WINPAK LTD.
TSX : WPK

WINPAK LTD.

October 21, 2010 17:15 ET

Winpak Reports Third Quarter Earnings

WINNIPEG, MANITOBA--(Marketwire - Oct. 21, 2010) - Winpak Ltd. (TSX:WPK) today reports consolidated results in US dollars for the third quarter of 2010, which ended on September 26, 2010. 

             
  September 26       September 27  
Year-To-Date Ended 2010       2009  
             
(thousands of US dollars, except per share amounts)            
             
Sales 424,511       370,527  
             
Net earnings 38,491       31,446  
             
Minority interest 1,067       1,386  
Provision for income taxes 18,439       15,905  
Interest income (68 )     (9 )
Depreciation and amortization 20,434       19,172  
             
EBITDA (1) 78,363       67,900  
             
Basic and fully diluted net earnings per share (cents) 59       48  
             
             
  September 26       September 27  
Third Quarter Ended 2010       2009  
             
(thousands of US dollars, except per share amounts)            
             
Sales 146,055       125,267  
             
Net earnings 11,926       9,889  
             
Minority interest 326       511  
Provision for income taxes 5,919       4,913  
Interest income (24 )     (18 )
Depreciation and amortization 7,035       6,680  
             
EBITDA (1) 25,182       21,975  
             
Basic and fully diluted net earnings per share (cents) 18       15  

Winpak Ltd. manufactures and distributes high-quality packaging materials and related packaging machines. The Company's products are used primarily for the packaging of perishable foods, beverages and in health care 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 Winpak's current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, 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.

Results of Operations

Net earnings for the third quarter of 2010 were $11.9 million or 18 cents per share compared to $9.9 million or 15 cents per share in the corresponding period of 2009, an increase of 20.2 percent. Volume growth improved net earnings per share by 2 cents but was fully offset by a contraction in gross profit margins due to higher raw material costs. A curb on operating expense growth in relation to advancing sales volumes contributed a further 0.5 cent in net earnings per share. The impact of foreign exchange on net earnings was also favorable by 2.5 cents per share.

For the nine months ended September 26, 2010, net earnings improved by 22.6 percent to $38.5 million or 59 cents per share, up from $31.4 million or 48 cents per share recorded in the corresponding period of 2009. Significant volume growth generated half of the improvement in net earnings or 5.5 cents per share. Limited advancement in operating expenses, in comparison to the robust growth in sales volumes, contributed a further 5.5 cents in net earnings per share. A lower effective income tax rate supplemented net earnings by an additional 1.5 cents per share while foreign exchange positively impacted results by a further 2 cents per share. A reduction in gross profit margins due to higher raw material costs decreased net earnings per share by 3.5 cents. 

Sales

Third quarter 2010 sales were $146.1 million, an increase of $20.8 million or 16.6 percent over the corresponding quarter in 2009. Volume growth was solid at 9.0 percent, as all product lines advanced. The largest percentage gain in sales volume was seen in biaxially oriented nylon followed by specialty films, which advanced in excess of 30 percent and 20 percent respectively. Sales of biaxially oriented nylon film was favorably impacted by business from new customers while the mounting success of the barrier shrink bag product line contributed to the rise in specialty films volume. Lidding experienced growth of approximately 9 percent due to expansion of die-cut coffee and yogurt lidding volumes. Moderate growth of approximately 5 percent was evident in rigid containers and modified atmosphere packaging followed by nominal growth in packaging machinery and parts. Higher selling prices, in support of increased raw material costs, enhanced sales by an additional 6.4 percent. The stronger Canadian dollar increased quarterly sales by a further 1.2 percent versus the third quarter of 2009.

On a year-to-date basis, sales improved by $54.0 million to $424.5 million, 14.6 percent higher than the first three quarters of 2009. Volume increases had the greatest impact, progressing sales by 10.8 percent. As with the quarterly results, both biaxially oriented nylon and specialty films sales had the largest volume improvement, advancing in excess of 30 percent and 20 percent respectively. Lidding, due to strong die-cut sales, added nearly 13 percent in volumes for the first nine months of 2010. The remaining product groups of rigid containers, modified atmosphere packaging and packaging machinery sales grew in volume in the mid-single digit range during this period. The stronger Canadian dollar bettered sales by an additional 2.2 percent in comparison to 2009. Sales were further augmented by 1.6 percent due to a combination of higher selling prices and sales mix changes. 

Gross profit margins

Gross profit margins declined to 28.2 percent of sales in the third quarter of 2010 from 29.7 percent of sales recorded in the same quarter of 2009. The 1.5 percentage point decrease in gross profit margins was due to a combination of higher raw material costs and, to a lesser extent, a shift in product mix. Whereas over half of the Company's revenues are indexed to the cost of raw materials, the Company has been moderately successful in matching raw material cost increases with higher selling prices where formal indexing programs are not in place. The decrease in margins would have been greater were it not for improvements in manufacturing performance in the quarter as a result of lower waste levels and enhanced productivity which offset the margin decline by approximately 2 percentage points.

For the first nine months of 2010, gross profit margins of 28.8 percent were 1.5 percentage points less than that achieved in the first three quarters of 2009. As with the results for the third quarter, rising raw material costs negatively impacted margins in 2010 as the spread between those costs and selling prices narrowed, offset in part by improved manufacturing performance. 

For reference, the following presents the weighted 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 = 100. The index was rebalanced as of December 28, 2009 to reflect the mix of the eight primary raw materials purchased in 2009. 

Quarter and Year 3/08 4/08 1/09 2/09 3/09 4/09 1/10 2/10 3/10
Purchase Price Index 190.7 160.3 128.0 124.9 131.2 138.6 150.5 159.1 150.7

The index in the third quarter fell by 5.3 percent after having risen by 27.4 percent in the previous twelve months. However, the decline in the index was mixed as certain raw materials receded while others experienced increases. Recent market activity suggests that raw material pricing may be trending upward at a modest pace and the Company will continue to work diligently in managing selling prices as raw material costs change. 

Expenses and Other

Excluding the impact of foreign exchange, while sales volumes in the third quarter increased by 9 percent over the corresponding period in 2009, the Company was able to limit the escalation in operating expenses to just over 6 percent. The net result was an increase of 0.5 cents in net earnings per share.

On a year-to-date basis, the Company was able to leverage its expenditure on operating expenses by limiting the increase in expenses to 2.4 percent, despite an increase in sales volumes of 10.8 percent over the same period in 2009. Firm cost control, particularly in selling, general and administration expenses, resulted in an increase in net earnings per share of approximately 5.5 cents. The reduction in the corporate income tax rate in Canada, effective January 1, 2010, further bolstered net earnings per share by 1.5 cents. 

Capital Resources, Cash Flow and Liquidity

The Company ended the third quarter with a cash and cash equivalents balance of $75.5 million, an improvement of $7.5 million in the quarter. Winpak continued to generate strong cash flow from operating activities before changes in working capital of $20.1 million in the third quarter. The Company used cash to supplement working capital by $1.2 million, make defined benefit pension payments of $0.9 million, dividends of $1.9 million, and plant and equipment additions of $7.1 million. During the quarter, a subsidiary of the Company redeemed preferred shares, including $2.0 million to the minority shareholder. There was also a favorable foreign exchange adjustment on cash and cash equivalents of $0.5 million.

For the first nine months of 2010, the Company improved its cash position by $14.3 million. Cash flow generated from operating activities before changes in working capital totaled $61.8 million, an increase over the prior period in 2009 of $6.5 million or 11.8 percent. To support the significant growth in sales, additional investments were made in working capital of $10.2 million. Cash was also used to fund plant, equipment and intangible asset additions of $27.2 million, dividend payments of $5.6 million, defined benefit pension payments of $3.5 million and redeem preferred shares in a subsidiary of $2.0 million. There was also a favorable foreign exchange adjustment on cash and cash equivalents of $1.0 million. The Company remains debt-free and has unutilized operating lines of $38 million, with the ability to increase borrowing capacity further should the need arise.

Summary of Quarterly Results Thousands of US dollars, except per share amounts (US cents)
                               
  Quarter Ended
  September 26   June 27   March 28   December 27   September 27   June 28   March 29   December 28
  2010   2010   2010   2009   2009   2009   2009   2008
                               
Sales 146,055   145,568   132,888   135,464   125,267   125,322   119,938   129,690
Net earnings 11,926   14,309   12,256   11,445   9,889   11,896   9,661   8,882
EPS 18   22   19   18   15   18   15   14
                               

Looking Forward

Although the increase in customer demand in the third quarter was somewhat less robust than in the first half of the year, the Company remains optimistic regarding volume growth in the fourth quarter and into 2011 as demand appears solid across all product groups. To foster future growth, Winpak will continue to invest organically to remain at the forefront of technology and provide a strong foundation for long-term success. Capital additions to date in 2010 have totaled $27 million and are expected to end the year in the range of $40 to $45 million, dependent on the timing of deposits and progress payments for capacity additions in rigid containers and added printing capabilities in other areas of the business. After a year of consistently rising raw material costs, it appears as though pricing has generally stabilized with only a modest upward trend currently evident. As a result, gross profit margins should remain within one or two percentage points of current levels, exceeding the five-year average. The Company continues to evaluate acquisition opportunities that would complement its core competencies in the areas of food and health care packaging; to date, however, the right combination of organization fit and valuation has not been present. Winpak will carry on with its acquisition strategy while at the same time, placing increased emphasis on organic growth opportunities due to the success enjoyed in recent years in pursuing this direction. 

Future Accounting Standards

International Financial Reporting Standards

In February 2008, the Canadian Accounting Standards Board confirmed that Publicly Accountable Enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition from Canadian generally accepted accounting principles ("GAAP") to IFRS will commence with the Company's first quarter of 2011, at which time the Company will elect to prepare both its fiscal 2011 and fiscal 2010 comparative financial information using IFRS. The Company expects the transition to IFRS to impact financial reporting, business processes, disclosure controls, internal controls over financial reporting and information systems.

The Company formally commenced its IFRS conversion project in the second quarter of 2008 and has engaged the services of an external advisor with IFRS expertise to work with management. Regular reporting is provided to the Company's senior management and Audit Committee of the Board of Directors. The Company's conversion project consists of three phases: diagnostic assessment, design and development, and implementation. To date, the diagnostic assessment phase of the project has been completed, the design and development phase is nearing completion, and an implementation plan has been devised. As of September 26, 2010, the project is on schedule in accordance with this plan. During the past quarter, significant efforts have been directed at completing the modifications to the Company's information systems, primarily to accommodate a change in functional currency of the Canadian entities. This included a pilot test of the programming changes with a simulation of the year-end close. Results were generally satisfactory with only minor revisions required. Parallel reporting for 2010 under both IFRS and Canadian GAAP is also progressing according to plan. Meetings have been held with internal accounting personnel as well as the Board of Directors to provide education with respect to IFRS and its effects on the Company. Winpak will continue to invest in training and external advisor resources throughout the transition to facilitate a timely and successful conversion. 

A detailed review of the major differences between Canadian GAAP and current IFRS has been undertaken and at this time, the Company has determined that the areas listed below are expected to have the greatest impact on the Company's Consolidated Financial Statements. The list and comments are intended to highlight only those areas believed to be the most significant and is not intended to be a complete and exhaustive list of all expected changes. In the period leading up to conversion, the International Accounting Standards Board will continue to issue new accounting standards and as a result, the final impact of IFRS on the Company's Consolidated Financial Statements can only be accurately measured once all the IFRS applicable at the conversion date of December 27, 2010 are known. Consequently, the analysis and policy decisions have been made based upon the Company's expectations regarding the accounting standards that the Company anticipates will be effective upon conversion to IFRS. Readers are cautioned that the disclosed impacts of IFRS on financial reporting are estimates and may be subject to change.

Initial Adoption – IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides guidance for an entity's initial adoption of IFRS and generally requires the retrospective application of all IFRS effective at the end of its first IFRS reporting period. IFRS 1 however does include certain mandatory exceptions and allows certain limited optional exemptions from this general requirement of retrospective application. The Company expects to apply the following significant optional exemptions available under IFRS 1 on the opening transition date of December 28, 2009:

  1. Business combinations – None will be restated prior to the transition date.
  2. Fair value as deemed cost – The Company will not elect to revalue any property, plant and equipment to fair value.
  3. Borrowing costs – Capitalization will only be applied prospectively from the transition date.
  4. Actuarial gains/losses on employee benefits – The Company will recognize all unrecorded actuarial gains/losses in retained earnings upon transition. The estimated charge to retained earnings is $10.0 million, based on the most recent actuarial valuations of the defined benefit plans.
  5. Cumulative translation differences – The Company will elect to reclassify all cumulative translation differences at the transition date from a separate component of equity to retained earnings. The estimated amount of the reclassification is an increase in retained earnings of $18.3 million.

Functional Currency – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that the functional currency of each entity in a consolidated group be determined separately based on the currency of the primary economic environment in which the entity operates. A list of primary and secondary indicators is used under IFRS in this determination and these differ in content and emphasis to a certain degree from those factors used under Canadian GAAP. The parent Company and all of its Canadian subsidiaries, with the exception of American Biaxis Inc., operate with the Canadian dollar as their functional currency under Canadian GAAP. However, it has been determined that under IFRS, these same entities will change to the US dollar as their functional currency such that all entities within the Winpak group will operate with the US dollar as their functional currency under IFRS. The net result going forward will be decreased earnings volatility due to foreign exchange fluctuations as the magnitude of net Canadian dollar monetary financial instrument exposure is significantly less than the net US dollar monetary financial instrument exposure within these entities. The estimated impact of this change in functional currency, as at December 28, 2009, is a decrease in financial statement items as follows: accumulated other comprehensive income - $39.6 million; property, plant and equipment - $19.7 million; future income tax liability - $5.8 million; goodwill - $1.1 million; inventory - $0.7 million; and intangible assets - $0.2 million. Retained earnings are estimated to increase by $23.7 million.

Borrowing Costs - International Accounting Standard (IAS) 23, Borrowing Costs, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be included as part of the cost of that asset. Under Canadian GAAP, the Company's policy was to expense these costs as incurred. This change is not expected to have a significant impact on the Company's future financial results.

Hedging – Under IAS 39, Financial Instruments Recognition and Measurement, the requirements for designating hedges and hedge accounting differ from those under Canadian GAAP. However, the Company is planning to continue to apply hedge accounting to its foreign exchange contracts under IFRS and as a result, the accounting treatment under IFRS is expected to remain the same as under current Canadian GAAP. 

Non-controlling interest – Under Canadian GAAP, minority interest is classified in the consolidated balance sheets between total liabilities and equity. Under IAS 27, Consolidated and Separate Financial Statements, minority interest will be reclassified to a separate component of equity entitled non-controlling interest. As at December 28, 2009, this reclassification is $15.9 million.

Impairment of Assets – IAS 36, Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use, which is based on discounted future cash flows. Canadian GAAP, on the other hand, generally uses a two-step approach to impairment testing of long-lived assets and finite-life intangible assets by first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists. If it is determined that there is impairment under this basis, the impairment is then calculated by comparing asset carrying values with fair values in much the same manner as computed under IFRS. Additionally under IFRS, testing for impairment occurs at the level of cash generating units, which is the lowest level of assets that generate largely independent cash inflows. This lower level of grouping compared to Canadian GAAP along with the one-step approach to testing for impairment may increase the likelihood that the Company will realize an impairment of assets under IFRS. It should also be noted that under IAS 36, previous impairment losses, with the exception of goodwill, can be reversed when there are indications that circumstances have changed whereas Canadian GAAP prohibits reversal of non-financial asset impairment losses. The Company has determined that as of the opening transition date of December 28, 2009, an impairment of goodwill with regard to the specialty film business has taken place under IAS 36. This will result in a reduction of goodwill and retained earnings of $3.4 million as of that date. 

Employee Benefit Plans – IAS 19, Employee Benefits, requires the past service cost element of defined benefit plans to be expensed on an accelerated basis, with vested past service costs being expensed immediately and unvested past service costs being recognized on a straight-line basis until the benefits become vested. This would result in a charge to retained earnings at December 28, 2009 of $1.3 million. Under Canadian GAAP, past service costs are generally amortized on a straight-line basis over the expected average remaining service period of active employees in the plan. In addition, IAS 19 requires an entity to make an accounting policy choice regarding the treatment of actuarial gains and losses. These choices include: (a) the corridor method which is similar to the method currently used by the Company under Canadian GAAP, (b) recording the actuarial gains and losses directly in income in the year incurred, and (c) recognizing the actuarial gains and losses directly in equity through comprehensive income. In April, 2010, the International Accounting Standards Board issued an exposure draft, Defined Benefit Plans: Proposed Amendments to IAS 19, which would essentially eliminate the choices regarding the treatment of actuarial gains and losses and require them to be recorded directly in equity through comprehensive income. As a result, the Company has chosen to recognize actuarial gains and losses directly in equity through comprehensive income as its accounting policy choice under IAS 19 to be consistent with the exposure draft.

Business Combinations, Consolidated Financial Statements and Non-Controlling Interests

As more fully described in Note 2 to the Consolidated Financial Statements, the CICA has issued three new accounting standards in January 2009: Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements, and Section 1602 Non-Controlling Interests, which apply commencing with the Company's 2011 fiscal year. 

Controls and Procedures

Disclosure Controls

Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management's evaluation of the design of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed as of September 26, 2010 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required.

Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management's design of the Company's internal controls over financial reporting, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed as of September 26, 2010 to provide reasonable assurance that the financial information being reported is materially accurate. During the third quarter ended September 26, 2010, there have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

Winpak Ltd.

Interim Consolidated Financial Statements

Third Quarter Ended: September 26, 2010

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) (unaudited)      
       
  September 26   December 27
  2010   2009
           
Assets          
           
Current Assets:          
  Cash and cash equivalents $ 75,481   $ 61,164
  Accounts receivable (note 7)   74,534     70,354
  Inventory (note 3)   81,591     70,559
  Prepaid expenses   2,983     2,211
  Future income taxes   3,133     2,310
    237,722     206,598
           
Property, plant and equipment (net)   249,582     239,017
           
Other assets   15,501     14,401
           
Intangible assets (net)   4,482     5,896
           
Goodwill   17,442     17,235
           
  $ 524,729   $ 483,147
           
Liabilities and Shareholders' Equity          
           
Current Liabilities:          
  Accounts payable and accrued liabilities $ 51,565   $ 44,965
  Income taxes payable   1,957     2,931
    53,522     47,896
           
Deferred credits   10,782     11,363
           
Future income taxes   32,159     32,459
           
Postretirement benefits   1,678     1,673
    98,141     93,391
           
Minority interest   14,978     15,871
           
Shareholders' equity:          
  Share capital   29,195     29,195
           
  Retained earnings   318,782     285,973
  Accumulated other comprehensive income (note 4)   63,633     58,717
    382,415     344,690
    411,610     373,885
  $ 524,729   $ 483,147
           
           
See accompanying notes to consolidated financial statements.     
Winpak Ltd.  
Consolidated Statements of Earnings and Retained Earnings  
(thousands of US dollars, except per share amounts) (unaudited)  
   
    Third Quarter Ended     Year-To-Date Ended  
    September 26     September 27     September 26     September 27  
    2010     2009     2010     2009  
Sales $ 146,055   $ 125,267   $ 424,511   $ 370,527  
Cost of sales   104,885     88,038     302,288     258,217  
Gross profit   41,170     37,229     122,223     112,310  
Expenses                        
  Selling, general & administrative (note 5)   19,466     18,778     54,471     54,645  
  Research and technical   3,387     3,156     9,586     8,874  
  Pre-production   170     -     237     63  
Earnings from operations   18,147     15,295     57,929     48,728  
Interest income   (24 )   (18 )   (68 )   (9 )
Earnings before income taxes and minority interest   18,171     15,313     57,997     48,737  
Provision for income taxes   5,919     4,913     18,439     15,905  
Minority interest   326     511     1,067     1,386  
Net earnings $ 11,926   $ 9,889   $ 38,491   $ 31,446  
   
Retained earnings, beginning of period   308,757     268,282     285,973     249,990  
  Net earnings   11,926     9,889     38,491     31,446  
  Dividends declared   (1,901 )   (1,786 )   (5,682 )   (5,051 )
Retained earnings, end of period $ 318,782   $ 276,385   $ 318,782   $ 276,385  
Earnings per share                        
Basic and fully diluted earnings per share (cents)   18     15     59     48  
Average number of shares outstanding (000's)   65,000     65,000     65,000     65,000  
   
Consolidated Statements of Comprehensive Income                
(thousands of US dollars) (unaudited)                 
    Third Quarter Ended     Year-To-Date Ended  
    September 26     September 27     September 26     September 27  
    2010     2009     2010     2009  
Net earnings $ 11,926   $ 9,889   $ 38,491   $ 31,446  
                         
Unrealized gains on translation of financial statements of operations with CDN dollar functional currency to US dollar reporting currency   2,461     10,485     5,381     18,653  
Unrealized gains on derivatives designated as cash flow hedges, net of income tax (2010 - $92 and $176) (2009 - $209 and $492)   214     455     471     1,069  
Realized (gains) losses on derivatives designated as cash flow hedges in prior periods transferred to net earnings in the current period, net of income tax (2010 - $(32) and $(400)) (2009 - $(113) and $228)   (76 )   (246 )   (936 )   391  
Other comprehensive income - net of income tax (note 4)   2,599     10,694     4,916     20,113  
Comprehensive income $ 14,525   $ 20,583   $ 43,407   $ 51,559  
   
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  
    September 26     September 27     September 26     September 27  
    2010     2009     2010     2009  
Cash provided by (used in):                        
                         
Operating activities:                        
Net earnings for the period $ 11,926   $ 9,889   $ 38,491   $ 31,446  
Items not involving cash:                        
  Depreciation   6,497     6,076     18,787     17,381  
  Amortization - intangible assets   538     604     1,647     1,791  
  Defined benefit plan costs   786     965     2,798     2,594  
  Future income taxes   (159 )   335     (1,284 )   452  
  Foreign exchange loss on long-term debt   -     -     -     559  
  Minority interest   326     511     1,067     1,386  
  Other   216     -     259     (319 )
    Cash flow from operating activities before the following   20,130     18,380     61,765     55,290  
                         
Change in working capital:                        
  Accounts receivable   (2,337 )   (542 )   (4,373 )   2,080  
  Inventory   (2,238 )   (1,969 )   (9,939 )   (921 )
  Prepaid expenses   324     505     (742 )   (192 )
  Accounts payable and accrued liabilities   2,447     (1,689 )   5,837     6,112  
  Income taxes payable   595     991     (966 )   2,088  
                         
Defined benefit plan payments   (909 )   (242 )   (3,532 )   (2,619 )
    18,012     15,434     48,050     61,838  
Investing activities:                        
  Acquisition of plant and equipment   (7,142 )   (4,986 )   (26,994 )   (10,485 )
  Acquisition of intangible assets   (89 )   (79 )   (209 )   (296 )
    (7,231 )   (5,065 )   (27,203 )   (10,781 )
                         
Financing activities:                        
  Repayments of long-term debt   -     -     -     (17,000 )
  Dividends paid   (1,882 )   (1,689 )   (5,638 )   (4,878 )
  Change in minority shareholdings in subsidiary   (1,960 )   -     (1,960 )   -  
    (3,842 )   (1,689 )   (7,598 )   (21,878 )
                         
Foreign exchange translation adjustment-cash and cash equivalents   515     1,095     1,068     1,695  
                         
Change in cash and cash equivalents   7,454     9,775     14,317     30,874  
                         
Cash and cash equivalents, beginning of period   68,027     40,895     61,164     19,796  
                         
Cash and cash equivalents, end of period $ 75,481   $ 50,670   $ 75,481   $ 50,670  
                         
Supplemental disclosure of cash flow information:                        
                         
Cash paid during the period for:                        
  Interest expense $ 4   $ 16   $ 10   $ 67  
  Income tax expense   5,308     3,433     19,551     12,096  
                         
See accompanying notes to consolidated financial statements.  

Notes to Consolidated Financial Statements
For the periods ended September 26, 2010 and September 27, 2009
(thousands of US dollars) (Unaudited)

1. Basis of Presentation

The unaudited interim consolidated financial statements have been prepared by the Company in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and have been prepared on a basis consistent with the same accounting policies and methods of application as disclosed in the Company's audited consolidated financial statements for the year ended December 27, 2009.

These unaudited interim consolidated 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 27, 2009.

The preparation of the interim consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its interim consolidated financial statements are reasonable and prudent, however, actual results could differ from these estimates.

2. Future Accounting Standards

In January 2009, the CICA issued three new accounting standards which all apply commencing with the Company's 2011 fiscal year.

(a) Business Combinations:

Section 1582 replaces Section 1581 Business Combinations and provides clarification as to what an acquirer must measure when it controls a business, the basis of valuation and the date at which the valuation should be determined. Section 1582 provides the CDN GAAP equivalent to IFRS 3 Business Combinations. This section outlines a variety of changes, including, but not limited to: an expanded definition of a business, measuring all business combinations and non-controlling interest at fair value, recognizing future income tax assets and liabilities and recording all acquisition related costs as expenses of the period except for costs incurred to issue debt or share capital. This new standard is applicable for acquisitions completed on or after November 1, 2011 although early adoption is permitted in 2010 to facilitate the transition to IFRS in 2011.

(b) Consolidations and Non-controlling Interests:

Sections 1601 and 1602 replace former Section 1600 – Consolidated Financial Statements. Section 1601 establishes standards for the preparation of consolidated financial statements after the acquisition date. Section 1602, which converges with the requirements of International Accounting Standard 27 (IAS 27) – Consolidated and Separate Financial Statements, establishes standards for the accounting and presentation of non-controlling interest in a subsidiary subsequent to a business combination.

(c) International Financial Reporting Standards:

The CICA Accounting Standards Board (ASB) has confirmed that the accounting standards for Publicly Accountable Enterprises will be required to converge with International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011 with comparable figures presented for 2010.

3. Inventory

  September 26   December 27
  2010   2009
       
Raw materials 27,151   23,759
Work-in-process 13,469   9,697
Finished goods 36,815   33,492
Spare parts 4,156   3,611
  81,591   70,559

During the third quarter of 2010, the Company recorded inventory write-downs for slow-moving and obsolete inventory of $1,566 (2009- $1,186) and reversals of previously written-down items that were sold to customers of $109 (2009- $70). For the first nine months of 2010, the Company recorded inventory write-downs to net realizable value of $4,092 (2009- $4,306) and reversals of previously written-down items of $1,232 (2009- $615). 

4. Accumulated Other Comprehensive Income

Accumulated other comprehensive income represents the net changes due to foreign exchange rate fluctuations in the net investment in the CDN dollar functional currency operations and the unrealized gains (losses) on derivatives designated as cash flow hedges.

    Third Quarter Ended   Year-To-Date Ended
    September 26   September 27   September 26   September 27
    2010   2009   2010   2009
                 
Balance, beginning of period   61,034   39,991   58,717   30,572
 Other comprehensive income   2,599   10,694   4,916   20,113
Balance, end of period   63,633   50,685   63,633   50,685
                 
The accumulated balances for each component of other comprehensive income, net of income taxes, are comprised of the following:                                     
                 
Unrealized gains on translation of financial statements of subsidiaries with        
 Canadian dollar functional currency to US dollar reporting currency 63,288   49,847
Unrealized gains on derivatives designated as cash flow hedges         345   838
Balance, end of period           63,633   50,685

5. Selling, General and Administrative

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

  Third Quarter Ended   Year-To-Date Ended
  September 26   September 27   September 26   September 27
  2010   2009   2010   2009
               
Foreign exchange translation loss (gain)  502   1,282   (299)   3,420
Defined benefit plan costs  786   965   2,798   2,594

Foreign exchange translation losses (gains) represent the realized and unrealized foreign exchange differences recognized upon translation of monetary assets and liabilities, including long-term debt. The amounts include realized foreign exchange losses (gains) on cash flow hedges arising from transfers of these amounts from other comprehensive income to net earnings. 

6. Financial Instruments

The following sets out the classification and the carrying value and fair value of financial instruments and non-financial derivatives as at September 26, 2010:

    Carrying / Fair   Fair
Assets (Liabilities) Classification Value   Value
         
Cash and cash equivalents Held for trading 75,481    
Accounts receivable Loans and receivables 74,041    
Accounts payable and accrued liabilities Other financial liabilities (51,565 )  
Cash flow hedging derivative Derivatives designated as effective hedges     493

The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value because of the short-term maturity of these instruments. The fair value of foreign currency forward and expandable option contracts, designated as a cash flow hedge, have been determined by valuing those contracts to market against prevailing forward foreign exchange rates as at the reporting date. The inputs used for fair value measurements, including their classification within the required three levels of the fair value hierarchy that prioritizes the inputs used for fair value measurement are as follows:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
Level 3 – inputs that are not based on observable market data.

The following table presents the classification of financial instruments within the fair value hierarchy as at September 26, 2010:

Financial Assets Level 1   Level 2   Level 3   Total
               
Cash and cash equivalents 75,481   -   -   75,481
Foreign currency forward and expandable option contracts -   493   -   493
Total 75,481   493   -   75,974

7. Financial Risk Management

In the normal course of business, the Company has risk exposures consisting primarily of foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. The Company manages its risks and risk exposures through a combination of derivative financial instruments, insurance, a system of internal and disclosure controls and sound business practices. The Company does not purchase any derivative financial instruments for speculative purposes.

Risk management is primarily the responsibility of the Company's corporate finance function. Significant risks are regularly monitored and actions are taken, when appropriate, according to the Company's approved policies, established for that purpose. In addition, as required, these risks are reviewed with the Company's Board of Directors.

Foreign Exchange Risk

The Company operates primarily in Canada and the Unites States. The functional currency of the parent company is CDN dollars and the reporting currency is US dollars. All operations in the United States and American Biaxis Inc. operate with the US dollar as the functional currency, while all Canadian operations, excluding American Biaxis Inc., operate with the CDN dollar as the functional currency. Most of the Company's business is conducted in US dollars. However, approximately 17 percent of sales are invoiced in CDN dollars and approximately 28 percent of costs are incurred in the same currency, resulting in a net outflow of costs in CDN dollars. Consequently, the Company records foreign currency differences on transactions.

In addition, translation differences arise when foreign currency monetary assets and liabilities are translated at foreign exchange rates that change over time. These foreign exchange gains and losses are recorded in selling, general & administrative expenses. As a result of the Company's US dollar net asset monetary position within the CDN dollar functional currency operations as at September 26, 2010, a one-cent change in the period end foreign exchange rate from 1.0256 to 1.0156 (US to CDN dollars) would have decreased net earnings by $401 for the third quarter of 2010. Conversely, a one-cent change in the period end foreign exchange rate from 1.0256 to 1.0356 (US to CDN dollars) would have increased net earnings by $401 for the third quarter of 2010. 

The Company's Foreign Exchange Policy requires that between 50 and 80 percent of the Company's net requirement of CDN dollars for the ensuing 9 to 15 months will be hedged at all times with a combination of cash and cash equivalents and forward or zero-cost option foreign currency contracts. Transactions are only conducted with certain approved Schedule I Canadian financial institutions. All foreign currency contracts are designated as cash flow hedges. Certain foreign currency contracts matured during the third quarter of 2010 and the Company realized pre-tax foreign exchange gains of $108 (year-to-date – realized pre-tax foreign exchange gains of $1,336). These foreign exchange gains were recorded in selling, general & administrative expenses. 

As at September 26, 2010, the Company had foreign currency forward contracts outstanding with a notional amount of $19.0 million US at an average exchange rate of 1.0523 (US to CDN dollars), maturing between October 2010 and August 2011 and the fair value of these financial instruments was an unrealized gain of $0.390 million US. In addition, the Company had foreign currency expandable option contracts outstanding with a notional amount of $5.0 million US at an average exchange rate of 1.04 (US to CDN dollars) which may be expanded to $7.5 million US if foreign exchange rates on their respective maturity date exceeds, on average, 1.1155 (US to CDN dollars) maturing between October 2010 and September 2011. The fair value of these financial instruments was an unrealized gain of $0.103 million. The aforementioned unrealized gains have been recorded in other comprehensive income.

An unrealized foreign exchange gain during the quarter of $306 (pre-tax) (year-to-date – unrealized foreign exchange gain of $647 (pre-tax)) was recorded in other comprehensive income. 

Interest Rate Risk

The Company's interest rate risk arises from interest rate fluctuations on the interest income that it earns on its cash invested in money market accounts and short-term deposits. In 2009, the Company developed and implemented an investment policy, which was approved by the Company's Board of Directors, with the primary objective to preserve capital, minimize risk and provide liquidity. Regarding the September 26, 2010 cash and cash equivalents balance of $75.5 million, a 1.0% increase/decrease in interest rate fluctuations would increase/decrease earnings before tax by $755 annually.

Commodity Price Risk

The Company's manufacturing costs are affected by the price of raw materials, namely petroleum-based and natural gas-based plastic resins and aluminum. In order to manage its risk, the Company has entered into selling price-indexing programs with certain customers. Changes in raw material prices for these customers are reflected in selling price adjustments but there is a slight time lag. For the three months ended September 26, 2010, 58% (year-to-date – 55%) of sales were to customers with selling price-indexing programs. For all other customers, the Company's preferred practice is to match raw material cost changes with selling price adjustments, albeit with a slight time lag. This matching is not always possible as customers react to selling price pressures related to raw material cost fluctuations according to conditions pertaining to their markets.

Credit Risk

The Company is exposed to credit risk from its cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign currency forward and expandable option contracts), as well as credit exposure to customers with outstanding accounts receivable balances. 

The following table details the maximum exposure to the Company's counterparty credit risk which represents the carrying value of the financial asset:

  September 26   December 27
  2010   2009
       
Cash and cash equivalents 75,481   61,164
Accounts receivable 74,041   69,172
Foreign currency forward and expandable option contracts 493   1,182
  150,015   131,518

Credit risk on cash and cash equivalents and financial instruments arises in the event of non-performance by the counterparties when the Company is entitled to receive payment from the counterparty who fails to perform. The Company has established an investment policy to manage its cash. The policy requires that the Company manage its risk by investing its excess cash on hand on a short-term basis, up to a maximum of six months, with several financial institutions and/or governmental bodies that must be 'AA' rated or higher by a recognized international credit rating agency or insured 100% by a 'AAA' rated CDN or US government. The Company manages its counterparty risk on its financial instruments by only dealing with CDN Schedule I financial institutions.

In the normal course of business, the Company is exposed to credit risk on its accounts receivable from customers. The Company's current credit exposure is higher in the weakened North American economic environment. To mitigate such risk, the Company performs ongoing customer credit evaluations and assesses their credit quality by taking into account their financial position, past experience and other pertinent factors. Management regularly monitors customer credit limits, performs credit reviews and, in certain cases insures accounts receivable against credit losses.

As at September 26, 2010, the Company believes that the credit risk for accounts receivable is mitigated due to the following: a) a broad customer base which is dispersed across varying market sectors and geographic locations, b) 96% of gross accounts receivable balances are outstanding for less than 60 days, c) 19% of the accounts receivable balances are insured against credit losses, and d) the Company's exposure to individual customers is limited and the ten largest customers, on aggregate, accounted for 29% of the total accounts receivable balance.

The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the earnings statement within selling, general, & administrative expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against selling, general, and administrative expenses in the earnings statement. The following table sets out the aging details of the Company's accounts receivable balances outstanding based on the status of the receivable in relation to when the receivable was due and payable and related allowance for doubtful accounts:

  September 26     December 27  
  2010     2009  
           
Current - neither impaired nor past due 55,983     53,224  
Not impaired but past the due date:          
  Within 30 days 17,217     16,725  
  31 - 60 days 1,865     1,271  
  Over 60 days 940     895  
  76,005     72,115  
  Less: Allowance for doubtful accounts (1,471 )   (1,761 )
  Total accounts receivable, net 74,534     70,354  

Liquidity Risk

Liquidity risk is the risk that the Company would not be able to meet its financial obligations as they come due. Management believes that the liquidity risk is low due to the strong financial condition of the Company. This risk assessment is based on the following: a) cash and cash equivalents amounts of $75.5 million, b) no outstanding long-term debt, c) unused credit facilities comprised of unsecured operating lines of $38 million, d) the ability to obtain term-loan financing to fund an acquisition, if needed, e) an informal investment grade credit rating, and f) the Company's ability to generate positive cash flows from ongoing operations. Management believes that the Company's cash flows are more than sufficient to cover its operating costs, working capital requirements, capital expenditures and dividend payments in 2010. The Company's accounts payable and accrued liabilities are all due within 6 months.

8. Capital Management

The Company's objectives in managing capital are to ensure the Company will continue as a going concern and have sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to deploy capital to provide an appropriate return on investment to its shareholders. The Company also strives to maintain an optimal capital structure to reduce the overall cost of capital.

In the management of capital, the Company includes bank indebtedness, long-term debt and shareholders' equity. The Board of Directors has established quantitative return on capital criteria for management and year-over-year sustainable earnings growth targets. The Board of Directors also reviews, on a regular basis, the level of dividends paid to the Company's shareholders.

The Company has externally imposed capital requirements as governed through its bank operating line credit facilities. The Company monitors capital on the basis of funded debt to EBITDA (earnings before interest, income taxes, depreciation and amortization) and debt service coverage. Funded debt is defined as the sum of long-term debt and bank indebtedness less cash and cash equivalents. The funded debt to EBITDA is calculated as funded debt, as at the financial reporting date, over the twelve-month rolling EBITDA. This ratio is to be maintained under 3.00:1. As at September 26, 2010, the ratio was 0.00:1. Debt service coverage is calculated as a twelve-month rolling earnings from operations over debt service. Debt service is calculated as the sum of one-sixth long-term debt outstanding plus annualized interest expense and dividends. This ratio is to be maintained over 1.50:1. As at September 26, 2010, the ratio was 10.32:1.

There were no changes in the Company's approach to capital management during the current period.

9. 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.

Contact Information

  • Winpak Ltd.
    K.P. Kuchma
    Vice President and CFO
    (204) 831-2254
    or
    Winpak Ltd.
    B.J. Berry
    President and CEO
    (204) 831-2216