Royal Tech (NYSE:RYG)
Historical Stock Chart
From Jul 2019 to Jul 2024
![Click Here for more Royal Tech Charts. Click Here for more Royal Tech Charts.](/p.php?pid=staticchart&s=NY%5ERYG&p=8&t=15)
TORONTO, Aug. 11 /PRNewswire-FirstCall/ -- Royal Group Technologies Limited (RYG-TSX; RYG-NYSE) today announced financial results for the three months ended June 30, 2005. Net sales for the quarter were $549 million versus $555 million during the same period in the prior year. Net earnings were $18.6 million or $0.20 per share, versus $35.5 million or $0.38 per share last year.
During the quarter ended June 30, 2005, sales declined 1% from the same quarter last year, principally due to the impact of the decline in the value of the US dollar on products exported to the United States from Canada. Assuming the same average US dollar exchange rate as in the matching quarter last year, sales in Canadian dollar equivalency would have been approximately $582 million, up 5% from last year. The increase in constant dollar sales can be primarily attributed to selling price increases. Royal generated 57% of its sales in the United States, 36% in Canada and 7% internationally.
Gross margin for the three months ended June 30, 2005 was $137.0 million, versus $159.0 million for the same quarter last year. Gross margin as a percentage of sales was 24.9%, compared to 28.7% during the same quarter last year, representing a 380 basis point decline. Escalating raw material costs net of recovery through selling price increases accounted for approximately $21 million of the decline, with the remainder primarily attributable to a decline in the value of the US dollar.
Operating expenses rose to $99.5 million, from $99.2 million last year. During the second quarter of 2005, the company benefited from reversal of a $8 million overaccrual for prior periods' management bonuses and a $1.3 million dollar gain on real estate. However, incremental expenses incurred in the second quarter of 2005 more than offset the foregoing gains. Incremental expenses included those relating to divestiture of a window coverings plant in Tijuana, Mexico, professional fees associated with the previously announced sale process, as well as professional fees related to regulatory investigations. In addition, product delivery expenses increased relative to the same quarter last year, largely as a result of new retail programs involving greater delivery expense.
Second quarter financial results in Canadian dollars expressed in accordance with Canadian GAAP are outlined in the following chart:
For the Quarter For the Six Months
Ended Ended
June 30, 05 June 30, 04 June 30, 05 June 30, 04
Sales ($000s) 549,168 554,673 936,863 975,778
Gross Margin ($000) 137,003 158,992 227,690 271,283
Gross Margin Percentage 24.9% 28.7% 24.3% 27.8%
Net Earnings ($000s) 18,583 35,488 7,188 44,903
E.P.S.
$ Basic and Diluted 0.20 0.38 0.08 0.48
Average Shares
Outstanding
Basic (000s) 93,445 93,354 93,432 93,350
Diluted (000s) 94,525 93,354 94,480 93,350
"Second quarter financial results underscore the necessity for change, which we have initiated through a comprehensive strategic planning process that is well underway", according to Lawrence J. Blanford, who was appointed President and CEO of Royal Group in May 2005. "Through restructuring our business unit portfolio, pursuit of profit improvement initiatives and development of full potential strategic plans for our core businesses, we have the opportunity to substantially improve Royal's financial performance and create greater shareholder value", added Mr. Blanford.
On July 28th, Royal Group announced its intention to divest of three non-core business units, noting that these divestiture decisions can assist the company to focus its capital and management resources on higher potential core businesses, as well improve the balance sheet through proceeds from dispositions. In addition, Royal Group announced its intention to divest of its unprofitable Polish subsidiary, noting that this divestiture can eliminate this subsidiary's on-going drain on Royal's overall profitability.
Royal Group Technologies Limited 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", "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 outcome of the ongoing internal review and investigations by the Special Committee of the Board of Directors; 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, remodeling 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; 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 August 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)
June 30/05 Dec. 31/04 June 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash (note 6) $ - $ 112,088 $ 118,294
Accounts receivable 368,008 257,346 382,160
Inventories 471,605 456,339 435,400
Prepaid expenses 22,902 13,893 19,283
-------------------------------------------------------------------------
862,515 839,666 955,137
Future income tax assets 22,541 16,561 21,200
Property, plant and equipment 1,297,439 1,330,600 1,424,410
Goodwill 214,379 213,620 218,044
Other assets 43,119 44,525 47,466
-------------------------------------------------------------------------
$ 2,439,993 $ 2,444,972 $ 2,666,257
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 6) $ 296,846 $ - $ -
Accounts payable and accrued
liabilities 285,510 268,348 287,553
Term bank loan (note 6) - 324,836 424,312
Term debt due within one year 18,656 18,303 20,296
-------------------------------------------------------------------------
601,012 611,487 732,161
Term debt 306,675 303,214 343,695
Future income tax liabilities 146,719 149,049 150,700
Minority interest 13,744 15,761 15,260
Shareholders' equity:
Capital stock (note 8) 634,866 633,754 633,754
Contributed surplus (note 8) 5,083 3,703 136
Retained earnings 877,267 878,779 890,559
Currency translation adjustment (145,373) (150,775) (100,008)
-------------------------------------------------------------------------
1,371,843 1,365,461 1,424,441
Investigations and agreement with
controlling shareholder (note 2)
Contingencies (note 10)
Subsequent event (note 12)
-------------------------------------------------------------------------
$ 2,439,993 $ 2,444,972 $ 2,666,257
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 6 months 6 months
ended ended ended ended
June 30/05 June 30/04 June 30/05 June 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(note 1) (note 1)
Net sales $ 549,168 $ 554,673 $ 936,863 $ 975,778
Cost of sales 412,165 395,681 709,173 704,495
-------------------------------------------------------------------------
Gross profit 137,003 158,992 227,690 271,283
Operating expenses 99,516 99,189 198,137 187,727
-------------------------------------------------------------------------
Earnings before the
undernoted 37,487 59,803 29,553 83,556
Interest and
financing charges 11,454 9,687 19,883 20,603
-------------------------------------------------------------------------
Earnings before
income taxes and
minority interest 26,033 50,116 9,670 62,953
Income tax expense
(note 5) 7,491 14,305 2,826 17,634
-------------------------------------------------------------------------
Earnings before
minority interest 18,542 35,811 6,844 45,319
Minority interest 41 (323) 344 (416)
-------------------------------------------------------------------------
Net earnings $ 18,583 $ 35,488 $ 7,188 $ 44,903
-------------------------------------------------------------------------
Earnings per share
(note 4):
Basic $ 0.20 $ 0.38 $ 0.08 $ 0.48
Diluted $ 0.20 $ 0.38 $ 0.08 $ 0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
3 months 3 months 6 months 6 months
ended ended ended ended
June 30/05 June 30/04 June 30/05 June 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Retained earnings,
beginning of period $ 867,384 $ 855,071 $ 878,779 $ 845,656
Net earnings 18,583 35,488 7,188 44,903
Premium on conversion
of multiple voting
shares (note 2) (8,700) - (8,700) -
-------------------------------------------------------------------------
Retained earnings,
end of period $ 877,267 $ 890,559 $ 877,267 $ 890,559
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 6 months 6 months
ended ended ended ended
June 30/05 June 30/04 June 30/05 June 30/04
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(note 1) (note 1)
Cash provided by
(used in):
Operating activities:
Net earnings $ 18,583 $ 35,488 $ 7,188 $ 44,903
Items not affecting
cash (note 11) 37,881 39,763 71,445 70,764
Change in non-cash
working capital
(note 11) (2,798) (15,139) (120,127) (52,518)
-------------------------------------------------------------------------
53,666 60,112 (41,494) 63,149
Financing activities:
(Decrease) increase
in bank
indebtedness
(note 6) (32,865) - 296,846 -
Decrease in term
bank loan (note 6) - (5,688) (324,836) (75,688)
Repayment of term
debt (71) (10,079) (141) (32,785)
Proceeds from
issuance of shares
under stock option
plan - 145 - 145
-------------------------------------------------------------------------
(32,936) (15,622) (28,131) (108,328)
Investing activities:
Acquisition of
property, plant
and equipment (18,779) (19,617) (40,143) (41,530)
Change in
investments (229) (63) (145) (3,577)
Change in minority
interest (1,641) 323 (2,045) 416
Proceeds from the
sale of
non-strategic
assets - 3,416 161 9,707
Change in other
assets (357) (532) (518) (601)
-------------------------------------------------------------------------
(21,006) (16,473) (42,690) (35,585)
Effect of foreign
exchange rate
changes on cash 276 399 227 479
-------------------------------------------------------------------------
Increase (decrease)
in cash during the
period - 28,416 (112,088) (80,285)
Cash, beginning of
period - 89,878 112,088 198,579
-------------------------------------------------------------------------
Cash, end of period $ - $ 118,294 $ - $ 118,294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ROYAL GROUP TECHNOLOGIES LIMITED
Additional Financial Information (unaudited)
(in thousands of Canadian dollars, except percentages)
-------------------------------------------------------------------------
3 months 3 months 6 months 6 months
ended ended ended ended
June 30/05 June June 30/05 June
30/04(i) 30/04(i)
-------------------------------------------------------------------------
Net Sales by Segment
Custom Profiles $ 206,042 $ 215,623 $ 353,929 $ 375,320
Exterior Claddings 90,788 99,392 149,838 168,040
Home Furnishings 55,040 60,818 107,788 117,643
Outdoor Products/RBS 85,148 91,665 145,564 144,240
Pipe/Fittings/Other
Construction 100,051 84,218 170,661 145,220
Eliminations (7,624) (13,554) (19,765) (23,053)
---------------------------------------------------
Total Products Segment 529,445 538,162 908,015 927,410
---------------------------------------------------
Materials 144,381 136,927 260,028 242,418
Machinery & Tooling 20,407 18,955 31,385 51,158
Services 20,283 21,140 39,254 40,409
Eliminations (165,348) (160,511) (301,819) (285,617)
---------------------------------------------------
Total Support Segment 19,723 16,511 28,848 48,368
---------------------------------------------------
---------------------------------------------------
Consolidated Net
Sales $ 549,168 $ 554,673 $ 936,863 $ 975,778
---------------------------------------------------
---------------------------------------------------
Net Sales by
Geographic Region
Canada 36% 34% 34% 32%
US 57% 59% 59% 59%
Foreign 7% 7% 7% 9%
---------------------------------------------------
Consolidated Net Sales 100% 100% 100% 100%
---------------------------------------------------
---------------------------------------------------
Percentage of Sales
Analysis
Gross profit 24.9% 28.7% 24.3% 27.8%
EBITDA 13.1% 16.8% 10.4% 15.3%
Cost of sales 75.1% 71.3% 75.7% 72.2%
Selling expenses 12.8% 12.4% 14.1% 12.8%
G&A expenses 5.3% 5.5% 7.0% 6.4%
Other
Net Funded Debt as
a percentage of
Total
Capitalization 31.0% 31.8% 31.0% 31.8%
Free Cash Flow
(Use) $ 34,617 $ 40,755 $ (82,126) $ 18,458
(i) Certain percentages for the three month and six month periods ended
June 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 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 June 30, 2005 and
the results of operations and cash flows for the three month and six
month periods ended June 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 June 30, 2005 as
compared to the three months ended June 30, 2004, which was the third
quarter of the 15 month period ending December 31, 2004 and the six
months ended June 30, 2005 as compared to the six months ended June 30,
2004.
Comparative figures
Certain comparative figures for the three months and six months ended
June 30, 2004 have been reclassified to conform with the financial
statement presentation adopted in fiscal 2005.
2. Investigations and agreement with the controlling shareholder
The Royal Canadian Mounted Police continues its previously announced
investigation. The Ontario Securities Commission has also indicated that
it is investigating the Group with respect to disclosure, financial
affairs and trading in the shares of the Group. Subsequent to the quarter
end, 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 and it has expressed its willingness to
cooperate with all regulators and law enforcement agencies in their
investigations. These investigations may produce results that have a
material impact on the Group and its previously reported financial
statements.
During the quarter, the Group obtained shareholder approval for the
settlement with the 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 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.
Performance is evaluated based on pre-tax earnings before amortization
and interest, and return on invested capital.
Products Elimi- Support Elimi- Consol-
Segment nations Segment nations idated
-------------------------------------------------------------------------
For the 3 months
ended June 30,
2005
Net sales $ 537,069 $ (7,624) $ 185,071 $(165,348) $ 549,168
Gross profit 114,789 22,214 137,003
Amortization
charges 24,871 9,469 34,340
Acquisition of
property, plant
and equipment 16,665 2,114 18,779
and goodwill
Property, plant
and equipment 636,284 661,155 1,297,439
Goodwill 178,743 35,636 214,379
Total assets 1,604,550 835,443 2,439,993
For the 6 months
ended June 30,
2005
Net sales $ 927,780 $ (19,765) $ 330,667 $(301,819) $ 936,863
Gross profit 181,255 46,435 227,690
Amortization
charges 49,197 19,144 68,341
Acquisition of
property, plant
and equipment 35,662 4,481 40,143
and goodwill
Property, plant
and equipment 636,284 661,155 1,297,439
Goodwill 178,743 35,636 214,379
Total assets 1,604,550 835,443 2,439,993
For the 3 months
ended June 30,
2004
Net sales $ 551,716 $ (13,554) $ 177,022 $(160,511) $ 554,673
Gross profit 123,697 35,295 158,992
Amortization
charges 23,733 9,898 33,631
Acquisition of
property, plant
and equipment 16,219 3,398 19,617
and goodwill
Property, plant
and equipment 706,968 717,442 1,424,410
Goodwill 182,408 35,636 218,044
Total assets 1,691,168 975,089 2,666,257
For the 6 months
ended June 30,
2004
Net sales $ 950,463 $ (23,053) $ 333,985 $(285,617) $ 975,778
Gross profit 201,065 70,218 271,283
Amortization
charges 47,013 19,066 66,079
Acquisition of
property, plant
and equipment 34,264 7,266 41,530
and goodwill
Property, plant
and equipment 706,968 717,442 1,424,410
Goodwill 182,408 35,636 218,044
Total assets 1,691,168 975,089 2,666,257
Net sales by geographic region for the 3 months ended June 30, 2005 were
57% (2004 - 59%) to the US, 36% (2004 - 34%) to Canada and 7% (2004 - 7%)
to other markets and for the 6 months ended June 30, 2005 were 59%
(2004 - 59%) to the US, 34% (2004 - 32%) to Canada and 7% (2004 - 9%) to
other markets.
4. Earnings per share
Basic earnings per share have been calculated using the weighted average
number of shares outstanding for the three month period of 93,444,502
(2004 - 93,353,670) and for the six month period of 93,431,879 (2004 -
93,350,233) respectively. Diluted earnings per share amounts assume the
exercise of options and restricted stock units ("RSUs") where a dilutive
effect would result. No options were included in the diluted earnings per
share calculation as all options were out of the money at both June 2005
and June 2004. The maximum dilutive number of shares for the three month
period was 94,524,502 (2004 - 93,353,670) and for the six month period
was 94,480,212 (2004 - 93,350,233) respectively.
During the quarter, 15,935,444 multiple voting shares were converted to
subordinate voting shares thus eliminating the Group's dual-class capital
structure. The Group now has one class of voting common shares. At
June 30, 2005, the Group had outstanding 93,444,502 common shares,
1,145,000 RSUs and 3,200,078 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 expense on its pre-
tax earnings reported under generally accepted accounting principles
("GAAP"). The effective tax rate for the quarter ended June 30, 2005 was
29%, comparable to the 29% in the previous quarter ended March 31, 2005.
6. Bank indebtedness
The Group finalized a credit facility in support of its North American
operations with three banks on March 24, 2005. It is a $340,000 revolving
credit facility with a secured portion and an unsecured portion. The
$300,000 first tranche, which increases to $312,500 on September 1, 2005,
bears interest at prime plus 0.5%, or either LIBOR or Bankers' Acceptance
Rate plus 1.5%. This portion of the credit facility is collateralized by
substantially all of the Group's assets in Canada and the United States,
although real property charges will only be registered initially against
certain properties located in Ontario, Canada. In addition, the Group
also maintains credit facilities with various indigenous banks in support
of its international operations in an aggregate amount of $82,800.
Until September 1, 2005, a second tranche of $40,000 (up to $37,500 of
which is unsecured) bears interest at prime plus 1.5%, or either LIBOR or
Bankers' Acceptance Rate plus 2.5%.
While the second tranche expires on August 31, 2005, on September 1,
2005, the fully collateralized first tranche of credit facility increases
to $312,500. The first tranche of the credit facility matures on
April 30, 2006.
A further separate credit facility, as reported in the quarter ended
March 31, 2005, for which a letter of intent was signed on May 11, 2005
was not further pursued.
7. Related party transactions
During the quarter, related party transactions with companies related to
the former controlling shareholder totaled $69 (2004 - $216). Related
party transactions principally between a non-wholly owned subsidiary of
the Group and minority shareholders of this subsidiary totaled $1,941
(2004 - $1,151). At June 30, 2005, there are accounts receivable from
companies related to the former controlling shareholder of $32 (2004 -
$154) and an account receivable from the former controlling shareholder
of $1,130 (2004 - $1,130). Payment of $1,130 was received in July, 2005.
At June 30, 2005, there are accounts receivable of $198 (2004 - $2) and
accounts payable of $438 (2004 - $1,157) 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 above.
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, 155,000 RSUs were issued and 20,000 RSUs were cancelled. At
June 30, 2005, there were 1,145,000 RSUs outstanding. Based on the market
price on the grant date of these RSUs, compensation expense of $1,279 was
recorded during the three month period ended June 30, 2005, including an
adjustment for RSUs issued and cancelled in the quarter. Based on RSUs
outstanding at June 30, 2005, compensation expense of $2,942 is expected
to be recorded in the remainder of fiscal 2005 and $5,883 in fiscal 2006.
9. Divestiture
During the quarter, the Group divested of its shares in its wood blind
business in Mexico. The Group maintains a financial and a purchase
agreement relationship with the company in Mexico. The Group recorded a
loss of $1,838 on this divestiture.
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.
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 is presently unable to determine whether this action
will have a material adverse effect on the business, results of
operations, financial condition and liquidity of the Group, and intends
to defend itself vigorously in these actions.
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 6 months 6 months
ended ended ended ended
Jun. 30/05 Jun. 30/04 Jun. 30/05 Jun. 30/04
-------------------------------------------------------------------------
a) Items not
affecting cash:
Amortization charges 34,340 33,632 68,341 66,080
Amortization of
deferred financing
costs 1,590 76 1,656 133
Future income taxes (1,761) 7,820 (8,308) 8,344
Other 3,712 (1,765) 9,756 (3,793)
-------------------------------------------------------------------------
Cash provided 37,881 39,763 71,445 70,764
-------------------------------------------------------------------------
b) Changes in non-cash
working capital:
Accounts receivable (65,505) (59,803) (109,037) (100,432)
Inventories 36,364 12,529 (14,333) 6,706
Prepaid expenses (3,503) (3,415) (10,538) (329)
Accounts payable and
accrued liabilities 29,846 35,550 13,781 41,537
-------------------------------------------------------------------------
Cash provided (used) (2,798) (15,139) (120,127) (52,518)
-------------------------------------------------------------------------
12. Subsequent event
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 Metal Industries' results are reported in the
Group's products segment. Roadex Transport's results are reported in the
Group's support segment. The combined revenues of these three business
units for the six months ended June 30, 2005, net of inter-company
eliminations were $65,938, with EBITDA being $7,277. The Group's invested
capital in these three business units was $80,946 at June 30, 2005.
In addition, the Group is in negotiations to sell its Polish operations.
With respect to the latter, a letter of intent was signed in July 2005
and negotiations are ongoing with respect to this sale. This business
unit has generated accumulated losses of $24,136 since operations
commenced in 1998. The Group's invested capital in this business unit was
$48,333 at June 30, 2005.
On July 28, 2005, the Group announced that results of testing on its
Royal Building Systems (RBS) indicate that this product does not
consistently meet the smoke generation requirements of applicable US
building codes for interior unfinished surfaces in non-utility buildings.
The Group has ceased shipment of all non-utility products globally. On
August 11, 2005 the Group announced that it would continue to follow the
Canadian Building Code as grounds for resumption of shipments in Canada.
For international locations the Group will apply Canadian Building Code
guidelines, as well as local building code requirements. Due to the
unique test requirements of the US Building Codes, the Group will
maintain its current policy not to ship projects into the US market and
international locations applying those standards, other than qualified
utility applications.
The Group has retained various experts to assist in determining the
impact of this issue. The Group is presently unable to determine whether
this will have a material adverse effect on the business, results of
operations, financial condition and liquidity of the Group.
Non-GAAP financial measures (unaudited)
"EBITDA" (earnings before interest, taxes, depreciation, amortization and
minority interest) or "operating margin" is not a recognized measure
under Canadian or United States (US) generally accepted accounting
principles (GAAP). Management believes that in addition to net earnings,
EBITDA is a useful supplementary measure as it provides investors with an
indication of cash available for distribution prior to debt service,
capital expenditures, income taxes and minority interest. Investors
should be cautioned, however, that EBITDA should not be construed as an
alternative to (i) net earnings determined in accordance with GAAP as an
indicator of the Company's performance or (ii) cash flow from operating,
investing and financing activities as a measure of liquidity and cash
flow. The Company's method of calculating EBITDA may differ from other
companies and, accordingly, the Company's EBITDA may not be comparable to
measures used by other companies.
Free cash flow (earnings before minority interest adjusted for items not
affecting cash, changes in non-cash working capital items, less
acquisition of property, plant and equipment and change in investments)
is not a recognized measure under GAAP. It therefore may not to be
comparable to similar measures presented by other issuers. Management
believes free cash flow to be an important indicator of the financial
performance of our business because it shows how much cash is available
to repay debt and to reinvest in the Company.
Net funded debt (bank indebtedness net of cash plus term bank loan and
term debt) to total capitalization (aggregate of shareholders' equity,
minority interest and net funded debt) ratio is not a recognized measure
under GAAP.
DATASOURCE: Royal Group Technologies Limited
CONTACT: Mark Badger, Vice President, Marketing and Corporate
Communications, Phone: (905) 264-0701, Fax: (905) 264-0702