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CCL Reports Record Third Quarter Results and Declares Dividend
TORONTO, Nov. 8 /CNW/ -
November 8, 2007
Dear Shareholder:
Please find enclosed your Third Quarter 2007 shareholder report for CCL
Industries Inc. This package provides detailed information about your
Company's recent business activities and its financial performance.
Your Board of Directors continues to be pleased with the strong financial
performance of your Company and today approved its quarterly dividend payable
on January 2, 2008. This dividend is supported by the strong cash flow and
earnings growth of your Company and is maintained at the current level after
having increased 9% earlier this year. This dividend is a continuation of
CCL's record of paying consecutive quarterly dividends for over 25 years
without a reduction. The dividend is $0.12 per Class B non-voting share and
$0.1075 per Class A voting share.
For over three years, CCL has been a 40% partner in the European ColepCCL
business. The joint venture was formed in 2004 with CCL contributing its
European custom manufacturing business. With the sale of CCL's North American
custom manufacturing business in 2005, the joint venture became a
non-strategic asset of CCL. In early October, we agreed to sell our share of
the joint venture to the majority owner. Although we have created significant
shareholder value by our involvement in ColepCCL, the sale was in line with
our strategy to be a focused specialty packaging company. The proceeds will be
invested in the Company's core businesses over time by way of capital spending
for organic growth and for accretive acquisitions. CCL is now truly a
pure-play global specialty packaging company and we believe that this will set
the framework for continued growth in shareholder value going forward.
Conference calls with our stakeholders are held following the release of
our quarterly results. Presentation materials used during the conference calls
and at our annual Investors' Day are posted on our website along with audio
recordings of the meetings. In addition, presentation materials used in
meetings with investors throughout the year are also posted on our website.
Instructions for accessing these services are set out at the end of this
earnings release.
We encourage all shareholders to access our website www.cclind.com on a
regular basis for investor and company news including scheduled dates for
future earnings releases. If you would like to have future Press Releases
e-mailed to you at the time they are issued, please complete the Information
Request Form under the "Investors" tab ("Contact Us" icon) on our website or
write to us at CCL to the attention of Christene Duncan.
Yours truly,
Jon K. Grant
Chairman of the Board
Investor Update
---------------
1. Press Release - Third Quarter 2007 Results and Dividend Declaration
2. Consolidated Financial Statements and Notes to the Financial
Statements
3. Third Quarter 2007 Management's Discussion and Analysis
4. Press Release - Sale of 40% interest in ColepCCL - October 4, 2007
Stock Symbol: TSX - CCL.A and CCL.B
CCL Reports Record Third Quarter Results and Declares Dividend
--------------------------------------------------------------
Results Summary
---------------
For Periods Ended September 30th
------------------------------------------------------------
Three Months Nine Months
------------------------------------------------------------
(in millions
of Cdn
dollars,
except per
share data) 2007 2006 % Change 2007 2006 % Change
---- ---- -------- ---- ---- --------
Sales $ 331.9 $ 293.5 13.1 $1,062.2 $ 903.3 17.6
----- ----- ------- -----
----- ----- ------- -----
Restructuring
and other
items - net
gain (loss) 1.2 (3.7) 0.9 (4.3)
----- ----- ------- -----
----- ----- ------- -----
Net earnings $ 23.8 $ 13.6 75.0 $ 82.6 $ 52.3 57.9
----- ----- ------- -----
----- ----- ------- -----
Per Class B shares
Net
earnings $ 0.74 $ 0.43 72.1 $ 2.56 $ 1.63 57.1
----- ----- ------- -----
----- ----- ------- -----
Diluted
earnings $ 0.71 $ 0.41 73.2 $ 2.47 $ 1.58 56.3
----- ----- ------- -----
----- ----- ------- -----
Restructuring
and other
items and
favourable
tax adjustments
included in
net earnings
- net gain
(loss) $ 0.12 $ (0.10) $ 0.28 $ (0.16)
----- ----- ------- ------
----- ----- ------- ------
Number of
outstanding
shares (in 000s)
Weighted
average
for the
period 32,250 32,229 0.1
Actual at
period end 32,786 32,594 0.6
Toronto, November 8, 2007 - CCL Industries Inc., a world leader in the
development of labelling solutions and specialty packaging for the consumer
products and healthcare industries, announced today its financial results for
the third quarter ended September 30, 2007 and the declaration of its
quarterly dividend.
Sales for the third quarter of 2007 of $331.9 million were 13% ahead of
the $293.5 million generated in the third quarter of 2006, while sales for the
first nine months of 2007 of $1,062.2 million were 18% higher than last year's
$903.3 million. Financial comparisons to the prior year's results in the third
quarter have been negatively affected by the significant appreciation of the
Canadian dollar relative to the U.S. dollar and to a lesser degree, most other
currencies. Sales increased for the quarter by 15% due to organic growth and
an acquisition offset in part by foreign exchange and a disposition of 2%. On
a comparative basis with last year's third quarter, sales increased
significantly in the Label Division and ColepCCL, but were down slightly in
the Container Division due to currency translation, and were also down
significantly in the Tube Division partly due to currency translation.
Year-to-date, sales increased by 16% as a result of organic growth and
acquisitions, while foreign exchange net of dispositions added a further 2%.
For the quarter and year-to-date periods, overall sales growth was split
equally between organic growth and acquisitions.
Net earnings for the third quarter of 2007 were $23.8 million, up 75%
from the $13.6 million recorded in the third quarter of 2006. This improvement
was due primarily to the substantial sales and operating income increases in
the business, the favourable impact of tax adjustments, and a recovery of
restructuring costs in 2007 and restructuring and other items incurred in
2006. Divisional operating income improved by $5.7 million or 19% from last
year's third quarter due to substantially stronger performances in the Label
and Container Divisions, partially offset by reduced income from the ColepCCL
joint venture and a modest loss in the Tube Division. In the third quarter of
2007, favourable tax adjustments of $2.9 million resulted in a decrease in
income tax expense. Additionally, the Container Division had a positive net
recovery of restructuring and other costs of $1.2 million before tax
($0.8 million after tax). In the third quarter of 2006, restructuring and
other costs and a favourable tax adjustment of $3.7 million before tax
($3.2 million after tax) were incurred.
For the first nine months of 2007, net earnings were $82.6 million, up
58% from $52.3 million in the comparable 2006 period. Net earnings for the
first nine months of 2007 were affected by a net recovery of restructuring and
other costs of $0.2 million and a gain on the sale of a property of
$0.7 million for a net gain of $0.9 million before tax (net gain of
$1.0 million after tax). Including the positive effect of favourable tax
adjustments of $7.9 million, net earnings increased by $8.9 million due to the
foregoing items.
Earnings per Class B share were $0.74 in the third quarter of 2007
compared to $0.43 earned in the same period last year, an increase of 72%.
Favourable tax adjustments in the third quarter of 2007 had a positive effect
on earnings per share of $0.09 and a recovery of restructuring and other items
increased earnings per share by a further $0.03. Consequently, restructuring
and other items and favourable tax adjustments in the third quarter of 2007
increased earnings per share by $0.12. In the third quarter of 2006,
restructuring and other items reduced earnings per share by $0.10. Diluted
earnings per Class B share were $0.71 in the third quarter of 2007 and $0.41
in the same period last year, a 73% increase.
For the first nine months of 2007, earnings per Class B share were $2.56
compared to $1.63 in the prior year period, a 57% increase. A gain on the sale
of a property, favourable tax adjustments, and a net recovery of restructuring
and other items increased earnings per Class B share by $0.28 for the first
nine months of 2007 versus a $0.16 reduction in the first nine months of 2006.
Diluted earnings per Class B share were $2.47 for year-to-date 2007 and $1.58
in the comparable 2006 period.
Donald G. Lang, Vice Chairman and Chief Executive Officer commented, "We
are pleased to report that we have another record quarterly earnings
performance in CCL's third quarter. Our third quarter earnings per share were
72% ahead of the third quarter last year and, excluding restructuring and
other items and favourable tax benefits, were a very satisfying 17% ahead of
last year's comparable period. We have continued to enjoy good sales growth
along with our global customers in most of the world. With the pending sale of
our interest in the ColepCCL joint venture scheduled for late November, we are
looking forward to the opportunity of putting the proceeds from this
disposition to work by further expansion of our international label franchise.
We have now achieved our long-term strategic goal of becoming a focused
specialty packaging company with no other peripheral businesses."
Mr. Lang continued, "The Label Division continues to reflect strong
global market conditions with good overall growth in sales and increased
profitability. Rapid international sales growth has resulted, in part, from
the beer industry conversion from paper labels to our clear film pressure
sensitive labels including our patented system for returnable bottles. Our
recently acquired shrink and stretch sleeve business purchased from Illinois
Tool Works in January of this year has generated sales and income at levels
well above our expectations. The Container Division has also seen a modest
increase in sales before currency translation and substantially improved
profitability relative to the last half of 2006, as it has improved its
margins as it manages higher aluminum commodity costs. The Tube Division has
experienced very sluggish volume and operated at a small loss due to softer
high-end personal care markets and reduced consumer spending in the United
States. However, recent order intake has been much improved. The ColepCCL
joint venture continues to enjoy strong sales growth but reduced operating
income due to inefficiencies, including outsourcing to satisfy the higher
volume and unfavourable product mix."
Mr. Lang stated, "Our strategy to become a world-class global specialty
packaging company is now complete. Although our focus is narrower, it allows
us to totally concentrate on the specific businesses that will add long-term
shareholder value. Our finances are in excellent shape with the net debt to
total capitalization ratio at 38%, well below our target level of 45%.
Proceeds from the ColepCCL disposition, the $76 million of cash on hand and
additional financial leverage available put us in a good position to
aggressively grow both organically and through accretive acquisition
opportunities that meet our valuation criteria to enhance our global
businesses."
Mr. Lang concluded, "Although we face the current challenges of the
slowing U.S. economy and the strong Canadian dollar, we remain optimistic
about the balance of 2007 and our outlook for 2008. Cash flow and earnings
growth continue to support our dividend policy. As a result, your Board of
Directors has declared a dividend at the same level as the higher dividend
declared earlier this year. The quarterly dividend is $0.12 on Class B
non-voting shares and $0.1075 on Class A voting shares to shareholders of
record at the close of business on December 12, 2007 payable on January 2,
2008. CCL continues its record of paying quarterly dividends without reduction
or omission for over 25 years."
CCL Industries Inc. manufactures pressure sensitive, shrink sleeve and
in-mould labels, aluminum containers and plastic tubes for leading global
companies in the home and personal care, healthcare and specialty food and
beverage sectors. With headquarters in Toronto, Canada, CCL Industries employs
approximately 5,000 people and operates 49 production facilities in North
America, Europe, Latin America and Asia.
Statements contained in this Press Release, other than statements of
historical facts, are forward-looking statements subject to a number of
uncertainties that could cause actual events or results to differ materially
from some statements made.
Note: CCL will hold a conference call at 10:00 a.m. EST on Friday,
November 9, 2007 to discuss these results.
To access this call, please dial Toll-Free North America -
1-800-734-1246 or Domestic and International - 416-641-6452.
Post-View service will be available from Friday, November 9, 2007
at 12:00 p.m. EST until Sunday, December 9, 2007 at 11:59 p.m. EST
Dial: Toll-Free North America - 1-800-558-5253
Domestic and International - 416-626-4100
- Access Code: 21350980
For more details on CCL, visit our website - www.cclind.com
CCL INDUSTRIES INC.
2007 Third Quarter
Consolidated Statements of Earnings and Retained Earnings
Unaudited Three months ended Nine months ended
September 30th September 30th
-------------------------------------------------------------------------
(in millions of
Cdn dollars,
except per
share data) 2007 2006 % Change 2007 2006 % Change
--------- --------- --------- --------- --------- ---------
Sales $ 331.9 $ 293.5 13.1 $1,062.2 $ 903.3 17.6
-----------------------------------------------------------
Income before
undernoted
items 53.9 46.6 15.7 184.4 151.3 21.9
Depreciation
and
amortization 21.1 18.1 63.4 54.7
Interest
expense, net 6.2 5.3 19.3 16.2
-----------------------------------------------------------
26.6 23.2 14.7 101.7 80.4 26.5
Restructuring
and other items
- net gain
(loss) (note 5) 1.2 (3.7) 0.9 (4.3)
-----------------------------------------------------------
Earnings before
income taxes 27.8 19.5 42.6 102.6 76.1 34.8
Income taxes 4.0 5.9 20.0 23.8
-----------------------------------------------------------
Net earnings 23.8 13.6 75.0 82.6 52.3 57.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained
earnings,
beginning of
period as
reported 524.7 445.0 476.6 413.0
Transition
adjustment on
adoption of
financial
instruments
standards,
net of tax
(note 1) - - (3.0) -
-----------------------------------------------------------
Retained
earnings,
beginning of
period as
restated 524.7 445.0 473.6 413.0
Net earnings 23.8 13.6 82.6 52.3
-----------------------------------------------------------
548.5 458.6 556.2 465.3
Less dividends:
Class A
shares 0.3 0.3 0.8 0.7
Class B
shares 3.6 3.3 10.8 9.6
-----------------------------------------------------------
3.9 3.6 11.6 10.3
-----------------------------------------------------------
Retained earnings,
end of
period $ 544.6 $ 455.0 $ 544.6 $ 455.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Class B $ 0.74 $ 0.43 72.1 $ 2.56 $ 1.63 57.1
Class A $ 0.73 $ 0.42 $ 2.52 $ 1.59
-------------------------------------------------------------------------
Diluted earnings per share
Class B $ 0.71 $ 0.41 73.2 $ 2.47 $ 1.58 56.3
Class A $ 0.70 $ 0.40 $ 2.43 $ 1.54
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
2007 Third Quarter
Consolidated Statements of Comprehensive Income
Unaudited Three months ended Nine months ended
September 30th September 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2007 2006
-------- -------- -------- --------
Net earnings 23.8 13.6 82.6 52.3
-----------------------------------
Other comprehensive income, net of tax:
Unrealized losses on translation of
financial statements of
self-sustaining foreign
operations (35.9) (1.2) (95.2) (9.1)
Gains on hedges of net investment
in self-sustaining
foreign operations,
net of tax of $6.6 million 14.8 9.1 40.1 6.9
-----------------------------------
Unrealized foreign currency
translation, net of hedging
activites (21.1) 7.9 (55.1) (2.2)
-----------------------------------
Losses on derivatives designated as
cash flow hedges, net of tax (3.1) - (7.1) -
Losses on derivatives designated as
cash flow hedges in prior periods
transferred to net earnings in the
current period, net of tax of
$0.5 million 3.0 - 6.4 -
-----------------------------------
Change in losses on derivatives
designated as cash flow hedges (0.1) - (0.7) -
-----------------------------------
Other comprehensive income (loss) (21.2) 7.9 (55.8) (2.2)
-----------------------------------
Comprehensive income (note 1) $ 2.6 $ 21.5 $ 26.8 $ 50.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
2007 Third Quarter
Consolidated Balance Sheets
Unaudited September December September
30th 31st 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2006
---------- --------- ---------
Assets
Current assets
Cash and cash equivalents $ 75.8 $ 125.0 $ 102.7
Accounts receivable - trade 195.0 178.8 175.8
Other receivables and prepaid
expenses (note 1) 27.6 23.1 20.2
Inventories 95.9 98.0 98.2
-----------------------------
394.3 424.9 396.9
Property, plant and equipment 651.9 628.0 562.3
Other assets 27.5 28.9 26.4
Future income tax assets 33.6 32.3 31.1
Intangible assets 34.8 39.5 39.8
Goodwill 416.6 389.0 388.8
-------------------------------------------------------------------------
Total assets $1,558.7 $1,542.6 $1,445.3
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank advances $ 10.9 $ 12.4 $ 9.5
Accounts payable and accrued
liabilities (note 1) 248.5 280.8 219.5
Income and other taxes payable 9.7 13.7 27.1
Current portion of long-term debt 15.5 16.1 17.0
-----------------------------
284.6 323.0 273.1
Long-term debt (note 1) 454.3 413.6 400.2
Other long-term items 48.4 52.3 51.7
Future income taxes 102.4 101.1 111.7
-------------------------------------------------------------------------
Total liabilities 889.7 890.0 836.7
-------------------------------------------------------------------------
Shareholders' equity
Share capital 200.2 197.5 197.3
Executive share purchase plan loans (1.3) (1.6) (1.6)
Shares Held in Trust (10.1) (5.6) (5.6)
-----------------------------
Share capital (note 2) 188.8 190.3 190.1
Contributed surplus 7.1 4.2 3.7
Retained earnings 544.6 476.6 455.0
Accumulated other comprehensive
loss (notes 1 & 4) (71.5) (18.5) (40.2)
-----------------------------
473.1 458.1 414.8
-------------------------------------------------------------------------
Total shareholders' equity 669.0 652.6 608.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,558.7 $1,542.6 $1,445.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
Certain 2006 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
Nine months ended September 30th
Consolidated Statements of Shareholders' Equity
Unaudited September September
30th 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006
--------- ---------
--------------------
Total shareholders' equity, beginning of period $ 652.6 $ 565.8
--------------------
--------------------
Share capital (note 2)
Class A shares, beginning of period 4.5 4.6
Conversion of class A to class B - (0.1)
--------------------
Class A shares, end of period 4.5 4.5
Class B shares, beginning of period Class B shares 193.0 191.5
Stock options exercised, class B 2.7 1.2
Conversion of class A to class B - 0.1
--------------------
Class B shares, end of period 195.7 192.8
Executive share purchase plan loans,
beginning of period (1.6) (1.8)
Repayment of executive share purchase plan loans 0.3 0.2
--------------------
Executive share purchase plan loans, end of period (1.3) (1.6)
Shares held in trust, beginning of period (5.6) (5.6)
Shares purchased and held in trust (4.5) -
--------------------
Shares held in trust, end of period (10.1) (5.6)
-------------------------------------------------------------------------
Share capital, end of period 188.8 190.1
-------------------------------------------------------------------------
Contributed surplus
Contributed surplus, beginning of period 4.2 2.0
Stock option expense 0.7 0.5
Stock based compensation plan 2.2 1.3
-------------------------------------------------------------------------
Contributed surplus, end of period 7.1 3.7
-------------------------------------------------------------------------
Retained earnings, beginning of period 476.6 413.0
Transition adjustment on adoption of new
accounting standards (3.0) -
Net earnings 82.6 52.3
Dividends
Class A 0.8 0.7
Class B 10.8 9.6
--------------------
Total dividends, end of period 11.6 10.3
-------------------------------------------------------------------------
Retained earnings, end of period 544.6 455.0
-------------------------------------------------------------------------
Accumulated other comprehensive loss (note 4)
Accumulated other comprehensive loss,
beginning of period (18.5) (38.0)
Transition adjustment on adoption of new
accounting standards 2.7 -
Other comprehensive loss (55.8) (2.2)
-------------------------------------------------------------------------
Accumulated other comprehensive loss, end of period (71.5) (40.2)
-------------------------------------------------------------------------
--------------------
Total shareholders' equity, end of period $ 669.0 $ 608.6
--------------------
--------------------
CCL INDUSTRIES INC.
2007 Third Quarter
Consolidated Statements of Cash Flows
Unaudited Three months ended Nine months ended
September 30th September 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2007 2006
--------- -------- -------- --------
Cash provided by (used for)
Operating activities
Net earnings $ 23.8 $ 13.6 $ 82.6 $ 52.3
Items not requiring cash:
Depreciation and amortization 21.1 18.1 63.4 54.7
Stock-based compensation 0.8 0.6 2.9 1.7
Future income taxes (1.9) 0.3 (3.3) 0.6
Restructuring and other items,
net of tax (note 5) - 3.6 (0.2) 6.6
-------------------------------------------------------------------------
43.8 36.2 145.4 115.9
Net change in non-cash working capital 10.3 (4.0) (31.0) (34.6)
-------------------------------------------------------------------------
Cash provided by operating activities 54.1 32.2 114.4 81.3
-------------------------------------------------------------------------
Financing activities
Proceeds on issuance of long-term debt 1.5 0.1 105.6 202.4
Retirement of long-term debt (13.8) (24.4) (17.1) (170.9)
Decrease in bank advances 0.4 5.7 (9.5) 0.5
Issue of shares 1.0 0.2 2.7 1.1
Purchase of shares held
in trust (note 2) - - (4.5) -
Dividends (3.9) (3.6) (11.6) (10.3)
-------------------------------------------------------------------------
Cash provided by (used for)
financing activities (14.8) (22.0) 65.6 22.8
-------------------------------------------------------------------------
Investing activities
Additions to property, plant
and equipment (43.2) (27.8) (113.4) (95.4)
Proceeds on disposal of property,
plant and equipment 0.7 10.7 5.3 12.2
Proceeds on business
dispositions (note 5) - - - 24.4
Business acquisitions (note 3) - - (105.6) (62.2)
Other (4.4) (2.5) (5.5) 1.4
-------------------------------------------------------------------------
Cash used for investing activities (46.9) (19.6) (219.2) (119.6)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash (3.5) 0.4 (10.0) (2.0)
-------------------------------------------------------------------------
Increase (decrease) in cash (11.1) (9.0) (49.2) (17.5)
Cash and cash equivalents at
beginning of period 86.9 111.7 125.0 120.2
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 75.8 $ 102.7 $ 75.8 $ 102.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents are defined as cash and short-term investments.
See notes to interim consolidated financial statements.
Certain 2006 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Periods ended September 30, 2007 and 2006
(Tabular amounts in millions of Cdn dollars except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Changes in accounting policies
The disclosures contained in these unaudited interim consolidated
financial statements do not include all of the requirements of
generally accepted accounting principles for annual financial
statements. The unaudited interim consolidated financial statements
should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2006.
The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in the
annual consolidated statements, except that: starting January 1, 2007,
the Company adopted the new Canadian Institute of Chartered
Accountants ("CICA") Handbook Sections 1530, "Comprehensive Income";
Section 3251, "Equity"; Section 3861, "Financial Instruments -
Disclosure and Presentation"; Section 3865, "Hedges" and Section 3855,
"Financial Instruments - Recognition and Measurement".
Section 1530 establishes standards for reporting and presenting
comprehensive income, which is defined as the change in equity from
transactions and other events from non-owner sources. Other
comprehensive income refers to items recognized in comprehensive
income that are excluded from net income calculated in accordance with
generally accepted accounting principles.
Section 3861 establishes standards for presentation of financial
instruments and non-financial derivatives, and identifies the
information that should be disclosed about them. Under the new
standards, policies followed for periods prior to the effective date
are generally not reversed, therefore, the comparative figures have
not been restated except for the requirement to restate currency
translation adjustment as part of other comprehensive income.
Section 3865 describes when and how hedge accounting can be applied as
well as the disclosure requirements. Hedge accounting enables the
recording of gains, losses, revenues and expenses from derivative
financial instruments in the same period as for those related to the
hedged item.
Section 3855 prescribes when a financial asset, financial liability or
non-financial derivative is to be recognized on the balance sheet and
at what amount, requiring fair value or cost-based measures under
different circumstances. Under Section 3855, financial instruments
must be classified into one of these five categories: held-for-
trading, held-to-maturity, loans and receivables, available-for-sale
financial assets or other financial liabilities. All financial
instruments, including derivatives, are measured on the balance sheet
at fair value except for loans and receivables, held-to-maturity
investments and other financial liabilities, which are measured at
amortized cost. Subsequent measurement and changes in fair value will
depend on their initial classification, as follows: held-for-trading
financial assets are measured at fair value and changes in fair value
are recognized in net earnings; available-for-sale financial
instruments are measured at fair value with changes in fair value
recorded in other comprehensive income until the investment is
derecognized or impaired at which time the amounts would be recorded
in net earnings.
Under adoption of these new standards, the Company designated its cash
and cash equivalents as held-for-trading. Long-term investments are
designated as available-for-sale. Cash and cash equivalents and long-
term investments are measured at fair value. Accounts receivable are
classified as loans and receivables, which are measured at amortized
cost. Bank advances, accounts payable and accrued liabilities and
long-term debt are classified as other financial liabilities, which
are measured at amortized cost. The Company has also elected to
expense, as incurred, transaction costs related to long-term debt.
Upon adoption of these new standards, the Company recorded a decrease
to opening retained earnings of $3.0 million. The decrease to opening
retained earnings was a result of the write-off of previously deferred
transaction costs related to issuance of long-term debt ($1.0 million
loss, net of tax of $0.5 million), the write-off of a deferred loss on
the termination of various cross currency interest rate swaps that did
not meet the new requirements ($2.1 million loss, no tax) and the
ineffectiveness of cash flow hedges discussed below ($0.1 million
gain, net of tax).
All derivative instruments, including embedded derivatives, are
recorded on the balance sheet at fair value unless exempted from
derivative treatment as a normal purchase or sale. All changes in
their fair value are recorded in net earnings unless cash flow hedge
accounting is used, in which case, changes in fair value are recorded
in other comprehensive income. The Company has applied this accounting
treatment for all embedded derivatives in existence at transition. The
impact of the change in accounting policy related to embedded
derivatives is not material.
The Company uses various financial instruments to manage foreign
currency exposures, fluctuation in interest rates and exposures
related to the purchase of aluminum for the Container Division. These
financial instruments are classified into three types of hedges: cash
flow hedges, fair value hedges and hedges of net investments in self-
sustaining operations.
In a cash flow hedge, the effective portion of changes in the fair
value of derivatives is recognized in other comprehensive income. Any
gain or loss in fair value relating to the ineffective portion is
recognized immediately in the statement of earnings. Upon adoption of
the new standards, the Company remeasured its cash flow hedge
derivatives at fair value. Aluminum forward contracts with a
favourable fair value of $0.6 million are recorded in other
receivables and prepaid expense. In addition, the Company entered into
Cross Currency Interest Rate Swap Agreements (CCIRSAs) that converted
U.S. dollar fixed rate debt into Canadian dollar fixed rate debt in
order to reduce the Company's exposure to the U.S. dollar debt and
currency exposures. This CCIRSA is also designated as a cash flow
hedge and has an unfavourable fair value of $9.3 million for the
current period and is recorded in long-term debt. The Company also had
used forward contracts to hedge foreign exchange exposure on
anticipated sales. All existing forward contracts matured earlier this
year. These hedges were previously recorded in accounts payable and
accrued liabilities.
In a fair value hedging relationship, the carrying value of the hedged
item is adjusted by gains or losses attributable to the hedged risk
and recorded in net earnings. This change in fair value of the hedged
item, to the extent the hedging relationship is effective, is offset
by changes in the fair value of the derivative also measured at fair
value on the balance sheet date, with changes in value recorded
through net earnings. The Company has two CCIRSAs designated as fair
value hedges, which convert U.S. dollar fixed rate debt into Canadian
dollar floating rate debt in order to reduce interest rate and
currency risk. In addition, the Company has an interest rate swap
converting U.S. dollar fixed rate debt to U.S. dollar floating rate
debt to reduce interest rate risk exposure. These fair value hedges
have an unfavourable fair value of $9.7 million and are recorded in
long-term debt.
In a hedge of a net investment in a self-sustaining foreign operation,
the portion of the gain or loss on the hedging item that is determined
to be an effective hedge should be recognized in comprehensive income
and the ineffective portion should be recognized in net earnings.
During 2006, the Company entered into CCIRSAs that converted Canadian
dollar fixed rate and floating rate debt into euro fixed rate debt and
euro floating rate debt in order to hedge the Company's exposure to
the euro, with a view to reducing foreign exchange fluctuations and
interest expense. These CCIRSAs have been designated as net investment
hedges and have a net favourable fair value of $5.2 million at the end
of the current period and are recorded in other assets and long-term
debt.
b) Recently issued accounting standards
In May 2007, the CICA issued a new Handbook Section 3031,
"Inventories", which addresses the measurement and disclosure of
inventory. The new standard is effective for interim and annual
financial statements for fiscal years beginning on or after January 1,
2008. Management is currently reviewing the potential impact on the
financial results of the Company. However, further disclosure will be
required in the Consolidated Statement of Earnings as it will now be
necessary to disclose the amount of inventories recognized as an
expense during the period. The Company will comply with this standard
on January 1, 2008.
In October 2006, the CICA issued new standards related to financial
instrument presentation and disclosure, Handbook Section 3862,
"Financial Instruments - Disclosure" and Handbook Section 3863,
"Financial Instruments - Presentation". These standards revise and
enhance the disclosure requirements of Handbook Section 3861,
"Financial Instruments - Disclosure and Presentation". These standards
are effective for interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2007. Management is
currently reviewing the potential impact on the Company. The Company
will comply with the requirements of the new standard when the
standard becomes effective.
In October 2006, the CICA approved new accounting standards, Handbook
Section 1535, "Capital Disclosures". This new section establishes
standards for disclosing information about an entity's capital and how
it is managed. This standard is effective for interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2007. Management is currently reviewing the potential
impact on the Company. The Company will comply with the requirements
of the new standard when the standard becomes effective.
2. SHARE CAPITAL
Issued and outstanding
September December September
30, 31, 30,
2007 2006 2006
---- ---- ----
Issued share capital $ 200.2 $ 197.5 $ 197.3
Less: Executive share purchase
plan loans (1.3) (1.6) (1.6)
Shares held in trust (10.1) (5.6) (5.6)
----------------------------------------------------------------------
Total $ 188.8 $ 190.3 $ 190.1
----------------------------------------------------------------------
----------------------------------------------------------------------
During 2007, the Company granted an award of 120,000 Class B shares of
the Company. These shares are restricted in nature and will vest in
2010 dependent on continuing employment and company performance. The
Company purchased these 120,000 shares in the open market and has
placed them in trust until they vest. The fair value of this stock
award is being amortized over the vesting period and recognized as
executive compensation expense.
Actual number of shares:
September 30, December 31, September 30,
2007 2006 2006
---- ---- ----
Class A 2,378,496 2,378,496 2,378,721
Class B 30,407,297 30,223,047 30,215,322
--------------------------------------
32,785,793 32,601,543 32,594,043
Less: Executive share purchase
plan shares - Class B (100,000) (125,000) (125,000)
Shares held in
trust - Class B (320,000) (200,000) (200,000)
--------------------------------------
Total 32,365,793 32,276,543 32,269,043
--------------------------------------
--------------------------------------
Year-to-date weighted average
number of shares 32,250,329 32,240,324 32,228,668
--------------------------------------
--------------------------------------
Year-to-date weighted average
diluted number of shares 33,498,920 33,259,055 33,254,709
--------------------------------------
--------------------------------------
3. ACQUISITIONS
On January 26, 2007, the Company completed its purchase of the sleeve
label business of Illinois Tool Works Inc. (ITW). ITW's sleeve label
business, through its two locations in the United Kingdom and one
location in each of Austria, Brazil and United States, is a leading
supplier of shrink sleeve and stretch sleeve labels for markets in
Europe and the Americas. The purchase price was $105.6 million, net of
cash acquired. The Company established a $95.0 million line of credit,
of which $75.0 million was drawn to facilitate the purchase. The
Company is reviewing the valuation of the net assets acquired,
including intangible assets, therefore, certain items disclosed below
may change when the review is completed in 2007.
Details of the transaction are as follows:
Current assets $ 24.3
Current liabilities (8.5)
Non-current assets at assigned values 39.4
Future taxes (0.8)
Goodwill and intangible assets 51.2
------------
Net assets purchased $ 105.6
------------
------------
Total consideration:
Cash, less cash acquired of $2.8 million $ 105.6
------------
------------
In January 2006, the Company purchased Prodesmaq, based in Vinhedo,
Brazil. Prodesmaq operated two state-of-the-art plants and is Brazil's
largest supplier of pressure sensitive labels for many global
companies in the home and personal care, healthcare and premium food
and beverage markets. The purchase price was $62.2 million, net of
cash acquired.
Details of the transaction are as follows :
Current assets $ 9.8
Current liabilities (2.1)
Non-current assets at assigned values 9.3
Intangible assets 14.8
Goodwill 30.4
------------
Net assets purchased $ 62.2
------------
------------
Total consideration:
Cash, less cash acquired of $1.7 million $ 62.2
------------
4. ACCUMULATED OTHER COMPREHENSIVE LOSS
September 30, December 31, September 30,
2007 2006 2006
---- ---- ----
Unrealized foreign currency
translation losses,
net of tax of $13.9 million $ (73.6) $ (18.5) $ (40.2)
Impact of new net investment
hedge accounting standards on
January 1, 2007,
net of tax $0.1 million 0.4 - -
Impact of new cash flow hedge
accounting standards on
January 1, 2007,
net of tax of $1.3 million 2.4 - -
Change in derivatives designated
as cash flow hedges,
net of tax recovery of $0.8 million (0.7) - -
--------------------------------------
$ (71.5) $ (18.5) $ (40.2)
--------------------------------------
--------------------------------------
5. RESTRUCTURING AND OTHER ITEMS
Three months ended Nine months ended
September 30th September 30th
----------------------------------------------------------------------
Segment 2007 2006 2007 2006
------- ---- ---- ---- ----
Container segment
restructuring Container $ 1.2 $ (0.2) 0.2 (2.4)
Sale of non-operational Corporate - - 0.7 -
land
Gain (loss) on net assets
sale of CCL Dispensing
Systems, LLC Tube - - - 1.6
Repatriation of capital Corporate - (3.5) (3.5)
-----------------------------------
Net gain (loss) $ 1.2 $ (3.7) $ 0.9 $ (4.3)
-----------------------------------
-----------------------------------
Tax recovery (expense) $ (0.4) $ 0.1 $ 0.1 $ (2.3)
----------------------------------------------------------------------
The Company commenced a senior management restructuring of the
Container segment and recorded provisions related mostly to severances
of $2.4 million ($1.6 million after tax) in the first nine months of
2006, and by year-end, additional costs related to obsolete equipment
and spare parts were recorded of $9.0 million ($5.6 million after
tax). In 2007, further costs of $1.0 million ($0.7 million after tax)
were incurred. In the third quarter 2007, a reduction in the severence
provision was realized resulting in an income adjustment of
$1.2 million ($0.8 million after tax).
In March 2007, the Company sold its non-operational land in Toronto,
Canada for $2.0 million cash and realized a gain of $0.7 million
($0.9 million after tax).
In February 2006, the Company sold its CCL Dispensing Systems, LLC net
assets for $24.4 million cash and realized a gain of $1.6 million
(loss of $1.3 million after tax).
In July 2006, the Company repatriated capital from a foreign
subsidiary, which resulted in a net foreign exchange loss of
$3.5 million. Gains and losses arise from the difference between the
exchange rate in effect on the date the capital was returned to Canada
compared to the historical rate in effect when the capital was
invested. These gains or losses on foreign exchange do not give rise
to any tax effect.
6. EMPLOYEE FUTURE BENEFITS
The expense for the defined benefit plans in the third quarter is
$0.4 million (2006 - $0.0 million) and year-to-date of $1.2 million
(2006 - $0.9 million).
7. SEGMENTED INFORMATION
Industry segments
Three months ended Nine months ended
September 30th September 30th
-------------------------------------------------------------------------
Operating Operating
Sales income Sales income
---------------------------------------------------------------------
2007 2006 2007 2006 2007 2006 2007 2006
------- ------- ------- ------- ------- ------- ------- -------
Label $222.9 $188.1 $ 28.6 $ 21.7 $706.4 $584.7 $ 98.0 $ 74.1
Container 40.2 41.5 2.9 1.9 142.4 134.2 14.9 13.8
Tube 11.8 17.0 (0.4) 1.4 45.8 53.8 1.2 3.9
ColepCCL 57.0 46.9 4.6 5.0 167.6 130.6 14.3 13.0
-----------------------------------------------------------------
Total
opera-
tions $331.9 $293.5 35.7 30.0 $1,062.2 $903.3 128.4 104.8
--------------- -----------------
Corporate expense (2.9) (1.5) (7.4) (8.2)
--------------- ---------------
32.8 28.5 121.0 96.6
Interest expense, net 6.2 5.3 19.3 16.2
--------------- ---------------
26.6 23.2 101.7 80.4
Restructuring and
other items - net
gain (loss) (note 5) 1.2 (3.7) 0.9 (4.3)
--------------- ---------------
Earnings before
income taxes 27.8 19.5 102.6 76.1
Income taxes 4.0 5.9 20.0 23.8
--------------- ---------------
Net earnings $ 23.8 $ 13.6 $ 82.6 $ 52.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable Assets Goodwill
------------------- --------
September 30th December 31st September 30th December 31st
2007 2006 2007 2006
---- ---- ---- ----
Label $1,007.9 $ 909.3 $ 336.2 $ 303.6
Container 173.8 194.4 12.7 12.8
Tube 83.8 96.9 25.6 30.0
ColepCCL 177.1 172.4 42.0 42.6
Corporate 116.1 169.6 0.1 -
----------------------------------------------------------
Total $1,558.7 $1,542.6 $ 416.6 $ 389.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation & Amortization Capital Expenditures
--------------------------- --------------------
Nine months ended Nine months ended
September 30th September 30th
-------------- --------------
2007 2006 2007 2006
---- ---- ---- ----
Continuing operations
---------------------
Label $ 43.5 $ 35.7 $ 89.1 $ 69.3
Container 8.5 7.9 7.3 17.4
Tube 5.2 5.4 6.7 5.5
ColepCCL 5.9 5.3 10.2 2.8
Corporate 0.3 0.4 0.1 0.4
-------------------------------------------------------
Total $ 63.4 $ 54.7 $ 113.4 $ 95.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. SUBSEQUENT EVENT
On October 4th, 2007, CCL announced the sale of its 40% interest in
the ColepCCL Portugal-Embalagens e Enchimentos S.A. joint venture to
its majority partner, RAR - Sociedade de Controle (Holding), S.A.,
based in Portugal. The joint venture represented CCL's last investment
in custom manufacturing businesses following the sale of the
North American custom manufacturing operations in 2005. After the
sale, CCL will be positioned as a pure global specialty packaging
company.
CCL is expected to receive approximately $135 million in cash with
50% payable on closing and the balance to be paid at the end of
February 2008 for its interest in the joint venture. ColepCCL will
retain all of the net debt in the business upon closing. CCL's share
of the ColepCCL net debt (a non-GAAP measure; see MD&A Section 12) is
$28.4 million at September 30, 2007. The transaction is expected to
close by the end of November 2007 and is subject to normal regulatory
approvals and the receipt by CCL of a firm guarantee and a letter of
credit with respect to the deferred payment of the purchase price.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Third Quarters Ended September 30, 2007 and 2006
This document has been prepared for the purpose of providing Management's
Discussion and Analysis (MD&A) of the financial condition and results of
operations for the third quarters ended September 30, 2007 and 2006 and an
update to the 2006 Annual MD&A document. The information in this interim MD&A
is current to November 8, 2007 and should be read in conjunction with the
Company's September 30, 2007 unaudited third quarter financial statements
released on November 8, 2007 and the 2006 Annual MD&A document, which forms
part of the CCL Industries Inc. 2006 Annual Report, dated February 21, 2007.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) and in accordance with the
requirements of section 1751, Interim Financial Statements, of the CICA
Handbook. Unless otherwise noted, both the financial statements and this
interim MD&A are expressed in Canadian dollars as the reporting currency. The
measurement currencies of CCL's operations are the Canadian dollar, the U.S.
dollar, the euro, the Danish krone, the U.K. pound sterling, the Mexican peso,
the Thailand baht, the Chinese renminbi, the Brazilian real, the Japanese yen
and the Polish zloty. CCL's Audit Committee and its Board of Directors have
reviewed this interim MD&A to ensure consistency with the approved strategy
and results of the Company.
Management's Discussion and Analysis contains forward-looking statements,
as defined in the Securities Act (Ontario) (hereinafter referred to as
"forward-looking statements"), including statements concerning possible or
assumed future results of operations of the Company. Forward-looking
statements typically are preceded by, followed by or include the words
"believes", "expects", "anticipates", "estimates", "intends", "plans" or
similar expressions. Forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions, including, but
not limited to: the impact of competition; consumer confidence and spending
preferences; general economic and geo-political conditions; currency exchange
rates; and CCL's ability to attract and retain qualified employees and,
accordingly, the Company's results could differ materially from those
anticipated in these forward-looking statements.
1. Overview
------------
CCL's global customers are continuing to experience higher sales levels
than last year as a result of the favourable international economy observed by
many institutions and commentators. CCL continues to benefit from the general
improvement in its customers' businesses and has experienced good sales growth
in most product categories through the third quarter of 2007. Demand for the
Company's products in Europe, Asia and Latin America has been strong but the
slowdown in the U.S. economy has resulted in softer markets for CCL's
customers in North America, particularly in the personal care sector.
Although there is cause for concern that the slower U.S. economy may have
a ripple effect into the global economy, our expectations are that markets
will remain very strong in Latin America and Asia and stable in Europe for the
balance of the year. European growth so far in 2007 has been driven by the
surge in demand for consumer products in Central and Eastern Europe. The rapid
development of consumerism in Latin America and Asia also continues to
generate strong growth for our customers' products. A number of CCL's
suppliers and packaging peers have, however, publicly announced that slower
demand for their products in the consumer products sector in the United States
will adversely affect their financial performance for the balance of 2007. CCL
continues to expect a low rate of sales growth in North America with mixed
performance by product category and an unclear outlook into 2008.
The Company's financial results continue to be negatively affected by the
strength of the Canadian dollar against most international currencies so far
in 2007. The major impact has been the non-cash currency translation impact on
our foreign earnings. The Company has been successful in improving its
financial performance over the last five years despite this continuous
currency headwind, particularly relative to the U.S. dollar. In addition,
CCL's first half of the year is generally stronger and more profitable than
the second half due to the extended holiday and vacation periods in the second
half of the year around the world and also due to the seasonality of certain
products.
2. Review of Consolidated Operations
-------------------------------------
Sales for the third quarter of 2007 of $331.9 million were 13% ahead of
the $293.5 million generated in the third quarter of 2006, while sales for the
first nine months of 2007 of $1,062.2 million were 18% higher than last year's
$903.3 million. Financial comparisons to the prior year's results in the third
quarter have been negatively affected by the significant appreciation of the
Canadian dollar relative to the U.S. dollar and to a lesser degree, most other
currencies. Sales increased for the quarter by 15% due to organic growth and
an acquisition offset in part by foreign exchange and a disposition of 2%. On
a comparative basis with last year's third quarter, sales increased
significantly in the Label Division and ColepCCL, but were down slightly in
the Container Division due to currency translation, and were also down
significantly in the Tube Division partly due to currency translation.
Year-to-date, sales increased by 16% as a result of organic growth and
acquisitions, while foreign exchange net of dispositions added a further 2%.
For the quarter and year-to-date periods, overall sales growth was split
equally between organic growth and acquisitions.
The following acquisitions and divestitures affected financial comparisons
for year-to-date results of 2007 versus 2006:
- In January 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries in Vinhedo, Brazil for
$62 million.
- In February 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, Illinois for $24 million. This
business is included in the Tube Division for comparative purposes.
- In October 2006, the non-core label business in Houten, the
Netherlands was sold for $3 million.
- On January 26, 2007, CCL acquired the shrink sleeve and stretch
sleeve business of Illinois Tool Works ("ITW") located in the United
Kingdom, Austria, Brazil and the United States for approximately
$106 million. The purchase equation for this acquisition will be
finalized in the fourth quarter of 2007.
Only the latter two transactions impacted financial comparisons for the
third quarter of 2007 compared with the same period in 2006.
Net earnings for the third quarter of 2007 were $23.8 million, up 75% from
the $13.6 million recorded in the third quarter of 2006. This improvement was
due primarily to the substantial sales and operating income increases in the
business, the favourable impact of tax adjustments, and a recovery of
restructuring costs in 2007 and restructuring and other items incurred in 2006
(a non-GAAP measure; refer to Section 12 later in this report discussing key
performance indicators and defining non-GAAP measures). Divisional operating
income (a non-GAAP measure; refer to Section 12 below) improved by
$5.7 million or 19% from last year's third quarter due to substantially
stronger performances in the Label and Container Divisions, partially offset
by reduced income from the ColepCCL joint venture and a modest loss in the
Tube Division. In the third quarter of 2007, corporate income tax rates were
lowered in Germany and the utilization of a previous tax loss was recognized
in Mexico, together totalling $2.9 million, resulted in a decrease in income
tax expense. Additionally, the Container Division had a positive net recovery
of restructuring and other costs of $1.2 million before tax ($0.8 million
after tax). In the third quarter of 2006, restructuring and other costs and a
favourable tax adjustment of $3.7 million before tax ($3.2 million after tax)
were incurred consisting primarily of a currency exchange loss on repatriation
of capital from a foreign operation.
For the first nine months of 2007, net earnings were $82.6 million, up 58%
from the $52.3 million in the comparable 2006 period. Net earnings for the
first nine months of 2007 were affected by a net recovery of restructuring and
other costs of $0.2 million and a gain on the sale of a property of
$0.7 million for a net gain of $0.9 million before tax (net gain of
$1.0 million after tax). Including the positive effect of favourable tax
adjustments of $7.9 million, net earnings increased by $8.9 million due to the
foregoing items.
Net interest expense for the third quarter was $6.2 million, $0.9 million
higher than last year's corresponding quarter due primarily to higher net debt
levels (a non-GAAP measure; refer to Section 12 below) and slightly higher
floating interest rates partially offset by favourable currency translation.
Corporate expenses for the quarter of $2.9 million were higher than last
year's third quarter of $1.5 million due to favourable pension and executive
compensation adjustments recorded in the third quarter of 2006. The overall
effective income tax rate was 14% for the third quarter of 2007 compared to
30% in the third quarter of 2006. If the impact of restructuring and other
items and favourable tax adjustments (a non-GAAP measure; see Section 12) were
excluded, the effective tax rate in the third quarter of 2007 would have been
24% compared to 27% in last year's third quarter. The adjusted tax rate was
lower due to a combination of relatively lower income in foreign jurisdictions
with higher tax rates, principally the United States and to tax rate
reductions previously enacted affecting 2007 tax expense.
Earnings per Class B share were $0.74 in the third quarter of 2007
compared to $0.43 earned in the same period last year, an increase of 72%.
Favourable tax adjustments had a positive effect on earnings per share in the
third quarter of 2007 of $0.09 and a recovery of restructuring and other items
in the third quarter of 2007 increased earnings per share by a further $0.03
(a non-GAAP measure; see Section 12). Consequently, restructuring and other
items and favourable tax adjustments in the third quarter of 2007 increased
earnings per share by $0.12. In the third quarter of 2006, restructuring and
other items reduced earnings per share by $0.10. Diluted earnings per Class B
share were $0.71 in the third quarter of 2007 and $0.41 in the same period
last year, a 73% increase.
For the first nine months of 2007, earnings per Class B share were $2.56
compared to $1.63 in the prior year period, a 57% increase. A gain on the sale
of a property, favourable tax adjustments, and a net recovery of restructuring
and other items (a non-GAAP measure; see Section 12) increased earnings per
Class B share by $0.28 for the first nine months of 2007 versus a $0.16
reduction in the first nine months of 2006. Diluted earnings per Class B share
were $2.47 year-to-date 2007 and $1.58 in the comparable 2006 period.
The following table is presented to provide context to the change in the
Company's financial performance compared to last year.
(in Canadian dollars)
---------------------
3rd Quarters Year-to-date
------------ ------------
Earnings per Class B shares 2007 2006 2007 2006
--------------------------- ---- ---- ---- ----
Net earnings $ 0.74 $ 0.43 $ 2.56 $ 1.63
Net gain (loss) from restructuring
and other items and favourable tax
adjustments included in net
earnings(*) $ 0.12 $(0.10) $ 0.28 $(0.16)
(*) A non-GAAP measure - see Section 12
The following table is selected financial information for the eleven most
recently completed quarters. In May 2005, the North American Custom
Manufacturing business was sold and was treated as Discontinued Operations.
The impact on net earnings per Class B share of the gain on the sale of
Custom in 2005 is included in the table. Net earnings per Class B share have
generally increased over time but have also fluctuated significantly due to
changes in foreign exchange rates, restructuring and other items, and
favourable tax adjustments.
The seasonality of the business has evolved over the last few years with
the first and second quarters generally being the strongest and second
strongest, respectively, due to the aggressive marketing plans of many
customers at the beginning of the year. Also, there are many products that
have a spring-summer bias in North America and Europe such as agricultural
chemicals, sun care and certain beverage products, which generate additional
sales volumes for CCL in the first half of the year. The last two quarters of
the year are also negatively affected from a sales and earnings perspective
due to the summer vacation periods in the northern hemisphere, Thanksgiving
and the late-December holiday season shutdowns in the fourth quarter.
(in millions of Canadian dollars, except per share amounts)
-----------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
----- ----- ----- ----- -----
Sales-continuing
operations
2007 $ 373.1 $ 357.2 $ 331.9
2006 313.2 296.6 293.5 $ 308.9 $1,212.2
2005 265.7 280.1 281.9 282.4 1,110.1
Net earnings-
continuing
operations
2007 30.0 28.8 23.8
2006 21.1 17.6 13.6 25.1 77.4
2005 16.1 5.1 15.3 13.5 50.0
Net earnings
2007 30.0 28.8 23.8
2006 21.1 17.6 13.6 25.1 77.4
2005 19.7 113.8 15.3 15.0 163.8
Net earnings per
Class B share -
continuing
operations
Basic
2007 0.93 0.89 0.74
2006 0.66 0.54 0.43 0.78 2.41
2005 0.50 0.16 0.48 0.43 1.57
Diluted
2007 0.90 0.86 0.71
2006 0.64 0.53 0.41 0.75 2.33
2005 0.49 0.16 0.46 0.41 1.52
Net earnings per Class B share
Basic
2007 0.93 0.89 0.74
2006 0.66 0.54 0.43 0.78 2.41
2005 0.61 3.53 0.48 0.48 5.10
Diluted
2007 0.90 0.86 0.71
2006 0.64 0.53 0.41 0.75 2.33
2005 0.60 3.45 0.46 0.46 4.97
Restructuring and
other items and
favourable tax
adjustments and gain
on discontinued
operations per
Class B share(*)
2007 0.05 0.11 0.12
2006 (0.03) (0.03) (0.10) 0.20 0.04
2005 - 2.96 - (0.02) 2.94
(*) A non-GAAP measure - see Section 12
3. Business Segment Review
---------------------------
Label Division
--------------
($ Millions) Q3 2007 Q3 2006 +/- %
------- ------- -----
Sales $ 222.9 $ 188.1 +19%
Operating Income $ 28.6 $ 21.7 +32%
Return on Sales(1) 12.8% 11.5%
Nine Nine
Months Months
2007 2006 +/- %
------- ------- -----
Sales $ 706.4 $ 584.7 +21%
Operating Income $ 98.0 $ 74.1 +32%
Return on Sales(1) 13.9% 12.7%
Capital Spending $ 89.1 $ 69.3
Depreciation and Amortization $ 43.5 $ 35.7
(1) A non-GAAP measure - see Section 12
Sales for the Label Division continue to reflect strong global market
conditions at $222.9 million for the third quarter, up 19% from $188.1 million
in the same quarter last year. The sales increase was a result of the
combination of organic growth and the ITW sleeve acquisition contributing 18%
with favourable foreign exchange, net of a disposition, contributing an
additional 1%. For the first nine months of 2007, sales of $706.4 million were
21% ahead of the $584.7 million recorded in the same period last year with 19%
coming from organic growth and acquisitions and 2% from foreign exchange, net
of a disposition.
Sales growth in the third quarter and year-to-date was due in part to the
ITW sleeve business acquisition acquired at the end of January 2007. Overall,
however, the base business also experienced a continuation of very good
organic sales growth and operating income improvements.
North America experienced only modest sales growth compared to last year
based on a slowing U.S. economy. Personal care volume was down slightly for
the quarter as our key customers experienced softer sales and a reduction in
new product launches. However, this was more than offset by increased volumes
in shrink sleeves and in-mould labels for the home care sector and new orders
for beverage labels for international customers. Healthcare sales were up
modestly due chiefly to the strength in expanded content labels. Specialty
products sales were well below last year's third quarter due to a soft
promotional label market compared to a strong prior year, partially offset by
continued good growth in agricultural chemical labels. Incoming promotional
label orders have improved so far for the fourth quarter. Overall in North
America, sales and profitability were up modestly despite weaker market
conditions.
Sales in Brazil were up substantially over last year due to the recently
acquired ITW sleeve business and modest volume growth. Operating income was up
due to the volume growth and the acquisition. Profitability in Brazil is well
above the average of our Label Division.
In Europe, sales showed good growth in personal care compared to last
year, driven by consumer demand in Central and Eastern Europe, and there was
continued growth in beverage applications as our German plant experienced
significant growth in beverage products to support customers' new launches and
summer seasonal demand. Healthcare and Specialty sales continued to show good
growth as we are attracting new business through global customer
relationships. This business continues to be above average in profitability.
The ITW sleeve acquisition continues to generate good sales growth and
operating income improvements at levels well above its recent history under
prior ownership. The greater presence in the sleeve market also drove strong
volume and profit improvement in the core CCL sleeve business in Europe.
The battery label business experienced good growth in the United States
and China. European sales were flat, based on certain customers transferring
volume to our plant in China although this did not occur as quickly as
originally anticipated. The European plant, however, benefited significantly
from strong sales of beverage labels to customers in emerging markets.
Asia continued to generate very strong sales and income growth from a very
small base. Sales in Thailand were substantially ahead of last year. In
addition, the Guangzhou, China operation that opened only a year ago, was very
busy in personal care. Our new sales office in Japan recorded its first
quarter of sales. The Label Division continues to benefit from its
international presence with large global personal care customers.
Operating income for the third quarter of 2007 was $28.6 million, up 32%
from $21.7 million in the third quarter of 2006. Negative currency translation
had a slight negative effect on these results. Drivers of this improvement
were the performance of the recent ITW acquisition and higher sales in most
product categories in each region. During the quarter, plants in Memphis,
Paris and Mexico continued the process of relocating, and incurred direct
moving costs of $0.5 million ($1.3 million year-to-date). The Mexican and
Memphis locations are two of the largest facilities in the Label Division's
network. Further moving costs are expected during the fourth quarter of 2007
for Mexico and Memphis, and into 2008 for Paris. Operating income as a
percentage of sales at 12.8% exceeded our internal targets and was well above
the 11.5% return generated in last year's third quarter. Year-to-date,
operating income was $98.0 million versus $74.1 million last year, up 32%.
Sales and operating income in the third quarter of 2007 for the ITW
acquisition noted earlier in this report were $24.1 million and $3.0 million,
respectively. The operation in Houten, the Netherlands, disposed of in the
fall of 2006, generated sales of $1.6 million and nominal operating income in
the third quarter of 2006.
Sales backlogs for the label business are generally low due to short
customer lead times, but indications are that customers' orders, overall,
continue to be reasonably firm considering the seasonality of certain
products, particularly beverage labels, through the balance of the year.
The Label Division invested $89.1 million in capital in the first nine
months of 2007 compared to $69.3 million in the same period last year. The
capital was spent throughout the business to maintain and expand the
manufacturing base due to a multitude of organic growth opportunities. The
addition of many presses in strategic locations and plant construction for the
relocation of the Memphis, Tennessee and Mexico City operations generated the
higher level of capital spending. Depreciation and amortization for the Label
Division was $43.5 million for the first three quarters of 2007 and
$35.7 million in the comparable 2006 period.
Container Division
------------------
($ Millions) Q3 2007 Q3 2006 +/- %
------- ------- -----
Sales $ 40.2 $ 41.5 -3%
Operating Income $ 2.9 $ 1.9 +53%
Return on Sales(1) 7.2% 4.6%
Nine Nine
Months Months
2007 2006 +/- %
------- ------- -----
Sales $ 142.4 $ 134.2 +6%
Operating Income $ 14.9 $ 13.8 +8%
Return on Sales(1) 10.5% 10.3%
Capital Spending $ 7.3 $ 17.4
Depreciation and Amortization $ 8.5 $ 7.9
(1) A non-GAAP measure - see Section 12
Sales in the third quarter were $40.2 million, down 3% from $41.5 million
last year. Sales increased organically for the quarter by 1% due to price
increases and with volume slightly below prior year. Foreign currency
translation was a negative factor, reducing sales growth by 4%. For the first
nine months of 2007, sales of $142.4 million were 6% above the $134.2 million
recorded in the same period last year due to organic growth of 8%, offset in
part by foreign currency translation of 2%.
The Container Division experienced a modest sales increase as management
has been able to justify raising prices on higher aluminum costs to its key
customers and has benefited from strong demand for aluminum aerosol containers
with bag-in-can technology. Volume in the standard aerosol format has fallen
off in the third quarter due in part to the weaker U.S. economy, volume losses
due to predatory competitive pricing and customer uncertainty concerning
consumer demand in this market. Beverage volume has shown some sequential
improvement from the second quarter with a couple of new customers utilizing
this package, but sales are at a lower level than the third quarter 2006.
Mexican aerosol container sales volumes were substantially higher in the third
quarter compared to last year. The growth by our global customers located in
Mexico continues to be a positive, in advance of our new aluminum container
plant in Guanajuato, Mexico, scheduled for start-up in the second half of
2008.
Operating income for the Container Division, before restructuring and
other items, for the third quarter of 2007 was $2.9 million, up 53% from
$1.9 million in the third quarter of 2006. The key improvement in
profitability over prior year is that the Division has been able to match its
selling prices to the changes in aluminum costs with its customers compared to
a year ago. Return on sales for the third quarter of 2007 was 7.2% compared to
4.6% in last year's third quarter. For the first three quarters of 2007,
operating income was $14.9 million versus $13.8 million last year, up 8%.
The aluminum container plant in Penetanguishene, Ontario sells a large
part of its production to the United States market in U.S. dollars. The
business had previously hedged a part of the Canadian dollar value of these
U.S. dollar sales by way of forward contracts and sold the rest of its U.S.
dollar sales at spot currency rates. Since June 2007, the Division has not
hedged the U.S. dollar. The change in the exchange rates on U.S. currency
transactions reduced comparative income for the Container Division by
$1.1 million in the third quarter of 2007 and $2.5 million year-to-date.
Further discussion of currency hedging follows in Section 4.
The Container Division invested $7.3 million in capital in the first nine
months of 2007 compared to $17.4 million in the same period last year. The
partial payment on a new production line and a modest level of maintenance
capital was expended so far in 2007 compared to the acquisition and
installation of production lines last year. Depreciation and amortization for
the first nine months of 2007 and 2006 were $8.5 million and $7.9 million,
respectively. The Division has successfully installed six new aluminum
container lines in the last four years. A seventh new line is ready to be
shipped and will be installed at a new plant under construction in Guanajuato,
Mexico and an eighth new line is on order for the same facility. The new plant
will come on line in the summer of 2008 with much of the new capacity already
committed by our customers.
The Container Division continues to hedge a relatively small portion of
its anticipated future aluminum purchases through futures contracts. The
proportion of future contracts outstanding has dropped considerably over the
last few years since the Division and its customers have been less inclined to
hedge aluminum costs at recent record price levels. The cost of aluminum
persists in remaining at historically high levels and the Division continues
to work at recovering aluminum costs by adjusting prices to its customers.
Also, most of the aluminum hedges that were acquired at much lower prices in
prior years have been realized and there has been and will continue to be less
benefit from aluminum hedges going forward. Generally, the Division has either
pricing agreements with customers that may fluctuate to adjust for the changes
in aluminum costs or fixed pricing contracts that are hedged by agreement with
key customers using aluminum forward contracts.
Tube Division
-------------
($ Millions) Q3 2007 Q3 2006 +/- %
------- ------- -----
Sales $ 11.8 $ 17.0 -31%
Operating Income $ (0.4) $ 1.4 not
meaningful
Return on Sales(1) -3.4% 8.2%
Nine Nine
Months Months
2007 2006 +/- %
------- ------- -----
Sales $ 45.8 $ 53.8 -15%
Operating Income $ 1.2 $ 3.9 -69%
Return on Sales (1) 2.6% 7.2%
Capital Spending $ 6.7 $ 5.5
Depreciation and Amortization $ 5.2 $ 5.4
(1) A non-GAAP measure - see Section 12
Sales in the third quarter for the Tube Division were $11.8 million, down
31% from $17.0 million last year. Foreign currency translation contributed 6%
to the sales decline for the quarter. Sales decreased significantly for the
quarter due to the slowing economy in the United States and the impact it has
had on consumer spending, customers' inventory levels, and the related
marketing plans of our personal care customers for cosmetic and skin care
products. Sales orders have picked up in October but it is too soon to
conclude that this downward trend has been permanently reversed. Sales in the
first three quarters of 2007 were $45.8 million, down 15% from the
$53.8 million recorded in 2006, with reduced sales activity contributing 10%,
and the disposition of CCL Dispensing and unfavourable foreign exchange
causing a reduction of 5%.
Operating income for the Tube Division for the third quarter of 2007 was a
loss of $0.4 million versus $1.4 million of income in the third quarter of
2006. The decrease was due to the downturn in sales and new orders with the
current level of fixed overhead to support the business, negatively impacting
margins. As a result, return on sales was a negative 3.4% in the third quarter
compared to an 8.2% return in prior years' third quarter. Operating income for
the first three quarters of 2007 was $1.2 million, down 69% from $3.9 million
recorded in the same period last year due to the lower sales and unfavourable
currency translation.
The Tube Division invested $6.7 million in maintenance capital and on the
down-payment for a new tube line in the first nine months of 2007 compared to
$5.5 million in the same period last year. Depreciation and amortization for
the first nine months of 2007 was $5.2 million and $5.4 million in 2006.
ColepCCL Joint Venture
----------------------
On October 4, 2007, CCL announced the sale of its 40% interest in the
ColepCCL Portugal - Embalagens e Enchimentos S.A. joint venture to its
majority partner, RAR - Sociedade de Controle (Holding), S.A., based in
Portugal. The joint venture represented CCL's last investment in custom
manufacturing businesses following the sale of the North American custom
manufacturing operations in 2005. After the sale, CCL will be positioned as a
pure global specialty packaging company.
CCL is expected to receive approximately $135 million in cash with 50%
payable on closing and the balance to be paid at the end of February 2008 for
its interest in the joint venture. ColepCCL will retain all of the net debt in
the business upon closing. CCL's share of the ColepCCL net debt (a non-GAAP
measure; see Section 12) is $28.4 million at September 30, 2007. The
transaction is expected to close by the end of November 2007 and is subject to
normal regulatory approvals and the receipt by CCL of a firm guarantee and a
letter of credit with respect to the deferred payment of the purchase price.
It is anticipated that a gain will be realized on the sale of this business.
The financial results for CCL's 40% proportional interest in the ColepCCL
joint venture are as follows:
($ Millions) Q3 2007 Q3 2006 +/- %
------- ------- -----
Sales $ 57.0 $ 46.9 +22%
Operating Income $ 4.6 $ 5.0 -8%
Return on Sales(1) 8.1% 10.7%
Nine Nine
Months Months
2007 2006 +/- %
------- ------- -----
Sales $ 167.6 $ 130.6 +28%
Operating Income $ 14.3 $ 13.0 +10%
Return on Sales(1) 8.5% 10.0%
Capital Spending $ 10.2 $ 2.8
Depreciation and Amortization $ 5.9 $ 5.3
(1) A non-GAAP measure - see Section 12
For the third quarter of 2007, CCL's share of the joint venture's sales
was $57.0 million. This sales level was 22% higher than the comparative sales
last year of $46.9 million due to a continuation of strong markets in Europe
and Eastern Europe for ColepCCL's products, and the 1% increase in the value
of European currencies over last year's third quarter. New order levels
continue to be firm and it is anticipated that sales will grow through the
balance of the year. For the first nine months of 2007, sales were
$167.6 million, up 28% from last year's $130.6 million with 6% of the increase
due to foreign currency translation.
Operating income in the third quarter of 2007 for ColepCCL was
$4.6 million, indicating a return on sales of 8.1%, and in the third quarter
of 2006, operating income was $5.0 million, with a return on sales of 10.7%.
Operating income was 8% behind last year's level despite the higher sales as
profit margins were lower due to unfavourable product mix and additional
operating expenses and inefficiencies, including outsourcing, to service the
substantially higher sales level. For the first three quarters of 2007,
operating income of $14.3 million was 10% ahead of the $13.0 million recorded
in the comparable 2006 period due in part to favourable currency translation.
Capital spending for the first nine months of 2007 was $10.2 million
compared to $2.8 million in the comparable 2006 period. Major expenditures
have been undertaken to expand aerosol can manufacturing capacity and improve
efficiencies. Depreciation and amortization was $5.9 million in the first
three quarters of 2007, up from $5.3 million in the first nine months of 2006.
4. Currency Translation and Transaction Hedging
------------------------------------------------
Approximately 90% of CCL's sales are generated from our international
operations and therefore, are recorded in foreign currencies, then translated
into Canadian dollars for reporting purposes. The U.S. dollar is the
functional currency for approximately one-third of the Company's total sales
and it depreciated 7% on average compared to the Canadian dollar in the third
quarter of 2007 versus last year's third quarter and depreciated 2%
year-to-date. In addition, European currencies are now the measurement
currencies for over nearly half of CCL's sales. The primary European currency,
the euro, however, has strengthened by 1% compared to the Canadian dollar
versus the prior year's quarter and 5% year-to-date. Changes in foreign
exchange rates had no net effect on earnings per share due to currency
translation in the third quarter and increased earnings per share by $0.05 for
the year-to-date versus last year.
Additionally, CCL historically utilized a hedging program to lock in a
portion of its expected U.S. dollar revenues earned in Canada by the Container
Division but this was discontinued by the end of June 2007. These hedge
transactions were at an average rate of $1.24 (US$ 3.0 million sold forward)
for the third quarter of 2006. The Container Division in Canada collected a
net of US$ 9.7 million in the third quarter of 2007 at this year's average
rate, 7% below the prior year's rate. This change in the exchange rates on
U.S. currency transactions reduced comparative income by $1.1 million in the
third quarter of 2007 and comparative earnings per share by $0.02 for the
quarter and $0.05 year-to-date for the Container Division.
The Company is not anticipating further hedges against any currencies on
the basis that the Company has a diversified basket of foreign exchange
exposures in many different regions and currencies except to protect the
purchase price of foreign capital equipment in certain countries.
5. Liquidity and Capital Resources
-----------------------------------
The Company's capital structure is as follows:
$ Millions September 30 December 31 September 30
---------- 2007 2006 2006
---- ---- ----
Total debt $480.7 $442.1 $426.7
Cash and cash equivalents 75.8 125.0 102.7
------ ------ ------
Net debt(1) $404.9 $317.1 $324.0
------ ------ ------
------ ------ ------
Shareholders' equity $669.0 $652.6 $608.6
------ ------ ------
------ ------ ------
Net debt: total capitalization(2) 37.7% 32.7% 34.7%
Book value per share(3) $20.73 $20.24 $18.90
(1) Net debt is a non-GAAP measure - see Section 12
(2) Net debt: total capitalization is a non-GAAP measure - see Section 12
(3) Book value per share is a non-GAAP measure - see Section 12
The Company has considerable cash resources and operates below
management's optimal target of financial leverage. As of September 30, 2007,
cash and cash equivalents amounted to $76 million compared to $103 million at
September 30, 2006. Net debt amounted to $405 million at September 30, 2007,
$81 million higher than the net debt of $324 million at the end of September
2006. The increase in net debt in this time frame is due principally to the
ITW sleeve business acquisition in the first quarter of 2007.
Net debt to total capitalization (a non-GAAP measure - see Section 12) at
September 30, 2007 was 38%, up from 35% at the end of September 2006 and 33%
at the end of 2006, primarily due to the ITW sleeve business acquisition. Book
value per share was $20.73 at the end of the third quarter of 2007, 10% above
$18.90 a year ago. The improvement in book value per share is primarily the
result of the increase in earnings retained by the Company, offset in part by
a decrease in shareholders' equity due to the changes in accumulated other
comprehensive loss (mainly due to currency translation).
The Company's debt structure is comprised of three private debt placements
completed in 1997, 1998 and 2006 for a total of US$ 326.8 million (Cdn$ 325.1
million) and a 5-year revolving line of credit initiated in January 2007 for
$95 million, of which $91 million was drawn at September 30, 2007. The
Company's overall average interest rate is 5.6% after factoring in the related
Interest Rate Swap Agreements ("IRSAs") and Cross Currency Interest Rate Swap
Agreements ("CCIRSAs"). The IRSAs and CCIRSAs are discussed later in Section 7
of this report.
The Company believes that it has sufficient cash on hand and the ability
to generate cash flow from operations to fund its expected financial
obligations during the balance of 2007 and into 2008, particularly in light of
the expected sale of the Company's interest in ColepCCL scheduled for late
November 2007.
6. Cash Flow
-------------
During the third quarters of 2007 and 2006, the Company generated cash
from operating activities of $54.1 million and $32.2 million, respectively.
The increase in cash flow compared to last year's third quarter was due to
higher net earnings and a reduction in non-cash working capital. On a
year-to-date basis, operating cash flow of $114.4 million is up 41% from the
$81.3 million provided in the same period of 2006.
Working capital was reduced in the third quarter by $10.3 million compared
to a $4.0 million increase last year. The reduction in working capital is due
to improved operational management of this asset and the lower level of
business activity from the seasonal high at the end of June this year. For the
nine months of 2007, working capital has increased by $31.0 million compared
to the $34.6 million of growth in 2006.
Capital spending in the third quarter was $43.2 million compared to
$27.8 million last year. The major capital expenditures in the third quarter
were for many new presses for the Label Division, building purchases and plant
expansions. The Company has increased its capital expenditures to take
advantage of organic growth and geographic expansion. This level of capital
spending was substantially higher than the $21.1 million of depreciation and
amortization in the third quarter of 2007 and $18.1 million in the third
quarter of 2006. Capital spending so far in 2007 is $113.4 million compared to
$95.4 million in the same period last year. Plans for capital spending in 2007
are expected to approximate the $150 million spent annually in 2006 and 2005.
Dividends declared and paid in each of the third quarters of 2007 and 2006
were $3.9 million and $3.6 million, respectively. The total number of shares
outstanding as at September 30, 2007 and 2006 were 32.8 million and 32.6
million, respectively, with the increase due to the exercise of stock options.
The Company has historically paid out dividends at a rate of 20-25% of net
earnings. Since the Company's cash flow and financial position are favourable,
the Board of Directors approved a continuation of the higher dividend declared
earlier this year of $0.1075 per Class A share and $0.12 per Class B share to
shareholders of record as of December 12, 2007 and payable on January 2, 2008.
The annualized dividend rate is $0.43 per Class A share and $0.48 per Class B
share.
7. Interest Rate and Foreign Exchange Management
-------------------------------------------------
The Company has utilized Interest Rate Swap Agreements to allocate
notional debt between fixed and floating rates by converting the underlying
U.S. dollar fixed rate private placement debt into U.S. dollar floating rate
debt. The Company has utilized IRSAs with a view to reducing interest expense
over time.
The Company has developed into a global business over the last few years
with a significant asset base in Europe. It has utilized Cross Currency
Interest Rate Swap Agreements to effectively convert notional U.S. dollar
fixed rate debt into fixed and floating euro debt in order to hedge its
euro-based assets and cash flows. The above-noted swap positions did not
change in the third quarter.
The effect of the IRSAs and CCIRSAs has been to reduce interest expense by
$0.1 million in the third quarter of 2007 compared to a reduction of
$0.2 million in the third quarter of 2006. Interest coverage (a non-GAAP
measure - see Section 12) improved to 6.2 times in 2007 compared to 5.7 times
in 2006 as at September 30th.
8. New Accounting Standards
----------------------------
A. Changes In Accounting Policies
----------------------------------
Starting on January 1, 2007, the Company adopted the new Canadian
Institute of Chartered Accountants ("CICA") Handbook Sections 1530,
"Comprehensive Income"; Section 3251, "Equity"; Section 3861, "Financial
Instruments - Disclosure and Presentation"; Section 3865, "Hedges" and Section
3855, "Financial Instruments - Recognition and Measurement".
Section 1530 establishes standards for reporting and presenting
comprehensive income, which is defined as the change in equity from
transactions and other events from non-owner sources. Other comprehensive
income refers to items recognized in comprehensive income that are excluded
from net income calculated in accordance with generally accepted accounting
principles.
Section 3861 establishes standards for presentation of financial
instruments and non-financial derivatives, and identifies the information that
should be disclosed about them. Under the new standards, policies followed for
periods prior to the effective date are generally not reversed, therefore, the
comparative figures have not been restated except for the requirement to
restate the currency translation adjustment as part of other comprehensive
income.
Section 3865 prescribes when and how hedge accounting can be applied as
well as the disclosure requirements. Hedge accounting enables the recording of
gains, losses, revenues and expenses from derivative financial instruments in
the same period as those related to the hedged item.
Section 3855 prescribes when a financial asset, financial liability or
non-financial derivative is to be recognized on the balance sheet and at what
amount, requiring fair value or cost-based measures under different
circumstances. Under Section 3855, financial instruments must be classified
into one of these five categories: held-for-trading, held-to-maturity, loans
and receivables, available-for-sale financial assets or other financial
liabilities. All financial instruments, including derivatives, are measured on
the balance sheet at fair value except for loans and receivables,
held-to-maturity investments and other financial liabilities, which are
measured at amortized cost. Subsequent measurement and changes in fair value
will depend on their initial classification, as follows: held-for-trading
financial assets are measured at fair value and changes in fair value are
recognized in net earnings; available-for-sale financial instruments are
measured at fair value with changes in fair value recorded in other
comprehensive income until the investment is derecognized or impaired at which
time the amounts would be recorded in net earnings.
Under adoption of these new standards, the Company designated its cash and
cash equivalents as held-for-trading. Long-term investments are designated as
available-for-sale. Cash and cash equivalents and long-term investments are
measured at fair value. Accounts receivable are classified as loans and
receivables, which are measured at amortized cost. Bank advances, accounts
payable and accrued liabilities and long-term debt are classified as other
financial liabilities, which are measured at amortized cost. The Company has
also elected to expense, as incurred, transaction costs related to long-term
debt.
Upon adoption of these new standards, the Company recorded a decrease to
opening retained earnings of $3.0 million. The decrease to opening retained
earnings was a result of the write-off of previously deferred transaction
costs related to issuance of long-term debt ($1.0 million loss net of tax of
$0.5 million), the write-off of a deferred loss on the termination of various
cross currency interest rate swaps that did not meet the new requirements
($2.1 million loss, no tax), and the ineffectiveness of cash flow hedges
discussed below ($0.1 million gain, net of tax).
All derivative instruments, including embedded derivatives, are recorded
on the balance sheet at fair value unless exempted from derivative treatment
as a normal purchase or sale. All changes in their fair value are recorded in
net earnings unless cash flow hedge accounting is used, in which case, changes
in fair value are recorded in other comprehensive income. The Company has
applied this accounting treatment for all embedded derivatives in existence at
transition. The impact of the change in accounting policy related to embedded
derivatives is not material.
The Company uses various financial instruments to manage foreign currency
exposures, fluctuation in interest rates and exposures related to the purchase
of aluminum for the Container Division. These financial instruments are
classified into three types of hedges: cash flow hedges, fair value hedges and
hedges of net investments in self-sustaining operations.
In a cash flow hedge, the effective portion of changes in the fair value
of derivatives is recognized in other comprehensive income. Any gain or loss
in fair value relating to the ineffective portion is recognized immediately in
the statement of earnings. Upon adoption of the new standards, the Company
re-measured its cash flow hedge derivatives at fair value. Aluminum forward
contracts with a favourable fair value of $0.6 million are recorded in other
receivables and prepaid expenses. In addition, the Company entered into Cross
Currency Interest Rate Swap Agreements (CCIRSAs) that converted U.S. dollar
fixed rate debt into Canadian dollar fixed rate debt in order to reduce the
Company's exposure to the U.S. dollar debt and currency exposures. This CCIRSA
is also designated as a cash flow hedge and has an unfavourable fair value of
$9.3 million for the current period and is recorded in long-term debt. The
Company also had used forward contracts to hedge foreign exchange exposure on
anticipated sales. All existing forward contracts matured earlier this year.
These hedges were previously recorded in accounts payable and accrued
liabilities.
In a fair value hedging relationship, the carrying value of the hedged
item is adjusted by gains or losses attributable to the hedged risk and
recorded in net earnings. This change in fair value of the hedged item, to the
extent the hedging relationship is effective, is offset by changes in the fair
value of the derivative also measured at fair value on the balance sheet date,
with changes in value recorded through net earnings. The Company has two
CCIRSAs designated as fair value hedges, which convert U.S. dollar fixed rate
debt into Canadian dollar floating rate debt in order to reduce interest rate
and currency risk. In addition, the Company has an interest rate swap
converting U.S. dollar fixed rate debt to U.S. dollar floating rate debt to
reduce interest rate risk exposure. These fair value hedges have an
unfavourable fair value of $9.7 million and are recorded in long-term debt.
In a hedge of a net investment in a self-sustaining foreign operation, the
portion of the gain or loss on the hedging item that is determined to be an
effective hedge should be recognized in comprehensive income and the
ineffective portion should be recognized in net earnings. During 2006, the
Company entered into CCIRSAs that converted Canadian dollar fixed rate and
floating rate debt into euro fixed rate debt and euro floating rate debt in
order to hedge the Company's exposure to the euro, with a view to reducing
foreign exchange fluctuations and interest expense. These CCIRSAs have been
designated as net investment hedges and have a net favourable fair value of
$5.2 million at the end of the current period and are recorded in other assets
and long-term debt.
B. Recently Issued Accounting Standards
----------------------------------------
In May 2007, the CICA issued a new Handbook Section 3031, "Inventories",
which addresses the measurement and disclosure of inventory. The new standard
is effective for interim and annual financial statements for fiscal years
beginning on or after January 1, 2008. Management is currently reviewing the
potential impact on the financial results of the Company. However, further
disclosure will be required in the Consolidated Statement of Earnings as it
will now be necessary to disclose the amount of inventories recognized as an
expense during the period. The Company will comply with the standard on
January 1, 2008.
In October 2006, the CICA issued new standards related to financial
instrument presentation and disclosure, Handbook Section 3862, "Financial
Instruments -Disclosure" and Handbook Section 3863, "Financial Instruments -
Presentation". These standards revise and enhance the disclosure requirements
of Handbook Section 3861, "Financial Instruments - Disclosure and
Presentation". These standards are effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1, 2007.
Management is currently reviewing the potential impact on the Company. The
Company will comply with the requirements of the new standard when the
standard becomes effective.
In October 2006, the CICA approved new accounting standards, Section 1535,
"Capital Disclosures". This new section establishes standards for disclosing
information about an entity's capital and how it is managed. This standard is
effective for interim and annual financial statements relating to fiscal years
beginning on or after October 1, 2007. Management is currently reviewing the
potential impact on the Company. The Company will comply with the requirements
of the new standard when the standard becomes effective.
9. Commitments and Contingencies
---------------------------------
The Company has no material "off-balance sheet" financing obligations
except for typical long-term operating lease agreements. The nature of these
commitments is described in note 14 of the December 31, 2006 Annual
Consolidated Financial Statements. The Company does not have any material
related party transactions. There are no defined benefit plans funded with CCL
stock.
10. Controls and Procedures
---------------------------
Disclosure Controls and Procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the Vice Chairman and Chief Executive Officer ("CEO")
and the Executive Vice President and Chief Financial Officer ("CFO") on a
timely basis so that appropriate decisions can be made regarding public
disclosure.
At the end of 2006, the CEO and CFO evaluated the effectiveness, design
and operation of CCL's disclosure controls and procedures, including a review
of the activities of the Disclosure Committee. This Committee reviews all
external reports and documents of CCL. As of September 30, 2007, based on this
evaluation of the disclosure controls and procedures, the CEO and CFO have
concluded that CCL's disclosure controls and procedures, as defined in
Multilateral instrument CSA 52-109 are effective to ensure that information
required to be disclosed in reports and documents that CCL files or submits
under Canadian securities legislation is recorded, processed, summarized and
reported within the time periods specified.
11. Risks and Strategies
------------------------
The 2006 Management's Discussion and Analysis in the Annual Report
detailed risks to the Company's business and the strategies that were planned
for 2007 and beyond. There have been no material changes to those risks and
strategies. CCL is now more exposed to the inherent risks associated with
running a more internationally diverse specialty packaging business. The
Company now has a greater dependence on the European, Latin American and Asian
economies and their currencies. These non-Canadian risks were described in the
2006 Management's Discussion and Analysis.
12. Outlook
-----------
The Company continues to focus on the growth prospects of its specialty
packaging business and the prudent management and reinvestment of its cash on
hand and cash flow generation with a view to the continued improvement in
shareholder value. The expected sale of the ColepCCL joint venture will give
rise to further funds to be reinvested in the business and completes the
transition of the Company into becoming exclusively a global specialty
packaging business. CCL continues to integrate and reorganize the large number
of recent acquisitions it has made into its global label network to improve
profitability and simplify administration. The Company is investigating
mid-sized potential acquisition and joint venture candidates that meet its
criteria of core products and customers, and its expectation of earnings
accretion in the first year of ownership from these strategic initiatives.
The growth in sales and income experienced in 2006 and throughout 2007 is
anticipated to continue as the Company is expected to generate additional
returns from its capital investments and acquisitions. Redeployment of the
proceeds from the sale of ColepCCL will take some time to complete but is
expected to more than replace the earnings from ColepCCL. CCL's growth over
the next six months is predominantly expected to come from outside North
America due to the current slowdown in the U.S. economy. Recent financial
reports from customers, suppliers and packaging peers indicate that the U.S.
economy is having a negative effect on their current and expected financial
performance. The length and depth of the U.S. economic slowdown, the
unfavourable impact of the stronger Canadian dollar and the continued
improvement in our operations in Europe, Latin America and Asia are key
factors expected to impact CCL's future earnings.
The seasonality of the business continues to evolve, particularly in the
Label Division, with the first quarter being the most profitable by a
considerable margin followed by the second quarter. The third and fourth
quarters are generally lower than the first two quarters. Sluggish customer
demand for personal care products in North America are expected to impact the
Tube and Container Divisions at least through the fourth quarter, although the
Container Division has seen a pick-up in beverage containers. Additionally,
the Label Division will be relocating its operations to new facilities in
Mexico and Memphis over the remainder of 2007, and Paris into 2008, and will
be incurring additional costs associated with these moves. The recent strength
in the Canadian dollar compared in particular to the U.S. dollar, will
continue to negatively impact comparative results due to adverse currency
translation. The Canadian dollar has recently also been stronger compared to
European currencies, primarily the euro, and may have an impact on future
comparative results.
13. Key Performance Indicators and Non-GAAP Measures
----------------------------------------------------
CCL measures the success of its business using a number of key performance
indicators, many of which are in accordance with Canadian GAAP as described
throughout this report. The following performance indicators are not
measurements in accordance with Canadian GAAP and should not be considered as
an alternative or replacement of any other measure of performance under
Canadian GAAP. These non-GAAP measures do not have any standardized meaning
and may not be comparable to similar measures presented by other issuers.
Restructuring and other items and favourable tax adjustments - A measure
of significant non-recurring items that are included in net earnings. The
impact of restructuring and other items and favourable tax adjustments on a
per share basis is measured by dividing the after-tax income of these items by
the average number of shares outstanding in the relevant period. Management
will continue to disclose the impact of these items on its results because the
timing and extent of such items do not reflect or relate to the Company's
ongoing operating performance. Management evaluates the operating income of
its divisions before the effect of these items.
Return on Sales - A measure indicating relative profitability of sales to
customers. It is defined as operating income divided by sales, expressed as a
percentage.
Divisional Operating Income - A measure indicating profitability of the
Company's business units defined as operating income before corporate
expenses, interest and restructuring and other items.
Net Debt - A measure indicating the financial indebtedness of the Company
assuming that all cash on hand is used to repay a portion of the outstanding
debt. It is defined as current debt including cash advances plus long-term
debt less cash and cash equivalents.
Net Debt to Total Book Capitalization - A measure indicating the financial
leverage of the Company. It measures the relative use of debt versus equity in
the book capital of the Company. Net debt to total book capitalization is
defined as Net Debt (see above) divided by Net Debt plus shareholders' equity,
expressed as a percentage.
Book Value per Share - A measure of the book shareholders' equity per the
combined Class A and Class B shares. It is calculated by dividing
shareholders' equity by the actual Class A and Class B shares outstanding,
excluding amounts and shares related to shares held in trust and the executive
share purchase plan.
Interest Coverage - A measure indicating the relative amount of operating
income generated by the Company compared to the amount of interest expense
incurred by the Company. It is calculated as operating income before
restructuring and other items plus net interest expense divided by net
interest expense calculated on a 12-month rolling basis.
Stock Symbol: TSX - CCL.A and CCL.B
CCL Industries Agrees to Sell its 40% Interest in European Joint Venture
------------------------------------------------------------------------
Toronto, October 4, 2007 - CCL Industries Inc., a world leader in
specialty packaging and labelling solutions for the consumer products and
healthcare industries, announced today it has signed an agreement to sell its
40% interest in its European joint venture, ColepCCL, Embalagens e Enchimentos
S.A. to its majority partner, RAR - Sociedade de Controle (Holding), S.A.,
based in Portugal.
CCL's merger with COLEP in 2004 created the largest European contract
manufacturer of personal care, household and pharmaceutical products. In 2006,
CCL's proportional share of ColepCCL's sales was $182.7 million and the joint
venture contributed $18.0 million of earnings before interest and taxes and
$25.5 million in EBITDA to CCL's financial results.
CCL will receive approximately $140 million in cash, 50% payable on
closing with the balance to be paid at the end of February 2008 for its
interest in the joint venture, which, including dividends received, will
nearly double CCL's return on its original investment. ColepCCL will retain
all of the net debt in the business upon closing. CCL's current share of the
net debt is approximately $28 million. The transaction is expected to close by
the end of November and is subject to normal regulatory approvals.
Donald G. Lang, Vice Chairman and Chief Executive Officer of CCL
Industries Inc. said, "RAR has been an excellent joint venture partner over
the last three and a half years and together, we have benefited from the
success of the business. ColepCCL's management team has met all of our
expectations by achieving the synergies that were identified at the time of
the merger and growing the business." Mr. Lang also commented that "ColepCCL
has many opportunities for both internal growth and acquisitions; however,
upon evaluating our own growth opportunities, we have decided to focus our
investment dollars in the businesses that we control.
"Over the last five years, CCL has consistently delivered improved
results with focused strategic capital investments in our core businesses and
bolt on acquisitions at CCL Label, which have met our financial hurdles. We
now have greater flexibility with this process and can accelerate building the
great franchises in our portfolio, which now make CCL a pure global specialty
packaging company."
CCL manufactures pressure sensitive, shrink sleeve and in-mould labels,
aluminum containers and plastic tubes for leading global companies in the home
and personal care, healthcare and specialty food and beverage sectors. With
headquarters in Toronto, Canada, CCL Industries employs approximately 5,000
people and operates 49 production facilities in North America, Europe, Latin
America and Asia.
Statements contained in this Press Release, other than statements of
historical facts, are forward-looking statements subject to a number of
uncertainties that could cause actual events or results to differ materially
from some statements made.
For more information, contact:
Steve Lancaster Executive Vice President and Chief Financial Officer
416-756-8517
For more details on CCL, visit our website - www.cclind.com
For further information:
For further information: Steve Lancaster, Executive Vice President and Chief Financial Officer, (416) 756-8517
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