, energy, water, packaging, and time.
Non-IFRS Financial Measures
The Company uses the following non-IFRS measures: Adjusted Operating Earnings, Adjusted Earnings per Share, Adjusted
EBITDA, Adjusted EBITDA Margin, Construction Capital, Net Debt, Free Cash Flow and Return on Net Assets. 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 EBITDA and Adjusted EBITDA Margin
Adjusted Operating Earnings, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS measures used by Management
to evaluate financial operating results. Adjusted Operating Earnings is defined as earnings before income taxes adjusted for
items that are not considered representative of ongoing 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.
Adjusted EBITDA is defined as Adjusted Operating Earnings plus depreciation and intangible asset amortization, adjusted for
items included in other expense that are not considered representative of ongoing operational activities of the business.
Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by sales.
6
The tables below provide a reconciliation of earnings (loss) before income taxes as reported under IFRS in the consolidated
financial statements to Adjusted Operating Earnings and Adjusted EBITDA for the three and twelve months ended December
31, as indicated below. Management believes that these non-IFRS measures are useful in assessing the performance of the
Company’s ongoing operations and its ability to generate cash flows to fund its cash requirements, including the Company’s
capital investment program.
Three
months
ended
December
31, 2020
Three
months
ended
December
31, 2019
($ millions)(i)
(Unaudited)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Total
Total
Earnings
(loss)
before
income taxes
$
89.4
(32.3)
(21.7)
$
35.4
$
62.1
(38.2)
(0.2)
$
23.6
Interest
expense
and
other
financing costs
Other
expense (income)
Restructuring
and
other
related costs
—
0.9
1.2
—
—
—
8.0
8.0
—
8.0
8.9
1.2
—
(0.6)
5.0
—
0.1
—
7.4
(4.1)
7.4
(4.6)
—
5.0
Earnings
(loss)
from operations
$
91.5
(32.3)
(5.7)
$
53.5
$
66.5
(38.1)
3.0
$
31.4
(Increase)
decrease
in
fair
value
of
biological assets
Unrealized
loss
on
derivative contracts
—
—
—
—
(1.8)
7.6
(1.8)
7.6
—
—
—
—
(7.8)
4.7
(7.8)
4.7
Adjusted
Operating Earnings
$
91.5
(32.3)
—
$
59.2
$
66.5
(38.1)
—
$
28.4
Depreciation
and amortization
Items
of
included
in
ongoing operations(iii)
other
income
(expense)
representative
46.5
(1.4)
3.6
—
—
50.0
43.1
3.3
1.3
(0.2)
0.6
(0.1)
—
—
46.4
0.5
Adjusted EBITDA
$
136.5
(28.7)
1.3
$
109.1
$
110.2
(34.9)
—
$
75.3
EBITDA Margin
Adjusted
(i)
(ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are
Totals may not add due to rounding.
(54.7)%
(70.3)%
11.4 %
12.6 %
9.7 %
N/A
N/A
7.4 %
comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when
assessing a segment's operating results.
(iii) Primarily includes insurance settlements, gain/loss on sale of long-term assets and asset impairment.
($ millions)(i)
(Unaudited)
Twelve
months
ended
December
31, 2020
Twelve
months
ended
December
31, 2019
Meat
Protein
Group
Plant
Protein
Non-
Group Allocated(ii)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Total
Total
Earnings
(loss)
before
income taxes
$
330.2
(125.8)
(44.5)
$
159.9
$
218.0
(84.2)
(46.8)
$
87.0
Interest
expense
and
other
financing costs
Other
(income) expense
Restructuring
and
other
related costs
—
(0.9)
4.3
—
0.1
—
31.5
17.5
31.5
16.8
—
0.3
—
4.3
11.0
—
0.2
—
32.0
2.7
—
32.0
3.3
11.0
Earnings
(loss)
from operations
$
333.6
(125.7)
4.5
$
212.4
$
229.3
(84.0)
(12.1)
$
133.3
(Increase)
decrease
in
fair
value
of
biological assets
Unrealized
(gain)
loss
on
derivative contracts
—
—
—
—
(0.7)
(3.8)
(0.7)
(3.8)
—
—
—
—
5.5
6.5
5.5
6.5
Adjusted
Operating Earnings
$
333.6
(125.7)
—
$
207.9
$
229.3
(84.0)
—
$
145.4
Depreciation
and amortization
177.6
14.4
—
192.0
164.2
12.6
—
176.8
Items
of
included
in
ongoing operations(iii)
other
income
representative
(2.7)
(0.1)
0.8
(2.0)
(0.3)
(0.2)
(0.4)
(1.0)
Adjusted EBITDA
$
508.5
(111.4)
0.8
$
397.9
$
393.2
(71.6)
(0.4)
$
321.2
Adjusted
EBITDA Margin
12.4 %
(52.8)%
N/A
9.2 %
10.4 %
(40.6)%
N/A
8.1 %
(i)
Totals may not add due to rounding.
(ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are
comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when
assessing a segment's operating results.
(iii) Primarily includes insurance settlements, gain/loss on sale of long-term assets and asset impairment.
7
Adjusted Earnings per Share
Adjusted Earnings per Share, a non-IFRS measure, is used by Management to evaluate financial operating results. It is
defined as basic earnings per share and is adjusted on the same basis as Adjusted Operating Earnings. The table below
provides a reconciliation of basic earnings per share as reported under IFRS in the audited consolidated statements of
earnings to Adjusted Earnings per Share for the years ended December 31, as indicated below. Management believes this
basis is the most appropriate on which to evaluate financial results as they are representative of the ongoing operations of the
Company.
($
per share)
(Unaudited)
Basic
earnings
per share
Income
tax
representative
recovery
of
Restructuring
Items
included
considered
operations(ii)
fair
Change in
not
considered
ongoing operations
related costs(i)
expense
and
in
other
other
representative
of ongoing
(income) not
value
of
biological assets
Unrealized
loss
(gain)
on derivatives
Adjusted
Earnings
per Share(iii)
Three
months
ended
December 31,
Twelve
months
ended
December 31,
2020
0.20
—
0.01
0.06
(0.01)
0.05
0.30
$
$
2019
0.14
—
0.03
(0.03)
(0.05)
0.03
0.12
$
$
$
$
2020
0.92
—
0.03
0.11
—
(0.02)
$
1.02
$
2019
0.60
(0.08)
0.07
0.02
0.03
0.04
0.68
(i)
(ii)
Includes per share impact of restructuring and other related costs, net of tax.
Primarily includes legal fees and provisions and transaction related costs, net of tax.
(iii) Totals may not add due to rounding.
Construction Capital
Construction Capital, a non-IFRS measure, is used by Management to evaluate the amount of capital resources invested in
specific strategic development projects that have not yet entered commercial production. It is defined as investments and
related financing charges in projects over $50.0 million that are related to longer-term strategic initiatives, with no returns
expected for at least 12 months in the future and the asset will be re-categorized from Construction Capital once operational.
Current strategic initiatives primarily include the investments in the London, Ontario poultry production facility, further capacity
and efficiency improvements in the prepared meats business, investments in plant protein capacity at the Walker Drive facility
in Brampton, Ontario, and the plant protein production facilities in Indiana. The following table is a summary of Construction
Capital activity and debt financing for the periods indicated below.
($ thousands)
Opening
balance
at
January 1
Additions
Interest
paid
and capitalized(i)
Balance
at
December 31
Construction
Capital
debt
financing(ii)
2020
2019
$
106,831
$
22,422
326,496
7,263
440,590
431,707
$
$
82,789
1,620
$
$
106,831
105,211
(i)
(ii)
Certain comparatives figures have been restated to conform with current year presentations.
Assumed to be fully funded by debt to the extent that the Company has Net Debt outstanding.
Net Debt
The following table reconciles Net Debt to amounts reported under IFRS in the Company's consolidated financial statements
as at December 31, as indicated below. The Company calculates Net Debt as cash and cash equivalents, less long-term debt
and bank indebtedness. Management believes this measure is useful in assessing the amount of financial leverage employed.
($ thousands)
Cash
and
cash equivalents
Current
portion
of
long-term debt
Long-term debt
Total debt
Net Debt
As
at December 31,
2020
100,828
(900)
(745,048)
(745,948)
(645,120)
$
$
$
$
$
$
$
$
2019
97,285
(899)
(538,429)
(539,328)
(442,043)
8
Free Cash Flow
Free Cash Flow, a non-IFRS measure, is used by Management to evaluate cash flow after investing in the maintenance or
expansion of the Company's asset base. It is defined as cash provided by operations, less cash additions to long-term assets
and capitalized interest. The following table calculates Free Cash Flow for the periods indicated below:
($ thousands)
(Unaudited)
Cash
Additions
provided
to
by
operating activities
long-term assets
Interest
Free
paid
Cash
and capitalized(i)
Flow
Three
months
ended
December 31,
Twelve
months
ended
December 31,
2020
84,906
(179,455)
(2,968)
(97,517)
$
$
$
$
$
$
2019
81,145
(83,474)
(1,311)
(3,640)
2020
$
321,449
(432,540)
(8,214)
$
(119,305)
$
$
$
2019
270,180
(268,095)
(2,650)
(565)
(i)
Certain comparatives figures have been restated to conform with current year presentations.
Return on Net Assets
Return on Net Assets ("RONA") is calculated by dividing tax effected earnings from operations (adjusted for items which are
not considered representative of the underlying operations of the business) by average monthly net assets. Net assets are
defined as total assets (excluding cash and deferred tax assets) less non-interest bearing liabilities (excluding deferred tax
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,
projections, beliefs, judgments and assumptions based on information available at the time the applicable forward-looking
statement was made and in light of the Company’s experience combined with its perception of historical trends. Such
statements include, but are not limited to, statements with respect to objectives and goals, in addition to statements with
respect to beliefs, plans, targets, goals, objectives, expectations, anticipations, estimates, and intentions. Forward-looking
statements are typically identified by words such as "anticipate", "continue", "estimate", "expect", "may", "will", "project",
"should", "could", "would", "believe", "plan", "intend", "design", "target", "undertake", "view", "indicate", "maintain", "explore",
"entail", "schedule", "objective", "strategy", "likely", "potential", "outlook", "aim", "propose", "goal", and similar expressions
suggesting future events or future performance. These statements are not guarantees of future performance and involve
assumptions, risks and uncertainties that are difficult to predict.
By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause
actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes
the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these
expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Specific forward-looking information in this document may include, but is not limited to, statements with respect to:
•
•
•
•
•
•
•
•
•
•
implications of COVID-19;
future performance, including future financial objectives, goals and targets, expected capital spend and expected SG&A
expenditures for the Company and each of its operating segments;
the execution of the Company's business strategy, including the development and expected timing of business initiatives,
brand expansion and repositioning, and other growth opportunities, as well as the impact thereof;
the impact of international trade conditions on the Company's business, including access to markets, implications
associated with the spread of foreign animal disease (such as African Swine Fever ("ASF")), and other social, economic
and political factors that affect trade;
competitive conditions and the Company's ability to position itself competitively in the markets in which it competes;
capital projects, including planning, construction, estimated expenditures, schedules, approvals, expected capacity, in-
service dates and anticipated benefits of construction of new facilities and expansions of existing facilities;
the Company's dividend policy, including future levels and sustainability of cash dividends, the tax treatment thereof and
future dividend payment dates;
the impact of commodity prices on the Company's operations and financial performance, including the use and
effectiveness of hedging instruments;
expected future cash flows and the sufficiency thereof, sources of capital at attractive rates, future contractual obligations,
future financing options, renewal of credit facilities, and availability of capital to fund growth plans, operating obligations
and dividends;
operating risks, including the execution, monitoring and continuous improvement of the Company's food safety programs,
animal health initiatives and cost reduction initiatives;
9
•
•
•
•
the implementation, cost and impact of environmental sustainability initiatives, as well as the anticipated future cost of
remediating environmental liabilities;
the adoption of new accounting standards and the impact of such adoption on the financial position of the Company;
expectations regarding pension plan performance, including future pension plan assets, liabilities and contributions; and
developments and implications of actual or potential legal actions.
Various factors or assumptions are typically applied by the Company in drawing conclusions or making the forecasts,
projections, predictions or estimations set out in the forward-looking statements. These factors and assumptions are based on
information currently available to the Company, including information obtained by the Company from third-party sources and
include but are not limited to the following:
•
•
•
•
•
•
•
•
•
•
•
•
expectations regarding the impact and future implications of COVID-19 and adaptations in operations, customer and
consumer behaviour, economic patterns and international trade;
the competitive environment, associated market conditions and market share metrics, the expected behaviour of
competitors and customers and trends in consumer preferences;
the success of the Company's business strategy, including execution of the strategy in each of the Meat Protein and Plant
Protein Groups;
prevailing commodity prices, interest rates, tax rates and exchange rates;
the economic condition of and the socio-political dynamics between Canada, the U.S., Japan and China, and the ability of
the Company to access markets in these countries;
the spread of foreign animal disease (including ASF), preparedness strategies to manage such spread, and implications
for all protein markets;
the availability of capital to fund future capital requirements associated with existing operations, assets and projects;
expectations regarding participation in and funding of the Company's pension plans;
the availability of insurance coverage to manage certain liability exposures;
the extent of future liabilities and recoveries related to legal claims;
prevailing regulatory, tax and environmental laws; and
future operating costs and performance, including the Company's ability to achieve operating efficiencies and maintain
high sales volumes, high turnover of inventories and high turnover of accounts receivable.
Readers are cautioned that these assumptions may prove to be incorrect in whole or in part. The Company's actual results
may differ materially from those anticipated in any forward-looking statements.
Factors that could cause actual results or outcomes to differ materially from the results expressed, implied, or projected in the
forward-looking statements contained in this document include, among other things, risks associated with the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
implications of COVID-19 on the operations and financial performance of the Company, as well the implications for macro
socio-economic trends;
competition, market conditions and the activities of competitors and customers;
food safety, consumer liability and product recalls;
the health status of livestock, including the impact of potential pandemics;
international trade and access to markets, as well as social, political and economic dynamics affecting same;
availability of and access to capital;
decision respecting the return of capital to shareholders;
the execution of capital projects, including cost, schedule and regulatory variables;
food safety, consumer liability and product recalls;
cyber security and the maintenance and operation of the Company’s information systems and processes;
acquisitions and divestitures;
climate change;
fluctuations in the debt and equity markets;
fluctuations in interest rates and currency exchange rates;
pension assets and liabilities;
cyclical nature of the cost and supply of hogs and the competitive nature of the pork market generally;
the effectiveness of commodity and interest rate hedging strategies;
impact of changes in the market value of the biological assets and hedging instruments;
10
•
•
•
•
•
•
the supply management system for poultry in Canada;
availability of plant protein ingredients;
intellectual property, including product innovation, product development, brand strategy and trademark protection;
consolidation of operations and focus on protein;
the use of contract manufacturers;
reputation;
• weather;
•
•
•
•
•
•
compliance with government regulation and adapting to changes in laws;
actual and threatened legal claims;
consumer trends and changes in consumer tastes and buying patterns;
environmental regulation and potential environmental liabilities;
consolidation in the retail environment;
employment matters, including complying with employment laws across multiple jurisdictions, the potential for work
stoppages due to non-renewal of collective agreements, recruiting and retaining qualified personnel, reliance on key
personnel and succession planning;
•
pricing of products;
• managing the Company’s supply chain;
•
•
changes in International Financial Reporting Standards and other accounting standards that the Company is required to
adhere to for regulatory purposes; and
other factors as set out under the heading "Risk Factors" in the Company's Management Discussion and Analysis for the
year ended December 31, 2020.
The Company cautions readers that the foregoing list of factors is not exhaustive.
Readers are further cautioned that some of the forward-looking information, such as statements concerning future capital
expenditures, Adjusted EBITDA Margin growth in the Meat Protein Group, expected sales and growth margin targets in the
Plant Protein Group and SG&A spend, may be considered to be financial outlooks for purposes of applicable securities
legislation. These financial outlooks are presented to evaluate potential future earnings and anticipated future uses of cash
flows and may not be appropriate for other purposes. Readers should not assume these financial outlooks will be achieved.
More information about risk factors can be found under the heading “Risk Factors” in the Company's Annual Management's
Discussion and Analysis for the year ended December 31, 2020, that is available on SEDAR at www.sedar.com. The reader
should review such section in detail. Additional information concerning the Company, including the Company’s Annual
Information Form, is available on SEDAR at www.sedar.com.
All forward-looking statements included herein speak only as of the date hereof. Unless required by law, the Company does
not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. All forward-looking statements contained herein are expressly qualified by this
cautionary statement.
About Maple Leaf Foods Inc.
Maple Leaf Foods Inc. is a producer of food products under leading brands including Maple Leaf®, Maple Leaf Prime®,
Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife®, and Field Roast™. The Company's portfolio includes
prepared meats, ready-to-cook and ready-to-serve meals, snacks kits, valued-added fresh pork and poultry, and plant protein
products. The address of the Company's registered office is 6985 Financial Dr. Mississauga, Ontario, L5N 0A1, Canada. The
Company employs approximately 13,500 people and does business primarily in Canada, the U.S. and Asia. The Company's
shares trade on the Toronto Stock Exchange (MFI).
11
Consolidated Balance Sheets
Canadian dollars)
As
at
December 31,
2020
As
at
December 31,
2019
of
thousands
(In
(Audited)
ASSETS
Current assets
cash equivalents
and
Cash
Accounts receivable
Notes receivable
Inventories
Biological assets
and
Income
other
Prepaid
expenses
held
Assets
for sale
taxes recoverable
other assets
and
and equipment
Property
Right-of-use assets
Investments
Other
Deferred
Goodwill
Intangible assets
Total assets
long-term assets
tax asset
LIABILITIES
Current liabilities
AND EQUITY
payable
and accruals
Accounts
Current
Current
Current
Income
Other
portion
portion
portion
taxes payable
current liabilities
of provisions
of
of
long-term debt
lease obligations
Long-term debt
Lease obligations
Employee benefits
Provisions
Other
Deferred
Total liabilities
long-term liabilities
tax liability
Shareholders’ equity
earnings
Share capital
Retained
Contributed surplus
other
Accumulated
Treasury stock
Total
Total
shareholders’ equity
and equity
liabilities
comprehensive
$
$
$
$
$
$
100,828
159,750
31,550
398,070
125,648
1,830
64,517
575
882,768
1,721,487
222,705
15,910
9,568
14,070
652,501
341,196
3,860,205
501,529
1,529
900
79,601
27,639
55,849
667,047
745,048
160,636
188,946
44,230
11,918
109,916
1,927,741
$
$
$
$
$
$
97,285
154,969
31,699
385,534
119,016
—
51,494
34,293
874,290
1,386,482
227,426
3,448
12,497
—
657,179
352,713
3,514,035
445,774
3,973
899
39,505
205
44,698
535,054
538,429
204,013
116,742
44,929
3,026
121,972
1,564,165
(loss) income
$
$
$
1
838,969
,124,973
5,866
(13,414)
(23,930)
1,932,464
3,860,205
$
1
840,005
,137,450
—
2,793
(30,378)
1,949,870
3,514,035
$
$
12
Consolidated Statements of Net Earnings
(In
thousands
of
Canadian
dollars,
except
share amounts)
2020
2019
2020
2019
Three
months
ended
December 31,
Twelve
months
ended
December 31,
Sales
Cost
of
goods sold
Gross profit
(Unaudited)
(Unaudited)
(Audited)
(Audited)
$
1,129,212
$
1,015,969
$
4,303,722
$
3,941,545
948,946
855,204
3,600,669
3,350,566
$
180,266
$
160,765
$
703,053
$
590,979
Selling,
general
and
administrative expenses
126,760
129,356
490,659
457,681
Earnings
before
the following:
$
53,506
$
31,409
$
212,394
$
133,298
Restructuring
and
other
related costs
Other
expense (income)
Earnings
before
interest
and
income taxes
Interest
expense
and
other
financing costs
Earnings
before
income taxes
Income
tax expense
Net earnings
Earnings
shareholders:
per
share
attributable
to
common
Basic
earnings
per share
Diluted
earnings
per share
Weighted
average
number
of
shares (millions):
Basic
Diluted
$
$
$
$
$
1,214
8,891
43,401
8,046
35,355
10,001
25,354
0.20
0.20
123.2
124.1
$
$
$
$
$
5,025
(4,624)
4,284
16,757
11,004
3,268
31,008
$
191,353
$
119,026
7,383
31,480
23,625
$
159,873
6,168
46,596
17,457
$
113,277
0.14
0.14
$
$
123.5
124.4
0.92
0.91
123.1
124.3
$
$
$
$
32,031
86,995
12,367
74,628
0.60
0.60
123.6
125.2
13
Consolidated Statements of Other Comprehensive
Income (Loss)
(In
thousands
of
Canadian dollars)
2020
2019
2020
2019
Three months ended December 31, Twelve months
ended
December 31,
Net earnings
Other
comprehensive
income (loss)
(Unaudited)
(Unaudited)
(Audited)
(Audited)
$
25,354
$
17,457
$
113,277
$
74,628
Actuarial
or
loss
2019:
(losses)
of
(Net
$1.8
gains
of
tax
million
that
$0.7
and
will not
million
$14.1 million)
be
and
reclassified
to
$16.1 million;
profit
Items
that
or loss:
are
or
may
be
reclassified subsequently
to
profit
Change
in
adjustment
million;
accumulated
(Net of
tax
$0.0
2019:
foreign
of
$0.0
million
currency
million
and
and $0.0
$0.0 million)
translation
Change
in
designated
$2.6
gain
foreign
currency
net
a
as
investment
and
million;
$1.4
million
$1.5 million)
on
and
long-term debt
(Net
$0.6
hedge
2019:
of
million
tax of
Change
in
hedges
2019:
unrealized
of tax
(Net
gains
of
million
$0.9
and
$0.2
and
(losses)
and
million
$0.6 million)
on
$5.2
cash
flow
million;
Total items
profit
that
or loss
are
or
may
be
reclassified
subsequently
to
Total
other
comprehensive
income (loss)
Comprehensive income
$
(1,859)
$
29,938
$
(46,822)
$
(9,870)
$
(17,466)
$
(4,429)
$
(8,814)
$
(15,992)
14,429
3,792
7,542
11,748
2,501
1,866
(14,935)
3,505
$
$
$
(536)
(2,395)
22,959
$
$
$
1,229
31,167
48,624
$
$
$
(16,207)
(63,029)
50,248
$
$
$
(739)
(10,609)
64,019
14
Consolidated Statements of Changes in Total Equity
thousands
(In
(Audited)
of
Canadian dollars)
Share
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)(i)
Foreign
currency
translation
surplus adjustment
Contributed
Unrealized
and
gains
losses
on
flow
cash
hedges
Treasury
stock
Total
equity
Balance
at December
31, 2019
$
840,005
1,137,450
Net earnings
Other
comprehensive loss
Dividends
declared
($0.64
per share)
Share-based
compensation expense
Deferred
compensation
taxes
on
share-based
Exercise
of
stock options
—
113,277
—
(46,822)
—
(78,932)
—
—
—
—
—
—
1,012
—
17,301
—
—
700
—
Settlement
of
share-based compensation
—
—
(9,737)
Change
in
shares
obligation
for
repurchase
of
(2,048)
—
(2,398)
4,274
(1,481)
(30,378)
$
1,949,870
—
—
—
113,277
(1,272)
(14,935)
—
—
—
—
—
—
—
—
—
(63,029)
(78,932)
17,301
700
1,012
—
6,448
(3,289)
—
—
(4,446)
Balance at
December
31, 2020
$
838,969
1,124,973
5,866
3,002
(16,416)
(23,930) $
1,932,464
thousands
(In
(Audited)
of
Canadian dollars)
Share
capital
Retained
earnings
Accumulated
comprehensive
(loss)(i)
other
income
Foreign
currency
translation
surplus adjustment
Contributed
Unrealized
and
gains
on
losses
flow
cash
hedges
Treasury
stock
Total
equity
Balance
at
December
31, 2018
$
849,655
1,178,389
4,649
8,518
(4,986)
(29,386)
$
2,006,839
Impact
of
new
IFRS standards
Net earnings
Other
comprehensive
(loss) income(ii)
Dividends
declared
($0.58
per share)
Share-based
compensation expense
Deferred
compensation
taxes
on
share-based
—
(1,100)
—
74,628
—
(9,870)
—
(71,824)
—
—
—
—
—
—
—
17,935
—
460
Settlement
of
share-based compensation
—
(20,463)
(7,028)
Shares
purchased
by
RSU trust
Exercise
of
stock options
Repurchase
of shares
—
7,760
—
—
—
—
(17,410)
(12,310)
(16,016)
—
—
—
—
(4,244)
3,505
—
—
—
—
—
—
—
—
—
(1,100)
74,628
(10,609)
(71,824)
17,935
460
—
13,986
(13,505)
—
(14,978)
(14,978)
—
—
—
—
7,760
(45,736)
Balance
at
December
31, 2019
$
840,005
$1,137,450
$
—
$
4,274
$
(1,481)
$
(30,378)
$
1,949,870
(i)
(ii)
Items that are or may be subsequently reclassified to profit or loss.
Included in other comprehensive income (loss) is the change in actuarial gains and losses that will not be reclassified to profit or loss and
has been reclassified to retained earnings.
15
—
—
—
—
—
—
—
—
—
—
—
—
—
Consolidated Statements of Cash Flows
(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
Share-based compensation
Deferred
income taxes
Income
tax current
Interest
expense
and
other
financing costs
Gain
on
sale
of
long-term assets
Asset impairment
Change
fair
derivatives
in
value
of
non-designated
Change
in
net
pension obligation
Net
income
taxes paid
Interest paid
Change
in
related costs
provision
for
restructuring
and
other
Change
in
derivatives margin
Other
Change
in
non-cash
operating
working capital
Three
months
ended
December 31,
Twelve
months
ended
December 31,
2020
(Unaudited)
2019
(Unaudited)
2020
(Audited)
2019
(Audited)
$
25,354
$
17,457
$
113,277
$
74,628
(1,846)
54,324
5,140
(18,480)
28,481
8,046
134
(177)
7,080
2,808
(5,061)
(5,731)
(4,033)
(15,474)
137
4,204
(7,771)
46,437
4,583
(4,126)
10,294
7,383
(5,256)
—
5,161
2,926
(2,726)
(7,131)
4,179
(4,014)
(412)
14,161
(687)
196,266
17,301
(5,945)
52,541
31,480
(2,024)
1,377
(3,947)
9,286
(26,212)
(28,839)
(3,509)
(8,074)
5,041
(25,883)
5,545
176,796
17,935
(1,323)
13,690
32,031
(4,164)
—
5,785
4,730
(40,682)
(28,137)
8,144
(2,210)
1,779
5,633
Cash
provided
by
operating activities
$
84,906
$
81,145
$
321,449
$
270,180
Financing activities
Dividends paid
Net
increase
in
long-term debt
Payment
of
lease obligation
Exercise
of
stock options
Repurchase
of shares
Payment
of
financing fees
Purchase
of
treasury stock
$
(19,756)
$
(17,921)
$
(78,932)
$
(71,824)
49,861
(10,469)
—
—
—
—
69,861
(8,971)
—
(20,347)
(38)
—
215,601
(37,554)
1,012
—
(599)
—
169,491
(34,690)
7,760
(20,347)
(5,635)
(14,978)
Cash
provided
by
financing activities
$
19,636
$
22,584
$
99,528
$
29,777
Investing activities
Additions
to
long-term assets
$
(179,455)
$
(83,474)
$
(432,540)
$
(268,095)
Acquisition
of
business,
net
of
cash
acquired
Interest
paid
and capitalized
Proceeds
from
sale
of
long-term assets
Purchase
of investments
Payment
acquisition
of
income
tax
liabilities
assumed
on
—
(2,968)
519
—
—
—
(1,311)
7,581
—
—
—
(8,214)
37,373
(14,053)
(847)
(2,650)
7,727
—
—
(11,385)
Cash
used
in
investing activities
Increase
in
cash
and
cash equivalents
Cash
and
cash
equivalents,
beginning
of period
$
$
(181,904)
(77,362)
178,190
$
$
(77,204)
26,525
70,760
$
$
(417,434)
3,543
97,285
$
$
(275,250)
24,707
72,578
Cash
and
cash
equivalents,
end
of period
$
100,828
$
97,285
$
100,828
$
97,285
16
Management’s Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
The Business
Financial Overview
Selected Financial Information
Company Vision and Strategic Plan
Response to COVID-19
Operating Review
Restructuring and Other Related Costs
Interest Expense and Other Financing Costs
Income Taxes
Subsequent Event
Capital Resources
Capital Expenditures
Normal Course Issuer Bid
Cash Flow and Financing
Contractual Obligations
Financial Instruments and Risk Management Activities
Employee Benefit Plans
Transactions with Related Parties
Government Incentives
Share Capital
Other Matters
Maple Leaf Centre for Action on Food Security
Summary of Quarterly Results
Summary of 2020 Fourth Quarter Results
Discussion of Factors Impacting the Company's Operations and Results
Environment
Risk Factors
Critical Accounting Estimates
Significant Accounting Policies
Internal Controls Over Financial Reporting
2021 Outlook and Long-term Targets
Non-IFRS Financial Measures
Forward-Looking Statements
1
1
2
2
3
3
5
5
5
5
5
7
7
7
8
8
12
12
13
13
13
13
14
15
16
17
18
26
28
29
30
31
33
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Management’s Discussion and Analysis
All dollar amounts are presented in Canadian dollars unless otherwise noted.
February 24, 2021
1. THE BUSINESS
Maple Leaf Foods Inc. (“Maple Leaf Foods” or the "Company") is a producer of food products under leading brands including Maple
Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife®, and Field Roast™. The Company's
portfolio includes prepared meats, ready-to-cook and ready-to-serve meals, snacks kits, valued-added fresh pork and poultry, and plant
protein products. The address of the Company's registered office is 6985 Financial Dr. Mississauga, Ontario, L5N 0A1, Canada. The
Company employs approximately 13,500 people and does business primarily in Canada, the U.S. and Asia. The Company's shares
trade on the Toronto Stock Exchange (MFI).
2. FINANCIAL OVERVIEW
millions
($
Sales
except
earnings
per share)
Net Earnings
Basic
Earnings
per Share
Adjusted
Operating
Adjusted
Earnings
Earnings(i)
Share(i)
per
Twelve
months
ended
December 31,
2020
4,303.7
113.3
0.92
207.9
1.02
$
$
$
$
$
2019
% Change
$
$
$
$
$
3,941.5
74.6
0.60
145.4
0.68
9.2 %
51.8 %
53.3 %
43.0 %
50.0 %
(i)
Refer to the section titled Non-IFRS Financial Measures starting on page 31 of this document for the definition of these non-IFRS measures.
Sales for 2020 were $4,303.7 million compared to $3,941.5 million last year, an increase of 9.2%, driven by strong growth in both the
Meat and Plant Protein Groups. An extra week in the fourth quarter of 2020 also contributed to sales growth.
Net earnings for 2020 were $113.3 million ($0.92 per basic share) compared to $74.6 million ($0.60 per basic share) last year. Strong
commercial performance in the Meat Protein Group more than offset incremental costs related to COVID-19, strategic investments in
the Plant Protein Group, as well as a non-recurring favourable resolution of an income tax audit last year. Results were also positively
impacted by a higher gain from non-cash fair value changes in biological assets and derivative contracts and higher non-recurring other
expenses, which are excluded in the calculation of Adjusted Operating Earnings below.
Adjusted Operating Earnings for 2020 were $207.9 million compared to $145.4 million last year, and Adjusted Earnings per Share for
2020 were $1.02 compared to $0.68 last year.
For further discussion on key metrics and a discussion of results by operating segment, refer to the section titled Operating Review
starting on page 3 of this document.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
3. SELECTED FINANCIAL INFORMATION
The following table summarizes selected financial information for the three years ended December 31:
($ millions except earnings per share and RONA)
Sales
Adjusted Operating Earnings(i)
Adjusted EBITDA(i)(ii)
Adjusted EBITDA Margin(i)
Net earnings
Adjusted Earnings per Share(i)
Basic earnings per share
Diluted earnings per share
Total assets(ii)
Construction Capital(i)
Net Debt(i)
Total long-term liabilities(ii)
Return on Net Assets ("RONA")(i)
Free Cash Flow
Cash provided by operating activities(iii)
Cash dividends per share
2020
2019
2018
$ 4,303.7
$ 3,941.5
$ 3,495.5
$
$
$
$
$
$
207.9
397.9
9.2%
113.3
1.02
0.92
0.91
$
$
$
$
$
$
145.4
321.2
8.1%
74.6
0.68
0.60
0.60
$
$
$
$
$
$
215.6
344.3
9.9%
101.3
1.22
0.81
0.79
$ 3,860.2
$ 3,514.0
$ 3,140.0
$
$
440.6
(645.1)
$
$
106.8
(442.0)
$ 1,260.7
$ 1,029.1
5.3%
$
$
$
(119.3)
321.4
0.64
3.9%
(0.6)
270.2
0.58
$
$
$
$
$
$
$
$
$
22.4
(310.8)
637.4
7.3%
119.8
299.7
0.52
(i)
(ii)
Please refer to the section entitled Non-IFRS Financial Measures starting on page 31 of this document.
2018 figures restated, see Note 29(a) of the Company's 2019 audited consolidated financial statements.
(iii) Certain comparative figures have been restated to conform with current year presentation.
4. COMPANY VISION AND STRATEGIC PLAN
With a vision to become the most sustainable protein company on earth, Maple Leaf Foods is committed to creating shared value by
delivering commercial and financial results and enhancing competitive advantage through addressing the significant environmental and
social challenges faced by society today. The Company believes that the pursuit of its purpose to 'Raise the Good in Food' is a
significant differentiator that will build trust and confidence among stakeholders.
Maple Leaf Foods has constructed a multi-faceted blueprint to articulate its purpose and guide the journey to achieving its vision.
The Company measures its progress towards becoming the most sustainable protein company on earth across four pillars:
•
•
•
•
Better Food - Maple Leaf Foods is actively addressing the most pressing diet-related health issues faced by society, including
reducing artificial ingredients, antibiotics use and sodium levels, and continually advancing leadership in food safety.
Better Planet - The Company embraces a culture that focuses on reducing its environmental impact to sustainable levels by
eliminating waste in any resource it consumes, including food, energy, water, packaging and time.
Better Care - Maple Leaf Foods extends its strong values-based culture to how it treats animals, both those raised and
sourced, and strives to be a leader in animal welfare.
Better Communities - Through the Maple Leaf Centre for Action on Food Security, the Company works collaboratively with
external organizations to reduce food insecurity, while fostering a work environment that keeps people safe, rewards
excellence and empowers everyone to contribute their best.
In order to drive long-term shared value creation, Maple Leaf Foods has developed the following foundational strategies:
•
•
Leveraging leadership in sustainability - Building off its milestone achievement in late 2019 of becoming the world’s first major
carbon neutral food company, Maple Leaf Foods amplified this commitment in 2020 through its brand marketing and
packaging. These efforts, coupled with its ongoing advancements in animal welfare and minimizing use of antibiotics, helped
drive strong double-digit sales growth in sustainable meats in 2020.
Eliminating waste and improving efficiency - Maple Leaf Foods has a history of executing initiatives designed to improve
efficiencies and contribute to profitability, backed by zero-based budgeting as a foundational element of its culture. In 2020, the
Company improved operating efficiencies across its existing supply chain, after excluding the costs associated with mitigating
2
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
•
•
•
•
COVID-19 risks. Maple Leaf Foods is also advancing construction of its new poultry plant in London, Ontario, which will help
optimize its poultry processing network while meeting the growing consumer demand for chicken.
Broadening reach into new geographies, channels and protein alternatives - In 2020, the Company continued to grow its
presence in foreign markets. The Meat Protein Group saw sustained sales momentum into the U.S. market, led by strong
double-digit growth of its Greenfield Natural Meat Co. brand, and continued exports into Asian markets. The Plant Protein
Group achieved 19.5% sales growth in 2020, supported by increased consumer adoption and strategic investments in
advertising, promotion and marketing to grow brand awareness and secure market share.
Embracing a digital future across the business - Maple Leaf Foods continues to deploy digital solutions throughout the
Company that improve access to data and information capture. In 2020, the Company converted its company-wide SAP
technology platform to the latest state-of-the-art in-memory solution (SAP S/4HANA) that will provide best-in-class data
analytics and scalability.
Investing in brands to build demand and consumer loyalty - Leveraging Meat Protein Group brand renovation work completed
in 2018, Maple Leaf Foods saw notable sales growth and market share expansion in 2020 across its Maple Leaf® and
Schneiders® brands. The Company also deployed this playbook to its Plant Protein Group brands, repositioning its Lightlife®
brand to focus on delivering simple and recognizable ingredients and reinforcing the commitment of its Field Roast™ brands to
deliver bold and adventurous taste.
Investing in people so talent thrives - In 2020, Maple Leaf Foods refreshed its guiding leadership values to better acknowledge
and reflect the organizations evolution over the last decade. The Company remains committed to developing people and
enabling them to maximize their contributions.
5. RESPONSE TO COVID-19
As an essential service, Maple Leaf Foods is focused on protecting the health and well-being of its people, maintaining business
continuity, and broadening its social outreach. To manage through this unprecedented environment, the Company has taken a number
of measures in its business and operating practices that include heightened safety policies and procedures, and close communication
and collaboration with public health authorities. These measures increased the Company’s cost structure due to higher labour, personal
protective equipment, sanitation and other expenses associated with the pandemic. The health and safety of our people is paramount
while ensuring the security of our food supply.
Overall, the Company believes its proactive and comprehensive efforts should mitigate operational impacts. As the COVID-19 situation
evolves, Maple Leaf Foods will continue to adapt and adopt best practices that prioritize the health and safety of its employees and the
stability of the food supply. As part of Maple Leaf Foods’ broader social responsibility, the Company has provided extensive support to
front-line staff, emergency food relief efforts and health care providers.
Maple Leaf Foods’ purpose and long-term strategy remain unchanged. In 2020 gross costs associated with COVID-19 were
approximately $58 million, primarily related to labour bonus payments, personal protective equipment, incremental sanitation, screening
and testing protocols, support for the Company's hog producers, donations to support front-line healthcare workers, emergency food
relief efforts and other preventative measures. This was partially offset by reductions in discretionary spend, resulting in a net impact of
approximately $42 million to total Company Adjusted EBITDA.
Continuing COVID-19 structural costs have been incorporated in the Company's 2021 operating plan.
6. OPERATING REVIEW
During the year ended December 31, 2020, the Company had two reportable segments. These segments offer different products, with
separate organizational structures, brands, financial and marketing strategies. The Company's chief operating decision makers
regularly review internal reports for these businesses: performance of the Meat Protein Group is based on revenue growth, Adjusted
Operating Earnings and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), while the performance of
the Plant Protein Group is based predominantly on revenue growth rates, gross margin optimization and controlling investment levels,
which generate high revenue growth rates.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
The following table summarizes the Company's sales, gross profit, selling, general and administrative expenses ("SG&A"), Adjusted
Operating Earnings, Adjusted EBITDA, and Adjusted EBITDA Margin by operating segment for the years ended December 31, 2020
and December 31, 2019.
($
millions)(i)
Sales
Gross profit
Selling,
general
and administrative expenses
Adjusted
Operating
Earnings(iii)
Adjusted EBITDA(iii)
Adjusted
EBITDA
Margin(iii)
(i)
Totals may not add due to rounding.
2020
2019
Meat
Protein
Group
Plant
Protein
Non-
Group Allocated(ii)
Meat
Protein
Group
Plant
Protein
Non-
Group Allocated(ii)
Total
Total
$
4,116.5
210.8
(23.6)
$
4,303.7
$
3,778.0
176.4
(12.9) $
3,941.5
$
$
$
$
680.3
346.6
18.3
144.0
333.6
(125.7)
508.5
(111.4)
4.5 $
703.1
— $
490.7
—
0.8
$
$
207.9
397.9
$
$
$
$
568.0
338.7
229.3
393.2
35.0
(12.1) $
591.0
119.0
(84.0)
(71.6)
— $
457.7
— $
145.4
(0.4) $
321.2
12.4%
(52.8%)
n/a
9.2%
10.4%
(40.6%)
n/a
8.1%
(ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, changes in the fair value of biological assets and
derivatives, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the
measures used by the Company when assessing a segment’s operating results.
(iii) Refer to the section titled Non-IFRS Financial Measures starting on page 31 of this document for the definition of these non-IFRS measures.
Meat Protein Group
The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, snack kits, value-added fresh pork
and poultry products that are sold to retail, foodservice and industrial channels, and agricultural operations in pork and poultry. The
Meat Protein Group includes leading brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat
Co.®, Swift® and other leading regional brands.
Sales for 2020 increased 9.0% to $4,116.5 million compared to $3,778.0 million last year. Sales growth was driven by a favourable mix-
shift towards sustainable meats and branded products, growth in exports to Asian markets, and pricing actions implemented to mitigate
inflation and other structural cost increases. Strong demand in the retail channel was offset by lower volume in foodservice as a result
of COVID-19. An extra week in the fourth quarter of 2020 also contributed to sales growth.
Gross profit for 2020 was $680.3 million (gross margin of 16.5%) compared to $568.0 million (gross margin of 15.0%) last year. Gross
profit performance benefited from a favourable product and channel mix attributed to expansion of sustainable meats and other branded
products, in addition to growth in exports to Asian markets. Partially offsetting strong commercial and plant operating performance were
increased costs in response to COVID-19 to safeguard the Company's employees and maintain production. Costs associated with
COVID-19 consisted of labour bonus payments, personal protective equipment, incremental sanitation, screening and testing protocols
and other preventative measures.
SG&A expenses for 2020 were $346.6 million (8.4% of sales) compared to $338.7 million (9.0% of sales) last year. Reductions in
discretionary spend such as travel, conferences and training, as well as advertising and promotions, were more than offset by an
increase in variable compensation.
Adjusted Operating Earnings for 2020 were $333.6 million compared to $229.3 million last year, driven by factors noted above.
Adjusted EBITDA Margin was 12.4% compared to 10.4% last year, consistent with the factors noted above.
Plant Protein Group
The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein, and vegan cheese products
sold to retail, foodservice and industrial channels. The Plant Protein Group includes the leading brands Lightlife® and Field Roast™.
Sales for 2020 were $210.8 million compared to $176.4 million last year, representing growth of 19.5%, or 18.1% after excluding the
impacts of foreign exchange. Growth was driven by expanded distribution of new products, continued volume increases in its existing
portfolio, and pricing actions implemented to mitigate inflation and other structural cost increases. An extra week in the fourth quarter of
2020 also contributed to sales growth.
Gross profit for 2020 was $18.3 million (gross margin of 8.7%) compared to $35.0 million (gross margin of 19.8%) last year. The
decrease in gross profit was attributed to higher supply chain costs, expenses associated with the Company's response to COVID-19 to
safeguard its employees and maintain production, and increased trade expenditures. Costs associated with COVID-19 consisted of
increased labour expenses, personal protective equipment, screening and testing, and other preventative measures.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
SG&A expenses for 2020 were $144.0 million (68.3% of sales) compared to $119.0 million (67.4% of sales) last year. The increase in
SG&A expenses reflected the evolution of the Company's plant protein strategy to drive sales growth and secure market share in a
rapidly growing market. Supporting this strategy, significant investment in advertising, promotion and marketing was incurred during the
year to enhance awareness, renovate and relaunch brands, introduce new products and expand distribution. In addition, the Company
invested to broaden organizational capacity and its pipeline of new product innovation.
Adjusted Operating Earnings for 2020 were a loss of $125.7 million compared to a loss of $84.0 million last year. The decline in
Adjusted Operating Earnings is consistent with the factors noted above.
7. RESTRUCTURING AND OTHER RELATED COSTS
For the year ended December 31, 2020, the Company recorded restructuring and other related costs of $4.3 million. Of this amount,
$4.4 million related to accelerated depreciation and $0.1 million related to severance and other employee costs as a result of the
previously announced future closures of the Brampton, Toronto and St. Mary's poultry plants. The remaining $0.2 million reversal
related to other organizational restructuring initiatives.
For the year ended December 31, 2019, the Company recorded restructuring and other related costs of $11.0 million. Of this amount,
$5.9 million related to accelerated depreciation and other asset write-offs, and $0.2 million related to severance and other employee
related costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto. The remaining $4.9 million
related to employee related costs for other organizational restructuring initiatives.
8. INTEREST EXPENSE AND OTHER FINANCING COSTS
Interest expense and other financing costs for 2020 were $31.5 million compared to $32.0 million in the prior year. The decrease was
mainly due to lower cost of borrowing and higher capitalized interest, partially offset by higher borrowing levels from the Company's
Credit Facility.
9. INCOME TAXES
The Company's income tax expense for 2020 resulted in an effective tax rate of 29.1%. The effective tax rate in 2020 differs from the
Canadian statutory tax rate of 26.3% primarily due to (i) the geographic mix of earnings; and (ii) non-deductible expenditures and
transaction costs. The effective tax rate in 2020 used in determining Adjusted Earnings per Share is 27.7%. The effective tax rate in
determining the Adjusted Earnings per Share in 2020 differs from the Canadian statutory tax rate primarily due to the geographic mix of
earnings.
The Company's income tax expense for 2019 resulted in an effective tax rate of 14.2%. The effective tax rate in 2019 differs from the
Canadian statutory tax rate of 26.7% primarily due to (i) the manufacturing and processing credit; (ii) a deferred income tax recovery
recorded on the remeasurement of deferred tax liabilities at a lower tax rate; (iii) an adjustment to tax expense for prior periods; and (iv)
the favourable resolution of an income tax audit. The effective tax rate in determining Adjusted Earnings per Share in 2019 is 25.0%.
The effective tax rate in determining the Adjustable Earnings per Share in 2019 differs from the Canadian statutory tax rate primarily
due to non-deductible expenditures, the deferred income tax recovery, and an adjustment to tax expense for prior periods.
10. SUBSEQUENT EVENT
On February 23, 2021, Certm Inc. and certain related companies exercised their put option to sell a poultry processing facility in
Schomberg, Ontario and associated poultry supply to Maple Leaf Foods for a purchase price of $40.0 million. The put option was part of
a purchase and sale agreement dated June 27, 2018 pursuant to which Maple Leaf Foods previously acquired two poultry plants and
associated poultry supply. The closing of the acquisition is expected to occur within 120 days subject to typical closing conditions. The
transaction will be financed from a combination of cash on hand and drawings under the existing credit facilities.
11. CAPITAL RESOURCES
The consumer foods industry in which the Company operates is generally characterized by high sales volume and high turnover of
inventories and accounts receivable. In general, accounts receivable and inventories are readily convertible into cash. Investment in
working capital is affected by fluctuations in the price of raw materials, seasonal and other market-related fluctuations. The Company
has consistently generated a strong base level of operating cash flow, even in periods of higher commodity prices and during
restructuring of its operations. These operating cash flows provide a base of underlying liquidity that the Company supplements with
credit facilities and cash on hand to provide longer-term funding and to finance fluctuations in working capital levels.
The Company's cash balance as at December 31, 2020 was $100.8 million (2019: $97.3 million). Cash is held in demand and short-
term investment deposits with Canadian financial institutions having long-term debt ratings of A or higher.
5
The composition of long-term debt is shown below:
($ thousands)
Revolving
line
of credit
U.S.
term credit
Canadian
term credit
Government loans
Total
long-term debt
Current
Non-current
Total
long-term debt
Capital(i)
Construction
included
in
total
long-term debt
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
As
at
December 31,
2020
$
50,000
$
337,544
350,000
8,404
745,948
900
745,048
$
$
$
$
2019
—
346,461
185,000
7,867
539,328
899
538,429
$ 745,948
$ 539,328
$
431,707
$
105,211
(i)
Refer to the section titled Non-IFRS Financial Measures starting on page 31 of this document for the definition of this non-IFRS measure.
On April 30, 2019, the Company entered into a new syndicated credit facility (the "Credit Facility") consisting of a $1,300.0 million
unsecured committed revolving line of credit maturing April 30, 2024 and two unsecured committed term credit facilities for US$265.0
million and $350.0 million maturing April 30, 2024 and April 30, 2023, respectively. The Credit Facility refinanced and replaced the
Company's previous $250.0 million and $400.0 million unsecured committed revolving credit facilities, which were due to mature on
November 7, 2019 and October 19, 2021, respectively. The Credit Facility can 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 the London Inter-bank Offered Rate
("Libor") for U.S. dollar loans. The Credit Facility is intended to meet the Company's funding requirements for capital investments in
addition to providing appropriate levels of liquidity and for general corporate purposes. On December 11, 2019, the Company amended
the Credit Facility to reduce interest paid upon achievement of certain sustainability targets. This reduction will not materialize until at
least 2021, and there is no penalty for not achieving the targets. In addition to loans, as at December 31, 2020 the Company had drawn
letters of credit of $6.4 million on the Credit Facility (2019: $6.2 million).
The Credit Facility requires the maintenance of certain covenants. As at December 31, 2020, the Company was in compliance with all
of these covenants.
The Company has additional uncommitted credit facilities for issuing letters of credit up to a maximum of $125.0 million (2019: $125.0
million). As at December 31, 2020, $67.0 million of letters of credit had been issued thereon (2019: $79.5 million).
The Company has various government loans on specific projects, with contractual interest rates ranging from non-interest bearing to
2.9% per annum (2019: 2.9%). These facilities are repayable over various terms from 2022 to 2032. As at December 31, 2020, $8.4
million (2019: $7.9 million) was outstanding. All of these facilities are committed.
On July 19, 2019, the Company amended its three-year accounts receivable securitization facility (the "Securitization Facility") by
extending the maturity to July 19, 2022 and increasing the maximum cash advance available to the Company under the Securitization
Facility to $120.0 million. The Securitization Facility provides cash funding with a proportion of the Company's receivables being sold,
and provides the Company with competitively priced financing and further diversifies its funding sources. Under the Securitization
Facility, the Company has sold certain of its trade accounts receivable, with very limited recourse, to an unconsolidated third-party trust
financed by an international financial institution with a long-term AA- debt rating, for cash and short-term notes back to the Company.
The receivables are sold at a discount to face value based on prevailing money market rates. The Company retains servicing
responsibilities for these receivables.
As at December 31, 2020, trade accounts receivable being serviced under this program amounted to $134.7 million (2019: $133.3
million). In return for the sale of its trade receivables, the Company will receive cash of $103.2 million (2019: $101.6 million) and notes
receivable in the amount of $31.5 million (2019: $31.7 million). The notes receivable are non-interest bearing and are settled 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, 2020, the Company recorded a net
payable in the amount of $16.8 million (2019: $10.1 million net payable) in accounts payable and accruals.
The Securitization Facility is subject to certain restrictions, including the maintenance of covenants. The Company was in compliance
with all of the requirements of this facility as at December 31, 2020. If the Securitization Facility were to be terminated, the Company
would recognize the related amounts on the consolidated balance sheets and consider alternative financing if required.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
12. CAPITAL EXPENDITURES
Capital expenditures for 2020 were $490.7 million compared to $270.7 million last year. The increase in capital expenditures was
primarily attributable to the construction of the London, Ontario poultry facility and modifications to the Company’s existing network in
order to create additional plant protein capacity.
The Company currently estimates its capital expenditures for the full year of 2021 will be in the range of $550 million to $650 million,
approximately 75% of which to be comprised of Construction Capital. A significant portion of the Construction Capital is related to the
London, Ontario poultry facility and other projects to add capacity and improve efficiency in our prepared meats business.
Construction Capital also includes the intended acquisition and build-out of a plant protein facility in Indianapolis, Indiana, as announced
on January 11, 2021. This 118,000 square foot facility will enable the Company to meet the growing demand for tempeh in a capital
efficient manner.
13. NORMAL COURSE ISSUER BID
On May 21, 2020 the Toronto Stock Exchange ("TSX") accepted the Company's notice of intention to commence a Normal Course
Issuer Bid ("NCIB"), allowing the Company to repurchase, at its discretion, up to 7.5 million common shares in the open market or as
otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company
are cancelled. The program commenced on May 25, 2020 and will terminate on May 24, 2021, or on such earlier date as the Company
completes its purchases pursuant to the notice of intention. Under this bid, during the year ended December 31, 2020, no shares were
purchased for cancellation.
On May 17, 2019, the TSX accepted the Company's notice of intention to commence an NCIB, allowing the Company to repurchase, at
its discretion, up to 7.5 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms
and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 24, 2019
and was terminated on May 23, 2020. Under this bid during the year ended December 31, 2020, no shares were purchased for
cancellation. Under this bid, during the year ended December 31, 2019, 0.8 million shares were purchased for cancellation for $20.3
million at a volume weighted average price paid of $24.21 per common share.
On May 22, 2018, the TSX accepted the Company's notice of intention to commence an NCIB, which allows the Company to
repurchase, at its discretion, up to 7.8 million common shares in the open market or as otherwise permitted by the TSX, subject to the
normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on
May 24, 2018 and was terminated on May 23, 2019 as the Company completed its purchase and cancellation of 4.0 million common
shares for $126.6 million at a volume weighted average price of $31.82 per common share. Under this bid, during year ended
December 31, 2019, no shares were purchased for cancellation.
14. CASH FLOW AND FINANCING
Cash and cash equivalents were $100.8 million at the end of 2020, compared to $97.3 million in 2019. The increase in cash and cash
equivalents for the year ended December 31, 2020 was primarily due to earnings, loans drawn on the Credit Facility, proceeds from
sale of long-term assets, partially offset by investment in property and equipment, higher quarterly dividend payments, and investment
in working capital.
Cash Flow from Operating Activities
Cash provided by operating activities for 2020 was $321.4 million compared to $270.2 million in 2019. The improvement was primarily
due to higher earnings, and lower income tax payments, partially offset by higher investment in working capital.
Cash Flow from Financing Activities
Cash provided by financing activities for 2020 was $99.5 million compared to $29.8 million in 2019. The increase was mainly due to
larger loans drawn on the Credit Facility and no share repurchases under the NCIB program in the current year, partially offset by
higher dividend payments.
Cash Flow from Investing Activities
Cash used in investing activities for $417.4 million for 2020 compared to $275.3 million in 2019. The increase was primarily due to
higher investment in property and equipment and the purchase of investments, partially offset by higher proceeds from sale of long-term
assets and last year's payment of income tax liabilities assumed on a prior year acquisition, which did not recur.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
15. CONTRACTUAL OBLIGATIONS
The following table provides information about certain of the Company's significant contractual obligations as at December 31, 2020.
This table presents the undiscounted cash flows payable in respect of financial liabilities and commitments.
Undiscounted payments due by fiscal year:
($ thousands)
Financial liabilities
Due within 1 Due between Due between
year 1 and 3 years 3 and 5 years
Due after 5
years
Total
Accounts payable and accruals
$ 501,529
—
—
Long-term debt
Foreign exchange contracts
Commodity futures contracts
Interest rate swaps
Lease obligations
Other liabilities
1,083
555
1,769
6,454
81,144
4,278
406,026
339,458
—
—
10,707
58,368
—
—
—
1,211
33,549
—
—
—
—
—
—
106,501
—
$ 501,529
746,567
555
1,769
18,372
279,562
4,278
$ 596,812
475,101
374,218
106,501
$1,552,632
The Company entered into a number of contracts related to the construction of new and expanded facilities. As at December 31, 2020
these contract commitments were approximately $465.0 million (2019: $634.0 million).
Management believes its cash flow, cash on hand, and available sources of financing provide the Company with 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 19 of the Company's 2020 audited consolidated financial statements
("consolidated financial statements").
16. 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 management of price and market risk in the foreign exchange, interest rate, and commodity markets, as well as funding and
investing activities.
The Company uses derivative financial instruments 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 risk management
programs and trading activity, and approve any new hedging or trading strategies.
Financial Instruments
The Company’s financial assets and liabilities are classified into the following categories:
Cash and cash equivalents
Accounts receivable
Notes receivable
Accounts payable and accruals
Long-term debt
Derivative instruments(i)
Investments
Fair value through profit or loss
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit or loss
Fair value through other comprehensive income
(i)
These derivative instruments may be designated as cash flow hedges, fair value hedges or net investments in foreign operations hedges as
appropriate. Derivatives designated as cash flow hedges are classified as FVTOCI.
The Company applies hedge accounting as appropriate and uses derivatives and other non-derivative financial instruments to manage
its exposures to fluctuations in foreign exchange rates, interest rates, and commodity prices.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
The fair values and notional amounts of derivative financial instruments as at December 31, are shown below:
2020
2019
Notional
amount(i)
Fair value
Asset(ii)
Liability(ii)
Notional
amount(i)
Fair value
Asset(ii) Liability(ii)
Cash
flow hedges
Foreign
exchange contracts
Commodity contracts
Interest
rate swaps
Fair
value hedges(iii)
Foreign
exchange contracts
Commodity contracts
Derivatives
not
designated
in a
formal
hedging relationship
Foreign
exchange contracts
Commodity contracts
Total fair value
Current(ii)(iv)(v)
Non-current(ii)
Total
fair value
$
$
16,245
$
472,544
28,139
$
135
$
11
$
29,273
$
497
$
695
—
—
—
—
18,372
$
479,129
2,160
$
830
$
18,383
$
2,657
$
$
$
83,793
$
2,970
$
—
76,957
—
1,769
$
$
50,718
$
904
$
54,725
3,184
$
2,970
$
1,769
$
4,088
$
40
—
—
40
—
—
—
$ 71,520
$
255
$
544
$
251,868
$
842
$
3,003
$ 115,855
1,175
—
$
242,711
91
991
$
$
$
1,430
$
544
5,230
$
20,696
5,230
$
8,779
—
11,917
$
5,230
$
20,696
$
$
$
933
$
3,994
7,678
$
4,034
6,197
$
4,034
1,481
—
$
7,678
$
4,034
(i)
(ii)
Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent.
The current portion of derivative assets and liabilities are recorded in prepaid expenses and other assets and other current liabilities, respectively, in
the consolidated balance sheets. The non-current portion of derivative assets and liabilities are recorded in other long-term assets and other long-
term liabilities, respectively, in the consolidated balance sheets.
(iii) The carrying amount of the hedged items in the consolidated balance sheets are recorded at the inverse of the associated hedging instruments and
are equal to the accumulated fair value hedge adjustments less hedge ineffectiveness.
(iv) Derivatives are short-term and will impact profit or loss at various dates within the next 12 months.
(v) As at December 31, 2020, the above fair value of current assets has been increased by $7.4 million (December 31, 2019: increased by $1.1
million), and the above fair value of current liabilities has been decreased by $1.8 million (December 31, 2019: $0.0 million) on the consolidated
balance sheets, representing the difference in the fair market value of exchange traded commodity contracts and the initial margin requirements.
The difference in margin requirements and fair market value is net settled in cash each day with the futures exchange and is recorded within cash
and cash equivalents.
The Company's financial assets and liabilities include accounts receivable, notes receivable and accounts payable and accruals for
which fair value approximates the carrying value due to their short-term nature.
The carrying value of long-term debt as at December 31, 2020 and 2019 approximates its fair value. The fair value of the Company’s
long-term debt has been classified as Level 2 in the fair value hierarchy and was estimated based on discounted future cash flows
using current rates for similar financial instruments subject to similar risks and maturities.
The Company's cash and cash equivalents, and derivative instruments are recorded at fair value. The fair value of cash and cash
equivalents approximates carrying value due to the short-term nature of the assets and has been classified as Level 1 in the fair value
hierarchy. The fair values of the Company’s interest rate and foreign exchange derivative instruments were estimated using current
market measures for interest rates and foreign exchange rates. Commodity futures and commodity options contracts are exchange-
traded and over-the-counter. Fair value is determined based on exchange prices and other observable market data.
Net gains and losses on financial instruments recognized at fair value through profit or loss consist of realized and unrealized gains and
losses on derivatives that were de-designated or were otherwise not in a formal hedging relationship.
For the year ended December 31, 2020, the Company recorded a loss of $23.6 million (2019: gain of $5.4 million) on financial
instruments recognized at fair value through profit or loss. The loss was mainly attributed to losses on exchange traded commodity
contracts which are used to economically hedge and offset price risk volatility inherent in the business.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
The table below sets out fair value measurements of derivative financial instruments as at December 31, 2020 using the fair value
hierarchy:
($ thousands)
Assets:
exchange contracts
Foreign
Commodity contracts(i)
Liabilities:
exchange contracts
Foreign
Commodity contracts(i)
Interest
rate swaps
Level 1
Level 2
Level 3
Total
$
$
$
$
—
—
—
—
44
—
44
3,360
145
3,505
555
—
18,372
18,927
—
—
—
—
—
—
—
$
$
$
3,360
145
3,505
555
44
18,372
$
18,971
(i)
Level 1 commodity contracts are net settled and recorded as a net asset or liability on the consolidated balance sheets.
There were no transfers between levels for the year ended December 31, 2020. Determination of fair value and the resulting hierarchy
requires the use of observable market data whenever available. The classification of a financial instrument in the hierarchy is based
upon the lowest level of input that is significant to the measurement of fair value. For financial instruments that are recognized at fair
value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing
categorization at the end of each reporting period.
Capital
The Company’s objective is to maintain a robust, cost-effective capital structure that ensures resilience, 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 internal cash flows and senior debt where
required.
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 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 cash and cash equivalents, less long-term
debt and bank indebtedness (“Net Debt”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”).
In addition to credit facilities and equity, the Company uses leases and a very limited recourse accounts receivable securitization
program as additional sources of financing.
The Company has maintained a stable dividend distribution that is based on a long-term sustainable net earnings base. From time to
time, the Company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under its
Restricted Share Unit Plan described in Note 22 of the consolidated financial statements.
There have been no material changes to the Company’s risk management activities during the year ended December 31, 2020.
Credit Risk
Credit risk refers to the risk of losses due to failure of the Company’s customers and counterparties to meet their payment obligations.
In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail,
foodservice, industrial, and convenience channels. 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. The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost.
At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit
risk on its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial
recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses. Average accounts
receivable days sales outstanding for the year is consistent with historic trends.
Management believes concentrations of credit risk with respect to accounts receivable are 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 described in Note 25 of the consolidated financial statements. 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, 2020 comprise approximately 23.8% (2019: two largest customers representing 21.6%) of total sales.
The Company is also exposed to credit risk on its notes receivable from an unconsolidated structured entity in respect of the accounts
receivable securitization program as described in Note 25 of the consolidated financial statements. Management believes that this
credit risk is limited by the long-term AA- debt rating held by the financial institution financing the third-party trust. The Company is
10
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
exposed to credit risk on its cash and cash equivalents (comprising primarily of deposits with Canadian chartered banks) and non-
exchange-traded derivative contracts. The Company mitigates this credit risk by transacting primarily with counterparties that are major
international financial institutions with long-term debt ratings of A or higher. 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, 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, 2020, the Company had available undrawn committed credit of $1,243.6 million (2019: $1,458.8 million) under the
terms of its principal banking arrangements as described in Note 14 of the consolidated financial statements. These banking
arrangements are subject to certain covenants and other restrictions.
Market Risk
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due
to changes in market interest rates.
The Company’s interest rate risk arises from long-term borrowings issued at fixed rates that create fair value interest rate risk and
variable-rate borrowings that create cash flow interest rate risk. In addition, the Company’s cash balances are typically invested in
short-term interest-bearing assets.
The Company manages its interest rate risk exposure by using a mix of fixed and variable-rate debt and periodically using interest rate
derivatives to achieve the desired proportion of variable to fixed-rate debt.
As at December 31, 2020, the Company had variable-rate debt of $737.5 million with a weighted average interest rate of 2.0% (2019:
$531.5 million at a weighted average interest rate of 3.3%). The Company has converted $472.5 million of the variable-rate debt to
fixed-rate debt using interest rate swaps with a weighted average interest rate of 3.3% (2019: $479.1 million at a weighted average
interest rate of 3.0%). In addition, the Company was exposed to floating interest rates on its accounts receivable securitization program.
As at December 31, 2020, the cash advance received pursuant to this program was $120.0 million at a weighted average interest rate
of 0.4% (2019: $111.7 million at a weighted average interest rate of 2.4%). The maximum amount available to the Company under
these programs is $120.0 million (2019: $120.0 million).
As at December 31, 2020, the Company had fixed-rate debt of $8.4 million (2019: $7.9 million) with a weighted average effective
interest rate of 4.2% (2019: 4.5%). 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.
Foreign Exchange Risk
Foreign exchange risk refers to the risk that the value of financial instruments or cash flows will fluctuate due to changes in foreign
exchange rates.
The Company’s foreign exchange risk arises primarily from transactions in currencies other than Canadian dollars, U.S. dollar-
denominated borrowings, and investments in foreign operations.
The Company uses 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.
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. The Company uses fixed price contracts with suppliers as well as exchange-
traded and over-the-counter futures and options to manage its exposure to price fluctuations on operating results.
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.
The Company applies the “own use exception” classification to certain contracts that are entered into for the purpose of procuring
commodities to be used in production and are not recognized on the balance sheets until delivery.
For a comprehensive discussion on the Company’s risk management practices and derivative exposures, please refer to Note 19 of the
consolidated financial statements.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
17. 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 market conditions indicate that there may be a significant effect on the Company’s consolidated financial statements.
During 2020, the Company recorded a pre-tax loss of $62.9 million through other comprehensive income (loss) related to the re-
measurement of plan assets and liabilities. This included a pre-tax loss of $127.9 million related to differences between plan experience
compared to actuarial assumptions and a pre-tax gain of $66.1 million related to differences between plan assets compared to the
discount rate.
During 2019, the Company recorded a pre-tax gain of $13.4 million through other comprehensive income (loss) related to the re-
measurement of plan assets and liabilities. This includes a pre-tax gain of $97.3 million related to differences between plan experience
compared to actuarial assumptions and a pre-tax loss of $84.8 million related to differences between plan assets compared to the
discount rates.
The Company operates both defined contribution and defined benefit plans. The assets of the defined benefit plans are invested
primarily in pooled funds that are subject to fluctuations in market prices. Discount rates used to measure plan liabilities are based on
long-term market interest rates. Fluctuations in these market prices and rates can impact pension expense and funding requirements.
The investment return before expenses on the Company's defined benefit pension plan assets was a gain of 9.4% in 2020 compared to
a gain of 13.3% in 2019.
The Company's contributions are funded through cash flows generated from operations. Management anticipates that future cash flows
from operations will be sufficient to fund expected future cash contributions. The Company's contributions to defined benefit plans
during 2020 were $11.7 million (2019: $12.0 million).
The Company expects to contribute $34.7 million to the pension plans in 2021, inclusive of defined benefit, defined contribution and
multi-employer plans.
18. TRANSACTIONS WITH RELATED PARTIES
Transactions between the Company and its consolidated entities have been eliminated in the Company's 2020 audited consolidated
financial statements.
The Company sponsors a number of defined benefit, defined contribution and post-retirement benefit plans. During the year ended
December 31, 2020, the Company's contributions to these plans were $30.3 million (2019: $30.1 million).
Key Management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of
the Company, directly or indirectly, including any external director of the Company.
Remuneration of key Management personnel of the Company is comprised of the following expenses:
($ thousands)
Short-term
employee benefits
Salaries,
bonuses,
and fees
Company
car allowances
Other benefits
Total
short-term
employee benefits
Severance benefits
Post-employment benefits
Share-based compensation
Total remuneration
2020
2019
$
15,575
$
13,640
316
128
326
137
$
16,019
$
14,103
—
716
110
805
11,230
11,326
$
27,965
$
26,344
During the year ended December 31, 2020, key Management personnel of the Company exercised 0.6 million share options (2019: 0.4
million share options) granted under the Maple Leaf Foods share option plans for an amount of $13.4 million (2019: $7.8 million).
The Company’s largest shareholder is McCain Capital Inc. (“MCI”) . The Company has been informed that Mr. Michael H. McCain, Chief
Executive Officer and President of the Company, is the controlling shareholder of MCI. For the year ended December 31, 2020, the
Company received services from MCI in the amount of $0.1 million (2019: $0.4 million), which represented the market value of the
transactions with MCI. As at December 31, 2020, $0.0 million (2019: $0.0 million) was owed to MCI relating to these transactions.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
McCain Financial Advisory Services ("MFAS"), is an entity jointly controlled by individuals including Mr. Michael H. McCain. For the year
ended December 31, 2020 and 2019, the Company provided services to and received from, MFAS for a nominal amount which
represented the market value of the transactions.
19. GOVERNMENT INCENTIVES
During the year ended December 31, 2020, the Company recorded government incentives totaling $20.5 million (2019: $3.8 million).
During the year ended December 31, 2020, the Company recognized $10.4 million (2019: $2.0 million) of government incentives as a
reduction in the cost of related assets. Of this amount, $6.9 million was received from the Government of Ontario and $2.4 million from
the Government of Canada to assist with the design, development and construction of the London, Ontario poultry facility. In addition,
the Company received $1.1 million in other incentives.
During the year ended December 31, 2020, the Company recognized $10.1 million (2019: $1.9 million) of government incentives in net
earnings. Of this amount, $6.9 million were received as grants from the Federal Government's Canada Emergency Wage Subsidy
("CEWS"). The CEWS enabled Maple Leaf Foods to prevent job losses and helped to ensure a stable and secure supply chain. Maple
Leaf Foods qualified for the subsidy and the decision to participate in the program was carefully considered, taking into account a
number of business imperatives including protecting staff and consideration of all stakeholders. An additional $3.0 million of ongoing
incentives was received from the Government of Canada to support agricultural business and $0.2 million in other incentives.
The Company currently recognizes $8.4 million of government debt on the consolidated balance sheets as described in Note 14 of the
consolidated financial statements. Of this amount, $4.2 million of debt is recognized from the Government of Canada to assist in
innovation within the agricultural sector in Canada. In addition, $4.2 million of debt relates to the development of the Company's facility
located in Hamilton, Ontario.
20. SHARE CAPITAL
As at December 31, 2020, there were 123,936,226 voting common shares issued and outstanding (2019: 123,890,126). As at February
18, 2021, there were 123,936,226 common shares issued and outstanding.
In each of the quarters of 2020, the Company declared and paid cash dividends of $0.16 (2019: $0.145) per voting common share,
representing a total annual dividend of $0.64 (2019: $0.58) per voting common share and aggregate dividend payments of $78.9 million
(2019: $71.8 million).
21. OTHER MATTERS
On February 24, 2021, the Board of Directors approved a quarterly dividend of $0.18 per share (up from $0.16 per share in each
quarter of 2020), $0.72 per share on an annual basis, payable March 31, 2021 to shareholders of record at the close of business March
8, 2021. Unless indicated otherwise by the Company at or before the time the dividend is paid, the dividend will be considered an
eligible dividend for the purposes of the “Enhanced Dividend Tax Credit System”.
22. MAPLE LEAF CENTRE FOR ACTION ON FOOD SECURITY
The Maple Leaf Centre for Action on Food Security (the “Centre”) is the primary expression of the Company's sustainability strategy
pillar of better communities. The Centre is a registered charity working to reduce food insecurity through collaboration with other
organizations and individuals, through advocating for critical policies and investing in programs required to make sustainable
improvements in food security. Additional information regarding the Centre is available on its website at:
https://www.feedopportunity.com.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
23. SUMMARY OF QUARTERLY RESULTS
The following is a summary of unaudited quarterly financial information for each quarter in the last two fiscal years:
($
millions)(i)
Sales
Meat
Protein Group
Protein Group
Plant
Non-allocated(ii)
Total Sales
Gross profit
2020
2019
First
Quarter
Third
Second
Quarter Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
981.4
$1,040.4
$1,014.4
$1,080.3
$
871.1
$
983.3
$
953.3
$
970.3
46.3
(5.0)
60.6
(6.4)
51.4
(8.6)
52.5
(3.6)
36.8
(0.8)
42.9
(3.5)
47.0
(4.5)
49.7
(4.0)
$1,022.8
$1,094.6
$1,057.2
$1,129.2
$
907.1
$1,022.7
$
995.8
$1,016.0
Meat
Protein Group
$
157.3
$
176.6
$
160.6
$
185.7
$
131.8
$
162.4
$
123.4
$
150.5
Protein Group
Plant
Non-allocated(ii)
Gross profit
Total
SG&A
Meat
Protein Group
Protein Group
Plant
Non-allocated(ii)
Total SG&A
Net
Earnings (loss)
Meat
Protein Group
Protein Group
Plant
Non-allocated(ii)
Total
Net
Adjusted
Earnings (loss)
Operating Earnings(iii)
6.8
7.9
(36.7)
(17.2)
3.4
64.1
0.3
(5.7)
8.5
39.2
9.3
(60.7)
10.0
6.4
7.2
3.0
$
127.4
$
167.3
$
228.1
$
180.3
$
179.5
$
111.0
$
139.8
$
160.8
$
88.0
$
83.7
$
80.7
$
94.2
$
86.4
$
89.5
$
78.8
$
84.0
30.9
—
34.1
—
46.5
—
32.5
—
11.9
—
16.9
—
44.9
—
45.3
—
$
118.9
$
117.8
$
127.2
$
126.8
$
98.3
$
106.4
$
123.7
$
129.3
$
68.2
$
92.8
$
79.9
$
89.4
$
42.3
$
74.0
$
39.6
$
62.1
(24.1)
(47.8)
(26.3)
(40.8)
(43.2)
29.3
(32.3)
(31.7)
(3.3)
11.1
(7.7)
(34.9)
(38.2)
(72.6)
8.7
(6.4)
$
(3.7)
$
25.7
$
66.0
$
25.4
$
50.1
$
(6.3)
$
13.4
$
17.5
Meat
Protein Group
$
69.2
$
92.9
$
80.0
$
91.5
$
45.4
$
72.9
$
44.6
$ 66.5
Protein Group
Plant
Non-allocated(ii)
Total
Adjusted
Adjusted EBITDA(iii)
Operating Earnings
Meat
Protein Group
Plant Protein Group
Non-allocated(ii)
Total
Adjusted EBITDA
Adjusted
EBITDA Margin(iii)
Meat
Protein Group
Plant Protein Group
Non-allocated(ii)
(24.1)
(26.3)
(43.1)
(32.3)
—
—
—
—
(3.3)
—
(7.7)
(34.9)
(38.1)
—
—
—
$
45.1
$
66.7
$
36.9
$
59.2
$
42.1
$
65.2
$
9.7
$
28.4
$
111.1
$
138.2
$
122.6
$ 136.5
$
84.8
$
112.7
$
85.4
$
110.2
(20.5)
(22.6)
(39.6)
(28.7)
—
—
(0.5)
1.3
(0.4)
—
(4.7)
(31.6)
(34.9)
—
(0.4)
—
$
90.5
$
115.7
$
82.6
$
109.1
$
84.4
$
108.0
$
53.4
$
75.3
11.3 %
13.3 %
12.1 %
12.6 %
9.7 %
11.5 %
9.0 %
11.4 %
(44.3)%
(37.2)%
(77.0)%
(54.7)%
(1.1)%
(10.9)%
(67.3)%
(70.3)%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Total Adjusted EBITDA Margin
8.9 %
10.6 %
7.8 %
9.7 %
9.3 %
10.6 %
5.4 %
7.4 %
(i)
Totals may not add due to rounding.
(ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of
expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s
operating results.
(iii) Refer to Non-IFRS Financial Measures starting on page 31 of this document.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
24. SUMMARY OF 2020 FOURTH QUARTER RESULTS
The following table summarizes the Company's sales, gross profit, SG&A expenses, Adjusted Operating Earnings, Adjusted EBITDA,
and Adjusted EBITDA Margin by operating segment for the fourth quarter ended December 31, 2020 and December 31, 2019:
($
millions)(i)
Sales
Gross profit
Selling,
general
and administrative expenses
Adjusted
Operating
Earnings(iii)
Adjusted EBITDA(iii)
Adjusted
EBITDA
Margin(iii)
(i)
Totals may not add due to rounding.
Three
months
ended
December
31, 2020
Three
months
ended
December
31, 2019
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Total
Total
$
1,080.3
$
$
$
$
185.7
94.2
91.5
136.5
52.5
0.3
32.5
(32.3)
(28.7)
(3.6) $
1,129.2
(5.7) $
180.3
— $
126.8
—
1.3
$
$
59.2
109.1
$
$
$
$
$
970.3
150.5
84.0
66.5
110.2
49.7
7.2
45.3
(38.1)
(34.9)
(4.1) $
1,016.0
3.0 $
160.8
— $
129.3
— $
28.4
— $
75.3
12.6%
(54.7)%
n/a
9.7%
11.4 %
(70.3)%
n/a
7.4%
(ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, changes in the fair value of biological assets and
derivatives, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the
measures used by the Company when assessing a segment’s operating results.
(iii) Refer to the section titled Non-IFRS Financial Measures starting on page 31 of this document for the definition of these non-IFRS measures.
Sales for the fourth quarter increased 11.1% to $1,129.2 million compared to $1,016.0 million last year. Sales growth was driven by
strong growth in both the Meat and Plant Protein Groups. An extra week in the fourth quarter of 2020 also contributed to sales growth.
Net Earnings for the fourth quarter of 2020 were $25.4 million ($0.20 per basic share) compared to $17.5 million ($0.14 per basic share)
last year. Strong commercial performance in the Meat Protein Group more than offset incremental costs related to COVID-19 and an
increase in variable compensation. Results were also impacted by a higher loss from non-cash fair value changes in biological assets
and derivative contracts and non-recurring other expenses, which are excluded from the calculation of Adjusted Operating Earnings.
Adjusted Operating Earnings for the fourth quarter of 2020 were $59.2 million compared to $28.4 million. The increase in Adjusted
Operating Earnings reflects strong commercial performance in meat protein, driven by favourable sales mix, continued growth in
sustainable meats and pricing actions taken to mitigate inflation and other structural cost increases. Results also benefited from lower
SG&A investments in Plant Protein.
Adjusted EBITDA Margin for the fourth quarter increased to 9.7% from 7.4% last year, consistent with the factors noted above.
Basic Earnings per Share was $0.20 for the fourth quarter of 2020 compared to $0.14 last year, consistent with the factors described
above.
Adjusted Earnings per Share in the fourth quarter of 2020 was $0.30 compared to $0.12 last year.
Meat Protein Group
Sales for the fourth quarter increased 11.3% to $1,080.3 million compared to $970.3 million last year. Sales growth was driven by a
favourable mix-shift towards sustainable meats and branded products in Canada, strong double-digit growth in sustainable meats in the
U.S., pricing actions implemented to mitigate inflation and other structural cost increases and an extra week in the fourth quarter of
2020. Stronger demand in the retail channel as a result of COVID-19 was offset by lower volume in foodservice.
Gross profit for the fourth quarter of 2020 was $185.7 million (gross margin of 17.2%) compared to $150.5 million (gross margin of
15.5%) last year. Strong commercial and operational performance, including favourable mix, continued expansion of sustainable meats
and pricing action implemented during the quarter to mitigate inflation and other structural cost increases all contributed to higher gross
profit in the quarter. This performance was partially offset by increased costs in response to COVID-19 to safeguard the Company's
employees and maintain production. Costs associated with COVID-19 consisted of personal protective equipment, incremental
sanitation, screening and testing protocols and other preventative measures.
SG&A expenses for the fourth quarter of 2020 were $94.2 million (8.7% of sales), compared to $84.0 million (8.7% of sales) last year.
The increase in SG&A expenses is primarily related to an increase in variable compensation. As a percentage of sales, SG&A expenses
were flat compared to last year.
Adjusted Operating Earnings for the fourth quarter of 2020 were $91.5 million compared to $66.5 million last year, driven by factors
noted above.
Adjusted EBITDA Margin for the fourth quarter was 12.6% compared to 11.4% last year, consistent with factors noted above.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Plant Protein Group
Sales for the fourth quarter were $52.5 million compared to $49.7 million last year, representing growth of 5.5% or 6.7% after excluding
the impact of foreign exchange. Sales growth was driven by an extra week in the fourth quarter of 2020 as well as pricing actions
implemented to mitigate inflation and structural cost increases.
Gross profit for the fourth quarter of 2020 was $0.3 million (gross margin of 0.5%) compared to $7.2 million (gross margin of 14.4%) last
year. The decrease in gross profit was attributed to inefficiencies associated with start-up production and other costs related to support
high growth, as well as expenses associated with COVID-19, including increased labour expenses, personal protective equipment,
screening and testing, and other preventative measures.
SG&A expenses for the fourth quarter of 2020 were $32.5 million (61.9% of sales), compared to $45.3 million (91.1% of sales) last year.
The decrease in SG&A expenses was driven by lapping of heightened investment in advertising and promotional expenses incurred in
the fourth quarter of 2019, partially offset by increased expenses related to organizational capacity.
Adjusted Operating Earnings for the fourth quarter of 2020 were a loss of $32.3 million compared to a loss of $38.1 million last year.
The increase in Adjusted Operating Earnings is mainly driven by a decrease in SG&A expenses as noted above.
25. DISCUSSION OF FACTORS IMPACTING THE COMPANY'S OPERATIONS AND RESULTS
Impact of Currency
The following table outlines the changes in currency rates that have affected the Company’s business and financial results:
(Unaudited)
U.S.
dollar /
Canadian dollar(i)
Canadian
dollar /
Japanese yen(i)
(i)
Source: Bloomberg.
As
at
December
31, 2020
$
1.27
¥
81.13
Annual Averages
2020
1.34
79.68
$
¥
2019
1.33
82.18
$
¥
2018
1.30
85.23
$
¥
2017
1.30
86.48
$
¥
2016
1.32
82.10
$
¥
2015
1.28
94.66
$
¥
During 2020, the Canadian dollar, on average weakened relative to the U.S. dollar by 1.1%. In the short term, a weaker Canadian dollar
expands export margins in the Company’s primary pork processing and hog production operations but increases the cost of raw
materials and ingredients in the domestic prepared meats business. The prepared meats business is able to react to changes in input
costs through pricing, cost reduction or investment in value-added products. Over the longer-term, a weaker Canadian dollar increases
the relative competitiveness of the domestic Canadian packaged goods operation, as imports of competing products from the U.S.
become less competitive while the Company’s ability to export and expand into the U.S. market increases.
During 2020, the Japanese yen, on average increased in value relative to the Canadian dollar by 3.0%. In general, a stronger Japanese
yen expands export margins to Japan in the Company’s fresh pork business. The Company ultimately seeks to manage pricing to offset
the impact of currency fluctuations.
The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign
exchange rates.
Market Influences for Pork Value Chain
The following table outlines the change in key commodity prices that affected the Company’s business and financial results:
(Unaudited)
Pork cutout (US$ per cwt)(i)(ii)
Hog market price per cwt (US$ per cwt)(i)(ii)
Hog market price per cwt (CAD per cwt)(i)(ii)
Corn (US$ per bushel)(iii)
As at
December
31, 2020
2020
2019
2018
2017
2016
2015
Annual Averages
$ 78.58
$ 77.02
$ 77.04
$ 75.18
$ 84.13
$ 78.66
$ 79.13
$ 59.98
$ 60.22
$ 67.33
$ 65.12
$ 71.42
$ 65.09
$ 70.59
$ 76.32
$ 80.75
$ 89.38
$ 84.42
$ 92.72
$ 86.23
$ 90.28
$ 4.84
$ 3.65
$ 3.83
$ 3.68
$ 3.59
$ 3.58
$ 3.81
(i)
(ii)
As at December 31, 2020, rate based on spot prices for the week ended December 31, 2020 (Sources: CME and USDA).
Annual averages based on five-day averages (Sources: CME and USDA).
(iii) Daily close prices (Sources: Bloomberg and CME).
In aggregate for 2020, the impact of hog and pork prices were favourable to the five-year average as a result of stronger pork
processing margins offsetting weaker hog production margins. Market volatility within the year was high due to the impact of COVID-19
on the hog and pork industries.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in commodity
prices.
Seasonality
The Company is sufficiently large and diversified, with a balanced portfolio, that seasonal factors within various parts of its operations
tend to offset each other; therefore, in isolation, they do not have a material impact on the Company’s consolidated earnings. For
example, in general, margins on fresh pork products tend to be higher in the last half of the year when hog prices historically decline
which in turn depresses earnings from raising hogs, maintaining balance within the Company's pork complex. Strong demand for grilled
meat products positively affects categories such as wieners and fresh sausages in the summer, while back-to-school promotions
support increased sales of sliced meats and lunch items in the fall. Higher demand for turkey and ham products occurs in the spring
and fourth quarter holiday seasons. In 2020, seasonality was impacted by COVID-19 as demand shifted from foodservice to retail and
normal consumption patterns were disrupted by lockdowns.
26. ENVIRONMENT
Maple Leaf Foods is committed to maintaining high standards of environmental responsibility and positive relationships in the
communities where it operates. It operates within the framework of an environmental policy entitled “Our Environmental Sustainability
Commitment” that is approved by the Board of Directors’ Safety and Sustainability Committee (the "Committee"). The Environmental
Sustainability Commitment can be found on www.mapleleaffoods.com/sustainability.
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. The Company
continues to invest in environmental infrastructure related to water, waste, and air emissions to ensure that environmental standards
continue to be met or exceeded, while implementing procedures to reduce the impact of operations on the environment.
In 2019, the Company amended its Credit Facility to become part of the first Sustainability-Linked Loan in Canada – a partnership with
nine global banks to encourage maintenance of carbon neutrality and reductions in Green House Gas ("GHG") emissions. The
Sustainability-Linked Loan consists of a $1,300.0 million unsecured committed revolving line of credit maturing April 30, 2024 and two
unsecured committed term credit facilities for US$265.0 million and $350.0 million maturing April 30, 2024 and April 30, 2023,
respectively. This Sustainability-Linked Loan is intended to meet the Company's funding requirements for capital investments and for
general corporate purposes. Under the terms of the Sustainability-Linked Loan, the Company can benefit from lower interest rates upon
achievement of certain sustainability targets and maintaining carbon neutrality. This reduction will not materialize until at least 2021, and
there is no penalty for not achieving the targets.
Expenditures related to current environmental requirements are not expected to have a material effect on the financial position or
earnings of the Company. However, it is possible that events could occur causing environmental expenditure to be significant and have
a material adverse effect on the Company’s financial condition or results of operations. Such events could include, but not be limited to,
additional environmental regulation or the occurrence of an adverse event at one of the Company’s locations. The Company currently
has a provision of $2.6 million related to expected environmental remediation costs. Please refer to Note 13 of the consolidated
financial statements for additional information. As a large food company there are health, environmental, and social issues that go
beyond short-term profitability that Management believes must shape its business if the Company is to realize a sustainable future.
Increasingly, moving beyond compliance to materially reducing the Company's environmental footprint is critical to addressing mounting
environmental issues and realizing increased operating efficiencies and cost reductions. The Company is committed to reducing its
environmental footprint by 50.0% by 2025 (2014 baseline), encompassing the three areas where Maple Leaf Foods has the largest
environmental impact: climate change (energy usage and emissions), water usage and solid waste.
The Company has developed environmental sustainability action plans at every operation to deliver on its environmental goals. In 2020,
the Company has made progress towards the implementation of these plans and reducing the Company’s environmental footprint. In
the fourth quarter of 2019, the Company publicly announced the development of a comprehensive carbon management strategy that
included the setting and approval of Science-Based Targets ("SBTs") for GHG emissions reduction, and the achievement of becoming a
carbon neutral company.
Science-Based Target
SBTs provide companies with a clearly defined pathway to future-proof growth by specifying how much and how quickly companies
need to reduce GHG emissions to meet the requirements of the global Paris Climate Accord. On September 9, 2019, the Science-
Based Target Initiative ("SBTi") approved Maple Leaf Foods' SBTs for GHG emissions reduction. As part of this approval, the SBTi
verified Maple Leaf Foods' comprehensive carbon inventory that was developed in accordance with the internationally accepted
Greenhouse Gas Protocol - developed by the World Resources Institute and World Business Council for Sustainable Development.
Maple Leaf Foods committed to reduce its absolute Scope 1 & 2 GHG emissions by 30% and its Scope 3 GHG emissions by 30% (per
1,000kg of production) by 2030 (2018 baseline).
17
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Carbon Neutral
Maple Leaf Foods achieved carbon neutrality by avoiding intensive emissions activities, reducing emissions by implementing energy
efficiency projects and replacing carbon intensive energy with lower carbon or renewable sources. Lastly, for all remaining emissions
that cannot be reduced or are currently unavoidable, the Company has invested in certified offset projects to bring its net GHG
emissions to zero. Using the carbon inventory that was validated by the SBTi, Maple Leaf Foods reviewed every aspect of its business
and identified opportunities to avoid and reduce emissions associated with its operations. The Company’s utility audit program identifies
energy, water and waste reduction opportunities that have a high return on investment and positive impact on reducing its
environmental footprint. The Company has implemented key projects across its facilities including a national LED lighting retrofit
program, heat recovery projects, water conservation/reuse opportunities, and organics diversion and recycling programs. Most of these
projects drive capital investment at each facility to sustain the Company’s environmental performance into the future.
Details on the Company's environmental performance and carbon strategy can be found in the Company's sustainability reports which
can be found at www.mapleleaffoods.com/sustainability.
27. RISK FACTORS
In carrying out its business and operations, the Company faces many risks. Many of these risks are described below, including those
risks that the Company currently considers to be most material. These risk factors, along with other risks and uncertainties not currently
known to the Company, or that the Company currently considers immaterial, could materially and adversely affect the Company’s
performance, operating results and ability to pay dividends or return capital to shareholders. Such risks could cause actual events to
differ materially from those described in any forward-looking statements, including any financial outlooks, targets or goals. Many of the
risks are beyond the Company's control and, in spite of any efforts the Company may make to manage or mitigate its risk exposure,
there is no guarantee that such risk management or mitigation activities will be successful. Readers should carefully consider the risk
factors set out below, along with the other information contained in this document and the Company's other public filings before making
an investment decision.
COVID-19
The Company’s business operations and financial condition may be materially adversely affected by public health emergencies,
including the COVID-19 pandemic, as well as related government responses and consumer and customer behaviour.The risk of
COVID-19 to the Company includes the physical and mental health and safety of its employees and contractors; the temporary
suspension of operations in geographic locations in which the Company operates; disruptions in international trade and access to
markets; operational restrictions and restrictions on gatherings of individuals; delays in the completion of capital projects; counterparty
credit risk; volatility in financial and commodity markets; shifts in customer and consumer demand; and supply chain disruptions; all or
any of which could materially adversely affect the Company’s business operations and financial results. As the spread (and risk of
spreading) of COVID-19 continues, governments may increase or extend restrictions, directives, orders or regulations that could
adversely affect the Company’s operations, suppliers, customers, counterparties, employee health, workforce productivity, insurance
premiums and coverage, and ability to advance its business strategy. Among the specific impacts that have been experienced since the
onset of the pandemic include: increased costs to implement additional health and safety measures; restrictions on pork exports to
China; decreased sales in foodservice channels; a shift in the sales mix; supply chain challenges; reduced ability to execute product
innovation initiatives; temporary stoppages of work at certain capital projects; and periodic operational slow-downs at some plants.
The Company is following recommendations from applicable government agencies, public health authorities and leading international
health organizations in order to maintain the continued safe operation of its business operations. It has implemented pandemic plans at
all of its locations and is continuing to review and audit the effectiveness of these efforts to protect the ongoing health of its workforce. It
is possible however, that such measures may not be effective. The full extent, effect and duration of the COVID-19 pandemic is
unknown at this time and the degree to which it may continue to affect the Company’s business operations and financial results will
depend on future developments, which are uncertain and cannot be predicted with certainty. Depending on the duration and severity of
the COVID-19 pandemic, such events may increase the effect of the other risks described in this Management Discussion and Analysis.
Competition, Market Conditions and the Activities of Competitors and Customers
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 factors such as product availability, product quality and taste, price, brand recognition, product variety, product
packaging and design, shelf space, reputation, nutritional and other claims, effective promotions, and the ability to target changing
consumer preferences. The Company may experience price pressure as a result of, among other things, competitors’ promotional effort
and strategies to grab market share, as well as in product categories characterized by low capacity utilization.
Competitive pressures from existing competitors, as well as, new entrants into various markets could result in reduced sales, margins,
profits, and market share, all of which could have a material adverse effect on the Company’s financial condition and results of
operations. The Company has seen intense competitive pressure in the plant protein space, as new entrants and more traditional food
companies vie for market share in this rapidly evolving market. The rapidly evolving nature of the plant protein business creates some
volatility and unpredictability. If the Company's assumptions about the potential growth of the plant protein sector do not materialize, or if
its assumptions about its ability to maintain and gain market share are incorrect, it is unlikely that the Company will be able to reach its
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2029 sales and gross margin growth targets. There is no guarantee that the investment that the Company is making in marketing,
advertising, and innovation will be successful in attracting market share or that it will deliver the anticipated long-term financial benefits
underpinning the growth targets.
The Company's ability to increase revenue and execute its business strategy depends in part on its ability to cost-effectively attract new
customers and consumers and retain existing customers and consumers. If the Company is unable to do this, its business, financial
condition and operating results may be materially adversely affected. Further, if customers or consumers do not perceive the
Company's product offerings to be of sufficient value and quality, or if it fails to offer new and relevant product offerings, it may not be
able to attract or retain customers or engage existing customers so that they continue to purchase products. For example, if growth in
demand for sustainable meat does not materialize or if the expected benefits associated with brand renovation are not realized, the
Company may not reach its Adjusted EBITDA targets in the Meat Protein Group or its consolidated growth targets.
The Company competes with other companies who may have greater financial and other resources, lower operating costs and lower
cost of capital. In some instances, this could force the Company to lower prices, resulting in lower profitability or, in the alternative,
cause it to lose market share if it fails to lower prices. In addition, some competitors may be more innovative, have more resources and/
or be able to bring new products to market faster. This could put the Company at a disadvantage in keeping up with the pace of
innovation and ability to introduce new products that appeal to evolving consumer trends. Innovation, speed to market and brand
identification have been particularly important drivers in the plant protein market.
Overall, these competitive pressures could cause the Company to lose market share, which may require it to lower prices, increase
marketing and advertising expenditures, and/or increase the use of discounting or promotional campaigns, each of which could
adversely affect its margins, could result in a decrease in its operating results and profitability and cause it to miss the growth targets it
has set.
Availability and Access to Capital
The ability of the Company to secure short-term and long-term financing on terms acceptable to the Company is critical to fund
business growth and manage its liquidity. As a result of acquisitions and return of capital to shareholders through dividend increases
and share buybacks, the Company is in a net debt position. Furthermore, the Company is embarking on a period of elevated capital
expenditures as it invests in large scale and efficient processing capacity. The failure or inability of the Company to secure short-term
and long-term financing in the future on terms that are commercially reasonable and acceptable to the Company could have a
significant impact on the Company’s opportunity for growth. 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 being required to pledge assets.
Livestock Health and Risks Associated with Animal Disease
The Company’s operations and the demand for the Company’s products can be significantly affected by outbreaks of disease among
hogs and poultry (collectively "livestock") or attributed to livestock whether it occurs within the Company’s production operations or in
the operations of third parties. Governments combat the spread of disease during outbreaks with measures that include among other
things restrictions on the movement of meat and livestock between jurisdictions which results in supply excesses and shortages and
price volatility which in some cases reaches extreme levels. In 2018, there was an outbreak of African Swine Fever in China which has
continued to spread. While restrictions have been put in place by the foreign jurisdictions to contain the spread of the disease in hog
populations, there can be no assurance the outbreak will be contained or that the outbreak will not spread to areas that supply the
Company with live hogs or that additional restrictions will be put in place that will impede the Company’s access to other markets or
create volatile market conditions. These could have a material adverse impact on the Company’s operations and financial condition. In
the longer term, the availability of livestock in the relative proximity of the Company's processing facilities may be impacted by climate
change if the availability of feed grains in the relative proximity of its processing facilities is altered.
The Company monitors herd and flock health status and has strict bio-security procedures and employee training programs throughout
its hog production system and ensures the animals receive veterinary medications as required. However, there is no guarantee these
processes will not fail. In addition, not all livestock procured by the Company may be subject to these processes, as the majority of
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. The Company has developed an 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 .
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.
International Trade
The Company exports significant amounts of its products to customers outside of Canada. In addition, the Company imports various
inputs and ingredients from other jurisdiction. To the extent that the Company is dependent on imports or export for its business, it is
subject to inherent risks associated with international trade, including: change in the free flow of food products between countries;
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fluctuations in currency values; discriminatory fiscal policies; unexpected changes in local regulations and laws; and the uncertainty of
enforcement of remedies in foreign jurisdictions. In addition, trade agreements between Canada and foreign jurisdictions could change
and 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. International trade and the associated access to markets can be influenced by
geopolitical events and disputes between Canada and other countries beyond the Company's control. As discussed under the
subheading "Livestock Health and Risks Associated with Animal Disease," the threat of the spread of animal disease could result in
significant disruption of international trade in the meat protein business, as governments use international trade barriers as a tool to
help manage the spread of such diseases.
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. For example, the Company has been affected by export restrictions on pork
imposed by China, including restrictions on exports from the Company's primary pork processing plant in Brandon, Manitoba that were
imposed in 2020 which had an adverse effect on the Company's pork sales and as a result the Company's overall operating results.
Food Safety, Customer and Consumer Liability and Product Recalls
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 organisms that can cause illness, or pathogens, such as certain strains of Escherichia coli
(E. coli), Salmonella and Listeria. There is a risk that these pathogens could be present in certain products produced by the Company.
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 or as a precautionary measure, 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 properly identified, or that the recall will not be successful or not be
enacted in a timely manner. Any product contamination could subject the Company to product liability claims, claims for economic
losses by customers and others in the supply chain, adverse publicity and government scrutiny, investigation or intervention, resulting in
increased costs and decreased sales. Many of these costs and losses are not covered by insurance. Any of these events could have a
material adverse impact on the Company’s financial condition and results of operations.
Execution of Capital Projects
The Company has multiple capital projects in development and underway. The successful completion of these projects is dependent on
a number of factors, many of which are outside the Company's control. The timing for completion and capital costs of these projects
may change depending on many factors some of which include the availability and cost of labour, materials and equipment, contractor
non-performance, weather conditions and cost of engineering, construction and other consulting services. The Company may incur
financing costs during the planning and construction phases of its growth projects, but the expected cash flows from the projects will not
materialize until after they are completed. To the extent projects are completed significantly behind schedule or over budget, its
business operations and results may be adversely affected. Project delays affect the timing of cash flows from such projects, which
could have an impact on the Company's ability to reach its financial targets, meet conditions associated with grants or concessions
previously secured for the projects and to fully execute its business strategy.
Cyber Security and Overall Management of the Company's Information Systems
The Company relies on information technology systems in all areas of operations. These systems are subject to an increasing number
of sophisticated cyber threats. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are
constantly evolving. Should a cyber-attack be successful and a breach of sensitive information occur or its systems and services be
disrupted, Maple Leaf Foods' financial position, brand, and/or ability to achieve its strategic objectives may be negatively affected.
The Company maintains policies, processes, and procedures to address capabilities, performance, security, and system availability
including resiliency and disaster recovery for systems, infrastructure, and data. Security protocols, along with information technology
security policies, address compliance with information technology security standards, including those relating to information belonging
to the Company’s customers, employees and suppliers. The Company actively monitors, manages, and continues to enhance its ability
to mitigate cyber risk through its enterprise wide programs. However, there is no assurance that any of these measures will be
successful.
The Company regularly implements process improvement initiatives to simplify and harmonize its systems and processes to optimize
performance and reduce the risk of errors in financial reporting. There cannot be any guarantee that any such changes 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.
Return of Capital to Shareholders is Not Guaranteed
The Company has a history of maintaining a normal course issuer bid in place which it may use to re-purchase its shares for
cancellation. There can be no assurance that the Company will continue with share repurchases. The Company also pays dividends
and reviews its dividend policy at least annually. The payment of dividends is at the discretion of the Board of Directors and there can
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be no assurance that the Company will maintain or increase its dividends in the future. Failure to continue with share repurchases and/
or failure to pay or increase dividends may have a material adverse effect on the Company’s share price.
Business Acquisitions and Divestitures
The Company has made acquisitions over the last two years and continues to review opportunities for strategic growth through
acquisitions. Any acquisitions may involve large transactions or realignment of existing investments, and present financial, managerial
and operational challenges, which, if not successfully overcome, may reduce the Company’s profitability. These risks include: the
diversion of Management’s attention from existing core businesses; difficulties integrating or separating personnel, financial, and other
systems; adverse effects on existing business relationships with suppliers and customers; inaccurate estimates of the rate of return on
acquisitions or investments; inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired
intangible assets, which could reduce future reported earnings; potential loss of customers or key employees of acquired businesses;
and indemnities and potential disputes with the buyers or sellers. Any of these 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. Such a 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 suppliers and customers. Any of these items could
materially adversely affect the Company’s financial condition and result in a reduction of earnings beyond the earnings of any operation
to be sold.
Climate Change
The potential effects of climate change could have a material impact on the Company and its operations, such risks include a range of
physical, financial, compliance and reputational risks. As part of its sustainability strategy and vision to be the most sustainable protein
company on earth, the Company has set environmental footprint reduction targets and has executed certain energy efficiency and GHG
emission reduction projects. While the Company takes steps to assess the commercial viability of these initiatives, there is no
assurance that the ongoing costs of these initiatives will continue to be economic. As new laws, regulations and industry standards
related to emission reductions continue to evolve, it is possible that the Company's practices, processes and facilities will require
significant modifications in order to comply. Further, it is possible that the changes necessary to reduce emissions will not be feasible or
that the costs will be material, either of which could have a material adverse effect on the Company’s operations and financial position.
Climate change considerations, including emissions associated with the Company’s meat protein business, may also create
reputational risk for the Company and challenge its ability to maintain market share for its meat protein products if consumers seek
alternative, lower-carbon protein alternatives. The Company’s mitigation strategies include its expansion into the growing plant protein
business and its ambitious, voluntarily emission reduction strategy which has allowed it to be carbon neutral since 2019.
In 2020, Maple Leaf Foods conducted a physical climate risk assessment and climate scenario analysis, working with an independent
third-party consultant, to better understand the climate-related risks and potential impacts to its livestock, assets, supply chain, and
operations. This assessment focused on extreme temperatures, freeze-thaw (i.e., number of ice days), water stress and extreme wind
and rainfall. These hazards were identified as most relevant to the business based on historical impacts, industry and academic reports
and internal consultation with various internal functions, including operations, commodities management, sustainability, finance and risk
management. Using global climate models, the Company identified the exposure of its assets, operations and supply chain to these
hazards. Based on the results of this assessment, the main potential physical risks to the Company’s business include:
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Extreme temperature days (over 30°C) are projected to increase across the Company’s Canadian locations, particularly in
Manitoba and Ontario, which have implications for processing and livestock health
All regions in which the Company operates have medium to high risk of water stress due to temperature rise and increased
drought risk, which can impact the availability of feed and water resources for sanitation
All Canadian regions will experience a medium / high risk of extreme rain by 2030 under a 4°C scenario, which increases the
risk of asset damage or operational disruptions
The risk of freeze-thaw cycles impacting MLF operations reduces over time in all Canadian regions due to overall temperature
increase
Using this information, the Company has prioritized where it should focus its physical risk mitigation efforts. Current efforts to mitigate
these risks include: diversifying its sourcing regions, maintaining temperature-controlled barns, maintaining contingency plans and
protocols for extreme weather and transportation of livestock, insurance of assets and reducing water consumption as part of the
Company’s environmental footprint reduction goals. There is no guarantee that these risk mitigation efforts will be effective.
Pension Plan Assets and Liabilities
In the normal course of business, the Company provides post-retirement pension benefits to its employees under both defined
contribution and defined benefit pension plan arrangements. The funded status of the plans significantly affects the net periodic benefit
costs of the Company’s pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest
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rates, mortality rates, early retirement rates, and the market value of plan assets can affect the level of plan funding required, increase
the Company’s future funding requirements, and cause volatility in the net periodic pension cost as well as the Company’s financial
results. 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 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; livestock diseases; and changes to foreign
jurisdiction restrictions on drugs, vitamin and feed additives used in hogs raised in Canada. 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 or that meat restricted from certain foreign markets can be sold at acceptable prices. 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 strength of the various independent farming operations upon which the Company relies to meet its requirements
for hogs. Any of these could have a material adverse effect on the Company's financial condition and results of operations.
Over the long term, a reduction in the availability of livestock at the Company’s processing plant may result in higher transportation
costs if livestock is sourced from more distant growing areas or result in higher capital costs if the Company is required to relocate
processing facilities. There can be no assurance that those extra operating costs or capital costs can be passed on to customers which
may have a material adverse effect on the Company’s financial condition and results of operations.
The Company is increasing its sales of raised without antibiotic meat products and in turn expanding the portion of its hog supply raised
without antibiotics. Animals raised without antibiotics have a higher cost of production and command higher prices. If the Company fails
to find markets or buyers willing to pay the premium price for all the raised without antibiotic meat produced, a portion of the higher cost
meat will be sold through lower price conventional channels.
Furthermore, the Company’s supply of raised without antibiotic meats may be at a greater risk supply disruption in the event of an
animal disease outbreak. Refer to the subheading "Livestock Health and Risks Associated with Animal Disease."
Availability of Plant Protein Ingredients
The Company's ability to secure a continuing supply of ingredients at competitive prices depends on many factors beyond its control,
such as the number and size of farms that grow the source crops, the risks associated with farming businesses (including poor harvests
impacting the quality of the crops), changes in national and world economic conditions and the Company's ability to forecast its
ingredient requirements. The ingredients used in the Company's plant protein products are vulnerable to adverse weather conditions
and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilence. Adverse weather conditions and natural
disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the
price of, quality ingredients. In addition, the Company may purchase some ingredients outside of the U.S. or Canada, and the
availability of such ingredients may be affected by events in other countries. The Company also competes with other food producers in
the procurement of ingredients, and this competition may increase in the future if consumer demand for plant protein products
increases. If supplies of quality ingredients are reduced or there is greater demand for such ingredients from the Company and others, it
may not be able to obtain sufficient supply that meets the Company's quality standards on favorable terms, or at all, which could impact
the Company's ability to supply products to distributors and retailers and may adversely affect its business, growth plans, results of
operations and financial condition.
Commodities and Hedging Strategies
The Company is a purchaser of, and its business is dependent on, certain commodities in the course of normal operations, such as
feed grains, livestock, plant protein ingredients, and energy, such as oil-based fuel, natural gas, and electricity. Commodity prices are
subject to fluctuation and such fluctuations are sometimes severe.
The Company may use commodity futures and options for hedging purposes to reduce the effect of changing prices in the short term,
but such hedges may not be successful in mitigating this commodity price risk 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 customers or switching to alternatives; however, no assurance can be given that customers will
continue to purchase the Company’s products if prices rise or that alternatives may be available or less costly. 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.
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Supply Management
Under Canada’s system of supply management, the Company’s poultry operations are required to source substantially all live poultry
for processing from Canadian farms which are collectively subject to restrictions on production under a quota system. Furthermore, the
price at which the live poultry is available is also controlled. Any lack of balance between the supply management quotas, available
processing capacity (particularly in light of COVID-19) and the demand for meat, may adversely impact the performance of the
Company's poultry business and as a consequence the Company's overall performance. It is also possible that the supply management
system could limit the future availability of live poultry for processing impeding the Company’s growth in the market or could create a
circumstance where excesses impact the price of poultry meat without a corresponding adjustment to the controlled live poultry price.
Furthermore, any dismantling of the supply management system could have negative effect on individual producers and disrupt the
availability of live poultry in Canada. In that event, the Company may not be able to find alternative sources of live supply which could
have a material adverse effect on the Company’s financial condition and results of operations.
Legal Matters
In the normal course of its operations, the Company becomes involved in various legal and regulatory actions relating to its commercial
activities and relationships, construction activities, employment matters, product liabilities, and other matters. Even if the Company is
not found liable for these claims, the cost of defending these actions may be material.
Among the legal matters in which the Company is involved include a class action against packaged bread manufacturers and retailers
and an ongoing investigation by the Competition Bureau into the Canadian bread industry, including alleged price fixing and related
securities disclosure issues. Both the class action and the investigation cover a time horizon that includes the period when the
Company was a majority shareholder of Canada Bread Company, Limited ("Canada Bread"). The Company is a named defendant in
the class action and is a subject in the investigation. The Company sold its interest in Canada Bread, which was a stand-alone public
company, in 2014. The final outcome of the investigation, the class action and any other actions or any future claims cannot be
predicted with certainty or reliably estimated. Unfavourable resolution of these or other legal matters could have a material adverse
effect on the Company, its financial condition and its reputation.
The Company maintains typical insurance coverages for a company of its size and nature. As a result, insurance coverage may be
available for some claims. However, in some circumstances, legal claims may not be covered by insurance or the insurance coverage
may not be sufficient to cover the claimed losses. Further, even if an action is settled within insurance limits, this can result in increases
to the Company’s insurance premiums or adversely affect its ability to secure insurance coverage.
Legal liability risks may also increase depending on the jurisdiction. For example, the United States tends to be a more litigious
environment and more unpredictable in terms of damages awards compared to Canada. As the Company looks to expand its sales in
the United States, it may be exposed to increased litigation risk. Further, there is an increasing trend for customers to try to impose
broad contractual indemnification obligations on suppliers like the Company. The Company seeks to mitigate this risk by negotiating
more reasonable contractual terms, including limitations on liability. However, it is not always successful in negotiating such
commercially reasonable terms, in which case it is faced with a decision to accept the increased liability exposure or to lose the
business, either of which could materially adversely effect the Company's financial condition and results of operations.
Reliance on Other Manufacturers
The Company relies on contract manufacturers for production of some of it products for reasons such as, seasonal peak demand,
unavailability of specialized equipment, or efficiency in the case of low volume product lines. Acceptable contract manufacturers may
not always be available which could result in higher production costs, additional capital requirements or lost sales. While the Company
maintains a strict quality and food safety protocol and monitoring regime, any deficiencies could result in product liability, recalls or other
consequence that could negatively impact the Company’s reputation and could have a material adverse effect on the Company’s
financial condition and results of operations.
Regulation
The Company’s operations are subject to extensive regulation by government agencies in the countries in which it operates, including:
the Canadian Food Inspection Agency; the Ministry of Agriculture in Canada; provincial Ministries of the Environment in Canada; and
the United States Department of Agriculture. These agencies regulate the processing, packaging, storage, distribution, advertising, and
labeling 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 all 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 to comply with applicable laws and regulations and permits and
licenses could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, which could have a material adverse effect on the Company’s reputation, financial condition and results of operations.
Various governments throughout 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. If any new regulations are enacted, the Company could
experience a disruption in the supply or distribution of its products, increased operating costs, and significant additional cost for capital
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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.
Foreign Currencies
A portion of the Company’s revenues and costs are either denominated in or directly linked to other currencies (primarily U.S. dollars
and Japanese yen). In periods when the Canadian dollar has appreciated both rapidly and materially against these foreign currencies,
revenues linked to U.S. dollars or Japanese yen are immediately reduced, while the Company’s ability to change prices or realize
natural hedges may lag the immediate currency change. The effect of such sudden changes in exchange rates can have a significant
immediate impact on the Company’s earnings. Due to the diversity of the Company’s operations, normal fluctuations in other currencies
do not generally have a material impact on the Company’s profitability in the short term due to either natural hedges and offsetting
currency exposures (for example, when revenues and costs are both linked to other currencies) or the ability in the near term to change
prices of its products to offset adverse currency movements. However, as the Company competes in international markets, and faces
competition in its domestic markets from U.S. competitors, significant changes in the Canadian to U.S. dollar exchange rate can have,
and have had, significant effects on the Company’s relative competitiveness in its domestic and international markets, as well as on its
financial condition and results of operations.
Reputation and Public Opinion
The Company is committed to its vision of becoming the most sustainable protein company on earth and by making meaningful
progress on its sustainability commitments. The Company strongly values it's reputation as a credible, responsible corporate citizen with
a track record of creating shareholder value. Maintaining a positive reputation in the eyes of its customers, consumers, communities,
governments, regulatory bodies and the general public is important to its continued success.
The potential for deterioration of the Company's reputation may arise in many contexts and for many different reasons. As a result
reputational risk cannot be managed in isolation from other forms of risk. For example, any real or perceived quality or safety concerns,
whether or not ultimately based on fact and whether or not involving the Company (such as incidents involving competitors, or the way
in which products are handled by customers, consumers or others in the distribution chain after they leave the control of the Company),
could cause negative publicity and reduced confidence in the Company, its brand or its products, which could in turn harm its reputation
and operating results. Any loss of confidence on the part of consumers in the Company's products, brands, the ingredients it uses or in
the safety and quality of it's products would be difficult and costly to overcome.
The growing use of social and digital media by the Company, its consumers and third parties increases the speed and extent that
information or misinformation and opinions can be shared. Negative publicity about the Company, its brands or its products on social or
digital media could seriously damage it's reputation. If the Company does not maintain the favorable perception of its brands, the
Company's sales and profits could be negatively impacted.
The Company is also subject to the activities of animal activists. Activist activities may spread information and misinformation about the
Company and its operations in a variety of ways, including through protests and attempts to disrupt operations, as well as through
various communication strategies, including the use of media and social media. These activities could adversely impact the reputation
of the Company. Further, activist activities and protests may at times create health and safety risks to animals, the people working at the
Company's plants, and to the protesters themselves.
Overall, negative public opinions or shifts in opinion whether about the Company, its brands, its industry or the overall environment in
which it operates could materially adversely affect its reputation, business, strategy and operations, as well its financial condition and
results of operations.
Consumer Trends
Success of the Company depends in part on the Company’s ability to respond to market trends and produce innovative products that
anticipate and respond to the changing tastes and dietary habits of consumers. From time to time certain products can be deemed to be
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 with new products that appeal to consumer preferences could result in declining demand and prices for the
Company’s products, which in turn could have a material adverse effect on the Company’s financial condition and results of operations.
Environmental Regulation and Risks
The Company’s operations are subject to extensive environmental laws and regulations pertaining to the discharge of materials into the
environment (including GHGs) 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 or levies or taxes assessed against the Company will not be altered in ways that will require the Company to
incur significant additional costs. In addition, certain facilities of the 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 of property underlying or in the vicinity of the Company’s present or
24
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur material unforeseen
expenses. Occurrences of any such events could have a material adverse effect on the Company’s financial condition and results of
operations.
Consolidating Customer Environment
As the retail grocery and foodservice trades continue to consolidate and customers grow larger and more sophisticated, the Company is
required to adjust to changes in purchasing practices and changing customer requirements. Failure to do so could result in losing sales
volumes and market share. The Company’s sales and profitability could also be affected by deterioration in the financial condition of, or
other adverse developments in, the relationship with one or more of its major customers. Foodservice channels in particular have been
under strain during the COVID-19 pandemic, requiring the Company to adapt. Any of these events could have a material adverse effect
on the Company’s financial condition and results of operations.
Consolidation of Operations and Focus on Protein
Over the last several years, the Company has increasingly consolidated its operations into fewer facilities. For example, it completed a
consolidation and upgrade of its prepared meats manufacturing network in 2015 and has reconfigured its prepared meats distribution
systems into two large distribution centers. Currently, the Company is advancing construction of a new large-scale poultry processing
plant to replace three older smaller scale plants which will be closed. As a result of these consolidation initiatives, there is a risk that
unforeseen disruption in such facilities could have a greater effect on the operations of the Company as a whole.
In addition, the Company made the decision several years ago to focus on being a protein company and divested the Company's non-
protein related business. As a result, the Company is less diversified than it would be if it was engaged in other food businesses,
making it susceptible to the trends in protein markets.
Weather
Weather conditions and changes in climate and other long-term trends may have a material effect on the availability and prices of the
commodities the Company uses. Adverse weather conditions can also impact crop health which has implications for the quality, cost for
the inputs for the Company's plant protein products, as well as animal feed in its meat business. Weather conditions, including extreme
heat and extreme cold, can also pose safety concerns for workers and animals which can affect the Company's operations. In addition,
weather conditions may also influence the Company's ability to complete capital projects on time, potentially resulting in delays and
increasing costs of such capital projects.
Employees, Contractors and Labour Relations
The Company and its subsidiaries have approximately 13,000 full-time and part-time employees, which include salaried and union
employees, many of whom are covered by collective agreements. These employees are located in various jurisdictions, each such
jurisdiction having differing employment laws. While the Company maintains systems and procedures to comply with the applicable
requirements, there is a risk that failures or lapses by individual managers could result in a violation or cause of action that could have a
material adverse effect on the Company’s financial condition and results of operations. Furthermore, if a collective agreement covering
a significant number of employees or involving certain key employees were to expire or otherwise cease to have effect leading to a
work stoppage, there can be no assurance that such work stoppage would not have a material adverse effect on the Company’s
financial condition and results of operations. The Company’s success is also dependent on its ability to recruit and retain qualified
personnel. The loss of one or more key personnel could have a material adverse effect on the Company’s financial condition and results
of operations.
Product Pricing
The Company’s profitability is dependent, in large part, on the Company’s ability to make pricing decisions regarding its products that,
on one hand encourage consumers to buy, yet on the other hand recoup development and other costs associated with those products.
Products that are priced too high will not sell and products priced too low will not generate an adequate return. Accordingly, any failure
by the Company to properly price its products could have a material adverse effect on the Company’s financial condition and results of
operations.
Supply Chain Management
Successful management of the Company’s supply chain is critical to the Company’s success. Insufficient supply of products threatens
the Company’s ability to meet customer demands while over capacity threatens the Company’s ability to generate competitive profit
margins. Accordingly, any failure by the Company to properly manage the Company’s supply chain could have a material adverse effect
on the Company’s financial condition and results of operations.
Strategic Risk Management
Successful identification and management of the strategic risks facing the Company from time to time is critical to the Company’s
success. Among other things, these risks include changes in technology, the food industry, customers, consumers, and competitors. As
the Company invests in its branding advertising, and marketing strategies, there is no guarantee that such investments will be
25
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
successful in generating the anticipated return on investment. Failure to properly adapt to changes in strategic risks could have a
material adverse effect on the Company’s financial condition and results of operations.
28. CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with IFRS requires Management to make judgements, estimates,
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses.
Actual amounts may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future periods affected.
Judgements included in the consolidated financial statements are decisions made by Management, based on analysis of relevant
information available at the time the decision is made. Judgements relate to the application of accounting policies and decisions related
to the measurement, recognition, and disclosure of financial information.
Information about areas of estimation uncertainty and critical judgements in applying accounting policies, that have the most significant
effects on the amounts recognized in the consolidated financial statements, are included both below and in the financial statement
notes relating to items subject to significant estimate uncertainty and critical judgements.
Long-Lived Assets Valuation
The Company performs impairment testing annually for goodwill and indefinite life intangible assets and, when circumstances indicate
that there may be impairment, for other long-lived assets and definite life intangibles. Management judgement is involved in determining
if there are circumstances indicating that testing for impairment is required, and in identifying Cash Generating Units (“CGUs”) for the
purpose of impairment testing.
The Company assesses impairment by comparing the recoverable amount of a long-lived asset, CGU, or CGU group to its carrying
value. The recoverable amount is defined as the higher of: (i) value in use; or (ii) fair value less cost to sell.
The determination of the recoverable amount involves significant assumptions, including those with respect to future cash inflows and
outflows, discount rates, terminal growth rates, royalty rates with respect to indefinite life intangible assets, and asset lives. These
assumptions could affect the Company’s future results if the current estimates of future performance and fair values change. These
determinations will affect the amount of amortization expense on definite life assets recognized in future periods.
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 estimation is required in establishing fair values. Changes in assumptions about the
inputs to these models could affect the reported fair value of the Company’s financial and non-financial assets and liabilities.
When measuring fair value of an asset or liability, the Company uses market observable data to the extent that it is possible. To the
extent that these estimates differ from those realized, the measured asset or liability, net earnings, and/or comprehensive income will be
affected in future periods.
Information about the valuation techniques and inputs used in determining the fair value of various assets and liabilities are disclosed in
Notes 6, 11, 12, 19, and 22 of the consolidated financial statements.
Nature of Interests in Other Entities
Management applies significant judgement in assessing the nature of its interest in unconsolidated structured entities relating to its
accounts receivable securitization facilities. The Company does not hold any equity interest in the structured entities and based on the
terms of the agreements under which the entities are established, the Company does not receive the returns related to their operations
and is exposed to limited recourse with respect to losses (refer to Note 25 of the consolidated financial statements).
Valuation of Inventory
Management makes estimates of the future customer demand for products when establishing appropriate provisions for inventory. In
making these estimates, Management considers the product life of inventory and the profitability of recent sales of inventory. In many
cases, product produced by the Company turns quickly and inventory on-hand values are low, thus reducing the risk of inventory
obsolescence. However, code or “best before” dates are very important in the determination of net 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 estimated, inventory, net earnings, and comprehensive income will be affected in
future periods.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Biological Assets
Biological assets are measured at each reporting date, at fair value less costs to sell, except when fair value cannot be reliably
measured. If fair value cannot be reliably measured, biological assets are measured at cost less depreciation and impairment losses.
Although a reliable measure of fair value may not be available at the point of initial recognition, it may subsequently become 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 net 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. Management uses estimates over the future price per
hog, foreign exchange rates, and estimated weight and cost of hogs at maturity in the determination of fair value. To the extent that
actual values differ from estimates, biological assets, net earnings and comprehensive income will be affected in future periods.
Trade Merchandise Allowances and Other Trade Discounts
The Company provides for estimated payments to customers based on various trade programs and contracts that often include
payments that are contingent upon attainment of specified sales volumes. Significant estimates used to determine these liabilities
include: the projected level of sales volume for the relevant period, and customer contracted rates for allowances, discounts, and
rebates. These arrangements are complex and there are a significant number of customers and products affected. Management has
systems and processes in place to estimate and value these obligations. To the extent that payments on trade discounts differ from
estimates of the related liability, accounts payable and accruals, net earnings, and comprehensive income will be affected in future
periods.
Employee Benefit Plans
The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected unit credit
method prorated on service, and Management’s best estimate of salary escalation and mortality rates. Discount rates used in actuarial
calculations are based on long-term interest rates and can have a material effect on the amount of plan liabilities and expenses.
Management employs external experts to advise the Company when deciding upon the appropriate estimates to use to value employee
benefit plan obligations and expenses. The Company's plans invest in pooled funds which hold underlying equity, debt and other
securities that are not quoted in an active market. Management relies on external experts to value these pooled funds. To the extent
that these estimates differ from those realized, employee benefit plan assets and liabilities and comprehensive income will be affected
in future periods.
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations were as follows:
Period
of
Rate
end
salary
discount rate
increase
2020
2019
2.40 %
2.75 %
3.10 %
2.75 %
Information
about
the
sensitivity
of
the
plan
obligations
to
changes
in
assumptions
is
presented below:
Increase
(decrease)
in
defined
benefit obligations
($ thousands)
Actuarial Assumption
Period
end
discount rate
Total
Sensitivity pensions
2.40 %
0.25 % decrease
$
41,226
salary increase
of
Rate
Mortality
0.25 %
increase
$
(39,903)
0.50 %
of
Increase
expected
increase
in
1 year
of
lifetime
plan participants
$
$
3,114
41,735
110% of
2014
2.75 %
Private
Canadian
Mortality
projected
generationally using
scale MI-2017
Sector
Pensioners'
Table,
Other post-
retirement
benefits
$
$
$
1,354
(1,231)
N/A
779
Total
$
42,580
$
(41,134)
$
$
3,114
42,514
Income Taxes
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
judgements regarding the carrying values of assets and liabilities that include estimates of future cash flows and earnings related to
such assets and liabilities, the interpretation of income tax legislation in the jurisdictions in which the Company operates, and the timing
of reversal of temporary differences. The Company establishes additional provisions for income taxes when, despite Management’s
27
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
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, deferred tax assets and liabilities,
net earnings, and comprehensive income will be affected in future periods.
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 consolidated financial statements. Changes to these estimates may affect the value of provisions, net earnings, and
comprehensive income in future periods.
Share-Based Compensation
The Company uses estimates in the calculation of the liability and expenses for certain share-based incentive plans including, but not
limited to, estimates of forfeitures, share price volatility, dividends, expected life of the award, risk-free interest rates, and Company
performance. 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 in future periods.
Some of the Company’s share-based payment plans may be settled 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 based on Management’s judgement may impact contributed surplus, liabilities,
net earnings, and comprehensive income in future periods.
Depreciation and Amortization
The Company’s property and equipment and definite life intangible assets are depreciated and amortized on a straight-line basis,
considering the estimated useful lives of the assets and residual values. Right-of-use ("ROU") assets are depreciated on a straight-line
basis, considering the shorter of the useful life of the underlying asset or the lease term. If it is reasonably certain at the commencement
of the lease arrangement that the Company will exercise its purchase option or otherwise obtain ownership of the underlying asset at
the end of the lease term, the ROU asset is depreciated over the useful life of the underlying asset. Changes to these estimates may
affect the carrying value of these assets, inventories, net earnings, and comprehensive income in future periods.
Leases
The Company applies significant judgement in assessing whether a contract is or contains a lease. Such judgements include the
determination of whether an asset or assets are specifically or implicitly identified in the contract, if the Company has the right to obtain
substantially all the economic benefits from use of the asset or assets and whether the Company has the right to direct the use of the
asset or assets. These judgements are made at the inception of a contract and may change if there are material changes to the
agreement.
Estimates are used to determine the incremental borrowing rate of a lease when the interest rate implicit to the lease is not readily
available. The Company's incremental borrowing rate is determined using a model which incorporates the Company's credit worthiness,
the nature and quality of the underlying asset, geographic environments and the duration of the lease. The inputs used in determining
the incremental borrowing rate are reviewed and updated quarterly.
The Company also applies significant judgement in determining whether it is reasonably certain to exercise lease extension options or
purchase options in a contract by considering all relevant factors and circumstances that may create an economic incentive for the
Company to exercise the option considering such factors as past experience, the terms and conditions of the contract, and the
importance of the underlying assets to the Company’s operations.
29. SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards Adopted During the Period
During the year ended December 31, 2020, the Company adopted certain IFRS and amendments. As required by International
Accounting Standard ("IAS") 8 Accounting Policies, Changes in Accounting Estimates and Errors, the nature and the effect of these
changes are disclosed below:
Conceptual Framework
Beginning January 1, 2020, the Company adopted the revised Conceptual Framework for Financial Reporting ("revised conceptual
framework"). The revised conceptual framework does not constitute a substantial revision from the previously effective guidance, but
does provide additional guidance on topics not previously covered such as presentation and disclosure. The adoption of the revised
conceptual framework did not have a material impact on the consolidated financial statements.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Definition of a Business
Beginning January 1, 2020, the Company adopted the IASB amendment regarding the definition of a business under IFRS 3 Business
Combinations. This amendment narrowed and clarified the definition of a business, as well as permitted a simplified assessment of
whether an acquired set of activities and assets is a group of assets rather than a business. The adoption of the amendment to IFRS 3
did not have a material impact on the consolidated financial statements.
Definition of Material
Beginning January 1, 2020, the Company adopted the amendments to IAS 1 Presentation of Financial Statements and IAS 8. These
amendments clarify and align the definition of material and provide guidance to help improve consistency in the application of
materiality when used in other IFRS standards. The adoption of the amendments to IAS 1 and IAS 8 did not have a material impact on
the consolidated financial statements.
Interest Rate Benchmark Reform - Phase 1
Beginning January 1, 2020, the Company adopted the amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments:
Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures to address the potential effects Interbank Offered Rates
("IBOR") reform could have on financial reporting. The amendments modify specific hedge accounting requirements to allow entities to
assume that the interest rate benchmark on which the hedged cash flows and the cash flows of which the hedging instrument are based
on, are not altered as a result of IBOR reform. The adoption of the amendments to IFRS 9, IAS 39 and IFRS 7 did not have a material
impact on the consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Effective
Interest Rate Benchmark Reform - Phase 2
On August 27, 2020 the IASB issued amendments to IFRS 9, IAS 39, and IFRS 7 to address issues that might affect financial reporting
after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. The amendments relate to
modification of financial assets, financial liabilities and lease liabilities, specific hedge accounting requirements, and disclosure
requirements. The Company intends to adopt the amendments in its consolidated financial statements for the annual period beginning
January 1, 2021. The adoption of amendments to IFRS 9, IAS 39, and IFRS 7 are not expected to have a material impact on the
consolidated financial statements.
Annual Improvements to IFRS (2018-2020) Cycle
On May 14, 2020, the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvement process.
Amendments were made to clarify which fees an entity includes when it applies the ‘10 per cent’ test in assessing whether to
derecognize a financial liability in accordance with IFRS 9. The amendments also remove the requirement in IAS 41 Agriculture for
entities to exclude taxation cash flows when measuring the fair value of a biological asset using a present value technique. Lastly, an
amendment was made to IFRS 1 First-time Adoption of International Financial Reporting Standards for subsidiaries as a first-time
adopter. The Company intends to adopt these amendments prospectively in its consolidated financial statements for the annual period
beginning January 1, 2022. The extent of the impact of the adoption of these standards has not yet been determined.
Onerous Contracts – Cost of Fulfilling a Contract
On May 14, 2020, the IASB issued amendments to IAS 37 to specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate
directly to the contract’. Costs that relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of
other costs that relate directly to fulfilling contracts. This amendment is effective on January 1, 2022. The Company intends to adopt this
amendment in its consolidated financial statement for the annual period beginning January 1, 2022. The extent of the impact of the
adoption of this amendment has not yet been determined.
Classification of Liabilities as Current or Non-current
On January 23, 2020, an amendment was issued to IAS 1 to address inconsistencies with how entities apply the standards over
classification of current and non-current liabilities. The amendment serves to address whether, in the statement of financial position,
debt and other liabilities with an uncertain settlement should be classified as current or non-current. This amendment is effective on
January 1, 2023. The Company intends to adopt this amendment in its consolidated financial statement for the annual period beginning
January 1, 2023. The extent of the impact of the adoption of this amendment has not yet been determined.
All other IFRSs and amendments issued but not yet effective have been assessed by the Company and are not expected to have a
material impact on the consolidated financial statements.
30. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management, under the direction and supervision of the Company’s Chief Executive Officer and Chief Financial Officer, is responsible
for establishing and maintaining disclosure controls and procedures. These controls and procedures are designed to provide
reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is accumulated and
communicated to Management in a timely manner so that information required to be disclosed by the Company under securities
29
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
legislation is recorded, processed, summarized and reported within the time periods specified in applicable securities legislation.
Management, under the direction and supervision of the Company’s Chief Executive Officer and Chief Financial Officer, is also
responsible for establishing and maintaining internal control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As required by National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, the Company’s Chief
Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Company’s internal control over financial reporting and disclosure controls and procedures as at December 31, 2020 and have
concluded that such controls and procedures are effective.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
There have been no changes in the Company’s internal control over financial reporting that occurred during the period beginning on
January 1, 2020, and ended on December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
31. 2021 OUTLOOK AND LONG-TERM TARGETS
Maple Leaf Foods is a leading consumer protein company, supported by an iconic portfolio of brands, a solid balance sheet and capital
structure that provide financial flexibility. Over the last several years, the Company has developed a foundation to pursue compelling
growth vectors across its business and to create value for all stakeholders.
In Plant Protein, the Company’s strategy is to invest for growth in this high potential market. In 2019, Maple Leaf Foods articulated its
ambitious goal to achieve approximately $3 billion in sales in the Plant Protein Group by 2029, assuming a market size of approximately
$25 billion. In that environment the Company would aspire to generate approximately 30% gross margin and SG&A expense (as a % of
sales) in the low double-digit range. Long-term, achieving these targets is expected to result in Adjusted EBITDA Margins that exceed
those in the Meat Protein Group. This will be driven by:
• Capitalizing on the high growth plant protein market, predominantly in the refrigerated space.
•
Leveraging Maple Leaf Foods’ established expertise in brand development and effective marketing.
• Delivering on a pipeline of new product innovation to broaden and deepen its product portfolio.
•
Executing on a multi-tiered supply capacity strategy focused on capital stewardship. This includes leverage of its existing Plant
Protein assets, utilizing footprint in the rest of its network, opportunistic partnerships with co-packing services, and
development of new capacity, which includes the planned Indianapolis, Indiana tempeh processing facility.
In Meat Protein, the Company’s strategy is to drive profitable growth. In 2017, Maple Leaf Foods articulated its target to reach an
Adjusted EBITDA margin of 14% - 16% in 2022, while driving low single-digit organic revenue growth. This will be driven by:
• Growth in sustainable meats, including further establishing the business as a leading provider of Raised Without Antibiotics
("RWA") pork and poultry into Canadian and U.S. markets.
• Continued benefits from brand renovation strategies to accelerate volume growth and product mix-shift in branded prepared
meats products.
•
Focus on cost control through operational efficiencies.
2021 Outlook
Throughout the COVID-19 pandemic, Maple Leaf Foods has remained focused on protecting its employees and ensuring continuity of
its supply chain. As a result, the current environment does increase certain operating costs and potential for short-term processing
disruptions to protect the health and safety of plant personnel. Continuing COVID-19 structural costs have been incorporated in the
Company's 2021 operating plan.
Maple Leaf Foods expects to achieve the following in 2021:
Meat Protein Group - Driving Profitable Growth
• Mid-to-high single digit sales growth on a 52-week comparable basis, driven by continued momentum in sustainable meats,
leveraging brand renovation, and growth into the U.S. market.
•
Adjusted EBITDA margin expansion, progressing towards the 2022 target of 14% -16%, driven by mix-shift benefits in
prepared meats resulting from growth in sustainable meats and brand renovation, as well as operational efficiencies, while
assuming pork complex conditions in-line with the 5-year average.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
Plant Protein Group - Investing for Growth
•
Sales growth for the year to be broadly in-line with the strategic target of 30%, excluding any impact from fluctuations in foreign
exchange. Growth is expected to be driven by continued momentum in the core product line, improved velocities and
distribution in the fresh line and resurgence in foodservice activity following the abatement of COVID-19 restrictions.
• Gross margin is expected to be volatile in the near-term, as benefits from structural improvements in the supply chain may be
impacted by investment opportunities to drive sales growth in a rapidly evolving market, as well as ongoing effects of
COVID-19.
•
SG&A expenses broadly in-line with 2020 levels, excluding any impact from fluctuations in foreign exchange, while declining
as a percentage of sales as the Company leverages investments in advertising, promotion and marketing to elevate the
Lightlife® and Field Roast™ brand renovations, drive innovation and build scale in the business.
Capital
•
The Company currently estimates its capital expenditures for the full year of 2021 will be in the range of $550 million to $650
million, approximately 75% of which to be comprised of Construction Capital. A significant portion of the Construction Capital is
related to the London, Ontario poultry facility and other projects to add capacity and improve efficiency in our prepared meats
business.
• Construction Capital also includes the intended acquisition and build-out of a plant protein facility in Indianapolis, Indiana, as
announced on January 11, 2021. This 118,000 square foot facility will enable the Company to meet the growing demand for
tempeh in a capital efficient manner.
Factors that could have an impact on our business, which we cannot estimate or control due to the COVID-19 pandemic, include:
•
•
•
•
Volatility in the pork and poultry commodity and foreign exchange markets.
The balance between retail and foodservice demand.
Potential future production disruptions or shutdowns.
The duration of government measures, including social distancing.
In addition to financial and operational priorities, Maple Leaf Foods believes that shared value and operating its business for the benefit
of all stakeholders is crucial. The Company’s guiding pillars to be the “Most Sustainable Protein Company on Earth” include Better
Food, Better Care, Better Communities, Better Planet and are core to how Maple Leaf Foods conducts itself. To that end, the
Company’s priorities include:
•
•
•
•
Better Food - leading the real food movement and transitioning key brands to 100.0% “raised without antibiotics”.
Better Care - further advancement of animal care, including progress towards transitioning all sows under management to
open housing systems by 2021.
Better Communities - investing approximately 1% of pre-tax profit to advance sustainable food security.
Better Planet - continuing to amplify its commitment to carbon neutrality, while focusing on eliminating waste in any resources
it consumes, including food, energy, water, packaging, and time.
32. NON-IFRS FINANCIAL MEASURES
The Company uses the following non-IFRS measures: Adjusted Operating Earnings, Adjusted Earnings per Share, Adjusted EBITDA,
Adjusted EBITDA Margin, Construction Capital, Net Debt, Free Cash Flow and Return on Net Assets. 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 EBITDA and Adjusted EBITDA Margin
Adjusted Operating Earnings, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS measures used by Management to
evaluate financial operating results. Adjusted Operating Earnings is defined as earnings before income taxes adjusted for items that are
not considered representative of ongoing 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. Adjusted EBITDA is defined as Adjusted
Operating Earnings plus depreciation and intangible asset amortization, adjusted for items included in other expense that are not
considered representative of ongoing operational activities of the business. Adjusted EBITDA Margin is calculated as Adjusted EBITDA
divided by sales.
The tables below provide a reconciliation of earnings (loss) before income taxes as reported under IFRS in the consolidated financial
statements to Adjusted Operating Earnings and Adjusted EBITDA for the years ended December 31, as indicated below. Management
31
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
believes that these non-IFRS measures are useful in assessing the performance of the Company’s ongoing operations and its ability to
generate cash flows to fund its cash requirements, including the Company’s capital investment program.
2020
2019
($ millions)(i)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(ii)
Total
Total
Earnings (loss) before income taxes
$
330.2
(125.8)
(44.5) $
159.9 $
218.0
(84.2)
(46.8) $
87.0
Interest expense and other financing costs
Other (income) expense
Restructuring and other related costs
—
(0.9)
4.3
—
0.1
—
31.5
17.5
—
31.5
16.8
4.3
—
0.3
11.0
—
0.2
—
32.0
2.7
—
32.0
3.3
11.0
Earnings (loss) from operations
$
333.6
(125.7)
4.5 $
212.4 $
229.3
(84.0)
(12.1) $
133.3
(Increase) decrease in fair value of biological assets
Unrealized (gain) loss on derivative contracts
—
—
—
—
(0.7)
(3.8)
(0.7)
(3.8)
—
—
—
—
5.5
6.5
5.5
6.5
Adjusted Operating Earnings
$
333.6
(125.7)
— $
207.9 $
229.3
(84.0)
— $
145.4
Depreciation and amortization
177.6
14.4
Items included in other income representative
of ongoing operations(iii)
(2.7)
(0.1)
—
0.8
192.0
164.2
12.6
—
176.8
(2.0)
(0.3)
(0.2)
(0.4)
(1.0)
Adjusted EBITDA
$
508.5
(111.4)
0.8 $
397.9 $
393.2
(71.6)
(0.4) $
321.2
Adjusted EBITDA Margin
12.4%
(52.8)%
N/A
9.2%
10.4%
(40.6)%
N/A
8.1%
(i)
Totals may not add due to rounding.
(ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of
expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment's
operating results.
(iii) Primarily includes insurance settlements, gain/loss on sale of long-term assets and asset impairment.
Adjusted Earnings per Share
Adjusted Earnings per Share, a non-IFRS measure, is used by Management to evaluate financial operating results. It is defined as
basic earnings per share and is adjusted on the same basis as Adjusted Operating Earnings. The table below provides a reconciliation
of basic earnings per share as reported under IFRS in the audited consolidated statements of net earnings to Adjusted Earnings per
Share for the years ended December 31, as indicated below. Management believes this basis is the most appropriate on which to
evaluate financial results as they are representative of the ongoing operations of the Company.
($ per share)
Basic earnings per share
Restructuring and other related costs(i)
Income tax recovery not considered representative of ongoing operations
Items included in other expense not considered representative of ongoing operations(ii)
Change in fair value of biological assets
Unrealized (gain) loss on derivative contracts
Adjusted Earnings per Share(iii)
(i)
(ii)
Includes per share impact of restructuring and other related costs, net of tax.
Primarily includes legal fees and provisions and transaction related costs, net of tax.
(iii) Totals may not add due to rounding.
Construction Capital
2020
0.92
0.03
—
0.11
—
(0.02)
1.02
$
$
2019
0.60
0.07
(0.08)
0.02
0.03
0.04
0.68
$
$
Construction Capital, a non-IFRS measure, is used by Management to evaluate the amount of capital resources invested in specific
strategic development projects that have not yet entered commercial production. It is defined as investments and related financing
charges in projects over $50.0 million that are related to longer-term strategic initiatives, with no returns expected for at least 12 months
in the future and the asset will be re-categorized from Construction Capital once operational. Current strategic initiatives primarily
include the investments in the London, Ontario poultry production facility, further capacity and efficiency improvements in the prepared
32
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
meats business, investments in plant protein capacity at the Walker Drive facility in Brampton, Ontario, and the plant protein production
facilities in Indiana. The following table is a summary of Construction Capital activity and debt financing for the periods indicated below.
($ thousands)
Opening
balance
at
January 1
Additions
Interest
paid
and capitalized(i)
Balance
at
December 31
Construction
Capital
debt
financing(ii)
2020
2019
$
106,831
$
22,422
326,496
7,263
82,789
1,620
$
$
440,590
431,707
$
$
106,831
105,211
(i)
(ii)
Certain comparatives figures have been restated to conform with current year presentations.
Assumed to be fully funded by debt to the extent that the Company has Net Debt outstanding.
Net Debt
The following table reconciles Net Debt to amounts reported under IFRS in the Company's consolidated financial statements as at
December 31, as indicated below. The Company calculates Net Debt as cash and cash equivalents, less long-term debt and bank
indebtedness. Management believes this measure is useful in assessing the amount of financial leverage employed.
($ thousands)
Cash
and
cash equivalents
Current
portion
of
long-term debt
Long-term debt
Total debt
Net Debt
Free Cash Flow
As
at
December
31,
2020
100,828
(900)
(745,048)
(745,948)
(645,120)
$
$
$
$
2019
97,285
(899)
(538,429)
(539,328)
(442,043)
$
$
$
$
Free Cash Flow, a non-IFRS measure, is used by Management to evaluate cash flow after investing in the maintenance or expansion of
the Company's asset base. It is defined as cash provided by operations, less cash additions to long-term assets and capitalized
interest. The following table calculates Free Cash Flow for the periods indicated below:
($ thousands)
Cash
Additions
provided
to
by
operating activities
long-term assets
Interest
Free
paid
Cash
and capitalized(i)
Flow
As
at
December
31,
2020
2019
$
321,449
$
270,180
(432,540)
(8,214)
(268,095)
(2,650)
$
(119,305)
$
(565)
(i)
Certain comparatives figures have been restated to conform with current year presentations.
Return on Net Assets
Return on Net Assets ("RONA") is calculated by dividing tax effected earnings from operations (adjusted for items which are not
considered representative of the underlying operations of the business) by average monthly net assets. Net assets are defined as total
assets (excluding cash and deferred tax assets) less non-interest bearing liabilities (excluding deferred tax liabilities). Management
believes that RONA is an appropriate basis upon which to evaluate long-term financial performance.
33. 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, projections, beliefs,
judgments and assumptions based on information available at the time the applicable forward-looking statement was made and in light
of the Company’s experience combined with its perception of historical trends. Such statements include, but are not limited to,
statements with respect to objectives and goals, in addition to statements with respect to beliefs, plans, targets, goals, objectives,
expectations, anticipations, estimates, and intentions. Forward-looking statements are typically identified by words such as "anticipate",
"continue", "estimate", "expect", "may", "will", "project", "should", "could", "would", "believe", "plan", "intend", "design", "target",
"undertake", "view", "indicate", "maintain", "explore", "entail", "schedule", "objective", "strategy", "likely", "potential", "outlook", "aim",
33
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
"propose", "goal", and similar expressions suggesting future events or future performance. These statements are not guarantees of
future performance and involve assumptions, risks and uncertainties that are difficult to predict.
By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual
results or events to differ materially from those anticipated in such forward-looking statements. The Company believes the expectations
reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be
correct and such forward-looking statements should not be unduly relied upon.
Specific forward-looking information in this document may include, but is not limited to, statements with respect to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
implications of COVID-19;
future performance, including future financial objectives, goals and targets, expected capital spend and expected SG&A
expenditures for the Company and each of its operating segments;
the execution of the Company's business strategy, including the development and expected timing of business initiatives, brand
expansion and repositioning, and other growth opportunities, as well as the impact thereof;
the impact of international trade conditions on the Company's business, including access to markets, implications associated with
the spread of foreign animal disease (such as African Swine Fever ("ASF")), and other social, economic and political factors that
affect trade;
competitive conditions and the Company's ability to position itself competitively in the markets in which it competes;
capital projects, including planning, construction, estimated expenditures, schedules, approvals, expected capacity, in-service
dates and anticipated benefits of construction of new facilities and expansions of existing facilities;
the Company's dividend policy, including future levels and sustainability of cash dividends, the tax treatment thereof and future
dividend payment dates;
the impact of commodity prices on the Company's operations and financial performance, including the use and effectiveness of
hedging instruments;
expected future cash flows and the sufficiency thereof, sources of capital at attractive rates, future contractual obligations, future
financing options, renewal of credit facilities, and availability of capital to fund growth plans, operating obligations and dividends;
operating risks, including the execution, monitoring and continuous improvement of the Company's food safety programs, animal
health initiatives and cost reduction initiatives;
the implementation, cost and impact of environmental sustainability initiatives, as well as the anticipated future cost of remediating
environmental liabilities;
the adoption of new accounting standards and the impact of such adoption on the financial position of the Company;
expectations regarding pension plan performance, including future pension plan assets, liabilities and contributions; and
developments and implications of actual or potential legal actions.
Various factors or assumptions are typically applied by the Company in drawing conclusions or making the forecasts, projections,
predictions or estimations set out in the forward-looking statements. These factors and assumptions are based on information currently
available to the Company, including information obtained by the Company from third-party sources and include but are not limited to the
following:
•
•
•
•
•
•
•
•
•
expectations regarding the impact and future implications of COVID-19 and adaptations in operations, customer and consumer
behaviour, economic patterns and international trade;
the competitive environment, associated market conditions and market share metrics, the expected behaviour of competitors and
customers and trends in consumer preferences;
the success of the Company's business strategy, including execution of the strategy in each of the Meat Protein and Plant Protein
Groups;
prevailing commodity prices, interest rates, tax rates and exchange rates;
the economic condition of and the socio-political dynamics between Canada, the U.S., Japan and China, and the ability of the
Company to access markets in these countries;
the spread of foreign animal disease (including ASF), preparedness strategies to manage such spread, and implications for all
protein markets;
the availability of capital to fund future capital requirements associated with existing operations, assets and projects;
expectations regarding participation in and funding of the Company's pension plans;
the availability of insurance coverage to manage certain liability exposures;
34
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
•
•
•
the extent of future liabilities and recoveries related to legal claims;
prevailing regulatory, tax and environmental laws; and
future operating costs and performance, including the Company's ability to achieve operating efficiencies and maintain high sales
volumes, high turnover of inventories and high turnover of accounts receivable.
Readers are cautioned that these assumptions may prove to be incorrect in whole or in part. The Company's actual results may differ
materially from those anticipated in any forward-looking statements.
Factors that could cause actual results or outcomes to differ materially from the results expressed, implied, or projected in the forward-
looking statements contained in this document include, among other things, risks associated with the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
implications of COVID-19 on the operations and financial performance of the Company, as well the implications for macro socio-
economic trends;
competition, market conditions and the activities of competitors and customers;
food safety, consumer liability and product recalls;
the health status of livestock, including the impact of potential pandemics;
international trade and access to markets, as well as social, political and economic dynamics affecting same;
availability of and access to capital;
decision respecting the return of capital to shareholders;
the execution of capital projects, including cost, schedule and regulatory variables;
food safety, consumer liability and product recalls;
cyber security and the maintenance and operation of the Company’s information systems and processes;
acquisitions and divestitures;
climate change;
fluctuations in the debt and equity markets;
fluctuations in interest rates and currency exchange rates;
pension assets and liabilities;
cyclical nature of the cost and supply of hogs and the competitive nature of the pork market generally;
the effectiveness of commodity and interest rate hedging strategies;
impact of changes in the market value of the biological assets and hedging instruments;
the supply management system for poultry in Canada;
availability of plant protein ingredients;
intellectual property, including product innovation, product development, brand strategy and trademark protection;
consolidation of operations and focus on protein;
the use of contract manufacturers;
reputation;
• weather;
•
•
•
•
•
•
compliance with government regulation and adapting to changes in laws;
actual and threatened legal claims;
consumer trends and changes in consumer tastes and buying patterns;
environmental regulation and potential environmental liabilities;
consolidation in the retail environment;
employment matters, including complying with employment laws across multiple jurisdictions, the potential for work stoppages due
to non-renewal of collective agreements, recruiting and retaining qualified personnel, reliance on key personnel and succession
planning;
•
pricing of products;
• managing the Company’s supply chain;
35
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2020 | MAPLE LEAF FOODS INC.
•
•
changes in International Financial Reporting Standards and other accounting standards that the Company is required to adhere to
for regulatory purposes; and
other factors as set out under the heading "Risk Factors" in the Company's Management Discussion and Analysis for the year
ended December 31, 2020.
The Company cautions readers that the foregoing list of factors is not exhaustive.
Readers are further cautioned that some of the forward-looking information, such as statements concerning future capital expenditures,
Adjusted EBITDA Margin growth in the Meat Protein Group, expected sales and growth margin targets in the Plant Protein Group and
SG&A spend, may be considered to be financial outlooks for purposes of applicable securities legislation. These financial outlooks are
presented to evaluate potential future earnings and anticipated future uses of cash flows and may not be appropriate for other
purposes. Readers should not assume these financial outlooks will be achieved.
More information about risk factors can be found under the heading “Risk Factors” in the Risk Factors section of this Management
Discussion and Analysis on page 18. The reader should review such section in detail. Additional information concerning the Company,
including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com.
All forward-looking statements included herein speak only as of the date hereof. Unless required by law, the Company does not
undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. All forward-looking statements contained herein are expressly qualified by this cautionary statement.
36
TABLE OF CONTENTS | 2020 | MAPLE LEAF FOODS INC.
38
41
42
43
44
45
46
46
48
56
56
57
58
59
59
60
61
62
64
65
66
67
67
70
71
78
78
79
82
83
83
84
84
85
Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Net Earnings
Consolidated Statements of Other Comprehensive Income (Loss)
Consolidated Statements of Changes in Total Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The Company
Basis of Preparation
Significant Accounting Policies
Accounts Receivable
Inventories
Biological Assets
Income Taxes
Assets Held for Sale
Property and Equipment
Right-of-Use Assets
Goodwill
Intangible Assets
Provisions
Long-Term Debt
Lease Obligations
Other Current Liabilities
Employee Benefits
Share Capital
Financial Instruments and Risk Management Activities
Interest Expense and Other Financing Costs
Earnings Per Share
Share-Based Payment
Segmented Financial Information
Government Incentives
Composition of the Company
Related Party Transactions
Commitments and Contingencies
Subsequent Event
37
INDEPENDENT AUDITORS' REPORT | 2020 | MAPLE LEAF FOODS INC.
Independent Auditors' Report
To the Shareholders of Maple Leaf Foods Inc.
Opinion
We have audited the consolidated financial statements of Maple Leaf Foods Inc. (the Entity), which comprise:
•
•
•
•
•
•
the consolidated balance sheets as at December 31, 2020 and December 31, 2019
the consolidated statements of net earnings for the years then ended
the consolidated statements of other comprehensive income (loss) for the years then ended
the consolidated statements of changes in total equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the
Entity as at December 31, 2020 and December 31, 2019, and its consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’
report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements
for the year ended December 31, 2020. These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditors’ report.
Evaluation of impairment of goodwill and indefinite life intangible assets
Description of the matter
We draw attention to Notes 2(d), 3(b), 3(k), 3(n), 11 and 12 to the financial statements. The Entity performs impairment testing annually
for goodwill and indefinite life intangible assets and, when circumstances indicate that there may be impairment. The Entity has
recorded goodwill and indefinite life intangible assets of $652,501 thousand and $341,196 thousand. The Entity assesses impairment
by comparing the recoverable amount of each of the indefinite life intangible assets or CGU groups to its carrying value. The Entity has
determined two CGU groups, Meat Protein and Plant Protein. The recoverable amount is defined as the higher of (i) value in use; or (ii)
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
group through its use. Fair value less cost to sell is the amount obtainable from the sale of an CGU group or an asset in an arm’s-length
transaction between knowledgeable, willing parties, less the costs of disposal. The determination of the recoverable amount involves
significant assumptions, including with respect to future cash inflows and outflows; discount rates, terminal growth rates; and royalty
rates in respect of indefinite life intangible assets.
Why the matter is a key audit matter
We identified the evaluation of impairment of goodwill and indefinite life intangible assets as a key audit matter. This matter represented
an area of higher risk of misstatement given the magnitude of goodwill and indefinite life intangible assets and the high degree of
estimation uncertainty in assessing the assumptions used to determine the recoverable amounts. Significant auditor judgement and the
involvement of professionals with specialized skills and knowledge was required to evaluate the evidence supporting the Entity’s
significant assumptions due to the sensitivity of the recoverable amounts to minor changes in significant assumptions.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
For a selection of indefinite life intangible assets and for all CGU groups:
• We compared the Entity’s historical future cash inflows and outflows to the actual results generated by the group of CGUs or
indefinite life intangible asset to assess the Entity’s ability to forecast future cash inflows and outflows.
38
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT | 2020 | MAPLE LEAF FOODS INC.
• We evaluated the appropriateness of the Entity’s future cash inflows and outflows by understanding the Entity’s long-term strategy
and, comparing to actual results. We took into account changes in conditions or events to assess the adjustments or lack of
adjustments, made in arriving at those future cash inflows and outflows.
We involved valuation professionals with specialized skills and knowledge, who assisted in assessing the discount rates, terminal
growth rates, and royalty rates used in the determination of the recoverable amounts. The procedures performed include the following:
•
•
Assessing the Entity’s discount rates against discount rate ranges that were independently developed using publicly available
market and industry data, and consideration of trading metrics of comparable entities.
Evaluated the terminal growth rates by considering the growth profile and overall macroeconomic conditions of the group of CGUs
or indefinite life intangible asset.
• Compared the Entity’s royalty rates against profitability metrics and publicly available data for a group of comparable entities.
Other Information
Management is responsible for the other information. Other information comprises:
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such
internal control as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity‘s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
39
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT | 2020 | MAPLE LEAF FOODS INC.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’
report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions
may cause the Entity to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
•
Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group
Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinion.
• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in
the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our auditors’ report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Kristen Carscallen.
Toronto, Canada
February 24, 2021
40
Consolidated Balance Sheets
CONSOLIDATED BALANCE SHEETS | 2020 | MAPLE LEAF FOODS INC.
Canadian dollars)
Notes
A s
at
December 31,
2020
A s
at
December 31,
2019(i)
of
thousands
(In
ASSETS
Current assets
cash equivalents
and
Cash
Accounts receivable
Notes receivable
Inventories
Biological assets
other
and
Income
Prepaid
expenses
held
Assets
for sale
taxes recoverable
other assets
and
and equipment
Property
Right-of-use assets
Investments
Other
Deferred
Goodwill
Intangible assets
Total assets
long-term assets
tax asset
LIABILITIES
Current liabilities
AND EQUITY
payable
and accruals
Accounts
Current
Current
Current
Income
Other
portion
portion
portion
taxes payable
current liabilities
of provisions
of
of
long-term debt
lease obligations
Long-term debt
Lease obligations
Employee benefits
Provisions
Other
Deferred
Total liabilities
long-term liabilities
tax liability
Shareholders’ equity
earnings
Share capital
Retained
Contributed surplus
Accumulated
other
Treasury stock
Total
shareholders’ equity
Total liabilities and equity
comprehensive
(loss) income
4
5
6
7
8
9
10
7
11
12
13
14
15
7
16
14
15
17
13
7
18
18
$
$
$
$
$
$
100,828
159,750
31,550
398,070
125,648
1,830
64,517
575
882,768
1,721,487
222,705
15,910
9,568
14,070
652,501
341,196
3,860,205
501,529
1,529
900
79,601
27,639
55,849
667,047
745,048
160,636
188,946
44,230
11,918
109,916
1,927,741
$
1
838,969
,124,973
5,866
(13,414)
(23,930)
$
1,932,464
$ 3,860,205
$
$
$
$
$
$
97,285
154,969
31,699
385,534
119,016
—
51,494
34,293
874,290
1,386,482
227,426
3,448
12,497
—
657,179
352,713
3,514,035
445,774
3,973
899
39,505
205
44,698
535,054
538,429
204,013
116,742
44,929
3,026
121,972
1,564,165
$
1
840,005
,137,450
—
2,793
(30,378)
$
1,949,870
$ 3,514,035
(i) Certain comparative figures have been restated to conform with current year presentation.
Commitments and contingencies (Note 27)
Subsequent event (Note 28)
See accompanying Notes to the Consolidated Financial Statements.
On behalf of the Board:
MICHAEL H. MCCAIN
WILLIAM E. AZIZ
41
Consolidated Statements of Net Earnings
CONSOLIDATED STATEMENTS OF NET EARNINGS | 2020 | MAPLE LEAF FOODS INC.
Years
(In
ended
thousands
December
of
31,
Canadian
dollars,
except
share amounts)
Notes
2020
2019
Sales
Cost
of
goods sold
Gross profit
Selling,
general
and
administrative expenses
Earnings
before
the following:
Restructuring
and
other
related costs
Other
expense
Earnings
before
interest
and
income taxes
Interest
expense
and
other
financing costs
Earnings
before
income taxes
Income
tax expense
Net earnings
Earnings
per
share
attributable
to
common shareholders:
Basic
earnings
per share
Diluted
earnings
per share
Weighted
average
number
of
shares (millions)
Basic
Diluted
See accompanying Notes to the Consolidated Financial Statements.
$
4,303,722
$
3,941,545
3,600,669
3,350,566
$
703,053
$
590,979
490,659
457,681
$
212,394
$
133,298
4,284
16,757
11,004
3,268
$
191,353
$
119,026
31,480
32,031
$
159,873
$
86,995
46,596
12,367
$
113,277
$
74,628
$
$
0.92
0.91
$
$
0.60
0.60
123.1
124.3
123.6
125.2
13
20
7
21
21
42
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | 2020 | MAPLE LEAF FOODS INC.
Consolidated Statements of Other Comprehensive
Income (Loss)
Years
(In
ended
thousands
December
of
31,
Canadian dollars)
Net earnings
Other
comprehensive
(loss) income
Actuarial
loss
that
will
not
be
reclassified
to
profit
or
loss
(Net
of
tax
of
$16.1
million;
2019:
$3.6 million)
2020
2019
$
113,277
$
74,628
$
(46,822)
$
(9,870)
Items
that
Change
are
in
be
may
or
accumulated
reclassified
foreign
subsequently
to
or loss:
profit
translation adjustment
currency
(Net
Change
of
in
of
tax
foreign
$0.0
million;
exchange
2019:
on
long-term
debt
designated
as
a
net
investment hedge
$0.0 million)
$
(8,814)
$
(15,992)
(Net
Change
of
in
tax
cash
flow
hedges
of
$1.4
million;
2019:
$2.2 million)
7,542
11,748
(14,935)
3,505
$
(16,207)
$
(739)
$
(63,029)
$
(10,609)
$
50,248
$
64,019
(Net
of
tax
of
$5.2
million;
2019:
$1.2 million)
Total
items
that
are
or
may
be
reclassified
subsequently
to
profit
or loss
Total
other
comprehensive loss
Comprehensive income
See accompanying Notes to the Consolidated Financial Statements.
43
Consolidated Statements of Changes in Total Equity
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY | 2020 | MAPLE LEAF FOODS INC.
(In
thousands
of
Canadian dollars)
Notes
Share
capital
Retained
earnings
Contributed
surplus
Accumulated
comprehensive
(loss)(i)
other
income
Foreign
currency
translation
adjustment
Unrealized
and
gains
on
losses
flow
cash
hedges
Treasury
stock
Total
equity
Balance
at
December
31, 2019
$840,005
1,137,450
Net earnings
Other
comprehensive loss
Dividends
declared
($0.64
per share)
Share-based
compensation expense
22
Deferred taxes
on
share-based compensation
Change
in
obligation
for
repurchase
of shares
18
(2,048)
Exercise
of
stock options
Settlement
of
share-based compensation
1,012
—
—
113,277
—
(46,822)
—
(78,932)
—
—
—
—
—
—
—
—
—
—
—
17,301
700
(2,398)
—
(9,737)
4,274
(1,481)
(30,378)
$
1,949,870
—
—
—
113,277
(1,272)
(14,935)
—
(63,029)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(78,932)
17,301
700
(4,446)
1,012
—
6,448
(3,289)
Balance
at
December
31, 2020
$838,969
1,124,973
5,866
3,002
(16,416)
(23,930)
$
1,932,464
(In
thousands
of
Canadian dollars)
Notes
Share
capital
Retained
earnings
Contributed
surplus
Accumulated
comprehensive
(loss)(i)
other
income
Foreign
currency
translation
adjustment
Unrealized
and
gains
losses
on
cash flow
hedges
Treasury
stock
Total
equity
Balance
at
December
31, 2018
$849,655
1,178,389
4,649
8,518
(4,986)
(29,386)
$
2,006,839
Impact
of
new
IFRS standards
—
(1,100)
Net earnings
Other
comprehensive
(loss) income
(ii)
Dividends
declared
($0.58
per share)
Share-based
compensation expense
Deferred
taxes
on
share-based compensation
Repurchase
of shares
Exercise
of
stock options
Shares
purchased
by
RSU trust
22
18
—
—
—
—
74,628
(9,870)
(71,824)
—
—
—
—
—
—
—
17,935
460
(17,410)
(12,310)
(16,016)
7,760
—
—
—
—
—
Settlement
of
share-based compensation
—
(20,463)
(7,028)
—
—
—
—
(4,244)
3,505
—
(1,100)
—
—
—
—
—
—
—
74,628
(10,609)
(71,824)
17,935
460
(45,736)
7,760
—
—
—
—
—
—
(14,978)
(14,978)
—
13,986
(13,505)
—
—
—
—
—
—
—
Balance
at
December
31, 2019
$840,005
1,137,450
—
4,274
(1,481)
(30,378)
$
1,949,870
(i)
(ii)
Items that are or may be subsequently reclassified to profit or loss.
Included in other comprehensive income (loss) is the change in actuarial gains and losses that will not be reclassified to profit or loss and has been
reclassified to retained earnings.
See accompanying Notes to the Consolidated Financial Statements.
44
Consolidated Statements of Cash Flows
CONSOLIDATED STATEMENTS OF CASH FLOW | 2020 | MAPLE LEAF FOODS INC.
Years
(In
ended
thousands
December
of
31,
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
Share-based compensation
Deferred
income taxes
Income
tax current
Interest
expense
and
other
financing costs
Gain
on
sale
of
long-term assets
Asset impairment
in
Change
fair
value
of
non-designated derivatives
Change
in
net
pension obligation
Net
income
taxes paid
Interest paid
Change
in
provision
for
restructuring
and
other
related costs
Change
in
derivatives margin
Other
Change
in
non-cash
operating
working capital
Cash
provided
by
operating activities
Financing activities
Dividends paid
Net
increase
in
long-term debt
Payment
of
lease obligation
Exercise
of
stock options
Repurchase
of shares
Payment
of
financing fees
Purchase
of
treasury stock
Cash
provided
by
financing activities
Investing activities
Additions
to
long-term assets
Acquisition
of
business,
net
of
cash
acquired
Interest
paid
and capitalized
Proceeds
from
sale
of
long-term assets
Purchase
of investments
Payment
of
income
tax
liabilities
assumed
on acquisition
Cash
used
in
investing activities
Increase
in
cash
and
cash equivalents
Cash
and
cash
equivalents,
beginning
of period
and
cash
Cash
(i) Certain comparative figures have been restated to conform with current year presentation.
equivalents,
of period
end
See accompanying Notes to the Consolidated Financial Statements.
45
Notes
2020
2019(i)
$
113,277
$
74,628
6
22
7
7
20
19
7
13
19
14
15
(687)
196,266
17,301
(5,945)
52,541
31,480
(2,024)
1,377
(3,947)
9,286
(26,212)
(28,839)
(3,509)
(8,074)
5,041
(25,883)
5,545
176,796
17,935
(1,323)
13,690
32,031
(4,164)
—
5,785
4,730
(40,682)
(28,137)
8,144
(2,210)
1,779
5,633
$
321,449
$
270,180
$
(78,932)
$
(71,824)
215,601
(37,554)
1,012
—
(599)
—
169,491
(34,690)
7,760
(20,347)
(5,635)
(14,978)
$
99,528
$
29,777
23
$
(432,540)
$
(268,095)
—
(8,214)
37,373
(14,053)
—
$
$
(417,434)
3,543
97,285
(847)
(2,650)
7,727
—
$
$
(11,385)
(275,250)
24,707
72,578
$
100,828
$
97,285
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Notes to the Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars unless otherwise indicated)
Years ended December 31, 2020 and 2019
1. THE COMPANY
Maple Leaf Foods Inc. (“Maple Leaf Foods” or the "Company") is a producer of food products under leading brands including Maple
Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife®, and Field Roast™. The Company's
portfolio includes prepared meats, ready-to-cook and ready-to-serve meals, snacks kits, valued-added fresh pork and poultry, and plant
protein products. The address of the Company's registered office is 6985 Financial Dr. Mississauga, Ontario, L5N 0A1, Canada. The
consolidated financial statements of the Company as at and for the year ended December 31, 2020, include the accounts of the
Company and its subsidiaries. The Company's results are organized into two segments: the Meat Protein Group and the Plant Protein
Group. The composition of the Company is further described in Note 25.
2. BASIS OF PREPARATION
(a) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as
issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described herein.
The consolidated financial statements were authorized for issue by the Board of Directors on February 24, 2021.
(b) Basis of Measurement
The consolidated financial statements have been prepared on a historical cost basis except for cash and cash equivalents, derivative
instruments, biological assets, defined benefit plan assets, investments, and liabilities associated with certain share-based
compensation, which are stated at fair value. Liabilities associated with employee benefits are stated at actuarially determined present
values.
(c) Functional and Presentation Currency
The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.
(d) Use of Estimates and Judgements
The preparation of consolidated financial statements in accordance with IFRS requires Management to make judgements, estimates,
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses.
Actual amounts may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future periods affected.
Judgements included in the consolidated financial statements are decisions made by Management, based on analysis of relevant
information available at the time the decision is made. Judgements relate to the application of accounting policies and decisions related
to the measurement, recognition, and disclosure of financial information.
Information about areas of estimation uncertainty and critical judgements in applying 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 estimate uncertainty and critical judgements.
Long-Lived Assets Valuation
The Company performs impairment testing annually for goodwill and indefinite life intangible assets and, when circumstances indicate
that there may be impairment, for other long-lived assets and definite life intangibles. Management judgement is involved in determining
if there are circumstances indicating that testing for impairment is required, and in identifying Cash Generating Units (“CGUs”) for the
purpose of impairment testing.
The Company assesses impairment by comparing the recoverable amount of a long-lived asset, CGU, or CGU group to its carrying
value. The recoverable amount is defined as the higher of: (i) value in use; or (ii) fair value less cost to sell.
The determination of the recoverable amount involves significant assumptions, including those with respect to future cash inflows and
outflows, discount rates, terminal growth rates, royalty rates with respect to indefinite life intangible assets, and asset lives. These
assumptions could affect the Company’s future results if the current estimates of future performance and fair values change. These
determinations will affect the amount of amortization expense on definite life assets recognized in future periods.
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 estimation is required in establishing fair values. Changes in assumptions about the
inputs to these models could affect the reported fair value of the Company’s financial and non-financial assets and liabilities.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
When measuring fair value of an asset or liability, the Company uses market observable data to the extent that it is possible. To the
extent that these estimates differ from those realized, the measured asset or liability, net earnings, and/or comprehensive income will be
affected in future periods.
Information about the valuation techniques and inputs used in determining the fair value of various assets and liabilities are disclosed in
Notes 6, 11, 12, 17, 19, and 22.
Nature of Interests in Other Entities
Management applies significant judgement in assessing the nature of its interest in unconsolidated structured entities relating to its
accounts receivable securitization facilities. The Company does not hold any equity interest in the structured entities and based on the
terms of the agreements under which the entities are established, the Company does not receive the returns related to their operations
and is exposed to limited recourse with respect to losses. Information about the nature of interest in other entities is disclosed in Note
25.
Valuation of Inventory
Management makes estimates of the future customer demand for products when establishing appropriate provisions for inventory. In
making these estimates, Management considers the product life of inventory and the profitability of recent sales of inventory. In many
cases, product produced by the Company turns quickly and inventory on-hand values are low, thus reducing the risk of inventory
obsolescence. However, code or “best before” dates are very important in the determination of net 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 estimated, inventory, net earnings, and comprehensive income will be affected in
future periods.
Biological Assets
Biological assets are measured at each reporting date, at fair value less costs to sell, except when fair value cannot be reliably
measured. If fair value cannot be reliably measured, biological assets are measured at cost less depreciation and impairment losses.
Although a reliable measure of fair value may not be available at the point of initial recognition, it may subsequently become 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 net 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. Management uses estimates over the future price per
hog, foreign exchange rates, and estimated weight and cost of hogs at maturity in the determination of fair value. To the extent that
actual values differ from estimates, biological assets, net earnings and comprehensive income will be affected in future periods.
Trade Merchandise Allowances and Other Trade Discounts
The Company provides for estimated payments to customers based on various trade programs and contracts that often include
payments that are contingent upon attainment of specified sales volumes. Significant estimates used to determine these liabilities
include: the projected level of sales volume for the relevant period, and customer contracted rates for allowances, discounts, and
rebates. These arrangements are complex and there are a significant number of customers and products affected. Management has
systems and processes in place to estimate and value these obligations. To the extent that payments on trade discounts differ from
estimates of the related liability, accounts payable and accruals, net earnings, and comprehensive income will be affected in future
periods.
Employee Benefit Plans
The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected unit credit
method prorated on service, and Management’s best estimate of salary escalation and mortality rates. Discount rates used in actuarial
calculations are based on long-term interest rates and can have a material effect on the amount of plan liabilities and expenses.
Management employs external experts to advise the Company when deciding upon the appropriate estimates to use to value employee
benefit plan obligations and expenses. The Company's plans invest in pooled funds which hold underlying equity, debt and other
securities that are not quoted in an active market. Management relies on external experts to value these pooled funds. To the extent
that these estimates differ from those realized, employee benefit plan assets and liabilities and comprehensive income will be affected
in future periods.
Income Taxes
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
judgements regarding the carrying values of assets and liabilities that include estimates of future cash flows and earnings related to
such assets and liabilities, the interpretation of income tax legislation in the jurisdictions in which the Company operates, and the timing
of reversal of temporary differences. The Company establishes additional provisions for income taxes when, despite Management’s
opinion that the Company’s tax positions are fully supportable, there is sufficient complexity or uncertainty in the application of
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
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, deferred tax assets and liabilities,
net earnings, and comprehensive income will be affected in future periods.
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 consolidated financial statements. Changes to these estimates may affect the value of provisions, net earnings, and
comprehensive income in future periods.
Share-Based Compensation
The Company uses estimates in the calculation of the liability and expenses for certain share-based incentive plans including, but not
limited to, estimates of forfeitures, share price volatility, dividends, expected life of the award, risk-free interest rates, and Company
performance. 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 in future periods.
Some of the Company’s share-based payment plans may be settled 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 based on Management’s judgement may impact contributed surplus, liabilities,
net earnings, and comprehensive income in future periods.
Depreciation and Amortization
The Company’s property and equipment and definite life intangible assets are depreciated and amortized on a straight-line basis,
considering the estimated useful lives of the assets and residual values. Right-of-use ("ROU") assets are depreciated on a straight-line
basis, considering the shorter of the useful life of the underlying asset or the lease term. If it is reasonably certain at the commencement
of the lease arrangement that the Company will exercise its purchase option or otherwise obtain ownership of the underlying asset at
the end of the lease term, the ROU asset is depreciated over the useful life of the underlying asset. Changes to these estimates may
affect the carrying value of these assets, inventories, net earnings, and comprehensive income in future periods.
Leases
The Company applies significant judgement in assessing whether a contract is or contains a lease. Such judgements include the
determination of whether an asset or assets are specifically or implicitly identified in the contract, if the Company has the right to obtain
substantially all the economic benefits from use of the asset or assets and whether the Company has the right to direct the use of the
asset or assets. These judgements are made at the inception of a contract and may change if there are material changes to the
agreement.
Estimates are used to determine the incremental borrowing rate of a lease when the interest rate implicit to the lease is not readily
available. The Company's incremental borrowing rate is determined using a model which incorporates the Company's credit worthiness,
the nature and quality of the underlying asset, geographic environments and the duration of the lease. The inputs used in determining
the incremental borrowing rate are reviewed and updated quarterly.
The Company also applies significant judgement in determining whether it is reasonably certain to exercise lease extension options or
purchase options in a contract by considering all relevant factors and circumstances that may create an economic incentive for the
Company to exercise the option considering such factors as past experience, the terms and conditions of the contract, and the
importance of the underlying assets to the Company’s operations.
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.
All intercompany accounts and transactions have been eliminated on consolidation.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
(b) Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method at the acquisition date, which is the date that control is
transferred to the Company. In assessing control, the Company takes into consideration potential voting rights that are currently
exercisable.
Goodwill is measured as the excess of the sum of the fair value of the consideration transferred in a business combination, the amount
of any non-controlling interests in the acquiree, and the fair value of any previously held equity interest in the acquiree over the net of
the acquisition date fair value of the identifiable assets acquired and the liabilities assumed. If the excess is negative, a bargain
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 the fourth quarter and as required when circumstances indicate that
its carrying amount may not be recoverable. Goodwill is tested for impairment at the CGU group level by comparing the carrying
amount to its recoverable amount, consistent with the methodology outlined in Note 3(k).
Any contingent consideration payable is measured at fair value at the acquisition date. If 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.
(c) Fair Value Measurements
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 at the measurement date. In estimating the fair value of an asset or a liability, the Company takes into account the
characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or
liability at the measurement date. Fair value for measurement and disclosure purposes is determined on such a basis, except for share-
based payment transactions, and measurements that have some similarities to fair value but are not fair value, such as net realizable
value or value in use.
Assets and liabilities, for which fair value is measured or disclosed in the consolidated financial statements, are classified using a three-
level fair value hierarchy that reflects the 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
Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly
Level 3 - one or more significant inputs used in a valuation technique are unobservable in determining fair values of the asset
or liability
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
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 sale in its present condition, 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.
(e) Translation of Foreign Currencies
The accounts of the Company are presented in 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 dollar
at the exchange rate for that date. Foreign exchange differences arising on translation are recognized in net earnings. 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 (loss) in total equity.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
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 the 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 net earnings.
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 operations, are recognized in other comprehensive income (loss) in the cumulate foreign currency translation differences.
(f) Financial Instruments
The Company’s financial assets, upon initial recognition, are measured at fair value and are classified as Fair Value through Profit or
Loss (“FVTPL”), Fair Value through Other Comprehensive Income (“FVOCI”), or amortized cost. The classification is determined at
initial recognition and is dependent on the business model in which a financial asset is managed and the characteristics of the
contractual cash flows. Subsequent reclassification may only occur on the first day of the reporting period following a change to the
business model. The classification of the Company’s financial assets is disclosed in Note 19.
The Company’s financial liabilities, upon initial recognition, are measured at fair value and are classified as amortized cost or FVTPL. A
financial liability is classified as amortized cost at initial recognition unless it is classified as held-for-trading, is a derivative instrument or
is specifically designated as FVTPL. Financial liabilities classified as amortized cost are subsequently measured using the effective
interest method while financial liabilities at FVTPL are subsequently measured at fair value with changes in fair value recognized in the
consolidated statements of net earnings in the period in which such changes arise.
The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost. At each
reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on
its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial
recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses.
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 instruments to manage its exposures to fluctuations in interest rates,
foreign exchange rates, and commodity prices.
At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging
instrument and the hedged item, the risk management objective, and 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 effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged
items. If a hedging 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 the consolidated statements of net earnings.
When hedge accounting is permitted, the hedging relationship may be designated as a cash flow hedge, a fair value hedge, or a net
investment in foreign operation hedge. For most cash flow hedges, the change in fair value of the hedging instrument is recorded, to the
extent it is effective, in other comprehensive income (loss) until the hedged item affects net earnings. If the cash flow hedge is a
forecast transaction that results in the recognition of a non-financial asset or liability, the Company removes that amount from the cash
flow hedge reserve and includes it directly in the initial cost or other carrying amount of the asset or the liability. In a fair value hedge,
the change in fair value of the hedging derivative is offset in the consolidated statements of net earnings by the change in fair value of
the hedged item relating to the hedged risk. For a net investment in a foreign operations hedge, foreign exchange gains and losses on
the designated financial instrument are recorded in accumulated other comprehensive income (loss) and are offset by the translation
adjustments on the underlying net assets of the foreign operations.
Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statements of net 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 (loss) is recognized in net earnings, as the hedged item affects net earnings, or when the hedged item is derecognized for a net
investment in a foreign operations hedge. If a designated hedge is no longer effective, the 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 net earnings.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
(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
Inventories are valued at the lower of cost and net realizable value, with cost being determined 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
Biological assets consist of live hogs, poultry, and eggs. For the purposes of valuation, 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 value of commercial stock is determined based on market prices of livestock of similar
age, breed, and genetic 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 at cost less accumulated depreciation and any
accumulated impairment losses. No active market exists for parent stock as they are rarely sold. Hog parent stock is depreciated on a
straight-line basis over two to three years after considering residual values, 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
The Company reviews long-lived assets or asset groups held and used, including property and equipment and intangible assets subject
to amortization, for recoverability whenever events or changes 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, CGU group or asset through
its use. Management develops its cash flow projections based on past performance and its expectations of future market and 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.
Fair value less cost to sell is the amount obtainable from the sale of an asset, CGU or CGU group 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 financing costs and income tax expense.
An impairment loss is recognized in the consolidated statements of net earnings when the carrying amount of any asset, CGU, or CGU
group exceeds its estimated recoverable amount. Impairment losses recognized in respect of CGUs or CGU group are allocated, first to
reduce the carrying amount of any goodwill allocated to the CGU or CGU group, and then to reduce the net carrying amount of the
other assets in the CGU or CGU group on a pro rata basis.
Impairment losses related to long-lived 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.
(l) Property and Equipment
Property and equipment, with the exception of land, is recorded at cost less accumulated depreciation and any net accumulated
impairment losses. Land is carried at cost and not depreciated. For qualifying assets, cost includes interest capitalized during the
construction or development period. Construction-in-process assets are capitalized during construction and depreciation commences
when the asset is available for use. Depreciation related to assets used in production is recorded in inventory and cost of goods sold.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Depreciation related to non-production assets is recorded through selling, general, and administrative expense ("SG&A"). Depreciation
is 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
10-40 years
3-20 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) Right-of-use Assets and Lease Obligations
At the inception of a contract, the Company assesses if the agreement is or contains a lease arrangement. A lease arrangement exists
if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company
recognizes a ROU asset and lease obligation with respect to all lease arrangements with a lease term greater than 12 months. Leases
with a term of 12 months or less and variable rent expenses are recognized as an expense in the consolidated statements of net
earnings when performance relating to those expenses has occurred.
The Company measures its lease obligation as the present value of the outstanding lease payments, discounted using the interest rate
implicit in the lease and the term of the contract adjusted for reasonably certain renewal or termination options. If the interest rate
implicit in the lease is not readily available, the payments are discounted using the Company’s incremental borrowing rate. The lease
obligation is subsequently measured by increasing the carrying amount for interest using the effective interest method. Lease payments
are recognized as reductions to the carrying amount of the lease obligation.
A ROU asset is measured at the amount of the initial lease obligation and adjusted for any lease payments made at or before the
commencement date of the lease less any incentives, initial direct costs, or the estimate of costs to restore the ROU asset at the
conclusion of the lease term. ROU assets are depreciated on a straight-line basis over the shorter of the useful life of the underlying
asset consistent with the Company’s depreciation policy for property and equipment as outlined in Note 3(I), or the lease term. If it is
reasonably certain at the commencement of the lease arrangement that the Company will exercise its purchase option or otherwise
obtain ownership of the underlying asset at the end of the lease term, the ROU asset is depreciated over the useful life of the underlying
asset.
The Company remeasures the lease obligation and ROU asset as a result of material modifications to a lease arrangement.
(n) Intangible Assets
Intangible assets include computer software, trademarks, recipes, customer relationships and poultry production quota. 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 net earnings on a straight-line basis over the estimated useful lives of the following assets:
Computer software
Customer relationships
Recipes
3-10 years
20-25 years
5-20 years
Indefinite life intangibles including trademarks and poultry production quota are tested for impairment annually in the fourth quarter and
required when circumstances indicate that the net carrying value may not be recoverable. Refer to Note 3(k) for impairment method.
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
The Company accrues obligations and costs in respect of employee defined benefit plans. The cost of pensions and other retirement
benefits earned by employees is actuarially determined using the projected unit credit method prorated on service and Management's
best estimate of salary escalation, retirement ages of employees, mortality rates, inflation and expected health care costs. Changes in
these assumptions could affect future pension expense. The fair value of plan assets and the present value of the obligation are used to
calculate net interest cost or income. 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. The discount rate used to value the current service cost is based on high-quality corporate bonds in
the same currency in which the employer contributions are expected to be made in and with terms of maturity that, on average, match
the expected remaining service period for active employees.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Actuarial gains and losses due to changes in defined benefit plan assets and obligations are recognized immediately in accumulated
other comprehensive income (loss).
When the calculation results in a net benefit asset, the recognized asset is 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”). 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 the asset ceiling is recognized in other comprehensive income (loss).
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 this liability is recognized in other comprehensive
income (loss) in the period in which the re-measurement occurs.
Defined Contribution Plans
The Company’s obligations for contributions to employee defined contribution pension plans are recognized in the consolidated
statements of net earnings in the periods during which services are rendered by employees.
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 employer representatives. The Company’s responsibility to make contributions to these plans is established pursuant to
collective bargaining agreements. The contributions made by the Company to the multi-employer plans are expensed when due.
(p) Share-Based Compensation
The Company applies the fair value method of accounting for share-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 share units (“RSUs”), including performance
share units (“PSUs”), is measured based on the fair value of the underlying shares on the grant date and expected achievement of
performance conditions. Compensation cost is recognized on a straight-line basis over the expected vesting period of the share-based
compensation. The Company estimates the number of units expected to vest at the grant date and revises the estimate as necessary if
subsequent information 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.
The Company has share-based 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.
(q) Provisions
Provisions are liabilities of the Company for which the amount and/or timing of settlement is uncertain. A provision is recognized in the
consolidated financial statements when the Company has a present legal or constructive obligation because 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 products to retail and foodservice customers, as well as the sale of
by-products to industrial and agricultural customers. The Company recognizes revenue for all sales at the fair value of the consideration
received or receivable. Sales are net of a provision for variable consideration of estimated allowances and sales incentives provided to
customers, such that it is highly probable that a significant reversal will not occur once the uncertainty related to the variable
consideration is subsequently resolved. For all transactions, revenue is recognized when control of the goods has transferred, being at
the point the customer receives and accepts the product. The customer may receive product either through delivery or by pick-up.
There are no significant financing components associated with the Company's payment terms.
The Company generally does not accept returns of spoiled products from customers. For product that may not be returned, the
Company, in 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.
The value of sales incentives provided to customers are estimated using historical trends and are recognized at the time of sale as a
reduction of revenue. Sales incentives include rebate and promotional programs provided to the Company's customers. These rebates
are based on achievement of specified volume or growth in volume levels and other agreed promotional activities. In subsequent
periods, the Company monitors the performance of customers against agreed upon obligations related to sales incentive programs and
makes any adjustments to both revenue and sales incentive accruals as required.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The Company enters into repurchase agreements, which represent sales to third parties where the Company is required to buy-back
the asset sold or a good containing that asset as a component. These sales and their associated cost of goods sold are not recognized
in the consolidated statements of net earnings until their eventual third party sale.
(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, construction, or production of a qualifying asset. The Company defines qualifying assets as any asset that
requires more than six months to prepare for its intended use. Borrowing costs attributable to qualifying assets are calculated using the
Company’s average borrowing cost excluding the costs associated with the derecognition of accounts receivables under 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 net earnings.
(t) Government Incentives
Government incentives are not recognized until there is reasonable assurance that they will be received and that the Company will be in
compliance with any conditions associated with the incentives. Incentives 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.
Government incentives 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 consolidated balance sheets. The incentive is
recognized in earnings over the useful life of the asset as a reduction of the related depreciation expense.
Government incentives that are receivable 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.
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 expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statements of net earnings,
except to the extent that it relates to a business combination, or items 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 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 when those temporary differences are expected to be recovered or settled
and in the manner in which those temporary differences are expected to be recovered or settled through sale or continued use. 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 in the period in which the enactment or substantive enactment takes place.
A deferred tax asset is recognized for unused tax losses, tax credits, and deductible temporary 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.
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
During the year ended December 31, 2020, the Company adopted certain IFRS and amendments. As required by International
Accounting Standard ("IAS") 8 Accounting Policies, Changes in Accounting Estimates and Errors, the nature and the effect of these
changes are disclosed below:
Conceptual Framework
Beginning January 1, 2020, the Company adopted the revised Conceptual Framework for Financial Reporting ("revised conceptual
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
framework"). The revised conceptual framework does not constitute a substantial revision from the previously effective guidance, but
does provide additional guidance on topics not previously covered such as presentation and disclosure. The adoption of the revised
conceptual framework did not have a material impact on the consolidated financial statements.
Definition of a Business
Beginning January 1, 2020, the Company adopted the IASB amendment regarding the definition of a business under IFRS 3 Business
Combinations. This amendment narrowed and clarified the definition of a business, as well as permitted a simplified assessment of
whether an acquired set of activities and assets is a group of assets rather than a business. The adoption of the amendment to IFRS 3
did not have a material impact on the consolidated financial statements.
Definition of Material
Beginning January 1, 2020, the Company adopted the amendments to IAS 1 Presentation of Financial Statements and IAS 8. These
amendments clarify and align the definition of material and provide guidance to help improve consistency in the application of
materiality when used in other IFRS standards. The adoption of the amendments to IAS 1 and IAS 8 did not have a material impact on
the consolidated financial statements.
Interest Rate Benchmark Reform - Phase 1
Beginning January 1, 2020, the Company adopted the amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments:
Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures to address the potential effects Interbank Offered Rates
("IBOR") reform could have on financial reporting. The amendments modify specific hedge accounting requirements to allow entities to
assume that the interest rate benchmark on which the hedged cash flows and the cash flows of which the hedging instrument are based
on, are not altered as a result of IBOR reform. The adoption of the amendments to IFRS 9, IAS 39 and IFRS 7 did not have a material
impact on the consolidated financial statements.
(w) Accounting Pronouncements Issued But Not Yet Effective
Interest Rate Benchmark Reform - Phase 2
On August 27, 2020 the IASB issued amendments to IFRS 9, IAS 39, and IFRS 7 to address issues that might affect financial reporting
after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. The amendments relate to
modification of financial assets, financial liabilities and lease liabilities, specific hedge accounting requirements, and disclosure
requirements. The Company intends to adopt the amendments in its consolidated financial statements for the annual period beginning
January 1, 2021. The adoption of amendments to IFRS 9, IAS 39, and IFRS 7 are not expected to have a material impact on the
consolidated financial statements.
Annual Improvements to IFRS (2018-2020) Cycle
On May 14, 2020, the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvement process.
Amendments were made to clarify which fees an entity includes when it applies the ‘10 per cent’ test in assessing whether to
derecognize a financial liability in accordance with IFRS 9. The amendments also remove the requirement in IAS 41 Agriculture for
entities to exclude taxation cash flows when measuring the fair value of a biological asset using a present value technique. Lastly, an
amendment was made to IFRS 1 First-time Adoption of International Financial Reporting Standards for subsidiaries as a first-time
adopter. The Company intends to adopt these amendments prospectively in its consolidated financial statements for the annual period
beginning January 1, 2022. The extent of the impact of the adoption of these standards has not yet been determined.
Onerous Contracts – Cost of Fulfilling a Contract
On May 14, 2020, the IASB issued amendments to IAS 37 to specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate
directly to the contract’. Costs that relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of
other costs that relate directly to fulfilling contracts. This amendment is effective on January 1, 2022. The Company intends to adopt this
amendment in its consolidated financial statement for the annual period beginning January 1, 2022. The extent of the impact of the
adoption of this amendment has not yet been determined.
Classification of Liabilities as Current or Non-current
On January 23, 2020, an amendment was issued to IAS 1 to address inconsistencies with how entities apply the standards over
classification of current and non-current liabilities. The amendment serves to address whether, in the statement of financial position,
debt and other liabilities with an uncertain settlement should be classified as current or non-current. This amendment is effective on
January 1, 2023. The Company intends to adopt this amendment in its consolidated financial statement for the annual period beginning
January 1, 2023. The extent of the impact of the adoption of this amendment has not yet been determined.
All other IFRSs and amendments issued but not yet effective have been assessed by the Company and are not expected to have a
material impact on the consolidated financial statements.
55
4. ACCOUNTS RECEIVABLE
Trade receivables
Less:
Allowance
for
doubtful accounts
Net
trade receivables
Other receivables:
Commodity
taxes receivable
Government receivable
Other
The aging of trade receivables is as follows:
Current
Past
due
0-30 days
Past
due
31-60 days
Past
due
>
60 days
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
As
at
December
31,
2020
2019
$
116,297
$
123,617
(2,080)
(3,107)
$
114,217
$
120,510
17,590
11,424
16,519
12,082
8,484
13,893
$
159,750
$
154,969
As
at
December
31,
2020
2019
$
90,983
$
79,284
19,658
2,266
3,390
30,990
4,559
8,784
$
116,297
$
123,617
Trade receivables are impaired when their estimated future cash flows are less than their contractual cash flows. The amount of
impairment takes into account the financial condition of the customers, delinquencies in payments, collaterals and credit insurance
coverage on the trade receivables.
The Company has sold certain of its trade accounts receivables under a securitization program as described in Note 25.
The Company's securitization program requires the sale of trade receivables to be treated as a sale from an accounting perspective and
as a result, trade receivables sold under this program are derecognized from the consolidated balance sheets as at December 31, 2020
and 2019.
5. INVENTORIES
Raw materials
Work
in process
Finished goods
Packaging
Spare parts
As
at
December
31,
2020
2019
$
69,594
$
60,190
33,149
217,041
21,212
57,074
33,297
223,877
16,940
51,230
$
398,070
$
385,534
For the year ended December 31, 2020, inventory in the amount of $3,228.1 million (2019: $3,061.8 million) was expensed through cost
of goods sold.
For the year ended December 31, 2020, inventories have been reduced by $10.2 million (2019: $10.4 million) as a result of write-downs
to net realizable value. The write-downs are included in the amount expensed through cost of goods sold.
56
6. BIOLOGICAL ASSETS
Balance
at
December
31, 2019
Additions
and purchases
Depreciation
Change
in
fair
value realized
Change
in
fair
value unrealized
Further
processing
and sales
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Hog
stock
Poultry stock
Commercial
$
88,018
373,326
—
10,587
(9,900)
(369,674)
Parent
23,400
7,122
(5,323)
—
—
—
Commercial
Parent
Total
5,318
81,187
—
—
—
(81,063)
5,442
2,280
3,812
(3,442)
—
—
—
$
119,016
465,447
(8,765)
10,587
(9,900)
(450,737)
2,650
$
125,648
Balance
at
December
31, 2020
$
92,357
25,199
Hog stock
Poultry stock
Balance
at
December
31, 2018
Additions
and purchases
Depreciation
Change
in
fair
value realized
Change
in
fair
value unrealized
Further processing
and sales
Commercial
$
82,590
346,335
—
5,042
(10,587)
(335,362)
Parent
22,115
5,697
(4,412)
—
—
—
Balance
at
December
31, 2019
$
88,018
23,400
Commercial
4,789
60,687
—
—
—
(60,158)
5,318
Parent
1,999
3,562
(3,281)
—
—
—
Total
$
111,493
416,281
(7,693)
5,042
(10,587)
(395,520)
2,280
$
119,016
Hog stock is comprised of approximately 0.9 million animals as at December 31, 2020 (2019: 0.8 million). During the years ended
December 31, 2020 and 2019, substantially all hog stock was directly transferred to the Company's primary processing operations.
Poultry stock is comprised of approximately 8.3 million eggs and 0.2 million birds as at December 31, 2020 (2019: 8.5 million eggs and
0.2 million birds).
The change in fair value of commercial hog stock for the year was a gain of $0.7 million for the year ended December 31, 2020 (2019:
loss of $5.5 million) recorded in cost of goods sold.
The fair value measures of commercial hog stock have been categorized as a Level 3 fair value based on inputs to the valuation
techniques used. There were no transfers between levels for the year ended December 31, 2020.
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 from pounds to kilograms, and specific significant
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 6.5% to 6.8%. 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.
Commercial poultry stock are valued at cost as an indicator of fair value in the case where little biological transformation has taken
place since initial cost occurrence or when the impact of the biological transformation on price is not expected to be material.
Where reliable market prices of parent stock are not available, they are valued at cost less accumulated depreciation and any
accumulated impairment losses. No active liquid market exists for parent stock as they are rarely sold.
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 status and has strict bio-security procedures and employee training programs throughout its livestock production
operation.
57
7. INCOME TAXES
The components of income tax expense were as follows:
Current
tax expense
Current year
Deferred tax
(recovery) expense
Origination
and reversal
of
temporary differences
Change
in
tax rates
Total
income tax expense
Reconciliation of Effective Tax rate
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
2020
2019
$
$
52,541
52,541
$
(5,945)
—
$
$
(5,945)
46,596
$
$
$
$
$
13,690
13,690
(348)
(975)
(1,323)
12,367
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
26.3% (2019: 26.7%)
$
42,119
$
23,228
2020
2019
Increase
(decrease)
in
income
tax
resulting from:
Tax
rate
differences
in
other jurisdictions
Manufacturing
and
processing credit
Share
based compensation
Non-deductible
expenses
and
transactional costs
Unrecognized
income
tax
benefit
of losses
Adjustment
for
favorable
tax
audit resolution
Deferred
tax
(recovery)
expense
relating
to
changes
in
tax rates
Adjustment
to
tax
expense
of
prior periods
Other
Income Tax Recognized in Other Comprehensive Income (Loss)
Derivative instruments
Pension adjustments
Deferred Tax Assets and Liabilities
Recognized Deferred Tax Asset and Liabilities
3,044
(1,910)
1,149
2,214
109
(224)
—
—
95
754
(1,240)
1,112
948
92
(10,460)
(975)
(1,434)
342
$
46,596
$
12,367
2020
$
(3,872)
(16,092)
$
(19,964)
2019
3,426
(3,350)
76
$
$
The Company has recognized deferred tax assets in the amount of approximately $127.8 million (2019: $88.9 million), relating primarily
to future deductions for employee benefits, tax losses and deductions carried forward, and restructuring expenses. These deferred tax
assets are recorded based on the Company's estimate that it will earn sufficient taxable profits to fully utilize its tax losses in the
appropriate carry over periods.
The Company has recognized deferred tax liabilities in the amount of approximately $223.6 million (2019: $210.9 million), relating
primarily to claims for tax depreciation in excess of accumulated book depreciation, cash basis farming adjustments, and the excess of
book value over the tax cost of intangible assets.
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Deferred
tax assets:
Tax
losses
and
deductions
carried forward
Accrued liabilities
Employee benefits
Other
Deferred
tax liabilities:
Property
and equipment
Cash
basis farming
Goodwill
and
other
intangible assets
Classified
in
the
consolidated
financial
statements as:
Deferred
tax
asset
Deferred
tax liability
Unrecognized Deferred Tax Assets
As
at
December
31,
2020
2019
$
64,469
$
38,213
11,604
50,609
1,119
13,172
32,156
5,358
$
127,801
$
88,899
$
147,555
$
129,540
24,491
51,601
24,591
56,740
$
223,647
$
210,871
$
$
14,070
109,916
$
$
—
121,972
The Company has no unrecognized deferred tax assets as at December 31, 2020 and 2019.
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, 2020 for the Company's subsidiaries was $497.9 million (2019: $395.5 million).
8. ASSETS HELD FOR SALE
As at December 31, 2020, assets held for sale are those relating to a vacant plant located in St. Anselme, Québec.
On July 27, 2020, the Company closed the sale of its poultry plant in Drummondville, Québec and associated supply to Giannone
Poultry of St. Cuthbert, Québec. for proceeds of $37.4 million. A gain on sale of $3.7 million related to the transaction was recognized
into other expense for the year.
As at December 31, 2019, assets held for sale are those relating to a poultry plant and associated quota in Drummondville, Québec and
a vacant plant located in St. Anselme, Québec.
9. PROPERTY AND EQUIPMENT
Cost
Accumulated depreciation
Land
Buildings
Machinery
and
equipment
Under
construction
Total
$
54,806
1,051,165
1,481,617
491,034
$
3,078,622
—
(378,570)
(978,565)
—
(1,357,135)
Net
balance,
December
31, 2020
$
54,806
672,595
503,052
491,034
$
1,721,487
Cost
Accumulated depreciation
Land
Buildings
Machinery and
equipment
Under
construction
Total
$
50,374
989,410
1,370,489
216,360
$ 2,626,633
—
(342,811)
(897,340)
—
(1,240,151)
Net balance, December 31, 2019
$
50,374
646,599
473,149
216,360
$ 1,386,482
The changes in net carrying amounts of property, plant and equipment during 2020 and 2019 were as follows:
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Land
Buildings
Machinery
and
Under
equipment construction
Total
Net
balance,
December
31, 2019
$
50,374
646,599
473,149
216,360
$
1,386,482
Additions
Transfers
from
under construction
Impairment
Depreciation
Foreign
currency translation
Other(i)
—
4,443
—
—
(11)
—
—
—
472,907
472,907
63,359
129,468
(197,270)
—
—
(36,411)
(395)
(557)
(1,218)
(96,597)
(579)
(1,171)
—
—
(963)
—
(1,218)
(133,008)
(1,948)
(1,728)
Net
balance, December 31, 2020
$
54,806
672,595
503,052
491,034
$ 1,721,487
Land
Buildings
Machinery and
equipment
Under
construction
Total
Net balance, December 31, 2018(ii)
Impact of new IFRS standards
Additions
Transfers from under construction
Depreciation
Foreign currency translation
Other(i)
$
52,084
639,993
(3,591)
—
2,195
—
(18)
(296)
(3,169)
—
46,136
(34,297)
(377)
(1,687)
461,818
(13,120)
130,055
$ 1,283,950
—
—
251,021
115,698
(164,029)
(19,880)
251,021
—
(88,531)
(488)
(2,228)
—
(122,828)
(695)
8
(1,578)
(4,203)
Net balance, December 31, 2019(i)
(i)
Includes disposals, reclassifications and other adjustments.
(ii) Restated, see Note 29(a) of the 2019 audited financial statements.
$
50,374
646,599
473,149
216,360
$ 1,386,482
Borrowing Costs
For the year ended December 31, 2020, borrowing costs of $8.2 million were capitalized (2019: $2.7 million), using an average
capitalization rate of 3.7% (2019: 4.2%).
10. RIGHT-OF-USE ASSETS
The Company enters into lease arrangements for land, buildings, vehicles, machinery and equipment, and other assets as part of its
daily operations.
Land and building leases include the rental of office space, manufacturing and distribution facilities and barns. These leases vary in
length and are typically over 5 years and may include several renewal options.
Vehicle leases primarily include leases of employee vehicles. Employee vehicle leases have an initial term of 3 years. As part of its
leasing agreement for employee vehicles, MLF is required to pay a residual value guarantee to the lessor for the value of the leased
vehicle at the end of the lease term. As at December 31, 2020, the Company's residual value guarantees on employee vehicles totaled
$2.8 million (2019: $2.6 million).
Machinery and equipment leases include the rental of manufacturing machinery and computer hardware. These leases vary in duration
and structure and typically do not exceed 10 years.
Other leased assets include an indefinite life poultry supply quota from a third party, with an option to purchase the quota in 2021.
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Right-of-use assets are comprised of:
Cost
Accumulated depreciation
Net
balance,
December
31, 2020
Land
and
Buildings
$
233,966
(53,738)
$
180,228
Vehicles
8,361
(3,915)
4,446
Machinery
and
Equipment
14,988
(5,787)
9,201
Other
Total
28,830
$
286,145
—
(63,440)
28,830
$
222,705
Cost
Accumulated depreciation
Net
balance,
December
31, 2019
Land and
Buildings
$
210,324
(28,814)
$
181,510
Vehicles
7,488
(2,530)
4,958
Changes in the net balance of right-of-use assets during 2020 and 2019 were as follows:
Net
balance, December
31, 2019
Additions
Depreciation
Dispositions,
retirements,
and other
Foreign
currency translation
Land
and
Buildings
$
181,510
31,490
(31,354)
(1,248)
(170)
Net
balance,
December
31, 2020
$
180,228
Opening Balance, January 1, 2019
Additions
Depreciation
Dispositions, retirements, and other
Foreign currency translation
Land and
Buildings
$
191,583
20,635
(29,527)
(1,063)
(118)
Net balance, December 31, 2019
$
181,510
Vehicles
4,958
3,112
(2,964)
(653)
(7)
4,446
Vehicles
5,039
3,418
(3,001)
(498)
—
4,958
Machinery
and
Equipment
15,115
(2,987)
12,128
Machinery
and
Equipment
12,128
517
(3,105)
(327)
(12)
9,201
Machinery
and
Equipment
Other
Total
28,830
$
261,757
—
(34,331)
28,830
$
227,426
Other
Total
28,830
$
227,426
—
—
—
—
35,119
(37,423)
(2,228)
(189)
28,830
$
222,705
Other
Total
15,363
28,830
$
240,815
—
(3,184)
(11)
(40)
—
—
—
—
24,053
(35,712)
(1,572)
(158)
12,128
28,830
$
227,426
Lease obligations associated with the Company's right-of-use assets are described in Note 15.
11. GOODWILL
The net carrying value for goodwill was $652.5 million as at December 31, 2020 (2019: $657.2 million). There were no impairment
losses recognized for the years ended December 31, 2020 and 2019.
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
For the purposes of annual impairment testing, goodwill is allocated to the Meat Protein and Plant Protein CGU groups, being the
groups expected to benefit from the synergies of each business combination in which the goodwill arose:
CGU Group
Meat Protein
Plant Protein
As
at
December
31,
2020
2019
$
469,710
$
469,560
182,791
187,619
$
652,501
$
657,179
Annual impairment testing involves determining the recoverable amount of the CGU group to which goodwill is allocated and comparing
this to the carrying value of the respective CGU groups. The measurement of the recoverable amount of the CGU groups was
calculated based on fair value less costs to sell. Where there was no market information available, fair value was determined by
discounting the future cash flows generated from the continuing use of the CGU groups. The calculation of the fair value based on
discounting the future cash flows was based on the following key assumptions:
• Cash inflows and outflows were projected based on the Company's long-term business plan. Cash flows for a further perpetual
period were extrapolated using growth rates of 2.0% to 3.0% (2019: 2.0% to 3.0%).
•
The business plan contains forecasts based on past experience of actual operating results in conjunction 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.
• Discount rates applied in determining the recoverable amount of the CGU groups were ranging from 8.4% to 12.1% (2019:
8.8% to 11.4%). The discount rates were estimated based on past experience and the weighted average cost of capital of
each CGU group and other competitors in the industry.
The values assigned to the key assumptions represent Management's assessment of future trends in the industries in which the CGU
groups operate and are based on both external and internal sources and historical trend data.
The change in the carrying amount of goodwill during 2020 and 2019 was as follows:
Net
balance,
beginning
of year
Foreign
currency translation
Net
balance,
end
of year
12. INTANGIBLE ASSETS
Definite life
Indefinite life
Total
intangible assets
Cost
Accumulated amortization
Net
balance,
December
31, 2020
Cost
Accumulated amortization
Software
in
use
$
168,239
(108,762)
$
59,477
Software
in
process
7,855
—
7,855
Software
in use
Software
in
process
$
137,666
20,643
(93,077)
—
Net
balance,
December
31, 2019
$
44,589
20,643
62
2020
2019
$
657,179
$
664,879
(4,678)
(7,700)
$
652,501
$
657,179
As
at
December
31,
2020
2019
$
202,852
$
212,922
138,344
139,791
$
341,196
$
352,713
Definite life
Recipes
32,882
(9,913)
22,969
Recipes
33,495
(6,952)
26,543
Customer
relationships
Total
132,330
$
341,306
(19,779)
(138,454)
112,551
$
202,852
Customer
relationships
Total
134,535
$
326,339
(13,388)
(113,417)
121,147
$
212,922
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The changes in net carrying amounts of definite life intangibles during 2020 and 2019 were as follows:
Net
balance,
December
31, 2019
Additions
Transfers
Amortization
Foreign
currency translation
Software
in
use
$
44,589
—
30,575
(15,688)
1
Software
in
process
20,643
17,787
(30,575)
—
—
Net
balance,
December
31, 2020
$
59,477
7,855
Net
balance,
December
31, 2018(i)
Additions
Transfers
Amortization
currency translation
Foreign
Other(ii)
balance,
Software
in use
$
41,615
—
17,225
(14,053)
(4)
(194)
Software in
process
18,144
19,724
(17,225)
—
—
—
Recipes
26,543
—
—
(3,263)
(311)
22,969
Recipes
30,511
—
—
(3,127)
(841)
—
26,543
Customer
relationships
Total
121,147
$
212,922
—
—
(6,884)
(1,712)
17,787
—
(25,835)
(2,022)
112,551
$ 202,852
Customer
relationships
Total
131,351
$
221,621
—
—
(6,792)
(3,412)
—
19,724
—
(23,972)
(4,257)
(194)
121,147
$
212,922
Net
December
31, 2019
$
44,589
20,643
(i)
(ii)
Restated, see Note 29(a) of the 2019 audited financial statements.
Includes disposals, reclassifications and other adjustments.
Amortization
Amortization is recorded through cost of goods sold or SG&A depending on the nature of the asset.
Borrowing Costs
For the years ended December 31, 2020 and 2019, there were no borrowing costs capitalized on intangible assets.
Indefinite Life Intangibles
Indefinite life intangible assets are comprised of trademarks and poultry production quota. The Company expects to renew the
registration of the trademarks and poultry production quota at each expiry date indefinitely and expects these assets to generate
economic benefit in perpetuity. As such, the Company assessed these intangibles to have indefinite useful lives.
The changes in net carrying amounts of indefinite life intangibles during 2020 and 2019 were as follows:
Net balance,
December
31, 2019
Foreign
currency translation
Net balance,
December
31, 2020
Net
balance, December 31, 2018(i)
of new
IFRS standards
Impact
Other(ii)
Foreign
currency translation
Net
balance,
December
31, 2019
(i)
Restated, see Note 29(a) of the 2019 audited financial statements
(ii) Reclassification of quota in Drummondville, Québec to Assets Held For Sale.
63
Indefinite life
Trademarks
$
119,638
Quota
20,153
Total
$
139,791
(1,447)
—
(1,447)
$
118,191
20,153
$
138,344
Trademarks
$
122,102
Quota
Total
80,893
$
202,995
—
—
(2,464)
(28,830)
(31,910)
—
(28,830)
(31,910)
(2,464)
$
119,638
20,153
$
139,791
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The indefinite life intangible assets are allocated between the Meat Protein and Plant Protein CGU groups as follows:
CGU Group
Meat Protein
Plant Protein
As
at
December
31,
2020
2019
$
83,573
$
83,573
54,771
56,218
$
138,344
$
139,791
The Company performs annual impairment testing on its indefinite life intangible assets. Annual impairment testing, consistent with the
impairment testing for goodwill as described in Note 11, involves determining the recoverable amount of each indefinite life intangible
asset and comparing it to the net carrying value.
The recoverable amount 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
Terminal
growth rate
Discount rate
13. PROVISIONS
2020
2019
1.0 - 3.0%
1.0 - 3.0%
1.0 - 3.0%
1.0 - 3.0%
8.4 - 12.1%
7.7 - 10.7%
Restructuring
and
related costs
other
Site
closing
other
cash costs
and
109
84
(48)
(84)
61
Total
$48,90 2
4,37 9
(3,62 1)
(3,90 1)
$45,75 9
$ 1,52 9
44,23 0
$45,75 9
Balance
at
December
31, 2019
Charges
Reversals
Cash payments
Legal
$
289
Environme
ntal
2,705
850
—
(400)
—
—
(84)
Balance
at
December
31, 2020
$
739
2,621
Current
Non-current
Total
at
December
31, 2020
Lease
make-
good
Severance
other
and
employee
related
—
—
—
—
—
45,799
3,445
(3,573)
(3,333)
42,338
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Balance
at
December
31, 2018
Impact
of
new
IFRS standards
Charges
Reversals
Cash payments
Non-cash items
Legal
$
289
—
—
—
—
—
Environment
al
Lease
make-good
4,762
—
—
(2,000)
(57)
—
1,810
(1,810)
—
—
—
—
—
Balance
at
December
31, 2019
$
289
2,705
Current
Non-current
Total
at
December
31, 2019
Restructuring and Other Related Costs
Restructuring
and
related costs
other
Severance
and
other
employee
related
Site
closing
other
and
cash costs
Total
43,820
2,671
$
53,352
—
(2,400)
8,678
(3,937)
(2,762)
—
45,799
40
—
(99)
(103)
109
(4,210)
8,718
(5,937)
(2,918)
(103)
$
48,902
$
3,973
44,929
$
48,902
For the year ended December 31, 2020, the Company recorded restructuring and other related costs of $4.3 million. Of this amount,
$4.4 million related to accelerated depreciation and $0.1 million related to severance and other employee costs as a result of the
previously announced future closures of the Brampton, Toronto and St. Mary's poultry plants. The remaining $0.2 million reversal
related to other organizational restructuring initiatives.
For the year ended December 31, 2019, the Company recorded restructuring and other related costs of $11.0 million. Of this amount,
$5.9 million related to accelerated depreciation and other asset write-offs, and $0.2 million related to severance and other employee
related costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto. The remaining $4.9 million
related to employee related costs for other organizational restructuring initiatives.
14. LONG-TERM DEBT
Revolving
line
of credit
U.S.
term credit
Canadian
term credit
Government loans
Total
long-term debt
Current
Non-current
Total
long-term debt
As
at
December
31,
2020
$
50,000
$
337,544
350,000
8,404
745,948
900
745,048
745,948
$
$
$
$
$
$
2019
—
346,461
185,000
7,867
539,328
899
538,429
539,328
On April 30, 2019, the Company entered into a new syndicated credit facility (the "Credit Facility") consisting of a $1,300.0 million
unsecured committed revolving line of credit maturing April 30, 2024 and two unsecured committed term credit facilities for US$265.0
million and $350.0 million maturing April 30, 2024 and April 30, 2023, respectively. The Credit Facility refinanced and replaced the
Company's previous $250.0 million and $400.0 million unsecured committed revolving credit facilities, which were due to mature on
November 7, 2019 and October 19, 2021, respectively. The Credit Facility can 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 the London Inter-bank Offered Rate
("Libor") for U.S. dollar loans. The Credit Facility is intended to meet the Company's funding requirements for capital investments in
addition to providing appropriate levels of liquidity and for general corporate purposes. On December 11, 2019, the Company amended
the Credit Facility to reduce interest paid upon achievement of certain sustainability targets. This reduction will not materialize until at
least 2021, and there is no penalty for not achieving the targets. In addition to loans, as at December 31, 2020 the Company had drawn
letters of credit of $6.4 million on the Credit Facility (2019: $6.2 million).
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The Credit Facility requires the maintenance of certain covenants. As at December 31, 2020, the Company was in compliance with all
of these covenants. The primary financial covenant requires that the Company maintain a Total Debt to Capitalization ratio below a
specified threshold.
The Company has additional uncommitted credit facilities for issuing letters of credit up to a maximum of $125.0 million (2019: $125.0
million). As at December 31, 2020, $67.0 million of letters of credit had been issued thereon (2019: $79.5 million).
The Company has various government loans on specific projects, with contractual interest rates ranging from non-interest bearing to
2.9% per annum (2019: 2.9%). These facilities are repayable over various terms from 2022 to 2032. As at December 31, 2020, $8.4
million (2019: $7.9 million) was outstanding. All of these facilities are committed.
The Company’s estimated average effective cost of borrowing for 2020 was approximately 3.6% (2019: 4.1%). Required repayments of
long-term debt are as follows:
2021
2022
2023
2024
2025
Total
required
repayments
of
long-term debt
$
1,083
5,330
400,696
338,101
1,357
$
746,567
The following table reconciles the changes in cash flows from financing activities for long-term debt for the period in the respective
years:
As
at
December
31,
Total
long-term
debt,
beginning of period
Revolving
and term
credit
facilities -
net drawings
Government
loans -
new issuance
Government
loans - repayments
Total
cash
flow
from
long-term
debt
financing activities
Foreign
exchange revaluation
Other
non-cash changes
Total
non-cash changes
Total
long-term
debt,
end
of period
15. LEASE OBLIGATIONS
Changes in the balance of lease obligations during 2020 and 2019 were as follows:
2020
2019
$
$
539,328
215,000
$
$
383,421
170,621
1,684
(1,083)
—
(1,130)
$
$
$
$
215,601
$ 169,491
(8,917)
$
(13,935)
(64)
(8,981)
745,948
351
$
$
(13,584)
539,328
As
at
December
31,
Total
lease obligations,
beginning
of period
Payments
Interest
Additions
Dispositions,
retirements,
and other
Foreign
currency translation
Total
lease
obligations,
end
of period
Current
Non-current
Total lease
obligations, end
of period
2020
2019
$
243,518
$
254,526
(45,040)
8,673
35,600
(2,324)
(190)
(42,304)
9,001
24,053
(1,487)
(271)
$
$
240,237
79,601
160,636
$
$
243,518
39,505
204,013
$
240,237
$
243,518
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Total cash outflows arising from lease obligations during 2020 and 2019 were as follows:
Payment
of
lease
obligations
in
Financing Activities
Payment
of
lease
interest
expense
in
Operating Activities
Total
cash
outflow
of leases
The maturity of contractual undiscounted lease obligation payments are as follows:
Due
within
1 year
Due between
1
and
Due between
3
and
3 years
5 years
As
at
December
31,
2020
2019
$
37,554
$
34,690
7,486
7,614
$
45,040
$
42,304
$
81,144
58,368
33,549
106,501
$
279,562
Due
after
5 years
Total
lease obligation payments
The Company does not face a significant liquidity risk in regard to its lease obligations.
The following amounts were recognized in the consolidated statements of net earnings pertaining to leases:
Variable
rent expense
(i)
Short-term
rent expense
(ii)
As
at
December
31,
2020
12,797
7,004
$
$
2019
12,184
5,937
$
$
(i)
(ii)
Relates to property taxes and common area maintenance on buildings which are calculated annually. These payments make up 28.4% (2019:
28.8%) of fixed payments made in the year.
Pertains primarily to leases of property, equipment and vehicles with a contract term of less than one year.
Right-of-use assets associated with the Company's lease obligations are described in Note 10.
16. OTHER CURRENT LIABILITIES
Derivative instruments
Obligation
for
repurchase
of shares
Contract liabilities
Other
17. EMPLOYEE BENEFITS
Notes
19
18
As
at
December 31,
2020
2019
$
8,779
$
4,034
29,835
11,522
5,713
25,389
10,983
4,292
$
55,849
$
44,698
The Company sponsors several defined benefit pension programs 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 with no members accruing benefits. These defined benefit plans require contributions to be
made to separately administered funds. Certain retired employees are covered under a post-retirement benefit plan, which reimburses
certain medical costs and provides life insurance coverage.
The Canadian plan is governed by the pension laws of Ontario. The U.K. plan is governed by the employment laws of the U.K.
The Company's pension funding policy is to contribute amounts sufficient, at a minimum, to meet local statutory funding requirements.
For the Company's defined 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 considering
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 the consolidated balance sheets. 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.
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Information about the Company's defined benefit plans as at December 31, in aggregate, are as follows:
Other post-
retirement
Other post-
2020
retirement
benefits
Pension
Total
benefits
Pension
2019
Total
Plan Assets
Fair
value, beginning
of year
$
Interest income
Actuarial gains(i)
Employer contributions
Employee contributions
Benefits paid
Administrative costs
Fair
value,
end
of year
Accrued
benefit obligations:
$
—
—
—
—
—
—
—
—
1,069,663
$
1,069,663
$
32,241
66,056
9,639
3,445
32,241
66,056
9,639
3,445
(69,218)
(69,218)
(2,784)
(2,784)
1,109,042
$
1,109,042
$
—
—
—
—
—
—
—
—
1,010,188
$
1,010,188
37,360
84,770
9,849
3,542
37,360
84,770
9,849
3,542
(73,357)
(73,357)
(2,689)
(2,689)
1,069,663
$
1,069,663
Balance,
beginning
of year
$
(51,179)
(1,134,499)
$
(1,185,678)
$
(50,345)
(1,057,903)
$
(1,108,248)
Current
service cost
Interest cost
Benefits
paid
from
plan assets
Benefits paid
directly
from the
Company
Actuarial
gains
(losses) - experience
Actuarial
losses - financial
assumptions
Employee contributions
Special termination benefits
Curtailments
Balance, end of year
Unfunded
Funded(ii)
Total benefit obligations
Other
Accrued net benefit obligations,
(74)
(17,759)
(17,833)
(85)
(13,492)
(13,577)
(1,535)
(34,696)
(36,231)
(1,844)
(39,550)
(41,394)
—
69,218
69,218
—
73,358
73,358
2,805
699
2,082
4,887
(16,492)
(15,793)
3,162
1,430
2,143
744
5,305
2,174
(3,580)
(108,526)
(112,106)
(3,497)
(95,967)
(99,464)
—
—
—
(3,445)
(3,445)
—
—
—
—
—
—
—
(3,542)
(3,542)
(500)
210
(500)
210
$
$
$
$
(52,864) (1,244,117) $ (1,296,981) $
(51,179) (1,134,499) $ (1,185,678)
(52,864)
(35,945)
$
(88,809)
$
(51,179)
(35,945)
$
(87,124)
—
(1,208,172)
(1,208,172)
—
(1,098,554)
(1,098,554)
(52,864) (1,244,117) $ (1,296,981) $
(51,179) (1,134,499) $ (1,185,678)
—
(1,007) $
(1,007) $
— $
(727) $
(727)
end of year
$
(52,864)
(136,082) $
(188,946) $
(51,179)
(65,563) $
(116,742)
(i) Return on plan assets greater than discount rate.
(ii)
Includes wholly and partially funded plans.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Pension benefit expense recognized in net earnings:
Current
service
cost -
defined benefit
Current
service
cost -
defined
contribution
and
multi-employer plans
Net
interest cost
Administrative costs
termination benefits(i)
Special
Curtailments(i)
Net
pension
benefit expense
2020
2019
$
17,759
$
13,492
18,308
2,454
2,784
—
—
16,450
2,190
2,689
500
(210)
$
41,305
$
35,111
(i)
Included in restructuring and other related costs pertaining to organizational restructuring initiatives and plant closures - refer to Note 13.
For the year ended December 31, 2020, the Company expensed salaries of $799.2 million (2019: $738.0 million), excluding pension
and other post-retirement benefits.
Amounts recognized in other comprehensive income (loss) (before income taxes):
Actuarial losses
2020
2019
$
(62,937)
$
(13,419)
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations were as follows:
Period
end
discount rate
Rate
of
salary
increase
Plan assets were comprised of:
Equity securities
Debt securities
Other
investments
and cash
2020
2.40 %
2.75%
2019
3.10%
2.75%
As
at
December
31,
2020
47%
48%
5%
100%
2019
45%
49%
6%
100%
As at December 31, 2020, the Company's plans were invested in pooled funds which hold underlying equity, debt and other securities
and are not quoted in an active market.
Other post-retirement benefits expense recognized in net earnings:
Current
service cost
Interest cost
Other
post-retirement
benefits expense
2020
74
1,535
1,609
$
$
2019
85
1,844
1,929
$
$
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Increase
(decrease)
in
defined
benefit obligations
Other post-
Total
retirement
Sensitivity pensions
benefits
Impact of changes in major assumptions:
Actuarial Assumption
Period
end
discount rate
2.40 %
0.25 %
decrease
$
41,226
salary increase
of
Rate
Mortality
110%
of
Canadian
Table,
2014
Pensioners'
projected
using
Private
2.75 %
Sector
Mortality
generationally
scale MI-2017
0.25 %
increase
$
(39,903)
0.50 %
Increase
of
expected
increase
in
1
year
of
lifetime
plan participants
$
$
3,114
41,735
1,354
(1,231)
N/A
779
Total
42,580
(41,134)
3,114
42,514
$
$
$
$
Measurement dates:
2020 expense
Balance sheet
December
31, 2019
December
31, 2020
The average expected maturity of the pension obligations is 13.6 years (2019: 13.2 years).
The Company expects to contribute $34.7 million to pension plans in 2021, inclusive of defined benefit plans, 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 the Pension
Investment Advisory Committee, as appropriate, retain responsibility and utilize suitable personnel for such activities and monitor the
activities undertaken by the selected personnel.
The plan assets are invested primarily in well-diversified pooled funds that meet the constraints set out in legislation of the jurisdictions
in which the plans operate. Further diversification criteria set out in investment funds' governing documents require the division of
investments between equities and fixed income. There are no significant concentrations of risks.
Multi-Employer Plan
The Company contributes to the Canadian Commercial Workers Industry Pension Plan which is a multi-employer defined benefit plan
for employees who are members of the United Food and Commercial Workers Canada union. This is a large-scale plan for union
workers of multiple companies across Canada. 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 the pension benefit
expense is $0.9 million (2019: $0.8 million) related to payments into this plan. The Company expects to contribute $0.9 million into this
plan in 2021.
18. SHARE CAPITAL
(Thousands
of shares)
Balance,
beginning
of year
Distributions
under
share-based
compensation plans
Exercise
of
share options
Shares repurchased
Purchase
of
treasury stock
Balance,
end
of year
Common Shares
Treasury Stock
2020
2019
122,930
123,448
204
46
—
—
440
358
(840)
(476)
123,180
122,930
2020
960
(204)
—
—
—
756
2019
924
(440)
—
—
476
960
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
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 they are entitled to one vote per
share at meetings of the Company.
Treasury Stock
Treasury stock is comprised of shares purchased by a trust in order to satisfy the requirements of the Company's Restricted Share Unit
Plan, as described in Note 22.
Share Repurchase
On May 21, 2020 the Toronto Stock Exchange ("TSX") accepted the Company's notice of intention to commence a Normal Course
Issuer Bid ("NCIB"), allowing the Company to repurchase, at its discretion, up to 7.5 million common shares in the open market or as
otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company
are cancelled. The program commenced on May 25, 2020 and will terminate on May 24, 2021, or on such earlier date as the Company
completes its purchases pursuant to the notice of intention. Under this bid, during the year ended December 31, 2020, no shares were
purchased for cancellation.
On May 17, 2019, the TSX accepted the Company's notice of intention to commence an NCIB, allowing the Company to repurchase, at
its discretion, up to 7.5 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms
and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 24, 2019
and was terminated on May 23, 2020. Under this bid during the year ended December 31, 2020, no shares were purchased for
cancellation. Under this bid, during the year ended December 31, 2019, 0.8 million shares were purchased for cancellation for $20.3
million at a volume weighted average price paid of $24.21 per common share.
On May 22, 2018, the TSX accepted the Company's notice of intention to commence an NCIB, which allows the Company to
repurchase, at its discretion, up to 7.8 million common shares in the open market or as otherwise permitted by the TSX, subject to the
normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on
May 24, 2018 and was terminated on May 23, 2019 as the Company completed its purchase and cancellation of 4.0 million common
shares for $126.6 million at a volume weighted average price of $31.82 per common share. Under this bid, during year ended
December 31, 2019, no shares were purchased for cancellation.
The Company entered into an Automatic Share Purchase Plan ("ASPP") with a broker that allows the purchase of common shares for
cancellation under the NCIB at any time during predetermined trading blackout periods. As at December 31, 2020, an obligation for the
repurchase of shares of $29.8 million (2019: $25.4 million) was recognized under the ASPP.
19. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
Capital
The Company’s objective is to maintain a robust, cost-effective capital structure that ensures resilience, 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 internal cash flows and senior debt where
required.
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 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 cash and cash equivalents, less long-term
debt and bank indebtedness (“Net Debt”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”).
In addition to credit facilities and equity, the Company uses leases and a very limited recourse accounts receivable securitization
program as additional sources of financing.
The Company has maintained a stable dividend distribution that is based on a long-term sustainable net earnings base. From time to
time, the Company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under its
Restricted Share Unit Plan described in Note 22.
There have been no material changes to the Company’s risk management activities during the year ended December 31, 2020.
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Financial Instruments
The Company’s financial assets and liabilities are classified into the following categories:
Cash
and
cash equivalents
Accounts receivable
Notes receivable
Accounts
payable
and accruals
Long-term debt
Derivative instruments(i)
Investments
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
FVTOCI
(i)
These derivative instruments may be designated as cash flow hedges, fair value hedges or net investments in foreign operations hedges as
appropriate. Derivatives designated as cash flow hedges are classified as FVTOCI.
The Company applies hedge accounting as appropriate and uses derivatives and other non-derivative financial instruments to manage
its exposures to fluctuations in foreign exchange rates, interest rates, and commodity prices.
The fair values and notional amounts of derivative financial instruments as at December 31, are shown below:
Cash
flow hedges
Foreign
exchange contracts
Commodity contracts
Interest
rate swaps
Fair
value hedges(iii)
Foreign
exchange contracts
Commodity contracts
Derivatives
not designated
in a
formal
hedging relationship
Foreign
exchange contracts
Commodity contracts
Total fair value
Current(ii)(iv)(v)
Non-current(ii)
Total
fair value
2020
2019
Notional
amount(i)
Fair value
Asset(ii)
Liability(ii)
Notional
amount(i)
Fair value
Asset(ii) Liability(ii)
$
$
28,139
$
135
$
11
$
29,273
$
497
$
16,245
695
—
—
—
$
472,544
—
18,372 $
479,129
2,160
$
830 $ 18,383
$ 2,657 $
$
$
83,793
$
2,970 $
— $
50,718 $
904 $
76,957
—
1,769 $
54,725
3,184
$
2,970 $ 1,769
$ 4,088 $
40
—
—
40
—
—
—
$
71,520
$
255 $
544 $ 251,868 $
842 $
3,003
$
115,855
1,175
— $ 242,711
91
991
$
$
$
1,430 $
544
5,230 $ 20,696
5,230 $ 8,779
—
11,917
$
933 $
3,994
$ 7,678 $
4,034
$ 6,197 $
4,034
1,481
—
$
5,230 $ 20,696
$ 7,678 $
4,034
(i)
(ii)
Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent.
The current portion of derivative assets and liabilities are recorded in prepaid expenses and other assets and other current liabilities, respectively, in
the consolidated balance sheets. The non-current portion of derivative assets and liabilities are recorded in other long-term assets and other long-
term liabilities, respectively, in the consolidated balance sheets.
(iii) The carrying amount of the hedged items in the consolidated balance sheets are recorded at the inverse of the associated hedging instruments and
are equal to the accumulated fair value hedge adjustments less hedge ineffectiveness.
(iv) Derivatives are short-term and will impact profit or loss at various dates within the next 12 months.
(v) As at December 31, 2020, the above fair value of current assets has been increased by $7.4 million (December 31, 2019: increased by $1.1
million), and the above fair value of current liabilities has been decreased by $1.8 million (December 31, 2019: $0.0 million) on the consolidated
balance sheets, representing the difference in the fair market value of exchange traded commodity contracts and the initial margin requirements.
The difference in margin requirements and fair market value is net settled in cash each day with the futures exchange and is recorded within cash
and cash equivalents.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The Company's financial assets and liabilities include accounts receivable, notes receivable and accounts payable and accruals for
which fair value approximates the carrying value due to their short-term nature.
The carrying value of long-term debt as at December 31, 2020 and 2019 approximates its fair value. The fair value of the Company’s
long-term debt has been classified as Level 2 in the fair value hierarchy and was estimated based on discounted future cash flows
using current rates for similar financial instruments subject to similar risks and maturities.
The Company's cash and cash equivalents, and derivative instruments are recorded at fair value. The fair value of cash and cash
equivalents approximates carrying value due to the short-term nature of the assets and has been classified as Level 1 in the fair value
hierarchy. The fair values of the Company’s interest rate and foreign exchange derivative instruments were estimated using current
market measures for interest rates and foreign exchange rates. Commodity futures and commodity options contracts are exchange-
traded and over-the-counter. Fair value is determined based on exchange prices and other observable market data.
Net gains and losses on financial instruments recognized at fair value through profit or loss consist of realized and unrealized gains and
losses on derivatives that were de-designated or were otherwise not in a formal hedging relationship.
For the year ended December 31, 2020, the Company recorded a loss of $23.6 million (2019: gain of $5.4 million) on financial
instruments recognized at fair value through profit or loss. The loss was mainly attributed to losses on exchange traded commodity
contracts which are used to economically hedge and offset price risk volatility inherent in the business.
The table below sets out fair value measurements of derivative financial instruments as at December 31, 2020 using the fair value
hierarchy:
Assets:
exchange contracts
Foreign
Commodity contracts(i)
Liabilities:
exchange contracts
Foreign
Commodity contracts(i)
Interest
rate swaps
Level 1
Level 2
Level 3
Total
$
$
$
$
—
—
—
—
44
—
44
3,360
145
3,505
555
—
18,372
18,927
—
—
—
—
—
—
—
$
3,360
145
$
3,505
$
555
44
18,372
$
18,971
(i)
Level 1 commodity contracts are net settled and recorded as a net liability on the consolidated balance sheets.
There were no transfers between levels for the year ended December 31, 2020. Determination of fair value and the resulting hierarchy
requires the use of observable market data whenever available. The classification of a financial instrument in the hierarchy is based
upon the lowest level of input that is significant to the measurement of fair value. For financial instruments that are recognized at fair
value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing
categorization at the end of each reporting period.
Accumulated other comprehensive income (loss)
The Company estimates that $4.2 million, net of tax of $1.5 million, of the unrealized loss included in accumulated other comprehensive
(loss) income will be reclassified into net earnings within the next 12 months. The actual amount of this reclassification will be impacted
by future changes in the fair value of financial instruments designated as cash flow hedges. The actual amount reclassified could differ
from this estimated amount.
During the year ended December 31, 2020, a loss of $3.6 million, net of tax of $1.3 million, was released to earnings from accumulated
other comprehensive (loss) income and included in the net change for the year (2019: gain of $1.9 million, net of tax of $0.7 million).
The risks associated with the Company’s financial instruments and policies for managing these risks are detailed below.
Market Risk
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due
to changes in market interest rates.
The Company’s interest rate risk arises from long-term borrowings issued at fixed rates that create fair value interest rate risk and
variable-rate borrowings that create cash flow interest rate risk. In addition, the Company’s cash balances are typically invested in
short-term interest-bearing assets.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The Company manages its interest rate risk exposure by using a mix of fixed and variable-rate debt and periodically using interest rate
derivatives to achieve the desired proportion of variable to fixed-rate debt.
As at December 31, 2020, the Company had variable-rate debt of $737.5 million with a weighted average interest rate of 2.0% (2019:
$531.5 million at a weighted average interest rate of 3.3%). The Company has converted $472.5 million of the variable-rate debt to
fixed-rate debt using interest rate swaps with a weighted average interest rate of 3.3% (2019: $479.1 million at a weighted average
interest rate of 3.0%). In addition, the Company was exposed to floating interest rates on its accounts receivable securitization program.
As at December 31, 2020, the cash advance received pursuant to this program was $120.0 million at a weighted average interest rate
of 0.4% (2019: $111.7 million at a weighted average interest rate of 2.4%). The maximum amount available to the Company under
these programs is $120.0 million (2019: $120.0 million).
As at December 31, 2020, the Company had fixed-rate debt of $8.4 million (2019: $7.9 million) with a weighted average effective
interest rate of 4.2% (2019: 4.5%). 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.
As at December 31, 2020, 55.5% (2019: 75.2%) of the Company’s outstanding debt and revolving accounts receivable securitization
program were not exposed to interest rate movements, after including the effect of interest rate swaps.
The Company's interest rate swaps are accounted for as cash flow hedges to reduce variability of floating rate interest payments of
variable-rate debt. The Company's designated interest rate swaps settle periodically against CDOR and USD LIBOR benchmarks and
mature in 2023 and 2024, respectively, in line with the hedged items. The Company's cash flow hedges of USD LIBOR interest
payments, which have a nominal value of US$250.0 million, extend beyond the anticipated cessation date of USD LIBOR. The
uncertainty surrounding the cessation of USD LIBOR and transition to a new benchmark may affect the effectiveness of the hedging
relationship. The Company applies the amendments to IFRS 9 issued in September 2019 to those hedging relationships directly
affected by IBOR reform and expects to adhere to ISDA fallback protocols and/or agree on fallback clauses with counterparties to
manage the transition process for affected hedges.
The critical terms of the interest rate swaps and the associated hedged items are closely aligned. The Company performs a qualitative
assessment of the effectiveness, and it is expected that the value of the interest rate swaps and the value of the corresponding
hedged items will systematically change in opposite directions in response to movements in the underlying interest rates. Sources of
hedge ineffectiveness include the effect of the counterparty and the Company's own credit risk on the fair value of the interest rate
swaps and a lack of access to negative benchmark interest rates on the Company's borrowings.
The change in fair values of interest rate hedges used as the basis for recognizing ineffectiveness for the year ended December 31,
2020 and 2019 were as follows:
2020
2019
Hedging
instruments
Hedged
items
Hedging
instruments
Hedged items
Cash
flow hedges
$
(18,372)
$
18,513
$
2,160
$
(2,184)
Amounts recognized in the consolidated statements of other comprehensive income (loss) as at December 31, consist of:
Cash
flow hedges
Balance,
beginning
of year
Eligible
change
in
fair
value
of
interest
rate swaps
Balance,
end
of year
2020
2019
Continuing
hedges
Discontinued
hedges
Continuing
hedges
Discontinued
hedges
$
$
2,160
$
(20,532)
(18,372)
$
—
—
—
$
$
— $
2,160
2,160
$
—
—
—
It is estimated that, all else constant, an adverse hypothetical 10.0% change in the variable interest rate would result in a decrease in
the fair value of the Company’s interest rate swaps of $0.4 million, with a decrease in earnings before taxes of $0.0 million and a
decrease in other comprehensive income (loss) of $0.4 million.
Foreign Exchange Risk
Foreign exchange risk refers to the risk that the value of financial instruments or cash flows will fluctuate due to changes in foreign
exchange rates.
The Company’s foreign exchange risk arises primarily from transactions in currencies other than Canadian dollars, U.S. dollar-
denominated borrowings, and investments in foreign operations.
The Company uses 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. The Company uses forward contracts which are accounted
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
for as fair value hedges to minimize the price risk assumed under forward priced contracts with suppliers. The Company also uses
forward contracts which are accounted for as cash flow hedges as well as non-designated derivative instruments to minimize the price
risk of anticipated transactions.
The critical terms of foreign exchange forward contracts and the associated hedged items are similar. The Company performs a
quantitative assessment of the effectiveness, and it is expected that the value of the forward contracts and the value of the
corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange
rates. The main source of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Company's own
credit risk on the fair value of the foreign exchange contracts, which is not reflected in the fair value of the hedged item attributable to
changes in foreign exchange rates. Other sources of ineffectiveness include differences in the underlying terms of the foreign exchange
contracts and the hedged items.
The Company's designated foreign exchange forward contracts mature within one year. The average exchange rate of the Company's
U.S. dollar denominated contracts is 1.31 (2019: 1.32).
As at December 31, 2020, the Company had US$265.0 million (2019: US$265.0 million) drawn on the Credit Facility (see Note 14)
that is designated as a net investment hedge of the Company's U.S. operations. Foreign exchange gains and losses on the
designated drawings are recorded in shareholders' equity in the foreign currency translation adjustment component of accumulated
other comprehensive income and offset translation adjustments on the underlying net assets of the U.S. operations, which are also
recorded in accumulated other comprehensive (loss) income. The gain on the net investment hedge recorded in other comprehensive
(loss) income for the year ended December 31, 2020 was $7.5 million, net of tax of $1.4 million (2019: gain of $11.7 million, net of tax
of $2.2 million).
The critical terms of the U.S. denominated drawings and the associated hedged items are the same. The Company performs a
qualitative assessment of the effectiveness, and it is expected that the value of the U.S. denominated drawings and the value of the
corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange
rates. There are no sources of hedge ineffectiveness.
The change in fair values of foreign exchange hedges used as the basis for recognizing ineffectiveness for the year ended
December 31, 2020 and 2019 were as follows:
Cash flow hedges
Fair value hedges
Net investment in foreign operations
2020
Hedging
instruments
Hedged
items
2019
Hedging
instruments Hedged items
$
$
$
124 $
(117) $
2,970 $
(3,104) $
457 $
904 $
(463)
(964)
17,344 $
(17,344) $
8,427 $
(8,427)
Amounts recognized in the consolidated statements of other comprehensive income (loss) as at December 31, consist of:
Cash flow hedges
Balance, beginning of year
Eligible change in fair value of foreign exchange contracts
Balance, end of year
Net investment in foreign operations
Balance, beginning of year
Eligible change in fair value of U.S. denominated drawings
Balance, end of year
2020
2019
Continuing Discontinued
hedges
hedges
Continuing Discontinued
hedges
hedges
457 $
(3,931) $
(2,122) $
(3,931)
(340)
—
2,579
—
117 $
(3,931) $
457 $
(3,931)
2020
2019
Continuing Discontinued
hedges
hedges
Continuing Discontinued
hedges
hedges
8,427 $
(10,289) $
(15,797) $
—
8,917
—
24,224
(10,289)
17,344 $
(10,289) $
8,427 $
(10,289)
$
$
$
$
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Gains (losses) related to the Company's designated derivative financial instruments recorded in the consolidated statements of net
earnings as at December 31, were as follows:
Cash
flow hedges
Foreign
exchange contracts
Fair
value hedges
Foreign
exchange contracts
2020
2019
Effective
portion(i)(ii)
Ineffective
portion(i)
Effective
portion(i)(ii)
Ineffective
portion(i)
$
$
— $
7
$
— $
—
2,066
$
(74)
$
904
$
(60)
(i) Gains (losses) are recorded in cost of goods sold in the consolidated statements of net earnings.
(ii)
The effective portion recognized in earnings for cash flow hedges represents the accumulated other comprehensive income (loss) released to the
consolidated statements of net earnings due to early termination of hedging relationships. The effective portion recognized in earnings for fair value
hedges represents the change in fair value of hedging instruments; the change in the hedged items are recorded at the inverse of the associated
hedging instruments within cost of goods sold in the consolidated statements of net earnings.
It is estimated that, all else constant, an adverse hypothetical 10.0% change in the value of the Canadian dollar against all relevant
currencies would result in a decrease in the fair value of the Company’s foreign exchange forward contracts of $16.1 million, with a
decrease in earnings before taxes of $13.3 million and a decrease in other comprehensive income (loss) of $2.8 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. The Company uses fixed price contracts with suppliers as well as exchange-
traded and over-the-counter futures and options to manage its exposure to price fluctuations.
The Company uses futures which are accounted for as fair value hedges as well as non-designated derivative instruments to minimize
the price risk assumed under forward priced contracts with suppliers. The Company also uses futures which are accounted for as cash
flow hedges as well as non-designated derivative instruments to minimize the price risk of anticipated transactions. The Company does
not use component hedging as part of its commodity price risk management.
The critical terms of the futures contracts and the associated hedged items are similar. The Company performs a quantitative
assessment of the effectiveness, and it is expected that the value of the futures contracts and the value of the corresponding hedged
items will systematically change in opposite direction in response to movements in the underlying commodity prices. Hedge
ineffectiveness in these hedging relationships is due to timing differences in the term of the futures contracts and the hedged items.
The Company's designated commodity futures contracts mature within one year. The outstanding designated commodity futures
contracts as at December 31, were as follows:
Cash
flow hedges
Corn
contracts
(i)
Fair
value hedges
Hog
contracts
(i)
2020
2019
Average
Price (USD)
Volume
(000's)
Average
Price (USD)
Volume
(000's)
$
$
4.39
2,905
$
—
75.52
800
$
81.92
—
514
(i)
Corn contracts' unit of measure is bushels where hog contracts' unit of measure is cwt
The change in fair values of commodity hedges used as the basis for recognizing ineffectiveness for the year ended December 31,
2020 and 2019 were as follows:
Cash
flow hedges
Fair
value hedges
2020
2019
Hedging
instruments
Hedged
items
Hedging
instruments
$
$
404
(1,769)
$
$
(395)
$
—
1,769
$
2,956
$
$
Hedged
items
—
(2,956)
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Amounts recognized in the consolidated statements of other comprehensive income (loss) as at December 31, consist of:
Cash
flow hedges
Balance,
beginning
of year
Eligible
change
in
fair
value
of
commodity contracts
Balance,
end
of year
2020
2019
Continuing
hedges
Discontinued
hedges
Continuing
hedges
Discontinued
hedges
$
$
—
$
—
$
395
291
395
$
291
$
— $
—
— $
—
—
—
Gains (losses) related to the Company's designated derivative financial instruments recorded in the consolidated statements of net
earnings as at December 31, were as follows:
Cash
flow hedges
Commodity contracts
Fair
value hedges
Commodity contracts
2020
2019
Effective
portion(i)(ii)
Ineffective
portion(i)
Effective
portion(i)(ii)
Ineffective
portion(i)
$
$
—
$
9
$
—
$
(4,724)
$
—
$
2,956
$
—
—
(i) Gains (losses) are recorded in cost of goods sold in the consolidated statements of net earnings.
(ii)
The effective portion recognized in earnings for cash flow hedges represents the accumulated other comprehensive income (loss) released to the
consolidated statements of net earnings due to early termination of hedging relationships. The effective portion recognized in earnings for fair value
hedges represents the change in fair value of hedging instruments; the change in the hedged items are recorded at the inverse of the associated
hedging instruments within cost of goods sold in the consolidated statements of net earnings.
It is estimated that, all else constant, an adverse hypothetical 10.0% change in market prices of the underlying commodities would
result in a decrease in the fair value of underlying outstanding derivative contracts of $21.2 million, with a decrease in earnings before
taxes of $12.7 million and $8.5 million in other comprehensive income (loss). The earnings before taxes excludes the offsetting impact
of the commodity price risk inherent in the transactions being hedged.
Credit Risk
Credit risk refers to the risk of losses due to failure of the Company’s customers and counterparties to meet their payment obligations.
In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail,
foodservice, industrial, and convenience channels. 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. The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost.
At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit
risk on its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial
recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses. Average accounts
receivable days sales outstanding for the year is consistent with historic trends.
Management believes concentrations of credit risk with respect to accounts receivable are 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 described in Note 25. 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, 2020 comprise
approximately 23.8% (2019: two largest customers representing 21.6%) of total sales.
The Company is also exposed to credit risk on its notes receivable from an unconsolidated structured entity in respect of the accounts
receivable securitization program as described in Note 25. Management believes that this credit risk is limited by the long-term AA- debt
rating held by the financial institution financing the third-party trust. The Company is exposed to credit risk on its cash and cash
equivalents (comprising primarily of deposits with Canadian chartered banks) and non-exchange-traded derivative contracts. The
Company mitigates this credit risk by transacting primarily with counterparties that are major international financial institutions with long-
term debt ratings of A or higher. 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.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The
contractual undiscounted cash flows payable in respect of financial liabilities as at the balance sheet date, were as follows:
Financial liabilities
Accounts
payable
and accruals
$
501,529
—
—
Due
within
1
year
Due
1
and
between
3 years
31, 2020
December
Due
3
and
between
5 years
1,083
555
1,769
6,454
81,144
4,278
406,026
339,458
—
—
10,707
58,368
—
—
—
1,211
33,549
—
Due
5
after
years
Total
—
—
—
—
—
106,501
—
$
501,529
746,567
555
1,769
18,372
279,562
4,278
Debt
Foreign
exchange contracts
Commodity
futures contracts
Interest
rate swaps
Lease obligations
Other liabilities
Total
$
596,812
475,101
374,218
106,501
$
1,552,632
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, 2020, the Company had available undrawn committed credit of $1,243.6 million (2019: $1,458.8 million) under the
terms of its principal banking arrangements as described in Note 14. These banking arrangements are subject to certain covenants and
other restrictions.
20. INTEREST EXPENSE AND OTHER FINANCING COSTS
Interest
on
borrowings
from
credit facility
Interest
on
lease obligations
Interest on
securitized receivables
Interest
on
government loans
Deferred
finance charges
Credit
facility
standby
fees
and
other interest
Interest capitalized
Write-off
of
deferred
finance charges
2020
2019
$
20,350
$
16,876
8,673
2,401
318
1,687
6,265
(8,214)
—
9,001
2,824
351
1,496
3,177
(2,650)
956
$
31,480
$
32,031
Interest paid during the year ended December 31, 2020 was $37.1 million (2019: $30.8 million).
21. EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing the net earnings of the Company by the weighted average number of
shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net earnings of the Company by the weighted average number of
shares outstanding during the year, adjusted for the effects of potentially dilutive instruments.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”):
Twelve
months
ended
December 31,
Net
earnings
2020
Weighted
average
of
shares(i)
number
EPS
Net earnings
$
113,277
123.1
$
0.92
$
74,628
1.2
Basic
Stock options(ii)
Diluted
2019
number
Weighted
average
of
shares(i)
123.6
1.6
EPS
$
0.60
$
113,277
124.3
$
0.91
$
74,628
125.2
$
0.60
(i)
(ii)
In millions.
Excludes the effect of approximately 2.4 million (2019: 2.3 million) options and performance shares that are anti-dilutive.
22. SHARE-BASED PAYMENT
Under the Maple Leaf Foods Share Option Plan in effect as at December 31, 2020, the Company may grant options to its employees
and employees of its subsidiaries to purchase shares of common stock. Under the Maple Leaf Foods Restricted Share Unit Plan
(adopted in 2006) ("the 2006 Plan") in effect as at December 31, 2020, the Company may grant RSUs and PSUs to its employees and
employees of its subsidiaries entitling employees to receive common shares or cash at the Company’s option. Options, RSUs, and
PSUs are granted from time to time by the Human Resources and Compensation Committee or by the Board of Directors on the
recommendation of the Human Resources and Compensation Committee. The vesting conditions for options, RSUs, and PSUs 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 Plans, eligible Directors may elect to receive their retainer and fees in
the form of DSUs or as common shares of the Company.
Stock Options
A summary of the status of the Company’s outstanding stock options as at December 31, 2020 and 2019, and changes during these
years are presented below:
Outstanding, beginning
of year
Granted
Exercised
Forfeited
Outstanding,
end
of year
Options
currently exercisable
2020
2019
Weighted
average
exercise
price
$ 26.26
$ 23.11
$
21.95
$
31.37
$
25.48
$
25.41
Options
outstanding
4,558,250
1,431,750
(46,100)
(54,350)
5,889,550
3,546,925
Weighted
average
exercise
price
$
25.38
$
28.42
$
21.65
$
29.96
$
26.26
$
24.14
Options
outstanding
3,976,300
1,060,350
(358,400)
(120,000)
4,558,250
2,868,900
All outstanding stock options vest and become exercisable over a period not exceeding five years (time vesting) from the date of grant.
The outstanding options have a term of seven years.
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
The number of options outstanding as at December 31, 2020, is as follows:
Options outstanding
Options currently
exercisable
Options
time
subject
to
vesting only
Weighted
average
exercise
price
term
Weighted
average
remaining
of options
(in years)
Number
outstanding
Weighted
average
exercise
Number
price outstanding
Weighted
average
exercise
price
Number
exercisable
Range
exercise
of
prices
$
20.28
to $ 24.91
3,513,700
$ 22.22
$ 28.38
to $ 30.86
1,670,700
$ 29.41
$ 31.57
to $ 32.50
705,150
$ 32.45
Total Options
5,889,550
$ 25.48
3.4
4.3
4.2
3.7
2,081,950
$ 21.61
1,431,750
$ 23.11
1,008,300
$ 30.06
662,400
$ 28.42
456,675
$ 32.47
248,475
$ 32.40
3,546,925
$ 25.41
2,342,625
$ 25.35
The number of options outstanding as at December 31, 2019, is as follows:
Options outstanding
Options
currently
exercisable
Options subject to time
vesting only
Range of
exercise prices
Number
outstanding
Weighted
average
exercise
price
Weighted
average
remaining
of options
(in years)
term
Weighted
average
exercise
price
Number
outstanding
Weighted
average
exercise
price
Number
exercisable
$ 20.28
to $ 22.53
2,128,200
$ 21.61
$ 28.38
to $ 30.86
1,707,400
$ 29.44
$ 31.57
to $ 32.50
722,650
$ 32.45
Total Options
4,558,250
$ 26.26
2.3
5.3
5.2
3.9
2,128,200
$ 21.61
—
$
—
488,200
$ 30.86
1,219,200
$ 28.87
252,500
$ 32.45
470,150
$ 32.45
2,868,900
$ 24.14
1,689,350
$ 29.87
At grant date, each option series is measured at 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, 2020 and 2019 are shown in the table below
(i):
Share price
at
grant date
Exercise price
Expected volatility
Option
life
(in years)(ii)
Expected
dividend yield
rate(iii)
interest
Risk-free
(i) Weighted average based on number of units granted.
(ii)
Expected weighted average life.
2020
$22.83
$23.11
23.3%
4.5
2.8%
1.0%
2019
$28.09
$28.42
21.3%
4.5
2.1%
1.8%
(iii) Based on Government of Canada bonds.
The fair value of options granted during the year ended December 31, 2020 was $4.5 million (2019: $4.5 million). Expenses relating to
current and prior year options were $4.5 million (2019: $4.3 million).
Restricted Share Units and Performance Share Units
The awards granted under the 2006 Plan are satisfied either by shares to be purchased on the open market by a trust established for
that purpose, or cash at the option of the Company at the time of vesting.
Under the 2006 Plan, one common share of the Company may be distributed for each RSU, and these units vest strictly over time. The
PSUs are subject to both time and performance vesting. The PSUs provide the holder with up to two RSUs based on the achievement
of predetermined Company performance targets. All outstanding RSUs and PSUs under the 2006 Plan vest over a period of
approximately one to three years from the date of grant.
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
A summary of the status of the Company’s RSU plans (including PSUs) as at December 31, 2020 and 2019 and changes during these
periods is presented below:
Outstanding,
beginning
of year
Granted
Exercised
Forfeited
Outstanding, end
of year
2020
2019
Weighted
average
value
at grant
fair
RSUs
outstanding
Weighted
average
value
fair
at grant
$
$
$
$
$
28.80
1,471,662
21.00
30.26
28.51
541,450
(671,658)
(95,539)
24.99
1,245,915
$
$
$
$
$
28.48
26.51
26.33
28.26
28.80
RSUs
outstanding
1,245,915
692,815
(329,381)
(59,214)
1,550,135
On April 1, 2016, the Company communicated to its employees the intent to issue RSUs at which time the service period commenced.
During the year ended December 31, 2017, the RSUs were formally granted. The service period for these units vested in 2019.
All of the Company's outstanding RSUs are accounted for as equity-settled awards.
The fair value of RSUs and PSUs granted during the 2020 was $12.5 million (2019: $12.5 million). Expenses for the year ended
December 31, 2020 relating to current and prior year RSUs and PSUs, were $11.3 million (2019: $12.2 million). No RSUs or PSUs were
cash settled in the years ended December 31, 2020 and 2019.
The key assumptions used in the valuation
of fair value of RSUs granted during the year are shown in the table below :
(i)
Expected
RSU
life
(in years)
Forfeiture rate
discount rate
Risk-free
(i) Weighted average based on number of units granted.
Director Share Units
2020
3.2
13.6%
1.1%
2019
3.1
12.6%
1.7%
If an eligible Director elects to receive his or her retainer and fees as common shares of the Corporation, the 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.
In 2013, the Company adopted a new Share Purchase and Deferred Share Unit 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, whereas the 2013 DSU Plan allows the Company, at its discretion, the flexibility to satisfy DSUs in common shares,
either issued from treasury or purchased by the Company on the open market. DSUs under the 2002 DSU Plan are 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.
The fair value of director share units expensed during the year ended December 31, 2020 was $1.5 million (2019: $1.4 million).
A summary of the status of the Company’s outstanding DSUs as at December 31, 2020 and 2019, and changes during these years are
presented below:
Units outstanding
Outstanding,
beginning
of year
Additions: granted
Additions:
dividends reinvested
Exercised
Outstanding,
end
of year
2020
2019
2013
DSU plan
2002
DSU plan
2013
DSU plan
2002
DSU plan
—
—
—
—
—
245,334
43,598
4,438
(75,532)
217,838
20,004
—
108
(20,112)
—
217,838
53,251
6,210
—
277,299
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
23. SEGMENTED FINANCIAL INFORMATION
During the year ended December 31, 2020, the Company had two reportable segments. These segments offer different products, with
separate organizational structures, brands, financial and marketing strategies. The Company's chief operating decision makers
regularly review internal reports for these businesses: performance of the Meat Protein Group is based on revenue growth, Adjusted
Operating Earnings and Adjusted EBITDA , while the performance of the Plant Protein Group is based predominantly on revenue
growth rates, gross margin optimization and controlling investment levels, which generate high revenue growth rates. Refer to the
section, Non-IFRS Financial Measures, of the Company's Management's Discussion and Analysis for the year ended December 31,
2020, for the definitions of these non-IFRS financial measures. The operations of each segment are described as follows:
(a) The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, hog production and value-
added fresh pork and poultry products that are sold to retail, foodservice and industrial channels. The Meat Protein Group includes
brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift® and many sub-
brands.
(b) The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein and vegan cheese
products sold to retail, foodservice and industrial channels. The Plant Protein Group includes the brands Lightlife® and Field
Roast™.
Sales
Gross profit
2020
2019
Meat
Protein
Group
Plant
Protein
Non-
Group Allocated(i)
Total(ii)
Meat
Protein
Group
Plant
Protein
Group
Non-
Allocated(i)
Total(ii)
$4,116,485
210,839
(23,602)
$4,303,722
$3,778,039
176,415
(12,909)
$3,941,545
$
680,264
18,301
4,488 $
703,053
$
568,045
34,994
(12,060) $
590,979
Selling,
general
and
administrative expenses
$ 346,644
144,015
— $
490,659
$ 338,706
118,975
— $
457,681
Earnings
(loss) before
income taxes
$ 330,201
(125,822)
(44,506) $ 159,873
$ 218,003
(84,223)
(46,785) $
86,995
Interest
expense and other financing costs
Other (income) expense
Restructuring and
other related costs
—
(865)
4,284
—
108
—
31,480
31,480
17,514
16,757
—
332
—
4,284
11,004
—
242
—
32,031
32,031
2,694
3,268
—
11,004
Earnings (loss) from operations
$ 333,620
(125,714)
4,488 $ 212,394 $ 229,339
(83,981)
(12,060) $ 133,298
(Increase) decrease in fair value of biological assets
Unrealized (gain) loss on derivative contracts
—
—
—
—
(687)
(687)
(3,801)
(3,801)
—
—
—
—
5,545
6,515
5,545
6,515
Adjusted Operating Earnings
$ 333,620
(125,714)
— $ 207,906 $ 229,339
(83,981)
— $ 145,358
Depreciation and amortization
177,564
14,417
—
191,981
164,197
12,599
—
176,796
Items included in other (expense)
of ongoing operations
income representative
(2,715)
(108)
789
(2,034)
(332)
(242)
(392)
(966)
Adjusted EBITDA
$ 508,469
(111,405)
789 $ 397,853 $ 393,204
(71,624)
(392) $ 321,188
(i)
(ii)
Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of
expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s
operating results.
Totals may not add due to rounding.
The following summarizes capital expenditures by segments:
Meat
Protein Group
Plant
Protein Group
Non-allocated
capital expenditures
Total
capital expenditures
2020
2019
$
448,725
$
221,822
19,266
22,698
27,911
21,012
$
490,689
$
270,745
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
Information About Geographic Areas
The following summarizes sales by country of origin:
Canada
U.S.
Japan
China
Other
Sales
(i)
Certain
comparative
figures
have
been
restated
to
conform
with
current
year presentation.
The
following
summarizes
the
location
of
non-current
assets
by
country:
Canada
U.S.
Other
non-current
assets(i)
Total
(i)
Excludes financial instruments, employee benefits and deferred tax assets.
2020
2019(i)
$
3,101,120
$
2,927,632
500,616
431,107
126,807
144,072
419,631
372,918
58,437
162,927
$
4,303,722
$
3,941,545
As
at
December 31,
2020
2019
$
2,558,886
$
2,246,146
391,538
393,146
205
453
$
2,950,629
$
2,639,745
Information About Major Customers
For the year ended December 31, 2020, the Company reported Meat and Plant Protein sales to two customers representing 12.6% and
11.2% (2019: 11.2% and 10.4%) of total sales. No other sales were made to any one customer that represented in excess of 10.0% of
total sales.
24. GOVERNMENT INCENTIVES
During the year ended December 31, 2020, the Company recorded government incentives totaling $20.5 million (2019: $3.8 million).
During the year ended December 31, 2020, the Company recognized $10.4 million (2019: $2.0 million) of government incentives as a
reduction in the cost of related assets. Of this amount, $6.9 million was received from the Government of Ontario and $2.4 million from
the Government of Canada to assist with the design, development and construction of the London, Ontario poultry facility. In addition,
the Company received $1.1 million in other incentives.
During the year ended December 31, 2020, the Company recognized $10.1 million (2019: $1.9 million) of government incentives in net
earnings. Of this amount, $6.9 million were received as grants from the Federal Government's Canada Emergency Wage Subsidy
("CEWS"). The CEWS enabled Maple Leaf Foods to prevent job losses and helped to ensure a stable and secure supply chain. Maple
Leaf Foods qualified for the subsidy and the decision to participate in the program was carefully considered, taking into account a
number of business imperatives including protecting staff and consideration of all stakeholders. An additional $3.0 million of ongoing
incentives was received from the Government of Canada to support agricultural business and $0.2 million in other incentives.
The Company currently recognizes $8.4 million of government debt on the consolidated balance sheets as described in Note 14 of the
consolidated financial statements. Of this amount, $4.2 million of debt is recognized from the Government of Canada to assist in
innovation within the agricultural sector in Canada. In addition, $4.2 million of debt relates to the development of the Company's facility
located in Hamilton, Ontario.
25. COMPOSITION OF THE COMPANY
Unconsolidated Structured Entity
The Company, as part of a securitization agreement, sells a portion of its receivables to an unconsolidated third-party trust.
On July 19, 2019, the Company amended its three-year accounts receivable securitization facility (the "Securitization Facility") by
extending the maturity to July 19, 2022 and increasing the maximum cash advance available to the Company under the Securitization
Facility to $120.0 million (2019: $120.0 million). The Securitization Facility provides cash funding with a proportion of the Company's
receivables being sold, and provides the Company with competitively priced financing and further diversifies its funding sources. Under
the Securitization Facility, the Company has sold certain of its trade accounts receivable, with very limited recourse, to an
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
unconsolidated third-party trust financed by an international financial institution with a long-term AA- debt rating, for cash and short-term
notes back to the Company. The receivables are sold at a discount to face value based on prevailing money market rates. The
Company retains servicing responsibilities for these receivables.
As at December 31, 2020, trade accounts receivable being serviced under this program amounted to $134.7 million (2019: $133.3
million). In return for the sale of its trade receivables, the Company will receive cash of $103.2 million (2019: $101.6 million) and notes
receivable in the amount of $31.5 million (2019: $31.7 million). The notes receivable are non-interest bearing and are settled 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, 2020, the Company recorded a net
payable in the amount of $16.8 million (2019: $10.1 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 current carrying value of the
interest in the notes receivable due from the structured entity. The Company has not recognized any income or losses with its interest in
unconsolidated structured entities for the year ended December 31, 2020 and 2019.
26. RELATED PARTY TRANSACTIONS
The Company sponsors a number of defined benefit, defined contribution and post-retirement benefit plans. During the year ended
December 31, 2020, the Company's contributions to these plans were $30.3 million (2019: $30.1 million).
Key Management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of
the Company, directly or indirectly, including any external director of the Company.
Remuneration of key Management personnel of the Company is comprised of the following expenses:
Short-term employee benefits
Salaries, bonuses, and fees
Company car allowances
Other benefits
Total short-term employee benefits
Severance benefits
Post-employment benefits
Share-based compensation
Total remuneration
2020
2019
$
15,575
$ 13,640
316
128
326
137
$
16,019
$ 14,103
—
716
110
805
11,230
11,326
$
27,965
$ 26,344
During the year ended December 31, 2020, key Management personnel of the Company exercised 0.6 million share options (2019: 0.4
million share options) granted under the Maple Leaf Foods share option plans for an amount of $13.4 million (2019: $7.8 million).
The Company’s largest shareholder is McCain Capital Inc. (“MCI”). The Company has been informed that Mr. Michael H. McCain, Chief
Executive Officer and President of the Company, is the controlling shareholder of MCI. For the year ended December 31, 2020, the
Company received services from MCI in the amount of $0.1 million (2019: $0.4 million), which represented the market value of the
transactions with MCI. As at December 31, 2020, $0.0 million (2019: $0.0 million) was owed to MCI relating to these transactions.
McCain Financial Advisory Services ("MFAS"), is an entity jointly controlled by individuals including Mr. Michael H. McCain. For the year
ended December 31, 2020 and 2019, the Company provided services to and received from, MFAS for a nominal amount which
represented the market value of the transactions.
27. COMMITMENTS AND CONTINGENCIES
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.
In the normal course of its operations, the Company becomes involved in various legal and regulatory actions relating to its commercial
activities and relationships, construction activities, employment matters, product liabilities, and other matters. Even if the Company is
not found liable for these claims, the cost of defending these actions may be material.
Among the legal matters in which the Company is involved include a class action against packaged bread manufacturers and retailers
and an ongoing investigation by the Competition Bureau into the Canadian bread industry, including alleged price fixing and related
securities disclosure issues. Both the class action and the investigation cover a time horizon that includes the period when the
Company was a majority shareholder of Canada Bread Company, Limited ("Canada Bread"). The Company is a named defendant in
the class action and is a subject in the investigation. The Company sold its interest in Canada Bread, which was a stand-alone public
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2020 | MAPLE LEAF FOODS INC.
company, in 2014. The final outcome of the investigation, the class action and any other actions or any future claims cannot be
predicted with certainty or reliably estimated. Unfavourable resolution of these or other legal matters could have a material adverse
effect on the Company, its financial condition and its reputation.
In the normal course of business, the Company and its subsidiaries enter into sales commitments with customers, and purchase
commitments with suppliers. These commitments are for varying terms and can provide for fixed or variable prices. The Company
believes that these contracts serve to reduce risk, and does not anticipate that losses will be incurred on these contracts.
The Company entered into a number of contracts related to the construction of new and expanded facilities. As at December 31, 2020
these contract commitments were approximately $465.0 million (2019: $634.0 million).
28. SUBSEQUENT EVENT
On February 23, 2021, Certm Inc. and certain related companies exercised their put option to sell a poultry processing facility in
Schomberg, Ontario and associated poultry supply to Maple Leaf Foods for a purchase price of $40.0 million. The put option was part of
a purchase and sale agreement dated June 27, 2018 pursuant to which Maple Leaf Foods previously acquired two poultry plants and
associated poultry supply. The closing of the acquisition is expected to occur within 120 days subject to typical closing conditions. The
transaction will be financed from a combination of cash on hand and drawings under the existing credit facilities.
85