Results of Operations:
Net earnings for the fourth quarter of 2008 were $8.9 million or 14 cents per share compared to $6.2 million or 10 cents per share in the corresponding period of 2007. The current three-month result represents the best quarterly net earnings recorded in the past five years, except for the second quarter of 2006 when profits included the sale of real estate. The 44.3% increase in net earnings compared to the fourth quarter of 2007 was mainly attributable to enhanced gross profit margins and the favorable impact of foreign exchange, offset in part by the effect of lower future Canadian income tax rates, which favorably impacted 2007 fourth quarter net earnings.
The improvement was largely the result of higher sales volumes, increased gross profit margins, expense reductions and the favorable effect of foreign exchange. This was partially offset by the favorable effect on 2007 earnings of lower future Canadian income tax rates.
Sales:
Fourth quarter sales in 2008 of $129.7 million increased by $3.1 million or 2.4% in relation to the 2007 corresponding period. Although sales increased overall, volumes fell by 4.0% or $5.0 million in comparison to the fourth quarter of 2007. Rigid containers, lidding and packaging machinery were the only product groups to exhibit modest single-digit volume increases in the quarter. Specialty films and biaxially oriented nylon film, on the other hand, both experienced a contraction in sales volumes of about 25%, while volumes in modified atmosphere packaging declined moderately by about 5%. A weaker Canadian dollar also negatively impacted sales by a further $4.9 million. Higher overall selling prices, however, offset the declines in sales due to volume and foreign exchange by advancing sales by a total of $13.0 million to counteract increased raw material costs.
In 2008, sales for the year increased by $45.4 million or 9.7% over 2007. Greater volumes accounted for $20.0 million of that increase or a 4.3% improvement over the prior year. All product groups contributed to core volume growth in 2008 with the exception of specialty films. Rigid containers experienced robust growth in excess of 15% while shipments of biaxially oriented nylon, modified atmosphere packaging (MAP) and lidding each grew at more modest rates ranging from 2 to 6%. MAP product volumes included $4.9 million in sales resulting from the acquisition of the film packaging business of Walsroder Packaging, a subsidiary of The Dow Chemical Company. Packaging machinery sales displayed respectable volume growth although at a less favorable product mix. Meanwhile, sales of specialty films declined as the state of the US economy had a more pronounced effect on this product group. Price and mix changes resulted in a sizable increase in sales of $23.2 million or 4.9% compared to 2007 as all business units instituted price increases to coincide with the sharp rise in raw material costs. The strengthening of the Canadian dollar versus the US dollar, on average for the year, also increased sales by $2.2 million or about 0.5%.
Gross profit margins:
Gross profit margins strengthened to 30.0% of sales in the fourth quarter of 2008, up substantially from the 20.7% of sales recorded in the corresponding quarter in 2007. The weakening of the Canadian dollar had a favorable impact on the gross profit margin percentage in the fourth quarter of 2008 of nearly 7 percentage points, reflecting the foreign exchange transaction differences on raw materials purchased by the Canadian subsidiaries in US dollars. The balance of the improvement of about 6.0 cents per share in net earnings was mainly attributable to selling price advances in relation to raw material costs and improved manufacturing performance. In particular, the lag typically experienced in selling price-indexing agreements, whereby adjustments to selling prices lag changes in raw material costs, augmented results for the quarter as raw material costs reversed their upward trend. The same practice had negatively impacted margins in previous quarters when raw material costs were rising. In comparison to the fourth quarter of 2007, a significant reduction in unfavorable manufacturing variances was achieved, as the start-up issues experienced in the prior year were substantially resolved.
In comparison to 2007, 2008 gross profit margins increased by $22.6 million due to foreign exchange impacts of $10.7 million, volume advances of $4.9 million, and improvements in manufacturing performance of $7.0 million, or 7.0 cents per share in after-tax dollars. This substantial gain was mainly attributable to the significant reduction in manufacturing variances in 2008, which contributed 5.5 cents in net earnings per share. Greater manufacturing efficiencies from lower unit costs for direct labor and overheads accounted for most of the remaining 1.5 cents per share advancement in gross profit margins. The company was also reasonably successful in matching raw material cost changes with selling price adjustments in the past year, having little impact on net earnings.
Expenses and Other:
For the fourth quarter of 2008, operating expenses increased in relation to the corresponding period in 2007 and represented a reduction in net earnings for the quarter of $1.2 million or nearly 2.0 cents per share, when adjusted for the effect of foreign exchange and sales volumes. Higher incentive costs and the timing of the recording of research and development tax credits accounted for the majority of the operating expense increase. Due to the considerable weakening of the Canadian dollar in the last three months of 2008, the overall impact of foreign exchange on the net earnings for the quarter was an improvement of 3.5 cents per share. In regard to income taxes, the fourth quarter of 2007 included the benefit of the enactment of lower future Canadian rates of income tax, which increased net earnings in 2007 by 4.0 cents per share but had no effect on the same period in 2008.
Year-to-date, interest costs declined by over $0.9 million in 2008 compared to the prior year and resulted in an increase of 1.0 cent in net earnings per share. The overall weakening of the Canadian dollar over the course of the year resulted in an increase of about 1.5 cents per share in 2008 compared to the prior year. The enactment of lower future Canadian income tax rates increased net earnings in 2007 more than 2008 by 3.5 cents per share. Conversely, the difference in income tax rates between 2008 and 2007, after adjusting for the tax effect of foreign exchange gains and losses, resulted in a contribution of about 0.5 cents per share to net earnings in the current year.
Capital Resources, Cash Flow and Liquidity:
At December 28, 2008, the company’s cash position totaled $19.8 million, an increase of $21.9 million in the fourth quarter of 2008 alone and $24.8 million from the prior year-end. The healthy increase in cash during the fourth quarter was generated by strong cash flow from operating activities before changes in working capital of $20.8 million as well as a net reduction in the investment in working capital of $5.4 million. The reduction in working capital was aided by a sharp decline in raw material inventories due to both decreases in quantities on hand and cost. During the quarter, cash was utilized for defined benefit pension payments of $1.7 million, equipment purchases of $3.2 million, purchase of intangibles of $0.2 million and dividends of $1.9 million. There was also a foreign exchange adjustment on cash of $2.7 million.
