Winpak’s 2016 net income attributable to equity holders was $104.3 million reflecting a year-over-year increase of $5.1 million or 5.1 percent. This
achievement marks yet another milestone for the Corporation. This growth was somewhat assisted by the weaker Canadian dollar and lower resin costs,
the base component used in Winpak products. As was the situation in 2015, these two factors, while benefiting the profit performance, challenged the
revenue line. This is due to the reality that nearly 70 percent of Winpak’s selling prices are indexed to resin costs. Notably, these headwinds did not
prevent the Company from registering record high sales of $822.5 million, which exceeded the prior year by $25.4 million and was driven by an impressive
year-over-year volume gain of 6.8 percent.
Complementing the above-stated financial performance, in 2016 Winpak successfully initiated the expansion of two of its manufacturing sites, primarily
to accommodate new production equipment. The most sophisticated coextrusion machine to ever be commissioned at Winpak, and one might argue
by any of its North American competitors, is designed to produce high-barrier plastic materials for modified atmosphere packaging applications. This
line commenced commercial production at the Corporation’s Winnipeg, Manitoba facility in the fourth quarter of 2016. This state-of-the-art system
further substantiates Winpak’s mandate to provide its customers with cutting-edge technology. Premier food conglomerates continue to value Winpak’s
trailblazing approach, acknowledging its superior skills and abilities by awarding the firm greater sales opportunities.
In 2016, Winpak’s Georgia-based specialty films business began construction of an 80,000 square foot addition to its existing building. This expansion
was necessary to house new equipment to satisfy the rising zeal for the Company’s shrink bag product offerings. This project is slated for completion in
the first quarter of 2017 and will initially provide space for two new blown coextrusion lines, as well as auxiliary machinery for printing and bag-making
applications. Once these lines are activated, it will alleviate the pressure of meeting customer demands by shortening lead-times and, hence, paving the
way for future growth. The specialty films group’s non-shrink bag products, used in the liquid packaging industry and certain specialty meat applications,
are also rapidly gaining recognition and applause from this business’ broadening customer base.
The North American consumers’ ongoing desire for quick-to-prepare food items, such as hot beverages and ready-to-serve meals, bodes extremely well
for Winpak and, most significantly, for its Ontario and Illinois rigid-based operations. Shelf-stable foods are becoming increasingly attractive to everyday
consumers. Winpak’s innovative high-barrier packaging materials are uniquely suited for these end-use applications. To satisfy this pressing market
demand, the Company broke ground on a 348,000 square foot expansion at one of its facilities in the Chicago, Illinois area, which is slated for completion
in the second quarter of 2017. This new structure will house customized, high-tech equipment essential to these consumer-driven requests for more
convenience packaging. Moreover, the rigid group has recently developed an environmentally-friendly structure that in 2016 was extremely well received
by specific food processing companies. This will certainly create exciting new selling advantages in the coming year.
Winpak’s lidding business operates at three locations, Quebec, Illinois and Querétaro, Mexico. Its product range is often marketed in conjunction with
the high-end containers manufactured by the Company’s rigid group, since most items of this specification require some form of lidding. With continuing
pressure from consumers for more convenience-type foods, Winpak’s lidding and rigid business will accelerate in tandem to keep up with the brisk pace.
In 2016, the Quebec facility streamlined its production operations that included an upgrade to one of its primary extrusion coating lines. This responded
to an urgent need for capacity to service designated sections of the food packaging industry. As the majority of lidding materials are printed, the end result
is a push for more output in this sector. In 2016, an order was placed for a new leading-edge printing press that is scheduled to come on-stream in the
first quarter of 2017. With this and the previously stated upgrades, the lidding group is well positioned to meet the anticipated onset of new business in
the coming year.
Winpak’s California-based machinery operations logged another superb year, both in sales and profitability. Equally striking was the performance in
system sales whereby products made by the Corporation’s rigid and flexible packaging groups are sold jointly with the firm’s packaging equipment. Sales
for both machinery and materials were further bolstered by the establishment of a packaging lab at the Company’s California-based location. This proved
to be a well-received benefit as it allows existing and potential customers to pretest packages before the actual launch of their product. This has definitely
been instrumental in further ensuring and enhancing customer allegiance.
Winpak’s business venture with Sojitz Corporation of Japan to produce biaxially-oriented nylon film, dating back to 1998, has performed well for both
parties. The year 2016 was no exception, as this unit announced over-the-top results in sales and profitability. Such enviable momentum was secured
by expanding its customer base and incorporating improved efficiencies throughout its operation. The quality of the biaxially-oriented nylon manufactured
at this facility surpasses all competition and, therefore, has been successful in warding off advances from domestic and offshore rivals who tend to sell
on price and not product integrity.
To say that 2016 was an exciting year would be an understatement. Building additions, new mega production equipment installations and sizeable
capacity upgrades were the order of the day; while at the same time the Corporation logged new highs for sales and profitability. With all the major
expansions either up and running or nearing completion, the required capacity will be in place for Winpak to address the rising demands for its specialty,
high-barrier plastics. This is primarily fueled by the growing customer desire for ready-to-serve convenience foods. Even more heartening, there is a
dynamic and dedicated team of nearly 2,400 Winpak associates poised to capitalize on the many future opportunities that the Corporation’s strategic plan
and financial commitments have created. With this in mind, Winpak is expecting the best for 2017.
B.J. Berry
President & Chief Executive Officer
Winnipeg, Canada
February 16, 2017
1
REPORT TO SHAREHOLDERS W
(Values expressed in US dollars)
Operating results ($ million except earnings per share)
Revenue
Income from operations
EBITDA (2)
Net income attributable to equity holders of the Company
Earnings per share (cents)
Investments and assets ($ million)
Investments in plant and equipment
Total assets
Financial position
2016
2015
2014
2013
2012 (1)
822.5
157.8
192.0
104.3
161
72.2
874.2
797.2
147.3
179.2
99.2
153
53.7
766.1
786.8
115.1
145.6
78.4
121
48.1
734.3
714.9
104.8
131.5
71.4
110
51.2
713.2
670.1
103.2
129.4
71.3
110
68.4
634.6
Total debt to equity attributable to equity holders of the Company (3)
Net return on opening equity attributable to equity holders of the Company
Return on opening invested capital (4)
0.0%
17.3%
30.8%
0.0%
17.0%
29.1%
0.0%
13.6%
24.2%
0.0%
14.3%
25.1%
0.0%
16.3%
28.9%
Revenue: Ten-year compound average growth rate (“CAGR”) 6.3%
$ U.S. million
900
800
700
600
500
400
300
200
100
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(1) Amounts have been restated to reflect the retrospective impact of amended IAS 19 “Employee Benefits”, which included an increase in net finance
expense due to the reduction in the expected return on defined benefit pension plan assets and an increase in general and administrative expenses
following the reclassification of certain plan administration costs.
(2) EBITDA (income before interest, tax, depreciation and amortization) is not a recognized measure under International Financial Reporting Standards
(IFRS). Management believes that in addition to net income attributable to equity holders of the Company, EBITDA is a useful supplemental measure as
it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be
cautioned, however, that EBITDA should not be construed as an alternative to net income attributable to equity holders of the Company determined in
accordance with IFRS as an indicator of the Company’s performance. The Company’s method of calculating EBITDA may differ from other companies
and, accordingly, EBITDA may not be comparable to measures used by other companies. Refer to the section entitled Selected Financial Information on
page 3 of this document for the calculation of EBITDA from 2014 to 2016.
(3) Total debt is defined as long-term debt plus bank overdrafts less cash and cash equivalents. From 2012 to 2016, the year-end balances did not
include any long-term debt or bank overdrafts.
(4) Return on opening invested capital is defined as income from operations divided by invested capital, which is defined as the sum of total debt, equity,
net deferred tax liability, and accumulated goodwill amortization.
2
REVIEW Certain statements made in the following Management’s Discussion and Analysis contain forward-looking statements including, but not limited to,
statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company’s intentions,
plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent Winpak’s current views based
on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company’s actual results could differ, which in
some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, Winpak
disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The
Company cautions investors not to place undue reliance upon forward-looking statements.
General Information
The following discussion and analysis dated February 16, 2017 was prepared by management and should be read in conjunction with the consolidated
financial 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 financial statements include the accounts of all subsidiaries. The Company’s functional and reporting currency is the US dollar. The
Company has filed a separate Management’s Discussion and Analysis for its fourth quarter of 2016, which is available on SEDAR at www.sedar.com.
The fiscal year of the Company ends on the last Sunday of the calendar year. Both the 2016 and 2015 fiscal 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 profit 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 finance (income) expense
Depreciation and amortization
EBITDA
2016
104.3
157.8
822.5
32.7%
161
12
-
874.2
211.2
108.2
49.8
(0.2)
34.2
192.0
2015
99.2
147.3
797.2
2014
78.4
115.1
786.8
32.3%
28.5%
153
12
150
766.1
165.0
101.8
45.5
0.1
31.8
179.2
121
12
100
734.3
143.8
79.7
35.5
(0.1)
30.5
145.6
3
MANAGEMENT’S DISCUSSION AND ANALYSIS W
Overall Performance
∆ Revenue reached an all-time high of $822.5 million, advancing by $25.4 million or 3.2 percent compared to 2015. Expanded volumes added
$54.2 million to revenue but price/mix declines and a weaker Canadian dollar detracted from revenue by $24.4 million and $4.4 million
respectively.
∆ Gross profit grew by 4.5 percent from $257.8 million in 2015 to $269.3 million. However, this did not quite keep pace with the rise in sales
volumes of 6.8 percent due to higher costs resulting from operational challenges.
∆ Net income attributable to equity holders of the Company surpassed the 2015 record result by $5.1 million or 5.1 percent, to finish at $104.3
million. Higher sales volumes, lower operating expenses and favorable foreign exchange contributed to this accomplishment.
∆ Cash and cash equivalents ended the year at $211.2 million, despite plant and equipment expenditures at an all-time high of $72.2 million. The
Company has no short-term borrowings or long-term debt outstanding.
Highlights
∆ Raw materials: In 2016, the annual average cost of raw materials declined by just over 5 percent from the prior year average, but before the
current year ended, resin prices had started to climb in tandem with world oil prices.
∆ Operating expenses: Lower compensation costs were the main driving force behind a reduction in operating expenses, increasing earnings
per share by 2.5 cents.
∆ Foreign exchange: In 2016, the average exchange rate of the Canadian dollar depreciated against its US counterpart by 4.8 percent compared
to 2015. The result was a gain on the translation of net Canadian dollar expenses into US funds and in combination with reduced losses on the
maturation of foreign exchange forward contracts, was responsible for a favorable foreign exchange impact on earnings per share of 5.0 cents.
∆ Capital expenditures: Capital expenditures in 2016 totaled $72.2 million, providing the foundation from which the Company can continue to
generate above-average organic growth.
∆ Financing and investing: Winpak generated $126.0 million in cash flow from operating activities, which was more than sufficient to fund $72.2
million in capital projects, $5.9 million in regular dividends, and $1.7 million of other items, resulting in an improvement in the net cash position
of $46.2 million from the end of the previous year. The Company will utilize its cash resources on hand and generate additional cash flow
from operations to fund its investing and financing activities in 2017. In addition, management will continue to evaluate strategic acquisition
opportunities in concert with implementing its organic capital investment program, all focused on enhancing long-term shareholder value.
4
MANAGEMENT’S DISCUSSION AND ANALYSIS
Results of Operations
Components of total increase in earnings per share (EPS)
Organic growth
Gross profit margins
Expenses, income taxes and non-controlling interests
Foreign exchange
Total increase in EPS (cents)
2016
11.0
(7.0)
(1.0)
5.0
8.0
2015
5.5
24.0
(4.0)
6.5
32.0
2014
11.5
(4.5)
3.5
0.5
11.0
Ongoing operations
Organic growth is the impact on net income due exclusively to increased sales volume and excludes the influence of acquisitions, divestitures and foreign
exchange. In 2016, this was the main catalyst propelling EPS growth of 11.0 cents in comparison to the prior year.
Gross profit expansion lagged behind the growth in sales volumes in relation to the prior year, resulting in a reduction in EPS of 7.0 cents. Less than
optimal manufacturing performance played a significant role in the result.
Diminished compensation costs drove operating expenses lower and elevated EPS by 2.5 cents compared to 2015. An increase in net income attributable
to non-controlling interests reduced EPS by 2.0 cents while a higher average income tax rate resulted in a further decrease of 1.5 cents.
Foreign exchange had a favorable impact of 5.0 cents on EPS 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
2015
33.5
(10.7)
(12.4)
10.4
2016
54.2
(24.4)
(4.4)
25.4
2014
70.8
7.1
(6.0)
71.9
For 2016, revenue reached an all-time high of $822.5 million, up by 3.2 percent or $25.4 million from the level recorded in the previous year despite the
headwinds of customer selling price-indexing linked to lower raw material costs and foreign exchange. Volumes grew by a notable 6.8 percent with all
major product groups progressing. Biaxially oriented nylon volumes had the highest percentage achievement versus the prior year. Lidding shipments
followed with high single-digit percentage gains due to new customers in foil rollstock applications along with sustained progress in die-cut lidding
including retort products. Rigid container along with specialty films and modified atmosphere packaging volumes all expanded in the mid single-digit
percentage range. Custom container shipments, including specialty beverage, along with condiment packaging and trays for home meal replacements
bolstered volume growth in rigid packaging. Additional business wins at major US protein customers drove volume growth in both specialty films and
modified atmosphere packaging. Although packaging machinery shipments were down from the prior year, spare part sales were robust in 2016. Partially
offsetting the positive impact of organic volume growth on annual revenues was a reduction of 3.1 percent or $24.4 million due to selling price/mix changes
as indexed selling prices fell in response to reduced raw material costs, with an approximate 90-day lag. Likewise, the decline in 2016 of the value of the
Canadian dollar in comparison to its US counterpart was responsible for a decline in revenues of 0.5 percent or $4.4 million.
Gross profit margins
In 2016, gross profit margins attained a level of 32.7 percent of revenue versus 32.3 percent reached in 2015. While volumes advanced by 6.8 percent in
2016, gross profit only grew by 4.5 percent from $257.8 million in 2015 to $269.3 million in the present year, resulting in a reduction in EPS of 7.0 cents.
Temporary capacity constraints in specialty films as well as modified atmosphere packaging resulted in added expense as production schedules could
not be fully optimized and volumes had to be supplemented by higher-cost purchased material. As the year ended, the Company’s sophisticated 13-layer
coextrusion production line at its Winnipeg modified atmosphere packaging facility was declared commercial which should greatly ease the constraints in
capacity experienced in 2016. Furthermore, manufacturing variances were elevated due to the technical challenges that had to be overcome in the launch
of new products and processes across a number of the Company’s product lines. As more experience is gained and best practices are developed, these
5
W
variances will abate considerably over time as the operations group continues to focus on improvement in these areas.
Winpak’s raw material index, which represents the weighted cost of a basket of the Company’s eight principal raw materials, fell 5.6 percent, on average,
during the past year. However, the change in raw material pricing was inconsistent amongst the different materials within the index with certain resins,
such as polypropylene where supply was tight, experiencing price inflation while others such as polyethylene or nylon exhibited some level of deflation.
As 2016 came to a close, with pressure coming from rising oil prices, the trend in raw material pricing was decidedly upward.
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
2016
2015
2014
139.7
(5.6%)
148.0
(16.4%)
177.0
1.4%
Expenses
Operating expenses, exclusive of foreign exchange impacts, increased by only 4.8 percent from the prior year in contrast to the expansion in sales
volume of 6.8 percent, resulting in an addition to EPS of 2.5 cents. With the moderate incline in the Company’s share price during the current year versus
the nearly 40 percent surge which occurred in the previous year, the result was a significant reduction in share-based incentive expenses. This, when
combined with a one-time $1,000 CAD 40th anniversary payment made to each of the Company’s over 2,200 employees in the third quarter of 2015,
was more than enough to offset increases in research, technical and pre-production costs primarily related to new products and processes. On the other
hand, a larger proportion of net income attributable to non-controlling interests and a higher average income tax rate subtracted 2.0 cents and 1.5 cents
from EPS respectively.
Foreign Exchange
Year-end exchange rate of CDN dollar to US dollar
Year-end exchange rate of US dollar to CDN dollar
Appreciation (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
2016
0.739
1.354
2.4%
0.751
1.332
2015
0.722
1.385
(16.0%)
0.789
1.267
2014
0.860
1.162
(7.9%)
0.910
1.099
(4.8%)
(13.3%)
(6.4%)
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.
Foreign exchange had a favorable impact on EPS of approximately 5.0 cents in 2016 compared to the prior year. Approximately 10 percent of revenues
and 20 percent of costs in the current year were denominated in Canadian dollars. The net outflow of Canadian dollars exposes Winpak to transaction
differences arising from exchange rate fluctuations. The depreciation in the average exchange rate of the Canadian dollar in relation to the US dollar in
2016 increased EPS by approximately 2.5 cents compared to 2015. Although there were losses realized on the maturation of foreign exchange contracts
entered into as part of the Company’s foreign exchange policy, these were minimal in the current year compared to much larger losses in 2015, which
resulted in a further boost to EPS of 2.5 cents in 2016 versus the previous year.
6
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of quarterly results
Thousands of US dollars, except earnings per share (EPS) amounts (cents)
Quarter ended
Revenue
Net income*
EPS
Quarter ended
Revenue
Net income*
EPS
2016
2015
March 27
June 26
September 25
December 25
198,154
204,129
204,699
215,550
822,532
26,564
25,166
24,036
28,578
104,344
March 29
June 28
September 27
December 27
41
39
37
44
161
199,440
198,257
193,726
205,746
797,169
22,463
26,845
22,305
27,635
99,248
35
41
34
43
153
*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 first and third quarters. Factors influencing 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 significant 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 influence
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 2016 and 2015 except that the first quarter net income was higher in 2016, as this was the only quarter
in 2016 with falling raw material prices which supplemented gross profit margins. In addition, third quarter revenues were elevated in the current year due
primarily to timing of specialty beverage container shipments. The first quarter of 2015 saw slightly stronger revenue performance than normal but the
deviation from historical norms was minimal.
Cash Flow, Liquidity and Capital Resources
At December 25, 2016, Winpak’s cash and cash equivalents balance climbed to $211.2 million, advancing by $46.2 million from a year prior. This increase
resulted from cash provided by operating activities of $126.0 million less disbursements for investing activities of $72.7 million and financing activities of
$7.1 million.
Operating activities
Cash from operating activities amounted to $126.0 million. A notable improvement of $12.6 million was realized in cash generated from operating
activities before changes in working capital which totaled $191.6 million. This was offset in part by a further investment in working capital for the current
year of $20.1 million. Trade and other receivables and inventories advanced by $16.3 million and $7.0 million respectively, and were influenced by the
growth in sales volumes of 6.8 percent. Furthermore, trade receivables were also impacted by extended payment terms at certain customers as part of
contract negotiations while inventories rose in response to a rise in raw material costs at the end of the year compared to the start. Income tax payments
reached $44.5 million, up significantly from the previous year by $18.0 million due to greater tax installments mandated by higher income levels. Finally,
employee defined benefit plan contributions of $1.5 million were funded during the year. The Company remains well funded with regard to its defined
benefit pension plans, with gross pension assets totalling over $85 million and a net unfunded liability of only $2.5 million on an accounting basis.
Investing activities
Investing activities in the current year totaled $72.7 million, of which plant and equipment additions represented $72.2 million. These expenditures were
at an all-time high for Winpak as the Company embarked on two significant building expansions in Sauk Village, Illinois and Senoia, Georgia totaling
approximately $25 million. In addition, a substantial investment was made in the latest extrusion and printing technology to support the continued
advancement of organic volume growth, a consistent pillar of the corporate strategy for the past decade. This included a state-of-the-art cast coextrusion
line at the modified atmosphere packaging facility in Winnipeg which became commercial in the fourth quarter and represented the largest single
equipment project ever undertaken by Winpak, both in monetary value and complexity. It provides a solid foundation to grow that part of the business
for years to come. Capital in progress at December 25, 2016 totaled $53.8 million, with the two building expansions initiated in the current year, slated
for completion in the first and second quarters of 2017. Over the long term, Winpak’s expenditures for equipment enhancements in maintaining existing
capacity have averaged approximately 2 percent of revenue.
7
W Financing activities
Financing activities in 2016 consisted of dividends to common shareholders of $5.9 million and a dividend payment of $1.2 million to a non-controlling
interest in a subsidiary. A regular quarterly dividend of $0.03 Canadian has been paid consistently since the third quarter of 2007 when it was doubled.
In general, it has been the philosophy of the Company to re-invest a significant portion of earnings back into the business to promote substantial organic
growth rather than pay sizeable dividends to shareholders. However, in recent years, the cash balance has swelled and as a result, in October 2015, a
special dividend of $73.8 million ($97.5 million Canadian) was paid to common shareholders and in 2014, a special dividend of $58.5 million ($65.0 million
Canadian) was also declared. The Board of Directors of Winpak does not have any specific plans regarding the declaration of special dividends in future
years but will make decisions in this regard as circumstances arise.
Resources
Investments to drive growth can be sizeable, requiring substantial financial resources. A range of funding alternatives is available including cash and
cash equivalents, cash flow provided by operations, additional debt, issuance of equity or a combination thereof. An informal investment grade credit
rating allows the Company access to relatively low interest rates on debt. The Company currently has operating lines of $38 million, which are believed
adequate for liquidity purposes. None of the lines were utilized as at December 25, 2016. Based on formal and informal discussions with various financial
institutions, Winpak believes that additional credit can be arranged from banks and other major lenders as the need arises. The Company is confident that
all 2017 requirements for capital expenditures, working capital, and dividend payments can be financed 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 financial condition of customers and financial 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 fluctuations in
interest rates, foreign exchange rates, raw material costs and counterparty financial condition can be expected to impact net income.
Winpak’s policy regarding interest expense is to fix interest rates on between one- and two-thirds of any long-term debt outstanding. The Company may
enter into derivative contracts or fixed-rate debt to minimize the risk associated with interest rate fluctuations. For the past seven 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 inflows from revenue in a currency with
outflows 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 financial institutions.
Significant fluctuations in foreign exchange rates represent a material exposure for the Company’s financial results. Hedging programs employed may
mitigate a portion of exposures to short-term fluctuations in foreign currency exchange rates. However, the Company’s financial 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 2016, certain foreign currency forward contracts matured and the Company realized pre-tax foreign exchange losses of $0.6 million. As at
December 25, 2016, the Company had US to CDN dollar foreign currency forward contracts outstanding with notional amounts of $23.0 million. The pre-
tax unrealized foreign exchange loss on these contracts of less than $0.1 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 fluctuations 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 reflected in selling price adjustments, albeit with a slight time lag. For 2016, approximately 69 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 significant to Winpak’s net income.
Credit risk arises from cash and cash equivalents held with banks, derivative financial instruments (foreign currency forward and option contracts), as
well as credit exposure to customers, including outstanding accounts receivable. The Company assesses the credit quality of counterparties, taking into
account their financial position, past experience and other factors. Management regularly monitors customer credit limits, performs credit reviews and,
in certain cases, insures accounts receivable balances against credit losses. The Company invests its excess cash on a short-term basis, to a maximum
of six months, with financial institutions and/or governmental bodies that must be rated AA rated or higher for CDN financial institutions and A-1 or higher
8
MANAGEMENT’S DISCUSSION AND ANALYSIS for US financial institutions by recognized international credit rating agencies or insured 100 percent by the US government or a AAA rated Canadian
federal or provincial government. Nonetheless, unexpected deterioration in the financial 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 25, 2016, are
summarized below.
Contractual Obligations
Payment due, by period (thousands of US dollars)
Operating leases
Purchase obligations
Total contractual obligations
Accounting Policy Changes
Total
1 year
2 - 3 years
4 - 5 Years
After 5 years
2,222
26,766
28,988
973
26,766
27,739
1,092
-
1,092
157
-
157
-
-
-
Future Accounting Changes
As more fully described in Note 6 to the Consolidated Financial Statements, three new accounting standards have been issued, IFRS 9 “Financial
Instruments”, IFRS 15 “Revenue from Contracts with Customers” and IFRS 16 “Leases”. IFRS 9 and IFRS 15 are effective for annual periods beginning
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
impact of these new standards and does not intend to early adopt these standards in its consolidated financial statements.
In addition, amendments to IAS 7 “Statement of Cash Flows” were issued in January 2016 and IFRIC Interpretation 22 “Foreign Currency Transactions
and Advance Consideration” was issued in December 2016. These are effective for annual periods beginning on or after January 1, 2017 and January
1, 2018 respectively. While the Company is currently assessing the impact of these changes, management does not expect them to have a significant
impact on the Company’s consolidated financial statements and does not intend to early adopt them.
Looking Forward
Following a strong finish to 2016, the Company remains optimistic as it enters 2017 in terms of volume and earnings advancement. Winpak continues
its strategic focus on organic growth with opportunities in the sales pipeline progressing on the road to new revenue for the corporation. In particular,
additional business from North America’s major food processors continue to bear fruit as these companies gain increased confidence in Winpak’s
capabilities and become entrenched in the outstanding customer service for which the Company has become known. From a raw material standpoint,
the prices of many of the Company’s widely used resins have escalated as of late due to tightness in supply and the rise of world oil prices and while
the future is uncertain, the near term trend is decidedly upward. This should not have a significant impact on gross profit margins as nearly 70 percent
of the Company’s revenues are indexed to the price of raw materials, albeit with an approximate 90-day time lag. As in 2016, the Company will remain
focused on improving operational performance, particularly in those areas where capacity constraints have presented challenges and where new products
and processes require more experience to optimize production. Of note, the massive cast coextrusion line at the Company’s modified atmosphere
packaging plant in Winnipeg was declared commercial in the fourth quarter of the year and 2017 will see added refinements and enhancements to further
improve its operation. Capital spending for 2017 is expected to be diminished from the record-high level experienced in the current year to an amount of
between $55 to $65 million, as the majority of the work on the building expansions at the Company’s specialty film operations in Senoia, Georgia and its
rigid container facility in Sauk Village, Illinois has been completed. The Company will continue to invest in organic growth opportunities while pursuing
acquisition prospects that fit strategically with Winpak’s core competencies in sophisticated packaging for food, beverage and healthcare applications.
With Winpak’s solid financial footing, it has the resources at its disposal to complete an acquisition when the proper strategic fit and price are present to
provide long-term shareholder value.
Critical Accounting Estimates and Judgments
The Company believes the following accounting estimates and judgments are critical to determining and understanding the operating results and the
financial position of the Company.
Employee benefit plans – Accounting for employee benefit 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 benefit plan assets or liabilities.
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 significant management judgment, including projections of future cash flows and
9
W
appropriate discount rates. The cash flows are derived from the financial forecast for the next five years and do not include restructuring activities that
the Company is not yet committed to or significant 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 flows, as well as other factors, are considered when making assumptions with regard to future cash
flows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as
the expected future cash inflows and the growth rate used for extrapolation purposes. A change in any of the significant 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.
Aggregation of operating segments – judgment is applied in aggregating operating segments into a reportable segment. Aggregation occurs when the
operating segments have similar economic characteristics and have similar products, production processes, types of customers, and distribution methods.
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 Officer and Chief Financial Officer have concluded
that these controls and procedures are designed and operating effectively as of December 25, 2016 to provide reasonable assurance that the information
being disclosed is recorded, summarized and reported as required.
Internal controls over financial reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with 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 financial 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 financial reporting. Based on management’s
design and testing of the effectiveness of the Company’s internal controls over financial reporting, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 25, 2016 to provide
reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 25, 2016, there
have been no changes in the design of the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, its internal controls over financial reporting.
Other
Additional information relating to the Company is available on SEDAR at www.sedar.com, including the Annual Information Form dated February 16, 2017.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Report to the Shareholders
The accompanying consolidated financial statements, management’s discussion and analysis (MD&A) and other information in the Annual Report are
the responsibility of management. The consolidated financial 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 financial information contained in this Annual Report are consistent with the consolidated financial statements.
To provide reasonable assurance that assets are safeguarded and that relevant and reliable financial 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 fulfills its responsibilities in the preparation of
the consolidated financial statements and MD&A, and in the financial control of operations. The Board recommends the appointment of the independent
auditors to the shareholders. The Audit Committee meets regularly with financial management and the independent auditors to discuss internal controls,
auditing matters and financial reporting issues and presents its findings to the Board. The Audit Committee reviews the consolidated financial statements,
MD&A and material financial announcements with management and the external auditors prior to submission to the Board for approval.
The consolidated financial 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 Officer
Winnipeg, Canada
February 16, 2017
Auditors’ Report to the Shareholders
Independent Auditors’ Report
To the Shareholders of Winpak Ltd.
K.P. Kuchma
Vice President and Chief Financial Officer
Winnipeg, Canada
February 16, 2017
We have audited the accompanying consolidated financial statements of Winpak Ltd. and its subsidiaries, which comprise the consolidated balance
sheets as at December 25, 2016 and December 27, 2015 and the consolidated statements of income, comprehensive income, changes in equity, and
cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Winpak Ltd. as at
December 25, 2016 and December 27, 2015 and its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Professional Accountants
February 16, 2017
Winnipeg, Canada
11
REPORTING
Years ended December 25, 2016 and December 27, 2015
(thousands of US dollars, except per share amounts)
Note
Revenue
Cost of sales
Gross profit
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 25, 2016 and December 27, 2015
(thousands of US dollars)
Net income for the year
Items that will not be reclassified to the statements of income:
Cash flow hedge losses recognized
Cash flow hedge losses transferred to property, plant and equipment
Employee benefit plan remeasurements
Income tax effect
Items that are or may be reclassified subsequently to the statements of income:
Cash flow hedge gains (losses) recognized
Cash flow hedge losses transferred to the statements of income
Income tax effect
Other comprehensive income 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 financial statements.
12
9
10
10
11
22
17
11
9
11
2016
822,532
(553,233)
269,299
(63,247)
(27,979)
(17,168)
(1,439)
(1,669)
157,797
670
(453)
158,014
(49,813)
108,201
104,344
3,857
108,201
161
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
2016
108,201
2015
101,803
(3)
19
2,516
(847)
1,685
961
626
(424)
1,163
2,848
(652)
4
1,743
(470)
625
(3,728)
2,976
201
(551)
74
111,049
101,877
107,192
3,857
111,049
99,322
2,555
101,877
CONSOLIDATED STATEMENTS OF INCOME (thousands of US dollars)
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments
Non-current assets:
Property, plant and equipment
Intangible assets
Employee benefit plan assets
Deferred tax assets
Total assets
Equity and Liabilities
Current liabilities:
Trade payables and other liabilities
Income taxes payable
Derivative financial instruments
Non-current liabilities:
Employee benefit 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 financial statements.
On behalf of the Board:
December 25
December 27
Note
2016
2015
12
13
14
15
16
17
18
19
17
18
21
21
211,225
124,148
564
103,516
3,024
308
442,785
409,147
14,501
6,721
1,060
431,429
874,214
71,448
6,226
348
78,022
9,253
15,424
760
43,486
68,923
146,945
29,195
(29)
676,478
705,644
21,625
727,269
874,214
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
Director
Director
13
CONSOLIDATED BALANCE SHEETS
(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 29, 2014
29,195
(641)
555,697
584,251
17,136
601,387
Comprehensive (loss) income for the year
Cash flow hedge losses, net of tax
Cash flow hedge losses transferred to the statements
of income, net of tax
Cash flow hedge losses transferred to property, plant and
equipment
Employee benefit 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
Balance at December 28, 2015
29,195
(1,208)
576,359
604,346
19,045
623,391
-
-
-
-
-
-
-
-
745
415
19
-
1,179
-
-
-
1,669
1,669
745
415
19
1,669
2,848
-
-
-
-
-
745
415
19
1,669
2,848
-
104,344
104,344
1,179
106,013
107,192
3,857
3,857
108,201
111,049
-
(5,894)
(5,894)
(1,277)
(7,171)
29,195
(29)
676,478
705,644
21,625
727,269
Comprehensive income for the year
Cash flow hedge gains, net of tax
Cash flow hedge losses transferred to the statements
of income, net of tax
Cash flow hedge losses transferred to property, plant and
equipment
Employee benefit plan remeasurements, net of tax
Other comprehensive income
Net income for the year
Comprehensive income for the year
Dividends
Balance at December 25, 2016
See accompanying notes to consolidated financial statements.
21
14
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Years ended December 25, 2016 and December 27, 2015
(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 defined benefit plan expenses
Multiemployer defined benefit pension plan withdrawal liability settlement gain
Net finance (income) expense
Income tax expense
Other
Cash flow from operating activities before the following
Change in working capital:
Trade and other receivables
Inventories
Prepaid expenses
Trade payables and other liabilities
Provisions
Employee defined benefit 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 financial statements.
15
Note
2016
2015
108,201
101,803
15
16
17
9, 17
10
11
17
16
21
12
35,054
(1,536)
666
3,219
-
(217)
49,813
(3,552)
191,648
(16,343)
(7,018)
387
2,874
-
(1,532)
(44,491)
549
(67)
126,007
(72,240)
(430)
(72,670)
(5,862)
(1,277)
(7,139)
46,198
165,027
211,225
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
CONSOLIDATED STATEMENTS OF CASH FLOWS (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 office 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 financial 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 fiscal year of the Company ends on the last Sunday of the calendar
year. As a result, the Company’s fiscal year is usually 52 weeks in duration, but includes a 53rd week every five to six years. The 2016 and 2015 fiscal
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 significantly reducing volatility of reported results
due to fluctuations in the rate of exchange between the Canadian and US currencies.
The consolidated financial statements have been prepared under the historical-cost convention, except that certain financial instruments, employee
benefit plans and share-based payments are stated at their fair value.
The consolidated financial statements were approved by the Board of Directors on February 16, 2017.
3. Accounting standards implemented in 2016:
The following accounting standards came into effect in 2016 and were implemented by the Company where applicable:
(a) Property, plant and equipment and intangibles:
The amendments to IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” prohibit the use of revenue-based depreciation for plant and
equipment and significantly limit the use of revenue-based amortization for intangible assets. These amendments were implemented with prospective
application and had no impact on the Company’s consolidated financial statements.
(b) Financial statement presentation:
The amendments to IAS 1 “Presentation of Financial Statements” were issued as part of the IASB’s major initiative to improve presentation and disclosure
in financial reports. These amendments had no significant impact on the Company’s consolidated financial statements.
4. Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial 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 financial 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.
Identifiable 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 identifiable 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.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS W (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 financial statements for the Company and its subsidiaries are prepared using their functional currency, that being the US dollar. The functional
currency is the currency of the primary economic environment in which the Company and its subsidiaries operate. Foreign currency transactions are
translated into the functional currency using exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Foreign currency differences arising
on translation are recognized directly to the statement of income. Non-monetary assets and liabilities arising from transactions in foreign currencies are
translated to the functional currency at the exchange rate prevailing at the date of the transaction.
(e) Revenue:
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, rebates and discounts. Revenue
is recognized when the risks and rewards of ownership have transferred to the customer. No revenue is recognized if there are significant 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 specified 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 first-in first-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 fixed overheads based on normal operating capacity. Any excess, unallocated, fixed 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 flows.
(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 4(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 benefits
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.
17
W Depreciation is computed using the straight-line method over the estimated useful lives of the assets, commencing the date the assets are ready for use
as follows:
Buildings 20 - 40 years
Equipment 4 - 20 years
Packaging machines 3 - 7 years
Depreciation methods, useful lives and residual values are reassessed annually or more frequently when there is an indication that they have changed.
The gain or loss on the retirement of an item of property, plant and equipment is the difference between the net sale proceeds and the carrying amount of
the asset and is recognized in the statement of income.
(l) Pre-production expenses:
Pre-production costs relating to installations of major new production equipment are expensed in the period in which incurred.
(m) Intangible assets:
Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses. See note 4(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 identifiable 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 inflows that are largely independent of the cash inflows
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 4(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 flows, using a pre-tax discount
rate that reflects 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 flows, the recoverable amount is determined for the CGU to which it belongs. The Company bases its impairment calculation on
detailed financial forecasts, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These financial
forecasts are generally covering a period of five years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows
after the fifth 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 first 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.
Income taxes:
(p)
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 financial statements, and by the availability of unused income
tax losses.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 financial 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
benefit 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.
(q) Employee benefit plans:
The Company maintains four funded non-contributory defined benefit 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 benefit obligations based on the yield of
high quality corporate bonds denominated in the same currency in which the benefits are expected to be paid and with terms to maturity that, on average,
match the terms of the benefit obligations. The cost of providing the benefits 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 benefit plan assets or obligation up to the balance sheet date where interim valuations are performed. For financial reporting
purposes, the Company measures the benefit obligations and fair value of assets for the defined benefit 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 benefit obligation, reduced by the fair value of benefit
plan assets. Any recognized asset or surplus is limited to the present value of economic benefits 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 finance cost is computed
based on the application of the discount rate to the net defined benefit 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 benefit payments and also reflects the impact of any pension plan
asset ceiling adjustments. The net finance cost is shown within either finance income or finance expense within the statement of income depending on
whether the defined benefit 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 benefit plan assets and the effect of the pension plan asset ceiling adjustment, are recognized directly in equity within other
comprehensive income. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit 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 defined benefit 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.
One of the Company’s subsidiaries maintains one unfunded contributory defined benefit postretirement plan for healthcare benefits for a limited group
of US individuals. A market discount rate is used to measure the benefit obligation based on the yield of high quality corporate bonds denominated in
the same currency in which the benefits are expected to be paid and with terms to maturity that, on average, match the terms of the benefit obligation.
The cost of providing the benefits 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 benefit 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 benefit obligation are charged to the statement of income as
finance expense. Remeasurements are recognized directly in equity within other comprehensive income. When the benefits of the plan are changed or
when the plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the
statement of income.
The Company maintains seven defined 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 benefits 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 benefits and when the Company recognizes costs for a restructuring.
Short-term benefit 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 profit-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.
19
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 flows at a
pre-income tax rate that reflects the current market assessments of the time value of money and the risks specific 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 flows and the timing of those cash flows. 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 finance expense or
finance income in the statement of income.
At each reporting date, other provisions are remeasured in line with changes in discount rates, estimated cash flows and the timing of those cash flows.
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 finance expense or finance income in the statement of income.
(s) Financial assets and liabilities:
Derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. The Company’s financial instruments are
classified 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 financial liabilities and d) derivative financial instruments - derivatives designated as effective hedges. All financial instruments,
including derivatives, are included in the consolidated balance sheet and are measured at fair value except loans and receivables and other financial
liabilities, which are measured at amortized cost. All changes in fair value are recorded to the statement of income unless cash flow 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 financial instruments:
The Company operates principally in Canada and the United States, which gives rise to risks that its income and cash flows may be adversely impacted by
fluctuations in foreign exchange rates. The Company enters into foreign currency forward contracts to manage foreign exchange exposures on anticipated
labor, operating costs, plant and equipment expenditures, and 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 flow hedges. The fair value of each contract is included on the balance sheet within
derivative financial 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 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 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 first 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.
5. Critical accounting estimates and judgments:
The application of the Company’s accounting policies requires managment to use estimates and judgments that can have a significant effect on the
revenues, expenses, comprehensive income, assets and liabilities recognized and disclosures made in the consolidated financial statements. Actual
results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized
prospectively. The following areas require management’s most critical estimates and judgments.
(a) Employee benefit plans:
Accounting for employee benefit 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 benefit plan assets or
liabilities.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of property, plant and equipment and intangible assets:
(b)
An integral component of impairment testing is determining the asset’s recoverable amount. The determination of the recoverable amount involves
significant management judgment, including projections of future cash flows and appropriate discount rates. The cash flows are derived from the financial
forecast for the next five years and do not include restructuring activities that the Company is not yet committed to or significant 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 flows, as well as other factors, are considered when
making assumptions with regard to future cash flows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate
used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. A change in
any of the significant 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.
(c) Aggregation of operating segments:
Management applies judgment in aggregating operating segments into a reportable segment. Aggregation occurs when the operating segments have
similar economic characteristics and have similar products, production processes, types of customers, and distribution methods.
6. Future accounting standards:
(a) Financial instruments:
IFRS 9 “Financial Instruments” was issued in November 2009, introducing new requirements for the classification and measurement of financial assets.
IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. IFRS
9, which has yet to be adopted, retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial
assets: amortized cost and fair value. The basis of classification depends on an entity’s business model and the contractual cash flow of the financial
asset. Classification is made at the time the financial asset is initially recognized, namely when the entity becomes a party to the contractual provisions of
the instrument. With regard to the measurement of financial liabilities designated as fair value through profit or loss, IFRS 9 requires that the amount of the
change in the fair value of the financial 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 financial liability’s credit risk are not subsequently reclassified to the statement of
income. Previously, the entire amount of the change in the fair value of the financial liability designated as fair value through profit 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 financial assets and ii) limited amendments to the classification 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 financial 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 financial statements.
(c) Leases:
IFRS 16 “Leases” was issued in January 2016, providing a single model for leases. The new standard introduces a balance sheet recognition and
measurement model for lessees, eliminating the distinction between operating and finance leases. As a result, most leases will be recognized on the
statement of financial position. Certain exemptions will apply for short-term leases and leases for low-value assets. Lessors will continue to classify
leases as operating and finance leases. 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 financial statements.
(d) Statements of cash flows:
In January 2016, amendments to IAS 7 “Statement of Cash Flows” were issued to improve information provided to users of financial statements about
an entity’s changes in liabilities arising from financing activities. These amendments are effective for annual periods beginning on or after January 1,
2017 with early adoption permitted. While the Company is currently assessing the impact of the amended standard, management does not expect the
amendments to have a significant impact on the Company’s consolidated financial statements.
21
W (e) Foreign currency transactions and advance consideration:
In December 2016, IFRIC Interpretation 22 “Foreign Currency Transactions and Advance Consideration” was issued to clarify the date that should be used
for translation when a foreign currency transaction involves an advance receipt or payment. The date of the transaction for the purpose of determining
the exchange rate to use on initial recognition of the related asset, expense or income is the date on which an entity initially recognizes the non-monetary
asset or non-monetary liability arising from the payment or receipt of advance consideration. The Interpretation is effective for annual periods beginning
on or after January 1, 2018 with early adoption permitted. The Interpretation will be adopted by the Company in 2018. While the Company is currently
assessing the impact of the Interpretation, management does not expect IFRIC 22 to have a significant impact on the Company’s consolidated financial
statements.
2016
2015
7. Expenses by nature:
Raw materials and consumables used
Depreciation and amortization
Personnel expenses (note 8)
Freight
Other expenses
Foreign exchange and cash flow hedge losses transferred from other comprehensive income (note 9)
8. Personnel expenses:
Wages and salaries
Social security
Employee defined benefit plan expenses
Employee defined contribution plan expenses
Multiemployer defined benefit pension plan withdrawal liability settlement gain (note 17)
Multiemployer defined benefit pension plan withdrawal liability - change in discount rates (note 17)
Share-based payments
9. Other expenses:
Foreign exchange loss
Cash flow hedge losses transferred from other comprehensive income
Multiemployer defined benefit pension plan withdrawal liability settlement gain (note 17)
Multiemployer defined benefit pension plan withdrawal liability - change in discount rates (note 17)
10. Finance income and expense:
Finance income on cash and cash equivalents and other
Net finance income on defined benefit plans
Finance income
Finance expense on bank overdrafts and other
Net finance expense on defined benefit plans
Unwinding of discount rates on provisions
Finance expense
Net finance income (expense)
22
(395,818)
(34,184)
(164,753)
(22,232)
(46,079)
(1,669)
(664,735)
(141,407)
(12,766)
(3,219)
(5,072)
-
-
(2,289)
(164,753)
(1,043)
(626)
-
-
(1,669)
561
109
670
(85)
(368)
-
(453)
217
(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)
(159,649)
(613)
(2,976)
1,815
(142)
(1,916)
265
77
342
(33)
(315)
(44)
(392)
(50)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. 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 flow hedges
Employee benefit 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
12. Cash and cash equivalents:
Bank balances
Money market and short-term deposits
13. Trade and other receivables:
Trade receivables
Less: Allowance for doubtful accounts
Net trade receivables
Other receivables
14. Inventories:
Raw materials
Work-in-process
Finished goods
Spare parts
2016
2015
(45,500)
(39,686)
(4,313)
(49,813)
(424)
(847)
(1,271)
26.8%
5.5
(0.8)
31.5%
(5,788)
(45,474)
201
(470)
(269)
26.7%
5.3
(1.1)
30.9%
December 25
December 27
2016
2015
29,753
181,472
211,225
115,320
(795)
114,525
9,623
124,148
27,559
18,113
49,254
8,590
103,516
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
During 2016, the Company recorded, within cost of sales, inventory write-downs for slow-moving and obsolete inventory of $7,593 (2015 - $7,905) and
reversals of previously written-down items of $2,466 (2015 - $2,112).
23
W 15. Property, plant and equipment:
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
Net book value
At December 28, 2015
Cost
Accumulated depreciation
2016 Activity
Additions
Disposals
Transfers
Depreciation
At December 25, 2016
At December 25, 2016
Cost
Accumulated depreciation
Land
Buildings
Equipment
Machines
In Progress
Total
Packaging
Capital
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
141,301
497,423
(41,610)
(271,592)
24,675
(23,695)
33,661
-
99,691
225,831
980
33,661
1,459
(62)
2,166
(4,635)
98,619
24,834
(345)
26,373
(30,052)
246,641
185
(2)
-
(367)
796
48,696
-
(28,539)
-
53,818
9,273
144,793
539,330
(46,174)
(292,689)
22,953
(22,157)
53,818
-
98,619
246,641
796
53,818
-
9,273
-
9,273
-
-
-
-
9,273
-
9,273
54,639
(369)
-
(32,836)
369,436
706,333
(336,897)
369,436
706,333
(336,897)
369,436
75,174
(409)
-
(35,054)
409,147
770,167
(361,020)
409,147
Government grants/tax credits in respect of property, plant and equipment were recognized within deferred income totaling $2,888 in 2016 (2015 - $800).
No impairment losses or impairment reversals were recorded during 2016 and 2015. No borrowing costs were capitalized during 2016 and 2015.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Intangible assets:
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
Net book value
At December 28, 2015
Cost
Accumulated amortization
2016 Activity
Additions
Disposals
Amortization
At December 25, 2016
At December 25, 2016
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
9,290
(7,341)
1,949
303
(3)
(513)
1,736
9,483
(7,747)
1,736
9,483
(7,747)
1,736
430
-
(576)
1,590
9,803
(8,213)
1,590
77
(32)
45
-
(21)
(1)
23
30
(7)
23
30
(7)
23
(8)
(3)
12
20
(8)
12
-
881
(573)
308
-
-
(88)
220
881
(661)
220
881
(661)
220
-
-
(87)
133
881
(748)
133
23,014
(7,946)
15,068
303
(24)
(602)
14,745
23,160
(8,415)
14,745
23,160
(8,415)
14,745
430
(8)
(666)
14,501
23,470
(8,969)
14,501
The 2016 goodwill balance includes $12,542 (2015 - $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 10.0 percent (2015 - 10.9 percent). Cash flows were projected based on actual operating results
and the five-year business plan. Average volume growth projected for the next five years was 4.7 percent (2015 - 5.0 percent) and the average gross profit
percentage projected over the same time-frame was two percentage points (2015 - two percentage points) lower than the actual gross profit percentage
attained in the current year. Cash flows after the five-year period were assumed to increase at a terminal growth rate of 1.5 percent (2015 - 1.5 percent).
As of December 25, 2016, there were no indefinite life intangible assets other than goodwill. 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.
No impairment losses or impairment reversals were recorded during 2016 and 2015.
17. Employee benefit plans:
The Company maintains four funded non-contributory defined benefit pension plans, one funded non-contributory supplementary income postretirement
plan for certain CDN-based executives, one unfunded contributory defined benefit postretirement plan for healthcare benefits for a limited group of US
individuals and seven defined contribution pension plans. Effective January 1, 2005, all defined benefit 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
defined contribution plans upon satisfaction of certain eligibility requirements.
25
W Multiemployer withdrawal liability
The Company participated in one multiemployer defined benefit pension plan providing benefits to certain unionized employees in the US. Management
reached an agreement with the Union to withdraw from the plan in the first quarter of 2011. Pursuant to US federal legislation, an employer who withdraws
from a plan with unfunded vested benefits 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. At each reporting date, the liability
was remeasured in line with changes in discount rates. During 2015, a remeasurement loss of $142 was reflected in other expenses. See note 9. In
addition, the Company reached a Settlement and Release Agreement with the trustee of the plan in the second quarter of 2015, 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 reflected in other expenses. See note 9.
The employee benefit 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 benefit plan asset investment policies, (b) the Company’s cash funding, and (c) the employee benefit entitlements within the respective benefit plans.
Total amounts paid by the Company on account of all benefit plans, consisting of: defined benefit pension plans, supplementary income postretirement
plan, direct payments to beneficiaries for the unfunded postretirement plan and the defined contribution plans, amounted to $6,589 (2015 - $6,301).
Defined contribution pension plans
The Company maintains four defined 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 $5,072 (2015 - $4,543).
Defined benefit plans
For financial reporting purposes, the Company measures the benefit obligations and fair value of the benefit 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, 2016 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 benefits were dated December 25, 2016. The supplementary income postretirement plan has no minimum funding
requirements. The next required actuarial valuations for all of the Company’s active defined benefit plans are three years from the aforementioned dates.
Based on the most recent actuarial valuations, the Company expects to contribute $2,268 in cash to its defined benefit plans in 2017. 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 25, 2016 and December 27, 2015, the benefit obligation pertaining to these plan members represented less than 10 percent of
the Company’s total benefit obligation.
All equity and debt securities have quoted prices in active markets. The defined benefit pension plans do not invest in the shares of the Company. The
objective of the benefit plan asset allocation policy is to manage the funded status of the benefit 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 fluctuations in the benefit
obligations. In the ideal case, benefit plan assets and obligations move in the same direction when interest rates change, creating a natural hedge against
possible underfunding of the benefit plans.
The following presents the financial position of the Company’s defined benefit pension plans and other postretirement benefits, which include the
supplementary income plan and the postretirement plan for healthcare benefits:
Funded status
Present value of funded obligations
Fair value of benefit plan assets
Status of funded obligations
Present value of unfunded obligations
Total funded status of obligations
Benefit plan assets not recognized due to pension plan asset ceiling limit
26
December 25
December 27
2016
2015
(85,691)
85,420
(271)
(2,188)
(2,459)
(73)
(2,532)
(80,832)
80,048
(784)
(2,296)
(3,080)
(82)
(3,162)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts recognized in the balance sheet
Employee benefit plan assets
Employee benefit plan liabilities
Change in benefit obligation
Benefit obligation, beginning of year
Current service cost
Finance expense
Remeasurement gains recognized in other comprehensive income
Benefits paid
Settlements
Foreign exchange
Benefit obligation, end of year
Change in benefit plan assets
Fair value of benefit plan assets, beginning of year
Expected return on benefit plan assets
Remeasurement gains (losses) recognized in other comprehensive income
Employer contributions
Benefits paid
Settlements
Benefit plan administration cost paid from the plan assets recognized in income
Foreign exchange
Fair value of benefit plan assets, end of year
Change in benefit plan assets not recognized due to pension plan asset ceiling limit
Balance, beginning of year
Remeasurement (gains) losses recognized in other comprehensive income
Balance, end of year
Benefit plan obligation
The following represents the geographical breakdown of the benefit obligation:
Canada
United States
The following represents the membership status breakdown of the benefit obligation:
Active members
Retired members
Deferred vested members
Other
Benefit plan assets
The following represents the weighted average allocation of benefit plan assets:
Asset category
Equity securities
Debt securities
Cash
Total
27
December 25
December 27
2016
2015
6,721
(9,253)
(2,532)
83,128
2,911
3,312
(282)
(2,489)
-
1,299
87,879
80,048
3,053
2,225
1,532
(2,489)
-
(308)
1,359
85,420
82
(9)
73
(49,843)
(38,036)
(87,879)
(57,088)
(26,169)
(4,136)
(486)
(87,879)
55%
41%
4%
100%
5,723
(8,885)
(3,162)
91,859
3,186
3,500
(2,005)
(2,612)
(1,912)
(8,888)
83,128
89,435
3,262
(180)
1,681
(2,612)
(1,559)
(357)
(9,622)
80,048
-
82
82
(46,696)
(36,432)
(83,128)
(50,983)
(26,075)
(5,614)
(456)
(83,128)
55%
41%
4%
100%
W Net benefit plan expense
Current service cost
Settlements
Plan administration cost
Net finance income
Net finance expense
Actual return on benefit plan assets
Cumulative remeasurements recognized in other comprehensive income
Cumulative amount, beginning of year
Annual activity
Remeasurement of benefit obligation:
Actuarial gains arising from changes in demographic assumptions
Actuarial (losses) gains arising from changes in financial assumptions
Actuarial gains (losses) arising from experience adjustments
Remeasurement of benefit plan assets - actuarial gains (losses) arising from experience adjustments
Remeasurement of benefit plan assets not recognized due to pension plan asset ceiling limit
Cumulative amount, end of year
Significant assumptions
The following weighted averages were used to value the benefit obligation:
Discount rate
Rate of compensation increase
2016
2015
(2,911)
-
(308)
(3,219)
109
(368)
(3,478)
5,278
(3,186)
353
(357)
(3,190)
77
(315)
(3,428)
3,082
(541)
(2,284)
590
(1,098)
790
282
2,225
9
2,516
1,975
-
2,163
(158)
2,005
(180)
(82)
1,743
(541)
December 25
December 27
2016
2015
4.1%
3.6%
4.2%
3.6%
Assumptions regarding future mortality were based on the following mortality tables: Canada - CPM - RPP2014 private generational (2015 - CPM -
RPP2014 private generational) and United States - RP2016 (2015 - RP2014).
At December 25, 2016, the weighted average duration of the benefit obligations was 14.8 years (2015 - 15.4 years).
Sensitivity analysis
At December 25, 2016, the present value of the benefit obligation was $87,879. Based on changes to the definitive actuarial assumptions, the benefit
obligation would have been as follows:
Discount rate - one percentage point
Future mortality - one year
Rate of compensation increase - one percentage point
Increase
Decrease
75,598
90,106
88,595
101,900
85,604
87,289
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Deferred tax assets and liabilities:
The following are the components of the deferred tax assets and liabilities recognized by the Company:
Assets
Liabilities
Net
December 25
December 27
December 25
December 27
December 25
December 27
2016
405
4,504
-
12
1,057
3
3,602
2,550
244
2015
372
4,450
-
436
1,405
3
3,284
2,808
244
12,377
(11,317)
1,060
13,002
(11,594)
1,408
2016
2015
-
-
-
(68)
(50,602)
(2,362)
(1,724)
(47)
-
(54,803)
11,317
(43,486)
-
-
(92)
-
(46,493)
(1,802)
(1,457)
-
-
(49,844)
11,594
(38,250)
2016
405
4,504
(68)
12
(49,545)
(2,359)
1,878
2,503
244
2015
372
4,450
(92)
436
(45,088)
(1,799)
1,827
2,808
244
(42,426)
(36,842)
-
-
(42,426)
(36,842)
Trade and other receivables
Inventories
Prepaid expenses
Derivative financial instruments
Property, plant and equipment
Intangible assets
Employee benefit 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:
2015
Trade and other receivables
Inventories
Prepaid expenses
Derivative financial instruments
Property, plant and equipment
Intangible assets
Employee benefit plans
Trade payables and other liabilities
Provisions
2016
Trade and other receivables
Inventories
Prepaid expenses
Derivative financial instruments
Property, plant and equipment
Intangible assets
Employee benefit plans
Trade payables and other liabilities
Provisions
Opening
Recognized
Recognized
Balance
In Income
In Equity
Ending
Balance
281
2,927
(66)
235
(39,224)
(1,250)
1,479
2,218
2,615
(30,785)
372
4,450
(92)
436
(45,088)
(1,799)
1,827
2,808
244
91
1,523
(26)
-
(5,864)
(549)
818
590
(2,371)
(5,788)
33
54
24
-
(4,457)
(560)
898
(305)
-
-
-
-
201
-
-
(470)
-
-
372
4,450
(92)
436
(45,088)
(1,799)
1,827
2,808
244
(269)
(36,842)
-
-
-
(424)
-
-
(847)
-
-
405
4,504
(68)
12
(49,545)
(2,359)
1,878
2,503
244
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 sufficient future income will be available to absorb temporary differences.
(36,842)
(4,313)
(1,271)
(42,426)
29
W 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 $420,068 (2015
- $375,151). Temporary differences relating to unremitted earnings of foreign subsidiaries which would be subject to withholding and other taxes totaled
$299,688 (2015 - $260,387).
19. Trade payables and other liabilities:
Trade payables
Other current liabilities and accrued expenses
20. Share-based payments:
December 25
December 27
2016
38,535
32,913
71,448
2015
33,990
34,544
68,534
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 first 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.
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
2016
180,000
(60,000)
60,000
180,000
-
2015
240,000
(120,000)
60,000
180,000
-
The 180,000 RSUs outstanding at the end of 2016 were granted at 60,000 RSUs annually from 2014 through 2016 and the 180,000 RSUs outstanding
at the end of 2015 were granted at 60,000 RSUs annually from 2013 through 2015.
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 $2,289 (2015 - $4,657). The average settlement price in 2016 was
$34.40 US per RSU (2015 - $33.37 US). At December 25, 2016, the carrying value of the liability, as well as the intrinsic value of the vested liability in
respect of the Plan, was $6,169 (2015 - $5,878).
21. Share capital and reserves:
Share capital
At December 25, 2016, the authorized voting common shares were unlimited (2015 - unlimited). The issued and fully paid voting common shares at
December 25, 2016 were 65,000,000 (2015 - 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 flow hedging instruments related to the hedged transactions
that have not yet occurred.
Dividends
During 2016, dividends in Canadian dollars of 12 cents per common share were declared (2015 - 12 cents). In addition, the Company paid a special
dividend in Canadian dollars of $1.50 per common share on October 15, 2015.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 classification and the carrying/fair value of financial instruments:
Assets (Liabilities)
Cash and cash equivalents
Trade and other receivables
Classification
Loans and receivables
Loans and receivables
Derivative financial instrument assets
Derivatives designated as effective hedges
Trade payables and other liabilities
Other financial liabilities
Derivative financial instrument liabilities
Derivatives designated as effective hedges
2016
104,344
65,000
161
2015
99,248
65,000
153
Carrying /
Fair Value
211,225
124,148
308
(71,448)
(348)
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 flow 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 classification 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 classification of financial instruments within the fair value hierarchy:
Financial Assets (Liabilities)
Level 1
Level 2
Level 3
At December 25, 2016
Foreign currency forward contracts - net
At December 27, 2015
Foreign currency forward contracts - net
-
-
(40)
(1,643)
-
-
Total
(40)
(1,643)
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 25, 2016, the supplier rebate receivable balance that was offset was $5,064 (2015 - $5,073).
24. Commitments and guarantees:
Commitments:
At December 25, 2016, the Company has commitments to purchase property, plant and equipment of $26,766 (2015 - $16,445).
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
2017
973
2018
624
2019
468
2020
157
2021
Thereafter
-
-
Total
2,222
During 2016, $1,018 was recognized as an expense in the statement of income in respect of operating leases (2015 - $1,020).
31
W Guarantees:
Directors and officers
The Company and its subsidiaries have entered into indemnification agreements with their respective directors and officers to indemnify them, to the
extent permitted by law, against any and all amounts paid in settlement and damages incurred by the directors and officers as a result of any lawsuit, or
any judicial, administrative or investigative proceeding involving the directors and officers. Indemnification claims will be subject to any statutory or other
legal limitation period. The Company has purchased directors’ and officers’ 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 indemnified 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 indemnified the Manitoba Pension Commission from any and all claims that may be made by any beneficiary under a certain defined
benefit 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 indemnification 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 indemnification agreements is remote. No amounts
have been recorded in the consolidated financial statements with respect to these indemnification agreements.
25. Financial risk management:
In the normal course of business, the Company has risk exposures consisting primarily of foreign exchange risk, interest rate risk, commodity price risk,
credit risk and liquidity risk. The Company manages its risks and risk exposures through a combination of derivative financial instruments, insurance,
a system of internal and disclosure controls and sound business practices. The Company does not purchase any derivative financial instruments for
speculative purposes.
Financial risk management is primarily the responsibility of the Company’s corporate finance function. Significant 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
25, 2016, a one-cent change in the year-end foreign exchange rate from 0.7388 to 0.7288 (CDN to US dollars) would have decreased net income by $6
for 2016. Conversely, a one-cent change in the year-end foreign exchange rate from 0.7388 to 0.7488 (CDN to US dollars) would have increased net
income by $6 for 2016.
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 financial institutions. All foreign currency contracts are
designated as cash flow hedges. Certain foreign currency forward contracts matured during the year and the Company realized pre-tax foreign exchange
losses of $645 (2015 losses - $3,612). Of these foreign exchange differences, losses of $626 (2015 losses - $2,976) were recorded in other expenses,
losses of $19 were recorded in plant and equipment (2015 losses - $4), and $0 was recorded directly to equity (2015 losses - $632).
As at December 25, 2016, the Company had US to CDN dollar foreign currency forward contracts outstanding with a notional amount of US $23.0 million
at an average exchange rate of 1.3500 maturing between January and June 2017. The fair value of these financial instruments was negative $40 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 fluctuations on the finance income that it earns on its cash invested in money market accounts
and short-term deposits. The Company developed and implemented an investment policy, which was approved by the Company’s Board of Directors,
with the primary objective to preserve capital, minimize risk and provide liquidity. Regarding the December 25, 2016 cash and cash equivalents balance
of $211.2 million, a 1.0 percent increase/decrease in interest rate fluctuations would increase/decrease income before income taxes by $2,112 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 reflected in selling price adjustments but there is a slight time lag. For 2016, 69 percent (2015 - 70 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
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 fluctuations 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 financial institutions, derivative financial 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 financial asset:
Cash and cash equivalents
Trade and other receivables
Foreign currency forward contracts
December 25
December 27
2016
211,225
124,148
308
335,681
2015
165,027
107,805
40
272,872
Credit risk on cash and cash equivalents and financial 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 financial institutions and/or governmental bodies that must be rated ‘AA’ or higher for CDN financial institutions and ‘A-1’ or higher for US financial
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 financial instruments by only dealing with CDN Schedule I financial 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 financial position, past experience
and other pertinent factors. Management regularly monitors customer credit limits, performs credit reviews and, in certain cases insures trade receivable
balances against credit losses.
As at December 25, 2016, 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) 98 percent (2015 - 97 percent) of the gross trade and
other receivable balance is within 30 days of the agreed upon payment terms with customers, and (c) 37 percent (2015 - 23 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
45 percent (2015 - 39 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 25
December 27
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
2016
107,044
15,658
1,492
749
124,943
(795)
124,148
2015
86,268
18,877
2,797
819
108,761
(956)
107,805
33
W 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
2016
(956)
82
78
1
(795)
2015
(700)
(536)
280
-
(956)
Liquidity risk
Liquidity risk is the risk that the Company would not be able to meet its financial obligations as they come due. Management believes that the liquidity
risk is low due to the strong financial condition of the Company. This risk assessment is based on the following: (a) cash and cash equivalents amounts
of $211.2 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 financing to fund an acquisition, if needed, (e) an informal investment grade credit rating, and (f) the Company’s ability to generate positive cash
flows from ongoing operations. Management believes that the Company’s cash flows are more than sufficient to cover its operating costs, working capital
requirements, capital expenditures and dividend payments in 2017. The Company’s trade payables and other liabilities and derivative financial 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 sufficient 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
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 defined 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 financial reporting date, over the 12-month rolling EBITDA. This ratio is to be maintained under 3.00:1. As at December 25, 2016, 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 finance expense and dividends. This ratio is to be maintained over 1.50:1. As at December 25,
2016, the ratio was 27.93:1.
There were no changes in the Company’s approach to capital management during 2016.
26. Segment reporting:
The Company’s operations are organized into six operating segments: modified atmosphere packaging, specialty films, rigid containers, lidding, biaxially
oriented nylon, and packaging machinery. The modified atmosphere packaging, specialty films, 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 profit margin and have similar products, production processes, types of customers, and distribution methods. 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 8 percent of total Company revenues and assets.
Modified 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 films for converting applications.
Specialty films includes a full line of barrier and non-barrier films 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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company operates principally in Canada and the United States. The following summary presents key information by geographic segment:
2016
Revenue
Property, plant and equipment and intangible assets
2015
Revenue
Property, plant and equipment and intangible assets
United
States
Canada
Other
Consolidated
676,262
204,178
104,151
218,235
648,953
175,883
97,716
207,031
42,119
1,235
50,500
1,267
822,532
423,648
797,169
384,181
Major customer
During 2016, the Company reported revenue to one customer representing 18 percent of total revenue (2015 - 18 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 financial condition.
28. Related party transactions:
The Company had revenue of $0 (2015 - $13), purchases of $3,706 (2015 - $4,191) and commission income of $295 (2015 - $602) with its majority
shareholder company. Trade and other receivables and trade payables and other liabilities include amounts of $205 (2015 - $136) and $83 (2015 - $353)
respectively with the majority shareholder company. These transactions were completed at market values with normal payment terms.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company.
The Board of Directors and Executive Committee are key management personnel. The following table details the compensation earned by these key
management personnel:
Salaries, fees and short-term benefits
Post-employment benefits
Share-based payments
2016
(4,652)
(443)
(2,289)
(7,384)
2015
(5,160)
(459)
(4,657)
(10,276)
No loans were advanced to key management personnel during the year.
The aggregate remuneration earned by the Board of Directors in 2016 was $541 (2015 - $548). As a group, the Board of Directors hold, directly or
indirectly, 52.5 percent (2015 - 52.7 percent) of the outstanding shares of the Company. The members of the Executive Committee hold, directly or
indirectly, 0.4 percent (2015 - 0.4 percent) of the outstanding shares of the Company.
35
W Annual Meeting
The Annual Meeting of Shareholders will be held on Wednesday, April 27, 2017 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 Office
100 Saulteaux Crescent, Winnipeg, Canada R3J 3T3
info@winpak.com
Board of Directors
Chairman, A.I. Aarnio-Wihuri (2), Kaarina, Finland; Chairman, Wihuri International Oy
Vice Chairman, J.M. Hellgren (2), Lahti, Finland; President and Chief Executive Officer, Wihuri International Oy
M.H. Aarnio-Wihuri (2), Kaarina, Finland; Manager, Sustainability Program, Wihuri International Oy
K.A. Albrechtsen (1), Winnipeg, Canada
D.R.W. Chatterley (1), Winnipeg, Canada
D. Spiring (2), Winnipeg, Canada; President and Chief Executive Officer, Economic Development Winnipeg Inc.
I.T. Suominen (1), Helsinki, Finland; Vice President and Chief Financial Officer, 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 Officer, 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 Officer, Winpak Ltd.
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
Bond Schoeneck & King PLLC, Buffalo, U.S.A.
36
CORPORATE INFORMATION