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)
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Sept. 30/05 Dec. 31/04 Sept. 30/04
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(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
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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
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$ 2,339,170 $ 2,444,972 $ 2,532,986
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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
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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)
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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)
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$ 2,339,170 $ 2,444,972 $ 2,532,986
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See accompanying notes to consolidated financial statements. ROYAL
GROUP TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF EARNINGS (in
thousands of Canadian dollars, except per share amounts)
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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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(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
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Gross profit 117,015 146,016 344,705 417,299 Operating expenses
115,513 102,858 313,650 290,585
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Earnings before the undernoted 1,502 43,158 31,055 126,714 Interest
and financing charges 10,909 9,784 30,792 30,387
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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
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Earnings (loss) before minority interest (6,657) 23,852 187 69,171
Minority interest 154 558 498 142
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Net earnings (loss) $ (6,503) $ 24,410 $ 685 $ 69,313
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Earnings (loss) per share (note 4): Basic $ (0.07) $ 0.26 $ 0.01 $
0.74 Diluted $ (0.07) $ 0.26 $ 0.01 $ 0.74
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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) -
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Retained earnings, end of period $ 870,764 $ 914,969 $ 870,764 $
914,969
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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)
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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
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(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)
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(4,977) (21,888) (47,667) (57,473) Effect of foreign exchange rate
changes on cash (1,412) (1,129) (1,185) (650)
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Decrease in cash during the period - (53,462) (112,088) (133,747)
Cash, beginning of period - 118,294 112,088 198,579
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Cash, end of period $ - $ 64,832 $ - $ 64,832
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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
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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
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