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Press release from Marketwire

Winpak Reports Fourth Quarter Earnings

Wednesday, February 16, 2011

Winpak Reports Fourth Quarter Earnings18:14 EST Wednesday, February 16, 2011WINNIPEG, MANITOBA--(Marketwire - Feb. 16, 2011) - Winpak Ltd. (TSX:WPK) today reports consolidated results in US dollars for the fourth quarter of 2010, which ended on December 26, 2010.December 26December 27 Year-To-Date Ended 20102009(thousands of US dollars, except per share amounts)Sales579,441505,991Net earnings52,57042,891Minority interest1,7091,802Provision for income taxes24,79421,180Interest (income) expense(170)141Depreciation and amortization28,03525,996EBITDA (1)106,93892,010Basic and fully diluted net earnings per share (cents)8166December 26December 27 Fourth Quarter Ended 20102009(thousands of US dollars, except per share amounts)Sales154,930135,464Net earnings14,07911,445Minority interest642416Provision for income taxes6,3555,275Interest (income) expense(102)150Depreciation and amortization7,6016,824EBITDA (1)28,57524,110Basic and fully diluted net earnings per share (cents)2218Winpak Ltd. manufactures and distributes high-quality packaging materials and related packaging machines. The Company's products are used primarily for the packaging of perishable foods, beverages and in health care applications.1 EBITDA is not a recognized measure under Canadian GAAP. Management believes that in addition to net earnings, this measure provides useful supplemental information to investors including an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that this measure should not be construed as an alternative to net earnings, determined in accordance with GAAP, as an indicator of the Company's performance. The Company's method of calculating this measure may differ from other companies, and, accordingly, the results may not be comparable. Management's Discussion and Analysis (presented in US dollars) Forward-looking statements : Certain statements made in the following Management's Discussion and Analysis contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company's intentions, plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent Winpak's current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, we disclaim any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions investors not to place undue reliance upon forward-looking statements. Results of Operations Net earnings for the fourth quarter of 2010 were $14.1 million or 22 cents per share compared to $11.4 million or 18 cents per share in the corresponding period of 2009, an increase of 23.0 percent. Volume growth improved net earnings per share by 2 cents while enhanced manufacturing performance and a favorable product mix augmented gross profit margins, resulting in an additional 3 cents in net earnings per share. This was offset in part by higher operating expenses which reduced net earnings per share by 1 cent.Net earnings for the year were $52.6 million or 81 cents per share compared to $42.9 million or 66 cents per share in 2009, surpassing the previous year's record result by 22.6 percent. Substantial volume growth accounted for nearly half of the improvement in net earnings or 7 cents per share. Limited advancement in operating expenses, in comparison to the significant sales volume growth, contributed a further 4.5 cents in net earnings per share. A lower effective income tax rate supplemented net earnings by an additional 1.5 cents per share while foreign exchange positively impacted results by a further 2 cents per share. Sales Fourth quarter sales of $154.9 million were $19.5 million or 14.4 percent higher than sales in the same quarter of 2009. Volume growth in the fourth quarter continued to be solid at 8.6 percent, with all product lines advancing except packaging machinery sales. The largest volume increase in percentage terms occurred in specialty films at over 16 percent, where an improving economy and the continuing success of the barrier shrink bag product line propelled sales growth. Rigid container volumes climbed by over 12 percent due to gains in condiment, coffee and pet food packaging. Both biaxially oriented nylon film and modified atmosphere packaging shipments grew by approximately 9 percent in comparison to the fourth quarter of 2009. A recovering economic environment and additions to the customer base drove success in these two product lines. Lidding growth was steady at approximately 5 percent led by the expansion of pharmaceutical, die-cut coffee, and yogurt volumes. Packaging machinery volumes declined by nearly 14 percent, mainly due to the timing of customer shipments; the order backlog going into 2011 for this product line is strong. Higher selling prices, in support of increased raw material costs, supplemented sales by an additional 4.9 percent. The stronger Canadian dollar elevated quarterly sales by a further 0.9 percent versus the fourth quarter of 2009.For all of 2010, sales grew by $73.5 million to $579.4 million, 14.5 percent greater than the prior year. Volumes were robust, up 10.2 percent from 2009 levels. Biaxially-oriented nylon and specialty film sales had the largest volume improvement, advancing by approximately 20 to 25 percent. Lidding, due to strong die-cut sales, added nearly 11 percent in volumes while rigid containers and modified atmosphere packaging volumes rose in the high-single digit range. The lone exception to increasing volumes was packaging machinery sales which declined marginally by about 2 percent. Higher overall selling prices bolstered sales by an additional 2.5 percent in comparison to 2009, while a stronger Canadian dollar added 1.8 percent to reported sales. Gross Profit Margins Gross profit margins improved to 29.9 percent of sales in the fourth quarter of 2010, up from the 29.2 percent of sales recorded in the corresponding quarter of 2009. The expansion in gross profit margins was partially due to a considerable improvement in manufacturing performance in the quarter where lower waste levels and enhanced productivity, due in part to higher sales volumes, prevailed. A more favorable product mix, compared to the fourth quarter of 2009, also enhanced gross profit margins. However, this was offset in part by higher raw material costs as the Company has been only moderately successful in matching these cost increases with higher selling prices where formal indexing programs are not in place.Gross profit margins for the twelve months of 2010 averaged 29.1 percent of sales compared to 30.0 percent of sales in 2009. Escalating raw material costs negatively impacted margins by over 2 percentage points in 2010 as the spread between those costs and selling prices narrowed. On the other hand, improved manufacturing performance offset most of this margin decline, resulting in an overall negligible impact on net earnings per share for the year.For reference, the following presents the weighted indexed purchased cost of Winpak's eight primary raw materials in the reported quarter and each of the preceding eight quarters, where base year 2001 = 100. The index was rebalanced as of December 28, 2009 to reflect the mix of the eight primary raw materials purchased in 2009.Quarter and Year 4/081/092/093/094/091/102/103/104/10Purchase Price Index 160.3128.0124.9131.2138.6150.5159.1150.7154.7After a temporary dip in the third quarter, the purchase price index continued its ascent in the fourth quarter, rising by 2.7 percent in the quarter and 23.9 percent since its recent low point in the second quarter of 2009. In early 2011, raw material costs have continued to escalate as pressures on feedstocks intensify, resulting in further increases of between 5 and 10 percent. The challenge for the Company will be to match these increases with selling price changes on the approximate 40 percent of sales that are not covered by indexing agreements. Although the remaining 60 percent of sales are indexed to the cost of raw materials, there is still a time lag involved which is dependent on the specific terms of each individual indexing contract. Operating Expenses and Other Excluding the impact of foreign exchange, the increase in operating expenses in the fourth quarter resulted in a decrease of approximately 1 cent in net earnings per share. Higher compensation costs were recorded for incentive accruals in response to improved earnings results and an advancement in the share price.On an annual basis, the Company was able to leverage its expenditure on operating expenses by limiting the increase in expenses to just 5.2 percent while sales volumes strengthened by 10.2 percent in relation to 2009. Firm cost control, particularly in selling, general and administrative expenses, resulted in net earnings per share growth of approximately 4.5 cents. The reduction in the corporate income tax rate in Canada, effective January 1, 2010, further complemented net earnings per share by 1.5 cents. Capital Resources, Cash Flow and Liquidity The Company's cash and cash equivalents balance improved by $15.0 million in the fourth quarter to end the year at $90.5 million. Winpak continued to generate strong cash flow from operating activities before changes in working capital of $27.2 million in the fourth quarter, a high in relation to any past quarter. In addition, $2.0 million was realized from a reduction in net working capital. During the quarter, cash was utilized to make defined benefit pension payments of $1.2 million, dividends of $1.9 million, and plant and equipment additions of $12.1 million. There was also a favorable foreign exchange adjustment on cash and cash equivalents of $1.0 million.Year-to-date, Winpak's cash position has grown by $29.3 million. Cash flow generated from operating activities, before changes in working capital and defined benefit plan payments, totaled $88.9 million, an increase of $12.2 million or 15.9 percent over 2009. To support the growth in sales, additional investments were made in working capital of $8.2 million, particularly in accounts receivable. Cash was also used to fund plant, equipment and intangible asset additions of $39.3 million, dividend payments of $7.5 million, defined benefit pension payments of $4.7 million and redeem preferred shares of a minority shareholder in a subsidiary of $2.0 million. There was also a favorable foreign exchange adjustment on cash and cash equivalents of $2.1 million. The Company remains debt-free and has unutilized operating lines of $38 million, with the ability to increase borrowing capacity further should the need arise. As a result, Winpak is confident that sufficient financial resources are in place to fund cash requirements for the foreseeable future. Summary of Quarterly Results Thousands of US dollars, except per share amounts (US cents) Quarter EndedDecember 26September 26June 27March 28December 27September 27June 28March 2920102010201020102009200920092009Sales154,930146,055145,568132,888135,464125,267125,322119,938Net earnings14,07911,92614,30912,25611,4459,88911,8969,661EPS2218221918151815 Looking Forward Following a strong finish to the year, the Company remains optimistic with regard to future prospects in 2011. Volume growth in 2010 exceeded 10 percent and although this high level of achievement may not be entirely sustainable going forward, demand should still increase in the mid to upper single-digit percentage range in 2011. Barring unforeseen events, gross profit margins for 2011 should remain within one or two percentage points of current levels, exceeding the five-year average. In the short-term, the escalation in raw material costs remains a concern as these have risen by nearly 25 percent in the last 18 months. Further raw material price escalations of approximately 7 percent have been implemented by suppliers in the first quarter of 2011 and additional increases of between 5 and 10 percent have been announced. Winpak is fortunate to be partially hedged with regard to these increases as approximately 60 percent of the Company's revenues are indexed to the cost of raw materials under customer agreements, albeit with a time lag. Using a longer-term outlook, the supply of natural gas, from which most of the Company's resins are derived, has been increasing due to recent discoveries and this should eventually have a stabilizing effect on raw material costs.Building on past successes and looking forward to future prospects, the Company has made the decision to embark on an aggressive internal capital investment program over the next 5 years. The program will focus on markets requiring more advanced technological requirements that tend to yield higher margins and have been the backbone of Winpak's past and current success. Capital expenditures for 2011 are expected to approximately double the levels spent in the current year. A new manufacturing plant is planned for the rigid packaging operations in addition to co-extrusion sheet and thermoforming lines; a major extrusion line is slated for the Winnipeg location; a further building expansion and extrusion lines are proposed for the Georgia facility; and additional laminating, printing and die-cut capacity is projected for the lidding operations. All of this investment is expected to occur without incurring any debt and the Company remains dedicated to evaluating acquisition opportunities that would complement its core competencies in the areas of food and health care packaging. With Winpak's very solid financial position and access to additional financing sources, the Company has the ability to consummate an external transaction that would enhance long-term shareholder value while staying committed to the internal capital investment plan. Future Accounting Standards International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board confirmed that Publicly Accountable Enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition from Canadian generally accepted accounting principles ("GAAP") to IFRS will commence with the Company's first quarter of 2011, at which time the Company will elect to prepare both its fiscal 2011 and fiscal 2010 comparative financial information using IFRS. The transition to IFRS will impact financial reporting, certain business processes, disclosure controls, internal controls over financial reporting and information systems.The Company formally commenced its IFRS conversion project in the second quarter of 2008 and had engaged the services of an external advisor with IFRS expertise to work with management. Regular reporting has been provided to the Company's senior management and Audit Committee of the Board of Directors. The Company's conversion project consists of three phases: diagnostic assessment, design and development, and implementation. To date, the diagnostic assessment phase and design and development phase of the project have been completed, and an implementation plan is being executed. As of December 26, 2010, the project is on schedule in accordance with this plan. During the past quarter, modifications to the Company's information systems have been completed to accommodate a change in functional currency of the Canadian entities. As of December 27, 2010, these entities are operating with the US dollar as their functional currency. Parallel reporting for 2010 under both IFRS and Canadian GAAP is also progressing according to plan. Meetings have been held with internal accounting personnel as well as the Board of Directors to provide education with respect to IFRS and its effects on the Company. Winpak will continue to invest in training and external advisor resources throughout the transition to facilitate a timely and successful conversion.A detailed review of the major differences between Canadian GAAP and current IFRS has been undertaken and at this time, the Company has determined that the areas listed below are expected to have the greatest impact on the Company's Consolidated Financial Statements. The list and comments are intended to highlight only those areas believed to be the most significant and is not intended to be a complete and exhaustive list of all expected changes. Readers are cautioned that the disclosed impacts of IFRS on financial reporting are estimates and may be subject to change.Initial Adoption – IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides guidance for an entity's initial adoption of IFRS and generally requires the retrospective application of all IFRS effective at the end of its first IFRS reporting period. IFRS 1 however does include certain mandatory exceptions and allows certain limited optional exemptions from this general requirement of retrospective application. The Company expects to apply the following significant optional exemptions available under IFRS 1 on the opening transition date of December 28, 2009:Business combinations – None will be restated prior to the transition date. Fair value as deemed cost – The Company will not elect to revalue any property, plant and equipment to fair value. Borrowing costs – Capitalization will only be applied prospectively from the transition date. Actuarial gains/losses on employee benefits – The Company will recognize all unrecorded actuarial gains/losses in retained earnings upon transition. Based on the most recent actuarial valuations of the defined benefit plans, the estimated impact as at December 28, 2009 is a charge to retained earnings of $10.0 million, a reduction of defined benefit pension plan assets of $14.5 million and a decrease in future income tax liabilities of $4.5 million. Cumulative translation differences – The Company will elect to reclassify all cumulative translation differences at the transition date from a separate component of equity to retained earnings. The estimated amount of the reclassification is an increase in retained earnings of $18.3 million. Functional Currency – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that the functional currency of each entity in a consolidated group be determined separately based on the currency of the primary economic environment in which the entity operates. A list of primary and secondary indicators is used under IFRS in this determination and these differ in content and emphasis to a certain degree from those factors used under Canadian GAAP. The parent Company and all of its Canadian subsidiaries, with the exception of American Biaxis Inc., operate with the Canadian dollar as their functional currency under Canadian GAAP. However, it has been determined that under IFRS, these same entities will change to the US dollar as their functional currency such that all entities within the Winpak group will operate with the US dollar as their functional currency under IFRS. The net result going forward will be decreased earnings volatility due to foreign exchange fluctuations as the magnitude of net Canadian dollar monetary financial instrument exposure is significantly less than the net US dollar monetary financial instrument exposure within these entities. The estimated impact of this change in functional currency, as at December 28, 2009, is a decrease in financial statement items as follows: accumulated other comprehensive income - $39.6 million; property, plant and equipment - $19.7 million; future income tax liabilities - $5.8 million; goodwill - $1.1 million; inventory - $0.7 million; and intangible assets - $0.2 million. Retained earnings are estimated to increase by $23.7 million.Borrowing Costs – International Accounting Standard (IAS) 23, Borrowing Costs, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be included as part of the cost of that asset. Under Canadian GAAP, the Company's policy was to expense these costs as incurred. This change is not expected to have a significant impact on the Company's future financial results.Hedging – Under IAS 39, Financial Instruments Recognition and Measurement, the requirements for designating hedges and hedge accounting differ from those under Canadian GAAP. However, the Company is planning to continue to apply hedge accounting to its foreign exchange contracts under IFRS and as a result, the accounting treatment under IFRS is expected to remain the same as under current Canadian GAAP.Non-controlling interest – Under Canadian GAAP, minority interest is classified in the consolidated balance sheets between total liabilities and equity. Under IAS 27, Consolidated and Separate Financial Statements, minority interest will be reclassified to a separate component of equity entitled non-controlling interest. As at December 28, 2009, this reclassification is $15.9 million.Impairment of Assets – IAS 36, Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use, which is based on discounted future cash flows. Canadian GAAP, on the other hand, generally uses a two-step approach to impairment testing of long-lived assets and finite-life intangible assets by first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists. If it is determined that there is impairment under this basis, the impairment is then calculated by comparing asset carrying values with fair values in much the same manner as computed under IFRS. Additionally under IFRS, testing for impairment occurs at the level of cash generating units, which is the lowest level of assets that generate largely independent cash inflows. This lower level of grouping compared to Canadian GAAP along with the one-step approach to testing for impairment may increase the likelihood that the Company will realize an impairment of assets under IFRS. It should also be noted that under IAS 36, previous impairment losses, with the exception of goodwill, can be reversed when there are indications that circumstances have changed whereas Canadian GAAP prohibits reversal of non-financial asset impairment losses. The Company has determined that as of the opening transition date of December 28, 2009, an impairment of goodwill with regard to the specialty film business has taken place under IAS 36. This will result in a reduction of goodwill and retained earnings of $3.4 million as of that date.Employee Benefit Plans – IAS 19, Employee Benefits, requires the past service cost element of defined benefit plans to be expensed on an accelerated basis, with vested past service costs being expensed immediately and unvested past service costs being recognized on a straight-line basis until the benefits become vested. This would result in a charge to retained earnings at December 28, 2009 of $1.3 million, a reduction of defined benefit pension plan assets of $1.9 million, and a decrease in future income tax liabilities of $0.6 million. Under Canadian GAAP, past service costs are generally amortized on a straight-line basis over the expected average remaining service period of active employees in the plan. In addition, under IAS 19 and IFRIC 14, the Company is not able to report an asset in its financial statements in excess of the economic benefit it can expect to receive in the form of a refund of a pension plan surplus and/or a reduction in future contributions. This differs from the treatment allowed under Canadian GAAP and as a result, under IFRS, the estimated impact as at December 28, 2009 is a decrease in financial statement items as follows: defined benefit pension plan assets - $1.6 million; future income tax liabilities - $0.5 million; and retained earnings - $1.1 million. Going forward, IAS 19 requires an entity to make an accounting policy choice regarding the treatment of actuarial gains and losses. These choices include: (a) the corridor method which is similar to the method currently used by the Company under Canadian GAAP, (b) recording the actuarial gains and losses directly in income in the year incurred, and (c) recognizing the actuarial gains and losses directly in equity through comprehensive income. In April, 2010, the International Accounting Standards Board issued an exposure draft, Defined Benefit Plans: Proposed Amendments to IAS 19, which would essentially eliminate the choices regarding the treatment of actuarial gains and losses and require them to be recorded directly in equity through comprehensive income. As a result, the Company has chosen to recognize actuarial gains and losses directly in equity through comprehensive income as its accounting policy choice under IAS 19 to be consistent with the exposure draft.Income Taxes – Under Canadian GAAP, when the functional currency for accounting purposes differs from the functional currency for taxation purposes, future (deferred) taxes are first calculated in the currency in which income taxes are paid and then translated to the functional currency for accounting purposes at the period end exchange rate. Under IFRS, IAS 12, Income Taxes, deferred taxes are calculated based on the functional currency for accounting purposes, regardless of what functional currency is used for taxation purposes. As a result of this difference between Canadian GAAP and IFRS, the estimated impact of this change to IFRS as at December 28, 2009 is an increase in retained earnings of $0.9 million, an increase in non-controlling interest of $0.8 million, and an increase in future income tax assets of $1.7 million. Controls and Procedures Disclosure Controls Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management's evaluation of the design and effectiveness of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 26, 2010 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required. Internal Controls Over Financial Reporting Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management's design and testing of the effectiveness of the Company's internal controls over financial reporting, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 26, 2010 to provide reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 26, 2010, there have been no changes in the design of the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.Winpak Ltd. Interim Consolidated Financial Statements Fourth Quarter Ended: December 26, 2010These interim consolidated financial statements have not been audited or reviewed by the Company's independent external auditors, PricewaterhouseCoopers LLP.Winpak Ltd.Consolidated Balance Sheets(thousands of US dollars) (unaudited)December 26December 2720102009AssetsCurrent assets:Cash and cash equivalents$90,488$61,164Accounts receivable (note 7)77,74770,354Income taxes receivable1,234-Inventory (note 3)76,76570,559Prepaid expenses2,2842,211Future income taxes3,4722,310251,990206,598Property, plant and equipment (net)257,208239,017Other assets15,63314,401Intangible assets (net)4,0075,896Goodwill17,59017,235$546,428$483,147Liabilities and Shareholders' EquityCurrent liabilities:Accounts payable and accrued liabilities$52,782$44,965Income taxes payable-2,93152,78247,896Deferred credits11,59711,363Future income taxes36,77232,459Postretirement benefits1,6741,673102,82593,391Minority interest15,62015,871Shareholders' equity:Share capital29,19529,195Retained earnings330,928285,973Accumulated other comprehensive income (note 4)67,86058,717398,788344,690427,983373,885$546,428$483,147See accompanying notes to consolidated financial statements.Winpak Ltd.Consolidated Statements of Earnings and Retained Earnings(thousands of US dollars, except per share amounts) (unaudited)Fourth Quarter EndedYear-To-Date EndedDecember 26December 27December 26December 272010200920102009Sales$154,930$135,464$579,441$505,991Cost of sales108,58195,851410,869354,068Gross profit46,34939,613168,572151,923Operating expensesSelling, general & administrative (note 5)21,48318,83475,95473,479Research and technical3,8923,44513,47812,319Pre-production-48237111Earnings from operations20,97417,28678,90366,014Interest (income) expense(102)150(170)141Earnings before income taxes and minority interest21,07617,13679,07365,873Provision for income taxes6,3555,27524,79421,180Minority interest6424161,7091,802Net earnings$14,079$11,445$52,570$42,891Retained earnings, beginning of period318,782276,385285,973249,990Net earnings14,07911,44552,57042,891Dividends declared(1,933)(1,857)(7,615)(6,908)Retained earnings, end of period$330,928$285,973$330,928$285,973Earnings per shareBasic and fully diluted earnings per share (cents)22188166Average number of shares outstanding (000's)65,00065,00065,00065,000Consolidated Statements of Comprehensive Income(thousands of US dollars) (unaudited)Fourth Quarter EndedYear-To-Date EndedDecember 26December 27December 26December 272010200920102009Net earnings$14,079$11,445$52,570$42,891Unrealized gains on translation of financial statements of operationswith CDN dollar functional currency to US dollar reporting currency4,1318,0609,51226,713Unrealized gains on derivatives designated as cash flow hedges,net of income tax (2010 - $116 and $292) (2009 - $211 and $703)2703537411,422Realized (gains) losses on derivatives designated as cash flow hedges inprior periods transferred to net earnings in the current period,net of income tax (2010 - $(76) and $(476)) (2009 - $(224) and $4)(174)(381)(1,110)10Other comprehensive income - net of income tax (note 4)4,2278,0329,14328,145Comprehensive income$18,306$19,477$61,713$71,036See accompanying notes to consolidated financial statements.Winpak Ltd.Consolidated Statements of Cash Flows(thousands of US dollars) (unaudited)Fourth Quarter EndedYear-To-Date EndedDecember 26December 27December 26December 272010200920102009Cash provided by (used in):Operating activities:Net earnings for the period$14,079$11,445$52,570$42,891Items not involving cash:Depreciation7,0716,21725,85823,598Amortization - intangible assets5306072,1772,398Defined benefit plan costs6197883,4173,382Future income taxes3,9161,5112,6321,963Foreign exchange loss on long-term debt---559Minority interest6424161,7091,802Other310461569142Cash flow from operating activities before the following27,16721,44588,93276,735Change in working capital:Accounts receivable(2,644)(3,572)(7,017)(1,492)Income taxes receivable(1,234)-(1,234)-Inventory5,4563,515(4,483)2,594Prepaid expenses717287(25)95Accounts payable and accrued liabilities1,6924,5187,52910,630Income taxes payable(1,955)(1,446)(2,921)642Defined benefit plan payments(1,218)(2,691)(4,750)(5,310)27,98122,05676,03183,894Investing activities:Acquisition of plant and equipment(12,023)(10,869)(39,017)(21,354)Acquisition of intangible assets(43)(148)(252)(444)(12,066)(11,017)(39,269)(21,798)Financing activities:Repayments of long-term debt---(17,000)Dividends paid(1,901)(1,786)(7,539)(6,664)Change in minority shareholdings in subsidiary--(1,960)-(1,901)(1,786)(9,499)(23,664)Foreign exchange translation adjustment-cash and cash equivalents9931,2412,0612,936Change in cash and cash equivalents15,00710,49429,32441,368Cash and cash equivalents, beginning of period75,48150,67061,16419,796Cash and cash equivalents, end of period$90,488$61,164$90,488$61,164 Supplemental disclosure of cash flow information: Cash paid during the period for:Interest expense$-$3$10$70Income tax expense3,8264,17523,37716,271See accompanying notes to consolidated financial statements.Notes to Consolidated Financial StatementsFor the periods ended December 26, 2010 and December 27, 2009(thousands of US dollars) (Unaudited) 1. Basis of PresentationThe unaudited interim consolidated financial statements have been prepared by the Company in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and have been prepared on a basis consistent with the same accounting policies and methods of application as disclosed in the Company's audited consolidated financial statements for the year ended December 27, 2009.These unaudited interim consolidated financial statements do not include all of the information and notes to the financial statements required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report for the year ended December 27, 2009.The preparation of the interim consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its interim consolidated financial statements are reasonable and prudent, however, actual results could differ from these estimates. 2. International Financial Reporting Standards (IFRS)The Company is required to converge with IFRS for fiscal years beginning on or after January 1, 2011 with comparative figures for 2011. The Company will be electing to report under IFRS for its 2011 fiscal year with comparative figures for 2010. 3. InventoryDecember 26December 2720102009Raw materials 24,29623,759Work-in-process 12,3469,697Finished goods 35,99133,492Spare parts 4,1323,61176,76570,559During the fourth quarter of 2010, the Company recorded inventory write-downs for slow-moving and obsolete inventory of $2,447 (2009- $631) and reversals of previously written-down items that were sold to customers of $134 (2009- $196). During 2010, the Company recorded inventory write- downs to net realizable value of $6,539 (2009- $4,937) and reversals of previously written-down items of $1,366 (2009- $811).4. Accumulated Other Comprehensive IncomeAccumulated other comprehensive income represents the net changes due to foreign exchange rate fluctuations in the net investment in the CDN dollar functional currency operations and the unrealized gains on derivatives designated as cash flow hedges. Fourth Quarter Ended Year-To-Date Ended December 26 December 27 December 26 December 27 2010 2009 2010 2009 Balance, beginning of period 63,633 50,685 58,717 30,572 Other comprehensive income 4,227 8,032 9,143 28,145 Balance, end of period 67,860 58,717 67,860 58,717 The accumulated balances for each component of other comprehensive income, net of income taxes, are comprised of the following: Unrealized gains on translation of financial statements of subsidiaries with Canadian dollar functional currency to US dollar reporting currency 67,419 57,907 Unrealized gains on derivatives designated as cash flow hedges 441 810 Balance, end of period 67,860 58,717 5. Selling, General and AdministrativeIncluded within selling, general & administrative expenses are the following amounts: Fourth Quarter EndedYear-To-Date EndedDecember 26December 27December 26December 272010200920102009Foreign exchange translation loss9121,1796134,599Defined benefit plan costs6197883,4173,382Foreign exchange translation losses represent the realized and unrealized foreign exchange differences recognized upon translation of monetary assets and liabilities. The amounts include realized foreign exchange losses/gains on cash flow hedges arising from transfers of these amounts from other comprehensive income to net earnings.6. Financial InstrumentsThe following sets out the classification and the carrying value and fair value of financial instruments as at December 26, 2010: Carrying / FairFairAssets (Liabilities)ClassificationValueValueCash and cash equivalentsLoans and receivables90,488Accounts receivableLoans and receivables77,118Accounts payable and accrued liabilitiesOther financial liabilities(52,782)Cash flow hedging derivativeDerivatives designated as effective hedges629The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying value because of the short-term maturity of these instruments. The fair value of foreign currency forward contracts, designated as cash flow hedges, have been determined by valuing those contracts to market against prevailing forward foreign exchange rates as at the reporting date. The inputs used for fair value measurements, including their classification within the required three levels of the fair value hierarchy that prioritizes the inputs used for fair value measurement are as follows:Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;Level 2 – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; andLevel 3 – inputs that are not based on observable market data.The following table presents the classification of financial instruments within the fair value hierarchy as at December 26, 2010:Financial Assets Level 1 Level 2 Level 3 Total Foreign currency forward contracts - 629 - 629 7. Financial Risk ManagementIn the normal course of business, the Company has risk exposures consisting primarily of foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. The Company manages its risks and risk exposures through a combination of derivative financial instruments, insurance, a system of internal and disclosure controls and sound business practices. The Company does not purchase any derivative financial instruments for speculative purposes.Risk management is primarily the responsibility of the Company's corporate finance function. Significant risks are regularly monitored and actions are taken, when appropriate, according to the Company's approved policies, established for that purpose. In addition, as required, these risks are reviewed with the Company's Board of Directors.Foreign Exchange RiskThe Company operates primarily in Canada and the Unites States. The functional currency of the parent company is CDN dollars and the reporting currency is US dollars. All operations in the United States and American Biaxis Inc. operate with the US dollar as the functional currency, while all Canadian operations, excluding American Biaxis Inc., operate with the CDN dollar as the functional currency. Most of the Company's business is conducted in US dollars. However, approximately 16 percent of sales are invoiced in CDN dollars and approximately 28 percent of costs are incurred in the same currency, resulting in a net outflow of costs in CDN dollars. Consequently, the Company records foreign currency differences on transactions.In addition, translation differences arise when foreign currency monetary assets and liabilities are translated at foreign exchange rates that change over time. These foreign exchange gains and losses are recorded in selling, general & administrative expenses. As a result of the Company's US dollar net asset monetary position within the CDN dollar functional currency operations as at December 26, 2010, a one-cent change in the period end foreign exchange rate from 1.0089 to 0.9989 (US to CDN dollars) would have decreased net earnings by $479 for 2010. Conversely, a one-cent change in the period end foreign exchange rate from 1.0089 to 1.0189 (US to CDN dollars) would have increased net earnings by $479 for 2010.The Company's Foreign Exchange Policy requires that between 50 and 80 percent of the Company's net requirement of CDN dollars for the ensuing 9 to 15 months will be hedged at all times with a combination of cash and cash equivalents and forward or zero-cost option foreign currency contracts. Transactions are only conducted with certain approved Schedule I Canadian financial institutions. All foreign currency contracts are designated as cash flow hedges. Certain foreign currency contracts matured during the fourth quarter of 2010 and the Company realized pre-tax foreign exchange gains of $250 (year-to-date – realized pre-tax foreign exchange gains of $1,586). These foreign exchange gains were recorded in selling, general & administrative expenses.As at December 26, 2010, the Company had foreign currency forward contracts outstanding with a notional amount of $17.0 million US at an average exchange rate of 1.0454 (US to CDN dollars), maturing between January and September 2011. The fair value of these financial instruments was an unrealized gain of $0.629 million US. The aforementioned unrealized gain has been recorded in other comprehensive income.An unrealized foreign exchange gain during the quarter of $386 (pre-tax) (year-to-date – unrealized foreign exchange gain of $1,033 (pre-tax)) was recorded in other comprehensive income.Interest Rate RiskThe Company's interest rate risk arises from interest rate fluctuations on the interest income that it earns on its cash invested in money market accounts and short-term deposits. The Company developed and implemented an investment policy, which was approved by the Company's Board of Directors, with the primary objective to preserve capital, minimize risk and provide liquidity. Regarding the December 26, 2010 cash and cash equivalents balance of $90.5 million, a 1.0 percent increase/decrease in interest rate fluctuations would increase/decrease earnings before tax by $905 annually.Commodity Price RiskThe Company's manufacturing costs are affected by the price of raw materials, namely petroleum-based and natural gas-based plastic resins and aluminum. In order to manage its risk, the Company has entered into selling price-indexing programs with certain customers. Changes in raw material prices for these customers are reflected in selling price adjustments but there is a slight time lag. For the three months ended December 26, 2010, 60 percent (year-to-date – 57 percent) of sales were to customers with selling price-indexing programs. For all other customers, the Company's preferred practice is to match raw material cost changes with selling price adjustments, albeit with a slight time lag. This matching is not always possible as customers react to selling price pressures related to raw material cost fluctuations according to conditions pertaining to their markets.Credit RiskThe Company is exposed to credit risk from its cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign currency forward contracts), as well as credit exposure to customers with outstanding accounts receivable balances. The following table details the maximum exposure to the Company's counterparty credit risk which represents the carrying value of the financial asset: December 26 December 27 2010 2009 Cash and cash equivalents 90,488 61,164 Accounts receivable 77,118 69,172 Foreign currency forward contracts 629 1,182 168,235 131,518 Credit risk on cash and cash equivalents and financial instruments arises in the event of non-performance by the counterparties when the Company is entitled to receive payment from the counterparty who fails to perform. The Company has established an investment policy to manage its cash. The policy requires that the Company manage its risk by investing its excess cash on hand on a short-term basis, up to a maximum of six months, with several financial institutions and/or governmental bodies that must be 'AA' rated or higher by a recognized international credit rating agency or insured 100 percent by a 'AAA' rated CDN or US government. The Company manages its counterparty risk on its financial instruments by only dealing with CDN Schedule I financial institutions.In the normal course of business, the Company is exposed to credit risk on its accounts receivable from customers. The Company's current credit exposure is higher in the weakened North American economic environment. To mitigate such risk, the Company performs ongoing customer credit evaluations and assesses their credit quality by taking into account their financial position, past experience and other pertinent factors. Management regularly monitors customer credit limits, performs credit reviews and, in certain cases insures accounts receivable against credit losses.As at December 26, 2010, the Company believes that the credit risk for accounts receivable is mitigated due to the following: a) a broad customer base which is dispersed across varying market sectors and geographic locations, b) 97 percent of gross accounts receivable balances are outstanding for less than 60 days, c) 17 percent of the accounts receivable balances are insured against credit losses, and d) the Company's exposure to individual customers is limited and the ten largest customers, on aggregate, accounted for 33 percent of the total accounts receivable balance.The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the earnings statement within selling, general, & administrative expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against selling, general, and administrative expenses in the earnings statement. The following table sets out the aging details of the Company's accounts receivable balances outstanding based on the status of the receivable in relation to when the receivable was due and payable and related allowance for doubtful accounts: December 26December 272010 2009Current - neither impaired nor past due 64,345 53,224 Not impaired but past the due date: Within 30 days 13,01516,725 31 - 60 days 1,2371,271 Over 60 days 77889579,37572,115 Less: Allowance for doubtful accounts (1,628)(1,761) Total accounts receivable, net 77,74770,354The following table details the continuity of the allowance for doubtful accounts: December 26 December 27 20102009Balance - beginning of year (1,761)(1,663) Provisions for the period, net of recoveries (320)(215) Uncollectible amounts written off 462180 Foreign exchange impact (9)(63)Balance - end of year (1,628)(1,761)Liquidity RiskLiquidity risk is the risk that the Company would not be able to meet its financial obligations as they come due. Management believes that the liquidity risk is low due to the strong financial condition of the Company. This risk assessment is based on the following: a) cash and cash equivalents amounts of $90.5 million, b) no outstanding long-term debt, c) unused credit facilities comprised of unsecured operating lines of $38 million, d) the ability to obtain term-loan financing to fund an acquisition, if needed, e) an informal investment grade credit rating, and f) the Company's ability to generate positive cash flows from ongoing operations. Management believes that the Company's cash flows are more than sufficient to cover its operating costs, working capital requirements, capital expenditures and dividend payments in 2011. The Company's accounts payable and accrued liabilities are virtually all due within 6 months.Commitments and Contractual ObligationsThe Company enters into commitments and contractual obligations in the normal course of business operations. The Company has commitments of $4,539 (2009 - $13,004) with respect to plant and equipment purchases. The Company rents premises and equipment under operating leases that expire at various dates until January 31, 2016. The aggregate minimum rentals payable for these leases are as follows: Year 2011 2012 2013 2014 2015 Thereafter Total Amount 1,348 1,332 1,239 1,189 566 11 5,685 8. Capital ManagementThe Company's objectives in managing capital are to ensure the Company will continue as a going concern and have sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to deploy capital to provide an appropriate return on investment to its shareholders. The Company also strives to maintain an optimal capital structure to reduce the overall cost of capital.In the management of capital, the Company includes bank indebtedness, long-term debt and shareholders' equity. established quantitative return on capital criteria for management and year-over-year sustainable earnings growth targets. reviews, on a regular basis, the level of dividends paid to the Company's shareholders. The Board of Directors has The Board of Directors also reviews, on a regular basis, the level of dividends paid to the Company's shareholders.The Company has externally imposed capital requirements as governed through its bank operating line credit facilities. The Company monitors capital on the basis of funded debt to EBITDA (earnings before interest, income taxes, depreciation and amortization) and debt service coverage. Funded debt is defined as the sum of long-term debt and bank indebtedness less cash and cash equivalents. The funded debt to EBITDA is calculated as funded debt, as at the financial reporting date, over the twelve-month rolling EBITDA. This ratio is to be maintained under 3.00:1. As at December 26, 2010, the ratio was 0.00:1. Debt service coverage is calculated as a twelve-month rolling earnings from operations over debt service. Debt service is calculated as the sum of one-sixth long-term debt outstanding plus annualized interest expense and dividends. This ratio is to be maintained over 1.50:1. As at December 26, 2010, the ratio was 10.94:1.There were no changes in the Company's approach to capital management during the current period.9. SeasonalityThe Company experiences seasonal variation in sales, with sales typically being the highest in the second and fourth quarters, and lowest in the first quarter.FOR FURTHER INFORMATION PLEASE CONTACT: K.P. KuchmaWinpak Ltd.Vice President and CFO(204) 831-2254ORB.J. BerryWinpak Ltd.President and CEO(204) 831-2216