WINPAK LTD.
TSX : WPK

WINPAK LTD.

October 27, 2005 15:11 ET

Winpak Reports Third Quarter 2005

WINNIPEG, MANITOBA--(CCNMatthews - Oct. 27, 2005) - Winpak Ltd. (TSX:WPK) -

The Board of Directors announces Winpak's consolidated results reported in US dollars for the third interim period of 2005, which ended on October 2, 2005. Earnings per share reflect the 10 for 1 share split that occurred in May 2005.



October 2 September 26
Year-To-Date Ended 2005 2004
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(thousands of US dollars, except per
share amounts)

Sales 328,998 287,402
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Net earnings 16,935 18,526
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Minority interest 32 804
Provision for income taxes 6,397 11,121
Interest 2,415 1,918
Depreciation and amortization 14,691 14,028
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EBITDA (1) 40,470 46,397
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Basic and fully diluted net
earnings per share 0.26 0.29
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October 2 September 26
Third Quarter Ended 2005 2004
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(thousands of US dollars, except per
share amounts)

Sales 112,306 97,902
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Net earnings 5,322 6,429
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Minority interest 60 299
Provision for income taxes 2,076 3,360
Interest 808 625
Depreciation and amortization 4,997 4,782
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EBITDA (1) 13,263 15,495
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Basic and fully diluted net
earnings per share 0.08 0.10
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Caution: (1) EBITDA is not a recognized measure under Canadian GAAP. Management believes that in addition to net earnings, this measure provides useful supplemental information to investors including an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that this measure should not be construed as an alternative to net earnings, determined in accordance with GAAP, as an indicator of the Company's performance. The Company's method of calculating this measure may differ from other companies, and, accordingly, the results may not be comparable.

The Company: Winpak Ltd. manufactures and distributes high-quality packaging materials and innovative packaging machines that are sold in combination with packaging materials. The Company's products are used primarily for the protection of perishable foods, beverages and in health care applications.

Management's Discussion and Analysis

presented in US dollars

Forward-looking statements: Certain statements made in the following Management's Discussion and Analysis contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company's intentions, plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent our current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, we disclaim any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions investors not to place undue reliance upon forward-looking statements.

Summary Results of Operations

Net earnings per share in the quarter ended October 2, 2005 were 2 cents lower than in the third quarter of 2004. Although organic growth added 1 cent per share to net earnings, higher raw material costs reduced gross profit margins and accordingly, net earnings by 3 cents per share.

For the nine months to date, net earnings were 3 cents per share less than in the corresponding period of the prior year. Organic business growth contributed 3.5 cents per share to net earnings while another 1.5 cents per share arose due to other causes. The decline in gross profit margins associated mainly with higher raw material costs cut net earnings by 8 cents per share.

Sales, volume growth and pricing

Sales, in comparison to the equivalent prior year periods, grew 14.7 percent in the third quarter and 14.5 percent, year to date, including volume growth of 6.5 percent and 6.3 percent, respectively. Products demonstrating volume strength in the nine months to date were: modified atmosphere packaging ("MAP"), biaxially oriented nylon ("BOPA") film, and lidding, including a newly developed die cut foil lid for juice containers. In the third quarter, specialty films also contributed to the growth, while sales of packaging machines and other products were low compared to 2004. Higher sales of packaging machines are expected in the fourth quarter of 2005. Average selling prices, including the impact of product mix, increased 6.2 percent both in the third quarter and nine-month period to date compared to the same periods last year, reflecting the partial pass-through of raw material cost escalations. Foreign exchange differences contributed the remainder of the sales increases, both in the third quarter and first three quarters. Consistent with normal practices, further selling price increases linked with raw material cost escalations should be implemented in the fourth quarter.

Gross profit margins

Insufficient pass-through of higher raw material costs again precipitated a significant decline in gross profit margins and consequently, net earnings in the third quarter. Compared to the prior year, margins deteriorated 3.7 percentage points in the reported quarter and 2.8 percentage points in the nine months to date. In the full year, gross profit margins are anticipated to decline from the 2004 level by approximately two and a half percentage points, which would impact net earnings in fiscal 2005 by about 10 cents per share. A significant portion of the reduced margin arises with MAP products. The greater availability of competing BOPA film, worldwide, has effectively barred price increases and accordingly the Company has significantly lowered expectations for the profitability of this product for the foreseeable future. Although improvement in manufacturing performance at two key plants has improved, providing some relief from higher raw material costs, unsatisfactory performance at two other locations offset the benefits. The Company is striving to ensure excess costs linked with manufacturing inefficiencies are eliminated.

The costs of Winpak's primary raw materials are impacted by the production capacity of suppliers and by the price of oil and natural gas based products used as feedstock for the materials. During the summer of 2005, certain raw material prices abated while, where possible, the impact of raw material price rises was temporarily avoided by pre-buying. However, indications are that average raw material costs will rise in the next two quarters and potential supply limitations may also add further impetus to raw material prices. The table below, with rebalanced weightings, presents eight quarters of the indexed purchase cost of Winpak's eight primary raw materials. The index increased 14.0 percent between the third quarters of 2004 and 2005 and an average of 22.5 percent for the comparable nine-month periods.



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Quarter and
Year 4/03 1/04 2/04 3/04 4/04 1/05 2/05 3/05
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Index of
Winpak's
eight
primary
raw
materials 103.1 110.7 113.5 118.8 127.8 144.1 140.5 135.4
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Other comments

In the third quarter, the benefits of a reduced effective rate of income tax and the lower amount of net earnings attributed to the minority shareholder of a subsidiary were entirely offset by foreign exchange losses and fuel surcharges on freight, which increased selling, general and administrative expenses. Year-to-date, the net impact of the aforementioned factors was an increment to net earnings of 1.5 cents per share. In both the three and nine-month periods, the lower effective rate of income tax was driven by the greater proportion of taxable income arising in lower tax-rate jurisdictions. In the nine months to date, the rate of income tax also included the benefit of a lower rate of tax applicable to certain components of the sale of the paper bag business in June 2005.

During the final quarter of 2005, Winpak expects payment for the inventory associated with the printed, paper bag business sold in June this year. Concurrently, business operations will cease at the Laird Drive, Toronto facility. Consequent to the sale of the paper bag business and the closure of the plant at Laird Drive, Winpak's revenues are expected to be approximately five percent lower, although the Company anticipates a small improvement in earnings from operations. The property at Laird Drive was made available for sale during the third quarter and the Company is discussing terms of sale with potential buyers.

Canada Revenue Agency has issued a final decision on the only remaining notices of objection filed by the Company with respect to the interest charges levied regarding fiscal years 1992 to 1994. The decision was moderately favorable to Winpak.

Capital Resources, Cash Flow and Liquidity

Winpak concluded the third quarter of 2005 with available cash funds of $14.0 million including $3.1 million provided in the third quarter. Year to date, the change in cash balances was lower than was generated in the comparable prior-year period by $2.1 million, which is consistent with lower net earnings. Included in the change in cash balances, however, were other significant differences that almost entirely offset each other. Investments in property, plant and equipment were $15.3 million lower than in 2004, reflecting the Company's estimated capital investment program for 2005 totaling $26 million. Payments against accounts payable and accrued liabilities, on the other hand, were $11.5 million greater than in 2004, due to the timing of disbursements for inventory, equipment and intangible assets. Higher spending on inventories amounted to $4.2 million and was due to the combination of higher raw material unit costs and pre-buying in advance of suppliers' announced price increases.

The Company's $30 million private placement of senior unsecured five-year Notes mature in August 2006 and consequently, is classified as a current liability. Winpak is confident that sufficient resources, including unsecured bank term and operating facilities, are available to fund cash needs for the foreseeable future, including repayment of the private placement Notes.

Looking Forward

Assuming no unforeseen events, the Company anticipates net earnings in 2005 of approximately 35 cents per share. This compares to 40 cents in 2004 and is at the bottom end of previous guidance of between 35 and 40 cents per share. Winpak is confident that substantial future business opportunities exist and accordingly, capital projects under consideration for 2006 could, if approved, exceed capital expenditures forecast for 2005. In 2006, at least 6 percent volume growth is anticipated compared to sales in 2005 when adjusted consequent to the sale of the paper bag business. At this time, despite the anticipated positive impacts of volume increases, selling price increases, improvements in manufacturing performance and the closure of the Laird Drive facility, no comment is provided on prospective net earnings in 2006, given the volatility of raw material prices and the unpredictable timing of selling price increases.



Corporate Office
100 Saulteaux Crescent
Winnipeg, Manitoba
Canada R3J 3T3
Tel. (204) 889-1015
Fax (204) 888-7806
Internet: www.winpak.com


Winpak Ltd.
Interim Consolidated Financial Statements
Year-to-date ended: October 2, 2005


These interim consolidated financial statements have not been
audited or reviewed by the Company's independent external auditors,
PricewaterhouseCoopers LLP.


Winpak Ltd.
Consolidated Balance Sheets
(thousands of US dollars)
(2005 Unaudited)

October 2 December 31
2005 2004
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Assets

Current Assets:
Cash 14,013 11,654
Accounts receivable 55,589 51,841
Inventories 69,875 63,802
Prepaid expenses 2,466 1,935
Future income taxes 3,202 2,234
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145,145 131,466

Property, plant and equipment (net) 203,055 200,870

Other assets 4,487 5,920

Intangible assets (net) 11,486 13,198

Goodwill 16,404 16,140
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380,577 367,594
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Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities 34,659 36,348
Current portion of long-term debt 30,000 0
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64,659 36,348

Long-term debt 24,000 59,000

Deferred credits 9,521 9,669

Future income taxes 30,549 28,704

Postretirement benefits 737 894
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129,466 134,615

Minority interest 11,002 10,971

Shareholders' Equity:
Share capital (note 3) 29,195 29,195
Retained earnings 175,801 160,856
Cumulative currency translation adjustments 35,113 31,957
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240,109 222,008
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380,577 367,594
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See accompanying notes to consolidated financial statements.


Winpak Ltd.
Consolidated Statements of Earnings
(thousands of US dollars, except per share amounts)
(Unaudited)
Third Quarter Ended Year-To-Date Ended
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October 2 September 26 October 2 September 26
2005 2004 2005 2004
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Sales $ 112,306 $ 97,902 $ 328,998 $ 287,402

Cost of sales 85,251 70,697 243,835 204,831
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Gross profit 27,055 27,205 85,163 82,571

Expenses

Selling, general &
administrative (note 4) 15,830 13,958 49,260 43,395

Research and technical 2,389 2,315 6,455 6,522

Pre-production 570 219 1,922 285

Loss on sale of business
(note 5) - - 1,747 -
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Earnings from operations 8,266 10,713 25,779 32,369

Interest 808 625 2,415 1,918
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Earnings before income
taxes and minority
interest 7,458 10,088 23,364 30,451

Provision for income
taxes 2,076 3,360 6,397 11,121

Minority interest 60 299 32 804
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Net earnings $ 5,322 $ 6,429 $ 16,935 $ 18,526
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Basic and fully diluted
earnings per share $ 0.08 $ 0.10 $ 0.26 $ 0.29
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Average number of shares
outstanding (000's)
(note 3) 65,000 65,000 65,000 65,000
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Consolidated Statements of
Retained Earnings
(thousands of US dollars)
(Unaudited)
Third Quarter Ended Year-To-Date Ended
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October 2 September 26 October 2 September 26
2005 2004 2005 2004
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Retained earnings,
beginning of period $ 171,146 $ 148,229 $ 160,856 $ 137,435
Net earnings 5,322 6,429 16,935 18,526
Dividends declared (667) (656) (1,990) (1,959)
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Retained earnings,
end of period $ 175,801 $ 154,002 $ 175,801 $ 154,002
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See accompanying notes to consolidated financial statements.


Winpak Ltd.
Consolidated Statements of Cash Flows
(thousands of US dollars)
(Unaudited)
Third Quarter Ended Year-To-Date Ended
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October 2 September 26 October 2 September 26
2005 2004 2005 2004
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Cash provided by (used in):

Operating activities:
Net earnings for the
period $ 5,322 $ 6,429 $ 16,935 $ 18,526
Items not involving cash:
Depreciation 4,429 4,270 12,985 12,494
Amortization - intangible
assets 568 512 1,706 1,534
Pension plan and
postretirement benefits 851 469 2,269 1,445
Future income taxes 1,473 2,741 342 3,341
Foreign exchange gain on
long-term debt (1,705) (1,579) (976) (451)
Minority interest 60 299 32 804
Loss on sale of
business (note 5) - - 1,747 -
Other 513 326 870 228
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Cash flow from
operating activities
before change in
working capital 11,511 13,467 35,910 37,921

Change in working capital:
Accounts receivable 359 1,318 (2,895) (3,168)
Inventories 1,205 1,489 (5,032) (856)
Prepaid expenses 119 475 (480) (651)
Accounts payable and
accrued liabilities (3,967) (1,138) (7,250) 4,209
Pension plan and
postretirement benefits
payments (283) (1,661) (2,150) (2,043)
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8,944 13,950 18,103 35,412
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Investing activities:
Acquisition of property,
plant and equipment (5,534) (14,334) (15,109) (30,488)
Proceeds on sale of
business (note 5) - - 6,073 -
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(5,534) (14,334) (9,036) (30,488)
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Financing activities:
Proceeds from long-term
debt - 1,000 2,000 1,000
Repayments of long-term
debt - - (7,000) -
Dividends paid (793) (722) (2,405) (2,217)
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(793) 278 (7,405) (1,217)
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Foreign exchange
translation adjustment on
cash 474 223 697 754
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Change in cash 3,091 117 2,359 4,461

Cash, beginning of
period 10,922 6,189 11,654 1,845
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Cash, end of period $ 14,013 $ 6,306 $ 14,013 $ 6,306
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Supplemental disclosure
of cash flow information:
--------------------------

Cash paid during the period
for:
Interest expense $ 1,430 $ 1,230 $ 3,222 $ 2,682
Income tax expense 1,288 223 7,854 5,922

See accompanying notes to consolidated financial statements.


Winpak Ltd.
Notes to Consolidated Financial Statements
For the periods ended October 2, 2005 and September 26, 2004
(thousands of US dollars, unless otherwise indicated)
(Unaudited)


1. Basis of presentation:

The unaudited consolidated interim financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles "GAAP". They have been prepared using the same accounting policies and methods of application as disclosed in the Company's audited consolidated financial statements for the year ended December 31, 2004 except as disclosed in note 2 to the consolidated interim financial statements.

These unaudited consolidated interim financial statements do not include all of the information and notes to the financial statements required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report for the year ended December 31, 2004.

2. Fiscal year:

Effective January 1, 2005 the Company changed its fiscal year-end from December 31 to the nearest Sunday to December 31. The Company's fiscal year will normally be 52 weeks in duration but will include a 53rd week every 5 to 6 years. The third quarter consolidated statements of earnings and retained earnings and cash flows are for the periods July 3 to October 2, 2005 and June 27 to September 26, 2004.

3. Share capital:

During the second quarter of 2005, the shareholders of the Company approved a ten-for-one share split of its issued and outstanding common shares. All references to net earnings per share (basic and fully diluted) have been retroactively restated to reflect the impact of the Company's ten-for-one common share split. As a result of the share split, the Company has 65,000,000 common shares authorized, issued and outstanding.

4. Selling, general & administrative expenses:

Included within selling, general & administrative expenses are the following amounts:



Third Quarter Ended Year-To-Date Ended
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October 2 September 26 October 2 September 26
2005 2004 2005 2004
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Foreign exchange
translation
(gains) losses (696) (358) (76) 356
Defined benefit pension
plan expense 696 361 1,812 1,152


Foreign exchange translation gains and losses represent the realized and unrealized foreign exchange differences recognized upon translation of monetary assets and liabilities (including long-term debt) and realization of cumulative currency translation adjustments.

5. Sale of business, related assets and associated costs:

In June 2005, the Company sold the assets of the printed, paper-based bag business operated from the Company's facility on Laird Drive, Toronto, Ontario. The divestment further focuses and aligns Winpak's manufacturing capabilities with core strategic markets. During a short transition period, customers will continue to be served from the Company's premises at Laird Drive and at the end of the transition, the purchaser will acquire the inventory associated with the bag business. Subsequently, the plant will be closed and the property vacated and sold. The second quarter earnings statement recorded the sale of the bag business and realization of cumulative currency translation adjustments as well as employee termination and other costs related to the future plant closure. It is expected that a majority of the employee termination costs will be paid out by the end of the second quarter of 2006.

The following is a summary of the amounts recognized on the sale of the paper bag business and future plant closure in the second quarter:



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Gain on sale of business and related assets (3,765)
Realized cumulative currency translation adjustments (1,663)
Employee termination costs 4,775
Pension plan curtailment costs 1,329
Equipment write-down and other costs 1,071
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Loss on sale of business 1,747
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The income tax recovery corresponding to the loss on sale of business was $1,872 and therefore the increase to net earnings recorded in the financial statements was $125.

The following is a summary of the costs recognized in the second and third quarters of 2005 regarding the plant closure, as well as the corresponding liability as at October 2, 2005:



Equipment
Employee Pension Plan Write-Down
Termination Curtailment and Other Total
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Balance - beginning
of second quarter 0 0 0 0

Costs accrued 4,775 1,329 1,071 7,175
Non-cash amounts 0 (1,047) (1,013) (2,060)
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Balance - end of
second quarter 4,775 282 58 5,115
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Costs accrued 0 0 0 0
Non-cash amounts 0 0 0 0
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Balance - end of third
quarter 4,775 282 58 5,115
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6. Seasonality:

The Company experiences seasonal variation in sales, with sales typically being the highest in the second and fourth quarters, and lowest in the first quarter.

7. Comparative interim amounts:

Certain comparative interim amounts have been reclassified to conform with the presentation in the current period.

Contact Information

  • Winpak Ltd.
    M.G. Johnston
    Vice President & CFO
    (204) 831-2254
    or
    Winpak Ltd.
    B.J. Berry
    President & CEO
    (204) 831-2216
    or
    Winpak Ltd. Corporate Office
    100 Saulteaux Crescent, Winnipeg, Manitoba
    Canada R3J 3T3
    (204) 889-1015
    (204) 888-7806 (FAX)
    www.winpak.com