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2016 Annual Report
Saputo produces, markets, and distributes a wide array of dairy products of
the utmost quality, including cheese, fl uid milk, extended shelf-life milk and cream
products, cultured products and dairy ingredients. Saputo is one of the top ten dairy
processors in the world, the largest cheese manufacturer and the leading fl uid milk and
cream processor in Canada, the third largest dairy processor in Argentina, and the fourth
largest in Australia. In the US, Saputo ranks among the top three cheese producers and
is one of the largest producers of extended shelf-life and cultured dairy products.
Our products are sold in several countries under well-known brand names such as
Saputo, Alexis de Portneuf, Armstrong, COON, Cracker Barrel*, Dairyland, DairyStar,
Friendship Dairies, Frigo Cheese Heads, La Paulina, Milk2Go/Lait’s Go, Neilson,
Nutrilait, Scotsburn*, Stella, Sungold, Treasure Cave and Woolwich Dairy.
Saputo Inc. is a publicly traded company and its shares are listed
on the Toronto Stock Exchange under the symbol “SAP”.
* Trademark used under licence.
Sector
Number of plants
Number of employees
% of total revenues
Canada Sector
USA Sector
International Sector
Products
sold in over
40
countries
24
25
4
53
plants
5,300
5,500
1,700
35%
52%
13%
12,500
employees
Years ended March 31 (in millions of CDN dollars)
Revenues
$10,991.5
$10,657.7
$ 6,002.9
2016
2015
2011
Adjusted EBITDA2
Adjusted net earnings2
Net earnings
$1,174.1
$1,061.7
$ 788.3
$626.9
$582.8
$450.1
$601.4
$612.9
$450.1
Fiscal 2016
+3.1%
Since 2011
+12.9% CAGR1
Fiscal 2016
+10.6%
Since 2011
+8.3%CAGR1
Fiscal 2016
+7.6%
Since 2011
+6.9%CAGR1
Fiscal 2016
-1.9%
Since 2011
+6.0%CAGR1
Segment
Total revenues (%)
Clientele
Retail
Foodservice
Industrial
49%
40%
11%
Sales are made to supermarket chains, mass-merchandisers,
convenience stores, independent retailers, warehouse clubs
and specialty cheese boutiques under company-owned or
customer brand names.
Sales are made to broadline distributors, as well as to restaurants
and hotels, under company-owned or customer brand names.
Sales are made to food processors using Saputo’s products
as ingredients to manufacture their products.
1 CAGR, Compound Annual Growth Rate is defined as the year over year growth rate over a specified amount of time.
2 Adjusted EBITDA and adjusted net earnings are non-IFRS measures. Refer to the “Measurement of Results not in Accordance with IFRS” section of the
Company’s Management Discussion and Analysis for the definition of these terms.
Message from the
Chairman of the Board
I am pleased to report another great year for Saputo,
and I am very proud of the progress we made while
holding firm to our values. Once again, our 12,500
employees have shown impressive abilities in adapting
to trends and changes in our business environment.
Our success is shared because it
is rooted in the dedication, loyalty
and effort of every single employee,
regardless of role or title. It brings
me great joy to see our employees
strive for excellence, and work
together to achieve our goals.
Our Board of Directors has provided us with prudent
guidance and leadership again this year. The insight
and proficiency of our Board complements the
experience and knowledge of our management team,
resulting in sound decisions for our Company.
The Board is composed of eight independent
directors, and two non-independent directors: myself
and the Vice Chairman of the Board, who is also the
Chief Executive Officer. The independent directors
hold separate meetings chaired by an independent
Lead Director after each Board meeting. Also, only
independent directors sit on the two committees
of our Board, namely the Audit Committee, and
the Corporate Governance and Human Resources
Committee. In fiscal 2016, we welcomed a new
director, Ms. Karen Kinsley who was appointed
in November 2015.
Every year, Saputo conducts an assessment of its
corporate governance practices against current best
practices and trends. The Board believes in good
governance as stated in our Company’s Management
Proxy Circular dated June 2, 2016. For additional
information concerning our practices and Board
nominees, I invite you to refer to this document.
Ms. Patricia Saputo and Mr. Pierre Bourgie have
advised us that they will not renew their mandates
as directors. On behalf of the Board, I would like
to thank them for having provided us with great
guidance through the years. Ms. Saputo has been
part of our Board since 1999 and Mr. Bourgie since
the Company went public in 1997, each lending their
loyalty, direction and support to the Company over
the years. Ms. Franziska Ruf and Ms. Diane Nyisztor
will be proposed for election to the Board at our
annual general meeting in August. We believe that
their experience and background will complement
our Board.
I extend my sincere gratitude to all Board members
for their dedication and hard work. I would also like
to thank Saputo’s customers, consumers, suppliers
and partners for the loyalty they have shown
our Company. We will continue to offer our
highest quality products, service levels, and
business practices.
The passion that drives all Saputo stakeholders
enables us to reach our goals today, and look to
the future with confidence and enthusiasm.
Emanuele (Lino) Saputo, C.M., O.Q., Dr h.c.
Chairman of the Board
Message from the
Chief Executive Officer
I am proud of our Company’s performance in fiscal
2016, especially when faced with tough challenges
in today’s markets.
As the quarters of the fiscal year
unfolded, we showed remarkable
resilience, met our challenges
head-on, and turned them around
through an innovative approach
and hard work.
Our accomplishments show we were able to adjust
to market headwinds and keep growing our business.
Most important, we continue to apply high standards
of execution to our newly acquired businesses, as
well as our existing operations.
Saputo continues to apply a strategy of growth by
acquisition. We acquired in May 2015 the everyday
cheese business from Lion-Dairy & Drinks Pty
Ltd, and in October 2015, the companies forming
Woolwich Dairy (Woolwich), one of North America’s
top producers of goat cheese. Woolwich products
are a great complement to Saputo’s cheese line and
now benefit from our vast supply chain, sales force
and customer base both in Canada and the US.
The Dairy Division (Canada) continued to develop
its value proposition to consumers and customers
through an appealing product mix. Even though the
Canadian market has been challenging, we continued
to expand the reach of our brands to consumers and
to work with our customers to grow their offerings
and product lines.
As the year progressed, the Division increased
volumes while improving product costing, as well as
warehousing and logistical costs. Significant capital
investments were also made in some plants to
further improve efficiency, capacity and quality.
As part of our ongoing efficiency initiatives, we
announced the closure of three plants in Canada
between June 2016 and December 2017 and the
consolidation of their production into some of our
other facilities.
In our USA Sector, performance in fiscal 2016 was
solid throughout the year. Both the Cheese Division
(USA) and the Dairy Foods Division (USA) generated
strong and steady results through increased volumes
on the revenue side, and operational efficiencies on
the cost side.
The Cheese Division (USA) has gained market share
and distribution for premium and newly launched
products, and these types of initiatives will continue
into next year. We are also making investments aimed
at enhancing our blue cheese production capability,
which will strengthen our position as a category
leader in the market.
The Dairy Foods Division (USA) has brought new
value-added products to market in partnership
with customers. We continue to capitalize on our
innovation model to grow our customers’ businesses
in several product categories such as organics, aseptic
packaged dairy and non-dairy products, and others.
We will keep on investing to support capacity,
and aim to further strengthen our competitive
cost position.
In our International Sector, global cheese and dairy
prices put downward pressure on profitability in fiscal
2016. Nevertheless, we focused on maximizing our
product mix to mitigate these negative impacts. We
worked with our customers in established markets to
strengthen our position and minimize volatility, while
controlling costs and increasing efficiency.
This fiscal year, we continued the journey to migrate
our enterprise resource planning (ERP) system. This
multi-year initiative, aimed at fundamental efficiency
improvement, requires a substantial investment in
time and resources to continue over the next few
years. I am pleased to report we are on schedule
for this project.
At Saputo, we are also committed to pursuing
sustainable and responsible business practices.
Our areas of focus are being reorganized into the
following pillars: food safety and quality, employee
health and safety, business ethics, responsible
sourcing (including animal care), environment,
nutrition and healthy living, as well as community
involvement. Using these pillars, we align our efforts
and resources on our business values and stakeholder
concerns.
In fiscal 2016, we have overcome many challenges.
I have no doubt we will continue to find innovative
solutions to capitalize on evolving trends and
growing markets, and to mitigate volatility in the
dairy industry. Our disciplined approach will enable
us to further expand our scope and scale around
the world. The global dairy industry holds many
opportunities for our Company, and we are well
positioned to grasp them. Strong values have always
been our path to success; they will keep on leading us
into a bright future.
Lino A. Saputo, Jr.
Chief Executive Officer and
Vice Chairman of the Board
Saputo Inc.
In our Dairy Division (Argentina), we increased
domestic market presence in our retail segment
with our branded products. We also successfully
introduced new products in the foodservice area
which contributed to a domestic volume increase.
Despite difficult market conditions and an inflationary
economy, our team in Argentina continues to be
innovative and solution-oriented.
In our Dairy Division (Australia), we worked toward
integrating the everyday cheese business, newly
acquired from Lion-Dairy & Drinks Pty Ltd. This
acquisition was a result of our strategic plan to
increase the Division’s presence in the branded
domestic cheese market. I am proud of the effort
displayed by the Division during the process of
building new capabilities to serve the market
throughout the year. We also increased milk
intake and production, consistent with our growth
strategy to serve the market and expand our
international presence.
At Saputo, our performance is directly related to
the contribution of our employees. Truly, they are
the driving force behind our success. Whether it
is a management team applying its experience and
perspective to a growth opportunity or a loyal
employee maintaining the high quality standard of our
products, Saputo cannot move forward without the
allegiance of our people. I offer both my thanks and
my admiration.
Our training initiatives demonstrate our commitment
to employee growth and development from the
inside, and from a wide variety of backgrounds.
The new Leadership Program ensures our “pipeline”
of talent is properly developed and gives our
management prospects the tools and resources to
potentially move up to higher levels of responsibility.
Management’s
Discussion and Analysis
—
Consolidated
Financial Statements
2016
TABLE OF CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Caution Regarding Forward-Looking Statements
Selected Financial Information
Financial Orientation
Elements to Consider when Reading Management’s Discussion and Analysis for Fiscal 2016
Measurement of Results not in Accordance with International Financial Reporting Standards
Outlook
Consolidated Results
Information by Sector
Canada Sector
USA Sector
International Sector
Liquidity, Financial and Capital Resources
Contractual Obligations
Balance Sheet
Guarantees
Related Party Transactions
Accounting Standards
Critical Accounting Policies and Use of Accounting Estimates
Future Standards
New Accounting Standards Adopted During the Year
Risks and Uncertainties
Disclosure Controls and Procedures
Internal Controls over Financial Reporting
Sensitivity Analysis of Interest Rate and US Currency Fluctuations
Quarterly Financial Information
Information by Sector
Canada Sector
USA Sector
International Sector
Summary of Fourth Quarter Results Ended March 31, 2016
Analysis of Earnings for the Year Ended March 31, 2015 Compared to March 31, 2014
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
3
4
6
6
7
8
8
10
10
12
15
16
18
18
18
19
19
19
20
21
23
25
25
25
26
28
28
28
29
29
32
34
41
MANAGEMENT’S DISCUSSION AND ANALYSIS
The goal of the management report is to analyze the results of, and the financial position for, the year ended
March 31, 2016. It should be read while referring to the audited consolidated financial statements and accompanying
notes. The accounting policies of Saputo Inc. (Company or Saputo) for financial years ended March 31, 2016, 2015 and
2014 are in accordance with International Financial Reporting Standards (IFRS). All dollar amounts are in Canadian
dollars, unless otherwise indicated. This report takes into account material elements between March 31, 2016 and
June 2, 2016, the date on which this report was approved by Saputo’s Board of Directors. Additional information about the
Company, including the annual information form for the year ended March 31, 2016, can be obtained on SEDAR at
www.sedar.com.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of securities laws. These statements are based,
among other things, on Saputo’s assumptions, expectations, estimates, objectives, plans and intentions as of the date
hereof regarding projected revenues and expenses, the economic, industry, competitive and regulatory environments in
which the Company operates or which could affect its activities, its ability to attract and retain customers and consumers,
as well as the availability and cost of milk and other raw materials and energy supplies, its operating costs and the pricing
of its finished products on the various markets in which it carries on business.
These forward-looking statements include, among others, statements with respect to the Company’s short and medium
term objectives, outlook, business projects and strategies to achieve those objectives, as well as statements with respect
to the Company’s beliefs, plans, objectives and expectations. The words “may”, “should”, “will”, “would”, “believe”, “plan”,
“expect”, “intend”, “anticipate”, “estimate”, “foresee”, “objective”, “continue”, “propose” or “target”, or the negative of these
terms or variations of them, the use of conditional tense or words and expressions of similar nature, are intended to identify
forward-looking statements.
By their nature, forward-looking statements are subject to a number of inherent risks and uncertainties. Actual results could
differ materially from the conclusion, forecast or projection stated in such forward-looking statements. 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 in the Company’s materials filed with the Canadian securities regulatory
authorities from time to time, including the “Risks and Uncertainties” section of this Management’s Discussion and
Analysis.
Forward-looking statements are based on Management’s current estimates, expectations and assumptions, which
Management believes are reasonable as of the date hereof, and, accordingly, are subject to changes after such date. You
should not place undue importance on forward-looking statements 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 or revise these forward-
looking statements, whether written or verbal, 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.
ANNUAL REPORT 2016
- 3 -
Selected Financial Information
Years ended March 31
(in millions of CDN dollars)
STATEMENT OF EARNINGS
Revenues
Canada
USA
International
Operating costs excluding depreciation, amortization,
gain on disposal of a business, acquisition,
restructuring and other costs
Canada
USA
International
Adjusted EBITDA1
Canada
USA
International
Adjusted EBITDA margin
Depreciation and amortization
Canada
USA
International
Gain on disposal of a business
Acquisition costs
Restructuring and other costs
Interest on long-term debt
Other financial charges
Earnings before income taxes
Income taxes
Net earnings
Net earnings margin
Attributable to:
Shareholders of Saputo Inc.
Non-controlling interest
2016
2015
2014
3,801.5
5,786.7
1,403.3
10,991.5
3,835.8
5,279.6
1,542.3
10,657.7
3,388.0
5,061.2
1,368.2
9,817.4
413.5
725.5
35.1
1,174.1
3,431.3
4,744.7
1,420.0
9,596.0
404.5
534.9
122.3
1,061.7
3,653.5
4,489.9
1,089.4
9,232.8
3,196.1
4,020.1
996.3
8,212.5
457.4
469.8
93.1
1,020.3
10.7%
10.0%
11.1%
55.1
120.0
23.5
198.6
–
3.0
31.2
48.3
22.1
870.9
269.5
601.4
59.5
92.7
18.7
170.9
(25.9)
0.7
(7.2)
54.0
19.3
849.9
237.0
612.9
53.7
85.0
7.9
146.6
–
9.5
36.2
53.2
15.8
759.0
225.0
534.0
5.5%
5.8%
5.8%
601.1
0.3
601.4
607.6
5.3
612.9
533.1
0.9
534.0
1 Adjusted EBITDA is a non-IFRS measure (refer to page 7) and is defined as earnings before interest, income taxes, depreciation, amortization,
gain on disposal of a business, acquisition, restructuring and other costs.
ANNUAL REPORT 2016
- 4 -
Years ended March 31
(in millions of CDN dollars, except per share amounts and ratios)
Net earnings
Gain on disposal of a business (net of income taxes of $0)
Acquisition costs (net of income taxes of $0.6, $0.2 and $0.3
for 2016, 2015 and 2014, respectively)
Restructuring and other costs (net of income taxes of $8.1,
$2.5 and $12.4 for 2016, 2015 and 2014, respectively)
Adjusted net earnings3
Adjusted net earnings margin
Attributable to:
Shareholders of Saputo Inc.
Non-controlling interest
PER SHARE DATA2
Earnings per share
Diluted earnings per share
Adjusted earnings per share3
Adjusted diluted earnings per share3
Dividends declared per share
Book value
BALANCE SHEET DATA
Working capital
Total assets
Interest bearing debt4
Total non-current financial liabilities
Equity
FINANCIAL RATIOS
Interest bearing debt / Equity
Adjusted return on average equity5
STATEMENT OF CASH FLOWS DATA
Net cash generated from operations
Amount of additions to property, plant and equipment,
intangible assets, net of proceeds on disposal
Business acquisitions
Dividends
2016
601.4
–
2.4
23.1
626.9
5.7%
626.6
0.3
626.9
1.53
1.51
1.60
1.58
0.54
10.37
819.0
7,172.3
1,467.1
1,208.3
4,069.8
2015
612.9
(25.9)
0.5
(4.7)
582.8
5.5%
577.5
5.3
582.8
1.55
1.53
1.48
1.46
0.52
9.25
2014
534.0
–
9.2
23.8
567.0
6.1%
566.1
0.9
567.0
1.37
1.35
1.45
1.43
0.46
7.28
783.1
6,800.3
1,667.2
1,524.8
3,628.6
170.8
6,356.9
2,060.0
1,398.4
2,839.2
0.36
19.2%
0.46
20.4%
0.73
22.8%
847.4
226.3
214.9
210.0
769.8
184.8
65.0
197.7
656.3
223.4
449.6
175.3
2 Fiscal 2014 per share data has been adjusted for a stock dividend of one common share per each issued and outstanding common share, which was paid
on September 29, 2014 and had the same effect as a two-for-one stock split of the Company’s outstanding common shares.
3 Adjusted net earnings and adjusted earnings per share (basic and diluted) are non-IFRS measures. Refer to “Measurement of Results not in Accordance
with International Financial Reporting Standards” on page 7 of this Management’s Discussion and Analysis for the definition of these terms.
4 Net of cash and cash equivalents.
5 Adjusted return on average equity is defined as adjusted net earnings divided by average total equity not considering the effect of annual fluctuations in
foreign currency translation.
ANNUAL REPORT 2016
- 5 -
FINANCIAL ORIENTATION
Profitability enhancement and shareholder value creation remain the cornerstones of Saputo’s objectives. The Company
continues to operate in a competitive and challenging global economic environment. Saputo remains focused on organic
growth and growth through acquisitions, in an effort to develop new markets and expand existing ones in addition to
reinforcing a global presence in emerging markets. To achieve these objectives, the Company continues to maintain strict
discipline in cost management and operational efficiency in order to remain a prudent operator and financial manager.
Additionally, the Company remains proactive in evaluating possible acquisitions and potential growth markets. Saputo
benefits from a solid balance sheet and capital structure, supplemented by a high level of cash generated by operations
and low debt levels. Saputo’s financial flexibility allows growth through targeted acquisitions and enables the Company to
overcome possible economic challenges. In fiscal 2016, the Company continued to strategically invest in capital projects,
expand its activities in new and existing markets, increase its dividend and effectively manage cash by purchasing back
its own shares through its normal course issuer bid.
ELEMENTS TO CONSIDER WHEN READING MANAGEMENT’S DISCUSSION AND
ANALYSIS FOR FISCAL 2016
The following are highlights and key performance measures for fiscal 2016:
• Net earnings totalled $601.4 million, down 1.9%.
• Adjusted net earnings1 totalled $626.9 million, up 7.6%.
• Earnings before interest, income taxes, depreciation, amortization, gain on disposal of a business, acquisition,
restructuring and other costs (adjusted EBITDA1) totalled $1.174 billion, up 10.6%.
• Revenues reached $10.992 billion, up 3.1%.
• Net cash generated from operations totalled $847.4 million, up 10.1%.
• In the Canada Sector, revenues decreased mainly due to the disposal of the Bakery Division in the fourth quarter of
fiscal 2015, partially offset by higher sales volumes and a favourable product mix. EBITDA increased due to lower
ingredients costs, additional sales volumes and lower warehousing and logistical costs. Lower dairy ingredients sales
prices and the disposal of the Bakery Division in fiscal 2015 partially offset this increase.
• In the USA Sector, the fluctuation of the average block market2 per pound of cheese and the average butter market3
price per pound, compared to the last fiscal year, decreased revenues by approximately $638 million. EBITDA increased
due to higher sales volumes, decreased ingredients costs and better efficiencies offsetting unfavourable market factors4
of approximately $29 million as compared to last fiscal year.
• In the International Sector, a drop in selling prices in the export market negatively affected EBITDA. It also resulted in
inventory write-downs of approximately $18 million.
• The acquisition of the companies forming Woolwich Dairy (Woolwich Acquisition) on October 5, 2015, contributed to
revenues and EBITDA of both the Canada and USA sectors.
• The acquisition of everyday cheese business of Lion-Dairy & Drinks Pty Ltd (EDC Acquisition) on May 25, 2015,
contributed to revenues and EBITDA in the International Sector.
• The fluctuation of the Canadian dollar versus foreign currencies had a positive impact on revenues and EBITDA of the
USA and the International sectors in fiscal 2016.
____________________________
1 Adjusted net earnings and adjusted EBITDA represent non-IFRS measures. Refer to “Measurement of Results not in Accordance with International
Financial Reporting Standards” on page 7 of this Management’s Discussion and Analysis for the definition of these terms.
2 "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.
3 "Average butter market" is the average daily price for Grade AA Butter traded on the CME, used as the base price for butter.
4 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, the market pricing impact
related to sales of dairy ingredients, as well as the impact of the average butter market price related to dairy food product sales.
ANNUAL REPORT 2016
- 6 -
MEASUREMENT OF RESULTS NOT IN ACCORDANCE WITH INTERNATIONAL
FINANCIAL REPORTING STANDARDS
In certain instances, the Company makes references to terms in evaluating financial performance measures, such as
EBITDA, adjusted EBITDA, adjusted net earnings and adjusted earnings per share, that hold no standardized meaning
under IFRS. These non-IFRS measurements are therefore not likely to be comparable to similarly titled or described
measures in use by other publicly traded companies nor do they indicate that excluded items are non-recurring. The
Company uses earnings before interest, income taxes, depreciation and amortization (EBITDA) as a performance
measure as it is a common industry measure and reflects the ongoing profitability of the Company’s consolidated business
operations.
Adjusted EBITDA represents earnings before interest, income taxes, depreciation, amortization, gain on disposal of a
business, acquisition, restructuring and other costs. Adjusted net earnings is defined by the Company as net earnings
prior to the inclusion of a gain on disposal of a business, acquisition, restructuring and other costs, net of applicable income
taxes, if any. Adjusted earnings per share is defined as adjusted net earnings attributable to shareholders of Saputo Inc.
per basic and diluted common share. The most comparable IFRS financial measures to the ones used by the Company
are earnings before income taxes, as well as net earnings and earnings per share (basic and diluted).
Adjusted EBITDA, adjusted net earnings and adjusted earnings per share, as used by Management, provide precision
and comparability with regards to the Company’s ongoing operation. They also provide readers with a representation of
the activities considered of relevance to the Company’s financial performance through the inclusion of additional financial
information that can be used to identify trends or additional disclosures that provide information into the manner in which
the Company is operated. Non-IFRS measures also provide comparability to the Company’s prior year results.
The definitions provided above are used in the context of the results and activities for the year ended March 31, 2016.
They are subject to change based on future transactions and as deemed necessary by Management in order to provide
a better understanding and comparability of future results and activities of the Company.
A reconciliation of earnings before income taxes, net earnings and earnings per share to adjusted EBITDA, adjusted net
earnings and adjusted earnings per share for the fiscal years in which Management has presented these adjusted
measures is provided below.
(in millions of CDN dollars)
Earnings before income taxes
Other financial charges
Interest on long-term debt
Gain on disposal of a business
Acquisition costs
Restructuring and other costs
Depreciation and Amortization
Adjusted EBITDA
2016
870.9
22.1
48.3
-
3.0
31.2
198.6
1,174.1
2015
849.9
19.3
54.0
(25.9)
0.7
(7.2)
170.9
1,061.7
2014
759.0
15.8
53.2
-
9.5
36.2
146.6
1,020.3
(in millions of CDN dollars, except per share amounts)
Net earnings1
Gain on disposal of a business2
Acquisition costs2
Restructuring and other costs2
Adjusted net earnings1
1 Attributable to shareholders of Saputo Inc.
2 Net of income taxes
Total
601.1
-
2.4
23.1
626.6
2016
Per Share
Basic Diluted
1.51
1.53
0.01
0.06
1.60
0.01
0.06
1.58
2015
Per Share
Basic
1.55
(0.06)
-
(0.01)
1.48
Diluted
1.53
(0.06)
-
(0.01)
1.46
Total
533.1
-
9.2
23.8
566.1
2014
Per Share
Basic
1.37
-
0.02
0.06
1.45
Diluted
1.35
-
0.02
0.06
1.43
Total
607.6
(25.9)
0.5
(4.7)
577.5
ANNUAL REPORT 2016
- 7 -
OUTLOOK
In fiscal 2017, the Company intends to continue benefitting from the Woolwich Acquisition in North America and the
EDC Acquisition in Australia for future development. Additionally, the Company will continue to improve its efficiencies,
while remaining committed to producing quality products, innovation and organic growth. It will continue to analyze its
overall activities, invest in capital projects and identify opportunities. The Company’s flexible capital structure and low
debt levels allow it to actively evaluate and pursue strategic acquisition opportunities, with the goal of expanding its
presence in key markets.
CONSOLIDATED RESULTS
CONSOLIDATED SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
(in millions of CDN dollars)
Fiscal years
Market factors1 2
Inventory write-down
Foreign currency exchange1 3
1 As compared to the previous 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, the market pricing impact
related to sales of dairy ingredients, as well as the impact of the average butter market price related to dairy food product sales.
2016
(29)
(18)
86
2015
(68)
(10)
26
3 Foreign currency exchange includes effect on EBITDA of conversion of US dollars, Australian dollars and Argentinian pesos to Canadian dollars.
Consolidated revenues totalled $10.992 billion, an increase of approximately $334 million or 3.1%, compared to
$10.658 billion in fiscal 2015. The increase is due mainly to higher sales volumes, as well as the inclusion of revenues
from the Woolwich Acquisition and EDC Acquisition. A lower average block market per pound of cheese, as well as a lower
average butter market price decreased revenues by approximately $638 million. Lower international selling prices of
cheese and dairy ingredients, as compared to last fiscal year, negatively affected revenues. The disposal of the Bakery
Division, in the fourth quarter of fiscal 2015, resulted in decreased revenues as compared to last fiscal year. Finally, the
fluctuation of the Canadian dollar versus foreign currencies increased revenues by approximately $836 million.
Consolidated earnings before interest, income taxes, depreciation, amortization, gain on disposal of a
business, acquisition, restructuring and other costs (Adjusted EBITDA1) amounted to $1.174 billion in fiscal 2016,
an increase of $112.4 million or 10.6% compared to $1.062 billion for fiscal 2015. The increase is due to higher sales
volumes, lower ingredients costs and increased operational efficiencies. The inclusion of the Woolwich Acquisition and
EDC Acquisition positively impacted EBITDA. The increase was partially offset by lower international selling prices of
cheese and dairy ingredients without a similar decline in the cost of milk as raw material. Market factors in the US negatively
affected EBITDA by approximately $29 million. As a result of the decrease in market selling prices, inventory was written
down by approximately $18 million, as compared to approximately $10 million for the last fiscal year. Also, the disposal
of the Bakery Division in fiscal 2015 negatively impacted EBITDA. Finally, the fluctuation of the Canadian dollar versus
foreign currencies had a favourable impact on EBITDA of approximately $86 million, as compared to last fiscal year.
The consolidated adjusted EBITDA margin increased to 10.7% in fiscal 2016, as compared to 10.0% in fiscal 2015,
resulting mainly from a higher EBITDA in the USA Sector as compared to the prior fiscal year.
Depreciation and amortization totalled $198.6 million in fiscal 2016, an increase of $27.7 million, compared to
$170.9 million in fiscal 2015. This increase is mainly attributed to the fluctuation of the Canadian dollar versus foreign
currencies, as well as additions to property, plant and equipment, increasing the depreciable base.
In fiscal 2016, the Company incurred acquisition costs relating to business acquisitions totalling $3.0 million
($2.4 million after tax), as well as restructuring costs in relation to plant closures announced in March 2016 in Canada
totalling $31.2 million ($23.1 million after tax). As part of the restructuring costs for fiscal 2016, the Company incurred
$5.5 million in severance costs and $25.7 million in impairment charges to property, plant and equipment.
In fiscal 2015, the Company realized a gain on disposal of a business of $25.9 million ($25.9 million after tax) relating
to the sale of the Bakery Division, which was concluded on February 2, 2015.
Net interest expense amounted to $70.4 million in fiscal 2016, compared to $73.3 million in fiscal 2015. This decrease
is mainly attributed to a lower level of debt.
____________________________
1 Adjusted EBITDA represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 8 -
Income taxes totalled $269.5 million in fiscal 2016, as compared to $237.0 million in fiscal 2015, for an effective tax rate
of 30.9% in fiscal 2016 as compared to 27.9% for the previous year. The increase of the fiscal 2016 effective tax rate is
mainly due to increases of profit in higher tax rate jurisdictions as well as the non-taxable gain on disposal of a business
in fiscal 2015. 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 fiscal 2016 totalled $601.4 million, a decrease of $11.5 million or 1.9% compared to $612.9 million in
fiscal 2015. This decrease is due to the factors mentioned above.
Adjusted net earnings1 for fiscal 2016 totalled $626.9 million, an increase of $44.1 million or 7.6% compared to
$582.8 million in fiscal 2015. This increase is due to the factors mentioned above, without considering gain on disposal
of a business, acquisition, restructuring and other costs.
____________________________
1 Adjusted net earnings represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 9 -
INFORMATION BY SECTOR
CANADA SECTOR
(in millions of CDN dollars)
Fiscal years
Revenues
EBITDA
2016
3,801.5
413.5
2015
3,835.8
404.5
2014
3,653.5
457.4
The Canada Sector consists of the Dairy Division (Canada). In fiscal 2015, the Sector included both the
Dairy Division (Canada) and the Bakery Division. The Bakery Division represented approximately 3% of the Sector’s
revenues, and was sold on February 2, 2015.
In fiscal 2016, the Canada Sector benefitted from increased sales volumes, both from existing operations, as well as from
the Woolwich Acquisition, completed on October 5, 2015.
REVENUES
Revenues from the Canada Sector totalled $3.802 billion, a decrease of $34.3 million or 0.9% as compared to
$3.836 billion in fiscal 2015. The decrease in revenues was mainly related to the disposal of the Bakery Division in the
fourth quarter of fiscal 2015, which was partially offset by higher sales volumes and a more favourable product mix as
compared to last fiscal year. Cheese, traditional milk and cream sales volumes were higher, while value-added milk
volumes decreased. The Woolwich Acquisition contributed positively to revenues for fiscal 2016.
The Sector manufactures approximately 33% of all Canadian natural cheese. Saputo’s market share of total fluid milk and
cream in Canada is approximately 36%. Saputo is the largest cheese manufacturer and the leading fluid milk and cream
processor.
The retail segment of the Dairy Division (Canada) continued to be the leading segment with approximately 63% of
revenues, slightly lower compared to last fiscal year. In fiscal 2016, fluid milk, cheese and butter per capita consumption
decreased, while the cream category remained stable, as compared to the previous fiscal year. The Division continued to
support its leading national brands, Dairyland, Saputo, Armstrong and Milk2Go, through various marketing activities.
Neilson continues to be the #1 brand in the refrigerated dairy case on a national basis and was supported by marketing
initiatives such as sponsorships and sampling events in fiscal 2016. Additionally, the retail segment continued to focus on
increasing the exposure of fine cheese brands across Canada, Alexis de Portneuf and DuVillage 1860, through expanded
distribution and marketing support.
The foodservice segment represented approximately 35% of revenues in the Dairy Division (Canada), slightly higher
compared to last fiscal year. The Company’s focus is to support customers such as distributors, restaurant chains and
pizzerias by providing quality products that perform to their expectations. Saputo strives to be the supplier of choice by
offering high quality service and support. The Company invests in the foodservice industry, through partnerships with
various culinary colleges and the Canadian Culinary Federation, amongst others, thereby investing in future generations
that will contribute to a strong and healthy industry.
The industrial segment represented 2% of revenues in the Dairy Division (Canada), the same share as last fiscal year.
EBITDA
EBITDA for the Canada Sector totalled $413.5 million for the year ended March 31, 2016 as compared to $404.5 million
in fiscal 2015, representing an increase of $9.0 million or 2.2%. The EBITDA margin increased to 10.9% from 10.5% in
fiscal 2016.
EBITDA increased in the Dairy Division (Canada) compared to the previous fiscal year, due to a combination of factors.
The Sector benefitted from an increase in sales volumes, a favourable product mix, lower ingredients costs and lower
warehousing and logistical costs. The inclusion of the Woolwich Acquisition positively increased EBITDA. This increase
was partially offset by a decline in the international dairy ingredient market, negatively impacting EBITDA as compared to
last fiscal year. The Company’s Enterprise Resource Planning (ERP) initiative, which was effective the entire fiscal year,
as compared to three months last year, increased expenses by approximately $8 million. Finally, the disposal of the Bakery
Division in the fourth quarter of last fiscal year negatively affected EBITDA by approximately $12 million.
ANNUAL REPORT 2016
- 10 -
OUTLOOK
The competitive market which existed in fiscal 2016 is anticipated to continue in fiscal 2017, and remains a Company
challenge. Additionally, dairy ingredient markets have declined since the last half of fiscal 2015 and are expected to
remain low through the first nine months of fiscal 2017. In order to mitigate downward margin pressures, stagnant
growth and competitive market conditions, the Company will continue to focus on reviewing overall activities to improve
its operational efficiency. As such, the Company announced towards the end of fiscal 2016 the closure of three plants,
being in Sydney (Nova Scotia), Princeville (Quebec) and Ottawa (Ontario). These closures are scheduled in June 2016,
August 2016 and December 2017 respectively. The Division continues to leverage its operational flexibility to enhance
profitability, in addition to maintaining cost control.
The Woolwich Acquisition enables the Company to increase its presence in the specialty cheese category in North
America. The Company will continue to evaluate potential synergies and focus on improving and expanding product
offerings to all customers.
During fiscal 2016, the Company continued to migrate to a new ERP system, as announced in fiscal 2015. The five-
year project regarding planning, designing and implementing of a new ERP system started in fiscal 2016 and should
require additions to intangibles and property, plant and equipment of approximately $250 million. The Company added
approximately $48 million in intangibles and incurred expenses for approximately $11 million related to this project
during fiscal 2016.
Innovation has always been a priority, enabling the Company to offer products that meet consumer needs. Accordingly,
additional resources have been allocated to product innovation, allowing to continue to forge and secure long-term
relationships with both customers and consumers.
Production capacity continues to be evaluated in line with the objective of reducing excess production capacity within the
Canada Sector plants, which, as at March 31, 2016, stood at 26% and 36% in cheese and fluid milk activities, respectively.
ANNUAL REPORT 2016
- 11 -
USA SECTOR
(in millions of CDN dollars)
Fiscal years
Revenues
EBITDA
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
(in millions of CDN dollars)
2016
5,786.7
725.5
2015
5,279.6
534.9
2014
4,489.9
469.8
Fiscal years
Market factors1 2
US currency exchange1
1 As compared to the previous 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, the market pricing impact
related to sales of dairy ingredients as well as the impact of the average butter market price related to dairy food product sales.
2016
(29)
82
2015
(68)
39
OTHER PERTINENT INFORMATION
(in US dollars, except for average exchange rate)
Fiscal years
Average block market per pound of cheese
Closing block price per pound of cheese1
Average butter market price per pound
Closing butter market price per pound2
Average whey market price per pound3
Spread4
US average exchange rate to Canadian dollar5
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
2016
1.596
1.460
2.184
1.955
0.303
0.119
1.311
2015
1.970
1.580
2.122
1.785
0.587
0.017
1.136
year.
2 Closing butter market price is the price of Grade AA Butter traded on the CME, on the last business day of each fiscal year.
3 Average whey powder market price is based on Dairy Market News published information.
4 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.
5 Based on Bank of Canada published information.
The USA Sector includes the Cheese Division (USA) and the Dairy Foods Division (USA).
In fiscal 2016, the USA Sector achieved strong results. In the Cheese Division (USA), the implementation of cost-
reduction activities resulted in improved operational efficiencies, minimizing the effect of the volatile cheese and dairy
ingredients commodity markets during the year. In the Dairy Foods Division (USA), pricing initiatives and other
measures were focused on mitigating the impact of commodity price fluctuations.
For fiscal 2016, the block market per pound of cheese opened at US$1.58 and decreased to US$1.46 by the end of
the fiscal year, as compared to opening at US$2.39 and closing at US$1.58 for fiscal 2015. For fiscal 2016, the average
block market per pound of cheese was US$1.60 compared to US$1.97 for fiscal 2015.
For fiscal 2016, the butter market price per pound opened at US$1.79 and increased to US$1.96 by the end of the
fiscal year, as compared to opening at US$2.00 and closing at US$1.79 for fiscal 2015. For fiscal 2016, the average
butter market price per pound was US$2.18 compared to US$2.12 for fiscal 2015.
In fiscal 2016, while benefitting from increased sales volumes, the USA Sector continued initiatives aimed at increasing
capacity, efficiency and operational flexibility.
ANNUAL REPORT 2016
- 12 -
REVENUES
Revenues for the USA Sector totalled $5.787 billion in fiscal 2016, an increase of $507.1 million or 9.6% in comparison
to $5.280 billion in fiscal 2015. Higher sales volumes in both US divisions, as well as the inclusion of the Woolwich
Acquisition, positively contributed to the increase. A lower average block market per pound of cheese and a lower
average butter market price as compared to last fiscal year decreased revenues by approximately $638 million. The
weakening of the Canadian dollar versus the US dollar increased revenues by approximately $832 million.
The retail segment contributed approximately 45% of total USA Sector revenues, up from 44% in fiscal 2015. Two of our
retail brands maintained their #1 market share positions. Frigo Cheese Heads continues to lead the string cheese brand
category in the US market and Treasure Cave continues to lead the crumbled blue cheese category. The Cheese
Division continued to gain distribution and marketing share by introducing several product line extensions including Frigo
Cheese Heads Premium Snacking Cheeses and Frigo Cheese Heads combos. The Dairy Foods Division benefitted
from positive trends in the private label category through the introduction of new products and continued to surpass
market growth in such categories as ESL creams/creamers, value-added milk and cultured products. Retail marketing
programs supported our major brands in the retail cheese category.
The foodservice segment contributed approximately 49% of total revenues, as compared to 50% in fiscal 2015. As we
continued to build on the sales momentum and brand equity for our premium brand of mozzarella, the upwards trend of
traffic counts observed last year continued during fiscal 2016. The Cheese Division (USA) increased awareness for
specialty products in the foodservice segment by offering various trade incentives again in fiscal 2016. We continued to
generate growth with new products developed to provide a value alternative to customers. Targeted specifically to the
pizza operator segment and the national chain restaurant accounts, marketing support included print media, direct mail
and web advertising, as well as broker / distributor incentives to entice additional business. The selling approach of the
Dairy Foods Division (USA) affords us an advantage in dealing with restaurant chains. As we continue to work with these
customers on new menu offerings, we remain the leading dairy provider to large national broadline distributors as well
as regional foodservice distributors, supplying private label brands of half-n-half creamers, whipping cream, cottage
cheese and sour cream.
The industrial segment includes cheese sales and accounted for approximately 6% of revenues, unchanged as
compared to fiscal 2015.
EBITDA
EBITDA totalled $725.5 million for fiscal 2016, an increase of $190.6 million or 35.6% in comparison to $534.9 million
in fiscal 2015. Contributing to the EBITDA increase were higher sales volumes and improved operational efficiencies
related to initiatives undertaken in the prior and current fiscal years. Additionally, pricing initiatives undertaken by the
Sector and lower ingredients costs positively affected EBITDA. Partially offsetting the EBITDA increase were
unfavourable market factors.
This year, the block market per pound of cheese slightly increased throughout the first half of fiscal 2016, then
decreased in the latter half of the fiscal year. The average block market per pound of cheese for fiscal 2016 was
US$1.60 as compared to US$1.97 for the previous fiscal year. During fiscal 2016, the block price opened at US$1.58
and closed at US$1.46, a decrease of US$0.12, compared to opening at US$2.39 and closing at US$1.58, a decrease
of US$0.81, for the previous fiscal year. The decline in both fiscal years resulted in an unfavourable realization of
inventories; however, the impact was more pronounced in fiscal 2015. The relationship between the average block
market per pound of cheese and the cost of milk as raw material was favourable in comparison to fiscal 2015. However,
the lower average block market negatively affected the absorption of fixed costs. The combination of these market
factors, including reduced profitability associated with higher commodity prices in the Dairy Foods Division (USA),
decreased EBITDA by approximately $29 million. The weakening of the Canadian dollar versus the US dollar had a
positive impact on the USA Sector’s EBITDA of approximately $82 million.
ANNUAL REPORT 2016
- 13 -
OUTLOOK
In the USA Sector, depressed selling prices on the international dairy ingredient market are expected to put downward
pressure on margins and the Company will continue to focus on controlling costs and increasing efficiencies in order to
mitigate their impact on EBITDA. The international dairy ingredient market price has declined since the last half of fiscal
2015 and these prices are anticipated to remain low throughout the first nine months of fiscal 2017.
In fiscal 2016, the Company completed the implementation of its business management model within the Dairy Foods
Division (USA), including various measures aimed at being a low-cost producer. The Dairy Foods Division (USA)
continues to focus on operational optimization and maximizing investment in its existing network in order to benefit from
new capabilities in production and enable future growth in bringing new products to market. The Company will keep
investing to support capacity, and aim to further strengthen its competitive cost position.
The Cheese Division (USA) plans to continue to gain distribution and market share for premium lines of snack cheeses.
The Company will continue making investment aimed at enhancing its blue cheese production capability, which will
strengthen its position as a category leader in the market.
The Woolwich Acquisition enables the Company to increase its presence in the specialty cheese category in North
America. The Company will continue to evaluate potential synergies and focus on improving and expanding product
offerings to all customers.
ANNUAL REPORT 2016
- 14 -
INTERNATIONAL SECTOR
(in millions of CDN dollars)
Fiscal years
Revenues
EBITDA
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
(in millions of CDN dollars)
Fiscal years
Inventory write-down
Foreign currency exchange1
1 As compared to the previous fiscal year.
2016
1,403.3
35.1
2015
1,542.3
122.3
2014
1,089.4
93.1
2016
(18)
4
2015
(10)
(13)
The International Sector includes the Dairy Division (Argentina), the Dairy Division (Australia), and the Dairy Ingredients
Division. The Dairy Ingredients Division includes national and export ingredients sales from the North American
divisions, as well as cheese exports from these same divisions.
REVENUES
Revenues for the International Sector totalled $1.403 billion for the fiscal year ended March 31, 2016, a decrease of
$139.0 million or 9.0% as compared to $1.542 billion in fiscal 2015. This decrease is due to the decline in international
cheese and dairy ingredient market prices. In the Dairy Division (Argentina), lower selling prices, as well as lower
volumes in the export market decreased revenues. They were partially offset by the impact of higher prices and higher
volumes in the domestic market, as compared to fiscal 2015. Revenues of the Dairy Division (Australia) increased due
to higher sales volumes and the inclusion of the EDC Acquisition. This increase was partially offset by the decline in
international cheese and dairy ingredient market prices, as well as lower selling prices in the domestic market.
Revenues of the Dairy Ingredients Division decreased as compared to fiscal 2015 mainly due to depressed dairy
ingredient prices in the international markets. The fluctuation of the Canadian dollar versus the foreign currencies used
in the International Sector positively impacted revenues by approximately $4 million.
EBITDA
EBITDA for the International Sector amounted to $35.1 million, a decrease of $87.2 million or 71.3% as compared to
$122.3 million for fiscal 2015. In the Dairy Division (Argentina), the decline in international cheese and dairy ingredient
market prices in the export market, as well as the fact that the cost of milk as raw material did not follow this decrease
as compared to fiscal 2015 negatively affected EBITDA. In the Dairy Division (Australia), the decrease in market selling
prices and the high relative cost of milk as raw material negatively affected EBITDA. The inclusion of the EDC
Acquisition positively impacted EBITDA. EBITDA for the Dairy Ingredients Division remained stable, as compared to
fiscal 2015. As a result of the decrease in market selling prices, inventory was written down by approximately $18
million, as compared to approximately $10 million for the last fiscal year. The Sector benefitted from additional volumes
that positively affected EBITDA. The fluctuation of the Canadian dollar versus the foreign currencies used in the
International Sector positively impacted EBITDA by approximately $4 million.
OUTLOOK
The International Sector will continue to pursue sales volumes growth in existing markets, as well as develop additional
international markets. Also, the Sector will pursue growth of cheese export sales volumes from the Cheese Division
(USA) to the extent US milk pricing is competitive with world prices. In line with the Sector’s objective to grow as a
global dairy player, the EDC Acquisition, completed in fiscal 2016, was added to the Dairy Division (Australia). We
anticipate that the EDC Acquisition will continue to bring new opportunities to the Sector. The Sector will continue to
evaluate overall activities to improve efficiencies and will aim to maximize its operational flexibility to mitigate fluctuations
in market conditions.
International cheese and dairy ingredient markets were depressed through the last half of fiscal 2015. These prices are
anticipated to remain low throughout the first nine months of fiscal 2017 and we expect this will continue to put downward
pressure on the Sector’s margins. As such, we will continue to focus on controlling costs and increasing efficiencies in
order to mitigate their impact on EBITDA.
ANNUAL REPORT 2016
- 15 -
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
operational objectives, as well as to provide details on how the Company manages its liquidity risk to meet its financial
obligations as they come due.
The majority of the Company’s liquidity needs are funded from cash generated by operations. Principally, these funds are
used for capital spending, dividends, business acquisitions, debt repayments and share repurchase. The Company also
has bank credit facilities available for general corporate purposes.
The Company’s cash flows are summarized in the following table:
(in millions of CDN dollars)
Fiscal years
Cash generated from operating activities
Net cash generated from operating activities
Cash used for investing activities
Cash (used for) generated from financing activities
Increase (decrease) in cash and cash equivalents
2016
1,147.4
847.4
(441.7)
(338.6)
67.1
2015
1,069.9
769.8
(166.4)
(572.9)
30.5
2014
881.5
656.3
(672.1)
4.9
(10.9)
Cash generated from operating activities amounted to $1.147 billion for fiscal 2016, an increase of $77.5 million
compared to $1.070 billion in fiscal 2015, mainly due to an increase in adjusted EBITDA1.
Net cash generated by operating activities amounted to $847.4 million for fiscal 2016, compared to $769.8 million in
fiscal 2015. This additional liquidity of $77.6 million is due to cash flows generated from an increase in adjusted EBITDA1
of $112.4 million. This was offset by a decrease in non-cash operating working capital items of $31.3 million driven by the
fluctuation of market prices in the USA Sector.
For investing activities, the Company used $441.7 million in fiscal 2016; $214.9 million was disbursed for business
acquisitions and $48.3 million for software licenses and professional service intangibles related to the ERP initiative. Also,
$183.5 million was disbursed for additions to property, plant and equipment, mainly related to specific and strategic
projects. Of these additions, 44% went into the replacement of property, plant and equipment and 56% to both implement
new technologies and to expand and increase certain manufacturing capacities.
Financing activities used $338.6 million in fiscal 2016. From this usage, $86.7 million represents net reimbursement of
interest bearing debt, payments of $210.0 million in dividends and repurchases of $91.8 million in share capital as part of
its normal course issuer bids. The Company issued shares for a cash consideration of $49.9 million as part of the stock
option plan.
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 requirements over at least the next twelve months. The
Company does not foresee any difficulty in securing financing beyond what is currently available through existing
arrangements to fund possible acquisitions.
(in millions of CDN dollars, except ratio)
Fiscal years
Current assets
Current liabilities
Working capital
Working capital ratio
2016
2,175.8
1,356.8
819.0
1.60
2015
1,962.5
1,179.4
783.1
1.66
2014
1,895.8
1,725.1
170.7
1.10
The working capital ratio is an indication of the Company’s ability to cover short-term liabilities with short-term assets,
without having excess dormant assets. The decrease in the working capital ratio is mainly attributed to a higher current
portion of long-term debt maturing in fiscal 2017 which amounts to $220.0 million.
____________________________
1 Adjusted EBITDA represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 16 -
CAPITAL MANAGEMENT
The Company’s capital strategy requires a well-balanced financing structure in order to maintain the flexibility required to
implement growth initiatives, while allowing it to pursue disciplined capital investments and maximize shareholder value.
The Company targets a long-term leverage of approximately 2.0 times net debt1 to Adjusted EBITDA2. From time to time,
the Company may deviate from its long-term leverage target to pursue acquisitions and other strategic opportunities.
Should such a scenario arise, the Company expects to deleverage over a reasonable period of time in order to seek to
maintain its investment grade ratings.
(in millions of CDN dollars, except ratio and number of shares and options)
Fiscal years
Cash and cash equivalents
Bank loans
Net debt1
Adjusted EBITDA2
Net debt-to-Adjusted EBITDA2
Number of common shares3
Number of stock options3
1 Total debt, net of cash and cash equivalents.
2 Adjusted EBITDA represents a non-IFRS measure. Refer to "Measurement of Results not in Accordance with International Financial Reporting
2014
39.3
310.1
2,060.0
1,020.3
2.02
392,520,687 392,225,049 390,137,824
16,896,962
2016
164.3
178.2
1,467.1
1,174.1
1.25
2015
72.6
169.8
1,667.2
1,061.7
1.57
17,081,469
16,903,824
Standards" on page 7 of this Management's Discussion and Analysis for the definition of this term.
3 Fiscal 2014 number of common shares and stock options have been adjusted for a stock dividend of one common share per each issued and
outstanding common share.
The Company had $164.3 million of cash and cash equivalents and available bank credit facilities of approximately
$1.028 billion, $178.2 million of which were drawn. See Note 9 to the consolidated financial statements for details of the
Company’s bank loans.
During fiscal 2015, the Company issued $300 million Series 1 medium term notes under its current short form base shelf
prospectus qualifying the offering of unsecured senior notes under a medium term note program (the MTN Program). The
short form base shelf prospectus expires in December 2016.
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 issuance. No preferred shares were outstanding. As
at May 24, 2016, 392,956,748 common shares and 20,633,164 stock options were outstanding.
NORMAL COURSE ISSUER BIDS
Under the normal course issuer bid (Bid) covering the period between November 17, 2014 and November 16, 2015, the
Company repurchased 800,000 common shares at an average price of $29.56 per share, for a total consideration of
approximately $23.6 million.
In November 2015, the Company renewed its normal course issuer bid (New Bid) to purchase up to 19,547,976 common
shares, which represented approximately 5% of its issued and outstanding common shares, over a 12-month period
beginning on November 17, 2015 and ending on November 16, 2016. Under the New Bid, between November 17, 2015
and March 31, 2016, the Company purchased 1,900,000 common shares at prices ranging from $35.26 to $36.62 per
share, for an aggregate consideration of approximately $68.1 million. During the year ended March 31, 2016, the Company
purchased 2,700,000 common shares at prices ranging from $29.56 to $36.62 per share, under the Bids for an aggregate
consideration of approximately $91.8 million (1,503,400 common shares at prices ranging from $31.18 to $33.37 per share
for the year ended March 31, 2015 for an aggregate consideration of approximately $48.8 million).
ANNUAL REPORT 2016
- 17 -
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 long-term debts and leases of premises,
equipment and rolling stock. Note 10 to the consolidated financial statements describes the Company’s commitment to
repay long-term debt, and Note 18 to the consolidated financial statements describes its lease commitments.
(in millions of CDN dollars)
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
Long-term debt
244.9
24.9
70.9
1,112.5
-
-
1,453.2
Minimum lease
30.5
22.8
18.8
14.9
11.9
32.1
131.0
Total
275.4
47.7
89.7
1,127.4
11.9
32.1
1,584.2
LONG-TERM DEBT
As described in Note 10 to the consolidated financial statements, the Company’s long-term debt is comprised of unsecured
bank term loan facilities of $812.5 million, maturing in December 2019, which bear interest at lenders’ prime rates plus a
maximum of 1.00%, or bankers’ acceptance rates plus 0.85%, up to a maximum of 2.00%, depending on the Company
credit ratings. These term loans obtained in October 2013 and December 2012 were amended in October 2015 to eliminate
the obligations of the Company to make quarterly repayments of principal prior to maturity. Additionally, an amount of
AUD$121.3 million is drawn from the bank term loan facilities obtained in May 25, 2015 with an annual interest rate at
Australian Bank Bill rate plus 0.85% due to mature in May 2018. The facilities require quarterly repayments of
AUD $6.3 million.
Long-term debt is also comprised of unsecured senior notes of $220.0 million issued at an interest rate of 5.82% and
maturing June 2016 and $300.0 million Series 1 medium term notes with an annual interest rate of 2.654% and maturing
in November 2019.
MINIMUM PAYMENTS ON OPERATING LEASES
The Company has long-term operating leases for premises, equipment and rolling stock.
BALANCE SHEET
The main balance sheet items as at March 31, 2016 varied mainly due to the weakening of the Canadian dollar versus
the US dollar in comparison to March 31, 2015, the EDC Acquisition and the Woolwich Acquisition.
The conversion rate of the US operations’ balance sheet items in US currency was CDN$1.2987 per US dollar as at
March 31, 2016, compared to CDN$1.2666 per US dollar as at March 31, 2015. The conversion rate of the Argentinian
operations’ balance sheet items in Argentinian currency was CDN$0.0889 per Argentinian peso as at March 31, 2016,
compared to CDN$0.1438 per Argentinian peso as at March 31, 2015. The conversion rate of the Australian operations’
balance sheet items in Australian currency was CDN$0.9957 per Australian dollar as at March 31, 2016, compared to
CDN$0.9669 per Australian dollar as at March 31, 2015. The weakening of the Canadian dollar versus the US and
Australian dollars resulted in higher values recorded for the balance sheet items of the foreign operations and was partially
offset by the strengthening of the Canadian dollar versus the Argentinian Peso.
The net cash (cash and cash equivalents less bank loans) position increased from negative $97.2 million as at
March 31, 2015, to negative $13.9 million as at March 31, 2016, mainly resulting from the increase of cash and cash
equivalent. The change in foreign currency translation adjustment recorded in other comprehensive income varied mainly
due to the strengthening of the US dollar.
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 18 to the consolidated
financial statements that discuss the Company’s guarantees.
ANNUAL REPORT 2016
- 18 -
RELATED PARTY TRANSACTIONS
In the normal course of business, the Company receives and provides goods and services from and to companies
subject to control or significant influence through ownership by its principal shareholder. These goods and services are
of an immaterial amount and compensated by a consideration equal to their fair value, comparable to similar arms’
length transactions. The goods and services that are received consist of office space rental, travel arrangements,
publicity and lodging. Transactions with key management personnel (comprised of directors and named executive
officers: the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and the three most highly compensated
executive officers) are also considered related party transactions and consist of short-term employee benefits, post-
employment benefits, stock-based compensation and payments under the deferred share unit plan. The goods and
services that are provided consist of services and dairy products. Refer to Note 19 to the consolidated financial
statements for further information on related party transactions.
ACCOUNTING STANDARDS
CRITICAL ACCOUNTING POLICIES AND USE OF ACCOUNTING ESTIMATES
The preparation of the Company’s financial statements requires Management to make certain judgements and
estimates about transactions and carrying values that are fulfilled at a future date. Judgements and estimates are
subject to fluctuations due to changes in internal and/or external factors and are continuously monitored by
Management. A discussion of the judgements and estimates that could have a material effect on the financial
statements is provided below.
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining
the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters
differs from the amounts that were initially recorded, such differences will impact the results for the reporting period and
the respective current income tax and deferred income tax provisions in the reporting period in which such
determination is made.
Deferred Income Taxes
The Company follows the liability method of accounting for deferred income taxes. Deferred income tax assets and
liabilities are measured using enacted or substantively 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
deferred income tax assets. Canadian, US and international tax rules and regulations are subject to interpretation and
require judgement on the part of the Company that may be challenged by taxation authorities. The Company believes
that it has adequately provided for deferred 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.
Goodwill, Intangible Assets and Business Combinations
Goodwill, trademarks and customer relationships have principally arisen as a result of business combinations. The
acquisition method, which also requires significant estimates and judgements, is used to account for these business
combinations. As part of the allocation process in a business combination, estimated fair values are assigned to the
net assets acquired, including trademarks and customer relationships. These estimates are based on forecasts of future
cash flows, estimates of economic fluctuations and an estimated discount rate. The excess of the purchase price over
the estimated fair value of the net assets acquired is then assigned to goodwill. In the event that actual net assets fair
values are different from estimates, the amounts allocated to the net assets, and specifically to trademarks and
customer relationships, could differ from what is currently reported. This would then have a pervasive impact on the
carrying value of goodwill. Differences in estimated fair values would also have an impact on the amortization of definite
life intangibles.
ANNUAL REPORT 2016
- 19 -
Property, Plant and Equipment
Critical judgement is necessary in the selection and application of accounting policies and useful lives as well as the
determination of which components are significant and how they are allocated. Management has determined that the
use of the straight-line method of amortization is the most appropriate as its facilities are operating at a similar output
potential on a year to year basis, which indicates that production is constant (please refer to the estimated useful lives
table for further details on the useful lives of productive assets). It is Management’s best estimate that the useful lives
and policies adopted adequately reflect the flow of resources and the economic benefits required and derived in the
use and servicing of these long-lived productive assets.
Impairment of Assets
Significant estimates and judgements are required in testing goodwill, intangible assets and other long-lived assets for
impairment. Management uses estimates or exercises judgement in assessing indicators of impairment, defining a
CGU, forecasting future cash flows and in determining other key assumptions such as discount rates and earnings
multipliers used for assessing fair value (less costs of disposal) or value in use. Estimates made for goodwill and
intangible assets can be found in Note 7. Other long-lived assets are tested only when indicators of impairment are
present.
Employee Future Benefits
The Company is the sponsor to both defined benefit and defined contribution plans, which provide pension and other
post-employment benefits to its employees. Several estimates and assumptions are required with regards to the
determination of the defined benefit expense and its related obligation, such as the discount rate used in determining
the carrying value of the obligation and the interest income on plan assets, the expected health care cost trend rate,
the expected mortality rate, etc. Actual results will normally differ from expectations. These gains or losses are
presented in the consolidated statements of comprehensive income.
FUTURE STANDARDS
The International Accounting Standards Board (IASB) made revisions as part of its continuing improvements project.
Below is a summary of the relevant standards affected and a discussion of the amendments.
IAS 19, Employee Benefits
IAS 19 has been amended to clarify that in determining the discount rate for post-employment benefit obligations, the
currency of the liability is of importance and not the country in which it arises. Furthermore, where there is no deep
market in high-quality corporate bonds in that currency, government bonds in the relevant currency should be used.
This amendment is effective for annual reporting periods beginning on or after January 1, 2016. Management is
currently evaluating the impact of the adoption of this amendment but is not expecting it to have a significant impact on
the Company’s financial statements
IAS 7, Statement of Cash Flows
In January 2016, the IASB amended IAS 7 to require further disclosures enabling users of the financial statement to
evaluate changes in liabilities arising from financing activities. To achieve this objective, the IASB requires that the
following changes in liabilities arising from financing activities are disclosed: (i) changes from financing cash flows; (ii)
changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign
exchange rates; (iv) changes in fair values; and (v) other changes.
This amendment is effective for the annual periods beginning on or after January 1, 2017. Management is currently
evaluating the impact of these disclosure requirements.
IFRS 9, Financial Instruments
The IASB issued IFRS 9 in November 2009 with the long-term goal of replacing IAS 39, Financial Instruments:
Recognition and Measurement. Several amendments have been made to this standard since that date including
amendments made in July and August 2014 relating to the classification of financial assets and the use of a single
impairment model for all financial instruments.
These amendments, along with the adoption of the standard, are effective for annual reporting periods beginning on or
after January 1, 2018. Management is currently evaluating the impact of the adoption of this standard, including
amendments.
ANNUAL REPORT 2016
- 20 -
IFRS 15, Revenue from Contracts with Customers
The IASB issued IFRS 15, Revenue from Contracts with Customers with its goal to provide a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. This new standard will
supersede current revenue recognition guidance in IAS 18, Revenue, IAS 11, Construction Contracts and IFRIC 13,
Customer Loyalty Programmes.
The objective of this standard is to provide a five-step approach to revenue recognition that includes identifying
contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction
prices to performance obligations and recognizing revenue when performance obligations are satisfied. In certain
instances, transfer of assets that are not related to the entity’s ordinary activities will also be required to follow some of
the recognition and measurement requirements of the new model. The standard also expands current disclosure
requirements.
On April 12, 2016, the IASB amended IFRS 15 to comprise clarifications of the guidance on identifying performance
obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus
net revenue presentation).
With regards to identifying performance obligations, the amendments clarify how to determine when promises in a
contract are ‘distinct’ goods or services and, therefore, should be accounted for separately. The amendments to
licensing guidance clarify when revenue from a licence of intellectual property should be recognised ‘over time’ and
when it should be recognised at a ‘point in time’. With regards to the principal versus agent assessment, the
amendments clarify that the principal in an arrangement controls a good or service before it is transferred to a customer.
This standard and related amendments are effective for annual reporting periods beginning on or after January 1, 2018.
Management is currently assessing the impact of the adoption of this standard.
IFRS 16, Leases
On January 13, 2016, the IASB published a new standard, IFRS 16, Leases. The new standard will eliminate the
distinction between operating and finance leases and will bring most leases on the balance sheet for lessees. For
lessors, the accounting remains mostly unchanged and the distinction between operating and finance leases is
retained.
This standard is effective for annual reporting periods beginning on or after January 1, 2019. Management is currently
assessing the impact of the adoption of this standard.
IFRS 10, Consolidated Financial Statements & IAS 28, Investments in Associates
The IASB previously issued a narrow-scope amendment to IFRS 10, Consolidated Financial Statements and IAS 28,
Investments in Associates and Joint Ventures to address an acknowledged inconsistency between the requirements in
IFRS 10 and those in IAS 28 when dealing with the sale or contribution of assets between an investor and its associate
or joint venture. The original amendments required a full gain or loss to be recognized where a transaction involved a
business or that a partial gain or loss be recognized when a transaction involved assets that did not constitute a
business.
The original effective date for this amendment was for annual reporting periods beginning on or after January 1, 2016
however, on December 21, 2015, the IASB decided to postpone this change until the completion of a broader review
by the IASB which may result in the simplification of accounting for such transactions and other aspects of accounting
for associates and joint ventures.
NEW ACCOUNTING STANDARDS ADOPTED DURING THE YEAR
The following standards were adopted by the Company on April 1, 2015:
IFRS 2, Share-based Payment
The IASB has amended the definitions of market and vesting conditions and added definitions for performance and
service conditions. Vesting conditions are now defined as either service conditions or performance conditions. The
amendments also clarify certain other requirements for performance, service, market and non-vesting conditions.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
ANNUAL REPORT 2016
- 21 -
IFRS 3, Business Combinations
The IASB amended IFRS 3 to clarify that contingent consideration in a business combination, whether an asset or
liability, should continue to be measured at fair value at each reporting date regardless of whether the contingent
consideration is considered a financial instrument within the scope of IFRS 9 or IAS 39 and regardless of whether it is
considered a non-financial asset or liability (changes in fair value shall be included in net earnings).
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IFRS 8, Operating Segments
The IASB amended IFRS 8 to require an entity to disclose the judgements in applying the aggregation criteria. The
standard now requires a brief description of the operating segments that have been aggregated in the present manner
and the economic indicators that have been assessed in determining that the aggregated operating segments share
similar economic characteristics.
The adoption of this amendment has not materially impacted the Company’s financial statements with the exception of
additional disclosures found in Note 23.
IFRS 8 has also been amended to clarify that an entity only needs to present a reconciliation between the total reporting
segment's assets to the entities' total assets if this information is usually provided to the chief operating decision maker.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016 as this
information is already disclosed by the Company in note 23.
IFRS 13, Fair Value
The IASB amended the basis for conclusion in IFRS 13 to clarify that the issuance of IFRS 13 (and related amendments
to IAS 39, Financial Instruments: Recognition and Measurement) does not require discounting of short-term receivables
and payables if they are not significant.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IAS 19, Employee Benefits
IAS 19 has been amended to clarify that employee (or third party) contributions that are independent of the number of
years of service can be deducted from the service cost in the period that the service is rendered and not necessarily
allocated over periods of service. Other contributions made by employees (or third parties) are to be attributed to the
periods of service using the plan's contribution formula or on a straight line basis.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IAS 24, Related Party Transactions
IAS 24 clarifies that a management entity providing key management personnel services to a reporting entity is also
considered a related party of the reporting entity. Therefore the amounts paid by the reporting entity in relation to those
services must also be included in the amounts disclosed in the related party transactions note. Disclosures of the
components of the services provided are not required.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IAS 40, Investment Property
The IASB amended this standard to clarify that this standard and IFRS 3, Business Combinations are not mutually
exclusive and the application of both standards may be required in the event of an asset acquisition. An entity will need
to determine whether the asset acquired meets the definition of investment property while also determining whether
the transaction constitutes a business acquisition under IFRS 3.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
ANNUAL REPORT 2016
- 22 -
RISKS AND UNCERTAINTIES
The main risks and uncertainties the Company is exposed to are presented hereafter. The Board of Directors (the Board)
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 these risk factors effectively.
The Audit Committee receives regular reports from Management on these matters. In this regard, the Audit Committee
and the Board have adopted and implemented certain policies and procedures which are reviewed at least annually. An
annual detailed presentation on all risk factors identified, as well as periodic presentations, are made by Management to
the Audit Committee and, as required, to the Board.
While risk management is part of the Company’s transactional, operational and strategic decisions, as well as the
Company’s overall management approach, risk management does not guarantee that events or circumstances will not
occur which could negatively affect the Company’s financial condition and performance.
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 be introduced into products or
packaging. 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 customers. 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 our products in the US, Argentina and Australia, as well as 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 the Company’s 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 and Australia, Saputo competes in the dairy industry on
a national basis with several regional, national and multinational competitors. Saputo also competes in the dairy industry
internationally. The Company’s performance in all the countries in which it does business 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
customers and an increase in the relative importance of some customers. One customer represented more than 10%
of total consolidated sales for fiscal 2016, with 10.6%. The Company’s ability to continue to service its customers in all
the markets that it serves will depend on the quality of its products and services as well as price.
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, 2016. 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.
SUPPLIER CONCENTRATION
The Company purchases goods and services from a limited number of suppliers as a result of consolidation within the
industries in which these suppliers operate in North America and other major markets. Furthermore, issues with suppliers
regarding pricing or performance of the goods and services they supply or the inability of suppliers to supply the required
volumes of such goods and services in a timely manner could impact the Company’s financial condition and performance.
Any such impact will depend on the effectiveness of the Company’s contingency plan.
ANNUAL REPORT 2016
- 23 -
UNANTICIPATED BUSINESS DISRUPTION
Major events, such as equipment failure, health pandemics and natural disasters, could lead to unanticipated business
disruption of any or certain of the Company’s manufacturing facilities. The effect would be more significant if the Company’s
larger manufacturing facilities are affected, in which case, the failure to find alternative suppliers or to replace lost
production capacity in a timely manner could negatively affect the Company’s financial condition and performance.
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 permitting
requirements, wastewater discharges, air emissions (greenhouse gases and other), releases of hazardous substances
and remediation of contaminated sites. The Company believes that its operations are in compliance, in all material
respects, with such environmental laws and regulations, except as disclosed in the Annual Information Form dated
June 2, 2016 for the fiscal year ended March 31, 2016. Compliance with these laws and regulations requires that the
Company continue to incur operating and maintenance costs and capital expenditures, including to control potential
impacts of its operations on local communities. 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 additional expenditures to achieve or maintain compliance.
CONSUMER TRENDS
Demand for the Company’s products is subject to changes in consumer trends. These changes may affect earnings. The
impact of these changes will depend on the Company’s ability to innovate and develop 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, maintain 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 35% of sales are realized in Canada, 52% in the US, and 13% internationally. 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.
INTEREST RATE AND ACCESS TO CAPITAL MARKET
Saputo’s interest bearing debt is subject to interest rate fluctuations. The impact on the Company’s results will depend
on its ability to maintain mechanisms to protect against such interest rate fluctuations. The Company’s growth is driven
mainly by acquisitions and is dependent on access to liquidity in the capital market.
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, economic 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 or comply. 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 the
Company’s ability to adapt, comply and mitigate. Saputo is currently in compliance with all important 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 devote the time and human resources required to
successfully integrate their activities with those 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.
ANNUAL REPORT 2016
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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 communication networks or security failures with respect to data centres or networks may impede or slow
down production, delay or taint certain decisions and result in financial losses for the Company. In addition, any
unauthorised access to information systems or malicious use could compromise the Company’s data integrity or result
in disclosure or loss of data which may have adverse effects on the Company’s activities and its results. Also, the
Company is currently undertaking technology initiatives regarding a new ERP system. There is no guarantee that the
implementation of the new ERP system will not disrupt or reduce the efficiency of the Company’s operations.
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) 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
to allow the information required to be disclosed under securities legislation to be recorded, processed, summarized and
reported within the time periods specified in securities legislation.
The CEO and the CFO, along with Management, after evaluating the effectiveness of the Company’s disclosure controls
and procedures as at March 31, 2016, have concluded that the Company’s disclosure controls and procedures were
effective.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and the CFO 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 IFRS.
The CEO and the CFO, along with Management, after evaluating the effectiveness of the Company’s internal control over
financial reporting as at March 31, 2016, have concluded that the Company’s internal control over financial reporting was
effective.
The CEO and the CFO, along with Management, have concluded, after having conducted an evaluation and to the best
of their knowledge that, as at March 31, 2016, 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 US CURRENCY FLUCTUATIONS
The debt subject to interest rate fluctuations was $548.9 million as at March 31, 2016 and consisted of $178.2 million of
bank loans and $370.7 million bank term loan facilities. A 1% change in the interest rate would lead to a change in net
earnings of approximately $3.8 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, 2016, the average US
dollar conversion was based on CDN$1.00 for US$0.762. A fluctuation of CDN$0.01 would have resulted in a change of
approximately $2.6 million in net earnings, $5.5 million in EBITDA and $44.2 million in revenues.
ANNUAL REPORT 2016
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QUARTERLY FINANCIAL INFORMATION
2016 QUARTERLY FINANCIAL INFORMATION - CONSOLIDATED STATEMENT OF EARNINGS
(in millions of CDN dollars, except per share amounts)
Q4
Q3
Q2
Q1 Fiscal 2016
Statement of earnings
Revenues
Operating costs excluding depreciation, amortization,
gain on disposal of a business, acquisition,
restructuring and other costs
Earnings before interest, income taxes, depreciation,
amortization, gain on disposal of a business,
acquisition, restructuring and other costs
Margin
Depreciation and amortization
Gain on disposal of a business
Acquisition costs
Restructuring and other costs
Interest on long-term debt
Other financial charges
Earnings before income taxes
Income taxes
Net earnings
Net margin
Gain on disposal of a business
Acquisition costs (net of income taxes of $0.6)
Restructuring and other costs (net of income taxes of
$8.1)
Adjusted net earnings1
Adjusted net earnings margin
ATTRIBUABLE TO:
Shareholders of Saputo Inc.
Non-controlling interest
Per Share
Net earnings
Basic
Diluted
Adjusted net earnings1
Basic
Diluted
2,734.0
2,901.0
2,792.1
2,564.4
10,991.5
2,420.9
2,580.6
2,510.4
2,305.5
9,817.4
313.1
11.5 %
54.8
-
0.3
31.2
12.1
3.1
211.6
70.4
141.2
5.2 %
-
0.5
23.1
164.8
320.4
11.0 %
50.1
-
0.3
-
12.0
7.4
250.6
75.4
175.2
6.0 %
-
0.2
-
175.4
281.7
10.1 %
48.3
-
1.6
-
12.4
6.7
212.7
64.1
148.6
5.3 %
-
1.1
-
149.7
258.9
10.1 %
45.4
-
0.8
-
11.8
4.9
196.0
59.6
136.4
5.3 %
-
0.6
-
137.0
1,174.1
10.7 %
198.6
-
3.0
31.2
48.3
22.1
870.9
269.5
601.4
5.5 %
-
2.4
23.1
626.9
6.0 %
6.0 %
5.4 %
5.3 %
5.7 %
165.0
(0.2 )
164.8
0.36
0.36
0.42
0.41
174.7
0.7
175.4
0.44
0.44
0.45
0.44
149.0
0.7
149.7
0.38
0.37
0.38
0.38
137.9
(0.9 )
137.0
0.35
0.34
0.35
0.34
626.6
0.3
626.9
1.53
1.51
1.60
1.58
1 Adjusted net earnings and adjusted earnings per share (basic and diluted) are non-IFRS measures. Refer to “Measurement of Results not in Accordance
with International Financial Reporting Standards” on page 7 of this Management’s Discussion and Analysis for the definition of these terms.
SELECTED FACTORS POSITIVELY (NEGATIVELY) AFFECTING EBITDA
(in millions of CDN dollars)
Fiscal year
2016
Market factors1 2
Inventory write-down
Foreign currency exchange1 3
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, the market pricing impact
related to sales of dairy ingredients as well as the impact of the average butter market price related to dairy food product sales.
Q3
(4)
-
29
Q2
(37)
-
27
Q1
3
(13)
15
Q4
9
(5)
15
3 Foreign currency exchange includes effect on EBITDA of conversion of US dollars, Australian dollars and Argentinian pesos to Canadian dollars.
ANNUAL REPORT 2016
- 26 -
2015 QUARTERLY FINANCIAL INFORMATION – CONSOLIDATED STATEMENT OF EARNINGS
(in millions of CDN dollars, except per share amounts)
Q4
Q3
Q2
Q1
Fiscal 2015
Statement of earning
Revenues
Operating costs excluding depreciation, amortization,
gain on disposal of a business, acquisition and
restructuring and other costs
Earnings before interest, income taxes, depreciation,
amortization, gain on disposal of a business,
acquisition, restructuring and other costs
Margin
Depreciation and amortization
Gain on disposal of a business
Acquisition costs
Restructuring and other costs
Interest on long-term debt
Other financial charges
Earnings before income taxes
Income taxes
Net earnings
Net margin
Gain on disposal of a business
Acquisition costs (net of income taxes of $0.2)
Restructuring and other costs (net of income taxes of
$2.5)
Adjusted net earnings1
Adjusted net earnings margin
ATTRIBUABLE TO:
Shareholders of Saputo Inc.
Non-controlling interest
Per Share
Net earnings
Basic
Diluted
Adjusted net earnings1
Basic
Diluted
2,513.8
2,821.8
2,701.3
2,620.8
10,657.7
2,281.8
2,543.1
2,419.2
2,351.9
9,596.0
232.0
9.2 %
278.7
9.9 %
46.7
(25.9 )
0.7
(7.2 )
12.1
5.3
200.3
42.9
157.4
6.3 %
(25.9 )
0.5
(4.7 )
43.9
-
-
-
13.6
4.5
216.7
62.1
154.6
5.5 %
-
-
-
127.3
5.1 %
154.6
5.5 %
126.3
1.0
127.3
0.40
0.39
0.32
0.32
152.6
2.0
154.6
0.39
0.38
0.39
0.38
282.1
10.4 %
41.4
-
-
-
13.7
4.5
222.5
66.9
155.6
5.8 %
-
-
-
155.6
5.8 %
154.3
1.3
155.6
0.39
0.39
0.39
0.39
268.9
10.3 %
38.9
-
-
-
14.6
5.0
210.4
65.1
145.3
5.5 %
-
-
-
145.3
5.5 %
144.3
1.0
145.3
0.37
0.36
0.37
0.36
1,061.7
10.0 %
170.9
(25.9 )
0.7
(7.2 )
54.0
19.3
849.9
237.0
612.9
5.8 %
(25.9 )
0.5
(4.7 )
582.8
5.5 %
577.5
5.3
582.8
1.55
1.53
1.48
1.46
1 Adjusted net earnings and adjusted earnings per share (basic and diluted) are non-IFRS measures. Refer to “Measurement of Results not in Accordance
with International Financial Reporting Standards” on page 7 of this Management’s Discussion and Analysis for the definition of these terms.
ANNUAL REPORT 2016
- 27 -
INFORMATION BY SECTOR
Canada Sector
(in millions of CDN dollars)
Fiscal years
Revenues
EBITDA
Q4
932.8
108.5
2016
Q3
992.7
107.5
2015
Q2
958.5
99.4
Q1
917.5
98.1
Q4
Q3
909.6
1,005.4
82.3
102.1
Q2
971.7
106.8
Q1
949.1
113.3
The Canada Sector consists of the Dairy Division (Canada). In fiscal 2015, the Sector included both the
Dairy Division (Canada) and the Bakery Division. The Bakery Division represented approximately 3% of the Sector’s
revenues, and was sold on February 2, 2015.
USA Sector
(in millions of CDN dollars)
Fiscal years
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenues
EBITDA
1,449.3
1,574.9
1,459.2
1,303.3
1,248.1
1,394.5
1,345.1
1,291.9
191.0
190.1
172.7
171.7
141.0
139.5
136.6
117.8
Selected factors positively (negatively) affecting EBITDA
(in millions of CDN dollars)
Fiscal years
Market factors1, 2
US currency exchange1
Q4
9
15
2016
Q3
(4)
25
Q2
(37)
27
Q1
3
15
Q4
(23)
15
2015
Q3
(20)
10
Q2
10
6
Q1
(35)
8
1 As compared to same quarter of previous 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
on the relationship between the average block market per pound of cheese and the cost of milk as raw material, the market pricing impact related to sales of dairy
ingredients, as well as the impact of the average butter market price related to dairy food product sales.
OTHER PERTINENT INFORMATION
(in US dollars, except for average exchange rate)
Fiscal year
2016
2015
Q4
1.479
1.460
2.055
1.955
0.247
0.128
1.371
Q1
1.642
1.620
1.877
1.918
0.430
0.078
1.229
Q4
1.542
1.580
1.660
1.785
0.458
0.061
1.244
Q3
1.582
1.508
2.562
2.080
0.226
0.152
1.333
Q2
1.679
1.670
2.243
2.510
0.309
0.120
1.309
Average block market per pound of cheese
Closing block price per pound of cheese¹
Average butter market price per pound
Closing butter market price per pound²
Average whey market price per pound³
Spread4
US average exchange rate to Canadian dollar5
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 Closing butter market price is the price of Grade AA Butter traded on the CME, on the last business day of each quarter.
3 Average whey powder market price is based on Dairy Market News published information.
4 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.
5 Based on Bank of Canada published information.
The USA Sector consists of the Cheese Division (USA) and the Dairy Foods Division (USA).
ANNUAL REPORT 2016
- 28 -
International Sector
(in millions of CDN dollars)
Fiscal years
Revenues
EBITDA
Q4
351.9
13.6
2016
Q3
333.4
22.8
Q2
Q1
Q4
374.4
343.6
356.1
9.6
(10.9)
8.7
2015
Q3
421.9
37.1
Q2
384.5
38.7
Q1
379.8
37.8
Selected factors positively (negatively) affecting EBITDA
(in millions of CDN dollars)
Fiscal years
Inventory write-down
Foreign currency exchange1
Q4
(5)
–
2016
Q3
–
4
Q2
–
–
Q1
(13)
–
Q4
(3)
–
2015
Q3
(7)
(5)
Q2
–
(4)
Q1
–
(4)
1 As compared to same quarter of previous fiscal year.
The International Sector consists of the Dairy Division (Argentina), the Dairy Division (Australia) and the Dairy
Ingredients Division. The Dairy Ingredients Division includes national and export ingredients sales from the North
American divisions, as well as cheese exports from these same divisions.
SUMMARY OF FOURTH QUARTER RESULTS ENDED MARCH 31, 2016
Consolidated revenues for the quarter ended March 31, 2016 amounted to $2.734 billion, an increase of $220.2 million
or 8.8% compared to $2.514 billion for the same quarter last fiscal year.
In the Canada Sector, revenues increased by approximately $23 million or 2.5% as compared to the corresponding quarter
last fiscal year. The inclusion of revenues from the Woolwich Acquisition and a favourable product mix increased revenues
during the quarter. Sales volumes of cheese and cream categories were higher, while traditional milk and butter categories
experienced a decrease. The disposal of the Bakery Division in the fourth quarter of fiscal 2015 reduced revenues as
compared to the same quarter last fiscal year.
The USA Sector revenues increased by approximately $201 million or 16.1% as compared to the corresponding quarter
last fiscal year. Higher sales volumes in both US divisions, as well as the inclusion of the Woolwich Acquisition, increased
revenues. The fluctuation of the average block market per pound of cheese and the butter market in the fourth quarter of
fiscal 2016, as compared to the corresponding quarter last fiscal year, decreased revenues by approximately $14 million.
The weakening of the Canadian dollar versus the US dollar increased revenues by approximately $148 million.
Revenues from the International Sector decreased by approximately $4 million or 1.1% as compared to the corresponding
quarter last fiscal year. In the Dairy Division (Argentina), lower sales volumes and lower selling prices in the export market
decreased revenues as compared to the same quarter last fiscal year. Additionally, the devaluation of the Argentinian peso
versus the Canadian dollar had a negative impact on revenues as compared to the same quarter last fiscal year. The
decrease was partially offset by higher selling prices and higher sales volumes in the domestic market. Revenues of the
Dairy Division (Australia) increased due to the inclusion of the EDC Acquisition and higher sales volumes in both domestic
and export markets, partially offset by the decline in the international cheese and dairy ingredient market prices. Dairy
Ingredients Division revenues were lower in the fourth quarter of fiscal 2016, as compared to the same quarter last fiscal
year due to depressed export market sales prices and lower sales volumes. The fluctuation of the Canadian dollar versus
the foreign currencies used in the International Sector negatively impacted revenues by approximately $33 million, as
compared to the same quarter last fiscal year.
ANNUAL REPORT 2016
- 29 -
Consolidated earnings before interest, income taxes, depreciation, amortization, gain on disposal of a
business, acquisition, restructuring and other costs (adjusted EBITDA1) totalled $313.1 million for the quarter
ended March 31, 2016, an increase of $81.1 million or 35.0% compared to the $232.0 million for the same quarter last
fiscal year.
The EBITDA of the Canada Sector increased by approximately $26 million or 31.6% in comparison to the same quarter
last fiscal year. The increase is due to lower ingredients costs, lower warehousing and logistical costs and decreased
administrative expenses as a result of the allocation of shared expenses totalling $8 million in the USA and International
sectors. Also, a favourable product mix increased EBITDA as compared to the same quarter last fiscal year. The
inclusion of the Woolwich Acquisition positively impacted EBITDA. This increase was offset by a lower international
dairy ingredient market.
The EBITDA of the USA Sector increased by approximately $50 million or 35.5% in comparison to the same quarter last
fiscal year. In the Cheese Division (USA), higher sales volumes, a decrease in ingredients costs, as well as better
efficiencies increased EBITDA as compared to the corresponding quarter last fiscal year. The Dairy Foods Division (USA)
benefitted from increased sales volumes, a favourable product mix, lower warehousing and logistical costs, as well as
decreased operational costs attributed to better cost control. The Sector benefitted from procurement efficiencies that had
a positive impact on EBITDA. During the quarter, a variation in the average block market per pound of cheese versus the
corresponding quarter last fiscal year had a favourable impact on the realization of inventories and an unfavourable impact
on the absorption of fixed costs. The relationship between the average block market per pound of cheese and the cost of
milk as raw material was favourable. These combined market factors, partially offset by lower dairy ingredient market and
unfavourable margins associated with the higher commodity prices in the Dairy Foods Division (USA), increased EBITDA
by approximately $9 million, as compared to the same quarter last fiscal year. The weakening of the Canadian dollar
versus the US dollar had a positive impact on EBITDA of approximately $15 million.
The EBITDA of the International Sector increased by approximately $5 million or 57.5% for the quarter ended
March 31, 2016 in comparison to the same quarter last fiscal year. In the Dairy Division (Argentina), higher sales volumes
combined with favourable market conditions increased EBITDA, as compared to the same quarter last fiscal year. In the
Dairy Division (Australia), the decrease in market selling prices and the fact that the cost of milk as raw material did not
follow this decrease negatively affected EBITDA. This EBITDA decrease was partially offset by higher volumes in both
domestic and export markets. The inclusion of the operations of the EDC Acquisition positively impacted EBITDA. EBITDA
of the Dairy Ingredients Division was comparable to the corresponding quarter last fiscal year. As a result of the decrease
in market selling prices, inventory was written-down by approximately $5 million. In the same quarter of last fiscal year,
inventory was written-down by approximately $3 million.
Depreciation and amortization for the quarter ended March 31, 2016 totalled $54.8 million, an increase of $8.1 million
compared to $46.7 million for the same quarter last fiscal year. This increase is mainly attributed to the fluctuation of the
Canadian dollar versus foreign currencies, as well as additions to property, plant and equipment, increasing the
depreciable base.
In the fourth quarter of fiscal 2016, the Company incurred acquisition costs relating to the business acquisitions
totalling $0.3 million ($0.7 million in fiscal 2015), as well as restructuring costs in relation to plant closures in Canada
totalling $31.2 million ($23.1 million after tax). In connection with these restructuring costs, the Company incurred $5.5
million in severance costs and $25.7 million in impairment charges to property, plant and equipment.
In the fourth quarter of fiscal 2015, the Company realized a gain on disposal of a business of $25.9 million ($25.9
million after tax) relating to the sale of the Bakery Division.
Net interest expense amounted to $15.2 million compared to $17.4 million for the corresponding period last fiscal year.
The decrease is mainly attributed to a lower level of debt resulting from payments made during the quarter, as compared
to the same quarter last fiscal year.
With respect to income taxes, the effective tax rate for the fourth quarter of fiscal 2016 was 33.3% compared to 21.4%
for the same quarter last fiscal year. The increase of the fourth quarter effective tax rate is mainly due to increases of profit
in higher tax rate jurisdictions as well as the non-taxable gain on disposal of a business in fiscal 2015. Also, last fiscal year
had a positive tax adjustment following the closure of prior year’s tax file. 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.
__________________________
1 Adjusted EBITDA represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 30 -
Net earnings amounted to $141.2 million for the quarter ended March 31, 2016, a decrease of $16.2 million compared to
the net earnings of $157.4 million for the same quarter last fiscal year. This is due to the factors mentioned above.
Adjusted net earnings1 amounted to $164.8 million for the quarter ended March 31, 2016, an increase of $37.5 million
compared to the adjusted net earnings of $127.3 million for the same quarter last fiscal year. This increase is due to the
factors mentioned above, without considering acquisition, restructuring and other costs.
During the quarter, the Company added $37.8 million in property, plant and equipment, issued shares for a cash
consideration of $25.3 million as part of the stock option plan and paid out $53.0 million in dividends to its shareholders.
For the same quarter, the Company generated net cash from operating activities of $295.6 million, an increase of $19.1
million as compared to the net cash generated from operating activities for the corresponding period last fiscal year.
QUARTERLY FINANCIAL INFORMATION
During fiscal 2016, quarterly changes in revenues and EBITDA as compared to fiscal 2015 were affected by the inclusion
of revenue and EBITDA derived from the EDC Acquisition and Woolwich Acquisition on May 25, 2015 and October 5, 2015
respectively. Additionally, changes in operational costs, sales volumes variances, product mix, the average block and
butter markets in the US and dairy ingredient market prices affected quarterly financial results.
In the Dairy Division (Canada) higher sales volumes, a better product mix, lower ingredients costs and lower warehousing
and logistical costs were the main driver of the increase of EBITDA offset by increased competitive pressures and higher
costs throughout the year. In the USA Sector, the lower average block and higher butter markets in fiscal 2016 compared
to fiscal 2015 negatively affected revenues while their fluctuations during the quarter positively impacted inventory
realization and other market factors. In the International Sector, cheese and dairy ingredient prices remained low in the
fourth quarter resulting in downward pressure on margins. The net fluctuation of the Canadian dollar versus the US and
Australian dollars in fiscal 2016 versus fiscal 2015 had a net positive impact on both revenues and EBITDA and was
partially offset by the strengthening of the Canadian dollar versus the Argentinian Peso. The quarterly earnings directly
reflect the effects of the previously mentioned items.
__________________________
1 Adjusted net earnings represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 31 -
ANALYSIS OF EARNINGS FOR THE YEAR ENDED MARCH 31, 2015 COMPARED TO
MARCH 31, 2014
Consolidated revenues totalled $10.658 billion, an increase of $1.425 billion or 15.4%, compared to $9.233 billion in
fiscal 2014. Revenues in the USA Sector increased by approximately $790 million. A higher average block market per
pound of cheese of US$1.97 compared to US$1.88 in fiscal 2014, a higher average butter market of US$2.12 compared
to US$1.62, as well as the weakening of the Canadian dollar increased revenues as compared to fiscal 2014. Revenues
from the International Sector increased by approximately $453 million. The inclusion of revenues from the Warrnambool
Acquisition for the full year as compared to nine weeks in fiscal 2014, as well as increased selling prices in accordance
with the cost of milk as raw material were partially offset by a decrease in selling prices in the international market and a
decrease in sales volumes in the Dairy Division (Argentina). Revenues from the Canada Sector increased by
approximately $182 million in comparison to fiscal 2014. The inclusion of revenues from the Scotsburn Acquisition since
April 14, 2014, in addition to increased sales volumes and higher selling prices in accordance with the increase in the cost
of milk as raw material explain the increased revenues in this Sector. The disposal of the Bakery Division in the fourth
quarter decreased revenues as compared to fiscal 2014.
Consolidated earnings before interest, income taxes, depreciation, amortization, gain on disposal of a
business, acquisition, restructuring and other costs (Adjusted EBITDA1) amounted to $1.062 billion in fiscal 2015,
an increase of $41.4 million or 4.1% compared to $1.020 billion for fiscal 2014. This amount is composed of increases in
the USA and International sectors of $65.1 million and $29.2 million, respectively, and a decrease in the Canada Sector
of $52.9 million. Foreign exchange fluctuations added approximately $26 million to EBITDA as compared to fiscal 2014.
The EBITDA of the USA Sector amounted to $534.9 million, an increase of $65.1 million, in comparison to $469.8
million for fiscal 2014. Increased efficiencies and higher sales volumes drove this increase. The average block market
per pound of cheese for fiscal 2015 was US$1.97 as compared to US$1.88 for fiscal 2014. This increase of the block
market per pound of cheese for fiscal 2015 had a favourable impact on the absorption of fixed costs. The decrease in
average block price throughout fiscal 2015, as opposed to the increasing trend during fiscal 2014 had a negative impact
on the realization of inventories. The relationship between the average block market per pound of cheese and the cost
of milk as raw material was less favourable as compared to fiscal 2014. Increased profitability associated with
commodity prices in the Dairy Foods Division (USA) had a positive effect on EBITDA. The combination of these market
factors decreased EBITDA by approximately $68 million as compared to fiscal 2014. The weakening of the Canadian
dollar versus the US dollar in fiscal 2015 added approximately $39 million to the USA Sector EBITDA.
EBITDA for the Canada Sector totalled $404.5 million in fiscal 2015, a decrease of $52.9 million in comparison to
$457.4 million for fiscal 2014. Increased warehousing, logistical, administration, production and ingredients costs as well
as an increasingly competitive environment had a negative impact on EBITDA. These were slightly offset by EBITDA
generation through increased sales volumes as compared to fiscal 2014. The disposal of the Bakery Division in the fourth
quarter also reduced EBITDA resulting from a slightly less than five-week contribution in the fourth quarter of fiscal 2015
as compared to a full fourth quarter of fiscal 2014.
EBITDA for the International Sector totalled $122.3 million in fiscal 2015, an increase of $29.1 million in comparison to
$93.2 million in fiscal 2014. The Sector benefitted from the contribution of the Warrnambool Acquisition for a full year in
fiscal 2015 as compared to only nine weeks in fiscal 2014. EBITDA of the Dairy Division (Argentina) decreased as
compared to fiscal 2014 due to declining international cheese and ingredient selling prices and the fact that the cost of
milk as raw material did not follow this decrease. Included in the results of fiscal 2015 was an inventory write-down of $9.5
million. The strengthening of the Canadian dollar in fiscal 2015 eroded approximately $13 million to the International
Sector’s EBITDA.
The consolidated adjusted EBITDA margin decreased to 10.0% in fiscal 2015, as compared to 11.1% in fiscal 2014,
resulting mainly from a lower EBITDA in the Canada Sector as compared to fiscal 2014.
____________________________
1 Adjusted EBITDA represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 32 -
Depreciation and amortization totalled $170.9 million in fiscal 2015, an increase of $24.3 million, compared to
$146.6 million in fiscal 2014. The increase is mainly due to the inclusion of the Warrnambool Acquisition for a full year as
compared to nine weeks in fiscal 2014. The increase also reflects variations in the depreciable asset base and fluctuations
in foreign exchange between the Canadian dollar and both the US dollar and Argentinian peso.
In fiscal 2015, the Company realized a gain on disposal of a business of $25.9 million ($25.9 million after tax) relating
to the sale of the Bakery Division, which closed on February 2, 2015. Also, the Company incurred acquisition costs
of approximately $0.7 million ($0.5 million after tax) related to the EDC Acquisition in Australia, announced on March 2,
2015 and completed on May 25, 2015. The Company also reversed in fiscal 2015 approximately $7.2 million of
restructuring costs ($4.7 million after tax) accounted for in fiscal 2014, mainly due to the cancellation of a planned plant
closure and lower than estimated other plant closure costs.
In fiscal 2014, the Company incurred acquisition costs of $9.5 million ($9.2 million after tax) relating to the
Warrnambool Acquisition, which closed on February 12, 2014, and the acquisition of the fluid milk activities of Scotsburn
Acquisition, completed on April 14, 2014. Also, restructuring costs and other costs is mainly in relation to plant
closures in the United States and Canada totalling $36.2 million ($23.8 million after tax).
Net interest expense amounted to $73.3 million in fiscal 2015, compared to $69.1 million in fiscal 2014. The increase is
mainly attributed to a full year of interest on additional debt to finance the Warrnambool Acquisition.
Income taxes totalled $237.0 million in fiscal 2015, as compared to $225.0 million in fiscal 2014, for an effective tax rate
of 27.9% in fiscal 2015 as compared to 29.6% for fiscal 2014. The reduction of the current year effective tax rate is mainly
due to the gain on disposal of a business that is not taxable and a positive tax adjustment following the closure of prior
year’s tax file. 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 fiscal 2015 totalled $612.9 million, an increase of $78.9 million or 14.8% compared to $534.0 million
in fiscal 2014. This increase is due to the factors mentioned above.
Adjusted net earnings1 for fiscal 2015 totalled $582.8 million, an increase of $15.8 million or 2.8% compared to
$567.0 million in fiscal 2014. This increase is due to the factors mentioned above, without considering gain on
disposal of a business, acquisition, restructuring and other costs.
1 Adjusted net earnings represents a non-IFRS measure. Refer to “Measurement of Results not in Accordance with International Financial Reporting
Standards” on page 7 of this Management’s Discussion and Analysis for the definition of this term.
ANNUAL REPORT 2016
- 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
International Financial Reporting Standards.
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 independent auditors to discuss internal controls, auditing matters
and financial reporting issues. It also reviews the annual report, the consolidated financial statements and the independent
auditors’ report. The Audit Committee recommends the independent auditors for appointment by the shareholders. The
independent auditors have unrestricted access to the Audit Committee. The consolidated financial statements have been
audited by the independent auditors Deloitte LLP, whose report follows.
(signed) Lino A.Saputo, Jr.
Lino A. Saputo, Jr.
Chief Executive Officer
and Vice Chairman of the Board
(signed) Louis-Philippe Carrière
Louis-Philippe Carrière, FCPA, FCA
Chief Financial Officer
and Secretary
June 2, 2016
ANNUAL REPORT 2016
- 34 -
INDEPENDENT AUDITOR’S REPORT
To the shareholders of Saputo Inc.
We have audited the accompanying consolidated financial statements of Saputo Inc., which comprise the consolidated
balance sheets as at March 31, 2016 and March 31, 2015, and the consolidated statements of earnings, consolidated
statements of comprehensive income, consolidated statements of equity and consolidated statements of cash flows for
the years then ended, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as Management determines
is necessary to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Saputo Inc. as at March 31, 2016 and March 31, 2015, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
(signed) Deloitte LLP 1
June 2, 2016
Montréal, Québec
____________________
1 CPA auditor, CA, public accountancy permit No. A116207
ANNUAL REPORT 2016
- 35 -
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions of CDN dollars, except per share amounts)
Years ended March 31
Revenues
Operating costs excluding depreciation, amortization, gain on disposal of a business,
acquisition, restructuring and other costs (Note 5)
Earnings before interest, income taxes, depreciation, amortization, gain on disposal
of a business, acquisition, restructuring and other costs
Depreciation and amortization (Notes 6 and 7)
Gain on disposal of a business (Note 22)
Acquisition, restructuring and other costs (Note 22)
Interest on long-term debt
Other financial charges (Note 13)
Earnings before income taxes
Income taxes (Note 14)
Net earnings
Attributable to:
Shareholders of Saputo Inc.
Non-controlling interest
Earnings per share (Note 15)
Net earnings
Basic
Diluted
2016
2015
$
10,991.5
$
10,657.7
9,817.4
9,596.0
1,174.1
198.6
-
34.2
48.3
22.1
870.9
269.5
$
601.4
$
601.1
0.3
$
601.4
$
1,061.7
170.9
(25.9)
(6.5)
54.0
19.3
849.9
237.0
612.9
607.6
5.3
612.9
$
$
1.53
1.51
$
$
1.55
1.53
The accompanying notes are an integral part of these audited consolidated financial statements.
ANNUAL REPORT 2016
- 36 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of CDN dollars)
Years ended March 31
Net earnings
Other comprehensive income (loss):
Items that may be reclassified to net earnings:
Exchange differences arising from foreign currency translation
Net unrealized gains (losses) on cash flow hedges1 (Note 20)
Reclassification of gains on cash flow hedges to net earnings2
Items that will not be reclassified to net earnings:
Actuarial gains (losses)3 (Note 17)
Other comprehensive income (loss)
Total comprehensive income
Attributable to:
Shareholders of Saputo Inc.
Non-controlling interest
1 Net of income taxes of $7.7 (2015 - $0.8).
2 Net of income taxes of $6.2 (2015 - $1.6).
3 Net of income taxes of $2.3 (2015 - $8.1).
2016
2015
$
601.4
$
612.9
56.9
13.5
(8.5)
61.9
6.5
6.5
68.4
$
669.8
$
$
$
$
669.5
0.3
669.8
$
373.4
(3.0)
(4.0)
366.4
(21.0)
(21.0)
345.4
958.3
953.5
4.8
958.3
The accompanying notes are an integral part of these audited consolidated financial statements.
ANNUAL REPORT 2016
- 37 -
CONSOLIDATED STATEMENTS OF EQUITY
(in millions of CDN dollars, except common shares)
For the year ended March 31, 2016
Share capital
Reserves
Common
Shares
Amount
Foreign
Currency
Translation
Cash
Flow
Hedges
Stock
Option
Plan
Total
Reserves
Retained
Earnings
Total
Non-
Controlling
Interest
Total
Equity
Net earnings
Other comprehensive income
Total comprehensive income
Dividends declared
Stock option plan (Note 12)
Shares issued under stock option plan
Amount transferred from reserves to
share capital upon exercise of
options
Excess tax benefit that results from the
excess of the deductible amount
over the compensation cost
recognized
Shares repurchased and cancelled
Balance, beginning of year
392,225,049 $
765.8 $
556.7 $
-
-
-
-
2,995,638
-
-
-
56.9
(5.0) $
-
5.0
69.6 $
621.3 $
-
-
-
61.9
2,173.8 $
601.1
6.5
3,560.9 $
601.1
68.4
-
-
49.9
-
-
-
-
-
-
-
17.7
-
-
(210.0)
17.7
-
-
-
669.5
(210.0)
17.7
49.9
67.7 $
0.3
-
0.3
-
-
-
3,628.6
601.4
68.4
669.8
(210.0)
17.7
49.9
-
10.8
-
-
(10.8)
(10.8)
-
-
-
-
-
(2,700,000)
-
(5.5)
-
-
-
-
5.6
-
5.6
-
-
(86.3)
5.6
(91.8)
-
-
5.6
(91.8)
Balance, end of year
392,520,687 $
821.0 $
613.6 $
- $
82.1 $
695.7 $
2,485.1 $
4,001.8 $
68.0 $
4,069.8
For the year ended March 31, 2015
Share capital
Reserves
Common
Shares
Amount
Foreign
Currency
Translation
Cash
Flow
Hedges
Stock
Option
Plan
Total
Reserves
Retained
Earnings
Total
Non-
Controlling
Interest
Total
Equity
Net earnings
Other comprehensive income
Total comprehensive income
Dividends declared
Stock option plan (Note 12)
Shares issued under stock option plan
Amount transferred from reserves to
share capital upon exercise of
options
Excess tax benefit that results from the
excess of the deductible amount
over the compensation cost
recognized
Shares repurchased and cancelled
Balance, beginning of year
390,137,824 $
703.1 $
183.3 $
1.5 $
57.5 $
242.3 $
1,830.9 $
2,776.3 $
62.9 $
-
-
-
-
-
-
-
-
3,590,625
54.0
-
373.4
-
(6.5)
-
-
-
366.9
607.6
(21.0)
-
-
-
-
-
-
-
18.7
-
-
18.7
-
(197.7)
-
-
54.0
607.6
345.9
953.5
(197.7)
18.7
5.3
(0.5)
4.8
-
-
-
2,839.2
612.9
345.4
958.3
(197.7)
18.7
54.0
-
11.5
-
-
(11.5)
(11.5)
-
-
-
-
-
(1,503,400)
-
(2.8)
-
-
-
-
4.9
-
4.9
-
-
(46.0)
4.9
(48.8)
-
-
4.9
(48.8)
Balance, end of year
392,225,049 $
765.8 $
556.7 $
(5.0) $
69.6 $
621.3 $
2,173.8 $
3,560.9 $
67.7 $
3,628.6
The accompanying notes are an integral part of these audited consolidated financial statements.
ANNUAL REPORT 2016
- 38 -
CONSOLIDATED BALANCE SHEETS
(in millions of CDN dollars)
As at
ASSETS
Current assets
Cash and cash equivalents
Receivables
Inventories (Note 4)
Income taxes (Note 14)
Prepaid expenses and other assets
Property, plant and equipment (Note 6)
Goodwill (Note 7)
Intangible assets (Note 7)
Other assets (Note 8)
Deferred income taxes (Note 14)
Total assets
LIABILITIES
Current liabilities
Bank loans (Note 9)
Accounts payable and accrued liabilities
Income taxes (Note 14)
Current portion of long-term debt (Note 10)
Long-term debt (Note 10)
Other liabilities (Note 11)
Deferred income taxes (Note 14)
Total liabilities
EQUITY
Share capital (Note 12)
Reserves
Retained earnings
Equity attributable to shareholders of Saputo Inc.
Non-controlling interest
Total equity
Total liabilities and equity
March 31, 2016 March 31, 2015
$
$
$
$
$
$
164.3 $
818.8
1,077.1
4.7
110.9
2,175.8
2,086.0
2,194.1
587.0
106.5
22.9
7,172.3 $
178.2 $
896.6
37.1
244.9
1,356.8
1,208.3
61.8
475.6
3,102.5 $
821.0
695.7
2,485.1
4,001.8
68.0
4,069.8 $
7,172.3 $
72.6
784.5
1,006.0
1.1
98.3
1,962.5
2,073.1
2,125.0
506.3
115.8
17.6
6,800.3
169.8
898.1
58.4
53.1
1,179.4
1,516.9
70.2
405.2
3,171.7
765.8
621.3
2,173.8
3,560.9
67.7
3,628.6
6,800.3
The accompanying notes are an integral part of these audited consolidated financial statements.
On behalf of the Board,
(signed) Emanuele (Lino) Saputo
Emanuele (Lino) Saputo, C.M., O.Q., Dr h.c.
Director
(signed) Tony Meti
Tony Meti
Director
ANNUAL REPORT 2016
- 39 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of CDN dollars)
Years ended March 31
Cash flows related to the following activities:
Operating
Net earnings
Adjustments for:
Stock-based compensation
Interest and other financial charges
Income tax expense
Depreciation and amortization
(Gain) loss on disposal of property, plant and equipment
Gain on disposal of a business
Restructuring charges related to plant closures
Share of joint venture earnings
Under (Over)funding of employee plans in excess of costs
Changes in non-cash operating working capital items
Cash generated from operating activities
Interest and other financial charges paid
Income taxes paid
Net cash generated from operating activities
Investing
Business acquisitions
Additions to property, plant and equipment
Additions to intangible assets
Proceeds from disposal of a business
Proceeds on disposal of property, plant and equipment
Other
Financing
Bank loans
Proceeds from issuance of long-term debt
Repayment of long-term debt
Issuance of share capital
Repurchase of share capital
Dividends
2016
2015
$
601.4
$
612.9
27.8
70.4
269.5
198.6
(1.2)
-
31.2
(6.7)
2.2
1,193.2
(45.8)
1,147.4
(63.5)
(236.5)
847.4
(214.9)
(183.5)
(48.3)
-
5.5
(0.5)
(441.7)
34.5
134.7
(255.9)
49.9
(91.8)
(210.0)
(338.6)
32.6
73.3
237.0
170.9
0.3
(25.9)
(7.2)
(7.7)
(1.8)
1,084.4
(14.5)
1,069.9
(61.0)
(239.1)
769.8
(65.0)
(186.9)
-
114.3
2.1
(30.9)
(166.4)
(150.4)
410.0
(640.0)
54.0
(48.8)
(197.7)
(572.9)
30.5
39.4
2.7
72.6
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, end of year
67.1
72.6
24.6
164.3
$
$
The accompanying notes are an integral part of these audited consolidated financial statements.
ANNUAL REPORT 2016
- 40 -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2016 and 2015
(Tabular amounts are in millions of CDN dollars except information on options, units and shares.)
NOTE 1 CORPORATE INFORMATION
Saputo Inc. (the Company) is a publicly traded company incorporated and domiciled in Canada. The Company’s shares
are listed on the Toronto Stock Exchange under the symbol “SAP.” The Company produces, markets and distributes a
wide array of dairy products from Canada, the United States, Argentina and Australia. The address of the Company’s
head office is 6869, Metropolitain Blvd. East, Montréal, Québec, Canada, H1P 1X8. The consolidated financial
statements (financial statements) of the Company for the year ended March 31, 2016 comprise the financial results of
the Company and its subsidiaries.
The financial statements for the year ended March 31, 2016 have been authorized for issuance by the Board of
Directors on June 2, 2016.
NOTE 2 BASIS OF PRESENTATION
STATEMENT OF COMPLIANCE
The consolidated annual financial statements of the Company have been prepared in accordance with International
Financial Reporting Standards (IFRS).
BASIS OF MEASUREMENT
The Company’s financial statements have been prepared on a going concern basis and applied based on the historical
cost principle except for certain assets and liabilities as described in the significant accounting policies section.
STOCK DIVIDEND
On August 5, 2014, the Board of Directors declared a stock dividend of one common share per each issued and
outstanding common share, which had the same effect as a two-for-one stock split of the Company’s outstanding
common shares, paid on September 29, 2014 to shareholders of record as of the close of business on
September 19, 2014. The Company’s shares began trading on an ex-dividend basis (split basis) on September 30, 2014
and references to common shares, options and related information made herein have been retroactively adjusted to
reflect the stock dividend.
FUNCTIONAL AND PRESENTATION CURRENCY
The Company’s financial statements are presented in Canadian dollars, which is also the consolidated entity’s
functional currency. All financial information has been rounded to the nearest million unless stated otherwise.
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company and entities under its control. Control exists
when an entity is exposed, or has rights, to variable returns from its involvement with investees and has the ability to affect
those returns through its power over them. 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 consist primarily of cash and short-term investments having an initial maturity of three
months or less at the time of acquisition.
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. Borrowing costs are allocated to qualifying inventory where inventory
takes a substantial period of time to reach finished goods status.
ANNUAL REPORT 2016
- 41 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses and are
depreciated using the straight-line method over their estimated useful lives as described below:
Buildings
Furniture, machinery and equipment
Rolling stock
15 to 40 years
3 to 20 years
5 to 10 years based on estimated kilometers traveled
Where components of an item of building or furniture, machinery and equipment are individually significant, they are
accounted for separately within the categories described above.
Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell, and no depreciation
is recorded. Assets under construction are not depreciated. Borrowing costs are capitalized to qualifying property, plant
and equipment where the period of construction of those assets takes a substantial period of time to get ready for their
intended use. Borrowing costs, if incurred, are added to the cost of those assets until such time as the assets are
substantially ready for their intended use.
For the purposes of impairment testing, property, plant and equipment are tested at the cash-generating unit (CGU)
level. Write-downs are included in “depreciation and amortization” presented on the consolidated statements of
earnings.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the consideration transferred in a given acquisition over the fair value of the
identifiable net assets acquired and is initially recorded at that value. Goodwill is subsequently carried at cost less any
impairment.
Intangible assets include trademarks, customer relationships and software that is not an integral part of the related
hardware. Intangible assets are initially recorded at their transaction fair values. Indefinite life intangibles are
subsequently carried at cost less any impairment losses. Definite life intangible assets are subsequently carried at cost
less accumulated amortization and less impairment losses, if any. Goodwill and trademarks are not amortized as they
are considered to be indefinite life intangible assets. However they are tested for impairment annually or more frequently
if events or changes in circumstances indicate that the assets might be impaired.
When testing goodwill and indefinite life intangible assets, the carrying values of the CGU’s or group of CGU’s including
goodwill are compared with their respective recoverable amounts (higher of fair value less costs of disposal and value
in use) and an impairment loss, if any, is recognized for the excess. When testing for impairment, the carrying values
(including the carrying value of the related CGU’s or group of CGU’s excluding goodwill) are also compared to their
recoverable amounts.
Customer relationships and software are considered to be definite life intangible assets and are amortized using the
straight-line method over their useful lives which vary from 5 to 15 years and are reviewed for indicators of impairment
prior to each reporting period.
Refer to “Impairment Testing of Cash-Generating Units” in Note 7 for a discussion of the CGU levels at which goodwill
and intangible assets are tested.
IMPAIRMENT OF OTHER LONG-LIVED ASSETS
Other long-lived assets are subject to an “indicators of impairment” test at each reporting period. In the event of an
indication of impairment, the asset or group of assets (referred to as CGU’s), for which identifiable cash flows that are
largely independent of the cash inflows from other assets or group of assets exist, are tested for impairment. An
impairment loss is recorded in net earnings when the carrying value exceeds the recoverable amount. The recoverable
amount is defined as the greater of fair value less costs of disposal and value in use.
ANNUAL REPORT 2016
- 42 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
BUSINESS COMBINATIONS
The Company accounts for its business combinations using the acquisition 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.
Significant debt issuance costs directly related to the funding of business acquisitions are included in the carrying value
of the debt and are amortized over the related debt term using the effective interest rate method. Acquisition costs are
expensed as incurred.
NON-CONTROLLING INTEREST
Non-controlling interests represent equity interest in acquired subsidiaries by third parties. The non-controlling
shareholders claim on net assets of the subsidiary is presented as a component within equity. Any share purchases
from non-controlling interests after the Company obtains control of a division are treated as transactions with equity
owners of the Company. Net earnings and each component of other comprehensive income are attributed to both the
owners of the Company and to the non-controlling interest.
EMPLOYEE FUTURE BENEFITS
The cost of pension and other post-retirement benefits is actuarially determined annually on March 31 using the
projected benefit method prorated based on years of service and using Management’s best estimates of rates of
compensation increases, retirement ages of employees and expected health care costs. Current service costs and
interest on obligations offset by interest income on plan assets are expensed in the year. Actuarial gains or losses, the
effect of an adjustment, if any, on the maximum amount recognized as an asset and the impact of the minimum funding
requirements, are recorded in other comprehensive income (loss) and immediately recognized in retained earnings
without subsequent reclassification to the consolidated statements of earnings. The net pension expenditure under
defined contribution pension plans is generally equal to the contributions made by the employer.
REVENUE RECOGNITION
The Company recognizes revenue 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 Company’s functional currency is the Canadian dollar. Accordingly, the balance sheet accounts of foreign
operations are translated into Canadian dollars using the exchange rates at the balance sheet dates and statements
of earnings accounts are translated into Canadian dollars using the average monthly exchange rates in effect during
the periods. The foreign currency translation adjustment (CTA) reserve presented in the consolidated statements of
comprehensive income and the consolidated statements of equity, 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 foreign operations for the periods presented resulted mainly
from the fluctuation in 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 at 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 operating costs.
ANNUAL REPORT 2016
- 43 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
STOCK-BASED COMPENSATION
The Company offers an equity settled stock option plan to certain employees within the organization pursuant to which
options are granted over a five-year vesting period with a ten-year expiration term. The fair value of each instalment of
an award is determined separately and recognized over the vesting period. When stock options are exercised, any
consideration paid by employees and the related compensation expense recorded as a stock option plan reserve are
credited to share capital.
The Company allocates deferred share units (DSU) to eligible Directors of the Company which are based on the market
value of the Company’s common shares. DSUs are granted on a quarterly basis, vest upon award and entitle Directors
to receive a cash payment for the value of the DSUs they hold following cessation of functions as a Director of the
Company. The Company recognizes an expense in its consolidated statements of earnings and a liability in its
consolidated balance sheets for each grant. The liability and related expense is subsequently re-measured at each
reporting period.
The Company offers performance share units (PSU) to senior management which are based on the market value of
the Company’s common shares. The PSU plan is non-dilutive and is settled in cash. These awards are considered
cash-settled share-based payment awards. A liability is recognized for the employment service received and is
measured initially, on the grant date, at the fair value of the liability. The liability is then subsequently remeasured at
each reporting period with any change in value recorded in net earnings. The compensation expense is recognized
over the three-year performance cycle.
RESEARCH AND DEVELOPMENT TAX CREDITS
The Company benefits from research and development tax credits related to operating costs and property, plant and
equipment. These credits are accounted for either as a reduction of operating costs or property, plant and equipment.
INCOME TAXES
Income tax expense represents the sum of current and deferred income tax and is recognized in the consolidated
statements of earnings with the exception of items that are recognized in the consolidated statements of comprehensive
income or directly in equity.
Current income taxes are determined in relation to taxable earnings for the year and incorporate any adjustments to
current taxes payable in respect of previous years.
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax
assets and liabilities are determined based on temporary differences between the carrying amount of an asset or liability
in the consolidated balance sheets and its tax basis. They are measured using the enacted or substantively enacted
tax rates that are expected to apply when the asset is realized or the liability is settled. A deferred income tax asset is
recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary
difference can be used.
ANNUAL REPORT 2016
- 44 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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, continue 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.
- Receivables are classified as loans and receivables and are measured at amortized cost.
- 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 DSUs and PSUs which is
measured at the fair value of common shares on the balance sheet dates.
Certain derivative instruments are utilized by the Company to manage exposure to variations in interest rate payments
and to manage foreign exchange rate risks, including foreign exchange forward contracts, currency swaps and interest
rate swaps. Derivatives are initially recognized at fair value at the date the derivative contracts, currency swaps are entered
into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is
immediately recognized in net earnings unless the derivative is designated as a hedging instrument.
HEDGING
The Company designates certain financial instruments as cash flow hedges. At the inception of the hedging relationship,
the Company formally documents its risk management objective, strategy, term, nature of risk being hedged and
identifies both the hedged item and hedging instrument.
Variations in the fair value of cash flow hedges representing gains or losses on the effective portion are recorded in
other comprehensive income until the hedged item affects net earnings. Variations in the fair value of cash flow hedges
representing gains or losses on the ineffective portion are recognized in net earnings.
The Company formally assesses at inception and quarterly thereafter, the effectiveness of the hedging instruments
ability to offset variations in the cash flow risks associated with the hedged item. Where a hedging relationship is no
longer effective, hedge accounting is discontinued and any subsequent change in the fair value of the hedging
instrument is recognized in net earnings.
JOINT VENTURES
Joint ventures are accounted for using the equity method and represent those entities in which the Company exercises
joint control over and for which it is exposed to variable returns from its involvement in the arrangement. Joint control
is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
ANNUAL REPORT 2016
- 45 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
FAIR VALUE HIERARCHY
All financial instruments measured at fair value are categorized into one of three hierarchy levels, described below, for
disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Each level reflects 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.
USE OF ESTIMATES AND JUDGEMENTS IN THE APPLICATION OF ACCOUNTING POLICIES
The preparation of the Company’s financial statements requires Management to make certain judgements and
estimates about transactions and carrying values that are fulfilled at a future date. Judgements and estimates are
subject to fluctuations due to changes in internal and/or external factors and are continuously monitored by
Management. A discussion of the judgements and estimates that could have a material effect on the financial
statements is provided below.
SIGNIFICANT ESTIMATES AND JUDGEMENTS
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining
the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters
differs from the amounts that were initially recorded, such differences will impact the results for the reporting period and
the respective current income tax and deferred income tax provisions in the reporting period in which such
determination is made.
Deferred Income Taxes
The Company follows the liability method of accounting for deferred income taxes. Deferred income tax assets and
liabilities are measured using enacted or substantively 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
deferred income tax assets. Canadian, US and international tax rules and regulations are subject to interpretation and
require judgement on the part of the Company that may be challenged by taxation authorities. The Company believes
that it has adequately provided for deferred 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.
ANNUAL REPORT 2016
- 46 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Goodwill, Intangible Assets and Business Combinations
Goodwill, trademarks and customer relationships have principally arisen as a result of business combinations. The
acquisition method, which also requires significant estimates and judgements, is used to account for these business
combinations. As part of the allocation process in a business combination, estimated fair values are assigned to the
net assets acquired, including trademarks and customer relationships. These estimates are based on forecasts of future
cash flows, estimates of economic fluctuations and an estimated discount rate. The excess of the purchase price over
the estimated fair value of the net assets acquired is then assigned to goodwill. In the event that actual net assets fair
values are different from estimates, the amounts allocated to the net assets, and specifically to trademarks and
customer relationships, could differ from what is currently reported. This would then have a pervasive impact on the
carrying value of goodwill. Differences in estimated fair values would also have an impact on the amortization of definite
life intangibles.
Property, Plant and Equipment
Critical judgement is necessary in the selection and application of accounting policies and useful lives as well as the
determination of which components are significant and how they are allocated. Management has determined that the
use of the straight-line method of amortization is the most appropriate as its facilities are operating at a similar output
potential on a year to year basis, which indicates that production is constant (please refer to the estimated useful lives
table for further details on the useful lives of productive assets). It is Management’s best estimate that the useful lives
and policies adopted adequately reflect the flow of resources and the economic benefits required and derived in the
use and servicing of these long-lived productive assets.
Impairment of Assets
Significant estimates and judgements are required in testing goodwill, intangible assets and other long-lived assets for
impairment. Management uses estimates or exercises judgement in assessing indicators of impairment, defining a
CGU, forecasting future cash flows and in determining other key assumptions such as discount rates and earnings
multipliers used for assessing fair value (less costs of disposal) or value in use. Estimates made for goodwill and
intangible assets can be found in Note 7. Other long-lived assets are tested only when indicators of impairment are
present.
Employee Future Benefits
The Company is the sponsor to both defined benefit and defined contribution plans, which provide pension and other
post-employment benefits to its employees. Several estimates and assumptions are required with regards to the
determination of the defined benefit expense and its related obligation, such as the discount rate used in determining
the carrying value of the obligation and the interest income on plan assets, the expected health care cost trend rate,
the expected mortality rate, etc. Actual results will normally differ from expectations. These gains or losses are
presented in the consolidated statements of comprehensive income.
EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
NOT YET IMPLEMENTED
The International Accounting Standards Board (IASB) made revisions as part of its continuing improvements project.
Below is a summary of the relevant standards affected and a discussion of the amendments.
IAS 19, Employee Benefits
IAS 19 has been amended to clarify that in determining the discount rate for post-employment benefit obligations, the
currency of the liability is of importance and not the country in which it arises. Furthermore, where there is no deep
market in high-quality corporate bonds in that currency, government bonds in the relevant currency should be used.
This amendment is effective for annual reporting periods beginning on or after January 1, 2016. Management is
currently evaluating the impact of the adoption of this amendment but is not expecting it to have a significant impact on
the Company’s financial statements.
ANNUAL REPORT 2016
- 47 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
IAS 7, Statement of Cash Flows
In January 2016, the IASB amended IAS 7 to require further disclosures enabling users of the financial statement to
evaluate changes in liabilities arising from financing activities. To achieve this objective, the IASB requires that the
following changes in liabilities arising from financing activities are disclosed: (i) changes from financing cash flows; (ii)
changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign
exchange rates; (iv) changes in fair values; and (v) other changes.
This amendment is effective for the annual periods beginning on or after January 1, 2017. Management is currently
evaluating the impact of these disclosure requirements.
IFRS 9, Financial Instruments
The IASB issued IFRS 9 in November 2009 with the long-term goal of replacing IAS 39, Financial Instruments:
Recognition and Measurement. Several amendments have been made to this standard since that date including
amendments made in July and August 2014 relating to the classification of financial assets and the use of a single
impairment model for all financial instruments.
These amendments, along with the adoption of the standard, are effective for annual reporting periods beginning on or
after January 1, 2018. Management is currently evaluating the impact of the adoption of this standard, including
amendments.
IFRS 15, Revenue from Contracts with Customers
The IASB issued IFRS 15, Revenue from Contracts with Customers with its goal to provide a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. This new standard will
supersede current revenue recognition guidance in IAS 18, Revenue, IAS 11, Construction Contracts and IFRIC 13,
Customer Loyalty Programmes.
The objective of this standard is to provide a five-step approach to revenue recognition that includes identifying
contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction
prices to performance obligations and recognizing revenue when performance obligations are satisfied. In certain
instances, transfer of assets that are not related to the entity’s ordinary activities will also be required to follow some of
the recognition and measurement requirements of the new model. The standard also expands current disclosure
requirements.
On April 12, 2016, the IASB amended IFRS 15 to comprise clarifications of the guidance on identifying performance
obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus
net revenue presentation).
With regards to identifying performance obligations, the amendments clarify how to determine when promises in a
contract are ‘distinct’ goods or services and, therefore, should be accounted for separately. The amendments to
licensing guidance clarify when revenue from a licence of intellectual property should be recognised ‘over time’ and
when it should be recognised at a ‘point in time’. With regards to the principal versus agent assessment, the
amendments clarify that the principal in an arrangement controls a good or service before it is transferred to a customer.
This standard and related amendments are effective for annual reporting periods beginning on or after January 1, 2018.
Management is currently assessing the impact of the adoption of this standard.
IFRS 16, Leases
On January 13, 2016, the IASB published a new standard, IFRS 16, Leases. The new standard will eliminate the
distinction between operating and finance leases and will bring most leases on the balance sheet for lessees. For
lessors, the accounting remains mostly unchanged and the distinction between operating and finance leases is
retained.
This standard is effective for annual reporting periods beginning on or after January 1, 2019. Management is currently
assessing the impact of the adoption of this standard.
ANNUAL REPORT 2016
- 48 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
IFRS 10, Consolidated Financial Statements & IAS 28, Investments in Associates
The IASB previously issued a narrow-scope amendment to IFRS 10, Consolidated Financial Statements and IAS 28,
Investments in Associates and Joint Ventures to address an acknowledged inconsistency between the requirements in
IFRS 10 and those in IAS 28 when dealing with the sale or contribution of assets between an investor and its associate
or joint venture. The original amendments required a full gain or loss to be recognized where a transaction involved a
business or that a partial gain or loss be recognized when a transaction involved assets that did not constitute a
business.
The original effective date for this amendment was for annual reporting periods beginning on or after January 1, 2016
however, on December 21, 2015, the IASB decided to postpone this change until the completion of a broader review
by the IASB which may result in the simplification of accounting for such transactions and other aspects of accounting
for associates and joint ventures.
EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
ADOPTED DURING THE YEAR
The following standards were adopted by the Company on April 1, 2015:
IFRS 2, Share-based Payment
The IASB has amended the definitions of market and vesting conditions and added definitions for performance and
service conditions. Vesting conditions are now defined as either service conditions or performance conditions. The
amendments also clarify certain other requirements for performance, service, market and non-vesting conditions.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IFRS 3, Business Combinations
The IASB amended IFRS 3 to clarify that contingent consideration in a business combination, whether an asset or
liability, should continue to be measured at fair value at each reporting date regardless of whether the contingent
consideration is considered a financial instrument within the scope of IFRS 9 or IAS 39 and regardless of whether it is
considered a non-financial asset or liability (changes in fair value shall be included in net earnings).
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IFRS 8, Operating Segments
The IASB amended IFRS 8 to require an entity to disclose the judgements in applying the aggregation criteria. The
standard now requires a brief description of the operating segments that have been aggregated in the present manner
and the economic indicators that have been assessed in determining that the aggregated operating segments share
similar economic characteristics.
The adoption of this amendment has not materially impacted the Company’s financial statements with the exception of
additional disclosures found in Note 23.
IFRS 8 has also been amended to clarify that an entity only needs to present a reconciliation between the total reporting
segment's assets to the entities' total assets if this information is usually provided to the chief operating decision maker.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016 as this
information is already disclosed by the Company in Note 23.
IFRS 13, Fair Value
The IASB amended the basis for conclusion in IFRS 13 to clarify that the issuance of IFRS 13 (and related amendments
to IAS 39, Financial Instruments: Recognition and Measurement) does not require discounting of short-term receivables
and payables if they are not significant.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
ANNUAL REPORT 2016
- 49 -
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
IAS 19, Employee Benefits
IAS 19 has been amended to clarify that employee (or third party) contributions that are independent of the number of
years of service can be deducted from the service cost in the period that the service is rendered and not necessarily
allocated over periods of service. Other contributions made by employees (or third parties) are to be attributed to the
periods of service using the plan's contribution formula or on a straight line basis.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IAS 24, Related Party Transactions
IAS 24 clarifies that a management entity providing key management personnel services to a reporting entity is also
considered a related party of the reporting entity. Therefore the amounts paid by the reporting entity in relation to those
services must also be included in the amounts disclosed in the related party transactions note. Disclosures of the
components of the services provided are not required.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
IAS 40, Investment Property
The IASB amended this standard to clarify that this standard and IFRS 3, Business Combinations are not mutually
exclusive and the application of both standards may be required in the event of an asset acquisition. An entity will need
to determine whether the asset acquired meets the definition of investment property while also determining whether
the transaction constitutes a business acquisition under IFRS 3.
This amendment did not impact the Company’s financial statements for the year ended March 31, 2016.
NOTE 4
INVENTORIES
Finished goods
Raw materials, work in progress and supplies
Total
March 31, 2016 March 31, 2015
$
$
$
702.6
374.5
692.2
313.8
1,077.1
$
1,006.0
The amount of inventories recognized as an expense in operating costs for the year ended March 31, 2016 is
$8,849.2 million ($8,662.4 million for the year ended March 31, 2015).
During fiscal 2016, a write-down of $17.6 million ($9.5 million at March 31, 2015) was included as an expense in “Operating
costs excluding depreciation, amortization, gain on disposal of a business, acquisition, restructuring and other costs” under
the caption “Changes in inventories of finished goods and work in process” presented in Note 5.
NOTE 5 OPERATING COSTS EXCLUDING DEPRECIATION, AMORTIZATION, GAIN
ON DISPOSAL OF A BUSINESS, ACQUISITION, RESTRUCTURING AND
OTHER COSTS
Changes in inventories of finished goods and work in process
Raw materials and consumables used
Foreign exchange gain
Employee benefits expense
Selling costs
Other general and administrative costs
Total
$
$
2016
15.9 $
7,715.5
(3.3)
1,201.7
287.2
600.4
9,817.4 $
2015
(62.4)
7,749.9
(15.2)
1,069.1
292.3
562.3
9,596.0
ANNUAL REPORT 2016
- 50 -
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
For the year ended March 31, 2016
Furniture,
machinery
and
Land Buildings
equipment
Rolling
stock
Held for
sale
Cost
As at March 31, 2015
$
Business acquisitions (Note 16)
Additions
Disposals
Transfers¹
Foreign currency adjustments
$
65.7
1.0
0.2
-
0.5
0.8
$
756.6
13.9
41.1
(1.1)
3.9
4.0
$
2,295.0
18.4
140.5
(18.2)
-
2.3
$
16.5
-
1.7
(0.9)
-
0.2
As at March 31, 2016
$
68.2
$
818.4
$
2,438.0
$
17.5
$
$
12.5
-
-
(12.5)
-
-
-
Total
3,146.3
33.3
183.5
(32.7)
4.4
7.3
$
3,342.1
Accumulated depreciation
As at March 31, 2015
Depreciation
Disposals
Impairment
Foreign currency adjustments
-
-
-
-
-
215.7
33.7
(1.1)
6.4
1.6
842.9
146.2
(17.5)
17.7
2.4
5.6
1.7
(0.8)
1.6
-
9.0
-
(9.0)
-
-
1,073.2
181.6
(28.4)
25.7
4.0
As at March 31, 2016
Net book value at March 31, 2016 $
1 Transfers from other assets to property, plant and equipment following the acquisition of the everyday cheese business of Lion-Dairy & Drinks
1,446.3
562.1
68.2
991.7
256.3
8.1
9.4
$
$
$
$
$
$
$
$
$
$
$
-
-
-
1,256.1
2,086.0
Pty Ltd (EDC Acquisition).
For the year ended March 31, 2015
Furniture,
machinery
and
Land
Buildings
equipment
Rolling
stock
Held for
sale
Cost
As at March 31, 2014
$
Business acquisition (Note 16)
Business disposal (Note 22)
Additions
Disposals
Transfers
Foreign currency adjustments
$
61.3
0.5
(0.3)
2.2
(0.3)
(0.7)
3.0
$
700.7
6.7
(22.6)
49.1
(15.0)
(4.9)
42.6
$
2,127.3
8.4
(105.1)
134.2
(33.4)
-
163.6
$
13.4
2.8
(0.5)
1.4
(0.2)
-
(0.4)
$
7.8
-
-
-
(0.9)
5.6
-
Total
2,910.5
18.4
(128.5)
186.9
(49.8)
-
208.8
As at March 31, 2015
$
65.7
$
756.6
$
2,295.0
$
16.5
$
12.5
$
3,146.3
Accumulated depreciation
As at March 31, 2014
Business disposal (Note 22)
Depreciation
Disposals
Transfers
Reversal of impairment
Foreign currency adjustments
As at March 31, 2015
$
-
-
-
-
-
-
-
-
202.3
(9.0)
30.0
(13.6)
(3.0)
(0.2)
9.2
770.2
(65.6)
124.3
(32.8)
-
(2.3)
49.1
2.4
(0.3)
1.7
(0.1)
-
-
1.9
6.9
-
-
(0.9)
3.0
-
-
981.8
(74.9)
156.0
(47.4)
-
(2.5)
60.2
$
215.7
$
842.9
$
5.6
$
9.0
$
1,073.2
Net book value at March 31, 2015 $
65.7
$
540.9
$
1,452.1
$
10.9
$
3.5
$
2,073.1
The net book value of property, plant and equipment under construction amounts to 84.5 million as at March 31, 2016
($61.9 million as at March 31, 2015), and consists mainly of machinery and equipment.
There are no assets held for sale as of March 31, 2016 (assets held for sale relate to land, building and equipment in
Canada in fiscal 2015). In fiscal 2015, these assets were recorded at lower of carrying value and fair value less costs
to sell. Certain prior year’s figures have been reclassified to conform to the current year’s presentation.
ANNUAL REPORT 2016
- 51 -
NOTE 7 GOODWILL AND INTANGIBLE ASSETS
The Company reports its operations under three geographic sectors. The Canada Sector consists of Dairy Division
(Canada). The USA Sector includes Cheese Division (USA) and Dairy Foods Division (USA). Finally, the International
Sector combines Dairy Division (Argentina), Dairy Division (Australia) and the Dairy Ingredients Division. The Dairy
Ingredients Division includes national and export ingredient sales and cheese export sales from the North American
divisions.
Indefinite Life
Definite Life
For the year ended March 31, 2016
Goodwill
Trademarks
Customer
relationships1
Software2
Total Intangible
Assets
Cost
As at March 31, 2015
Business acquisitions (Note 16)
Additions
Foreign currency adjustments
$
$
2,125.0
30.5
-
38.6
As at March 31, 2016
$
2,194.1
$
Accumulated Amortization
As at March 31, 2015
Amortization
Foreign currency adjustments
As at March 31, 2016
$
-
-
-
-
317.9 $
31.4
-
2.6
351.9 $
-
-
-
$
- $
$
240.2
11.1
-
4.5
$
-
-
48.3
0.3
255.8
$
48.6
$
51.8
17.0
0.5
69.3
$
186.5
$
-
-
-
-
$
558.1
42.5
48.3
7.4
656.3
51.8
17.0
0.5
69.3
Net book value at March 31, 2016 $
2,194.1
$
351.9 $
48.6
$
587.0
Indefinite Life
Definite Life
For the year ended March 31, 2015
Goodwill
Trademarks
Customer
relationships1
Software2
Total Intangible
Assets
Cost
As at March 31, 2014
Business acquisition (Note 16)
Business disposal (Note 22)
Foreign currency adjustments
$
$
1,954.7
30.4
(44.4)
184.3
As at March 31, 2015
$
2,125.0
$
Accumulated Amortization
As at March 31, 2014
Amortization
Foreign currency adjustments
As at March 31, 2015
$
-
-
-
-
302.2 $
9.6
(2.2)
8.3
317.9 $
-
-
-
Net book value at March 31, 2015 $
2,125.0
$
317.9 $
1 Customer relationships are amortized straight-line over a period of 15 years.
2 None of the additions were internally generated.
$
- $
$
216.0
5.4
-
18.8
240.2
$
33.4
14.9
3.5
51.8
$
188.4
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
518.2
15.0
(2.2)
27.1
558.1
33.4
14.9
3.5
51.8
506.3
Certain prior year’s figures have been reclassified to conform to the current year’s presentation.
IMPAIRMENT TESTING OF CASH-GENERATING UNITS
Goodwill
In determining whether goodwill is impaired, the Company is required to estimate the recoverable amount of CGUs or
groups of CGUs to which goodwill is allocated. Management considers the sectors below to be CGUs or groups of
CGUs as they represent the lowest levels at which goodwill is monitored for internal management purposes.
ANNUAL REPORT 2016
- 52 -
NOTE 7 GOODWILL AND INTANGIBLE ASSETS (CONT’D)
Goodwill has been allocated to each CGU or group of CGUs as follows:
Allocation of goodwill
Canada
USA
Cheese Division (USA)
Dairy Foods Division (USA)
International
Dairy Division (Australia)
Dairy Division (Argentina)
Dairy Ingredients Division
March 31, 2016
$
323.2 $
March 31, 2015
293.7
1,015.7
594.9
221.9
9.6
28.8
2,194.1 $
986.6
583.2
222.8
9.7
29.0
2,125.0
$
Recoverable amounts for Dairy Division (Canada), Cheese Division (USA), Dairy Foods Division (USA) and Dairy
Ingredients Division have been estimated using an earnings multiplier valuation model (fair value less costs of disposal).
The key assumptions used in these models consist mainly of earnings multipliers for market comparables that are
applied to the results of each CGU or group of CGUs tested.
Recoverable amounts for Dairy Division (Australia) and Dairy Division (Argentina) have been estimated using a
discounted cash flow (value in use) model based on the following key assumptions:
Cash flows: Cash flow forecasts for a given CGU are based on earnings before interest, income taxes,
depreciation and amortization and are adjusted for a terminal growth rate and income tax rates. The cash flow
forecast does not exceed a period of five years with a terminal value calculated as a perpetuity in the final year.
Terminal growth rate: Management uses a terminal growth rate to adjust its forecasted cash flows based on
expected increases in inflation and revenue for the CGU.
Discount rate: Cash flows are discounted using pre-tax discount rates.
The Company performed its annual impairment test and in all cases the recoverable amounts exceeded their respective
carrying values including goodwill.
Trademarks
Trademarks are included in the following CGU or group of CGUs:
Allocation of trademarks
Neilson - Dairy Division (Canada)
Other
March 31, 2016
$
March 31, 2015
223.2
94.7
317.9
223.2 $
128.7
351.9 $
$
For purposes of trademarks impairment testing, recoverable amounts of the CGU or group of CGUs to which they
belong have been estimated using discounted cash flows (value in use) based on the following key assumptions:
Cash flows: Cash flow forecasts for a given trademark are based on earnings before interest, income taxes,
depreciation and amortization and are adjusted for a terminal growth rate and income tax rates. The cash flow
forecast does not exceed a period of five years with a terminal value calculated as a perpetuity in the final year.
Terminal growth rate: Management uses a terminal growth rate to adjust its forecasted cash flows based on
expected increases in inflation and revenue for the products under trademark.
Discount rate: Cash flows are discounted using pre-tax discount rates.
The Company tested its trademarks for impairment using value in use (discounted cash flows) to establish recoverable
amounts. The recoverable amounts for each trademark and other intangibles not subject to amortization were then
compared to their carrying values. In all circumstances, the recoverable amounts exceeded carrying values and
therefore no impairment losses were necessary. For definite life intangibles subject to amortization, no indicators of
impairment were present for fiscal 2016.
ANNUAL REPORT 2016
- 53 -
NOTE 8 OTHER ASSETS
Taxes receivable
Joint ventures
Other
March 31, 2016
March 31, 2015
$
$
6.9
48.8
50.8
$
106.5
$
9.3
42.7
63.8
115.8
The Company has two joint ventures in Australia, for which it holds a 50% and 49% interest, respectively. In both joint
ventures, the terms of the contract require unanimous consent of all parties in order to direct the significant operations of
the ventures. The joint ventures have a June 30th year end and are accounted for under the equity method. The Company
recognized $6.7 million in net earnings, representing its share of earnings in the joint ventures for the year ended
March 31, 2016 ($7.7 million for the year ended March 31, 2015).
NOTE 9 BANK LOANS
The Company has available bank credit facilities providing for unsecured bank loans as follows:
Credit Facilities
North America-USA
North America-Canada
Argentina
Argentina
Australia
Australia
Maturity
December 2019¹
December 2019¹
Yearly²
Yearly3
Yearly4
Yearly5
Available for use
Amount drawn
Canadian
Currency
Equivalent
259.7
389.6
119.5
95.1
99.6
64.9
1,028.4
Base Currency
March 31, 2016
March 31, 2015
$
200.0 USD
300.0 USD
92.0 USD
1,070.0 ARS
100.0 AUD
50.0 USD
$
-
-
50.0
13.7
84.6
29.9
6.3
0.6
40.5
73.4
23.7
25.3
$
178.2
$
169.8
¹ Bears monthly interest at rates ranging from lender’s prime rates plus a maximum of 1% or LIBOR or banker’s acceptance rate plus 0.85% up to a
maximum of 2% depending on the Company credit ratings.
² Bear monthly interest at local rate and can be drawn in USD.
3 Bear monthly interest at local rate and can be drawn in ARS.
4 Bear monthly interest at Australian Bank Bill Rate plus 0.85%.
5 Bear monthly interest at LIBOR plus 0.75%.
ANNUAL REPORT 2016
- 54 -
NOTE 10 LONG-TERM DEBT
Unsecured bank term loan facilities
Obtained October 2013 and due in December 2019 ($500 million)1
Obtained December 2012 and due in December 2019 ($850 million)2
Obtained May 2015 and due in May 2018 (AUD$140 million) 3
Unsecured senior notes4
5.82%, issued in June 2009 and due in June 2016
2.65%, issued in November 2014 and due in November 2019
Current portion
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
March 31, 2016
March 31, 2015
$
$
$
$
$
212.5
600.0
120.7
220.0
300.0
1,453.2
244.9
$
1,208.3
$
$
244.9
24.9
70.9
1,112.5
-
-
300.0
750.0
-
220.0
300.0
1,570.0
53.1
1,516.9
53.1
432.5
212.5
212.5
659.4
-
1 Bears monthly interest at rates ranging from lender’s prime plus a maximum of 1%, or bankers’ acceptance rates plus 0.85% up to a maximum of 2%,
depending on the Company credit ratings.
2 Bear monthly interest at rates ranging from lender's prime plus a maximum of 1% or LIBOR or bankers’ acceptance rates plus 0.85% up to a maximum
of 2%, depending on the Company credit ratings. Effective February 4, 2013, the Company entered into an interest rate swap to fix its rate. As at
March 31, 2016, interest rate on $562.5 million of the facility was fixed at 1.58% plus applicable spread ($700.0 million as at March 31, 2015).
3 Bears monthly interest at Australian Bank Bill rate plus 0.85%.
4 Interest payments are semi-annual.
$
1,453.2
$
1,570.0
The term loans obtained in October 2013 and December 2012 were amended in October 2015 to eliminate the obligations
of the Company to make quarterly repayments of principal prior to maturity.
Bank term loan facilities were obtained on May 25, 2015, in order to fund the EDC Acquisition (Note 16). The facilities
require quarterly repayments of AUD$6.3 million that began on September 30, 2015.
On November 14, 2014, Saputo Inc. filed a short form base shelf prospectus qualifying an offering of unsecured senior
notes under a medium term note program for distribution to the public over a 25-month period and issued a first series on
November 26, 2014.
ANNUAL REPORT 2016
- 55 -
NOTE 11 OTHER LIABILITIES
Employee benefits (Note 17)
Derivative financial liabilities (Note 20)
Performance share unit liabilities and related fringe benefits
Other
NOTE 12 SHARE CAPITAL
March 31, 2016
March 31, 2015
$
$
31.2 $
-
20.2
10.4
61.8
$
37.7
7.9
14.9
9.7
70.2
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 issuance.
ISSUED
392,520,687 common shares (392,225,049 common shares in 2015)
$
821.0 $
765.8
March 31, 2016
March 31, 2015
2,995,638 common shares (3,590,625 in 2015) were issued during the year ended March 31, 2016 for an amount of
$49.9 million ($54.0 million in 2015) pursuant to the share option plan. For the year ended March 31, 2016, the amount
transferred from stock option plan reserve was $10.8 million ($11.5 million in 2015).
Pursuant to the normal course issuer bid which began on November 17, 2014, and expired on November 16, 2015, the
Company was authorized to repurchase for cancellation up to 19,532,686 of its common shares. Under the normal course
issuer bid that became effective on November 17, 2015, and expiring on November 16, 2016, the Company is authorized
to repurchase, for cancellation purposes, up to 19,547,976 of its common shares. During the year ended March 31, 2016,
the Company repurchased 2,700,000 common shares, at prices ranging from $29.56 to $36.62 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
$86.3 million was charged to retained earnings.
STOCK DIVIDEND
On August 5, 2014, the Board of Directors declared a stock dividend of one common share per each issued and
outstanding common share, which had the same effect as a two-for-one stock split of the Company’s outstanding common
shares. The dividend on the common shares was paid on September 29, 2014 to shareholders of record as of the close
of business on September 19, 2014. The additional common shares were issued on September 29, 2014. The total number
of common shares issued presented above reflects retroactively the impact of the two-for-one stock split.
SHARE OPTION PLAN
The Company has an equity settled share option plan to allow for the purchase of common shares by key employees and
officers of the Company. The total number of common shares which may be issued pursuant to this plan as at
March 31, 2016 cannot exceed 29,285,383 common shares. As at March 31, 2016, 12,381,559 common shares are
issuable under this plan in addition to the 16,903,824 common shares underlying options outstanding. Options granted
prior to July 31, 2007 may be exercised at a price equal to the closing quoted value of the common 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.
ANNUAL REPORT 2016
- 56 -
NOTE 12 SHARE CAPITAL (CONT’D)
Options issued and outstanding as at year end are as follows:
March 31, 2016
March 31, 2015
Number of
options
Number of exercisable
options
Number of
options
Number of exercisable
options
Granting
period
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Exercise
price
9.04
$
$
8.18
$ 11.55
$ 13.91
$ 10.70
$ 14.66
$ 21.61
$ 21.48
$ 25.55
$ 27.74
$ 35.08
-
-
435,208
668,138
1,012,588
1,157,511
1,332,346
2,560,580
3,012,835
3,567,457
3,157,161
16,903,824
-
-
435,208
668,138
1,012,588
1,157,511
927,154
1,265,506
993,423
597,373
-
7,056,901
8,088
479,498
699,650
847,189
1,277,517
1,724,819
1,710,493
2,977,347
3,442,002
3,914,866
-
17,081,469
Changes in the number of outstanding options are as follows:
Balance, beginning of year
Options granted
Options exercised
Options cancelled
Balance, end of year
2016
2015
Number of
options
17,081,469
3,280,395
(2,995,638)
(462,402)
16,903,824
Weighted
average
exercise
price
$ 21.09
$ 35.08
$ 16.66
$ 27.75
$ 24.41
Number of
options
16,896,962
4,125,652
(3,590,625)
(350,520)
17,081,469
8,088
479,498
699,650
847,189
1,277,517
1,167,445
870,233
948,185
590,358
39,486
-
6,927,649
Weighted
average
exercise
price
$ 18.26
$ 27.74
$ 15.04
$ 24.53
$ 21.09
The exercise price of the options granted in fiscal 2016 is $35.08, which corresponds to the weighted average market price
for the five trading days immediately preceding the date of grant ($27.74 in fiscal 2015).
The weighted average fair value of options granted in fiscal 2016 was estimated at $6.02 per option ($5.46 in fiscal 2015),
using the Black Scholes option pricing model with the following assumptions:
Weighted average:
Risk-free interest rate
Expected life of options
Volatility
Dividend rate
March 31, 2016
March 31, 2015
0.80%
5.3 years
21.19%
1.53%
1.71%
5.3 years
23.43%
1.82%
A compensation expense of $17.7 million ($15.1 million net of taxes) relating to stock options was recorded in the statement
of earnings for the year ended March 31, 2016 and $17.8 million ($15.0 million net of taxes) was recorded for the year
ended March 31, 2015.
Options to purchase 4,218,934 common shares at a price of $41.40 per share were granted on April 1, 2016.
ANNUAL REPORT 2016
- 57 -
NOTE 12 SHARE CAPITAL (CONT’D)
DEFERRED SHARE UNIT PLAN FOR DIRECTORS
In accordance with the DSU plan, all eligible Directors of the Company are allocated annually a fixed amount of DSUs
which are granted on a quarterly basis. Additionally, Directors receive quarterly remuneration either in cash or in DSUs, at
the choice of each Director. If a Director elects to receive DSUs, the number of DSUs varies as it is based on the market
value of the Company’s common shares. When they cease to be a Director of the Company, a cash payment equal to the
market value of the accumulated DSUs 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 Company
includes the cost of the DSU plan in “Operating costs excluding depreciation, amortization, gain on disposal of a business,
acquisition, restructuring and other costs”.
Balance, beginning of year
Annual grant
Board compensation
Payment to directors
Variation due to change in stock price
Balance, end of year
2016
2015
Units
418,757
34,780
19,922
(98,503)
-
374,956
Liability
$ 15.2
1.2
0.6
(3.2)
2.5
$ 16.3
Units
443,448
38,400
20,599
(83,690)
-
418,757
Liability
$ 12.9
1.3
0.7
(2.3)
2.6
$ 15.2
The Company enters into equity forward contracts in order to mitigate the compensation costs associated with its DSU
plan. As at March 31, 2016, the Company had equity forward contracts on 320,000 Saputo Inc. common shares (440,000
as of March 31, 2015) with a notional value of $11.7 million ($16.1 million as of March 31, 2015). The net compensation
expense related to the DSU plan was $3.1 million for the year ended March 31, 2016 ($2.0 million for March 31, 2015),
including the effect of the equity forward contracts.
PERFORMANCE SHARE UNIT PLAN
The Company offers senior management a performance share unit (PSU) plan to form part of long-term incentive
compensation, together with other plans discussed within this report. The PSU plan is non-dilutive and is settled in cash
only. Under the PSU plan, each performance cycle shall consist of three fiscal years of the Company. At the time of the
grant of a PSU, the Company determines the performance criteria which must be met. Following completion of a three-
year performance cycle, the PSUs for which the performance criteria have been achieved will vest and the value that will
be paid out is the price of the common shares at such time, multiplied by the number of PSUs for which the performance
criteria have been achieved. The amount potentially payable to eligible employees is recognized as a payable and is
revised at each reporting period. The expense is included in employee benefits under the “Operating costs excluding
depreciation, amortization, gain on disposal of a business, acquisition, restructuring and other costs” caption.
Balance, beginning of year
Annual grant
Cancelled
Payment
Variation due to change in stock price
Balance, end of year
2016
2015
Units
560,996
280,930
(16,734)
(119,471)
-
705,721
Liability
$ 14.9
6.9
(0.5)
(3.8)
5.9
$ 23.4
Units
272,256
333,720
(10,386)
(34,594)
-
560,996
Liability
$ 5.7
7.3
(0.3)
(1.2)
3.4
$ 14.9
On April 1, 2016, 255,975 PSUs were granted at a price of $41.40 per unit ($35.08 in 2015).
The Company enters into equity forward contracts in order to mitigate the compensation costs associated with its PSU
plan. As at March 31, 2016, the Company had equity forward contracts on 700,000 Saputo Inc. common shares (600,000
as of March 31, 2015) with a notional value of $25.4 million ($22.1 million as of March 31, 2015). The net compensation
expense related to PSUs was $7.5 million for the year ended March 31, 2016 ($7.8 million for the year ended
March 31, 2015), including the effect of the equity forward contracts.
ANNUAL REPORT 2016
- 58 -
NOTE 13 OTHER FINANCIAL CHARGES
Finance costs
Finance income
NOTE 14
INCOME TAXES
Income tax expense is comprised of the following:
Current tax expense
Deferred tax expense
Income tax expense
$
$
$
$
2016
27.5 $
(5.4)
22.1
$
2015
19.9
(0.6)
19.3
2016
227.2 $
42.3
269.5
$
2015
207.7
29.3
237.0
RECONCILIATION OF THE EFFECTIVE TAX RATE
The effective income tax rate was 30.9% in 2016 (27.9% in 2015). The Company’s income tax expense differs from the
one calculated by applying Canadian statutory rates for the following reasons:
Earnings before tax
Income taxes, calculated using Canadian statutory
income tax rates of 26.3% (26.1% in 2015)
Adjustments resulting from the following:
Effect of tax rates for foreign subsidiaries and other deductions
Changes in tax laws and rates
Benefit arising from investment in subsidiaries
Manufacturing and processing deduction
Stock-based compensation
Disposal of a business
Tax losses for which no deferred income tax assets was recognized
Adjustments in respect of prior years
Other
$
2016
870.9 $
229.3
63.2
(2.1)
(14.3)
(14.1)
2.9
-
3.5
(3.7)
4.8
2015
849.9
221.8
51.2
0.4
(17.7)
(7.6)
2.7
(10.9)
3.3
(4.4)
(1.8)
Income tax expense
$
269.5
$
237.0
During the year, as a result of an increase in the Canadian corporation tax rate, the statutory tax rate has increased by
approximately 0.2%.
INCOME TAX RECOGNIZED IN OTHER COMPREHENSIVE INCOME
Income tax on items recognized in other comprehensive income in 2016 and 2015 were as follows:
Deferred tax benefit (expense) on actuarial losses (gains)
on employee benefit obligations
Deferred tax benefit (expense) on cash flow hedge losses (gains)
Total income tax recognized in other comprehensive income
INCOME TAX RECOGNIZED IN EQUITY
Income tax on items recognized in equity in 2016 and 2015 were as follows:
2016
2015
$
$
(2.3) $
(1.5)
(3.8) $
8.1
2.4
10.5
Excess tax benefit that results from the excess of the deductible
amount over the stock-based compensation recognized in net earnings
Total income tax recognized in equity
2016
2015
$
$
5.6
$
5.6
$
4.9
4.9
ANNUAL REPORT 2016
- 59 -
NOTE 14
INCOME TAXES (CONT’D)
CURRENT TAX ASSETS AND LIABILITIES
Current tax assets
Current tax liabilities
Current tax liabilities (net)
DEFERRED TAX BALANCES
Deferred tax assets
Deferred tax liabilities
Deferred tax liabilities (net)
$
$
$
$
2016
$
4.7
(37.1)
(32.4) $
$
2016
22.9
(475.6)
(452.7) $
2015
1.1
(58.4)
(57.3)
2015
17.6
(405.2)
(387.6)
DEFERRED TAX ASSETS AND LIABILITIES
The movement of deferred tax assets and liabilities are shown below:
Deferred tax asset
Income
tax
losses
Net
assets of
pension
plans
Accounts
payable
and
accrued
liabilities
Total
Inventories
For the year ended March 31, 2016
Deferred tax liabilities
Property,
plant and
equipment
Other
Long-
term
debt
Total
Balance, beginning
of the year
$
43.6
$
-
$
12.0
$
55.6
$
17.6
$
300.6
$
125.0
$
-
$
443.2
Charged/credited to
net earnings
Charged/credited to
other
comprehensive
income or equity
Acquisitions
Translation and
other
Balance, end of the
year
8.3
7.9
(2.3)
13.9
(5.9)
17.3
44.8
-
1.2
-
1.6
(2.3)
-
(2.3)
2.8
-
-
(2.7)
(2.3)
-
(5.0)
0.1
-
3.3
5.8
1.5
4.7
2.9
-
-
-
-
56.2
1.5
8.0
8.8
$
50.4
$
7.2
$
7.4
$
65.0
$
11.8
$
327.0
$
178.9
$
-
$
517.7
Deferred tax asset
Income
tax losses
Net
assets of
pension
plans
Accounts
payable
and
accrued
liabilities
Total
Inventories
For the year ended March 31, 2015
Deferred tax liabilities
Property,
plant and
equipment
Other
Long-
term
debt
Total
Balance, beginning
of the year
$
44.9
$
4.8
$
7.5
$
57.2
$
45.0
$
257.9
$
87.4
$
2.5
$
392.8
Charged/credited to
net earnings
Charged/credited to
other
comprehensive
income or equity
Acquisitions
Translation and
other
Balance, end of the
(3.5)
(4.8)
(4.0)
(12.3)
(30.1)
18.1
31.5
(2.5)
17.0
-
-
2.2
-
-
-
8.1
-
0.4
8.1
-
2.6
-
-
-
(0.7)
(2.4)
-
2.7
25.3
8.5
-
-
-
(2.4)
(0.7)
36.5
year
$
43.6
$
-
$
12.0
$
55.6
$
17.6
$
300.6
$
125.0
$
-
$
443.2
ANNUAL REPORT 2016
- 60 -
NOTE 15 EARNINGS PER SHARE
Net earnings attributable to shareholders of Saputo Inc.
Weighted average number of common shares outstanding
Dilutive options
Weighted average diluted number of common shares outstanding
Basic earnings per share
Diluted earnings per share
2016
$
601.1 $
2015
607.6
392,579,171
5,192,621
391,101,412
6,159,277
397,771,792
397,260,689
$
$
1.53 $
1.51 $
1.55
1.53
Basic and diluted earnings per share have been adjusted to reflect the two-for-one stock split discussed in Note 12.
When calculating diluted earnings per share for the year ended March 31, 2016, 3,157,161 (no options for the year
ended March 31, 2015) were excluded from the calculation because their exercise price is higher than the average
market value for the year.
Shares purchased under the normal course issuer bid were excluded from the calculation of earnings per share as of
the date of purchase.
NOTE 16 BUSINESS ACQUISITIONS
Woolwich Dairy
On October 5, 2015, the Company acquired a 100% ownership interest, on a debt-free basis, in the companies forming
Woolwich Dairy (Woolwich). Woolwich generates annual revenues of approximately $70.0 million and employs
approximately 190 people.
Woolwich produces, distributes, markets and sells goat cheese in Canada and the USA. Woolwich operations are
comprised of three manufacturing facilities (in Québec and in Ontario, Canada and in Wisconsin, USA), as well as a
distribution center (in Ontario, Canada). Woolwich is a leading manufacturer of branded and private label goat cheese
for the North American market. Its brands include Woolwich Dairy, Chevrai and Wholesome Goat.
The transaction enabled the Company to increase its presence in the specialty cheese category in North America.
The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on the fair values
presented below:
Assets acquired
Liabilities assumed
Net assets acquired and total consideration paid
Cash
Receivables
Inventories
Prepaid expenses and other assets
Property, plant and equipment
Goodwill
Intangible Assets
Deferred income taxes
Bank loans
Accounts payable and accrued liabilities
Deferred income taxes
$
2016
Woolwich Dairy
0.8
6.0
16.7
0.2
25.0
30.5
17.4
1.0
(0.1)
(7.7)
(7.3)
$
82.5
Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within
the Dairy Division (Canada) and Cheese Division (USA) CGUs.
ANNUAL REPORT 2016
- 61 -
NOTE 16 BUSINESS ACQUISITIONS (CONT’D)
Everyday Cheese Business of Lion-Dairy & Drinks Pty Ltd
On May 25, 2015, Warrnambool Cheese and Butter Factory Company Holdings Limited (WCB) (Dairy Division
(Australia)) completed the EDC Acquisition based in Victoria, Australia. The EDC Acquisition generates annual sales
of approximately $156.0 million and employs approximately 170 people.
The EDC Acquisition operations include cutting and wrapping, distribution, sales & marketing and intellectual property
associated with the COON, Cracker Barrel (trademark used under licence), Mil Lel and Fred Walker brands.
The transaction enabled WCB to increase its presence in consumer branded everyday cheese products segment in
Australia with strong market positions in this segment.
The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on the fair values
presented below:
Assets acquired
Liabilities assumed
Net assets acquired and total consideration paid
2016
Everyday Cheese Business of Lion-Dairy & Drinks Pty Ltd.
Inventories
Receivables
Property, plant and equipment
Intangible Assets
Deferred income taxes
Accounts payable and accrued liabilities
$
92.4
9.2
8.3
25.1
1.1
(3.7)
$
132.4
Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within the
International Sector.
Scotsburn Co-Operative Services Limited
On April 14, 2014, the Company acquired the fluid milk activities of Scotsburn Co-Operative Services Limited based in
Atlantic Canada. Its operations consist of manufacturing, selling, marketing, distributing and merchandising of products
such as fluid milk, cream, sour cream, ice cream mix and cottage cheese, mainly under the Scotsburn (trademark used
under licence) brand. The final allocation of the purchase price is presented below.
Assets acquired
Liabilities assumed
Inventories
Prepaid expenses and other assets
Property, plant and equipment
Goodwill
Intangible Assets
Accounts payable and accrued liabilities
Deferred income taxes
2015
Scotsburn Co-Operative Services Limited
5.1
0.8
22.5
24.6
15.0
(2.0)
(1.0)
$
Net assets acquired and total consideration paid
$
65.0
Goodwill reflects the value assigned to expected future synergies and an assembled workforce within the Canada
Sector.
ANNUAL REPORT 2016
- 62 -
NOTE 17 EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS
The Company sponsors various post-employment benefit plans. These include pension plans, both defined contribution
and defined benefit plans, and other post-employment benefits. Post-employment benefit plans are classified as either
defined contribution plans or defined benefit plans.
Defined Contribution Plans
The Company offers and participates in defined contribution pension plans of which 98% of its active employees are
members. The net pension expense under these types of plans is generally equal to the contributions made by the
employer and constitutes an expense for the year in which they are due. For fiscal 2016, the defined contribution
expenses for the Company amounted to $42.2 million compared to $37.1 million for fiscal 2015.
Defined Benefit Plans
The Company participates in defined benefit pension plans in which the remaining active employees are members.
Under the terms of the defined benefit pension plans, pensions are based on years of service and the retirement
benefits are equal to 2% of the average eligible earnings of the last employment years multiplied by years of credited
service.
The registered pension plans must comply with statutory funding requirements in the province or state in which they
are registered. Funding valuations are required on an annual or triennial basis, depending on the jurisdiction, and
employer contributions must include amortization payments for any deficit, over a period of 5 to 15 years. Contribution
holidays are allowed and subject to certain thresholds. Other non-registered pension plans and benefits other than
pension are not subject to any minimum funding requirements.
The cost of these pension benefits earned by employees is actuarially determined using the projected benefits method
prorated on services and using a discount rate based on high quality corporate bonds and Management’s assumptions
bearing on, among other things, rates of compensation increase and retirement age of employees. All of these
estimates and assessments are formulated with the help of external consultants. The plan assets and benefit
obligations were valued as at March 31 with the assistance of the Company's external actuaries. The Company also
offers complementary retirement benefits programs, such as health insurance, life insurance and dental plans to eligible
employees and retired employees. The Company expects to contribute approximately $3.5 million to its defined benefit
plans in 2017. The Company’s net liability for post-employment benefit plans comprises the following:
$
March 31, 2016
62.6
57.1
March 31, 2015
$
$
74.5
63.5
11.0
25.1
36.1
1.6
37.7
37.7
5.5
25.0
30.5
0.7
31.2
31.2
Present value of funded obligation
Fair value of assets
Present value of net obligations for funded plans
Present value of unfunded obligations
Present value of net obligations
Asset ceiling test
Accrued pension/benefit cost as at March 31
Employee benefit amounts on the balance sheet as net liability
$
ANNUAL REPORT 2016
- 63 -
NOTE 17 EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS (CONT’D)
The changes in the present value of the defined benefit obligations are as follows:
March 31, 2016
March 31, 2015
Defined benefit obligation, beginning of year
Current service costs
Contribution by plan participants
Interest cost
Actuarial losses (gains) from change in experience
Actuarial losses (gains) from change in economic assumptions
Actuarial losses (gains) from change in demographic assumptions
Business disposal, net of acquisition
Effects of settlement1
Exchange differences
Benefits paid
$
$
99.6
6.2
-
3.4
(0.1)
(11.3)
-
-
(8.2)
0.5
(2.5)
Defined benefit obligation, end of year
$
87.6
$
The changes in the fair value of plan assets are as follows:
282.8
7.1
0.7
10.0
5.7
32.7
1.2
(162.4)
(66.9)
1.9
(13.2)
99.6
$
March 31, 2016
63.5
2.1
(3.4)
(0.4)
4.8
-
(7.4)
-
0.4
(2.5)
57.1
March 31, 2015
$
$
254.4
9.0
7.1
(0.6)
11.3
0.6
(67.4)
(138.8)
1.1
(13.2)
63.5
$
Fair value of plan assets, beginning of year
Interest income on plan assets
Return on plan assets, excluding interest income
Administration costs
Contributions by employer
Contributions by participants
Effects of settlement1
Business disposal, net of acquisition
Exchange differences
Benefits paid
Fair value of plan assets, end of year
1 Annuities were purchased to release the plan from its liability with regards to retirees.
ANNUAL REPORT 2016
- 64 -
NOTE 17 EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS (CONT’D)
Actual return on plans assets amounted to a loss of $1.7 million in fiscal 2016 compared to a gain of $15.4 million in
fiscal year 2015.
The fair value of plan assets, which do not include assets of the Company, consist of the following:
Bonds
Equity instruments
Cash and short–term investments
March 31, 2016
March 31, 2015
55 %
40 %
5 %
100 %
57 %
38 %
5 %
100 %
The expenses recognized below are included in "Operating costs excluding depreciation, amortization, gain on disposal
of a business, acquisition, restructuring, and other costs" within employee benefits expense (refer to Note 5) and are
detailed as follows:
Employer current service cost
Effect of settlement
Administration costs
interest costs
Interest on effect of asset ceiling
Interest income on plan assets
Defined benefits plans expense
March 31, 2016
March 31, 2015
$
$
6.2
(0.8)
0.4
3.3
-
(2.1)
$
7.0
$
7.1
0.4
0.6
10.1
0.2
(8.9)
9.5
The Company recognizes actuarial gains and losses in the period in which they occur, for all its defined benefit plans.
These actuarial gains and losses are recognized in other comprehensive income and are presented below:
$
March 31, 2016
7.9
0.9
8.8
$
March 31, 2015
$
$
(32.5)
3.4
(29.1)
Net gains (losses) during the year
Effect of the asset ceiling test
Amount recognized in other comprehensive income
ANNUAL REPORT 2016
- 65 -
NOTE 17 EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS (CONT’D)
Weighted average assumptions used in computing the benefit obligations at the balance sheet date are as follows:
Discount rate
Duration of the obligation
Future salary increases
March 31, 2016
4.10 %
18.40
3.00 %
March 31, 2015
3.44 %
17.00
3.00 %
The impact of an increase and a decrease of 1% on the discount rate would be $12.8 million and $15.6 million
respectively. Also, an increase or a decrease of 1% on the future salary assumptions would be approximately $4.0
million on the obligation and a 10% increase in life expectancy would represent approximately $1.4 million.
Weighted average assumptions used in computing the net periodic pension cost for the year are as follows:
Discount rate
Future salary increases
March 31, 2016
March 31, 2015
3.44 %
3.00 %
4.25 %
3.00 %
For measurement purposes, a 3.5% to 7.0% annual rate of increase was used for health, life insurance and dental plan
costs for the fiscal years 2016 and 2015.
Assumed medical cost trend rates have an effect on the amounts recognized in profit or loss. A one percentage point
change in the assumed medical cost trend rates would have marginal impact on cost and obligations.
NOTE 18 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
$
$
30.5
22.8
18.8
14.9
11.9
32.1
131.0
The Company guarantees to certain lessors a portion of the residual value of certain leased assets with respect to
operations which mature until 2017. 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 financial statements.
CLAIMS
The Company is a defendant to certain claims arising from the normal course of its business. The Company is also a
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 disposals. 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, 2016, 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, 2016 and March 31, 2015, the Company has not recorded any significant
liabilities associated with these indemnifications.
ANNUAL REPORT 2016
- 66 -
NOTE 19 RELATED PARTY TRANSACTIONS
The Company receives and provides goods and services which consist of rent, travel, publicity, lodging and
management services from and to companies subject to control or significant influence through ownership by its
principal shareholder. These transactions, which are not significant to the Company’s financial position or financial
results, are made in the normal course of business and have been recorded at the fair value, consistent with market
values for similar transactions.
Transactions with key management personnel (short-term employee benefits, post-employment benefits, stock-based
compensation and payments under the DSU plan) are also considered related party transactions. Management defines
key management personnel as named executive officers: the CEO, CFO and the three most highly compensated
executive officers of the Company whom are among those persons having responsibility and authority for controlling,
overseeing and planning the activities of the Company, as well as the Company’s Directors.
Transactions with related parties are as follows:
Entities subject to control or significant influence through ownership by its principal shareholder $
Key management personnel
Directors
Named Executive Officers
$
Dairy products and other services provided by the Company were the following:
2016
4.6 $
2.6
20.3
27.5 $
2015
4.3
2.8
16.7
23.8
2016
2015
Entities subject to control or significant influence through ownership by its principal shareholder $
0.3 $
0.4
Outstanding receivables and accounts payable and accrued liabilities for the transactions above are the following:
Entities subject to control or significant influence
through ownership by its principal shareholder $
0.1 $
0.1 $
0.1 $
0.1
Receivables
Accounts payable and
accrued liabilities
March 31, 2016 March 31, 2015 March 31, 2016 March 31, 2015
Key management personnel
Directors
Named executive officers
-
-
-
-
16.3
28.7
$
0.1 $
0.1 $
45.1 $
15.2
25.2
40.5
The amounts payable to the Directors consist entirely of balances payable under the Company’s DSU plan. Refer to
Note 12 for further details. The amounts payable to named executive officers consist of short-term employee benefits,
share-based awards and post-retirement benefits.
KEY MANAGEMENT PERSONNEL COMPENSATION
The compensation expense for transactions with the Company’s key management personnel, including annual fees of the
executive Chairman, consists of the following:
Directors
Cash-settled payments
Stock-based compensation
Named executive officers
Short-term employee benefits
Post-employment benefits
Stock-based compensation
Total compensation
2016
2015
0.8 $
1.8
2.6 $
13.2
2.1
5.0
20.3 $
0.8
2.0
2.8
8.9
1.8
6.0
16.7
22.9 $
19.5
$
$
$
$
ANNUAL REPORT 2016
- 67 -
NOTE 19 RELATED PARTY TRANSACTIONS (CONT’D)
SUBSIDIARIES
The Company’s subsidiaries are wholly owned with the exception of WCB (Note 16) for which a 12.08% non-controlling
interest exists. The following information summarizes the Company’s significant subsidiaries which produce a wide array
of dairy products including cheese, fluid milk, extended shelf-life milk and cream products, cultured products and dairy
ingredients:
Saputo Cheese USA Inc.
Saputo Dairy Products Canada G.P.
Saputo Dairy Foods USA, LLC
Warrnambool Cheese and Butter Factory Company Holdings Limited
Molfino Hermanos S.A.
100.00 %
100.00 %
100.00 %
87.92 %
100.00 %
Percentage Owned
Location
USA
Canada
USA
Australia
Argentina
NOTE 20 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, interest rate risk, foreign exchange risk and price risk (including commodity price risk).
These financial instruments are subject to normal credit conditions, financial controls and risk management and
monitoring strategies.
Occasionally, the Company may enter into derivative financial instrument transactions in order to mitigate or hedge
risks in accordance with risk management strategies. The Company does not enter into these arrangements for
speculative purposes.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents
and receivables.
Cash equivalents consist mainly of short-term investments. The Company has deposited these cash equivalents in
reputable financial institutions.
The Company also offers credit to its customers in the normal course of business for trade receivables. Credit valuations
are performed on a regular basis and reported results take into account allowances for potential bad debts.
Due to its large and diverse customer base and its geographic diversity, the Company has low exposure to credit risk
concentration with respect to customer’s receivables. There are no receivables from any individual customer that
exceeded 10% of the total balance of receivables as at March 31, 2016 and March 31, 2015. However, one customer
that represented more than 10% of total consolidated sales for the year ended March 31, 2016, with 10.6% (one
customer with 10.2% in 2015).
Allowance for doubtful accounts and past due receivables are reviewed by Management at each balance sheet date.
The Company updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability
of receivable balances from each customer taking into account historic collection trends of past due accounts.
Receivables are written off once determined not to be collectible.
On average, the Company will generally have 10% of receivables that are due beyond normal terms, but are not
impaired. The carrying amount of receivables is reduced by an allowance account and the amount of the loss is
recognized in the statement of earnings within operating costs. Subsequent recoveries of amounts previously written
off are credited against operating costs in the statement of earnings. However, Management does not believe that these
allowances are significant.
LIQUIDITY RISK
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 through the management of its capital structure and financial leverage, as outlined in Note 21
relating to 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.
ANNUAL REPORT 2016
- 68 -
NOTE 20 FINANCIAL INSTRUMENTS (CONT’D)
INTEREST RATE RISK
The Company is exposed to interest rate risks through its financial obligations that bear variable interest rates.
Bank loans bear interest at fluctuating rates and thereby expose the Company to interest rate risk on cash flows associated
to interest payments. The senior notes bear interest at fixed rates and, as a result, no interest rate risk exists on these
cash flows.
The bank term loan bears interest at variable rates and thereby exposes the Company to interest rate risk on cash
flows associated to interest payments. As a result of such interest rate risk, the Company entered into interest rate
swap agreements on February 4, 2013 for the initial term of the bank term loan facility, ending in December 2016, in
which the Company agreed to exchange variable interest payments for fixed rate payments at specified intervals. In
fiscal 2015, the bank term loans were extended to December 2019. The swap term will remain unchanged and the
hedge is expected to continue to be effective for the remainder of its term, on $562.5 million. The effective fixed interest
rate is 1.58% (plus applicable spread). Refer to Note 10 for further details on the unsecured bank term loan facility. The
Company has designated these interest rate swaps as cash flow hedges of interest rate risk in accordance with its risk
management strategy.
On March 31, 2016, the cash flow hedges of interest rate risk were assessed to be highly effective and accordingly, an
unrealized gain of $3.8 million (net of tax of $1.2 million) was recorded in other comprehensive income. These cash
flow hedges were also deemed to be highly effective on March 31, 2015 and an unrealized loss of $3.9 million (net of
tax of $1.3 million) was recorded in other comprehensive income (and an associated asset) as a result. The amounts
recorded in the statement of comprehensive income are transferred to the statement of net earnings to offset interest
on long-term debt when the interest expense is recorded in net earnings.
During the fiscal year, the Company entered into interest rate lock agreements to fix the interest rate related to future
debt obligations in order to mitigate future market interest rate movements. The Company has designated these interest
rate locks as cash flow hedges of interest rate risk and subsequent to the debt being issued, the amount in other
comprehensive income would be reclassified to interest income when the interest is recorded in net earnings.
On March 31, 2016, the cash flow hedges of interest rate lock were assessed to be highly effective and accordingly, an
unrealized loss of $2.5 million (net of tax of $0.9 million) was recorded in other comprehensive income.
For the fiscal year ended March 31, 2016, the interest expense on long-term debt totalled $48.3 million ($54.0 million in
fiscal 2015). The interest accrued on March 31, 2016 was $6.5 million ($6.2 million at March 31, 2015).
As at March 31, 2016, the net amount exposed to short-term rates fluctuations was approximately $384.6 million. Based
on this exposure, an assumed 1% increase in the interest rate would have an unfavourable impact of approximately
$2.7 million on net earnings with an equal but opposite effect for an assumed 1% decrease.
FOREIGN EXCHANGE RISK
The Company operates internationally and is exposed to foreign exchange risk resulting from various foreign currency
transactions. 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. In fiscal 2016, the Company entered into forward exchange contracts to sell US dollars and buy Australian
dollars in order to mitigate market fluctuations in the US/AUD exchange rates for forecasted sales transactions. As at
March 31, 2016, the cash flow hedges were highly effective and accordingly, the Company recognized an unrealized
gain of $3.2 million (net of tax of $1.4 million) in other comprehensive income. An amount of $2.3 million was reclassified
to net earnings during fiscal 2016 related to these forward exchange contracts. In fiscal 2015, the Company did not
have any outstanding foreign currency contracts as at the balance sheet and an amount of $4.0 million was reclassified
to net earnings.
The Company is mainly exposed to US dollar fluctuations. The following table details the Company’s sensitivity to a 1%
weakening of the Canadian dollar against the US dollar on net earnings and comprehensive income. For a 1%
appreciation of the Canadian dollar against the US dollar, there would be an equal and opposite impact on net earnings
and comprehensive income.
Change in net earnings
Change in comprehensive income
$
$
2016
3.4 $
29.1 $
2015
2.6
32.0
ANNUAL REPORT 2016
- 69 -
NOTE 20 FINANCIAL INSTRUMENTS (CONT’D)
COMMODITY PRICE RISK
In certain instances, the Company enters into futures contracts to hedge against fluctuations in the price of commodities.
Outstanding contracts as at the balance sheet date had a negative fair value of approximately $4.1 million (positive fair
value of approximately $1.0 million at March 31, 2015).
The Company applies hedge accounting for certain of these transactions. On March 31, 2016, these hedges
(designated as cash flow hedges) were assessed to be highly effective and accordingly, an unrealized gain of
$9.0 million (net of tax of $6.0 million) is recorded in other comprehensive income. The gain recorded in the statement
of comprehensive income are transferred to the statement of net earnings when the related inventory is ultimately sold.
On March 31, 2015, these hedges (designated as cash flow hedges) were assessed to be highly effective and
accordingly, an unrealized gain of $0.9 million (net of tax of $0.6 million) is recorded in other comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined that the fair value of its financial assets and financial liabilities with short-term maturities
approximates their carrying value. These financial instruments include cash and cash equivalents, receivables, 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, 2016 and March 31, 2015. 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.
Cash flow hedges
Interest rate derivatives (Level 2)
Commodity derivatives (Level 2)
Foreign exchange derivatives (Level 2)
Derivatives not designated in a formal
hedging relationship
Commodity derivatives (Level 2)
Long-term debt (Level 3)
March 31, 2016
March 31, 2015
Fair value
Carrying value
Fair value
Carrying value
$
(6.2) $
(1.6)
7.9
(6.2) $
(1.6)
7.9
(7.9) $
1.4
-
(7.9)
1.4
-
$
(2.5) $
(2.5) $
(0.4) $
1,461.5
1,453.2
1,592.6
(0.4)
1,570.0
The following table summarizes the financial instruments measured at fair value in the consolidated balance sheet as
at March 31, 2016 and March 31, 2015, classified using the fair value hierarchy described in Note 3.
March 31, 2016
Cash and cash equivalents
Interest rate swaps
Commodity futures contracts
Foreign exchange contracts
March 31, 2015
Cash and cash equivalents
Interest rate swaps
Commodity futures contracts
$
$
$
$
Level 1
Level 2
Level 3
164.3 $
-
-
-
164.3 $
- $
(6.2)
(4.1)
7.9
(2.4) $
- $
-
-
-
- $
Level 1
Level 2
Level 3
72.6 $
-
-
72.6 $
- $
(7.9)
1.0
(6.9) $
- $
-
-
- $
Total
164.3
(6.2)
(4.1)
7.9
161.9
Total
72.6
(7.9)
1.0
65.7
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 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.
ANNUAL REPORT 2016
- 70 -
NOTE 21 CAPITAL DISCLOSURES
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategies and
undertake selective acquisitions, while at the same time taking a conservative approach towards financial leverage and
management of financial risk. An additional objective includes a target for long-term leverage of 2.0 times net debt to
earnings before interest, income taxes, depreciation, amortization, gain on disposal of a business, acquisition,
restructuring and other costs. From time to time, the Company may deviate from its long-term leverage target to pursue
acquisitions and other strategic opportunities. Should such a scenario arise, the Company expects to deleverage over a
reasonable period of time in order to seek to maintain its investment grade ratings. Also, the Company seeks to provide
an adequate return to its shareholders. 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 equity. Net debt consists of long-term 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 earnings before
interest, income taxes, depreciation, amortization, gain on disposal of a business, acquisition, restructuring and other
costs. The net debt-to-earnings before interest, income taxes, depreciation, amortization, gain on disposal of a business,
acquisition, restructuring and other costs ratios as at March 31, 2016 and March 31, 2015 are as follows:
Bank loans
Long-term debt, including current portion
Cash and cash equivalents
Net debt
Earnings before interest, income taxes, depreciation, amortization, gain on disposal of a
business, acquisition, restructuring and other costs
Net debt-to-earnings before interest, income taxes, depreciation, amortization, gain on
disposal of a business, acquisition, restructuring and other costs
$
$
$
2016
178.2 $
1,453.2
(164.3)
1,467.1 $
2015
169.8
1,570.0
(72.6)
1,667.2
1,174.1 $
1,061.7
1.25
1.57
The Company has existing credit facilities which require a quarterly review of financial ratios and the Company is not
in violation of any such ratio covenants as at March 31, 2016.
The Company is not subject to capital requirements imposed by a regulator.
ANNUAL REPORT 2016
- 71 -
NOTE 22 GAIN ON DISPOSAL OF A BUSINESS, ACQUISITION, RESTRUCTURING
AND OTHER COSTS
Gain on disposal of a business, acquisition, restructuring and other costs are summarized as follows:
Restructuring and other costs (cost reversal)
Acquisition costs
Gain on disposal of a business
Total
$
$
2016
31.2 $
3.0
-
34.2 $
2015
(7.2)
0.7
(25.9)
(32.4)
Restructuring and other costs (cost reversal)
In fiscal 2016, the Company announced the closures of three facilities. The closures are scheduled for June 2016,
August 2016 and December 2017.
Costs associated with the closures recorded in fiscal 2016 and reversal of costs in fiscal 2015 regarding restructuring
activities are summarized in the table below:
Write down of non-current assets
Severance
Other
Total costs (reversal)
$
$
2016
25.7 $
5.5
-
31.2 $
2015
(4.5)
(1.1)
(1.6)
(7.2)
The write down of non-current assets consists of impairment charges to property, plant and equipment to bring them to
the lower of carrying value and recoverable amount. The total after tax costs for fiscal 2016 are $18.9 million.
The restructuring costs recorded in fiscal 2016 represent estimated expenses required to restructure these operations.
Liabilities related to severance expenditures have been grouped within current and non-current liabilities on the balance
sheet.
Reversal of costs in fiscal 2015 are due to the cancellation of a planned plant closure and lower than anticipated closure
costs. Amounts due to the cancellation of the plant closure were reversed back to property, plant and equipment. The total
after tax effect is $4.2 million.
Acquisition costs
In fiscal 2016, the Company incurred acquisition costs of $3.0 million ($2.4 million after tax) in relation to the business
acquisitions ($0.7 million or $0.5 million after tax in fiscal 2015).
Gain on disposal of a business
On February 2, 2015, the Company sold Saputo Bakery Inc., its Bakery Division which was classified within the Canada
Sector, to Canada Bread Company, Limited, a subsidiary of Grupo Bimbo S.A.B. de C.V. for a selling price of $114.3
million on a debt-free basis. The Company recorded a gain of $25.9 million on disposal. The Bakery Division’s revenues
(approximately $107.0 million) represented approximately 1% of Saputo’s consolidated revenues.
ANNUAL REPORT 2016
- 72 -
NOTE 23 SEGMENTED INFORMATION
The Company reports under three geographic sectors. The Canada Sector consists of Dairy Division (Canada). The
USA Sector aggregates the Cheese Division (USA) and the Dairy Foods Division (USA). Finally, the International Sector
aggregates the Dairy Division (Argentina), the Dairy Ingredients Division and the Dairy Division (Australia). The Dairy
Ingredients Division includes national and export ingredients sales from the North American divisions, as well as cheese
exports from these same divisions.
These reportable sectors are managed separately as each sector represents a strategic business unit that offers
different products and serves different markets. The Company measures geographic and sector performance based
on earnings before interest, income taxes, depreciation, amortization, gain on disposal of a business, acquisition,
restructuring and other costs.
Management has aggregated the Cheese Division (USA) and the Dairy Foods Division (USA) due to similarities in long-
term average return and correlated market factors driving pricing strategies that affect the operations of both divisions.
The divisions within the International Sector have been combined due to similarities in global market factors and
production processes.
The accounting policies of the sectors are the same as those described in Note 3 relating to significant accounting
policies.
Information on reportable sectors
Years ended March 31
Revenues
Canada
USA
International
Earnings before interest, income taxes, depreciation, amortization, gain on
disposal of a business, acquisition, restructuring and other costs
Canada
USA
International
Depreciation and amortization
Canada
USA
International
Gain on disposal of a business
Acquisition, restructuring and other costs
Financial charges, net
Earnings before income taxes
Income taxes
Net earnings
2016
2015
3,801.5 $
5,786.7
1,403.3
10,991.5 $
3,835.8
5,279.6
1,542.3
10,657.7
413.5 $
725.5
35.1
1,174.1 $
404.5
534.9
122.3
1,061.7
$
$
$
$
$
55.1 $
120.0
23.5
59.5
92.7
18.7
$
198.6 $
170.9
-
34.2
70.4
870.9
269.5
$
601.4 $
(25.9)
(6.5)
73.3
849.9
237.0
612.9
ANNUAL REPORT 2016
- 73 -
NOTE 23 SEGMENTED INFORMATION (CONT’D)
Geographic information
Total Assets
Canada
USA
International
Net book value of property, plant and equipment
Canada
USA
International
Total liabilities
Canada
USA
International
March 31, 2016 March 31, 2015
$
$
$
$
$
$
1,955.6 $
4,046.7
1,170.0
7,172.3 $
585.1 $
1,248.1
252.8
2,086.0 $
1,758.2 $
704.2
640.1
3,102.5 $
1,810.1
3,875.7
1,114.5
6,800.3
579.5
1,227.8
265.8
2,073.1
2,009.0
675.2
487.5
3,171.7
NOTE 24 DIVIDENDS
During the year ended March 31, 2016, the Company paid dividends totalling $210.0 million, or $0.54 per share ($197.7
million, or $0.52 per share for the year ended March 31, 2015).
ANNUAL REPORT 2016
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EXHIBIT TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Calculation of Earnings Coverage Ratio
The following table sets forth the earnings coverage ratio for the 12-month period ended March 31, 2016:
Earnings coverage ratio
13.36 times
The earnings coverage ratio is equal to net earnings (before interest on long-term debt and other financial charges
and incomes taxes) for the applicable period divided by interest on long-term debt and other financial charges for
the applicable period.
ANNUAL REPORT 2016
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Head Office
Saputo Inc.
6869 Métropolitain Blvd. East
Montréal, QC Canada H1P 1X8
Telephone: 514-328-6662
www.saputo.com
Annual Meeting of Shareholders
Tuesday, August 2, 2016, at 10 a.m.
Laval Room, Hotel Sheraton Laval
2440 Autoroute des Laurentides
Laval, QC Canada H7T 1X5
Investor Relations
Sandy Vassiadis
Telephone: 514-328-3347
Email: investors@saputo.com
Stock Exchange
Toronto Stock Exchange
Symbol: SAP
Transfer Agent
Computershare Trust Company of Canada
1500, boul. Robert-Bourassa, Suite 700
Montréal, QC Canada H3A 3S8
Telephone: 514-982-7888
External Auditors
Deloitte LLP, Montréal, QC, Canada
Dividend Policy
Saputo Inc. declares quarterly
cash dividends on common shares at
$0.135 per share, representing a yearly
dividend of $0.54 per share. The balance
of the Company’s earnings is reinvested
to finance the growth of its business.
The Board of Directors reviews the
Company’s dividend policy from time to
time, but at least once annually, based on
financial condition, financial performance,
capital requirements and such other
factors as are deemed relevant by
the Board in its sole discretion.
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