(i) Currency risk (ii) Interest rate risk (iii) Commodity price risk Capital management 6. SEGMENT REPORTING Business segments The Company uses derivatives to manage market risks. Generally the Company seeks to apply hedge accounting in order to manage volatility in profit or loss. The Company does not utilize derivative financial instruments for speculative purposes. The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates. The Company partially manages these exposures by contracting primarily in Canadian dollars, euros, U.K. pounds and U.S. dollars. Additionally, each subsidiary’s sales and expenses are primarily denominated in its local currency, further minimizing the foreign exchange impact on the operating results. In other cases, borrowings are done by non-Canadian-dollar-based subsidiaries in their own functional currencies such that the principal and interest are denominated in a currency that matches the cash flows generated by those subsidiaries. These provide natural hedges that do not require the application of hedge accounting. The Company is exposed to market risks related to interest rate fluctuations on its debt. To mitigate this risk, the Company maintains a combination of fixed and floating rate debt. Aluminum is the major raw material used in the Container Segment. Prices for aluminum fluctuate in response to changes in supply and demand, market uncertainty and a variety of other factors beyond the Company’s control. The Company uses customer specific aluminum derivative instruments (hedging items) along with fixed price contracts (hedged items) to minimize the impact of aluminum price fluctuations. Aluminum derivative contracts are accounted for as cash flow hedges and changes in value are recorded on the statement of financial position in other comprehensive income. Any ineffective portion is recorded in selling, general and administrative expenses. Payments made or proceeds received upon the settlement of these contracts are recorded in cost of goods sold. The Company’s objective is to maintain a strong capital base throughout the economic cycle so as to maintain investor, creditor and market confidence and to sustain the future development of the business. This capital structure supports the Company’s objective to provide an attractive financial return to its shareholders equal to that of its leading specialty packaging peers (between 12% and 14% up until 2009 but lower since the global recession). The Company defines capital as total shareholders’ equity and measures the return on capital (or return on equity) by dividing annual net earnings before goodwill impairment loss and restructuring and other items by the average of the beginning and the end-of-year shareholders’ equity. In 2011, the return on capital was 10.7% (2010 – 9.5%) and was well within the range of the Company’s leading specialty packaging peers. Management and the Board maintain a balance between the expected higher return on capital that might be possible with a higher level of financial debt and the advantages and security afforded by a lower level of financial leverage. The Company believes that an optimum level of net debt (defined as current debt, including bank advances, plus long-term debt, less cash and cash equivalents) to total book capitalization (defined as net debt plus shareholders’ equity) is a maximum of 45%. This ratio was 21% at December 31, 2011 (2010 – 24%), and therefore the Company has further capacity to invest in the business with additional debt without exceeding the optimum level. The Company has provided a growing level of dividends to its shareholders over the last few years, generally related to its growth in earnings. The dividends are declared bearing in mind the Company’s current earnings, cash flow and financial leverage. There were no changes in the Company’s approach to capital management during the year. The Company is subject to certain covenants on its unsecured senior notes. This includes a covenant requiring a minimum consolidated net worth. The Company monitors the ratios on a quarterly basis and at December 31, 2011, was in compliance with all its covenants. The Company has three reportable segments, as described below, which are the Company’s main business units. The business units offer different products and services, and are managed separately as they require different technology and marketing strategies. For each of the business units, the Company’s chief executive officer and the chief operating decision maker reviews internal management reports regularly. CCL Industries Inc. 2011 Annual Report 59