Stock Symbol: TSX - CCL.A and CCL.B
TORONTO, Aug. 2 /CNW/ -
Dear Shareholder:
Please find enclosed your Second Quarter 2007 shareholder report for CCL Industries Inc. This package provides detailed information about your Company's recent business activities and its financial performance.
Over the last five years, CCL has developed into a global specialty packaging business, operating 49 plants in 15 countries, and as a result of this strategic evolution, we are seeing more interest from Canadian and American investors that are looking for global franchises. Investors are now routinely comparing CCL to our international specialty packaging peers as there are no comparable Canadian public companies. These financial comparisons have highlighted to the investment community in both Canada and the United States that our stock has been relatively under-valued. We believe that the globalization and performance of CCL has been and should continue to be a positive influence on shareholder value.
Your Board of Directors is very pleased with the strong financial performance of your Company and today approved its quarterly dividend payable on September 28, 2007. This dividend is supported by the strong cash flow and earnings growth of your Company and is maintained at the current level after having increased 9% in March 2007. This dividend is a continuation of CCL's record of paying consecutive quarterly dividends for over 25 years without a reduction. The dividend is $0.12 per Class B non-voting share and $0.1075 per Class A voting share.
Conference calls with our stakeholders are held following the release of our quarterly results. Presentation materials used during the conference calls and the annual Investors' Day, as described above, are posted on our website along with audio recordings of the meetings. In addition, presentation materials used in meetings with investors are also posted on our website. Instructions for accessing these services are set out at the end of this earnings release.
We encourage all shareholders to access our website www.cclind.com on a regular basis for investor and company news including scheduled dates for future earnings releases. If you would like to have future Press Releases e-mailed to you at the time they are issued, please complete the Information Request Form under the "Investors" tab ("Contact Us" icon) on our website or write to us at CCL to the attention of Christene Duncan.
Yours truly,
Jon K. Grant
Chairman of the Board
Investor Update
---------------
1. Press Release - Second Quarter 2007 Results and Dividend Declaration
2. Consolidated Financial Statements
3. Notes to Consolidated Financial Statements
4. Second Quarter 2007 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) 2007 2006 Change 2007 2006 Change
-------- -------- -------- -------- -------- --------
Sales $ 357.2 $ 296.6 20.4 $ 730.3 $ 609.8 19.8
-------- -------- -------- --------
-------- -------- -------- --------
Restructuring and
other items -
net loss - (1.0) (0.3) (0.6)
-------- -------- -------- --------
Net earnings $ 28.8 $ 17.6 63.6 $ 58.8 $ 38.7 51.9
-------- -------- -------- --------
-------- -------- -------- --------
Per Class B shares
Net earnings $ 0.89 $ 0.54 64.8 $ 1.82 $ 1.20 51.7
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings $ 0.86 $ 0.53 62.3 $ 1.76 $ 1.17 50.4
-------- -------- -------- --------
-------- -------- -------- --------
Restructuring and
other items and
favourable tax
adjustments
included in
net earnings -
net gain (loss) $ 0.11 $ (0.03) $ 0.16 $ (0.06)
-------- -------- -------- --------
-------- -------- -------- --------
Number of
outstanding shares
(in 000s)
Weighted average
for the period 32,233 32,212 0.1
Actual at period
end 32,708 32,580 0.4
CCL Industries Inc., a world leader in the development of manufacturing, packaging and labelling solutions for the consumer products and healthcare industries, announced today its financial results for the second quarter ended June 30, 2007 and the declaration of its quarterly dividend.
Sales for the second quarter of 2007 of $357.2 million were 20% ahead of the $296.6 million recorded in the second quarter of 2006, while sales for the first six months of 2007 of $730.3 million were 20% higher than last year's $609.8 million. Financial comparisons to the prior year's results have been positively affected by the significant appreciation of the euro and most other currencies relative to the Canadian dollar offset by further depreciation of the U.S. dollar. Sales increased for the quarter by 19% due to organic growth and an acquisition, while foreign exchange net of a disposition added a further 1%. On a comparative basis with last year's second quarter, sales increased significantly in all reporting segments with the exception of a decline in the Tube Division. For the year-to-date, sales increased by 17% as a result of organic growth and acquisitions, while foreign exchange net of dispositions added a further 3%. For the quarter and year-to-date periods, overall sales growth was split equally between organic growth and acquisitions.
Net earnings for the second quarter of 2007 were $28.8 million, up 64% from the $17.6 million recorded in the second quarter of 2006 due primarily to the substantial sales and operating income increases in the business, the impact of favourable tax adjustments in 2007 and restructuring and other items incurred in 2006. Divisional operating income improved by $7.9 million or 23% from last year's second quarter due to substantially stronger performances in the Label and Container Divisions and higher income from the ColepCCL joint venture. Operating income in the Tube Division was below prior year's level. In the second quarter of 2007, favourable tax adjustments due to a reduction in tax rates in foreign subsidiaries and a positive tax settlement increased net earnings by $3.6 million. In the second quarter of 2006, restructuring and other costs of $1.0 million before tax were incurred ($0.7 million after tax) primarily in the Container Division.
For the first six months of 2007, net earnings were $58.8 million, up 52% from the $38.7 million in the comparable 2006 period. Net earnings for the six months of 2007 were affected by restructuring and other costs of $1.0 million and a gain on the sale of a property of $0.7 million for a net loss of $0.3 million before tax (net gain of $0.2 million after tax). Including the positive effect of favourable tax adjustments of $5.0 million, net earnings increased by $5.2 million due to the foregoing items.
Earnings per Class B share were $0.89 in the second quarter of 2007 compared to $0.54 earned in the same period last year, an increase of 65%. Favourable tax adjustments had a positive effect on earnings per share in the second quarter of 2007 of $0.11. Restructuring costs in the second quarter of 2006 decreased earnings per Class B share by $0.03. Diluted earnings per Class B share were $0.86 in the second quarter of 2007 and $0.53 in the second quarter of 2006.
For the first six months of 2007, earnings per Class B share were $1.82 compared to $1.20 in the prior year period, a 52% increase. A gain on the sale of a property and favourable tax adjustments net of restructuring and other items increased earnings per Class B share by $0.16 for the first half of 2007 versus a $0.06 reduction in the first half of 2006. Diluted earnings per Class B share were $1.76 for the first six months of 2007 and $1.17 in the first half of 2006.
Donald G. Lang, Vice Chairman and Chief Executive Officer commented, "We are very satisfied with another record quarterly earnings performance in CCL's second quarter. We are pleased that our second quarter earnings per share were 65% ahead of the second quarter last year and, excluding restructuring and other items and favourable tax benefits, were an exceptional 37% ahead of last year's comparable period. Our global customers are generally enjoying good sales growth in most of the world and are expanding rapidly into new geographies. Our strategy to expand with them internationally has been rewarding and we intend to continue to grow with them wherever we can add value."
Mr. Lang continued, "The Label Division continues to show robust growth in sales and increased profitability. The conversion in the beer industry from paper labels to pressure sensitive labels has given rise to a significant new global business base for the Company. We continue to be extremely pleased with the operating performance of the former Illinois Tool Works business specializing in shrink and stretch sleeves, acquired in January. The Container Division has also seen an increase in sales and improved profitability relative to the last half of 2006, as it continues to adjust to higher aluminum commodity costs. The Tube Division has experienced sluggish volume and a reduction in income compared to last year's level due to softer personal care markets and reduced consumer spending in the United States. Our ColepCCL joint venture continues to enjoy strong sales and improved operating income in the favourable European economic environment."
Mr. Lang stated, "Our strategy to grow with our customers globally has been successful and we will continue on that strategic path. Our finances are in excellent shape with the net debt to total capitalization ratio at 38%, well below our target level of 45%. We have $87 million of cash on hand and additional financial leverage available, which will allow us to grow both organically and to entertain accretive acquisitions in our core businesses."
Mr. Lang concluded, "We remain optimistic about the balance of 2007 building on our very solid first half. We continue to generate growth in both earnings and cash flow. As a result, your Board of Directors has declared a dividend at the same level as the higher dividend declared earlier this year. The quarterly dividend is $0.12 on Class B non-voting shares and $0.1075 on Class A voting shares to shareholders of record at the close of business on September 14, 2007 payable on September 28, 2007. CCL continues its record of paying quarterly dividends without reduction or omission for over 25 years."
CCL Industries Inc. manufactures pressure sensitive, shrink sleeve and in-mould labels, aluminum containers and plastic tubes for leading global companies in the home and personal care, healthcare and specialty food and beverage sectors. With headquarters in Toronto, Canada, CCL Industries employs approximately 5,000 people and operates 49 production facilities in North America, Europe, Latin America and Asia. CCL's joint venture, ColepCCL operates five plants in Europe and employs approximately 2,000 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 2, 2007 to discuss these results.
To access this call, please dial Toll-Free North America -
1-800-633-8954 or Domestic and International - 416-641-6653.
Post-View service will be available from Thursday,
August 2, 2007 at 6:00 p.m. EDT until Saturday,
September 1, 2007 at 11:59 p.m. EDT.
Dial: Toll-Free North America - 1-800-558-5253
Domestic and International - 416-626-4100
- Access Code: 21343124.
For more details on CCL, visit our web site - www.cclind.com
Financial Tables follow ...
CCL INDUSTRIES INC.
2007 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) 2007 2006 Change 2007 2006 Change
-------- -------- -------- -------- -------- --------
Sales $ 357.2 $ 296.6 20.4 $ 730.3 $ 609.8 19.8
-----------------------------------------------------
Income before
undernoted items 62.7 49.6 26.4 130.5 104.7 24.6
Depreciation and
amortization 21.5 18.5 42.3 36.6
Interest expense,
net 6.5 5.3 13.1 10.9
-----------------------------------------------------
34.7 25.8 34.5 75.1 57.2 31.3
Restructuring and
other items - net
loss (note 5) - (1.0) (0.3) (0.6)
-----------------------------------------------------
Earnings before
income taxes 34.7 24.8 39.9 74.8 56.6 32.2
Income taxes 5.9 7.2 16.0 17.9
-----------------------------------------------------
Net earnings 28.8 17.6 63.6 58.8 38.7 51.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings,
beginning of period
as reported 499.8 430.9 476.6 413.0
Transition adjustment
on adoption of
financial
instruments
standards, net of
tax (note 1) - - (3.0) -
-----------------------------------------------------
Retained earnings,
beginning of period
as restated 499.8 430.9 473.6 413.0
Net earnings 28.8 17.6 58.8 38.7
-----------------------------------------------------
528.6 448.5 532.4 451.7
Less dividends:
Class A shares 0.2 0.2 0.5 0.4
Class B shares 3.7 3.3 7.2 6.3
-----------------------------------------------------
3.9 3.5 7.7 6.7
-----------------------------------------------------
Retained earnings,
end of period $ 524.7 $ 445.0 $ 524.7 $ 445.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
Class B $ 0.89 $ 0.54 64.8 $ 1.82 $ 1.20 51.7
Class A $ 0.87 $ 0.52 $ 1.79 $ 1.17
-------------------------------------------------------------------------
Diluted earnings
per share
Class B $ 0.86 $ 0.53 62.3 $ 1.76 $ 1.17 50.4
Class A $ 0.84 $ 0.51 $ 1.73 $ 1.14
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
2007 Second Quarter
Consolidated Statements of Comprehensive Income (Loss)
Three months Six months
Unaudited ended June 30th ended June 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Net earnings 28.8 17.6 58.8 38.7
-------------------------------------------
Other comprehensive income,
net of tax:
Unrealized losses on
translation of financial
statements of
self-sustaining
foreign operations (55.3) (20.5) (59.3) (7.9)
Gains (losses) on hedges
of net investment in
self-sustaining
foreign operations,
net of tax of
$4.6 million 24.4 6.7 25.3 (2.2)
-------------------------------------------
Unrealized foreign currency
translation, net of
hedging activities (30.9) (13.8) (34.0) (10.1)
-------------------------------------------
Losses on derivatives
designated as cash flow
hedges, net of tax (3.9) - (4.0) -
Gains on derivatives
designated as cash flow
hedges in prior periods
transferred to net
earnings in the current
period, net of tax
of $0.3 million 3.6 - 3.4 -
-------------------------------------------
Change in losses on
derivatives designated as
cash flow hedges (0.3) - (0.6) -
-------------------------------------------
Other comprehensive loss (31.2) (13.8) (34.6) (10.1)
-------------------------------------------
Comprehensive income (loss)
(note 1) $ (2.4) $ 3.8 $ 24.2 $ 28.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
CCL INDUSTRIES INC.
2007 Second Quarter
Consolidated Balance Sheets
June December June
Unaudited 30th 31st 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2006
---------- ---------- ----------
Assets
Current assets
Cash and cash equivalents $ 86.9 $ 125.0 $ 111.7
Accounts receivable - trade 200.6 178.8 170.2
Other receivables and prepaid
expenses (note 1) 27.1 23.1 27.4
Inventories 96.9 98.0 99.5
--------------------------------
411.5 424.9 408.8
Property, plant and equipment 655.8 628.0 561.5
Other assets 26.0 28.9 24.5
Future income tax assets 33.0 32.3 31.1
Intangible assets 36.4 39.5 46.9
Goodwill 425.8 389.0 386.3
-------------------------------------------------------------------------
Total assets $ 1,588.5 $ 1,542.6 $ 1,459.1
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank advances $ 7.5 $ 12.4 $ 3.8
Accounts payable and accrued
liabilities (note 1) 254.5 280.8 227.3
Income and other taxes payable 8.9 13.7 23.8
Current portion of long-term debt 16.3 16.1 21.6
--------------------------------
287.2 323.0 276.5
Long-term debt (note 1) 479.4 413.6 420.5
Other long-term items 50.6 52.3 52.1
Future income taxes 103.1 101.1 120.0
-------------------------------------------------------------------------
Total liabilities 920.3 890.0 869.1
-------------------------------------------------------------------------
Shareholders' equity
Share capital (note 2) 187.5 190.3 189.9
Contributed surplus 6.3 4.2 3.1
Retained earnings 524.7 476.6 445.0
Accumulated other comprehensive loss
(notes 1 & 4) (50.3) (18.5) (48.0)
-------------------------------------------------------------------------
Total shareholders' equity 668.2 652.6 590.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,588.5 $ 1,542.6 $ 1,459.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See notes to interim consolidated financial statements.
Certain 2006 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
2007 Second Quarter
Consolidated Statements of Cash Flows
Three months Six months
Unaudited ended June 30th ended June 30th
-------------------------------------------------------------------------
(in millions of Cdn dollars) 2007 2006 2007 2006
Cash provided by (used for) ---------- ---------- ---------- ----------
Operating activities
Net earnings $ 28.8 $ 17.6 $ 58.8 $ 38.7
Items not requiring cash:
Depreciation and
amortization 21.5 18.5 42.3 36.6
Stock-based compensation 1.0 0.6 2.1 1.1
Future income taxes (0.7) (2.5) (1.4) 0.3
Restructuring and other
items, net of tax
(note 5) - 1.7 (0.2) 2.9
-----------------------------------------------------------------------
50.6 35.9 101.6 79.6
Net change in non-cash
working capital 4.5 9.2 (41.3) (30.5)
-----------------------------------------------------------------------
Cash provided by operating
activities 55.1 45.1 60.3 49.1
-------------------------------------------------------------------------
Financing activities
Proceeds on issuance of
long-term debt 0.4 1.5 104.1 202.3
Retirement of long-term debt (1.1) (6.0) (3.3) (146.5)
Decrease in bank advances (3.6) (5.8) (9.9) (5.2)
Issue of shares 0.9 0.2 1.6 0.9
Purchase of shares held
in trust (note 2) - - (4.4) -
Dividends (3.9) (3.5) (7.7) (6.7)
-----------------------------------------------------------------------
Cash provided by (used for)
financing activities (7.3) (13.6) 80.4 44.8
-------------------------------------------------------------------------
Investing activities
Additions to property, plant
and equipment (39.0) (25.1) (70.2) (67.6)
Proceeds on disposal of
property, plant and
equipment 1.7 0.3 4.6 1.5
Proceeds on business
dispositions (note 5) - - - 24.4
Business acquisitions
(note 3) - - (105.6) (62.2)
Other (4.3) 2.2 (1.1) 3.9
-----------------------------------------------------------------------
Cash used for investing
activities (41.6) (22.6) (172.3) (100.0)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash (5.9) (3.0) (6.5) (2.4)
-------------------------------------------------------------------------
Increase (decrease) in cash 0.3 5.9 (38.1) (8.5)
Cash and cash equivalents at
beginning of period 86.6 105.8 125.0 120.2
-------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 86.9 $ 111.7 $ 86.9 $ 111.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents are defined as cash and short-term investments.
See notes to interim consolidated financial statements.
Certain 2006 figures have been restated for comparative purposes.
CCL INDUSTRIES INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Periods ended June 30, 2007 and 2006
(Tabular amounts in millions of Cdn dollars except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Changes in accounting policies
The disclosures contained in these unaudited interim consolidated
financial statements do not include all of the requirements of
generally accepted accounting principles for annual financial
statements. The unaudited interim consolidated financial statements
should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2006.
The unaudited interim consolidated financial statements are based
upon accounting principles consistent with those used and described
in the annual consolidated statements, except that: starting
January 1, 2007, the Company adopted the new Canadian Institute of
Chartered Accountants ("CICA") Handbook Sections 1530, "Comprehensive
Income", Section 3251, "Equity", Section 3861, "Financial Instruments
- Disclosure and Presentation", Section 3865, "Hedges" and Section
3855, "Financial Instruments - Recognition and Measurement".
Section 1530 establishes standards for reporting and presenting
comprehensive income, which is defined as the change in equity from
transactions and other events from non-owner sources. Other
comprehensive income refers to items recognized in comprehensive
income that are excluded from net income calculated in accordance
with generally accepted accounting principles.
Section 3861 establishes standards for presentation of financial
instruments and non-financial derivatives, and identifies the
information that should be disclosed about them. Under the new
standards, policies followed for periods prior to the effective date
are generally not reversed, therefore, the comparative figures have
not been restated except for the requirement to restate currency
translation adjustment as part of other comprehensive income.
Section 3865 describes when and how hedge accounting can be applied
as well as the disclosure requirements. Hedge accounting enables the
recording of gains, losses, revenues and expenses from derivative
financial instruments in the same period as for those related to the
hedged item.
Section 3855 prescribes when a financial asset, financial liability
or non-financial derivative is to be recognized on the balance sheet
and at what amount, requiring fair value or cost-based measures under
different circumstances. Under Section 3855, financial instruments
must be classified into one of these five categories: held-for-
trading, held-to-maturity, loans and receivables, available-for-sale
financial assets or other financial liabilities. All financial
instruments, including derivatives, are measured on the balance sheet
at fair value except for loans and receivables, held-to-maturity
investments and other financial liabilities, which are measured at
amortized cost. Subsequent measurement and changes in fair value will
depend on their initial classification, as follows: held-for-trading
financial assets are measured at fair value and changes in fair value
are recognized in net earnings; available-for-sale financial
instruments are measured at fair value with changes in fair value
recorded in other comprehensive income until the investment is
derecognized or impaired at which time the amounts would be recorded
in net earnings.
Under adoption of these new standards, the Company designated its
cash and cash equivalents as held-for-trading. Long-term investments
are designated as available-for-sale. Cash and cash equivalents and
long-term investments are measured at fair value. Accounts receivable
are classified as loans and receivables, which are measured at
amortized cost. Bank advances, accounts payable and accrued
liabilities and long-term debt are classified as other financial
liabilities, which are measured at amortized cost. The Company has
also elected to expense, as incurred, transaction costs related to
long-term debt.
Upon adoption of these new standards, the Company recorded a decrease
to opening retained earnings of $3.0 million. The decrease to opening
retained earnings was a result of the write-off of previously
deferred transaction costs related to issuance of long-term debt
($1.0 million loss, net of tax of $0.5 million), the write-off of a
deferred loss on the termination of various cross currency interest
rate swaps that did not meet the new requirements ($2.1 million loss,
no tax) and the ineffectiveness of cash flow hedges discussed below
($0.1 million gain, net of tax).
All derivative instruments, including embedded derivatives, are
recorded on the balance sheet at fair value unless exempted from
derivative treatment as a normal purchase or sale. All changes in
their fair value are recorded in net earnings unless cash flow hedge
accounting is used, in which case, changes in fair value are recorded
in other comprehensive income. The Company has applied this
accounting treatment for all embedded derivatives in existence at
transition. The impact of the change in accounting policy related to
embedded derivatives is not material.
The Company uses various financial instruments to manage foreign
currency exposures, fluctuation in interest rates and exposures
related to the purchase of aluminum for the Container Division. These
financial instruments are classified into three types of hedges: cash
flow hedges, fair value hedges and hedges of net investments in self-
sustaining operations.
In a cash flow hedge, the effective portion of changes in the fair
value of derivatives is recognized in other comprehensive income. Any
gain or loss in fair value relating to the ineffective portion is
recognized immediately in the statement of earnings. Upon adoption of
the new standards, the Company remeasured its cash flow hedge
derivatives at fair value. Aluminum forward contracts with a
favourable fair value of $1.7 million are the largest component of
the Company's cash flow hedges and are recorded in other receivables
and prepaid expense. In addition, the Company entered into Cross
Currency Interest Rate Swap Agreements (CCIRSAs) that converted
U.S. dollar fixed rate debt into Canadian dollar fixed rate debt in
order to reduce the Company's exposure to the U.S. dollar debt and
currency exposures. This CCIRSA is also designated as a cash flow
hedge and has an unfavourable fair value of $5.6 million for the
current period and is recorded in long-term debt. The Company also
uses forward contracts to hedge foreign exchange exposure on
anticipated sales. All existing forward contracts matured during the
current quarter. These hedges were previously recorded in accounts
payable and accrued liabilities.
In a fair value hedging relationship, the carrying value of the
hedged item is adjusted by gains or losses attributable to the hedged
risk and recorded in net earnings. This change in fair value of the
hedged item, to the extent the hedging relationship is effective, is
offset by changes in the fair value of the derivative also measured
at fair value on the balance sheet date, with changes in value
recorded through net earnings. The Company has two CCIRSAs designated
as fair value hedges, which convert U.S. dollar fixed rate debt into
Canadian dollar floating rate debt in order to reduce interest rate
and currency risk. In addition, the Company has an interest rate swap
converting U.S. dollar fixed rate debt to U.S. dollar floating rate
debt to reduce interest rate risk exposure. These fair value hedges
have an unfavourable fair value of $7.7 million and are recorded in
long-term debt.
In a hedge of a net investment in a self-sustaining foreign
operation, the portion of the gain or loss on the hedging item that
is determined to be an effective hedge should be recognized in
comprehensive income and the ineffective portion should be recognized
in net earnings. During 2006, the Company entered into CCIRSAs that
converted Canadian dollar fixed rate and floating rate debt into euro
fixed rate debt and euro floating rate debt in order to hedge the
Company's exposure to the euro, with a view to reducing foreign
exchange fluctuations and interest expense. These CCIRSAs have been
designated as net investment hedges and have a net favourable fair
value of $3.6 million at the end of the current period and are
recorded in other assets and long-term debt. The Company had also
entered into a non-deliverable forward foreign exchange contract to
hedge its investment in its Brazilian subsidiaries. This foreign
exchange contract was previously recorded in accounts payable and
accrued liabilities. It expired in April 2007 and was settled by a
payment of $1.5 million in cash from CCL. The Company has elected to
record the forward points associated with the forward contract in
accumulated other comprehensive income. The forward points are
recognized in income on maturity of the contract.
b) Recently issued accounting standards
In May 2007, the CICA issued a new Handbook Section 3031,
"Inventories", which addresses the measurement and disclosure of
inventory. The new standard is effective for interim and annual
financial statements for fiscal years beginning on or after
January 1, 2008. Management is currently reviewing the potential
impact on the financial results of the Company. However, further
disclosure will be required in the Consolidated Statement of Earnings
as it will now be necessary to disclose the amount of inventories
recognized as an expense during the period. The Company will comply
with this standard on January 1, 2008.
In October 2006, the CICA issued new standards related to financial
instrument presentation and disclosure, Handbook Section 3862,
"Financial Instruments - Disclosure" and Handbook Section 3863,
"Financial Instruments - Presentation". These standards revise and
enhance the disclosure requirements of Handbook Section 3861,
"Financial Instruments - Disclosure and Presentation". These
standards are effective for interim and annual financial statements
relating to fiscal years beginning on or after October 1, 2007.
Management is currently reviewing the potential impact on the
Company. The Company will comply with the requirements of the new
standard when the standard becomes effective.
In October 2006, the CICA approved new accounting standards, Handbook
Section 1535, "Capital Disclosures". This new section establishes
standards for disclosing information about an entity's capital and
how it is managed. This standard is effective for interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2007. Management is currently reviewing the potential
impact on the Company. The Company will comply with the requirements
of the new standard when the standard becomes effective.
2. SHARE CAPITAL
Issued and outstanding
June 30, December 31, June 30,
-------- ------------ --------
2007 2006 2006
----- ----- -----
Issued share capital $ 199.2 $ 197.5 $ 197.1
Less: Executive share purchase
plan loans (1.6) (1.6) (1.6)
Shares held in trust (10.1) (5.6) (5.6)
-------------------------------------
Total $ 187.5 $ 190.3 $ 189.9
-------------------------------------
-------------------------------------
During 2007, the Company granted an award of 120,000 Class B shares
of the Company. These shares are restricted in nature and will vest
in 2009 dependent on continuing employment and company performance.
The Company purchased these 120,000 shares in the open market and has
placed them in trust until they vest. The fair value of this stock
award is being amortized over the vesting period and recognized as
executive compensation expense.
Actual number of shares:
June 30, December 31, June 30,
-------- ------------ --------
2007 2006 2006
----- ----- -----
Class A 2,378,496 2,378,496 2,381,584
Class B 30,329,847 30,223,047 30,198,759
--------------------------------------
32,708,343 32,601,543 32,580,343
Less: Executive share
purchase plan shares
- Class B (125,000) (125,000) (125,000)
Shares held in trust
- Class B (320,000) (200,000) (200,000)
--------------------------------------
Total 32,263,343 32,276,543 32,255,343
--------------------------------------
--------------------------------------
Year-to-date weighted average
number of shares 32,232,585 32,240,324 32,211,906
--------------------------------------
--------------------------------------
Year-to-date weighted average
diluted number of shares 33,501,168 33,259,055 33,256,345
--------------------------------------
--------------------------------------
3. ACQUISITIONS
On January 26, 2007, the Company completed its purchase of the sleeve
label business of Illinois Tool Works Inc. (ITW). ITW's sleeve label
business, through its two locations in the United Kingdom and one
location in each of Austria, Brazil and United States, is a leading
supplier of shrink sleeve and stretch sleeve labels for markets in
Europe and the Americas. The purchase price was $105.6 million, net
of cash acquired. The Company established a $95.0 million line of
credit, of which $75.0 million was drawn to facilitate the purchase.
The Company is reviewing the valuation of the net assets acquired,
including intangible assets, therefore, certain items disclosed below
may change when the review is completed in 2007.
Details of the transaction are as follows:
Current assets $ 24.3
Current liabilities (8.5)
Non-current assets at assigned values 39.4
Future taxes (0.8)
Goodwill and intangible assets 51.2
-----------
Net assets purchased $ 105.6
-----------
-----------
Total consideration:
Cash, less cash acquired of $2.8 million $ 105.6
-----------
-----------
In January 2006, the Company purchased Prodesmaq, based in Vinhedo,
Brazil. Prodesmaq operated two state-of-the-art plants and is
Brazil's largest supplier of pressure sensitive labels for many
global companies in the home and personal care, healthcare and
premium food and beverage markets. The purchase price was
$62.2 million, net of cash acquired.
Details of the transaction are as follows:
Current assets $ 9.8
Current liabilities (2.1)
Non-current assets at assigned values 9.3
Intangible assets 14.8
Goodwill 30.4
-----------
Net assets purchased $ 62.2
-----------
-----------
Total consideration:
Cash, less cash acquired of $1.7 million $ 62.2
-----------
-----------
4. ACCUMULATED OTHER COMPREHENSIVE LOSS
June 30, December 31, June 30,
------------ ------------ ------------
2007 2006 2006
------------ ------------ ------------
Unrealized foreign currency
translation losses, net of tax
of $12.0 million $ (52.5) $ (18.5) $ (48.0)
Impact of new net investment
hedge accounting standards on
January 1, 2007, net of tax
$0.1 million 0.4 - -
Impact of new cash flow hedge
accounting standards on
January 1, 2007, net of tax
of $1.3 million 2.4 - -
Change in derivatives designated
as cash flow hedges, net of tax
recovery of $0.5 million (0.6) - -
------------ ------------ ------------
$ (50.3) $ (18.5) $ (48.0)
------------ ------------ ------------
------------ ------------ ------------
5. RESTRUCTURING AND OTHER ITEMS
Three months ended Six months ended
June 30th June 30th
---------------------------------------------------------------------
Segment 2007 2006 2007 2006
------- ---- ---- ---- ----
Container segment
restructuring Container $ - $ (0.9) (1.0) (2.2)
Sale of non-
operational land Corporate - - 0.7 -
Gain (loss) on net
assets sale of
CCL Dispensing
Systems, LLC Tube - (0.1) - 1.6
--------------------------------------
Net loss $ - $ (1.0) $ (0.3) $ (0.6)
--------------------------------------
--------------------------------------
Tax recovery
(expense) $ - $ 0.3 $ 0.5 $ (2.3)
---------------------------------------------------------------------
The Company commenced a senior management restructuring of the
Container segment and recorded provisions related to severances of
$2.2 million ($1.5 million after tax) in the first six months of
2006, and by year-end, additional costs related to obsolete equipment
and spare parts were recorded of $9.2 million ($5.7 million after
tax). In 2007, further costs of $1.0 million ($0.7 million after tax)
were incurred.
In March 2007, the Company sold its non-operational land in Toronto,
Canada for $2.0 million cash and realized a gain of $0.7 million
($0.9 million after tax).
In February 2006, the Company sold its CCL Dispensing Systems, LLC
net assets for $24.4 million cash and realized a gain of $1.6 million
(loss of $1.3 million after tax).
6. EMPLOYEE FUTURE BENEFITS
The expense for the defined benefit plans in the second quarter is
$0.4 million (2006 - $0.5 million) and year-to-date of $0.8 million
(2006 - $0.9 million).
7. SEGMENTED INFORMATION
Industry segments
Three months ended June 30th Six months ended June 30th
-------------------------------------------------------------------------
Operating Operating
Sales income Sales income
---------------------------------------------------------------
2007 2006 2007 2006 2007 2006 2007 2006
------- ------- ------- ------- ------- ------- ------- -------
Label $238.4 $191.5 $ 31.6 $ 23.2 $483.5 $396.6 $ 69.4 $ 52.4
Container 49.3 48.3 6.0 5.7 102.2 92.7 12.0 11.9
Tube 15.8 17.7 0.2 1.5 34.0 36.8 1.6 2.5
ColepCCL 53.7 39.1 4.4 3.9 110.6 83.7 9.7 8.0
---------------------------------------------------------------
Total
opera-
tions $357.2 $296.6 42.2 34.3 $730.3 $609.8 92.7 74.8
--------------- ---------------
Corporate expense (1.0) (3.2) (4.5) (6.7)
--------------- ---------------
41.2 31.1 88.2 68.1
Interest expense, net 6.5 5.3 13.1 10.9
--------------- ---------------
34.7 25.8 75.1 57.2
Restructuring and other
items - net loss (note 5) - (1.0) (0.3) (0.6)
--------------- ---------------
Earnings before income
taxes 34.7 24.8 74.8 56.6
Income taxes 5.9 7.2 16.0 17.9
--------------- ---------------
Net earnings $ 28.8 $ 17.6 $ 58.8 $ 38.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Identifiable Assets Goodwill
------------------- --------
June 30th December 31st June 30th December 31st
--------- ------------- --------- -------------
2007 2006 2007 2006
---- ---- ---- ----
Label $ 1,018.6 $ 909.3 $ 343.4 $ 303.6
Container 179.2 194.4 12.7 12.8
Tube 86.2 96.9 27.4 30.0
ColepCCL 174.3 172.4 42.2 42.6
Corporate 130.2 169.6 0.1 -
--------------------------------------------------------
Total $ 1,588.5 $ 1,542.6 $ 425.8 $ 389.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation &
Amortization Capital Expenditures
-------------- --------------------
Six months ended Six months ended
June 30th June 30th
------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
Continuing operations
---------------------
Label $ 28.9 $ 23.9 $ 59.1 $ 48.3
Container 5.7 5.2 2.5 13.1
Tube 3.6 3.6 1.3 4.0
ColepCCL 3.9 3.6 7.3 1.9
Corporate 0.2 0.3 - 0.3
-------------------------------------------------------
Total $ 42.3 $ 36.6 $ 70.2 $ 67.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
Second Quarters Ended June 30, 2007 and 2006
This document has been prepared for the purpose of providing Management's Discussion and Analysis (MD&A) of the financial condition and results of operations for the second quarters ended June 30, 2007 and 2006 and an update to the 2006 Annual MD&A document. The information in this interim MD&A is current to August 2, 2007 and should be read in conjunction with the Company's June 30, 2007 unaudited second quarter financial statements released on August 2, 2007 and the 2006 Annual MD&A document, which forms part of the CCL Industries Inc. 2006 Annual Report, dated February 21, 2007.
The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and in accordance with the requirements of section 1751, Interim Financial Statements, of the CICA Handbook. Unless otherwise noted, both the financial statements and this interim MD&A are expressed in Canadian dollars as the reporting currency. The measurement currencies of CCL's operations are the Canadian dollar, the U.S. dollar, the euro, the Danish krone, the U.K. pound sterling, the Mexican peso, the Thailand baht, the Chinese renminbi, the Brazilian real, the Japanese yen and the Polish zloty. CCL's Audit Committee and its Board of Directors have reviewed this interim MD&A to ensure consistency with the approved strategy and results of the Company.
Management's Discussion and Analysis contains forward-looking statements, as defined in the Securities Act (Ontario) (hereinafter referred to as "forward-looking statements"), including statements concerning possible or assumed future results of operations of the Company. Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including, but not limited to: the impact of competition; consumer confidence and spending preferences; general economic and geo-political conditions; currency exchange rates; and CCL's ability to attract and retain qualified employees and, accordingly, the Company's results could differ materially from those anticipated in these forward-looking statements.
1. Overview
-----------
In a continuation of recent trends, most of CCL's global customers are experiencing higher sales levels than last year based on the current favourable worldwide economy. CCL also continues to benefit from this positive business environment and has enjoyed good sales growth in most product categories through the second quarter of 2007. Both CCL and its customers have continued to see firm demand in Europe, Asia and Latin America with more modest growth in North America.
Based on recent economic data, it is expected that markets will remain very strong in Latin America, Asia and Europe. European growth will be driven by the large demand for consumer products in Central and Eastern Europe. There are continued concerns about a slowdown in the U.S. economy and this has been reflected in cautionary comments from some of our customers and suppliers in North American. CCL continues to expect only modest sales growth in North America for the balance of 2007. CCL's first half of the year is generally stronger and more profitable than the second half due to the extended holiday and vacation periods in the second half of the year around the world and the seasonality of specific products.
2. Review of Consolidated Operations
------------------------------------
Sales for the second quarter of 2007 of $357.2 million were 20% ahead of the $296.6 million recorded in the second quarter of 2006, while sales for the first six months of 2007 of $730.3 million were 20% higher than last year's $609.8 million. Financial comparisons to the prior year's results have been positively affected by the significant appreciation of the euro and most other currencies relative to the Canadian dollar partially offset by the further depreciation of the U.S. dollar. Sales increased for the quarter by 19% due to organic growth and an acquisition, while foreign exchange net of a disposition added a further 1%. On a comparative basis with last year's second quarter, sales increased significantly in all reporting segments with the exception of a decline in the Tube Division. For the year-to-date, sales increased by 17% as a result of organic growth and acquisitions, while foreign exchange net of dispositions added a further 3%. For the quarter and year-to-date periods, overall sales growth was split about equally between organic growth and acquisitions.
The following acquisitions and divestitures affected financial comparisons in the second quarter and year-to-date results of 2007 versus 2006:
- In January 2006, the Label Division acquired the label converting
assets of Prodesmaq and its subsidiaries in Vinhedo, Brazil for
$62 million.
- In February 2006, the Company divested the assets of its CCL
Dispensing business in Libertyville, Illinois for $24 million. It is
included in the Tube Division for comparative purposes.
- In October 2006, the non-core label business in Houten, the
Netherlands was sold for $3 million.
- On January 26, 2007, CCL acquired the shrink sleeve and stretch
sleeve business of Illinois Tool Works ("ITW") located in the
United Kingdom, Austria, Brazil and the United States for
approximately $106 million. The purchase equation for this
acquisition will be finalized by fourth quarter 2007.
Net earnings for the second quarter of 2007 were $28.8 million, up 64% from the $17.6 million recorded in the second quarter of 2006. This improvement was due primarily to the substantial sales and operating income increases in the business, the impact of favourable tax adjustments in 2007 and restructuring and other items incurred in 2006. Divisional operating income defined as operating income before corporate expenses, interest and restructuring and other items improved by $7.9 million or 23% from last year's second quarter due to substantially stronger performances in the Label and Container Divisions and higher income from the ColepCCL joint venture. Operating income in the Tube Division was below prior year's level. In the second quarter of 2007, a favourable tax settlement was reached in a foreign subsidiary and corporate income tax rates were lowered in Canada, the United Kingdom and Denmark, resulting in a decrease in future tax liabilities and income tax expense of $3.6 million in the quarter. In the second quarter of 2006, restructuring and other costs of $1.0 million before tax were incurred ($0.7 million after tax) primarily in the Container Division.
For the first six months of 2007, net earnings were $58.8 million, up 52% from the $38.7 million in the comparable 2006 period. Net earnings for the six months of 2007 were affected by restructuring and other costs of $1.0 million and a gain on the sale of a property of $0.7 million for a net loss of $0.3 million before tax (net gain of $0.2 million after tax). Including the positive effect of favourable tax adjustments of $5.0 million, net earnings increased by $5.2 million due to the foregoing items.
Net interest expense for the second quarter was $6.5 million, $1.2 million higher than last year's corresponding quarter due primarily to higher net debt levels (defined as bank advances and long term debt net of cash and cash equivalents) and slightly higher floating interest rates. Corporate expenses for the quarter of $1.0 million were substantially below last year's second quarter of $3.2 million due to lower insurance costs including a reduction in self-insured claims reserves and reduced variable executive compensation. The overall effective income tax rate was 17% for the second quarter of 2007 compared to 29% in the second quarter of 2006. If the impact of restructuring and other items and favourable tax adjustments were excluded, the effective tax rate in the second quarter of 2007 would have been 27% compared to 29% in last year's second quarter (a non-GAAP measure; see Section 12 later in this report discussing key performance indicators and defining non-GAAP measures).
Earnings per Class B share were $0.89 in the second quarter of 2007 compared to $0.54 earned in the same period last year, an increase of 65%. Favourable tax adjustments had a positive effect on earnings per share in the second quarter of 2007 of $0.11. Restructuring and other items in the second quarter of 2006 decreased earnings per Class B share by $0.03 (a non-GAAP measure; see Section 12).
Diluted earnings per Class B share were $0.86 in the second quarter of 2007 and $0.53 in the same period last year.
For the first six months of 2007, earnings per Class B share were $1.82 compared to $1.20 in the prior year period, a 52% increase. A gain on the sale of a property and favourable tax adjustments net of restructuring and other items increased earnings per Class B share by $0.16 for the first half of 2007 versus a $0.06 reduction in the first half of 2006 (a non-GAAP measure; see Section 12).
The following table is presented to provide context to the change in the Company's financial performance.
(in Canadian dollars)
-------------------
2nd Quarters Year-to-date
---------------------------------
Earnings per Class B shares 2007 2006 2007 2006
------- ------- ------ -------
Net earnings $ 0.89 $ 0.54 $1.82 $ 1.20
Net gain (loss) from restructuring and
other items and favourable tax
adjustments included in net
earnings(x) $ 0.11 ($0.03) $0.16 ($0.06)
(x) A non-GAAP measure - see Section 12
The following is selected financial information for the ten most recently
completed quarters. In May 2005, the North American Custom Manufacturing
business was sold and was treated as Discontinued Operations.
(in millions of Canadian dollars, except per share amounts)
---------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
----- ----- ----- ----- -----
Sales-continuing
operations
2007 $373.1 $357.2
2006 313.2 296.6 $293.5 $308.9 $1,212.2
2005 265.7 280.1 281.9 282.4 1,110.1
Net earnings-continuing
operations
2007 30.0 28.8
2006 21.1 17.6 13.6 25.1 77.4
2005 16.1 5.1 15.3 13.5 50.0
Net earnings
2007 30.0 28.8
2006 21.1 17.6 13.6 25.1 77.4
2005 19.7 113.8 15.3 15.0 163.8
Net earnings per
Class B share -
continuing operations
Basic
2007 $0.93 $0.89
2006 0.66 0.54 $0.43 $0.78 $2.41
2005 0.50 0.16 0.48 0.43 1.57
Diluted
2007 0.90 0.86
2006 0.64 0.53 0.41 0.75 2.33
2005 0.49 0.16 0.46 0.41 1.52
Net earnings per
Class B share
Basic
2007 0.93 0.89
2006 0.66 0.54 0.43 0.78 2.41
2005 0.61 3.53 0.48 0.48 5.10
Diluted
2007 0.90 0.86
2006 0.64 0.53 0.41 0.75 2.33
2005 0.60 3.45 0.46 0.46 4.97
Restructuring and other
items and favourable tax
adjustments and gain on
discontinued operations
per Class B share((x))
2007 0.05 0.11
2006 (0.03) (0.03) (0.10) 0.20 0.04
2005 - 2.96 - (0.02) 2.94
(x) A non-GAAP measure - see Section 12
The impact on net earnings per Class B share of the gain on the sale of Custom in 2005 is included in the table above. Net earnings per Class B share have generally increased over time but have also fluctuated significantly due to changes in foreign exchange rates, restructuring costs and other items, and favourable tax adjustments.
In addition, the seasonality of the business has evolved over the last few years with the first and second quarters being the strongest and second strongest, respectively, due to the aggressive marketing plans of many customers at the beginning of the year. Also, there are many products that have a spring-summer bias in North America and Europe such as agricultural chemicals and certain beverage products, which generate additional sales volumes for CCL in the first half of the year. The last two quarters of the year are negatively affected from a sales perspective by summer vacation in the Northern Hemisphere, Thanksgiving, and the Christmas season shutdowns in the fourth quarter.
3. Business Segment Review
--------------------------
Label Division
--------------
($ Millions) Q2 2007 Q2 2006 +/- %
-------- -------- --------
Sales $238.4 $191.5 +25%
Operating Income $ 31.6 $ 23.2 +36%
Return on Sales(1) 13.3% 12.1%
1st Half 1st Half
2007 2006 +/- %
-------- -------- --------
Sales $483.5 $396.6 +22%
Operating Income $ 69.4 $ 52.4 +32%
Return on Sales(1) 14.4% 13.2%
Capital Spending $ 59.1 $ 48.3
Depreciation and Amortization $ 28.9 $ 23.9
(1) A non-GAAP measure - see Section 12
Sales for the Label Division were strong at $238.4 million for the second quarter, up 25% from $191.5 million in the same quarter last year. The sales increase was a result of an acquisition and organic growth contributing 23%, and foreign exchange net of a disposition adding a further 2%. For the first six months of 2007, sales of $483.5 million were 22% ahead of the $396.6 million recorded in the same period last year with 18% coming from organic growth and acquisitions and 4% from foreign exchange net of a disposition.
Sales growth in the second quarter was due in part to the ITW sleeve business acquisition (owned by CCL since the end of January 2007). Overall, however, the base business also experienced a continuation of very positive organic sales growth and operating income improvements.
North America continued to report only modest sales growth based on a slowing U.S. economy. Personal care volume was down for the quarter compared to the very strong markets enjoyed last year, as our key customers experienced softer sales and a reduction in new product launches. This was partially offset by increased volumes in shrink sleeves and in-mould labels for new product lines in the home care sector. In addition, new orders for beverage labels for international customers were supported by the North American operations. Healthcare sales were up slightly due chiefly to the strength in expanded content labels. Specialty products sales were slightly below last year's second quarter with good growth in agricultural chemical labels more than offset by a relatively soft promotional label market compared to a strong prior year, influenced by the World Cup. Overall in North America, profitability was up modestly on slightly higher sales despite weaker market conditions.
Brazil continued to show strong sales growth with improvements in operating income due to the volume growth and operating efficiencies and the recently acquired ITW sleeve business. Profitability in Brazil is well above the average of our Label Division.
In Europe, sales showed good growth in personal care compared to last year, driven by consumer demand in Central and Eastern Europe, and there was enormous growth in beverage applications as two plants in other business lines were converted to beverage products to support the demand. Healthcare and specialty sales were strong as we continue to secure new business through global customer relationships. This business continues to be very profitable. The ITW sleeve acquisition generated strong sales and operating income, well above its recent history under prior ownership and much better than management's expectations for this business.
The battery label business was managed geographically in the past. The business is now organized on a global basis and experienced modest growth in Europe and the United States but generated less sales in China than expected due to a customer delay in transferring volume from Europe into that operation.
Asia continued to generate very strong sales and income growth from a very small base. Sales in Thailand were substantially ahead of last year. In addition, the Guangzhou, China operation that opened only a year ago, was very busy in personal care. The Label Division continues to benefit from its international presence with large global personal care customers.
Operating income for the second quarter of 2007 was $31.6 million, up 36% from $23.2 million in the second quarter of 2006. Positive currency translation contributed modestly to this improvement. Drivers of this improvement were the performance of the recent ITW acquisition and higher sales in most product categories in each region. During the quarter, plants in Memphis, Paris and Mexico were in the process of relocating, and incurred direct moving costs of $0.6 million. The Mexican and Memphis locations are two of the largest facilities in the Label Division's network. Further moving costs are expected during the balance of 2007. Operating income as a percentage of sales at 13.3% exceeded our internal targets and was well above the 12.1% return generated in last year's second quarter. The first and second quarters have become the strongest and second strongest, respectively, for the Label Division due to the aggressive marketing plans of many customers at the beginning of the year, seasonal products such as agricultural chemicals, and minimal vacation and holiday shutdowns. Year-to-date, operating income was $69.4 million versus $52.4 million last year, up 32%.
Sales and operating income in the second quarter of 2007 for the ITW acquisition noted earlier in this report were $28.3 million and $5.5 million, respectively. The operation in Houten, the Netherlands, disposed of in the fall of 2006 generated sales of $2.0 million and nominal operating income in the second quarter of 2006.
Sales backlogs for the label business are generally low due to short customer lead times, but indications are that customers' orders overall continue to be seasonally firm through the third quarter of 2007.
The Label Division invested $59.1 million in capital in the first six months of 2007 compared to $48.3 million in the same period last year. The capital was spent throughout the business to maintain and expand the manufacturing base by adding presses in strategic locations, plant construction for the future relocation of the Memphis, Tennessee and Mexico City operations and a plant extension in Brazil. Depreciation and amortization for the Label Division were $28.9 million for the first half of 2007 and $23.9 million in the comparable 2006 period.
Container Division
------------------
($ Millions) Q2 2007 Q2 2006 +/- %
-------- -------- --------
Sales $ 49.3 $ 48.3 +2%
Operating Income $ 6.0 $ 5.7 +5%
Return on Sales(1) 12.2% 11.8%
1st Half 1st Half
2007 2006 +/- %
-------- -------- --------
Sales $102.2 $ 92.7 +10%
Operating Income $ 12.0 $ 11.9 +1%
Return on Sales(1) 11.7% 12.8%
Capital Spending $ 2.5 $ 13.1
Depreciation and Amortization $ 5.7 $ 5.2
(1) A non-GAAP measure - see Section 12
Sales in the second quarter were $49.3 million, up 2% from $48.3 million last year. Sales increased organically for the quarter by 3% due to price increases with volume generally unchanged. Foreign currency translation was a negative factor, reducing the sales growth by 1%. For the first six months of 2007, sales of $102.2 million were 10% above the $92.7 million recorded in the same period last year.
The Container Division experienced a modest sales increase as management has been able to pass on higher aluminum costs to its key customers and has benefited from strong demand for aluminum aerosol containers with bag-in-can technology. Personal care volume in the aerosol format had been satisfactory into the second quarter but recent order levels have slowed due in part to the weaker U.S. economy, volume losses due to predatory competitive pricing and customer uncertainty concerning consumer demand in this market. Beverage volume has continued to be light but there are many interesting sizeable opportunities that may come into production in the second half of 2007. Mexican aerosol container sales volumes were substantially higher in the second quarter compared to last year. The growth by our global customers located in Mexico provides further justification for the seventh new aluminum container line to be installed in the new plant in Guanajuato, Mexico for start-up in mid 2008.
Operating income for the Container Division before restructuring and other items for the second quarter of 2007 was $6.0 million, up 5% from $5.7 million in the second quarter of 2006. The key issues continue to be the significant increase in aluminum costs, the reduction of aluminum hedges and related income, and our ability to pass on price increases to customers. The reduction in higher margin beverage volume has also resulted in unfavourable product mix. Return on sales for the second quarter of 2007 was 12.2% compared to 11.8% in last year's second quarter. For the first half of 2007, operating income was $12.0 million versus $11.9 million last year, up 1%.
The aluminum container plant in Penetanguishene, Ontario sells a large part of its production to the United States market in U.S. dollars. The business has hedged a part of the Canadian dollar value of these U.S. dollar sales by way of forward contracts and sells the rest of its U.S. dollar sales at spot currency rates. The change in the exchange rates on U.S. currency transactions reduced comparative income for the Container Division by $0.9 million in the second quarter of 2007 and $1.4 million year-to-date. Further discussion of currency hedging follows later in this report.
The Container Division invested $2.5 million in capital in the first six months of 2007 compared to $13.1 million in the same period last year. Only modest maintenance capital was expended in the first half of 2007 compared to the acquisition and installation of production lines last year. Depreciation and amortization for the first half of 2007 and 2006 were $5.7 million and $5.2 million, respectively. The Division has successfully installed six new aluminum container lines in the last four years. A seventh new line is ready to be shipped and will be installed at a new plant under construction in Guanajuato, Mexico. The new plant will come on line in the first half of 2008.
The Container Division continues to hedge a small portion of its anticipated future aluminum purchases through futures contracts. The proportion of future contracts outstanding has dropped considerably over the last few years since the Division and its customers have been less inclined to hedge aluminum costs at recent record price levels. The cost of aluminum persists in remaining at relatively high levels and the Division continues to be challenged to recover these additional costs by adjusting prices to its customers. Also, most of the aluminum hedges that were acquired at much lower prices in prior years have been realized and there has been and will continue to be less benefit from aluminum hedges going forward. Generally, the Division has either pricing agreements with customers that may fluctuate to adjust for the changes in aluminum costs or fixed pricing contracts that are hedged by agreement with key customers using aluminum forward contracts.
Tube Division
-------------
($ Millions) Q2 2007 Q2 2006 +/- %
-------- -------- --------
Sales $ 15.8 $ 17.7 -11%
Operating Income $ 0.2 $ 1.5 -87%
Return on Sales(1) 1.3% 8.5%
1st Half 1st Half
2007 2006 +/- %
-------- -------- --------
Sales $ 34.0 $ 36.8 -8%
Operating Income $ 1.6 $ 2.5 -36%
Return on Sales(1) 4.7% 6.8%
Capital Spending $ 1.3 $ 4.0
Depreciation and Amortization $ 3.6 $ 3.6
(1) A non-GAAP measure - see Section 12
Sales in the second quarter for the Tube Division were $15.8 million, down 11% from $17.7 million last year. Sales decreased for the quarter due to the slowing economy in the United States and the impact it has had on consumer spending and the related marketing plans of our personal care customers. This trend is expected to continue into the third quarter with some improvement by the fourth quarter. Sales in the first half of 2007 were $34.0 million, down 8% from the $36.8 million recorded in 2006 due to lower volume, the disposition of CCL Dispensing and unfavourable foreign exchange.
Operating income for the Tube Division for the second quarter of 2007 was $0.2 million, down 87% from $1.5 million in the second quarter of 2006. The decrease was due to the downturn in sales and new orders with the current level of fixed overhead to support the business, negatively impacting margins. As a result, return on sales was 1.3% in the second quarter compared to an 8.5% return in prior years' second quarter. Year-to-date operating income was $1.6 million, down 36% from $2.5 million recorded in the same period last year.
The Tube Division invested $1.3 million in maintenance capital in the first six months of 2007 compared to $4.0 million in the same period last year. Depreciation and amortization for the first half of 2007 and 2006 were $3.6 million in each year.
ColepCCL Joint Venture - CCL's 40% proportionate share
------------------------------------------------------
($ Millions) Q2 2007 Q2 2006 +/- %
-------- -------- --------
Sales $ 53.7 $ 39.1 +37%
Operating Income $ 4.4 $ 3.9 +13%
Return on Sales(1) 8.2% 10.0%
1st Half 1st Half
2007 2006 +/- %
-------- -------- --------
Sales $110.6 $ 83.7 +32%
Operating Income $ 9.7 $ 8.0 +21%
Return on Sales(1) 8.8% 9.6%
Capital Spending $ 7.3 $ 1.9
Depreciation and Amortization $ 3.9 $ 3.6
(1) A non-GAAP measure - see Section 12
For the second quarter of 2007, CCL's share of the joint venture's sales was $53.7 million. This sales level was 37% higher than the comparative sales last year of $39.1 million due to a continuation of strong markets in Europe and Eastern Europe for ColepCCL's products and the 5% increase in the value of the euro over last year's second quarter. New order levels continue to be firm and it is anticipated that sales will grow in the second half of the year. For the first half of 2007, sales were $110.6 million, up 32% from last year's $83.7 million.
Operating income in the second quarter of 2007 for ColepCCL was $4.4 million, indicating a return on sales of 8.2%, and in the second quarter of 2006, operating income was $3.9 million, with a return on sales of 10.0%. Operating income was 13% ahead of last year's level due to higher sales and currency translation, partially offset by lower margins due to product mix and additional expenses incurred to service the substantially higher sales level. For the first half of 2007, operating income of $9.7 million was 21% ahead of the $8.0 million recorded in the first half of 2006.
Capital spending for the first six months of 2007 was $7.3 million compared to $1.9 million in the comparable 2006 period. Major expenditures have been undertaken to expand aerosol can manufacturing capacity. Depreciation and amortization were $3.9 million in the first half of 2007, up from $3.6 million in the first half of 2006.
4. Currency Translation and Currency Transaction Hedging
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Approximately 90% of CCL's sales are generated from our international operations and therefore, are recorded in foreign currencies and then translated into Canadian dollars for reporting purposes. The U.S. dollar is the functional currency for approximately 33% of the Company's total sales and it depreciated 2% on average compared to the Canadian dollar in the second quarter of 2007 versus last year's second quarter. In addition, European currencies are now the measurement currencies for over 48% of CCL's sales. The primary European currency, the euro, however, strengthened by 5% compared to the Canadian dollar versus prior year's quarter. Changes in foreign exchange rates have increased earnings per share due to currency translation by $0.01 in the second quarter compared to 2006 and $0.06 year-to-date.
Additionally, CCL has utilized a hedging program to lock in a portion of its expected U.S. dollar revenues earned in Canada by the Container Division. These hedge transactions were at an average rate of $1.24 (US$ 6.0 million sold forward) for the second quarter of 2006 and were $1.13 (US$ 3.0 million sold forward) for the second quarter of 2007. The Container Division in Canada also collected an additional US$ 12.5 million at this year's average rate, 2% below the prior year's rate. This change in the exchange rates on U.S. currency transactions reduced comparative income by $0.9 million in the second quarter of 2007 and reduced comparative earnings per share by $0.02 for the quarter and $0.03 year-to-date. As at June 30, 2007, there were no outstanding foreign exchange contracts due to the overall reduced materiality and risk. The Company has discontinued its hedging program as it has a partial natural hedge due to interest payments on its long-term debt being primarily in U.S. dollars.
After the acquisition of Prodesmaq early in 2006, the Company hedged a portion of its expected cash flow from Brazil. The hedge involved locking in 20.8 million reais at $0.48 per Canadian dollar ($10.0 million in total), which matured in April 2007 at $0.55. The loss on the contract settlement of $1.5 million was charged to other comprehensive loss. The Company is not anticipating further hedges against the Brazilian currency or any other currencies on the basis that the Company has a diversified basket of foreign exchange exposures in many different regions and currencies.
5. Liquidity and Capital Resources
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The Company's capital structure is as follows:
$ Millions June 30 December 31 June 30
2007 2006 2006
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Total debt $ 503.2 $ 442.1 $ 445.9
Cash and cash equivalents 86.9 125.0 111.7
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Net debt(1) $ 416.3 $ 317.1 $ 334.2
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Shareholders' equity $ 668.2 $ 652.6 $ 590.0
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Net debt: total capitalization(2) 38.4% 32.7% 36.2%
Book value per share(3) $ 20.79 $ 20.24 $ 18.34
(1) Net debt is a non-GAAP measure - see Section 12
(2) Net debt: total capitalization is a non-GAAP measure - see Section 12
(3) Book value per share is a non-GAAP measure - see Section 12
The Company has considerable cash resources and operates below management's optimal target of financial leverage. As of June 30, 2007, cash and cash equivalents amounted to $87 million compared to $112 million at June 30, 2006. Net debt amounted to $416 million at June 30, 2007, $82 million higher than the net debt of $334 million at the end of June 2006. The increase in net debt in this time frame is primarily due to the ITW sleeve business acquisition in the first quarter of 2007.
Net debt to total capitalization (a non-GAAP measure - see Section 12) at June 30, 2007 was 38%, up from 36% at the end of June 2006 and 33% at the end of 2006 primarily due to the ITW sleeve business acquisition. Book value per share was $20.79 at the end of the second quarter of 2007, 13% above $18.34 a year ago. The increase is primarily the result of earnings retained in the Company, offset in part by the decrease in shareholders' equity due to the changes in accumulated other comprehensive loss (mainly due to currency translation).
The Company's debt structure is comprised of three private debt placements completed in 1997, 1998 and 2006 for a total of US$ 336.2 million (Cdn$ 358.2 million) and a 5-year revolving line of credit initiated in January 2007 for $95 million, of which $86 million was drawn at June 30, 2007. The Company's overall average interest rate is 5.6% after factoring in the related Interest Rate Swap Agreements ("IRSAs") and Cross Currency Interest Rate Swap Agreements ("CCIRSAs"). The IRSAs and CCIRSAs are discussed later in this report.
The Company believes that it has sufficient cash on hand and the ability to generate cash flow from operations to fund its expected financial obligations during the balance of 2007.
6. Cash Flow
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During the second quarters of 2007 and 2006, the Company generated cash from operating activities of $55.1 million and $45.1 million, respectively. The increase in cash flow compared to last year's second quarter was due primarily to higher net earnings.
Working capital was reduced in the second quarter by $4.5 million compared to a $9.2 million decrease last year. The smaller reduction is indicative of the high level of activity across the business.
Capital spending in the second quarter was $39.0 million compared to $25.1 million last year. The major capital expenditures in the second quarter were for many new presses for the Label Division and building purchases and expansions. This level of capital spending was higher than the $21.5 million of depreciation and amortization in the second quarter of 2007 and the $18.5 million in the second quarter of 2006 as the Company continues to invest in new growth opportunities for the business. Plans for capital spending in 2007 are expected to be below the $150 million spent in 2006 with $70.2 million spent in the first half of 2007.
Dividends declared in each of the second quarters of 2007 and 2006 were $3.9 million and $3.5 million, respectively. The total number of shares outstanding as at June 30, 2007 and 2006 were 32.7 million and 32.6 million, respectively, with the increase due to the exercise of stock options. The Company has historically paid out dividends at a rate of 20-25% of net earnings. Since the Company's cash flow and financial position are strong, the Board of Directors approved a continuation of the higher dividend declared earlier this year of $0.1075 per Class A share and $0.12 per Class B share to shareholders of record as of September 14, 2007 and payable on September 28, 2007. The annualized dividend rate is $0.43 per Class A share and $0.48 per Class B share.
7. Interest Rate and Foreign Exchange Management
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The Company has utilized Interest Rate Swap Agreements to allocate notional debt between fixed and floating rates by converting the underlying U.S. dollar fixed rate private placement debt into U.S. dollar floating rate debt. The Company has utilized IRSAs with a view to reducing interest expense over time.
The Company has developed into a global business over the last few years with a significant asset base in Europe. It has utilized Cross Currency Interest Rate Swap Agreements to effectively convert notional U.S. dollar fixed rate debt into fixed and floating euro debt in order to hedge its euro-based assets and cash flows.
The effect of the IRSAs and CCIRSAs has been to reduce interest expense by $0.2 million in the second quarter of 2007 compared to a reduction of $0.3 million in the second quarter of 2006. Interest coverage (a non-GAAP measure - see Section 12) improved to 6.2 times in 2007 compared to 5.8 times in 2006 as at June 30th.
8. New Accounting Standards
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A. Changes In Accounting Policies
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Starting on January 1, 2007, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 1530, "Comprehensive Income"; Section 3251, "Equity"; Section 3861, "Financial Instruments - Disclosure and Presentation"; Section 3865, "Hedges" and Section 3855, "Financial Instruments - Recognition and Measurement".
Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.
Section 3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. Under the new standards, policies followed for periods prior to the effective date are generally not reversed, therefore, the comparative figures have not been restated except for the requirement to restate the currency translation adjustment as part of other comprehensive income.
Section 3865 prescribes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as those related to the hedged item.
Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured on the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net earnings.
Under adoption of these new standards, the Company designated its cash and cash equivalents as held-for-trading. Long-term investments are designated as available-for-sale. Cash and cash equivalents and long-term investments are measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank advances, accounts payable and accrued liabilities and long-term debt are classified as other financial liabilities, which are measured at amortized cost. The Company has also elected to expense, as incurred, transaction costs related to long-term debt.
Upon adoption of these new standards, the Company recorded a decrease to opening retained earnings of $3.0 million. The decrease to opening retained earnings was a result of the write-off of previously deferred transaction costs related to issuance of long-term debt ($1.0 million, loss net of tax of $0.5 million), the write-off of a deferred loss on the termination of various cross currency interest rate swaps that did not meet the new requirements ($2.1 million loss, no tax) and the ineffectiveness of cash flow hedges discussed below ($0.1 million gain, net of tax).
All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless exempted from derivative treatment as a normal purchase or sale. All changes in their fair value are recorded in net earnings unless cash flow hedge accounting is used, in which case, changes in fair value are recorded in other comprehensive income. The Company has applied this accounting treatment for all embedded derivatives in existence at transition. The impact of the change in accounting policy related to embedded derivatives is immaterial.
The Company uses various financial instruments to manage foreign currency exposures, fluctuation in interest rates, and exposures related to the purchase of aluminum for the Container Division. These financial instruments are classified into three types of hedges: cash flow hedges, fair value hedges and hedges of net investments in self-sustaining operations.
In a cash flow hedge, the effective portion of changes in the fair value of derivatives is recognized in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in the statement of earnings. Upon adoption of the new standards, the Company remeasured its cash flow hedge derivatives at fair value. Aluminum forward contracts with a favourable fair value of $1.7 million are the largest component of the Company's cash flow hedges and are recorded in other receivables and prepaid expenses. In addition, the Company entered into Cross Currency Interest Rate Swap Agreements (CCIRSAs) that converted U.S. dollar fixed rate debt into Canadian dollar fixed rate debt in order to reduce the Company's exposure to the U.S. dollar debt and currency exposures. This CCIRSA is also designated as a cash flow hedge and has an unfavourable fair value of $5.6 million for the current period and is recorded in long-term debt. The Company also uses forward contracts to hedge foreign exchange exposure on anticipated sales. All existing forward contracts matured during the current quarter. These hedges were previously recorded in accounts payable and accrued liabilities.
In a fair value hedging relationship, the carrying value of the hedged item is adjusted by gains or losses attributable to the hedged risk and recorded in net earnings. This change in fair value of the hedged item, to the extent the hedging relationship is effective, is offset by changes in the fair value of the derivative also measured at fair value on the balance sheet date, with changes in value recorded through net earnings. The Company has two CCIRSAs designated as fair value hedges, which convert U.S. dollar fixed rate debt into Canadian dollar floating rate debt in order to reduce interest rate and currency risk. In addition, the Company has an interest rate swap converting U.S. dollar fixed rate debt to U.S. dollar floating rate debt to reduce interest rate risk exposure. These fair value hedges have an unfavourable fair value of $7.7 million and are recorded in long-term debt.
In a hedge of a net investment in a self-sustaining foreign operation, the portion of the gain or loss on the hedging item that is determined to be an effective hedge should be recognized in comprehensive income and the ineffective portion should be recognized in net earnings. During 2006, the Company entered into CCIRSAs that converted Canadian dollar fixed rate and floating rate debt into euro fixed rate debt and euro floating rate debt in order to hedge the Company's exposure to the euro, with a view to reducing foreign exchange fluctuations and interest expense. These CCIRSAs have been designated as net investment hedges and have a net favourable fair value of $3.6 million at the end of the current period and are recorded in other assets and long-term debt. The Company had also entered into a non-deliverable forward foreign exchange contract to hedge its investment in its Brazilian subsidiaries. This foreign exchange contract was previously recorded in accounts payable and accrued liabilities. It expired in April 2007 and was settled by a payment of $1.5 million in cash from CCL. The Company has elected to record the forward points associated with the forward contract in accumulated other comprehensive income. The forward points are recognized in income on the maturity of the contract.
B. Recently Issued Accounting Standards
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In May 2007, the CICA issued a new Handbook Section 3031, "Inventories", which addresses the measurement and disclosure of inventory. The new standard is effective for interim and annual financial statements for fiscal years beginning on or after January 1, 2008. Management is currently reviewing the potential impact on the financial results of the Company. However, further disclosure will be required in the Consolidated Statement of Earnings as it will now be necessary to disclose the amount of inventories recognized as an expense during the period. The Company will comply with the standard on January 1, 2008.
In October 2006, the CICA issued new standards related to financial instrument presentation and disclosure, Handbook Section 3862, "Financial Instruments - Disclosure" and Handbook Section 3863, "Financial Instruments - Presentation". These standards revise and enhance the disclosure requirements of Handbook Section 3861, "Financial Instruments - Disclosure and Presentation". These standards are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. Management is currently reviewing the potential impact on the Company. The Company will comply with the requirements of the new standard when the standard becomes effective.
In October 2006, the CICA approved new accounting standards, Section 1535, "Capital Disclosures". This new section establishes standards for disclosing information about an entity's capital and how it is managed. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. Management is currently reviewing the potential impact on the Company. The Company will comply with the requirements of the new standard when the standard becomes effective.
9. Commitments and Contingencies
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The Company has no material "off-balance sheet" financing obligations except for typical long-term operating lease agreements. The nature of these commitments is described in note 14 of the December 31, 2006 Annual Consolidated Financial Statements. The Company does not have any material related party transactions. There are no defined benefit plans funded with CCL stock.
10. Risks and Strategies
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The 2006 Management's Discussion and Analysis in the Annual Report detailed risks to the Company's business and the strategies that were planned for 2007 and beyond. There have been no material changes to those risks and strategies. CCL is now more exposed to the inherent risks associated with running a more internationally diverse specialty packaging business. The Company now has a greater dependence on the European, Latin American and Asian economies and their currencies. These non-Canadian risks were described in the 2006 Management's Discussion and Analysis.
11. Outlook
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The Company continues to focus on the growth prospects of its specialty packaging business and the prudent management and reinvestment of its cash on hand and cash flow generation with a view to the continued improvement in shareholder value in 2007 and beyond. CCL is continuing to integrate and reorganize the large number of recent acquisitions it has made into its global network to improve profitability and simplify administration. The Company is investigating mid-sized potential acquisition and joint venture candidates that meet its criteria of core products and customers, and its expectation of earnings accretion in the first year of ownership.
The organic growth in sales and income experienced in 2006 and the first half of 2007 is anticipated to continue into the balance of 2007 as the Company is expected to generate additional returns from its capital investments and acquisitions. Growth is predominantly expected to come from outside North America due to the slowdown in the U.S. economy.
The seasonality of the business continues to evolve, particularly in the Label Division, with the first quarter being the most profitable by a considerable margin followed by the second quarter. The overall outlook for the balance of the year is positive. However, there are challenges expected during the remainder of 2007 associated with the cost of aluminum in the Container Division and its ability to maintain margins through higher selling prices to its customers. Sluggish customer demand for personal care products in North America are expected to impact the Tube and Container Divisions at least through the third quarter. In addition, the Label Division will be relocating its operations to new facilities in Mexico and Memphis over the remainder of 2007 and Paris into 2008, and will be incurring additional costs associated with these moves. The recent weakness in the U.S. dollar compared to the Canadian dollar will continue to negatively impact comparative results due to adverse currency translation. Currently, the Canadian dollar relative to the European currencies, primarily the euro, and other currencies is effectively unchanged from last year's rates and may have little impact on comparative results.
12. Key Performance Indicators and Non-GAAP Measures
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CCL measures the success of its business using a number of key performance indicators, many of which are in accordance with Canadian GAAP as described throughout this report. The following performance indicators are not measurements in accordance with Canadian GAAP and should not be considered as an alternative or replacement of any other measure of performance under Canadian GAAP. These non-GAAP measures do not have any standardized meaning and may not be comparable to similar measures presented by other issuers.
Restructuring and other items and favourable tax adjustments - A measure of significant non-recurring items that are included in net earnings. The impact of restructuring and other items and favourable tax adjustments on a per share basis is measured by dividing the after-tax income of these items by the average number of shares outstanding in the relevant period. Management will continue to disclose the impact of these items on its results because the timing and extent of such items do not reflect or relate to the Company's ongoing operating performance. Management evaluates the operating income of its divisions before the effect of these items.
Return on Sales - A measure indicating relative profitability of sales to customers. It is defined as operating income divided by sales, expressed as a percentage.
Net Debt - A measure indicating the financial indebtedness of the Company assuming that all cash on hand is used to repay a portion of the outstanding debt. It is defined as current debt including cash advances plus long-term debt less cash and cash equivalents.
Net Debt to Total Book Capitalization - A measure indicating the financial leverage of the Company. It measures the relative use of debt versus equity in the book capital of the Company. Net debt to total book capitalization is defined as Net Debt (see above) divided by Net Debt plus shareholders' equity, expressed as a percentage.
Book Value per Share - A measure of the book shareholders' equity per the combined Class A and Class B shares. It is calculated by dividing shareholders' equity by the actual Class A and Class B shares outstanding excluding amounts and shares related to shares held in trust and the executive share purchase plan.
Interest Coverage - A measure indicating the relative amount of operating income generated by the Company compared to the amount of interest expense incurred by the Company. It is calculated as operating income before restructuring and other items plus net interest expense divided by net interest expense calculated on a 12-month rolling basis.