More annual reports from Winpak Limited:
2023 ReportPeers and competitors of Winpak Limited:
Simply Good FoodsREPORT TO SHAREHOLDERS W Winpak’s 2015 net pro t attributable to equity holders was $99.2 million and re ects a year-over-year growth of $20.9 million or 26.7 percent, far out- distancing the previous all-time record for the Corporation. This accomplishment was bolstered somewhat by the weaker Canadian dollar and lower resin costs, notably affected by the worldwide decline in petrochemical prices. Although these reduced raw material expenditures bene ted the Company’s pro t performance, they impacted the revenue line, as 70 percent of Winpak’s selling prices are indexed to resin costs. In spite of this situation, 2015 sales of $797.2 million exceeded the prior year amount by $10.4 million, driven by a respectable volume gain of 4.3 percent. Winpak’s future growth is hinged, in part, by consumer demand for more convenience-type food products and packages. In recent years, this surge has been more evident at the rm’s Ontario and Illinois rigid-based operations. Consumer pressure for quick-to-prepare food, such as hot beverages and ready-to-serve meals, has leant itself to high-barrier materials of the type manufactured at Winpak. Shelf-stable food items, similar to those utilized by the military and astronauts, are becoming more appealing for everyday consumers. The Company’s state-of-the-art products are especially suited for these end-use applications. Towards the latter part of 2015, the rm’s rigid group introduced more environmentally-friendly materials, which are eliciting ongoing rave reviews in the marketplace. To keep up with the above-mentioned enticing growth opportunities, plans are underway to extend the Company’s building in Sauk Village, Illinois by an additional 350,000 square feet. Winpak’s lidding business is closely linked to the rm’s rigid operations, since many of the rigid containers require a sophisticated lid. The most heartening success in 2015 was the debut of a retort structure used for highly-complex shelf-stable food products. This particular product offering was only made available as a result of the new extrusion coating/lamination machine installed at the Quebec facility in 2013. This unique line also facilitated the Company’s advances into other food applications, speci cally tailored to consumer preference for convenience-type packaging. The popularity of Winpak’s lidding products continues to expand, even beyond the borders of North America. To match pace with this trend, further capacity designated to the printing area, will be coming on-stream in 2016. Winpak operates lidding facilities in Quebec, Illinois and Mexico. The demand for Winpak’s modi ed atmosphere packaging materials topped all expectations in 2015, so much so that, at times, this business unit had to rely on its sister company in Europe to backup supply requirements. A new production line activated at the Manitoba site in 2013 was virtually sold out in 2015, due to the supermarket trades’ adoption of an innovative style of package. To rectify such capacity shortfalls going forward, a mega coextrusion line is slated to start up in the second quarter of 2016. The output and ef ciency of this unit will dramatically surpass anything currently operating in North America and will allow Winpak to remain at the forefront of technology in the modi ed atmosphere packaging eld. The Company’s prominence is now being recognized and rewarded by many of North America’s primary food processing giants. Promising opportunities await in 2016. Winpak’s Georgia-based specialty lms group continues to make headway in the North American shrink bag market. One of its greatest achievements in 2015 was luring an industry-leading customer away from a major competitor. This further bolstered this business unit’s positive trajectory and precipitated the need to fast-forward the expansion schedule to add 85,000 square feet onto the existing building. This base will house additional extrusion, bag- making and printing equipment, some of which will be operative by the fourth quarter of 2016. The short-term challenge facing this business unit will be to satisfy the demand for its products, while ensuring quality and service are maintained to Winpak standards. This specialty lms group foray into the liquid packaging eld is consistently gaining traction as the barrier properties of its exible materials are applauded as the package of choice over the use of glass jars and tin cans. Here, too, the rm has committed to investing in supplementary capacity to respond to existing market trends. In 2015, Winpak’s machinery operations registered yet another impressive year, both in sales and pro tability. The main purpose for the Company acquiring a machinery business was to tie materials produced at its exible and rigid packaging operations with equipment sales. This approach was initially successful in the rigid business and, in recent years, has persistently gained momentum for its exible materials – proving the original vision was correct. The sales and marketing strategy was considerably enhanced by the establishment of a packaging lab that allows customers to test package products at Winpak’s machinery plant in California. This is certainly developing and ensuring customer loyalty. Winpak can now boast machine installations in 24 countries worldwide. In 1998, the Company entered into an enterprising venture with Sojitz of Japan to manufacture biaxially-oriented nylon lms, with Winpak holding 51 percent ownership. The year 2015 logged a very successful showing, as the rm targeted its sights on further improving operational ef ciencies and product quality. These measures promoted a signi cant uptake in its pro tability while warding off some advances from domestic and offshore competitors, who have a tendency to sell on price and not product integrity. Winpak’s materials are known throughout the marketplace for their superior performance. Winpak is coming off a strong 2015. The remarkable momentum generated, coupled with the expansion plans in play, will provide for an exciting 2016. With the continual increase in customers’ desire for more convenience-type packaging, and the strong foothold Winpak has secured at some of the world’s largest food processing companies, future growth in sales and pro ts are assured. Though Winpak’s focus in recent years has tended to foster the business organically, attractive acquisitions will always remain in the Corporation’s crosshairs. Team spirit at Winpak is at an all-time high and this is attributed to the work ethic, energy and effort of the nearly 2,300 associates who continue to make Winpak a most successful Company. B.J. Berry President & Chief Executive Of cer Winnipeg, Canada February 18, 2016 3 1 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 18, 2016 was prepared by management and should be read in conjunction with the consolidated nancial statements prepared in accordance with Canadian generally accepted accounting principles as set out in Part 1 of the Handbook of the Chartered Professional Accountants (CPA) of Canada. The following discussion and analysis is presented in US dollars except where otherwise noted. The consolidated nancial statements include the accounts of all subsidiaries. The Company’s functional and reporting currency is the US dollar. The Company has led a separate Management’s Discussion and Analysis for its fourth quarter of 2015, which is available on SEDAR at www.sedar.com. The scal year of the Company ends on the last Sunday of the calendar year. Both the 2015 and 2014 scal years comprised 52 weeks. 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 ten 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 healthcare 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 t margin Earnings per share (cents) Dividends declared per common share (Canadian cents) Special dividend paid per common share (Canadian cents) Total assets Cash and cash equivalents Reconciliation of EBITDA Net income Income tax expense Net nance expense (income) Depreciation and amortization EBITDA 2015 99.2 147.3 797.2 32.3% 153 12 150 766.1 165.0 101.8 45.5 0.1 31.8 179.2 2014 78.4 115.1 786.8 2013 71.4 104.8 714.9 28.5% 29.1% 121 12 100 734.3 143.8 79.7 35.5 (0.1) 30.5 145.6 110 12 - 713.2 161.1 72.1 32.3 0.4 26.7 131.5 4 2 W Overall Performance ∆ Revenue reached an all-time high of $797.2 million, advancing by $10.4 million or 1.3 percent compared to 2014. Increased volumes added $33.5 million to revenue but price/mix declines and a weaker Canadian dollar detracted from revenue by $10.7 million and $12.4 million respectively. ∆ Gross profi t margins expanded by 3.8 percentage points from the prior year to 32.3 percent of revenue. A widening of the spread between selling prices and raw material costs due to declining resin prices was the main catalyst. ∆ Net income attributable to equity holders of the Company eclipsed the 2014 record result by $20.9 million or 26.7 percent, to nish at $99.2 million. Higher sales volumes, expanded gross pro t margins and favorable foreign exchange all contributed to the excellent outcome. ∆ Cash and cash equivalents ended the year at $165.0 million, despite the declaration of a special dividend of $73.8 million ($97.5 million Canadian or $1.50 Canadian per share) in the third quarter of 2015 and plant and equipment additions of $53.7 million. The Company has no short-term borrowings or long-term debt outstanding. Highlights ∆ Raw materials: In 2015, the cost of raw materials, which are primarily petrochemical based, dropped signi cantly from a year ago following the decline in world oil and natural gas prices. ∆ Operating expenses: Greater compensation costs contributed to a higher level of operating expenses, reducing earnings per share by 2.5 cents. In commemoration of the 40th anniversary of the Company’s incorporation, every Winpak employee received $1,000 Canadian in recognition of their contribution to the organization’s success. ∆ Foreign exchange: In 2015, the average exchange rate of the Canadian dollar depreciated against its US counterpart by 13.3 percent, when compared to the prior year. The result was a gain on the translation of net Canadian dollar expenses into US funds and was primarily responsible for a favorable foreign exchange impact on earnings per share of 6.5 cents. ∆ Capital expenditures: Capital expenditures in 2015 totaled $53.7 million or 6.7 percent of revenue, equipping the Company with the capacity necessary to continue above-average organic growth. ∆ Financing and investing: In 2015, Winpak generated $156.0 million in cash ow from operating activities, which was more than suf cient to fund a special dividend of $73.8 million, $53.7 million in capital projects, $6.3 million in regular dividends, and $0.9 million of other items, resulting in an improvement in the net cash position of $21.3 million. The Company will utilize its cash resources on hand and generate additional cash ow from operations to fund its investing and nancing activities in 2016. In addition, management will continue to evaluate strategic acquisition opportunities in concert with implementing the organic capital investment program, all focused on enhancing long-term shareholder value. 5 3 MANAGEMENT’S DISCUSSION AND ANALYSIS Results of Operations Components of total increase in earnings per share Organic growth Gross pro t margins Expenses, income taxes and non-controlling interests Foreign exchange Total increase in earnings per share (cents) 2015 5.5 24.0 (4.0) 6.5 32.0 2014 11.5 (4.5) 3.5 0.5 11.0 2013 8.0 (5.5) (1.0) (1.5) 0.0 Ongoing operations Organic growth is the impact on net income due exclusively to increased sales volume and excludes the in uence of acquisitions, divestitures and foreign exchange. In 2015, this resulted in earnings per share growth of 5.5 cents in comparison to the prior year. Gross pro t margins swelled in relation to 2014, primarily due to an increase in the spread between selling prices and raw material costs as the latter decreased signi cantly due to the fall in oil and natural gas prices. This caused an expansion in earnings per share of 24.0 cents. Greater compensation costs and reduced research and development tax credits drove operating expenses higher and reduced earnings per share by 2.5 cents compared to 2014. An increase in earnings attributable to non-controlling interests further reduced earnings per share by 2.0 cents and was only partially offset by a lower effective income tax rate, excluding permanent differences, which improved earnings per share by 0.5 cents. Foreign exchange had a net favorable impact of 6.5 cents on earnings per share versus the previous year. The weaker Canadian dollar versus its US counterpart in the current year was responsible for the positive result. Revenue Revenue Change Volume increase Price and mix (losses) gains Foreign exchange loss Total increase in revenue Millions of US dollars 2014 70.8 7.1 (6.0) 71.9 2015 33.5 (10.7) (12.4) 10.4 2013 48.1 (0.6) (2.7) 44.8 Revenue in 2015 of $797.2 million surpassed the prior year amount of $786.8 million by $10.4 million or 1.3 percent, despite the headwinds of foreign exchange and price-indexing linked to lower raw material costs. Volumes increased by 4.3 percent, while modest, still outpaced the organic growth of most of Winpak’s major competitors. All product groups advanced, led by modi ed atmosphere packaging, which exceeded prior year volumes by more than 10 percent due to increased sales of sophisticated packaging for processed meat and cheese applications. Biaxially oriented nylon lm, and packaging machinery and part sales volumes progressed in the mid-single-digit percentage range with the latter reaching new heights in revenue. Rigid container and lidding shipments, after advancing by approximately 15 percent in the prior year, registered growth in low single-digit percentage terms in 2015 but are poised to return to more accelerated levels in the upcoming year. Specialty lms shipments also grew in low single-digit percentages and were constrained by capacity-related challenges in its shrink bag operations. In comparison to 2014, selling price/mix changes in 2015 had an unfavorable impact on revenues of $10.7 million or 1.4 percent due in large part to the pass-through of lower raw material costs to indexed customers. Foreign exchange further reduced reported revenues by $12.4 million or 1.6 percent on the conversion of Canadian dollar sales into US funds at a lower average exchange rate in 2015 versus the prior year. 6 4 W Gross profi t margins In 2015, gross pro t margins reached an all-time high at 32.3 percent of revenue, eclipsing the 2014 level of 28.5 percent by a sizeable 3.8 percentage points. The result was an addition to earnings per share of 24.0 cents. As the vast majority of the Company’s raw materials are petrochemical based, the signi cant decline in oil and natural gas prices during the year lowered the cost of certain resins and resulted in a widening of the gap between raw material costs and selling prices. However, much of the resin cost decline was passed through to customers as approximately 70 percent of Winpak’s revenues are indexed to changes in raw material prices, albeit with a time lag of approximately 90 days. This time lag, though, has elevated gross pro t margins to some extent as raw material cost decreases in the latter part of the year will not be re ected in selling price declines until 2016. Margins were also aided by the fact that market conditions did not dictate signi cant price adjustments for non-indexed accounts. Offsetting some of the bene t of reduced material costs on gross pro t margins were elevated manufacturing variances which continued to persist in parts of the business where capacity was constrained. Much effort is being placed in this area to reduce bottlenecks and in mid-2016 will be further aided by new capacity coming on stream. Winpak’s raw material index, which represents the weighted cost of a basket of the Company’s eight principal raw materials, dropped by 16.4 percent, on average, during the past 12 months. However, not all raw materials experienced such substantial declines as specialty resins displayed relative stability during this period. Although resin supply and demand in North America was in relative balance as 2015 ended, with the exception of polypropylene where supply was tight, it is dif cult to determine what impact the most recent collapse in world oil prices will have on future costs. Raw Material Index Average annual index: weighted cost of a basket of Winpak’s eight principal raw materials, where base year 2001 = 100 (Decrease) increase in index compared to prior year 2015 2014 2013 148.0 (16.4%) 177.0 1.4% 174.6 1.5% Expenses Operating expenses, adjusted for foreign exchange impacts, advanced by just over 2 percentage points more than the growth in sales volumes over the prior year, resulting in a reduction in earnings per share of 2.5 cents. Higher compensation costs were the main factor as an approximate 40 percent increase in the Company’s share price impacted equity-based incentive costs in addition to a one-time $1,000 CAD payment made to each of the Company’s over 2,200 employees in the third quarter of 2015 on the occasion of the 40th anniversary of the founding of Winpak. Lower research and development tax credits in 2015 versus the previous year also added to higher operating expenses. A greater proportion of earnings attributable to non- controlling interests in the current year decreased earnings per share by a further 2.0 cents relative to 2014. On a positive note, due in large part to income being earned in more favorable income tax jurisdictions in the current year, a lower effective income tax rate excluding permanent differences resulted in a supplement to earnings per share of approximately 0.5 cents. Foreign Exchange Year-end exchange rate of CDN dollar to US dollar Year-end exchange rate of US dollar to CDN dollar Depreciation 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 Depreciation of CDN dollar vs. US dollar average exchange rate compared to the prior year 2015 0.722 1.385 (16.0%) 0.789 1.267 2014 0.860 1.162 (7.9%) 0.910 1.099 2013 0.934 1.070 (7.0%) 0.972 1.029 (13.3%) (6.4%) (2.7%) Winpak utilizes the US currency as both its reporting and functional currency. However, with more than half of its production capacity 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. With a small production facility located in Mexico, the Company is also exposed to foreign exchange risks on costs denominated in Mexican pesos but these are negligible. 7 5 MANAGEMENT’S DISCUSSION AND ANALYSIS On a net basis, foreign exchange had a favorable impact on earnings per share of approximately 6.5 cents in 2015 compared to the prior year. Approximately 11 percent of revenues in the current year were denominated in Canadian dollars and approximately 22 percent of costs were incurred in the same currency. The net out ow of Canadian dollars exposes Winpak to transaction differences arising from exchange rate uctuations. The depreciation in the average exchange rate of the Canadian dollar in relation to the US dollar in 2015 increased earnings per share by approximately 7.0 cents compared to 2014. Furthermore, translation differences, which arise when primarily Canadian dollar monetary assets and liabilities are translated at exchange rates that change over time, augmented earnings per share in the current year by an additional 1.0 cent in comparison to 2014. This was partially offset by losses realized on the maturation of foreign exchange contracts entered into as part of the Company’s foreign exchange policy, which decreased earnings per share by 1.5 cents in 2015 versus the prior year. Summary of quarterly results Thousands of US dollars, except earnings per share (e.p.s.) amounts (cents) Quarter ended Revenue Net income* e.p.s. Quarter ended Revenue Net income* e.p.s. 2015 2014 March 29 June 28 September 27 December 27 199,440 198,257 193,726 205,746 797,169 22,463 26,845 22,305 27,635 99,248 March 30 June 29 September 28 December 28 35 41 34 43 153 188,077 199,426 192,982 206,269 786,754 16,163 19,406 19,448 23,343 78,360 25 30 30 36 121 *attributable to equity holders of the Company Various factors affect timing of the Company’s earnings 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 rst and third quarters. Factors in 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 Canadian and US dollars from one quarter to another may cause revenue and net income to vary from the historic trend. Similarly, sudden and signi 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 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 historical pattern essentially held true for both 2015 and 2014 except that the rst quarter revenue was slightly stronger in 2015 and third quarter net income in 2014 was marginally higher than the second quarter, deviating somewhat from the normal trend. Cash Flow, Liquidity and Capital Resources At December 27, 2015, Winpak’s cash and cash equivalents amounted to $165.0 million, advancing by $21.3 million from a year prior. This increase resulted from cash provided by operating activities of $156.0 million less disbursements for investing activities of $54.0 million and nancing activities of $80.7 million. Operating activities Cash provided by operating activities totaled $156.0 million, surpassing the 2014 achievement by $58.6 million or over 60 percent. A combination of a strong earnings performance along with a reduction in working capital were the main catalysts behind the enhancement. Cash generated from operating activities before changes in working capital amounted to $179.0 million, a substantial appreciation of $33.6 million compared to the prior year. This was further supplemented by a decline in the investment in working capital for the current year which fell by $9.4 million. Inventories declined by $4.1 million, primarily in raw materials as the price of many of the resins used by the Company dropped markedly from a year ago. This also impacted trade and other receivables to a certain extent as selling prices abated in response, and in conjunction with a reduction in the days sales outstanding to 45 days at year- end from 49 days at the close of the previous year, resulted in a reduction of $4.6 million in net receivables. Income tax payments totaled $26.5 million, up $1.1 million from the previous year. Finally, employee de ned bene t plan contributions of $1.7 million were funded during the year along with a lump sum settlement payment of $4.5 million to retire the remaining multiemployer de ned bene t pension plan liability that resulted from the Company’s withdrawal from that plan in 2011. The latter resulted in a gain on settlement of $1.8 million. The Company remains well funded with regard to its de ned bene t pension plans, with gross pension assets totalling over $80 million and a net unfunded liability of only $3.2 million on an accounting basis. 8 6 W Investing activities Investing activities in the current year totaled $54.0 million, of which plant and equipment additions represented $53.7 million. This exceeded the prior year expenditures by $5.6 million and were focused on adding more extrusion capacity in rigid containers, modi ed atmosphere packaging and specialty lms, which together made up two-thirds of the capital spending. The largest expenditure related to a state-of-the-art cast coextrusion line at the modi ed atmosphere packaging facility in Winnipeg which was still in process at the end of the year and is expected to be commissioned by mid-2016. Capital in progress at December 27, 2015 totaled $33.7 million. 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 2015 consisted of dividends to common shareholders totaling $80.1 million, consisting of a special dividend paid in October of the current year of $73.8 million ($97.5 million Canadian) and regular dividends of $6.3 million. This represented a dividend yield of 5.0 percent based on the opening share price of $32.39 Canadian as at December 28, 2014 (2014 yield - 4.9 percent resulting from a special dividend of $58.5 million and regular dividends of $7.2 million). The Board of Directors of Winpak does not have any speci c plans regarding the declaration of special dividends in future years but will make decisions in this regard as circumstances arise. In addition to dividends to equity holders of the Company, a dividend payment of $0.6 million was paid to a non-controlling interest in a subsidiary. Resources Investments to drive growth can be sizeable, requiring substantial nancial resources. A range of funding alternatives is available including cash and cash equivalents, cash 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 27, 2015. Based on formal and informal discussions with various nancial institutions, Winpak believes that additional credit can be arranged from banks and other major lenders as the need arises. The Company is con dent that all 2016 requirements for capital expenditures, working capital, and dividend payments can be 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 nancial condition of customers and 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 uctuations in interest rates, foreign exchange rates, raw material costs and counterparty nancial condition can be expected to impact net income. Winpak’s policy regarding interest expense is to x interest rates on between one- and two-thirds of any long-term debt outstanding. The Company may enter into derivative contracts or xed-rate debt to minimize the risk associated with interest rate uctuations. For the past six years, Winpak has not had any long-term debt outstanding. 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 ows from revenue in a currency with out 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 nancial institutions. Signi cant uctuations in foreign exchange rates represent a material exposure for the Company’s nancial results. Hedging programs employed may mitigate a portion of exposures to short-term uctuations in foreign currency exchange rates. However, the Company’s 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 three-quarters of a US cent per share. During 2015, certain foreign currency forward contracts matured and the Company realized pre-tax foreign exchange losses of $3.0 million. As at December 27, 2015, the Company had US to CDN dollar and US to Euro dollar foreign currency forward contracts outstanding with notional amounts of $34.0 million and $2.7 million respectively. The pre-tax unrealized foreign exchange loss on these contracts of $1.6 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 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 ected in selling price adjustments, albeit with a slight time lag. For 2015, approximately 70 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 cant to Winpak’s net income. 9 7 MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS Credit risk arises from cash and cash equivalents held with banks, derivative 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 Credit risk arises from cash and cash equivalents held with banks, derivative nancial instruments (foreign currency forward and option contracts), as account their nancial position, past experience and other factors. Management regularly monitors customer credit limits, performs credit reviews and, well as credit exposure to customers, including outstanding accounts receivable. The Company assesses the credit quality of counterparties, taking into in certain cases, insures accounts receivable balances against credit losses. The Company invests its excess cash on a short-term basis, to a maximum account their nancial position, past experience and other factors. Management regularly monitors customer credit limits, performs credit reviews and, of six months, with nancial institutions and/or governmental bodies that must be rated AA rated or higher for CDN nancial institutions and A-1 or higher in certain cases, insures accounts receivable balances against credit losses. The Company invests its excess cash on a short-term basis, to a maximum for US nancial institutions by recognized international credit rating agencies or insured 100 percent by the US government or a AAA rated Canadian of six months, with nancial institutions and/or governmental bodies that must be rated AA rated or higher for CDN nancial institutions and A-1 or higher federal or provincial government. Nonetheless, unexpected deterioration in the nancial condition of a counterparty can have a negative impact on the for US nancial institutions by recognized international credit rating agencies or insured 100 percent by the US government or a AAA rated Canadian Company’s net income in the case of default. federal or provincial government. Nonetheless, unexpected deterioration in the nancial condition of a counterparty can have a negative impact on the Company’s net income in the case of default. The Company enters into contractual obligations in the normal course of business operations. These obligations, as at December 27, 2015, are summarized below. The Company enters into contractual obligations in the normal course of business operations. These obligations, as at December 27, 2015, are summarized below. Contractual Obligations Payment due, by period (thousands of US dollars) Contractual Obligations Operating leases Purchase obligations Operating leases Total contractual obligations Purchase obligations Total contractual obligations Accounting Policy Changes Total Total 3,023 16,445 3,023 19,468 16,445 19,468 4 - 5 Years Payment due, by period (thousands of US dollars) 2 - 3 years 1 year After 5 years 1 year 1,011 16,445 1,011 17,456 16,445 17,456 2 - 3 years 1,408 4 - 5 Years 604 After 5 years - - 1,408 1,408 - 1,408 - 604 604 - 604 - - - - - Accounting Policy Changes Future Accounting Changes As more fully described in Note 5 to the Consolidated Financial Statements, three new accounting standards have been issued, IFRS 9 “Financial Future Accounting Changes Instruments”, IFRS 15 “Revenue from Contracts with Customers” and IFRS 16 “Leases”. IFRS 9 and IFRS 15 are effective for annual periods beginning As more fully described in Note 5 to the Consolidated Financial Statements, three new accounting standards have been issued, IFRS 9 “Financial on or after January 1, 2018 while IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the Instruments”, IFRS 15 “Revenue from Contracts with Customers” and IFRS 16 “Leases”. IFRS 9 and IFRS 15 are effective for annual periods beginning impact of these new standards and does not intend to early adopt these standards in its consolidated nancial statements. In addition, amendments to on or after January 1, 2018 while IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the the existing standards IAS 16 “Property, Plant and Equipment”, IAS 38 “Intangible Assets”, and IAS 1 “Presentation of Financial Statements” were issued impact of these new standards and does not intend to early adopt these standards in its consolidated nancial statements. In addition, amendments to and are effective for annual periods beginning on or after January 1, 2016. The amendments to IAS 16 and IAS 38 are not expected to have any impact the existing standards IAS 16 “Property, Plant and Equipment”, IAS 38 “Intangible Assets”, and IAS 1 “Presentation of Financial Statements” were issued on the Company’s consolidated nancial statements. The Company is currently assessing the impact of the amendments to IAS 1 and does not intend and are effective for annual periods beginning on or after January 1, 2016. The amendments to IAS 16 and IAS 38 are not expected to have any impact to early adopt amended IAS 1 in its consolidated nancial statements. on the Company’s consolidated nancial statements. The Company is currently assessing the impact of the amendments to IAS 1 and does not intend to early adopt amended IAS 1 in its consolidated nancial statements. Looking Forward Looking Forward As 2016 begins, the Company is optimistic with regard to the upcoming year. Opportunities in the sales pipeline are signi cant and should provide the impetus for expanding volumes in 2016 and beyond. There are several technical complexities that need to be conquered to bring certain of these As 2016 begins, the Company is optimistic with regard to the upcoming year. Opportunities in the sales pipeline are signi cant and should provide opportunities to fruition but management is con dent that these challenges will be met. Raw material pricing is expected to remain relatively stable in the impetus for expanding volumes in 2016 and beyond. There are several technical complexities that need to be conquered to bring certain of these the near term as demand and ful llment are in relative equilibrium, with the exception of polypropylene resin where tightness of supply is evident in the opportunities to fruition but management is con dent that these challenges will be met. Raw material pricing is expected to remain relatively stable in marketplace and may exert upward pressure on pricing going forward. However, with the further decline and volatility in world oil prices as of late, it is the near term as demand and ful llment are in relative equilibrium, with the exception of polypropylene resin where tightness of supply is evident in the dif cult to predict what impact this may have on future raw material prices. Gross pro t margins will likely fall a couple of percentage points from elevated marketplace and may exert upward pressure on pricing going forward. However, with the further decline and volatility in world oil prices as of late, it is fourth quarter levels as the effect from recent declines in raw material costs on indexed selling prices will be realized in the early part of the upcoming year dif cult to predict what impact this may have on future raw material prices. Gross pro t margins will likely fall a couple of percentage points from elevated due to the lag period of approximately three months. Manufacturing performance will continue to remain a focus for the operations group in 2016 and fourth quarter levels as the effect from recent declines in raw material costs on indexed selling prices will be realized in the early part of the upcoming year improvement will be essential to alleviate bottlenecks in areas where capacity is currently constrained in order to achieve the Company’s volume growth due to the lag period of approximately three months. Manufacturing performance will continue to remain a focus for the operations group in 2016 and objectives. Of particular importance will be the commercialization of the massive technologically-advanced cast coextrusion line which is in the process improvement will be essential to alleviate bottlenecks in areas where capacity is currently constrained in order to achieve the Company’s volume growth of being installed at the Company’s modi ed atmosphere packaging facility in Winnipeg. The weakness in the Canadian dollar versus its US counterpart, objectives. Of particular importance will be the commercialization of the massive technologically-advanced cast coextrusion line which is in the process while reducing reported revenues, will continue to be favorable to the Company’s earnings, as Canadian dollar denominated costs exceed revenues in of being installed at the Company’s modi ed atmosphere packaging facility in Winnipeg. The weakness in the Canadian dollar versus its US counterpart, that currency. Should the exchange rate stabilize at current levels, further positive effects will be evident in 2016 results due to the Company’s foreign while reducing reported revenues, will continue to be favorable to the Company’s earnings, as Canadian dollar denominated costs exceed revenues in exchange hedging policy whereby between 50 and 80 percent of the net requirement of Canadian dollars for the ensuing 9 to 15 months are hedged at that currency. Should the exchange rate stabilize at current levels, further positive effects will be evident in 2016 results due to the Company’s foreign all times with forward or zero-option contracts. To some extent, this has muted the favorable effect of the weaker Canadian dollar on 2015’s net income. exchange hedging policy whereby between 50 and 80 percent of the net requirement of Canadian dollars for the ensuing 9 to 15 months are hedged at Capital spending for 2016 should be somewhat higher than 2015’s level of $53.7 million as the rigid container operations in Chicago are planning to all times with forward or zero-option contracts. To some extent, this has muted the favorable effect of the weaker Canadian dollar on 2015’s net income. add a further 350,000 square feet to its existing Sauk Village facility which was constructed in 2012 and an addition of 85,000 square feet is budgeted Capital spending for 2016 should be somewhat higher than 2015’s level of $53.7 million as the rigid container operations in Chicago are planning to for the Company’s shrink bag operations in Georgia. The Company will continue to pursue acquisition opportunities in Winpak’s core competencies add a further 350,000 square feet to its existing Sauk Village facility which was constructed in 2012 and an addition of 85,000 square feet is budgeted of sophisticated packaging for food, beverage and healthcare applications while it remains committed to substantial organic growth through capital for the Company’s shrink bag operations in Georgia. The Company will continue to pursue acquisition opportunities in Winpak’s core competencies investment. With Winpak’s solid nancial position, it has the resources necessary to complete an acquisition when the proper t and price are present to of sophisticated packaging for food, beverage and healthcare applications while it remains committed to substantial organic growth through capital provide long-term shareholder value. investment. With Winpak’s solid nancial position, it has the resources necessary to complete an acquisition when the proper t and price are present to provide long-term shareholder value. 10 10 8 W Critical Accounting Estimates The Company believes the following accounting estimates are critical to determining and understanding the operating results and the 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 cant management judgment, including projections of future cash ows and appropriate discount rates. The cash ows are derived from the nancial forecast for the next ve years and do not include restructuring activities that the Company is not yet committed to or signi cant future investments that will enhance the asset’s performance of the cash-generating unit (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 ows, as well as other factors, are considered when making assumptions with regard to future cash ows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate used for the discounted cash ow model as well as the expected future cash in ows and the growth rate used for extrapolation purposes. A change in any of the signi 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 benefi t plans – Accounting for employee bene 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, mortality rate and healthcare costs. These assumptions depend on underlying factors such as economic conditions, government regulations, investment performance and employee demographics. These assumptions could change in the future and may result in material adjustments to employee bene 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 cer and Chief Financial Of cer have concluded that these controls and procedures are designed and operating effectively as of December 27, 2015 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required. Internal controls over fi nancial reporting Management is responsible for establishing and maintaining adequate internal controls over nancial reporting to provide reasonable assurance regarding the reliability of nancial reporting and the preparation of 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 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 2013) as the control framework in designing its internal controls over nancial reporting. Based on management’s design and testing of the effectiveness of the Company’s internal controls over nancial reporting, the Company’s Chief Executive Of cer and Chief Financial Of cer have concluded that these controls and procedures are designed and operating effectively as of December 27, 2015 to provide reasonable assurance that the nancial information being reported is materially accurate. During the fourth quarter ended December 27, 2015, there have been no changes in the design of the Company’s internal controls over nancial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over nancial reporting. Other Additional information relating to the Company is available on SEDAR at www.sedar.com, including the Annual Information Form dated February 18, 2016. 11 9 REPORTING Management’s Report to the Shareholders The accompanying consolidated nancial statements, management’s discussion and analysis (MD&A) and other information in the Annual Report are the responsibility of management. The consolidated 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 nancial information contained in this Annual Report are consistent with the consolidated nancial statements. To provide reasonable assurance that assets are safeguarded and that relevant and reliable 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 lls its responsibilities in the preparation of the consolidated nancial statements and MD&A, and in the nancial control of operations. The Board recommends the appointment of the independent auditors to the shareholders. The Audit Committee meets regularly with nancial management and the independent auditors to discuss internal controls, auditing matters and nancial reporting issues and presents its ndings to the Board. The Audit Committee reviews the consolidated nancial statements, MD&A and material nancial announcements with management and the external auditors prior to submission to the Board for approval. The consolidated nancial statements have been audited on behalf of the shareholders by the independent external auditors, KPMG LLP, whose report follows. B.J. Berry President and Chief Executive Of cer Winnipeg, Canada February 18, 2016 Auditors’ Report to the Shareholders Independent Auditors’ Report To the Shareholders of Winpak Ltd. K.P. Kuchma Vice President and Chief Financial Of cer Winnipeg, Canada February 18, 2016 We have audited the accompanying consolidated nancial statements of Winpak Ltd. and its subsidiaries, which comprise the consolidated balance sheets as at December 27, 2015 and December 28, 2014 and the consolidated statements of income, comprehensive income, changes in equity, and cash ows for the years then ended, and the related notes, which comprise a summary of signi cant accounting policies and other explanatory information. Management’s responsibility for the consolidated fi nancial statements Management is responsible for the preparation and fair presentation of these consolidated 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 nancial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated 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 nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated nancial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated nancial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated 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 nancial statements. We believe that the audit evidence we have obtained in our audits is suf cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated nancial statements present fairly, in all material respects, the consolidated nancial position of Winpak Ltd. as at December 27, 2015 and December 28, 2014 and its consolidated nancial performance and its consolidated cash ows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants February 18, 2016 Winnipeg, Canada 12 10 CONSOLIDATED STATEMENTS OF INCOME Years ended December 27, 2015 and December 28, 2014 (thousands of US dollars, except per share amounts) Note Revenue Cost of sales Gross pro t Sales, marketing and distribution expenses General and administrative expenses Research and technical expenses Pre-production expenses Other 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 diluted earnings per share - cents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 27, 2015 and December 28, 2014 (thousands of US dollars) Net income for the year Items that will not be reclassi ed to the statements of income: Cash ow hedge losses recognized Cash ow hedge losses transferred to property, plant and equipment Employee bene t plan remeasurements Income tax effect Items that are or may be reclassi ed subsequently to the statements of income: Cash ow hedge losses recognized Cash ow hedge losses transferred to the statements of income Income tax effect Other comprehensive income (loss) for the year - net of income tax Comprehensive income for the year Attributable to: Equity holders of the Company Non-controlling interests See accompanying notes to consolidated nancial statements. 13 11 8 9 9 10 22 16 10 8 10 2015 797,169 (539,347) 257,822 (59,823) (32,236) (15,362) (1,158) (1,916) 147,327 342 (392) 147,277 (45,474) 101,803 99,248 2,555 101,803 153 2015 101,803 (652) 4 1,743 (470) 625 (3,728) 2,976 201 (551) 74 101,877 99,322 2,555 101,877 2014 786,754 (562,379) 224,375 (60,970) (28,945) (14,275) (1,443) (3,678) 115,064 586 (469) 115,181 (35,529) 79,652 78,360 1,292 79,652 121 2014 79,652 - - (7,349) 2,330 (5,019) (1,576) 1,603 (7) 20 (4,999) 74,653 73,361 1,292 74,653 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 nancial instruments Non-current assets: Property, plant and equipment Intangible assets Employee bene t plan assets Deferred tax assets Total assets Equity and Liabilities Current liabilities: Trade payables and other liabilities Provisions Income taxes payable Derivative nancial instruments Non-current liabilities: Employee bene 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 See accompanying notes to consolidated nancial statements. On behalf of the Board: Director Director 14 12 December 27 December 28 Note 2015 2014 11 12 13 14 15 16 17 18 19 16 19 17 21 21 165,027 107,805 2,050 96,498 3,411 40 374,831 369,436 14,745 5,723 1,408 391,312 766,143 68,534 - 10,569 1,683 80,786 8,885 14,071 760 38,250 61,966 142,752 29,195 (1,208) 576,359 604,346 19,045 623,391 766,143 143,761 112,454 2,873 100,586 4,344 - 364,018 348,002 15,068 5,249 1,990 370,309 734,327 69,098 427 690 875 71,090 7,673 14,831 6,571 32,775 61,850 132,940 29,195 (641) 555,697 584,251 17,136 601,387 734,327 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 30, 2013 29,195 (661) 547,891 576,425 16,188 592,613 Comprehensive income for the year Cash ow hedge losses, net of tax Cash ow hedge losses transferred to the statements of income, net of tax Employee bene t plan remeasurements, net of tax Other comprehensive income (loss) Net income for the year Comprehensive income for the year Dividends 21 - - - - - - - (1,154) 1,174 20 20 - - - - - (5,019) (5,019) 78,360 73,341 (1,154) 1,174 (5,019) (4,999) 78,360 73,361 - - - - 1,292 1,292 (1,154) 1,174 (5,019) (4,999) 79,652 74,653 (65,535) (65,535) (344) (65,879) Balance at December 28, 2014 29,195 (641) 555,697 584,251 17,136 601,387 Balance at December 29, 2014 29,195 (641) 555,697 584,251 17,136 601,387 Comprehensive (loss) income for the year Cash ow hedge losses, net of tax Cash ow hedge losses transferred to the statements of income, net of tax Cash ow hedge losses transferred to property, plant and equipment Employee bene t plan remeasurements, net of tax Other comprehensive (loss) income Net income for the year Comprehensive (loss) income for the year Dividends 21 - - - - - - - - (2,752) (632) (3,384) 2,181 4 - (567) - (567) - - 1,273 641 99,248 99,889 2,181 4 1,273 74 99,248 99,322 - - - - - (3,384) 2,181 4 1,273 74 2,555 2,555 101,803 101,877 - (79,227) (79,227) (646) (79,873) Balance at December 27, 2015 29,195 (1,208) 576,359 604,346 19,045 623,391 See accompanying notes to consolidated nancial statements. 15 13 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 27, 2015 and December 28, 2014 (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 ned bene t plan expenses Multiemployer de ned bene t pension plan withdrawal liability settlement gain Net nance expense (income) Income tax expense Other Cash 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 ned bene t plan contributions Income tax paid Interest received Interest paid Net cash from operating activities Investing activities: Acquisition of plant and equipment - net Acquisition of intangible assets Financing activities: Dividends paid Dividend paid to 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 See accompanying notes to consolidated nancial statements. 16 14 Note 2015 2014 101,803 79,652 14 15 16 8, 19 9 10 16 15 21 11 32,836 (1,559) 602 3,190 (1,815) 50 45,474 (1,565) 179,016 4,649 4,088 933 (294) (4,467) (1,681) (26,456) 253 (21) 156,020 (53,678) (303) (53,981) (80,127) (646) (80,773) 21,266 143,761 165,027 31,657 (1,664) 549 3,273 - (117) 35,529 (3,507) 145,372 (14,046) (8,282) (1,270) 6,068 (108) (5,091) (25,364) 314 (148) 97,445 (48,052) (699) (48,751) (65,679) (344) (66,023) (17,329) 161,090 143,761 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS W (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 healthcare applications. The address of the Company’s registered of ce is 100 Saulteaux Crescent, Winnipeg, Manitoba, Canada R3J 3T3. The ultimate controlling party of Winpak Ltd. is Wihuri International Oy of Helsinki, Finland, a privately held company. 2. Basis of presentation: The Company prepares its consolidated nancial statements in accordance with Canadian generally accepted accounting principles as set out in Part 1 of the Handbook of the Chartered Professional Accountants (CPA) of Canada. The scal year of the Company ends on the last Sunday of the calendar year. As a result, the Company’s scal year is usually 52 weeks in duration, but includes a 53rd week every ve to six years. The 2015 and 2014 scal years comprised 52 weeks. 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 and therefore management believes this increases transparency by signi cantly reducing volatility of reported results due to uctuations in the rate of exchange between the Canadian and US currencies. The consolidated nancial statements have been prepared under the historical-cost convention, except that certain nancial instruments, employee bene t plans and share-based payments are stated at their fair value. The consolidated nancial statements were approved by the Board of Directors on February 18, 2016. 3. Signi cant accounting policies: (a) Principles of consolidation: The consolidated 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. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is obtained until the date that control ceases. The 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 income 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 assumed from 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 in the statement of income. Identi 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 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. (c) Non-controlling interests: Winpak Ltd. owns 51 percent of the equity interest in American Biaxis Inc., a subsidiary located in Winnipeg, Manitoba, Canada. Non-controlling interests represent the remaining 49 percent equity interest 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 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. 17 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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/tax credits: Grants/tax credits from government are recognized at their fair value when there is a reasonable assurance that the grant/tax credit will be received and/ or earned and any speci ed conditions will be met. Grants/tax credits 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/tax credits received in relation to research and development activities and labor creation programs are recorded to reduce these costs when it is determined there is reasonable assurance the grants/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 rst-in 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 xed overheads based on normal operating capacity. Any excess, unallocated, 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 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 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 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. 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. 18 16 W (l) Pre-production expenses: Pre-production costs relating to installations of major new production equipment are expensed in the period in which incurred. (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 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 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 ows that are largely independent of the cash in 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 ows, using a pre-tax discount rate that re 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 ows, the recoverable amount is determined for the CGU to which it belongs. The Company bases its impairment calculation on detailed nancial forecasts, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These nancial forecasts are generally covering a period of ve years. For longer periods, a long-term growth rate is calculated and applied to project future cash ows after the 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 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 benefi t plans: The Company maintains four funded non-contributory de ned bene 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 t obligations based on the yield of high quality corporate bonds denominated in the same currency in which the bene ts are expected to be paid and with terms to maturity that, on average, match the terms of the bene t obligations. The cost of providing the bene 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 t plan assets or obligation up to the balance sheet date where interim valuations are performed. For nancial reporting purposes, the Company measures the bene t obligations and fair value of assets for the de ned bene t plans as of the year-end date. The amount recognized in the balance sheet at each year-end reporting date represents the present value of the bene t obligation, reduced by the fair value of bene t plan assets. Any recognized asset or surplus is limited to the present value of economic bene 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. Current service costs are charged to the statement of income and included in the same line items as the related compensation cost. The net nance cost is computed based on the application of the discount rate to the net de ned bene t pension plan asset or liability at the start of the annual period, taking into account any anticipated changes during the upcoming year as a result of contributions and bene t payments and also re ects the impact of any pension plan asset ceiling adjustments. The net nance cost is shown within either nance income or nance expense within the statement of income depending on whether the de ned bene t pension plan was in an asset or liability position at the start of the year. Remeasurements, which comprise actuarial gains and losses, the return on bene t plan assets and the effect of the pension plan asset ceiling adjustment, are recognized directly in equity within other comprehensive income. When the bene ts of a plan are changed or when a plan is curtailed, the resulting change in bene t that relates to past service or the gain or loss on curtailment is recognized immediately in the statement of income. The Company recognizes gains and losses on the settlement of a de ned bene t plan when the settlement occurs in the statement of income. The Company’s funding policy is in compliance with statutory regulations and amounts funded are deductible for income tax purposes. 19 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS One of the Company’s subsidiaries maintains one unfunded contributory de ned bene t postretirement plan for healthcare bene ts for a limited group of US individuals. A market discount rate is used to measure the bene t obligation based on the yield of high quality corporate bonds denominated in the same currency in which the bene ts are expected to be paid and with terms to maturity that, on average, match the terms of the bene t obligation. The cost of providing the bene ts is actuarially determined using the projected unit credit method. The amount recognized in the balance sheet at each year-end reporting date represents the present value of the bene t obligation. 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 t obligation are charged to the statement of income as nance expense. Remeasurements are recognized directly in equity within other comprehensive income. When the bene ts of the plan are changed or when the plan is curtailed, the resulting change in bene t that relates to past service or the gain or loss on curtailment is recognized immediately in the statement of income. The Company participated in one multiemployer de ned bene t pension plan up until the rst quarter of 2011, which provided bene ts to certain unionized employees in the US. See note 19 for the details on the accounting for the withdrawal from the plan in 2011 and the settlement of the remaining liability in 2015. The Company maintains seven de 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 ts are recognized as an expense in the statement of income at the earlier of when the Company can no longer withdraw the offer of those bene ts and when the Company recognizes costs for a restructuring. Short-term bene 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 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 comprises the expected income tax payable or receivable on the taxable income or loss 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 adjustments to income taxes payable or receivable in respect of previous periods. Current income tax 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 nancial statements, and by the availability of unused income tax losses. Deferred tax is recognized using the balance sheet method in which temporary differences are calculated based on the carrying amounts of assets and liabilities for 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. 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 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. 20 18 W (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 ows at a pre-income tax rate that re ects the current market assessments of the time value of money and the risks speci 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 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 remeasured in line with changes in discount rates, estimated cash ows and the timing of those cash 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 nance expense or nance income in the statement of income. At each reporting date, other provisions are remeasured in line with changes in discount rates, estimated cash ows and the timing of those cash 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 nance expense or nance income in the statement of income. (s) Financial assets and liabilities: Derivative nancial instruments are measured at fair value, even when they are part of a hedging relationship. The Company’s nancial instruments are classi 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 nancial liabilities and d) derivative nancial instruments - derivatives designated as effective hedges. All nancial instruments, including derivatives, are included in the consolidated balance sheet and are measured at fair value except loans and receivables and other nancial liabilities, which are measured at amortized cost. All changes in fair value are recorded to the statement of income unless cash 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 fi nancial instruments: The Company operates principally in Canada and the United States, which gives rise to risks that its income and cash ows may be adversely impacted by uctuations in foreign exchange rates. The Company enters into foreign currency forward contracts to manage foreign exchange exposures on anticipated labor, operating costs, property, plant and equipment expenditures, and special dividend payments 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 ow hedges. The fair value of each contract is included on the balance sheet within derivative nancial instrument assets or liabilities, depending on whether the fair value was in an asset or liability position. In the case of labor and operating costs, 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. For special dividend payments, changes in the fair value of these contracts are recorded directly in equity. (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 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 remeasured at each reporting date. Any changes in the fair value of the liability are recognized as a personnel expense in the statement of income. (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. 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 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 cant management judgment, including projections of future cash ows and appropriate discount rates. The cash ows are derived from the nancial forecast for the next ve years and do not include restructuring activities that the Company is not yet committed to or signi 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 ows, as well as other factors, are considered when making assumptions with regard to future cash ows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate 21 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS used for the discounted cash ow model as well as the expected future cash in ows and the growth rate used for extrapolation purposes. A change in any of the signi 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 benefi t plans: Accounting for employee bene t plans requires the use of actuarial assumptions. The assumptions include the discount rate, rate of compensation increase, mortality rate and healthcare costs. These assumptions depend on underlying factors such as economic conditions, government regulations and employee demographics. These assumptions could change in the future and may result in material adjustments to employee bene t plan assets or liabilities. 5. Future accounting standards: (a) Financial instruments: IFRS 9 “Financial Instruments” was issued in November 2009, introducing new requirements for the classi cation and measurement of nancial assets. IFRS 9 was amended in October 2010 to include requirements for the classi cation and measurement of nancial liabilities and for derecognition. IFRS 9, which has yet to be adopted, retains but simpli es the mixed measurement model and establishes two primary measurement categories for nancial assets: amortized cost and fair value. The basis of classi cation depends on an entity’s business model and the contractual cash ow of the nancial asset. Classi cation is made at the time the nancial asset is initially recognized, namely when the entity becomes a party to the contractual provisions of the instrument. With regard to the measurement of nancial liabilities designated as fair value through pro t or loss, IFRS 9 requires that the amount of the change in the fair value of the nancial liability, that is attributable to changes in the credit risk of that liability, is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in the statement of income. Changes in fair value attributable to a nancial liability’s credit risk are not subsequently reclassi ed to the statement of income. Previously, the entire amount of the change in the fair value of the nancial liability designated as fair value through pro t or loss was presented in the statement of income. In November 2013, a new general hedge accounting standard was issued, forming part of IFRS 9. It will more closely align with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Another revised version of IFRS 9 was issued in July 2014 mainly to include i) impairment requirements for nancial assets and ii) limited amendments to the classi cation and measurement requirements by introducing a fair value through other comprehensive income measurement category for certain simple debt instruments. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing the impact of this new standard and does not intend to early adopt IFRS 9 in its consolidated nancial statements. (b) Revenue from contracts with customers: IFRS 15 “Revenue From Contracts With Customers” was issued in May 2014, specifying the steps and timing for recognizing revenue. The new standard also requires more informative, relevant disclosures. IFRS 15 supersedes IAS 11 “Construction Contracts” and IAS 18 “Revenue”, as well as various IFRIC and SIC interpretations regarding revenue. IFRS 15 is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this new standard and does not intend to early adopt IFRS 15 in its consolidated nancial statements. (c) Property, plant and equipment and intangibles: Amendments to IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” were issued in May 2014, prohibiting the use of revenue-based depreciation for property, plant and equipment and signi cantly limiting the use of revenue-based amortization for intangible assets. These amendments are effective for annual periods beginning on or after January 1, 2016 and are to be applied prospectively. The Company does not expect the amendments to have any impact on its consolidated nancial statements. (d) Financial statement presentation: Amendments to IAS 1 “Presentation of Financial Statements” were issued in December 2014 as part of the IASB’s major initiative to improve presentation and disclosure in nancial reports. These amendments are effective for annual periods beginning on or after January 1, 2016 with early adoption permitted. The amended standard will be adopted by the Company in 2016. The Company is currently assessing the impact of these amendments. (e) Leases: IFRS 16 “Leases” was issued in January 2016, providing a single model for leases. The current distinction between nance leases and operating leases has been abolished. As a result, most leases will be recognized on the statement of nancial position. Certain exemptions will apply for short-term leases and leases for low-value assets. IFRS 16 replaces IAS 17 “Leases” and the related interpretations. IFRS 16 is effective for annual periods beginning on or after January 1, 2019 and is to be applied retrospectively. Early adoption is permitted under certain conditions. The Company is currently assessing the impact of this new standard and does not intend to early adopt IFRS 16 in its consolidated nancial statements. 22 20 W 2015 2014 (394,223) (31,879) (159,649) (21,076) (39,426) (3,589) (649,842) (137,011) (11,921) (3,190) (4,543) 1,815 (142) (4,657) (419,120) (30,542) (158,489) (22,733) (37,468) (3,338) (671,690) (133,993) (12,946) (3,273) (4,150) - (340) (3,787) (159,649) (158,489) (613) (2,976) 1,815 (142) (1,916) 265 77 342 (33) (315) (44) (392) (50) (1,735) (1,603) - (340) (3,678) 335 251 586 (161) (153) (155) (469) 117 6. Expenses by nature: Raw materials and consumables used Depreciation and amortization Personnel expenses (note 7) Freight Other expenses Foreign exchange and cash ow hedge losses transferred from other comprehensive income (note 8) 7. Personnel expenses: Wages and salaries Social security Employee de ned bene t plan expenses Employee de ned contribution plan expenses Multiemployer de ned bene t pension plan withdrawal liability settlement gain (note 19) Multiemployer de ned bene t pension plan withdrawal liability - change in discount rates (note 19) Share-based payments 8. Other expenses: Foreign exchange loss Cash ow hedge losses transferred from other comprehensive income Multiemployer de ned bene t pension plan withdrawal liability settlement gain (note 19) Multiemployer de ned bene t pension plan withdrawal liability - change in discount rates (note 19) 9. Finance income and expense: Finance income on cash and cash equivalents and other Net nance income on de ned bene t plans Finance income Finance expense on bank overdrafts and other Net nance expense on de ned bene t plans Unwinding of discount rates on provisions Finance expense Net nance (expense) income 23 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Income tax expense: Current tax expense Current year Deferred tax expense Origination and reversal of temporary differences Income tax expense Income tax (expense) recovery recognized in other comprehensive income Cash ow hedges Employee bene t plan remeasurements 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 Permanent differences and other Effective income tax rate 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 13. Inventories: Raw materials Work-in-process Finished goods Spare parts 2015 2014 (39,686) (29,130) (5,788) (45,474) 201 (470) (269) 26.7% 5.3 (1.1) 30.9% (6,399) (35,529) (7) 2,330 2,323 26.7% 5.8 (1.7) 30.8% December 27 December 28 2015 2014 17,532 147,495 165,027 99,770 (956) 98,814 8,991 107,805 27,263 16,267 46,092 6,876 96,498 9,636 134,125 143,761 106,038 (700) 105,338 7,116 112,454 31,851 18,466 44,130 6,139 100,586 During 2015, the Company recorded, within cost of sales, inventory write-downs for slow-moving and obsolete inventory of $7,905 (2014 - $7,169) and reversals of previously written-down items of $2,112 (2014 - $2,176). 24 22 14. Property, plant and equipment: Net book value At December 30, 2013 Cost Accumulated depreciation 2014 Activity Additions Disposals Transfers Depreciation At December 28, 2014 At December 28, 2014 Cost Accumulated depreciation Net book value At December 29, 2014 Cost Accumulated depreciation 2015 Activity Additions Disposals Transfers Depreciation At December 27, 2015 At December 27, 2015 Cost Accumulated depreciation W Land Buildings Equipment Machines In Progress Total Packaging Capital 9,273 132,751 429,968 - 9,273 (33,160) (224,315) 99,591 205,653 26,183 (24,967) 1,216 13,981 - 13,981 612,156 (282,442) 329,714 - - - - 7,208 - 327 (4,162) 9,273 102,964 18,742 (101) 10,395 (27,092) 207,597 445 (32) - (403) 1,226 23,683 - (10,722) - 26,942 50,078 (133) - (31,657) 348,002 9,273 140,286 454,434 - (37,322) (246,837) 9,273 102,964 207,597 26,060 (24,834) 1,226 26,942 - 26,942 656,995 (308,993) 348,002 9,273 140,286 454,434 - (37,322) (246,837) 9,273 102,964 207,597 26,060 (24,834) 1,226 26,942 - 26,942 656,995 (308,993) 348,002 - - - - 9,273 1,271 (63) - (4,481) 99,691 26,325 (266) 20,164 (27,989) 225,831 160 (40) - (366) 980 26,883 - (20,164) - 33,661 9,273 141,301 497,423 (41,610) (271,592) 24,675 (23,695) 33,661 - 99,691 225,831 980 33,661 - 9,273 54,639 (369) - (32,836) 369,436 706,333 (336,897) 369,436 Government grants/tax credits in respect of property, plant and equipment were recognized within deferred income totaling $800 in 2015 (2014 - $2,004). No impairment losses or impairment reversals were recorded during 2015 and 2014. No borrowing costs were capitalized during 2015 and 2014. 25 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Intangible assets: Net book value At December 30, 2013 Cost Accumulated amortization 2014 Activity Additions Disposals Amortization At December 28, 2014 At December 28, 2014 Cost Accumulated amortization Net book value At December 29, 2014 Cost Accumulated amortization 2015 Activity Additions Disposals Amortization At December 27, 2015 At December 27, 2015 Cost Accumulated amortization Goodwill Software Patents Customer Related Total 12,766 - 12,766 - - - 12,766 12,766 - 12,766 12,766 - 12,766 - - - 12,766 12,766 - 12,766 8,710 (6,978) 1,732 699 (23) (459) 1,949 9,290 (7,341) 1,949 9,290 (7,341) 1,949 303 (3) (513) 1,736 9,483 (7,747) 1,736 461 (396) 65 - (19) (1) 45 77 (32) 45 77 (32) 45 - (21) (1) 23 30 (7) 23 881 (484) 397 - - (89) 308 881 (573) 308 881 (573) 308 - - (88) 220 881 (661) 220 22,818 (7,858) 14,960 699 (42) (549) 15,068 23,014 (7,946) 15,068 23,014 (7,946) 15,068 303 (24) (602) 14,745 23,160 (8,415) 14,745 The amortization of software and patents is included within general and administrative expenses and the amortization of customer related intangibles is included within sales, marketing and distribution expenses. As of December 27, 2015, there were no inde nite life intangible assets other than goodwill. The 2015 goodwill balance of $12,766 (2014 - $12,766) includes $12,542 (2014 - $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 10.9 percent (2014 - 12.3 percent). Cash ows were projected based on actual operating results and the ve-year business plan. Average volume growth for the next ve years was 5.0 percent (2014 - 9.3 percent) and the average gross pro t percentage over the same time-frame was two percentage points (2014 - one percentage point) lower than the actual gross pro t percentage attained in the current year. Cash ows after the ve year period were assumed to increase at a terminal growth rate of 1.5 percent (2014 - 1.5 percent). No impairment losses or impairment reversals were recorded during 2015 and 2014. 26 24 W 16. Employee bene t plans: The Company maintains four funded non-contributory de ned bene t pension plans, one funded non-contributory supplementary income postretirement plan for certain CDN-based executives, one unfunded contributory de ned bene t postretirement plan for healthcare bene ts for a limited group of US individuals and seven de ned contribution pension plans. Effective January 1, 2005, all de ned bene 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 ned contribution plans upon satisfaction of certain eligibility requirements. During 2014, the Company wound up one funded non-contributory de ned bene t pension plan. The Company participated in one multiemployer de ned bene t pension plan up until the rst quarter of 2011, which provided bene ts to certain unionized employees in the US. See note 19 for the details on the accounting for the Company’s withdrawal from the plan in 2011 and the settlement of the remaining liability in 2015. The employee bene t plans are overseen by the Company Pension Committee (CPC) which is comprised of two members from senior management and one Board member. The CPC is responsible for determining and recommending the following items to the Company’s Board of Directors for approval: (a) the bene t plan asset investment policies, (b) the Company’s cash funding, and (c) the employee bene t entitlements within the respective bene t plans. Total amounts paid by the Company on account of all bene t plans, consisting of: de ned bene t pension plans, supplementary income postretirement plan, direct payments to bene ciaries for the unfunded postretirement plan and the de ned contribution plans, amounted to $6,301 (2014 - $9,293). Defi ned contribution pension plans The Company maintains four de 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 $4,543 (2014 - $4,150). Defi ned benefi t plans For nancial reporting purposes, the Company measures the bene t obligations and fair value of the bene 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, 2015 for one plan, January 1, 2014 for one plan, December 31, 2013 for one plan, and October 31, 2014 for one inactive plan. These actuarial valuations establish the minimum funding requirements. The most recent actuarial valuations for funding purposes for the supplementary income postretirement plan and the postretirement plan for healthcare bene ts were dated December 27, 2015. The supplementary income postretirement plan has no minimum funding requirements. The next required actuarial valuations for all of the Company’s active de ned bene t plans are three years from the aforementioned dates. Based on the most recent actuarial valuations, the Company expects to contribute $2,098 in cash to its de ned bene t plans in 2016. The CPC also reviews the funding position of each plan on an annual basis and makes recommendations to the Company’s Board of Directors regarding any additional cash funding by the Company deemed appropriate. Regarding the funded non-contributory plans and the supplementary income postretirement plan, the normal retirement age is 65. The option to retire early and receive a reduced pension begins at age 55. For most plan members, the annual pension entitlement is based on years of credited service and the earnings attained in each of those years. However, for certain CDN-based executives, the annual pension entitlement is based on years of credited service and the highest average annual base compensation excluding incentive payments during the highest 36 consecutive months of earnings prior to retirement. At December 27, 2015 and December 28, 2014, the bene t obligation pertaining to these plan members represented less than 10 percent of the Company’s total bene t obligation. All equity and debt securities have quoted prices in active markets. The de ned bene t pension plans do not invest in the shares of the Company. The objective of the bene t plan asset allocation policy is to manage the funded status of the bene t 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 Company Pension Committee also pays attention to potential uctuations in the bene t obligations. In the ideal case, bene t plan assets and obligations move in the same direction when interest rates change, creating a natural hedge against possible underfunding of the bene t plans. The following presents the nancial position of the Company’s de ned bene t pension plans and other postretirement bene ts, which include the supplementary income plan and the postretirement plan for healthcare bene ts: Change in benefi t obligation Bene t obligation, beginning of year Current service cost Finance expense Remeasurement (gains) losses recognized in other comprehensive income Bene ts paid Settlements Foreign exchange Bene t obligation, end of year 27 25 December 27 December 28 2015 2014 91,859 3,186 3,500 (2,005) (2,612) (1,912) (8,888) 83,128 78,701 2,786 3,580 15,224 (2,595) (1,651) (4,186) 91,859 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Change in benefi t plan assets Fair value of bene t plan assets, beginning of year Expected return on bene t plan assets Remeasurement (losses) gains recognized in other comprehensive income Employer contributions Bene ts paid Settlements Bene t plan administration cost paid from the plan assets recognized in income Foreign exchange Fair value of bene t plan assets, end of year Change in benefi t plan assets not recognized due to pension plan asset ceiling limit Balance, beginning of year Remeasurement losses (gains) recognized in other comprehensive income Other Balance, end of year Funded status Present value of funded obligations Fair value of bene t plan assets Status of funded obligations Present value of unfunded obligations Total funded status of obligations Bene t plan assets not recognized due to pension plan asset ceiling limit Amounts recognized in the balance sheet Employee bene t plan assets Employee bene t plan liabilities Benefi t plan obligation The following represents the geographical breakdown of the bene t obligation: United States Canada The following represents the membership status breakdown of the bene t obligation: Active members Retired members Deferred vested members Other Benefi t plan assets The following represents the weighted average allocation of bene t plan assets: Asset category Equity securities Debt securities Cash Total 28 26 December 27 December 28 2015 2014 89,435 3,262 (180) 1,681 (2,612) (1,559) (357) (9,622) 80,048 - - 82 82 (80,832) 80,048 (784) (2,296) (3,080) (82) (3,162) 5,723 (8,885) (3,162) (36,432) (46,696) (83,128) (50,983) (26,075) (5,614) (456) (83,128) 55% 41% 4% 100% 82,821 3,678 7,834 5,091 (2,595) (2,023) (423) (4,948) 89,435 354 (41) (313) - (89,506) 89,435 (71) (2,353) (2,424) - (2,424) 5,249 (7,673) (2,424) (38,331) (53,528) (91,859) (54,922) (29,829) (6,575) (533) (91,859) 55% 41% 4% 100% Net benefi t plan expense Current service cost Settlements Plan administration cost Net nance income Net nance expense Actual return on bene t plan assets Cumulative remeasurements recognized in other comprehensive income Cumulative amount, beginning of year Annual activity Remeasurement of bene t obligation: Actuarial losses arising from changes in demographic assumptions Actuarial gains (losses) arising from changes in nancial assumptions Actuarial (losses) gains arising from experience adjustments Remeasurement of bene t plan assets - actuarial (losses) gains arising from experience adjustments Remeasurement of bene t plan assets not recognized due to pension plan asset ceiling limit Cumulative amount, end of year Signifi cant assumptions The following weighted averages were used to value the bene t obligation: Discount rate Rate of compensation increase W 2015 2014 (3,186) 353 (357) (3,190) 77 (315) (3,428) 3,082 (2,786) (64) (423) (3,273) 251 (153) (3,175) 11,512 (2,284) 5,065 - 2,163 (158) 2,005 (180) (82) 1,743 (541) (4,833) (10,976) 585 (15,224) 7,834 41 (7,349) (2,284) December 27 December 28 2015 2014 4.2% 3.6% 4.0% 3.6% Assumptions regarding future mortality were based on the following mortality tables: Canada - CPM - RPP2014 private generational (2014 - CPM - RPP2014 private generational) and United States - RP2014 (2014 - RP2014). At December 27, 2015, the weighted average duration of the bene t obligations was 15.4 years (2014 - 16.3 years). Sensitivity analysis At December 27, 2015, the present value of the bene t obligation was $83,128. Based on changes to the de nitive actuarial assumptions, the bene t obligation would have been as follows: Discount rate - one percentage point Future mortality - one year Rate of compensation increase - one percentage point Increase Decrease 72,225 85,162 83,756 96,795 81,043 82,589 The postretirement bene t plan assumed healthcare cost trend rate is 7.4 percent with the rate declining to 4.5 percent by 2028. A one-percentage point movement in the assumed healthcare cost trend rate would affect the net bene t plan expense by approximately $5 and the bene t obligation by $136. 29 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 27 December 28 December 27 December 28 December 27 December 28 2015 372 4,450 - 436 1,405 3 3,284 2,808 244 2014 281 2,927 - 235 1,984 6 2,798 2,308 2,615 13,002 (11,594) 1,408 13,154 (11,164) 1,990 2015 2014 - - - (92) (46,493) (1,802) (1,457) - - (49,844) 11,594 (38,250) - - (66) - (41,208) (1,256) (1,319) (90) - (43,939) 11,164 (32,775) 2015 372 4,450 (92) 436 (45,088) (1,799) 1,827 2,808 244 2014 281 2,927 (66) 235 (39,224) (1,250) 1,479 2,218 2,615 (36,842) (30,785) - - (36,842) (30,785) Trade and other receivables Inventories Prepaid expenses Derivative nancial instruments Property, plant and equipment Intangible assets Employee bene t plans Trade payables and other liabilities Provisions Tax assets (liabilities) Set off of tax Net tax assets (liabilities) Movement in deferred tax assets and liabilities: 2014 Trade and other receivables Inventories Prepaid expenses Derivative nancial instruments Property, plant and equipment Intangible assets Employee bene t plans Trade payables and other liabilities Provisions 2015 Trade and other receivables Inventories Prepaid expenses Derivative nancial instruments Property, plant and equipment Intangible assets Employee bene t plans Trade payables and other liabilities Provisions Opening Recognized Recognized Balance In Income In Equity Ending Balance 368 2,983 (72) 242 (87) (56) 6 - (33,828) (5,396) (710) (658) 2,392 2,574 (540) (193) (174) 41 - - - - - (7) 2,330 - - 281 2,927 (66) 235 (39,224) (1,250) 1,479 2,218 2,615 (26,709) (6,399) 2,323 (30,785) 281 2,927 (66) 235 (39,224) (1,250) 1,479 2,218 2,615 (30,785) 91 1,523 (26) - (5,864) (549) 818 590 (2,371) (5,788) - - - 201 - - (470) - - 372 4,450 (92) 436 (45,088) (1,799) 1,827 2,808 244 (269) (36,842) 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 cient future income will be available to absorb temporary differences. 30 28 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 $375,151 (2014 - $325,284). Temporary differences relating to unremitted earnings of foreign subsidiaries which would be subject to withholding and other taxes totaled $260,387 (2014 - $214,936). W 18. Trade payables and other liabilities: Trade payables Other current liabilities and accrued expenses 19. Provisions: Balance at December 29, 2014 Current liabilities Non-current liabilities 2015 Annual activity Payments Finance expense - unwinding of discount Reversals Change in discount rates Balance at December 27, 2015 At December 27, 2015 Current liabilities Non-current liabilities December 27 December 28 2015 33,990 34,544 68,534 Multiemployer Asset Retirement Withdrawal Liability Obligations 427 5,811 6,238 (4,609) 44 (1,815) 142 - - - - - 760 760 - - - - 760 - 760 760 2014 37,226 31,872 69,098 Total 427 6,571 6,998 (4,609) 44 (1,815) 142 760 - 760 760 Multiemployer withdrawal liability The Company participated in one multiemployer de ned bene t pension plan providing bene ts to certain unionized employees in the US. Management reached an agreement with the Union to withdraw from the plan in the rst quarter of 2011. Pursuant to US federal legislation, an employer who withdraws from a plan with unfunded vested bene ts is responsible for a share of that underfunding. As a consequence of withdrawing from the plan, the Company was required to make monthly payments at a constant dollar value of $36, or $427 on an annual basis, until June 2032. During the second quarter of 2015, the Company reached a Settlement and Release Agreement with the trustee of the plan, whereby the remaining liability was settled with a lump sum payment of $4,466. As a result of the settlement, the Company reversed the residual balance pertaining to the liability and recorded a gain of $1,815. The amount was re ected in other expenses. See note 8. 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 to the President for the RSUs and the RSUs vest immediately. 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 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 be paid immediately 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. 31 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2015 240,000 (120,000) 60,000 180,000 - 2014 240,000 (60,000) 60,000 240,000 60,000 The 180,000 RSUs outstanding at the end of 2015 mature 60,000 annually from 2017 through 2019 and the 240,000 RSUs outstanding at the end of 2014 mature 60,000 annually from 2015 through 2018. The fair value of the RSUs at the grant date and each subsequent reporting date is based upon the market value of the Company’s common shares. The personnel expense recorded in the statement of income under the Plan was $4,657 (2014 - $3,787). The average settlement price in 2015 was $33.37 US per RSU (2014 - $24.60 US). At December 27, 2015, the carrying value of the liability, as well as the intrinsic value of the vested liability in respect of the Plan, was $5,878 (2014 - $6,688). 21. Share capital and reserves: Share capital At December 27, 2015, the authorized voting common shares were unlimited (2014 - unlimited). The issued and fully paid voting common shares at December 27, 2015 were 65,000,000 (2014 - 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 ow hedging instruments related to the hedged transactions that have not yet occurred. Dividends During 2015, dividends in Canadian dollars of 12 cents per common share were declared (2014 - 12 cents). In addition, the Company paid a special dividend in Canadian dollars of $1.50 per common share on October 15, 2015 (March 20, 2014 - $1.00). 22. Earnings per share: Net income attributable to equity holders of the Company Weighted average shares outstanding (000’s) Basic and diluted earnings per share - cents 23. Financial instruments: The following sets out the classi cation and the carrying/fair value of nancial instruments: Assets (Liabilities) Cash and cash equivalents Trade and other receivables Classi cation Loans and receivables Loans and receivables Derivative nancial instrument assets Derivatives designated as effective hedges Trade payables and other liabilities Other nancial liabilities Derivative nancial instrument liabilities Derivatives designated as effective hedges 2015 99,248 65,000 153 2014 78,360 65,000 121 Carrying / Fair Value 165,027 107,805 40 (68,534) (1,683) 32 30 W 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 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 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. The following table presents the classi cation of nancial instruments within the fair value hierarchy: Financial Assets (Liabilities) Level 1 Level 2 Level 3 Total At December 27, 2015 Foreign currency forward contracts - net At December 28, 2014 Foreign currency forward contracts - net - - (1,643) (875) - - (1,643) (875) When the Company has a legally enforceable right to set off supplier rebates against supplier trade payables and intends to settle the amount on a net basis or simultaneously, the balance is presented as an offset within Trade Payables and Other Liabilities on the consolidated balance sheet. At December 27, 2015, the supplier rebate receivable balance that was offset was $5,073 (2014 - $5,109). 24. Commitments and guarantees: Commitments: At December 27, 2015, the Company has commitments to purchase property, plant and equipment of $16,445 (2014 - $19,612). The Company rents premises and equipment under operating leases that expire at various dates until April 30, 2020. The aggregate minimum rentals payable for these leases are as follows: Year Amount 2016 1,011 2017 814 2018 594 2019 454 2020 Thereafter 150 - Total 3,023 During 2015, $1,020 was recognized as an expense in the statement of income in respect of operating leases (2014 - $1,165). Guarantees: Directors and offi cers The Company and its subsidiaries have entered into indemni cation agreements with their respective directors and of 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 cers as a result of any lawsuit, or any judicial, administrative or investigative proceeding involving the directors and of cers. Indemni cation claims will be subject to any statutory or other legal limitation period. The Company has purchased directors’ and of 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 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 ed the Manitoba Pension Commission from any and all claims that may be made by any bene ciary under a certain de ned bene 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 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 cation agreements is remote. No amounts have been recorded in the consolidated nancial statements with respect to these indemni cation agreements. 33 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 nancial instruments, insurance, a system of internal and disclosure controls and sound business practices. The Company does not purchase any derivative nancial instruments for speculative purposes. Financial risk management is primarily the responsibility of the Company’s corporate nance function. Signi 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 expenses. As a result of the Company’s CDN dollar net asset monetary position as at December 27, 2015, a one-cent change in the year-end foreign exchange rate from 0.7223 to 0.7123 (CDN to US dollars) would have decreased net income by $50 for 2015. Conversely, a one-cent change in the year-end foreign exchange rate from 0.7223 to 0.7323 (CDN to US dollars) would have increased net income by $50 for 2015. 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 and special dividend payments will be settled in other foreign currencies. Transactions are only conducted with certain approved Schedule I Canadian nancial institutions. All foreign currency contracts are designated as cash ow hedges. Certain foreign currency forward contracts matured during the year and the Company realized pre-tax foreign exchange losses of $3,612 (2014 losses - $1,603). Of these foreign exchange differences, losses of $2,976 (2014 losses - $1,603) were recorded in other expenses, losses of $4 were recorded in property, plant and equipment (2014 - $0), and losses of $632 were recorded directly to equity (2014 - $0). As at December 27, 2015, the Company had US to CDN dollar foreign currency forward contracts outstanding with a notional amount of US $34.0 million at an average exchange rate of 1.3182 maturing between January and December 2016 and US to Euro dollar foreign currency forward contracts outstanding with a notional amount of US $2.7 million at an average rate of 0.9037 (US dollars to Euros) maturing between January and July 2016. The fair value of these nancial instruments was negative $1,643 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 uctuations on the 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 27, 2015 cash and cash equivalents balance of $165.0 million, a 1.0 percent increase/decrease in interest rate uctuations would increase/decrease income before income taxes by $1,650 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 ected in selling price adjustments but there is a slight time lag. For 2015, 70 percent (2014 - 68 percent) of revenue was generated from 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 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 nancial institutions, derivative 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 nancial asset: Cash and cash equivalents Trade and other receivables Foreign currency forward contracts 34 32 December 27 December 28 2015 165,027 107,805 40 272,872 2014 143,761 112,454 - 256,215 W Credit risk on cash and cash equivalents and 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 nancial institutions and/or governmental bodies that must be rated ‘AA’ or higher for CDN nancial institutions and ‘A-1’ or higher for US nancial institutions by recognized international credit rating agencies or insured 100 percent by the US government or a ‘AAA’ rated CDN federal or provincial government. The Company manages its counterparty risk on its nancial instruments by only dealing with CDN Schedule I nancial institutions. In the normal course of business, the Company is exposed to credit risk on its trade and other receivables from customers. To mitigate such risk, the Company performs ongoing customer credit evaluations and assesses their credit quality by taking into account their 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 27, 2015, 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 (2014 - 95 percent) of the gross trade and other receivable balance is within 30 days of the agreed upon payment terms with customers, and (c) 23 percent (2014 - 22 percent) of the trade and other receivables balance is insured against credit losses. The Company’s exposure to the ten largest customer balances, on aggregate, accounted for 39 percent (2014 - 44 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. 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: December 27 December 28 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 2015 86,268 18,877 2,797 819 108,761 (956) 107,805 2015 (700) (536) 280 - (956) 2014 86,703 21,298 4,019 1,134 113,154 (700) 112,454 2014 (1,197) (63) 558 2 (700) Liquidity risk Liquidity risk is the risk that the Company would not be able to meet its nancial obligations as they come due. Management believes that the liquidity risk is low due to the strong nancial condition of the Company. This risk assessment is based on the following: (a) cash and cash equivalents amounts of $165.0 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 nancing to fund an acquisition, if needed, (e) an informal investment grade credit rating, and (f) the Company’s ability to generate positive cash ows from ongoing operations. Management believes that the Company’s cash ows are more than suf cient to cover its operating costs, working capital requirements, capital expenditures and dividend payments in 2016. The Company’s trade payables and other liabilities and derivative 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 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. In the management of capital, the Company includes bank overdrafts, bank loans and shareholders’ equity. The Board of Directors has established 35 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 nancial reporting date, over the 12-month rolling EBITDA. This ratio is to be maintained under 3.00:1. As at December 27, 2015, 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 nance expense and dividends. This ratio is to be maintained over 1.50:1. As at December 27, 2015, the ratio was 21.99:1. There were no changes in the Company’s approach to capital management during 2015. 26. Segment reporting: The Company’s operations are organized into six operating segments: modi ed atmosphere packaging, specialty lms, rigid containers, lidding, biaxially oriented nylon, and packaging machinery. The modi ed atmosphere packaging, specialty lms, rigid containers, and lidding operating segments have been aggregated as one reportable segment as they have similar economic characteristics, including long-term sales volume growth and long-term average gross pro t margin. In addition, the biaxially oriented nylon and packaging machinery operating segments have been aggregated with these four operating segments as their combined revenues and assets represents less than 7 percent of total Company revenues and assets. Modi ed atmosphere packaging extends the shelf life of perishable foods, while at the same time maintains or improves the quality of the product. The packaging is used for a wide range of markets and applications, including fresh and processed meats, poultry, cheese, medical device packaging, high performance pouch applications and high-barrier lms for converting applications. Specialty lms includes a full line of barrier and non-barrier lms which are ideal for converting applications such as printing, laminating, and bag making, including shrink bags. Rigid containers includes portion control and single-serve containers, as well as plastic sheet and custom retort trays, which are used for applications such as food, pet food, beverage, dairy, industrial, and healthcare. Lidding products are available in die-cut, daisy chain and rollstock formats and are used for applications such as food, dairy, beverage, industrial and healthcare. The Company operates principally in Canada and the United States. The following summary presents key information by geographic segment: 2015 Revenue Property, plant and equipment and intangible assets 2014 Revenue Property, plant and equipment and intangible assets United States Canada Other Consolidated 648,953 175,883 97,716 207,031 635,755 162,080 101,985 199,652 50,500 1,267 49,014 1,338 797,169 384,181 786,754 363,070 Major customer During 2015, the Company reported revenue to one customer representing 18 percent of total revenue (2014 - 19 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 nancial condition. 28. Related party transactions: The Company had revenue of $13 (2014 - $133), purchases of $4,191 (2014 - $4,006) and commission income of $602 (2014 - $475) with its majority shareholder company. Trade and other receivables and trade payables and other liabilities include amounts of $136 (2014 - $87) and $353 (2014 - $432) respectively with the majority shareholder company. These transactions were completed at market values with normal payment terms. 36 34 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: W Salaries, fees and short-term bene ts Post-employment bene ts Share-based payments 2015 (5,160) (459) (4,657) (10,276) 2014 (5,149) (427) (3,787) (9,363) No loans were advanced to key management personnel during the year. The aggregate remuneration earned by the Board of Directors in 2015 was $548 (2014 - $510). As a group, the Board of Directors hold, directly or indirectly 52.7 percent (2014 - 52.6 percent) of the outstanding shares of the Company. The members of the Executive Committee hold, directly or indirectly, 0.4 percent (2014 - 0.4 percent) of the outstanding shares of the Company. 37 35 CORPORATE INFORMATION Annual Meeting The Annual Meeting of Shareholders will be held on Wednesday, April 20, 2016 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 ce 100 Saulteaux Crescent, Winnipeg, Canada R3J 3T3 info@winpak.com Board of Directors Chairman, A.I. Aarnio-Wihuri (2), Helsinki, Finland; Chairman, Wihuri International Oy Vice Chairman, J.M. Hellgren (2), Helsinki, Finland; President and Chief Executive Of cer, Wihuri International Oy M.H. Aarnio-Wihuri (2), Helsinki, Finland; Manager, Sustainability Program, Wihuri International Oy K.A. Albrechtsen (1), Winnipeg, Canada D.R.W. Chatterley (1), Winnipeg, Canada J.R. Lavery (2), Niagara-on-the-Lake, Canada A.B. Martyszenko (1), Winnipeg, Canada; Senior Partner, M Group Chartered Professional Accountants LLP I.T. Suominen (1), Helsinki, Finland; Vice President and Chief Financial Of cer, Wihuri International 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 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 cer, Winpak Ltd. J.R. McMacken, Executive Vice President, Winpak Portion Packaging O.Y. Muggli, Vice President, Technology, Winpak Ltd. D.J. Stacey, President, Winpak Portion Packaging Auditors KPMG LLP, Winnipeg, Canada Legal Counsel Thompson Dorfman Sweatman LLP, Winnipeg, Canada Jones Day, Atlanta, U.S.A. 38 36 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 EMBALAJES WINPAK DE MÉXICO S.A. DE C.V. AV. DE LA MONTAÑA #112, EDIFICIO MT1, MÓDULO 2 PARQUE INDUSTRIAL QUERÉTARO SANTA ROSA JÁUREGUI. 76220 QUERÉTARO, QUERÉTARO. MÉXICO T: (52) 442-256-1900 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. T: (708) 753-5700 F: (708) 757-2447 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 FILMS INC. 100 WIHURI PARKWAY SENOIA GA 30276-9703 U.S.A. T: (770) 599-6656 F: (770) 599-8387 WINPAK LANE, INC. 998 S. SIERRA WAY SAN BERNARDINO CA 92408 U.S.A. T: (909) 885-0715 F: (909) 381-1934 WIHURI GROUP, 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 OY KAIVOLANKATU 5 FI-37630 VALKEAKOSKI FINLAND T: +358 20 510 311 F: +358 20 510 3444 WIPAK BORDI S.R.L. VIA UNGARETTI IT-20912 CAORSO ITALY T: +39 523 821 382 F: +39 523 822 185 WIPAK WALSRODE GMBH & CO. KG POB 1661 DE-29656 WALSRODE GERMANY T: +49 5161 443 903 F: +49 5161 441 43903 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. SMAKOW 10 PL-49-318 SKARBIMIERZ OSIEDLE POLAND T: +48 77 404 2000 F: +48 77 404 2001 WIPAK B.V. NIEUWSTADTERWEG 17 NL-6136 KN SITTARD NETHERLANDS T: +31 46 420 2999 F: +31 46 458 1311 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 PACKAGING [CHANGSHU] CO. LTD. NO. 88 FUCHUNJIANG ROAD CHANGSHU NEW & HI-TECH INDUSTRIAL DEVELOPMENT ZONE CN-215533 JIANGSU, CHINA T: +86 512 82365958 F: +86 512 82365957 BIAXIS OY LTD. TEKNIKONKATU 2 FI-15520 LAHTI FINLAND T: +358 20 510 312 F: +358 20 510 3500 38
Continue reading text version or see original annual report in PDF format above