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Winpak registered another blockbuster year! Net earnings of $52.6 million or 81 cents per share for 2010 surpassed the prior years record by 22.6 percent or 15 cents per share. This impressive performance was realized during a period of rising raw material costs, an unstable global economy and a less than desirable Canadian/US exchange rate. Strict adherence to the corporations mandate to control costs and enhance efficiencies, coupled with aggressive selling, all contributed to making 2010 the most profitable year in the Companys history. Barring any unforeseen major setbacks, this positive momentum will extend into 2011 and future years. Just as outstanding was Winpaks 2010 sales accomplishment of $579 million, which far exceeded the previous years figures by $73 million or 14.5 percent. Winpaks accelerated sales growth is due, in part, to the Companys ongoing commitment to invest in sizable capital projects. These initiatives have allowed the sales organization and its customers to benefit from the latest technology, as it relates to both new and existing products. However, the most pivotal component of Winpaks success story is the dynamic spirit and commitment of its people to propel the Company to greater heights. Even more exciting times are ahead for Winpak. The capital program for the next five years will be the Companys largest ever and will zero in on markets dependent upon Winpaks proprietary technology and, hence, capitalize on promoting items that yield higher margins. In the third quarter of 2010, a significant building expansion was completed at the Companys Georgia-based specialty films plant. This facility will house additional machinery necessary to keep pace with the pressing demand for the Companys barrier shrink bag product line. This added space and planned capital equipment will provide the capacity to more than triple the sales of this highly sought-after product. Along with its formidable growth rate, this proprietary item has created sales opportunities at major meat and cheese processing plants for other Winpak materials. New extrusion equipment is also slated for Winpaks Georgia operation in 2011 to respond to the attractive sales surge in liquid and other unique packaging applications. Winpaks modified atmosphere packaging materials repeatedly receive rave reviews in both the North and South American marketplace. To comply with the predicted rise in sales volume and to ensure the Company remains on the leading edge of technology, a major new production line is designated for the Companys Winnipeg location. Installation is scheduled to commence in the fourth quarter of 2011, with the new line up and running in 2012. As more and more food products require increasingly complex high-barrier packaging materials, the future promises to be extremely bright for Winpaks modified atmosphere packaging operations. In 2010, Winpak completed a substantial capital project at its Chicago, Illinois rigid packaging plant with the successful start-up of another new coextrusion sheet line. As the barrier properties of rigid packaging materials become more sophisticated, their burgeoning popularity as alternatives to glass and metal cans will yield rewarding growth opportunities for Winpak. Confirming this fact, Winpak sales of these products continue to exceed all expectations. Confident this trend will persist, Winpaks Board of Directors endorsed a capital project that will result in the construction of a new 260,000 square foot plant. New coextrusion sheet and thermoforming lines will be installed at this location, which is projected to be in operation by early 2012. The site selected has sufficient land to double the buildings size in order to manage anticipated future growth. Winpaks die-cut lids are manufactured in two geographic locations. During the last five-year period, the Quebec facility was expanded on two separate occasions, and in Illinois a new plant was erected in 2007. Winpaks continual success in growing sales of die-cut lids, coupled with the Companys track record in establishing itself in the pharmaceutical industry, has escalated the need for enlarged capacity and production space. Plans call for expansion at both locations, with consideration also being given to setting up a small converting operation outside the borders of Canada and the United States that will further benefit export sales. In addition to die-cut lids and pharmaceutical applications, Winpak is aggressively pursuing other geographic and product markets for its proprietary foil-based structures. The superior quality of the Companys biaxially-oriented nylon materials produced at its Winnipeg site, in collaboration with Winpaks business partner, Sojitz Corporation of Japan, is consistently out-performing the competition. It is predicted that the two primary production lines at this facility will be entirely sold out in 2011. The Companys technical team is spearheading a capital project that will boost outputs and thus provide the needed volume for the immediate future. As the global popularity of biaxially-oriented nylon films intensifies, it will cause demand to start to exceed supply, resulting in margins for this unique product to elevate. The Companys decision to stand its ground in 2009, refusing to match unrealistic low competitive pricing, has definitely proved to be the right tactic. Winpaks machinery operation continues to design and manufacture equipment geared to seize selling opportunities for the Companys flexible and rigid packaging materials. This system selling approach was significantly enhanced during the fourth quarter of 2010 when the president of this business unit assumed the additional responsibility of vice president of corporate development. It is foreseen that this new posting will further energize the promotion of cross-selling among the sales forces of all the business units. The Company has also heightened its efforts to generate machine sales through the establishment of a global network of distributors. These advancements should increasingly build new sales for both the Companys machinery and packaging materials. Winpak had a banner year in 2010! The Companys winning formula for growing sales and profits will be replicated and even greater endeavors will be made to outdistance this promising precedent. As outlined in this report, major capital expenditures are planned throughout the operation, as the Company strides to take advantage of the enormous opportunities that exist for packaging food and health-care products reliant on the type of proprietary and sophisticated packaging materials manufactured by Winpak. Moving forward, the Company will continue to seek out strategic acquisitions focusing on packaging operations servicing staple food and health-care end-use applications. Winpak is unwavering in its confidence, determination and ability to grow the business, both in sales and profitability.
REVIEW
2010 Operating results ($ million except e.p.s.) Sales Earnings from operations (EBIT) EBITDA (1) Net earnings Net earnings per share (cents) Investments and assets ($ million) Investments in property, plant and equipment Total assets Financial position Total debt to equity (2) Net return on opening equity Return on opening invested capital (3) 579.4 78.9 106.9 52.6 81 39.0 546.4 0.0% 14.1% 21.2%
2009 506.0 66.0 92.0 42.9 66 21.4 483.1 0.0% 13.8% 18.3%
2008 512.0 46.3 71.7 29.4 45 14.7 418.4 0.0% 9.1% 11.6%
2007 466.6 34.0 58.1 24.0 37 36.0 441.6 8.4% 8.8% 10.0%
2006 447.1 48.8 69.6 32.6 50 38.9 387.4 6.9% 13.3% 14.8%
$ US million 60 50 40 30 20 10 0
Net Earnings (4): Ten-year compound average growth rate ("CAGR") 11.3%
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2007
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2009
2010
(1) EBITDA (earnings before interest, tax, depreciation and amortization) is not a recognized measure under Canadian GAAP. Management believes that in addition to net earnings, EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of the Companys performance. The Companys method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. (2) Total debt is defined as long-term debt plus bank indebtedness less cash and cash equivalents. At December 26, 2010, December 27, 2009 and December 28, 2008, cash and cash equivalents exceeded long-term debt plus bank indebtedness. (3) Return on opening invested capital is defined as EBIT divided by invested capital, which is defined as the sum of total debt, minority interest, net future income tax liability, shareholders' equity, and accumulated goodwill amortization. (4) Net earnings in 2001 and 2000 have been restated for goodwill to conform to the current years presentation.
B.J. Berry President and Chief Executive Officer Winnipeg, Canada February 16, 2011
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General Information
The following discussion and analysis dated February 16, 2011 was prepared by management and should be read in conjunction with the consolidated financial statements prepared in accordance with Canadian GAAP. The following discussion and analysis is presented in US dollars except where otherwise noted. The consolidated financial statements include the accounts of all subsidiaries. All subsidiaries in the United States and American Biaxis Inc. operate with the US dollar as the functional currency, while the Company and all its Canadian subsidiaries, excluding American Biaxis Inc., operate with the Canadian dollar as the functional currency. The Company has filed a separate Managements Discussion and Analysis for its fourth quarter of 2010, which is available on SEDAR at www.sedar.com.
29.1%
30.0%
26.1%
546.4 90.5
483.1 61.2
418.4 2.8
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Gross profit margins in 2010 averaged 29.1 percent of sales compared to 30.0 percent of sales in 2009. Escalating raw material costs negatively impacted margins by over 2 percentage points in 2010 as the spread between those costs and selling prices narrowed. The Company has been only moderately successful in matching raw material cost increases with higher selling prices where formal indexing programs are not in place. On the other hand, improved manufacturing performance offset most of this margin decline, resulting in an overall negligible impact on net earnings per share for the year. Lower waste levels and enhanced productivity, in part due to higher sales volumes, helped lower manufacturing costs. As a result, the current year gross profit margin of 29.1 percent of sales compares very favorably to the 5-year average of 25.8 percent of sales experienced in the 2004 to 2008 timeframe. Winpaks raw material index, which represents the weighted cost of a basket of the Companys eight principal raw materials, escalated by 17.9 percent during 2010. This continued the pattern of increases seen in the six consecutive years prior to 2009, whereas in 2009 a depressed worldwide economy precipitated a drop in raw material prices. The Company has a natural hedge against rising raw material costs in that approximately 60 percent of the Companys sales are subject to formal selling price-indexing agreements, whereby selling prices are adjusted as raw material prices change, albeit with a time lag. The proportion of sales subject to indexing agreements has risen steadily over the past three years, from just over one-third to the current level. Raw Material Index 2010 Average annual index: weighted cost of a basket of Winpak's eight principal raw materials, where base year 2001 = 100 Increase (decrease) in index compared to prior year 153.8 17.9% 2009 130.4 (25.1%) 2008 174.1 12.5%
Organic growth is the impact on net earnings due exclusively to increased sales volume and excludes the influence of acquisitions, divestitures and foreign exchange. This was the main driver impacting improved earnings in 2010, adding 7.0 cents in net earnings per share in comparison to the prior year. Despite the significant progression in raw material costs in 2010, the Company was able to neutralize its negative effect on net earnings through improvements in manufacturing performance and the partial hedge provided by selling price-indexing agreements. The Company was able to limit the escalation in operating expenses in relation to sales volumes, resulting in an advancement in net earnings per share by approximately 4.5 cents. In addition, lower income taxes provided a further 1.5 cents in net earnings per share. The strengthening of the Canadian dollar against its US counterpart in 2010 had a detrimental impact on net earnings when applied to the Companys net Canadian dollar disbursements. However, this was more than offset by a much lower foreign translation exchange loss on net monetary items in 2010 versus the prior year, as well as realized gains from the maturing of foreign exchange contracts entered into as part of the Companys hedging strategy. The net result was a favorable impact on net earnings per share of 2.0 cents in relation to 2009.
Ongoing operations
In 2010, the Company was able to leverage its expenditure on operating expenses by limiting the increase in expenses to just 5.2 percent while sales volumes strengthened by 10.2 percent in relation to 2009. Firm cost control, particularly in selling, general and administrative expenses, resulted in net earnings per share growth of approximately 4.5 cents. The reduction in the corporate income tax rate in Canada, effective January 1, 2010, further complemented net earnings per share by 1.5 cents.
Expenses
Foreign exchange
Year-end exchange rate of CDN dollar to US dollar Year-end exchange rate of US dollar to CDN dollar
Sales
Sales Change 2010 Volume increase Price and mix gains (losses) Foreign exchange gain (loss) Total increase (decrease) in sales 51.5 12.6 9.4 73.5 Millions of US dollars 2009 24.8 (23.2) (7.6) (6.0) 2008 20.0 23.2 2.2 45.4
Appreciation (depreciation) of CDN dollar vs. US dollar year-end exchange rate compared to the prior year Average exchange rate of CDN dollar to US dollar Average exchange rate of US dollar to CDN dollar Appreciation (depreciation) of CDN dollar vs. US dollar average exchange rate compared to the prior year
Sales advanced by $73.5 million to $579.4 million, 14.5 percent greater than the prior year. Volumes were robust, up 10.2 percent or $51.5 million from 2009 levels. Biaxially-oriented nylon and specialty film sales had the largest volume improvement, advancing by approximately 20 to 25 percent, as the economic environment improved and new customers were added. Further, with regard to specialty film sales, the success of the barrier shrink bag product line propelled sales growth as new capacity was added during the year. Lidding, due to strong die-cut sales in coffee and yogurt markets, added nearly 11 percent in volumes while rigid containers and modified atmosphere packaging volumes rose in the high single-digit range. The lone exception to increasing volumes was packaging machinery sales which declined marginally by about 2 percent, although the order backlog going into 2011 for this product line is strong. Higher overall selling prices, primarily in response to increased raw material costs, bolstered sales by an additional 2.5 percent or $12.6 million in comparison to 2009, while a stronger Canadian dollar added 1.8 percent or $9.4 million to reported sales.
Most of the Companys business is conducted in the United States dollar and Winpak utilizes the US currency as its reporting currency. However, all of Winpaks Canadian subsidiaries, excluding American Biaxis Inc., operate with the Canadian dollar as the functional currency. Consequently, Winpak records foreign currency differences on transactions and translations. Approximately 16 percent of sales are denominated in Canadian dollars and approximately 28 percent of costs are incurred in the same currency. The net outflow of Canadian dollars exposes Winpak to transaction differences arising from exchange rate fluctuations. The change in the average exchange rate of the Canadian dollar in relation to the US dollar decreased net earnings by 4.0 cents per share in 2010 and increased net earnings by 2.5 cents per share in 2009, compared to the prior year in each case. In addition, Winpaks Canadian companies purchase raw materials in US dollars. The change in exchange rate between the date of purchase of raw materials and eventual sale of the completed inventories generates further transaction exchange differences. These transaction differences were particularly significant in 2009 but much less so in 2010. Winpak estimates that these transaction differences advanced net earnings in 2010 by 2.0 cents per share and reduced net earnings in 2009 by 10.0 cents per share. Translation differences arise when foreign currency monetary assets and liabilities are translated at exchange rates that change over time. The change in spot conversion rate of the Canadian dollar from year to year and the maturity of foreign exchange contracts increased net earnings in 2010 by 4.0 cents per share and 2009 by 2.5 cents per share, compared to the prior year in each case.
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Financing activities in 2010 consisted of dividends of $7.5 million and the preferred share redemption of a minority shareholder in a subsidiary of $2.0 million. The quarterly dividends were paid at the rate of 3.0 Canadian cents per share which, based on the December 26, 2010 closing share price of CDN $11.79, provides a dividend yield of 1.0 percent. Investments to drive growth can be sizeable, requiring substantial financial resources. A range of funding alternatives is available including cash and cash equivalents, cash flow provided by operations, additional debt, issuance of equity or a combination thereof. An informal investment grade credit rating allows the Company to enjoy relatively low interest rates on debt. The Company currently has operating lines of $38 million, which are believed adequate for liquidity purposes. None of the lines were utilized as at December 26, 2010. Based on formal and informal discussions with various financial institutions, Winpak is confident that additional credit can be arranged from banks and other major lenders as the need arises. The Company believes that all 2011 requirements for capital expenditures, working capital, and dividend payments can be financed from cash resources, cash provided by operating activities and unused credit facilities.
2009 Quarter ended March 29 June 28 September 27 December 27 Sales 119,938 125,322 125,267 135,464 505,991 Net earnings 9,661 11,896 9,889 11,445 42,891 e.p.s. 15 18 15 18 66
Resources
Various factors affect timing of the Companys earnings during the course of a year. Seasonal factors typically contribute to stronger sales and net earnings in the second and fourth quarters compared to the first and third quarters. Factors influencing seasonal trends are the higher demand for certain food products in advance of the summer season and the greater number of holidays in the fourth quarter. During the third quarter, sales and earnings are typically lower due to reduced order levels and plant maintenance shutdowns scheduled to coincide with the summer. Sudden and substantial changes in the rate of exchange between the US and Canadian dollars from one quarter to another may cause sales and net earnings to vary from the historic trend. Similarly, sudden and significant changes in the cost of raw materials consumed from one quarter to another can be expected to increase or decrease net earnings in a manner that does not conform to the normal pattern. Furthermore, unexpected adverse weather conditions could influence the supply and price of raw materials or customer order levels. Generally, the normal historical trends held true for both 2010 and 2009 with the second and fourth quarters recording the highest sales and profit levels. The one exception was that sales levels in the third quarter of 2010 were marginally greater than the second quarter of 2010 by less than $0.5 million or 0.3 percent.
Operating activities
Investing activities
Investing activities in 2010 amounted to $39.3 million, an increase of $17.5 million over 2009, and consisted of purchases of plant and equipment of $39.0 million and intangible assets of $0.3 million. The Company continues to subscribe to the philosophy of investing in plant and equipment to remain at the forefront of the latest and most advanced technology in order to retain its competitive advantage. Expansions of capacity in modified atmosphere packaging, lidding and rigid containers occurred with investments in extrusion, printing and die-cutting capabilities. Additional investment in 2010 included increasing shrink bag capacity due to the continued success of this product line in the marketplace. Over the long term, Winpaks expenditures for equipment enhancements in maintaining existing capacity have averaged approximately 2 percent of sales.
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Looking Forward
Following a strong finish to the year, the Company remains optimistic with regard to future prospects in 2011. Volume growth in 2010 exceeded 10 percent and although this high level of achievement may not be entirely sustainable going forward, demand should still increase in the mid to upper single-digit percentage range in 2011. Barring unforeseen events, gross profit margins for 2011 should remain within one or two percentage points of current levels, exceeding the five-year average. In the short-term, the escalation in raw material costs remains a concern as these have risen by nearly 25 percent in the last 18 months. Further raw material price escalations of approximately 7 percent have been implemented by suppliers in the first quarter of 2011 and additional increases of between 5 and 10 percent have been announced. Winpak is fortunate to be partially hedged with regard to these increases as approximately 60 percent of the Companys revenues are indexed to the cost of raw materials under customer agreements, albeit with a time lag. Using a longerterm outlook, the supply of natural gas, from which most of the Companys resins are derived, has been increasing due to recent discoveries and this should eventually have a stabilizing effect on raw material costs. Building on past successes and looking forward to future prospects, the Company has made the decision to embark on an aggressive internal capital investment program over the next five years. The program will focus on markets requiring more advanced technological requirements that tend to yield higher margins and have been the backbone of Winpaks past and current success. Capital expenditures for 2011 are expected to approximately double the levels spent in the current year. A new manufacturing plant is planned for the rigid packaging operations in addition to coextrusion sheet and thermoforming lines; a major extrusion line is slated for the Winnipeg location; a further building expansion and extrusion lines are proposed for the Georgia facility; and additional laminating, printing and die-cut capacity is projected for the lidding operations. All of this investment is expected to occur without incurring any debt and the Company remains dedicated to evaluating acquisition opportunities that would complement its core competencies in the areas of food and healthcare packaging. With Winpaks very solid financial position and access to additional financing sources, the Company has the ability to consummate an external transaction that would enhance long-term shareholder value while staying committed to the internal capital investment plan.
Disclosure controls
Other
Additional information relating to the Company is available on SEDAR at www.sedar.com, including the Annual Information Form dated February 16, 2011.
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REPORTING
Managements Report to the Shareholders
The accompanying consolidated financial statements, managements discussion and analysis (MD&A) and other information in the Annual Report are the responsibility of management. The financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these statements in accordance with Canadian generally accepted accounting principles. The MD&A and financial information contained in this Annual Report are consistent with the financial statements. To provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is being reported, management has developed and maintains a system of internal controls. An integral part of the system is the requirement that employees maintain the highest standard of ethics in their activities. Business reviews and internal audits are performed by corporate executives and an internal audit team to evaluate internal controls, systems and procedures. The Board of Directors, acting through the Audit Committee, is responsible for determining that management fulfills its responsibilities in the preparation of financial statements and MD&A, and in the financial control of operations. The Audit Committee recommends to the shareholders the appointment of the independent auditor. The Audit Committee meets regularly with financial management and the independent auditor to discuss internal controls, auditing matters and financial reporting issues and presents its findings to the Board. The Audit Committee reviews the consolidated financial statements, MD&A and material financial announcements with management and the external auditor prior to submission to the Board for approval. The consolidated financial statements have been audited on behalf of the shareholders by the independent external auditor, PricewaterhouseCoopers LLP, whose report follows.
REPORTING
B.J. Berry President and Chief Executive Officer Winnipeg, Canada February 16, 2011
K.P. Kuchma Vice President and Chief Financial Officer Winnipeg, Canada February 16, 2011
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2010 Sales Cost of sales Gross profit Operating expenses Selling, general and administrative (note 4) Research and technical Pre-production Earnings from operations Interest (income) expense (note 9) Earnings before income taxes and minority interest Provision for income taxes (note 10) Minority interest Net earnings Retained earnings, beginning of year Net earnings Dividends declared Retained earnings, end of year Basic and fully diluted earnings per share (cents) Average number of shares outstanding (000's) 579,441 410,869 168,572 75,954 13,478 237 78,903 (170) 79,073 24,794 1,709 52,570 285,973 52,570 (7,615) 330,928 81 65,000
2009 505,991 354,068 151,923 73,479 12,319 111 66,014 141 65,873 21,180 1,802 42,891 249,990 42,891 (6,908) 285,973 66 65,000
(thousands of US dollars)
2010 Assets Current assets: Cash and cash equivalents Accounts receivable (note 15) Income taxes receivable Inventory (note 5) Prepaid expenses Future income taxes (note 10) Property, plant and equipment (note 6) Other assets (note 7) Intangible assets (note 8) Goodwill (note 8) 90,488 77,747 1,234 76,765 2,284 3,472 251,990 257,208 15,633 4,007 17,590 546,428
2009
61,164 70,354 70,559 2,211 2,310 206,598 239,017 14,401 5,896 17,235 483,147
Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities Income taxes payable Deferred credits Future income taxes (note 10) Postretirement benefits (note 11) Minority interest 52,782 52,782 11,597 36,772 1,674 102,825 15,620 29,195 330,928 67,860 398,788 427,983 546,428 44,965 2,931 47,896 11,363 32,459 1,673 93,391 15,871 29,195 285,973 58,717 344,690 373,885 483,147
Other comprehensive income - net of income tax (note 13) Comprehensive income See accompanying notes to consolidated financial statements.
Director
Director
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General:
Winpak Ltd. is incorporated under the Canada Business Corporations Act. The Company manufactures and distributes high-quality packaging materials and related packaging machines. The Companys products are used primarily for the packaging of perishable foods, beverages and in health-care applications.
Cash provided by (used in): Operating activities: Net earnings Items not involving cash: Depreciation Amortization - intangible assets Defined benefit plan costs Future income taxes Foreign exchange loss on long-term debt Minority interest Other Cash flow from operating activities before the following Change in working capital: Accounts receivable Income taxes receivable Inventory Prepaid expenses Accounts payable and accrued liabilities Income taxes payable Defined benefit plan payments Investing activities: Acquisition of plant and equipment Acquisition of intangible assets Financing activities: Repayments of long-term debt Dividends paid Change in minority shareholdings in subsidiary 52,570 25,858 2,177 3,417 2,632 1,709 569 88,932 (7,017) (1,234) (4,483) (25) 7,529 (2,921) (4,750) 76,031 (39,017) (252) (39,269) (7,539) (1,960) (9,499) 2,061 29,324 61,164 90,488 42,891 23,598 2,398 3,382 1,963 559 1,802 142 76,735 (1,492) 2,594 95 10,630 642 (5,310) 83,894 (21,354) (444) (21,798) (17,000) (6,664) (23,664) 2,936 41,368 19,796 61,164
1. Basis of presentation:
The consolidated financial statements are expressed in US dollars and prepared in accordance with Canadian generally accepted accounting principles (GAAP). The fiscal year of the Company ends on the last Sunday of the calendar year. As a result, the Companys fiscal year is usually 52 weeks in duration, but includes a 53rd week every five to six years. The 2010 and 2009 fiscal years comprised 52 weeks.
Foreign exchange translation adjustment on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense Income tax expense See accompanying notes to consolidated financial statements.
Property, plant and equipment are reviewed for impairment when certain events or changes in circumstances indicate that the net carrying value may not be recoverable, based upon undiscounted future net cash flows directly associated with the use and possible disposal of the asset. The amount of the impairment, if any, is measured by deducting the fair value of the asset from its net carrying value and is charged to depreciation expense. (f) Pre-production costs: Pre-production costs relating to installations of major new equipment are expensed in the period in which incurred.
10 23,377
70 16,271
(g) Goodwill: The excess acquisition cost over the underlying value of the net assets, including intangible assets, at the date of acquisition is recorded as goodwill. Goodwill is subject to annual impairment tests and written down from carrying value to fair value if a decline in value is considered to have occurred based upon expected discounted cash flows of the respective reporting unit.
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The carrying values of intangible assets are tested for impairment when events or circumstances indicate that carrying amounts may not be recoverable. When such a situation occurs, the expected undiscounted cash flows over the remaining useful lives of the assets are compared to their carrying values. Intangible assets will be written down to their fair values by a charge to amortization expense if declines in carrying values are identified. (i) Research and technical costs: Research and technical costs are expensed in the period in which the costs are incurred. Related tax credits are recorded to reduce these costs when it is determined there is reasonable assurance the tax claims will be realized. Deferred credits: Investment tax credits for plant and equipment are amortized on a straight-line basis over the estimated useful life of the related asset.
(j)
(k) Employee benefit plans: The Company maintains five funded non-contributory defined benefit pension plans in Canada and the US and one funded noncontributory supplementary income postretirement plan for certain CDN-based executives. A market discount rate is used to measure the benefit obligations. The expected return on pension plan assets is calculated on the fair value of the assets as of the year-end reporting date. The cost of these non-contributory defined benefit pension plans is actuarially determined using the projected benefits method prorated on years of employee service, final average salary levels during specified years of employment, retirement ages of employees and other actuarial factors, together with the expected rate of return on pension plan assets. Current service costs, interest costs on the benefit obligation, curtailment and settlement costs are charged to earnings as they accrue. Past service costs, plan amendments, changes in assumptions, the net transitional asset amount and the cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of plan assets are amortized to earnings on a straight-line basis over the expected average remaining service lives (9-15 years) of active plan members. The Companys funding policy is in compliance with statutory regulations and the amounts funded are deductible for income tax purposes. One of the Companys subsidiaries maintains one unfunded contributory defined benefit postretirement plan for health-care benefits for a limited group of US individuals. A market discount rate is used to measure the benefit obligation. The cost of the plan is actuarially determined using the per capita claims cost method. Current service costs and interest costs on the benefit obligation are charged to earnings as they accrue. Past service costs, plan amendments, changes in assumptions and the cumulative unrecognized net actuarial gains and losses are amortized to earnings on a straight-line basis over the expected average future lifetime (10 years) of the retirees. The Company participates in one multiemployer defined benefit pension plan providing benefits to certain unionized employees in the US. The administration of the plan and investment of its assets are controlled by a board of independent trustees. The Companys responsibility to make contributions is the amount established pursuant to its collective agreement; however poor performance of the investments in this plan could have an adverse impact on the Company, its employees and former employees who are members of this plan. This multiemployer defined benefit pension plan is accounted for using the accounting standards for defined contribution plans as there is insufficient information to apply defined benefit pension plan accounting. Accordingly, the Companys pension expense is the annual funding contribution and the Company does not recognize its share of a plan surplus or deficit. The Company maintains seven defined contribution pension plans in Canada and the US. The pension expense for these plans is the annual funding contribution by the Company. (l) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are recognized for the future differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply when the asset is realized or the liability is settled. The effect of changes in income tax rates is recognized in the period in which the rate change is considered substantively enacted. When necessary, a valuation allowance is recorded to reduce future income tax assets to an amount that is more likely than not to be realized.
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Goodwill: As at December 26, 2010 and December 27, 2009, the Company performed impairment tests on remaining goodwill balances and concluded that no provision for impairment was required. The difference in the carrying value of goodwill year-over-year relates to the change in foreign exchange rates.
Foreign exchange translation losses represent the realized and unrealized foreign exchange differences recognized upon translation of monetary assets and liabilities. The amounts include realized foreign exchange (gains) losses on cash flow hedges arising from transfers of these amounts from other comprehensive income to net earnings.
9. Long-term debt:
The Company currently does not have a committed term loan facility in place. The Company has uncommitted, unsecured operating lines of credit totaling US $38,000. Interest is comprised of the following: Interest expense on long-term debt Interest expense on bank indebtedness and other Interest income on cash and cash equivalents 2010 12 (182) (170) 2009 24 180 (63) 141
5. Inventory:
2010 Raw materials Work-in-process Finished goods Spare parts 24,296 12,346 35,991 4,132 76,765 2009 23,759 9,697 33,492 3,611 70,559
During 2010, the Company recorded write-downs for slow-moving and obsolete inventory of $6,539 (2009 $4,937) and reversals of previously written-down items that were sold to customers of $1,366 (2009 $811).
7. Other assets:
2010 Defined benefit pension plans (note 11) Other postretirement benefits (note 11) Income tax credits recoverable 14,273 1,219 141 15,633 2009 11,686 1,916 799 14,401
Future income tax assets: Reserves and accrued liabilities Future income tax liabilities: Buildings, equipment and packaging machines Accrued pension asset Postretirement benefits Intangible assets and goodwill
A subsidiary has income tax credits recoverable which are available to reduce provincial income taxes payable in the future. These income tax credits expire if not utilized by 2016, 2017, 2019 and 2020 in the amounts of $29, $108, $2 and $2 respectively.
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2,286 3,030 (4,458) 614 1,472 1,186 (614) (208) 69 673 1,106 2,578
1,952 2,637 (6,188) 5,343 3,744 3,786 (5,343) (187) 66 741 (937) 2,807
251 515 (202) (955) (391) 955 276 (1) 1,230 839
144 445 (331) 1,211 1,469 135 (1,211) 248 (66) (894) 575
46,976 4,458 4,651 (1,459) 1,510 56,136 (4,780) 3,633 (1,147) (324) 413 15,331 14,273
32,964 6,188 5,245 (1,519) 4,098 46,976 (6,412) 1,939 (4,473) (516) 459 16,216 11,686
6,428 202 99 (216) 262 6,775 (1,940) 229 (1,711) 1,220 36 (455)
5,369 331 65 (173) 836 6,428 (2,185) (2,185) 1,450 978 243
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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 contracts, designated as cash flow hedges, have been determined by valuing those contracts to market against prevailing forward foreign exchange rates as at the year-end 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 December 26, 2010: Financial Assets Level 1 Level 2 629 Level 3 Total 629
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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 percent 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 Companys 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 balances against credit losses.
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 $90.5 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 Companys ability to generate positive cash flows from ongoing operations. Management believes that the Companys cash flows are more than sufficient to cover its operating costs, working capital requirements, capital expenditures and dividend payments in 2011. The Companys accounts payable and accrued liabilities are virtually all due within six months.
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20. Contingencies:
In the normal course of business activities, the Company may be subject to various legal actions. Management contests these actions and believes resolution of the actions will not have a material adverse impact on the Companys financial condition.
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CORPORATE INFORMATION
PACKAGING SOLUTIONS
The Annual Meeting of Shareholders will be held on Thursday, April 28, 2011 at 4:30 p.m. at The Fort Garry Hotel, Winnipeg, Canada Winpak Ltd. shares are listed WPK on the Toronto Stock Exchange Computershare Investor Services Inc. The most recent version of the Annual Information Form for Winpak Ltd. is available by contacting Winpaks Corporate Office 100 Saulteaux Crescent, Winnipeg, Canada R3J 3T3 info@winpak.com
Annual Meeting
Listing
Transfer Agent
Chairman, A. Aarnio-Wihuri (2), Helsinki, Finland; Chairman, Wihuri Oy J.M. Hellgren, Helsinki, Finland; President and Chief Executive Officer, Wihuri Oy T.P. Fagernas (2), Helsinki, Finland J.R. Lavery (2), Winnipeg, Canada D.R.W. Chatterley (1), Winnipeg, Canada J.S. Pollard (1), Winnipeg, Canada; Co-Chief Executive Officer, Pollard Banknote Limited I.T. Suominen (1), Helsinki, Finland; Vice President and Chief Financial Officer, Wihuri Oy
(1) (2) Member of the Audit Committee Member of the Compensation, Governance and Nominating Committee
Board of Directors
Executive Committee
The Executive Committee, in consultation with the Board of Directors, establishes the objectives and the long-term direction of the Company. The Committee meets regularly throughout the year to review progress towards achievement of the Company's goals and to implement policies and procedures directed at optimizing performance. B.J. Berry, President and Chief Executive Officer, Winpak Ltd. K.M. Byers, President, Winpak Films Inc. D.A. Johns, President, Winpak Division, a division of Winpak Ltd. T.L. Johnson, President, Winpak Heat Seal Packaging K.P. Kuchma, Vice President and Chief Financial Officer, Winpak Ltd. J.R. McMacken, President, Winpak Portion Packaging N.L. Rozek, Vice President, Technology, Winpak Ltd. D.J. Stacey, President, Winpak Lane, Inc. and Vice President, Corporate Development, Winpak Ltd.
Auditor
Legal Counsel
Thompson Dorfman Sweatman LLP, Winnipeg, Canada Jones Day, Atlanta, U.S.A.
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