Royal Group Technologies Limited Announces Third Quarter Financial Results

----------------------------------------------------------------------- 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 accrue iabilities310,400 268,348 274,749 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 debt250,235 303,214 312,513 Future income tax liabilities132,677 149,049 166,862 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 earnings870,764 878,779 914,969 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 months3 months9 months9 month nded 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) 33,374263 96,327 Income tax expense (recovery) (note 5) (2,750) 9,522 76 27,156 ------------------------------------------------------------------------- Earnings (loss) before minority interest (6,657) 23,852187 69,171 Minority interest 154558498142 ------------------------------------------------------------------------- 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 months3 months9 months9 month nded 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) 24,410685 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 months3 months9 months9 month nded 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 affectin ash (note 11)27,480 36,917 98,925 107,681 Change in non-cas orking capital(note 11)61,922 26,938 (58,205)(25,580) ------------------------------------------------------------------------- 82,899 88,265 41,405 151,414 Financing activities: (Decrease) increas n bank indebtedness(note 6)(57,990) - 238,856 - Decrease in term ban oan (note 6) - (98,347) (324,836) (174,035) Repayment of term debt (18,520)(20,363)(18,661)(53,148) Proceeds from issuanc f shares under stoc ption 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 14243 (131) (3,334) Change in minorit nterest 290 (540) (1,755) (124) Proceeds from the sal f non-strategi ssets 7,591 - 7,752 9,707 Change in othe ssets 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 ended9 months ende nded 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 profit22.6% 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 ercentage of Tota apitalization 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 $2,200. 3. Segmented information Operating segments are defined as components of an enterprise about which separate financial information is available and which are evaluated regularly by the chief decision-makers in deciding how to allocate resources and in assessing performance. The Group's significant operating segments are: (a) Products segment: This segment represents production and sale of products predominately to the renovation and retrofit market, which include custom profiles, exterior claddings, home furnishings, outdoor products/Royal Building Systems and pipe/fittings/other construction. (b) Support segment: This segment represents materials, machinery and tooling and services provided predominately to the Products Segment. It includes PVC resin and chemical additives manufactured and utilized to produce compounds, as well as a variety of recycled plastics and materials. Machinery and tooling manufacturing, property management, distribution, transportation, research and development, as well as various support services, such as strategic guidance, sales, operational issues, purchasing, financial and administrative support and human resources, are also provided by this segment. Products Elimi- Support Elimi-Consol- SegmentnationsSegmentnations idated ------------------------------------------------------------------------- For the 3 months ended September 30, 2005 Net sales$ 513,256 $ (6,358) $ 159,742 $ (147,777) $ 518,863 Gross profit101,757 15,258 117,015 Amortization charges24,493 9,721 34,214 Acquisition of property, plant and equipment and goodwill10,633 2,669 13,302 Property, plant and equipment 609,163 642,8061,251,969 Goodwill 176,653 35,635 212,288 Total assets 1,563,373 775,7972,339,170 For the 9 months ended September 30, 2005 Net sales$1,441,036 $ (26,123) $ 490,409 $ (449,596) $1,455,726 Gross profit283,012 61,693 344,705 Amortization charges73,690 28,865 102,555 Acquisition of property, plant and equipment and goodwill46,295 7,150 53,445 Property, plant and equipment 609,163 642,8061,251,969 Goodwill 176,653 35,635 212,288 Total assets 1,563,373 775,7972,339,170 For the 3 months ended September 30, 2004 Net sales$ 521,987 $ (9,766) $ 167,142 $ (154,525) $ 524,838 Gross profit117,720 28,296 146,016 Amortization charges22,923 9,551 32,474 Acquisition of property, plant and equipment and goodwill16,285 5,080 21,365 Property, plant and equipment 682,402 709,3251,391,727 Goodwill 179,923 35,635 215,558 Total assets 1,623,597 909,3892,532,986 For the 9 months ended September 30, 2004 Net sales$1,472,450 $ (32,819) $ 501,127 $ (440,142) $1,500,616 Gross profit318,785 98,514 417,299 Amortization charges69,936 28,617 98,553 Acquisition of property, plant and equipment and goodwill50,549 12,346 62,895 Property, plant and equipment 682,402 709,3251,391,727 Goodwill 179,923 35,635 215,558 Total assets 1,623,597 909,3892,532,986 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 months3 months9 months9 month nded ended ended ended Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04 ------------------------------------------------------------------------- a) Items not affecting cash: Amortization charges 34,214 32,473 102,555 98,553 Amortization of deferred financing costs 2,544 65 4,200198 Future income taxes (15,309) 12,990 (23,617) 21,334 Other 6,031 (8,611) 15,787 (12,404) ------------------------------------------------------------------------- Cash provided 27,480 36,917 98,925 107,681 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- Cash provided (used) 61,922 26,938 (58,205)(25,580) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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.

Related Articles

• Tommy Hilfiger Corporation Announces Preliminary Results for the Second Quarter of Fiscal 2006
  11 November 2005



• The GEO Group, Inc., Village of Baldwin and Webber Township File Suit Against The State of Michigan for Wrongful Termination of Prison Lease
  5 November 2005



• Aon Reports Third Quarter Net Income of $122 Million
  5 November 2005



• Lawsuit Loan Eases Financial Pain of Man with Broken Back
  3 November 2005



• Lawsuit Loan Eases Financial Pain of Man with Broken Back
  3 November 2005



• Litman Law, International Patent & Trademark Law Firm, Hires The Borenstein Group as Branding & PR Agency
  1 November 2005



• Former DEA Caribbean Field Division Country Attache Pleads Guilty to Submitting False Financial Reports
  29 October 2005



• Pre-Paid Legal Announces Third Quarter 2005 Financial Results
  26 October 2005



• Maytag Announces Third Quarter Results; Schedules Stockholder Meeting
  22 October 2005



• Weyerhaeuser Reports Third Quarter Net Earnings of $285 Million, or $1.16 per Diluted Share, on Net Sales of $5.6 Billion
  22 October 2005



• IBERIABANK Corporation Reports Third Quarter Earnings
  21 October 2005



• ACS Announces First Quarter Fiscal Year 2006 Results
  21 October 2005



• Foundry Networks(TM) Reports Third Quarter Financial Results
  21 October 2005



• Ford Reports Third Quarter 2005 Financial Results
  21 October 2005



• SureWest to Report Third Quarter 2005 Results November 7
  21 October 2005