Winpak Ltd. (WPK)(TSX:WPK) today reports consolidated results in US dollars for
the fourth quarter of 2008, which ended on December 28, 2008.
December 28 December 30
Year Ended 2008 2007
---------- ------------ ------------
(thousands of US dollars, except per share amounts)
Sales 512,037 466,622
------------ ------------
------------ ------------
Net earnings 29,352 23,958
------------ ------------
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Minority interest 64 (74)
Provision for income taxes 15,725 8,061
Interest 1,131 2,044
Depreciation and amortization 25,407 24,138
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EBITDA (1) 71,679 58,127
------------ ------------
------------ ------------
Basic and fully diluted net earnings per
share (cents) 45 37
------------ ------------
------------ ------------
December 28 December 30
Fourth Quarter Ended 2008 2007
-------------------- ------------ ------------
(thousands of US dollars, except per share amounts)
Sales 129,690 126,638
------------ ------------
------------ ------------
Net earnings 8,882 6,157
------------ ------------
------------ ------------
Minority interest (107) 5
Provision for income taxes 5,568 (770)
Interest 215 552
Depreciation and amortization 6,110 6,509
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EBITDA (1) 20,668 12,453
------------ ------------
------------ ------------
Basic and fully diluted net earnings per
share (cents) 14 10
------------ ------------
------------ ------------
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 fourth quarter of 2008 were $8.9 million or 14 cents per
share compared to $6.2 million or 10 cents per share in the corresponding period
of 2007. The current three-month result represents the best quarterly net
earnings recorded in the past five years, except for the second quarter of 2006
when profits included the sale of real estate. The 44.3 percent increase in net
earnings compared to the fourth quarter of 2007 was mainly attributable to
enhanced gross profit margins and the favorable impact of foreign exchange,
offset in part by the effect of lower future Canadian income tax rates, which
favorably impacted 2007 fourth quarter net earnings.
Net earnings for the year were $29.4 million or 45 cents per share compared to
$24.0 million or 37 cents per share in 2007, an increase in net earnings of 22.5
percent. The improvement was largely the result of higher sales volumes,
increased gross profit margins, expense reductions and the favorable effect of
foreign exchange. This was partially offset by the favorable effect on 2007
earnings of lower future Canadian income tax rates.
Sales
Fourth quarter sales in 2008 of $129.7 million increased by $3.1 million or 2.4
percent in relation to the 2007 corresponding period. Although sales increased
overall, volumes fell by 4.0 percent or $5.0 million in comparison to the fourth
quarter of 2007. Rigid containers, lidding and packaging machinery were the only
product groups to exhibit modest single-digit volume increases in the quarter.
Specialty films and biaxially oriented nylon film, on the other hand, both
experienced a contraction in sales volumes of approximately 25 percent, while
volumes in modified atmosphere packaging declined moderately by approximately 5
percent. A weaker Canadian dollar also negatively impacted sales by a further
$4.9 million. Higher overall selling prices, however, offset the declines in
sales due to volume and foreign exchange by advancing sales by a total of $13.0
million to counteract increased raw material costs.
In 2008, sales for the year increased by $45.4 million or 9.7 percent over 2007.
Greater volumes accounted for $20.0 million of that increase or a 4.3 percent
improvement over the prior year. All product groups contributed to core volume
growth in 2008 with the exception of specialty films. Rigid containers
experienced robust growth in excess of 15 percent while shipments of biaxially
oriented nylon, modified atmosphere packaging ("MAP") and lidding each grew at
more modest rates ranging from 2 to 6 percent. MAP product volumes included $4.9
million in sales resulting from the acquisition of the film packaging business
of Walsroder Packaging, a subsidiary of The Dow Chemical Company. Packaging
machinery sales displayed respectable volume growth although at a less favorable
product mix. Meanwhile, sales of specialty films declined as the state of the
U.S. economy had a more pronounced effect on this product group. Price and mix
changes resulted in a sizable increase in sales of $23.2 million or 4.9 percent
compared to 2007 as all business units instituted price increases to coincide
with the sharp rise in raw material costs. The strengthening of the Canadian
dollar versus the US dollar, on average for the year, also increased sales by
$2.2 million or approximately 0.5 percent.
Gross profit margins
Gross profit margins strengthened to 30.0 percent of sales in the fourth quarter
of 2008, up substantially from the 20.7 percent of sales recorded in the
corresponding quarter in 2007. The weakening of the Canadian dollar had a
favorable impact on the gross profit margin percentage in the fourth quarter of
2008 of nearly 7 percentage points, reflecting the foreign exchange transaction
differences on raw materials purchased by the Canadian subsidiaries in U.S.
dollars. The balance of the improvement of approximately 6.0 cents per share in
net earnings was mainly attributable to selling price advances in relation to
raw material costs and improved manufacturing performance. In particular, the
lag typically experienced in selling price-indexing agreements, whereby
adjustments to selling prices lag changes in raw material costs, augmented
results for the quarter as raw material costs reversed their upward trend. The
same practice had negatively impacted margins in previous quarters when raw
material costs were rising. In comparison to the fourth quarter of 2007, a
significant reduction in unfavorable manufacturing variances was achieved, as
the start-up issues experienced in the prior year were substantially resolved.
In comparison to 2007, 2008 gross profit margins increased by $22.6 million due
to foreign exchange impacts of $10.7 million, volume advances of $4.9 million,
and improvements in manufacturing performance of $7.0 million, or 7.0 cents per
share in after-tax dollars. This substantial gain was mainly attributable to the
significant reduction in manufacturing variances in 2008, which contributed 5.5
cents in net earnings per share. Greater manufacturing efficiencies from lower
unit costs for direct labor and overheads accounted for most of the remaining
1.5 cents per share advancement in gross profit margins. The Company was also
reasonably successful in matching raw material cost changes with selling price
adjustments in the past year, having little impact on net earnings.
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 31, 2007 to reflect the mix of the eight primary raw materials
purchased in 2007.
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Quarter and Year 4/06 1/07 2/07 3/07 4/07 1/08 2/08 3/08 4/08
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Purchase
Price Index 148.8 146.0 152.5 158.3 161.8 167.9 174.6 190.7 160.3
----------------------------------------------------------------------------
The index in the fourth quarter fell by 15.9 percent from the previous record
high recorded in the third quarter of 2008 but was only marginally lower than
the index for the fourth quarter of 2007. The trend reversal experienced in this
past quarter is certainly encouraging and if stability in raw material pricing
at current levels is achieved, a further decline in the index could be expected.
However, with continued volatility in pricing, it is difficult to determine what
future trends are likely.
Expenses and Other
For the fourth quarter of 2008, operating expenses increased in relation to the
corresponding period in 2007 and represented a reduction in net earnings for the
quarter of $1.2 million or nearly 2.0 cents per share, when adjusted for the
effect of foreign exchange and sales volumes. Higher incentive costs and the
timing of the recording of research and development tax credits accounted for
the majority of the operating expense increase. Due to the considerable
weakening of the Canadian dollar in the last three months of 2008, the overall
impact of foreign exchange on the net earnings for the quarter was an
improvement of 3.5 cents per share. In regard to income taxes, the fourth
quarter of 2007 included the benefit of the enactment of lower future Canadian
rates of income tax, which increased net earnings in 2007 by 4.0 cents per share
but had no effect on the same period in 2008.
Year-to-date, interest costs declined by over $0.9 million in 2008 compared to
the prior year and resulted in an increase of 1.0 cent in net earnings per
share. The overall weakening of the Canadian dollar over the course of the year
resulted in an increase of approximately 1.5 cents per share in 2008 compared to
the prior year. The enactment of lower future Canadian income tax rates
increased net earnings in 2007 more than 2008 by 3.5 cents per share.
Conversely, the difference in income tax rates between 2008 and 2007, after
adjusting for the tax effect of foreign exchange gains and losses, resulted in a
contribution of approximately 0.5 cents per share to net earnings in the current
year.
Capital Resources, Cash Flow and Liquidity
At December 28, 2008, Winpak's cash position totaled $19.8 million, an increase
of $21.9 million in the fourth quarter of 2008 alone and $24.8 million from the
prior year-end. The healthy increase in cash during the fourth quarter was
generated by strong cash flow from operating activities before changes in
working capital of $20.8 million as well as a net reduction in the investment in
working capital of $5.4 million. The reduction in working capital was aided by a
sharp decline in raw material inventories due to both decreases in quantities on
hand and cost. During the quarter, cash was utilized for defined benefit pension
payments of $1.7 million, equipment purchases of $3.2 million, purchase of
intangibles of $0.2 million and dividends of $1.9 million. There was also a
foreign exchange adjustment on cash of $2.7 million.
Year-to-date, Winpak's cash position improved by $24.8 million as reflected in
total funds provided by operations of $47.3 million and a foreign exchange
adjustment on cash of $3.1 million less disbursements for investing and
financing activities of $25.6 million. Cash flow derived from operating
activities before changes in working capital and payments to defined benefit
plans totaled $64.4 million, a record for the Company. Cash was used to fund
additional working capital requirements of $11.3 million, capital equipment
additions of $14.8 million, dividends of $7.7 million, defined benefit plan
payments of $5.8 million, intangibles of $1.0 million and repayment of long-term
debt of $5.0 million. Additional cash was generated by an investment of $2.9
million by a minority shareholder in a subsidiary.
At the close of the year, the Company's cash exceeded its total debt, consisting
of $17 million in long-term debt, by $2.8 million. Winpak is confident that
sufficient financial resources are in place to fund cash requirements for the
foreseeable future and with its strong balance sheet, is poised to take
advantage of any acquisition opportunities that would be beneficial to the
long-term interests of the Company.
Summary of Quarterly Results
Thousands of U.S. dollars, except per share amounts (U.S. cents)
Quarter Ended
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Sept- Dec- Sept-
December ember June March ember ember July April
28 28 29 30 30 30 1 1
2008 2008 2008 2008 2007 2007 2007 2007
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Sales 129,690 131,419 127,582 123,346 126,638 116,745 114,479 108,760
Net
earnings 8,882 7,288 7,231 5,951 6,157 5,073 5,224 7,504
EPS 14 11 11 9 10 7 8 12
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Looking Forward
Much has changed in the fourth quarter in the overall economy that will impact
the Company in the ensuing year. If the weakening of the Canadian dollar
exhibited in the fourth quarter of 2008 is maintained at the same level
throughout 2009, Winpak's results going forward will be favorably impacted as
the Company's costs denominated in Canadian funds exceed the Company's Canadian
dollar sales. The sharp decline in commodity prices, particularly in the case of
natural gas, petroleum, and aluminum, has resulted in decreases in raw material
costs after six successive years of increases. Just over 40 percent of the
Company's sales are subject to formal selling price-indexing agreements, whereby
selling prices are adjusted as raw material prices change, albeit with a time
lag. However, the remaining portion of the customer base, although still subject
to selling price adjustments, has not kept up with the more than 85 percent
increase in raw material costs that has transpired over the last six years. As a
result, as raw material costs decline, margins that have eroded in recent years
should experience some recovery, as this portion of the customer base should not
expect to benefit to the same degree from these raw material cost decreases.
The overall state of the North American and global economies is also of concern
to the Company. Many businesses are experiencing a reduction in demand for their
products and certainly Winpak is not immune from this as evidenced by the 4.0
percent curtailment in fourth quarter volumes. Nonetheless, as approximately 90
percent of the Company's sales are into the food and healthcare markets, where
demand is fairly inelastic to economic downturns, the impact of the economic
slump on Winpak should be considerably less than on companies in other
industries. The management of the Company, however, must still be mindful of any
credit concerns with customers that could arise in this economic environment,
although Winpak believes that its processes and procedures in this area should
minimize this risk.
In recent years leading up to the current year, the Company has invested heavily
in property, plant and equipment to maintain and advance the Company's
technological strengths. This included adding new capacity for high-barrier
films, shrink bags, custom thermoforming and lidding. Though most of these
projects were completed in 2007, there still remains unused extrusion capacity
related to these additions of well over $50 million in sales going forward at
current selling prices. This provides a strong foundation from which to build
upon for the future. In 2009, the capital program will focus on adding shrink
bag capacity as well as furthering thermoforming capabilities in addition to
other equipment enhancements directed at improving efficiencies or extending the
life of current equipment. In this regard, the Company anticipates doubling its
spending on capital projects from the very modest level of just under $15
million in 2008 in conjunction with retiring its remaining long-term debt
obligations. Furthermore, due to the Company's strong financial position with
current cash resources outstripping short-term and long-term debt, Winpak is
very well placed to respond to acquisition opportunities that may arise which
enhance shareholder value and further strengthen the Company's future outlook.
Accounting Policy Changes
As more fully described in Note 2 to the Consolidated Financial Statements, the
Company adopted the Canadian Institute of Chartered Accountants' Handbook
Sections 3031, 3862, 3863 and 1535. The changes were adopted prospectively from
December 31, 2007. These new standards had no significant impact on the
Company's Consolidated Financial Statements.
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 be applicable for the Company's first quarter of 2011, at which time
the Company will 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 initial diagnostic assessment
phase of the project has been completed and a detailed IFRS implementation plan
has been developed for fiscal 2009. A high level review of the major differences
between Canadian GAAP and current IFRS has been undertaken and at this time, the
Company has determined that the differences with the highest potential impact to
the Company's accounting policies are related to: property, plant and equipment;
financial instruments and hedges; impairments; employee defined benefit plans;
income taxes; financial statement disclosures; as well as the initial adoption
of IFRS under the provisions of IFRS 1, First-Time Adoption of IFRS. The
potential impact of these changes on the Company's future financial position and
results of operations has yet to be determined as accounting policy choices
under IFRS are subject to a number of accounting alternatives which still have
to be evaluated by the Company. To date, the project leaders have received
training with respect to IFRS through attendance at seminars and through working
with various specialists from the external advisory firm. Winpak will continue
to invest in training and external advisor resources throughout the transition
to facilitate a timely and successful conversion.
Goodwill, Intangible Assets and Financial Statement Concepts
In February 2008, the CICA issued Section 3064 Goodwill and Intangible Assets,
replacing Section 3062 Goodwill and Other Intangible Assets and Section 3450
Research and Development Costs. The new Section establishes standards on the
recognition, measurement, presentation and disclosure for goodwill and
intangible assets subsequent to their initial recognition. The standard requires
retroactive application to prior period financial statements and will apply
commencing with the Company's 2009 fiscal year. The Company has completed its
initial assessment on the impact of this new standard on its consolidated
financial statements. Management expects the standard to have no significant
impact on the required financial statement disclosures and no effect on the
Company's consolidated financial results.
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 and effectiveness of
the Company's disclosure controls and procedures, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that these controls and
procedures are designed and operating effectively as of December 28, 2008 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 and testing of the
effectiveness of the Company's internal controls over financial reporting, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that these controls and procedures are designed and operating effectively as of
December 28, 2008 to provide reasonable assurance that the financial information
being reported is materially accurate. During the fourth quarter ended December
28, 2008, 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
Fourth Quarter Ended: December 28, 2008
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)
December 28 December 30
2008 2007
------------- -------------
Assets
Current Assets:
Cash $ 19,796 $ -
Accounts receivable (note 8) 63,175 57,308
Income taxes receivable - 6,292
Inventory (note 4) 68,117 74,742
Prepaid expenses 2,060 1,945
Future income taxes 3,363 2,702
------------- -------------
156,511 142,989
Property, plant and equipment (net) 227,180 263,328
Other assets 11,259 10,739
Intangible assets (net) 5,983 6,690
Goodwill 16,082 17,854
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$ 417,015 $ 441,600
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Liabilities and Shareholders' Equity
Current Liabilities:
Bank indebtedness (unsecured) $ - $ 5,037
Accounts payable and
accrued liabilities 33,298 38,061
Income taxes payable 2,017 -
------------- -------------
35,315 43,098
Long-term debt 17,000 22,000
Deferred credits 10,860 12,603
Future income taxes 28,390 28,640
Postretirement benefits 1,624 1,596
------------- -------------
93,189 107,937
Minority interest 14,069 11,065
Shareholders' equity:
Share capital 29,195 29,195
Retained earnings 249,990 228,470
Accumulated other comprehensive income
(note 5) 30,572 64,933
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280,562 293,403
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309,757 322,598
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$ 417,015 $ 441,600
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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)
Fourth Quarter Ended Year-To-Date Ended
------------------------ -------------------------
------------------------ -------------------------
December 28 December 30 December 28 December 30
2008 2007 2008 2007
------------------------ -------------------------
Sales $ 129,690 $ 126,638 $ 512,037 $ 466,622
Cost of sales 90,768 100,380 379,196 356,420
------------------------ -------------------------
Gross profit 38,922 26,258 132,841 110,202
Expenses
Selling, general &
administrative
(note 6) 21,383 17,833 75,062 65,313
Research and
technical 2,947 2,051 10,684 9,721
Pre-production 34 430 823 1,179
------------------------ -------------------------
Earnings from
operations 14,558 5,944 46,272 33,989
Interest 215 552 1,131 2,044
------------------------ -------------------------
Earnings before
income taxes and
minority interest 14,343 5,392 45,141 31,945
Provision for income
taxes 5,568 (770) 15,725 8,061
Minority interest (107) 5 64 (74)
------------------------ -------------------------
Net earnings $ 8,882 $ 6,157 $ 29,352 $ 23,958
------------------------ -------------------------
------------------------ -------------------------
Retained earnings,
beginning of period
As previously
reported $ 242,721 $ 224,302 $ 228,470 $ 211,139
Change in accounting
policy - (note 2 (c)) - - (492) -
------------------------ -------------------------
Restated 242,721 224,302 227,978 211,139
Net earnings 8,882 6,157 29,352 23,958
Dividends declared (1,613) (1,989) (7,340) (6,627)
------------------------ -------------------------
Retained earnings,
end of period $ 249,990 $ 228,470 $ 249,990 $ 228,470
------------------------ -------------------------
------------------------ -------------------------
Earnings per share
Basic and fully
diluted earnings per
share (cents) 14 10 45 37
------------------------ -------------------------
------------------------ -------------------------
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)
Fourth Quarter Ended Year-To-Date Ended
------------------------ -------------------------
------------------------ -------------------------
December 28 December 30 December 28 December 30
2008 2007 2008 2007
------------------------ -------------------------
Net earnings $ 8,882 $ 6,157 $ 29,352 $ 23,958
Unrealized (losses)
gains on translation
of financial statements
of operations with
CDN dollar functional
currency to US dollar
reporting currency (24,430) 3,072 (33,663) 31,442
Unrealized (losses)
gains on derivatives
designated as cash
flow hedges, net of
income tax (2008 -
$(558) and $(615))
(2007 - $37 and $376) (1,037) 68 (1,140) 699
Realized losses
(gains) on
derivatives
designated as cash
flow hedges in
prior periods
transferred to net
earnings in the
current period,
net of income tax
(2008 - $228 and
$238) (2007 - $(110)
and $(335)) 423 (204) 442 (623)
------------------------ -------------------------
Other comprehensive
(loss) income - net
of income tax (note 5) (25,044) 2,936 (34,361) 31,518
------------------------ -------------------------
Comprehensive income $ (16,162) $ 9,093 $ (5,009) $ 55,476
------------------------ -------------------------
------------------------ -------------------------
See accompanying notes to consolidated financial statements.
Winpak Ltd.
Consolidated Statements of Cash Flows
(thousands of US dollars) (unaudited)
Fourth Quarter Ended Year-To-Date Ended
------------------------ -------------------------
------------------------ -------------------------
December 28 December 30 December 28 December 30
2008 2007 2008 2007
------------------------ -------------------------
Cash provided by
(used in):
Operating
activities:
Net earnings for the
period $ 8,882 $ 6,157 $ 29,352 $ 23,958
Items not
involving cash:
Depreciation 5,653 6,091 23,685 22,121
Amortization -
intangible assets 457 418 1,722 2,017
Defined benefit
plan costs 784 660 2,693 3,254
Future income taxes 2,376 (1,560) 3,411 (274)
Foreign exchange
loss on long-term debt 3,104 328 4,015 328
Minority interest (107) 5 64 (74)
Other (327) (147) (495) 142
------------------------ -------------------------
Cash flow from
operating activities
before the following 20,822 11,952 64,447 51,472
Change in
working capital:
Accounts receivable (2,062) (253) (11,166) 540
Income taxes
receivable 1,557 (1,572) 6,050 (4,318)
Inventory 8,404 5,121 (3,031) 2,442
Prepaid expenses 151 990 (410) 118
Accounts payable and
accrued liabilities (4,333) (2,149) (4,471) (7,175)
Income taxes payable 1,669 - 1,669 -
Defined benefit plan
payments (1,666) (5) (5,815) (7,210)
------------------------ -------------------------
24,542 14,084 47,273 35,869
------------------------ -------------------------
Investing activities:
Acquisition of
property, plant
and equipment (3,248) (8,202) (14,812) (35,957)
Acquisition of
intangible assets (235) - (1,015) -
------------------------ -------------------------
(3,483) (8,202) (15,827) (35,957)
------------------------ -------------------------
Financing activities:
Repayments of
long-term debt - (17,000) (5,000) (17,000)
Proceeds from
long-term debt - 17,000 - 17,000
Dividends paid (1,888) (1,960) (7,716) (5,471)
Investment by
minority shareholder
in subsidiary - - 2,940 -
------------------------ -------------------------
(1,888) (1,960) (9,776) (5,471)
------------------------ -------------------------
Foreign exchange
translation adjustment
on cash 2,733 (169) 3,163 (2,472)
------------------------ -------------------------
Change in cash
position 21,904 3,753 24,833 (8,031)
(Bank indebtedness)
cash, beginning
of period (2,108) (8,790) (5,037) 2,994
------------------------ -------------------------
Cash (bank
indebtedness),
end of period $ 19,796 $ (5,037) $ 19,796 $ (5,037)
------------------------ -------------------------
------------------------ -------------------------
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for:
Interest expense $ 292 $ 728 $ 1,651 $ 3,028
Income tax expense 143 1,930 3,895 9,855
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
For the periods ended December 28, 2008 and December 30, 2007
(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 28, 2008 except as
described in Note 2.
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 30, 2007.
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. Accounting Policy Changes
Effective December 31, 2007, the Company adopted the following new Canadian
Institute of Chartered Accountants (CICA) accounting standards.
(a) Financial Instruments - Disclosures and Presentation:
Section 3862 Financial Instruments - Disclosure, describes the required
disclosures related to the significance of financial instruments on the
Company's financial position and performance and the nature and extent of risks
arising from financial instruments to which the Company is exposed and how the
Company manages those risks and Section 3863 Financial Instruments -
Presentation, describes the standards for presentation of financial instruments
and non-financial derivatives and carries forward, unchanged, the presentation
requirements of Section 3861 Financial Instruments - Disclosure and Presentation
(notes 7 and 8).
(b) Capital Management:
Section 1535 Capital Disclosures, establishes standards for disclosing
information about a Company's capital and how it is managed to enable users of
financial statements to evaluate the Company's objectives, policies and
processes for managing capital, quantitative data about what the Company regards
as capital and whether the Company has complied with any externally imposed
capital requirements (note 9).
The aforementioned standards have no impact on the classification or valuation
of the Company's interim consolidated financial instruments.
(c) Inventory:
Section 3031 Inventories, which replaced Section 3030 Inventories, establishes
standards on the definition of 'cost' to include all costs of purchase (net of
supplier payment discounts), costs of conversion and other costs incurred in
bringing the inventories to their present state. Companies are required to
systematically allocate variable and fixed production overhead costs that are
incurred in converting materials into finished goods. The allocation of fixed
production overheads is based on normal production capacity of the production
facilities. In addition, the standard requires companies to assess the
recoverability of inventory costs in comparison to net realizable value.
Declines in replacement cost below carrying values for raw material inventories
do not require write downs if the finished goods in which they will be utilized
are expected to be sold at or above cost. The standard requires disclosing, in
the current period, the write-down amount recognized as an expense and the
amount recognized as a reversal of previous write-downs (note 4).
The Company has adopted Section 3031 effective December 31, 2007 and restated
2008 opening retained earnings. As a result of this change, inventory was
reduced by $746, current future income tax assets were increased by $254 and
retained earnings were reduced by $492. In accordance with the requirement of
the section comparative interim amounts have not been restated.
3. Future Accounting Standards
The CICA has issued the following handbook section, which applies commencing
with the Company's 2009 fiscal year.
(a) Goodwill, Intangible Assets and Financial Statement Concepts:
In February 2008, the CICA issued Section 3064 Goodwill and Intangible Assets,
replacing Section 3062 Goodwill and Other Intangible Assets and Section 3450
Research and Development Costs. The new Section establishes standards on the
recognition, measurement, presentation and disclosure for goodwill and
intangible assets subsequent to their initial recognition. The standard requires
retroactive application to prior period financial statements. The Company has
completed its initial assessment on the impact of this new standard on its
consolidated financial statements. Management expects the standard to have no
significant impact on the required financial statement disclosures and no effect
on the Company's consolidated financial results.
(b) International Financial Reporting Standards:
In January 2006, the CICA Accounting Standards Board (ASB) adopted a strategic
plan for the direction of accounting standards in Canada. As part of that plan,
accounting standards for Public Accountable Enterprises would be required to
converge with International Financial Reporting Standards (IFRS) for fiscal
years beginning on or after January 1, 2011 with comparative figures presented
for 2010 on the same basis. In February 2008, the CICA ASB confirmed the
effective date of the initial adoption of IFRS.
The Company has completed the initial diagnostic assessment, which involved a
high level review of the major differences between Canadian GAAP and current
IFRS. Currently, the Company has determined that the differences with the
highest potential impact to the Company's accounting policies are related to:
property, plant and equipment, financial instruments and hedges, impairments,
employee defined benefit plans, income taxes, financial statement disclosures,
as well as the initial adoption of IFRS under the provisions of IFRS 1,
First-Time Adoption of IFRS.
The Company has commenced the detailed diagnostic assessment phase of the
project and has started to evaluate the accounting policy differences based on
management's current understanding of the IFRS. The impact of these changes on
the Company's future financial position and results of operations has yet to be
determined as accounting policy choices under IFRS are subject to a number of
accounting alternatives which have not been evaluated by the Company.
4. Inventory
December 28 December 30
2008 2007
----------------------------------------------------------------------------
Raw materials 23,935 27,280
Work-in-process 12,390 11,738
Finished goods 28,806 34,107
Spare parts 2,986 1,617
-------------------------
68,117 74,742
-------------------------
-------------------------
During the fourth quarter of 2008, the Company recorded inventory write-downs
for slow moving and obsolete inventory of $1,650 (Year-to-date- $5,799) and
reversals of previously written-down items that were sold to customers of $413
(Year-to-date- $922).
5. Accumulated Other Comprehensive Income
The accumulated other comprehensive income account represents the net changes
due to foreign exchange rate fluctuations in the net investment in the Canadian
dollar functional currency operations and the unrealized (losses) gains on
derivatives designated as cash flow hedges.
Fourth Quarter Ended Year-To-Date Ended
-------------------------- --------------------------
-------------------------- --------------------------
December 28 December 30 December 28 December 30
2008 2007 2008 2007
-------------------------- --------------------------
Balance, beginning
of period 55,616 61,997 64,933 33,415
Other comprehensive
(loss) income (25,044) 2,936 (34,361) 31,518
-------------------------- --------------------------
Balance, end of
period 30,572 64,933 30,572 64,933
-------------------------- --------------------------
-------------------------- --------------------------
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 operations with Canadian dollar
functional currency to US dollar reporting
currency 31,194 64,857
Unrealized (losses) gains on derivatives
designated as cash flow hedges (622) 76
--------------------------
Balance, end of period 30,572 64,933
--------------------------
6. Selling, General & Administrative Expenses
Fourth Quarter Ended Year-To-Date Ended
-------------------------- --------------------------
December 28 December 30 December 28 December 30
2008 2007 2008 2007
-------------------------- --------------------------
Foreign exchange
translation losses
(gains) 4,345 (57) 5,254 (1,504)
Defined benefit plan
costs 784 660 2,693 3,254
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.
7. Financial Instruments
The following table presents the carrying value and fair value of financial
instruments and non-financial derivatives as at December 28, 2008:
Carried at Carried at
Cost/Amortized Fair Value
---------------- -----------
Carrying / Fair Carrying
Assets (Liabilities) Classification Value Value
----------------------------------------------------------------------------
Cash Held for trading 19,796
Accounts receivable Loans and receivables 63,175
Accounts payable and Other financial
accrued liabilities liabilities (32,342)
Cash flow hedging derivative Derivatives designated
as effective hedges (956)
Long-term debt Other financial
liabilities (17,000)
----------------------------------------------------------------------------
Fair value is based on quoted market prices when available. However, when
financial instruments lack an available trading market, fair value is determined
using management's estimates and is calculated using market factors with similar
characteristics and risk profiles. These amounts represent point-in-time
estimates and may not reflect fair value in the future. These calculations are
subjective in nature, involve uncertainties and are a matter of judgment.
The following summarizes the methods and assumptions used in estimating the fair
value of the Company's financial instruments:
a) Short-term financial instruments approximate their carrying amount due to the
relatively short period to maturity. These include cash, accounts receivable,
bank indebtedness and accounts payable and accrued liabilities.
b) Long-term debt with a variable interest rate is carried at cost, which
reflects fair value as the interest rate is the current market rate available to
the Company.
c) Foreign exchange forward 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.
8. Financial Risk Management
The Company's risk management program focuses on the unpredictability of
financial markets and seeks to minimize potential adverse effects on the
Company's financial performance. 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 U.S.
dollars. All operations in the United States and American Biaxis Inc. operate
with the U.S. 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 U.S. dollars. However,
approximately 19 percent of sales are invoiced in CDN dollars and approximately
27 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 U.S. dollar net monetary
position within the CDN dollar functional currency operations as at December 28,
2008, a one-cent strengthening / weakening in the year-end foreign exchange rate
from CDN dollars to U.S. dollars would have had no impact on net earnings for
2008.
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 on hand and forward or
zero-cost option foreign exchange contracts. Transactions are only conducted
with certain approved Schedule 1 Canadian financial institutions. All foreign
exchange contracts are designated as cash flow hedges. Certain foreign currency
forward contracts matured during the fourth quarter of 2008 and the Company
realized pre-tax foreign exchange losses of $651 (year-to-date - realized
pre-tax foreign exchange losses of $680). These foreign exchange losses were
recorded in selling, general & administrative expenses. As at December 28, 2008,
the Company had foreign currency forward contracts outstanding with a notional
amount of $16.0 million US at an average exchange rate of 1.1412 (US to CDN
dollars), maturing between January 2009 and November 2009 and the fair value of
the notional amount of these contracts was $15.044 million US as of December 28,
2008. An unrealized foreign exchange loss during the quarter of $1,595 (pre-tax)
(year-to-date - unrealized foreign exchange loss of $1,755 (pre-tax)) was
recorded in other comprehensive income.
Interest Rate Risk
The Company's interest rate risk arises from its floating rate bank indebtedness
and long-term debt. The Company's policy regarding interest expense is to fix
interest rates on between one-and two-thirds of long-term debt outstanding. The
Company may enter into interest rate swap agreements in order to limit exposure
to increases in interest rates and fix interest rates on certain portions of
long-term debt. For the current period, the Company elected to have all
long-term debt at a floating interest rate due to the relatively low level of
debt outstanding. As such, no interest rate swap instruments were entered into
during the fourth quarter of 2008, and none were outstanding as at December 28,
2008.
Regarding the December 28, 2008 long-term debt balance of $17.0 million, a 1%
increase / decrease in floating interest rates would decrease / increase
earnings before tax by $170 annually.
Commodity Price Risk
Manufacturing costs for the Company's products 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 not immediately reflected in selling price adjustments,
there is a slight time lag. For the three months ended December 28, 2008, 42%
(year-to-date - 41%) of sales were to customers with formal selling
price-indexing agreements. 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
Credit risk arises from cash held with banks, derivative financial instruments
(foreign exchange forward and option contracts and interest rate swaps with
positive fair values), as well as credit exposure to customers, including
outstanding accounts receivable. The maximum exposure to credit risk is equal to
the carrying value of the financial assets.
The objective of managing counter-party credit risk is to prevent losses on
financial assets. The Company assesses the credit quality of counter- parties,
taking into account their financial position, past experience and other factors.
Management regularly monitors customer credit limits, performs credit reviews,
and in certain cases insures accounts receivable balances against credit losses.
As at December 28, 2008, 19% of the Company's total accounts receivable balance
was insured against credit losses.
The Company's exposure to individual customers is limited and the ten largest
customers as at December 28, 2008, on aggregate, accounted for 26% of the
Company's total accounts receivable balance.
The carrying amount of accounts receivable are 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, & administrative expenses in the earnings
statement.
The following table details the aging of the Company's receivables and related
allowance for doubtful accounts:
December 28 December 30
2008 2007
----------------------------------------------------------------------------
Current 45,029 39,325
Past due amounts:
1 - 60 days 18,688 17,602
Greater than 60 days 1,121 1,919
Less: Allowance for doubtful accounts (1,663) (1,538)
-------------------------
Total accounts receivable, net 63,175 57,308
-------------------------
-------------------------
Liquidity Risk
Investments to drive growth can require significant financial resources. A range
of funding alternatives is available to the Company including cash flow provided
by operations, additional debt, the issuance of equity or a combination thereof.
The moderate level of outstanding debt and an informal investment grade credit
rating allow the Company to enjoy relatively low interest rates. Under the terms
of the Company's bank credit facilities currently in place, the $17 million of
long-term debt outstanding is revolving, although the Company retains the right
to repay, without penalty, amounts as deemed appropriate. The Company has
determined that total current credit facilities of $68 million (unsecured),
including operating lines of $48 million and term-debt lines of $20 million, are
adequate. Of the total credit facilities, $48 million was unused as at December
28, 2008. The Company has remained within all bank debt covenants and foresees
no change in its ability to meet these covenants in 2009.
The 2009 requirements for capital expenditures, working capital and debt
repayments can be financed from cash on hand, cash flow provided by operating
activities and unused credit facilities. The Company expects to repay all of the
$17 million of long-term debt outstanding in the 2009 fiscal year unless
unexpected circumstances occur.
Commitments and Contractual Obligations
The Company enters into commitments and contractual obligations in the normal
course of business operations. The Company has commitments of $1,314 (2007 -
$2,898) with respect to equipment purchases. The Company rents premises and
equipment under operating leases that expire at various dates until April 30,
2015. The aggregate minimum rentals payable for these leases are as follows:
Year 2009 2010 2011 2012 2013 Thereafter Total
------------------------------------------------------------------------
Amount $ 1,824 1,628 825 603 544 721 6,145
9. Capital Management
The Company's objectives in managing capital are to ensure that 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 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. 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
December 28, 2008, 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 December 28, 2008, the ratio was 3.99:1.
There were no changes in the Company's approach to capital management during the
current period.
10. 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.
11. Comparative Interim Amounts
Certain comparative interim amounts have been reclassified to conform with the
presentation in the current period.
Maple Peak Investments (TSXV:MAP)
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