TORONTO, Nov. 23 /CNW/ -- TORONTO, Nov. 23 /CNW/ - Quarterly Report
to Shareholders George Weston Limited 40 Weeks Ended October 9,
2010 FORWARD-LOOKING STATEMENTS This Quarterly Report for George
Weston Limited ("GWL") and its subsidiaries (collectively, the
"Company"), including this Management's Discussion and Analysis
("MD&A"), contains forward-looking statements about the
Company's objectives, plans, goals, aspirations, strategies,
financial condition, liquidity, obligations, results of operations,
cash flows, performance, prospects and opportunities. Words such as
"anticipate", "expect", "believe", "foresee", "could", "estimate",
"goal", "intend", "plan", "seek", "strive", "will", "may" and
"should" and similar expressions, as they relate to the Company and
its management, are intended to identify forward-looking
statements. These forward-looking statements are not historical
facts but reflect the Company's current expectations concerning
future results and events. These forward-looking statements are
subject to a number of risks and uncertainties that could cause
actual results or events to differ materially from current
expectations, including, but not limited to: -- the possibility
that the Company's plans and objectives will not be achieved; --
changes in economic conditions including the rate of inflation or
deflation; -- changes in consumer spending and preferences; --
heightened competition, whether from new competitors or current
competitors; -- the availability and increased costs relating to
raw materials, ingredients and utilities, including electricity and
fuel; -- changes in the Company's or its competitors' pricing
strategies; -- failure of the Company's franchised stores to
perform as expected; -- risks associated with the terms and
conditions of financing programs offered to the Company's
franchisees; -- failure to realize sales growth, anticipated cost
savings or operating efficiencies from the Company's major
initiatives, including investments in the Company's information
technology systems, supply chain investments and other cost
reduction initiatives, or unanticipated results from these
initiatives; -- the inability of the Company to successfully
implement its infrastructure and information technology components
of its plan; -- the inability of the Company's information
technology infrastructure to support the requirements of the
Company's business; -- the inability of the Company to manage
inventory to minimize the impact of obsolete or excess inventory
and to control shrink; -- failure to execute successfully and in a
timely manner the Company's major initiatives, including the
implementation of strategies and introduction of innovative and
reformulated products or new and renovated stores; -- unanticipated
results associated with the Company's strategic initiatives,
including the impact of acquisitions or dispositions of businesses
on the Company's future revenues and earnings; -- the inability of
the Company's supply chain to service the needs of the Company's
stores; -- failure to achieve desired results in labour
negotiations, including the terms of future collective bargaining
agreements which could lead to work stoppages; -- changes to the
regulatory environment in which the Company operates; -- the
adoption of new accounting standards and changes in the Company's
use of accounting estimates; -- fluctuations in the Company's
earnings due to changes in the value of stock-based compensation
and equity derivative contracts relating to GWL and Loblaw
Companies Limited ("Loblaw") common shares; -- changes in the
Company's tax liabilities including changes in tax laws or future
assessments; -- reliance on the performance of and retention of
third-party service providers, including those associated with the
Company's supply chain and apparel business; -- public health
events; -- risks associated with product defects, food safety and
product handling; -- changes in interest and foreign currency
exchange rates; -- the inability of the Company to collect on its
credit card receivables; -- any requirement of the Company to make
contributions to its funded defined benefit pension plans in excess
of those currently contemplated; -- the inability of the Company to
attract and retain key executives; and -- supply and quality
control issues with vendors. These and other risks and
uncertainties are discussed in the Company's materials filed with
the Canadian securities regulatory authorities from time to time,
including the Enterprise Risks and Risk Management section of the
MD&A included in GWL's 2009 Annual Report. These
forward-looking statements contained herein and in particular in
the Report to Shareholders and MD&A reflect management's
current assumptions regarding these risks and uncertainties and
their respective impact on the Company. Other risks and
uncertainties not presently known to the Company or that the
Company presently believes are not material could also cause actual
results or events to differ materially from those expressed in its
forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect
the Company's expectations only as of the date of this Quarterly
Report. The Company disclaims any intention or obligation to update
or revise these forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by
law. CONSOLIDATED RESULTS OF OPERATIONS George Weston Limited's
third quarter 2010 basic net earnings per common share from
continuing operations were $1.32 compared to $0.44 for the same
period in 2009, an increase of $0.88. Of this increase, $0.31 was
attributable to improvements in the operating performance of the
Company's two operating segments, Weston Foods and Loblaw Companies
Limited. The balance of the improvement of $0.57 was
primarily attributable to the following: -- the positive impact of
$0.51 per common share related to unrealized foreign exchange
losses; -- the positive impact of $0.24 per common share related to
the commodity derivatives fair value adjustment at Weston Foods;
partially offset by -- the negative impact of $0.21 per common
share related to the accounting for Weston Holdings Limited's, a
subsidiary of George Weston Limited, forward sale agreement for 9.6
million Loblaw common shares. 16 Weeks Ended 40 Weeks Ended
(unaudited) ($ millions except Oct. 9, Oct. 10, Oct. 9, Oct. 10,
where otherwise 2010 2009 2010 2009 indicated) Change Change Sales
$ 9,884 $ 9,777 1.1% $ 24,591 $ 24,283 1.3% Operating income $ 490
$ 333 47.1% $ 1,153 $ 722 59.7% Operating margin 5.0% 3.4% 4.7%
3.0% Interest expense and $ 100 $ 80 25.0% $ 321 $ 264 21.6% other
financing charges Net earnings from $ 184 $ 71 NM((3)) $ 351 $ 48
NM((3)) continuing operations Net earnings $ 184 $ 86 NM((3)) $ 351
$ 953 NM((3)) Basic net earnings $ 1.32 $ 0.44 NM((3)) $ 2.46 $
0.11 NM((3)) per common share from continuing operations ($) Basic
net earnings $ 1.32 $ 0.56 NM((3)) $ 2.46 $ 7.12 NM((3)) per common
share ($) EBITDA((1))( ) $ 707 $ 530 33.4% $ 1,695 $ 1,212 39.9%
EBITDA margin((1)) 7.2% 5.4% 6.9% 5.0% Net debt((1)) $ 431 $ 233
85.0% $ 431 $ 233 85.0% The Company achieved strong financial
results in operating performance at Weston Foods and Loblaw despite
a marginal increase in sales of 1.1% to $9,884 million compared to
$9,777 million in the same period in 2009. Operating income for the
third quarter of 2010 was $490 million compared to $333 million in
the same period in 2009, an increase of $157 million or 47.1%.
Consolidated operating margin for the third quarter of 2010 was
5.0% compared to 3.4% for the same period in 2009. Weston Foods
operating income was positively impacted by the benefits realized
from productivity improvements and other cost reduction
initiatives, lower input costs and lower legal and restructuring
charges, which were partially offset by the impact of lower pricing
in certain product categories. Weston Foods brand and product
development efforts continue in an effort to improve overall sales,
while its focus on plant and distribution optimization along with
other ongoing cost reduction initiatives continue to ensure a low
cost operating structure. The improvement in operating income at
Loblaw was primarily attributable to continued buying synergies,
disciplined vendor management, improved control label profitability
and inventory management and a stronger Canadian dollar, partially
offset by increased transportation costs, incremental costs related
to the investment in information technology and supply chain, the
cost in connection with the ratification of new collective
agreements and increased labour costs. Loblaw continues to make
progress towards the final stages of its renewal program in a
market which remains highly competitive and under deflationary
pressures. These factors, combined with the significant risk and
cost associated with the major systems and infrastructure programs
Loblaw is undertaking, will continue to put future sales and
margins increasingly under pressure. Interest expense and other
financing charges for the third quarter of 2010 increased by $20
million to $100 million from $80 million in the third quarter of
2009 primarily due to an increase in the non-cash charge related to
the fair value adjustment of Weston Holdings Limited's forward sale
agreement for 9.6 million Loblaw common shares of $36 million when
compared to the same period in 2009, partially offset by a loss of
$8 million recorded in the third quarter of 2009 related to the
redemption of the George Weston Limited 12.7% Promissory Notes.
Excluding the impact of these items, interest expense and other
financing charges for the third quarter of 2010 decreased by $8
million compared to the third quarter of 2009. The effective income
tax rate decreased to 30.0% in the third quarter of 2010 compared
to 41.5% in the third quarter of 2009. The decrease in the
effective income tax rate compared to the same period in 2009 was
primarily due to a decrease in non-deductible foreign exchange
losses and a decrease in income tax expense relating to certain
prior year income tax matters. Net Debt((1)) The Company's
net debt((1)) as at the end of the third quarter of 2010 was $431
million compared to $299 million as at year end 2009. The increase
was primarily due to fixed asset purchases at Loblaw, dividend
payments and the acquisition of Keystone Bakery Holdings, LLC
("Keystone") by Weston Foods, partially offset by positive cash
flows from operating activities. OPERATING SEGMENTS Weston Foods As
a result of the Company's ongoing review of its strategic options,
the Company recently completed two bakery acquisitions. On
September 24, 2010 the Company purchased Keystone for approximately
$188 million (U.S. $186 million). Keystone is a U.S. manufacturer
and supplier of frozen cupcakes, donuts and cookies. The results of
Keystone operations from the date of acquisition were included in
the Company's third quarter operating results and were not
significant to consolidated net earnings from continuing
operations. Subsequent to the end of the third quarter of 2010, the
Company announced and completed the acquisition of ACE Bakery Ltd.,
a manufacturer and supplier of artisan and European-style rustic
bread varieties for $110 million. Weston Foods sales for the third
quarter of 2010 of $494 million decreased 1.6% compared to the same
period in 2009. Foreign currency translation negatively impacted
sales by approximately 2.0%, while the Keystone acquisition
positively impacted sales growth by approximately 1.1%. Of the
remaining decline of 0.7%, approximately 1.0% was attributable to
lower pricing in certain product categories. Volume increased in
the third quarter of 2010 by 1.5% when compared to the same period
in 2009, of which 1.2% was attributable to the acquisition of
Keystone. Weston Foods operating income was $111 million in the
third quarter of 2010 compared to $36 million in the same period in
2009. Operating margin was 22.5% for the third quarter of 2010
compared to 7.2% in the third quarter of 2009. Excluding the impact
of the effect of stock-based compensation net of equity derivatives
and the commodity derivatives fair value adjustment, which are more
fully described in the MD&A, Weston Foods operating income was
strong when compared to the same period in 2009. Operating income
was positively impacted by the benefits realized from productivity
improvements and other cost reduction initiatives, lower input
costs and lower legal and restructuring charges, which were
partially offset by the impact of lower pricing in certain product
categories. Loblaw Loblaw sales for the third quarter of 2010 of
$9,593 million increased 1.3% compared to the third quarter of
2009. Sales in the third quarter of 2010 were positively impacted
by 1.7% by the acquisition of T&T Supermarket Inc. ("T&T"),
which was completed at the end of the third quarter of 2009. Sales
in food were flat, sales in drugstore declined marginally, sales
growth in apparel was strong while sales of other general
merchandise declined significantly and gas bar sales increased
significantly. Loblaw operating income for the third quarter of
2010 was $388 million compared to $376 million in the same period
in 2009, an increase of 3.2%. Loblaw operating margin was 4.0% for
both the third quarter of 2010 and for the third quarter of 2009.
Excluding the impact of the effect of stock-based compensation net
of equity forwards and the asset impairment charge due to the
closure of a distribution centre in Quebec, operating income
improved as a result of continued buying synergies, disciplined
vendor management, improved control label profitability and
inventory management and a stronger Canadian dollar, partially
offset by increased transportation costs, incremental costs related
to the investment in information technology and supply chain, the
cost in connection with the ratification of new collective
agreements and increased labour costs. OUTLOOK((2) ) The
consolidated results of George Weston Limited will continue to
reflect the operating performance of both the Weston Foods and
Loblaw operating businesses for the remainder of 2010. In addition,
the Company's results will be subject to earnings volatility caused
by the impact of changes in U.S. foreign currency exchange rates on
a portion of the U.S. dollar denominated cash and short term
investments. Earnings volatility may also result from other
non-operating factors including commodity prices and their impact
on the Company's commodity derivatives, the Loblaw common share
price and its impact on the forward sale agreement for 9.6 million
Loblaw common shares and short term interest rates. For the
remainder of 2010, Weston Foods expects continued strong operating
performance with earnings reflecting seasonally lower operating
margins and a modest contribution from the two recently completed
bakery acquisitions. The Company continues its ongoing efforts to
reduce costs through improved efficiencies and productivity. The
Company remains focused on growing sales by optimizing product mix
and product innovation to meet changing consumer buying
preferences. Loblaw continues to make progress towards the final
stages of its overall renewal program. As a result of buying
efficiencies related to its information technology and
infrastructure initiatives and adjustments to the timing of certain
phases of those initiatives, Loblaw now expects the impact to 2010
operating income of the incremental infrastructure and information
technology costs to be lower than previously anticipated. The costs
and risks associated with these investments combined with
deflationary pressures and heightened competition will continue to
challenge sales and margins. George Weston Limited continues to
assess opportunities for the deployment of its significant holdings
of cash and short term investments. [signed] W. Galen Weston
Toronto, Canada Chairman and President November 22, 2010
Management's Discussion and Analysis The following Management's
Discussion and Analysis ("MD&A") for George Weston Limited
("GWL") and its subsidiaries (collectively, the "Company") should
be read in conjunction with the Company's 2010 unaudited interim
period consolidated financial statements and the accompanying notes
of this Quarterly Report, the audited annual consolidated financial
statements and the accompanying notes for the year ended December
31, 2009 and the related annual MD&A included in the Company's
2009 Annual Report. The Company's third quarter 2010 unaudited
interim period consolidated financial statements and the
accompanying notes have been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and are reported
in Canadian dollars. These unaudited interim period consolidated
financial statements include the accounts of the Company and
variable interest entities ("VIEs") that the Company is required to
consolidate in accordance with Accounting Guideline 15,
"Consolidation of Variable Interest Entities". A glossary of terms
and ratios used throughout this Quarterly Report can be found
beginning on page 114 of the Company's 2009 Annual Report. In
addition, this Quarterly Report includes the following terms:
"rolling year net debt((1)) to EBITDA((1))", which is defined as
net debt((1)) divided by cumulative EBITDA((1)) for the latest four
quarters; "rolling year return on average net assets((1))", which
is defined as cumulative operating income for the latest four
quarters divided by average net assets((1)); "rolling year return
on average common shareholders' equity", which is defined as
cumulative net earnings available to common shareholders from
continuing operations for the latest four quarters divided by
average total common shareholders' equity; and "operating working
capital" which is defined as the sum of accounts receivable,
inventories and prepaid expenses and other assets less accounts
payable and accrued liabilities. The information in this MD&A
is current to November 22, 2010, unless otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS As disclosed previously, the
fresh bread and baked goods business in the United States ("U.S.
fresh bakery business") was sold on January 21, 2009. The results
and the gain on the sale of the U.S. fresh bakery business have
been reflected separately as discontinued operations in the
comparative results. Sales Sales for the third quarter of 2010
increased 1.1%, or $107 million, to $9,884 million from $9,777
million in the third quarter of 2009. On a year-to-date basis,
sales increased 1.3% to $24,591 million. The impact of foreign
currency translation on the Weston Foods operating segment
negatively impacted consolidated sales growth by approximately 0.1%
for the third quarter of 2010 and 0.2% on a year-to-date basis.
When compared to the same period last year, the Company's
consolidated sales for the third quarter of 2010 were impacted by
each of its reportable operating segments as follows: -- Negatively
by 0.1% as a result of a sales decrease of 1.6% at Weston Foods.
Foreign currency translation negatively impacted Weston Foods'
sales by approximately 2.0%, while the Keystone Bakery Holdings,
LLC ("Keystone") acquisition positively impacted sales growth by
approximately 1.1%. Of the remaining decline of 0.7%, approximately
1.0% was attributable to lower pricing in certain product
categories. Volume increased in the third quarter of 2010 by 1.5%
when compared to the same period in 2009, of which 1.2% was
attributable to the acquisition of Keystone. -- Positively by 1.2%
due to sales growth of 1.3% at Loblaw. T&T Supermarket Inc.
("T&T") sales positively impacted Loblaw's sales by 1.7%.
Same-store sales in the quarter declined 0.4%. Sales in food were
flat. Loblaw's internal retail food price index was flat compared
to internal retail food price inflation in the third quarter of
2009. Sales in drugstore declined marginally, sales growth in
apparel was strong while sales of other general merchandise
declined significantly and gas bar sales increased significantly.
Operating Income Operating income for the third quarter of 2010 was
$490 million compared to $333 million in the third quarter of 2009.
Consolidated operating margin of 5.0% for the third quarter of 2010
increased compared to 3.4% for the same period in 2009. When
compared to the same period last year, the Company's change in
operating income for the third quarter 2010 was impacted positively
by 22.5% due to an increase in operating income at Weston Foods,
and positively by 3.6% due to an increase in operating income at
Loblaw. In addition, the reduction in foreign exchange losses
associated with the effect of foreign exchange on a portion of the
U.S. dollar denominated cash and short term investments held by
Dunedin Holdings S.à r.l. ("Dunedin"), a subsidiary of GWL,
positively impacted operating income growth by 21.0%. The
year-over-year change in the following items influenced operating
income for the third quarter of 2010 compared to the third quarter
of 2009: -- a charge of $9 million (2009 - $79 million) related to
unrealized foreign exchange losses associated with the effect of
foreign exchange on a portion of the U.S. dollar denominated cash
and short term investments held by Dunedin, a subsidiary of GWL,
and certain of its affiliates; -- income of $24 million (2009 - a
charge of $17 million) related to the commodity derivatives fair
value adjustment at Weston Foods; -- a charge of $9 million (2009 -
$11 million) related to the effect of stock-based compensation net
of equity derivatives of both GWL and Loblaw; and -- a charge of $3
million (2009 - nil) related to an asset impairment due to the
closure of a Loblaw distribution centre in Quebec. Year-to-date
operating income for 2010 was $1,153 million compared to $722
million in 2009. Operating margin for year-to-date 2010 was 4.7%
compared to 3.0% in 2009. The year-over-year change in the
following items influenced operating income for year-to-date 2010
compared to 2009: -- a charge of $44 million (2009 - $265 million),
of which $44 million (2009 - $231 million) related to foreign
exchange losses associated with the effect of foreign exchange on a
portion of the U.S. dollar denominated cash and short term
investments held by Dunedin and certain of its affiliates and nil
(2009 - a charge of $34 million) related to the reversal of
cumulative foreign currency translation losses; -- nil (2009 - a
charge of $73 million) related to the non-cash goodwill impairment
in Weston Foods' biscuits, cookies, cones and wafers business; -- a
charge of $26 million (2009 - nil) related to an asset impairment
due to the closure of a Loblaw distribution centre in Quebec; --
income of $34 million (2009 - $12 million) related to the commodity
derivatives fair value adjustment at Weston Foods; and -- a charge
of $19 million (2009 - $23 million) related to the effect of
stock-based compensation net of equity derivatives of both GWL and
Loblaw. Included in the foreign exchange loss reported in
year-to-date 2009 was a $48 million charge related to the
conversion of U.S. $2.4 billion of cash and short term investments
to approximately $3.0 billion Canadian dollars following the sale
of the U.S. fresh bakery business. This loss was a result of the
appreciation of the Canadian dollar relative to the U.S. dollar
between the closing date of the sale and the dates on which the
proceeds were converted to Canadian dollars. Excluding the impact
of the specific items noted above, operating income for the third
quarter and year-to-date 2010 was strong compared to the same
periods in 2009. EBITDA((1)) increased by $177 million to $707
million in the third quarter of 2010 compared to $530 million in
the third quarter of 2009. EBITDA margin((1)) for the third quarter
of 2010 increased to 7.2% from 5.4% in the same period in 2009. On
a year-to-date basis, EBITDA((1)) increased by $483 million to
$1,695 million compared to $1,212 million in 2009. Year-to-date
EBITDA margin((1)) increased to 6.9% from 5.0% in 2009. EBITDA((1))
and EBITDA margins((1)) for the third quarter and year-to-date 2010
were positively impacted by the reduction in foreign exchange
losses associated with the effect of foreign exchange on a portion
of the U.S. dollar denominated cash and short term investments held
by Dunedin and certain of its affiliates, and higher EBITDA
margins((1)) at both Weston Foods and Loblaw. The year-to-date 2009
EBITDA margin((1)) at Weston Foods was negatively impacted by the
non-cash goodwill impairment charge recorded in the first quarter
of 2009. Interest Expense and Other Financing Charges Interest
expense and other financing charges for the third quarter of 2010
increased by $20 million to $100 million from $80 million in the
third quarter of 2009 primarily due to: -- an increase in the
non-cash charge related to the fair value adjustment of Weston
Holdings Limited's ("WHL"), a subsidiary of GWL, forward sale
agreement for 9.6 million Loblaw common shares of $36 million when
compared to the same period in 2009; partially offset by -- a loss
of $8 million recorded in the third quarter of 2009 related to the
redemption of the GWL 12.7% Promissory Notes. Excluding the impact
of the specific items noted above, interest expense and other
financing charges decreased by $8 million. Year-to-date interest
expense and other financing charges increased by $57 million to
$321 million from $264 million in 2009. This increase was primarily
due to an increase in the non-cash charge related to the fair value
adjustment of WHL's forward sale agreement for 9.6 million Loblaw
common shares of $104 million when compared to 2009, partially
offset by a loss of $49 million recorded in 2009 on the redemption
of the GWL 12.7% Promissory Notes. Income Taxes The effective
income tax rates for the third quarter and year-to-date 2010 were
30.0% and 32.3% (2009 - 41.5% and 48.0%), respectively. Both
the third quarter and year-to-date decreases in the effective
income tax rates compared to the same periods in 2009 were
primarily due to decreases in non-deductible foreign exchange
losses. The third quarter was further impacted by a decrease in
income tax expense relating to certain prior year income tax
matters when compared to the same period in 2009. In March
2010, the federal budget proposed changes that impact the tax
deductibility of cash-settled stock options. As at the end of the
third quarter of 2010, the Company had $14 million in current and
future tax assets relating to outstanding employee stock options
that will be expensed when the proposed changes are substantively
enacted. Subsequent to the end of the third quarter of 2010, the
Canada Revenue Agency ("CRA") advised GWL of its intent to
challenge the characterization of a gain reported in a previous tax
return filing. Should the CRA be successful in its assertion, the
maximum exposure to the Company's net earnings would be
approximately $70 million. GWL intends to vigorously defend its
filing position. No amount has been recorded in the Company's
financial statements. Net Earnings from Continuing Operations Net
earnings from continuing operations for the third quarter of 2010
were $184 million compared to $71 million in the third quarter of
2009 and on a year-to-date basis, net earnings from continuing
operations were $351 million compared to $48 million in 2009. Basic
net earnings per common share from continuing operations for the
third quarter of 2010 were $1.32 compared to $0.44 in the same
period in 2009 and year-to-date 2010 basic net earnings per common
share from continuing operations were $2.46 compared to $0.11 in
2009. Basic net earnings per common share from continuing
operations in the third quarter of 2010 compared to the third
quarter of 2009 were affected by the following factors: -- a $0.07
per common share charge (2009 - $0.58) related to unrealized
foreign exchange losses associated with the effect of foreign
exchange on a portion of the U.S. dollar denominated cash and short
term investments held by Dunedin and certain of its affiliates; --
$0.14 per common share income (2009 - $0.10 per common share
charge) related to the commodity derivatives fair value adjustment
at Weston Foods; -- a $0.04 per common share non-cash charge (2009
- $0.17 per common share non-cash income) related to the accounting
for WHL's forward sale agreement for 9.6 million Loblaw common
shares; -- a $0.05 per common share charge (2009 - $0.08) related
to the effect of stock-based compensation net of equity derivatives
of both GWL and Loblaw; -- a $0.01 per common share charge (2009 -
nil) related to an asset impairment due to the closure of a Loblaw
distribution centre in Quebec; and -- nil per common share (2009 -
$0.01 per common share charge) related to the redemption of the GWL
12.7% Promissory Notes. The 2010 year-to-date basic net earnings
per common share from continuing operations compared to 2009 were
affected by the following factors: -- a $0.34 per common share
charge (2009 - $1.86), of which $0.34 (2009 - $1.60) related to
foreign exchange losses associated with the effect of foreign
exchange on a portion of the U.S. dollar denominated cash and short
term investments held by Dunedin and certain of its affiliates and
nil (2009 - $0.26 per common share charge) related to the reversal
of cumulative foreign currency translation losses; -- a $0.40 per
common share non-cash charge (2009 - $0.21 per common share
non-cash income) related to the accounting for WHL's forward sale
agreement for 9.6 million Loblaw common shares; -- nil per common
share (2009 - $0.38 per common share charge) related to the
non-cash goodwill impairment in Weston Foods' biscuits, cookies,
cones and wafers business; -- nil per common share (2009 - $0.29
per common share charge) related to the redemption of the GWL 12.7%
Promissory Notes; -- $0.19 per common share income (2009 - $0.05)
related to the commodity derivatives fair value adjustment at
Weston Foods; -- a $0.05 per common share charge (2009 - $0.15)
related to the effect of stock-based compensation net of equity
derivatives of both GWL and Loblaw; and -- a $0.09 per common share
charge (2009 - nil) related to an asset impairment due to the
closure of a Loblaw distribution centre in Quebec. Discontinued
Operations Net earnings from discontinued operations were nil for
the third quarter of 2010 compared to $15 million in the same
period in 2009. On a year-to-date basis, net earnings from
discontinued operations were nil in 2010 compared to $905 million
in 2009. Included in year-to-date 2009 net earnings from
discontinued operations was a gain on disposal of the U.S. fresh
bakery business of $936 million ($898 million, net of tax). Net
Earnings Net earnings for the third quarter of 2010 were $184
million compared to $86 million in the same period in 2009 and on a
year-to-date basis, net earnings were $351 million compared to $953
million in 2009. Basic net earnings per common share for the third
quarter of 2010 were $1.32 compared to $0.56 in the same period in
2009 including net earnings from discontinued operations per common
share of nil compared to $0.12 in the same period in 2009.
Year-to-date 2010 basic net earnings per common share of $2.46
compared to $7.12 in 2009, including net earnings from discontinued
operations per common share of nil compared to $7.01 in 2009. GWL's
ownership of Loblaw was 62.8% as at the end of the third quarter of
2010 and 62.5% as at year end 2009. GWL's ownership of Loblaw was
62.1% as at the end of the third quarter of 2009 and 61.9% as at
year end 2008. The increases in GWL's ownership were due to the
Company's participation in the Loblaw Dividend Reinvestment Plan
and Loblaw's repurchase of 1.7 million of its common shares during
the fourth quarter of 2009. REPORTABLE OPERATING SEGMENTS Weston
Foods The Weston Foods operating segment achieved strong financial
results despite soft sales in the third quarter of 2010. Weston
Foods sales were negatively impacted by foreign currency
translation and lower pricing in certain product categories.
Operating income increased in the third quarter of 2010 compared to
the same period in 2009 and after excluding the impact of the
commodity derivatives fair value adjustment, the impact of
stock-based compensation net of equity derivatives and also foreign
currency translation, operating income in the third quarter of 2010
remained strong. Operating income was positively impacted by the
benefits realized from productivity improvements and other cost
reduction initiatives, lower input costs, and lower legal and
restructuring charges, which were partially offset by the impact of
lower pricing in certain product categories. On September 24, 2010,
the Company purchased Keystone, a U.S. manufacturer and supplier of
frozen cupcakes, donuts and cookies for approximately $188 million
(U.S. $186 million). The results of Keystone operations from the
date of acquisition were included in the Company's third quarter
operating results and were not significant to consolidated net
earnings from continuing operations. Sales Weston Foods sales for
the third quarter of 2010 of $494 million decreased 1.6% compared
to the same period in 2009. Foreign currency translation negatively
impacted sales by approximately 2.0%, while the Keystone
acquisition positively impacted sales growth by approximately 1.1%.
Of the remaining decline of 0.7%, approximately 1.0% was
attributable to lower pricing in certain product categories. Volume
increased in the third quarter of 2010 by 1.5% when compared to the
same period in 2009, of which 1.2% was attributable to the
acquisition of Keystone. On a year-to-date basis, sales of $1,238
million decreased 7.2% compared to 2009. Foreign currency
translation negatively impacted sales by approximately 4.8%, while
the Keystone acquisition positively impacted sales growth by
approximately 0.5%. Of the remaining decline of 2.9%, approximately
2.5% was attributable to lower pricing across key product
categories. Volume increased on a year-to-date basis by 0.1% when
compared to 2009. The acquisition of Keystone contributed 0.5% to
volume growth. The following sales analysis excludes the impact of
foreign currency translation. Fresh bakery sales decreased
approximately 0.9% in the third quarter of 2010 compared to the
same period in 2009 mainly driven by lower sales volumes. On a
year-to-date basis, sales decreased 1.1% compared to 2009, driven
by lower sales volumes and lower pricing including increased
promotional spending. Volume decreased in the third quarter of 2010
and on year-to-date basis mainly due to lower sales of private
label products. Year-to-date volumes were positively impacted by
growth in the Gadoua, D'Italiano and Wonder brands. The
introduction of new products, such as Gadoua MultiGo, Wonder
Invisibles, Jake's Bake House, Country Harvest Ancient Grains,
Wonder SimplyFree and D'Italiano Focaccia, contributed positively
to branded sales during the third quarter and year-to-date 2010.
Frozen bakery sales increased approximately 3.4% in the third
quarter of 2010 and were flat on a year-to-date basis compared to
the same periods in 2009, mainly due to the acquisition of
Keystone. Excluding the effect of this acquisition, frozen bakery
sales increased approximately 0.4% in the third quarter of 2010
compared to the same period in 2009. On a year-to-date basis, sales
decreased 1.4% compared to 2009 due to lower sales volumes and
lower pricing. Volume in the third quarter was flat and volume
year-to-date decreased compared to the same periods in 2009 due to
decreases in certain product categories including the continued
softness in the food service market and the loss of certain
distributed products. Biscuit sales, principally wafers, ice-cream
cones, cookies and crackers, decreased approximately 3.8% in the
third quarter of 2010 and 8.5% year-to-date compared to the same
periods in 2009, mainly due to lower pricing in certain product
categories. Volume increased in the third quarter of 2010 compared
to the same period in 2009 mainly due to growth in cookie and wafer
sales, partially offset by lower cone and cup sales. On a
year-to-date basis, volume increased compared to 2009 due to growth
in cookie sales, partially offset by cone and cup sales. Operating
Income Weston Foods operating income was $111 million in the third
quarter of 2010 compared to $36 million in the same period in 2009.
Operating margin was 22.5% for the third quarter of 2010 compared
to 7.2% in the third quarter of 2009. The year-over-year change in
the following items influenced operating income for the third
quarter of 2010 compared to the third quarter of 2009: -- income of
$24 million (2009 - a charge of $17 million) related to the
commodity derivatives fair value adjustment; and -- income of $1
million (2009 - a charge of $6 million) related to the effect of
stock-based compensation net of equity derivatives. On a
year-to-date basis, Weston Foods operating income increased to $223
million from $65 million in 2009. Operating margin for 2010 was
18.0% compared to 4.9% in 2009. The year-over-year change in the
following items influenced operating income for year-to-date 2010
compared to 2009: -- nil (2009 - a charge of $73 million) related
to the non-cash goodwill impairment in Weston Foods' biscuits,
cookies, cones and wafers business; -- income of $34 million (2009
- $12 million) related to the commodity derivatives fair value
adjustment; and -- income of $11 million (2009 - a charge of $6
million) related to the effect of stock-based compensation net of
equity derivatives. In addition, operating income for the third
quarter and year-to-date 2010 was negatively impacted by foreign
currency translation due to a stronger Canadian dollar relative to
the U.S. dollar. Weston Foods is exposed to commodity price
fluctuations primarily as a result of purchases of certain raw
materials, fuels and utilities. In accordance with the Company's
risk management strategy, Weston Foods enters into commodity
derivatives to reduce the impact of price fluctuations in
forecasted raw material purchases over a specified period of time.
These commodity derivatives are not acquired for trading or
speculative purposes. Certain of these derivatives are not
designated for financial reporting purposes as cash flow hedges of
anticipated future raw material purchases, and accordingly hedge
accounting does not apply. As a result, changes in the fair value
of these derivatives, which include realized and unrealized gains
and losses related to future purchases of raw materials, are
recorded in operating income. Weston Foods recorded income of $24
million (2009 - a charge of $17 million) during the third quarter
of 2010, and on a year-to-date basis income of $34 million (2009 -
$12 million), related to the fair value adjustment of exchange
traded commodity derivatives that were not designated within a
hedging relationship. Despite the impact of accounting for these
commodity derivatives on the Company's reported results, the
derivatives have the economic impact of largely mitigating the
associated risks arising from price fluctuations in the underlying
commodities during the period that the commodity derivatives are
held. Weston Foods continuously evaluates strategic and cost
reduction initiatives related to its manufacturing assets,
distribution networks and administrative infrastructure with the
objective of ensuring a low cost operating structure. Restructuring
activities related to these initiatives are ongoing. In the third
quarter of 2010, income of $4 million (2009 - a charge of $2
million), and on a year-to-date basis a charge of $2 million (2009
- $9 million) were recorded in operating income related to
restructuring activities. Subsequent to the end of the third
quarter of 2010, the Company reversed its previously communicated
decision to close a fresh bakery manufacturing facility in Quebec
as a result of its ability to reach a satisfactory collective
agreement with a new union. As a result, in the third quarter of
2010, the Company reversed a charge of $4 million recorded in the
first quarter of 2010 relating to certain employee termination
benefits which are no longer expected to be incurred as at the end
of the third quarter of 2010. Weston Foods operating income for the
third quarter and year-to-date 2010 were impacted by changes in the
following items when compared to the same periods in 2009: the
commodity derivatives fair value adjustment, the effect of
stock-based compensation net of equity derivatives, and also
foreign currency translation. Operating income on a year-to-date
basis was also positively impacted by the non-cash goodwill
impairment charge in Weston Foods' biscuits, cookies, cones and
wafers business recorded in the first quarter of 2009. Excluding
these specific items, operating income in the third quarter and
year-to-date 2010 remained strong compared to the same periods in
2009. Operating income was positively impacted by the benefits
realized from productivity improvements and other cost reduction
initiatives, lower input costs and lower legal and restructuring
charges, which were partially offset by the impact of lower pricing
in certain product categories. Gross margin, including the impact
of the commodity derivatives fair value adjustment, increased in
the third quarter of 2010 and on a year-to-date basis compared to
the same periods in 2009. EBITDA((1)) increased by $73 million to
$127 million in the third quarter of 2010 compared to $54 million
in the third quarter of 2009. On a year-to-date basis EBITDA((1))
increased by $154 million to $263 million compared to $109 million
in 2009, mainly due to the non-cash goodwill impairment charge
recorded in the first quarter of 2009 and the increase in operating
income as described above. EBITDA margin((1)) increased in the
third quarter of 2010 to 25.7% from 10.8% in 2009 and on a
year-to-date basis to 21.2% from 8.2% in 2009. Subsequent to the
end of the third quarter of 2010, the Company announced and
completed the acquisition of ACE Bakery Ltd., a manufacturer and
supplier of artisan and European-style rustic bread varieties, for
$110 million. Loblaw Sales Sales for the third quarter of
2010 increased by 1.3% to $9,593 million compared to the third
quarter of 2009. The following factors explain the major components
of the increase: -- T&T sales positively impacted Loblaw's
sales by 1.7%; -- same-store sales declined by 0.4%; -- sales in
food were flat; -- Loblaw's internal retail food price index was
flat. This compared to internal retail food price inflation in the
third quarter of 2009. National food price inflation was 1.3% as
measured by the "Consumer Price Index for Food Purchased from
Stores" ("CPI"). CPI does not necessarily reflect the effect of
inflation on the specific mix of goods sold in Loblaw stores; --
sales in drugstore declined marginally, impacted by deflation due
to regulatory changes in Ontario and the introduction of generic
versions for certain prescription drugs; -- sales growth in apparel
was strong while sales of other general merchandise declined
significantly due to reductions in assortment and square footage
and lower discretionary consumer spending; -- gas bar sales
increased significantly as a result of higher retail gas prices and
strong volume growth; and -- during the third quarter of 2010, net
retail square footage remained flat, as 2 stores opened and 2
stores closed. During the last four quarters, 14 stores were opened
and 24 stores were closed, resulting in a net decrease of 0.1
million square feet, or 0.2%. On a year-to-date basis, sales
increased by 1.8% to $23,836 million compared to 2009. The
following factors, in addition to the quarterly factors mentioned
above, further explain the increase: -- T&T sales positively
impacted Loblaw's sales by 1.8%; -- same-store sales declined by
0.3%; and -- sales and same-store sales were positively impacted by
approximately 0.2% as a result of a labour disruption during the
first quarter of 2009 in certain Maxi stores in Quebec. These
stores reopened in the first quarter of 2009, except for two stores
that were permanently closed. Operating Income Operating income was
$388 million for the third quarter of 2010 compared to $376 million
in the same period in 2009, an increase of 3.2%. Operating margin
was 4.0% for both the third quarter of 2010 and the third quarter
of 2009. Gross profit increased by $152 million to $2,317 million
in the third quarter of 2010 compared to $2,165 million in the
third quarter of 2009. Gross profit as a percentage of sales was
24.2% in the third quarter of 2010 compared to 22.9% in the same
period in 2009. In the third quarter of 2010, the increase in gross
profit and gross profit as a percentage of sales was primarily
attributable to continued buying synergies, disciplined vendor
management, improved control label profitability and inventory
management and a stronger Canadian dollar, partially offset by
increased transportation costs. The increase in operating income
was primarily due to the change in gross profit as described above,
partially offset by a charge of $10 million (2009 - $5 million)
related to the effect of stock-based compensation net of the equity
forwards, a $3 million asset impairment charge due to the closure
of a distribution centre in Quebec, incremental costs of $46
million related to Loblaw's investment in information technology
and supply chain and increased labour costs. In addition, in
connection with the ratification of new 5-year collective
agreements with certain Ontario locals of the United Food and
Commercial Workers Canada union, Loblaw incurred a cost of
approximately $17 million in the third quarter of 2010. With the
ratification of these collective agreements, Loblaw expects
improved operational flexibility. EBITDA((1)) increased by $34
million, or 6.1%, to $589 million in the third quarter of 2010
compared to $555 million in the third quarter of 2009. EBITDA
margin((1)) increased in the third quarter of 2010 to 6.1% from
5.9% in the same period in 2009. The increases in EBITDA((1)) and
EBITDA margin((1)) were primarily due to the changes in operating
income as described above. Year-to-date operating income for 2010
increased by $52 million, or 5.6%, to $974 million, and resulted in
an operating margin of 4.1% compared to 3.9% in 2009. Year-to-date
gross profit increased by $362 million to $5,830 million compared
to $5,468 million in 2009. Year-to-date gross profit as a
percentage of sales was 24.5% compared to 23.3% in 2009. The
year-to-date 2010 increase in gross profit and gross profit as a
percentage of sales was primarily attributable to continued buying
synergies, disciplined vendor management, improved control label
profitability and inventory management and a stronger Canadian
dollar, partially offset by increased transportation costs. The
year-to-date increases in operating income and operating margin
were primarily due to the changes in gross profit as described
above, partially offset by a charge of $30 million (2009 - $17
million) related to the effect of stock-based compensation net of
the equity forwards, incremental costs of $115 million related to
Loblaw's investment in information technology and supply chain, the
$17 million cost incurred in the third quarter of 2010 in
connection with the ratification of new collective agreements and
increased labour costs. Included in the incremental costs was $16
million of costs related to changes in Loblaw's distribution
network in Quebec recorded in the second quarter of 2010. In
addition, in connection with the distribution network changes, a
$26 million asset impairment charge was recorded for the closure of
a distribution centre. Year-to-date operating income in 2009
included a gain of $8 million from the sale of financial
investments by President's Choice Bank ("PC Bank"), a wholly owned
subsidiary of Loblaw. Year-to-date EBITDA((1))( )increased by $108
million, or 7.9% to $1,476 million compared to $1,368 million in
2009. EBITDA margin((1) )improved to 6.2% compared to 5.8% in 2009.
The year-to-date increases in EBITDA((1)) and EBITDA margin((1))
were primarily due to the changes in year-to-date operating income
as described above. CONSOLIDATED FINANCIAL CONDITION Financial
Ratios The Company's net debt((1)) to equity ratio at the end of
the third quarter of 2010 was 0.06:1 compared to 0.04:1 at year end
2009. The slight increase in this ratio when compared to year end
2009 was due to the increase in net debt((1)) as discussed in the
net debt((1)) section below. The rolling year net debt((1)) to
EBITDA((1)) ratio was 0.2 times at the end of the third quarter of
2010 and at year end 2009 compared to 0.1 times at the end of the
third quarter of 2009. The interest coverage ratio in the third
quarter of 2010 increased to 4.6 times compared to 3.9 times in the
third quarter of 2009. On a year-to-date basis, the interest
coverage ratio increased to 3.4 times in 2010 compared to 2.6 times
in 2009. The increases were primarily due to the increase in
operating income, partially offset by the increase in interest
expense. The Company's rolling year return on average net
assets((1)) at the end of the third quarter of 2010 was 13.1%
compared to 10.0% at the end of the same period in 2009 and 9.3% at
year end 2009. The Company's rolling year return on average common
shareholders' equity was 6.3% at the end of the third quarter of
2010 compared to 6.9% at the end of the same period in 2009 and
1.5% at year end 2009. Capital Securities Of the 12.0 million
authorized non-voting Loblaw second preferred shares, Series A, 9.0
million were outstanding at the end of the third quarter of 2010.
Dividends on capital securities are presented in interest expense
and other financing charges in the consolidated statements of
earnings. Outstanding Share Capital GWL's outstanding share capital
is comprised of common shares and preferred shares. An unlimited
number of common shares is authorized and 129.1 million common
shares were outstanding at the end of the third quarter of 2010.
Ten million preferred shares, Series I, are authorized and 9.4
million were outstanding, 10.0 million preferred shares, Series
III, are authorized and 8.0 million were outstanding and 8.0
million preferred shares, Series IV and Series V, are authorized
and were outstanding, in each case, at the end of the third quarter
of 2010. During the second quarter of 2010, GWL renewed its Normal
Course Issuer Bid ("NCIB") to purchase on the Toronto Stock
Exchange or enter into equity derivatives to purchase up to 5% of
its common shares outstanding. GWL did not purchase any shares
under its NCIB in the first three quarters of 2010 or in 2009.
Dividends On October 1, 2010, common share dividends of $0.36 per
share and preferred share dividends of $0.32 per share for the
Series III and Series IV preferred shares and dividends of $0.30
per share for the Series V preferred shares were paid as declared
by GWL's Board of Directors. On September 15, 2010, preferred share
dividends of $0.36 per share for the Series I preferred shares were
paid as declared by the Board. Subsequent to the end of the third
quarter of 2010, common share dividends of $0.36 per share and
preferred share dividends of $0.32 per share for the Series III and
Series IV preferred shares and dividends of $0.30 per share for the
Series V preferred shares, payable on January 1, 2011, were
declared by GWL's Board of Directors. In addition, dividends of
$0.36 per share for Series I preferred shares, payable on December
15, 2010, were also declared. LIQUIDITY AND CAPITAL RESOURCES Cash
Flows from Operating Activities of Continuing Operations Third
quarter 2010 cash flows from operating activities of continuing
operations were $681 million compared to $879 million in the same
period in 2009. On a year-to-date basis, cash flows from operating
activities of continuing operations were $1,100 million compared to
$1,349 million in 2009. The decreases when compared to the same
periods in 2009 were primarily due to the change in non-cash
working capital, partially offset by the increases in EBITDA((1))
as described in the results of operations section above. Cash Flows
used in Investing Activities of Continuing Operations Third quarter
2010 cash flows used in investing activities of continuing
operations were $649 million compared to $164 million in the same
period in 2009. On a year-to-date basis, cash flows used in
investing activities of continuing operations were $756 million
compared to $1,311 million in 2009. The increase in the third
quarter when compared to the same period in 2009 was primarily due
to the changes in short term investments and security deposits, and
the increase in fixed asset purchases. The year-to-date decrease
when compared to 2009 was primarily due to the change in short term
investments, partially offset by the increase in fixed asset
purchases and the change in security deposits. Also impacting third
quarter and year-to-date 2010 cash flows from investing activities
was $188 million net cash consideration in connection with the
acquisition of Keystone by Weston Foods. Capital investment
amounted to $485 million (2009 - $293 million) for the third
quarter and $877 million (2009 - $640 million) year-to-date 2010,
including $17 million and $36 million, respectively, that was
financed by Loblaw through capital leases. The Company's estimate
of capital expenditures has increased to approximately $1.3 billion
for the year 2010 due to an increase in Loblaw's planned retail
renovations driven by better than expected performance of renovated
stores. Cash Flows used in Financing Activities of Continuing
Operations Third quarter 2010 cash flows used in financing
activities of continuing operations were $131 million compared to
$213 million in the same period in 2009. On a year-to-date basis,
cash flows used in financing activities of continuing operations
were $179 million compared to $853 million in 2009. The decrease in
the third quarter when compared to the same period in 2009 was due
to an increase in long term debt. The year-to-date decrease when
compared to 2009 was primarily due to the redemption of GWL's 10.6
million preferred shares, Series II, for $265 million in the second
quarter of 2009, the repayment of short term and bank indebtedness
in the second quarter of 2009 and the decrease in long term debt
repayments in 2010. During the third quarter of 2010 PC Bank began
accepting deposits under a new Guaranteed Investment Certificate
("GIC") program. The GICs, which are sold through an independent
broker channel, are issued with fixed terms ranging from 12 to 60
months and are non-redeemable prior to maturity. Individual
balances up to $100,000 are Canada Deposit Insurance Corporation
insured. As at October 9, 2010, $7 million was recorded as long
term debt on the consolidated balance sheet. During the second
quarter of 2010, Loblaw issued $350 million principal amount of 10
year unsecured Medium Term Notes ("MTN"), Series 2-B pursuant to
its MTN, Series 2 program. Interest on the notes is payable
semi-annually at a fixed rate of 5.22%. The notes are unsecured
obligations and are redeemable at the option of Loblaw. In the
second quarter of 2009, Loblaw issued $350 million principal amount
of 5 year unsecured MTN, Series 2-A which pay a fixed rate of
interest of 4.85% payable semi-annually. During the second quarter
of 2010 Loblaw's $300 million, 7.10% MTN due May 11, 2010 matured
and was repaid. During the first quarter of 2009, Loblaw repaid its
$125 million 5.75% MTN and GWL repaid its $250 million 5.90% MTN,
both of which matured. Net Debt((1) ) The Company's net debt((1)
)as at the end of the third quarter of 2010 was $431 million
compared to $299 million as at year end 2009. The increase was
primarily due to fixed asset purchases at Loblaw, dividend payments
and the acquisition of Keystone by Weston Foods, partially offset
by positive cash flows from operating activities. Sources of
Liquidity The Company holds significant cash and short term
investments denominated in Canadian and United States dollars.
These funds are invested in highly liquid marketable short term
investments consisting primarily of Canadian and United States
government treasury bills and treasury notes, United States
government sponsored debt securities, Canadian bank term deposits
and corporate commercial paper. Loblaw expects that cash and cash
equivalents, short term investments, future operating cash flows
and the amounts available to be drawn against its credit facility
will enable it to finance its capital investment program and fund
its ongoing business requirements, including working capital,
pension plan funding and financial obligations over the next twelve
months. In addition, given reasonable access to capital markets,
Loblaw does not foresee any impediments in securing financing to
satisfy its long term obligations. PC Bank participates in various
securitization programs that provide the primary source of funds
for the operation of its credit card business. Under these
securitization programs, a portion of the total interest in the
credit card receivables is sold to independent trusts pursuant to
co-ownership agreements. PC Bank purchases receivables from and
sells receivables to the trusts from time to time depending on PC
Bank's financing requirements. In the third quarter of 2010, PC
Bank accumulated $150 million of collections that will be used in
the fourth quarter to repurchase a portion of its co-ownership
interest in securitized receivables from two of the independent
trusts. In the fourth quarter of 2010, PC Bank intends to
simultaneously increase the co-ownership interest of another trust
leaving the total level of securitization unchanged but rebalanced
between trusts. A portion of the securitization receivables that is
held by an independent trust facility was also renewed for 2 years
during the third quarter of 2010. During the first quarter of 2010,
PC Bank also repurchased $90 million (2009 - nil) of co-ownership
interest in securitized receivables from an independent trust. On
March 17, 2011, the five-year $500 million senior notes and
subordinated notes issued by Eagle Credit Card Trust will mature.
Eagle Credit Card Trust has declared an accumulation commencement
date of December 1, 2010 at which time collections will be
accumulated until an amount sufficient to repay the notes at
maturity has been accumulated. Loblaw is considering alternatives
for refinancing these notes in the securitization market. In the
absence of additional securitization of receivables, Loblaw would
be required to use its cash and short term investments or raise
alternative financing by issuing additional debt or equity
instruments. The independent trusts' recourse to PC Bank's assets
is limited to PC Bank's excess collateral of $114 million as at
October 9, 2010 (October 10, 2009 - $124 million; December 31, 2009
- $121 million) as well as standby letters of credit issued as at
October 9, 2010 of $103 million (October 10, 2009 - $116 million;
December 31, 2009 - $116 million) based on a portion of the
securitized amount. During the third quarter of 2010, Loblaw's
Short Form Base Shelf Prospectus dated June 5, 2008 which allowed
for the issuance of up to $1 billion of unsecured debt and/or
preferred shares expired. On November 19, 2010, Loblaw filed a
Short Form Base Shelf Prospectus which allows for the issuance of
up to $1 billion of unsecured debt and/or preferred shares over a
25-month period. Loblaw has traditionally obtained its long term
financing primarily through a MTN program. Loblaw may refinance
maturing long term debt with MTN if market conditions are
appropriate or it may consider other alternatives. During the third
quarter of 2010, Dominion Bond Rating Service ("DBRS") reaffirmed
Loblaw's credit ratings and trend. During the second quarter of
2010, Standard & Poor's ("S&P") reaffirmed Loblaw's credit
ratings and outlook. The following table sets out the current
credit ratings of Loblaw: Dominion Bond Rating Service Standard
& Poor's Credit Ratings Credit Rating Trend Credit Rating
Outlook (Canadian Standards) Commercial paper R-2 (middle) Stable
A-2 Stable Medium term notes BBB Stable BBB Stable Preferred shares
Pfd-3 Stable P-3 (high) Stable Other notes and BBB Stable BBB
Stable debentures The rating organizations listed above base their
credit ratings on quantitative and qualitative considerations.
These credit ratings are forward-looking and are intended to give
an indication of the risk that Loblaw will not fulfill its
obligations in a timely manner. Loblaw's and PC Bank's ability to
obtain funding from external sources may be restricted by
downgrades in Loblaw's current credit ratings should Loblaw's
financial performance and condition deteriorate. In addition,
credit and capital markets are subject to inherent global risks
that may negatively affect Loblaw's access and ability to fund its
financial and other liabilities. Loblaw mitigates these risks by
maintaining appropriate levels of cash and short term investments,
committed lines of credit and by diversifying its sources of
funding and the maturity profile of its debt and capital
obligations. The Company (excluding Loblaw) expects that cash and
cash equivalents, short term investments and future operating cash
flows will enable it to finance its capital investment program and
fund its ongoing business requirements, including working capital
and pension plan funding over the next 12 months. The Company
(excluding Loblaw) does not foresee any impediments in satisfying
its long term obligations. During the third quarter of 2010, DBRS
and S&P both reaffirmed GWL's credit ratings and reaffirmed the
Company's trend and outlook, respectively. The following table sets
out the current credit ratings of GWL: Dominion Bond Rating Service
Standard & Poor's Credit Ratings Credit Rating Trend Credit
Rating Outlook (Canadian Standards) Commercial paper R-2 (high)
Stable A-2 Stable Medium term notes BBB Stable BBB Stable Preferred
shares Pfd-3 Stable P-3 (high) Stable Other notes and BBB Stable
BBB Stable debentures The rating organizations listed above base
their credit ratings on quantitative and qualitative
considerations. These credit ratings are forward-looking and are
intended to give an indication of the risk that GWL will not
fulfill its obligations in a timely manner. GWL's ability to obtain
funding from external sources may be restricted by downgrades in
its current credit ratings, should its financial performance and
condition deteriorate. In addition, credit and capital markets are
subject to inherent global risks that may negatively affect GWL's
access and ability to fund its financial and other liabilities. The
Company (excluding Loblaw) mitigates these risks by maintaining
appropriate levels of cash and short term investments, committed
lines of credit when required and by diversifying its sources of
funding and the maturity profile of its debt and capital
obligations. Independent Funding Trusts Certain independent
franchisees of Loblaw obtain financing through a structure
involving independent funding trusts, which were created to provide
loans to the independent franchisees to facilitate their purchase
of inventory and fixed assets, consisting mainly of fixtures and
equipment. These trusts are administered by a major Canadian
chartered bank. The gross principal amount of loans issued to
Loblaw's independent franchisees by the independent funding trusts
as at October 9, 2010 was $395 million (October 10, 2009 - $377
million; December 31, 2009 - $390 million), including $188 million
(October 10, 2009 - $143 million; December 31, 2009 - $163 million)
of loans payable by VIEs consolidated by the Company. Loblaw has
agreed to provide credit enhancement of $66 million (October 10,
2009 - $66 million; December 31, 2009 - $66 million) in the form of
a standby letter of credit for the benefit of the independent
funding trust representing not less than 15% of the principal
amount of the loans outstanding. This standby letter of credit has
never been drawn upon. This credit enhancement allows the
independent funding trust to provide financing to Loblaw's
independent franchisees. As well, each independent franchisee
provides security to the independent funding trust for its
obligations by way of a general security agreement. In the event
that an independent franchisee defaults on its loan and Loblaw has
not, within a specified time period, assumed the loan, or the
default is not otherwise remedied, the independent funding trust
would assign the loan to Loblaw and draw upon this standby letter
of credit. During the second quarter of 2010, the $475 million,
364-day revolving committed credit facility that is the source of
funding to the independent trusts was renewed. The financing
structure has been reviewed and Loblaw has determined there were no
additional VIEs to consolidate as a result of this financing.
Equity Derivative Contracts As at October 9, 2010, Glenhuron
Bank Limited ("Glenhuron"), a subsidiary of Loblaw, had equity
forward contracts to buy 1.5 million (October 10, 2009 - 3.2
million; December 31, 2009 - 1.5 million) Loblaw common shares at
an average forward price of $56.27 (October 10, 2009 - $53.76;
December 31, 2009 - $66.25) including $0.05 (October 10, 2009 -
$9.14; December 31, 2009 - $10.03) per common share of interest
expense. As at October 9, 2010, the interest and unrealized market
loss of $23 million (October 10, 2009 - $71 million; December 31,
2009 - $48 million) was included in accounts payable and accrued
liabilities. In the second quarter of 2009, Glenhuron paid $38
million to a counterparty to terminate a portion of the equity
forwards representing 1.6 million shares, which led to the
extinguishment of a corresponding portion of the associated
liability. Also as at October 9, 2010, GWL had equity swaps to buy
1.7 million (October 10, 2009 - 1.7 million; December 31, 2009 -
1.7 million) GWL common shares at an average forward price of
$103.17 (October 10, 2009 - $103.17; December 31, 2009 - $103.17).
As at October 9, 2010, the unrealized market loss of $44 million
(October 10, 2009 - $78 million; December 31, 2009 - $61 million)
was included in accounts payable and accrued liabilities. Employee
Future Benefit Contributions During the third quarter of 2010, the
Company contributed $39 million (2009 - $40 million) and on a
year-to-date basis, contributed $93 million (2009 - $89 million) to
its funded defined benefit pension plans. The Company expects to
contribute $29 million to these plans during the fourth quarter of
2010. The actual amount paid may vary from the estimate based on
actuarial valuations being completed, market performance and
regulatory requirements. The Company regularly monitors and
assesses plan experience and the impact of changes in participant
demographics, changes in capital markets and other economic factors
that may impact funding requirements, employee future benefit costs
and actuarial assumptions. QUARTERLY RESULTS OF OPERATIONS Under an
accounting convention common to the food distribution industry, the
Company follows a 52-week reporting cycle which periodically
necessitates a fiscal year of 53 weeks. 2008 was a 53-week year.
The 52-week reporting cycle is divided into four quarters of 12
weeks each except for the third quarter, which is 16 weeks in
duration. The following is a summary of selected consolidated
financial information derived from the Company's unaudited interim
period consolidated financial statements for each of the eight most
recently completed quarters. This information was prepared in
accordance with Canadian GAAP. Quarterly Financial Information
(unaudited) Third Quarter Second Quarter First Quarter Fourth
Quarter ($ 2010 2009 2010 2009 2010 2009 2009 2008 millions except
where otherwise indicated) Sales $ $ $ $ 7,484 $ 7,177 $ 7,022 $
7,537 $ 8,050 9,884 9,777 7,530 Net $ 184 $ 71 $ 125 $ 4 $ 42 $
(27) $ 79 $ 357 earnings (loss) from continuing operations Net $
184 $ 86 $ 125 $ 4 $ 42 $ 863 $ 82 $ 405 earnings Net earnings
(loss) per common share from continuing operations ($) Basic $ 1.32
$ 0.44 $ 0.89 $ $ 0.25 $ $ 0.53 $ 2.69 (0.05) (0.28) Diluted $ 1.31
$ 0.44 $ 0.89 $ $ 0.25 $ $ 0.52 $ 2.69 (0.05) (0.28) Net earnings
(loss) per common share ($) Basic $ 1.32 $ 0.56 $ 0.89 $ $ 0.25 $
6.61 $ 0.56 $ 3.06 (0.05) Diluted $ 1.31 $ 0.56 $ 0.89 $ $ 0.25 $
6.61 $ 0.55 $ 3.06 (0.05) Quarterly sales for the last eight
quarters were impacted by the following significant items: -- the
acquisition of Keystone in the third quarter of 2010; -- the
acquisition of T&T by Loblaw in the third quarter of 2009; --
foreign currency exchange rates; -- seasonality and the timing of
holidays; -- the additional week of operating results in the fourth
quarter of 2008; and -- the sales of Weston Foods' dairy and
bottling operations which was sold in the fourth quarter of 2008.
Quarterly net earnings for the last eight quarters were impacted by
the following significant items: -- foreign exchange losses
associated with the effect of foreign exchange on a portion of the
U.S. dollar denominated cash and short term investments held by
Dunedin and certain of its affiliates, beginning in the first
quarter of 2009; -- the commodity derivatives fair value adjustment
at Weston Foods; -- accounting for WHL's forward sale agreement of
9.6 million Loblaw common shares; -- fluctuations in stock-based
compensation net of equity derivatives of both GWL and Loblaw; --
the loss on the redemption of the GWL 12.7% Promissory Notes in the
second and the third quarters of 2009; -- the asset impairment
charge due to the closure of a Loblaw distribution centre in
Quebec; -- the non-cash goodwill impairment charge in Weston Foods'
biscuits, cookies, cones and wafers business in the first quarter
of 2009; -- the reversal of the cumulative foreign currency
translation loss associated with Dunedin and certain of its
affiliates in the first quarter of 2009; -- the reversal of the
cumulative foreign currency translation loss associated with the
reduction in the Company's U.S. net investment in self-sustaining
foreign operations in the fourth quarter of 2009; -- the
incremental costs related to Loblaw's investment in information
technology and supply chain; -- restructuring and other charges
incurred by Weston Foods and Loblaw; -- the gain on sale of Weston
Foods' U.S. fresh bakery business in the first quarter of 2009; --
the income of Weston Foods' dairy and bottling operations which was
sold in the fourth quarter of 2008; and -- the gain on disposal of
Weston Foods' dairy and bottling operations and the gain on sale of
Loblaw's food service business in the fourth quarter of 2008.
INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible
for establishing and maintaining a system of disclosure controls
and procedures to provide reasonable assurance that all material
information relating to the Company and its subsidiaries is
gathered and reported to senior management on a timely basis so
that appropriate decisions can be made regarding public disclosure.
Management is also 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 GAAP. In designing such
controls, it should be recognized that due to inherent limitations,
any controls, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives and may not prevent or detect misstatements.
Additionally, management is necessarily required to use judgment in
evaluating controls and procedures. On July 18, 2010, Loblaw
successfully implemented the second phase of its Enterprise
Resource Planning ("ERP") system. This implementation resulted in
changes to the internal controls over financial reporting during
the third quarter of 2010 for Loblaw's corporate administration
functions and general ledger. The changes in controls have
materially affected the Company's internal controls over financial
reporting related to these areas. Except for the preceding changes,
there was no other change in the Company's internal control over
financial reporting during the third quarter of 2010 that has
materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting. ENTERPRISE
RISKS AND RISK MANAGEMENT Detailed descriptions of the operating
and financial risks and risk management strategies are included in
the Enterprise Risks and Risk Management Section on page 35 of the
2009 annual MD&A as well as note 28 to the audited annual
consolidated financial statements, included in the Company's 2009
Annual Report. The following is an update to those enterprise risks
and risk management strategies: Information Technology, Integrity
and Reliability To support the current and future requirements of
the business in an efficient, cost-effective and well-controlled
manner, the Company is reliant on information technology ("IT")
systems. These systems are essential in providing management with
relevant, reliable and accurate information for decision making,
including its key performance indicators. Any significant failure
or disruption of these systems or the failure to successfully
migrate from legacy systems to new systems as part of Loblaw's
significant IT infrastructure initiatives could negatively affect
the Company's reputation, ability to carry on business, revenues
and financial performance. If the information provided by the IT
systems is inaccurate, the risk of disclosing inaccurate or
incomplete information is increased. Loblaw has under invested in
its IT infrastructure in the past and its systems are in need of
upgrading. An IT strategic plan was developed to guide the new
systems environment that Loblaw requires. On July 18, 2010, Loblaw
successfully implemented the second phase of its ERP which involved
integrating its general ledger and related reporting for finance
across the business and launching additional functionality
including its Corporate accounts payable and marketing procurement
processes and now has close to 1,000 colleagues working on its new
ERP. In addition, at the beginning of September 2010, Loblaw's next
major ERP release related to its merchandising management module
began a pilot focusing on two smaller Merchandise categories.
Loblaw will roll-out the category management module pilot to
additional categories in the fourth quarter of 2010. Loblaw
leveraged this new ERP functionality to successfully close its
third quarter reporting period. Loblaw is planning for additional
system implementations in 2011 to streamline merchandising and
operations activities. This is one of the largest technology
infrastructure programs ever implemented by Loblaw and is
fundamental to its long-term growth strategies. Completing it will
require intense focus and significant investment over the next two
years. Change management risk and other associated risks will arise
from the various projects which will be undertaken to upgrade
existing systems and introduce new systems to effectively manage
the business going forward. Failure by Loblaw to appropriately
invest in IT or failure to implement IT infrastructure in a timely
or effective manner may negatively impact the Company's financial
performance. Labour Relations A majority of Loblaw's store level
and distribution centre workforce is unionized. Renegotiating
collective agreements may result in work stoppages or slowdowns,
which could negatively affect the Company's financial performance,
depending on their nature and duration. In 2010, 73 collective
agreements affecting approximately 35,000 Loblaw colleagues expire.
In the third quarter of 2010, Loblaw was successful in negotiating
the renewal of its major Ontario retail collective agreements
including its single largest agreement covering approximately
13,700 colleagues. Loblaw continues to negotiate the 66 remaining
collective agreements carried over from prior years. Although
Loblaw attempts to mitigate work stoppages and disputes through
early negotiations, work stoppages or slowdowns remain possible.
Regulatory Beginning in the first quarter of 2010, the provincial
governments of Quebec, Ontario, Alberta, Nova Scotia and British
Columbia introduced amendments to the regulation of generic
prescription drug prices paid by provincial governments pursuant to
their respective public drug benefit plans. Under these amendments,
manufacturer costs of generic drugs paid by the provincial drug
plans will be reduced, and in Ontario, the current system of drug
manufacturers paying professional allowances to pharmacies will be
eliminated. The amendments also reduce the manufacturer costs of
generic drugs purchased out-of-pocket or through private employer
drug plans. Loblaw continues to identify opportunities to mitigate
the impact of these amendments, including programs to add new
services and enhance existing services to attract customers. The
amendments could have a material impact on the financial results of
the Company if Loblaw is not able to effectively mitigate their
negative impact. FUTURE ACCOUNTING STANDARDS Business Combinations
In January 2009, the Canadian Institute of Chartered Accountants
("CICA") issued Section 1582, "Business Combinations", which will
replace Section 1581 of the same title and issued Sections 1601,
"Consolidated Financial Statements", and 1602, "Non-Controlling
Interests". These standards will harmonize Canadian GAAP with
International Financial Reporting Standards ("IFRS"). The
amendments establish principles and requirements for determining
how an enterprise recognizes and measures the fair value of certain
assets and liabilities acquired in a business combination,
including non-controlling interests, contingent consideration and
certain acquired contingencies. The amendments also require that
acquisition related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the
business combination. The impact of implementing these amendments
is currently being assessed. International Financial Reporting
Standards The Canadian Accounting Standards Board requires that all
public companies adopt IFRS for interim and annual financial
statements relating to fiscal years beginning on or after January
1, 2011. As a result, the Company's audited annual consolidated
financial statements for the year ended December 31, 2011 will be
the first audited annual consolidated financial statements that
will be prepared in accordance with the requirements of IFRS.
Starting in the first quarter of 2011 the unaudited interim period
consolidated financial statements will be prepared in accordance
with International Accounting Standard ("IAS") 34, "Interim
Financial Reporting", including comparative figures for 2010.
Project Status A detailed description of the Company's IFRS project
structure is included in section 16 "Future Accounting Standards"
on page 47 of the 2009 annual MD&A included in the Company's
2009 Annual Report. The following is an update on the project
status. The IFRS conversion project continues to progress. Targeted
training regarding anticipated changes resulting from IFRS
implementation continues to be provided to appropriate business
units and finance colleagues. In addition, the Company has
continued its quarterly and additional IFRS information sessions
for the Board of Directors providing updates on certain
transitional and 2010 quarterly IFRS adjustments and disclosures
(including certain preliminary policy choices), implications of
IFRS standards to the business, and their impact on the financial
statement disclosure. The Company also intends to provide an
information session to key external stakeholders regarding the
impacts of IFRS in early 2011. The IFRS conversion project is
integrated with Loblaw's ERP implementation. As ERP phases have
been deployed, Loblaw has ensured that the requirements of IFRS
adoption were incorporated. For ERP phases that have not yet been
deployed, Loblaw is ensuring that the requirements of IFRS are
identified and incorporated. The implementation of IFRS is expected
to have an impact on certain financial metrics that are used in
calculating Loblaw's financial covenants under certain of its debt
agreements. These debt agreements provide for the opportunity to
negotiate the covenants to reflect the impact of the transition to
IFRS. Loblaw has begun preliminary discussions with certain of its
lenders to formalize these adjustments. To the extent that Loblaw
and its lenders are unable to agree upon the covenant adjustments,
the existing covenants will continue to apply and will be
calculated on the basis of Canadian GAAP as it existed prior to the
conversion to IFRS. The Company continues to integrate IFRS into
the Company's budgeting and internal reporting processes. In
accordance with the Company's transition plan, during the third
quarter of 2010, the Company also completed its preliminary Q1 2011
IFRS financial statement format and draft note disclosures. Key
milestones for the remainder of the year are in line with the
Company's original plan and include the completion of the opening
transitional balance sheet and compilation of the quarterly
financial statements. The Company continues to progress on its IFRS
transition plan as previously disclosed. Changes to the Company's
internal controls over financial reporting which include
enhancement of existing controls and the design and implementation
of new controls, where needed, are in process. At this time the
Company expects no material change in internal controls over
financial reporting resulting from the adoption and implementation
of IFRS. Changes in Accounting Policies and First-Time Adoption of
IFRS The information below is provided as an update to allow
investors and others to obtain a better understanding of the
possible effects on the Company's consolidated financial statements
and operating performance measures. The changes identified below
should not be regarded as a complete list of changes that will
result from the transition to IFRS as it is intended to highlight
those areas where significant progress has been made and that are
believed to be most significant at this point in the project.
Readers are cautioned that it may not be appropriate to use such
information for any other purpose and the information is subject to
change. The International Accounting Standards Board has
significant ongoing projects that could affect the ultimate
differences between Canadian GAAP and IFRS and their impact on the
Company's consolidated financial statements. Therefore, the
Company's analysis of changes and accounting policy decisions have
been made based on the accounting standards that are currently in
effect. To date, the Company has determined preliminary conclusions
for certain policy decisions as discussed below and included in the
MD&A included in the Company's 2009 Annual Report. These
preliminary conclusions are contingent on the standards that will
be effective at the time of transition. The Company continues to
assess the quantitative impact of certain of the transitional
adjustments on the consolidated opening balance sheet and
consolidated interim period financial statements as a result of
changes in accounting policies as well as certain IFRS 1, "First
Time Adoption of IFRS" ("IFRS 1") elections and exemptions. The
preliminary impacts provided below represent updates to those
provided in the 2009 annual MD&A pertaining to the transitional
balance sheet as at January 1, 2010. The Company expects to provide
additional updates in its 2010 annual MD&A. Consolidation IAS
27, "Consolidated and Separate Financial Statements" and Standing
Interpretations Committee 12, "Consolidation - Special Purpose
Entities" ("IAS 27") assess consolidation using a control model.
Under IFRS, Loblaw will be required to consolidate Eagle Credit
Card Trust, the independent trust that funds the purchase of credit
card receivables from PC Bank through the issuance of notes
resulting in an increase of approximately $500 million of credit
card receivables and related notes before the provision for loan
losses. In addition Loblaw will be required to consolidate the
independent funding trust through which franchisees obtain
financing. Loblaw will no longer be required to consolidate certain
independent franchisees and other entities providing warehouse and
distribution service agreements that were previously consolidated
under Canadian GAAP pursuant to the requirements of Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG
15"). Upon implementation of IFRS, the Company expects to record an
increase in assets and liabilities. The Company continues to
quantify the remaining impact of this standard. Revenue Under
Canadian GAAP each franchise arrangement was evaluated under AcG
15. As a result of Loblaw no longer consolidating certain
independent franchisees, Loblaw was required to evaluate each
franchise arrangement under IAS 18, "Revenue" ("IAS 18") at its
inception. Based on the guidance in IAS 18, Loblaw concluded that
each franchise arrangement contains separately identifiable
components. As a result of this multi-element arrangement Loblaw
was required to determine the fair value of all consideration
exchanged including certain loans and receivables. The impact of
applying these requirements has resulted in Loblaw concluding that
the fair value of certain consideration was lower than its face
value at inception. Furthermore, Loblaw has made a policy choice to
allocate the consideration to each component in the multi-element
arrangement on a relative fair value basis to both the delivered
and undelivered components. Upon implementation of IFRS the Company
expects to record a decrease in certain assets and deferred
consideration. The Company continues to quantify the impact of this
standard. Financial Instruments Under Canadian GAAP each Loblaw
franchise arrangement was evaluated under AcG 15. IFRS has no
concept of a variable interest resulting in certain financial
assets no longer being eliminated on consolidation. As a result
Loblaw was required to evaluate certain financial assets relating
to the franchise arrangement in accordance with IAS 39, "Financial
Instruments: Recognition and Measurement" ("IAS 39") which requires
application retrospectively to the inception of each arrangement.
Loblaw's evaluation identified that one or more events that
provided objective evidence that the cash flows associated with
certain financial assets relating to certain of the franchise
arrangements were impaired. Upon implementation of IFRS the Company
expects to record a decrease in certain financial assets. The
Company continues to quantify the impact of this standard. IAS 39
contains criteria that are different from Canadian GAAP for the
derecognition of financial assets and requires an evaluation of the
extent to which an entity retains the risks and rewards of
ownership. Under Canadian GAAP these financial assets qualify for
sale treatment. The Company has determined that under IFRS
securitized credit card receivables will not qualify for
derecognition. Upon implementation of IFRS the Company expects to
record an increase in credit card receivables of approximately $1.2
billion, excluding Eagle Trust, before the provision for loan
losses with a corresponding increase to liabilities. IAS 39
requires the incorporation of credit value adjustments in the
measurement of effectiveness and ineffectiveness of a hedging
relationship. Cross-currency and interest rate swaps were
designated as effective cash flow hedging relationships under
Canadian GAAP. Certain tranches of the swaps that were part of the
hedging relationship have expired in 2010 and will continue to
expire up to mid-2011. Loblaw has concluded to not assess hedge
effectiveness under IFRS which will result in derecognition at the
date of transition to IFRS. Upon implementation of IFRS the Company
expects to record a transitional adjustment of approximately $10
million, net of allocation to minority interest, from accumulated
other comprehensive loss to retained earnings within shareholders'
equity. Minority interest is referred to as "non-controlling
interest" under IFRS. Employee Benefits IAS 19, "Employee
Benefits", provides a policy choice regarding recognition of
actuarial gains and losses for defined benefit pension plans and
other defined benefit plans, permitting deferred recognition using
the corridor method or immediate recognition in either other
comprehensive income within shareholders' equity or through
earnings. Under Canadian GAAP the Company applies the corridor
method. Upon implementation of IFRS the Company currently intends
to recognize actuarial gains and losses immediately through other
comprehensive income within shareholders' equity for defined
benefit pension plans and other defined benefit plans and through
earnings for other long term employee benefits. In addition, IFRS 1
provides an optional election which the Company expects to apply
that will result in the recognition of all cumulative actuarial
gains and losses through retained earnings on transition to IFRS.
The Company's choice must be applied to all defined benefit pension
plans, other defined benefit plans and other long term employee
benefits consistently. As a result of this election the Company has
engaged its external actuaries to quantify this amount and will
reclassify the unamortized net actuarial loss to retained earnings
on transition to IFRS. Share-based Payments IFRS 2, "Share-Based
Payments", requires that cash-settled stock-based compensation be
measured based on fair value of the awards. Canadian GAAP requires
that such compensation be measured based on the intrinsic values of
the awards. This difference is expected to impact the accounting
measurement of the Company's stock options, restricted share units
and deferred share units. Upon implementation of IFRS the Company
expects to record a transitional adjustment to decrease
shareholders' equity by approximately $10 million, net of
non-controlling interest. Foreign Currency IFRS 1 provides an
optional election whereby cumulative translation gains or losses in
accumulated other comprehensive loss can be reclassified to
retained earnings on transition to IFRS. The Company currently
expects to utilize this election by reclassifying the cumulative
translation loss of $103 million recorded in accumulated other
comprehensive loss at December 31, 2009 to retained earnings.
Cumulative translation gains and losses will be recognized
prospectively from the date of transition. Property, Plant and
Equipment IAS 16, "Property, Plant and Equipment", provides
specific guidance such that when an individual component of an item
within property, plant and equipment is replaced and capitalized,
the replaced component of the original asset must be derecognized
even if the replacement part was not originally componentized. In
addition IFRS is more prescriptive with respect to eligible costs
such as site-dismantling and restoration costs. The Company expects
to record a transitional adjustment of a decrease in assets and a
decrease in shareholders' equity of approximately $50 million, net
of non-controlling interest. Impairment of Assets IAS 36,
"Impairment of Assets", requires that assets be tested for
impairment at the level of cash generating units ("CGU"), which are
defined as the lowest level of assets that generate largely
independent cash inflows. The Company has completed its analysis
and concluded that the CGU for Weston Foods will be at a lower
level than under Canadian GAAP but will continue to be the major
production categories and geographic regions where cash inflows are
largely dependent on each other. For Loblaw, the CGU will
predominantly be an individual store compared to Canadian GAAP
where store net cash flows are grouped together by primary market
areas, where they are largely dependent on each other. The Company
has completed its preliminary assessment of the events triggering
potential impairments and reversal of impairments. On transition
the Company expects to record a reduction of assets and a reduction
in shareholders' equity. The Company continues to quantify the
impact of this standard. Leases IAS 17, "Leases", requires the
allocation of minimum lease payments between the land and building
elements of a lease to be in proportion to the relative fair values
of the leasehold interests in the land and building, whereas under
Canadian GAAP it is based on the fair value of the land and
building in aggregate. In addition, IFRS permits the immediate
recognition of gains and losses on sale leaseback transactions
which result in an operating lease, provided that the transaction
is established at fair value. Under Canadian GAAP, gains and losses
are generally deferred and amortized in proportion to the lease
payments over the lease term. Upon implementation of IFRS the
Company expects to record additional finance leases on the balance
sheet. The Company continues to quantify the impact of this
standard. Customer Loyalty Programs International Financial
Reporting Interpretations Committee 13, "Customer Loyalty
Programs", requires the fair value of loyalty programs to be
recognized as a separate component of the initial sales
transaction. Loblaw will be required to defer a portion of the
initial sales transaction in which the awards are granted. Loblaw
has made a policy choice to defer the portion of the sales
transaction on the relative fair value of the awards granted. Under
Canadian GAAP, Loblaw recognizes the net cost of the program in
operating expenses. Upon implementation of IFRS, the Company
expects to record a transitional adjustment to decrease
shareholders' equity by approximately $10 million, net of
non-controlling interest. Borrowing Costs IAS 23 "Borrowing Costs"
("IAS 23") requires the capitalization of borrowing costs directly
attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. IFRS 1 provides
an election to permit application of the requirements of IAS 23
prospectively from the date of transition. The Company intends to
apply this election prospectively and apply IAS 23 from the date of
transition. Upon implementation of IFRS, the Company expects to
record a transitional adjustment to decrease shareholders' equity
by approximately $120 million, net of non-controlling interest.
OUTLOOK((2)) The consolidated results of George Weston Limited will
continue to reflect the operating performance of both the Weston
Foods and Loblaw operating businesses for the remainder of 2010. In
addition, the Company's results will be subject to earnings
volatility caused by the impact of changes in U.S. foreign currency
exchange rates on a portion of the U.S. dollar denominated cash and
short term investments. Earnings volatility may also result from
other non-operating factors including commodity prices and their
impact on the Company's commodity derivatives, the Loblaw common
share price and its impact on the forward sale agreement for 9.6
million Loblaw common shares and short term interest rates. For the
remainder of 2010, Weston Foods expects continued strong operating
performance with earnings reflecting seasonally lower operating
margins and a modest contribution from the two recently completed
bakery acquisitions. The Company continues its ongoing efforts to
reduce costs through improved efficiencies and productivity. The
Company remains focused on growing sales by optimizing product mix
and product innovation to meet changing consumer buying
preferences. Loblaw continues to make progress towards the final
stages of its overall renewal program. As a result of buying
efficiencies related to its information technology and
infrastructure initiatives and adjustments to the timing of certain
phases of those initiatives, Loblaw now expects the impact to 2010
operating income of the incremental infrastructure and information
technology costs to be lower than previously anticipated. The costs
and risks associated with these investments combined with
deflationary pressures and heightened competition will continue to
challenge sales and margins. George Weston Limited continues to
assess opportunities for the deployment of its significant holdings
of cash and short term investments. ADDITIONAL INFORMATION
Additional information about the Company has been filed
electronically with the Canadian securities regulatory authorities
through the System for Electronic Document Analysis and Retrieval
(SEDAR) and is available online at www.sedar.com. This Quarterly
Report includes selected information on Loblaw Companies Limited, a
62.8%-owned public reporting company with shares trading on the
Toronto Stock Exchange. For information regarding Loblaw, readers
should also refer to the materials filed by Loblaw with the
Canadian securities regulatory authorities from time to time.
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(1) See Non-GAAP Financial Measures. (2) To be read in
conjunction with "Forward-Looking Statements". (3) NM - not
meaningful. NON-GAAP FINANCIAL MEASURES The Company uses the
following non-GAAP measures: EBITDA and EBITDA margin, net debt,
rolling year net debt to EBITDA, net debt to equity and rolling
year return on average net assets. The Company believes these
non-GAAP financial measures provide useful information to both
management and investors in measuring the financial performance and
financial condition of the Company for the reasons outlined below.
These measures do not have a standardized meaning prescribed by
Canadian GAAP and therefore they may not be comparable to similarly
titled measures presented by other publicly traded companies and
should not be construed as an alternative to other financial
measures determined in accordance with Canadian GAAP. EBITDA and
EBITDA Margin The following tables reconcile earnings from
continuing operations before minority interest, income taxes,
interest and depreciation and amortization ("EBITDA") to Canadian
GAAP net earnings reported in the unaudited interim period
consolidated statements of earnings for the sixteen and forty week
periods ended as indicated. For each of its reportable operating
segments, segment EBITDA is reconciled to segment operating income.
EBITDA is useful to management in assessing the performance of the
Company's ongoing operations and its ability to generate cash flows
to fund its cash requirements, including the Company's capital
investment program. EBITDA margin is calculated as EBITDA divided
by sales. 16 Weeks Ended 16 Weeks Ended Oct. 9, 2010 Oct. 10, 2009
($ millions) Weston Other Weston Other Foods Loblaw ((2))
Consolidated Foods Loblaw ((2)) Consolidated Net earnings from
continuing operations $ 184 $ 71 Add impact of the following:
Minority interest 89 77 Income taxes 117 105 Interest expense and
other financing charges 100 80 Operating income $ (loss) $ 111 $
388 $ (9) $ 490 $ 36 $ 376 (79) $ 333 Depreciation and amortization
((1)) 16 201 217 18 179 197 EBITDA $ $ 127 $ 589 $ (9) $ 707 $ 54 $
555 (79) $ 530 40 Weeks Ended 40 Weeks Ended Oct. 9, 2010 Oct. 10,
2009 Weston Other Weston Other ($ millions) Foods Loblaw ((2))
Consolidated Foods Loblaw ((2)) Consolidated Net earnings from
continuing operations $ 351 $ 48 Add impact of the following:
Minority interest 212 190 Income taxes 269 220 Interest expense and
other financing charges 321 264 Operating income $ $ (loss) $ 223 $
974 (44) $ 1,153 $ 65 $ 922 (265) $ 722 Depreciation and
amortization ((1)) 40 502 542 44 446 490 EBITDA $ $ $ $ $ 263 1,476
(44) $ 1,695 $ 109 1,368 (265) $ 1,212 (1) Includes depreciation of
$13 million (2009 - $13 million) and year-to-date of $32 million
(2009 - $34 million) included in cost of inventories sold. (2)
Operating income for the third quarter and year-to-date 2010
includes a loss of $9 million and $44 million (2009 - $79 million
and $231 million), respectively, related to foreign exchange losses
associated with the effect of foreign exchange on a portion of the
U.S. dollar denominated cash and short term investments held by
Dunedin and certain of its affiliates, which are integrated foreign
subsidiaries for accounting purposes. Year-to-date 2009 operating
income also includes the cumulative foreign currency translation
loss of $34 million associated with Dunedin and certain of its
affiliates, which was reversed from accumulated other comprehensive
loss on the date of the sale of the U.S. fresh bakery business. Net
Debt The following table reconciles net debt used in the net
debt to equity and rolling year net debt to EBITDA ratios to
Canadian GAAP measures reported as at the periods ended as
indicated. The Company calculates net debt as the sum of bank
indebtedness, short term debt, long term debt, certain other
liabilities and the fair value of the related financial derivatives
less cash and cash equivalents, short term investments, security
deposits and the fair value of the related financial derivatives.
The Company believes this measure is useful in assessing the amount
of financial leverage employed. As at ($ millions) Oct. 9, 2010
Oct. 10, 2009 Dec. 31, 2009 Bank indebtedness $ 5 $ 6 $ 2 Short
term debt 326 291 300 Long term debt due within one 407 342 343
year Long term debt 5,398 5,271 5,377 Other liabilities 37 36 36
Fair value of financial (325) (298) (327) derivatives related to
the above 5,848 5,648 5,731 Less: Cash and cash equivalents 3,487
3,452 3,368 Short term investments 1,316 1,397 1,538 Security
deposits 436 373 348 Fair value of financial 178 193 178
derivatives related to the above $ 5,417 $ 5,415 $ 5,432 Net debt $
431 $ 233 $ 299 Capital securities are excluded from the
calculation of net debt. For the purpose of calculating net debt,
the fair values of financial derivatives are not credit value
adjusted in accordance with Emerging Issues Committee Abstract 173,
"Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities". As at October 9, 2010, the credit value adjustment
was a loss of $4 million (October 10, 2009 - $5 million; December
31, 2009 - $4 million). Net Assets The following table
reconciles net assets used in the rolling year return on average
net assets ratio to Canadian GAAP measures reported as at the
periods ended as indicated. The Company believes the rolling year
return on average net assets ratio is useful in assessing the
return on productive assets. Net assets is calculated as total
assets less cash and cash equivalents, short term investments,
security deposits, the fair value of Weston Holdings Limited's
("WHL"), a subsidiary of GWL, forward sale agreement for 9.6
million Loblaw common shares and accounts payable and accrued
liabilities. As at ($ millions) Oct. 9, 2010 Oct. 10, 2009 Dec. 31
, 2009 Canadian GAAP total assets $ 20,434 $ 19,769 $ 20,143 Less:
Cash and cash 3,487 3,452 3,368 equivalents Short term investments
1,316 1,397 1,538 Security deposits 436 373 348 Fair value of WHL's
406 461 446 forward sale agreement for 9.6 million Loblaw shares
Accounts payable and 3,435 3,458 3,616 accrued liabilities Net
assets $ 11,354 $ 10,628 $ 10,827 Consolidated Statements of
Earnings (unaudited) 16 Weeks Ended 40 Weeks Ended ($ millions Oct.
10, 2009 Oct. 9, 2010 Oct. 10, 2009 except where otherwise
indicated) Oct. 9, 2010 Sales $ 9,884 $ 9,777 $ 24,591 $ 24,283
Operating Expenses Cost of 7,447 18,268 18,338 inventories sold
(note 11) 7,353 Selling, 1,813 4,660 4,694 administrative and other
expenses 1,837 Depreciation and 184 510 456 amortization (note 11)
204 Goodwill 73 impairment (note 12) 9,394 9,444 23,438 23,561
Operating Income 490 333 1,153 722 Interest Expense 80 321 264 and
Other Financing Charges (note 6) 100 Earnings from 253 832 458
Continuing Operations Before the Following: 390 Income Taxes 105
269 220 (note 7) 117 273 148 563 238 Minority Interest 89 77 212
190 Net Earnings from 71 351 48 Continuing Operations 184
Discontinued 15 905 Operations (note 4) Net Earnings $ 184 $ 86 $
351 $ 953 Net Earnings per Common Share - Basic ($) Continuing $
0.44 $ 2.46 $ 0.11 Operations (note 8) $ 1.32 Discontinued $ 0.12 $
7.01 Operations Net Earnings $ 1.32 $ 0.56 $ 2.46 $ 7.12 Net
Earnings per Common Share - Diluted ($) Continuing $ 0.44 $ 2.45 $
0.11 Operations (note 8) $ 1.31 Discontinued $ 0.12 $ 7.01
Operations Net Earnings $ 1.31 $ 0.56 $ 2.45 $ 7.12 See
accompanying notes to the unaudited interim period consolidated
financial statements. Consolidated Statements of Changes in
Shareholders' Equity (unaudited) 40 Weeks Ended ($ millions except
where otherwise Oct. 9, 2010 Oct. 10, 2009 indicated) Share Capital
Preferred Shares $ 817 $ 817 Common Shares 133 133 Total Share
Capital, Beginning and End of $ 950 $ 950 Period Retained Earnings,
Beginning of Period $ 6,084 $ 5,282 Cumulative impact of
implementing new (4) accounting standards (note 2) Net earnings 351
953 Dividends declared Per common share ($) - $1.08 (2009 - (139)
(139) $1.08) Per preferred share - Series I - $1.09 (10) (10) ($)
(2009 - $1.09) - Series III - $0.97 (8) (8) (2009 - $0.97) - Series
IV - $0.97 (7) (7) (2009 - $0.97) - Series V - $0.89 (7) (7) (2009
- $0.89) Retained Earnings, End of Period $ 6,264 $ 6,060
Accumulated Other Comprehensive Loss, $ (92) $ (322) Beginning of
Period Cumulative impact of implementing new (1) accounting
standards (note 2) Other comprehensive (loss) income (25) 166
Accumulated Other Comprehensive Loss, End of $ (117) $ (157) Period
(note 18) Total Shareholders' Equity $ 7,097 $ 6,853 See
accompanying notes to the unaudited interim period consolidated
financial statements. Consolidated Statements of Comprehensive
Income (unaudited) 16 Weeks Ended 40 Weeks Ended Oct. 9, 2010 Oct.
10, Oct. 9, 2010 Oct. 10, 2009 ($ millions) 2009 Net earnings $ 184
$ 86 $ 351 $ 953 Other comprehensive (loss) income, net of income
taxes and minority interest Foreign currency (7) (59) (20) 24
translation adjustment Reclassification of cumulative foreign
currency translation loss to net earnings (note 18) 144 (7) (59)
(20) 168 Net unrealized (3) (7) (6) (14) loss on available-for-sale
financial assets Reclassification of net loss (gain) on
available-for-sale financial assets to net earnings 1 10 6 (5) (2)
3 (19) Net (loss) gain on (1) (1) 1 derivatives designated as cash
flow hedges Reclassification of net (gain) loss on derivatives
designated as cash flow hedges to net earnings (1) (4) 16 (2) (5)
17 Other comprehensive (9) (58) (25) 166 (loss) income Total
Comprehensive $ 175 $ 28 $ 326 $ 1,119 Income See accompanying
notes to the unaudited interim period consolidated financial
statements. Consolidated Balance Sheets As at Oct. 9, 2010 Oct. 10,
2009 Dec. 31, 2009 ($ millions) (unaudited) (unaudited) ASSETS
Current Assets Cash and cash equivalents $ 3,487 $ 3,452 $ 3,368
(note 9) Short term investments 1,316 1,397 1,538 Accounts
receivable (note 691 666 851 10) Inventories (note 11) 2,267 2,266
2,210 Future income taxes 82 66 87 Prepaid expenses and other 116
146 98 assets Total Current Assets 7,959 7,993 8,152 Fixed Assets
9,293 8,744 9,020 Goodwill and Intangible Assets 1,473 1,261 1,296
(note 12) Future Income Taxes 48 93 61 Other Assets 1,661 1,678
1,614 Total Assets $ 20,434 $ 19,769 $ 20,143 LIABILITIES Current
Liabilities Bank indebtedness $ 5 $ 6 $ 2 Accounts payable and
accrued 3,435 3,458 3,616 liabilities Income taxes 70 38 78 Short
term debt (note 14) 326 291 300 Long term debt due within 407 342
343 one year Total Current Liabilities 4,243 4,135 4,339 Long Term
Debt (note 15) 5,398 5,271 5,377 Future Income Taxes 278 322 269
Other Liabilities 654 603 617 Capital Securities (note 16) 220 219
220 Minority Interest 2,544 2,366 2,379 Total Liabilities 13,337
12,916 13,201 SHAREHOLDERS' EQUITY Share Capital 950 950 950
Retained Earnings 6,264 6,060 6,084 Accumulated Other (117) (157)
(92) Comprehensive Loss (note 18) Total Shareholders' Equity 7,097
6,853 6,942 Total Liabilities and $ 20,434 $ 19,769 $ 20,143
Shareholders' Equity Contingencies, commitments and guarantees
(note 19). See accompanying notes to the unaudited interim period
consolidated financial statements. Consolidated Cash Flow
Statements (unaudited) 16 Weeks Ended 40 Weeks Ended ($ millions)
Oct. 9, 2010 Oct. 10, Oct. 9, 2010 Oct. 10, 2009 2009 Operating
Activities Net earnings from $ 273 $ 148 $ 563 $ 238 continuing
operations before minority interest Depreciation and 217 197 542
490 amortization Goodwill impairment 73 (note 12) Foreign exchange
losses 9 79 44 265 (note 20) Loss on redemption of 8 49 debt (notes
6 & 15) Settlement of equity (38) forward contracts (note 17)
Future income taxes 40 (16) 27 (45) Fair value adjustment of Weston
Holdings Limited's forward sale agreement (note 6) 7 (29) 68 (36)
Change in non-cash 101 490 (210) 375 working capital Other 34 2 66
(22) Cash Flows from 681 879 1,100 1,349 Operating Activities of
Continuing Operations Investing Activities Fixed asset purchases
(468) (293) (841) (640) Short term investments 108 294 190 (801)
Proceeds from fixed 21 4 37 10 asset sales Business acquisition -
(188) (194) (188) (194) net of cash acquired (note 3) Credit card
21 28 145 236 receivables, after securitization (note 10) Franchise
investments (20) 5 (13) (4) and other receivables Security deposits
and (123) (8) (86) 82 other Cash Flows used in (649) (164) (756)
(1,311) Investing Activities of Continuing Operations Financing
Activities Bank indebtedness (8) 3 2 (89) Short term debt 9 9 26
(162) Long term - Issued 28 10 405 370 debt (note 15) - Retired
(note 15) (20) (91) (342) (480) Capital - Retired (265) securities
(note 16) Dividends - To common (93) (92) (186) (139) shareholders
- To preferred shareholders (19) (19) (41) (33) - To minority
shareholders (28) (33) (43) (55) Cash Flows used in (131) (213)
(179) (853) Financing Activities of Continuing Operations Effect of
Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents
(13) (124) (46) (196) Cash Flows (used in) (112) 378 119 (1,011)
from Continuing Operations Cash Flows from 15 3,017 Discontinued
Operations (note 4) Change in Cash and Cash (112) 393 119 2,006
Equivalents Cash and Cash 3,599 3,059 3,368 1,446 Equivalents,
Beginning of Period Cash and Cash $ 3,487 $ 3,452 $ 3,487 $ 3,452
Equivalents, End of Period See accompanying notes to the unaudited
interim period consolidated financial statements. Notes to the
Unaudited Interim Period Consolidated Financial Statements 1.
Summary of Significant Accounting Principles Basis of
Presentation The unaudited interim period consolidated
financial statements were prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and follow the
same accounting policies and methods of application as those used
in the preparation of the audited annual consolidated financial
statements for the year ended December 31, 2009. Under Canadian
GAAP, additional disclosure is required in annual financial
statements and accordingly the unaudited interim period
consolidated financial statements should be read together with the
audited annual consolidated financial statements and the
accompanying notes included in George Weston Limited's 2009 Annual
Report. Basis of Consolidation The unaudited interim period
consolidated financial statements include the accounts of George
Weston Limited ("GWL") and its subsidiaries (collectively, the
"Company") with provision for minority interest. The Company's
interest in the voting share capital of its subsidiaries is 100%
except for Loblaw Companies Limited ("Loblaw"), which was 62.8% at
the end of the third quarter of 2010, 62.1% at the end of the third
quarter of 2009 and 62.5% at year end 2009. In addition, the
Company consolidates variable interest entities ("VIEs") pursuant
to the Canadian Institute of Chartered Accountants ("CICA")
Accounting Guideline 15, "Consolidation of Variable Interest
Entities", ("AcG 15"), that are subject to control by Loblaw on a
basis other than through ownership of a majority of voting
interest. AcG 15 defines a variable interest entity as an entity
that either does not have sufficient equity at risk to finance its
activities without subordinated financial support or where the
holders of the equity at risk lack the characteristics of a
controlling financial interest. AcG 15 requires the primary
beneficiary to consolidate VIEs and considers an entity to be the
primary beneficiary of a VIE if it holds variable interests that
expose it to a majority of the VIEs' expected losses or that
entitle it to receive a majority of the VIEs' expected residual
returns or both. The Company has two reportable operating segments:
Weston Foods and Loblaw. Use of Estimates and Assumptions The
preparation of the unaudited interim period consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts and disclosures made in the
unaudited interim period consolidated financial statements and
accompanying notes. These estimates and assumptions are based on
management's historical experience, best knowledge of current
events and conditions and activities that may be undertaken in the
future. Actual results could differ from these estimates. Certain
estimates, such as those related to valuation of inventories,
impairment of fixed assets, employee future benefits, goodwill and
intangible assets and income and other taxes depend upon subjective
or complex judgments about matters that may be uncertain, and
changes in those estimates could materially impact the consolidated
financial statements. Illiquid credit markets, volatile equity,
foreign currency, energy markets and declines in consumer spending
have combined to increase the uncertainty inherent in such
estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates
resulting from continuing changes in the economic environment will
be reflected in the financial statements in future periods. Future
Accounting Standards Business Combinations In January 2009, the
CICA issued Section 1582, "Business Combinations", which will
replace Section 1581 of the same title, and issued Sections 1601,
"Consolidated Financial Statements", and 1602, "Non-Controlling
Interests". These standards will harmonize Canadian GAAP with
International Financial Reporting Standards. The amendments
establish principles and requirements for determining how an
enterprise recognizes and measures the fair value of certain assets
and liabilities acquired in a business combination, including
non-controlling interests, contingent consideration and certain
acquired contingencies. The amendments also require that
acquisition related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the
business combination. The impact of implementing these amendments
is currently being assessed. Comparative Information Certain
prior year information has been reclassified to conform with the
current year presentation. 2. Implementation of New Accounting
Standards Accounting Standards Implemented in 2009 Goodwill and
Intangible Assets In November 2007, the CICA issued
amendments to Section 1000, "Financial Statement Concepts", and
Accounting Guideline 11, "Enterprises in the Development Stage",
issued a new Section 3064, "Goodwill and Intangible Assets"
("Section 3064") to replace Section 3062, "Goodwill and Other
Intangible Assets", withdrew Section 3450, "Research and
Development Costs" and amended Emerging Issues Committee ("EIC")
Abstract 27, "Revenues and Expenditures During the Pre-operating
Period" to not apply to entities that have adopted Section 3064.
These amendments, in conjunction with Section 3064, provide
guidance for the recognition of intangible assets, including
internally developed assets from research and development
activities, ensuring consistent treatment of all intangible assets,
whether separately acquired or internally developed. The Company
implemented these requirements as at January 1, 2009, retroactively
with restatement of the comparative periods. Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities On
January 20, 2009, the EIC issued Abstract 173, "Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities". The
committee reached a consensus that a company's credit risk and the
credit risk of its counterparties should be considered when
determining the fair value of its financial assets and financial
liabilities, including derivative instruments. The transitional
provisions require the abstract to be applied retrospectively
without restatement of prior periods. Financial assets and
financial liabilities, including derivative instruments were
remeasured as at January 1, 2009 to take into account the
appropriate Company's credit risk and counterparty credit risk. As
a result, a decrease in other assets of $12 million, a decrease in
other liabilities of $4 million, a decrease in minority interest of
$3 million, an increase net of income taxes and minority interest
in accumulated other comprehensive loss of $1 million and a
decrease in retained earnings net of income taxes and minority
interest of $4 million were recorded on the consolidated balance
sheet. Financial Instruments - Disclosures In June 2009, the CICA
amended Section 3862, "Financial Instruments - Disclosures", to
include additional disclosure relating to the measurement of fair
value for financial instruments and liquidity risk. The amendment
establishes a three level hierarchy that reflects the significance
of the inputs used in fair value measurements on financial
instruments. The amendment was implemented by the Company in 2009
and the additional disclosures are included in the notes to the
audited annual consolidated financial statements included in the
Company's 2009 Annual Report. 3. Business Acquisitions On September
24, 2010, Maplehurst Bakeries, LLC, a subsidiary of GWL, acquired
all of the outstanding shares of Keystone Bakery Holdings, LLC
("Keystone"), for total consideration of approximately $188 million
(U.S. $186 million), including $1 million of transaction costs. The
acquisition was accounted for using the purchase method of
accounting and accordingly, the consolidated financial statements
include the results of operations since the date of the acquisition
and are reported in the Weston Foods segment. The timing of the
acquisition date relative to the quarter end was such that a
determination or estimation of fair value of certain assets
acquired has not yet been finalized. As a result, the actual amount
allocated to each of the identifiable net assets may vary from
preliminary amounts. The preliminary purchase price allocation is
as follows: ($ millions) Net assets acquired: Accounts receivable $
9 Inventories 6 Fixed assets 17 Goodwill and intangible assets 164
Accounts payable and accrued liabilities (8) Cash consideration,
net of cash acquired $ 188 In the first quarter of 2010, Loblaw
finalized the purchase price allocation related to the acquisition
of T&T Supermarket Inc. acquired in the third quarter of 2009
which resulted in a reduction of goodwill of $2 million (note 12).
During the second and the third quarters of 2010, Loblaw issued
shares from treasury under its Dividend Reinvestment Plan (the
"DRIP"). As a result of the Company's participation in the DRIP,
the Company's proportional ownership of Loblaw increased and was
accounted for as a step acquisition of Loblaw by the Company,
resulting in a year-to-date increase to goodwill of $9 million
(2009 - $6 million) (note 12). Subsequent to the end of the third
quarter of 2010, the Company announced and completed the
acquisition of ACE Bakery Ltd., a manufacturer and supplier of
artisan and European-style rustic bread varieties, for $110
million. 4. Discontinued Operations As part of the sale of the
fresh bread and baked goods business in the United States ("U.S.
fresh bakery business") in the first quarter of 2009 and typical of
the normal process of selling a business, Dunedin Holdings S.à r.l.
("Dunedin") agreed to indemnify Grupo Bimbo in the event of
inaccuracies in representations and warranties or if it fails to
perform agreements and covenants provided for in the agreement of
purchase and sale. The terms of the indemnification provisions vary
in duration and may extend for an unlimited period of
time. The indemnification provisions could result in future
cash outflows and statement of earnings charges. The Company is
unable to reasonably estimate its total maximum potential liability
as certain indemnification provisions do not provide for a maximum
potential amount and the amounts are dependent on the outcome of
future contingent events, the nature and likelihood of which cannot
be determined at this time. The results of discontinued operations
presented in the comparative period consolidated statement of
earnings were as follows: 16 Weeks Ended 40 Weeks Ended ($
millions) Oct. 10, 2009 Oct. 10, 2009((1)) Sales $ 145 Operating
income 9 Gain on disposal((2)) $ 15 936 Interest income( )and other
financing charges((3)) (1) Earnings before the following: 15 946
Income taxes 41 Earnings from discontinued operations $ 15 $ 905
(1) Reflects results of the U.S. fresh bakery business up to the
date of sale, January 21, 2009 and the gain on disposal. (2) Net of
the reclassification of cumulative foreign currency translation
loss of $110 million associated with the U.S. fresh bakery business
that was previously reflected in accumulated other comprehensive
loss (note 18). (3) In calculating earnings from discontinued
operations, no general interest expense was allocated to these
operations. The cash flows from discontinued operations presented
in the comparative period consolidated cash flow statement were as
follows: 16 Weeks Ended 40 Weeks Ended ($ millions) Oct. 10, 2009
Oct. 10, 2009((1)) Cash flows used in operations $ (105) Cash flows
from investing $ 15 3,107 Cash flows from financing 15 Cash flows
from discontinued $ 15 operations $ 3,017 Reflects the proceeds
received on the sale and the cash flows of (1) the U.S. fresh
bakery business up to the date of sale, January 21, 2009. 5.
Distribution Network Costs On April 27, 2010, Loblaw announced
changes to its distribution network in Quebec. In connection with
these changes a certain distribution centre was closed and an asset
impairment charge of $3 million and $26 million for the third
quarter and year-to-date 2010, respectively, was recorded as the
carrying value of the facility exceeded the fair value. In
addition, employee termination charges and other costs of $16
million were incurred. As at October 9, 2010, $10 million was
recorded on the consolidated balance sheet in accounts payable and
accrued liabilities related to these charges. 6. Interest Expense
and Other Financing Charges 16 Weeks Ended 40 Weeks Ended ($
millions) Oct. 9, 2010 Oct. 10, 2009 Oct. 9, 2010 Oct. 10, 2009
Interest on long $ 115 $ 115 $ 287 $ 285 term debt Loss on 8 49
redemption of debt (note 15) Interest expense (5) (1) 3 on
financial derivative instruments Other financing charges((1)) (36)
53 (52) Net short term (8) (4) (12) (16) interest income Interest
income (1) (1) (4) on security deposits Dividends on 4 4 11 15
capital securities Capitalized to (6) (6) (16) (16) fixed assets
Interest expense $ 100 $ 80 $ 321 $ 264 and other financing charges
(1) Other financing charges for the third quarter and year-to-date
2010 include a non-cash charge of $7 million (2009 - non-cash
income of $29 million) and a non-cash charge of $68 million (2009 -
non-cash income of $36 million), respectively, related to the fair
value adjustment of Weston Holdings Limited's ("WHL"), a subsidiary
of GWL, forward sale agreement for 9.6 million Loblaw common
shares. The fair value adjustment of the forward contract is a
non-cash item resulting from fluctuations in the market price of
the underlying Loblaw common shares that WHL owns. WHL does not
record any change in the market price associated with the Loblaw
common shares it owns. Any cash paid under the forward contract
could be offset by the sale of the Loblaw common shares. Also
included in other financing charges for the third quarter and
year-to-date 2010 is forward accretion income of $12 million (2009
- $11 million) and $28 million (2009 - $28 million), respectively,
and the forward fee of $5 million (2009 - $4 million) and $13
million (2009 - $12 million), respectively, associated with WHL's
forward sale agreement. Interest on debt and dividends on capital
securities paid in the third quarter and year-to-date 2010 were
$119 million and $351 million (2009 - $134 million and $389
million), respectively, and interest received on cash, short term
investments and security deposits was $23 million and $51 million
(2009 - $18 million and $74 million), respectively. 7. Income Taxes
The effective income tax rates for the third quarter and
year-to-date 2010 were 30.0% and 32.3% (2009 - 41.5% and 48.0%),
respectively. Both the third quarter and year-to-date
decreases in the effective income tax rates compared to the same
periods in 2009 were primarily due to decreases in non-deductible
foreign exchange losses. The third quarter was further
impacted by a decrease in income tax expense relating to certain
prior year income tax matters when compared to the same period in
2009. Net income taxes paid in the third quarter and year-to-date
2010 were $63 million and $242 million (2009 - $63 million and $267
million), respectively. Subsequent to the end of the third quarter
of 2010, the Canada Revenue Agency ("CRA") advised GWL of its
intent to challenge the characterization of a gain reported in a
previous tax return filing. Should the CRA be successful in its
assertion, the maximum exposure to the Company's net earnings would
be approximately $70 million. GWL intends to vigorously defend its
filing position. No amount has been recorded in the Company's
financial statements. 8. Basic and Diluted Net Earnings per Common
Share from Continuing Operations 16 Weeks Ended 40 Weeks Ended ($
millions except where otherwise indicated) Oct. 9, 2010 Oct. 10,
2009 Oct. 9, 2010 Oct. 10, 2009 Net earnings from continuing
operations $ 184 $ 71 $ 351 $ 48 Prescribed dividends on preferred
shares in share capital (14) (14) (34) (34) Net earnings from
continuing operations available to common shareholders for basic
earnings per share $ 170 $ 57 $ 317 $ 14 Reduction in net earnings
due to dilution at Loblaw (1) (1) Net earnings from continuing
operations available to common shareholders for diluted earnings
per share $ 169 $ 57 $ 316 $ 14 Weighted average common shares
outstanding (in millions) 129.1 129.1 129.1 129.1 Dilutive effect
of stock-based compensation((1)) (in millions) Diluted weighted
average common shares outstanding (in millions) 129.1 129.1 129.1
129.1 Basic net earnings per common share from continuing
operations ($) $ 1.32 $ 0.44 $ 2.46 $ 0.11 Diluted net earnings per
common share from continuing operations ($) $ 1.31 $ 0.44 $ 2.45 $
0.11 (1) Stock options outstanding with an exercise price greater
than the quarter and year-to-date average market prices of GWL's
common shares are not included in the computation of diluted net
earnings per common share from continuing operations. Accordingly,
for the third quarter and year-to-date 2010, 422,733 and 425,684
stock options, with a weighted average exercise price of $100.81
and $100.64, respectively, were excluded from the computation of
diluted net earnings per common share from continuing operations.
For the third quarter and year-to-date 2009, 1,476,502 stock
options, with an average exercise price of $81.91, were excluded
from the computation of diluted net earnings per common share from
continuing operations. 9. Cash and Cash Equivalents The components
of cash and cash equivalents were as follows: As at ($ millions)
Oct. 9, 2010 Oct. 10, 2009 Dec. 31, 2009 Cash $ 155 $ 124 $ 294
Cash equivalents - short term investments with a maturity of 90
days or less: Bank term deposits 1,616 1,004 1,140 Government
treasury bills 1,101 1,694 1,446 Government-sponsored debt 206 231
99 securities Corporate commercial paper 388 399 389 Foreign bonds
21 Cash and cash equivalents $ 3,487 $ 3,452 $ 3,368 As at October
9, 2010, October 10, 2009 and December 31, 2009, U.S. $2,144
million, U.S. $2,231 million and U.S. $2,220 million (October 9,
2010 - $2,168 million; October 10, 2009 - $2,324 million; December
31, 2009 - $2,338 million), respectively, was included in cash and
cash equivalents, short term investments and security deposits on
the consolidated balance sheets. The following is a summary of
unrealized foreign exchange losses as a result of translating U.S.
dollar denominated cash and cash equivalents, short term
investments and security deposits: 16 Weeks Ended 40 Weeks Ended ($
millions) Oct. 9, 2010 Oct. 10, 2009 Oct. 9, 2010 Oct. 10, 2009
Loblaw((1)) $ 10 $ 93 $ 39 $ 156 The Company (excluding
Loblaw)((2)) 9 117 48 200 Consolidated $ 19 $ 210 $ 87 $ 356 (1)
Includes losses of $6 million and $19 million (2009 - $54 million
and $77 million) related to cash and cash equivalents, for the
third quarter and year-to-date 2010, respectively. During the third
quarter and year-to-date 2010, the loss on cash and cash
equivalents, short term investments and security deposits was
partially offset in operating income and other comprehensive (loss)
income by the unrealized foreign exchange gain of $10 million and
$39 million (2009 - $93 million and $155 million), respectively, on
Loblaw's cross currency swaps. (2) Includes losses of $7 million
and $27 million (2009 - $70 million and $119 million) related to
cash and cash equivalents, for the third quarter and year-to-date
2010, respectively. During the third quarter and year-to-date 2010,
unrealized foreign exchange losses associated with the effect of
foreign exchange on a portion of the U.S. dollar denominated cash
and cash equivalents and short term investments held by Dunedin and
certain of its affiliates of $9 million and $44 million (2009 - $79
million and $183 million), respectively, were recognized in
operating income (note 20). The remaining unrealized foreign
exchange losses as a result of translating U.S. dollar denominated
net assets, including cash and cash equivalents, short term
investments and security deposits held in self-sustaining foreign
operations are recognized in other comprehensive (loss) income
(note 18). 10. Accounts Receivable The components of accounts
receivable were as follows: As at ($ millions) Oct. 9, 2010 Oct.
10, 2009 Dec. 31, 2009 Credit card receivables $ 1,875 $ 1,955 $
2,128 Amount securitized (1,635) (1,775) (1,725) Net credit card
receivables 240 180 403 Other receivables 451 486 448 Accounts
receivable $ 691 $ 666 $ 851 Credit Card Receivables President's
Choice Bank ("PC Bank"), a wholly owned subsidiary of Loblaw,
participates in various securitization programs that provide the
primary source of funds for the operation of its credit card
business. Under these securitization programs, a portion of the
total interest in the credit card receivables is sold to
independent trusts pursuant to co-ownership agreements. PC Bank
purchases receivables from and sells receivables to the trusts from
time to time depending on PC Bank's financing requirements. In the
third quarter of 2010, PC Bank accumulated $150 million of
collections that will be used in the fourth quarter to repurchase a
portion of its co-ownership interest in securitized receivables
from two of the independent trusts. A portion of the securitized
receivables that is held by an independent trust facility was also
renewed for two years during the third quarter of 2010. During the
first quarter of 2010, PC Bank also repurchased $90 million of
co-ownership interest in securitized receivables from an
independent trust. The independent trusts' recourse to PC Bank's
assets is limited to PC Bank's excess collateral of $114 million as
at October 9, 2010 (October 10, 2009 - $124 million; December 31,
2009 - $121 million) as well as standby letters of credit issued as
at October 9, 2010 of $103 million (October 10, 2009 - $116
million; December 31, 2009 - $116 million) based on a portion of
the securitized amount. Other Receivables Other receivables
consist mainly of receivables from Loblaw's independent
franchisees, associated stores and independent accounts, and
receivables from Weston Foods customers. 11. Inventories The
components of inventories were as follows: As at ($ millions) Oct.
9, 2010 Oct. 10, 2009 Dec. 31, 2009 Raw materials and supplies $ 37
$ 34 $ 36 Finished goods 2,230 2,232 2,174 Inventories $ 2,267 $
2,266 $ 2,210 Cost of inventories sold includes $13 million and $32
million (2009 - $13 million and $34 million) of depreciation during
the third quarter and year-to-date 2010, respectively. For
inventories recorded as at October 9, 2010, Loblaw recorded $13
million (October 10, 2009 - $15 million) as an expense for the
write-down of inventories below cost to net realizable value. 12.
Goodwill and Intangible Assets As at Weston Oct. 9, 2010 ($
millions) Foods Loblaw Total Oct. 10, 2009 Dec. 31, 2009 Goodwill,
beginning of period $ 92 $ 1,103 $ 1,195 $ 1,116 $ 1,116 Goodwill,
acquired during the period (note 3) 164 10 174 193 156 Adjusted
purchase price allocation (note 3) (2) (2) Goodwill impairment((1))
(73) (73) Impact of foreign currency translation (1) (1) (5) (4)
Goodwill, end of period 255 1,111 1,366 1,231 1,195 Trademarks and
brand names 13 51 64 14 64 Other intangible assets 4 39 43 16 37
Goodwill and intangible assets $ 272 $ 1,201 $ 1,473 $ 1,261 $
1,296 (1) Weston Foods reorganized its remaining operations
subsequent to the disposition of the U.S. fresh bakery business in
the first quarter of 2009 resulting in a write-down of goodwill
related to the biscuits, cookies, cones and wafers business. In
connection with the acquisition of Keystone, Weston Foods has
recorded goodwill and intangible assets of $164 million as at
October 9, 2010. For purposes of this note disclosure, the entire
$164 million has been presented as goodwill acquired. As discussed
in note 3, management has yet to finalize the amount to be
allocated to each of the identifiable net assets acquired and
therefore, the actual amount allocated to goodwill and intangible
assets may vary from the preliminary amount. 13. Employee Future
Benefits The Company's total net benefit plan cost recognized in
operating income was $68 million and $166 million (2009 - $64
million and $160 million) for the third quarter and year-to-date
2010, respectively. The total net benefit plan cost included costs
for the Company's defined benefit pension and other benefit plans,
defined contribution pension plans and multi-employer pension
plans. 14. Short Term Debt Included in short term debt are GWL's
Series B debentures, due on demand, of $326 million (October 10,
2009 - $291 million; December 31, 2009 - $300 million) as at the
end of the third quarter of 2010. 15. Long Term Debt As at October
9, 2010, October 10, 2009 and December 31, 2009, U.S. $300 million
(October 9, 2010 - $303 million; October 10, 2009 - $313 million;
December 31, 2009 - $316 million) of Loblaw fixed rate notes was
recorded in long term debt on the consolidated balance sheets.
During the second quarter of 2010, Loblaw issued $350 million
principal amount of unsecured Medium Term Notes ("MTN"), Series 2-B
pursuant to its MTN, Series 2 program. The Series 2-B notes pay a
fixed rate of interest of 5.22% payable semi-annually commencing on
December 18, 2010 until maturity on June 18, 2020. During the
second quarter of 2009, Loblaw issued $350 million principal amount
of unsecured MTN, Series 2-A which pay a fixed rate of interest of
4.85% payable semi-annually. The Series 2-A and 2-B notes are
subject to certain covenants and are unsecured obligations of
Loblaw and rank equally with all the unsecured indebtedness of
Loblaw that has not been subordinated. The Series 2-A and 2-B notes
may be redeemed at the option of Loblaw, in whole at any time or in
part from time to time, upon not less than 30 days and not more
than 60 days notice to the holders of the notes. During the second
quarter of 2010, Loblaw's $300 million 7.10% MTN matured and was
repaid. During the first quarter of 2009, Loblaw's $125 million
5.75% MTN matured and was repaid. During the second quarter of
2009, GWL entered into an agreement to repurchase a portion of the
12.7% Promissory Notes, due 2030. During the third quarter of 2009,
GWL repurchased these and all of the remaining notes, pursuant to
the terms of the notes, for an aggregate purchase price of $73
million. As a result, GWL recorded a loss of $8 million in the
third quarter of 2009 and $49 million, year-to-date 2009, in
interest expense and other financing charges (note 6). During the
first quarter of 2009, GWL's $250 million 5.90% MTN matured and was
repaid. 16. Capital Securities During the second quarter of 2009,
GWL's 10.6 million 5.15% non-voting preferred shares, Series II,
which were presented as capital securities and included in current
liabilities, were redeemed for cash of $25.00 per share, or $265
million in aggregate plus accrued and unpaid dividends to but
excluding April 1, 2009. Of the 12.0 million authorized non-voting
Loblaw second preferred shares, Series A, 9.0 million were
outstanding at the end of the third quarter of 2010. Dividends on
capital securities are presented in interest expense and other
financing charges in the consolidated statements of earnings (note
6). 17. Stock-Based Compensation The following table
summarizes the Company's cost recognized in operating income
related to its stock-based compensation plans, restricted share
unit plans and GWL's and Glenhuron Bank Limited's ("Glenhuron"), a
subsidiary of Loblaw, equity derivatives: 16 Weeks Ended 40 Weeks
Ended ($ millions) Oct. 9, 2010 Oct. 10, 2009 Oct. 9, 2010 Oct. 10,
2009 Stock option plans / share appreciation right plan expense
(income) $ 10 $ (5) $ 35 $ (2) Restricted share unit plan expense 6
3 15 9 Equity derivative contracts (income) loss (7) 13 (31) 16 Net
stock-based compensation expense $ 9 $ 11 $ 19 $ 23 Stock Option
Plan The following is a summary of GWL's stock option and
share appreciation right plan activity: 16 Weeks Ended 40 Weeks
Ended Number of Oct. 10, Oct. 10, Options/Rights Oct. 9, 2010 2009
Oct. 9, 2010 2009 Outstanding options/rights, beginning of period
1,448,553 1,786,328 1,761,345 1,616,344 Granted 128,774 300,573
230,430 Exercised (33,878) (520) (119,911) (19,507)
Forfeited/cancelled (28,001) (398,558) (69,460) Outstanding
options, end of period 1,543,449 1,757,807 1,543,449 1,757,807
Share appreciation value paid ($ millions) $ $ $ 1 $ During the
third quarter of 2010, GWL granted stock options with an exercise
price of $81.05. The share appreciation value paid by GWL in the
third quarters of 2010 and 2009 and year-to-date 2009 was nominal.
The following is a summary of Loblaw's stock option plan activity:
16 Weeks Ended 40 Weeks Ended Number of Options Oct. 10, Oct. 10,
Oct. 9, 2010 2009 Oct. 9, 2010 2009 Outstanding options, beginning
of period 9,585,006 9,560,681 9,207,816 7,892,660 Granted 21,782
44,032 2,510,877 2,709,647 Exercised (138,836) (34,950) (563,811)
(116,358) Forfeited/cancelled (119,314) (308,218) (1,806,244)
(1,224,404) Outstanding options, end of period 9,348,638 9,261,545
9,348,638 9,261,545 Share appreciation value paid ($ millions) $ 2
$ 1 $ 5 $ 1 During the third quarter of 2010, Loblaw granted stock
options with an exercise price of $43.42 (2009 - $34.31). At the
end of the third quarter of 2010, GWL outstanding stock options
represented approximately 1.2% (2009 - 1.3%) of GWL's issued and
outstanding common shares. Loblaw's outstanding stock options
represented approximately 3.3% (2009 - 3.3%) of its issued and
outstanding common shares. The number of stock options outstanding
was within the Companies' guidelines of 5% of the total number of
outstanding shares. Restricted Share Unit ("RSU") Plan The
following is a summary of GWL's RSU plan activity: 16 Weeks Ended
40 Weeks Ended Number of Awards Oct. 9, 2010 Oct. 10, 2009 Oct. 9,
2010 Oct. 10, 2009 RSUs, beginning of period 162,213 151,526
152,555 151,769 Granted 1,157 49,056 61,677 Cash settled (34,148)
(59,423) Cancelled (4,093) (2,497) RSUs, end of period 163,370
151,526 163,370 151,526 RSUs cash settled ($ millions) $ $ $ 2 $ 4
The following is a summary of Loblaw's RSU plan activity: 16 Weeks
Ended 40 Weeks Ended Number of Awards Oct. 9, 2010 Oct. 10, 2009
Oct. 9, 2010 Oct. 10, 2009 RSUs, beginning of period 1,081,909
997,618 973,351 829,399 Granted 2,590 13,373 375,315 442,460 Cash
settled (12,073) (12,585) (183,837) (199,920) Cancelled (12,513)
(20,537) (104,916) (94,070) RSUs, end of period 1,059,913 977,869
1,059,913 977,869 RSUs cash settled ($ millions) $ 1 $ 1 $ 7 $ 7
Equity Derivative Contracts As at October 9, 2010, Glenhuron
had equity forward contracts to buy 1.5 million (October 10, 2009 -
3.2 million; December 31, 2009 - 1.5 million) Loblaw common shares
at an average forward price of $56.27 (October 10, 2009 - $53.76;
December 31, 2009 - $66.25) including $0.05 (October 10, 2009 -
$9.14; December 31, 2009 - $10.03) per common share of interest
expense. As at October 9, 2010, the interest and unrealized market
loss of $23 million (October 10, 2009 - $71 million; December 31,
2009 - $48 million) was included in accounts payable and accrued
liabilities. In the second quarter of 2009, Glenhuron paid $38
million to terminate a portion of the equity forwards representing
1.6 million shares, which led to the extinguishment of a
corresponding portion of the associated liability. Also as at
October 9, 2010, GWL had equity swaps to buy 1.7 million (October
10, 2009 - 1.7 million; December 31, 2009 - 1.7 million) GWL common
shares at an average forward price of $103.17 (October 10, 2009 -
$103.17; December 31, 2009 - $103.17). As at October 9, 2010, the
unrealized market loss of $44 million (October 10, 2009 - $78
million; December 31, 2009 - $61 million) was included in accounts
payable and accrued liabilities. 18. Accumulated Other
Comprehensive Loss The following tables provide further detail
regarding the composition of accumulated other comprehensive loss:
40 Weeks Ended Oct. 9, 2010 Foreign currency Cash translation
Available-for- flow ($ millions) adjustment sale assets hedges
Total Balance, beginning $ $ of period (103) $ (3) $ 14 (92)
Foreign currency translation adjustment (20) (20) Net unrealized
loss on available-for-sale financial assets( (1)) (6) (6)
Reclassification of loss on available-for-sale financial assets(
(2)) 6 6 Net loss on derivatives designated as cash flow hedges(
(3)) (1) (1) Reclassification of gain on derivatives designated as
cash flow hedges((4)) (4) (4) Balance, end of $ $ period (123) $
(3) $ 9 (117) (1) Net of income taxes of nil and
minority interest of $4 million. (2) Net of income
taxes of nil and minority interest of $3 million. (3)
Net of income taxes recovered of $1 million and minority interest
of nil. (4) Net of income taxes recovered of $1 million
and minority interest of $2 million. The change in the foreign
currency translation adjustment in the first three quarters of 2010
of $20 million resulted from the appreciation of the Canadian
dollar relative to the U.S. dollar.
40 Weeks Ended Oct. 10, 2009 Foreign currency Cash translation
Available-for- flow ($ millions) adjustment sale assets hedges
Total Balance, beginning $ $ $ $ of period (334) 10 2 (322)
Cumulative impact of implementing new accounting standards((1)) (1)
(1) Foreign currency translation adjustment 24 24 Reclassification
of cumulative foreign currency translation loss to net earnings 144
144 Net unrealized loss on available-for-sale financial assets(
(2)) (14) (14) Reclassification of gain on available-for-sale
financial assets( (3)) (5) (5) Net gain on derivatives designated
as cash flow hedges((4)) 1 1 Reclassification of loss on
derivatives designated as cash flow hedges((5)) 16 16 Balance, end
of $ $ $ $ period (166) (9) 18 (157) (1) Net of income
taxes recovered of $1 million and minority interest of $1 million.
(2) Net of income taxes recovered of $1 million and
minority interest of $9 million. (3) Net of income
taxes recovered of $3 million and minority interest of $3 million.
(4) Net of income taxes of $7 million and minority
interest of $2 million. (5) Net of income taxes
recovered of $10 million and minority interest of $5 million. The
change in the foreign currency translation adjustment in the first
three quarters of 2009 of $24 million resulted primarily from the
depreciation of the Canadian dollar relative to the U.S. dollar in
the period prior to the sale of the U.S. fresh bakery business,
partially offset by the appreciation of the Canadian dollar
thereafter. The Company also reversed a cumulative foreign currency
translation loss of $144 million in the first quarter of 2009, of
which $34 million was recorded in operating income and $110 million
was included in the results of discontinued operations (note 4).
19. Contingencies, Commitments and Guarantees Guarantees -
Independent Funding Trusts Certain independent franchisees of
Loblaw obtain financing through a structure involving independent
trusts, which were created to provide loans to the independent
franchisees to facilitate their purchase of inventory and fixed
assets, consisting mainly of fixtures and equipment. The trusts are
administered by a major Canadian chartered bank. The gross
principal amount of loans issued to Loblaw's independent
franchisees by the independent funding trusts as at October 9, 2010
was $395 million (October 10, 2009 - $377 million; December 31,
2009 - $390 million) including $188 million (October 10, 2009 -
$143 million; December 31, 2009 - $163 million) of loans payable by
VIEs consolidated by the Company. Loblaw has agreed to provide
credit enhancement of $66 million (October 10, 2009 - $66 million;
December 31, 2009 - $66 million) in the form of a standby letter of
credit for the benefit of the independent funding trust
representing not less than 15% (October 10, 2009 - 15%) of the
principal amount of the loans outstanding. The standby letter of
credit has not been drawn upon. During the second quarter of 2010,
the $475 million, 364-day revolving committed credit facility that
is the source of funding to the independent trusts was renewed. The
financing structure has been reviewed and Loblaw has determined
there were no additional VIEs to consolidate as a result of this
financing. Standby Letters of Credit Standby letters of
credit for the benefit of independent trusts with respect to the
credit card receivables securitization program of PC Bank have been
issued by major Canadian chartered banks. These standby letters of
credit could be drawn upon in the event of a major decline in the
income flow from or in the value of the securitized credit card
receivables. Loblaw has agreed to reimburse the issuing banks for
any amount drawn on the standby letters of credit. The aggregate
gross potential liability under these arrangements, which
represents 9% (October 10, 2009 - 9%; December 31, 2009 - 9%) on a
portion of the securitized credit card receivables amount, is
approximately $103 million (October 10, 2009 - $116 million;
December 31, 2009 - $116 million) (note 10). Legal
Proceedings The Company is the subject of various legal
proceedings and claims that arise in the ordinary course of
business. The outcome of all of these proceedings and claims is
uncertain. However, based on information currently available, these
proceedings and claims, individually and in the aggregate, are not
expected to have a material impact on the Company. 20.
Segment Information The Company has two reportable operating
segments: Weston Foods and Loblaw. The accounting policies of the
reportable operating segments are the same as those described
herein and in the Company's 2009 Annual Report. The Company
measures each reportable operating segment's performance based on
operating income. Neither reportable operating segment is reliant
on any single external customer. 16 Weeks Ended 40 Weeks Ended Oct.
10, ($ millions) Oct. 9, 2010 2009 Oct. 9, 2010 Oct. 10, 2009 Sales
Weston Foods $ 494 $ 502 $ 1,238 $ 1,334 Loblaw 9,593 9,473 23,836
23,424 Intersegment (203) (198) (483) (475) Consolidated $ 9,884 $
9,777 $ 24,591 $ 24,283 Operating Income Weston Foods $ 111 $ 36 $
223 $ 65 Loblaw 388 376 974 922 Other((1)) (9) (79) (44) (265)
Consolidated $ 490 $ 333 $ 1,153 $ 722 As at ($ millions) Oct. 9,
2010 Oct. 10, 2009 Dec. 31, 2009 Total Assets Weston Foods $ 1,707
$ 1,886 $ 1,674 Loblaw 15,667 14,818 15,151 Other((2)) 3,060 3,065
3,318 Consolidated $ 20,434 $ 19,769 $ 20,143
(1) Operating income for the third quarter and
year-to-date 2010 includes a loss of $9 million and $44 million
(2009 - $79 million and $231 million), respectively, related to
foreign exchange losses associated with the effect of foreign
exchange on a portion of the U.S. dollar denominated cash and short
term investments held by Dunedin and certain of its affiliates,
which are integrated foreign subsidiaries for accounting purposes.
Year-to-date 2009 operating income also includes the cumulative
foreign currency translation loss of $34 million associated with
Dunedin and certain of its affiliates, which was reversed from
accumulated other comprehensive loss on the date of the sale of the
U.S. fresh bakery business (note 18). (2) Other
includes cash and cash equivalents and short term investments held
by Dunedin and certain of its affiliates. Corporate Profile George
Weston Limited is a Canadian public company, founded in 1882,
engaged in food processing and distribution. The Company has two
reportable operating segments: Loblaw and Weston Foods, and holds
cash and short term investments. The Loblaw operating segment,
which is operated by Loblaw Companies Limited and its subsidiaries,
is Canada's largest food distributor and a leading provider of
drugstore, general merchandise and financial products and services.
The Weston Foods operating segment is a leading fresh and frozen
baking company in Canada and is engaged in frozen baking and
biscuit manufacturing in the United States. Trademarks George
Weston Limited and its subsidiaries own a number of trademarks.
These trademarks are the exclusive property of George Weston
Limited and its subsidiary companies. Trademarks where used in this
report are in italics. Shareholder Information Registrar and
Transfer Agent Toll free (Canada and U.S.A.): Computershare
Investor Services Inc. 1-800-564-6253 100 University Avenue
International direct dial: (514) Toronto, Canada 982-7555 M5J 2Y1
Fax: (416) 263-9394 Toll free fax: 1-888-453-0330 To change your
address or eliminate multiple mailings or for other shareholder
account inquiries, please contact Computershare Investor Services
Inc. Investor Relations Shareholders, security analysts and
investment professionals should direct their requests to Mr.
Geoffrey H. Wilson, Senior Vice President, Financial Control and
Investor Relations, at the Company's Executive Office or by e-mail
at investor@weston.ca. Additional financial information has been
filed electronically with the Canadian securities regulatory
authorities in Canada through the System for Electronic Document
Analysis and Retrieval (SEDAR). The Company holds an analyst call
shortly following the release of its quarterly results. This call
will be archived in the Investor Zone section of the Company's
website. This Quarterly Report includes selected information on
Loblaw Companies Limited, a 62.8%-owned public reporting subsidiary
company with shares trading on the Toronto Stock Exchange. For
information regarding Loblaw, readers should also refer to the
materials filed by Loblaw with the Canadian securities regulatory
authorities from time to time. These filings are also maintained at
Loblaw's corporate website at www.loblaw.ca. Third Quarter
Conference Call and Webcast George Weston Limited will host a
conference call as well as an audio webcast on Tuesday, November
23, 2010 at 11:00 a.m. (EST). To access via tele-conference, please
dial (647) 427-7450. The playback will be made available two hours
after the event at (416) 849-0833, passcode: 19301683#. To access
via audio webcast, please visit the "Investor Zone" section of
www.weston.ca. Pre-registration will be available. Ce rapport est
disponible en français.
pMr. Geoffrey H. Wilson, Senior Vice President, Financial Control
and Investor Relations at the Company's Executive Office, (416)
922-2500 or by e-mail at a
href="mailto:investor@weston.ca"investor@weston.ca/a./p
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