Winpak Limited
Annual Report 2011

Plain-text annual report

REPORT TO SHAREHOLDERS Records are meant to be broken! Each year, for the past four years, Winpak’s net income has aggressively surpassed the prior year’s standings. For 2011, net income attributable to common shareholders of $63.8 million or 98 cents per share, outpaced 2010’s performance by 15.3 percent or 13 cents per share. Of further distinction, quarterly earnings per share for each of the past 15 consecutive quarters have exceeded the preceding year’s achievements for the same timeframes. The Company’s enviable pro(cid:2) t (cid:2) gures were supported by strong revenue in 2011 of $652.1 million, which favorably outdistanced 2010 by $72.6 million or 12.5 percent. There is a new buzz at the Company originating from the resolve to see Winpak’s revenue escalate to one billion dollars by the year 2015. The Corporation’s new battle cry is the “Billion Dollar Commitment” and its acronym “BDC” is entrenched in the spirit and work ethic of the entire Winpak team. This enthusiasm and dedication to the cause is backed by Winpak’s Board of Directors having endorsed a capital program, which will provide plant expansions and state-of-the-art manufacturing equipment, allowing Winpak to remain at the forefront of technical breakthroughs. Exciting events continue to happen in all areas of Winpak’s business. One of the more enterprising undertakings in 2011 was the construction of a new 260,000 square foot building in Sauk Village, Illinois. This venture is nearing completion and will be in operation in the second quarter of 2012. Said facility will house additional extrusion and thermoforming lines producing high-barrier sheet materials that will greatly extend the shelf-life of perishable foods. As the barrier properties of rigid plastic packaging materials become more sophisticated, their popularity as alternatives to glass jars and metal cans will yield even more rewarding growth opportunities for Winpak. This capital project will satisfy customers’ intensi(cid:2) ed demands for this type of packaging and advance the Company’s ongoing sales in this burgeoning market. Long-term plans call for doubling the size of this plant and suf(cid:2) cient land has been set aside for this eventuality. Winpak’s range of shrink bags continues to garner rave reviews in the marketplace. Supplementary extrusion and bag-making capacity was installed in 2011 at the Company’s Georgia-based specialty (cid:2) lms plant in order to satisfy customer requests for this product offering. When this facility was enlarged in 2010, space was allocated for future growth. However, based on the fact that this specialty item has been so well received, projections dictate that future expansion plans may need to be pushed forward. Success of the shrink bag product line has further enabled the Company to offer a one-stop shop for its customers. Hence, major meat and cheese processing plants are consistently favoring Winpak as a reliable supplier for more of their packaging needs. Outside the meat and cheese industries, speci(cid:2) c equipment acquired for Winpak’s Georgia operations in 2011 promoted revenue growth in liquid and other unique packaging applications. The Company’s promising entry into the pharmaceutical and health-care markets continues to gather steam. Winpak’s own and licensed proprietary technology is the springboard for providing new business opportunities. To keep pace with the appeal for novel products in these markets, coupled with the ongoing success of the die-cut lid business, a major extrusion/coating/laminating line has been speci(cid:2) ed and is slated for installation at the Quebec plant in 2012. To house this new equipment, the Quebec facility will be expanded. Plans are also in the works that will see the start-up of a converting operation outside the borders of Canada and the United States in 2012. Revenue from Winpak’s modi(cid:2) ed atmosphere packaging materials is gaining impressive momentum at some of North America’s largest meat and cheese processing operations. Success is attributed to excellent quality products, a dynamic sales force and a comprehensive product range, thus attractively affording customers the ability to source all of their modi(cid:2) ed atmosphere packaging needs from one supplier. To further capitalize on this strength, a new production line will be installed in 2012 at the Company’s Winnipeg location. An extra 75,000 square feet will be built onto the plant to accommodate other auxiliary capacity needs. With the ever-surging demand for complex, high-barrier packaging materials, the future bodes well for Winpak’s modi(cid:2) ed atmosphere packaging product offerings. The goal for Winpak’s machinery operations is to design and manufacture equipment that will utilize the Company’s (cid:3) exible and rigid packaging materials thus continually advancing its commitment to promote cross-selling. This approach has generated success, not only in the Company’s more traditional food end-use applications, but more recently in-roads have also been made for packaging material revenues to health-care and industrial end-use product markets. These persistent efforts have reaped dividends in that 2011 was a banner year for both machinery and system revenue. Based on these results, this winning formula will be replicated in 2012. Winpak’s business venture with Sojitz Corporation of Japan to produce biaxially oriented nylon logged a good sales year in 2011. By diligently improving ef(cid:2) ciency on existing production lines, output was increased. Even with this added bene(cid:2) t, it is anticipated that due to the intensi(cid:2) ed popularity for biaxially-oriented nylon, the Company’s two primary products lines will be entirely sold out by the end of 2012. The Company’s superior biaxially-oriented nylon materials continue to out-perform the competition. This subsidiary is now in a position where the demand for its product is beginning to exceed supply. It will now focus even more diligently on weeding out less lucrative business and, hence, maximize pro(cid:2) ts. Winpak had a most noteworthy year in 2011 and this further af(cid:2) rms its established track record for attaining its goals. The business plan is (cid:2) rmly in place for Winpak to obtain its Billion Dollar Commitment in the year 2015. This initiative has been supported by the Corporation’s Board of Directors, capital has been earmarked to provide the required capacity for growth and with the determination and winning spirit of the entire Winpak team, a foundation has been solidi(cid:2) ed to ensure success. This is signi(cid:2) cantly enhanced by the enormous opportunities that exist for packaging food and health-care products reliant on the type of proprietary and sophisticated materials manufactured by Winpak. Winpak’s future is assured and de(cid:2) nitely looks most promising for both revenue and pro(cid:2) ts. B.J. Berry President and Chief Executive Of(cid:2) cer Winnipeg, Canada February 16, 2012 1 REVIEW (Values expressed in US dollars) Operating results ($ million except earnings per share) Revenue Income from operations EBITDA (2) Net income attributable to equity holders of the Company Earnings per share (cents) Investments and assets ($ million) Investments in property, plant and equipment Total assets Financial position 2011 2011 652.1 95.0 122.6 63.8 98 48.9 567.6 2010 2009 (1) 2008 (1) 2007 (1) 579.4 79.0 105.0 55.3 85 39.0 507.7 506.0 512.0 466.6 66.0 92.0 42.9 66 46.3 71.7 29.4 45 34.0 58.1 24.0 37 21.4 483.1 14.7 418.4 36.0 441.6 Total debt to equity attributable to equity holders of the Company (3) Net return on opening equity attributable to equity holders of the Company Return on opening invested capital (4) 0.0% 16.3% 27.1% 0.0% 16.1% 23.8% 0.0% 13.8% 18.3% 0.0% 9.1% 11.6% 8.4% 8.8% 10.0% Revenue: Ten-year compound average growth rate (“CAGR”) 8.4% $ U.S. million 700 600 500 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (1) Amounts are as previously reported under Canadian GAAP. (2) EBITDA (income before interest, tax, depreciation and amortization) is not a recognized measure under International Financial Reporting Standards (IFRS). Management believes that in addition to net income attributable to equity holders of the Company, EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net income attributable to equity holders of the Company determined in accordance with IFRS as an indicator of the Company’s performance. The Company’s method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. (3) Total debt is de(cid:2) ned as long-term debt plus bank overdrafts less cash and cash equivalents. At December 25, 2011, December 26, 2010, December 27, 2009 and December 28, 2008, cash and cash equivalents exceeded long-term debt plus bank overdrafts. (4) Return on opening invested capital is de(cid:2) ned as income from operations divided by invested capital, which is de(cid:2) ned as the sum of total debt, equity, net deferred tax liability, and accumulated goodwill amortization. 2 MANAGEMENT’S DISCUSSION AND ANALYSIS Certain statements made in the following Management’s Discussion and Analysis contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company’s intentions, plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent Winpak’s current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company’s actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, Winpak disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions investors not to place undue reliance upon forward-looking statements. General Information The following discussion and analysis dated February 16, 2012 was prepared by management and should be read in conjunction with the consolidated (cid:2) nancial statements prepared in accordance with International Financial Reporting Standards (IFRS). The Company’s adoption of IFRS is effective as of December 27, 2010, the start of the 2011 (cid:2) scal year. Comparative (cid:2) gures for (cid:2) scal 2010 have been restated in accordance with IFRS, including the December 28, 2009 transition date balance sheet. The following discussion and analysis is presented in US dollars except where otherwise noted. The consolidated (cid:2) nancial statements include the accounts of all subsidiaries. As part of the Company’s conversion to IFRS, entities with the Canadian dollar as their functional currency under Canadian GAAP changed their functional currency to the US dollar. As a result, the Company’s functional and reporting currency is the US dollar. The Company has (cid:2) led a separate Management’s Discussion and Analysis for its fourth quarter of 2011, which is available on SEDAR at www.sedar.com. Company Overview Winpak is an integrated converter operating in the packaging materials segment. The Company utilizes manufacturing technology focused on the core competency of sophisticated extrusion and conversion of plastic and aluminum foil materials. The business encompasses three product groups produced in eight manufacturing facilities located in North America. Winpak distributes products to customers primarily in North America for use in the packaging of perishable foods, beverages and in health-care applications. Selected Financial Information Millions of US dollars, except per share and margin amounts Net income attributable to equity holders of the Company Income from operations Revenue Gross pro(cid:2) t margin Earnings per share (cents) Dividends declared per common share (Canadian cents) Total assets Cash and cash equivalents 2011 63.8 95.0 652.1 28.8% 98 12 567.6 126.9 2010 55.3 79.0 579.4 29.8% 85 12 507.7 90.5 3 MANAGEMENT’S DISCUSSION AND ANALYSIS Overall Performance (cid:4) Revenue grew by $72.6 million from 2010 levels on the strength of improved volumes of 6.6 percent, representing $38.4 million in revenue. This was further supplemented by higher overall selling prices and a stronger Canadian dollar which resulted in additional revenue of $30.0 million and $4.2 million respectively. (cid:4) Gross pro(cid:2) t margins declined by one percentage point from the prior year to 28.8 percent of revenue, but remained above the (cid:2) ve-year average for the Company. The continued escalation in raw material costs had a negative impact on margins, but selling price increases, improved product mix and manufacturing performance helped to partially offset this effect. (cid:4) Net income attributable to equity holders of the Company moved up to $63.8 million from $55.3 million in 2010, an increase of 15.3 percent or $8.5 million. This advancement was due primarily to improved sales volume, product mix, manufacturing performance and limited growth in operating and other expenses. In addition, 2010 contained a one-time recognition of a withdrawal liability under IFRS related to a multiemployer de(cid:2) ned bene(cid:2) t pension plan which negatively impacted results for that year. (cid:4) Cash position improved by $36.4 million to end the year at $126.9 million due primarily to strong cash (cid:3) ow from operating activities. The Company has no bank overdrafts or long-term debt outstanding. Highlights (cid:4) Raw materials: Raw material costs continued their ascent of the last two years as the Company’s raw material index climbed by 15.3 percent over the previous year and more than 36 percent in the last two years. (cid:4) Manufacturing performance: Lower waste levels and enhanced productivity, due in part to higher sales volumes, helped drive further improvements in manufacturing performance over and above those attained in 2010. These provided support to gross pro(cid:2) t margins which were otherwise negatively impacted by higher raw material costs. (cid:4) Operating expenses: The Company was successful at limiting its percentage increase in operating expenses to approximately half of the increase in sales volumes, resulting in a betterment to earnings per share of approximately 3.5 cents. Personnel costs, in particular, were closely controlled and were a major contributing factor to the enhanced result. (cid:4) Foreign exchange: In 2011, the average exchange rate of the Canadian dollar appreciated against the US dollar when compared to the prior year by 4.6 percent, negatively impacting results. Coupled with greater foreign exchange losses in 2011 on translation of Canadian dollar net monetary items and foreign exchange gains recorded in 2010 on Canadian income taxes, the overall foreign exchange impact on net income attributable to equity holders of the Company was a reduction of approximately $4.6 million or 7.0 cents per share in comparison to 2010. (cid:4) Capital expenditures: Capital expenditures in 2011 totaled $48.9 million, an all-time high for the Corporation. Nearly 80 percent of this amount relates to projects still in progress at the end of the year, with completion slated for various points in time throughout 2012 and into 2013. This is the (cid:2) rst year of an ambitious organic expansion program, aimed at advancing revenue to a level approaching $1 billion by the end of 2015, known throughout the Winpak organization as the “Billion Dollar Commitment” (“BDC”). (cid:4) Financing and investing: During 2011, Winpak generated $95.4 million in cash (cid:3) ow from operating activities, which was more than suf(cid:2) cient to fund $48.9 million in capital projects, $7.8 million in dividends, and return equity to the non-controlling interests in a subsidiary of $1.8 million, leaving a year-end net cash position of $126.9 million. The Company will utilize its cash resources on hand and generate additional cash (cid:3) ow from operations to fund its investing and (cid:2) nancing activities in 2012. In addition, management will continue to evaluate strategic acquisition opportunities in concert with implementing the BDC plan, all focused on enhancing long-term shareholder value. 4 Results of Operations Components of total increase in earnings per share Organic growth Gross pro(cid:2) t margins Expenses and non-controlling interests Withdrawal liability expense on de(cid:2) ned bene(cid:2) t multiemployer pension plan Foreign exchange Total increase in earnings per share (cents) 2011 5.5 4.0 3.5 7.0 (7.0) 13.0 Ongoing operations Organic growth is the impact on net income due exclusively to increased sales volume and excludes the in(cid:3) uence of acquisitions, divestitures and foreign exchange. In 2011, this added 5.5 cents to earnings per share in comparison to the prior year. In spite of the continued escalation in raw material costs in 2011, the Company was able to neutralize its impact on net income through improvements in product mix and manufacturing performance, and the partial hedge provided by selling price-indexing agreements. The Company was successful in limiting the rise in operating expenses relative to sales volumes, resulting in an enhancement in earnings per share of approximately 3.5 cents. Furthermore, in the prior year, the Company recorded a one-time withdrawal liability related to the one multiemployer de(cid:2) ned bene(cid:2) t pension plan that the Company participates in, depressing 2010 earnings per share by 7.0 cents. On average, in 2011, the Canadian dollar was stronger against its US counterpart than in 2010, negatively impacting net income when applied to the Company’s net Canadian dollar disbursements. Net income was further impacted by foreign translation exchange losses on Canadian net monetary items in the current year in addition to foreign exchange gains recorded in 2010 by the Canadian legal entites on (cid:2) ling their income tax returns in Canadian dollars. The net result was a reduction in 2011 earnings per share of 7.0 cents in relation to 2010. Revenue Revenue Change Volume increase Price and mix gains (losses) Foreign exchange gain (loss) Total increase (decrease) in revenue Millions of US dollars 2010 51.5 12.6 9.4 73.5 2011 38.4 30.0 4.2 72.6 2009 24.8 (23.2) (7.6) (6.0) Revenue reached an all-time high of $652.1 million, increasing by $72.6 million or 12.5 percent from the prior year. More than half of the revenue expansion was due to volume growth of 6.6 percent or $38.4 million, with rigid packaging, including specialty beverage and condiment containers, leading the way at over a 20 percent ascent . Packaging machinery also had a very solid year, advancing by over 15 percent on the strength of both parts and new machinery demand. Lidding and modi(cid:2) ed atmosphere packaging sales volumes progressed in the low single-digit percentage range, while the more commodity-related biaxially oriented nylon and specialty (cid:2) lms receded by a similar amount. The lacklustre performance of the US economy during 2011 held back growth, particularly in more commodity-related products. Selling price increases paralleled higher raw material costs and together with mix changes, furthered 2011 revenue by 5.2 percent or $30.0 million compared to the previous year. The conversion of Canadian dollar sales into US funds at a higher average exchange rate in 2011 versus 2010 supplemented revenue by an additional 0.7 percent or $4.2 million. Gross pro(cid:2) t margins Gross pro(cid:2) t margins reached a level of 28.8 percent of revenue in 2011, one full percentage point less than the result achieved in the prior year. Escalating raw material costs negatively impacted margins by over 2 percentage points in 2011 versus 2010. However, this was partly offset by enhanced manufacturing performance as a result of lower waste and heightened productivity levels. This, along with product mix improvements and a reasonable amount of success in matching raw material cost progressions with selling price increases, resulted in an increment of 4.0 cents in earnings per share in 2011, as the growth in dollar terms of gross pro(cid:2) t was $15.3 million or 8.9 percent, which exceeded the relative expansion in sales volumes of 6.6 percent. 5 MANAGEMENT’S DISCUSSION AND ANALYSIS Winpak’s raw material index, which represents the weighted cost of a basket of the Company’s eight principal raw materials, rose by 15.3 percent during 2011. This continued the escalation of the past two years which has seen the average annual index jump by over 36 percent during this period. The Company, however, has a partial natural hedge against rising raw material costs in that greater than 60 percent of the Company’s revenues are subject to formal selling price-indexing agreements, whereby selling prices are adjusted as raw material costs change, albeit with a time lag. Raw Material Index Average annual index: weighted cost of a basket of Winpak’s eight principal raw materials , where base year 2001 = 100 Increase (decrease) in index compared to prior year 2011 2010 2009 177.4 15.3% 153.8 17.9% 130.4 (25.1%) Expenses On a net basis, lower operating and other expenses, excluding foreign exchange, resulted in an improvement in earnings per share of 10.5 cents in 2011 versus the prior year. In 2010, the Company recognized a one-time withdrawal liability under IFRS related to the one multiemployer de(cid:2) ned bene(cid:2) t pension plan in which the Company participates. After being informed by an independent board of trustees that the plan was in a critical status funding position, the Company made the decision to withdraw from the plan and became responsible for making certain payments into the plan over a twenty- year period; 2010 earnings per share were reduced accordingly by 7.0 cents per share. The organization was also able to leverage its expenditure on operating expenses by limiting the increase in expenses, excluding foreign exchange impacts to just 3.5 percent while sales volumes strengthened by 6.6 percent in relation to 2010. In particular, personnel expenses included within operating expenses declined slightly, after adjusting for foreign exchange differences, and contributed to earnings per share growth of approximately 3.5 cents. The reduction in net income attributed to non-controlling interests resulted in an additional 1 cent in earnings per share compared to 2010 while a higher overall effective income tax rate in 2011, due primarily to a larger proportion of net income being earned in higher tax jurisdictions, reduced earnings per share by 1 cent. Foreign Exchange Year-end exchange rate of CDN dollar to US dollar Year-end exchange rate of US dollar to CDN dollar (Depreciation) appreciation of CDN dollar vs. US dollar year-end exchange rate compared to the prior year Average exchange rate of CDN dollar to US dollar Average exchange rate of US dollar to CDN dollar Appreciation (depreciation) of CDN dollar vs. US dollar average exchange rate compared to the prior year 2011 0.980 1.021 (1.1%) 1.010 0.991 2010 0.991 1.009 4.1% 0.966 1.035 2009 0.952 1.050 15.3% 0.870 1.149 4.6% 11.0% (8.0%) Under IFRS, Winpak utilizes the US currency as both its reporting and functional currency. However, with half of its manufacturing facilities located in Canada, it is exposed to foreign exchange risks and records foreign currency differences on transactions and translations denominated in Canadian dollars as well as other foreign currencies. In total, foreign exchange had a negative impact on earnings per share of approximately 7.0 cents in 2011 compared to 2010. Approximately 17 percent of sales in the current year are denominated in Canadian dollars and approximately 29 percent of costs are incurred in the same currency. The net out(cid:3) ow of Canadian dollars exposes Winpak to transaction differences arising from exchange rate (cid:3) uctuations. The appreciation in the average exchange rate of the Canadian dollar in relation to the US dollar in 2011 decreased earnings per share by approximately 1.5 cents compared to the prior year. In addition, translation differences arise when primarily Canadian dollar monetary assets and liabilities are translated at exchange rates that change over time. The change in spot conversion rate of the Canadian dollar from the start to the end of the year decreased earnings per share in 2011 by 1.0 cent in comparison to 2010. Although gains were realized on the maturation of foreign exchange contracts entered into as part of the Company’s foreign exchange policy, the gains were lower than in 2010, further decreasing earnings per share by 0.5 cents in 2011 versus the prior year. In 2010, the Company’s Canadian legal entities (cid:2) led their income tax returns in Canadian dollars, a currency different from their functional currency under IFRS. This resulted in foreign exchange gains in 2010 approaching 4.0 cents in earnings per share which reduced income tax expense. In 2011, the Company received approval from the Canada Revenue Agency to (cid:2) le its Canadian income tax returns in US dollars, thereby eliminating this foreign exchange (cid:3) uctuation in 2011 and subsequent years. 6 Summary of quarterly results Thousands of US dollars, except earnings per share (e.p.s.) amounts (cents) Quarter ended Revenue March 27 June 26 September 25 December 25 148,537 161,340 170,670 171,516 652,063 2011 Net income* 14,694 16,195 14,408 18,486 63,783 *attributable to equity holders of the Company e.p.s. Quarter ended Revenue Net income* e.p.s. 2010 March 28 June 27 September 26 December 26 23 25 22 28 98 132,888 145,568 146,055 154,930 579,441 15,240 14,130 13,132 12,794 55,296 23 22 20 20 85 Various factors affect timing of the Company’s income during the course of a year. Typically, seasonal factors contribute to stronger revenue and net income in the second and fourth quarters compared to the (cid:2) rst and third quarters. Factors in(cid:3) uencing seasonal trends are the higher demand for certain food products in advance of the summer season and the greater number of holidays in the fourth quarter. During the third quarter, revenue and net income are typically lower due to reduced order levels and plant maintenance shutdowns scheduled to coincide with the summer. Sudden and substantial changes in the rate of exchange between the US and Canadian dollars from one quarter to another may cause revenue and net income to vary from the historic trend. Similarly, sudden and signi(cid:2) cant changes in the cost of raw materials consumed from one quarter to another can be expected to increase or decrease net income in a manner that does not conform to the normal pattern. Furthermore, unexpected adverse weather conditions could in(cid:3) uence the supply and price of raw materials or customer order levels, and the timing of startup of new manufacturing equipment can cause revenue and net income to depart from established trends. The following items in(cid:3) uenced the timing of the Company’s reported results beyond historic trends. Net income in the (cid:2) rst quarter of 2010 was bolstered by higher foreign exchange gains, while 2010 fourth quarter net income was negative impacted by the recording ot the withdrawal liability related to the multiemployer de(cid:2) ned bene(cid:2) t pension plan. Revenue in 2010 followed the normal pattern with the exception of the third quarter where revenue exceeded that of the second quarter by only 0.3 percent. In 2011, net income followed the established pattern previously described whereas revenue in the third quarter was elevated due to selling price increases and an atypical surge in demand in rigid containers in the period. Cash Flow, Liquidity and Capital Resources At December 25, 2011, Winpak’s cash position totaled $126.9 million, an increase of $36.4 million or 40.2 percent from the prior year-end. This improvement re(cid:3) ected total funds provided by operating activities of $95.4 million less disbursements for investing activities of $49.4 million and (cid:2) nancing activities of $9.6 million. Operating activities Cash (cid:3) ow provided by operating activities totaled $95.4 million, a net improvement of $17.3 million from 2010. The cash (cid:3) ow derived from operating activities, before changes in working capital and employee bene(cid:2) t plan payments, improved by $18.9 million in total from the prior year. The increase in net income in 2011 of $7.8 million plus the increases in depreciation and amortization of $1.7 million and income tax expense of $8.6 million accounted for $18.1 million of the advancement. The elevation in income tax expense is as a result of an improvement in earnings performance and a higher effective income tax rate in 2011 due to a larger proportion of net income being earned in higher tax jurisdictions as well as foreign exchange gains recorded against income tax expense in 2010. The investment in working capital for the year only advanced by $1.6 million, while revenue forged ahead by $72.6 million. Accounts receivable grew by $6.7 million or 8.7 percent, less than the percentage increase in revenue of 10.7 percent in the fourth quarter of 2011 versus the prior year period. Inventories edged up by a mere $1.9 million or 2.6 percent as the Company was able to effectively manage inventory levels to a minimum. Accounts payable and accrued liability levels climbed by $6.8 million in part due to elevated payable levels related to property, plant and equipment additions in progress at year-end. Payments were made to de(cid:2) ned bene(cid:2) t pension plans during the year totaling $5.1 million, $0.4 million more than in 2010. Investing activities Investing activities in 2011 reached $49.4 million, an increase of $10.1 million over 2010, and consisted of an all-time high amount of property, plant and equipment purchases of $48.9 million and intangible assets of $0.5 million. This is in keeping with the Company’s philosophy of investing in the latest and most advanced technology in order to retain its competitive advantage and represents the (cid:2) rst year of the organization’s capital spending under the BDC plan. Of the $48.9 million in property, plant and equipment additions, $38.2 million consisted of construction in progress and equipment deposits, projects which will not be in commercial production until various points in time throughout 2012 and into 2013. The largest undertaking is the construction of a 260,000 square foot rigid packaging facility in Sauk Village, Illinois, at a year-to-date cost of over $15 million, with completion scheduled for the 7 MANAGEMENT’S DISCUSSION AND ANALYSIS end of the (cid:2) rst quarter of 2012. Expansions of capacity in modi(cid:2) ed atmosphere packaging, lidding, specialty (cid:2) lms and rigid containers are in process with investments in extrusion, printing, slitting and die-cutting capabilities. Over the long term, Winpak’s expenditures for equipment enhancements in maintaining existing capacity have averaged approximately 2 percent of revenue. Financing activities Financing activities in 2011 consisted of dividends to common shareholders of $7.8 million and the preferred share redemption and dividend payment to a non-controlling interest in a subsidiary totaling $1.8 million. The quarterly common share dividends were paid at the rate of CDN $0.03 per share which, based on the December 25, 2011 closing share price of CDN $12.05, provides a dividend yield of 1.0 percent. Resources Investments to drive growth can be sizeable, requiring substantial (cid:2) nancial resources. A range of funding alternatives is available including cash and cash equivalents, cash (cid:3) ow provided by operations, additional debt, issuance of equity or a combination thereof. An informal investment grade credit rating allows the Company access to relatively low interest rates on debt. The Company currently has operating lines of $38 million, which are believed adequate for liquidity purposes. None of the lines were utilized as at December 25, 2011. Based on formal and informal discussions with various (cid:2) nancial institutions, Winpak is con(cid:2) dent that additional credit can be arranged from banks and other major lenders as the need arises. The Company believes that all 2012 requirements for capital expenditures, working capital, and dividend payments can be (cid:2) nanced from cash resources, cash provided by operating activities and unused credit facilities. Risks and Financial Instruments The Company recognizes that net income is exposed to changes in market interest rates, foreign exchange rates, prices of raw materials and risks regarding the (cid:2) nancial condition of customers and (cid:2) nancial counterparties. These market conditions are regularly monitored and actions are taken, when appropriate, according to Winpak’s policies established for the purpose. Despite the methods employed to manage these risks, future (cid:3) uctuations in interest rates, exchange rates, raw material costs and counterparty (cid:2) nancial condition can be expected to impact net income. Winpak’s policy regarding interest expense is to (cid:2) x interest rates on between one- and two-thirds of any long-term debt outstanding. The Company may enter into derivative contracts or (cid:2) xed-rate debt to minimize the risk associated with interest rate (cid:3) uctuations. With respect to foreign exchange risk, Winpak employs hedging programs to minimize risks associated with changes in the value of the Canadian dollar relative to the US dollar. To the extent possible, the Company maximizes natural currency hedging by matching in(cid:3) ows from revenue in either currency with out(cid:3) ows of costs and expenses denominated in the same currency. For the remaining exposure, the Company’s foreign exchange policy requires that between 50 and 80 percent of the Company’s net requirement of Canadian dollars for the ensuing 9 to 15 months will be hedged at all times with forward or zero-cost option contracts. The Company may also enter into forward foreign currency contracts when equipment purchases will be settled in other foreign currencies. Purchases of foreign exchange products for the purpose of speculation are not permitted. Transactions are only conducted with certain approved Schedule I Canadian (cid:2) nancial institutions. Fluctuations in foreign exchange rates represent a material exposure for the Company’s (cid:2) nancial results. Hedging programs employed may mitigate a portion of exposures to short-term (cid:3) uctuations in foreign currency exchange rates. However, the Company’s (cid:2) nancial results over the long term will inevitably be affected by sizeable changes in the value of the Canadian dollar relative to the US dollar. Winpak estimates that each time the exchange rate strengthens or weakens by one Canadian cent against the US dollar, net income, with respect to transaction differences, will decrease or increase, respectively, by approximately one-half of a US cent per share. During 2011, certain foreign currency forward contracts matured and the Company realized pre-tax foreign exchange gains of $1.1 million. As at December 25, 2011, the Company had US to CDN dollar foreign currency forward contracts outstanding with a notional amount of $21.0 million and US dollar to Swiss franc foreign currency forward contracts outstanding with a notional amount of $7.6 million. The pre-tax unrealized foreign exchange loss on these contracts of $0.6 million was recorded in other comprehensive income. Winpak has not participated in any derivatives market for raw materials. Winpak is not aware of any instrument that fully mitigates (cid:3) uctuations in raw material costs over the long term. To manage this risk, Winpak has entered into formal selling price-indexing agreements with certain customers whereby changes in raw material prices are re(cid:3) ected in selling price adjustments, albeit with a slight time lag. By the end of 2011, approximately 63 percent of Winpak’s revenues were governed by selling price-indexing agreements. For all other customers, the Company responds to changes in raw material costs by adjusting selling prices on a customer-by-customer basis. However, market conditions can have an impact on these price adjustments such that the combined impact of selling price adjustments and changes in raw material costs can be signi(cid:2) cant to Winpak’s net income. Credit risk arises from cash and cash equivalents held with banks, derivative (cid:2) nancial instruments (foreign currency forward and option contracts), as well as credit exposure to customers, including outstanding accounts receivable. The Company assesses the credit quality of counterparties, taking into account their (cid:2) nancial position, past experience and other factors. Management regularly monitors customer credit limits, performs credit reviews and, in certain cases, insures accounts receivable balances against credit losses. The Company invests its excess cash on a short-term basis, to a maximum of six months, with (cid:2) nancial institutions and/or governmental bodies that must be AA rated or higher by a recognized international credit rating agency or insured 100 percent by a AAA rated Canadian or US government. Nonetheless, unexpected deterioration in the (cid:2) nancial condition of a counterparty can have a negative impact on the Company’s net income in the case of default. 8 The Company enters into contractual obligations in the normal course of business operations. These obligations, as at December 25, 2011, are summarized below. Contractual Obligations Payment due, by period (thousands of US dollars) Operating leases Purchase obligations Total contractual obligations Accounting Policy Changes Total 1 year 2 - 3 years 4 - 5 Years After 5 years 4,534 35,184 39,718 1,529 35,184 36,713 2,423 - 2,423 582 - 582 - - - International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board con(cid:2) rmed that Publicly Accountable Enterprises will be required to adopt International Financial Reporting Standards (IFRS) for interim and annual (cid:2) nancial statements relating to (cid:2) scal years beginning on or after January 1, 2011. As permitted under National Instrument 52-107, the Company has elected to adopt IFRS for its (cid:2) scal year beginning December 27, 2010 and accordingly reported under this basis as of the (cid:2) rst quarter of 2011, with (cid:2) scal 2010 comparative (cid:2) nancial information being presented using IFRS. Note 29 details the impact of the transition to IFRS on the Company’s reported balance sheet, changes in equity, statements of income, comprehensive income and cash (cid:3) ows, including the nature and effect of signi(cid:2) cant changes in accounting policies from those used in the Company’s Canadian GAAP consolidated (cid:2) nancial statements for the year ended December 26, 2010. The following highlights the impacts of the more signi(cid:2) cant changes in accounting policies: First-Time Adoption of International Financial Reporting Standards – IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides guidance for an entity’s initial adoption of IFRS and generally requires the retrospective application of all IFRS effective at the end of its (cid:2) rst IFRS reporting period. IFRS 1 however does include certain mandatory exceptions and allows certain limited optional exemptions from this general requirement of retrospective application. The exemptions and exceptions most relevant to the Company under IFRS 1 on the opening transition date of December 28, 2009 are as follows: i. ii. iii. iv. v. vi. Business combinations – An exemption is available within IFRS 1 that allows a Company to carry forward its previous Canadian GAAP accounting for business combinations prior to the transition date. The Company has elected to apply this exemption and as a result, acquisitions prior to December 28, 2009 have not been restated to comply with IFRS 3 “Business Combinations”. Fair value as deemed cost – This exemption allows a Company to revalue property, plant and equipment at fair value at its transition date and use this fair value as the deemed cost. The Company did not apply this exemption. Borrowing costs – This exemption allows an entity to adopt IAS 23 “Borrowing Costs” prospectively on qualifying assets for which the capitalization commencement date is after the transition date. The Company applied this exemption. Employee bene(cid:2) ts – IFRS 1 allows a Company to recognize all cumulative actuarial gains and losses at the transition date. The Company has elected to apply this exemption and all unrecognized actuarial gains and losses have been recognized, resulting in a charge to opening retained earnings at December 28, 2009 of $10.0 million. In addition, the Company has applied the exemption whereby employee bene(cid:2) t plan historical disclosures required under IAS 19, Employee Bene(cid:2) ts, may be provided only for (cid:2) scal years subsequent to the transition to IFRS. Cumulative translation differences – This exemption allows a Company to deem the amount of cumulative translation differences to be zero at transition and instead, transfer this amount into retained earnings. The Company has elected to apply this exemption at December 28, 2009, resulting in the cumulative translation differences balance of $18.3 million being transferred to increase retained earnings. Estimates – IFRS 1 prescribes a mandatory exemption from full retrospective application of IFRS as it relates to the use of estimates. It requires that a company’s estimates in accordance with IFRS at the date of transition to IFRS must be consistent with estimates made for the same date in accordance with previous Canadian GAAP (after adjustments to re(cid:3) ect any difference in accounting policies), unless there is objective evidence that those estimates were in error. The Company did not use hindsight in its estimates upon transition to IFRS, nor did it (cid:2) nd any evidence that any of its previously made estimates were in error. Functional Currency – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that the functional currency of each entity in a consolidated group be determined separately based on the currency of the primary economic environment in which the entity operates. A list of primary and secondary indicators is used under IFRS in this determination and these differ in content and emphasis to a certain degree from those factors used under Canadian GAAP. The parent Company and all of its Canadian subsidiaries, with the exception of American Biaxis Inc., operated with the Canadian dollar as their functional currency under Canadian GAAP. However, it was determined that under IFRS, these same entities had a change in their functional currency at varying points in prior years, such that all entities within the Winpak group now operate with the US dollar as their functional currency. The historical cost basis for certain balance sheet items is different under IFRS than it was under Canadian GAAP and the balance in the cumulative translation differences for each of these Canadian subsidiaries was held constant at the amount in effect at the date of the change in functional currency. The impact of this change in functional currency, as at December 28, 2009, was a net decrease in equity of $15.9 million. For the year ended December 26, 2010, the 9 MANAGEMENT’S DISCUSSION AND ANALYSIS change in functional currency increased net income by $7.0 million and decreased other comprehensive income by $9.5 million. The speci(cid:2) c line items affected by the change in functional currency are detailed in note 29 to the consolidated (cid:2) nancial statements. Going forward, income volatility due to foreign exchange (cid:3) uctuations should decline as the magnitude of net Canadian dollar monetary (cid:2) nancial asset exposure is signi(cid:2) cantly less than the net US dollar monetary (cid:2) nancial asset exposure within the Canadian entities. Impairment of Assets – Upon transition to IFRS, all of the Company’s property, plant and equipment and intangible assets, including goodwill, were reviewed to determine whether there were any indications of impairment. When these indications were present, the asset’s recoverable amount was estimated. IAS 36, Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use, which is based on discounted future cash (cid:3) ows. Canadian GAAP, on the other hand, generally used a two-step approach to impairment testing of long-lived assets and (cid:2) nite-life intangible assets by (cid:2) rst comparing asset carrying values with undiscounted future cash (cid:3) ows to determine whether impairment existed. If it was determined that there was impairment under this basis, the impairment was then calculated by comparing asset carrying values with fair values in much the same manner as computed under IFRS. Additionally under IFRS, testing for impairment occurs at the level of cash generating units (CGUs), which is the lowest level of assets that generate largely independent cash in(cid:3) ows. This lower level of grouping compared to Canadian GAAP along with the one-step approach to testing for impairment may increase the likelihood that the Company will realize an impairment of assets under IFRS in the future. It should also be noted that under IAS 36, previous impairment losses, with the exception of goodwill, can be reversed when there are indications that circumstances have changed whereas Canadian GAAP prohibited reversal of non-(cid:2) nancial asset impairment losses. As of the transition date of December 28, 2009, the Company determined that an impairment of goodwill with regard to the specialty (cid:2) lm business had taken place under IAS 36. This resulted in a reduction of goodwill and retained earnings of $3.4 million as of that date. Employee Bene(cid:2) t Plans – As previously mentioned, under IFRS 1, the Company has elected to recognize all cumulative actuarial gains and losses at the transition date, resulting in a charge to opening retained earnings at December 28, 2009 of $10.0 million. Under Canadian GAAP, past service costs for de(cid:2) ned bene(cid:2) t pension plans were generally amortized on a straight-line basis over the expected average remaining service period of active employees in the plan. IAS 19, Employee Bene(cid:2) ts, requires the past service costs to be expensed on an accelerated basis, with vested past service costs being expensed immediately and unvested past service costs being recognized on a straight-line basis until the bene(cid:2) ts become vested. This resulted in a charge to retained earnings at December 28, 2009 of $1.4 million. Under IAS 19 and IFRIC 14, the Company is not able to report an asset in its (cid:2) nancial statements in excess of the economic bene(cid:2) t it can expect to receive in the form of a refund of a pension plan surplus and/or a reduction in future contributions. This differs from the treatment allowed under Canadian GAAP and as a result, under IFRS, the impact as at December 28, 2009 is a decrease in retained earnings of $1.1 million. In total, the changes under IFRS related to employee bene(cid:2) ts resulted in a net decrease to opening retained earnings upon transition of $12.5 million. Subsequent to the transition date, the Company has selected to recognize actuarial gains and losses directly in equity through other comprehensive income as its accounting policy choice under IAS 19 to be consistent with the latest revisions to the standard issued by the IASB which will become mandatory for annual periods beginning on or after January 1, 2013. Under Canadian GAAP, unrecognized actuarial gains and losses, in excess of 10 percent of the greater of the bene(cid:2) t obligation or the fair value of plan assets, were amortized to the statement of income on a straight-line basis over the expected average remaining service lives of active plan members. This change in policy recognition of actuarial gains and losses along with the other changes under IFRS related to past service costs and recognition of pension assets, had a minimal effect on net income for the year ended December 26, 2010. The employee bene(cid:2) t accounting changes had a marginal increase of $0.4 million on other comprehensive income for the year ended December 26, 2010. Under IFRS, interest costs on the bene(cid:2) t obligation of de(cid:2) ned bene(cid:2) t plans are charged to the statement of income as a (cid:2) nance expense and the expected return on employee bene(cid:2) t plan assets is presented as (cid:2) nance income. Under Canadian GAAP, these two items were presented as part of personnel expenses within various lines within the statement of income. As a result of this change, (cid:2) nance income and (cid:2) nance expense increased by $3.5 million for the year ended December 26, 2010. Various other reclassi(cid:2) cations related to this item were insigni(cid:2) cant. Provisions – Under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, the threshold for recording provisions is considerably lower than under Canadian GAAP as the probability for recording a provision for a cash out(cid:3) ow has to be only more likely than not under IFRS. Under Canadian GAAP, the probability of a future out(cid:3) ow has to be viewed as likely before a liability is recorded, which is a much higher probability than under IFRS. As a result, provisions are inclined to be recorded more often and/or sooner under IFRS than under Canadian GAAP. The Company participates in one multiemployer de(cid:2) ned bene(cid:2) t pension plan providing bene(cid:2) ts to certain unionized employees in the US. Under IAS 19, multiemployer plans, that are de(cid:2) ned bene(cid:2) t plans, are to be accounted for as such under IFRS unless suf(cid:2) cient information is not available to use de(cid:2) ned bene(cid:2) t accounting. Most multiemployer plans, by their nature, do not provide suf(cid:2) cient information to participating employers to enable them to use de(cid:2) ned bene(cid:2) t accounting. However, IAS 19 notes that IAS 37 should be considered for certain multiemployer plans. IAS 37 is applicable in recognizing a liability where there is a contractual agreement to determine how a de(cid:2) cit would be funded. The board of independent trustees of the multiemployer plan communicated to both the Company and the Union that this plan was in a critical status position from a funding perspective in 2010. During the fourth quarter of 2010, the Company, with the assistance of external consultants, determined that the only economically feasible course of action was to withdraw from the plan. In 2011, an agreement was reached with the Union to withdraw from the plan and the necessary paperwork was (cid:2) led with the plan trustees. Pursuant to US federal pension legislation, an employer who withdraws from a plan with unfunded vested bene(cid:2) ts is legally responsible for a share of that underfunding. Based on the relevant facts and circumstances, it was concluded that the potential withdrawal liability met the de(cid:2) nition of a provision under IFRS as at December 26, 2010, which was not the case under Canadian GAAP. As a result of this difference, for the year ended December 26, 2010, other expenses increased by $7.1 million and income tax expense decreased by $2.5 million, for a reduction in net income of $4.6 million. 10 Income Taxes – Under Canadian GAAP, when the functional currency for accounting purposes differed from the functional currency for taxation purposes, deferred taxes were (cid:2) rst calculated in the currency in which income taxes were paid and then translated to the functional currency for accounting purposes at the period end exchange rate. Under IFRS, IAS 12, Income Taxes, deferred taxes are calculated based on the functional currency for accounting purposes, regardless of the functional currency used for taxation purposes. As a result of this difference between Canadian GAAP and IFRS, retained earnings increased by $0.9 million and non-controlling interests increased by $0.8 million as at December 28, 2009. The offset was an increase in deferred tax assets. There was virtually no impact on 2010 net income in regard to this change. Non-controlling interest – Under Canadian GAAP, minority interest was classi(cid:2) ed in the consolidated balance sheets between total liabilities and equity. Under IAS 27, Consolidated and Separate Financial Statements, minority interest is reclassi(cid:2) ed to a separate component of equity entitled non-controlling interest. As at December 28, 2009, this reclassi(cid:2) cation was $15.9 million. Under Canadian GAAP, minority interest in the consolidated statements of income was presented as an expense. Under IFRS, non-controlling interests are presented as an allocation of net income for the period. Future Accounting Changes As more fully described in Note 5 to the Consolidated Financial Statements, various new accounting standards have been issued which apply as follows: IFRS 7 “Financial Instruments: Disclosures”, effective for annual periods beginning July 1, 2011; IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements”, IFRS 12 “Disclosure of Interests in Other Entities”, amended IAS 27 “Separate Financial Statements”, and amended IAS 28 “Investments in Associates and Joint Ventures”, effective for annual periods beginning January 1, 2013; amended IAS 32 “Financial Instruments: Presentation”, effective for annual periods beginning January 1, 2014; and IFRS 9 “Financial Instuments”, effective for annual periods beginning January 1, 2015. None of these standards is expected to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. The IASB issued an amendment to IAS 1 “Financial Statement Presentation” regarding the presentation of items of other comprehensive income. This amendment is effective for annual periods beginning July 1, 2012 and is not expected to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. The IASB also issued a new accounting standard and an amended standard effective for annual periods beginning January 1, 2013: IFRS 13 “Fair Value Measurement” which is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards; and amended IAS 19 “Employee Bene(cid:2) ts” which is a comprehensive set of amendments dealing with the manner in which pensions and other employee bene(cid:2) ts are recorded, classi(cid:2) ed and disclosed in the (cid:2) nancial statements. The Company has not yet begun the process of assessing the impact that these standards will have on its consolidated (cid:2) nancial statements. Looking Forward The Company is optimistic as it enters 2012, after a very satisfying end to 2011. The outlook for the US economy, where over three-quarters of the Company’s business is conducted, appears to be more favorable moving forward, which should strengthen future sales volumes. Unfortunately, with enhanced economic activity usually comes increased raw material costs which will bring pressure to bear on margins. The challenge will be to match these raw material increases with selling price changes to the greatest degree possible. With over 60 percent of the organization’s revenues subject to customer price-indexing agreements, whereby selling prices are adjusted as raw material costs change, albeit with a time lag, Winpak has a built-in partial hedge to raw material cost in(cid:3) ation. This should help to keep margins within a few percentage points of current levels for 2012. The Company’s commitment to investment in the latest technology to remain at the forefront in terms of product offerings continued in 2011 with the highest levels ever spent on property, plant and equipment in Winpak’s history. Although capital investment is never without risk, the focus continues on markets within which the Company is familiar and utilizing extrusion technologies that have formed the backbone of the organization’s success. This will continue in 2012 with plans to approximately double capital spending to further broaden the product range as well as add to existing capacity aimed at achieving $1 billion in revenue by the year 2015. A major expansion is planned for the Montreal facility to bolster the Company’s foil technology, extrusion capacity will be expanded in the modi(cid:2) ed atmosphere packaging plant in Winnipeg, additional extrusion equipment is planned for the specialty (cid:2) lms unit in Georgia and extrusion lines will be installed in the new Sauk Village, Illinois rigid packaging site. As capacity comes on stream and equipment is commissioned, there will be temporary margin contractions while technical challenges get resolved and revenues build to the anticipated volumes. The Company also remains dedicated to evaluating external acquisition opportunities that would complement its core competencies in the areas of food and health care packaging. With Winpak’s extremely solid (cid:2) nancial position, it has the resources available to consummate an acquisition transaction while still remaining strongly committed to the organic growth capital investment plan. Critical Accounting Estimates The Company believes the following accounting estimates are critical to determining and understanding the operating results and the (cid:2) nancial position of the Company. Impairment of property, plant and equipment and intangible assets – An integral component of impairment testing is determining the asset’s recoverable amount. The determination of the recoverable amount involves signi(cid:2) cant management judgment, including projections of future cash (cid:3) ows and appropriate discount rates. The cash (cid:3) ows are derived from the (cid:2) nancial forecast for the next (cid:2) ve years and do not include restructuring activities that the Company is not yet committed to or signi(cid:2) cant future investments that will enhance the asset’s performance of the CGU being tested. Qualitative factors, including market presence and trends, strength of customer relationships, strength of local management, strength of debt and capital markets, and degree of variability in cash (cid:3) ows, as well as other factors, are considered when making assumptions with regard to future cash (cid:3) ows and the appropriate discount 11 MANAGEMENT’S DISCUSSION AND ANALYSIS rate. The recoverable amount is most sensitive to the discount rate used for the discounted cash (cid:3) ow model as well as the expected future cash in(cid:3) ows and the growth rate used for extrapolation purposes. A change in any of the signi(cid:2) cant assumptions or estimates could result in a material change in the recoverable amount. The company has eight CGUs, of which the carrying values for two include goodwill and must be tested for impairment annually. Employee bene(cid:2) t plans – Accounting for employee bene(cid:2) t plans requires the use of actuarial assumptions. The assumptions include the discount rate, expected rate of return on plan assets, rate of compensation increase and health care costs. These assumptions depend on underlying factors such as economic conditions, government regulations, investment performance, employee demographics and mortality rates. These assumptions could change in the future and may result in material adjustments to employee bene(cid:2) t plan assets or liabilities. Disclosure Controls and Internal Controls Disclosure controls Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management’s evaluation of the design and effectiveness of the Company’s disclosure controls and procedures, the Company’s Chief Executive Of(cid:2) cer and Chief Financial Of(cid:2) cer have concluded that these controls and procedures are designed and operating effectively as of December 25, 2011 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required. Internal controls over (cid:2) nancial reporting Management is responsible for establishing and maintaining adequate internal controls over (cid:2) nancial reporting to provide reasonable assurance regarding the reliability of (cid:2) nancial reporting and the preparation of (cid:2) nancial statements for external purposes in accordance with Canadian generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over (cid:2) nancial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over (cid:2) nancial reporting. Based on management’s design and testing of the effectiveness of the Company’s internal controls over (cid:2) nancial reporting, the Company’s Chief Executive Of(cid:2) cer and Chief Financial Of(cid:2) cer have concluded that these controls and procedures are designed and operating effectively as of December 25, 2011 to provide reasonable assurance that the (cid:2) nancial information being reported is materially accurate. During the fourth quarter ended December 25, 2011, there have been no changes in the design of the Company’s internal controls over (cid:2) nancial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over (cid:2) nancial reporting. Other Additional information relating to the Company is available on SEDAR at www.sedar.com, including the Annual Information Form dated February 16, 2012. 12 REPORTING Management’s Report to the Shareholders The accompanying consolidated (cid:2) nancial statements, management’s discussion and analysis (MD&A) and other information in the Annual Report are the responsibility of management. The (cid:2) nancial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these statements in accordance with International Financial Reporting Standards. The MD&A and (cid:2) nancial information contained in this Annual Report are consistent with the (cid:2) nancial statements. To provide reasonable assurance that assets are safeguarded and that relevant and reliable (cid:2) nancial information is being reported, management has developed and maintains a system of internal controls. An integral part of the system is the requirement that employees maintain the highest standard of ethics in their activities. Business reviews and internal audits are performed by corporate executives and an internal audit team to evaluate internal controls, systems and procedures. The Board of Directors, acting through the Audit Committee, is responsible for determining that management ful(cid:2) lls its responsibilities in the preparation of (cid:2) nancial statements and MD&A, and in the (cid:2) nancial control of operations. The Audit Committee recommends to the shareholders the appointment of the independent auditor. The Audit Committee meets regularly with (cid:2) nancial management and the independent auditor to discuss internal controls, auditing matters and (cid:2) nancial reporting issues and presents its (cid:2) ndings to the Board. The Audit Committee reviews the consolidated (cid:2) nancial statements, MD&A and material (cid:2) nancial announcements with management and the external auditor prior to submission to the Board for approval. The consolidated (cid:2) nancial statements have been audited on behalf of the shareholders by the independent external auditor, PricewaterhouseCoopers LLP, whose report follows. B.J. Berry President and Chief Executive Of(cid:2) cer Winnipeg, Canada February 16, 2012 K.P. Kuchma Vice President and Chief Financial Of(cid:2) cer Winnipeg, Canada February 16, 2012 13 REPORTING Auditor’s Report to the Shareholders Independent Auditor’s Report To the Shareholders of Winpak Ltd. We have audited the accompanying consolidated (cid:2) nancial statements of Winpak Ltd. and its subsidiaries, which comprise the consolidated balance sheets as at December 25, 2011, December 26, 2010 and December 28, 2009 and the consolidated statements of income, comprehensive income, changes in equity, and cash (cid:3) ows for the years ended December 25, 2011 and December 26, 2010, and the related notes, which comprise a summary of signi(cid:2) cant accounting policies and other explanatory information. Management’s responsibility for the consolidated (cid:2) nancial statements Management is responsible for the preparation and fair presentation of these consolidated (cid:2) nancial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated (cid:2) nancial 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 (cid:2) nancial 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 audits to obtain reasonable assurance about whether the consolidated (cid:2) nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated (cid:2) nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated (cid:2) nancial 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 (cid:2) nancial 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 (cid:2) nancial statements. We believe that the audit evidence we have obtained in our audits is suf(cid:2) cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated (cid:2) nancial statements present fairly, in all material respects, the (cid:2) nancial position of Winpak Ltd. and its subsidiaries as at December 25, 2011, December 26, 2010 and December 28, 2009 and its (cid:2) nancial performance and its cash (cid:3) ows for the years ended December 25, 2011 and December 26, 2010 in accordance with International Financial Reporting Standards. Chartered Accountants Winnipeg, Canada February 16, 2012 14 CONSOLIDATED STATEMENTS OF INCOME Years ended December 25, 2011 and December 26, 2010 (thousands of US dollars, except per share amounts) Revenue Cost of sales Gross pro(cid:2) t Other income (expenses) Sales, marketing and distribution expenses General and administrative expenses Research and technical expenses Pre-production expenses Income from operations Finance income Finance expense Income before income taxes Income tax expense Net income for the year Attributable to: Equity holders of the Company Non-controlling interests Basic and fully diluted earnings per share - cents Note 8 9 9 10 22 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 25, 2011 and December 26, 2010 (thousands of US dollars) Net income for the year Cash (cid:3) ow hedge (losses) gains recognized Cash (cid:3) ow hedge gains transferred to the statement of income Cash (cid:3) ow hedge gains transferred to property, plant and equipment Actuarial (losses) gains on employee bene(cid:2) t plans Income tax relating to applicable components of other comprehensive income Other comprehensive income (loss) for the year - net of income tax Comprehensive income for the year 8 16 10 Attributable to: Equity holders of the Company Non-controlling interests 2011 652,063 (464,299) 187,764 (520) (53,043) (26,345) (12,606) (240) 95,010 4,417 (3,865) 95,562 (30,653) 64,909 63,783 1,126 64,909 98 2011 64,909 (167) (996) (60) (11,771) 3,990 (9,004) 55,905 54,779 1,126 55,905 2010 579,441 (406,948) 172,493 (5,244) (49,078) (25,501) (13,436) (237) 78,997 3,656 (3,557) 79,096 (22,026) 57,070 55,296 1,774 57,070 85 2010 57,070 1,033 (1,586) - 402 191 40 57,110 55,336 1,774 57,110 See accompanying notes to consolidated (cid:2) nancial statements, including note 29(c) which reconciles amounts previously reported under Canadian GAAP to International Financial Reporting Standards (IFRS). 15 CONSOLIDATED BALANCE SHEETS (thousands of US dollars) Assets Current assets: Cash and cash equivalents Trade and other receivables Income taxes receivable Inventories Prepaid expenses Derivative (cid:2) nancial instruments Non-current assets: Property, plant and equipment Intangible assets Employee bene(cid:2) t plan assets Deferred tax assets Other receivables Total assets Equity and Liabilities Current liabilities: Trade payables and other liabilities Provisions Income taxes payable Derivative (cid:2) nancial instruments Non-current liabilities: Employee bene(cid:2) t plan liabilities Deferred income Provisions Deferred tax liabilities Total liabilities Equity: Share capital Reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interests Total equity Total equity and liabilities Note December 25 2011 December 26 2010 December 28 2009 11 12 13 14 15 16 17 18 19 16 19 17 21 21 126,879 83,935 33 78,018 2,769 242 291,876 256,938 15,076 - 3,729 - 275,743 567,619 59,294 592 4,988 836 65,710 12,504 10,243 8,423 17,116 48,286 113,996 29,195 (426) 409,008 437,777 15,846 453,623 567,619 90,488 77,118 1,953 76,075 2,284 629 248,547 234,797 16,666 3,330 4,174 141 259,108 507,655 52,560 368 1,554 - 54,482 6,719 11,221 7,614 20,322 45,876 100,358 29,195 441 361,128 390,764 16,533 407,297 507,655 61,164 69,172 1,255 69,812 2,211 1,182 204,796 220,196 18,505 1,110 3,408 799 244,018 448,814 44,965 - 5,051 - 50,016 7,181 11,363 870 19,622 39,036 89,052 29,195 810 313,038 343,043 16,719 359,762 448,814 See accompanying notes to consolidated (cid:2) nancial statements, including note 29(b) which reconciles amounts previously reported under Canadian GAAP to IFRS. On behalf of the Board: Director Director 16 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (thousands of US dollars) Attributable to Equity Holders of the Company Share Retained Non- Controlling Note Capital Reserves Earnings Total Interests Total Equity Balance at December 28, 2009 29,195 810 313,038 343,043 16,719 359,762 Comprehensive income (loss) for the year Cash (cid:3) ow hedge gains, net of tax Cash (cid:3) ow hedge gains transferred to the statement of income, net of tax Actuarial gains on employee bene(cid:2) t plans, net of tax Other comprehensive income (loss) Net income for the year Comprehensive income (loss) for the year Preferred share redemption Dividends 21 - - - - - - - - 741 (1,110) - (369) - (369) - - 409 409 55,296 55,705 741 (1,110) 409 40 55,296 55,336 - - - - 1,774 1,774 - - - - (1,960) (7,615) (7,615) - 741 (1,110) 409 40 57,070 57,110 (1,960) (7,615) Balance at December 26, 2010 29,195 441 361,128 390,764 16,533 407,297 Balance at December 27, 2010 29,195 441 361,128 390,764 16,533 407,297 Comprehensive income (loss) for the year Cash (cid:3) ow hedge losses, net of tax Cash (cid:3) ow hedge gains transferred to the statement of income, net of tax Cash (cid:3) ow hedge gains transferred to property, plant and equipment, net of tax Actuarial losses on employee bene(cid:2) t plans, net of tax Other comprehensive income (loss) Net income for the year Comprehensive income (loss) for the year Preferred share redemption Dividends 21 - - - - - - - - - (109) (714) (44) - (867) - (867) - - - - - (8,137) (8,137) 63,783 55,646 (109) (714) (44) (8,137) (9,004) 63,783 54,779 - - (7,766) (7,766) - - - - - 1,126 1,126 (980) (833) (109) (714) (44) (8,137) (9,004) 64,909 55,905 (980) (8,599) Balance at December 25, 2011 29,195 (426) 409,008 437,777 15,846 453,623 See accompanying notes to consolidated (cid:2) nancial statements. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 25, 2011 and December 26, 2010 (thousands of US dollars) Cash provided by (used in): Operating activities: Net income for the year Items not involving cash: Depreciation Amortization - deferred income Amortization - intangible assets Employee de(cid:2) ned bene(cid:2) t plan expenses Net (cid:2) nance income Income tax expense Other Cash (cid:3) ow from operating activities before the following Change in working capital: Trade and other receivables Inventories Prepaid expenses Trade payables and other liabilities Provisions Employee de(cid:2) ned bene(cid:2) t plan payments Income tax paid Interest received Interest paid Net cash from operating activities Investing activities: Acquisition of property, plant and equipment (net) Acquisition of intangible assets Financing activities: Dividends paid Change in non-controlling interests in subsidiary Change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Note 2011 2010 64,909 26,789 (1,223) 2,049 2,928 (552) 30,653 (1,433) 124,120 (6,676) (1,943) (485) 6,756 795 (5,148) (22,347) 309 (20) 95,361 (48,906) (462) (49,368) (7,789) (1,813) (9,602) 36,391 90,488 126,879 57,070 25,061 (1,154) 2,091 2,537 (99) 22,026 (2,348) 105,184 (7,946) (6,263) (73) 8,099 7,112 (4,750) (23,377) 116 (10) 78,092 (39,017) (252) (39,269) (7,539) (1,960) (9,499) 29,324 61,164 90,488 14 15 16 9 10 16 15 11 See accompanying notes to consolidated (cid:2) nancial statements, including note 29(d) which highlights the signi(cid:2) cant adjustments made to the amounts previously reported under Canadian GAAP. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (thousands of US dollars, unless otherwise indicated) 1. General Winpak Ltd. is incorporated under the Canada Business Corporations Act. The Company manufactures and distributes high-quality packaging materials and related packaging machines. The Company’s products are used primarily for the packaging of perishable foods, beverages and in health-care applications. The address of the Company’s registered of(cid:2) ce is 100 Saulteaux Crescent, Winnipeg, Manitoba, Canada R3J 3T3. The ultimate controlling party of Winpak Ltd. is Wihuri Oy of Helsinki, Finland, a privately held Company. 2. Basis of presentation The Company prepares its consolidated (cid:2) nancial statements in accordance with Canadian generally accepted accounting principles as set out in Part 1 of the Handbook of the Canadian Institute of Chartered Accountants (CICA). The (cid:2) scal year of the Company ends on the last Sunday of the calendar year. As a result, the Company’s (cid:2) scal year is usually 52 weeks in duration, but includes a 53rd week every (cid:2) ve to six years. The 2011 and 2010 (cid:2) scal years comprised 52 weeks. In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS), and require publicly accountable enterprises to apply such standards for years beginning on or after January 1, 2011. The Company’s current (cid:2) scal year commenced on December 27, 2010. As permitted under National Instrument 52-107, the Company elected to commence reporting on this new basis for the year ended December 25, 2011. In these (cid:2) nancial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS. These consolidated (cid:2) nancial statements were the (cid:2) rst prepared in accordance with IFRS. Accordingly, IFRS 1 has been applied. Subject to certain transition elections disclosed in note 29, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at December 28, 2009 and throughout all periods presented, as if these policies had always been in effect. Note 29 discloses the impact of the transition to IFRS on the Company’s reported balance sheet, changes in equity, statements of income, comprehensive income and cash (cid:3) ows, including the nature and effect of signi(cid:2) cant changes in accounting policies from those used in the Company’s Canadian GAAP consolidated (cid:2) nancial statements for the year ended December 26, 2010. The Company’s functional and reporting currency is the US dollar. The US dollar is the reporting currency as more than three-quarters of the Company’s business is conducted in US dollars thereby increasing transparency by signi(cid:2) cantly reducing volatility of reported results due to (cid:3) uctuations in the rate of exchange between the US and Canadian currencies. As part of the Company’s conversion to IFRS, entities with the Canadian dollar as their functional currency under Canadian GAAP changed their functional currency to the US dollar (see note 29). The consolidated (cid:2) nancial statements have been prepared under the historical-cost convention, except that certain (cid:2) nancial instruments, employee bene(cid:2) t plans, share-based payments and provisions are stated at their fair value. The consolidated (cid:2) nancial statements were approved by the Board of Directors on February 16, 2012. 3. Signi(cid:2) cant accounting policies (a) Principles of consolidation: The consolidated (cid:2) nancial statements include the accounts of the Company, its wholly-owned subsidiaries: Winpak Portion Packaging Ltd., Winpak Heat Seal Packaging Inc., Winpak Holdings Ltd., Winpak Inc., Winpak Films Inc., Winpak Portion Packaging, Inc., Winpak Lane, Inc., Winpak Heat Seal Corporation, Grupo Winpak De Mexico, S.A. De C.V., Embalajes Winpak De Mexico, S.A. De C.V., and Administracion Winpak De Mexico, S.A. De C.V., and its majority-owned subsidiary American Biaxis Inc. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the (cid:2) nancial and operating policies so as to obtain bene(cid:2) ts from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. Subsidiaries are fully consolidated from the date on which control is obtained until the date that control ceases. The (cid:2) nancial statements of all subsidiaries are prepared as of the same reporting date using consistent accounting policies. All inter- company balances and transactions, including any unrealized pro(cid:2) ts arising from inter-company transactions have been eliminated. (b) Business combinations: Business combinations are accounted for using the acquisition method of accounting. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred by the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition costs incurred are expensed and included in general and administrative expenses. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with IAS 39 either in the statement of income or as a change to other comprehensive income. Contingent consideration that is classi(cid:2) ed as equity is not re-measured, and its subsequent settlement is accounted for within equity. Identi(cid:2) able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. Goodwill is initially measured as the excess of the aggregate of the consideration transferred over the net identi(cid:2) able assets acquired and liabilities assumed. If this consideration is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (c) Non-controlling interests: Non-controlling interests represent equity interests in American Biaxis Inc. owned by third parties. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income and other comprehensive income is recognized directly in equity. (d) Foreign currency translation: The (cid:2) nancial statements for the Company and its subsidiaries are prepared using their functional currency, that being the US dollar. The functional currency is the currency of the primary economic environment in which the Company and its subsidiaries operate. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Foreign currency differences arising on translation are recognized directly to the statement of income. Non-monetary assets and liabilities arising from transactions in foreign currencies are translated to the functional currency at the exchange rate prevailing at the date of the transaction. (e) Revenue: Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, rebates and discounts. Revenue is recognized when the risks and rewards of ownership have transferred to the customer. No revenue is recognized if there are signi(cid:2) cant uncertainties regarding recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, or there is continuing management involvement with the goods. (f) Research and technical expenses: Research and technical expenses are expensed in the period in which the costs are incurred. (g) Government grants: Grants from government are recognized at their fair value when there is a reasonable assurance that the grant will be received and/or earned and any speci(cid:2) ed conditions will be met. Grants received in relation to the purchase and construction of plant and equipment are included in non-current liabilities as deferred income and are credited to the statement of income on a straight-line basis over the estimated useful life of the related asset. Grants received in relation to research and development activities are recorded to reduce these costs when it is determined there is reasonable assurance the tax credits will be realized. (h) Leases: Rental income received from packaging machine operating leases is recognized on a straight-line basis over the term of the corresponding lease. Payments made under operating leases are recognized in the statement of income on a straight-line basis over the term of the lease, while any lease incentive received is recognized as a reduction of the total lease expense, over the term of the lease. Inventories: (i) Inventories are stated at the lower of cost and net realizable value. The cost of inventories is based on the (cid:2) rst-in (cid:2) rst-out principle and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories, cost includes an appropriate share of variable and (cid:2) xed overheads based on normal operating capacity. Any excess, unallocated, (cid:2) xed overhead costs are expensed as incurred. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (j) Cash and cash equivalents: Cash and cash equivalents include cash on hand, cash invested in interest-bearing money market accounts and short-term deposits with maturities of less than three months. Cash equivalents are all highly liquid investments. Bank overdrafts are shown within current liabilities. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash (cid:3) ows. (k) Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. All costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management are included in the carrying value of the asset. When the Company has a legal right or constructive obligation to restore a site on which an asset is located either through make-good provisions in lease agreements or decommissioning of environmental risks, the present value of the estimated costs of dismantling and removing the asset and restoring the site are included in the carrying value of the asset with a corresponding increase to provisions. Borrowing costs directly attributable to the acquisition, construction or production of qualifying property, plant and equipment that takes an extended period of time to be placed into service are added to the cost of the assets, until such time as the assets are substantially ready for their intended use. See note 3(o) on impairment. When parts of an item of plant and equipment have different useful lives, they are accounted for as separate items (major components). The cost of replacing a component of an item of plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic bene(cid:2) ts of the item will occur and its cost can be measured reliably. The costs of day-to-day maintenance of plant and equipment are recognized directly in the statement of income. 20 Depreciation is computed using the straight-line method over the estimated useful lives of the assets, commencing the date the assets are ready for use as follows: Buildings 20 - 40 years Equipment 4 - 20 years Packaging machines 3 - 7 years Depreciation methods, useful lives and residual values are reassessed annually or more frequently when there is an indication that they have changed. The gain or loss on the retirement of an item of property, plant and equipment is the difference between the net sale proceeds and the carrying amount of the asset and is recognized in the statement of income. (l) Pre-production expenses: Pre-production costs relating to installations of major new production equipment are expensed in the period in which occurred. (m) Intangible assets: Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses. See note 3(o) on impairment. Computer software that is integral to a related item of hardware is included with plant and equipment. All other computer software is treated as an intangible asset. The cost of intangible assets acquired in an acquisition is the fair value at the acquisition date. The cost of separately acquired intangible assets, including computer software, comprises the purchase price and any directly attributable costs of preparing the asset for use. Amortization is computed using the straight-line method over the estimated useful lives of the assets, as follows: Patents 8 - 17 years Customer-related 10 years Marketing-related 2 - 10 years Computer software 3 - 12 years (n) Goodwill: Goodwill represents the excess of the consideration transferred over the Company’s interest in the fair value of the net identi(cid:2) able assets, including intangible assets, and liabilities of the acquiree at the date of acquisition. At the date of acquisition, goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. A CGU is the smallest group of assets that generates cash in(cid:3) ows that are largely independent of the cash in(cid:3) ows from other assets or groups of assets. Goodwill is tested at least annually for impairment at the CGU level and is carried at cost less accumulated impairment losses (see note 3(o)). Impairment: (o) The carrying amount of the Company’s property, plant and equipment and intangible assets (other than goodwill) are reviewed at each reporting date to determine whether there is any indication of impairment. Goodwill is tested for impairment annually or at any time if an indicator of impairment exists. If any such indication exists, the applicable asset’s recoverable amount is estimated. The recoverable amount of the Company’s assets are calculated as the value-in-use, being the present value of future cash (cid:3) ows, using a pre-tax discount rate that re(cid:3) ects the current assessment of the time value of money, or the fair value less costs to sell, if greater. For an asset that does not generate largely independent cash (cid:3) ows, the recoverable amount is determined for the CGU to which it belongs. The Company bases its impairment calculation on detailed (cid:2) nancial forecasts, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These (cid:2) nancial forecasts are generally covering a period of (cid:2) ve years. For longer periods, a long-term growth rate is calculated and applied to project future cash (cid:3) ows after the (cid:2) fth year. An impairment loss is recognized whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognized in the statement of income. Impairment losses recognized in respect of CGUs are allocated (cid:2) rst to reduce the carrying amount of any goodwill allocated to the CGU and then, to reduce the carrying amount of other assets in the CGU on a pro rata basis. Impairment losses in respect of goodwill are not reversed. In respect of property, plant and equipment and intangible assets, an impairment loss is reversed if there has been an indication that an impairment loss recognized in prior periods may no longer exist or may have decreased. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been previously recognized. (p) Employee bene(cid:2) t plans: The Company maintains (cid:2) ve funded non-contributory de(cid:2) ned bene(cid:2) t pension plans in Canada and the US and one funded non-contributory supplementary income postretirement plan for certain CDN-based executives. A market discount rate is used to measure the bene(cid:2) t obligations based on the yield of high quality corporate bonds denominated in the same currency in which the bene(cid:2) ts are expected to be paid and with terms to maturity that, on average, match the terms of the bene(cid:2) t obligations. The cost of providing the bene(cid:2) ts is actuarially determined using the projected unit credit method. Actuarial valuations are conducted, at a minimum, on a triennial basis with interim valuations performed as deemed necessary. Consideration is given to any event that could impact the bene(cid:2) t plan assets or obligation up to the balance sheet date where interim valuations are performed. For (cid:2) nancial reporting purposes, the Company measures the bene(cid:2) t obligations and fair value of assets for the de(cid:2) ned bene(cid:2) t plans as of the year-end date. Current service costs are charged to the statement of income and included in the same line items as the related compensation cost. Interest costs on the bene(cid:2) t obligation are charged to the statement of income as (cid:2) nance expense. Likewise, the expected return on bene(cid:2) t plan assets is presented in the statement 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of income as (cid:2) nance income. Actuarial gains and losses are recognized directly in equity within other comprehensive income. Gains and losses on the curtailment or settlement of a plan are recognized in the statement of income when the Company is demonstrably committed to the curtailment or settlement. Past service costs are recognized immediately in the statement of income to the extent that the bene(cid:2) ts are already vested, and are otherwise amortized on a straight-line basis over the average period until the amended bene(cid:2) ts become vested. The amount recognized in the balance sheet at each year-end reporting date represents the present value of the bene(cid:2) t obligation, adjusted for unrecognized past service costs, and reduced by the fair value of bene(cid:2) t plan assets. Any recognized asset or surplus is limited to the present value of economic bene(cid:2) ts available in the form of any future refunds from the plan or reductions in future contributions. To the extent that there is uncertainty regarding entitlement to the surplus, no asset is recorded. The Company’s funding policy is in compliance with statutory regulations and amounts funded are deductible for income tax purposes. One of the Company’s subsidiaries maintains one unfunded contributory de(cid:2) ned bene(cid:2) t postretirement plan for health care bene(cid:2) ts for a limited group of US individuals. A market discount rate is used to measure the bene(cid:2) t obligation based on the yield of high quality corporate bonds denominated in the same currency in which the bene(cid:2) ts are expected to be paid and with terms to maturity that, on average, match the terms of the bene(cid:2) t obligation. The cost of providing the bene(cid:2) ts is actuarially determined using the per capita claims cost method. Current service costs are charged to the statement of income as they accrue and are included in general and administrative expenses. Interest costs on the bene(cid:2) t obligation are charged to the statement of income as (cid:2) nance expense. Actuarial gains and losses are recognized directly in equity within other comprehensive income. Past service costs are recognized immediately to the extent that the bene(cid:2) ts are already vested, and are otherwise amortized on a straight-line basis over the average period until the amended bene(cid:2) ts become vested. The amount recognized in the balance sheet at each year-end reporting date represents the present value of the bene(cid:2) t obligation, adjusted for unrecognized past service costs. The Company participates in one multiemployer de(cid:2) ned bene(cid:2) t pension plan providing bene(cid:2) ts to certain unionized employees in the US. The administration of the plan and investment of its assets are controlled by a board of independent trustees. The Company’s responsibility to make contributions is the amount established pursuant to its collective agreement; however poor performance of the investments in this plan could have an adverse impact on the Company, its employees and former employees who are members of this plan. This multiemployer de(cid:2) ned bene(cid:2) t pension plan is accounted for using the accounting standards for de(cid:2) ned contribution plans as there is insuf(cid:2) cient information to apply de(cid:2) ned bene(cid:2) t pension plan accounting. Accordingly, the Company’s pension expense charged to the statement of income is the annual funding contribution and the Company does not re(cid:3) ect its share of a plan surplus or de(cid:2) cit. The cost of withdrawing from the plan is charged to the statement of income and is calculated as the present value of the required future cash out(cid:3) ows. For further information on the Company’s withdrawal from the plan, refer to notes 19 and 29(b). Changes in estimates with respect to the withdrawal liability are recorded to the statement of income. The Company maintains seven de(cid:2) ned contribution pension plans in Canada and the US. The pension expense charged to the statement of income for these plans is the annual funding contribution by the Company. Termination bene(cid:2) ts are recognized as an expense in the statement of income when the Company is committed to a formal detailed plan to either terminate employment before the normal retirement date or to provide termination bene(cid:2) ts as a result of an offer made to encourage voluntary redundancy. Termination bene(cid:2) ts for voluntary redundancies are recognized as an expense in the statement of income if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Short-term bene(cid:2) t obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or pro(cid:2) t-sharing plans if the Company has a legal or constructive obligation to pay this amount as a result of past service provided by the employee. Income taxes: (q) Income tax expense comprises current and deferred tax. Income tax expense is recognized in the statement of income except to the extent that it relates to items recorded directly to other comprehensive income or equity, in which case it is recognized directly in other comprehensive income or equity, respectively. Current income tax expense is the expected income tax payable on the taxable income for the period, using income tax rates enacted or substantively enacted in the jurisdictions the Company is required to pay income tax at the reporting date, and any income adjustments to income taxes payable in respect of previous periods. Current income tax expense is adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the (cid:2) nancial statements, and by the availability of unused income tax losses. Deferred tax expense is recognized using the balance sheet method in which temporary differences are calculated based on the carrying amounts of assets and liabilities for (cid:2) nancial reporting purposes and the tax bases of assets and liabilities for income taxation purposes. Deferred tax is not recognized for the following temporary timing differences: the initial recognition for both goodwill and assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income; and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the income tax rates that are expected to be applied when the temporary difference reverses, that is, when the asset is realized or the liability is settled, based on the income tax laws that have been enacted or substantively enacted at the reporting date. 22 Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available against which the assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related income tax bene(cid:2) t will be realized. Current tax assets and liabilities are offset when the Company and its subsidiaries have a legally enforceable right to offset the amounts and intend to either settle on a net basis, or to realize the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balance on a net basis. Management periodically evaluates positions taken in income tax returns with respect to situations in which applicable income tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to income tax authorities. (r) Provisions: A provision is recognized when there is a legal or constructive obligation as a result of a past event and it is probable that a future outlay of cash will be required to settle the obligation, and the amount can be reliably estimated. Provisions are determined by discounting the expected future cash (cid:3) ows at a pre-income tax rate that re(cid:3) ects the current market assessments of the time value of money and the risks speci(cid:2) c to the obligation. When some or all of the monies required to settle a provision are expected to be recovered from a third party, the recovery is recognized as an asset when it is virtually certain that the recovery will be received. When the Company has a legal right or constructive obligation to restore a site on which an asset is located either through make-good provisions in lease agreements or decommissioning of environmental risks, the present value of the estimated costs of dismantling and removing the asset and restoring the site is recognized as a provision with a corresponding increase to the related item of property, plant and equipment. At each reporting date, the obligation is re-measured in line with changes in discount rates, estimated cash (cid:3) ows and the timing of those cash (cid:3) ows. Any changes in the obligation are added or deducted from the related asset. The change in the present value of the obligation due to the passage of time is recognized as a (cid:2) nance expense in the statement of income. At each reporting date, other provisions are re-measured in line with changes in discount rates, estimated cash (cid:3) ows and the timing of those cash (cid:3) ows. Any changes in the provision are recognized in the statement of income. The change in the present value of the provision due to the passage of time is recognized as a (cid:2) nance expense in the statement of income. (s) Financial assets and liabilities: Derivative (cid:2) nancial instruments are measured at fair value, even when they are part of a hedging relationship. The Company’s (cid:2) nancial instruments are classi(cid:2) ed as follows: a) cash and cash equivalents - loans and receivables, b) trade and other receivables - loans and receivables c) trade payables and other liabilities - other (cid:2) nancial liabilities and d) derivative (cid:2) nancial instruments - derivatives designated as effective hedges. All (cid:2) nancial instruments, including derivatives, are included in the consolidated balance sheet and are measured at fair value except loans and receivables and other (cid:2) nancial liabilities, which are measured at amortized cost. All changes in fair value are recorded to the statement of income unless cash (cid:3) ow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income to the extent the derivatives are deemed to be effective hedges. (t) Derivative (cid:2) nancial instruments: The Company operates principally in Canada and the United States, which gives rise to risks that its income and cash (cid:3) ows may be adversely impacted by (cid:3) uctuations in foreign exchange rates. The Company enters into foreign currency forward contracts to manage foreign exchange exposures on anticipated labor, overhead, and property, plant and equipment expenditures to be incurred in Canadian dollars and equipment expenditures to be incurred in other foreign currencies. All foreign currency forward contracts are designated as cash (cid:3) ow hedges. The fair value of each contract is included on the balance sheet within derivative (cid:2) nancial instrument assets or liabilities, depending on whether the fair value was in an asset or liability position. In the case of labor and overhead expenditures, changes in the fair value of these contracts are initially recorded in other comprehensive income and subsequently recorded in the statement of income when the hedged item affects income or loss. In the case of property, plant and equipment expenditures, changes in the fair value of these contracts are initially recorded in other comprehensive income and upon settlement of the contract, the gain or loss is included in the cost of the corresponding asset. (u) Share-based payments: The Company maintains a share-based compensation plan, which provides restricted share units under the President’s Incentive Plan. Units under the plan vest immediately, and are paid in cash during the fourth quarter of the third year or the (cid:2) rst quarter of the fourth year after the date of grant based upon the quoted market value of the common shares of the Company on the day prior to the date of payment. The fair value of the units granted is recognized as a personnel expense, with a corresponding increase in liabilities, over the period that the units pertain. The liability is re-measured at each reporting date. Any changes in the fair value of the liability are recognized as a personnel expense in the statement of income. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (v) Earnings per share: Basic earnings per share are calculated by dividing the net income attributable to equity holders of the Company for the period by the weighted average number of common shares outstanding during the period. Fully diluted earnings per share are calculated on the same basis as there are no potentially dilutive common shares. 4. Critical accounting estimates and judgments The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by de(cid:2) nition, seldom equal the actual results. The estimates and assumptions that are critical to the determination of carrying value of assets and liabilities are addressed below. Impairment of property, plant and equipment and intangible assets: (a) An integral component of impairment testing is determining the asset’s recoverable amount. The determination of the recoverable amount involves signi(cid:2) cant management judgment, including projections of future cash (cid:3) ows and appropriate discount rates. The cash (cid:3) ows are derived from the (cid:2) nancial forecast for the next (cid:2) ve years and do not include restructuring activities that the Company is not yet committed to or signi(cid:2) cant future investments that will enhance the asset’s performance of the CGU being tested. Qualitative factors, including market presence and trends, strength of customer relationships, strength of local management, strength of debt and capital markets, and degree of variability in cash (cid:3) ows, as well as other factors, are considered when making assumptions with regard to future cash (cid:3) ows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate used for the discounted cash (cid:3) ow model as well as the expected future cash in(cid:3) ows and the growth rate used for extrapolation purposes. A change in any of the signi(cid:2) cant assumptions or estimates could result in a material change in the recoverable amount. The Company has eight CGUs, of which the carrying values for two include goodwill and must be tested for impairment annually. (b) Employee bene(cid:2) t plans: Accounting for employee bene(cid:2) t plans requires the use of actuarial assumptions. The assumptions include the discount rate, expected rate of return on bene(cid:2) t plan assets, rate of compensation increase and health care costs. These assumptions depend on underlying factors such as economic conditions, government regulations, investment performance, employee demographics and mortality rates. These assumptions could change in the future and may result in material adjustments to employee bene(cid:2) t plan assets or liabilities. 5. Future accounting standards (a) Financial instruments - disclosures: The Accounting Standards Board approved the incorporation of the amendments to IFRS 7 “Financial Instruments: Disclosures” and the related amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards” into Part 1 of the Handbook. These amendments were made to Part 1 in January 2011 and are effective for annual periods beginning on or after July 1, 2011. The amendments relate to required disclosures for transfers of (cid:2) nancial assets to help users of (cid:2) nancial statements evaluate the risk exposures relating to such transfers and the effect of those risks on an entity’s (cid:2) nancial position. While the Company is currently assessing the impact of this new standard, management does not expect the standard to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. (b) Financial instruments: IFRS 9 “Financial Instruments” was issued in November 2009 as the (cid:2) rst step in the project to replace IAS 39. IFRS 9 retains but simpli(cid:2) es the mixed measurement model and establishes two primary measurement categories for (cid:2) nancial assets: amortized cost and fair value. The basis of classi(cid:2) cation depends on an entity’s business model and the contractual cash (cid:3) ow of the (cid:2) nancial asset. Classi(cid:2) cation is made at the time the (cid:2) nancial asset is initially recognized, namely when the entity becomes a party to the contractual provisions of the instrument. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. While the Company is currently assessing the impact of this new standard, management does not expect the standard to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. In May 2011, the International Accounting Standards Board issued the following standards: IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements”, IFRS 12 “Disclosure of Interests in Other Entities”, IAS 27 “Separate Financial Statements”, IFRS 13 “Fair Value Measurement” and amended IAS 28 “Investments in Associates and Joint Ventures”. Each of the new standards is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. While the Company is currently assessing the impact of the new and amended standards, management does not expect the standards to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. The Company has not yet determined whether any of the new requirements will be early adopted. The following is a brief summary of the new standards: (c) Consolidation: IFRS 10 “Consolidated Financial Statements” requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the (cid:2) nancial and operating policies of an entity so as to obtain bene(cid:2) ts from its activities. IFRS 10 replaces SIC 12 “Consolidation – Special Purpose Entities” and parts of IAS 27 “Consolidated and Separate Financial Statements”. 24 (d) Joint arrangements: IFRS 11 “Joint Arrangements” requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operations. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 “Interests in Joint Ventures” and SIC 13 “Jointly Controlled Entities - Non-monetary Contributions by Venturers”. (e) Disclosure of interests in other entities: IFRS 12 “Disclosure of Interests in Other Entities” establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosures and also introduces signi(cid:2) cant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interests in other entities. (f) Fair value measurement: IFRS 13 “Fair Value Measurement” is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clari(cid:2) es that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the speci(cid:2) c standards requiring fair value measurements and in many cases does not re(cid:3) ect a clear measurement basis or consistent disclosures. (g) Amendments to other standards: There have been amendments to existing standards, including IAS 27 “Separate Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures”. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated (cid:2) nancial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 - 12 as explained above. In June 2011, the International Accounting Standards Board amended IAS 1 “Financial Statement Presentation” and IAS 19 “Employee Bene(cid:2) ts”. (h) Financial statement presentation: The amendments to IAS 1 “Financial Statement Presentation” requires entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be recycled to the statement of income in the future. Items that will not be recycled such as re-measurements resulting from amendments to IAS 19 will be presented separately from items that may be recycled in the future, such as deferred gains and losses on cash (cid:3) ow hedges. Entities that presented other comprehensive income items before tax will be required to show the amount of tax related to the two groups separately. The amendment is effective for annual periods beginning on or after July 1, 2012. Early adoption is permitted and full retrospective application is required. The Company has not yet determined whether the amended standard will be early adopted. (i) Employee bene(cid:2) ts: The amendments to IAS 19 “Employee Bene(cid:2) ts” makes signi(cid:2) cant changes to the recognition and measurement of de(cid:2) ned bene(cid:2) t pension expense and termination bene(cid:2) ts, and to the disclosure for all employee bene(cid:2) ts. Actuarial gains and losses are renamed re-measurements and will be recognized immediately in other comprehensive income. Re-measurements recognized in other comprehensive income will not be recycled through the statement of income in subsequent periods. The amendments also accelerate the recognition of past service costs whereby they are recognized in the period of a plan amendment. The annual expense for a de(cid:2) ned bene(cid:2) t plan will be computed based on the application of the discount rate to the net de(cid:2) ned bene(cid:2) t plan asset or liability. The amendments to IAS 19 will also impact the presentation of pension expense as bene(cid:2) t costs will be split between (i) the cost of bene(cid:2) ts accrued in the current period (service cost) and bene(cid:2) t changes (past service cost, settlements and curtailments); and (ii) (cid:2) nance expense or income. The amendment is effective for periods beginning on or after January 1, 2013. Early adoption is permitted. The amendment should be applied retrospectively, except for changes to the carrying value of assets that include bene(cid:2) t costs in the carrying amount. The Company has not yet begun the process of assessing what impact the amended standard may have on its (cid:2) nancial statements or whether or not it will early adopt. (j) Financial instruments - presentation: In December 2011, the International Accounting Standards Board issued an amendment to the application guidance in IAS 32 “Financial Instruments: Presentation” to clarify some of the requirements for offsetting (cid:2) nancial assets and (cid:2) nancial liabilities on the statement of (cid:2) nancial position. As a result, the International Accounting Standards Board has also published an amendment to IFRS 7 “Financial Instruments: Disclosures”. The amendments do not change the current offsetting model in IAS 32 but instead clari(cid:2) es that the right of offset must not be contingent on a future event. It also must be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendments also clarify that gross settlement mechanisms with features that both (i) eliminate credit and liquidity risk and (ii) process receivables and payables in a single settlement process, are effectively equivalent to net settlement. The offsetting disclosures in IFRS 7 are to be retrospectively applied, with an effective date for annual periods beginning on or after January 1, 2013. However, the clari(cid:2) cations to the application guidance in IAS 32 are to be retrospectively applied, with an effective date for annual periods beginning on or after January 1, 2014. While the Company is currently assessing the impact of this new standard, management does not expect the standard to have a signi(cid:2) cant impact on the Company’s consolidated (cid:2) nancial statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Expenses by nature: Raw materials and consumables used Depreciation and amortization Personnel expenses (note 7) Freight Other expenses Net foreign exchange and cash (cid:3) ow hedge gains transferred from other comprehensive income (note 8) 7. Personnel expenses: Wages and salaries Social security expenses Expenses related to de(cid:2) ned bene(cid:2) t plans Contribution to de(cid:2) ned contribution plans and de(cid:2) ned bene(cid:2) t multiemployer pension plan Withdrawal liability expense on de(cid:2) ned bene(cid:2) t multiemployer pension plan Share-based payments 8. Other income (expenses): Foreign exchange (loss) gain Cash (cid:3) ow hedge gains transferred from other comprehensive income Withdrawal liability expense on de(cid:2) ned bene(cid:2) t multiemployer pension plan 9. Finance income and expense: Finance income on cash and cash equivalents Expected return on bene(cid:2) t plan assets Finance income Finance expense on bank overdrafts and other Finance expense on bene(cid:2) t plan obligation Unwinding of discount rates on provisions Finance expense Net (cid:2) nance income 2011 (337,074) (27,615) (138,661) (17,750) (36,228) 275 (557,053) 2011 (119,742) (11,120) (2,928) (3,115) (795) (961) 2010 (288,985) (25,998) (137,495) (16,558) (33,276) 1,868 (500,444) 2010 (113,355) (10,340) (2,537) (2,840) (7,112) (1,311) (138,661) (137,495) 2011 (721) 996 (795) (520) 2011 328 4,089 4,417 (48) (3,579) (238) (3,865) 552 2010 282 1,586 (7,112) (5,244) 2010 182 3,474 3,656 (12) (3,545) - (3,557) 99 26 10. Income tax expense: Current tax expense Current year Adjustment for prior years Deferred tax expense Origination and reversal of temporary differences Change in enacted or substantively enacted tax rates 2011 2010 (29,424) - (29,424) (1,229) - (1,229) (22,744) 87 (22,657) 418 213 631 Total income tax expense (30,653) (22,026) Income tax recovery recognized in other comprehensive income Cash (cid:3) ow hedges Actuarial gains and losses Reconciliation of effective income tax rate Combined Canadian federal and provincial income tax rate United States income taxed at rates higher than Canadian tax rates Change in enacted or substantively enacted Canadian provincial income tax rates Non-taxable foreign exchange differences Capital cost allowance and cumulative eligible capital tax pool foreign exchange differences Permanent differences and other Effective income tax rate Effective January 1, 2011, the Canadian federal income tax rate dropped from 18 percent to 16.5 percent. 356 3,634 3,990 28.2% 4.5 - - - (0.6) 32.1% 184 7 191 29.8% 1.4 (0.3) (2.4) (0.9) 0.2 27.8% 11. Cash and cash equivalents: Bank balances Money market and short-term deposits 12. Trade and other receivables: Trade receivables Less: Allowance for doubtful accounts Net trade receivables Other receivables December 25 December 26 December 28 2011 17,320 109,559 126,879 2010 12,118 78,370 90,488 2009 21,783 39,381 61,164 December 25 2011 81,811 (1,446) 80,365 3,570 83,935 December 26 2010 December 28 2009 74,861 (1,628) 73,233 3,885 77,118 65,999 (1,761) 64,238 4,934 69,172 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Inventories: Raw materials Work-in-process Finished goods Spare parts December 25 December 26 December 28 2011 22,584 13,753 37,367 4,314 78,018 2010 24,138 12,266 35,757 3,914 76,075 2009 23,570 9,619 33,230 3,393 69,812 During 2011, the Company recorded, within cost of sales, inventory write-downs for slow-moving and obsolete inventory of $6,080 (2010 - $6,539) and reversals of previously written-down items of $1,688 (2010 - $1,366). 14. Property, plant and equipment: Land Buildings Equipment Machines In Progress Total Packaging Expansions Net book value At December 28, 2009 Cost Accumulated depreciation 2010 Activity Additions Disposals Transfers Depreciation At December 26, 2010 At December 26, 2010 Cost Accumulated depreciation Net book value At December 27, 2010 Cost Accumulated depreciation 2011 Activity Additions Disposals Transfers Depreciation At December 25, 2011 At December 25, 2011 Cost Accumulated depreciation 2,565 - 2,565 - - - - 2,565 2,565 - 2,565 2,565 - 2,565 - - - - 2,565 2,565 - 2,565 76,321 314,388 (20,952) (164,134) 55,369 150,254 29,555 (26,398) 3,157 4,660 - 2,527 (2,416) 60,140 33,111 (283) 6,324 (21,628) 167,778 627 (240) - (1,017) 2,527 83,508 350,472 (23,368) (182,694) 60,140 167,778 28,305 (25,778) 2,527 8,851 - 8,851 1,787 - (8,851) - 1,787 1,787 - 1,787 431,680 (211,484) 220,196 40,185 (523) - (25,061) 234,797 466,637 (231,840) 234,797 83,508 350,472 (23,368) (182,694) 60,140 167,778 28,305 (25,778) 2,527 1,787 - 1,787 466,637 (231,840) 234,797 377 38,204 2,014 - - (3,078) 59,076 8,598 (263) 1,376 (22,881) 154,608 - - (830) 2,074 - (1,376) - 38,615 38,615 - 38,615 49,193 (263) - (26,789) 256,938 510,910 (253,972) 256,938 85,522 356,074 (26,446) (201,466) 59,076 154,608 28,134 (26,060) 2,074 28 Government grants in respect of property, plant and equipment were recognized within deferred income totaling $249 in 2011 (2010 - $1,043). No impairment losses or impairment reversals were recorded during 2011 (2010 - nil). No borrowing costs were capitalized during 2011 (2010 - nil). 15. Intangible assets: Net book value At December 28, 2009 Cost Accumulated amortization and impairment 2010 Activity Additions Amortization At December 26, 2010 At December 26, 2010 Cost Accumulated amortization and impairment Net book value At December 27, 2010 Cost Accumulated amortization and impairment 2011 Activity Additions Disposals Amortization At December 25, 2011 At December 25, 2011 Cost Accumulated amortization and impairment Goodwill Software Patents Related Related Total Customer Marketing 31,546 (18,780) 12,766 - - 12,766 31,546 (18,780) 12,766 31,546 (18,780) 12,766 - - - 12,766 31,546 (18,780) 12,766 6,831 (5,333) 1,498 243 (662) 1,079 7,056 (5,977) 1,079 7,056 (5,977) 1,079 461 (3) (676) 861 7,510 (6,649) 861 4,017 (3,899) 118 9 (55) 72 4,026 (3,954) 72 4,026 (3,954) 72 1 - (29) 44 4,027 (3,983) 44 11,996 (8,394) 3,602 - (1,160) 2,442 11,996 (9,554) 2,442 11,996 (9,554) 2,442 - - (1,160) 1,282 11,996 (10,714) 1,282 2,058 (1,537) 521 - (214) 307 1,924 (1,617) 307 1,924 (1,617) 307 - - (184) 123 1,924 (1,801) 123 56,448 (37,943) 18,505 252 (2,091) 16,666 56,548 (39,882) 16,666 56,548 (39,882) 16,666 462 (3) (2,049) 15,076 57,003 (41,927) 15,076 The amortization of software and patents is included within general and administrative expenses and the amortization of customer related and marketing related intangibles is included within sales, marketing and distribution expenses. As of December 25, 2011, there were no inde(cid:2) nite life intangible assets other than goodwill. The 2011 goodwill balance of $12,766 (2010 - $12,766) includes $12,542 (2010 - $12,542) related to the lidding CGU. The impairment testing for this CGU was conducted under the value-in-use approach, using a pre-tax discount rate of 12.4 percent (2010 - 13.5 percent). Cash (cid:3) ows were projected based on actual operating results and the (cid:2) ve-year business plan. For the 2011 impairment testing, average volume growth for the next (cid:2) ve years was 4.1 percent and the average gross pro(cid:2) t percentage over the same time-frame was two percentage points lower than the actual gross pro(cid:2) t percentage attained in 2011. For the 2010 impairment testing, the average volume growth for the next (cid:2) ve years was 2.5 percent and the average gross pro(cid:2) t percentage over the same time-frame was within one percentage point of the actual gross pro(cid:2) t percentage attained in 2010. Cash (cid:3) ows after the (cid:2) ve year period were assumed to increase at a terminal growth rate of 1.5 percent (2010 - 1.5 percent). No impairment losses or impairment reversals were recorded during 2011 (2010 - nil). 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Employee bene(cid:2) t plans: The Company maintains (cid:2) ve funded non-contributory de(cid:2) ned bene(cid:2) t pension plans, one funded non-contributory supplementary income postretirement plan for certain CDN-based executives, one unfunded contributory de(cid:2) ned bene(cid:2) t postretirement plan for health-care bene(cid:2) ts for a limited group of US individuals, one multiemployer de(cid:2) ned bene(cid:2) t pension plan for certain unionized employees in the US and seven de(cid:2) ned contribution pension plans. Effective January 1, 2005, all de(cid:2) ned bene(cid:2) t pension plans were frozen to new entrants except one, which was frozen effective January 1, 2009. All new CDN employees are required, and all new US employees have the option, to participate in de(cid:2) ned contribution plans upon satisfaction of certain eligibility requirements. Total amounts paid by the Company on account of all bene(cid:2) t plans, consisting of: de(cid:2) ned bene(cid:2) t pension plans, supplementary income postretirement plan, direct payments to bene(cid:2) ciaries for the unfunded postretirement plan, the multiemployer de(cid:2) ned bene(cid:2) t pension plan and the de(cid:2) ned contribution plans, amounted to $8,328 (2010 - $7,590). De(cid:2) ned bene(cid:2) t plans For (cid:2) nancial reporting purposes, the Company measures the bene(cid:2) t obligations and fair value of the bene(cid:2) t plan assets as of the year-end date. The most recent actuarial valuations for funding purposes for the funded non-contributory plans were completed as at the following dates: January 1, 2010 for one plan, December 31, 2010 for three plans, and October 31, 2005 for one frozen plan which will not have a new actuarial valuation completed at this time. The most recent actuarial valuations for funding purposes for the supplementary income postretirement plan and the postretirement plan for health-care bene(cid:2) ts were dated January 1, 2009 and January 1, 2010 respectively. The next required actuarial valuations for all of the Company’s de(cid:2) ned bene(cid:2) t plans are three years from the aforementioned dates. Based on the most recent actuarial valuations, the Company expects to contribute $2,671 in cash to its de(cid:2) ned bene(cid:2) t plans in 2012. The following presents the (cid:2) nancial position of the Company’s de(cid:2) ned bene(cid:2) t pension plans and other post retirement bene(cid:2) ts, which include the supplementary income plan and the postretirement plan for health-care bene(cid:2) ts: Change in bene(cid:2) t obligation Bene(cid:2) t obligation, beginning of year Current service cost Finance expense Actuarial losses recognized in other comprehensive income Bene(cid:2) ts paid Foreign exchange Bene(cid:2) t obligation, end of year Change in bene(cid:2) t plan assets Fair value of bene(cid:2) t plan assets, beginning of year Expected return on bene(cid:2) t plan assets Actuarial (losses) gains recognized in other comprehensive income Employer contributions Bene(cid:2) ts paid Foreign exchange Fair value of bene(cid:2) t plan assets, end of year Funded status Present value of funded obligations Fair value of bene(cid:2) t plan assets Status of funded obligations Present value of unfunded obligations Total funded status of obligations Assets not recognized due to pension plan asset ceiling limit 2011 2010 65,769 2,928 3,579 8,099 (2,162) (662) 77,551 62,911 4,089 (4,125) 5,148 (2,162) (744) 65,117 57,909 2,537 3,545 1,856 (1,675) 1,597 65,769 53,404 3,474 1,186 4,750 (1,675) 1,772 62,911 December 25 December 26 December 28 2011 2010 2009 (75,659) 65,117 (10,542) (1,892) (12,434) (70) (12,504) (63,829) 62,911 (918) (1,940) (2,858) (531) (3,389) (56,048) 53,404 (2,644) (1,861) (4,505) (1,566) (6,071) 30 December 25 December 26 December 28 2011 2010 2009 - (12,504) (12,504) 62% 32% 6% 100% 3,330 (6,719) (3,389) 62% 32% 6% 100% 2011 (2,928) (3,579) 4,089 (2,418) (1,364) (459) (870) (235) (2,928) (36) (12,224) 453 (11,771) 402 (11,771) (11,369) 65,117 (77,551) (12,434) (4,125) 584 1,110 (7,181) (6,071) 61% 32% 7% 100% 2010 (2,537) (3,545) 3,474 (2,608) (1,184) (338) (818) (197) (2,537) 4,660 (670) 1,072 402 - 402 402 62,911 (65,769) (2,858) 1,186 - Amounts recognized in the balance sheet Employee bene(cid:2) t plan assets Employee bene(cid:2) t plan liabilities Bene(cid:2) t plan assets The following represents the weighted average allocation of bene(cid:2) t plan assets: Asset category Equity securities Debt securities Cash Total Net bene(cid:2) t plan expense Current service cost Finance expense on bene(cid:2) t obligation Expected return on bene(cid:2) t plan assets Current service cost is recognized in the following line items in the statement of income: Cost of sales Sales, marketing and distribution expenses General and administrative expenses Research and technical expenses Actual return on bene(cid:2) t plan assets Amounts recognized in other comprehensive income Actuarial losses Assets not recognized due to pension plan asset ceiling limit Cumulative actuarial gains / (losses) recognized in other comprehensive income Cumulative amount, beginning of year Recognized during the year Cumulative amount, end of year Historical information Fair value of bene(cid:2) t plan assets Present value of bene(cid:2) t obligations De(cid:2) cit in the plans Experience adjustments arising on bene(cid:2) t plan assets Experience adjustments arising on bene(cid:2) t plan liabilities 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Signi(cid:2) cant assumptions The following weighted averages were used: Bene(cid:2) t obligations as of the year-end date: Discount rate Rate of compensation increase Net bene(cid:2) t plan expense for the year: Discount rate Expected return on bene(cid:2) t plan assets Rate of compensation increase 2011 2010 4.5% 3.7% 5.4% 6.4% 3.9% 5.4% 3.9% 6.0% 6.3% 3.9% The de(cid:2) ned bene(cid:2) t pension plans do not invest in the shares of the Company. The expected rate of return on the bene(cid:2) t plan assets is based on historical and projected rates of return for each asset category measured over a four-year time period. The objective of the asset allocation policy is to manage the funded status of the plans at an appropriate level of risk, giving consideration to the security of the assets and the potential volatility of market returns. The long-term rate of return is targeted to exceed the return indicated by a benchmark portfolio by at least 1 percent annually. The postretirement bene(cid:2) t plan assumed health-care cost trend rate is 8.1 percent with the rate declining to 4.5 percent by 2028. A one-percentage point change in the assumed health-care cost trend rate would affect the net bene(cid:2) t plan expense by approximately $5 and the bene(cid:2) t obligation by $111. Multiemployer de(cid:2) ned bene(cid:2) t pension plan The Company participates in one multiemployer de(cid:2) ned bene(cid:2) t pension plan providing bene(cid:2) ts to certain unionized employees in the US. The administration of the plan and investment of its assets are controlled by a board of independent trustees. The trustees have determined that this plan is in a critical status position from a funding perspective. As a result, the trustees have formulated a funding rehabilitation plan to forestall a possible insolvency of the plan. The rehabilitation plan requires participating employers to provide phased in contribution increases for future years with the contributions increasing 25 percent by 2012. These contributions are directed solely toward improving the plan’s funding status. During 2011, the Company (cid:2) led the necessary paperwork with the plan trustees to withdraw from the plan. Pursuant to US federal legislation, an employer who withdraws from a plan with unfunded vested bene(cid:2) ts is responsible for a share of that underfunding. See note 19 for the details on the accounting for the withdrawal liability. This multiemployer de(cid:2) ned bene(cid:2) t pension plan is accounted for using the accounting standards for de(cid:2) ned contribution plans as there is insuf(cid:2) cient information to apply de(cid:2) ned bene(cid:2) t pension plan accounting. Accordingly, the Company’s pension expense in respect to this plan of $135 (2010 - $456) is the annual funding contribution and the Company does not recognize its share of a plan surplus or de(cid:2) cit. De(cid:2) ned contribution pension plans The Company maintains four de(cid:2) ned contribution plans for employees in Canada and three savings retirement plans (401(k) Plans) for employees in the United States. The Company’s total expense for these plans was $2,980 (2010 - $2,384). 17. Deferred tax assets and liabilities: The following are the components of the deferred tax assets and liabilities recognized by the Company: Assets Liabilities Net December 25 December 26 December 25 December 26 December 25 December 26 Trade and other receivables Inventories Prepaid expenses Derivative (cid:2) nancial instruments Property, plant and equipment Intangible assets Employee bene(cid:2) t plans Trade payables and other liabilities Provisions Tax assets (liabilities) Set off of tax Net tax assets (liabilities) 2011 447 3,147 - 168 3,726 965 4,446 1,611 3,511 18,021 (14,292) 3,729 2010 498 2,608 - - 4,167 887 2,455 1,622 2,745 14,982 (10,808) 4,174 32 2011 2010 - - - (76) (30,762) (449) - (121) - (31,408) 14,292 (17,116) - - (74) (188) (29,518) (403) (811) (136) - (31,130) 10,808 (20,322) 2011 447 3,147 (76) 168 (27,036) 516 4,446 1,490 3,511 2010 498 2,608 (74) (188) (25,351) 484 1,644 1,486 2,745 (13,387) (16,148) - - (13,387) (16,148) Movement in deferred tax assets and liabilities: 2010 Trade and other receivables Inventories Prepaid expenses Derivative (cid:2) nancial instruments Property, plant and equipment Intangible assets Employee bene(cid:2) t plans Trade payables and other liabilities Provisions 2011 Trade and other receivables Inventories Prepaid expenses Derivative (cid:2) nancial instruments Property, plant and equipment Intangible assets Employee bene(cid:2) t plans Trade payables and other liabilities Provisions Opening Recognized Recognized Exchange Balance In Income In Equity Differences Ending Balance 557 2,237 (74) (372) (59) 371 3 - (22,563) (2,192) 588 2,364 793 256 (16,214) 498 2,608 (74) (188) (73) (592) 684 2,489 631 (51) 539 (2) - (25,351) (1,685) 484 1,644 1,486 2,745 32 (832) 4 766 - - - 184 - - - - 7 191 - - - 356 - - 3,634 - - (16,148) (1,229) 3,990 - - - (3) (596) (31) (135) 9 - (756) - - - - - - - - - - 498 2,608 (74) (188) (25,351) 484 1,644 1,486 2,745 (16,148) 447 3,147 (76) 168 (27,036) 516 4,446 1,490 3,511 (13,387) Deferred tax assets have been recognized where it is probable that they will be recovered. In recognizing deferred tax assets, the Company has considered if it is probable that suf(cid:2) cient future income will be available to absorb temporary differences. No deferred tax liability has been recognized in respect of temporary differences associated with investments in subsidiaries where the Company controls the timing of the reversal and it is probable that such temporary differences will not reverse in the foreseeable future. The aggregate amount of temporary differences associated with investments in domestic and foreign subsidiaries for which a deferred tax liability has not been recognized is $190,659 (2010 - $157,802). Temporary differences relating to unremitted earnings of foreign subsidiaries which would be subject to withholding and other taxes totalled $114,821 (2010 - $96,416). 18. Trade payables and other liabilities: Trade payables Other current liabilities and accrued expenses December 25 December 26 December 28 2011 32,138 27,156 59,294 2010 26,783 25,777 52,560 2009 23,798 21,167 44,965 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. Provisions: Balance at December 27, 2010 Current liabilities Non-current liabilities 2011 Annual activity Finance expense - unwinding of discount Change in discount rates Balance at December 25, 2011 At December 25, 2011 Current liabilities Non-current liabilities Multiemployer Asset Withdrawal Retirement Liability Obligations Total 368 6,744 7,112 216 795 8,123 491 7,632 8,123 - 870 870 22 - 892 101 791 892 368 7,614 7,982 238 795 9,015 592 8,423 9,015 Multiemployer withdrawal liability The Company participates in one multiemployer de(cid:2) ned bene(cid:2) t pension plan providing bene(cid:2) ts to certain unionized employees in the US. The administration of the plan and investment of its assets are controlled by a board of independent trustees. The trustees communicated to both the Company and the Union in 2010 that this plan was in a critical status position from a funding perspective. During the fourth quarter of 2010, the Company analyzed its options with the assistance of external consultants. Management has determined that the only economically feasible alternative was to withdraw from the plan and therefore, in the (cid:2) rst quarter of 2011, reached an agreement with the Union to proceed. In addition, the Company (cid:2) led the necessary paperwork with the plan trustees to withdraw from the plan. Pursuant to US federal legislation, an employer who withdraws from a plan with unfunded vested bene(cid:2) ts is responsible for a share of that underfunding. As a consequence of withdrawing from the plan, the Company will be required to make monthly payments at a constant dollar value estimated at $41, or $491 on an annual basis, over a twenty year period. A one-percentage point increase in the discount rates would have decreased the December 25, 2011 liability by $676 and increased income before income taxes by $676. Asset retirement obligations For certain building leases, the Company is required to remove all equipment and restore the premises at the end of the lease. 20. Share-based payments: Effective January 1, 2004, the Board of Directors established the President’s Incentive Plan (Plan), whereby the Company grants to B.J. Berry (President) 60,000 restricted share units (RSUs) upon completion of each year of service. There is no cost of the RSUs to the President and there is no potential for repricing. The Company pays to the President the cash value of the RSUs based on the closing share price on a date selected by the President during the fourth quarter of the third year or the (cid:2) rst quarter of the fourth year subsequent to the year the RSUs were granted. A date cannot be selected during periods in which insiders may not trade Winpak shares. In the event of the termination of the President’s employment for any reason, the cash value of the RSUs shall vest and be paid to the President or his personal representative, as the case may be. The cash value of a RSU is the market value of the common shares of the Company on the day prior to the date of payment. In addition, the Company is required to pay the President an amount equal to the dividends paid on the common shares of the Company with respect to each RSU if, as and when, declared and paid. Details of RSUs issued and outstanding during the current and prior year are as follows: Outstanding, beginning of year Settled Granted Outstanding, end of year Available for settlement, end of year 34 2011 240,000 (60,000) 60,000 240,000 60,000 2010 240,000 (60,000) 60,000 240,000 60,000 The 240,000 RSUs outstanding at the end of 2011 mature 60,000 annually from 2012 through 2015 and the 240,000 RSUs outstanding at the end of 2010 mature 60,000 annually from 2011 through 2014. The fair value of the RSUs at the grant date and each subsequent reporting date is determined based upon the market value of the Company’s common shares. The personnel expense recorded in the statement of income under the Plan was $961 (2010 - $1,311). The settlement price in 2011 was $14.72 US per RSU (2010 - $8.83 US). At December 25, 2011, the carrying value of the liability, as well as the intrinsic value of the vested liability, in respect of the Plan was $2,856 (2010 - $2,828). 21. Share capital and reserves: Share capital At December 25, 2011, the authorized voting common shares were unlimited (2010 - unlimited). The issued and fully paid voting common shares at December 25, 2011 were 65,000,000 (2010 - 65,000,000). The shares have no par value. The Company has no stock option plans in place. Reserves Reserves comprise the effective portion of the cumulative net change in the fair value of cash (cid:3) ow hedging instruments related to the hedged transactions that have not yet occurred. Dividends During 2011, dividends in Canadian dollars of 12 cents per common share were declared (2010 - 12 cents). 22. Earnings per share: Net income attributable to equity holders of the Company Weighted average shares outstanding (000’s) Basic and fully diluted earnings per share - cents 23. Financial instruments: The following sets out the classi(cid:2) cation and the carrying value and fair value of (cid:2) nancial instruments: Assets (Liabilities) Cash and cash equivalents Trade and other receivables Classi(cid:2) cation Loans and receivables Loans and receivables Derivative (cid:2) nancial instrument assets Derivatives designated as effective hedges Trade payables and other liabilities Other (cid:2) nancial liabilities Derivative (cid:2) nancial instrument liabilities Derivatives designated as effective hedges 2011 63,783 65,000 98 2010 55,296 65,000 85 Carrying / Fair Value 126,879 83,935 242 (59,294) (836) The fair value of cash and cash equivalents, trade and other receivables, trade payables and other liabilities approximate their carrying value because of the short-term maturity of these instruments. The fair value of foreign currency forward contracts, designated as cash (cid:3) ow hedges, have been determined by valuing those contracts to market against prevailing forward foreign exchange rates as at the year-end reporting date. The inputs used for fair value measurements, including their classi(cid:2) cation within the required three levels of the fair value hierarchy that prioritizes the inputs used for fair value measurement, are as follows: Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 - inputs that are not based on observable market data. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the classi(cid:2) cation of (cid:2) nancial instruments within the fair value hierarchy as at December 25, 2011: Financial Assets (Liabilities) Foreign currency forward contracts 24. Commitments and guarantees: Level 1 - Level 2 (594) Level 3 - Total (594) Commitments: The Company has commitments to purchase property, plant and equipment of $35,184 (2010 - $4,539). The Company rents premises and equipment under operating leases that expire at various dates until January 31, 2016. The aggregate minimum rentals payable for these leases are as follows: Year Amount 2012 1,529 2013 1,272 2014 1,151 2015 571 2016 Thereafter 11 - Total 4,534 During 2011, $1,767 was recognized as an expense in the statement of income in respect of operating leases (2010 - $1,850). Guarantees: Directors and of(cid:2) cers The Company and its subsidiaries have entered into indemni(cid:2) cation agreements with their respective directors and of(cid:2) cers to indemnify them, to the extent permitted by law, against any and all amounts paid in settlement and damages incurred by the directors and of(cid:2) cers as a result of any lawsuit, or any judicial, administrative or investigative proceeding involving the directors and of(cid:2) cers. Indemni(cid:2) cation claims will be subject to any statutory or other legal limitation period. The Company has purchased directors’ and of(cid:2) cers’ liability insurance to mitigate losses from any such claims. Leased real property The Company and its subsidiaries enter into operating leases in the ordinary course of business for real property. In certain instances, the Company and its subsidiaries have indemni(cid:2) ed the landlord from any obligations that may arise from any occurrences of personal bodily injury, loss of life and property damages. The Company’s property and liability insurance coverage mitigates losses from any such claims. Pension plan The Company has indemni(cid:2) ed the Manitoba Pension Commission from any and all claims that may be made by any bene(cid:2) ciary under a certain de(cid:2) ned bene(cid:2) t pension plan. The indemnity relates to the transfer of a portion of the surplus in the respective pension plan to a non-contributory supplementary income plan. Given the nature of the aforementioned indemni(cid:2) cation agreements, the Company is unable to reasonably estimate its maximum potential liability under these agreements. The Company believes the likelihood of a material payment pursuant to these indemni(cid:2) cation agreements is remote. No amounts have been recorded in the consolidated (cid:2) nancial statements with respect to these indemni(cid:2) cation agreements. 25. Financial risk management: In the normal course of business, the Company has risk exposures consisting primarily of foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. The Company manages its risks and risk exposures through a combination of derivative (cid:2) nancial instruments, insurance, a system of internal and disclosure controls and sound business practices. The Company does not purchase any derivative (cid:2) nancial instruments for speculative purposes. Financial risk management is primarily the responsibility of the Company’s corporate (cid:2) nance function. Signi(cid:2) cant risks are regularly monitored and actions are taken, when appropriate, according to the Company’s approved policies, established for that purpose. In addition, as required, these risks are reviewed with the Company’s Board of Directors. Foreign exchange risk Translation differences arise when foreign currency monetary assets and liabilities are translated at foreign exchange rates that change over time. These foreign exchange gains and losses are recorded in other income (expenses). As a result of the Company’s CDN dollar net asset monetary position as at December 25, 2011, a one-cent change in the year-end foreign exchange rate from 1.0208 to 1.0108 (US to CDN dollars) would have increased net income by $202 for 2011. Conversely, a one-cent change in the year-end foreign exchange rate from 1.0208 to 1.0308 (US to CDN dollars) would have decreased net income by $202 for 2011. 36 The Company’s foreign exchange policy requires that between 50 and 80 percent of the Company’s net requirement of CDN dollars for the ensuing 9 to 15 months will be hedged at all times with a combination of cash and cash equivalents and forward or zero-cost option foreign currency contracts. The Company may also enter into forward foreign currency contracts when equipment purchases will be settled in other foreign currencies. Transactions are only conducted with certain approved Schedule I Canadian (cid:2) nancial institutions. Certain foreign currency forward contracts matured during the year and the Company realized pre-tax foreign exchange gains of $1,056. Of these foreign exchange gains, $996 were recorded in other income (expenses) and $60 were recorded in property, plant and equipment. As at December 25 2011, the Company had US to CDN dollar foreign currency forward contracts outstanding with a notional amount of US $21.0 million at an average exchange rate of 1.0209 maturing between January and September 2012 and US dollar to Swiss franc foreign currency forward contracts outstanding with a notional amount of US $7.6 million at an average exchange rate of 0.8634 (US dollars to Swiss francs) maturing between February and August 2012. The fair value of these (cid:2) nancial instruments was negative $594 US and the corresponding unrealized loss has been recorded in other comprehensive income. Interest rate risk The Company’s interest rate risk arises from interest rate (cid:3) uctuations on the (cid:2) nance income that it earns on its cash invested in money market accounts and short-term deposits. The Company developed and implemented an investment policy, which was approved by the Company’s Board of Directors, with the primary objective to preserve capital, minimize risk and provide liquidity. Regarding the December 25, 2011 cash and cash equivalents balance of $126.9 million, a 1.0 percent increase/decrease in interest rate (cid:3) uctuations would increase/decrease income before income taxes by $1,269 annually. Commodity price risk The Company’s manufacturing costs are affected by the price of raw materials, namely petroleum-based and natural gas-based plastic resins and aluminum. In order to manage its risk, the Company has entered into selling price-indexing programs with certain customers. Changes in raw material prices for these customers are re(cid:3) ected in selling price adjustments but there is a slight time lag. For 2011, 62 percent of revenue was to customers with selling price-indexing programs. For all other customers, the Company’s preferred practice is to match raw material cost changes with selling price adjustments, albeit with a slight time lag. This matching is not always possible, as customers react to selling price pressures related to raw material cost (cid:3) uctuations according to conditions pertaining to their markets. Credit risk The Company is exposed to credit risk from its cash and cash equivalents held with banks and (cid:2) nancial institutions, derivative (cid:2) nancial instruments (foreign currency forward contracts), as well as credit exposure to customers, including outstanding trade and other receivable balances. The following table details the maximum exposure to the Company’s counterparty credit risk which represents the carrying value of the (cid:2) nancial asset: Cash and cash equivalents Trade and other receivables Foreign currency forward contracts December 25 December 26 December 28 2011 126,879 83,935 242 211,056 2010 90,488 77,118 629 168,235 2009 61,164 69,172 1,182 131,518 Credit risk on cash and cash equivalents and (cid:2) nancial instruments arises in the event of non-performance by the counterparties when the Company is entitled to receive payment from the counterparty who fails to perform. The Company has established an investment policy to manage its cash. The policy requires that the Company manage its risk by investing its excess cash on hand on a short-term basis, up to a maximum of six months, with several (cid:2) nancial institutions and/or governmental bodies that must be ‘AA’ rated, or higher, by a recognized international credit rating agency or insured 100 percent by a ‘AAA’ rated CDN or US government. The Company manages its counterparty risk on its (cid:2) nancial instruments by only dealing with CDN Schedule I (cid:2) nancial institutions. In the normal course of business, the Company is exposed to credit risk on its trade and other receivables from customers. The Company’s current credit exposure is higher in the weakened North American economic environment. To mitigate such risk, the Company performs ongoing customer credit evaluations and assesses their credit quality by taking into account their (cid:2) nancial position, past experience and other pertinent factors. Management regularly monitors customer credit limits, performs credit reviews and, in certain cases insures trade receivable balances against credit losses. As at December 25, 2011, the Company believes that the credit risk for trade and other receivables is mitigated due to the following: (a) a broad customer base which is dispersed across varying market sectors and geographic locations, (b) 97 percent (2010 - 97 percent) of gross trade and other receivable balances are outstanding for less than 60 days, (c) 20 percent (2010 - 17 percent) of the trade and other receivables balance are insured against credit losses, and (d) the Company’s exposure to individual customers is limited and the ten largest customers, on aggregate, accounted for 35 percent (2010 - 33 percent) of the total trade and other receivables balance. The carrying amount of trade and other receivables is reduced through the use of an allowance account and the amount of the loss is recognized in the statement of income within general and administrative expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against general and administrative expenses in the statement of income. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets out the aging details of the Company’s trade and other receivables balances outstanding based on the status of the receivable in relation to when the receivable was due and payable and related allowance for doubtful accounts: Current - neither impaired nor past due Not impaired but past the due date: Within 30 days 31 - 60 days Over 60 days Less: Allowance for doubtful accounts Total trade and other receivables, net The following table details the continuity of the allowance for doubtful accounts: Balance, beginning of year Provisions for the year, net of recoveries Uncollectible amounts written off Foreign exchange impact Balance, end of year December 25 2011 66,890 15,606 1,841 1,044 85,381 (1,446) 83,935 December 26 2010 December 28 2009 63,716 13,015 1,237 778 78,746 (1,628) 77,118 2011 (1,628) (90) 272 - (1,446) 52,042 16,725 1,271 895 70,933 (1,761) 69,172 2010 (1,761) (320) 462 (9) (1,628) Liquidity risk Liquidity risk is the risk that the Company would not be able to meet its (cid:2) nancial obligations as they come due. Management believes that the liquidity risk is low due to the strong (cid:2) nancial condition of the Company. This risk assessment is based on the following: (a) cash and cash equivalents amounts of $126.9 million, (b) no outstanding bank loans, (c) unused credit facilities comprised of unsecured operating lines of $38 million, (d) the ability to obtain term-loan (cid:2) nancing to fund an acquisition, if needed, (e) an informal investment grade credit rating, and (f) the Company’s ability to generate positive cash (cid:3) ows from ongoing operations. Management believes that the Company’s cash (cid:3) ows are more than suf(cid:2) cient to cover its operating costs, working capital requirements, capital expenditures and dividend payments in 2012. The Company’s trade payables and other liabilities and derivative (cid:2) nancial instrument liabilities are virtually all due within twelve months. Capital management The Company’s objectives in managing capital are to ensure the Company will continue as a going concern and have suf(cid:2) cient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to deploy capital to provide an appropriate return on investment to its shareholders. The Company also strives to maintain an optimal capital structure to reduce the overall cost of capital. In the management of capital, the Company includes bank overdrafts, bank loans and shareholders’ equity. The Board of Directors has established quantitative return on capital criteria for management and year-over-year sustainable earnings growth targets. The Board of Directors also reviews, on a regular basis, the level of dividends paid to the Company’s shareholders. The Company has externally imposed capital requirements as governed through its bank operating line credit facilities. The Company monitors capital on the basis of funded debt to EBITDA (income before interest, income taxes, depreciation and amortization) and debt service coverage. Funded debt is de(cid:2) ned as the sum of bank loans and bank overdrafts less cash and cash equivalents. The funded debt to EBITDA is calculated as funded debt, as at the (cid:2) nancial reporting date, over the 12-month rolling EBITDA. This ratio is to be maintained under 3.00:1. As at December 25, 2011, the ratio was 0.00:1. Debt service coverage is calculated as a 12-month rolling income from operations over debt service. Debt service is calculated as the sum of one-sixth of bank loans outstanding plus annualized (cid:2) nance expense and dividends. This ratio is to be maintained over 1.50:1. As at December 25, 2011, the ratio was 13.15:1. There were no changes in the Company’s approach to capital management during 2011. 38 26. Segment reporting: The Company operates in one operating segment being the manufacture and sale of packaging materials. The Company operates principally in Canada and the United States. The following summary presents key information by geographic segment: 2011 Revenue Property, plant and equipment and intangible assets 2010 Revenue Property, plant and equipment and intangible assets United States Canada Other Consolidated 503,643 122,351 110,462 149,663 452,194 101,165 97,230 150,298 37,958 - 30,017 - 652,063 272,014 579,441 251,463 Major customer During 2011, the Company reported revenue to one customer representing 14 percent of total revenue (2010 - 8 percent). 27. Contingencies: In the normal course of business activities, the Company may be subject to various legal actions. Management contests these actions and believes resolution of the actions will not have a material adverse impact on the Company’s (cid:2) nancial condition. 28. Related party transactions: The Company had revenue of $0 (2010 - $215) and purchases of $3,811 (2010 - $3,895) with its majority shareholder company. Trade and other receivables and trade payables and other liabilities include amounts of $39 (2010 - $39) and $0 (2010 - $28) respectively with the majority shareholder company. These transactions were completed at market values with normal payment terms. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company. The Board of Directors and Executive Committee are key management personnel. The following table details the compensation earned by these key management personnel: Salaries, fees and short-term bene(cid:2) ts Post-employment bene(cid:2) ts Share-based payments 2011 (4,680) (370) (961) (6,011) 2010 (4,871) (398) (1,311) (6,580) No loans were advanced to key management personnel during the year. The aggregate remuneration earned by the Board of Directors in 2011 was $500 (2010 - $496). As a group, the Board of Directors hold, directly or indirectly 52.6 percent (2010 - 52.7 percent) of the outstanding shares of the Company. The members of the Executive Committee hold, directly or indirectly, 0.4 percent (2010 - 1.0 percent) of the outstanding shares of the Company. 29. Transition to IFRS: The effect of the Company’s transition to IFRS, described in note 2, is summarized in this note as follows: a) Transition elections at December 28, 2009 b) Reconciliation of equity as previously reported under Canadian GAAP to IFRS at December 28, 2009, and December 26, 2010 c) Reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS for the year ended December 26, 2010 d) Adjustments to the consolidated statements of cash (cid:3) ows for the year ended December 26, 2010 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (a) Transition elections: The requirements for (cid:2) rst time adoption of IFRS are set out in IFRS 1. In general, a company is required to determine its IFRS accounting policies and to apply these retrospectively in order to determine its opening balance sheet under IFRS. However, due to cost and/or practical considerations, retrospective application is not always possible. Accordingly, IFRS 1 permits companies adopting IFRS for the (cid:2) rst time to take certain exemptions from the full requirements of IFRS in the transition period. The exemptions most relevant to the Company are as follows: Business combinations An exemption is available within IFRS 1 that allows a Company to carry forward its previous Canadian GAAP accounting for business combinations prior to the transition date. The exemption is optional and can be applied to any business combination transaction prior to the transition date. However, should a Company choose to adjust a prior business combination to comply with IFRS, all business combinations subsequent to the date of the adjusted transaction must also be retrospectively adjusted. The Company has elected to apply this exemption and as a result, acquisitions prior to December 28, 2009 have not been restated to comply with IFRS 3 “Business Combinations”. Borrowing costs This exemption allows an entity to adopt IAS 23 “Borrowing Costs” prospectively on qualifying assets for which the capitalization commencement date is after the transition date. The Company applied this exemption. Employee bene(cid:2) t plans IFRS 1 allows a Company to recognize all cumulative actuarial gains and losses at the date of transition. The Company has applied this exemption and all unrecognized actuarial gains and losses have been recognized in opening retained earnings at December 28, 2009. In addition, employee bene(cid:2) t plan historical disclosures required under IAS 19 may be provided only for (cid:2) scal years subsequent to the transition to IFRS. The Company has applied this exemption. Cumulative translation differences (CTD) This exemption allows CTD to be deemed zero at transition. The Company has applied this exemption at December 28, 2009 and the previous balance recorded within a separate component of equity was transferred to retained earnings. Fair value or revaluation as deemed cost This exemption allows a Company to revalue property, plant and equipment at fair value at its transition date and use this fair value as the deemed cost. This election applies to individual assets. The Company did not apply this exemption. Estimates IFRS 1 stipulates a mandatory exemption from full retrospective application of IFRS as it relates to the use of estimates. It requires that a company’s estimates in accordance with IFRS at the date of transition to IFRS must be consistent with estimates made for the same date in accordance with previous Canadian GAAP (after adjustments to re(cid:3) ect any difference in accounting policies), unless there is objective evidence that those estimates were in error. The Company did not use hindsight in its estimates upon transition to IFRS, nor did it (cid:2) nd any evidence that any of its previously made estimates were in error. Hedge Accounting IFRS 1 stipulates a mandatory exemption from full retrospective application of IFRS as it relates to hedge accounting. In order for a hedging relationship to qualify for hedge accounting at the transition date, the relationship must have been fully designated and documented as effective at the transaction date in accordance with Canadian GAAP, and that designation and documentation must be updated in accordance with IAS 39 at the transition to IFRS. The Company’s hedging relationships were fully documented and designated at the transaction dates under Canadian GAAP and satis(cid:2) ed the hedge accounting criteria under IFRS at the transition date. 40 (b) Reconciliation of equity as previously reported under Canadian GAAP to IFRS: At December 28, 2009 (thousands of US dollars) Assets Current assets: Cash and cash equivalents Trade and other receivables Income taxes receivable Inventories Prepaid expenses Deferred tax assets Derivative (cid:2) nancial instruments Non-current assets: Property, plant and equipment Intangible assets Goodwill Employee bene(cid:2) t plan assets Other assets Deferred tax assets Other receivables Total assets Equity and Liabilities Current liabilities: Trade payables and other liabilities Income taxes payable Non-current liabilities: Employee bene(cid:2) t plan liabilities Deferred income Provisions Deferred tax liabilities Total liabilities CDN GAAP Change In Functional IFRS 1 - Employee Reclasses Currency CTD Bene(cid:2) ts Impairment Income Taxes Netting IFRS 61,164 - 70,354 a) (1,182) - - - (2,310) 1,182 (2,310) - 17,235 (17,235) 13,602 (14,401) 2,310 799 2,310 - - - - - 865 865 - 70,559 2,211 2,310 - 206,598 239,017 5,896 17,235 - 14,401 - - 276,549 483,147 b) a) c) c) d) d) b) d) 44,965 2,931 e) 47,896 1,673 11,363 - 32,459 e) 45,495 93,391 - - - (747) - - - (747) (19,691) (1,251) - - - - - (20,942) (21,689) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (865) (865) - (5,830) (5,830) (5,830) - - - - - - - - - - - (17,811) - - - - - - - - - - - - (3,375) - - - - - (17,811) (17,811) (3,375) (3,375) - - - - - 189 (5,510) (5,321) (5,321) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,730 - 1,730 1,730 - - - - - - - - - - - - (39,598) (18,309) 23,739 18,309 (12,490) (3,375) 882 (15,859) - (15,859) (21,689) - - - - (12,490) (3,375) - (12,490) (17,811) - (3,375) (3,375) 882 848 1,730 1,730 41 - - 1,255 - - - - 61,164 69,172 1,255 69,812 2,211 - 1,182 1,255 204,796 870 - - 5,319 - (632) - 5,557 6,812 - 1,255 1,255 5,319 - 870 (632) 5,557 6,812 - - - - - - - 6,812 220,196 18,505 - 1,110 - 3,408 799 244,018 448,814 44,965 5,051 50,016 7,181 11,363 870 19,622 39,036 89,052 - 29,195 810 313,038 343,043 16,719 359,762 448,814 Non-controlling interests 15,871 f) (15,871) Equity: Share capital Reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interests Total equity Total equity and liabilities 29,195 58,717 285,973 373,885 - f) 373,885 483,147 - - - - 15,871 15,871 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) Reconciliation of equity as previously reported under Canadian GAAP to IFRS - continued: Change In Functional IFRS 1 - Employee Income Reclasses Currency CTD Bene(cid:2) ts Impairment Taxes Provisions Netting IFRS At December 26, 2010 (thousands of US dollars) Assets Current assets: Cash and cash equivalents Trade and other receivables Income taxes receivable Inventories Prepaid expenses Deferred tax assets Derivative (cid:2) nancial instruments Non-current assets: Property, plant and equipment Intangible assets Goodwill Employee bene(cid:2) t plan assets Other assets Deferred tax assets Other receivables Total assets Equity and Liabilities Current liabilities: CDN GAAP 90,488 77,747 1,234 76,765 2,284 3,472 - 251,990 257,208 4,007 17,590 - 15,633 - - 294,438 546,428 a) e) b) a) c) c) d) d) b) d) Trade payables and other liabilities 52,782 Provisions Income taxes payables Non-current liabilities: Employee bene(cid:2) t plan liabilities Deferred income Provisions Deferred tax liabilities Total liabilities - (629) (636) - - (3,472) 629 (4,108) - 17,590 (17,590) 15,492 (15,633) 3,472 141 3,472 - - - (690) - - - (690) (23,281) (1,556) - - - - - (24,837) (636) (25,527) - - 52,782 1,674 11,597 - - - - - - - - 36,772 e) 50,043 102,825 (636) (636) (636) (222) 199 (23) - - (376) - (6,805) (7,181) (7,204) - - - - - - 15,620 15,620 (18,323) - (18,323) (636) (25,527) 42 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (16,938) - - - - - - - - - - - - (3,375) - - - - - (16,938) (16,938) (3,375) (3,375) - - - - - - 269 (5,360) (5,091) (5,091) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,862 - 1,862 1,862 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 368 368 6,744 (2,489) 4,255 4,623 - - - - - 1,355 - - - - 90,488 77,118 1,953 76,075 2,284 - 629 1,355 248,547 870 234,797 - - 16,666 - 4,776 3,330 - (1,160) - 4,486 5,841 - 4,174 141 259,108 507,655 - - 1,355 1,355 4,776 - 870 (1,160) 4,486 5,841 - - - - - - - 52,560 368 1,554 54,482 6,719 11,221 7,614 20,322 45,876 100,358 - 29,195 441 361,128 390,764 16,533 407,297 5,841 507,655 Non-controlling interests 15,620 f) (15,620) Equity: Share capital Reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interests Total equity Total equity and liabilities 29,195 67,860 330,928 427,983 - f) 427,983 546,428 (49,110) (18,309) 30,787 18,309 (11,847) (3,375) 949 (4,623) - - - - (11,847) (3,375) - (11,847) (16,938) - (3,375) (3,375) 949 913 1,862 1,862 (4,623) - (4,623) - PRINCIPAL DIFFERENCES BETWEEN CANADIAN GAAP AND IFRS Reclasses a) Previously, the assets and liabilities related to cash (cid:3) ow hedging derivatives were presented within trade and other receivables. They are now shown as derivative (cid:2) nancial instrument assets and liabilities. b) Under IFRS, all deferred taxes are classi(cid:2) ed as non-current, irrespective of the classi(cid:2) cation of the underlying assets or liabilities to which they relate, or the expected reversal of the temporary difference. The balances that were classi(cid:2) ed as a current asset are now classi(cid:2) ed as a non-current asset. c) Goodwill is now included within intangible assets. d) Under Canadian GAAP, other assets included amounts pertaining to de(cid:2) ned bene(cid:2) t plans, other postretirement bene(cid:2) ts and income tax credits recoverable. The balances relating to de(cid:2) ned bene(cid:2) t plans and other postretirement bene(cid:2) ts are now included within employee bene(cid:2) t plan assets or liabilities and the balances relating to income tax credits recoverable are shown within other receivables. e) In accordance with Canadian GAAP, the income tax effects relating to inter-company pro(cid:2) t eliminations were classi(cid:2) ed as income taxes receivable or payable, but in accordance with IFRS, they have been presented as part of deferred tax liabilities. f) Non-controlling interests in the consolidated balance sheets are presented as a separate component within equity. Under Canadian GAAP, non- controlling interests in the balance sheets were previously classi(cid:2) ed between total liabilities and equity. Change in functional currency IAS 21 requires that the functional currency of each entity in a consolidated group be determined separately based on the currency of the primary economic environment in which the entity operates. A list of primary and secondary indicators is used under IFRS in this determination and these differ in content and emphasis from those factors used under Canadian GAAP. The parent Company and its Canadian subsidiaries, with the exception of American Biaxis Inc., operated with the Canadian dollar as their functional currency under Canadian GAAP. However, it was determined that under IFRS, these same entities had a change in their functional currency, at varying points in time, in prior years. Accordingly, the historical cost basis for certain balance sheet items is different under IFRS than it was under Canadian GAAP. In addition, the balance in the cumulative translation differences (CTD) for each of these Canadian subsidiaries was held constant at the amount in effect at the date of the change in functional currency. At December 28, 2009 and December 26, 2010, inventories, property, plant and equipment, intangible assets, deferred tax liabilities, CTD and retained earnings recorded under Canadian GAAP were adjusted to re(cid:3) ect the changes in functional currency under IFRS. Additionally, at December 26, 2010, adjustments were made to trade payables and other liabilities, income taxes payable and deferred income. IFRS 1 - CTD In accordance with IFRS 1, the Company has elected to deem all foreign currency translation differences that arose prior to the date of transition in respect of all foreign operations to be nil at the date of transition. Accordingly, CTD were reclassi(cid:2) ed to retained earnings. There was no related income tax effect. Employee bene(cid:2) ts Under Canadian GAAP, unrecognized actuarial gains and losses in excess of 10 percent of the greater of the bene(cid:2) t obligation or the fair value of bene(cid:2) t plan assets were amortized to the statement of income on a straight-line basis over the expected average remaining service lives of active plan members. Under IFRS, the Company’s accounting policy is to recognize all actuarial gains and losses directly in equity within other comprehensive income. In addition, the unrecognized actuarial gains and losses that were amortized to the statement of income under Canadian GAAP during 2010 were reversed. Furthermore, for employee bene(cid:2) t plans denominated in Canadian dollars, the net adjustment regarding actuarial gains and losses made under IFRS was revalued into US dollars at the year-end exchange rate. At the date of transition, all previously unrecognized cumulative actuarial gains and losses were recognized in retained earnings. At December 28, 2009, employee bene(cid:2) t plan assets were reduced by $14,339 and employee bene(cid:2) t plan liabilities were increased by $189. The related income tax effect served to decrease deferred tax liabilities by $4,530. Retained earnings were reduced by $9,998. At December 26, 2010, the cumulative adjustment pertaining to actuarial gains and losses reduced employee bene(cid:2) t plan assets by $14,785, increased employee bene(cid:2) t plan liabilities by $269, lowered deferred tax liabilities by $4,739 and reduced retained earnings by $10,315. Under IFRS, the Company is not able to report an employee bene(cid:2) t plan asset in excess of the economic bene(cid:2) t it can expect to receive in the form of a refund of an employee bene(cid:2) t plan surplus and/or a reduction in future contributions. This differs from the treatment allowed under Canadian GAAP and as a result, at December 28, 2009, a decrease in the following items was made: employee bene(cid:2) t plan assets - $1,566, deferred tax liabilities - $420 and retained earnings - $1,146. At December 26, 2010, reductions in the following items were made: employee bene(cid:2) t plan assets - $531, deferred tax liabilities - $142 and retained earnings $389. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under Canadian GAAP, past service costs were amortized to the statement of income on a straight-line basis over the expected average remaining service lives of active plan members. Under IFRS, the Company’s accounting policy is to recognize past service costs directly to the statement of income if vested, or on a straight-line basis over the average remaining vesting period if unvested. No past service costs were recorded during 2010. In addition, the past service costs amortized to the statement of income under Canadian GAAP were reversed. For employee bene(cid:2) t plans denominated in Canadian dollars, the net adjustment regarding past service costs made under IFRS was revalued into US dollars at the year-end exchange rate. At the date of transition, all previously unrecognized vested past service costs were recognized in retained earnings. At December 28, 2009, employee bene(cid:2) t plan assets were reduced by $1,906. The related income tax effect lowered deferred tax liabilities by $560. Retained earnings were reduced by $1,346. At December 26, 2010, employee bene(cid:2) t plan assets declined by $1,622, deferred tax liabilities decreased by $479 and retained earnings decreased by $1,143. Impairment Upon transition to IFRS, all of the Company’s property, plant and equipment and intangible assets were reviewed to determine whether there were any indications of impairment. When these indications were present, the asset’s recoverable amount was estimated. In addition, all goodwill balances were tested for impairment upon transition to IFRS. For goodwill impairment testing under IFRS, goodwill is allocated to cash-generating units (CGUs). In contrast, Canadian GAAP tests goodwill impairment at the operating unit level. The Company’s specialty (cid:2) lms business was classi(cid:2) ed as one reporting unit for Canadian GAAP, but has been separated into two CGUs under IFRS. The goodwill balance relating to the specialty (cid:2) lms business was allocated to the extrusion/coextrusion CGU. At the transition date of December 28, 2009, it was concluded that an impairment of goodwill had taken place and the entire balance was written off, with a corresponding reduction in retained earnings. No income tax effect was recorded. The impairment testing for the extrusion/coextrusion CGU was conducted under the value-in-use approach, using a pre-tax discount rate of 19 percent. Cash (cid:3) ows were projected based on actual operating results and the (cid:2) ve-year business plan. Average volume growth for 2010 to 2014 was 1.5 percent and the average gross pro(cid:2) t percentage over the same time-frame was within one percentage point of the actual gross pro(cid:2) t percentage attained in 2009. Cash (cid:3) ows after 2014 were assumed to increase at a terminal growth rate of 1.5 percent. Income taxes Under Canadian GAAP, when the functional currency for accounting purposes differs from the functional currency for income tax purposes, deferred taxes are (cid:2) rst calculated in the currency in which income taxes are paid and then translated to the functional currency for accounting purposes at the period end exchange rate. Under IAS 12, deferred taxes are calculated based on the functional currency for accounting purposes, regardless of what functional currency is used for income tax purposes. A portion of the additional deferred tax asset was attributed to the non-controlling interests. Provisions The Company participates in one multiemployer de(cid:2) ned bene(cid:2) t pension plan providing bene(cid:2) ts to certain unionized employees in the US. The administration of the plan and investment of its assets are controlled by a board of independent trustees. The trustees communicated to both the Company and the Union in 2010 that this plan was in a critical status position from a funding perspective. During the fourth quarter of 2010, the Company analyzed its options with the assistance of external consultants. Management has determined that the only economically feasible alternative was to withdraw from the plan and therefore, in the (cid:2) rst quarter of 2011, reached an agreement with the Union to proceed. In addition, the Company (cid:2) led the necessary paperwork with the plan trustees to withdraw from the plan. Pursuant to US federal legislation, an employer who withdraws from a plan with unfunded vested bene(cid:2) ts is responsible for a share of that underfunding. Based on the relevant facts and circumstances, it was concluded that the potential withdrawal liability met the de(cid:2) nition of a provision under IFRS as at December 26, 2010 and was recorded. Under Canadian GAAP, the threshold for the recording of a liability is much higher and therefore the withdrawal liability did not meet the applicable recognition criteria at that date. As a consequence of withdrawing from the plan, the Company will be required to make monthly payments at a constant dollar value estimated at $41, or $491 on an annual basis, over a twenty year period. Using pre-income tax discount rates that re(cid:3) ect the risks speci(cid:2) c to the withdrawal liability, the corresponding present value of the liability at December 26, 2010 of $7,112 and related tax effect of $2,489 were recorded within provisions and deferred taxes respectively. Netting Under IAS 1, assets and liabilities should not be offset unless offsetting is speci(cid:2) cally allowed in another standard. Therefore, in the consolidated IFRS balance sheets, income taxes, derivative (cid:2) nancial instruments, employee bene(cid:2) ts and deferred taxes are now presented in both assets and liabilities, where applicable. In addition, the balance pertaining to asset retirement obligations was netted against property, plant and equipment and is now shown in non-current provisions. 44 Change In Functional Employee Income Reclasses Currency Bene(cid:2) ts Taxes Provisions IFRS (c) Reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS: For The Year Ended December 26, 2010 (thousands of US dollars) Revenue Cost of sales Gross pro(cid:2) t Other income (expenses) Sales, general and administrative expenses Sales, marketing and distribution expenses General and administrative expenses Research and technical expenses Pre-production expenses Income from operations Finance income Finance expense Income before income taxes Non-controlling interests Income tax expense Net income for the year Attributable to: Equity holders of the Company Non-controlling interests CDN GAAP 579,441 (410,869) 168,572 - (75,954) - - (13,478) (237) 78,903 a) a) a) a) 170 - b) b) 79,073 (1,709) c) (24,794) 52,570 - - - - 3,731 3,731 - 190 190 (613) 2,993 (435) 75,954 (49,119) (26,222) - - - - 12 (12) 1,709 - 1,709 - - - - 114 6,838 - - 6,838 - 210 7,048 - - 41 607 42 445 3,474 (3,545) 374 - (140) 234 Other comprehensive income: Cumulative translation difference adjustment Cash (cid:3) ow hedge gains recognized Cash (cid:3) ow hedge gains transferred to the statement of income Actuarial gains on employee bene(cid:2) t plans Income tax relating to applicable components of other comprehensive income Other comprehensive income (loss) for the year - net of income tax Comprehensive income for the year 9,512 1,033 (1,586) - 184 9,143 61,713 - - - - - - 1,709 (9,512) - - - - (9,512) (2,464) - - - 402 7 409 643 - - - - - - - - - - - - - - - - - - - - 579,441 (406,948) 172,493 (77) (7,112) (5,244) - - - - - (77) (7,112) - - - (49,078) (25,501) (13,436) (237) 78,997 3,656 (3,557) (77) (7,112) 79,096 - - 209 132 2,489 (22,026) (4,623) 57,070 55,296 1,774 57,070 - 1,033 (1,586) 402 191 40 - - - - - - 132 (4,623) 57,110 PRINCIPAL DIFFERENCES BETWEEN CANADIAN GAAP AND IFRS Reclasses a) Sales, general and administrative expenses have been separated into two categories: sales, marketing and distribution expenses and general and administrative expenses. Foreign exchange gains and losses were previously included within sales, general and administrative expenses. They are now shown within other income (expenses) (note 8). b) Finance income and (cid:2) nance expense were previously shown on a net basis under Canadian GAAP. Under IFRS, the two components are shown separately. c) Under Canadian GAAP, non-controlling interests in the consolidated statement of income were presented as an expense. Under IFRS, non-controlling interests are presented as an allocation of net income for the year. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Change in functional currency In 2010, depreciation expense and material costs within cost of sales, foreign exchange gains and losses on monetary items, amortization expense within general and administrative expenses and income tax expense recorded under Canadian GAAP were adjusted to re(cid:3) ect the changes in functional currency under IFRS relating to the applicable Canadian subsidiaries. Certain foreign exchange gains and losses were included in taxable income, but were not recorded for accounting purposes due to having the US dollar as the functional currency. In addition, the foreign exchange revaluation of the CDN dollar denominated capital cost allowance and cumulative eligible capital income tax pools generated an income tax recovery. Under Canadian GAAP, certain entities had the Canadian dollar as their functional currency. Changes in the cumulative translation differences (CTD) were recorded throughout 2010. However, as a result of these entities now having the US dollar as their functional currency under IFRS, no CTD are recorded. Employee bene(cid:2) ts Consistent with the Company’s accounting policy under IFRS of recording actuarial gains and losses directly in equity within other comprehensive income, the amounts amortized to the statement of income under Canadian GAAP were reversed. In addition, for employee bene(cid:2) t plans denominated in Canadian dollars, the cumulative adjustment made in respect of actuarial gains and losses under IFRS was revalued into US dollars at the year-end exchange rate and the corresponding foreign exchange gains and losses were recorded to the statement of income. As a result, for the year ended December 26, 2010, income before income taxes increased by $90 and net income increased by $31. During 2010, pre-income tax actuarial gains of $402 were recorded in other comprehensive income, as well as an income tax recovery of $7, leading to net other comprehensive income of $409. Included within these (cid:2) gures were adjustments made to employee bene(cid:2) t plan assets for which the balance exceeded the economic bene(cid:2) t to be received in the form of a refund of an employee bene(cid:2) t plan surplus and/or a reduction in future contributions. The amortization of past service costs to the statement of income under Canadian GAAP was also reversed. For employee bene(cid:2) t plans denominated in Canadian dollars, the cumulative adjustment made in respect of past service costs under IFRS was revalued into US dollars at the year-end exchange rate and the corresponding foreign exchange gains and losses were recorded to the statement of income. As a result, for the year ended December 26, 2010, income before income taxes increased by $284 and net income increased by $203. Under IFRS, interest costs on the bene(cid:2) t obligation are charged to the statement of income as a (cid:2) nance expense. Likewise, the expected return on bene(cid:2) t plan assets is presented in the statement of income as (cid:2) nance income. Under Canadian GAAP, these two items were presented as part of personnel expenses. For the year ended December 26, 2010, (cid:2) nance income increased by $3,474, (cid:2) nance expense increased by $3,545 and personnel expenses declined by $71. Income taxes Consistent with the change in the method of calculating deferred tax balances under IFRS, for the year ended December 26, 2010, income tax recoveries were recorded, including the reclassi(cid:2) cation of foreign exchange gains recorded under Canadian GAAP. A portion of the net adjustment was attributed to non-controlling interests. Provisions The provision relating to the withdrawal liability on the multiemployer de(cid:2) ned bene(cid:2) t pension plan, including the applicable income tax recovery, was recorded during 2010. (d) Adjustments to the consolidated statement of cash (cid:3) ows: As a result of reversing the amortization of actuarial gains and losses and past service costs in the statement of income, de(cid:2) ned bene(cid:2) t plan expenses were revised. In addition, the net de(cid:2) ned bene(cid:2) t expense reclassi(cid:2) cation pertaining to (cid:2) nance income and (cid:2) nance expense is shown within the net (cid:2) nance income line on the consolidated statement of cash (cid:3) ows. Consistent with the adjustments made regarding the changes in functional currency to depreciation and amortization expense, the corresponding amounts on the consolidated statement of cash (cid:3) ows were adjusted. Under Canadian GAAP, a portion of the change in the CTD pertains to working capital balances. As such, the changes in working capital balances relating to the change in the CTD are excluded from the consolidated statement of cash (cid:3) ows. Under IFRS reporting, all operations have the US dollar as their functional currency. Accordingly, no CTD are required and none of the changes in working capital relate to the CTD as they do under Canadian GAAP. 46 CORPORATE INFORMATION Annual Meeting The Annual Meeting of Shareholders will be held on Wednesday, April 25, 2012 at 4:30 p.m. at The Fort Garry Hotel, Winnipeg, Canada Listing Winpak Ltd. shares are listed WPK on the Toronto Stock Exchange Transfer Agent Computershare Investor Services Inc. Annual Information Form The most recent version of the Annual Information Form for Winpak Ltd. is available by contacting Winpak’s Corporate Of(cid:2) ce 100 Saulteaux Crescent, Winnipeg, Canada R3J 3T3 info@winpak.com Board of Directors Chairman, A. Aarnio-Wihuri (2), Helsinki, Finland; Chairman, Wihuri Oy M.H. Aarnio-Wihuri, Helsinki, Finland J.M. Hellgren (2), Helsinki, Finland; President and Chief Executive Of(cid:2) cer, Wihuri Oy J.R. Lavery (2), Winnipeg, Canada D.R.W. Chatterley (1), Winnipeg, Canada J.S. Pollard (1), Winnipeg, Canada; Co-Chief Executive Of(cid:2) cer, Pollard Banknote Limited I.T. Suominen (1), Helsinki, Finland; Vice President and Chief Financial Of(cid:2) cer, Wihuri Oy (1) Member of the Audit Committee (2) Member of the Compensation, Governance and Nominating Committee Executive Committee The Executive Committee, in consultation with the Board of Directors, establishes the objectives and the long-term direction of the Company. The Committee meets regularly throughout the year to review progress towards achievement of the Company’s goals and to implement policies and procedures directed at optimizing performance. B.J. Berry, President and Chief Executive Of(cid:2) cer, Winpak Ltd. K.M. Byers, President, Winpak Films Inc. D.A. Johns, President, Winpak Division, a division of Winpak Ltd. T.L. Johnson, President, Winpak Heat Seal Packaging K.P. Kuchma, Vice President and Chief Financial Of(cid:2) cer, Winpak Ltd. J.R. McMacken, President, Winpak Portion Packaging O.Y. Muggli, Vice President, Technology, Winpak Ltd. D.J. Stacey, President, Winpak Lane, Inc. and Vice President, Corporate Development, Winpak Ltd. Auditor PricewaterhouseCoopers LLP, Winnipeg, Canada Legal Counsel Thompson Dorfman Sweatman LLP, Winnipeg, Canada Jones Day, Atlanta, U.S.A. 47 PACKAGING SOLUTIONS WINPAK LTD. CORPORATE OFFICE, 100 SAULTEAUX CRESCENT, WINNIPEG, MB, CANADA R3J 3T3 T: (204) 889-1015 F: (204) 888-7806 WWW.WINPAK.COM WINPAK GROUP WWW.WINPAK.COM WINPAK DIVISION A DIVISION OF WINPAK LTD. 100 SAULTEAUX CRESCENT WINNIPEG, MB R3J 3T3 CANADA T: (204) 889-1015 F: (204) 832-7781 AMERICAN BIAXIS INC. 100 SAULTEAUX CRESCENT WINNIPEG, MB R3J 3T3 CANADA T: (204) 837-0650 F: (204) 837-0659 WINPAK INC. P.O. BOX 14748 MINNEAPOLIS, MN 55414 U.S.A. T: (204) 889-1015 F: (204) 832-7781 WINPAK FILMS INC. 219 ANDREWS PARKWAY SENOIA, GA 30276-9703 U.S.A. T: (770) 599-6656 F: (770) 599-8387 WINPAK PORTION PACKAGING LTD. 26 TIDEMORE AVENUE TORONTO, ON M9W 7A7 CANADA T: (416) 741-6182 F: (416) 741-2918 WINPAK PORTION PACKAGING, INC. 3345 BUTLER AVENUE SOUTH CHICAGO HEIGHTS, IL 60411-5590 U.S.A. T: (708) 755-4483 F: (708) 755-7257 WINPAK PORTION PACKAGING, INC. 828A NEWTOWN-YARDLEY ROAD, SUITE 101 NEWTOWN, PA 18940-1785 U.S.A. T: (267) 685-8200 F: (267) 685-8243 WINPAK PORTION PACKAGING, INC. 1111 WINPAK WAY SAUK VILLAGE, IL 60411 U.S.A. WINPAK HEAT SEAL PACKAGING INC. 21919 DUMBERRY ROAD VAUDREUIL-DORION, QC J7V 8P7 CANADA T: (450) 424-0191 F: (450) 424-0563 WINPAK HEAT SEAL CORPORATION 1821 RIVERWAY DRIVE PEKIN, IL 61554 U.S.A. T: (309) 477-6600 F: (309) 477-6699 WINPAK LANE, INC. 998 S. SIERRA WAY SAN BERNARDINO, CA 92408 U.S.A. T: (909) 885-0715 F: (909) 381-1934 WIHURI OY, HEAD OFFICE, WIHURINAUKIO 2, FI-00570 HELSINKI, FINLAND T: +358 20 510 10 F: +358 20 510 2658 WWW.WIHURI.COM WIPAK GROUP WWW.WIPAK.COM WIPAK OY WIPAKTIE 2, POB 45 FI-15561 NASTOLA FINLAND T: +358 20 510 311 F: +358 20 510 3300 WIPAK VALKEAKOSKI OY KAIVOLANKATU 5 FI-37630 VALKEAKOSKI FINLAND T: +358 20 510 311 F: +358 20 510 3444 WIPAK GRYSPEERT S.A.S. ZONE DES BOIS, BP 60006 BOUSBECQUE FR-59558 COMINES CÉDEX FRANCE T: +33 320 115 656 F: +33 320 115 670 WIPAK UK LTD. UNIT 3, BUTTINGTON BUSINESS PARK UK-WELSHPOOL, POWYS SY21 8SL GREAT BRITAIN T: +44 1938 555 255 F: +44 1938 555 277 WIPAK POLSKA SP. Z O.O. UI. SIKORSKIEGO 20 PL-49-340 LEWIN BRZESKI POLAND T: +48 77 404 2000 F: +48 77 404 2001 BIAXIS OY LTD. TEKNIKONKATU 2 FI-15520 LAHTI FINLAND T: +358 20 510 312 F: +358 20 510 3500 WIPAK AVANS OY TEOLLISUUSTIE 4 B FI-27510 EURA FINLAND T: +358 20 510 311 F: +358 20 510 3471 WIPAK IBERICA S.L. C/SANT CELONI, N076 P.I. CAN PRAT 08450 LLINARS DEL VALLÉS BARCELONA SPAIN T: +34 937 812 020 F: +34 937 812 033 WIPAK WALSRODE GMBH & CO. KG POB 1661 DE-29656 WALSRODE GERMANY T: +49 5161 443 903 F: +49 5161 441 43903 WIPAK B.V. NIEUWSTADTERWEG 17 NL-6136 KN SITTARD NETHERLANDS T: +31 46 420 2999 F: +31 46 458 1311 48 

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