WINPAK LTD.
TSX : WPK

WINPAK LTD.

October 25, 2006 17:02 ET

Winpak Reports Third Quarter 2006 Results

WINNIPEG, MANITOBA--(CCNMatthews - Oct. 25, 2006) - Winpak Ltd. (TSX:WPK) today reported consolidated results in US dollars for the third interim period of 2006, which ended on October 1, 2006.




October 1 October 2
Year-To-Date Ended 2006 2005
------------------ --------- ---------

(thousands of US dollars, except per share amounts)

Sales 334,032 327,043
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--------- ---------
Net earnings 25,997 16,935
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--------- ---------

Minority interest 239 32
Provision for income taxes 10,186 6,397
Interest 1,700 2,415
Depreciation and amortization 15,470 14,691
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EBITDA (1) 53,592 40,470
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Basic and fully diluted net earnings per share (cents) 40 26
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October 1 October 2
Third Quarter Ended 2006 2005
------------------- --------- ---------

(thousands of US dollars, except per share amounts)

Sales 111,638 111,625
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--------- ---------
Net earnings 7,841 5,322
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Minority interest 35 60
Provision for income taxes 1,956 2,076
Interest 514 808
Depreciation and amortization 5,326 4,997
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EBITDA (1) 15,672 13,263
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--------- ---------

Basic and fully diluted net earnings per share (cents) 12 8
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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, pharmaceuticals and in medical applications.

(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.


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 for the third quarter of 2006 were 4 cents per share higher than in the third quarter of 2005, including the one-time benefit of 2.5 cents due to the enactment of lower income tax rates earlier in 2006. The remaining earnings increment of 1.5 cents per share includes cost savings subsequent to the closure of the paper converting plant at Laird Drive, Toronto and higher gross profit margins, partially offset by the impact of the year-over-year strengthened Canadian dollar.

In the nine months ended October 1, 2006, net earnings were 14 cents per share higher than in the comparable period of the prior year. Of the 14 cents increase, 9 cents per share comprised mainly the gain on sale of premises recorded in the second quarter and also the third quarter adjustment for the recently enacted lower income tax rates. Higher gross profit margins contributed 4 cents per share to net earnings, which included 3 cents per share consequent to the closure of the paper converting plant. Lower pre-production, freight, general & administrative expenses and expenses saved due to the paper converting plant closure provided 3.5 cents per share, while the stronger Canadian dollar, year-over-year, decreased net earnings per share by 2.5 cents.

Sales volume and pricing

Sales in the third quarter were virtually unchanged from the comparable prior period. When excluding sales by the paper bag business from the third quarter of 2005, year-over-year sales increased by 4.0 percent. This sales gain comprised: 6.4 percent pricing and 1.8 percent foreign exchange, partially offset by 4.2 percent lower volume. The price increases were initiated mainly by modified atmosphere packaging (MAP), specialty films and lidding products. Approximately two-thirds of the lower volume was consequent to the Company's decision to cease supply of certain low-margin paper converting and drink cup products. Lower shipments of specialty film products substantially accounted for the remaining volume decrease. The Company's expected volume increments in 2006 have not occurred and include the impact of underutilized capacity specifically for biaxially oriented nylon (BOPA) film and polypropylene trays. Winpak's BOPA film business continues to significantly underperform in the face of worldwide oversupply at historically low margins and this situation is not expected to change appreciably in the near future. The Company has yet to establish an adequate foothold in the market for case ready trays but continues to expect incremental sales from these or similar trays manufactured by the specialty equipment.

Year-to-date sales were 2.1 percent greater than in 2005, or 6.3 percent higher when adjusted to exclude the paper bag business. Pricing provided growth of 5.0 percent and foreign exchange, 1.7 percent, which were offset to a minor extent by slightly lower volumes. Comments provided for the third quarter regarding pricing and volume similarly applied to the nine months to October 1, 2006. However, the specific volume declines discussed for the third quarter were largely offset by higher shipments of lidding and MAP products, which lead to the smaller decline of 0.4 percentage points in the nine months.

Gross profit margins

Compared to the same quarter a year ago, gross profit margins increased 1.8 percentage points. Selling price and mix gains generated a margin improvement of 1.0 percentage point. Savings facilitated by the closure of the paper converting plant in Toronto added 0.7 points, and other factors, 0.1 point.

Margins year-to-date were 0.4 percent higher than the 25.4 percent achieved in the same period of 2005. The margin improvements in the third quarter were sufficient to more than offset the lower margins reported in the first half, netting to the slight year-to-date advance of 0.2 percentage points. The impact of foreign exchange was negative but was more than compensated by mix gains of 0.9 percentage points consequent to closing the paper converting plant.

For reference, the following presents the indexed purchased cost of Winpak's eight primary raw materials in the reported quarter and each of the preceding eight quarters, where base year 2001 equals 100.



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Quarter and Year 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06
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Purchase Price Index 118.8 127.8 144.1 140.5 135.4 153.0 149.5 146.8 155.4
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The indexed costs of raw materials purchased by Winpak in the third quarter of 2006 increased by 5.9 percent from the immediately preceding quarter. Since the second interim report was issued, the second quarter index was revised from 141.0 to 146.8, which represents an easing of 1.8 percent from the immediately preceding first quarter of 2006. The revision of the second quarter 2006 index had no impact on the analysis of the second quarter interim financial statements. Comparing the third quarter indexed prices to those of the preceding second quarter, increases in average purchase costs of polyethylene, polystyrene and foil drove the index to a new high.

Sale of property/business

In June 2006, Winpak concluded the previously announced sale of the premises formerly occupied by the converting operating unit at Laird Drive, Toronto, Ontario. The printed, paper bag converting business had been sold in June 2005 and normal operations at the premises ceased by the end of October 2005. Net cash proceeds for the premises of $8.3 million generated a pre-tax gain of $5.5 million and net earnings of $4.3 million. The low income tax expense applied to the sale was due to the effective rate of tax applicable to the capital gains element of the transaction.

In June 2005, Winpak sold certain assets of the printed, paper bag business. Costs were incurred consequent to the closure of the plant formerly utilized by the bag business for employee termination and other related expenses and favourable cumulative currency translation adjustments were realized. In the 2005 financial statements these transactions netted a pre-tax loss of $1.7 million and the impact on net earnings was insignificant.

Capital Resources, Cash Flow and Liquidity

At the close of the third quarter Winpak's bank indebtedness amounted to $5.8 million. Net outflows were $18.7 million which included repayment from available cash and bank facilities of the remaining $15 million of private placement Notes when due in August. The remaining $3.7 million expended in the third quarter included plant and equipment, dividends, partially offset with cash provided by operating activities.

Year-to-date, cash flow from operating activities increased by $7.3 million. This improvement included $4.8 million higher net earnings for the period, excluding gains and losses on sale of assets. The remaining improvement of $2.5 million includes a $4.3 million reduction of inventories following the buildup in prior periods, partially offset by additional voluntary payments to defined benefit plans totaling $2.0 million. Higher expenditures for property, plant and equipment were in keeping with the greater capital investment program undertaken in 2006. Proceeds on sale of assets were $2.6 million greater in the current year.

Winpak is confident that sufficient financial resources are in place to fund cash needs for the foreseeable future.

Looking Forward

Sales in 2006 should advance at a rate approximating the low end of the Company's goal for annual sales growth of six to nine percent, when adjusting 2005 for the paper bag business. Most of this year's sales growth should be linked to price increases driven by continued raw material cost increases. The anticipated volume growth in 2006 is lower than traditionally attained. Sales volume and pricing in this MD&A contains discussion on the limited growth. However, the Company's MAP and lidding products are expected to maintain their current strong performance and market share. Winpak anticipates continuing net earnings benefits arising from the closure of the Toronto paper converting facility and other cost efficiencies. Increments may also be realized, albeit in a less predictable manner, by recovering prior margin contractions through the dynamics of selling prices and raw material costs. Regarding the fourth quarter, Winpak expects performance to follow historic seasonal trends. Accordingly, assuming no unforeseen events, net earnings should be slightly higher than the average of the preceding three quarters, when excluding from the average the impact of asset sales and enacted changes in income tax rates.



Winpak Ltd.
Interim Consolidated Financial Statements
Third Quarter Ended: October 1, 2006


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)
(October 1, 2006 Unaudited)


October 1 January 1
2006 2006
----------- -----------
Assets

Current Assets:
Cash $ - $ 4,942
Accounts receivable 56,901 50,018
Inventories 71,897 69,889
Prepaid expenses 2,856 1,707
Future income taxes 3,635 3,239
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135,289 129,795

Property, plant and equipment (net) 222,621 208,189
Other assets 6,828 4,358
Intangible assets (net) 9,254 10,921
Goodwill 16,687 16,404
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$ 390,679 $ 369,667
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Liabilities and Shareholders' Equity

Current Liabilities:
Bank indebtedness $ 5,760 $ -
Accounts payable and accrued liabilities 35,214 35,424
Current portion of long-term debt - 15,000
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40,974 50,424

Long-term debt 24,000 24,000
Deferred credits 10,100 9,370
Future income taxes 27,926 28,353
Postretirement benefits 1,451 752
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104,451 112,899

Minority interest 11,167 10,928

Shareholders' Equity:
Share capital 29,195 29,195
Retained earnings 205,258 181,319
Cumulative currency translation adjustments 40,608 35,326
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275,061 245,840
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$ 390,679 $ 369,667
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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
--------------------- --------------------
--------------------- --------------------
October 1 October 2 October 1 October 2
2006 2005 2006 2005
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Sales (note 2) $ 111,638 $ 111,625 $ 334,032 $ 327,043
Cost of sales 83,331 85,251 247,803 243,835
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Gross profit 28,307 26,374 86,229 83,208

Expenses
Selling, general &
administrative (note 2, 3) 15,622 15,149 46,171 47,305
Research and technical 2,241 2,389 6,627 6,455
Pre-production 98 570 656 1,922
(Gain) loss on sale of assets
(note 4) - - (5,347) 1,747
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Earnings from operations 10,346 8,266 38,122 25,779

Interest 514 808 1,700 2,415
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Earnings before income taxes
and minority interest 9,832 7,458 36,422 23,364
Provision for income taxes
(note 5) 1,956 2,076 10,186 6,397
Minority interest 35 60 239 32
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Net earnings $ 7,841 $ 5,322 $ 25,997 $ 16,935
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--------------------- --------------------

Basic and fully diluted
earnings per share (cents) 12 8 40 26
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--------------------- --------------------
Average number of shares
outstanding (000's) 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 1 October 2 October 1 October 2
2006 2005 2006 2005
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Retained earnings,
beginning of period $ 198,110 $ 171,146 $ 181,319 $ 160,856
Net earnings 7,841 5,322 25,997 16,935
Dividends declared (693) (667) (2,058) (1,990)
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Retained earnings,
end of period $ 205,258 $ 175,801 $ 205,258 $ 175,801
----------------------- ---------------------
----------------------- ---------------------

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
----------------------- -----------------------
----------------------- -----------------------
October 1 October 2 October 1 October 2
2006 2005 2006 2005
----------------------- -----------------------

Cash provided by (used in):

Operating activities:
Net earnings for the
period $ 7,841 $ 5,322 $ 25,997 $ 16,935

Items not involving cash:
Depreciation 4,773 4,429 13,803 12,985
Amortization -
intangible assets 553 568 1,667 1,706
Pension plan and
postretirement benefits 964 851 2,844 2,269
Future income taxes (1,552) 1,473 (1,387) 342
Foreign exchange loss
(gain) on long-term
debt 130 (1,705) (395) (976)
Minority interest 35 60 239 32
(Gain) loss on sale of
assets (note 4) - - (5,347) 1,747
Other 625 513 986 870
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Cash flow from operating
activities before
change in working
capital 13,369 11,511 38,407 35,910

Change in working capital:
Accounts receivable (2,171) 359 (6,107) (2,895)
Inventories (2,198) 1,205 (723) (5,032)
Prepaid expenses (303) 119 (1,108) (480)
Accounts payable and
accrued liabilities 1,425 (3,967) (649) (7,250)
Defined benefit plan
payments (2,296) (283) (4,425) (2,150)
----------------------- -----------------------
7,826 8,944 25,395 18,103

Investing activities:
Acquisition of property,
plant and equipment (10,505) (5,534) (27,054) (15,109)
Proceeds on sale of
assets (note 4) - - 8,632 6,073
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(10,505) (5,534) (18,422) (9,036)
----------------------- -----------------------

Financing activities:
Proceeds from long-term
debt - - - 2,000
Repayments of long-term
debt (15,000) - (15,000) (7,000)
Dividends paid (871) (793) (2,545) (2,405)
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(15,871) (793) (17,545) (7,405)
----------------------- -----------------------

Foreign exchange
translation
adjustment on cash (116) 474 (130) 697
----------------------- -----------------------
Change in cash/bank
indebtedness (18,666) 3,091 (10,702) 2,359
Cash, beginning of
period 12,906 10,922 4,942 11,654
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(Bank indebtedness),
cash end of period $ (5,760) $ 14,013 $ (5,760) $ 14,013
----------------------- -----------------------
----------------------- -----------------------

Supplemental disclosure
of cash flow information:
--------------------------

Cash paid during the
period for:
Interest expense $ 1,060 $ 1,430 $ 2,638 $ 3,222
Income tax expense 2,005 1,288 9,824 7,854


See accompanying notes to consolidated financial statements.



Winpak Ltd.
Notes to Consolidated Financial Statements
For the periods ended October 1, 2006 and October 2, 2005
(thousands of US dollars, unless otherwise indicated)
(Unaudited)
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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 January 1, 2006.

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 January 1, 2006.

2. Accounting change:

Vendor Consideration:

In 2005, the CICA Emerging Issues Committee issued EIC-156 'Accounting By A Vendor for Consideration Given To a Customer'. The EIC concluded that cash consideration including customer volume rebates and cash discounts given by a vendor to a customer is presumed to be a reduction in the selling price of the vendor's products and should be classified as a reduction of sales based on systematic and rational methods. The EIC is effective for fiscal years beginning on or after January 1, 2006. The Company decided to early adopt the requirements of EIC-156 effective in the fourth quarter 2005. Accordingly, 2005 comparative amounts for the third quarter and year-to-date for sales and selling, general and administrative expenses have both been reduced by $681 and $1,955 respectively.

3. Selling, general & administrative expenses:

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



Third Quarter Ended Year-To-Date Ended
-------------------- ---------------------
October 1 October 2 October 1 October 2
2006 2005 2006 2005
-------------------- ---------------------
Foreign exchange translation
(gains) losses 44 (696) (307) (76)
Defined benefit plan expense 813 696 2,397 1,812


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.

4. Sale of property, business, related assets and associated costs:

In June 2006, Winpak sold the premises formerly occupied by the converting operating unit in Laird Drive, Toronto, Ontario. The printed, paper bag converting business had been sold in June 2005 and normal operations at the premises ceased by the end of October 2005. Net cash proceeds for the premises of $8,303 generated a pre-tax gain of $5,463 and net earnings of $4,266. The low income tax expense applied to the sale was due to the effective rate of tax applicable to the capital gains element of the transaction.

In June 2005, the Company sold certain assets of the printed, paper bag business operated from the aforementioned Toronto, Ontario premises for cash proceeds of $6,073, representing a pre-tax gain of $3,765. Consequent to the asset sale and plant closure, the Company incurred termination and other related costs and realization of cumulative currency translation adjustments totaling $5,512, netting a pre-tax loss on sale of the business of $1,747. The nature of these transactions for income tax purposes resulted in an income tax recovery of $1,872 and a $125 increase to net earnings.

A majority of the remaining employee termination costs will be paid out by the end of the second quarter of 2007. The pension plan curtailment and settlement costs are expected to be paid out in the first half of the 2007 fiscal year.

The following is a summary of the amounts recognized in the third quarter of 2006 regarding the 2005 plant closure, as well as the corresponding liability as at October 1, 2006:



Pension Plan Asset
Employee Curtailment Provisions
Termination and Settlement and Other Total
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Accrued Liability -
end of second quarter 1,715 942 8 2,665
Cash payments (367) - - (367)
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Accrued Liability -
end of third quarter 1,348 942 8 2,298
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5. Provision for income taxes:

The Canadian Federal government substantively enacted legislation that progressively reduces the future federal corporate income tax rate over a period of several years. As a result, the Company was required to re-measure its future income tax assets and liabilities using the newly enacted corporate income tax rates, taking into account the tax rates anticipated to be in effect when the related future income tax assets are realized or liabilities are settled. This resulted in a non-cash reduction in future income taxes and an income tax recovery of $1,483 in the third quarter of 2006.

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 and CFO
    (204) 831-2254
    or
    Winpak Ltd.
    B.J. Berry
    President and CEO
    (204) 831-2216
    Website: www.winpak.com