Stock Symbol: TSX - CCL.A and CCL.B
TORONTO, Aug. 3 /CNW/ -
Dear Shareholder:
Please find enclosed the Second Quarter 2006 financial results and
related public disclosures for CCL Industries Inc. This shareholder package
provides detailed information about your Company's business activities and
financial performance.
Over the last six years, CCL has completed 25 acquisition and divestiture
transactions totaling over $800 million. These activities helped to reposition
the Company as a major global player focused on specialty packaging. We have
been continuously reviewing further strategic acquisition possibilities, but
it has now been over six months since our last transaction, the successful
purchase of Prodesmaq's label business in Brazil. This unplanned break from
these types of business deals has provided time for management to digest the
new companies and to reorganize operations in anticipation of organic growth
and international acquisition opportunities expected in the years ahead.
Your Board of Directors is pleased to approve the next quarterly dividend
payable on September 29, 2006. This dividend is supported by the strong cash
flow and earnings growth of your Company and by the relatively conservative
financial leverage of the business. This dividend is a continuation of CCL's
record of paying consecutive quarterly dividends for over 25 years without a
reduction. The dividend is $0.11 per Class B non-voting share and $0.0975 per
Class A voting share.
Conference calls with our stakeholders are held following the release of
our quarterly results and when significant events require additional
communication. These calls are made to ensure that all stakeholders are kept
current with our business developments and to support our good corporate
governance practices. Presentation materials used during the conference calls
and the annual Investors' Day are posted on our web site along with audio
recordings of the meetings. Instructions for accessing these services are set
out at the end of this earnings release.
We encourage all shareholders to access our web site www.cclind.com on a
regular basis for investor and company news. 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 Investor Relations Section on our web
site or write to us at CCL to the attention of Christene Duncan.
Yours truly,
Jon K. Grant
Chairman of the Board
Investor Update
---------------
1. Second Quarter 2006 Results and Dividend Release
2. Consolidated Statements of Earnings and Retained Earnings
3. Consolidated Balance Sheets
4. Consolidated Statements of Cash Flows
5. Notes to Consolidated Financial Statements
6. Second Quarter 2006 Management's Discussion and Analysis
<<
Results Summary
---------------
For Periods Ended June 30th
-----------------------------------------------------
Three Months Six Months
-----------------------------------------------------
(in millions of
Cdn dollars,
except per % %
share data) 2006 2005 Change 2006 2005 Change
---- ---- ------ ---- ---- ------
Sales $ 296.6 $ 280.1 5.9 $ 609.8 $ 545.8 11.7
------- ------- ------- -------
------- ------- ------- -------
Unusual items
- net loss (1.0) (15.5) (0.6) (15.5)
------- ------- ------- -------
------- ------- ------- -------
Net earnings
from continuing
operations 17.6 5.1 245.1 38.7 21.2 82.5
Net earnings
from discontinued
operations,
net of tax - 1.7 - 5.3
Gain on sale of
discontinued
operations,
net of tax - 107.0 - 107.0
------- ------- ------- -------
Net earnings $ 17.6 $ 113.8 $ 38.7 $ 133.5
------- ------- ------- -------
------- ------- ------- -------
Per Class B
shares
Continuing
operations $ 0.54 $ 0.16 237.5 $ 1.20 $ 0.66 81.8
Discontinued
operations - 0.06 - 0.17
Gain on sale
of discontinued
operations - 3.31 - 3.31
------- ------- ------- -------
Class B - net
earnings $ 0.54 $ 3.53 $ 1.20 $ 4.14
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings
per Class B $ 0.53 $ 3.45 $ 1.17 $ 4.05
------- ------- ------- -------
------- ------- ------- -------
Unusual items and
tax benefit on
previously
unrecognized
tax losses
included in
continuing
operations -
net loss $ (0.03) $ (0.35) $(0.06) $ (0.35)
------- ------- ------- -------
------- ------- ------- -------
Number of
outstanding
shares (in 000s)
Weighted average
for the
period 32,212 32,272
Actual at
period end 32,580 32,202
>>
Toronto, August 3, 2006 - CCL Industries Inc., a world leader in
specialty packaging and labelling solutions for the consumer products and
healthcare industries, announced today its financial results for the second
quarter ended June 30, 2006 and the declaration of its quarterly dividend.
Sales for the second quarter of 2006 of $296.6 million were 6% ahead of
the $280.1 million recorded in the second quarter of 2005 for continuing
operations, while sales for the first six months of 2006 of $609.8 million
were 12% higher than last year's $545.8 million. Financial comparisons to the
prior year's results have continued to be negatively affected by the
significant appreciation of the Canadian dollar relative to the U.S. dollar,
the euro and most other currencies. In addition, business acquisitions and a
disposition have impacted the comparison to prior periods. Sales increased for
the quarter by 17% (23% year-to-date) due to acquisitions and organic growth,
partially offset by a decrease of 11% (11% year-to-date) due to foreign
exchange and the disposition. On a comparative basis with last year's second
quarter, sales increased in the Label, Container and Tube Divisions (excluding
the disposition). Sales volume for ColepCCL was marginally lower than last
year's level.
Net earnings from continuing operations for the second quarter of 2006
were $17.6 million, up by 245% from the $5.1 million recorded in the second
quarter of 2005. Net earnings were impacted by a loss from unusual items of
$1.0 million before tax ($0.7 million after tax) in the second quarter of
2006. In the second quarter of 2005, there was a loss from unusual items of
$15.5 million ($15.4 million after tax) partially offset by a positive tax
benefit from previously unrecognized losses of $4.3 million. In May 2005, CCL
completed the sale of its North American Custom Manufacturing Division
("Custom") for gross proceeds of $273 million and has recorded this business
as a discontinued operation. Historical financial information on continuing
operations has been restated to reflect this change. Net earnings from
discontinued operations, including the gain on the sale of Custom were
$108.7 million in last year's second quarter.
Earnings from continuing operations per Class B share were $0.54 in the
second quarter of 2006 compared to the $0.16 earned in the same period last
year, an increase of 238%. Unusual items in the second quarter of 2006
decreased earnings per Class B share by $0.03. Unusual items net of the tax
benefit from previously unrecognized tax losses in last year's second quarter
negatively affected earnings per Class B share by $0.35. Earnings per Class B
share from discontinued operations in the second quarter of 2005 including the
gain on sale were $3.37. Diluted earnings per Class B share were $0.01 lower
than basic earnings per Class B share in the second quarter of 2006 and were
$0.08 lower in the comparable 2005 period.
For the first half of 2006, earnings from continuing operations per Class
B share were $1.20 compared to $0.66 in the year earlier period, an 82%
increase. Unusual items including the tax benefit from previously unrecognized
tax losses reduced earnings per Class B share by $0.06 for the first half of
2006 versus a $0.35 reduction in the year earlier comparable period. Earnings
per Class B share from discontinued operations for the six months of 2005,
including the gain on sale, were $3.48. Diluted earnings per Class B share
were $0.03 lower than basic earnings for the first six months of 2006 and were
$0.09 lower in the first half of 2005.
Donald G. Lang, Vice Chairman and Chief Executive Officer commented, "We
are pleased with the performance of our businesses in the second quarter after
our record first quarter. Our earnings per share from continuing operations,
excluding unusual items, in the second quarter were 12% higher than last
year's comparable period despite an 11% negative impact of the strong Canadian
dollar on these results. Over the last year, we have more than replaced the
earnings from the disposed North American Custom Manufacturing business with
organic and acquisition growth in our specialty packaging core despite the
significant unfavourable currency effect."
Mr. Lang continued, "The Label Division continues to enjoy good growth as
our strategy to invest in accretive acquisitions such as the Prodesmaq
business in Brazil, expand our high-end equipment base and build new plants to
support our customers are producing a positive earnings trajectory. The
Container Division experienced modest sales growth in aerosols but much slower
sales for beverage bottles. Order backlogs have been reduced to historical
levels due to the significant capacity expansion installed over the last
couple of years and the focus is now on developing new products and customers.
The new management team in the Container Division is in the process of
restructuring operations to lower costs and be more responsive to its
customers. It is gratifying to see the sequential improvement in sales and
income in our Tube Division as management continues to strive for a leadership
position in this business in North America. Our ColepCCL joint venture is
performing reasonably well despite weaker sales but is expecting to see
improvements in the last half of 2006."
Mr. Lang added, "CCL's second quarter operating cash flow was robust as
we now have over $110 million cash on hand despite our aggressive capital
spending program. Net debt to capitalization has been reduced to 36% from 38%
at the end of March, below our target range of 40-45%, and book value per
share has grown to $18.34, up 6% from a year ago."
Mr. Lang concluded, "Our outlook for 2006 is reasonably positive as we
have had a very strong first half. We have seen some early signs of softness
in the U.S. market, particularly for personal care products but it is too
early to tell whether this is a trend. Based on our positive cash flows and
firm financial position, your Board of Directors has declared a continuation
of the quarterly dividend at its current level after having increased it by
10% last quarter. The quarterly dividend is $0.11 on the Class B non-voting
shares and $0.0975 on the Class A voting shares to shareholders of record at
the close of business on September 15, 2006 payable on September 29, 2006. CCL
continues its record of paying quarterly dividends without reduction or
omission for over 25 years."
CCL Industries Inc. manufactures pressure-sensitive labels, aluminum
containers and plastic tubes, providing state-of-the-art specialty packaging
solutions to global producers of consumer brands in the home and personal
care, healthcare and specialty food and beverage sectors. With headquarters in
Toronto, Canada, CCL Industries employs approximately 4,600 people and
operates 46 production facilities in North America, Europe, Latin America and
Asia. CCL's joint venture, ColepCCL operates 5 plants in Europe and employs
approximately 1,800 people.
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 4:00 p.m. EDT on Thursday,
----- August 3, 2006 to discuss these results.
To access this call, please dial Toll-Free North America -
1-800-377-5794 or Domestic and International - 416-641-6696.
Post-View service will be available from Thursday, August 3, 2006
at 6:00 p.m. EDT until Sunday, September 3, 2006 at 11:59 p.m.
EDT.
Dial: Toll-Free - 1-800-558-5253 - Access Code: 21298473.
For more details on CCL, visit our web site - www.cclind.com
Financial Tables follow ...
CCL INDUSTRIES INC.
2006 Second Quarter
Consolidated Statements of Earnings and Retained Earnings
Three Months Six Months
Unaudited ended June 30th ended June 30th
-------------------------------------------------------------------------
(in millions of
Cdn dollars,
except per % %
share data) 2006 2005 Change 2006 2005 Change
-------- -------- -------- -------- -------- --------
Sales $ 296.6 $ 280.1 5.9 $ 609.8 $ 545.8 11.7
-----------------------------------------------------
Income before
undernoted items 49.6 43.7 13.5 104.7 87.1 20.2
Depreciation and
amortization 18.5 16.2 36.6 31.7
Interest expense,
net 5.3 5.3 10.9 10.6
-----------------------------------------------------
25.8 22.2 16.2 57.2 44.8 27.7
Unusual items -
net loss (note 5) (1.0) (15.5) (0.6) (15.5)
-----------------------------------------------------
Earnings before
income taxes 24.8 6.7 270.1 56.6 29.3 93.2
Income taxes 7.2 1.6 17.9 8.1
-----------------------------------------------------
Net earnings from
continuing
operations 17.6 5.1 245.1 38.7 21.2 82.5
Net earnings
from discontinued
operations, net
of tax (note 4) - 1.7 - 5.3
Gain on sale of
discontinued
operations, net
of tax (note 4) - 107.0 - 107.0
-----------------------------------------------------
Net earnings 17.6 113.8 38.7 133.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings,
beginning of
period 430.9 289.2 413.0 272.7
Net earnings 17.6 113.8 38.7 133.5
Repurchase of
shares - (10.7) - (10.7)
-----------------------------------------------------
448.5 392.3 451.7 395.5
Less dividends:
Class A shares 0.2 0.2 0.4 0.4
Class B shares 3.3 3.0 6.3 6.0
-----------------------------------------------------
3.5 3.2 6.7 6.4
-----------------------------------------------------
Retained earnings,
end of period $ 445.0 $ 389.1 $ 445.0 $ 389.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Class B -
Continuing
operations $ 0.54 $ 0.16 237.5 $ 1.20 $ 0.66 81.8
Discontinued
operations $ - $ 0.06 $ - $ 0.17
Gain on sale
of discontinued
operations $ - $ 3.31 $ - $ 3.31
-----------------------------------------------------
Class B -
Net earnings $ 0.54 $ 3.53 (84.7) $ 1.20 $ 4.14 (71.0)
Class A(x) $ 0.52 $ 3.51 $ 1.17 $ 4.11
-------------------------------------------------------------------------
Diluted earnings
per share
Class B -
Continuing
operations $ 0.53 $ 0.16 231.3 $ 1.17 $ 0.65 80.0
Discontinued
operations $ - $ 0.05 $ - $ 0.16
Gain on sale
of discontinued
operations $ - $ 3.24 $ - $ 3.24
-----------------------------------------------------
Class B -
Net earnings $ 0.53 $ 3.45 (84.6) $ 1.17 $ 4.05 (71.1)
Class A(x) $ 0.51 $ 3.43 $ 1.14 $ 4.02
-------------------------------------------------------------------------
(x) Earnings per class A shares are $0.02 lower than Class B shares for
the second quarters ($0.03 year-to-date ) for 2005 and 2006.
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
2006 Second Quarter
Consolidated Balance Sheets
June 30th December 31st June 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2006 2005 2005
----------- ----------- -----------
(Unaudited) (Unaudited)
Assets
Current assets
Cash and cash equivalents $ 111.7 $ 120.2 $ 230.3
Accounts receivable - trade 170.2 162.2 162.6
Other receivables and
prepaid expenses 27.4 20.7 29.8
Inventories 99.5 102.1 96.0
-------------------------------------
408.8 405.2 518.7
Capital assets 561.5 534.7 479.8
Other assets 24.5 29.2 29.3
Intangible assets 46.9 27.9 27.8
Goodwill 386.3 371.9 323.4
-------------------------------------------------------------------------
Total assets $ 1,428.0 $ 1,368.9 $ 1,379.0
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank advances $ 3.8 $ 8.8 $ 10.2
Accounts payable
and accrued
liabilities 227.3 240.3 222.1
Income and other taxes
payable 23.8 24.3 26.9
Current portion of
long-term debt 21.6 17.3 165.5
--------------------------------------
276.5 290.7 424.7
Long-term debt 420.5 376.5 258.0
Other long-term items 52.1 51.4 53.3
Future income taxes 88.9 84.5 87.3
-------------------------------------------------------------------------
Total liabilities 838.0 803.1 823.3
-------------------------------------------------------------------------
Shareholders' equity
Share capital (note 2) 189.9 188.7 188.2
Contributed surplus 3.1 2.0 0.4
Retained earnings 445.0 413.0 389.1
Foreign currency translation
adjustment (48.0) (37.9) (22.0)
-------------------------------------------------------------------------
Total shareholders' equity 590.0 565.8 555.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,428.0 $ 1,368.9 $ 1,379.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
Certain 2005 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
2006 Second Quarter
Consolidated Statements of Cash Flows
Three Months Six Months
Unaudited ended June 30th ended June 30th
-------------------------------------------------------------------------
(in millions of 2006 2005 2006 2005
Cdn dollars, -------- -------- -------- --------
Cash provided
by (used for)
Operating activities
Net earnings $ 17.6 $ 113.8 $ 38.7 $ 133.5
Earnings from discontinued
operations - (1.7) - (5.3)
Gain on sale of discontinued
operations - (107.0) - (107.0)
Items not requiring cash:
Depreciation and amortization 18.5 16.2 36.6 31.7
Stock-based compensation 0.6 - 1.1 0.1
Future income taxes (2.5) (0.6) 0.3 2.7
Unusual items (note 5) 0.7 15.4 1.9 15.4
-----------------------------------------------------------------------
34.9 36.1 78.6 71.1
Net change in non-cash working
capital 10.2 (3.7) (29.5) (28.2)
-----------------------------------------------------------------------
Cash provided by continuing
operations 45.1 32.4 49.1 42.9
Cash provided by (used for)
discontinued operations - (3.3) - 3.7
-----------------------------------------------------------------------
Cash provided by operating
activities 45.1 29.1 49.1 46.6
-------------------------------------------------------------------------
Financing activities
Proceeds on issuance of
long-term debt 1.5 3.2 202.3 35.5
Retirement of long-term debt (6.0) (1.0) (146.5) (2.7)
Decrease in bank advances (5.8) (60.9) (5.2) (25.8)
Issue of shares 0.2 2.3 0.9 3.6
Repurchase of shares - (14.1) - (14.1)
Dividends (3.5) (3.2) (6.7) (6.4)
-----------------------------------------------------------------------
Cash provided by (used for)
financing activities (13.6) (73.7) 44.8 (9.9)
-------------------------------------------------------------------------
Investing activities
Additions to capital assets (25.1) (40.6) (67.6) (84.7)
Proceeds on disposal of
capital assets 0.3 0.2 1.5 0.4
Proceeds on business
dispositions (note 4 and 5) - 272.8 24.4 272.8
Business acquisitions (note 3) - (0.3) (62.2) (64.1)
Other 2.2 (2.8) 3.9 (0.1)
-----------------------------------------------------------------------
Cash (used for) provided
by investing activities (22.6) 229.3 (100.0) 124.3
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash (3.0) (1.6) (2.4) (2.1)
-------------------------------------------------------------------------
Increase (decrease) in cash 5.9 183.1 (8.5) 158.9
Cash and cash equivalents
at beginning of period 105.8 47.2 120.2 71.4
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 111.7 $ 230.3 $ 111.7 $ 230.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents are defined as cash and short-term investments.
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Periods ended June 30, 2006 AND 2005
(Tabular amounts in millions of Cdn dollars except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT 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, 2005.
Comparative figures have been reclassified where necessary to
correspond with the current period's presentation.
2. SHARE CAPITAL
Issued and outstanding
June 30, December 31, June 30,
----------- ----------- -----------
2006 2005 2005
----------- ----------- -----------
Issued share capital $ 197.1 $ 196.1 $ 190.0
Less: Executive share purchase
plan loans (1.6) (1.8) (1.8)
Shares held in trust (5.6) (5.6) -
-------------------------------------
Total $ 189.9 $ 188.7 $ 188.2
-------------------------------------
-------------------------------------
During 2005, the Company granted a stock award of 200,000 Class B
shares of the Company. These shares are restricted in nature; 120,000
shares will vest in 2007 dependent on performance conditions, and
80,000 shares will vest in 2009 dependent on continuing employment.
The Company purchased these 200,000 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
compensation expense.
Actual number of shares:
June 30, December 31, June 30,
----------- ------------ -----------
2006 2005 2005
----------- ------------ -----------
Class A 2,381,584 2,422,204 2,434,951
Class B 30,198,759 30,088,789 29,766,842
-------------------------------------
Subtotal 32,580,343 32,510,993 32,201,793
Less: Executive share
purchase plan shares (125,000) (150,000) (150,000)
Shares held in trust (200,000) (200,000) -
-------------------------------------
Total 32,255,343 32,160,993 32,051,793
-------------------------------------
-------------------------------------
June 30, December 31, June 30,
----------- ------------ -----------
2006 2005 2005
----------- ------------ -----------
Year-to-date weighted
average number of shares 32,211,906 32,171,433 32,271,556
-------------------------------------
-------------------------------------
Year-to-date weighted
average diluted number
of shares 33,256,345 33,010,605 32,984,684
-------------------------------------
-------------------------------------
3. ACQUISITIONS
In January 2006, the Company purchased Prodesmaq, based in Vinhedo,
Brazil. Prodesmaq operates 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. The Company is reviewing the
valuation of the net assets acquired, therefore certain items
disclosed below may change when the review is completed in 2006.
Details of the transaction are as follows:
Current assets $ 11.0
Current liabilities (2.1)
Non-current assets at assigned values 9.2
Future taxes (7.3)
Intangible assets 20.2
Goodwill 31.2
-----------
Net assets purchased $ 62.2
-----------
-----------
Total consideration:
Cash, less cash acquired of $1.7 million $ 62.2
-----------
-----------
In January 2005, the Company purchased Steinbeis Packaging based in
Holzkirchen, Germany, for $64.1 million, net of cash acquired. The
purchase price was financed by cash on hand and bridge bank financing
denominated in euros. In addition, the Company completed the purchase
of the Holzkirchen building and land right for $4.0 million euros in
March 2006. Steinbeis Packaging, through its plants in the U.S.,
France, Germany and China, supplies battery labels on a global basis
and provides premium decorative label solutions for the European
consumer products market.
Details of the purchase price allocations, as finalized at December
31, 2005, are as follows:
Current assets $ 34.9
Current liabilities (39.2)
Non-current assets at assigned values 44.8
Long-term liabilities (7.6)
Future taxes (4.6)
Intangible assets 3.7
Goodwill 32.1
-----------
Net assets purchased $ 64.1
-----------
-----------
Total consideration:
Cash, less cash acquired of $4.8 million $ 64.1
-----------
-----------
4. DISCONTINUED OPERATIONS
In May 2005, the Company sold its North American Custom Manufacturing
Division for $272.8 million in cash to KCP Income Fund, a Toronto
based contract manufacturer of private label household products. The
sale resulted in a gain of $129.8 million ($107.0 million after tax)
for the period ended June 30, 2005. Closing adjustments in fourth
quarter of 2005 resulted in a revised gain of $131.0 million
($108.5 million after tax) for the year ended December 31, 2005. The
disposition is reported as discontinued operations and the results
are as follows:
Three months Six months
ended June 30th ended June 30th
---------------------------------------------------------------------
2005 2005
---------- ----------
Sales from discontinued operations $ 83.0 $ 246.8
---------- ----------
Income before undernoted items 4.5 14.0
Depreciation and amortization 1.7 5.1
Interest expense, net 0.3 1.0
---------- ----------
Earnings before income taxes 2.5 7.9
Income taxes 0.8 2.6
---------- ----------
Net earnings from discontinued
operations $ 1.7 $ 5.3
---------- ----------
---------- ----------
Gain on sale of discontinued
operations, net of tax
of $22.8 million $ 107.0 $ 107.0
---------------------------------------------------------------------
Interest expense reported above in discontinued operations included
an allocation from the Company's total interest expense based on the
ratio of net assets sold to total net assets. Income tax expense has
been based on the effective income tax rate in the local country.
5. UNUSUAL ITEMS Three months Six months
ended June 30th ended June 30th
---------------------------------------------------------------------
Segment 2006 2005 2006 2005
--------- -------- --------- --------- --------
Container segment
restructuring Container $ (0.9) $ - $ (2.2) $ -
Gain (loss) on net
assets sale of CCL
Dispensing Systems,
LLC Tube (0.1) - 1.6 -
Impairment of
IntraPac L.P.
investment Corporate - (11.7) - (11.7)
Mexico Container
business
restructuring and
asset write-down Container - (3.8) - (3.8)
-------------------------------------
Loss $ (1.0) $ (15.5) $ (0.6) $ (15.5)
-------------------------------------
-------------------------------------
Tax recovery (expense)
- unusual items $ 0.3 $ 0.1 $ (1.3) $ 0.1
---------------------------------------------------------------------
In 2006, the Company commenced a senior management restructuring of
the Container segment and recorded a provision related mostly to
severances totalling $2.2 million ($1.5 million after tax). Further
costs will be incurred in 2006 as the Company completes its
evaluation.
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 $1.4 million after tax).
In March 2006, the Company repaid US$120 million on its unsecured
senior notes which resulted in a foreign exchange gain and a capital
gain for tax purposes. This resulted in the utilization of a
previously unrecognized tax benefit from a 2002 unusual item write-
down, and generated an unusual tax recovery of $1.0 million in the
first quarter.
In June 2005, the Company provided for an impairment of its equity
investment in IntraPac L.P. in the amount of $11.7 million
($11.6 million after tax).
In June 2005, the Company completed an evaluation of its plastic
packaging business within the Container Division in Mexico and
recorded a provision for impairment of related capital assets and
inventory write-downs that amounted to $3.8 million, with no tax
benefit.
6. EMPLOYEE FUTURE BENEFITS
The expense for the defined benefit plans in the second quarter is
$0.5 million (2005 - $0.4 million) and year-to-date $0.9 million
(2005 - $0.9 million). In addition, the gain on disposal of
discontinued operations in 2005 included $1.3 million of settlement
losses.
7. SEGMENTED INFORMATION
Industry segments
In 2006, the Company has separated the Container segment into
Container and Tube, to more closely represent the current management
structure and provide more relevant information to the Company's
stackholders. The new Container segment manufactures aluminum aerosol
containers, while the Tube segment manufactures plastic tubes.
Three months ended June 30th Six months ended June 30th
---------------------------------------------------------------------
Sales Operating income Sales Operating income
--------------------------------------------------------
2006 2005 2006 2005 2006 2005 2006 2005
------ ------ ------ ------ ------ ------ ------ -------
Label $191.5 $167.2 $ 23.2 $ 19.3 $396.6 $324.5 $ 52.4 $ 38.4
Container 48.3 44.8 5.7 6.0 92.7 80.9 11.9 11.3
Tube 17.7 20.2 1.5 1.1 36.8 41.2 2.5 2.0
ColepCCL 39.1 47.9 3.9 4.1 83.7 99.2 8.0 9.5
--------------------------------------------------------
Total
operations $296.6 $280.1 34.3 30.5 $609.8 $545.8 74.8 61.2
------------- -------------
Corporate
expense (3.2) (3.0) (6.7) (5.8)
-------------- --------------
31.1 27.5 68.1 55.4
Interest
expense,
net 5.3 5.3 10.9 10.6
-------------- --------------
25.8 22.2 57.2 44.8
Unusual items
- net loss (1.0) (15.5) (0.6) (15.5)
-------------- --------------
Earnings
before
income
taxes 24.8 6.7 56.6 29.3
Income
taxes 7.2 1.6 17.9 8.1
-------------- --------------
Net
earnings
from
continuing
operations 17.6 5.1 38.7 21.2
Net
earnings
from
discontinued
operations,
net of tax - 1.7 - 5.3
Gain on sale
of discontinued
operations,
net of tax - 107.0 - 107.0
-------------- --------------
Net earnings $ 17.6 $113.8 $ 38.7 $133.5
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable Assets Goodwill
------------------- --------
June 30th December 31st June 30th December 31st
--------- ------------- --------- -------------
2006 2005 2006 2005
---------- ---------- ---------- -----------
Label $ 848.3 $ 756.2 $ 302.7 $ 276.7
Container 179.1 177.0 12.8 12.7
Tube 89.3 118.2 28.6 40.4
ColepCCL 165.4 163.3 42.2 42.1
Discontinued
operations - - - -
Corporate 145.9 154.2 - -
-----------------------------------------------------
Total $ 1,428.0 $ 1,368.9 $ 386.3 $ 371.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation & Amortization Capital Expenditures
--------------------------- --------------------
Six months ended June 30th Six months ended June 30th
--------------------------- ---------------------------
2006 2005 2006 2005
---------- ---------- ---------- -----------
Continuing operations
---------------------
Label $ 23.9 $ 18.5 $ 48.3 $ 58.0
Container 5.2 4.5 13.1 14.9
Tube 3.6 4.2 4.0 4.8
ColepCCL 3.6 4.2 1.9 2.3
Discontinued
operations - - - 4.5
Corporate 0.3 0.3 0.3 0.2
-----------------------------------------------------
Total $ 36.6 $ 31.7 $ 67.6 $ 84.7
---------------------------------------------------------------------
---------------------------------------------------------------------
>>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Second Quarters Ended June 30, 2006 and 2005
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 second quarters ended June 30, 2006 and 2005 and an update
to the 2005 Annual MD&A document. The information in this interim MD&A is
current to August 3, 2006 and should be read in conjunction with the Company's
June 30, 2006 unaudited second quarter financial statements released on August
3, 2006 and the 2005 Annual MD&A document, which forms part of the CCL
Industries Inc. 2005 Annual Report, dated February 16, 2006.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and in accordance with the
requirements of section 1751 of the CICA Handbook. Unless otherwise noted,
both these financial statements and this interim MD&A are expressed in
Canadian dollars as the reporting currency. The measurement currencies of
CCL's operations are primarily 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 and the Polish zloty. CCL's
Audit Committee and its Board of Directors have reviewed this interim MD&A to
ensure consistency with the current approved strategy and actual results of
the Company.
Management's Discussion and Analysis contains 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 geopolitical conditions; currency exchange rates; and CCL's ability to
attract and retain qualified employees and, as such, the Company's results
could differ materially from those anticipated in these forward-looking
statements.
Overview of Business Conditions
-------------------------------
The global markets in which CCL's customers operate have continued to be
generally positive through the second quarter of 2006; however, North American
markets have shown some signs of softening after a very strong first quarter.
CCL has experienced good growth in most of its product categories in line with
its customers' performance. The economies in the countries where CCL operates
continue to be generally satisfactory despite volatile energy and commodity
costs and the impact of these higher costs throughout the supply chain. The
U.S. Federal Reserve has continued to raise short-term interest rates in its
attempt to soften the impact of potential inflation and to stem the weakening
of the U.S. dollar. The cumulative effect of these higher rates appear to
finally have reduced consumer spending in the second quarter and therefore
have negatively affected, to a smaller degree, the personal care market in the
U.S., particularly in the latter part of the quarter. The European economy is
reasonably stable while Asian and Latin American markets are still growing
rapidly.
Most of CCL's global customers continue to be experiencing higher sales
volumes than last year, reflecting the positive world economy with the
exception of the U.S. markets that have been affected by reduced consumer
spending. As a result, CCL had an exceptional first quarter and had reasonable
growth in most product categories and regions in the second quarter with the
exception of its personal care business in the U.S. In general, new orders to
date in the third quarter continue to show strength although order intake from
personal care customers in the U.S. in particular have seen a softening trend.
The impact of higher material prices on our customers' products and the
supply chain's ability to access raw materials continues to be challenging.
All CCL business units are direct or indirect users of hydrocarbon-based
commodities and energy. The costs of many raw materials used to manufacture
CCL's products have been volatile and some are at substantially higher price
levels than in 2005. Management has generally been able to control these costs
and maintain profit margins with a combination of procurement leverage and
price increases to customers. Managing these high input costs and the timing
and size of negotiated customer selling price increases in response will
continue to be a challenge throughout 2006.
The strengthening of the Canadian dollar has also continued to have a
negative effect on CCL and its reported financial results. Compared to the
second quarter of 2005, the U.S. dollar has depreciated on average by 10% (8%
year-to-date) relative to the Canadian dollar, while the euro has also
depreciated by 10% (12% year-to-date).
The Label Division continues to enjoy reasonable sales growth as our
global customers are expanding product lines and the business is realizing the
synergies of our international network in the marketplace including our recent
Brazilian acquisition. New orders have been firm with the exception of the
slowdown that continued into the third quarter in the U.S. personal care
business. The significant additional new manufacturing capacity installed in
the Container Division has had the expected effect of reducing customer order
backlogs and improving service levels. At the same time, there has been
reduced order intake particularly in beverage and to some extent, in personal
care for specific sizes of aerosol containers. The Tube Division continues to
experience a steady turnaround in sales with a good market share growth trend
in the second quarter although new orders are softer in July. ColepCCL, CCL's
40% owned joint venture, overall had reduced sales from a year ago, excluding
the negative effect of currency but expect to see improvements in the last
half of the year. Further details on divisional sales trends can be found
later in this report.
Discontinued Operations
-----------------------
On May 17, 2005, CCL completed the sale of the North American Custom
Manufacturing business ("Custom") for $273 million in cash, resulting in an
after-tax gain of $108.5 million after final adjustments in December 2005. CCL
recorded this divestiture as a discontinued operation and consequently, the
sales and income contribution from Custom in 2005 has been excluded from
continuing operations.
Review of Consolidated Continuing Operations
--------------------------------------------
Sales for the second quarter of 2006 of $296.6 million were 6% ahead of
the $280.1 million recorded in the second quarter of 2005 for continuing
operations, while sales for the first six months of 2006 of $609.8 million
were 12% higher than last year's $545.8 million. Financial comparisons to the
prior year's results have continued to be negatively affected by the
significant appreciation of the Canadian dollar relative to the U.S. dollar,
the euro, and most other currencies. In addition, business acquisitions and a
disposition (as described below) have impacted the comparison to prior
periods. Sales increased for the quarter by 17% (23% year-to-date) due to
acquisitions and organic growth, partially offset by a decrease of 11% (11%
year-to-date) due to foreign exchange and the disposition. On a comparative
basis with last year's second quarter, sales increased in the Label, Container
and Tube divisions (excluding the disposition). Sales volumes for ColepCCL
were marginally lower than the prior year level.
The following six acquisitions and one divestiture affected financial
comparisons in the first two quarters of 2006 versus 2005.
<<
- January 31, 2005, the Label Division acquired Steinbeis Packaging,
based in Holzkirchen, Germany for $64 million.
- July 1, 2005, the Tube Division acquired the remaining 30% of CCL
Dispensing Systems that it did not already own for $3 million.
- August 2, 2005, the Label Division acquired the remaining 49% of the
CCL-Pachem European joint venture for $23 million including debt
assumed and, in addition, purchased the assets of Merroc Ltd., a
label converter located in Cumbernauld, Scotland for $2 million.
- September 13, 2005, the Label Division acquired the business of
Inprint Systems headquartered in Ashford, England for $63 million.
- January 11, 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries in Vinhedo, Brazil for
$62 million.
- February 7, 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, IL for $24 million.
>>
Net earnings from continuing operations for the second quarter of 2006
were $17.6 million, up by 245% from the $5.1 million recorded in the second
quarter of 2005. Net earnings were impacted by a loss from unusual items of
$1.0 million before tax ($0.7 million after tax) in the second quarter of
2006. In the second quarter of 2005, there was a loss from unusual items of
$15.5 million ($15.4 million after tax) partially offset by a positive tax
benefit from previously unrecognized losses of $4.3 million. Net earnings from
discontinued operations, including the gain on the sale of Custom, were
$108.7 million in last year's second quarter. Operating income from continuing
operations improved by 12% from last year's second quarter due to a
substantially stronger performance in the Label and Tube Divisions, but
slightly lower income from the ColepCCL joint venture and the Container
Division because of the negative effect of currency translation and
transactions due to the depreciation of the U.S. dollar and the euro, relative
to the Canadian dollar.
Net interest expense from continuing operations was $5.3 million in the
second quarter, same as last year's corresponding quarter due primarily to
higher interest rates on cash on hand in 2006, offset by interest allocated
for discontinued operations in 2005. Since the sale of Custom in mid-May of
last year, all interest expense and the interest income received on the cash
from the sale of Custom are included in continuing operations. Corporate
expenses for the quarter were $0.2 million higher than last year due to
inflation. The overall effective income tax rate for continuing operations was
29% for the quarter, excluding the tax on unusual items, versus 27% in the
second quarter of 2005, excluding unusual items and the tax benefit from
previously unrecognized losses. The tax rate was higher in 2006 due to more
taxable income earned in jurisdictions with relatively higher tax rates.
For the first six months of 2006, net earnings from continuing operations
were $38.7 million, up 83% from the $21.2 million in the comparable 2005
period. Net earnings for the six months of 2006 were affected by a loss from
unusual items of $0.6 million ($1.9 million after tax). Unusual items in the
first half of 2005 were $15.5 million ($15.4 million after tax) and the
positive tax benefit from previously unrecognized losses was $4.3 million. Net
earnings from discontinued operations, including the gain on the sale of
Custom for the first six months of 2005 were $112.3 million.
Earnings from continuing operations per Class B share were $0.54 in the
second quarter of 2006 compared to the $0.16 earned in the same period last
year, an increase of 238%. Unusual items in the second quarter of 2006
decreased earnings per Class B share by $0.03. Unusual items and the tax
benefit from previously unrecognized tax losses in last year's second quarter
negatively affected earnings per Class B share by $0.35. For comparative
purposes, if the unusual items and the tax benefit were excluded, net earnings
from continuing operations increased by 12% in the second quarter 2006 versus
2005. Earnings per Class B share from discontinued operations in the second
quarter of 2005 including the gain on sale were $3.37. The impact of the
unusual items and the tax benefit 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 significant unusual 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 unusual items. Diluted earnings per Class B
share were $0.01 lower than basic earnings per Class B share in the second
quarter of 2006.
For the first six months of 2006, earnings from continuing operations per
Class B share were $1.20 compared to $0.66 in the year earlier period, an 82%
increase. Unusual items including the tax benefit from previously unrecognized
tax losses reduced earnings per Class B share by $0.06 for the first half of
2006 versus a $0.35 reduction in the prior year period. For comparative
purposes, if the unusual items and the tax benefits were excluded, net
earnings from continuing operations increased by 26% in the first half of 2006
versus 2005. Diluted earnings per Class B share were $0.03 lower than basic
earnings for the first six months of 2006.
<<
There were three unusual items in the first six months of 2006 for a total
loss of $0.6 million ($1.9 million loss after-tax) and a loss of $1.0 million
($0.7 million after tax) in the second quarter, as follows:
- Sale of CCL Dispensing - CCL acquired 70% of CCL Dispensing in 2001
and acquired the remaining 30% in 2005. This business was part of the
Tube Division. Its net assets were sold in February 2006 for a pre-
tax profit of $11.9 million, excluding $10.2 million of the segment's
goodwill, which was allocated to this disposition, resulting in a
pre-tax profit of $1.7 million. Tax of $3.0 million was incurred on
the sale, resulting in an after-tax loss of $1.3 million. In second
quarter of 2006, a closing adjustment reduced the gain by
$0.1 million.
- Container Division Restructuring - During the latter part of the
first quarter of 2006, the Company reorganized the management of this
business and incurred severance and other related costs on this
restructuring. The new management is reviewing all aspects of the
business and anticipates that further restructuring costs will be
incurred in the remainder of 2006. This unusual expense was
$0.9 million ($0.6 million after tax) for the current quarter and
$2.2 million ($1.5 million after tax) on a year-to-date basis.
- Unusual Tax Recovery - In March, with the repayment of the
US$ 120 million notes, certain foreign exchange gains were realized
for tax purposes only. Tax payments are not required due to the
ability of the Company to utilize previously unrecognized capital
losses generated from a 2002 unusual item write-down. The utilization
of these capital losses gave rise to a reduction in tax expense of
$1.0 million in the first quarter.
In summary, the unusual items in the second quarter of 2006 were as
follows:
Tax
Recovery After Tax
Gain/(Loss) (Expense) Gain/(Loss)
----------- --------- -----------
Sale of CCL Dispensing $(0.1) $ - $(0.1)
Container Division Restructuring (0.9) 0.3 (0.6)
------ ----- ------
$(1.0) $0.3 $(0.7)
------ ----- ------
------ ----- ------
For the first six months of 2006, the unusual items and the tax recovery
were:
Tax
Recovery After Tax
Gain/(Loss) (Expense) Gain/(Loss)
----------- --------- -----------
Sale of CCL Dispensing $ 1.6 $ (3.0) $ (1.4)
Container Division Restructuring (2.2) 0.7 (1.5)
Unusual Tax Recovery - 1.0 1.0
------ ----- ------
$(0.6) $ (1.3) $ (1.9)
------ ----- ------
------ ----- ------
The earnings impact of these unusual items was a loss of $0.03 per Class B
share for the second quarter of 2006 and $0.06 year-to-date.
The following table is presented to provide context to the change in the
Company's business as a result of the sale of Custom. CCL's strategy has been
to replace the income previously generated by Custom. The progress of the
replacement of the Custom income is of primary importance to our shareholders
and the financial community. This progress is measured based on earnings per
Class B share from the following table. The gain from the sale of the Custom
business in 2005 is excluded for this purpose. If the net negative impact of
unusual items were excluded from these results, there is major improvement
over the prior year earnings performance on a year-to-date basis.
(in Canadian dollars)
----------------------
2nd Quarters Year-to-date
---------------------------------
Earnings per Class B shares 2006 2005 2006 2005
--------------------------- ---- ---- ---- ----
From continuing operations $ 0.54 $ 0.16 $ 1.20 $ 0.66
From discontinued operations - $ 0.06 - $ 0.17
Net loss from unusual items and
tax benefit included in
continuing operations(x) $ 0.03 $ 0.35 $ 0.06 $ 0.35
(x) A non-GAAP measure referred to earlier, under Review of Consolidated
Continuing Operations.
The sale of Custom required a restatement of results including allocating
certain costs between continuing and discontinued operations. Interest expense
was allocated based on the ratio of the net assets employed in the business
(not the proceeds from the sale) to the total net assets of CCL. The income
tax expense was based on Custom operating as an independent business in Canada
and the United States and incurring income tax at the appropriate federal,
provincial and state tax rates.
The following is selected financial information for the 10 most recently
completed quarters.
(in millions of Canadian dollars, except per share amounts)
------------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
----- ----- ----- ----- ------
Sales-continuing
operations
2006 $ 313.2 $ 296.6 $ 609.8
2005 265.7 280.1 $ 281.9 $ 282.4 1,110.1
2004 240.7 232.0 220.0 221.2 913.9
Net earnings-
continuing operations
2006 21.1 17.6 38.7
2005 16.1 5.1 15.3 13.5 50.0
2004 11.5 9.1 13.6 9.8 44.0
Net earnings
2006 21.1 17.6 38.7
2005 19.7 113.8 15.3 15.0 163.8
2004 14.8 11.9 18.6 13.9 59.2
Net earnings per
Class B share
continuing operations
Basic
2006 $ 0.66 $ 0.54 $ 1.20
2005 0.50 0.16 $ 0.48 $ 0.43 1.57
2004 0.36 0.28 0.42 0.30 1.36
Diluted
2006 0.64 0.53 1.17
2005 0.49 0.16 0.46 0.41 1.52
2004 0.35 0.27 0.42 0.30 1.34
Net earnings per
Class B share
Basic
2006 0.66 0.54 1.20
2005 0.61 3.53 0.48 0.48 5.10
2004 0.46 0.37 0.58 0.43 1.84
Diluted
2006 0.64 0.53 1.17
2005 0.60 3.45 0.46 0.46 4.97
2004 0.45 0.36 0.57 0.43 1.81
Unusual items and
tax benefit,
including one-time
gain per Class
B share, net gain
(loss)
2006 (0.03) (0.03) (0.06)
2005 - 2.96 - (0.02) 2.94
2004 - - 0.13 (0.07) 0.06
>>
The impact on net earnings per Class B share of unusual items and the
gain on sale of Custom in 2005 are included in the table above. Net earnings
per Class B share have fluctuated significantly due to these unusual items.
Excluding unusual items, there has generally been an improvement in earnings
over the last two years.
As only about 10% of CCL's sales are generated from Canadian
manufacturing locations, the 90% of sales from international operations are
recorded in foreign currencies and then translated into Canadian dollars for
reporting purposes. The U.S. dollar is the functional currency for about 40%
of the Company's total sales and it depreciated 10% on average compared to the
Canadian dollar in the second quarter 2006 versus last year's second quarter.
In addition, European currencies are now the measurement currencies for over
40% of CCL's sales and the primary European currency, the euro, has also
weakened by 10% compared to the Canadian dollar versus the prior year quarter.
All other countries, including Brazil, Mexico and CCL's Asian operations
account for approximately 10% of total sales. Changes in foreign exchange
rates have reduced earnings per share due to currency translation by $0.05 in
the second quarter compared to 2005, and $0.11 on a year-to-date basis.
Additionally, CCL has a hedging program to lock in a portion of its
expected U.S. dollar revenues earned in Canada by the Container Division.
These hedging transactions were at an average rate of $1.23 (US$ 5.3 million
sold forward) for the second quarter of 2005 and were $1.24 (US$ 6.0 million
sold forward) for the second quarter of 2006. The Container Division also took
in an additional US$ 6.1 million at this year's average rate; 10% below the
prior year rate. The change in the exchange rates on U.S. currency
transactions reduced comparative income for continuing operations by
$0.7 million in the second quarter of 2006 ($1.1 million year-to-date) and
reduced comparative earnings per share by $0.02 for the quarter ($0.03
year-to-date). As at June 30, 2006, outstanding foreign exchange contracts for
2006 and 2007 had a positive fair value of $0.6 million.
Net interest expense for continuing operations was $5.3 million for the
second quarters of 2006 and 2005. Higher floating interest rates on U.S. debt
were offset by the depreciation of the U.S. dollar and the euro. The Company's
borrowings are primarily denominated in U.S. dollars and in the form of
private placements from U.S. institutional investors with a portion swapped
into euros. Net interest expense is net of interest earned on both short-term
investments and interest rate swaps.
Interest Rate Swap Agreements ("IRSA") have had the effect of converting
U.S. dollar fixed rate debt into U.S. dollar floating rate debt. Cross
Currency Interest Rate Swap Agreements ("CCIRSA") have had the effect of
converting U.S. dollar fixed rate debt into euro floating rate debt. There
were no changes to these hedging instruments in the second quarter of 2006.
The unrealized loss on all of the above agreements as at June 30, 2006
amounted to $14.0 million. The effect of the IRSAs and CCIRSAs has been to
reduce interest expense by $0.3 million in the second quarter of 2006
($0.8 million year-to-date) compared to a reduction of $0.8 million in the
second quarter of 2005 ($1.8 million year-to-date). Interest coverage (defined
as operating income before unusual items and net interest expense divided by
net interest expense calculated on a 12-month rolling basis) improved to 5.8
times in 2006 compared to 5.3 times in 2005 as at June 30.
The Company's financial position has a sound foundation. As of June 30,
2006, cash and cash equivalents amounted to $112 million compared to $230
million at June 30, 2005. Net debt amounted to $334 million at June 30, 2006,
$131 million higher than the net debt of $203 million at the end of June 2005.
The increase in net debt in this timeframe is primarily due to the previously
noted acquisitions and capital spending partially offset by operating cash
inflows. Capital spending in the second quarter of $25.1 million compared to
$40.6 million last year. The major capital expenditures in the second quarter
were for further payments on production lines for the Container Division, many
new presses for the Label Division, and new plant installations and equipment
in China and Mexico. This level of capital spending was higher than the
$18.5 million of depreciation and amortization in the second quarter of 2006
due to the Company's many growth opportunities. Non-cash working capital
decreased $10.2 million in the second quarter of 2006 after the typical
seasonal build-up in the strong first quarter following the slow holiday
period. The increase in non-cash working capital in the second quarter of 2005
was $3.7 million. On a year-to-date basis, non-cash working capital grew by
$29.5 million in 2006 versus $28.2 million in 2005.
In June 2005, the Company announced its intention to acquire, via a
Normal Course Issuer Bid ("Bid"), up to 10,000 Class A voting shares and
2,100,000 of its issued and outstanding Class B non-voting shares between June
16, 2005 and June 15, 2006. This Bid represented 0.4% of the issued and
outstanding Class A shares and 9.8% of the public float of the Class B shares.
The Bid expired in June 2006 without the repurchase of any shares. The Company
has not registered for a new Bid at this time.
During the second quarters of 2006 and 2005, the Company generated cash
from all operations of $45.1 million and $29.1 million, respectively. The
increase in cash flow is primarily due to the $13.9 million reduction in cash
expended on working capital in 2006 compared to 2005.
Net debt to total capitalization, defined as net debt divided by net debt
plus shareholders' equity, at June 30, 2006 was 36%, up from 27% at the end of
June 2005 and 33% at the end of December 2005 primarily due to acquisitions
and capital spending. Book value per share, defined as shareholders' equity
divided by total period end shares, was $18.34 at the end of the second
quarter of 2006, 6% above the $17.31 recorded a year ago. The increase is
primarily the result of earnings retained in the Company, offset in part by
the reduction in shareholders' equity due to foreign currency translation
adjustments.
Discussion of Divisional Business Segments
------------------------------------------
Label Division
--------------
Sales for the Label Division were $191.5 million for the second quarter,
up 15% from $167.2 million in the same quarter last year. For the six months
to date, sales were $396.6 million, up 22% from the $324.5 million of the
comparable prior year period. The sales increase in the second quarter was a
result of acquisitions contributing 17% and organic growth 8% partially offset
by negative foreign exchange of 10%.
Sales growth in the second quarter was predominantly due to the Inprint,
Pachem and Prodesmaq acquisitions, but the base business also generally saw a
continuation of the positive trends experienced since late in 2004. North
American personal care orders showed some softness in second quarter and were
flat with last year for the quarter. Specialty products sales were very strong
and well ahead of last year's second quarter with good growth in agricultural
chemical labels and promotional labels. The North American healthcare business
again recorded good sales growth, particularly in Canada and the insert
market, as the business has continued to make meaningful advances with
customers in the pharmaceutical industry.
In Europe, a strengthening economy has seen sales in local currency
improve in personal care, and particularly strong increases in food and
beverage compared to last year. Healthcare sales were down slightly although
the business remains very profitable and the battery business continued to
show strong sales and income growth. The Merroc and Inprint acquisitions,
along with the increased ownership of Pachem, have significantly improved
CCL's European position in all categories.
Sales in 2006 for Thailand in local currency were 52% ahead of last year
with further growth expected as it expands its customer base. The new plant in
Guangzhou, China made its first commercial sales in the second quarter and had
its first break-even month in June. The plant in Hefei, China focused
primarily on battery labels, continues to progress. The Prodesmaq acquisition
in Brazil had a very strong sales and income performance as it serves CCL's
global customers in the South American market. The label business continues to
take advantage of its international presence dealing with large global
customers. There are many new opportunities for growth in the developing
world, and from new product introductions and applications in each label
business category.
Operating income for the second quarter of 2006 was $23.2 million, up 20%
from the $19.3 million in the second quarter of 2005 despite the continuing
negative effect of currency translation. Drivers of this improvement were the
performance of all the acquisitions and most product categories in each
region. Key increases in operating income, excluding acquisitions, versus last
year, were earned in the healthcare and specialty businesses in North America,
food and beverage in Europe and in the Asian operations. Year-to-date,
operating income was $52.4 million versus $38.4 million last year, up 36%.
Operating income as a percentage of sales at 12.1% in the second quarter
exceeded our internal targets and the 11.5% return generated in last year's
second quarter. As was anticipated by management, returns were below the first
quarter results as the first quarter has generally been the strongest quarter
for the Label Division.
On January 11, 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries for approximately $62 million in cash
on a debt-free basis. Prodesmaq is Brazil's largest supplier of
pressure-sensitive labels in the home and personal care, healthcare and
premium food and beverage categories. In 2005, Prodesmaq had sales of $37
million and operated with exceptional profit margins.
CCL acquired Inprint Systems on September 13, 2005 for $63 million in
cash. Inprint, based in Ashford, England, primarily produces specialty
healthcare labels and rounds out CCL's European presence in this business with
plants in England, the Netherlands, Italy and the United States. At the
beginning of August 2005, the Label Division acquired the remaining 49% of the
Austrian-based CCL-Pachem joint venture for $23 million, paid in a combination
of cash, 200,000 CCL Class B shares and debt assumed. At the same time, CCL
also acquired the assets of Merroc Ltd. located in Cumbernauld, Scotland for
$2 million in cash. Merroc provides leading European paint manufacturers with
pressure-sensitive colour chip labels.
Incremental sales and operating income in the second quarter of 2006 for
the above-noted acquisitions were $27.2 million and $3.8 million,
respectively.
Sales backlogs for the label business are generally low due to short
customer lead times, but indications are that customers' orders continue to be
firm through the third quarter of 2006 with the exception of the U.S. personal
care business. There is seasonality in the overall label business with the
first quarter generally stronger than the other three quarters. This
seasonality is a result of many factors including summer vacations
particularly in Europe, strong agchem label production before the spring
planting season, and the increased battery label production in the late summer
and fall for the Holiday season. Certain locations are also particularly
impacted by lengthy plant shutdowns during summer vacations and at year-end.
Raw material pricing and our ability to pass on cost increases and maintain
profit margins continue to be a challenge.
The Label Division invested $19.5 million in capital in the second
quarter of 2006 compared to $24.4 million in the same period last year. The
capital was spent throughout the Division to maintain and expand its
manufacturing base by adding presses in strategic locations, plant
construction for the relocated Robbinsville, NJ operation and initial payments
on new plants to be constructed outside of Memphis, TN and in Mexico. The
Division expects to continue to spend capital to increase its capabilities,
expand geographically, and replace or upgrade existing plants and equipment to
improve efficiencies over the next few years. Depreciation and amortization
for the Label Division were $12.2 million for the second quarter of 2006 and
$9.5 million in the comparable 2005 period.
Container Division
------------------
During the first quarter, the Container Division was split into two
management teams with new leadership for each business. The former aluminum
container unit is now the Container Division and the former Plastic Packaging
unit is now the Tube Division with separate disclosure later in this report.
Sales in the second quarter were $48.3 million, up 8% from $44.8 million
last year and for the first half of 2006 were $92.7 million, up 15% from the
$80.9 million last year. Sales increased for the second quarter due to organic
growth including price increases and sales to the former Custom business in
2006 (considered as inter-company sales in 2005 and therefore excluded from
2005 sales) offset in part by a decrease of 5% due to foreign currency
translation. If the effect of the inter-company sales and currency translation
were excluded, sales were up by 6% in the second quarter.
The Container Division continued to benefit in the second quarter from
the demand for aluminum aerosol containers and other new applications for
shaped-can technology. Personal care sales in the aerosol format continued to
grow modestly. The impact of added internal capacity and the substantially
lower demand for smaller diameter and beverage products has resulted in the
Division continuing to reduce its backlogs to more appropriate levels and
eliminated the outsourcing of production of aluminum containers to overseas
suppliers in support of customer requirements. For the first time in many
years, the Division has open capacity to fill and will be focusing on new
products and customers.
Operating income for the Container Division before unusual items for the
second quarter of 2006 was $5.7 million, down 5% from $6.0 million in the
second quarter of 2005 due to unfavourable foreign exchange and higher
aluminum costs despite higher sales volumes. For the first half of 2006,
operating income was $11.9 million versus $11.3 million last year, up 5%.
Return on sales for the second quarter of 2006 was 11.8% compared to 13.4% in
last year's second quarter.
The aluminum container plant in Penetanguishene, Ontario sells a large
part of its production to the United States market in U.S. dollars. As
previously discussed, the business hedges part of these sales in Canadian
dollars by way of forward contracts. The change in the exchange rates on U.S.
currency transactions reduced comparative income for the Container Division by
$0.7 million in the second quarter of 2006.
During the first quarter, the Container Division commenced reorganization
of its operations by bringing in a new management team to improve operational
effectiveness and to be more responsive to its customers. This restructuring
includes a complete review of all operations and assets with a goal of
improving financial returns and cash flow. It is expected that the
restructuring review will be completed during the balance of 2006. During the
second quarter, the restructuring cost was $0.9 million ($0.6 million after
tax) consisting primarily of severance expenses. These costs are recorded as
an unusual item.
The Container Division invested $3.4 million in capital in the second
quarter of 2006 compared to $8.2 million in the same quarter last year, to
maintain and expand its manufacturing base and reduce its production costs.
The costs incurred to install the new production lines in Hermitage, PA, were
the most significant expenditure in the second quarter. Depreciation and
amortization for the second quarters of 2006 and 2005 were $2.7 million and
$2.4 million, respectively. The Division has successfully installed six new
aluminum container lines in the last three years and has a seventh new line on
order for 2007.
The Container Division continues to hedge some of its anticipated future
aluminum purchases through futures contracts. The fair value of these futures
at June 30, 2006 was a positive $9.7 million. The cost of aluminum has
continued to stay at substantially higher levels than a year ago. The Division
will continue to be challenged to recover these cost increases by increasing
its selling prices since certain customer contracts are at fixed prices and
the level of hedged aluminum purchases has not been completely matched with
customer contracts.
Tube Division
-------------
Sales in the second quarter for the Tube Division were $17.7 million,
down 12% from $20.2 million last year. Sales decreased for the quarter by 31%
due to foreign currency translation and the divestiture of CCL Dispensing
Systems. However, this reduction was partially offset by an increase in tube
sales due to strong organic growth, price increases and improved mix to more
highly decorated tubes and sales to the former Custom business in 2006
(considered as inter-company sales in 2005 and therefore, excluded from 2005
sales). If the effect of the inter-company sales, currency translation and the
divestitures were excluded, sales were up by 14% in the second quarter. The
demand for plastic tubes showed good improvement in the quarter, particularly
in the Los Angeles plant, and new orders appear to be generally firm. Sales in
the first half of 2006 were $36.8 million, down 11% from the $41.2 million
recorded in 2005 due to currency translation and the divestiture. The Division
is developing many new customers and products in the high-end market with
highly decorated complex tubes.
In early February 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, IL for $24 million in cash. This business
was deemed to be non-core as it was a small player in the global closures
market. Operating income contribution from this business in 2005 was
approximately $1 million. The gain on the sale of this business reported in
first quarter 2006 was $1.7 million (but a $1.3 million loss after tax) after
allocating $10.2 million of goodwill from the Tube Division. The goodwill
allocated to this divestiture originated primarily from the plastic tube
acquisition in 1997. In the second quarter, a closing adjustment on the sale
reduced the gain by $0.1 million and is treated as an unusual item.
Operating income for the Tube Division for the second quarter of 2006 was
$1.5 million, up 36% from $1.1 million in the second quarter of 2005 despite
the unfavourable foreign exchange impact and the $0.3 million reduction in
income from the disposed closure business. Year-to-date operating income was
$2.5 million, up 25% from the $2.0 million recorded in the same period last
year. The return on sales of 8.5% in the second quarter compared to a 5.4%
return in the prior year second quarter.
The Tube Division invested $0.9 million in capital in the second quarter
of 2006 compared to $4.2 million in the same quarter last year, to maintain
and expand its manufacturing base and reduce its production costs.
Depreciation and amortization for the second quarters of 2006 and 2005 were
$1.7 million and $2.1 million, respectively.
ColepCCL Joint Venture
----------------------
The ColepCCL joint venture was created in mid-July 2004. For the second
quarter of 2006, CCL's 40% proportionate share of the joint venture's sales
was $39.1 million. This sales level was 18% lower than the comparative sales
last year of $47.9 million due primarily to the 10% decline in the value of
the euro for the comparable quarter. In local currency, sales were down
compared to the same quarter a year ago due to reductions in the contract
manufacturing business partially offset by increases in the metal packaging
segment. For the first half of 2006, sales were $83.7 million, down 16% from
last year's $99.2 million. New order levels are somewhat stronger and it is
anticipated that sales will improve over the balance of the year.
Operating income in the second quarter of 2006 for ColepCCL was
$3.9 million, indicating a return on sales of 10.0%, and in the second quarter
of 2005, operating income was $4.1 million, with a return on sales of 8.6%.
For the first half of 2006, operating income of $8.0 million was 16% below the
$9.5 million recorded in the first half of 2005. Operating income was below
last year's level due to currency translation and lower volume, offset in part
by improved product mix and the reduced cost impact of the plant shutdown in
Madrid, Spain in June 2005. The land and building in Madrid have been sold and
proceeds from the sale totalling approximately $22 million were received in
July 2006 by ColepCCL.
Liquidity and Capital Structure
-------------------------------
The Company's debt structure is primarily comprised of three private debt
placements completed in 1997, 1998 and 2006 totalling US$ 345.5 million (Cdn $
385.6 million) at June 30, 2006. The Company's overall average interest rate
is 5.6% after factoring in the related Interest Rate and Cross Currency Swap
Agreements.
The most recent private placement for a total of US$ 170 million closed
on March 7, 2006 followed by the repayment of US$ 120 million on 10-year notes
that matured on March 15, 2006. The balance of the borrowed funds was to be
used for general corporate purposes and for funding future growth
opportunities. The new series of notes has two tranches: US$ 60 million for
five years at 5.29% and US$ 110 million for 10 years at 5.57%. The Company
effectively converted the five-year notes into a five-year fixed rate euro
debt by entering into two independent CCIRSAs with a financial institution.
The intent of this transaction was to more effectively hedge CCL's assets and
cash flows in Europe. This transaction reduced the effective rate on the
five-year notes to 3.82%.
The summary of net debt is as follows:
<<
$ Millions June 30, 2006 December 31, 2005 June 30, 2005
---------- ------------- ----------------- -------------
Total debt $445.9 $402.6 $433.7
Cash on hand 111.7 120.2 230.3
------ ------ ------
Net debt $334.2 $282.4 $203.4
------ ------ ------
------ ------ ------
>>
Net debt has increased from 2005 year-end, primarily due to the Prodesmaq
acquisition, the seasonal working capital build-up, and the extensive capital
expenditure program, offset in part by earnings and the disposition of the
dispensing closure business. The major reason for the increase of net debt
from a year ago was the significant acquisition program.
Working capital grew in its typical seasonal fashion including the impact
of acquisitions in the first half by $29.5 million compared to $28.2 million
last year.
For the second quarter, capital spending of $25.1 million was
substantially lower than the $40.6 million spent in the second quarter of
2005. However, capital spending exceeded this quarter's depreciation and
amortization of $18.5 million. This major capital expenditure program was to
provide for increased capacity and geographic reach, to implement cost
reduction programs and to maintain the existing business and asset base. Plans
for capital spending in 2006 are expected to be approximately $150 million as
the Company continues to expand its business base into new markets, and invest
in assets to add capacity and improve its competitiveness.
Dividends declared in the second quarter of 2006 were $3.5 million
compared to the $3.2 million in the second quarter of 2005 due to the 10%
increase in the dividend rate effective June 2006. The total number of shares
outstanding as at June 30, 2006 was 32.6 million compared to 32.2 million a
year ago due to the exercise of stock options and the issuance of shares for
the Pachem acquisition. The Company has historically paid out dividends at a
rate of 20-25% of normalized earnings. Since the Company's cash flow and
financial position is strong, the Board of Directors approved a continuation
of the quarterly dividend at $0.0975 per Class A share and $0.11 per Class B
share to shareholders of record as of September 15, 2006 and payable on
September 29, 2006.
The Company has no material "off-balance sheet" financing obligations
except for typical long-term operating lease agreements and has not
experienced any material change in its contractual obligations and
contingencies since year-end 2005. The nature of these commitments and
contingencies is described in note 14 of the December 31, 2005 Annual
Consolidated Financial Statements. The Company does not have any material
related party transactions. There are no defined benefit plans funded with CCL
stock.
Risks and Strategies
--------------------
The 2005 Management's Discussion and Analysis in the Annual Report
detailed the risks to the Company's business and the strategies that were
planned for 2006 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 more dependence on the European, Latin American and Asian
economies and their currencies. These non-Canadian risks were described in the
2005 Management's Discussion and Analysis.
Outlook
-------
The Company continues to be focused on the growth prospects of its
specialty packaging business and the prudent management and reinvestment of
the cash generated from the disposition of Custom with a view to the continued
improvement in shareholder value in 2006 and beyond. CCL will continue to
integrate and reorganize the large number of recent acquisitions it has made
to improve profitability and simplify administration. The Company is
investigating mid-sized potential acquisition candidates that meet its
criteria of core products and customers, and the expectation of earnings
accretion in the first year of ownership.
The organic growth in sales and income experienced in 2005 and so far in
2006 are anticipated to continue and the Company is expected to generate
additional returns from its recent significant capital investments and
acquisitions. However, as indicated earlier, there are concerns about the
slowing of the U.S. economy and the apparent softness in consumer spending and
its potential impact on personal care customers in the U.S. The seasonality of
the business continues to evolve, particularly in the Label Division, with the
first quarter being generally the strongest. There are other challenges
expected in the remainder of 2006 and into 2007. There continues to be a focus
on managing the balance between cost increases due to the significant
inflation and volatility of energy, aluminum and oil-based resins in our raw
materials and the Company's ability to recover those cost increases through
higher selling prices to its customers or the mitigation of these costs in the
procurement supply chain. The strength of the Canadian dollar relative to the
currencies of CCL's foreign operations continues to negatively impact earnings
compared to 2005 performance levels and is anticipated to do so throughout
2006. However, recent weakness in the Canadian dollar could reduce the future
impact of currency translation.
