Winpak's Q3 net income up 9.9% year-over-year to US$14.4M on 16.9% increase in net sales to US$170.7M; results driven by improved product mix, increased volume primarily in rigid packaging
October 20, 2011
– Winpak Ltd. (WPK) today reports consolidated results in US dollars for the third quarter
of 2011, which ended on September 25, 2011.
Management’s Discussion and Analysis (presented in US dollars)
This management’s discussion and analysis for the three and nine months ended September 25, 2011 reflects the Company’s adoption of International Financial Reporting Standards (IFRS) as of December 27, 2010, the start of the 2011 fiscal year. Comparative periods for fiscal 2010 have been restated in accordance with IFRS, including the December 28, 2009 transition date balance sheet, however, periods prior to fiscal 2010 have not been restated and are reported in accordance with Canadian GAAP. Note 7 of the interim consolidated financial statements for the three and nine months ended September 25, 2011 contains a detailed reconciliation of the Company’s financial statements previously prepared under Canadian GAAP to those under IFRS for the three and nine months ended September 26, 2010 and for the year ended December 26, 2010 as well as the balance sheets as of these dates and the opening transition date of December 28, 2009. In addition, a detailed description of the effects of the adoption of IFRS on the Company’s financial reporting is included later in this management’s discussion and analysis under Accounting Changes.
Net income attributable to common shareholders for the third quarter of 2011 was $14.4 million or 22 cents in earnings per share compared to $13.1 million or 20 cents per share in the corresponding quarter of 2010, an increase of 9.7 percent. Volume growth contributed 2.0 cents in earnings per share as did enhancements in gross profit due to product mix changes and greater manufacturing efficiencies. Curtailment in operating expense growth added a further 1.5 cents in earnings per share. Offsetting these positive developments were a higher effective income tax rate and the negative impact of foreign exchange which decreased earnings per share by 1.0 cent and 2.5 cents respectively.
For the nine months ended September 25, 2011, net income attributable to common shareholders progressed to $45.3 million or 70 cents in earnings per share, up 6.6 percent from the $42.5 million or 65 cents per share recorded in the comparable prior year period. Increased volumes yielded 4.5 cents in earnings per share while gross profit improvement added a further 4.0 cents per share. Limited operating expense growth, in relation to volume expansion, provided nearly 1.0 cent in earnings per share while the impact of the stronger Canadian dollar had a negative impact on earnings per share of approximately 4.5 cents for the first nine months of 2011 versus 2010.
Revenue for the third quarter of 2011 rose by $24.6 million to $170.7 million, an improvement of 16.9 percent over the comparable quarter in 2010. Volumes overall grew by 9.5 percent, but as was the case in the second quarter, demand remained uneven across product lines. Shipments were especially robust in rigid packaging, where volumes rose by over 30 percent due to demand in condiment and specialty beverage products. Although representing less than 3 percent of total revenues, packaging machinery sales were also strong after a slow start in the first half of the year. Lidding sales volumes, which partially move in tandem with rigid packaging revenues, also advanced by just over 5 percent in the quarter. Modified atmosphere packaging volumes were essentially flat with the third quarter of 2010, as some customers reduced inventory levels in response to the lackluster performance of the US economy. Even further exposed to the slowdown in US economic activity were the more commodity product lines of biaxially oriented nylon and specialty films, where sales quantities declined by low to mid- single digit percentages. Higher overall selling prices, in response to raw material cost increases and changes in product mix, contributed 6.3 percent to third quarter revenue. The stronger Canadian dollar, versus the third quarter of 2010, further improved revenue by 1.1 percent.
For the first three quarters of 2011, revenue expanded to $480.5 million, an increase of $56.0 million or 13.2 percent in relation to the corresponding period in 2010. More than half of the progression in revenue was due to volume growth of 7.3 percent, as all product groups advanced with the exception of biaxially oriented nylon which declined marginally. The volume enrichment was spearheaded by single-serve rigid container shipments, exceeding the corresponding prior year period by more than 20 percent. Packaging machinery shipment growth followed closely behind in percentage terms. The remaining product lines of modified atmosphere packaging, lidding and specialty films all rose by low single-digit percentages in terms of quantities. Selling price gains paralleled higher raw material costs and together with sales mix changes, furthered year-to-date revenue by 4.9 percent. The conversion of Canadian dollar sales into US funds at a higher average exchange rate in 2011 versus 2010 supplemented revenue by an additional 1.0 percent.
Gross profit margins
Gross profit margins declined to 27.6 percent of revenue in the third quarter of 2011 from 28.3 percent of revenue recorded in the same quarter of 2010. However, in dollar terms, gross profit advanced by 14.2 percent to $47.2 million in the current quarter from $41.3 million in the third quarter of 2010, exceeding the increase in sales volume of 9.5 percent and contributing 2.0 cents to earnings per share. Product mix changes and improved manufacturing performance, primarily through efficiency gains and scrap reduction, more than offset the negative impact of raw material cost escalations on gross profit. The Company was moderately successful in applying selling price increases to match raw material cost advances for non-indexed accounts although competitive pressures did result in some margin erosion at certain customers. The remaining approximate 65 percent of revenues are indexed whereby selling prices are adjusted by agreement as raw material costs change, albeit with a time lag of about three months on average.
For the first three quarters of 2011, gross profit margins of 28.6 percent were 0.8 percentage points less than the result achieved in the corresponding period in 2010 but the percentage growth in dollar terms exceeded the relative increase in volumes. As with the results for the third quarter, product mix improvements and enhanced manufacturing performance helped to overcome the impact of rising raw material costs on margins and resulted in an addition of 4.0 cents to earnings per share.
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 27, 2010 to reflect the mix of the eight primary raw materials purchased in 2010.
The purchase price index in the third quarter of 2011 leveled off, declining by less than 1 percent from the previous quarter. However, it still remains 21.4 percent higher than a year earlier and is only 4.1 percent lower than its highest level ever recorded by the Company, just three years prior. It has continued to be a challenge to prevent margin erosion in this high cost environment.
Expenses and Other
While sales volumes in the third quarter expanded by 9.5 percent versus the corresponding period in 2010, the Company was able to leverage its expenditure on operating expenses by limiting their increase to 4.4 percent, excluding the impact of foreign exchange. The net result was an increase of 1.5 cents in earnings per share, with a portion due to lower share-based incentive costs. The overall impact of foreign exchange on net income for the third quarter of 2011, in relation to the same period in 2010, was a reduction of 2.5 cents in earnings per share. This was due to a combination of a foreign exchange loss on Canadian net monetary assets, a higher average exchange rate applied to net Canadian dollar expenses in the third quarter of 2011, and a foreign exchange gain in the third quarter of 2010 on Canadian dollar tax balances resulting in a reduction of income tax expense in that period. In addition, a higher effective income tax rate in the current quarter versus the corresponding prior year quarter lowered earnings per share by 1.0 cent due to a larger proportion of net income being earned in higher tax jurisdictions.
On a year-to-date basis, foreign exchange had a negative impact of 4.5 cents in earnings per share compared to the same period in 2010. The impact was spread relatively equally between the translation of net Canadian dollar costs into US funds at a higher exchange rate in 2011 than 2010, foreign exchange losses on Canadian net monetary assets in 2011, and foreign exchange gains recorded by the Canadian legal entities on filing their 2010 income tax returns in Canadian dollars. In 2011, the Company has received approval to file its Canadian tax returns in US dollars, thereby eliminating this latter foreign exchange fluctuation in 2011 and later years. Limiting the escalation in operating expenses to less than the increase in sales volumes helped deliver a further 1.0 cent in earnings per share. The reduction in corporate income tax rates at the federal level in Canada at the beginning of 2011 mainly offset the negative impact on earnings caused by a greater proportion of income earned in higher tax jurisdictions in the current year.
Capital Resources, Cash Flow and Liquidity
The Company’s cash and cash equivalents balance ended the third quarter at $107.5 million, an increase of $9.8 million in the three-month period. Winpak continued to generate consistent cash flow from operating activities before changes in working capital of $30.0 million in the quarter, improving upon the comparable period in 2010 by $3.9 million. Cash was utilized to supplement working capital by $1.4 million, property, plant and equipment additions of $11.9 million, income tax payments of $4.4 million, dividends of $2.0 million, and employee benefit plan payments of $0.5 million.
For the first nine months of 2011, the Company added $17.1 million to its cash position. Cash flow from operating activities before changes in working capital of $88.8 million, improved by $6.7 million over the comparable period in 2010. Increases in working capital utilized $16.7 million in cash, with higher raw material costs and heightened sales volumes contributing to a rise in inventory of $12.0 million. Cash was also used for property, plant and equipment additions of $27.8 million, income tax payments of $16.5 million, dividends of $5.9 million, employee benefit plan payments of $3.0 million, and distributions to the non-controlling interests in a subsidiary of $1.8 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.
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.