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ROYAL GROUP ANNOUNCES: - Third Quarter Financial Results - Status of Sale Process - Status of Portfolio Restructuring
TORONTO, Nov. 11 /PRNewswire-FirstCall/ -- Royal Group Technologies Limited (RYG-TSX; RYG-NYSE) today announced unaudited financial results for the three months ended September 30, 2005. Net sales for the quarter were $518.9 million, representing a one percent decline from $524.8 million during the same period in 2004. Royal Group recorded a net loss of $6.5 million representing a loss of $0.07 per share, which was in the range indicated by the Company in an advisory news release issued on November 2, 2005. During the same quarter in 2004, net earnings were $24.4 million, or $0.26 per share.
The decline in net sales in the quarter can be primarily attributed to the strengthening of the Canadian dollar vis-a-vis the US dollar, with approximately 56% of sales during the quarter denominated in US dollars. Assuming the same average US dollar exchange rate as in the same quarter last year, Royal Group's sales in Canadian dollar equivalency would have been up by approximately five percent, mainly as the result of price increases implemented to partially offset rising raw materials costs.
Gross margin for the three months ended September 30, 2005 was $117.0 million, versus $146.0 million for the same quarter last year. Gross margin as a percentage of sales declined to 22.6% compared with 27.8% during the same quarter last year, primarily as a result of higher raw material costs and unfavorable currency exchange rates. Escalating raw material costs net of recovery through selling price increases accounted for approximately $15 million of the decline in gross margin. The strengthening Canadian dollar is estimated to have negatively impacted gross margin by $9 million, Currency exchange and raw material increases net of recovery through selling price increases accounted for approximately $24 million of the decline.
Operating expenses, which include selling, transportation and general administrative costs, rose 12.3% to $115.5 million, from $102.9 million in the same quarter in the previous year. The most significant contributor to the increase in operating expenses was fees paid to professionals totaling approximately $10 million pretax or $0.075 per share, related to assisting in the development of the management improvement plan, as well as advice and assistance with respect to the previously announced sale process. The next significant contributor to the increase was a $4 million write-down of the accounts receivable from a former Mexican subsidiary. Other items affecting operating expenses were higher selling and delivery costs resulting from increased freight expenses, costs associated with the closure of redundant warehousing, as well as the ongoing costs related to regulatory investigations.
"During our third quarter, we successfully developed a comprehensive management improvement plan, which aims to improve financial performance through business unit portfolio restructuring, actions to improve profitability and strategies to realize the full potential of core business units", said Lawrence J. Blanford who was appointed Royal Group's President and CEO in May of 2005. "With the plan now approved, we are aggressively implementing and gaining traction with the many initiatives imbedded in the plan," noted Mr. Blanford. He added that Royal Group, "is focused on implementing aggressive sales and marketing initiatives, to capitalize on strong building markets." He concluded noting that, "it will take time for these initiatives to fully manifest themselves as improved financial results, but solid progress is being made toward unlocking Royal Group's true potential."
During the first nine months of 2005, sales decreased three percent to $1.456 billion from $1.501 billion in the prior year, again primarily as a result of the unfavorable change in currency exchange rates. Gross Margin declined 17% to $344.7 million from $417.3 million in the previous year, primarily as a result of higher raw material costs that were not fully recovered through selling price increases, as well as the negative impact of the rise in the Canadian dollar vis-a-vis the US dollar. Net earnings during the first nine months of 2005 were $0.7 million, versus $69.3 million in the previous year, principally reflecting higher raw materials costs and unfavourable foreign exchange, as well as reflecting higher operating expenses associated with restructuring Royal Group, higher transportation expenses, costs associated with the current sale process and on-going regulatory investigations costs.
On November 2, 2005, the Group announced that it might be marginally offside on one of the covenants of its revolving credit facility. The Group has obtained an amendment to this bank covenant from its lenders and continues to be in compliance.
Third-quarter and year-to-date financial results in Canadian dollars, expressed in accordance with Canadian GAAP, are summarized in the following chart:
For the Quarter For the Nine Months
Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
Sales ($000s) 518,863 524,838 1,455,726 1,500,616
Gross Margin ($000) 117,015 146,016 344,705 417,299
Gross Margin Percentage 22.6% 27.8% 23.7% 27.8%
Net Earnings (Loss)
($000s) (6,503) 24,410 685 69,313
E.P.S. (L.P.S.)
$ Basic and Diluted (0.07) 0.26 0.01 0.74
Average Shares Outstanding
Basic (000s) 93,445 93,356 93,436 93,352
Diluted (000s) 93,445 94,839 94,525 93,846
Royal Group announced today that its business unit portfolio restructuring activities are proceeding as expected, with negotiations pertaining to the divestiture of Royal Alliance and Baron Metal in advanced stages. The company is also in negotiations pertaining to the divestiture of its Polish subsidiary, and has begun the process of soliciting bids for its Royal Ecoproducts subsidiary. Commenting on portfolio restructuring, Mr. Blanford noted that, "divestiture of other non-core subsidiaries is also being contemplated, with decisions on these business units to be made in the coming weeks."
Finally, Royal Group also confirmed today that the previously announced sale process is proceeding according to the path outlined in its news release of September 22, 2005, with potential bidders currently receiving presentations from management. The company aims to complete the process of soliciting bids for the company in December of 2005. At this time, no firm offer has been made to purchase the shares or assets of Royal Group and there can be no assurance that such an offer will be made, or a transaction concluded.
Royal Group Technologies is a manufacturer of innovative, polymer-based home improvement, consumer, and construction products. The company has extensive vertical integration, with operations dedicated to provision of materials, machinery, tooling, real estate, and transportation services to its plants producing finished products. Royal Group's manufacturing facilities are primarily located throughout North America, with international operations in South America, Europe, and Asia. Additional investment information is available on Royal Group's web site at http://www.royalgrouptech.com/ under the "Investor Relations" section.
The information in this document contains certain forward-looking statements with respect to Royal Group Technologies Limited, its subsidiaries and affiliates. These statements are often, but not always made through the use of words or phrases such as "expect", "should continue", "continue", "believe", "anticipate", "suggest", "estimate", "contemplate", "target", "plan", "budget", "may", "will", "schedule" and "intend" or similar formulations. By their nature, these forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant, known and unknown, business, economic, competitive and other risks, uncertainties and other factors affecting Royal specifically or its industry generally that could cause actual performance, achievements and financial results to differ materially from those contemplated by the forward-looking statements. These risks and uncertainties include the ongoing shareholder value maximization process and its outcome; the ongoing internal review and investigations by the Special Committee of the Board of Directors and its outcome; the outcome of the ongoing assessment and review of the Royal Building System's compliance with the smoke generated elements of the US building code and the safety of buildings constructed with the Royal Building System; fluctuations in the level of renovation, remodelling and construction activity; changes in product costs and pricing; an inability to achieve or delays in achieving savings related to the cost reductions or increases in revenues related to sales price increases; the sufficiency of our restructuring activities, including the potential for higher actual costs to be incurred in connection with restructuring activities compared to the estimated costs of such actions; the ability to recruit and retain qualified employees; the level of outstanding debt and our current debt ratings; Royal's ability to maintain adequate liquidity and refinance its debt structure by April 30, 2006, the expiry date of its current bank credit facility; the ability to meet the financial covenants in our credit facilities; changes in product mix; the growth rate of the markets into which Royal's products are sold; market acceptance and demand for Royal's products; changes in availability or prices for raw materials; pricing pressures resulting from competition; difficulty in developing and introducing new products; failure to penetrate new markets effectively; the effect on foreign operations of currency fluctuations, tariffs, nationalization, exchange controls, limitations on foreign investment in local business and other political, economic and regulatory risks; difficulty in preserving proprietary technology; adverse resolution of any litigation, investigations, administrative and regulatory matters, intellectual property disputes, or similar matters; changes in securities or environmental laws, rules and regulations; currency risk exposure and other risks described from time to time in publicly filed disclosure documents and securities commission reports of Royal Group Technologies Limited and its subsidiaries and affiliates. In view of these uncertainties we caution readers not to place undue reliance on these forward-looking statements. Statements made in this document are made as of November 11, 2005 and Royal disclaims any intention or obligation to update or revise any statements made herein, whether as a result of new information, future events or otherwise.
ROYAL GROUP TECHNOLOGIES LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Sept. 30/05 Dec. 31/04 Sept. 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash (note 6) $ - $ 112,088 $ 64,832
Accounts receivable 341,885 257,346 338,251
Inventories 450,248 456,339 432,596
Prepaid expenses 18,613 13,893 17,019
-------------------------------------------------------------------------
810,746 839,666 852,698
Future income tax assets 23,806 16,561 24,372
Property, plant and equipment 1,251,969 1,330,600 1,391,727
Goodwill 212,288 213,620 215,558
Other assets 40,361 44,525 48,631
-------------------------------------------------------------------------
$ 2,339,170 $ 2,444,972 $ 2,532,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 6) $ 238,856 $ - $ 325,965
Accounts payable and accrued
liabilities 310,400 268,348 274,749
Term bank loan (note 6) - 324,836 -
Term debt due within one year 46,709 18,303 19,207
-------------------------------------------------------------------------
595,965 611,487 619,921
Term debt 250,235 303,214 312,513
Future income tax liabilities 132,677 149,049 166,862
Minority interest 13,957 15,761 14,616
Shareholders' equity:
Capital stock (note 8) 634,866 633,754 633,754
Contributed surplus (note 8) 6,705 3,703 1,770
Retained earnings 870,764 878,779 914,969
Currency translation adjustment (165,999) (150,775) (131,419)
-------------------------------------------------------------------------
1,346,336 1,365,461 1,419,074
Investigations and agreement with
the former controlling shareholder
(note 2)
Contingencies (note 10)
Subsequent event (note 12)
-------------------------------------------------------------------------
$ 2,339,170 $ 2,444,972 $ 2,532,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
-------------------------------------------------------------------------
3 months 3 months 9 months 9 months
ended ended ended ended
Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(note 1) (note 1)
Net sales $ 518,863 $ 524,838 $ 1,455,726 $ 1,500,616
Cost of sales 401,848 378,822 1,111,021 1,083,317
-------------------------------------------------------------------------
Gross profit 117,015 146,016 344,705 417,299
Operating expenses 115,513 102,858 313,650 290,585
-------------------------------------------------------------------------
Earnings before the
undernoted 1,502 43,158 31,055 126,714
Interest and financing
charges 10,909 9,784 30,792 30,387
-------------------------------------------------------------------------
Earnings (loss) before
income taxes and minority
interest (9,407) 33,374 263 96,327
Income tax expense
(recovery) (note 5) (2,750) 9,522 76 27,156
-------------------------------------------------------------------------
Earnings (loss) before
minority interest (6,657) 23,852 187 69,171
Minority interest 154 558 498 142
-------------------------------------------------------------------------
Net earnings (loss) $ (6,503) $ 24,410 $ 685 $ 69,313
-------------------------------------------------------------------------
Earnings (loss)
per share (note 4):
Basic $ (0.07) $ 0.26 $ 0.01 $ 0.74
Diluted $ (0.07) $ 0.26 $ 0.01 $ 0.74
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
3 months 3 months 9 months 9 months
ended ended ended ended
Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Retained earnings,
beginning of period $ 877,267 $ 890,559 $ 878,779 $ 845,656
Net earnings (loss) (6,503) 24,410 685 69,313
Premium on conversion
of multiple voting
shares (note 2) - - (8,700) -
-------------------------------------------------------------------------
Retained earnings,
end of period $ 870,764 $ 914,969 $ 870,764 $ 914,969
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
3 months 3 months 9 months 9 months
ended ended ended ended
Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(note 1) (note 1)
Cash provided by
(used in):
Operating activities:
Net earnings (loss) $ (6,503) $ 24,410 $ 685 $ 69,313
Items not affecting
cash (note 11) 27,480 36,917 98,925 107,681
Change in non-cash
working capital
(note 11) 61,922 26,938 (58,205) (25,580)
-------------------------------------------------------------------------
82,899 88,265 41,405 151,414
Financing activities:
(Decrease) increase
in bank indebtedness
(note 6) (57,990) - 238,856 -
Decrease in term bank
loan (note 6) - (98,347) (324,836) (174,035)
Repayment of term debt (18,520) (20,363) (18,661) (53,148)
Proceeds from issuance
of shares under stock
option plan - - - 145
-------------------------------------------------------------------------
(76,510) (118,710) (104,641) (227,038)
Investing activities:
Acquisition of property,
plant and equipment (13,302) (21,365) (53,445) (62,895)
Change in investments 14 243 (131) (3,334)
Change in minority
interest 290 (540) (1,755) (124)
Proceeds from the sale
of non-strategic
assets 7,591 - 7,752 9,707
Change in other
assets 430 (226) (88) (827)
-------------------------------------------------------------------------
(4,977) (21,888) (47,667) (57,473)
Effect of foreign
exchange rate changes
on cash (1,412) (1,129) (1,185) (650)
-------------------------------------------------------------------------
Decrease in cash during
the period - (53,462) (112,088) (133,747)
Cash, beginning of
period - 118,294 112,088 198,579
-------------------------------------------------------------------------
Cash, end of period $ - $ 64,832 $ - $ 64,832
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
Additional Financial Information (unaudited)
(in thousands of Canadian dollars, except percentages)
-------------------------------------------------------------------------
3 months 9 months
3 months ended 9 months ended
ended Sept. ended Sept.
Sept. 30/05 30/04(i) Sept. 30/05 30/04(i)
-------------------------------------------------------------------------
Net Sales by Segment
Custom Profiles $ 201,123 $ 214,872 $ 555,052 $ 590,192
Exterior Claddings 92,696 96,263 242,534 264,303
Home Furnishings 56,261 63,134 164,049 180,777
Outdoor Products/RBS 57,684 56,908 203,248 201,148
Pipe/Fittings/Other
Construction 105,493 90,810 276,154 236,030
Eliminations (6,358) (9,766) (26,123) (32,819)
---------------------------------------------------
Total Products Segment 506,899 512,221 1,414,914 1,439,631
---------------------------------------------------
Materials 130,275 134,174 390,303 376,592
Machinery & Tooling 9,496 14,424 40,881 65,582
Services 19,970 18,544 59,224 58,953
Eliminations (147,777) (154,525) (449,596) (440,142)
---------------------------------------------------
Total Support Segment 11,964 12,617 40,812 60,985
---------------------------------------------------
---------------------------------------------------
Consolidated Net
Sales $ 518,863 $ 524,838 $ 1,455,726 $ 1,500,616
---------------------------------------------------
---------------------------------------------------
Net Sales by
Geographic Region
Canada 38% 37% 36% 34%
US 56% 58% 58% 59%
Foreign 6% 5% 6% 7%
---------------------------------------------------
Consolidated Net Sales 100% 100% 100% 100%
---------------------------------------------------
---------------------------------------------------
Percentage of Sales
Analysis
Gross profit 22.6% 27.8% 23.7% 27.8%
EBITDA 6.9% 14.4% 9.2% 15.0%
Cost of sales 77.4% 72.2% 76.3% 72.2%
Selling expenses 13.5% 12.4% 13.9% 12.7%
G&A expenses 8.8% 7.2% 7.7% 6.7%
Other
Net Funded Debt as a
percentage of Total
Capitalization 28.3% 29.3% 28.3% 29.3%
Free Cash Flow
(Use) $ 69,457 $ 66,585 $ (12,669) $ 85,043
(i) Certain percentages for the three month and nine month periods ended
September 30, 2004 have been reclassified to reflect the current
presentation adopted in fiscal 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars)
1. Consolidated financial statements
Basis of presentation
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles for interim financial statements. Accordingly,
certain information and note disclosures included in the annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted or condensed. These
financial statements include the accounts of Royal Group Technologies
Limited ("the Group"), its subsidiaries and its proportionate share of
its joint ventures.
These financial statements should be read in conjunction with the
Group's audited financial statements as of and for the fifteen months
ended December 31, 2004, as set out in the Group's December 31, 2004
Annual Report.
In the opinion of management, these financial statements reflect all
adjustments, which consist only of normal and recurring adjustments,
necessary to present fairly the financial position at September 30, 2005
and the results of operations and cash flows for the three month and nine
month periods ended September 30, 2005.
The Group's accounting principles remain unchanged from the most recent
fiscal year ended December 31, 2004. For details, please refer to note 1
on page 29 of the Group's 2004 Annual Report.
The Group operates predominantly in the seasonal North American
renovation, remodeling and new construction segments of the marketplace.
As such, net sales, net earnings and cash flow are impacted by the amount
of activity in these segments. Historically, the Group's highest revenue
generating quarters have been the three months ended June 30 and
September 30.
Change in year end
The Group changed its fiscal year end to December 31 from September,
effective for fiscal 2004. The change to the calendar year basis is more
consistent with its sales planning and business reporting activities and
programs. Accordingly these unaudited interim consolidated financial
statements include results for the three months ended September 30, 2005
as compared to the three months ended September 30, 2004, which was the
fourth quarter of the 15 month period ending December 31, 2004 and the
nine months ended September 30, 2005 as compared to the nine months ended
September 30, 2004.
Comparative figures
Certain comparative figures for the three months and nine months ended
September 30, 2004 have been reclassified to conform with the financial
statement presentation adopted in fiscal 2005.
2. Investigations and agreement with the former controlling shareholder
The Royal Canadian Mounted Police ("RCMP") continues its previously
announced investigation. The Ontario Securities Commission ("OSC") also
continues its investigation of the Group with respect to disclosure,
financial affairs and trading in the shares of the Group. During the
current quarter, the Group received notification that the Securities and
Exchange Commission ("SEC") is investigating the Group's past accounting
practices and disclosures. As part of these investigations, the Group
received various requests for information, including on July 27, 2005 a
subpoena from the SEC, and it has expressed it s willingness to cooperate
with all regulators and law enforcement agencies in their investigations.
The Group is unable to determine if these investigations will have a
material impact on the Group and its previously reported financial
statements. No amount has been accrued in the financial statements.
In the second quarter of the current year, the Group obtained shareholder
approval for the settlement with the former controlling shareholder and
the conversion of the multiple voting shares to single voting shares. On
June 23, 2005, the Group filed the articles of amendment approved by the
shareholders on May 25, 2005. The Group now has one class of voting
common shares.
In lieu of a cash payment to the Group by the former controlling
shareholder personally of the full amount of the gain earned by all
interested parties on the sale of the Vaughan West Lands to the Group the
conversion of his multiple voting shares to common shares on a
one-for-one basis has occurred. The Group decreased retained earnings by
$8,700, decreased land by $5,200, increased miscellaneous income by
$1,300 for the part of the Vaughan West land sold in fiscal 2004, and
increased interest income by $2,200.
3. Segmented information
Operating segments are defined as components of an enterprise about which
separate financial information is available and which are evaluated
regularly by the chief decision-makers in deciding how to allocate
resources and in assessing performance.
The Group's significant operating segments are:
(a) Products segment:
This segment represents production and sale of products predominately
to the renovation and retrofit market, which include custom profiles,
exterior claddings, home furnishings, outdoor products/Royal Building
Systems and pipe/fittings/other construction.
(b) Support segment:
This segment represents materials, machinery and tooling and services
provided predominately to the Products Segment. It includes PVC resin
and chemical additives manufactured and utilized to produce
compounds, as well as a variety of recycled plastics and materials.
Machinery and tooling manufacturing, property management,
distribution, transportation, research and development, as well as
various support services, such as strategic guidance, sales,
operational issues, purchasing, financial and administrative support
and human resources, are also provided by this segment.
Products Elimi- Support Elimi- Consol-
Segment nations Segment nations idated
-------------------------------------------------------------------------
For the 3 months
ended
September 30,
2005
Net sales $ 513,256 $ (6,358) $ 159,742 $ (147,777) $ 518,863
Gross profit 101,757 15,258 117,015
Amortization
charges 24,493 9,721 34,214
Acquisition of
property, plant
and equipment
and goodwill 10,633 2,669 13,302
Property, plant
and equipment 609,163 642,806 1,251,969
Goodwill 176,653 35,635 212,288
Total assets 1,563,373 775,797 2,339,170
For the 9 months
ended
September 30,
2005
Net sales $1,441,036 $ (26,123) $ 490,409 $ (449,596) $1,455,726
Gross profit 283,012 61,693 344,705
Amortization
charges 73,690 28,865 102,555
Acquisition of
property, plant
and equipment
and goodwill 46,295 7,150 53,445
Property, plant
and equipment 609,163 642,806 1,251,969
Goodwill 176,653 35,635 212,288
Total assets 1,563,373 775,797 2,339,170
For the 3 months
ended
September 30,
2004
Net sales $ 521,987 $ (9,766) $ 167,142 $ (154,525) $ 524,838
Gross profit 117,720 28,296 146,016
Amortization
charges 22,923 9,551 32,474
Acquisition of
property, plant
and equipment
and goodwill 16,285 5,080 21,365
Property, plant
and equipment 682,402 709,325 1,391,727
Goodwill 179,923 35,635 215,558
Total assets 1,623,597 909,389 2,532,986
For the 9 months
ended
September 30,
2004
Net sales $1,472,450 $ (32,819) $ 501,127 $ (440,142) $1,500,616
Gross profit 318,785 98,514 417,299
Amortization
charges 69,936 28,617 98,553
Acquisition of
property, plant
and equipment
and goodwill 50,549 12,346 62,895
Property, plant
and equipment 682,402 709,325 1,391,727
Goodwill 179,923 35,635 215,558
Total assets 1,623,597 909,389 2,532,986
Net sales by geographic region for the 3 months ended September 30, 2005
were 56% (2004 - 58%) to the US, 38% (2004 - 37%) to Canada and 6% (2004
- 5%) to other markets and for the 9 months ended September 30, 2005 were
58% (2004 - 59%) to the US, 36% (2004 - 34%) to Canada and 6% (2004 - 7%)
to other markets.
4. Earnings (loss) per share
Basic earnings (loss) per share have been calculated using the weighted
average number of shares outstanding for the three month period of
93,444,502 (2004 - 93,356,170) and for the nine month period of
93,435,666 (2004 - 93,352,014) respectively. Diluted earnings per share
amounts assume the exercise of options and restricted stock units
("RSUs") where a dilutive effect would result. The RSUs were not included
in the computation of diluted net income per share for the quarter ended
September 30, 2005 because the effect of including the RSUs in the
computation would have been anti-dilutive. No options were included in
the diluted earnings per share calculation as all options were out of the
money at both September 2005 and September 2004. The maximum dilutive
number of shares for the three month period was 93,444,502 (2004 -
94,839,492) and for the nine month period was 94,525,110 (2004 -
93,846,455) respectively. At September 30, 2005, the Group had
outstanding 93,444,502 voting common shares, 1,185,000 RSUs under the
Senior Management Incentive Plan ("SMIP") and 3,225,078 options to
acquire voting common shares under the Group's employee stock option
plan.
5. Income taxes
During the quarter, the Group recorded an income tax recovery on its
pre-tax loss reported under GAAP. The effective tax rate for the quarter
was 29.2%, comparable to the 28.8% in the previous quarter ended June 30,
2005.
6. Bank indebtedness
Bank credit facilities available to the Group as at September 30, 2005
included:
1. A $312,500 committed, secured revolving credit facility made
available to the Canadian parent company and certain of its U.S.
subsidiaries for general operating and corporate purposes. The
credit facility is collateralized by substantially all of the
Group's assets in Canada and the United States, although real
property charges have by agreement been registered only against
certain specific properties located in Ontario. The facility bears
interest at bank prime plus 0.5%, or either LIBOR or Bankers'
Acceptance Rate plus 1.5%. The facility matures April 30, 2006; and
2. Credit facilities totaling the equivalent of $68,300 made available
by various indigenous banks to the Group's international
subsidiaries to fund their local operations. The terms and
conditions of these facilities vary in accordance with local
practices, but are consistent with the Group's other credit
arrangements.
On November 2, 2005, the Group announced that it might be marginally
offside on one of the covenants of its revolving credit facility. The
Group has obtained an amendment to this bank covenant and continues to be
in compliance.
7. Related party transactions
During the quarter, related party transactions with companies related to
the former controlling shareholder totaled $96 (2004 - $103). Related
party transactions principally between a non-wholly owned subsidiary of
the Group and minority shareholders of this subsidiary totaled $1,521
(2004 - $1,824). At September 30, 2005, there are accounts receivable
from companies related to the former controlling shareholder of $37
(2004 - $35) and an account receivable from the former controlling
shareholder of $nil (2004 - $1,130).
At September 30, 2005, there are accounts receivable of $58 (2004 - $51)
and accounts payable of $671 (2004 - $1,513) relating to other related
parties.
These related party transactions were in the normal course of the Group's
business relating either to products typically manufactured by it and
sold at prices and terms consistent with those to third parties, the
recovery of costs incurred in respect of certain shared services and the
purchase of other goods and services such as rent for premises.
See note 2 for the details of the settlement with the former controlling
shareholder.
8. Stock-based compensation plans
During fiscal 2004, the Group established the Senior Management Incentive
Plan ("SMIP") to provide for the issuance of a maximum of 1,400,000 RSUs.
Each RSU entitles the participant to receive one voting share or an
equivalent cash payment on the entitlement date provided that the vesting
criteria are satisfied, including performance-based criteria established
in respect of the participant's grant of RSUs. It is the Group's
intention to settle in shares on the entitlement date. During the current
quarter, 60,000 RSUs were issued and 20,000 RSUs were cancelled. At
September 30, 2005, there were 1,185,000 RSUs outstanding. Based on the
market price on the grant date of these RSUs, compensation expense of
$1,551 (2004 - $1,674) was recorded during the three month period ended
September 30, 2005, including an adjustment for RSUs issued and cancelled
in the quarter. Based on RSUs outstanding at September 30, 2005,
compensation expense of $1,575 is expected to be recorded in the
remainder of fiscal 2005 and $6,299 in fiscal 2006.
9. Divestiture
On July 28, 2005, the Group announced that the board of directors
approved the potential divestiture of certain non-core business units,
including Royal Alliance, Baron Metals Industries and Roadex Transport.
Royal Alliance and Baron Metals Industries' results are reported in the
Group's Products segment. Roadex Transport's results are reported in the
Group's Support segment. A letter of intent was signed in October 2005 in
respect of the sale of Royal Alliance. The Group's invested capital in
these three business units was $75,986 at September 30, 2005.
In addition, the Group is in negotiations to sell its Polish operations,
which has been a non-performing business unit. A letter of intent was
signed in July 2005 and negotiations are ongoing with respect to this
sale. The Group's invested capital in this business unit was $45,466 at
September 30, 2005.
10. Contingencies
As noted in note 19 of the 2004 consolidated financial statements, the
Group is the subject of a pending criminal investigation being conducted
by the Antitrust Division of the United States Department of Justice. The
investigation focuses on alleged price fixing in the window coverings
industry. The Group is cooperating with the Department of Justice and is
attempting to negotiate a resolution of the matter. The Group is
presently unable to determine the likelihood of loss, if any, as a result
of this action. As noted in note 19 of the 2004 consolidated financial
statements, the Group and certain of its former officers, former
directors and former employees have been named as defendants in a class
action shareholder lawsuit filed in the United States District Court for
the Southern District of New York. The action purports to assert U.S.
federal securities law violations, principally alleging that the Group
misrepresented its business performance and engaged in various
improprieties. The complaint seeks certification of the putative class,
unspecified damages, reasonable costs and attorneys' fees, and other
relief. The Group intends to defend itself vigorously in these actions.
The Group is presently unable to determine the likelihood of loss, if
any, as a result of this action and no amount is accrued in the financial
statements.
On July 28, 2005, the Group announced that results of recent testing on
its Royal Building Systems (RBS) indicated that this product did not
consistently meet the smoke generation requirements of applicable US
building codes for interior unfinished surfaces in non-utility buildings
and as a result the Group ceased shipment of all non-utility products
globally. Following confirmation of code compliance, the Group has
resumed sales of the RBS 4, 6 and 8 inch and RBS 8i (insulated) concrete
wall systems. The Royal RENEW product is currently undergoing similar
analysis and testing for re-introduction upon successful product review.
The Group is presently unable to determine the likelihood of loss, if
any, as a result of this issue and no amount has been accrued in the
financial statements.
The Group is also involved in various claims, legal proceedings,
investigations and complaints arising in the course of business. Where
the Group expects to incur a loss as a result of a claim, an estimate of
the loss has been recorded as an expense. In all other cases, the Group
cannot determine whether these claims, legal proceedings, investigations
and complaints will, individually or collectively, have a material
adverse effect on the business, results of operations and financial
condition and liquidity of the Group.
11. Supplementary cash flow information
3 months 3 months 9 months 9 months
ended ended ended ended
Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04
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a) Items not affecting
cash:
Amortization charges 34,214 32,473 102,555 98,553
Amortization of
deferred financing
costs 2,544 65 4,200 198
Future income taxes (15,309) 12,990 (23,617) 21,334
Other 6,031 (8,611) 15,787 (12,404)
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Cash provided 27,480 36,917 98,925 107,681
-------------------------------------------------------------------------
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b) Changes in non-cash
working capital:
Accounts receivable 14,830 34,914 (94,207) (65,518)
Inventories 12,567 (5,345) (1,766) 1,361
Prepaid expenses 1,510 1,914 (9,028) 1,585
Accounts payable and
accrued liabilities 33,015 (4,545) 46,796 36,992
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Cash provided (used) 61,922 26,938 (58,205) (25,580)
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12. Subsequent event
The previously announced sale process is proceeding, with potential
bidders currently receiving presentations from management. The Group aims
to complete the process of soliciting bids in December 2005. There has
been no firm offer to purchase the shares or assets of the Group and
there can be no assurance that such an offer will be made.
On October 18, 2005, the Group announced the potential divestiture of
Royal Ecoproducts Co. The Group's invested capital in this business unit
was $20,663 at September 30, 2005. The Group is unable to determine the
extent of loss, if any, at this time as it has only started the process
of this divestiture.
DATASOURCE: Royal Group Technologies Limited
CONTACT: contact: Mark Badger, Vice President of Marketing and Corporate
Communications, Royal Group Technologies Limited, Phone (905) 264-0701