Dedicated Everyday
2010 AnnuAl report
WHEN DEDICATION LEADS TO SUCCESS
By being dedicated everyday, Saputo’s 9,800 employees contribute to the success of the Company. Since
its humble beginnings, Saputo Inc. has grown to become the 12th largest dairy processor in the world, the largest
in Canada, the 3rd largest in Argentina, among the top 3 cheese producers in the United States and the largest
snack-cake manufacturer in Canada.
By being dedicated everyday, we process approximately 6 billion litres of raw milk per year and are
determined to reach new heights. We remain focused on being better and stronger through optimization of our
activities, product innovation and acquisitions.
By being dedicated everyday, we strive to provide consumers with high quality products including cheese, fluid
milk, yogurt, dairy ingredients and snack-cakes. Our major brands such as Saputo, Alexis de Portneuf, Armstrong,
Baxter, Dairyland, Danscorella, De Lucia, Dragone, DuVillage 1860, Frigo Cheese Heads, Kingsey, La Paulina, Neilson,
Nutrilait, Ricrem, Stella, Treasure Cave, HOP&GO!, Rondeau and Vachon are well-known and distributed in over
40 countries worldwide.
our organizaTion
2 SectorS
Dairy ProDucts
Canada, EuropE and argEntina (CEa) dairy produCts sECtor
5 DiviSionS
• Dairy ProDucts Division (canaDa)
• Dairy ProDucts Division (euroPe)
• Dairy ProDucts Division (argentina)
usa dairy produCts sECtor
• Dairy ProDucts Division (usa)
grocery ProDucts
• Bakery Division
Saputo Inc. (Company or Saputo) is a publicly
traded company whose shares are listed on the
Toronto Stock Exchange under the symbol SAP.
Dairy ProDucts sector
as at March 31, 2010
nuMBer
of Plants
nuMBer of
eMPloyees
revenues
cea
30
5,990
64.5
usa
15
2,927
32.8
grocery
ProDucts
sector
1
936
2.7
COVER PICTURE: Sylvain Boivin, Dave Robinette and Jean-Christophe Plouffe, Production, Mont-Laurier, QC, Canada
Employees in background: Francis Beauchamp, Alain Doré and Luc Lachaine, Production, Mont-Laurier, QC, Canada
Ta b l e o f c o n T e n T s
0 1 Highlights ] I-IV Operating Review ] 04 Message from the Chairman of the Board ]
06 Message from the President and Chief Executive Officer ] 10 Social Responsibility ] Shareholder Information,
Management’s Analysis, Consolidated Financial Statements and Notes to Consolitated Financial Statements
are presented in the document entitled Management’s Statements.
highlighTs
fiscal years ended March 31
(in thousands of Canadian (CDn) dollars, except per share amounts and ratios)
2010
2009
2008
revenues
Dairy products Sector
CeA
uSA
Grocery products Sector
earnings before interest, depreciation, amortization
and income taxes (eBitDa)1
Dairy products Sector
CeA
uSA
Grocery products Sector
net earnings
Cash flows generated by operations
Working capital
total assets
Interest bearing debt2
Shareholders’ equity
Per share3
net earnings
Basic
Diluted
Dividends declared4
Book value
financial ratios
Interest bearing debt/Shareholders’ equity
return on average shareholders’ equity
$
3,745,930
1,906,189
5,652,119
158,463
$
3,323,541
2,304,613
$
2,966,293
1,927,983
5,628,154
165,109
4,894,276
164,624
$
5,810,582
$
5,793,263
$
5,058,900
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
457,895
218,375
676,270
15,801
692,071
382,714
583,615
355,684
3,253,451
387,543
2,028,598
1.85
1.83
0.58
9.78
0.19
19.1%
378,898
152,006
530,904
16,895
547,799
278,948
467,288
166,728
3,499,103
713,001
1,972,348
$
363,365
145,478
508,843
17,201
$
$
526,044
288,200
291,062
$
$
416,292
$ 2,733,476
282,704
$
$ 1,619,160
$
$
$
$
1.35
1.34
0.56
9.52
0.36
15.5%
1.40
1.38
0.48
7.86
0.17
18.3%
1 Measurement of results not in accordance with Generally Accepted Accounting principles.
the Company assesses its financial performance based on its eBItDA, this being earnings before interest, depreciation, amortization and income taxes.
eBItDA is not a measure of performance as defined by Generally Accepted Accounting principles in Canada, and consequently may not be comparable to similar measurements
presented by other companies. reference is made to the section entitled “Measurement of results not in accordance with Generally Accepted Accounting principles”.
2 net of cash and cash equivalents.
3 All references to number and prices of Common Shares for fiscal 2008 herein have been adjusted to reflect the 100% stock dividend declared on December 10, 2007, which had
the same effect as a two-for-one stock split.
4 For the purpose of the Income tax Act and other similar provincial legislation, all dividends paid as of January 1, 2007 and thereafter, are eligible dividends until further notice.
REVENUES
(in millions of CDn dollars)
EBITDA
(in millions of CDn dollars)
NET EARNINgS
(in millions of CDn dollars)
2010
5,810.6
2009
5,793.3
2008
5,058.9
2010
692.1
2009
547.8
2008
526.0
2010
382.7
2009
278.9
2008
288.2
CASH FLOWS
gENERATED
BY OPERATIONS
(in millions of CDn dollars)
2010
583.6
2009
467.3
2008
291.1
saPuto 2010 AnnuAl report
1
operaTing
review
THE SUM OF
SMALL EVERYDAY
ACTIONS RESULTS
IN LONg TERM
ACHIEVEMENTS
The Dairy Products Division (Canada)
manufactures 32% of all natural
cheese and processes 35%
of all fluid milk in Canada.
CEA Dairy
Products Sector
DAIRY PRODUCTS DIVISION
(CANADA)
While the market remained stable, the Division maintained its
focus on efficiency driven actions. the acquisition of neilson Dairy
has started to yield logistics benefits and the Division serves
customers with higher fill rate standards while optimizing
delivery schedules.
Several initiatives were implemented to maximize the benefits of
previous capital investments. these included initiatives aimed at
improving filling utilization, packaging rates per minute as well as
the sourcing of packaging and raw materials.
the Division also increased its capacity in specialty cheese
operations to address the volume growth experienced by this
segment. Sales were expanded on a national basis contributing to
the growth of specialty cheese consumption.
REVENUES (%) PER MARkET SEgMENT
Dairy products Division (Canada)
70% RETAIL
26% FOODSERVICE
4% INDUSTRIAL
saputo was the official supplier of packaged dairy products
for the vancouver 2010 olympic and Paralympic Winter games
and sponsored five athletes who participated in the games.
A website and a media campaign including some social media networks
were developed to follow their journey and to create excitement
among employees and consumers. In addition, Saputo advertised
its partnership with the 2010 Winter games on packaging, truck
trailers as well as via numerous promotions with retailers.
Manon Gagnon, Production, Gaétan Moisan, Packaging,
and Pauline Doyon, Production, St-Raymond, QC, Canada
I
The Dairy Products Division
(Argentina) processes an
average of 2 million litres of
raw milk daily, which accounts
for approximately 8% of all
milk processed in the country.
DAIRY PRODUCTS DIVISION
(ARGENTINA)
the Division expanded its internal storage
capacity to reduce reliance on outside providers as
well as decrease logistic costs. this upgrade
enabled the Division to improve customer service
and provide flexibility.
Moreover, the Division improved its grated cheese
operations to respond to market demand while achieving better
productivity and improving workplace safety.
the Division strengthened its position in the domestic market
through continual investments in marketing initiatives to support
sales of La Paulina products.
MARkETINg INITIATIVES
CANADA
Introduction of new packaging for Neilson
Dairy Oh! and Dairyland organic milk.
Media campaigns to promote Armstrong cheeses,
Saputo Mediterranean cheeses and International
Delight* coffee creamers.
Launch of a free magazine, Ingredients Etc., featuring
recipes using Saputo products.
Promotional campaign for Saputo DHA1 family
products supporting Dairy Oh! milk and
Lil’ Ones yogurt.
ARgENTINA
TV campaign featuring La Paulina grated cheese.
Promotional campaign supporting
La Paulina cheeses.
Launch of a revamped La Paulina website.
*Trademark used under license
1 Docosahexaenoic acid
DAIRY PRODUCTS DIVISION
(EUROPE)
the Division implemented a new mozzarella
production process in the united Kingdom
(uK) and completed its capital investments
to optimize cheese making processes. the
Division also rationalized a leased facility
within the Heiden plant in Germany in order
to improve operational costs.
NEW PRODUCTS
CANADA
Launch of 3 Alexis de Portneuf
blue cheeses.
Introduction of Neilson organic
milk and lactose free milk.
Launch of Armstrong natural cheese
and colby cheese slices.
Launch of Saputo new smoked
bocconcini.
Introduction of fresh marble cheese
curds under the Kingsey brand.
Launch of a new Alexis de Portneuf
brie Bonaparte flavoured with
apricot and maple syrup.
ARgENTINA
Introduction of La Paulina cream
cheese, grated cheese and tybo.
II
Eraldo Fermin Faurie, Pasteurization and
Carlos Antonio Bechis, Maintenance, Tio Pujio, Argentina
USA Dairy
Products Sector
The Dairy Products
Division (USA)
produces approximately
9% of all natural cheese
in the United States (US).
NEW PRODUCTS
Launch of Frigo Cheese
Heads Superstring,
a string cheese fortified
with Vitamins A & D
and added calcium.
Introduction of a
New York blend, low
moisture mozzarella
cheese and part-skim
mozzarella cheese, for
the foodservice segment.
Anthony Burk, Production,
Waupun, WI, USA
DAIRY PRODUCTS DIVISION
(USA)
the Division continued to improve and simplify its production processes during
fiscal 2010. Initiatives such as upgrading refrigeration systems, installing new
equipment, implementing new technologies and increasing whey recovery allowed
the Division to increase production and reduce packaging for both cheese and dairy
ingredient products. these improvements resulted in higher quality products,
enhanced consistency and increased efficiency.
the Division completed the acquisition of the activities of F&A Dairy of California, Inc.
this transaction included a facility producing mozzarella, provolone and whey
products. Its integration into the Saputo structure is progressing well and the capital
improvement plan should be completed during fiscal 2011.
VOLUME (%) PER MARkET SEgMENT
Dairy products Division (uSA)
49% FOODSERVICE
36% RETAIL
15% INDUSTRIAL
Karla Holback and Kenneth Miller,
Production, Waupun, WI, USA
Grocery Products
Sector
Réjean Lemelin and Huguette Giguère, Production,
Ste-Marie, QC, Canada
BAkERY DIVISION
the Division’s productivity was increased through a better control of product
weight, line speed, rationalization of stock-keeping units (SKu) and extension of
product shelf-life, resulting in a reduction of losses and improved planning
enabling the Division to close its Québec facility as well as 23 thrift stores.
logistics were also optimized with the standardization of boxes and cases
and the reorganization of distribution networks in ontario and Western Canada,
resulting in increased cost efficiency.
MARkETINg
INITIATIVES
Enhanced packaging
and marketing initiatives
to support Stella, Alto and
Saputo products in the
foodservice segment.
Marketing merchandising
featuring Black Creek
premium cheddar.
Promotional support
for number 1 retail brands
Frigo Cheese Heads in the
cheese string category
and Treasure Cave in the
blue cheese category1.
Launch of a revamped
website for Stella
cheeses and for Frigo
Cheese Heads.
1 Source: IRI Total US FDMW, latest
12 weeks, ending March 21, 2010.
The Bakery Division
is Canada’s top
snack-cake
manufacturer and
caters mainly to retail
segment clients.
NEW PRODUCTS
Introduction of new
Vachon cakes such
as Pouding chomeur,
Opera and Cupcakes.
Launch of Igor line
of products including
Bagaloo Apple Snack,
Bongo Yogurt and Berry
granola Bar as well as
Canoo Hazelnut-Cocoa.
MARkETINg
INITIATIVES
Introduction of new
branding and packaging
for all Vachon products.
Media advertising
campaign featuring
the new Igor line
of products.
Social media
campaign to support
Vachon Jos Louis cakes.
Launch of a series of
Vachon frozen desserts
including Chocolat
Mirroir, Tiramisu and
Soft Apple cakes.
saPuto 2010 AnnuAl report
IV
achievemenTs
Saputo products
were honoured
on many occasions
during fiscal 2010.
La Sauvagine and
La Roche Noire
Alexis de Portneuf
both earned gold at
the event, in the washed
rind and the new cheese
categories respectively.
Le Cendrillon Alexis de Portneuf was crowned World Champion,
all categories combined, at the prestigious World Cheese Awards 2009.
Le Cendrillon was therefore hailed the world’s best cheese after
competing alongside 2,440 cheeses from 34 countries.
Consumers and customers around the world appreciate the great taste
Sur fond blanc
Options de reproduction
Couleurs utilisées
C
000
Pantone couc hé
PMS 1795C Pour le logo Vachon seulement
Noir et blanc
Noir
CMYK (quadrichromie)
C0/M94/Y94/K6 Pour le logo Vachon seulement
Suivre les recettes de couleur du logo Jos Louis envoyé
MC/TM
2 saPuto 2010 AnnuAl report
Le Fourmier and Le Bonaparte
Alexis de Portneuf were both
acclaimed among 1,327 products
by the American Cheese Society,
winning 1st place in the blue-veined
and soft ripened cheese
categories respectively.
The mozzarella whole
milk and part skim milk
from the Dairy Products
Division (USA) both
earned silver in their
respective category
at the World Cheese
Awards 2009.
With dedication and passion,
Saputo’s employees craft high
quality products.
In Argentina, the La Paulina
brand is the favourite soft cheese
among consumers with 16% of market
share1 and is the number 1 brand
of danbo cheese with 30% of the
market share1.
1 Source: kantar World Panel – Consumer Research 2009
Consumers and customers around the world appreciate the great taste
of Saputo products distributed under a vast portfolio of brands.
saPuto 2010 AnnuAl report
3
message from
The chairman of The boarD
anDré BérarD
Corporate Director
lucien BoucharD
Senior Partner,
Davies Ward Phillips &
Vineberg LLP
Pierre Bourgie
President
and Chief Executive Officer,
Société Financière
Bourgie (1996) Inc.
frank a. Dottori
President,
Fadco Consulting Inc.
and Managing Director,
greenfield Ethanol’s
Cellulosic Ethanol division
eManuele (lino) saPuto
Chairman of the Board
While 2009 was
characterized by
a worldwide climate
of economic
uncertainty, we have
doubled our efforts
and demonstrated
our will to continue
offering high quality
products while
remaining a low-
cost manufacturer.
Thanks to our
everyday efforts,
I can proudly say
we have once
more achieved
our objectives.
4 saPuto 2010 AnnuAl report
As Chairman of the Board, I would like to congratulate Management as well as the members of
the Board of Directors for their excellent work within the precarious economic context. All were up
to the challenge and fulfilled their mandate efficiently. Saputo recognizes the importance of being
dedicated everyday, and working as a team to overcome unpredictable factors and challenges.
We have always valued and supported these principles, which have been more beneficial than
ever this year. the ongoing efforts of every single employee, regardless of role or title, contributed
undoubtedly to maintaining our efficiency.
the family values and traditions upon which the Company was built remain fundamental aspects
of our culture today. our simple structure enables our employees to work closely as a team and
contributes directly to our success.
BELiEVing in sound goVErnanCE
the Board of Directors is responsible for the stewardship of the Company and overseeing its
management. to help fulfill this mandate, the members of the Board of Directors favour an
approach based on the importance of sharing knowledge and experience amongst themselves
and with the Management of the Company, while sharing their understanding of the industry
and markets in which the Company operates. In this regard, the Board of Directors visits
facilities, attends presentations on the industry, on strategic development and other matters
of interest and evaluates its work to optimize its contribution to Saputo.
the Board is comprised of 12 directors, of which 10 are independent directors who meet
separately from Management following each regular meeting and as needed. the
founders of the Company are represented on the Board and the positions of Chairman
of the Board and Chief executive officer are distinct and held by two non-independent
Board members. Consequently, a lead Director is also appointed to provide independent
leadership to the Board of Directors. the Board considers that the value of the equity
stake held by the principal shareholder ensures that his interests are aligned with those
of all shareholders.
message from
The chairman of The boarD
Since our beginnings, we insisted on building foundations strong enough
to overcome adverse conditions the industry may face.
anthony M. fata
President,
Sager Food Products Inc.
Jean gaulin
Corporate Director
tony Meti
President,
g.D.N.P. Consulting
Services, Inc.
caterina Monticciolo, ca,
President,
Julvest Capital Inc.
lino a. saPuto, Jr.
President
and Chief Executive Officer,
Saputo Inc.
Patricia saPuto, ca, icD.D,
Chief Financial Officer,
Placements Italcan Inc.
louis a. tanguay
Corporate Director
the Board of Directors has 2 committees: the Corporate Governance and Human resources Committee
and the Audit Committee. Members of both committees are exclusively independent and have access
to the Management team to assist them in carrying out their duties. At each Board meeting, a periodic
report is presented by the respective committees’ chair, after which a discussion period takes place
between the Directors. therefore, Board members are kept informed on the achievements and projects
of each Committee.
the Board believes in the importance of good governance practices, as stated in the Management proxy
Circular, dated June 9, 2010. For additional information concerning the Company’s corporate governance
practices, please refer to such document.
rECogniZing CoLLECtiVE EFForts
I am truly thankful to all members of the Board of Directors for their support and assistance. their expertise
and experience enable us to make decisions based on the best interest of Saputo’s shareholders.
I am grateful to our clients and business partners and I would like to thank them for their trust and loyalty.
We are dedicated to working hard and remaining disciplined in order to reiterate our will to offer the best
of Saputo; quality and service wise.
to conclude, I sincerely thank all Saputo employees for their dedication to the Company. With their
determination and their contribution, they are key players in our quest for success. their efforts and desire
to take on challenges were key in helping achieve our goals and even enabled us to surpass them.
It is with confidence and enthusiasm that the Board and myself are starting fiscal 2011.
lino saPuto
Chairman of the Board
saPuto 2010 AnnuAl report
5
message from The presiDenT
anD chief execuTive officer
As the economic downturn struck most parts of the world, we rolled up
our sleeves and worked hard daily to overcome the challenge. We faced
the issue head on, questioned ourselves and aimed to improve our ways
on a day-to-day basis. Thanks to our determination and our ability to
work as a team, we grew even stronger and delivered great results.
once more, we reinforced our commitment to growth and focused on finding ways to improve our
operating efficiencies. We endeavoured to evolve through innovation, while keeping in mind the strong
fundamental values of Saputo. our goal is, and has always been, to offer consumers the highest quality
products while remaining a low-cost producer and to meet the emerging needs of the market.
total revenues for fiscal year ended March 31, 2010 reached $5.811 billion, up 0.3% from last fiscal year.
net earnings totalled $382.7 million, compared to $278.9 million for fiscal 2009.
FoCusEd on aChiEVing ExCELLEnCE
to remain a worldwide dairy processor, we have to keep pace and surpass ourselves. throughout
fiscal 2010, we have reorganized and improved some of our operations to become more efficient.
We have grown organically and through acquisitions, we have developed new strategies and operational
processes, and we have sought new ways to be more sustainable.
Sustained efforts
by our dedicated
employees around
the world contributed
to our success.
DAIRY PRODUCTS DIVISION (CANADA)
Fiscal 2010 was our first complete fiscal year following the implementation of the new cheese
regulations, which came into effect in December 2008. the legal challenge filed by Saputo to
contest the new standards was dismissed by the Federal Court of Canada in october 2009,
and we filed an appeal, along with another Canadian dairy processor. A decision has yet to be
rendered. Due to these new standards, we were obliged to reformulate some of our recipes and
abandon the use of certain technologies developed during the course of the past 25 years.
these regulations still impacted our production this fiscal year and resulted in some price
increases in the market. nevertheless, the changes allowed us once again to show our ability
to face challenges and to adapt to various situations while mitigating the impact on our results.
Fiscal 2010 was also the first complete fiscal year following the acquisition of neilson Dairy.
Its integration is in progress as we expanded the distribution of its brand portfolio and products
across Canada. Based on the well-established heritage of Neilson in ontario, we converted our
Dairyland fluid milk and cream products into the Neilson brand in that province. We also ensured that
all Saputo customers had access to Neilson products across the country.
As part of the continual analysis of our activities and the implementation of measures aimed at improving
our operational efficiency, we announced the closure of our Brampton, ontario plant which will be effective
by october 31, 2010. We also announced the consolidation of all the distribution activities of the Greater
toronto Area into one distribution center which should be completed at the end of September 2010.
Dairy consumption in Canada is relatively stable, with the exception of certain niche categories. We
anticipated this trend and capitalized on existing and growing categories. therefore, our specialty cheese
group focused on offering a wide variety of quality fine cheeses. In fiscal 2010, one of our products,
Le Cendrillon Alexis de Portneuf, earned the prestigious title “World’s Best Cheese” at the World Cheese
Awards 2009 while La Sauvagine and La Roche Noire both won Gold in their respective category.
We also improved our presence in the specialty and single-served flavoured milk categories.
6 saPuto 2010 AnnuAl report
message from The presiDenT
anD chief execuTive officer
corporaTe managemenT
louis-PhiliPPe carrière
Executive Vice President,
Finance and Administration
clauDe PinarD
Executive Vice President,
Communications
and Social Responsibility
lionel etteDgui
President and
Chief Operating Officer,
Bakery Division
lino a. saPuto, Jr.
President and
Chief Executive Officer
Dino Dello sBarBa
President and
Chief Operating Officer,
Dairy Products Division
(Canada) and by interim
(Europe and Argentina)
Pierre leroux
Executive Vice President,
Human Resources
and Corporate Affairs
terry BrockMan
President and
Chief Operating Officer,
Dairy Products
Division (USA)
We periodically introduce new products to the market, thus catering to consumers’ ever-changing
expectations and growing appetite for new and innovative products. our growth in the Canadian dairy
market is fuelled by innovation and our main strategies consist of satisfying consumers’ dynamic needs
based on new trends and increasing our sales volumes.
We improved our Canadian Dairy products Division’s operations through various projects aiming at
developing better technologies and becoming more efficient. Among them, we upgraded our
cheesemaking processes by implementing new optimized techniques developed internally. In one of
our facilities, we also integrated an in-house bottle blowing machine enabling us to be more efficient.
Besides having a positive impact on the environment, this technology also facilitates logistics and reduces
operational delays.
saPuto 2010 AnnuAl report
7
DAIRY PRODUCTS DIVISION (USA)
Following a challenging fiscal 2009 characterized by significant fluctuations in the block market per
pound of cheese and unprecedented price increases in commodities, the uS Division anticipated a fresh
start for fiscal 2010. During the first six months of fiscal 2010, the average block market1 per pound of
cheese decreased steadily to support levels, before showing signs of a possible recovery during the
latter half of fiscal 2010. this momentum continued into the third quarter and suddenly dropped during
the last week of December 2009. Downward pressure resulted in the block market per pound of cheese
decreasing throughout the fourth quarter. Although it was less volatile as compared to previous fiscal
years, the block market per pound of cheese was still below historical levels, creating a challenging
environment for our uS Division. We are in a better position to face these price fluctuations as a result
of acquisitions made in the past years which have improved our whey drying capabilities and provided
us with a better balance.
During the fiscal year, we pursued our growth strategy by realizing the Division’s third acquisition
completed in the past three years, the activities of F&A Dairy of California, Inc., a mozzarella, provolone
and whey products manufacturer based in newman, California. We are currently restructuring some of
the acquired operations to adapt to Saputo’s operating environment. We also implemented other initiatives
such as transferring production lines between facilities in order to increase efficiencies. Furthermore, we
increased capacity in some of our plants and completed capital investments in many locations, thereby
improving the overall quality and consistency of our products to further satisfy our customers.
To cater
to consumers’
expectations
and needs, we
focused on
developing new
products that
meet the
emerging trends.
During fiscal 2010, the uS government took steps to counterbalance low milk prices which
had impacted domestic dairy farmers. Several programs, aimed at providing emergency
relief to uS dairy farmers, were implemented by the government. In addition, the California
Department of Food and Agriculture enacted a temporary change to the milk pricing
formula for California milk. this temporary measure was in place from January 1, 2010 to
March 31, 2010. these modifications did not have a material effect on the operations
of our uS Division.
Within the retail segment, the natural cheese category benefitted from volume growth.
Indeed, consumers favoured homemade meals in response to the economic context.
private label cheeses, increasingly supported by retailers, replaced branded sales volumes
and led to growth in natural cheese consumption as a result of their more competitive
pricing. Within the foodservice segment, including the pizza category, consumers’ casual
dining habits were reduced thus lowering sales volumes which resulted in foodservice
operators seeking cost savings.
DAIRY PRODUCTS DIVISION (ARgENTINA)
In Argentina, we began fiscal 2010 by facing depressed selling prices in the dairy products’
export market, which slowly increased during our third and fourth quarters, while milk prices
as raw material remained relatively high throughout the year.
the Division continued to work on improving its efficiencies with initiatives aimed at
improving its results. Among them, we expanded our internal storage capacity and
improved our grated cheese operations.
over the last year, domestic consumption remained stable. to cater to consumers’ expectations
and needs, we focused on developing new products that meet emerging trends. Some products
were launched during fiscal 2010 and others will be launched in the upcoming years. Furthermore,
we strengthened our position in the domestic market by continuing to invest in marketing initiatives
supporting sales of La Paulina products.
1 “Average block market” is the average daily price of a 40 pound block of cheddar traded on the Chicago Mercantile Exchange (CME), used as the
base price for cheese.
8 saPuto 2010 AnnuAl report
DAIRY PRODUCTS DIVISION (EUROPE)
In europe, dairy producers were confronted by low cheese prices leading the market to
deal with excess inventory.
In the uK, since the beginning of the fiscal year, we significantly reduced our milk intake due
to the non-competitive cost of milk in relation to the selling price of cheese. As such, we will
work towards re-establishing the necessary milk supply relative to our requirements.
Dairy consumption in europe remained relatively stable. We implemented cost cutting
measures to improve profitability while maintaining a well balanced presence within the
retail and foodservice segments. We will continue to keep ourselves appraised of the changes
in the european market and will adapt our strategy accordingly.
BAkERY DIVISION
the Bakery Division is actively seeking new ways to improve efficiency and deliver better
results in terms of profitability. through numerous improvements, product shelf-life was
extended, resulting in a better management and causing less returns. As a result, the
Québec manufacturing facility and 23 thrift stores were closed. the distribution
channels for ontario and Western Canada have both been revised. In addition, the Division
rationalized its stock-keeping units (sku), thus standardizing the products and resulting
in production improvements. the Bakery Division benefitted from the lowering of certain
ingredient prices while others suffered a price increase. to address this situation,
the Division reviewed some of its recipes and found alternatives to mitigate the impact
of such price increases.
Our flexible
approach and
our capacity to
adapt to various
situations enabled
us to capitalize
on opportunities
and deliver
positive results.
As consumption in the snack-cake products category is rather stable, we developed and launched new
products, under the Igor brand, within the snack category. Moreover, we introduced a new line of frozen
desserts. the Division will continue to identify ways to improve its results and will focus on product
development to meet consumers’ expectations.
dEdiCatEd EVEryday to rEaCh nEw hEights
now that we have reached our goal to become a world-class dairy processor, we will draw from this
inspiration to keep on giving the best of ourselves. over the next year, we will focus on finding ways to
optimize our activities, concentrate our efforts on product innovation and continue to look for acquisition
opportunities that would bring added value to our current operations. We are proud to deliver quality
products while remaining a low cost dairy processor. We will keep in mind consumers’ and customers’
expectations and needs and we will work as a team to achieve our objectives.
By being dedicated everyday, we were ready to overcome the challenges presented by the difficult
economic context of this fiscal year. the willingness and the daily efforts demonstrated by our team
proved that even through difficult times, we can find ways to become bigger, better and stronger. our
flexible approach and our capacity to adapt to various situations enabled us to capitalize on opportunities
and deliver positive results.
We have always favoured a strategy based on day-to-day operations and it has proven to be successful.
our small everyday actions have led to favourable results and helped us become more efficient. All
dairy processors have access to the same raw material and equipment, what distinguishes us are our
dedicated employees, who, themselves, state our family traditions and values as the number one reason
to work at Saputo. We will stay dedicated to our values and we will pursue our quest for success.
lino a. saPuto, Jr.
President and Chief Executive Officer
saPuto 2010 AnnuAl report
9
social responsibiliTy
Dedicated
to building
a better
society,
everyday
By contributing economically, acting respectfully
towards the environment and by being socially
involved, Saputo demonstrates that the values
upon which it was founded remain an integral
part of its corporate culture.
As the Company cares about the future of
generat ions to come , susta i nabi l ity is a n
essential part of its daily operations. The
importance of preserving the environment,
seeking ways to develop processes to optimize
the use of raw materials, minimize chemical
usage, packaging, energy consumption or
transportation are all part of Saputo’s responsible
business approach. Compliance with laws and
international norms are also at the core of
the Company’s priorities.
F u r t h e r m o re , S ap uto co nt r i b ute s to t h e
betterment of communities through partnerships
and sponsorships. Through its involvement,
the Company supports many initiatives aimed
at promoting a healthy lifestyle including both
sound eating habits and physical activity.
Ariel Fernando Celayes, Quality Control, and
Jose Abel Galeano, Production, Tio Pujio, Argentina
Prioritizing
a Favourable Work
Environment
At Saputo, the 9,800 employees, working in 5 countries, are considered our most
valuable asset. By being dedicated everyday and working together to achieve
collective goals, they are an essential part of Saputo’s success. Saputo believes
that offering employees a favourable work environment allows them to excel.
Saputo provides good working conditions by offering internal advancement
opportunities, enabling its employees to learn and grow through personal
development programs and achieve their full potential. Various teaching methods
such as in-class with instructors, e-learning, one-to-one mentoring or a day
training on the job have been implemented over the years to meet learning needs
of employees. Saputo encourages its employees to build on their strengths and
to take on new challenges and responsibilities in a stimulating and rewarding
work environment. the Company, which focuses on the importance of open
communication and teamwork, also counts on a management coaching
program to support its culture.
Moreover, Saputo relies on strong principles providing a workplace free from any
form of violence and constraint such as harassment, whether psychological or
sexual, or discrimination based on race, national or ethnic origin, color, religion,
age, sex, sexual orientation, matrimonial status, civil status, or physical or mental
handicap. these principles are defined in a Code of ethics, which is distributed
to all employees and to which they must adhere. With regards to labour relations,
Saputo complies with applicable local laws and regulations, and respects the
right of employees to form representative organizations.
As the employees’ and their families’ well-being is important to Saputo, fringe
benefit programs, including collective insurance programs and retirement plans
are available. Also, 49% of employees elected to participate in the Company’s
employee share ownership plan. providing employees with good working
conditions has always been a priority at Saputo and over the years, it has shown
that a favourable work environment leads to great results for both parties.
the average number of years of service is approximately 10 years.
employees are
the cornerstone of saputo’s
success, which is why the
company promotes open
communication and
internal advancement.
WORkFORCE DATA As at March 31, 2010
eMPloyees
nuMBer of PerManent
nuMBer of Part tiMe
nuMBer of teMPorary
average age
average years of service
canaDa
4,324
419
202
41
10
Dairy ProDucts Division
euroPe
argentina
123
5
6
39
7
875
9
27
38
12
usa
2,771
23
132
42
9
Bakery
Division
750
150
36
44
9
saPuto 2010 AnnuAl report
11
Health and Safety,
a Key Concern
By working as a team, every single employee contributes to the evolution of the
Company and is important to its success. Saputo attaches great importance to
their security. Having high standards such as pursuing the goal to attain an injury-
free work environment allows members of the Saputo organization to fulfill their
duties while remaining positive and motivated.
In Argentina, the Division focused its efforts on integrating safety procedures
into their core processes and have reduced the total recordable Accident
Frequency rate and the lost time rate compared to previous year. this was
achieved by implementing various measures such as dedicating environmental
Health & Safety teams to provide training on operating procedures and changes
to ergonomically improve the workplace.
Furthermore, within the uS Division, safety training and safety audits have been
performed reducing the total recordable Accident Frequency rate by 11.4% and
the lost time rate by 22.6% versus the previous year, while the Bakery Division
reduced its rates by 15.9% and 32.2%, respectively.
With high levels of commitment and communication throughout its operations,
Saputo is open to recommendations to improve the welfare of the employees.
Saputo believes that engaging employees from all levels to take responsibility to
protect their own well-being and their colleagues’ fosters a healthy working
environment. this mindset encourages knowledge retention by employees and
the transmission of such knowledge to future Company employees.
at saputo,
health and safety
govern actions.
The Tulare – Bardsley,
California and Reedsburg
and Monroe, Wisconsin
plants have not had
a Lost Time Accident
in more than 2 years.
In Argentina, the Division reduced the Total
Recordable Accident Frequency Rate by 43%
and the Lost Time Rate by 48% compared
to the previous year.
12 saPuto 2010 AnnuAl report
Dario Ardelio Jesus Bonavia, Hygiene and Security,
and Susana Del Carmen Gomez, Health and Safety,
Tio Pujio, Argentina
Carolyn Quehl and Donna Demeulenaere,
Quality Control, Tavistock, ON, Canada
Mastering
Quality
Quality related
issues are
always a priority
to ensure
consumer
satisfaction.
That is why
Saputo’s quality
programs and
procedures are
essential to
its activities.
As part of Saputo’s heritage, providing consumers with high quality products has
always been the ultimate goal. Consumers trust Saputo’s brands and associate
its products with excellence and reliability. Maintaining high quality standards
comes with hard work and care of every facet of the process. this approach
requires the support of every department before a product receives the
Saputo stamp of approval. that is why the Company adheres to programs such
as HACCp (Hazard Analysis Critical Control point).
Moreover, the SQF (Safe Quality Food) program, a leading global food safety
and quality certification and management system, is being implemented within
14 plants in the uS Division. the program provides independent certification
that a supplier’s food safety and quality management system complies with
international and domestic food safety regulations.
product quality should not be compromised and satisfying consumers remains
essential. Saputo works towards customer satisfaction and is dedicated to answer
consumers’ queries via its websites and toll-free numbers.
saputo maintains its dedication
to excellence and to crafting
high quality products.
saPuto 2010 AnnuAl report
13
Focusing
on the
Environment
saputo is dedicated
to pursuing environmentally
responsible business
practices and is continuously
seeking improvement
in its environmental
performance.
Saputo focuses on initiatives aimed at reducing the impact of its operations on
the environment. employees recognize that efforts dedicated to efficiently
managing resources reduce the Company’s environmental footprint and
decrease overall costs. For instance, the St-Hyacinthe, Québec facility reduced
its daily water consumption by 10% via a recuperation project, thus saving
55 million litres of total water used within the plant annually. the Fond du lac,
Wisconsin plant integrated a more efficient Cleaning in place (CIp) system with
the installation of silos to capture cow water from the milk evaporators, resulting
in savings of 1 million gallons of potable city water each month.
the Company also uses reverse osmosis (ro) permeate, a by-product from
whey filtration processes, as a pre-rinse during the CIp of equipment or silos.
plants have realized the cost benefits of reducing their potable water intake which
has a positive impact on the environment.
As environment protection and water scarcity are becoming growing concerns,
Saputo set, throughout fiscal 2010, a primary focus on gathering information from
its operations to evaluate the impact of its energy and potable water usage on the
environment. understanding these facets has enabled the Company to evaluate
its greenhouse gas emissions.
through the validation of its environmental footprint and the measurement of
the critical parts of its manufacturing processes, Saputo should be able to evaluate
its products’ life cycle during fiscal 2011.
rEsponsiBLE EnErgy Consumption
By adopting environmentally responsible business practices, Saputo encourages
entrepreneurship among its employees, who seek opportunities to improve the
Company’s way of operating. As part of its sustainability strategy, Saputo is
dedicated to the conservation of energy and the natural resources which are
used for its day-to-day operations.
The optimization project implemented in
St-Hyacinthe, Québec, has reduced the water
consumption equivalent to the yearly average
household usage of 184 Canadian homes.
In Fond du Lac,
Wisconsin, the plant
reduced its yearly water
consumption equivalent
to the volume of
18 Olympic size pools.
14 saPuto 2010 AnnuAl report
Tom Pleshek,
Maintenance, Black Creek, WI, USA
reduction in greenhouse gas emissions equates to energy efficiency
improvements. With this in mind, the Company’s plants have embarked
on initiatives to reduce these emissions from both direct and indirect
business operations. In the uS Division, the paige plant, California, received
an environmental leadership Award from Southern California edison for
the installation of a new large capacity evaporative condenser, allowing
the plant to gain energy savings of 2 million kWh.
At Saputo, projects in all divisions are evaluated to ensure that not only
the return on investment is adequate, but also that sound judgement is used
so that throughput energy is maximized while reducing the resources
required to achieving continuous growth. Acting responsibly with respect
to total energy utilized throughout the Company is important. Saputo also
believes that embedding carbon footprinting into its processes is essential
to understanding the environmental impact of the products’ life cycle.
Saputo has elected to participate in the Carbon Disclosure project and will
be disclosing information such as Scope 1 (direct emissions) and Scope 2
(indirect emissions). For more information about Saputo’s emissions,
please visit www.cdproject.net.
sound usE oF matEriaLs
Being efficient through simplicity has always been true to Saputo’s core
values. the Company’s sustainable strategy and practice are to produce
more while minimizing waste, as well as maximizing the use of raw
materials while maintaining or even improving the quality of products.
At Saputo’s plant in Burnaby, British Columbia, the packaging department
integrated an in-house bottle blowing machine which reduces overall raw
material wastes and transportation. through the innovative packaging
process, the annual reduction in diesel consumption from transportation
equates to approximately 24,000 litres per year. this simple modification
to the process and sound use of raw materials not only reduces wastes
but also increases the plant’s productivity. the Fond du lac and lena plants,
Wisconsin, upgraded their packaging equipment, generating close to
17,000 lbs of plastic stretch wrap savings a year.
The California
plants generated
over $1 million
in energy savings
during the last
fiscal year.
At the Paige plant, California,
4,666,441 kWh were saved
during the last fiscal year,
which is the equivalent
of powering an average of
364 homes per
year in the US, or
a carbon footprint
reduction of
2,800 tons.
In Burnaby, British Columbia, 47,000 kg of
Low Density Polyethylene (LDPE) plastic bags
have been eliminated during the last fiscal year
due to the implementation of an in-house
bottling process, resulting in the
elimination of approximately
110 tons of CO2 to the atmosphere.
Natalie Cholowski, Quality Control, and
Henryk Sokolnicki, Production, Burnaby, BC, Canada
saPuto 2010 AnnuAl report
15
Community
Outreach
saputo places
great importance
on contributing
to the betterment
of the communities
where it operates
by focusing on the
development of youth,
whether in terms
of sports, nutrition
or entrepreneurship.
Giving back to the community is fundamental to Saputo’s values. During fiscal 2010,
the Company played an important role in encouraging sports at all levels, proudly
supporting talented athletes, who are dedicated everyday to be the best in their
respective discipline. their determination, courage and perseverance enable them
to be commendable sport ambassadors and role models for the general public.
As part of its partnership with the 2010 Winter olympic and paralympic Games
in Vancouver, Saputo was the official supplier of packaged dairy products both
distributed and sold during the Games. In addition, Saputo sponsored five athletes
who participated in the Games: Jennifer Heil and Chloé Dufour-lapointe, Freestyle
Skiing – Moguls, Dasha Gaiazova, Cross-Country Skiing, Dominique Maltais,
Snowboard Cross and Valérie Maltais, Short-track Speed Skating.
Saputo continues its partnership with the Quebec Foundation for Athletic
excellence (FAeQ), supporting 25 talented athletes in various disciplines such as
cross-country skiing, cycling, diving, freestyle skiing – moguls, speed skating,
soccer, weightlifting, wheelchair basketball and wrestling. the FAeQ bursaries
enable athletes to combine sports at national and international levels and academics.
representing an excellent way to stay healthy and active, soccer is also accessible
and promotes values such as teamwork, leadership and respect. that is why
Saputo is deeply involved in this sport, notably by being one of the founding
partners of the Montréal Impact professional soccer team, champion of the
united Soccer leagues in 2009, and through its implication with the Québec
Soccer Federation. With its rising popularity, soccer is considered to be the most
praised sport by future generations, thus Saputo proudly contributes to its
development. During fiscal 2010, the Company sponsored the Club 9 de Julio, an
Argentinean soccer school where hundreds of children play daily, allowing the
Club to buy materials in order to improve their installations.
As a healthy and balanced lifestyle includes both physical activity and sound
eating habits, Saputo partnered with Breakfast Clubs of Canada to promote good
eating habits in elementary schools. the organization enables over
200,000 children to participate in a school breakfast program, providing them
with nutritious food to start their day off right. Saputo also contributed to food
banks in selected Canadian, American and Argentinean regions, by making
monetary and product donations.
Moreover, Saputo supported the Make-A-Wish Foundation of America in the
uS, which enables children with life-threatening medical conditions to make one
of their dreams come true.
With its involvement in the community, Saputo wishes to act as a role model for
its employees and encourage them to get involved in their own neighbourhood
with its Corporate Matching program. through this initiative, donations made
by employees to non-profit organizations are matched by the Company.
Savouring our
athletes’ passion
Congratulations to our five Saputo
sponsored athletes who participated in the
Vancouver 2010 Winter Olympic Games.
Jennifer Heil,
Freestyle Skiing –
Moguls, won
Canada’s 1st medal
at the Games.
16 saPuto 2010 AnnuAl report
TABLE OF CONTENTS
MANAGEMENT’S ANALYSIS
Caution Regarding Forward-Looking Statements
Global Overview
Financial Orientation
Elements to Consider when Reading Management’s Analysis for Fiscal 2010
Selected Consolidated Financial Information
Information by Sector
CEA Dairy Products Sector
USA Dairy Products Sector
Grocery Products Sector
Liquidity, Financial and Capital Resources
Contractual Obligations
Balance Sheet
Off-Balance Sheet Arrangements
Guarantees
Related Party Transactions
Accounting Standards
Critical Accounting Policies and Use of Accounting Estimates
Risks and Uncertainties
Disclosure Controls and Procedures
Internal Controls over Financial Reporting
Sensitivity Analysis of Interest Rate and the US Currency Fluctuations
Measurement of Results not in Accordance with Generally Accepted
Accounting Principles
2009 and 2010 Quarterly Financial Information
Summary of the Fourth Quarter Results Ended March 31, 2010
Quarterly Financial Information
Analysis of Earnings for the Year Ended March 31, 2009 Compared to
March 31, 2008
Outlook
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
3
4
4
6
8
11
13
14
16
16
16
17
17
17
22
23
26
26
26
26
28
30
31
32
33
34
39
MANAGEMENT’S ANALYSIS
The goal of the management report is to analyze the results of and the financial position for the year ended March 31, 2010. It should be
read while referring to audited consolidated financial statements and accompanying notes. Saputo Inc.’s (Company or Saputo) accounting
policies are in accordance with Canadian Generally Accepted Accounting Principles of the Canadian Institute of Chartered Accountants.
All dollar amounts are in Canadian dollars unless otherwise indicated. This report takes into account material elements between
March 31, 2010 and June 9, 2010, the date of this report, on which it was approved by the Board of Directors of Saputo. Additional
information about the Company, including the annual information form for the year ended March 31, 2010, can be obtained on sedar at
www.sedar.com.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report, including the “Outlook” section, contains forward-looking statements within the meaning of securities laws. These
statements are based, among others, on Saputo’s current assumptions, expectations, estimates, objectives, plans and intentions
regarding projected revenues and expenses, the economic and industry environments in which the Company operates or which could
affect its activities, its ability to attract and retain clients and consumers as well as its operating costs, raw materials and energy supplies
which are subject to a number of risks and uncertainties. Forward-looking statements can generally be identified by the use of the
conditional tense, the words “may”, “should”, “would”, “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”, “foresee”, “objective” or
“continue” or the negative of these terms or variations of them or words and expressions of similar nature. Actual results could differ
materially from the conclusion, forecast or projection stated in such forward-looking information. As a result, the Company cannot
guarantee that any forward-looking statements will materialize. Assumptions, expectations and estimates made in the preparation of
forward-looking statements and risks that could cause actual results to differ materially from current expectations are discussed
throughout this Management Analysis and, in particular, in “Risks and Uncertainties”. Forward-looking information contained in this
report, including the “Outlook” section, is based on Management’s current estimates, expectations and assumptions, which Management
believes are reasonable as of the current date. You should not place undue importance on forward-looking information and should not
rely upon this information as of any other date. Except as required under applicable securities legislation, Saputo does not undertake to
update these forward-looking statements, whether written or oral, that may be made from time to time by itself or on its behalf, whether
as a result of new information, future events or otherwise.
GLOBAL OVERVIEW
Fiscal 2010 was a successful year for Saputo.
Saputo is the twelfth largest dairy processor in the world, the largest dairy processor in Canada, among the top three cheese producers
in the US, the third largest dairy processor in Argentina and the largest snack-cake manufacturer in Canada.
Saputo operates its business through two sectors and five divisions, the Dairy Products Sector and the Grocery Products Sector. The
Canada, Europe and Argentina (CEA) Dairy Products Sector is composed of the Dairy Products Division (Canada), the Dairy Products
Division (Europe) and the Dairy Products Division (Argentina); the USA Dairy Products Sector is composed of the Dairy Products
Division (USA) and the Grocery Products Sector is composed of the Bakery Division. The Dairy Products Sector accounts for 97.3% of
consolidated revenues, and the Grocery Products Sector, for 2.7% of consolidated revenues. Saputo manufactures almost all of the
products it commercializes.
Saputo’s dairy products are available in all segments of the food market: retail, foodservice and industrial. The retail segment accounts
for 58% of total revenues within the Dairy Products Sector. Sales are made to supermarket chains, mass-merchandisers, convenience
stores, independent retailers, warehouse clubs and specialty cheese boutiques under its own brand names as well as under private
labels. Products manufactured for and sold within this segment include dairy products and non-dairy products such as non-dairy
creamers, juices and drinks.
The foodservice segment accounts for 31% of total revenues within the Dairy Products Sector. Sales are made to broad line distributors as
well as restaurants and hotels under its own brand names and various private labels. Through its Canadian distribution network, Saputo
also offers non-dairy products manufactured by third parties. The Company also produces dairy blends mainly for the ice cream market.
SAPUTO_ 2010 ANNUAL REPORT_3
The industrial segment accounts for 11% of total revenues within the Dairy Products Sector. Sales are made to food processors that use
Saputo’s products as ingredients to manufacture their products. The Company produces dairy ingredients such as lactose, whey powder
and whey protein in its Canadian, USA and Argentinean facilities. Saputo supplies various international clients with cheese, lactose, whey
powder and protein.
Saputo’s grocery products are sold in Canada almost exclusively in the retail segment through supermarket chains, independent
retailers, and warehouse clubs. Products are also available on a small-scale in the US, through co-packing agreements whereby the
Company manufactures products for third parties under brand names owned by such parties. Products manufactured and sold within
this Sector include snack-cakes, pies, cereal bars and fresh cookies.
FINANCIAL ORIENTATION
The Company’s objectives are to exercise strict discipline in cost management and operational efficiency as well as push the limits of
innovation, while capitalizing on opportunities to expand existing markets and global presence to enhance shareholder wealth. This past
fiscal year, Saputo successfully navigated in an unpredictable economy affected by a financial downturn, by using prudent operating and
financial management. Additionally, the Company continued to expand its presence in the US with the acquisition of the activities of F&A
Dairy of California, Inc. (F&A Dairy Acquisition) on July 20, 2009, in line with its growth strategy, and is close to completing the
integration of the fiscal 2009 acquisitions.
Saputo benefits from a solid balance sheet, supplemented by a high level of cash generated by operations and low debt levels allowing
for financial flexibility to face possible economic changes and growth through targeted acquisitions. In the past fiscal year, the Company
continued to strategically invest in capital projects, reduced its debt, increased its payments of dividends, and continued to effectively
manage cash by purchasing back its own shares through the use of a Normal Course Issuer Bid (NCIB).
ELEMENTS TO CONSIDER WHEN READING MANAGEMENT’S ANALYSIS FOR FISCAL 2010
During fiscal 2010, Saputo experienced a good financial performance:
• Net earnings totalled $382.7 million, up 37.2%
• Earnings before interest, income taxes, depreciation and amortization (EBITDA) totalled $692.1 million, up 26.3%
• Revenues reached $5.811 billion, up 0.3%
• Cash flows generated by operations totalled $583.6 million, up 24.9%
The Company had improved results in both the CEA and the USA Dairy Products Sectors in fiscal 2010. The results from the CEA Dairy
Products Sector benefitted mainly from the full year contribution of the acquired activities of Neilson Dairy (Neilson Dairy Acquisition)
which was completed on December 1, 2008. Benefits from various cost-cutting initiatives and additional sales volumes also contributed
favourably to the results. Furthermore, the benefits from volume increases in the Argentinean operations were totally negated
throughout the year due to the high cost of milk as raw material versus lower selling prices, mainly in the export market. The Dairy
Products Division (Europe) experienced improvements resulting from better efficiencies, despite lower sales volumes and high milk
prices. Included in the results of fiscal 2009 is an inventory write down related to the European and Argentinean Divisions.
4_SAPUTO_ 2010 ANNUAL REPORT
Improved results in the USA Dairy Products Sector were due to several factors including benefits derived from the initiatives undertaken
by the Company in prior and current fiscal years with regards to improved operational efficiencies as well as the implementation of
various selling price initiatives. Additionally, a reduction in the cost of ingredients, as well as changes to the milk pricing formula made
by the United States Department of Agriculture (USDA) in the third quarter of fiscal 2009 and the inclusion of the F&A Dairy Acquisition
all positively contributed to the results in the USA Dairy Products Sector. The average block market per pound of cheese equalled
US$1.35 in fiscal 2010, a US$0.36 decrease in comparison to US$1.71 for fiscal 2009. This decrease in the block market resulted in a
less favourable absorption of fixed costs. The relationship between the average block market per pound of cheese and the cost of milk
as raw material was also less favourable in fiscal 2010 in comparison to fiscal 2009. The increasing block market throughout the current
fiscal year had a favourable impact on the realization of inventories, especially in the final two quarters of fiscal 2010, in comparison to
the same two quarters of fiscal 2009. An increase in the dairy ingredients market also positively affected the results for fiscal 2010.
Included in the results of fiscal 2009 is a rationalization charge for the closure of the Hinesburg, Vermont manufacturing facility and an
inventory write down charge.
Finally, the strengthening of the Canadian dollar negatively impacted results in the USA and Argentinean Dairy Products Divisions.
The fiscal 2010 Grocery Products Sector results decreased slightly as compared to last fiscal year. The Sector benefitted from better
product mix and decreases in operating costs, although these were negated by increases in costs related to brand support and a
rationalization charge related to the closure of its Québec facility as well as 23 thrift stores in Québec and Ontario and restructuring of
the distribution network in Ontario.
SAPUTO_ 2010 ANNUAL REPORT_5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Years ended March 31
(in thousands of Canadian (CDN) dollars, except per share amounts and ratios)
2010
2009
2008
Statement of earnings data
Revenues
Dairy Products Sector
CEA1
USA
Grocery Products Sector
Cost of sales, selling and administrative expenses
Dairy Products Sector
CEA
USA
Grocery Products Sector
EBITDA2
Dairy Products Sector
CEA
USA
Grocery Products Sector
EBITDA margin (%)
Depreciation and amortization
Dairy Products Sector
CEA
USA
Grocery Products Sector
Operating income
Dairy Products Sector
CEA
USA
Grocery Products Sector
Interest on long-term debt
Other interest, net of interest income
Earnings before income taxes
Income taxes
Net earnings
Net earnings margin (%)
Net earnings per share
Diluted net earnings per share
Dividends declared per share
Balance sheet data
Total assets
Interest bearing debt3
Shareholders' equity
Statement of cash flows data
Cash flows generated by operations
$
3,745,930
$
3,323,541
$
2,966,293
1,906,189
5,652,119
158,463
2,304,613
5,628,154
165,109
1,927,983
4,894,276
164,624
$
5,810,582
$
5,793,263
$
5,058,900
$
3,288,035
$
2,944,643
$
2,602,928
1,687,814
4,975,849
142,662
2,152,607
5,097,250
148,214
1,782,505
4,385,433
147,423
$
5,118,511
$
5,245,464
$
4,532,856
$
457,895
$
378,898
$
363,365
218,375
676,270
15,801
152,006
530,904
16,895
145,478
508,843
17,201
$
692,071
$
547,799
$
526,044
11.9%
9.5%
10.4%
$
54,843
$
41,560
$
36,810
49,844
104,687
8,819
58,849
100,409
7,875
34,780
71,590
7,844
$
113,506
$
108,284
$
79,434
$
403,052
$
337,338
$
326,555
168,531
571,583
6,982
93,157
430,495
9,020
110,698
437,253
9,357
$
578,565
$
439,515
$
446,610
29,901
5,161
543,503
160,789
20,684
11,031
407,800
128,852
18,806
6,538
421,266
133,066
$
382,714
$
278,948
$
288,200
6.6%
4.8%
5.7%
$
1.85
$
1.35
$
1.40
$
1.83
$
1.34
$
1.38
$
0.58
$
0.56
$
0.48
$
3,253,451
$
3,499,103
$
2,733,476
$
387,543
$
713,001
$
282,704
$
2,028,598
$
1,972,348
$
1,619,160
$
583,615
$
467,288
$
291,062
Amount of additions to fixed assets, net of proceeds on disposal
¹ Canada, Europe and Argentina Dairy Products Sector.
² Measurement of results not in accordance with Generally Accepted Accounting Principles. The Company assesses its financial performance based on its
EBITDA, this being earnings before interest, depreciation, amortization and income taxes. EBITDA is not a measure of performance as defined by
Generally Accepted Accounting Principles in Canada, and consequently may not be comparable to similar measurement presented by other companies.
Reference is made to the section entitled "Measurement of results not in accordance with Generally Accepted Accounting Principles".
³ Net of cash and cash equivalents.
$
106,334
112,831
$
$
96,438
6_SAPUTO_ 2010 ANNUAL REPORT
CONSOLIDATED SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
Fiscal years
(in millions of CDN dollars)
Market factors¹ ²
Inventory write down
US foreign currency exchange¹
Rationalization charges
1 As compared to the previous fiscal year.
2010
2009
8.0
(2.1)
(12.0)
(7.9)
(40.0)
(20.9)
11.0
(2.0)
2 Market factors include the average block market per pound of cheese and its effect on the absorption of fixed costs and on the realization of
inventories, the effect of the relationship between the average block market per pound of cheese and the cost of milk as raw material as well as
market pricing impact related to sales of dairy ingredients.
Saputo’s consolidated revenues totalled $5.811 billion, an increase of $17.3 million or 0.3% compared to $5.793 billion for fiscal 2009.
Revenues from the CEA Dairy Products Sector increased by approximately $422 million in comparison to last fiscal year. The inclusion of
the Neilson Dairy Acquisition contributed to revenues for a full year as compared to four months last fiscal year. In addition, higher
selling prices in the Canadian operations in accordance with the increase in the cost of milk as raw material and increased sales volumes
from the Canadian and Argentinean activities explain the increased revenues in this Sector. Lower selling prices from the Argentinean
export sales decreased revenues in fiscal 2010 as compared to the prior fiscal year. The USA Dairy Products Sector revenues decreased
by approximately $398 million. This decrease is mainly due to a lower average block market per pound of cheese of US$1.35 in fiscal
2010, compared to US$1.71 in fiscal 2009, lowering revenues by approximately $284 million. Revenue increases due to the F&A Dairy
Acquisition, along with a favourable dairy ingredients market were completely offset by lower sales volumes as compared to last fiscal
year. These factors combined accounted for a reduction of approximately $42 million in revenues. Revenues from the Grocery Products
Sector decreased by approximately $7 million mainly due to lower sales volumes. The strengthening of the Canadian dollar in fiscal 2010
eroded approximately $116 million in revenues in comparison to last fiscal year.
Consolidated earnings before interest, income taxes, depreciation and amortization (EBITDA) amounted to $692.1 million in fiscal
2010, an increase of $144.3 million or 26.3% compared to the $547.8 million for fiscal 2009. The increase is due to both the CEA and
USA Dairy Products Sectors. EBITDA for the CEA Dairy Products Sector totalled $457.9 million in fiscal 2010, an increase of $79.0 million
in comparison to $378.9 million for last fiscal year. This increase is mainly attributed to the inclusion of the Neilson Dairy Acquisition, in
addition to better efficiencies, including cost reduction initiatives in manufacturing, warehousing and logistics, and a more favourable
dairy ingredients market compared to last fiscal year. Included in EBITDA is a rationalization charge of $3.4 million in connection with the
recently announced closure of the Brampton, Ontario fluid plant and the consolidation of the Toronto, Ontario distribution activities. The
Argentinean operations diminished the EBITDA increase mainly due to the high cost of milk as raw material versus lower selling prices in
the export market. The Dairy Products Division (Europe) improved its EBITDA in fiscal 2010 mainly through increased efficiencies and by
implementing cost cutting measures despite the continuing challenges facing these markets, more precisely high cost of milk compared
to low selling prices. Included in the EBITDA of the Dairy Products Divisions (Argentina and Europe) for fiscal 2009 was an inventory write
down of $8.4 million as a result of negative market conditions.
The EBITDA of the USA Dairy Products Sector amounted to $218.4 million, an increase of $66.4 million in comparison to $152.0 million
for last fiscal year. EBITDA increased as compared to the previous fiscal year due to initiatives undertaken by the Company in the prior
and current fiscal years with regards to improving operational efficiencies as well as the F&A Dairy Acquisition. Also, lower ingredient and
fuel costs in addition to changes made to the milk pricing formula by the USDA in the third quarter of fiscal 2009 more than offset
increased promotional costs during fiscal 2010. These combined factors increased EBITDA by approximately $59 million during fiscal
2010 as compared to fiscal 2009. The average block market per pound of cheese steadily increased throughout fiscal 2010; however its
average for the year ended March 31, 2010 was US$1.35 as compared to US$1.71 for the previous fiscal year. The lower average block
market negatively affected the Sector’s absorption of fixed costs. The average whey market of approximately US$0.34 in fiscal 2010 was
US$0.12 higher than the US$0.22 average during fiscal 2009. As whey is a factor in determining the product-price formula, the
relationship between the average block market per pound of cheese and the cost of milk as raw material was also less favourable in fiscal
2010 in comparison to fiscal 2009. Conversely, the increasing block market throughout the fiscal year favourably impacted the
realization of inventories, especially in the last two quarters of fiscal 2010 in comparison to fiscal 2009. Lastly, a more favourable dairy
ingredients market positively impacted EBITDA. The combination of these market factors had a positive impact of approximately
$7 million on EBITDA. Also, included in the results of fiscal 2010 was an inventory write down of $2.1 million, due to a drop in the block
market per pound of cheese late in the third quarter of fiscal 2010. In comparison, included in the EBITDA of fiscal 2009 is a
rationalization charge of $2.0 million for the closure of the Hinesburg, Vermont manufacturing facility in addition to an inventory write
down of $12.5 million for reasons similar to fiscal 2010. The strengthening of the Canadian dollar in fiscal 2010 eroded approximately
$12 million of the USA Dairy Products Sector’s EBITDA.
SAPUTO_ 2010 ANNUAL REPORT_7
The EBITDA of the Grocery Products Sector decreased by $1.1 million to $15.8 million in the current fiscal year, from $16.9 million in
fiscal 2009. This decrease is mainly due to rationalization costs of $4.5 million related to the closure of the Québec facility and 23 thrift
stores in Québec and Ontario and the restructuring of Ontario’s distribution network in addition to decreased volumes as a result of
product rationalization and thrift store closures. These negative factors were partially offset by the benefits derived from operational
initiatives implemented throughout fiscal 2010.
The consolidated EBITDA margin increased to 11.9% in fiscal 2010 as compared to 9.5% in fiscal 2009 mainly due to the Dairy Products
Sector.
Depreciation and amortization expense totalled $113.5 million in fiscal 2010, an increase of $5.2 million over $108.3 million in fiscal
2009. The increase is mainly attributed to the inclusion of a full year’s depreciation for Neilson Dairy Acquisition in the CEA Dairy
Products Sector as compared to only four months in fiscal 2009. Also included in depreciation and amortization expense for fiscal 2010
is an impairment amount of $2.6 million for the closure of the Brampton, Ontario fluid milk plant and the consolidation of the Toronto,
Ontario distribution activities. In addition, capital investments undertaken by all divisions in the current and prior fiscal years also
contributed to increase depreciation expense. Included in fiscal 2009 depreciation and amortization expense was an impairment amount
of $8.6 million related to the closure of the Hinesburg, Vermont manufacturing facility.
Net interest expense amounted to $35.1 million in fiscal 2010 compared to $31.7 million in fiscal 2009. The increase is mainly related
to the financing of the Neilson Dairy Acquisition.
Income taxes totalled $160.8 million in fiscal 2010 as compared to $128.9 million for an effective tax rate of 29.6% in fiscal 2010 as
compared to 31.6% in fiscal 2009. During the third quarter of fiscal 2010, the Company reduced its future income tax liability by
approximately $1.4 million to reflect a reduction in the Canadian tax rate sanctioned during the quarter. The income tax rate varies and
could increase or decrease based on the amount of taxable income derived and from which source, any amendments to tax laws and
income tax rates and changes in assumptions and estimates used for tax assets and liabilities by the Company and its affiliates.
Net earnings for the fiscal year ended March 31, 2010 totalled $382.7 million, an increase of $103.8 million or 37.2% compared to
$278.9 million in fiscal 2009. The increase is due to the factors mentioned above.
INFORMATION BY SECTOR
CEA DAIRY PRODUCTS SECTOR
Fiscal years
(in millions of CDN dollars)
Revenues
EBITDA
2010
2009
2008
$
3,745.9
$
3,323.5
$
2,966.3
$
457.9
$
378.9
$
363.4
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
Fiscal years
(in millions of CDN dollars)
Market factors¹ ²
Inventory write down
Rationalization charges
1 As compared to previous fiscal year.
2010
2009
1.0
-
(3.4)
(23.0)
(8.4)
-
2 Market factors include the international market pricing impact related to sales of dairy ingredients.
The CEA Dairy Products Sector had a very productive year despite the various market-related challenges. The Neilson Dairy Acquisition,
completed on December 1, 2008 contributed to the results for a full year. The Company’s continual analysis of cost structures and
activities relating to manufacturing, distribution and warehousing intended to optimize efficiencies allowed cost savings which
contributed positively to this past fiscal year’s results. The Dairy Products Divisions (Europe and Argentina), were affected throughout
fiscal 2010 by high milk costs as raw material versus low selling prices in the international market negatively impacting the results.
Despite these challenges, the CEA Dairy Products Sector performed well during fiscal 2010.
8_SAPUTO_ 2010 ANNUAL REPORT
REVENUES
Revenues from the CEA Dairy Products Sector totalled $3.746 billion, an increase of $422.4 million or 12.7% as compared to the
$3.323 billion in fiscal 2009. The increase in revenues is distributed as follows: approximately $453 million is attributed to the Dairy
Products Division (Canada) offsetting approximately a $30 million reduction in revenues related to the Dairy Products Divisions (Europe
and Argentina).
The revenue increase in the Dairy Products Division (Canada) is mainly derived from the Neilson Dairy Acquisition contributing for a full
year in fiscal 2010 as compared to only four months a year earlier. These revenues are in line with the annual revenues generated at the
time of acquisition. Also, higher selling prices stemming from the increase in the cost of milk as raw material was another factor in the
total revenue increase for the current fiscal year. The dairy ingredients market had a positive impact on revenues, as did the increase in
sales volumes and better product mix as compared to the preceding fiscal year.
In fiscal 2010, the pricing, rebating and discounting practices in all segments were unchanged from prior fiscal years.
The Company produces approximately 32% of all the natural cheese manufactured in Canada. Similarly, Saputo’s share of total
production of fluid milk in Canada is approximately 35%. Saputo remains the leader in the Canadian Dairy Industry in both these
categories.
The retail segment continues to be the leading segment in the Dairy Products Division (Canada) with 70% of revenues, an increase from
the 66% for fiscal 2009. This increase is the result of the addition of the Neilson Dairy Acquisition for the full year which serves mainly
the retail segment. Most product categories within the Canadian dairy market are relatively stable in per capita consumption. Saputo is
pleased to have both the number one and two brands 1 in the refrigerated dairy case category with Dairyland and Neilson in the fluid milk
business. In a more competitive market, the value-added milk portfolio continued to fare well. Distinct promotion and advertising
continue to support its leading brands, Trustate, Dairy Oh!, and Milk 2 GO, in an effort to continue growth and market expansion.
The foodservice segment represents 26% of revenues in the Dairy Products Division (Canada), a decrease from the 29% in the prior fiscal
year. Although the foodservice segment percentage decreased due to the inclusion of Neilson Dairy Acquisition, whose sales are mainly
in the retail segment, the foodservice segment nevertheless increased in fiscal 2010 as compared to fiscal 2009 due to the increase in
sales volumes. The focus in this segment is to meet and surpass customers’ needs as well as develop long-term business relationships.
Product performance is viewed as key to achieving the loyalty of chefs as well as foodservice distributors and pizzeria operators.
Additionally, the Company prides itself on outstanding service levels and the ability to provide customers with an assortment of dairy
products including cheese, milk and culture products.
The industrial segment accounts for 4% of revenues of the Dairy Products Division (Canada), a decrease from the 5% in the previous fiscal
year. This segment includes sales of cheese and dairy ingredients. More favourable dairy ingredients market conditions positively
impacted revenues in this segment as compared to last fiscal year.
Revenues for the Dairy Products Division (Europe) decreased during fiscal 2010 as compared to the prior fiscal year. This decrease was
due to the significant reduction of the milk intake due to the non-competitive high cost of milk in relation to the low selling price of
cheese in the overall market, resulting in lower sales volumes. A slight rebounding trend occurred during the latter stages of the current
fiscal year.
Revenues from the Dairy Products Division (Argentina) were higher in fiscal 2010 as compared to fiscal 2009 as a result of increased
volumes, mainly in the export market. These volume increases were partially offset by a decrease in selling prices in the international
market that existed in fiscal 2009 and continued into fiscal 2010. Finally, the appreciation of the Canadian dollar as compared to the
previous fiscal year negatively impacted revenues in the CEA Dairy Products Sector by approximately $43 million.
EBITDA
EBITDA totalled $457.9 million for the year ended March 31, 2010 as compared to $378.9 million in fiscal 2009, which represents an
increase of $79.0 million or 20.8%. EBITDA margin also increased to 12.2% from 11.4% in fiscal 2009 as a result of benefits derived from
operational efficiencies as compared to the previous fiscal year as well as a more favourable dairy ingredients market for fiscal 2010. The
inclusion of a full year for its Neilson Dairy Acquisition as compared to only four months for fiscal 2009 benefitted this Sector’s EBITDA.
Also, the Canadian Division was able to improve the Neilson Dairy activities contributing further to EBITDA. Additional EBITDA was also
1 Source: Nielsen MarketTrack, National All Channels, 52 Weeks Ending August 29, 2009.
SAPUTO_ 2010 ANNUAL REPORT_9
generated as a result of increased sales volumes and benefits derived from various cost reduction initiatives mainly in the activities of
manufacturing, warehousing and logistics. Included in EBITDA is a rationalization charge of approximately $3.4 million in connection
with the recently announced closure of the Brampton, Ontario fluid plant and the consolidation of the Toronto, Ontario distribution
activities. These charges result from decisions made in line with the continual analysis of the Company’s overall activities and
implementation of measures aimed at improving operational efficiencies.
During fiscal 2010, synergies were achieved, mainly by the combination of routes and standardization of cost structures from coast to
coast. The EBITDA reflects increased efficiencies in both cheese and fluid manufacturing activities and the implementation of numerous
initiatives targeting more specialized plants. The Neilson Dairy Acquisition with its two manufacturing facilities in Ontario, Canada
allowed the Dairy Products Division (Canada) to expand its presence in the Ontario fluid milk and cream markets. The Company
completed the implementation of measures to mitigate the negative impact brought by compliance with the amendments to the new
standards of composition for cheese manufactured in and imported to Canada introduced in December 2008. Finally, in fiscal 2010, the
dairy ingredients market was more favourable compared to fiscal 2009 by approximately $1 million.
The Dairy Products Division (Europe) improved its EBITDA in fiscal 2010 despite the continuing challenges facing these markets, more
precisely high cost of milk versus lower selling prices in the export markets. This improvement in EBITDA can be attributed mainly to the
progress realized with respect to efficiencies, cost reduction measures as well as streamlining of the operations.
The Dairy Products Division (Argentina)’s EBITDA decreased in fiscal 2010, negatively affected by a decrease in the selling prices in the
export market as compared to the prior fiscal year, while the price for milk as raw material remained high. Partially offsetting the EBITDA
decrease were benefits derived from operational efficiencies and increase in sales volumes both in the domestic and export markets.
OUTLOOK
The Dairy Products Division (Canada) will continue to invest in projects to increase capacity in the specialty cheese facilities in order to
increase its presence in the growing specialty cheese category.
To further capitalize on the Neilson Dairy Acquisition, Saputo recently announced plans to relocate the Brampton milk and cream
production to other facilities in the following quarters. Additionally, the Company will consolidate distribution in the Greater Toronto
area within the new distribution center. These measures were announced on March 30, 2010 and the expected completion date is fall
2010. Saputo expects after-tax savings of approximately $6.5 million per year.
In the next fiscal year, Saputo will continue to review overall activities in an effort to improve operational efficiencies and decrease
operational costs. Production capacity continues to be consistently scrutinized as the objective is to optimise excess production
capacities at the CEA Dairy Products Sector plants, which at March 31, 2010 are at 28% and 37% in cheese and fluid activities
respectively.
The Dairy Products Division (Europe) anticipates that fiscal 2011 will still be a challenging year with respect to obtaining milk supply at
prices competitive with the selling price of cheese. Nevertheless, the Division will work toward increasing its volume while improving
efficiency of its manufacturing facilities.
The Dairy Products Division (Argentina) will continue to seek volume growth more so in the domestic market. Other challenges will be to
face the increasing cost of milk as raw material while remaining competitive with the selling price in the export market. The Division will
also continue to focus on improving operational efficiencies in an effort to improve its results.
10_SAPUTO_ 2010 ANNUAL REPORT
USA DAIRY PRODUCTS SECTOR
Fiscal years
(in millions of CDN dollars)
Revenues
EBITDA
2010
2009
2008
$
$
1,906.2
218.4
$
$
2,304.6
152.0
$
$
1,928.0
145.5
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
Fiscal years
(in millions of CDN dollars)
Market factors¹ ²
US currency exchange¹
Inventory write down
Rationalization charges
1 As compared to the previous fiscal year.
2010
2009
7.0
(12.0)
(2.1)
-
(17.0)
11.0
(12.5)
(2.0)
2 Market factors include the average block market per pound of cheese and its effect on the absorption of fixed costs and on the realization of
inventories, the effect of the relationship between the average block market per pound of cheese and the cost of milk as raw material as well as
market pricing impact related to sales of dairy ingredients.
OTHER PERTINENT INFORMATION
Fiscal years
(in US dollars, except for average exchange rate)
Average block market per pound of cheese
Closing block price¹ per pound of cheese
Whey market price² per pound
Spread³
US average exchange rate to Canadian dollar⁴
2010
2009
1.351
1.400
0.340
0.152
1.091
1.708
1.290
0.220
0.177
1.128
1 Closing block price is the price of a 40 pound block of cheddar traded on the Chicago Mercantile Exchange (CME) on the last business day of the fiscal year.
2 Whey powder market price is based on Dairy Market News published information.
3 Spread is the average block market per pound of cheese less the result of the average cost per hundredweight of Class III and/or Class 4b milk price
divided by 10.
4 Based on Bank of Canada published information.
In fiscal 2010, continued volatile and unfavourable market conditions in the US dairy industry affected the USA Dairy Products Sector.
Throughout the first half of the fiscal year, the average block market per pound of cheese continued to trade below historical averages,
negatively impacting the results. The average was US$1.21 for the first six months of fiscal 2010. During July 2009, the block market per
pound of cheese decreased to levels inferior to the dairy industry support level of US$1.13. In the latter half of the fiscal year, the
average block market per pound of cheese began its upward climb, with an average of US$1.49. During the current fiscal year, the
average block market per pound of cheese was US$1.35, as compared to US$1.71 for fiscal 2009. The volatility of highs and lows were
not as pronounced in fiscal 2010 as compared to fiscal 2009, in which the market witnessed a big drop in the block market per pound of
cheese between the third and fourth quarters. Dairy ingredient market prices began the fiscal year below historical averages also,
steadily increasing throughout the entire fiscal year. These market trends leading up to the end of the fiscal year were one of the
contributing factors towards the USA Dairy Products Sector improvement in fiscal 2010. On July 20, 2009, the Company completed the
F&A Dairy Acquisition.
In fiscal 2010, the California Department of Food and Agriculture (CDFA) increased the Class 4b milk pricing formula by approximately
US$0.10 per hundredweight for the period of January 1, 2010 to March 31, 2010. This increase was aimed at providing relief to
distressed dairy farmers. The increase did not materially affect the results of the Dairy Products Division (USA). The USDA also
implemented various programs to provide relief to struggling farmers. These programs concentrated on providing immediate relief
through loss assistance payments to eligible farmers, increasing the dairy products support price from August through October 2009,
export incentive programs to help exporters meet prevailing world food prices, as well as purchase programs to alleviate inventory
pressures in the US dairy market. These measures did not have an impact on the results of the USA Dairy Products Sector.
REVENUES
Revenues from the USA Dairy Products Sector totalled $1.906 billion for the fiscal year ended March 31, 2010 as compared to
$2.305 billion in fiscal 2009, representing a decrease of $398.4 million or 17.3%. This decrease is mainly due to the lower average block
market per pound of cheese in fiscal 2010 of US$1.35 in comparison to US$1.71 in fiscal 2009. This reduced revenues by approximately
$284 million as compared to fiscal 2009. Several other factors also affected revenues, including a decrease in sales volumes, which
SAPUTO_ 2010 ANNUAL REPORT_11
negated the favourable impacts of both the inclusion of the F&A Dairy Acquisition in addition to the upswing in the dairy ingredients
market as compared to fiscal 2009. These factors combined negatively affected revenues by approximately $42 million. The
strengthening of the Canadian dollar also resulted in a decrease in revenues of approximately $73 million as compared to the prior fiscal
year.
The pricing, rebating, and discounting practices in all segments were unchanged throughout the year.
During fiscal 2010, the retail, foodservice, and industrial segments accounted for 36%, 49% and 15%, respectively, of the Sector’s total
sales volumes. During fiscal 2009, the retail, foodservice, and industrial segments accounted for 35%, 47%, and 18%, respectively, of the
Sector’s total sales volumes. The F&A Dairy Acquisition did not significantly change the percentages of sales volumes per segment.
In the retail segment, the natural cheese category enjoyed strong growth in fiscal 2010, as consumers returned to prepared meals at
home in response to the economic recession. This growth was driven by private label items, which enjoyed heightened support from
retailers, at the expense of branded sales volumes. However, the Division is proud that its Frigo Cheese Heads and Treasure Cave brands
have maintained their number one rankings1 within their respective string cheese and blue cheese retail brand categories. Throughout
the fiscal year, the Division has concentrated its marketing efforts on supporting these brands in order to maintain its leading positions.
In fiscal 2010, the foodservice segment was negatively affected by the economic recession. Reduced casual dining resulting in lower
sales volumes drove foodservice operators to seek cost savings, as well as promotional efforts to rebuild this volume. The Dairy Products
Division (USA) continued to support its leading foodservice brands. The Division’s support of its premium line of mozzarella, with new
varieties and enhanced package graphics yielded positive results in fiscal 2010.
The industrial segment includes sales of cheese and dairy ingredients. In fiscal 2010, more favourable dairy ingredients prices positively
affected the industrial segment. The F&A Dairy Acquisition, which included a dairy ingredient drying facility, contributed to increasing
revenues in this segment.
EBITDA
During fiscal 2010, earnings before interest, income taxes, depreciation and amortization totalled $218.4 million, a $66.4 million or
43.7% increase in comparison to the $152.0 million in fiscal 2009.
During the current fiscal year, the USA Dairy Products Sector benefitted from initiatives undertaken in the prior and current fiscal years
with regards to improving operational efficiencies as well as the implementation of various selling price initiatives. Other factors which
improved EBITDA as compared to the prior fiscal year include lower ingredient and fuel costs in addition to the changes made to the milk
pricing formula by the USDA in the third quarter of fiscal 2009. The F&A Dairy Acquisition also contributed to the EBITDA increase. These
combined factors increased EBITDA by approximately $59 million during fiscal 2010 as compared to fiscal 2009. The average block
market per pound of cheese rose steadily throughout fiscal 2010; however its average for the year ended March 31, 2010 was US$1.35
as compared to US$1.71 for the previous fiscal year. The lower average negatively affected the Sector’s absorption of fixed costs. The
average whey market of approximately US$0.34 in fiscal 2010 was US$0.12 higher than the US$0.22 average during fiscal 2009. As whey
is a factor in determining the product-price formula, the relationship between the average block market per pound of cheese and the
cost of milk as raw material was also less favourable in fiscal 2010 in comparison to fiscal 2009. Conversely, the increasing block market
throughout the current fiscal year favourably impacted the realization of inventories, especially in the last two quarters of fiscal 2010.
Lastly, the dairy ingredients market positively impacted EBITDA. The combination of these market factors had a positive impact of
approximately $7 million on EBITDA. The market necessitated an adjustment to inventory valuation during the year leading to an
inventory write down of $2.1 million, due to a drop in the block market per pound of cheese late in the third quarter of fiscal 2010. In
comparison, included in the EBITDA of fiscal 2009 is a rationalization charge of $2.0 million for the closure of the Hinesburg, Vermont
manufacturing facility in addition to an inventory write down of $12.5 million for reasons similar to fiscal 2010. The strengthening of the
Canadian dollar in fiscal 2010 eroded approximately $12 million in EBITDA.
OUTLOOK
On July 20, 2009, Saputo completed the F&A Dairy Acquisition. This transaction allowed the Division to expand its business and presence
within the US dairy industry. In fiscal 2010, the Division successfully transitioned these operations into its existing systems and structure
and expects to achieve further benefits from this acquisition in fiscal 2011.
1 Source : IRI Total US FDMW, latest 12 weeks, ending March 21, 2010.
12_SAPUTO_ 2010 ANNUAL REPORT
In fiscal 2010, the Division completed and/or began numerous strategic capital projects. Projects relating to its Midwest facilities
acquired in fiscal 2009, as well as its new facility acquired as part of the F&A Dairy Acquisition, should be completed in the first half of
fiscal 2011. These capital projects should allow the Division to increase its production capacity, enabling it to grow organically, improve
operational efficiencies, and identify other opportunities for growth. Finally, marketing efforts will continue to focus on supporting
leading brands.
GROCERY PRODUCTS SECTOR
Fiscal years
(in millions of CDN dollars)
Revenues
EBITDA
2010
2009
2008
$
158.5
$
165.1
$
164.6
$
15.8
$
16.9
$
17.2
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
Fiscal years
(in millions of CDN dollars)
Rationalization charges
REVENUES
2010
2009
(4.5)
-
Revenues for the Grocery Products Sector totalled $158.5 million for the fiscal year ended March 31, 2010, a $6.6 million decrease
compared to the previous fiscal year. Certain operational improvements made throughout the current fiscal year resulted amongst
others in a reduction in product returns, allowing the Division to close 23 thrift stores in Québec and Ontario in the second quarter of
fiscal 2010 thus decreasing revenues. Lower sales volumes from the US co-packing and Western Canadian activities also decreased
revenues, along with the rationalization of the Sector’s product portfolio by discontinuing lower sales volume products.
During the current fiscal year, Saputo continued to support its brands with marketing initiatives geared towards in-store activities.
The Company also introduced many new products under the Vachon brand name and relaunched the Igor brand in the snack
products category. In the US, efforts were concentrated in maintaining the existing clients and offering them new products to meet
their needs.
EBITDA
The EBITDA of the Grocery Products Sector totalled $15.8 million a decrease of $1.1 million compared to the previous fiscal year. This
decrease was mainly due to rationalization costs of $4.5 million related to the closure of its Québec facility and 23 thrift stores in
Québec and Ontario and the restructuring of its distribution network in Ontario. Partially offsetting the EBITDA decrease were many
initiatives that were taken throughout the current fiscal year such as; the extension of product shelf-life, operational improvements
which lowered product returns, the reduction of the numbers of stock-keeping unit (SKU), thus providing a more standardized
product offering, and the improvement of the production process. Finally, the Division reviewed some of its recipes in an effort to
find more efficient ways of using some of its ingredients since these costs are constantly increasing. These initiatives have resulted in
a better product mix and improved operating costs.
OUTLOOK
The Division will continue to review different aspects of its operations, such as lower volume SKU’s and the standardization of
packaging and ingredients. Also, it will focus on further plant automation in the coming fiscal year. The integration of the distribution
channels for Ontario and Western regions should be completed in early fiscal 2011. The Division incurred rationalization costs of
$4.5 million in the current fiscal year, and expects savings of approximately $3 million in EBITDA per year. In addition, the Division
will continue to expand its product offering such as new upscale products in a large cake format in the frozen category. In the US
market, the Division will review the possibility of providing a limited product offering under the Vachon brand name. Finally, the
Division will maintain its focus on operational efficiency and brand support.
SAPUTO_ 2010 ANNUAL REPORT_13
LIQUIDITY, FINANCIAL AND CAPITAL RESOURCES
The intent of this section is to provide insight into the cash and capital management strategies and how they drive the operational
objectives and also provide details into how the Company manages its liquidity risk to be able to meet its financial obligations as they
come due.
The majority of the liquidity needs are funded from cash generated by operations. Principally, these funds are used for strategic capital
spending, dividends, and for principal and interest payments on the debt. Also, the Company has bank credit facilities available for
general corporate purposes which can be used for working capital requirements and/or business acquisitions.
The Company’s cash flows are summarized in the following table:
Fiscal years
(in thousands of CDN dollars)
Cash generated by operating activities
Changes in non-cash working capital items
Cash (used) for investing activities
Cash (used) generated by financing activities
Increase (decrease) in cash and cash equivalents
2010
2009
2008
$
583,615
$
467,288
$
291,062
60,776
(172,912)
(391,504)
19,199
77,817
(755,365)
161,579
(126,498)
(99,791)
(354,437)
(56,148)
(119,523)
Cash generated by operating activities before changes in non-cash working capital items amounted to $522.8 million for fiscal 2010, an
increase of $133.3 million compared to $389.5 million in fiscal 2009. During fiscal 2010, non-cash working capital items generated
$60.8 million, in comparison to $77.8 million in fiscal 2009. The increase in funds generated from non-cash working capital items in
fiscal 2010 and fiscal 2009 are mainly due to decreased working capital levels in the US operations resulting from the decrease in the
average block market per pound of cheese.
In investing activities, the Company used $172.9 million in fiscal 2010 mainly for additions to fixed assets of $106.9 million, of which
nearly 22% went into the replacement of fixed assets and 78% to implement new technologies, as well as to expand and increase certain
manufacturing capacities. Also, the F&A Dairy Acquisition, with a purchase price of $49.6 million, explains the cash usage for investing
activities.
As for financing activities in fiscal 2010, the Company increased its long-term debt by $330.0 million as part of an unsecured Senior
Notes debt financing and repaid $178.5 million in long-term unsecured Senior Notes and $340.0 million of credit facilities classified as
long-term debt. The Company also repaid bank loans for $71.9 million and paid $119.0 million in dividends. Moreover, the Company
also issued shares for a cash consideration of $26.0 million as part of the stock option plan and repurchased $38.1 million of share
capital as part of the NCIB.
LIQUIDITY
Cash and cash equivalents, cash flows generated from operations, and the availability to draw against existing bank credit facilities are
expected to enable the Company to meet its liquidity and capital investment requirements over at least the next twelve months,
exclusive of any possible acquisitions. The Company does not foresee any difficulty in securing financing should it be required beyond
what it already has in place and access to.
Fiscal years
(in thousands of CDN dollars, except ratio)
2010
2009
2008
Current assets
Current liabilities
Working capital
Working capital ratio
$
1,046,378
$
1,125,672
$
1,179,500
690,694
355,684
1.51
958,944
166,728
1.17
763,208
416,292
1.55
The Company’s working capital ratio is an indication of its ability to cover the short-term liabilities with short-term assets, without
having excess dormant assets.
The increase in the working capital ratio is mainly attributed to the reimbursement of the March 31, 2009 current portion of the long-
term debt (US$170 million Senior Notes).
14_SAPUTO_ 2010 ANNUAL REPORT
CAPITAL MANAGEMENT
The Company’s capital strategy requires a well-balanced financing structure in order to maintain flexibility to implement growth
initiatives while allowing it to pursue disciplined capital investments and maximize shareholder value.
Fiscal years
(in thousands of CDN dollars, except ratio and number of shares and options)
2010
2009
2008
Cash and cash equivalents
Bank loans
$
54,819
$
43,884
$
165,710
$
61,572
$
139,399
$
222,584
Long-term debt including short-term portion
$
380,790
$
617,486
$
225,830
Interest-bearing debt¹
Shareholders' equity
Interest-bearing¹ debt-to-equity ratio
Common shares
Preferred shares
Stock options
Dividends paid
¹ Net of cash and cash equivalents.
$
387,543
$
713,001
$
282,704
$
2,028,598
$
1,972,348
$
1,619,160
0.19
0.36
0.17
207,425,823
207,087,283
205,962,964
-
-
-
$
9,413,750
$
9,128,841
$
8,893,428
$
118,996
$
111,660
$
94,455
The Company had $54.8 million of cash and cash equivalents and available bank credit facilities of approximately $599 million,
$61.6 million of which are drawn. See Note 7 to the consolidated financial statement that describes the bank loans.
Share capital authorized by the Company is comprised of an unlimited number of common and preferred shares. The common shares
are voting and participating. The preferred shares can be issued in one or more series, and the terms and privileges of each class must
be determined at the time of their creation. As at May 27, 2010 207,527,188 common shares and 11,018,089 stock options were
outstanding.
NORMAL COURSE ISSUER BIDS
The Company announced on November 4, 2008 its intention to purchase, by way of a normal course issuer bid (Bid), for cancellation
purposes, some of its common shares through the facilities of the Toronto Stock Exchange, beginning on November 13, 2008. Under the
Bid, the Company could have purchased for cancellation up to 10,340,377 common shares. This represented 5% of its
206,807,551 issued and outstanding common shares as of October 31, 2008. These purchases could have been made in accordance
with applicable regulations over a maximum period of 12 months beginning on November 13, 2008 and ending on November 12, 2009.
The cash consideration, which the Company paid for any common shares acquired by it under the Bid is the market price of such
common shares at the time of acquisition.
Saputo announced on November 3, 2009 its intention to purchase, by way of a new normal course issuer bid (New Bid), for cancellation
purposes, some of its common shares through the facilities of the Toronto Stock Exchange, beginning on November 13, 2009. Under the
New Bid, the Company may purchase for cancellation up to 10,322,467 common shares. This represents 5% of its 206,449,340 issued
and outstanding common shares as of October 31, 2009. These purchases can be made in accordance with applicable regulations over a
maximum period of 12 months beginning on November 13, 2009 and ending on November 12, 2010. The cash consideration, which the
Company pays for any common shares acquired by it under the New Bid is the market price of such common shares at the time of
acquisition.
During the year ended March 31, 2010, the Company purchased 1,420,200 common shares, at prices ranging from $24.10 to $29.99
per share, relating to the NCIB. During the year ended March 31, 2009, the Company did not purchase any common shares under the
NCIB.
The Company believes that the purchase of its own shares may, under appropriate circumstances, be a responsible investment of funds
on hand. Copies of the notice with respect to both bids may be obtained without charge upon request to the Secretary of the Company.
SAPUTO_ 2010 ANNUAL REPORT_15
CONTRACTUAL OBLIGATIONS
The Company manages and continually monitors its commitments and contractual obligations to ensure that these can be met with
funding provided by operations and capital structure optimization.
The Company’s contractual obligations consist of commitments to repay certain of its long-term debts and certain repayment estimates
for other long-term debts as well as certain leases of premises, equipment and rolling stock. Note 8 to the consolidated financial
statements describes the Company’s commitment to repay long-term debt, and Note 17 to the Consolidated Financial Statements
describes its lease commitments.
(in thousands of CDN dollars)
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
Total
LONG-TERM DEBT
Long-term debt
Minimum lease
Total
$
-
$
12,600
$
12,600
-
-
-
160,790
220,000
10,285
8,161
7,094
5,261
6,977
10,285
8,161
7,094
166,051
226,977
$
380,790
$
50,378
$
431,168
As described in Note 8 to the consolidated financial statements, the Company completed during the first quarter of fiscal 2010 a
$330.0 million debt financing, composed of $110.0 million Canadian denominated unsecured Senior Notes, issued at an interest rate of
5.34% for a term of five years maturing on June 22, 2014, and $220.0 million Canadian denominated unsecured Senior Notes issued at
an interest rate of 5.82% for a term of seven years maturing on June 22, 2016. The proceeds of this financing were used to pay down
part of the Company’s existing long-term debt credit facilities and for general corporate purposes.
MINIMUM PAYMENTS ON OPERATING LEASES
The Company has long-term operating leases for premises, equipment and rolling stock.
BALANCE SHEET
In comparison to March 31, 2009, the main balance sheet items as at March 31, 2010 varied due to the appreciation of the Canadian
dollar versus both the US dollar and the Argentinean peso.
The conversion rate of the US operations’ balance sheet items in US currency was CND$1.0158 per US dollar as at March 31, 2010,
compared to CND$1.2613 per US dollar as at March 31, 2009. The conversion rate of the Argentinean operations’ balance sheet items in
Argentinean currency was CND$0.2614 per Argentinean peso as at March 31, 2010 compared to CND$0.3318 per Argentinean peso as
at March 31, 2009. The strengthening of the Canadian dollar results in lower values recorded for the balance sheet items of the foreign
operations.
Changes in the main balance sheet items were also due to the F&A Dairy Acquisition.
The net cash position increased from negative $95.5 million as at March 31, 2009, to negative $6.8 million as at March 31, 2010, mainly
by the repayment of bank loans from cash generated from operations. The change in foreign currency translation adjustment listed
under accumulated other comprehensive income varied due to the strengthening of the Canadian dollar.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has certain off-balance sheet arrangements, consisting primarily of leasing certain premises as well as certain lease
agreements for equipment and rolling stock. These agreements are recorded as operating leases. Future minimum lease payments as at
March 31, 2010 totalled $50.4 million. The Company does not use derivative financial instruments for speculation. Saputo uses certain
derivative financial instruments in specific situations. In the normal course of business, the Canadian operations import some products
and the management of foreign exchange risk occasionally leads us to make certain foreign currency purchases in euros and US dollars,
which amounted to 2.3 million euros and 4.0 million US dollars as at March 31, 2010.
The Company periodically enters into forward contracts to protect itself against price fluctuations on certain commodities when it has
secured a commitment to sell a finished product. As at March 31, 2010, the market value of these contracts was negative $1.1 million.
16_SAPUTO_ 2010 ANNUAL REPORT
The Company’s exposure to the derivative financial instruments used is not affected by changing economic conditions, since these
instruments are generally held until maturity. See notes 17 and 19 to the consolidated financial statements that describe the Company’s
off-balance sheet arrangements.
GUARANTEES
From time to time, the Company enters into agreements in the normal course of its business, such as service arrangements and leases,
and in connection with business or asset acquisitions or disposals, agreements, which by nature may provide for indemnification to third
parties. These indemnification provisions may be in connection with breach of representations and guarantees and for future claims for
certain liabilities, including liabilities related to tax and environmental issues. The terms of these indemnification provisions vary in
duration. See note 17 to the consolidated financial statements that discuss the Company’s guarantees.
RELATED PARTY TRANSACTIONS
In the normal course of business, the Company receives and provides goods and services from and to companies subject to significant
influence by its principal shareholder. These goods and services of an immaterial amount are compensated by a counterpart equal to the
fair market value, which are comparable to similar transactions. The goods and services that are received consist of rent of office space,
travel arrangements, transportation of goods, lodging and the purchase of canned goods as well as management fees for compensation
of the Chairman of the Board. The goods and services that are provided consist of dairy products. See Note 18 to the consolidated
financial statements that describe the related party transactions.
ACCOUNTING STANDARDS
APPLIED STANDARDS
During the fiscal year ended March 2010, the Company adopted the following new accounting policies as described in the Canadian
Institute of Chartered Accountants (CICA) Handbook.
GOODWILL AND INTANGIBLE ASSETS
Section 3064 of the CICA Handbook, Goodwill and Intangible Assets, replaces Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. The new section establishes standards for the recognition, measurement, presentation
and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented companies. Standards
concerning goodwill are unchanged from the standards included in the previous Section 3062. The adoption of this new section had no
significant impact on the consolidated financial statements.
FINANCIAL INSTRUMENTS – DISCLOSURES
Section 3862 was amended to improve fair value and liquidity risk disclosures. This Section now requires that all financial instruments
measured at fair value be categorized into one of three hierarchy levels, described below, for disclosure purposes. Each level is based on
the transparency of the inputs used to measure the fair values of assets and liabilities:
- Level 1 –
- Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
inputs are unadjusted quoted prices of identical instruments in active markets.
indirectly.
- Level 3 – one or more significant inputs used in a valuation technique are not based on observable market data in determining fair
values of the instruments.
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification
of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The
additional disclosures required as a result of the adoption of these standards are included in the notes to the consolidated financial
statements (Note 19).
FUTURE STANDARDS
BUSINESS COMBINATIONS
Section 1582, Business Combinations, replacing Section 1581 of the same name will be applicable to business combinations for which
the acquisition date is on or after the Company’s interim and fiscal year beginning April 1, 2011. Early adoption is permitted. This
Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements
SAPUTO_ 2010 ANNUAL REPORT_17
about a business combination and its effects. The Company has not yet determined the impact of the adoption of this new Section on the
consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
Section 1601, Consolidated Financial Statements, replacing Section 1600 of the same name, will be applicable to financial statements
relating to the Company’s interim and fiscal year beginning on or after April 1, 2011. Early adoption is permitted. This Section
establishes standards for the preparation of consolidated financial statements. The Company has not yet determined the impact of the
adoption of this new Section on the consolidated financial statements.
NON-CONTROLLING INTERESTS
Section 1602, Non-Controlling Interests will be applicable to financial statements relating to the Company’s interim and fiscal year
beginning on or after April 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for a non-controlling
interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company has not yet determined
the impact of the adoption of this new Section on the consolidated financial statements.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In February 2008, the AcSB announced January 1, 2011 as the changeover date for publicly-listed companies with December 31st year
ends to adopt IFRS, replacing Canada’s own generally accepted accounting principles. The changeover date applies to interim and annual
financial statements relating to fiscal years beginning on or after January 1, 2011. Accordingly, the Company’s IFRS adoption date of
April 1, 2011 will require restatement, for comparative purposes, of amounts reported by the Company for the year ended
March 31, 2011 and an opening IFRS balance sheet as of April 1, 2010.
In order to ensure seamless transition to IFRS, the Company has divided its convergence plan into the following phases:
Phase I: IDENTIFICATION AND ANALYSIS
Phase II: IMPACT ANALYSIS AND DEVELOPMENT PHASE
Phase III: IMPLEMENTATION PHASE
The Company is currently in phase II of its convergence plan, which began on October 1, 2009 and is proceeding according to schedule.
In this phase, the Company is determining which divergences are of relevance to its operations and the quantitative impact these
divergences will have on its financial statements including comparatives. The Company has also undertaken the necessary steps to
develop processes to identify divergences and to ensure their timely reporting. The Company intends to complete phase II and enter
phase III in fiscal 2011.
In phase III, the Company will track Canadian GAAP to IFRS divergences and develop model financial statements that are IFRS compliant
to ensure seamless transition.
The Company is currently reviewing accounting policy decisions with active implication of Management in the identification and approval
of significant IFRS policy divergences. Management will continue to monitor divergences caused by future IFRS amendments throughout
the convergence period. Where decisions have been rendered, discussions of the implications have been provided below.
The Company has identified the following eight accounting areas that it has deemed of either high or moderate significance:
IFRS 1 “First Time Adoption of Reporting Standards”
IFRS 2 “Share-Based Payment”
IFRS 3 “Business Combinations”
IAS 12 “Income Taxes”
IAS 16 “Property, Plant and Equipment”
IAS 19 “Employee Benefits”
IAS 32 & IAS 39 “Financial Instruments Presentation, Recognition and Measurement”
IAS 36 “Impairment of Assets”
Significance has been established as the potential impact divergences may have on the Company’s financial statements and existing
reporting environment. The determination of the significance of the areas listed above has been assessed based on a review of CICA
publications detailing divergences between Canadian GAAP and IFRS and through an analysis undertaken by the IFRS Convergence Team
of all currently enacted IFRS Standards.
18_SAPUTO_ 2010 ANNUAL REPORT
Readers of the financial statements are cautioned that the International Accounting Standards Board (IASB) intends to further revise
several accounting standards that may result in the addition or removal of accounting standards identified as significant for the Company
listed above. The IASB has also indicated several other convergence projects between IFRS and FASB that may further alter this
assessment.
Financial statements readers should note that transition divergences between Canadian GAAP and IFRS will be accounted for as
adjustments to April 1, 2010 retained earnings (or another category of equity where applicable) and not through the consolidated
statements of earnings. As such, reconciliations shall be presented in the year of first-time IFRS adoption reconciling previously reported
Canadian GAAP to IFRS.
The discussion provided below is not intended to represent a complete list of all relevant Canadian GAAP to IFRS divergences. Instead,
only significant divergences that will result in either material adjustment to the financial statements or add significant complexities to the
current reporting environment have been identified. Management is currently in the process of quantifying its divergences and will
continue to do so throughout the transition period.
IDENTIFICATION AND IMPACT OF ACCOUNTING POLICY CHANGES
IFRS 1 “FIRST TIME ADOPTION OF REPORTING STANDARDS”
IFRS 1 discusses the framework for transition from an entity’s current reporting standards to IFRS. The general requirement of IFRS 1
is to apply IFRS retrospectively on first-time adoption. However, the Company has identified the following significant exemptions that
allow prospective application:
•
•
•
IFRS 3 BUSINESS COMBINATIONS - IFRS 1 allows an entity to apply IFRS 3 either retrospectively to all combinations, retrospectively
from a certain point forward or prospectively. The Company has elected to apply IFRS 3 prospectively. Accordingly, no
accounting adjustments will occur to business combinations for differences between GAAP and IFRS (identified below) prior to
the date of transition. Consequently, there will be no restatement of pre-transition Goodwill or Intangibles.
IAS 21 THE EFFECTS OF CHANGES ON FOREIGN EXCHANGE RATES – IFRS 1 allows an entity to recognize all cumulative translation
adjustments of foreign operations in Retained Earnings, effectively zeroing out the pre-transition balance. The Company has
elected to apply this exemption.
IAS 16 PROPERTY, PLANT & EQUIPMENT - IFRS 1 allows an entity to carry forward its fixed asset cost, subject to the elimination of
any discrepancies with Canadian GAAP or to revalue its fixed assets at fair value on transition and subsequently apply those
values as deemed cost. The Company has elected to retroactively apply the fixed asset historical cost model for IFRS purposes on
its transition date.
IFRS 2 “SHARE-BASED PAYMENT”
GRADED VESTING - For share options that vest in instalments, IFRS requires the use of the graded vesting method which requires that
each instalment be treated as a separate grant with its own separate fair value. Canadian GAAP, however, allows an entity the option of
either using the graded vesting method or the straight-line method which uses a single pool approach and recognizes expenses equally,
over the average life of the grant. The Company is currently using the straight-line method for its grants that vest over a 5-year period.
The use of the graded vesting model will not result in a material impact over the 5-year vesting period. Readers, however, are cautioned
that the graded vesting model will result in the recognition of greater expenses in the first two years of a grant issuance and fewer
expenses in the remaining three year period compared to the model currently in use by the Company.
IFRS 3 “BUSINESS COMBINATIONS”
The Company has identified the following Canadian GAAP to IFRS divergences specific to its reporting environment:
•
•
ACQUISITION COSTS - Acquisition related costs (other than debt and equity issuance costs) must be expensed under IFRS as
opposed to current Canadian GAAP practice which allows their capitalization (under certain conditions).
EXIT, RELOCATION AND TERMINATION COSTS – Exit, termination and relocation costs are usually expensed under IFRS unless, at the
acquisition date, the acquiree already has an existing liability for restructuring costs recognized in accordance with IAS 37
”Provisions, Contingent Liabilities & Contingent Assets.” Under Canadian GAAP, a company would generally be permitted to
capitalize these costs under less stringent guidelines.
SAPUTO_ 2010 ANNUAL REPORT_19
The Entity will not restate acquisition related assets, including Goodwill and Intangibles, pertaining to prior business combinations as a
result of the election found in IFRS 1 allowing the prospective application of IFRS 3 (please refer to discussion in IFRS 1 above).
As a result of the Accounting Standard Boards continuing efforts to harmonize Canadian GAAP with IFRS, the AcSB has issued Handbook
Section 1582 which fundamentally converges to IFRS. Section 1582 is applicable for the first annual reporting period beginning on or
after January 1, 2011 (earlier adoption is permitted). In fiscal 2011, the Company has decided not to early adopt Section 1582 and, as a
result, acquisitions made in fiscal 2011 (if any) will result in the capitalization of acquisition and exit, relocation and termination costs.
This election will, in the event of a business combination, result in a reconciling adjustment to the comparative period for the Company’s
first IFRS reporting statement.
IAS 12 “INCOME TAXES”
DEFERRED INCOME TAXES – Referred to as future income taxes under Canadian GAAP, IFRS and Canadian GAAP are consistent in the
conceptual approach to utilizing the liability method in assessing the impact of temporary differences arising from differences between
tax bases for income tax purposes and carrying values for financial reporting purposes. The Company is currently evaluating the impact
of this requirement.
DIFFERENCES ON INTANGIBLE ASSETS - Under Canadian Income Tax Act requirements, an entity can only include 75% of the cost of an
intangible asset in the cumulative eligible capital account. Under Canadian GAAP, the tax basis for eligible capital expenditures
represents the balance in the cumulative eligible capital account plus 25% of the carrying amount. IFRS, however, does not provide
guidance on the determination of the tax basis for eligible capital expenditures. As a result, IFRS appears to require an entity to
compare the tax basis not including the 25% portion with its related balance sheet carrying value. The Company is currently
evaluating the impact of this requirement.
UNCERTAIN TAX POSITIONS - In determining whether an uncertain tax position is to be accrued, Canadian GAAP and IFRS differ on the
threshold at which the recognition criterion is met. IFRS requires the accrual for an uncertain tax position when it is “more likely than
not” that a resulting outflow of resources will occur. Canadian GAAP, however, requires the recognition of a liability when it is "likely"
that an outflow of resources will occur which signifies a considerably higher threshold than that of IFRS. The Company is currently
evaluating the impact of this requirement.
IAS 16 “PROPERTY, PLANT AND EQUIPMENT” (PP&E)
The following divergence has been identified between Canadian GAAP and IFRS that will impact the Company’s reporting and IT
infrastructure:
•
COMPONENTIZATION - Under IFRS, an entity is required to “componentize” an individual item of PP&E into its various significant
parts for purposes of separate amortization of each significant component using useful lives and amortization methods that
more closely reflect their respective service potential. Practice under Canadian GAAP has been to depreciate fixed assets
according to category only.
The Company is currently in the process of quantifying the impact of this divergence.
IAS 19 “EMPLOYEE BENEFITS”
The Company sponsors both defined benefit pension plans and other benefit plans in Canada and the US. At the time of transition,
IFRS requires certain adjustments to the Company's balance sheet explained as follows:
•
•
UNAMORTIZED TRANSITIONAL ASSET - Canadian GAAP permitted an entity to carry an unamortized transitional asset upon first-
time adoption of Section 3461 Employee Future Benefits. There is no concept of unamortized transitional assets under IFRS,
however, resulting in a write down to this asset category.
ACTUARIAL GAINS AND LOSSES - IFRS 1 permits an entity to recognize all unamortized actuarial gains and losses at the date of
transition to IFRS in retained earnings. The Company has elected to apply this transitional option. An entity must then determine
whether to account for future actuarial gains or losses either:
1. Entirely in expense;
2. Partially recognized in expense based on the corridor approach which results in only a portion of actuarial gains or losses
recognized in income (current method used by the Company);
3. Fully recognized in Other Comprehensive Income without subsequent recycling to expense, an option not permitted under
Canadian GAAP.
The Company has elected to recognize future actuarial gains or losses fully to Other Comprehensive Income upon transition to IFRS.
20_SAPUTO_ 2010 ANNUAL REPORT
IAS 32 & IAS 39 “FINANCIAL INSTRUMENTS PRESENTATION, RECOGNITION AND MEASUREMENT”
IAS 32 and 39 establish the recognition and measurement criteria for financial assets and liabilities including classification criteria.
The most significant potential divergences noted by the Company within these IFRS Standards relate to derecognition, impairment
and hedge effectiveness requirements. Upon transition, the Company will be required to perform an impairment and hedge
effectiveness test (where applicable) and to derecognize all assets and liabilities not consistent with IFRS.
Accordingly, the Company will provide further discussion on this topic once the analysis of this standard has been finalized in fiscal
2011.
IAS 36 “IMPAIRMENT OF ASSETS”
IMPAIRMENT OF ASSETS CALCULATION - Under IFRS, an asset is impaired when its carrying value exceeds its recoverable amount.
Though this concept is similar under Canadian GAAP, the definition and calculation of recoverable amount differs. IFRS defines
recoverable amount as the greater of:
a) fair value less costs to sell, and
b) value in use (which represents the discounted present value of future cash flows).
Canadian GAAP, however, prescribes a two-step approach. Under the first step, the carrying value of the asset is compared to its
undiscounted cash flows. Under the second step, where the carrying amount exceeds the undiscounted cash flows in step one, the
asset is written down to its fair value, based on discounted cash flows. As a result, impairment losses under IFRS may occur more
frequently than under Canadian GAAP. However, IAS 36 does allow an entity to reverse impairment losses, except for Goodwill, as
they occur. The Company is currently evaluating the effect of this divergence on its current impairment testing models.
CASH GENERATING UNIT (CGU) - IFRS utilizes the concept of CGU when assessing impairment of fixed assets, intangibles and goodwill
which requires the grouping of the smallest identifiable assets that generate cash inflows largely independent of those of other assets
or groups of assets. The Company is currently evaluating the impact of the concept of CGU when assessing impairment.
IDENTIFICATION AND RESOLUTION OF KEY INFORMATION TECHNOLOGY (IT) AND DATA SYSTEMS REQUIREMENTS
The Company has performed an initial analysis of its data system infrastructure and has concluded that transition to IFRS will not
result in a material modification to any of its IT processes resulting from divergences noted previously.
With regards to fixed assets and the need for componentization, the Company’s current accounting information systems support the
ability, with minor modification, to record components of individual assets. As such, the Company will not incur significant
incremental cost in addressing this issue. The Company’s IT infrastructure will be capable of supporting componentization in the
fiscal 2011 year.
It should be noted however that future amendments to IFRS’ may result in IT infrastructure complexities not considered at the time of
writing of this management analysis.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is currently in the process of assessing the impact that divergences noted above will have on its internal control and
financial reporting structure. Further updates to this key element will be made upon finalization of this assessment. It is the
Company’s intention to have controls in place that address the divergences noted above by the fourth quarter of fiscal year 2011.
FINANCIAL REPORTING EXPERTISE, INCLUDING TRAINING REQUIREMENTS
The Company has undertaken the development of an internal communication plan to disseminate relevant modifications to the
accounting for and reporting of financial results ensuing from significant IFRS divergences. Management has been provided training
seminars. Further seminars are planned in the upcoming fiscal year and throughout the transition period to employees of the finance
group and other relevant areas of the Company.
DISCLOSURE CONTROLS AND PROCEDURES
The Company is continuously monitoring updated filing requirements and communicating relevant information to its investors
through communications in its interim and annual reports. Further updates will be provided in fiscal 2011.
SAPUTO_ 2010 ANNUAL REPORT_21
BUSINESS ACTIVITIES AND OTHER MATTERS INFLUENCED BY GAAP MEASURES
Performance measures impact the Company on a routine basis. EBITDA is a common measure used in the evaluation of the
Company’s performance and debt covenant calculations. The Company is currently in the process of assessing the impact that
divergences will have on its business activities and will update progress made in future publications. Financial Statement readers
should note, however, that this key element must be monitored throughout the transition period and as such, the expected
implementation date of this key element is not fixed.
CRITICAL ACCOUNTING POLICIES AND USE OF ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in accordance with Generally Accepted Accounting Principles requires Management
to make estimates. These estimates are established on the basis of previous fiscal years and Management’s best judgment. Management
continually reviews these estimates. Actual results may differ from those estimates. The following section establishes the main estimates
used in preparing the consolidated financial statements of Saputo Inc.
FIXED ASSETS
In order to allocate the cost of fixed assets over their useful lives, estimates of the duration of their useful lives must be carried out. The
cost of each fixed asset will then be attributed over the duration of its useful life and amortized year after year on this basis.
PORTFOLIO INVESTMENT
The portfolio investment is recorded at cost. The Company carries out an annual valuation to ensure that the fair value of the investment
is not lower than the carrying amount. To calculate an estimated fair value, the Company uses the Company’s EBITDA by applying to it a
multiple based on comparable industry standards. If the portfolio investment undergoes a decline in value that is permanent, its carrying
amount would be written down to account for this decline in value. The Company has performed the impairment test and no write down
was necessary in fiscal 2010.
GOODWILL
The accounting standards require that goodwill not be amortized and that an impairment test be performed annually or more frequently
when events occur or circumstances arise that could indicate a reduction in its fair value. To determine any decline in value, each of the
respective accounting units are required to undergo an assessment. The Company’s assessments are based on multiples for Saputo and
for the industry. These multiples are applied to EBITDA and net assets. Should the calculated value be lower than the book value, a write
down would be taken. The Company has performed the impairment test, no write down was necessary in fiscal 2010.
BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting. Under this method, the Company
allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on estimated fair values at the date
of acquisition, with the excess of the purchase price amount allocated to goodwill.
STOCK-BASED COMPENSATION
The Company uses the fair value based method to expense stock based compensation. With this method, the Company records a
compensation cost over the vesting period of the options granted. The expected useful life of options used for calculating the fair value
of options is based on Management’s experience and judgment.
TRADEMARKS
Impairment testing has to be performed on all trademarks annually. Estimated future cash flows to be derived from the intangibles are
discounted to the present using current market rates. The discounted cash flow is compared to the carrying value of the trademarks.
Should the discounted cash flow be lower than the book value, a write down would be taken. The Company has performed the
impairment test and no write down was necessary in fiscal 2010.
HEDGING
The Company uses interest rate derivatives to manage the combination of floating to fixed interest rates on its bank debt. The Company
currently uses cash flow hedges and does not use any fair value hedges. For its cash flow hedges, the effective portion of the changes in
fair value of the hedging item is recognized in accumulated other comprehensive income, whereas the ineffective portion is recognized
in interest expense. The amounts recognized in accumulated other comprehensive income, with respect to cash flow hedges, are
reclassified in net earnings in the period or periods during which the hedged item affects net earnings.
PENSION PLANS
The Company offers and participates in defined contribution pension plans of which more than 85% of its active employees are
members. The net pension expenditure under these types of plans is generally equal to the contributions made by the employer.
22_SAPUTO_ 2010 ANNUAL REPORT
The Company also participates in defined benefit pension plans in which the remaining active employees are members. The cost of
these pension benefits earned by employees is actuarially determined using the projected benefits method prorated on services and
using Management’s assumptions bearing on, among other things, the discount rate, expected return on plan assets, rates of
compensation increase and the retirement age of employees. All of these estimates and assessments are formulated with the help of
external consultants.
The discount rate is determined on the basis of the effective rates of return on high-quality long-term corporate bonds, as required
by the adjusted standard, to account for the duration of plan liability. The rate applied for the period ended December 31, 2009 was
6.0%, compared to 7.47% used in the prior year. Saputo established the expected average return on invested assets at 6.76% (7.01%
in prior year) given the type and combination of these assets. This assumption is deemed reasonable and is supported by external
consultants. The compensation growth rate was set at 3.5% over the long-term, taking into consideration estimated future inflation
rates. Any changes in these assumptions or any plan experience that differs from the expected entails actuarial gains or losses with
respect to expected results. If these gains or losses exceed 10% of the maximum of the asset or liability of the plans, they are
amortized over the expected average remaining service life of the group of employees participating in the plans, in compliance with
CICA recommendations.
Pension plan assets are held by several independent trusts, and the average composition of the overall portfolio as at December 31,
2009 was 1% in cash and short-term investments, 51% in bonds and 48% in shares of Canadian, US and foreign companies. For the
moment, the Company does not expect any major change to this asset allocation. The average composition as of December 31, 2008
was 7% in cash and short-term investments, 52% in bonds and 41% in shares of Canadian, US and foreign companies.
For defined benefit plans, actuarial valuations were performed in December 2009, covering more than 93% of the obligations with
respect to this type of plan. Following these valuations, a solvency deficiency of $44.5 million was noted on December 31, 2009. In
accordance with the provincial legislation, an additional contribution is required for the next five years to pay off this deficiency of
$44.5 million. The additional payment required for fiscal 2011 will be of $12.4 million ($5.4 million for 2010).
The Company also offers a complementary retirement medical benefits program. For the purpose of assessing costs related to this
program, the hypothetical annual growth rate of medical costs was set between 5.5% and 11% for fiscal year 2011 and, based on the
assumptions used, these rates should gradually decline to reach 5.25% in fiscal 2015. The effect of an increase or decrease of 1% on
overall health care costs has no material impact on the results.
FUTURE INCOME TAXES
The Company follows the liability method of accounting for income taxes. Future income tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered
or settled. As a result, a projection of taxable income is required for those years, as well as an assumption of the ultimate recovery or
settlement period for temporary differences. The projection of future taxable income is based on Management’s best estimates and may
vary from actual taxable income. On an annual basis, the Company assesses its need to establish a valuation allowance for its future
income tax assets. Canadian, US and international tax rules and regulations are subject to interpretation and require judgment on the
part of the Company that may be challenged by the taxation authorities. The Company believes that it has adequately provided for future
tax obligations that may result from current facts and circumstances. Temporary differences and income tax rates could change due to
fiscal budget changes and/or changes in income tax laws.
RISKS AND UNCERTAINTIES
The main risks and uncertainties the Company is exposed to are presented hereafter. The Board of Directors delegated to the Audit
Committee the responsibility to study and evaluate the risk factors inherent to the Company and ensure that appropriate measures are in
place to enable Management to identify and manage them effectively. Accordingly, the Audit Committee and the Board of Directors
adopted and implemented policies and procedures that are reviewed at least annually. Moreover, an annual detailed presentation on all
risk factors identified and periodic presentations are made to the Audit Committee, and as required, to the Board of Directors.
While risk management is part of the Company’s transactional, operational and strategic decisions as well as the Company’s overall
management approach, it does not guarantee that events or circumstances will not occur which could negatively affect its financial
condition and performance.
SAPUTO_ 2010 ANNUAL REPORT_23
PRODUCT LIABILITY
Saputo’s operations are subject to certain dangers and risks of liability faced by all food processors, such as the potential contamination
of ingredients or products by bacteria or other external agents that may accidentally be introduced into products or packaging. The
Company has quality control procedures in place within its operations to reduce such risks and has never experienced any material
contamination problems with its products. However, the occurrence of such a problem could result in a costly product recall and serious
damage to Saputo’s reputation for product quality.
SUPPLY OF RAW MATERIALS
Saputo purchases raw materials that may represent up to 85% of the cost of products. It processes raw materials into the form of finished
edible products intended for resale to a broad range of consumers. Availability of raw materials as well as variations in the price of
foodstuffs can therefore influence the Company’s results upwards or downwards, and the effect of any increase of foodstuff prices on
results depends on the Company’s ability to transfer those increases to its customers and this, in the context of a competitive market.
US AND INTERNATIONAL MARKETS
The price of milk as raw material and the price of cheese products in the US, Argentina and Europe as well as dairy ingredients and
cheese in international markets are based on market supply and demand forces. The prices are tied to numerous factors, such as the
health of the economy and supply and demand levels for dairy products in the industry. Price fluctuations may affect the Company’s
results. The effect of such fluctuations on results will depend on its ability to implement mechanisms to reduce them.
COMPETITION
The food processing industry is extremely competitive. The Canadian dairy industry is highly competitive and is comprised of three
major competitors, including Saputo. In the US, Argentina, Germany and the UK, Saputo competes in the dairy industry on a national
basis with several regional and national competitors. The Company’s performance in all the countries in which it operates will be
dependent on its ability to continue to offer quality products at competitive prices.
CONSOLIDATION OF CLIENTELE
During the last few years, there has been important consolidation in the food industry in all market segments. Given that Saputo serves
these segments, the consolidation within the industry has resulted in a decrease in the number of clients and an increase in the relative
importance of some clients. No customer represented more than 10% of total consolidated sales for fiscal 2010 except for one which
represented 14%. The Company’s ability to continue to service its clients in all the markets that it serves will depend on the quality of its
products, services and the prices of its products.
CREDIT RISK
The Company grants credit to its customers in the normal course of business. Credit valuations are performed on a regular basis and the
financial statements take into account an allowance for bad debts. The Company considers that it has low exposure to concentration of
credit risk with respect to accounts receivable from customers due to its large and diverse customer base operating in three segments,
retail, foodservice and industrial, and its geographic diversity. There are no accounts receivable from any individual customer that
exceeded 10% of the total balance of accounts receivable as at March 31, 2010. The allowance for bad debts and accounts receivable due
is reviewed regularly by Management. The Company updates its estimate of the allowance for doubtful accounts based on the evaluation
of the recoverability of accounts receivable balances of each customer taking into consideration historic collection trends of past due
accounts.
ECONOMIC ENVIRONMENT
The Company’s operations could be affected by the economic context should the unemployment level, interest rates or inflation reach
levels that influence consumer trends and consequently, impact the Company’s sales and profitability.
ENVIRONMENT
Saputo’s business and operations are subject to environmental laws and regulations, including those relating to wastewater discharges,
releases of hazardous and non hazardous substances, and remediation of contaminated sites. The Company believes that its operations
are in compliance, in all material aspects, with such environmental laws and regulations, except as disclosed in the Annual Information
Form dated June 9, 2010 for the fiscal year ended March 31, 2010. Compliance with these laws and regulations requires that the
Company continues to incur operating and maintenance costs and capital expenditures. Future events such as changes in environmental
laws and regulations or more vigorous regulatory enforcement policies could have a material adverse effect on the financial position of
Saputo and could require significant additional expenditures to achieve or maintain compliance.
24_SAPUTO_ 2010 ANNUAL REPORT
CONSUMER TRENDS
Demand for the Company’s products is subject to changes in consumer trends. These changes may affect earnings. In order to
constantly adapt to these changes, the Company innovates and develops new products.
INTELLECTUAL PROPERTY
As the Company is involved in the production, sale and distribution of food products, it relies on brand recognition and loyalty from its
clientele in addition to relying on the quality of its products. Also, as innovation forms part of the Company’s growth strategy, its
research and development teams develop new technologies, products and process optimization methods. The Company therefore takes
measures to protect and enforce its intellectual property. Any infringement to its intellectual property could damage its value and limit
the Company’s ability to compete. In addition, Saputo may have to engage in litigation in order to protect its rights which could result in
significant costs.
FINANCIAL RISK EXPOSURES
Saputo has financial risk exposure to varying degrees relating to the currency of each of the countries where it operates. Approximately
63% of sales are realized in Canada, 33% in the US, and 4% in Argentina. Cash flows from operations in each of the countries where
Saputo operates act as a natural hedge against the exchange risks related to debt denominated in such countries’ currency. The level of
the financial risk exposure related to currency will depend on its ability to maintain this natural hedge or any other protection
mechanism.
LEGISLATIVE, REGULATORY, NORMATIVE AND POLITICAL CONSIDERATIONS
The Company is subject to local, provincial, state, federal and international laws, regulations, rules and policies as well as to social,
economical and political contexts prevailing in places where Saputo conducts its activities. Consequently, the modification or change of
any of these elements may have an unfavourable impact on Saputo’s results and operations and may require that important expenses be
made in order to adapt to or comply with it. More specifically, the production and distribution of food products are subject to federal,
state, provincial and local laws, rules, regulations and policies and to international trade agreements, all of which provide a framework
for Saputo’s operations. The impact of new laws and regulations, stricter enforcement or interpretations or changes to enacted laws and
regulations will depend on its ability to adapt and comply. Saputo is currently in compliance with all important government laws and
regulations and maintains all important permits and licenses in connection with its operations.
GROWTH BY ACQUISITIONS
The Company plans to grow both organically and through acquisitions. Historically, the Company has grown through acquisitions and
should reasonably and in large part rely on new acquisitions to pursue its growth. The ability to properly evaluate the fair value of the
businesses being acquired, to properly evaluate the time and human resources required to successfully integrate their activities with
these of the Company as well as the capability to realize synergies, improvements and the expected profit and to achieve anticipated
returns constitute inherent risks related to acquisitions.
TARIFF PROTECTION
Dairy-producing industries are still partially protected from imports by tariff-rate quotas which permit a specific volume of imports at a
reduced or zero tariff and impose significant tariffs for greater quantities of imports. There is no guarantee that political decisions or
amendments to international trade agreements will not, at some point in the future, result in the removal of tariff protection in the dairy
market, resulting in increased competition. The Company’s performance will be dependent on its ability to continue to offer quality
products at competitive prices.
INFORMATION SYSTEMS
The Company is increasingly dependent upon integrated information technology applications for its business. The main risks relate to
confidentiality, data integrity and interruption of computer services. Therefore, any failure of these applications or communications
network or security failure with respect to data centers or networks may impede or slow down production, delay or taint certain decisions
and result in financial losses for the Company. In addition, any accidental or intentional loss of data that would be used by third parties
may have adverse effects on the Company’s activities and its results.
SAPUTO_ 2010 ANNUAL REPORT_25
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining disclosure controls and
procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material information
relating to the Company is made known to Management in a timely manner so that information required to be disclosed under securities
legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.
The Chief Executive Officer and the Chief Financial Officer, together with Management, after evaluating the effectiveness of the
Company’s disclosure controls and procedures as at March 31, 2010, have concluded that the Company’s disclosure controls and
procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries
would have been known to them.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining internal control over financial
reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
The Chief Executive Officer and the Chief Financial Officer, together with Management, after evaluating the effectiveness of the
Company’s internal control over financial reporting as at March 31, 2010, have concluded that the Company’s internal control over
financial reporting was effective.
The Chief Executive Officer and the Chief Financial Officer, together with Management, have concluded after having conducted an
evaluation and to the best of their knowledge that, as at March 31, 2010, no change in the Company’s internal control over financial
reporting occurred that could have materially affected or is reasonably likely to materially affect the Company’s internal control over
financial reporting.
SENSITIVITY ANALYSIS OF INTEREST RATE AND THE US CURRENCY FLUCTUATIONS
As at March 31, 2010, the Company had outstanding $50.8 million Senior Notes bearing interest at a fixed rate of 8.41%, maturing in
November 2014. The Company also completed a $330 million debt financing, composed of $110 million Canadian denominated
unsecured Senior Notes, issued at an interest rate of 5.34% for a term of five years maturing on June 22, 2014, and $220 million
Canadian denominated unsecured Senior Notes issued at an interest rate of 5.82% for a term of seven years maturing on June 22, 2016.
In addition, the Company used $61.6 million of its bank credit facilities. In fiscal 2009, the Company entered into floating to fixed
interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s Acceptance rate. The Company will pay an
average fixed rate of 1.05% plus 0.5%, up to a maximum of 1.125% on amounts totalling $300 million between January 22, 2009 and
February 7, 2011. The debt subject to interest rate fluctuations was $61.6 million as at March 31, 2010. A 1% change in the interest rate
would lead to a change in net earnings of approximately $0.4 million. Canadian and US currency fluctuations may affect earnings.
Appreciation of the Canadian dollar compared to the US dollar would have a negative impact on earnings. Conversely, a decrease in the
Canadian dollar would have a positive impact on earnings. During the fiscal year ended March 31, 2010, the average US dollar conversion
was based on CND$1.00 for US$0.92. A fluctuation of CND$0.01 would have resulted in a change of approximately $0.9 million in net
earnings, $2.5 million in EBITDA and $20.6 million in revenues.
MEASUREMENT OF RESULTS NOT IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company defines EBITDA as earnings before interest, income taxes, depreciation and amortization. EBITDA is presented on a
consistent basis from period to period.
Saputo uses EBITDA, among other measures, to assess the operating performance of its ongoing businesses without the effects of
depreciation expense. Saputo excludes depreciation expense because it largely depends on the accounting methods and assumptions a
company uses, as well as non-operating factors such as the historical cost of capital assets.
26_SAPUTO_ 2010 ANNUAL REPORT
EBITDA is not a measurement of results that is defined in accordance with Generally Accepted Accounting Principles (GAAP) in Canada,
nor is it intended to be regarded as an alternative to other financial operating performance measures. It is not intended to represent
funds available for debt service, dividend payments, reinvestment or other discretionary uses, and should not be considered separately
or as a substitute for measures of performance prepared in accordance with GAAP in Canada. EBITDA is used by the Company because
Management believes it is a meaningful measure of performance. EBITDA is commonly used by the investment community to analyze the
performance of companies in the industries in which the Company is active. The Company’s definition of EBITDA may not be identical to
similarly titled measures reported by other companies and consequently may not be comparable to similar measurements presented by
other companies.
The most comparable Canadian GAAP financial measure is that of operating income. The tables below present the reconciliation of
operating income to EBITDA on a consolidated basis.
MEASUREMENT OF RESULTS NOT IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Fiscal year
(in thousands of CDN dollars)
Dairy Products Sector
CEA
USA
2010
Total
Grocery
Products Sector
Total
Operating income
$ 403,052 $ 168,531 $ 571,583 $ 6,982 $ 578,565
Depreciation and amortization
EBITDA
Fiscal year
(in thousands of CDN dollars)
54,843 49,844 104,687 8,819 113,506
$ 457,895 $ 218,375 $ 676,270 $ 15,801 $ 692,071
Dariy Products Sector
CEA
USA
2009
Total
Grocery
Products Sector
Total
Operating income
Depreciation and amortization
EBITDA
$ 337,338 $ 93,157 $ 430,495 $ 9,020 $ 439,515
41,560 58,849 100,409 7,875 108,284
$ 378,898 $ 152,006 $ 530,904 $ 16,895 $ 547,799
SAPUTO_ 2010 ANNUAL REPORT_27
THE 2009 AND 2010 QUARTERLY FINANCIAL INFORMATION
HAS NOT BEEN REVIEWED BY AN EXTERNAL AUDITOR
2010 QUARTERLY FINANCIAL INFORMATION- CONSOLIDATED STATEMENT OF EARNINGS
(in thousands of CDN dollars, except per share amounts)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(audited)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Fiscal 2010
Statement of earnings data
Revenues
$
1,446,434
$
1,482,693
$
1,497,272
$
1,384,183
$
5,810,582
Cost of sales, selling and administrative
1,287,978
1,308,021
1,313,782
1,208,730
5,118,511
expenses
Earnings before interest, depreciation,
$
158,456
$
174,672
$
183,490
$
175,453
$
692,071
amortization and income taxes
Margin %
11.0%
11.8%
12.3%
12.7%
11.9%
Depreciation and amortization
$
28,350
$
28,013
$
27,342
$
29,801
$
113,506
Operating income
Interest on long-term debt
Other interest, net
Earnings before income taxes
Income taxes
Net earnings
Net margin %
Per share
Net earnings
Basic
Diluted
$
130,106
$
146,659
$
156,148
$
145,652
$
578,565
6,513
1,531
9,658
1,029
7,606
1,243
6,124
1,358
29,901
5,161
$
122,062
$
135,972
$
147,299
$
138,170
$
543,503
37,241
41,520
42,969
39,059
160,789
$
84,821
$
94,452
$
104,330
$
99,111
$
382,714
5.9%
6.4%
7.0%
7.2%
6.6%
0.41
0.41
0.46
0.45
0.50
0.50
0.48
0.47
1.85
1.83
28_SAPUTO_ 2010 ANNUAL REPORT
2009 QUARTERLY FINANCIAL INFORMATION – CONSOLIDATED STATEMENT OF EARNINGS
(in thousands of CDN dollars, except per share amount)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(audited)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Fiscal 2009
Statement of earnings data
Revenues
Cost of sales, selling and administrative
expenses
1,361,910
1,211,593
1,453,544
1,323,598
1,517,457
1,391,802
1,460,352
1,318,471
5,793,263
5,245,464
Earnings before interest, depreciation,
150,317
129,946
125,655
141,881
547,799
amortization and income taxes
Margin %
Depreciation and amortization
Operating income
Interest on long-term debt
Other interest, net
Earnings before income taxes
Income taxes
Net earnings
Net margin %
Per share
Net earnings
Basic
Diluted
11.0%
22,395
8.9%
8.3%
9.7%
9.5%
22,962
34,090
28,837
108,284
127,922
106,984
4,597
2,188
4,834
1,826
121,137
38,174
100,324
31,296
91,565
5,573
3,212
82,780
25,021
113,044
5,680
3,805
103,559
34,361
439,515
20,684
11,031
407,800
128,852
82,963
69,028
57,759
69,198
278,948
6.1%
4.7%
3.8%
4.7%
4.8%
0.40
0.40
0.34
0.33
0.28
0.28
0.33
0.33
1.35
1.34
SAPUTO_ 2010 ANNUAL REPORT_29
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
Fiscal year
(in millions of CDN dollars)
Market factors¹ ²
US foreign currency exchange¹
Inventory write down
Rationalization charges
4t h Quarter
3rd Quarter
2nd Quarter
1st Q uarter
2010
15.0
(11.0)
-
(6.4)
18.0
(9.0)
(2.1)
(0.6)
5.0
3.0
-
(0.9)
(30.0)
5.0
-
-
¹ As compared to the same quarter of the last fiscal year.
² Market factors include the average block market per pound of cheese and its effect on the absorption of fixed costs and on the realization of
inventories, the effect of the relationship between the average block market per pound of cheese and the cost of milk as raw material as well as
market pricing impact related to sales of dairy ingredients.
OTHER PERTINENT INFORMATION
Fiscal years
(in US dollars, except for average exchange rate)
Average block market per pound of cheese
Closing block price¹ per pound of cheese
Whey market price² per pound
Spread³
US average exchange rate to Canadian dollar⁴
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2010
2009
4th Quarter
1.465
1.400
0.400
0.129
1.041
1.517
1.450
0.370
0.149
1.056
1.232
1.413
0.320
0.155
1.096
1.189
1.115
0.270
0.176
1.172
1.203
1.290
0.160
0.196
1.254
¹ Closing block price is the price of a 40 pound block of cheddar traded on the Chicago Mercantile Exchange (CME) on the last business day of each
quarter.
² Whey powder market price is based on Dairy Market News published information.
³ Spread is the average block market per pound of cheese less the result of the average cost per hundredweight of Class III and/or Class 4b milk price
divided by 10.
⁴ Based on Bank of Canada published information.
SUMMARY OF THE FOURTH QUARTER RESULTS ENDED MARCH 31, 2010
Revenues for the quarter ended March 31, 2010 amounted to $1.384 billion, a decrease of $76.2 million or 5.2% compared to
$1.460 billion for the same quarter last fiscal year.
The USA Dairy Products Sector revenues decreased by approximately $45 million as compared to the corresponding quarter last fiscal
year. A more favourable average block market per pound of cheese in the fourth quarter of US$1.46 compared to US$1.20 during the
fourth quarter of fiscal 2009 increased revenues by approximately $61 million. The inclusion of the F&A Dairy Acquisition in fiscal 2010,
and a more favourable dairy ingredients market was offset by lower sales volumes resulting in decreasing revenues by approximately
$15 million as compared to the same quarter last fiscal year. Finally, the strengthening of the Canadian dollar eroded approximately
$91 million as compared to the same quarter last fiscal year.
In the CEA Dairy Products Sector, revenues decreased by approximately $28 million in the fourth quarter as compared to last fiscal year.
Slightly lower sales volumes in our Canadian and Argentinean Divisions offset the additional revenues generated by a more favourable
dairy ingredients market in Canada and price increases in the Argentinean operations. Finally, the strengthening of the Canadian dollar
against the Argentinean peso eroded revenues as compared to the same quarter last fiscal year by approximately $14 million.
Revenues from the Grocery Products Sector decreased by approximately $4 million in the fourth quarter of fiscal 2010 in comparison to
the same quarter last fiscal year. This decrease is due to lower sales volumes from the US co-packing activities combined with the
reduced thrift stores activities as compared to the same quarter last fiscal year.
Earnings before interest, income taxes, depreciation and amortization (EBITDA) totalled $175.5 million for the quarter ended
March 31, 2010, an increase of $33.6 million or 23.7% compared to the $141.9 million for the same quarter last fiscal year. The increase
is attributed to both the CEA and USA Dairy Products Sector.
EBITDA for the CEA Dairy Products Sector increased by approximately $20 million in comparison to the same quarter last fiscal year in
this Sector. This increase is explained mainly by operational efficiencies, a more favourable dairy ingredients market and improved
results from our Argentinean operations. The inclusion of a $3.4 million rationalization charge in connection with the recently
announced closure of the Brampton, Ontario fluid plant and the consolidation of the Toronto, Ontario distribution activities decreased
EBITDA for the quarter compared to the same quarter last fiscal year. The Dairy Products Division (Europe) also contributed to the
increased EBITDA in the fourth quarter as compared to the same quarter last fiscal year.
30_SAPUTO_ 2010 ANNUAL REPORT
The EBITDA of the USA Dairy Products Sector increased by approximately $16 million in the current quarter compared to the same
quarter last fiscal year. The Sector benefitted from the initiatives undertaken in prior and current fiscal years with regards to improved
operational efficiencies as well as lower ingredient and other costs and the inclusion of the F&A Dairy Acquisition. These factors together
positively affected EBITDA by approximately $14 million as compared to the same quarter last fiscal year. An increase in the average
block market per pound of cheese to US$1.46 in the current quarter as compared to US$1.20 in the same quarter last fiscal year,
positively affected the absorption of the fixed costs as well as having a favourable impact on the realization of inventories in the fourth
quarter of fiscal 2010 as compared to the same quarter last fiscal year. Additionally, the Sector experienced a more favourable dairy
ingredients market. These increases were partially offset by a less favourable relationship between the average block market per pound
of cheese and the cost of milk as raw material compared to the same quarter last fiscal year. These combined market factors increased
EBITDA by approximately $13.0 million as compared to the same quarter last fiscal year. The strengthening of the Canadian dollar during
the quarter eroded approximately $11 million in EBITDA.
The EBITDA of the Grocery Products Sector decreased by approximately $2 million for the quarter ended March 31, 2010 in comparison
to the same quarter last fiscal year. During the quarter, a rationalization charge of approximately $3 million in relation to the
restructuring of the Sector’s distribution network in Ontario, offset the benefits derived from the initiatives implemented throughout the
year.
Depreciation and amortization for the quarter ended March 31, 2010 totalled $29.8 million, an increase of $1.0 million compared to
$28.8 million for the same quarter last fiscal year. The increase is mainly due to an impairment amount of $2.6 million included in
depreciation and amortization for the closure of the Brampton, Ontario fluid milk plant and consolidation of the distribution activities.
Net interest expense decreased to $7.5 million compared to $9.5 million for the corresponding period last fiscal year. The decrease can
be explained by the reduction of bank loans and long-term debt compared to the same period last fiscal year.
With respect to income taxes, the effective tax rate for the current quarter was 28.2% compared to 33.2% for the same quarter last fiscal
year. The income tax rate varies and could increase or decrease based on the amount of taxable income derived and from which source,
any amendments to tax laws and income tax rates and changes in assumptions and estimates used for tax assets and liabilities by the
Company and its affiliates.
Net earnings amounted to $99.1 million for the quarter ended March 31, 2010, an increase of $29.9 million compared to the same
quarter last fiscal year.
During the quarter, the Company added approximately $26 million in fixed assets, issued shares for a cash consideration of $7.9 million
as part of the stock option plan and paid out $30.0 million in dividends to its shareholders. The Company also decreased its bank loans
by approximately $55.5 million during the current quarter. For the same quarter, the Company generated cash flows of $160.7 million, a
decrease from the $209.1 million generated for the corresponding period last fiscal year. This decrease can be attributed mainly to the
higher working capital items generated in the US Division due to a greater decrease in the average block market per pound of cheese
during the fourth quarter of fiscal 2009 as compared to fiscal 2010.
QUARTERLY FINANCIAL INFORMATION
During fiscal 2010, specific circumstances affected the quarterly changes in revenues and earnings before interest, income taxes,
depreciation and amortization compared to fiscal 2009. An increasing average block market per pound of cheese throughout the fiscal
year as compared to the decreasing trend of last fiscal year had a positive impact on the realization of inventories. The average block
market for fiscal 2010 was lower than fiscal 2009, and this had a negative impact on the absorption of fixed costs. The increase of the
dairy ingredients market throughout the current fiscal year positively impacted the Company’s revenues and EBITDA. However, dry whey
being a determining factor in the price of milk, this increase negatively affected the relationship between the average block market per
pound of cheese and the cost of milk as raw material. EBITDA was impacted this fiscal year by an inventory write down, albeit to a much
lesser extent than last fiscal year, where the Company wrote down inventory in the third quarter in response to a drop in cheese prices in
the international market. The strengthening of the Canadian dollar in the third and fourth quarters of fiscal 2010 was more predominant
versus the weakening of the Canadian dollar in the first and second quarters of fiscal 2010, eroding both revenues and EBITDA in the
fiscal year. The Company also completed the F&A Dairy Acquisition in the USA Dairy Products Sector and included a full year’s activities
of the Neilson Dairy Acquisition in the CEA Dairy Products Sector increasing both revenues and EBITDA. The quarterly earnings directly
reflect the effects of the previously mentioned items.
SAPUTO_ 2010 ANNUAL REPORT_31
ANALYSIS OF EARNINGS FOR THE YEAR ENDED MARCH 31, 2009
COMPARED TO MARCH 31, 2008
Consolidated revenues in fiscal 2009 totalled $5.793 billion, an increase of $734.4 million or 14.5% compared to $5.059 billion for
fiscal 2008. Our USA Dairy Products Sector revenues increased by approximately $377 million. The inclusion of the Alto Acquisition,
along with selling price increases offset lower revenues due to lower sales volumes and the downward trend of the dairy ingredients
market. These factors combined accounted for approximately $332 million of additional revenues. An average block market per pound
of cheese of US$1.71 in fiscal 2009, compared to US$1.88 in fiscal 2008, negatively affected revenues by approximately $96 million.
Revenues from our CEA Dairy Products Sector increased by approximately $357 million in comparison to fiscal 2008. The inclusion of
four months of revenues from the Neilson Dairy Acquisition, in addition to higher selling prices in our Canadian and Argentinean
operations, in accordance with the increase in the cost of milk as raw material and increased sales volumes from our Argentinean
activities explain the increased revenues in this Sector. Less favourable dairy ingredients market conditions decreased revenues in fiscal
2009 as compared to the prior fiscal year. Revenues from our Grocery Products Sector remained relatively stable, increasing by
approximately $0.5 million in comparison fiscal 2008. The weakening of the Canadian dollar in fiscal 2009 added approximately
$150 million in revenues in comparison to fiscal 2008.
Consolidated earnings before interest, income taxes, depreciation and amortization (EBITDA) amounted to $547.8 million in fiscal
2009, an increase of $21.8 million or 4.1% compared to the $526.0 million for fiscal 2008. The increase was mainly due to the CEA Dairy
Products Sector, for which EBITDA amounted to $378.9 million in fiscal 2009, an increase of $15.5 million in comparison to
$363.4 million for the preceding fiscal year. This increase was mainly attributed to the inclusion of the Neilson Dairy Acquisition, in
addition to better efficiencies, including cost reduction initiatives in production, warehousing and logistics, and increased sales volumes
from the Argentinean operations as compared to the prior fiscal year. The negative impact of the unfavourable dairy ingredients market
conditions decreased EBITDA by approximately $23 million. The EBITDA of the Dairy Products Division (Europe) was negatively affected
due to difficult market conditions.
The EBITDA of the USA Dairy Products Sector amounted to $152.0 million, an increase of $6.5 million in comparison to $145.5 million
for fiscal 2008. The inclusion of the Alto Dairy Cooperative acquired on April 1, 2008 in the US (Alto Acquisition), as well as the initiatives
undertaken by the Company in prior and current fiscal years with regards to improved operational efficiencies and increased selling
prices benefitted the EBITDA. The decision by the USDA in the third quarter of fiscal 2009 to change the product-price formula also had
a positive impact on EBITDA. These benefits offset increased ingredients, fuel and other costs during fiscal 2009. Also, the Sector
incurred approximately $2 million of rationalization charges in relation to the closure of the facility in Hinesburg, Vermont. These factors
combined increased EBITDA by approximately $26 million as compared to the prior fiscal year. An average block market per pound of
cheese of US$1.71 in fiscal 2009 in comparison to US$1.88 in fiscal 2008 negatively impacted EBITDA, causing an unfavourable basis of
absorption of the fixed costs and having an unfavourable impact on the realization of the inventories in fiscal 2009. In addition, the
Sector’s EBITDA decreased due to an unfavourable dairy ingredients market as compared to fiscal 2008. These decreases were offset by a
more favourable relationship between the average block market per pound of cheese and the cost of milk as raw material as compared to
the prior fiscal year. Included in the EBITDA is an inventory write down of $12.5 million. These market factors combined had a negative
impact of approximately $30 million on the EBITDA of fiscal 2009 as compared to fiscal 2008. Finally, the weakening of the Canadian
dollar added approximately $11 million to fiscal 2009’s EBITDA.
The EBITDA of the Grocery Products Sector decreased by $0.3 million to $16.9 million in fiscal 2009, from $17.2 million in fiscal 2008.
This decrease is mainly due to additional costs in an effort to support its brands, along with a decrease in sales volumes and higher
ingredients, packaging, labour and energy costs totalling approximately $5 million. These factors offset the benefits from the selling
price increase.
The consolidated EBITDA margin decreased to 9.5% in fiscal 2009 as compared to 10.4% in fiscal 2008. This decrease is due to lower
EBITDA margins achieved by all the sectors as compared to fiscal 2008.
Depreciation and amortization expense totalled $108.3 million in fiscal 2009, an increase of $28.9 million over $79.4 million in fiscal
2008. The increase is mainly attributed to the Alto Acquisition in the USA Dairy Products Sector and the Neilson Dairy Acquisition in the
CEA Dairy Products Sector. Also included in depreciation and amortization expense is an impairment amount of $8.6 million for the
closure of the Hinesburg, Vermont manufacturing facility. In addition, capital investments undertaken by all divisions in fiscal 2009 and
2008 also contributed to increase depreciation expense.
Net interest expense amounted to $31.7 million in fiscal 2009 compared to $25.3 million in fiscal 2008. The increase is mainly due to
the Alto and Neilson Dairy Acquisitions as well as the weakening of the Canadian dollar increasing the interest expense on the US dollar
debt.
32_SAPUTO_ 2010 ANNUAL REPORT
Income taxes totalled $128.9 million in fiscal 2009 as compared to $133.1 million for an effective tax rate of 31.6% in both fiscal 2009
and 2008. During the second quarter of fiscal 2008, the Company recorded a tax charge of approximately $3 million due to a reduction
of future income tax assets recorded in previous fiscal years for the Argentinean Division. In the third quarter of fiscal 2008, this charge
was offset by a one-time tax benefit of approximately $6.5 million to reflect the reduction in the Canadian federal tax rates sanctioned in
December 2007. The income tax rate varies and could increase or decrease based on the amount of taxable income derived and from
which source, any amendments to tax laws and income tax rates and changes in assumptions and estimates used for tax assets and
liabilities by the Company and its affiliates.
Net earnings for the fiscal year ended March 31, 2009 totalled $278.9 million, a decrease of $9.3 million or 3.2% compared to
$288.2 million in fiscal 2008. The decrease is due to the factors mentioned above.
OUTLOOK
In fiscal 2011, the Company intends on maintaining its sound approach and continue to maximize efficiencies. Saputo’s goal remains
to pursue growth internally and through acquisitions. The Company’s flexible capital structure and low debt levels allows it to actively
pursue and evaluate strategic investment opportunities, with the goal of expanding its presence in key markets. With the adoption of
IFRS on the horizon, the Company will pursue its convergence plan, ensuring a smooth transition with respect to its systems and
operations. From an operational standpoint, the Company remains committed to product innovation and will also continue the
analysis of its activities and follow through on the implementation of measures aimed at improving efficiencies.
SAPUTO_ 2010 ANNUAL REPORT_33
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation and presentation of the consolidated financial statements and the financial information
presented in this annual report. This responsibility includes the selection of accounting policies and practices and making judgments and
estimates necessary to prepare the consolidated financial statements in accordance with generally accepted accounting principles.
Management has also prepared the financial information presented elsewhere in this annual report and has ensured that it is consistent
with the consolidated financial statements.
Management maintains systems of internal control designed to provide reasonable assurance that assets are safeguarded and that
relevant and reliable financial information is being produced.
The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is responsible
for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility principally
through its Audit Committee, which is comprised solely of independent directors. The Audit Committee meets periodically with
Management and the external auditors to discuss internal controls, auditing matters and financial reporting issues. It also reviews the
annual report, the consolidated financial statements and the external auditors’ report. The Audit Committee recommends the external
auditors for appointment by the shareholders. The external auditors have unrestricted access to the Audit Committee. The consolidated
financial statements have been audited by the external auditors Deloitte & Touche LLP, whose report follows.
Lino A. Saputo, Jr.
President and
Louis-Philippe Carrière, FCA
Executive Vice President,
Chief Executive Officer
Finance and Administration, and Secretary
May 28, 2010
AUDITORS’ REPORT TO THE SHAREHOLDERS OF SAPUTO INC.
We have audited the consolidated balance sheets of Saputo Inc. as at March 31, 2010 and 2009 and the consolidated statements of
earnings, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the
Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
March 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.
1
Montréal, Québec
May 28, 2010
1 Chartered accountant auditor permit n˚ 18190.
34_SAPUTO_ 2010 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended March 31
(in thousands of CDN dollars, except per share amount)
Revenues
Cost of sales, selling and administrative expenses
Earnings before interest, depreciation, amortization and income taxes
Depreciation and amortization (Notes 4 and 5)
Operating income
Interest on long-term debt
Other interest, net (Note 12)
Earnings before income taxes
Income taxes (Note 13)
Net earnings
Earnings per share (Note 14)
Net earnings
Basic
Diluted
2010
2009
$
5,810,582
$
5,793,263
5,118,511
5,245,464
692,071
113,506
578,565
29,901
5,161
543,503
160,789
547,799
108,284
439,515
20,684
11,031
407,800
128,852
$
382,714
$
278,948
$
1.85
$
1.35
$
1.83
$
1.34
SAPUTO_ 2010 ANNUAL REPORT_35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands of CDN dollars, except common shares)
For the year ended March 31, 2010
Share capital (Note 10)
Common
Shares (in
thousands)
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Contributed
Surplus
Total
Shareholders'
Equity
207,087
$
555,529
$
1,373,856
$
16,219
$
26,744
$
1,972,348
Balance at beginning of year
Comprehensive income:
Net earnings
Net change in currency translation of financial statements
of self-sustaining foreign operations
Net change on derivative financial instruments designated
as cash flow hedges, net of tax
Total comprehensive income
Dividends declared
Stock based compensation
-
-
-
-
-
-
-
-
-
-
Shares issued under stock option plan
1,759
26,008
Amount transferred from contributed surplus to share capital
upon exercise of options
Excess tax benefit that results from the excess of the
deductible amount over the compensation cost recognized
-
-
7,075
-
382,714
-
-
-
(205,527)
1,263
(118,996)
-
-
-
-
-
-
-
-
8,060
-
382,714
(205,527)
1,263
178,450
(118,996)
8,060
26,008
(7,075)
-
792
-
792
(38,064)
-
-
-
-
-
-
Shares repurchased and cancelled
Balance at end of year1
Balance at beginning of year
Comprehensive income:
Net earnings
Net change in currency translation of financial statements
of self-sustaining foreign operations
Net change on derivative financial instruments designated
as cash flow hedges, net of tax
Total comprehensive income
Dividends declared
Stock based compensation
(1,420)
(3,863)
(34,201)
207,426
$
584,749
$
1,603,373
$
(188,045)
$
28,521
$
2,028,598
For the year ended March 31, 2009
Share capital (Note 10)
Common
Shares (in
thousands)
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Contributed
Surplus
Total
Shareholders'
Equity
205,963
$
536,921
$
1,206,568
$
(146,414)
$
22,085
$
1,619,160
-
-
-
-
-
-
-
-
-
-
278,948
-
-
-
163,896
(1,263)
(111,660)
-
-
-
-
-
-
-
-
-
-
-
-
-
7,791
-
(3,687)
555
278,948
163,896
(1,263)
441,581
(111,660)
7,791
14,921
-
555
$
1,373,856
$
16,219
$
26,744
$
1,972,348
Shares issued under stock option plan
1,124
14,921
Amount transferred from contributed surplus to share capital
upon exercise of options
-
3,687
Excess tax benefit that results from the excess of the
deductible amount over the compensation cost recognized
Balance at end of year2
555,529
1 Retained Earnings and Accumulated Other Comprehensive Income total is $1,415,328.
2 Retained Earnings and Accumulated Other Comprehensive Income total is $1,390,075.
207,087
$
-
-
36_SAPUTO_ 2010 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
As at March 31
(in thousands of CDN dollars)
ASSETS
Current assets
Cash and cash equivalents
Receivables
Inventories (Note 2)
Income taxes
Future income taxes (Note 13)
Prepaid expenses and other assets
Portfolio investment (Note 3)
Fixed assets (Note 4)
Goodwill (Note 5)
Trademarks and other intangibles (Note 5)
Other assets (Note 6)
Future income taxes (Note 13)
LIABILITIES
Current liabilities
Bank loans (Note 7)
Accounts payable and accrued liabilities
Income taxes
Future income taxes (Note 13)
Current portion of long-term debt (Note 8)
Long-term debt (Note 8)
Other liabilities (Note 9)
Future income taxes (Note 13)
SHAREHOLDER'S EQUITY
On behalf of the Board,
Lino Saputo
Director
Louis A. Tanguay
Director
2010
2009
$
54,819
$
43,884
367,069
566,754
5,940
22,302
29,494
427,227
583,594
9,585
23,881
37,501
1,046,378
1,125,672
41,343
41,343
1,038,756
1,149,662
716,695
316,613
90,272
3,394
760,283
327,516
88,326
6,301
$
3,253,451
$
3,499,103
$
61,572
$
139,399
471,106
149,377
8,639
-
690,694
380,790
9,694
143,675
484,866
113,910
6,348
214,421
958,944
403,065
22,180
142,566
1,224,853
1,526,755
2,028,598
1,972,348
$
3,253,451
$
3,499,103
SAPUTO_ 2010 ANNUAL REPORT_37
2010
2009
$
382,714
$
278,948
8,060
113,506
300
19,874
2,238
(3,853)
522,839
60,776
583,615
(49,613)
(106,876)
542
(16,965)
(172,912)
(71,935)
330,000
(518,517)
26,008
(38,064)
(118,996)
(391,504)
19,199
(8,264)
43,884
7,791
108,284
(3,450)
2,721
(62)
(4,761)
389,471
77,817
467,288
(630,353)
(121,863)
9,032
(12,181)
(755,365)
(81,682)
340,000
-
14,921
-
(111,660)
161,579
(126,498)
4,672
165,710
$
54,819
$
43,884
$
34,843
$
29,242
$
100,068
$
124,829
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31
(in thousands of CDN dollars)
Cash flows related to the following activities:
Operating
Net earnings
Items not affecting cash and cash equivalents
Stock based compensation
Depreciation and amortization
Loss (gain) on disposal of fixed assets
Future income taxes
Deferred share units
Funding of employee plans in excess of costs
Changes in non-cash operating working capital items
Investing
Business acquisitions (Note 15)
Additions to fixed assets
Proceeds on disposal of fixed assets
Other assets and other liabilities
Financing
Bank Loans
Proceeds from issuance of long-term debt
Repayment of long-term debt
Issuance of share capital
Repurchase of share capital
Dividends
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental information
Interest paid
Income taxes paid
38_SAPUTO_ 2010 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2010 and 2009
(Tabular amounts are in thousands of CDN dollars except information on options, units and shares.)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING POLICIES
During the year, the Company adopted the following new accounting policies as described in the CICA Handbook (Canadian Institute of
Chartered Accountants):
GOODWILL AND INTANGIBLE ASSETS
Effective April 1, 2009, the Company adopted Section 3064 of the CICA Handbook, Goodwill and Intangible Assets, which replaces
Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The new section establishes
standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented companies. Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. The adoption of this new section had no significant impact on the consolidated financial statements.
FINANCIAL INSTRUMENTS - DISCLOSURES
In June 2009, the CICA amended Section 3862 to improve fair value and liquidity risk disclosures. Section 3862 now requires that all
financial instruments measured at fair value be categorized into one of three hierarchy levels, described below, for disclosure purposes.
Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities:
- Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.
- Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly.
- Level 3 – one or more significant inputs used in a valuation technique are not based on observable market data in determining fair
values of the instruments.
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification
of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The
additional disclosures required as a result of the adoption of these standards are included in the Notes to the Consolidated Financial
Statements (Note 19).
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
In the preparation of financial statements in conformity with Canadian GAAP, Management must make estimates such as the net
realizable value of inventories, the useful life, impairment and depreciation of fixed assets, the valuation of goodwill, portfolio
investments, trademarks and other intangibles, purchase price allocation, fair value of financial instruments and income taxes and
certain actuarial and economic assumptions used in determining defined benefit pension costs, fair value of long-lived assets, accrued
pension benefit obligations and pension plan assets, and stock-based compensation that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the revenues and expenses for
the period. Actual results could differ from these estimates.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and
balances have been eliminated. Investments over which the Company has effective control are consolidated. The operating results of
acquired businesses, from their respective acquisition dates, are included in the consolidated statements of earnings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists primarily of unrestricted cash and short-term investments having an initial maturity of three months
or less at the time of acquisition.
SAPUTO_ 2010 ANNUAL REPORT_39
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
INVENTORIES
Finished goods, raw materials and work in process are valued at the lower of cost and net realizable value. Cost being determined under
the first in, first out method.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the
enacted or substantively enacted tax rates that will be in effect when the differences are expected to reverse. Future income tax assets
are recognized only to the extent that, in the opinion of Management, it is more likely than not that the future income tax asset will be
realized.
INVESTMENT
The portfolio investment is recorded at cost less the excess of dividends received over the Company’s share in accumulated earnings.
The Company monitors its investment for other than temporary declines in fair value and charges net earnings when other than
temporary decline in estimated value occurs.
FIXED ASSETS
Fixed assets are stated at cost and are depreciated using the straight-line method over their estimated useful lives based on the
following terms:
Buildings
Furniture, machinery and equipment
Rolling stock
20 to 40 years
3 to 20 years
5 to 10 years or based on kilometres traveled
Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to dispose, and no depreciation is
recorded. Assets under construction are not amortized.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event indications exist that the carrying amount of long-lived assets may not be recoverable, undiscounted estimated cash flows
are projected over their remaining term, and compared to the carrying amount. To the extent such projections indicate that future
undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge is recorded to reduce the carrying
amount to equal to fair value, as represented by projected future discounted cash flows.
GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
Goodwill and trademarks are not amortized; however they are tested for impairment annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired. The carrying values of goodwill and trademarks are compared with their
respective fair values, and an impairment loss is recognized for the excess, if any. Other intangibles are amortized using the straight-line
method over their useful lives which vary from 5 to 15 years.
BUSINESS COMBINATIONS
The Company accounts for its business combinations using the purchase method of accounting. Under this method, the Company
allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on estimated fair values at the date
of acquisition, with the excess of the purchase price amount allocated to goodwill.
EMPLOYEE FUTURE BENEFITS
The cost of pension and other post-retirement benefits is actuarially determined using the projected benefit method prorated on
services and using Management estimates of expected return on plan assets, which is based on market-related value, rates of
compensation increase, retirement ages of employees and expected health care costs and other post retirement benefits. Current service
costs are expensed in the year. In accordance with GAAP, past service costs and the excess of the net actuarial gains or losses related to
defined benefit pension plans over 10% of the greater of the benefit obligations or fair value of plan assets are amortized over the
expected average remaining service period of active employees entitled to receive benefits under the plans. The Company recognizes
changes in the fair value of plan assets over a period of five years to determine the defined benefit pension costs. In the case where a
plan restructuring entails both a plan curtailment and settlement of obligations from the plan, the curtailment is recorded before the
settlement. The average remaining service period of active participants covered by the pension plans is 11.8 years. The net pension
expenditure under defined contribution pension plans is generally equal to the contributions made by the employer.
40_SAPUTO_ 2010 ANNUAL REPORT
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of goods when the title and risk of loss are transferred to customers, price is
determinable, collection is reasonably assured and when persuasive evidence of an arrangement exists. Revenues are recorded net of
sales incentives including volume rebates, shelving or slotting fees and advertising rebates.
FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of the self-sustaining companies operating outside Canada are translated into Canadian dollars using the
exchange rates at the balance sheet dates. Statement of earnings accounts are translated into Canadian dollars using the average
monthly exchange rates in effect during the periods. The unrealized gains (losses) on translation of the financial statements of self-
sustaining foreign operations account presented in accumulated other comprehensive income (loss) represents accumulated foreign
currency gains (losses) on the Company’s net investments in companies operating outside Canada. The change in the unrealized gains
(losses) on translation of the financial statements of self-sustaining foreign operations account for the period resulted mainly from the
fluctuation in the value of the Canadian dollar as compared to the US dollar.
Foreign currency accounts of the Company and its subsidiaries are translated using the exchange rates at the balance sheet dates for
monetary assets and liabilities and the prevailing exchange rates at the time of transactions for income and expenses. Non-monetary
items are translated at the historical exchange rates. Gains or losses resulting from this translation are included in the cost of sales,
selling and administrative expenses.
Foreign currency (loss) gain
STOCK-BASED COMPENSATION
2010
2009
$ (348)
$ 1,962
The fair value based method of accounting is used to expense stock-based compensation awards. This method consists of recording
compensation cost to earnings over the vesting period of options granted. When stock options are exercised, any consideration paid by
employees and the related compensation expense recorded as contributed surplus are credited to share capital.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares outstanding during the year. The dilutive effect of stock
options is determined using the treasury stock method.
RESEARCH AND DEVELOPMENT TAX CREDITS
The Company benefits from research and development tax credits related to operating costs and fixed assets. These credits are
accounted for either as a reduction of operating costs or fixed assets.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are initially measured at fair value. Subsequently, financial instruments classified as financial assets
available for sale, held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at
fair value on the balance sheet at each reporting date, whereas other financial instruments are measured at amortized cost using the
effective interest method.
The Company has made the following classifications:
-
-
-
Cash and cash equivalents are classified as financial assets held for trading and are measured at fair value.
Accounts receivable are classified as loans and receivables and are measured at amortized cost.
Portfolio investment is classified as available for sale, and is carried at cost since it does not have a quoted price in an active market.
- Other assets that meet the definition of a financial asset are classified as loans and receivables and are initially measured at fair
value and subsequently at amortized cost.
-
Bank loans, accounts payable and accrued liabilities, other liabilities and long-term debt are classified as other liabilities and are
measured at amortized cost, with the exception of the liability related to deferred share units which is measured at fair value.
- Derivative financial instruments are measured at fair value. The change in fair value of the effective portion of the hedge, when
applicable, is recognized in other comprehensive income, net of income taxes.
SAPUTO_ 2010 ANNUAL REPORT_41
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
HEDGES
The Company uses interest rate derivatives to manage the combination of floating to fixed interest rates on its bank debt. The Company
currently uses cash flow hedges and does not use any fair value hedges. For its cash flow hedges, the effective portion of the changes in
fair value of the hedging item is recognized in accumulated other comprehensive income, whereas the ineffective portion is recognized
in interest expense. The amounts recognized in accumulated other comprehensive income, with respect to cash flow hedges, are
reclassified in net earnings in the period or periods during which the hedged item affects net earnings.
FUTURE ACCOUNTING POLICIES
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting
requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected
five-year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to
use IFRS, replacing Canada’s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2011. Accordingly, the Company's transition date of April 1, 2011 will require the restatement for comparative purposes
of amounts reported by the Company for the year ended March 31, 2011. While the Company is in the second phase of its convergence
plan and proceeding according to schedule the financial reporting impact of the transition to IFRS cannot be quantified at this time.
BUSINESS COMBINATIONS
In 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581 of the same name. This new section will be
applicable to business combinations for which the acquisition date is on or after the Company’s interim and fiscal year beginning
April 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a
reporting entity provides in its financial statements about a business combination and its effects. The Company has not yet determined
the impact of the adoption of this new Section on the consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
In 2009, the CICA issued Section 1601, Consolidated Financial Statements, replacing Section 1600 of the same name. This new section
will be applicable to financial statements relating to the Company’s interim and fiscal year beginning on or after April 1, 2011. Early
adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Company has not
yet determined the impact of the adoption of this new Section on the consolidated financial statements.
NON-CONTROLLING INTERESTS
In 2009, the CICA issued Section 1602, Non-Controlling Interests. This new Section will be applicable to financial statements relating to
the Company’s interim and fiscal year beginning on or after April 1, 2011. Early adoption is permitted. This Section establishes standards
for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination.
The Company has not yet determined the impact of the adoption of this new Section on the consolidated financial statements.
NOTE 2 INVENTORIES
Finished goods
Raw materials, work in process and supplies
2010
2009
$
372,373
$
368,456
194,381
215,138
$
566,754
$
583,594
The amount of inventories recognized as an expense in cost of sales for the year ended March 31, 2010 is $4,579,330,000
($4,715,075,000 for the year ended March 31, 2009).
The Company recorded an inventory write down of $2,109,000 ($20,900,000 in 2009) which was recognized as an expense in cost of
sales.
42_SAPUTO_ 2010 ANNUAL REPORT
NOTE 3 PORTFOLIO INVESTMENT
21% sha re capital interest in Dare Holdings Ltd .
2 010
2 009
$
41,343
$
41,343
A dividend of $1,500,000 was received during fiscal 2010 and was accounted for in revenues ($1,500,000 in 2009).
NOTE 4 FIXED ASSETS
2010
Cost
Accumulated
depreciation Net book value
2009
Accumulated
depreciation
Cost
Net book value
Land
$
38,920
$
-
$
38,920
$
42,243
$
-
$
42,243
382,480
92,164
290,316
417,335
90,675
326,660
Buildings
Furniture, machinery
and equipment
Rolling stock
Held for sale
1,242,504
13,117
6,008
543,674
8,435
-
698,830
1,321,468
4,682
6,008
13,329
2,502
548,676
7,864
-
772,792
5,465
2,502
$
1,149,662
644,273
During the year, the depreciation expense related to fixed assets totalled $105,609,000 ($97,245,000 in 2009).
1,683,029
1,038,756
1,796,877
$
$
$
$
$
647,215
An impairment of fixed assets in the amount of $2,603,000 was recorded as a result of a plant closure and consolidation of distribution
activities in the CEA Dairy Products Sector ($8,649,000 in 2009 in the USA Dairy Products Sector) and is included in depreciation and
amortization expense.
In 2009, a gain on disposal of fixed assets held for sale totalling $3,450,000 was recorded in cost of sales, selling and administrative
expenses.
The net book value of fixed assets under construction amounts to $46,271,000 as at March 31, 2010 ($67,707,000 as at
March 31, 2009) and consists mainly of machinery and equipment.
The assets held for sale relate mainly to land and buildings in Canada and in the United States as a result of certain plant closures.
SAPUTO_ 2010 ANNUAL REPORT_43
NOTE 5 GOODWILL, TRADEMARKS AND OTHER INTANGIBLES
2010
2009
Dairy Products
Sector
Grocery Products
Sector
Dairy Products
Sector
Grocery Products
Sector
Total
Total
Goodwill
Balance, beginning of year
$ 590,853 $ 169,430 $ 760,283 $ 353,116 $ 169,430 $ 522,546
Foreing currency
translation adjustment
(64,328) -
(64,328)
61,508
- 61,508
Business acquisitions
(Note 15)
20,740 - 20,740 176,229 - 176,229
Total Goodwill
$ 547,265 $ 169,430 $ 716,695 $ 590,853 $ 169,430 $ 760,283
Trademarks
Balance, beginning of year
$ 255,955 $ 2,000 $ 257,955 $ 28,125 $ 2,000 $ 30,125
Foreing currency
translation adjustment
(4,903) - (4,903) 4,630 - 4,630
Business acquisitions
(Note 15)
- - - 223,200 - 223,200
Balance, end of year
$ 251,052 $ 2,000 $ 253,052 $ 255,955 $ 2,000 $ 257,955
Other intangibles
Balance, beginning of year
$ 69,561 $ - $ 69,561 $ 7,918 $ - $ 7,918
Foreing currency
translation adjustment
(817) - (817) 933 - 933
Business acquisitions
(Note 15)
Amortization
Balance, end of year
Total trademarks
and other intangibles
111 - 111 63,100 - 63,100
(5,294) - (5,294) (2,390) - (2,390)
69,561
$
$
-
$
-
$
$
$
63,561
63,561
69,561
$
314,613
$
2,000
$
316,613
$
325,516
$
2,000
$
327,516
The gross carrying amount of Other intangibles is $71,479,000 as at March 31, 2010 ($72,707,000 in 2009) and the accumulated
amortization is $7,918,000 as at March 31, 2010 ($3,146,000 in 2009).
NOTE 6 OTHER ASSETS
Net accrued pension plan assets (Note 16)
Taxes receivables
Other
2010
2009
$
64,451
$
61,040
15,893
9,928
18,993
8,293
$
90,272
$
88,326
44_SAPUTO_ 2010 ANNUAL REPORT
NOTE 7 BANK LOANS
The Company has available bank credit facilities providing for unsecured bank loans as follows:
Available for use
Amount drawn
Credit Facilities
Canadian Currency
Equivalent
Maturity
Base Currency
North America-US Currency
¹December 2012
132,054
130,000
North America-CDN Currency
¹December 2012
375,846
370,000
Canada
Argentina
Germany
United Kingdom
Amount classified as long-term debt
May 2009
² Yearly
³ Yearly
³ Yearly
-
73,490
6,869
10,795
599,054
-
281,140
5,000
7,000
USD
USD
ARS
EUR
BPS
2010
-
30,000
-
28,213
-
3,359
61,572
-
61,572
2009
-
390,000
40,000
47,927
1,472
-
479,399
(340,000)
139,399
¹ Bear monthly interest at rates based on lender's prime rates plus a maximum of 0.25% or LIBOR or banker's acceptance rate plus 0.50% up to a maximum
of 1.125%, depending on a financial ratio of the Company.
² Bear monthly interest at local rate and can be drawn in ARS or USD.
³ Bear monthly interest at base rate plus 1.50% or LIBOR-EURIBOR plus 1.50%.
NOTE 8 LONG-TERM DEBT
Unsecured senior notes¹
2010
2009
8.12%, issued in November 1999 and due in November 2009 (US$170,000,000)
$
-
$
214,421
8.41%, issued in November 1999 and due in November 2014 (US$50,000,000)
5.34%, issued in June 2009 and due in June 2014
5.82%, issued in June 2009 and due in June 2016
Bank loan - long-term portion (Note 7)
Current portion
Estimated principal repayments are as follows:
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
¹Interest payments are semi-annual.
NOTE 9 OTHER LIABILITIES
Employee future benefits (Note 16)
Other
50,790
110,000
220,000
-
380,790
-
63,065
-
-
340,000
617,486
214,421
$
380,790
$
403,065
$
-
$
200,000
-
-
-
160,790
220,000
140,000
-
-
-
63,065
$
380,790
$
403,065
2010
2009
$
9,256
$
9,797
438
12,383
$
9,694
$
22,180
SAPUTO_ 2010 ANNUAL REPORT_45
NOTE 10 SHARE CAPITAL
AUTHORIZED
The authorized share capital of the Company consists of an unlimited number of common and preferred shares. The common shares are
voting and participating. The preferred shares may be issued in one or more series, the terms and privileges of each series to be
determined at the time of their creation.
ISSUED
207,425,823 comm on shares (207,087,283 i n 2009)
2010
2009
$
584,749
$
555,529
1,758,740 common shares (1,124,319 in 2009) were issued during the year ended March 31, 2010 for an amount of $26,008,000
($14,921,000 in 2009) pursuant to the share option plan. For share options granted since April 1, 2002, the amount previously
accounted for as an increase to contributed surplus was also transferred to share capital upon the exercise of options. For the year
ended March 31, 2010, the amount transferred from contributed surplus was $7,075,000 ($3,687,000 in 2009).
Pursuant to the normal course issuer bid, which began on November 13, 2008, and expired on November 12, 2009, the Company was
authorized to purchase for cancellation up to 10,340,377 of its common shares. Under the new normal course issuer bid that became
effective on November 13, 2009, and expiring on November 12, 2010, the Company is authorized to purchase, for cancellation
purposes, up to 10,322,467 of its common shares. During the year ended March 31, 2010, the Company purchased 1,420,200 common
shares, at prices ranging from $24.10 to $29.99 per share, relating to the normal course issuer bids. The excess of the purchase price
over the carrying value of the shares in the amount of $34,201,000 was charged to retained earnings. During the year ended March 31,
2009 the Company did not purchase any common shares under the normal course issuer bids.
SHARE OPTION PLAN
The Company established a share option plan to allow for the purchase of common shares by key employees, officers and directors of
the Company. The total number of common shares which may be issued pursuant to this plan cannot exceed 28,000,000 common
shares. As at March 31, 2010, 14,838,951 common shares are issuable under this plan. Options granted prior to July 31, 2007 may be
exercised at a price equal to the closing quoted value of the shares on the day preceding the grant date. Options granted thereafter may
be exercised at a price not less than the weighted average market price for the five trading days immediately preceding the date of grant.
The options vest at 20% per year and expire ten years from the grant date.
46_SAPUTO_ 2010 ANNUAL REPORT
NOTE 10 SHARE CAPITAL (CONT’D)
Options issued and outstanding as at the year ends are as follows:
2010
2009
Granting
period
Exercise
price
Number of
options
Number of
exercisable options
Number of
options
Number of
exercisable options
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$
9.85
$
6.75
$
9.50
$
15.18
$
11.25
$
16.53
$
18.08
$
16.35
$
23.09
$
27.81
$
21.40
-
33,644
182,307
322,158
572,238
670,588
1,011,254
1,412,668
1,502,581
1,522,354
2,183,958
9,413,750
-
33,644
182,307
322,158
572,238
670,588
721,888
645,677
547,815
306,704
-
33,436
157,440
269,398
544,730
908,166
1,003,300
1,255,410
1,765,450
1,618,484
1,573,027
-
33,436
157,440
269,398
544,730
908,166
723,258
657,616
575,704
307,012
-
-
4,003,019
9,128,841
4,176,760
Changes in the number of outstanding options are as follows:
2010
2009
Number of
options
Weighted
average
exercise price
Number of
options
Weighted
average
exercise price
Balance at beginning of year
9,128,841
$
16.93
8,893,428
$
16.52
Options granted
Options exercised
Options cancelled
Balance at end of year
2,232,039
$
21.40
1,634,393
$
27.81
(1,758,740)
$
14.78
(1,124,319)
$
13.27
(188,390)
$
20.91
(274,661)
$
20.83
9,413,750
$
18.65
9,128,841
$
16.93
The exercise price of the options granted in fiscal 2010 is $21.40, which corresponds to the weighted average market price for the five
trading days immediately preceding the date of grant ($27.81 in 2009).
The fair value of options granted in fiscal 2010 was estimated at $3.26 per option ($4.98 in 2009), using the Black Scholes option pricing
model with the following assumptions:
Risk-free interest rate:
Expected life of options:
Volatility:
Dividend rate:
2010
2009
1.9%
5 years
19.1%
2.0%
3.0%
5 years
19.0%
1.7%
A compensation expense of $8,060,000 ($7,224,000 after income taxes) relating to stock options was recorded in cost of sales, selling
and administrative expenses for the year ended March 31, 2010 and $7,791,000 ($6,865,000 after income taxes) was recorded for the
year ended March 31, 2009.
Options to purchase 1,753,233 common shares at a price of $29.32 were granted on April 1, 2010.
DEFERRED SHARE UNITS PLAN FOR DIRECTORS
In accordance with the deferred share units plan, all eligible directors of the Company are allocated annually a fixed amount of deferred
share units which are granted on a quarterly basis. Moreover, the directors have a choice to receive either cash or deferred
SAPUTO_ 2010 ANNUAL REPORT_47
NOTE 10 SHARE CAPITAL (CONT’D)
share units for their compensation. The number of units issued to each director is based on the market value of the Company’s common
shares at each grant date. Following cessation of functions as director of the Company, a cash payment equal to the market value of the
accumulated deferred share units will be disbursed. The liability relating to these units is adjusted by taking the number of units
outstanding multiplied by the market value of common shares at the Company’s year-end. The variation of the liability is recorded as an
expense in cost of sales, selling and administrative expenses.
Beginning of year
Annual grant
Board compensation
Increase (decrease) due to change in stock price
2010
Units
Liability
2009
Units
Liability
146,063
$
3,385
112,601
$
3,447
20,000
15,335
-
549
415
1,274
18,000
15,462
-
433
364
(859)
End of year
181,398
$
5,623
146,063
$
3,385
NOTE 11 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on translation
of financial statements of self-sustaining foreign operations
Losses on derivatives items designated as hedges
of interest cash flows, net of tax
Balance
as at
April 1, 2009
Net changes
incurred during
the year
Balance
as at
March 31, 2010
$
17,482
$
(205,527)
$
(188,045)
(1,263)
1,263
-
Accumulated other comprehensive income (loss)
$
16,219
$
(204,264)
$
(188,045)
Net unrealized (losses) gains on translation
of financial statements of self-sustaining foreign operations
Losses on derivatives items designated as hedges
of interest cash flows, net of tax
Balance
as at
April 1, 2008
Net changes
incurred during
the year
Balance
as at
March 31, 2009
$
(146,414)
$
163,896
$
17,482
-
(1,263)
(1,263)
Accumulated other comprehensive (loss) income
$
(146,414)
$
162,633
$
16,219
NOTE 12 OTHER INTEREST
Expense
In come
NOTE 13 INCOME TAXES
The provision for income taxes is comprised of the following:
Current income taxes
Future income taxes
48_SAPUTO_ 2010 ANNUAL REPORT
2 010
2 009
$
5,216
$
11,380
(55)
(349)
$
5,161
$
11,031
2010
2009
$
140,915
$
126,131
19,874
2,721
$
160,789
$
128,852
NOTE 13 INCOME TAXES (CONT’D)
Reconciliation of income taxes, calculated using statutory Canadian income tax rates, to the income tax provision presented in the
statement of earnings:
Income taxes, calculated using Canadian statutory
income tax rates of 29.52% (31.06% in 2009)
Adjustments resulting from the following:
Effects of tax rates for foreign subsidiaries
Changes in tax laws and rates
Benefit arising from investment in subsidiaries
Stock based compensation
Effect of losses carry forward
Other
Provision for income taxes
2010
2009
$
160,434
$
126,677
10,693
(2,225)
(14,202)
1,838
1,443
2,808
5,306
(857)
(15,008)
1,776
3,493
7,465
$
160,789
$
128,852
The tax effects of temporary differences and other items that give rise to significant portions of the future tax asset and liability are as
follows:
Future income tax asset
Accounts payable and acrrued liabilities
Income tax losses
Portfolio Investment
Other
Future income tax liability
Inventories
Fixed assets
Net assets of pens ion plans
Other assets
Long-term debt
Classified in the financial statements as:
Current future income tax asset
Long-term future income tax asset
Current future income tax liability
Long-term future income tax liability
Net future income tax liability
2 010
2 009
$
14,451
$
14,677
230
743
7,660
2,505
740
7,135
$
23,084
$
25,057
2 010
2 009
$
3,706
$
1,732
109,230
15,203
19,063
2,500
107,310
13,625
10,647
10,475
$
149,702
$
143,789
2010
2009
$
22,302
$
23,881
3,394
(8,639)
6,301
(6,348)
(143,675)
(142,566)
$
(126,618)
$
(118,732)
As at March 31, 2010, in addition to the income tax losses recorded, the Company has income tax losses of approximately
$17,984,000 ($19,760,000 in 2009) which may be used to reduce future years’ taxable income of its foreign subsidiaries. These
losses can be carried forward indefinitely.
NOTE 14 EARNINGS PER SHARE
Net earnings
Weighted average number of common shares outstanding
Dilutive options
Dilutive number of common shares outstanding
Basic earnings per share
Diluted earnings per share
2010
2009
$
382,714
$
278,948
206,987,839
206,720,191
1,857,080
1,595,432
208,844,919
208,315,623
$
1.85
$
1.35
$
1.83
$
1.34
SAPUTO_ 2010 ANNUAL REPORT_49
NOTE 14 EARNINGS PER SHARE (CONT’D)
When calculating dilutive earnings per share, 1,175,232 options (1,573,027 in 2009) were excluded from the calculation because
their exercise price is higher than the average market value.
Shares purchased in fiscal 2010 under normal course issuer bids were excluded from the calculation of earnings per share as of the
date of purchase.
NOTE 15 BUSINESS ACQUISITIONS
On July 20, 2009, the Company completed the acquisition of the activities of F&A Dairy of California, Inc. in the United States.
On December 1, 2008, the Company completed the acquisition of the activities of Neilson Dairy.
On April 1, 2008, the Company completed the acquisition of the cheese activities of Alto Dairy Cooperative in the United States.
Assets acquired
Receivables
Inventories
Prepaid expenses
Fixed assets
Goodwill
Trademarks and other intangibles
March 31, 2010
March 31, 2009
F&A Dairy of
Neilson Dairy
Alto Dairy
California Inc.
Cooperative
$
-
$
29,983
$
31,709
3,860
-
24,902
20,740
111
9,859
378
87,040
112,880
286,300
22,096
262
70,840
63,349
-
Liabilities assumed
Accounts payable and accrued liabilities
$
-
$
56,041
$
27,182
Future income tax
-
1,120
-
Net assets acquired
$
49,613
$
469,279
$
161,074
Consideration
Cash paid
$
49,613
$
469,279
$
161,074
NOTE 16 EMPLOYEE PENSION AND OTHER BENEFITS PLANS
The Company provides benefits and defined contribution pension plans as well as other benefits plans such as health insurance, life
insurance and dental plans to eligible employees and retired employees.
Under the terms of the defined benefit pension plans, pensions are based on years of service and the average salary of the last
employment years or the career salary. The Company and the employee share the cost of the contributions which are based on
recommendations from independent actuaries. For defined benefits plans, actuarial valuations were performed in December 2009,
covering more than 93% of the obligations with respect to this type of plan. The measurement date of pension plan assets and
liabilities is December 31.
The defined contribution pension plans entitle participating employees to an annual contribution giving right to a pension.
Defined benefit pension plans assets are held by several independent trusts, and the composition of the overall portfolio as at
December 31, 2009 was 1% in cash and short-term investments, 51% in bonds and 48% in shares of Canadian, US and foreign
companies. For the moment, the Company does not expect any major change to this asset allocation. The composition as of
December 31, 2008 was 7% in cash and short-term investments, 52% in bonds and 41% in shares of Canadian, US and foreign
companies.
50_SAPUTO_ 2010 ANNUAL REPORT
NOTE 16 EMPLOYEE PENSION AND OTHER BENEFITS PLANS (CONT’D)
FINANCIAL POSITION OF THE PLANS
Changes in accrued benefit obligations
Benefit obligations at beginning of year
$
169,680
$
11,330
$
196,170
12,684
2010
2009
Defined benefit
pension plans
Other benefits
plans
Defined benefit
pension plans
Other benefits
plans
Addition during the year
Current service cost
Interest cost
Benefits paid
Actuarial losses (gains)
Foreign currency (gain) loss
Benefit obligations at end of year
Changes in fair value of plan assets
Fair value of plan assets at beginning of year
Actual return (loss) on plan assets
Employer contributions
Employee contributions
Benefits paid
Foreign currency (loss) gain
Fair value of plan assets at end of year
Funded status
Deficit, end of year
Unamortized actuarial losses
Unamortized past service cost
Valuation allowance
Unamortized transitional (asset) obligation
Asset (liability) as at the measurement date
Employer contributions made from the measurement
date to the end of the year
Net asset (liability) recognized in the
balance sheet
-
4,573
12,302
(13,689)
27,325
(817)
199,374
166,708
23,847
6,264
1,046
(13,689)
(548)
183,628
(15,746)
83,889
645
(295)
(5,282)
63,211
-
24
705
(1,037)
(43)
(384)
10,595
-
-
1,037
-
(1,037)
-
-
(10,595)
608
139
-
581
(9,267)
-
6,137
10,834
(12,848)
(31,341)
728
169,680
192,060
(22,784)
8,611
1,100
(12,848)
569
166,708
(2,972)
68,628
853
(559)
(6,437)
59,513
26
231
674
(1,222)
(1,448)
385
11,330
-
-
1,035
187
(1,222)
-
-
(11,330)
505
201
-
777
(9,847)
1,240
11
1,527
50
$
64,451
$
(9,256)
$
61,040
$
(9,797)
All defined benefit pension plans present an accrued benefit obligation in excess of plan assets.
SAPUTO_ 2010 ANNUAL REPORT_51
NOTE 16 EMPLOYEE PENSION AND OTHER BENEFITS PLANS (CONT’D)
EMPLOYEE BENEFITS PLANS EXPENSE
Defined benefit plans
Employer current service cost
Interest cost on benefit obligations
Actual return on plan assets
Actuarial losses (gains)
Curtailment
Unadjusted benefits expense (income) before taking
into account the long-term nature of the cost
Difference between expected return and actual
return on plan assets
Difference between amortized past service costs and
plan amendment for the year
Difference between net actuarial loss recognized and
actuarial loss on benefit obligations
Transitional (asset) obligation amortization
Defined benefit plans expense before
valuation allowance
Valuation allowance
Defined benefit plans expense
Defined contribution plans expense
2010
2009
Defined benefit
pension plans
Other benefits
plans
Defined benefit
pension plans
Other benefits
plans
$
3,526
$
24
$
5,037
$
42
12,302
(23,847)
27,325
87
19,393
10,075
121
(25,692)
(1,155)
2,742
(264)
2,478
17,997
705
-
(131)
104
702
-
31
41
196
970
-
970
-
10,834
22,784
(31,341)
-
7,314
(37,117)
115
34,651
(1,156)
3,807
(18)
3,789
15,537
674
-
(1,448)
-
(732)
-
59
1,573
196
1,096
-
1,096
-
Total benefit plans expense
$
20,475
$
970
$
19,326
$
1,096
For the year ended March 31, 2010, the Company’s total expense for all its employee benefits plans was $21,445,000 ($20,422,000
in 2009) and the total Company contributions to the employee benefits plans was $25,298,000 ($25,183,000 in 2009).
For the purposes of determining the defined benefit pension cost, the assets of the plans were smoothed. The asset valuation method
used is a smoothed value recognizing gains and losses over a 5-year period, at a rate of 20% per year. Those gains and losses represent
the difference between the actual return and the expected long-term return of the pension fund. This method aims at reducing the effect
of short-term variations in financial markets.
Weighted average assumptions
To determine benefits obligation at the end of year:
Discount rate
Rate of compensation increase
To determine benefits plans expenses:
Discount rate
6.00%
3.50%
7.47%
5.93%
3.50%
6.68%
7.47%
3.50%
5.61%
6.68%
3.50%
5.44%
Expected long-term rate of return on plan assets
N/A
3.50%
For measurement purposes, a 5.5% to 11.0% annual rate of increase was used for health, life insurance and dental plan costs for the
Rate of compensation increase
6.76%
3.50%
7.01%
3.50%
3.50%
N/A
year 2011 and this rate is assumed to decrease gradually to 5.25% in 2015. In comparison, during the previous year, a 6.3% to 7.6%
annual rate was used for the year 2010 and that rate was assumed to decrease gradually to 5% in 2014.
52_SAPUTO_ 2010 ANNUAL REPORT
NOTE 17 COMMITMENTS AND CONTINGENCIES
LEASES
The Company carries on some of its operations in leased premises and has also entered into lease agreements for equipment and rolling
stock. The minimum annual lease payments required for the next fiscal years are as follows:
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
$
12,600
10,285
8,161
7,094
5,261
6,977
$
50,378
The Company guarantees to certain lessors a portion of the residual value of certain leased assets with respect to operations which
mature until 2015. If the market value of leased assets, at the end of the respective operating lease term, is inferior to the guaranteed
residual value, the Company is obligated to indemnify the lessors, specific to certain conditions, for the shortfall up to a maximum
value. The Company believes that the potential indemnification will not have a significant effect on the consolidated financial
statements.
CLAIMS
The Company is defendant to certain claims arising from the normal course of its business. The Company is also defendant in certain
claims and/or assessments from tax authorities in various jurisdictions. The Company believes that the final resolution of these
claims and/or assessments will not have a material adverse effect on its earnings or financial position.
INDEMNIFICATIONS
The Company from time to time offers indemnifications to third parties in the normal course of its business, in connection with
business or asset acquisitions or dispositions. These indemnification provisions may be in connection with breach of representations
and warranties and for future claims for certain liabilities, including liabilities related to tax and environmental matters. The terms of
these indemnification provisions vary in duration. At March 31, 2010, given that the nature and amount of such indemnifications
depend on future events, the Company is unable to reasonably estimate its maximum potential liability under these agreements. The
Company has not made any significant indemnification payments in the past, and as at March 31, 2010 and 2009, the Company has
not recorded a liability associated with these indemnifications.
NOTE 18 RELATED PARTY TRANSACTIONS
The Company receives and provides goods and services from and to companies subject to significant influence through ownership by
its principal shareholder. These transactions were made in the normal course of business and have been recorded at the exchange
amount which corresponds to the fair market value, being the market value of similar transactions.
Goods and services received were the following:
Rent, travel, transport and lodging expenses and canned goods
Management fees for compensation of the Chairman of the Board
2010
2009
$
3,785
$
4,923
$
500
$
500
$
4,285
$
5,423
Goods and services provided were the following:
Dairy products and services provided by the Company
$
384
$
528
There is an amount payable by the Company of $61,000 with respect to these transactions as at March 31, 2010 ($1,380,000 in 2009).
SAPUTO_ 2010 ANNUAL REPORT_53
NOTE 19 FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments which by their nature involve risk, including credit
risk, liquidity risk and market risk. Market risk consists of price risk (including commodity price risk), foreign exchange risk and
interest rate risk. These financial instruments are subject to normal credit conditions, financial controls, risk management as well as
monitoring procedures.
A)
The Company has determined that the fair value of its financial assets and financial liabilities with short-term maturities
FAIR VALUE OF FINANCIAL INSTRUMENTS
approximates their carrying value. These financial instruments include cash and cash equivalents, accounts receivable, bank loans,
accounts payable and accrued liabilities. The table below shows the fair value and the carrying value of other financial instruments as
at March 31, 2010 and 2009. Since estimates are used to determine fair value, they must not be interpreted as being realizable in the
event of a settlement of the instruments.
2010
2009
Fair Value Carrying Value
Fair value
Carrying value
Other assets that meet the definition of a financial asset
$
1,516
$
1,538
$
1,719
$
1,735
Long-term debt
Interest rate swaps
Currency forwards
420,922
380,790
615,554
617,486
(372)
(247)
(372)
(247)
(1,785)
233
(1,785)
233
The following table summarizes the financial instruments measured at fair value in the consolidated balance sheet as at
March 31, 2010, classified using the fair value hierarchy described in Note 1.
Cash and cash equivalents
Interest rate swaps
Currency forwards
Level 1
Level 2
Level 3
Total
$
54,819
$
-
$
-
$
-
$
-
$
(372)
$
-
$
-
$
-
$
(247)
$
-
$
-
Fair values of other assets, long-term debt and derivative financial instruments are determined using discounted cash flow models
based on market inputs prevailing at the balance sheet date and are also obtained from financial institutions. Where applicable, these
models use market-based observable inputs including interest-rate-yield curves, volatility of certain prices or rates and credit
spreads. If market based observable inputs are not available, judgement is used to develop assumptions used to determine fair
values. The Company does not use unobservable inputs that are significant to the fair value measurements in their entirety. The fair
value estimates are significantly affected by assumptions including the amount and timing of estimated future cash flows and
discount rates. The Company’s derivatives transactions are accounted for on a fair value basis.
B)
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents and accounts
CREDIT RISK
receivables.
The cash equivalents consist mainly of short-term deposits. None of the cash equivalents are in asset backed commercial paper
products. The Company has deposited the cash equivalents with reputable financial institutions.
The Company grants credit to its customers in the normal course of business. Credit valuations are performed on a regular basis and
the financial statements take into account an allowance for bad debts.
The Company considers that it has low exposure to concentration of credit risk with respect to accounts receivable from customers
due to its large and diverse customer base operating and its geographic diversity. There are no accounts receivable from any
individual customer that exceeded 10% of the total balance of accounts receivable as at March 31, 2010.
Allowance for doubtful accounts and past due receivables are reviewed by Management at each balance sheet reporting date. The
Company updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of accounts
receivable balances of each customer taking into account historic collection trends of past due accounts. Accounts receivable are
written off once determined not to be collectable.
54_SAPUTO_ 2010 ANNUAL REPORT
NOTE 19 FINANCIAL INSTRUMENTS (CONT’D)
On average, the Company will generally have 10% of accounts receivable that is due beyond normal terms, but is not impaired. The
carrying amount of accounts receivable is reduced by an allowance account and the amount of the loss is recognized in the statement
of earnings within cost of sales, selling and administrative expenses. Subsequent recoveries of amounts previously written off are
credited against cost of sales, selling and administrative expenses in the statement of earnings. However, Management does not
believe that these allowances are significant.
C)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages
LIQUIDITY RISK
liquidity risk through the management of its capital structure and financial leverage, as outlined in Note 20-Capital Disclosures. It
also manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves
the Company’s operating and capital budgets, as well as any material transactions out of the normal course of business.
D)
The bank loans bear interest at fluctuating rates. The senior notes are at a fixed rate therefore no interest rate risk exists.
INTEREST RATE RISK
For the fiscal year ended March 31, 2010, the interest expense on long-term debt totalled $29,901,000 ($20,684,000 in
March 31, 2009). The interest accrued to March 31, 2010 was an amount of $6,660,000 ($8,661,000 at March 31, 2009).
The Company is exposed to interest rate risks through its financial obligations bearing variable interest rates.
As at March 31, 2010, the net amount exposed to short-term rates fluctuations was approximately $61,500,000. Based on this
exposure, an assumed 1 percentage point increase in interest rate would have an unfavourable impact of approximately $440,000 on net
earnings with an equal but opposite effect for an assumed 1 percentage point decrease. The Company uses derivative contracts to
manage the combination of floating interest rates on its bank debt.
E)
The Company operates internationally and is exposed to foreign exchange risk resulting from various foreign currency transactions.
FOREIGN EXCHANGE RISK
Foreign exchange transaction risk arises primarily from future commercial transactions that are denominated in a currency that is not
the functional currency of the Company’s business unit that is party to the transaction. The Company had outstanding foreign
currency contracts as at the balance sheet date for the purchase of 2,300,000 euros (1,800,000 euros in 2009) and
4,000,000 US dollars (none in 2009).
The Company is mainly exposed to fluctuations of the US dollar. The following table details the Company’s sensitivity to a 1%
strengthening of the US dollar on the net earnings and comprehensive income against the Canadian dollar. For a 1% weakening of the
US dollar against the Canadian dollar, there would be an equal and opposite impact on net earnings and comprehensive income.
Increase in net earnings
Increase in comprehensive income
2010
2009
US dollar impact
US dollar impact
$
895
$
514
$
10,004
$
8,050
F)
The Company occasionally enters into contracts to hedge against fluctuations in the price of commodities. Outstanding contracts as
COMMODITY PRICE RISK
at the balance sheet date had a negative fair value of approximately $1,119,000 (negative fair value of $3,790,000 in 2009). The
Company does not use hedge accounting for these transactions.
SAPUTO_ 2010 ANNUAL REPORT_55
NOTE 20 CAPITAL DISCLOSURES
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategy and undertake selective
acquisitions, while at the same time taking a conservative approach towards financial leverage and management of financial risk. An
additional objective is to provide an adequate return to its shareholders. Furthermore, the Company believes that the purchases of its
own shares may, under appropriate circumstances, be a responsible use of its capital.
The Company’s capital is composed of net debt and shareholders’ equity. Net debt consists of interest-bearing debt and bank loans, net
of cash and cash equivalents. The Company’s primary use of capital is to finance acquisitions.
The primary measure used by the Company to monitor its financial leverage is its ratio of net debt to shareholders’ equity. The net debt-
to-equity ratio as at March 31, 2010 and March 31, 2009 was as follows:
Bank loans
Current portion of long-term debt
Long-term debt
Cash and cash equivalents
Net debt
Shareholders' equity
Net debt-to-equity
2010
2009
$
61,572
$
139,399
-
380,790
(54,819)
214,421
403,065
(43,884)
$
387,543
$
713,001
$
2,028,598
$
1,972,348
0.19:1
0.36:1
The Company has existing credit facilities which require a quarterly review of financial ratios and the Company is not in violation of
any such ratios as at March 31, 2010.
The Company is not subject to capital requirements imposed by a regulator.
NOTE 21 SEGMENTED INFORMATION
The Company has two operating sectors: Dairy Products and Grocery Products.
The Dairy Products Sector principally includes the production and distribution of cheeses, fluid milk and dairy ingredients. The
activities of this Sector are carried out in Canada, Europe and Argentina (CEA) and in the United Sates (USA).
The Grocery Products Sector consists of the production and marketing of mainly snack-cakes.
These operating sectors are managed separately because each sector represents a strategic business unit that offers different
products and serves different markets. The Company measures performance based on geographic operating income and sector
operating income on a stand-alone basis.
The accounting policies of the sectors are the same as those described in Note 1 relating to significant accounting policies. The
Company does not have any intersector sales.
56_SAPUTO_ 2010 ANNUAL REPORT
NOTE 21 SEGMENTED INFORMATION (CONT’D)
Information on operating sectors
Revenues
1
CEA
2010
USA
Total
CEA
2009
USA
Total
Dairy products
$
3,745,930
$
1,906,189
$
5,652,119
$
3,323,541
$
2,304,613
$
5,628,154
Grocery products
158,463
-
158,463
165,109
-
165,109
$
3,904,393
$
1,906,189
$
5,810,582
$
3,488,650
$
2,304,613
$
5,793,263
Earnings before interest,
depreciation,
and income taxes
Dairy products
$
457,895
$
218,375
$
676,270
$
378,898
$
152,006
$
530,904
Grocery products
15,801
-
15,801
16,895
-
16,895
$
473,696
$
218,375
$
692,071
$
395,793
$
152,006
$
547,799
Depreciation and
amortization
Dairy products
Grocery products
Operating income
$
54,843
$
49,844
$
104,687
$
41,560
$
58,849
$
100,409
8,819
-
8,819
7,875
-
7,875
$
63,662
$
49,844
$
113,506
$
49,435
$
58,849
$
108,284
Dairy products
$
403,052
$
168,531
$
571,583
$
337,338
$
93,157
$
430,495
Grocery products
6,982
-
6,982
9,020
-
9,020
$
410,034
$
168,531
$
578,565
$
346,358
$
93,157
$
439,515
Interest, net
Earnings before
income taxes
Income taxes
Net earnings
35,062
543,503
160,789
31,715
407,800
128,852
$
382,714
$
278,948
¹ Revenues are attributable to countries based upon manufacturing origin.
SAPUTO_ 2010 ANNUAL REPORT_57
NOTE 21 SEGMENTED INFORMATION (CONT’D)
Geographic information
2010
2009
Canada
Argentina
& Europe
United States
Total
Canada
Argentina
& Europe
United States
Total
$
3,441,501
$
304,429
$
1,906,189
$
5,652,119
$
2,988,513
$
335,028
$
2,304,613
$
5,628,154
158,463
-
-
158,463
165,109
-
-
165,109
$
3,599,964
$
304,429
$
1,906,189
$
5,810,582
$
3,153,622
$
335,028
$
2,304,613
$
5,793,263
$
1,648,241
$
190,868
$
1,142,115
$
2,981,224
$
1,660,987
$
271,142
$
1,295,986
$
3,228,115
272,227
-
-
272,227
270,988
-
-
270,988
$
1,920,468
$
190,868
$
1,142,115
$
3,253,451
$
1,931,975
$
271,142
$
1,295,986
$
3,499,103
$
426,913
$
76,460
$
497,636
$
1,001,009
$
438,675
$
97,210
$
572,615
$
1,108,500
37,747
-
-
37,747
41,162
-
-
41,162
$
464,660
$
76,460
$
497,636
$
1,038,756
$
479,837
$
97,210
$
572,615
$
1,149,662
$
32,050
$
5,597
$
63,585
$
101,232
$
43,359
$
12,107
$
63,000
$
118,466
5,644
-
-
5,644
3,397
-
-
3,397
$
37,694
$
5,597
$
63,585
$
106,876
$
46,756
$
12,107
$
63,000
$
121,863
Revenues1
Dairy products
Grocery products
Total assets
Dairy products
Grocery products
Net book value
of fixed assets
Dairy products
Grocery products
Additions to
fixed assets
Dairy products
Grocery products
Goodwill
Dairy products
Grocery products
269,064
169,430
365
-
277,836
-
547,265
169,430
$
269,204
169,430
$
395
-
$
321,254
-
$
590,853
169,430
$
438,494
$
365
$
277,836
$
716,695
$
438,634
$
395
$
321,254
$
760,283
¹ Revenues are attributable to countries based upon manufacturing origin.
NOTE 22 COMPARATIVE AMOUNTS
Certain of the prior year’s comparative figures have been reclassified to conform to the current year’s presentation.
58_SAPUTO_ 2010 ANNUAL REPORT
heaD office
Saputo Inc.
6869 Metropolitain Blvd. East
St-Léonard, QC Canada H1P 1X8
Telephone: 514.328.6662
Fax: 514.328.3310
www.saputo.com
general annual Meeting
of shareholDers
Tuesday, August 3, 2010, at 9:30 a.m.
Laval Room, Hotel Sheraton Laval
2440 Autoroute des Laurentides
Laval, QC Canada H7T 1X5
investor relations
Corporate Communications
Telephone: 514.328.3377
Fax: 514.328.3364
Email: investors@saputo.com
stock exchange
Toronto
Symbol: SAP
transfer agent
Computershare Trust Company of Canada
1500 University Street, Suite 700
Montréal, QC Canada H3A 3S8
Telephone: 514.982.7888
external auDitors
Deloitte & Touche LLP, Montréal QC
DiviDenD Policy
Saputo Inc. declares quarterly cash dividends
on common shares at $0.145 per share,
representing a yearly dividend of $0.58 per
share. The balance of corporate earnings
is reinvested to finance the growth of the
Company’s business.
The Board of Directors may review the
Company’s dividend policy from time to time
based on financial position, operating results,
capital requirements and such other factors
as are deemed relevant by the Board in its
sole discretion.
Jennifer Heil,
Freestyle Skiing –
Moguls, won
Canada’s 1st medal
at the Games.
www.saputo.com