EXHIBIT 1
[LOGO]
ROYAL GROUP
TECHNOLOGIES
[PHOTO]
BUILDING A
BETTER WORLD(TM)
COMPANY PROFILE
Royal's mission is to provide industry leading products to renovate, improve or
construct a building, while striving to enhance the environment and maximizing
returns for shareholders.
- -- Royal is a vertically integrated manufacturer of innovative, plastic home
improvement, consumer and construction products.
- -- Royal Group is a public company with its Subordinate Voting Shares listed on
the Toronto Stock Exchange and New York Stock Exchange.
- -- Royal's operations are located primarily in Canada and the U.S., with
international locations in South America, Europe and Asia. The operations,
are arranged into two segments: The Products Segment and the Support Segment.
- -- The Products Segment is comprised of the following product lines:
i) Home Improvement Products primarily consist of extruded PVC products,
including window and door profiles, siding and roofing. These products
are primarily sold to fabricators and building product distributors.
ii) Consumer Products consist of a broad range of extruded and injection
molded products including window coverings, outdoor storage solutions,
fencing, decking, railing, housewares and furniture. These products are
primarily sold to home-owners through retail home improvement chain
stores.
iii) Construction Products consist of pipe and fitting systems, as well as
commercial doors. These products are distributed through a network of
distributors and contractors to the new construction sector of the
market.
iv) Royal Building Systems and Foreign Operations include components of
Royal Building Systems(TM) sold throughout the world, and other building
products manufactured by foreign operations sold in conjunction with the
System or alone.
- -- The Support Segment is composed of a series of activities, which are
primarily supplied to the Products Segment, to facilitate superior customer
service, rapid product development and a low cost structure. The activities
of the Support Segment include:
i) Materials manufacture, involves production of PVC resin, chemical
additives, compounding and recycling. In addition, a wide variety of
post-industrial waste materials are recycled into usable raw material,
utilizing proprietary RoyalEco(TM) technology.
ii) Machinery development and manufacture involves extrusion equipment,
tooling and computerized material handling systems.
iii) Services include distribution, research and development, and property
management services provided to the Group.
[LOGO]
Royal Group
Technologies
PRODUCTS SUPPORT
SEGMENT SEGMENT
HOME IMPROVEMENT
Custom Profiles
Exterior Cladding
MATERIALS
CONSUMER
Window Coverings
Outdoor Products
Housewares & Furniture
MACHINERY
& TOOLING
CONSTRUCTION
Pipe & Fittings
Commercial Doors
SERVICES
RBS & FOREIGN
OPERATIONS
CONTENTS
Financial Highlights 1
Message from the Chairman 2
Letter to Shareholders 3
Products Segment 4
Support Segment 16
Royal in the News 18
Environmental, Health,
Safety and Social
Stewardship 19
Management's Discussion & Analysis 20
Financial Statements 26
Notes to Financials 30
Supplementary Financial Information 38
Corporate Governance 42
Shareholder & Corporate Information 43
The Royal Family of Brands 44
FINANCIAL HIGHLIGHTS
Years ended September 30, 2002, 2001 and 2000
(In thousands of Canadian dollars, except per share amounts)
<Table>
<Caption>
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
CORPORATE OPERATING RESULTS
Net sales $ 1,915,230 $ 1,669,036 $ 1,549,481
EBITDA(4) 360,558 315,927 378,399
Net earnings 129,160 117,438 169,117
Cash flow(1) 286,436 255,527 280,334
Free cash flow (use)(2) 117,190 (62,986) (264,784)
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Diluted earnings $ 1.38 $ 1.27 $ 1.89
Book value per share(5) $ 16.10 $ 14.95 $ 13.62
CORPORATE FINANCIAL POSITION
Working capital 167,474 179,762 197,004
Property, plant and equipment 1,637,049 1,604,499 1,455,027
Goodwill and other assets 275,757 245,729 248,857
Shareholders' equity 1,500,922 1,361,687 1,236,222
Invested capital(3) 2,449,752 2,355,352 2,133,923
- -------------------------------------------------------------------------------------------------------------------
CORPORATE FINANCIAL RATIOS
EBITDA margin(4) 18.8% 18.9% 24.4%
Current ratio 1.2X 1.3x 1.3x
Funded debt to invested capital 38% 41% 41%
Return on invested capital 7.1% 7.1% 10.5%
- -------------------------------------------------------------------------------------------------------------------
</Table>
(1) Cash flow, being earnings before minority interest plus items not affecting
cash.
(2) Free cash flow (use) is a non-GAAP measure, being cash flow, less change in
non-cash working capital items, less acquisition of property, plant and
equipment.
(3) Aggregate of shareholders' equity, minority interest, and funded debt less
cash on hand.
(4) It should be noted that EBITDA and EBITDA margin are widely used terms in
financial markets, but are non-GAAP measurements. Both of these terms are
defined in the Management's Discussion and Analysis section of this report.
(5) Book value per share is a non-GAAP measure, being Shareholders' Equity
divided by the number of shares outstanding at year-end.
<Table>
CONSOLIDATED NET SALES CONSOLIDATED NET EARNINGS CONSOLIDATED CASH FLOW(1) CONSOLIDATED FREE CASH FLOW(2)
(in millions of dollars) (in millions of dollars) (in millions of dollars) (in millions of dollars)
[CHART] [CHART] [CHART] [CHART]
</Table>
Royal Group Technologies Limited ANNUAL REPORT 2002 1
MESSAGE FROM THE CHAIRMAN
[PHOTO]
Vic De Zen,
Chairman and C.E.O.
IT IS WITH GREAT PRIDE AND CONFIDENCE THAT I ANNOUNCE THE APPOINTMENT OF DOUGLAS
DUNSMUIR TO THE NEWLY CREATED POSITION OF PRESIDENT. HE WILL FOCUS ON THE DAY TO
DAY OPERATIONAL ISSUES, WHILE I CONTINUE TO FOCUS ON STRATEGIC ISSUES, INCLUDING
NEW PRODUCT DEVELOPMENT.
As I indicated in my message to you last year, our goals are to achieve
profitable growth, generate free cash flow, reduce debt and improve returns on
invested capital. We made progress towards our goals in 2002, with the
performances of most divisions other than Window Coverings in line with our
expectations. However, our rate of progress towards our goals was restrained in
2002, primarily as a result of unexpected costs associated with an accelerated
transition of the window coverings market.
Still, we attained sales of $1.9 billion and net earnings of $129 million,
representing increases from the previous year of 15% and 10% respectively. We
generated positive free cash flow of $117 million, helping us to reduce our
debt. We are particularly proud to have reduced the ratio of net debt to total
capitalization to 38% at year-end, representing a substantial improvement from
last year.
Responding to rapid changes in consumer preferences for window coverings,
we are strategically repositioning the division. We are evolving from being
primarily a manufacturer of vertical blinds, to being a supplier of a broad
range of custom- tailored window covering systems, sold increasingly through
retail home improvement stores. It should take us until spring of 2003 to fully
effect the transition of our window coverings business, after which we will be
primarily positioned in a higher value-added segment of the market.
We are particularly pleased with our acquisition of Marley Mouldings, as
well as the integration of Marley within Royal's operations. Immediately after
Marley Mouldings' acquisition in December of 2001, Marley began to enjoy the
benefits of Royal's materials purchasing power and vertical integration. As the
year progressed, Marley enjoyed accelerating sales growth, as new products were
introduced and some of Royal's distribution channels were leveraged. The roll
out of Marley's cellular foam window, which both looks and feels like wood, is
progressing well, providing us access to the large wood window frame segment of
the market.
We are beginning to see some of the early fruits of our intensive new
product development program. As a result of our development program,
distributors of our products are able to offer home-owners over $30 thousand of
renovation and improvement products. Much of this potential content has been
introduced in the last three years, underscoring that we have just begun to
scratch the surface of some very large markets. When you combine this increase
in potential sales per home with an aging housing inventory and consumers
increasing preference for maintenance-free products, we believe that we are in
the right place at the right time.
During 2001, we completed our new industrial complex in Woodbridge, giving
us the capacity we require to accommodate expected growth for several years. The
new technology that we have implemented in the industrial complex is providing
improving manufacturing throughput rates, enabling us to further consolidate
plants into the complex. Our efficient manufacturing infrastructure provides us
a platform to enhance our competitive advantage and improve returns, for many
years to come.
In March, Douglas Dunsmuir was appointed to the position of President of
the Group. Doug brings over 16 years of history as a member of Royal Group's
Executive Management team. He will focus on the day to day operational issues,
while I continue to focus on strategic issues, including new product
development. Working together with our team of employees, we intend to seize the
potential we have, both in the short and longer terms.
In 2003, we intend to add new independent Directors to our Board. These new
Directors will assist us to review our strategic plans, as well as bring us new
perspectives.
We thank you for your support, as we have initiated the transition of our
window coverings business and seek to increase capacity utilization. We have
full intention to reward your patience with vigorous pursuit of all actions
necessary to improve shareholders' returns.
[SIGNATURE]
Vic De Zen, Chairman and C.E.O.
January 1, 2003
2 Royal Group Technologies Limited ANNUAL REPORT 2002
LETTER TO SHAREHOLDERS
AS A TEAM, WE ARE EXCITED ABOUT OUR ABILITY
TO EXECUTE THE PLANS WE HAVE FORMULATED.
I have stepped into my new role at a time rich with opportunities, yet
confronted with the challenges of effecting the transition of our Window
Coverings Division and increasing capacity utilization throughout the Group.
INCREASING CAPACITY UTILIZATION
During 2002, a series of actions were taken to increase capacity utilization in
the Group. These actions included further plant consolidations and utilization
of traditionally product specific manufacturing plants to produce a broader
array of products.
Internationally, we have introduced a series of building products into
plants originally intended for production of just Royal Building Systems(TM)
components. In Poland, we have introduced window profiles and fencing, which
have helped to initiate the transition to profitability. We have also begun to
develop Western European markets for vinyl siding and window profiles, adding a
number of new customers in 2002.
Similarly, in China we have successfully introduced window profiles to help
accelerate earnings growth. We are presently experiencing rapid growth in demand
in China for both window profiles and components of Royal Building Systems(TM),
with machine capacity to be expanded by 30% in 2003.
In North America, a series of plant reorganizations are serving to increase
utilization of our new industrial complex in Woodbridge. These reorganizations
include expanding foam extrusion operations into a custom profile plant and
distributing that plant's custom profile production among three adjacent custom
profile plants. In addition, Royal's rapidly expanding fencing and decking
operations are increasingly drawing extrusions from adjacent custom profile
plants.
During 2002, we completed development of several new products, which will
be manufactured in existing facilities, thereby increasing capacity utilization.
These new products include a durable PVC gutter and downspout system, a line of
home office furniture, a porch planking system that closely resembles wood and
additional railing systems.
The actions we are undertaking are expected to improve capacity utilization
to about 70% by the end of 2003, which will be an important step toward
attainment of capacity utilization rates in excess of 80% and our historical
EBITDA margins of 23 to 24%. We operated throughout 2002 with capacity
utilization in the low 60% range.
WINDOW COVERINGS - SUCCESSFUL TRANSITION IN PROGRESS
Repositioning strategies are being effected in our Window Coverings Division in
response to changes in window covering fashion trends, consumers' increasing
preference for custom-tailored window coverings and consumers' desire to
purchase coverings at conveniently located home improvement stores. While we
have been repositioning ourselves, we have been subject to intense price
competition in the traditional ready-made sector of the market.
We have recently rolled out a series of tailored window covering programs
with leading home improvement retail chain stores. These programs involve a
home-owner choosing from a wide variety of window fashions at a store and
submitting the exact dimensions of their windows. Within days, window treatments
meeting specific dimensional and style requirements are back at the store or
delivered to the customer's home. We are proud to note that Royal has just been
given a Vendor of the Year Award by the Home Depot, recognizing the creativity
of our programs. Tailored programs significantly increase the value Royal
provides its customers.
OUR GOALS AND OUR PLAN TO GET THERE
Our strategic plan is comprised of three clear imperatives:
- -- Continued development of high value-added, industry leading products;
- -- Leverage of existing distribution channels with these new products; and
- -- Loading existing plants with increasing volumes of existing products and our
new products, in order to increase capacity utilization.
In the strategic planning process, we established the following targets for the
period 2003 through 2005:
- -- Organic sales growth averaging 10% per year, with sales of $2.5 billion in
2005;
- -- Return to EBITDA margins of 23 to 24%; and
- -- Return to invested capital returns in the low double digits.
It takes more than a plan to bring improved financial results to fruition.
It involves a commitment by our Executive Management team to work with all of
our employees, to stay focussed on satisfying customers needs, while
implementing systems that will allow us to contain costs and make greater
utilization of our existing assets.
As a team, we are excited about our ability to execute the plans we have
formulated. I look forward to keeping you posted on our progress.
[SIGNATURE]
Douglas Dunsmuir, President
January 1, 2003
Royal Group Technologies Limited ANNUAL REPORT 2002 3
PRODUCTS SEGMENT
Home Improvement
ROYAL'S DECORATIVE
INTERIOR AND EXTERIOR
MOULDINGS FOR HOMES
ARE ENJOYING RAPID
GROWTH IN DEMAND.
[PHOTO]
CUSTOM PROFILES
Royal's custom profile products are the largest and most diverse of our product
lines, composing over one third of overall sales. The majority of sales continue
to be to the fabricators of windows and doors, but include a growing portion of
decorative trim for the interior and exterior of the home, as a result of the
acquisition of Marley Mouldings in December of 2001.
Royal enjoys a series of sustainable competitive advantages in the vinyl
window framing marketplace. These advantages emerge from our vertical
integration, which allows us to quickly and cost effectively make dies to
produce window systems specifically for a window fabricator's marketplace. Our
integration, involving materials formulation and manufacture, allows us to offer
fabricators unique colors and unique performance characteristics. This custom
approach to serving our window fabricator customers allows them to provide their
markets with higher value-added products.
Vinyl window and door framing continues to be the material of choice by
most home-owners, with over 50% of all windows installed in 2002 being vinyl.
Vinyl has long been the material of choice for the renovation sector of the
market, but has recently gained considerable penetration in the new home sector,
as home-owners increasingly specify durable, easy to maintain products. In
response, a series of architecturally rich window systems have been developed
for window fabricator customers seeking to distinguish windows in particular
residential construction projects.
First introduced in 2001, the RoyalEco(TM) basement window system enjoyed
solid growth in 2002, as window fabricators increasingly recognized its
durability and ease of installation. Produced using Royal's patented
RoyalEco(TM) technology, the basement window system is manufactured using a
variety of plastic waste materials that are injection molded into an affordable
and durable window frame. This basement window system received Window and Door
Magazine's coveted Crystal Achievement Award in 2002.
We are completing development of a RoyalEco(TM) casement window system,
which is being designed to provide superior strength to large-span casement
window applications in new home construction. The RoyalEco(TM) casement window
system is a modular window system, capable of accommodating a variety of size
and style configurations.
The acquisition of Marley Mouldings assists us with a series of strategic
initiatives, including penetration of the wood segment of the window-framing
marketplace. Almost $1 billion of wood window framing is purchased in a year in
North America, representing over one third of the window-framing marketplace.
There is a portion of the home-owning public that prefer windows having the look
and feel of wood, but wishing to avoid maintenance. Marley's Pro Sash(R) foam
vinyl window system gives homeowners both the look and feel of wood both with
the durability and ease of maintenance of plastic at an affordable price. Marley
began to roll out Pro Sash(R) window framing system through Royal's extensive
window fabricator base in 2002 with a number of fabricators working with the
product by year end.
Marley's decorative interior and exterior mouldings for homes are enjoying
rapid growth in demand. As you can see in the picture on the opposite page,
Marley's mouldings very closely simulate the look of a variety of types of wood.
With a solid foam core, in combination with a strong outer surface, they also
feel like wood. They can be cut like wood, glued like wood, nailed or screwed
like wood. Unlike wood, they do not shrink, expand, rot, feed termites or
require repeated refinishing.
Marley's interior products include polymer baseboard mouldings, crown
mouldings, chair rail and picture framing. On the outside of homes, Marley
offers garage door mouldings, brick mouldings and exterior door jamb systems.
With almost five billion dollars of wood moulding and millwork purchased in
North America in a year, Marley's industry leading technology leaves Royal in a
solid position for increasing penetration.
In 2002, we continued to consolidate some of our window profile extrusion
plants, in pursuit of greater capacity utilization and increasing returns for
shareholders. We also accelerated introduction of vinyl window profiles into
markets served by our international plants, further improving capacity
utilization.
CUSTOM PROFILES 5 YR.
SALES GROWTH
(in millions of dollars)
[GRAPH]
NORTH AMERICAN WINDOW FRAMING
MARKET DATA
[PIE CHART]
CORE BRAND
[LOGOS]
Royal Group Technologies Limited ANNUAL REPORT 2002 5
PRODUCTS SEGMENT
Home Improvement
[Photo] [Photo] [Photo] [Photo]
Custom Window Royal Heirloom NeverPut [R] Exterior Dual Flow [R] Vinyl
Profiles Mouldings Mouldings Gutter and Downspout
System
With increasing demand and prudent consolidation of operations underway, the
custom profile operations are poised to contribute to increasing returns on
invested capital.
EXTERIOR CLADDING
Royal's Exterior Cladding products enjoyed another solid year of growth in 2002,
posting sales of $300 million, representing a 26% increase over the previous
year. We are particularly proud of this achievement, as it exemplifies the
strength of our product offering and marketing capabilities.
In 2002, we continued to add new distributors for our products, both in the
United States and Canada. Distributors continue to select Royal as a result of
our leading edge siding products, broad offering of complementary building
products and our relatively low level of market penetration.
In many geographic locations in the United States, markets have become
saturated by competitors that have established distributors in close proximity
to each other. With a relatively low level of penetration, Royal offers
distributors and contractors an attractive alternative.
Royal's leading edge products continue to offer distributors and
contractors healthy differentiation from more widely available competitive
products. Royal's position with its distributors and contractors is further
enhanced by offering a series of complementary building products, including
roofing, soffit and trim coils. We intend to launch a pro line of vinyl gutter
and downspout in 2003, further enhancing our offering.
Amongst the unique products introduced in 2002, was the Royal Designer
Shake(TM). Cedar shakes have been popular with homeowners for generations. Now,
the classic look of authentic cedar shake and the ease of maintenance of plastic
is available with the Royal Designer Shake(TM). This exterior cladding comes in
two distinctive profiles, Rough Sawn and Hand Split, both of which complement a
wide range of architectural styles that elevate homes beyond the ordinary.
In order to accommodate increasing demand for exterior cladding products, a
series of new high-speed extrusion lines are being added in both of our US and
Canadian manufacturing locations. In Canada, our 450 thousand square foot plant
in the new industrial complex will install two high-speed lines in Spring of
2003, preparing us for peak seasonal demand. Upon addition of these lines to our
Canadian facility, we will be capable of producing over 4 million squares per
year in the Canadian facility.
The Exterior Cladding Division's growth is enabling full utilization of
manufacturing facilities, which is contributing to improving returns.
EXTERIOR CLADDING 5 YR.
SALES GROWTH
(in millions of dollars)
[GRAPH]
NORTH AMERICAN VINYL SIDING
MARKET DATA
[PIE CHART]
CORE BRAND
[LOGO]
6 Royal Group Technologies Limited ANNUAL REPORT 2002
[PHOTO]
AMONGST THE UNIQUE
PRODUCTS INTRODUCED IN
2002, WAS THE ROYAL
DESIGNER SHAKE(TM).
NOW, THE CLASSIC LOOK
OF AUTHENTIC CEDAR
SHAKE AND THE EASE OF
MAINTENANCE OF PLASTIC
IS AVAILABLE.
Royal Group Technologies Limited ANNUAL REPORT 2002 7
PRODUCTS SEGMENT
Consumer
[PHOTO OF WINDOWS]
WE HAVE INTRODUCED AN
INDUSTRY LEADING LINE OF
WINDOW FASHIONS,
INCLUSIVE OF A BROAD
VARIETY OF BLINDS, ROLLER
SHADES, SHUTTERS AND
CORNICE MOULDINGS.
WINDOW COVERINGS
Window coverings markets were extremely challenging in 2002. Three shifts in
consumers' preferences impacted our Window Coverings Division in 2002, as
follows:
1. Decreasing demand for vertical blinds and increasing demand for horizontal
blinds, including faux wood and wood, as well as increasing demand for
roller shades and shutters.
2. Increasing demand for window coverings tailored to exact window dimensions.
3. Increasing preference to purchase window coverings from conveniently located
home improvement stores.
Acceleration of these preference shifts, combined with intense
international competition in the ready-made segment of the market, precipitated
a significant shortfall in the financial performance of our Window Coverings
Division in 2002.
We are rapidly responding to market dynamics, with products and programs
suiting the changing needs of consumers. We have introduced an industry leading
line of window fashions, inclusive of PVC, wood and aluminum horizontal blinds,
woven wood blinds, roller shades, shutters and cornice mouldings, through
leading home improvement and retail stores. We have also introduced a series of
cut to fit and custom window covering programs, allowing consumers to tailor
dress their windows.
We have incurred much of the up front development and promotional costs
associated with these programs at a time when margins have become compressed for
conventional ready-made window treatments. However, we are expecting a shift in
product mix in 2003, which will favour higher value-added tailored programs,
helping us to improve the profitability of the Window Coverings Division. In
addition, we have initiated a series of cost reduction measures.
The repositioning of our Window Coverings Division will take some time to
gain traction. We expect our new programs to garner increasing market
penetration in 2003. Our goal is to achieve break-even earnings performance in
2003, which will significantly contribute to improvement of Royal's overall
financial performance.
OUTDOOR PRODUCTS
Outdoor Products include a broad offering of outdoor storage solutions, fencing,
decking, deck railings and the recently introduced gazebo package. The focus of
this product group has been to introduce an attractive, durable line of
maintenance-free products for the backyard.
[GRAPH OF WINDOW COVERINGS 5 YR. SALES GROWTH]
[PIE CHART OF NORTH AMERICAN HARD WINDOW COVERINGS MARKET DATA]
Our pre-assembled fencing products enjoyed rapid growth in 2002, with over
300 stores now carrying the product line. Over 12 styles of fencing are now
available in stores, to give individual home owners a distinct look. In 2003, it
is expected that another 250 stores will carry the product, increasing our
market penetration.
We continue to be pleased with acceptance of our do-it-yourself and
professionally installed PVC fencing and decking product lines. We believe that
our fencing and decking business is at the same stage that the vinyl window
profile business was 20 years ago.
With increasing public awareness of environmental and health problems
associated with certain kinds of treated wood, there is increasing demand for
alternative products. In addition to the broad range of PVC fencing and decking
styles currently offered, we are developing a decking product to compete against
pressure treated wood, using our RoyalEco(TM) technology. We are also completing
development of a porch planking system that will look and feel like wood, using
Marley's cellular foam technology. We intend to penetrate this rapidly expanding
market with a broad range of products, which appeal to home-owners at all price
points.
In 2003, we are introducing a new line of outdoor storage solutions. This
new series will be positioned at the high end of the market and sport a number
of architectural features, including richer base and accent coloring, steeper
pitched roofs, and decorative trim. This new line will complete our current
offering, with products appealing to all home-owners' objectives, including
economy, functionality and aesthetic appeal.
CORE BRAND
[LOGO]
Royal Group Technologies Limited ANNUAL REPORT 2002 | 9
PRODUCTS SEGMENT
Consumer
[PHOTO OF BROCK DECK(TM) SYSTEMS]
[PHOTO OF GRACIOUS LIVING(TM) STUDENT DESK]
[PHOTO OF PREMIER(TM) GARDEN SHED]
[ROYAL DECOR(TM) SPINDLE AND GINGERBREAD DESIGNS]
[GRAPH OF HOUSEWARES & FURNITURE 5 YR. SALES GROWTH]
[GRAPH OF OUTDOOR PRODUCTS 5 YR. SALES GROWTH]
HOUSEWARES AND FURNITURE
Gracious Living continued to post strong growth in 2002, with sales of $117
million, representing an 11% increase from the previous year. Growth was
achieved through a combination of greater consumer awareness of Gracious
Living's products, increasing distribution and introductions of new products.
Gracious Living's products are now marketed through North America's largest
retailers, including Walmart, Lowes, Home Depot, Target and Canadian Tire.
During 2002, we continued to set the stage for future growth, with a
series of successful new product introductions. These products include a series
of banquet tables for residential and commercial applications. Features include
an easy to clean polymer surface, telescopic folding legs, and a patented
folding table top. Gracious Living banquet tables are lightweight, durable and
easy to store. Introduced in fall of 2001, demand for the tables was
outstanding, with initial production capacity sold out.
We recently introduced an affordable, attractive and functional student
desk. Contemporary in style and design, each desk comes equipped with a
slide-out keyboard shelf and castors for added mobility. To complement the
banquet table and student desk, we have introduced a lightweight and compact
folding chair with a unique seat locking system.
In the $5 billion indoor storage and organization market, we have recently
introduced a new generation of storage totes, called ProTote(TM). This new
generation of totes is heavy duty in construction and is made for rugged
everyday use.
In order to accommodate expected growth in demand, a series of operational
actions were taken in 2002 to reduce cost and improve production, warehousing,
and distribution efficiency.
With increasing demand for both core and new products, coupled with
expanding manufacturing capabilities, Gracious Living is poised for continuing
profitable growth in the years ahead.
CORE BRAND
[LOGO]
10 | Royal Group Technologies Limited ANNUAL REPORT 2002
[PHOTO]
WE BELIEVE THAT THE PLASTIC FENCING AND DECKING MARKET IS AT THE SAME STAGE THAT
THE VINYL WINDOW PROFILE MARKET WAS 20 YEARS AGO.
Royal Group Technologies Limited ANNUAL REPORT 2002 11
PRODUCTS SEGMENT
Construction
WE ARE BEGINNING TO ENJOY THE FRUITS OF INVESTMENTS IN THE DEVELOPMENT AND
MARKETING OF COMPLETE MUNICIPAL PIPE AND FITTING SYSTEMS, AS WELL AS THE ROLL
OUT OF A SERIES OF HIGH VALUE-ADDED CABLE/CONDUIT PROTECTION SYSTEMS.
12 Royal Group Technologies Limited ANNUAL REPORT 2002
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Korflo(TM) Pipe Plumbing and Electrical Electrical Fittings
Drainage System Conduit Pipe
PIPE AND FITTINGS
Royal Pipe Systems enjoyed solid growth in 2002, attaining sales of $212
million, up by 14% from the previous year. Sales growth in this division
reflects the successful execution of strategies embarked upon three years ago to
increase the breadth of Royal's product offering. We are beginning to enjoy the
fruits of investments in the development and marketing of complete municipal and
electrical pipe and fitting systems, as well as the roll out of a series of high
value-added cable/conduit protection systems.
The market for traditional municipal, plumbing and electrical pipe and
fittings was buoyant in 2002, as a result of robust levels of housing
development. While we expect that levels of housing development will temper in
the years ahead, we continue to expect that PVC will increasingly be the
material of choice for potable water, sewer and electrical pipe and fittings. In
particular, Royal's PVC potable water pipe continues to be specified in place of
conventional systems because of the alarming rate of failure of these systems.
We expect that replacement of failing conventional systems will serve to buoy
the municipal pipe and fittings market in the years ahead.
In 2001, we introduced a series of cable/conduit protection systems, under
the name Kortech(TM). These systems were enthusiastically received by
distributors, engineers and contractors. This is a large and growing market
segment. The advances made by our Quickstop(TM) line of fire stop products
introduced in 2001, continued in 2002. A full line of retrofitable fire stop
products were added to
[BAR GRAPH] [PIE CHART]
PIPE & FITTINGS 5 YR. SALES GROWTH NORTH AMERICAN PIPE & FITTINGS
(in millions of dollars) MARKET DATA
our line, increasing the demand for and specification of our Quickstop(TM)
products.
Traditionally, Royal's pipe and fittings systems have been marketed
primarily in Canada, in close proximity to manufacturing plants. Newer, higher
value-added fitting products are now being rolled out successfully in select
global markets, providing another avenue for profitable future growth.
Having invested in product development, marketing roll outs, and
manufacturing expansion over the past three years, the pipe and fittings group
is now poised to contribute to our corporate goal of improving returns on
invested capital.
CORE BRANDS
[LOGO] Royal Group Technologies Limited ANNUAL REPORT 2002 13
PRODUCTS SEGMENT
Royal Building Systems & Foreign Operations
DURING 2002, INTERNATIONAL ACTIVITIES FOCUSSED ON INTRODUCING EXISTING NORTH
AMERICAN BUILDING PRODUCTS INTO FOREIGN PLANTS, SUCH AS THE VINYL WINDOW
PROFILES WHICH WERE USED TO MAKE WINDOWS FOR THIS APARTMENT IN CHINA.
14 Royal Group Technologies Limited ANNUAL REPORT 2002
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Window Profiles Royal Building Royal Building Royal Building
for apartments Systems(TM) Systems(TM) Systems(TM)
in China in China in Mexico in Poland
ROYAL BUILDING SYSTEMS AND FOREIGN OPERATIONS
Royal Building Systems and Foreign Operations include components of Royal
Building Systems(TM) sold throughout the world and other building products
manufactured by foreign operations sold in conjunction with the system or alone.
During 2002, international activities focussed on introducing existing
building products into foreign plants. These initiatives were undertaken to
increase foreign capacity utilization, thereby initiating increasing returns on
invested capital.
In Poland, window profiles have now been successfully introduced in the
Polish marketplace, as well as in other locations throughout Europe. Fencing has
also been introduced in Poland and is undergoing rapid increases in demand.
Since the inception of our plant in Poland in 1998, we have produced siding
which has been consumed in Eastern European countries. In 2002, we began to roll
out our siding products successfully in Western Europe.
In China, we are experiencing rapid growth in demand for vinyl window
profiles, which have become the material of choice for windows in China. We are
in the process of adding extrusion lines for window profile production in order
to respond to rising demand. Demand for components of Royal Building Systems(TM)
is also enjoying substantial growth in China, particularly in industrial and
commercial markets. Over 1.2 million square feet of space was built in China
using the System in 2002.
In Mexico, we have historically produced Royal Building Systems(TM) and
window coverings. We are now introducing vinyl window profiles as well. We are
working toward an arrangement
RBS/FOREIGN OPERATIONS 5 YR. SALES GROWTH
(in millions of dollars)
(BAR GRAPH)
ROYAL BUILDING SYSTEMS(TM) CONTINUES TO STRENGTHEN ITS POSITION IN
TARGET MARKETS.
with the Home Depot in Mexico to distribute a number of our products, including
Royal Building Systems(TM), mouldings, window coverings and some of Gracious
Livings's products. The home improvement market in Mexico is significant in size
and we are working to favorably position our broad product offering.
In South America, we continue to be subjected to soft domestic market
conditions in Argentina. We intend to weather the economic malaise in Argentina,
by exporting to neighboring Brazil. In 2002, we made considerable progress
developing the Brazilian market and we expect that these initiatives will help
us to increase use of our Argentinian capacity in the coming year.
Our initiatives in 2002 serve to facilitate increasing returns from our
foreign operations in the years ahead.
CORE BRAND
[LOGO] Royal Group Technologies Limited ANNUAL REPORT 2002 15
SUPPORT SEGMENT
(PHOTO)
OUR INTEGRATION OF
MATERIALS OPERATIONS
CONTINUES TO ENABLE
US TO DEVELOP NEW
PRODUCTS MORE
QUICKLY AND
SUCCESSFULLY THAN
NON-INTEGRATED
COMPETITORS.
16 Royal Group Technologies Limited ANNUAL REPORT 2002
The Support Segment is comprised of a series of activities, which are primarily
supplied to the Products Segment, to facilitate a low cost structure, superior
customer service and rapid product development. The activities of the Support
Segment include:
o Materials manufacture, involving production of PVC resin, chemical
additives, compounding and recycling. In addition, a wide variety of
post-industrial waste materials are recycled into usable raw material,
utilizing proprietary RoyalEco(TM) technology.
o Machinery/tooling development and manufacture involves extrusion equipment,
tooling and computerized material handling systems.
o Services include distribution, research and development, and property
management services provided to the Group.
MATERIALS
In 2002, a series of raw material initiatives were undertaken by the Support
Segment to assist with development of new products. These initiatives included
the development of compounds for various window coverings, pipe fittings and
exterior cladding products. Our integration of materials operations continues to
enable us to develop new products more rapidly and successfully than
non-integrated competitors.
In addition, we continued to develop materials that would further enhance
the productivity and efficiency of the entire Group. These materials included
new stabilizer and lubricant packages, which enhance the processibility of
compounds utilized in extrusion and injection molding operations.
As part of our continuous improvement program at our PVC resin plant, we
have recently identified a series of process improvements, which are currently
being initiated. These process improvements will allow us to increase our
production of PVC resin in 2003 to almost 500 million pounds, representing a 35
million pound increase from 2002.
We are presently adopting enterprise management systems and technologies
that will enable us to more precisely gear raw materials production to orders
being received by product producing plants. This initiative is expected to
facilitate inventory reductions and increasing customer service in future years.
[PHOTO]
Research and Development-Sintering
MACHINERY AND TOOLING
Over the course of 2002, machinery operations were restructured, to focus on
servicing existing equipment and improving technology, instead of primarily
fabricating new equipment. This restructuring results from the recent completion
of Royal's significant manufacturing expansion program. Royal's current capacity
utilization, based on existing manufacturing infrastructure, is expected to
increase significantly over the next few years.
Machinery operations have also focussed on refinement of processes, to
provide optimal output rates. A series of studies to identify best practices in
the Group were initiated in 2002, with the machinery operations playing an
important role in the dissemination of best practices throughout the Group.
SERVICES
With the completion of Royal's new industrial complex in 2001, we wound down our
plant construction activities in 2002. By the end of 2002, we were no longer
engaged as general contractors and electrical contractors, or involved in
heating, ventilation or water conditioning activities. These activities were
essential to the timely completion of our expansion program, but are no longer
necessary as we have sufficient infrastructure to grow for several years.
We have maintained our property management services, which strive to
contribute to improve efficiency and reduce operating costs. Property management
service activities focus on initiatives facilitating optimal use of utilities.
In 2002, we continued to add systems to the Group that serve to reduce the
amount of water consumed in manufacturing operations. We also added a number of
technicians within the Group to ensure that our water conservation systems are
performing optimally. These initiatives continue to reduce the amount of water
required to service our manufacturing operations.
In the face of deregulation of electrical services in Ontario, we entered
into a contract with our electric provider to protect us in the event of an
inflationary environment. This contract has served us well, as electricity costs
in Ontario have escalated over the past year.
Our distribution services, including our transportation company and our
large distribution centre in Woodbridge, will play increasing roles in supplying
distributors of our products with increasing reliability and cost effectiveness.
The Support Group continues to provide Royal with a competitive edge over
less integrated competitors. Royal's competitive position will be enhanced
further through the initiatives undertaken in 2002.
Royal Group Technologies Limited ANNUAL REPORT 2002 17
ROYAL IN THE NEWS
[PHOTO OF 2002 CRYSTAL ACHIEVEMENT AWARD WINNER]
ROYAL GROUP
RECEIVES
ACHIEVEMENT
AWARD
FOR ROYALECO(TM)
BASEMENT
WINDOW
[LOGO OF ROYAL RECYCLES]
"A HUMBLE BASEMENT WINDOW MAY BE
AN UNLIKELY SOURCE FOR INNOVATION, BUT
THE CANADIAN COMPANY'S ROYALECO
PRODUCT IS INNOVATIVE IN SEVERAL
IMPORTANT WAYS."
WINDOW & DOOR MAGAZINE, AUGUST 2002
[LOGO]
18 | Royal Group Technologies Limited ANNUAL REPORT 2002
ENVIRONMENTAL,HEALTH, SAFETY
& SOCIAL STEWARDSHIP
IN 2002, ROYAL GROUP MAINTAINED ITS LEADERSHIP ROLE IN THE PLASTICS INDUSTRY ON
THE ISSUES OF RECYCLING, WORKING ENVIRONMENTS AND ENVIRONMENTAL STEWARDSHIP.
ENVIRONMENTAL
Royal continues to be at the vanguard of recycling initiatives in the plastics
industry. Royal is one of the largest recyclers of rigid PVC in the world, with
equipment now capable of recycling over 100 million pounds per year of PVC
scrap. The scrap is generated by a series of post industrial sources, including
customers. Using Royal's unique PVC recycling technology, scrap is turned into
usable raw material for certain products, helping to divert scrap from landfill
sites. Utilization of PVC recycling capacity continues to increase.
In addition, Royal's patented RoyalEco(TM) technology enables the
manufacture of building products from a series of waste streams, including
automobile trim and construction site waste. Products produced using
RoyalEco(TM) technology included DuraSlate(TM) roof tiles, RoyalEco(TM) basement
window systems and bases for outdoor storage buildings.
Responsible environmental management goes beyond recycling programs. Royal
Group's chemical producing operations are members of the Canadian Chemical
Producers Association, mandating that the Group adhears to an international
Responsible Care Program. Responsible Care provides a framework for operating in
a way that affects every aspect of corporate life. It requires commitment to
environmental performance, with public verification by peer members and
community representatives.
HEALTH & SAFETY
Maintaining the well being of employees is a critical element of the Group's
success. As a management team, we strive to foster a culture valuing initiatives
that ensure the health and safety of employees. Our operations throughout the
world continue to implement components of our Integrated Management System,
which involves employee input with respect to continuous improvement of the
safety of operations and the quality of products. These undertakings have
resulted in a number of enhancements to employees' working environment.
Our collaborative approach to creation of healthy work environments is producing
measurable benefits, with over 900,000 man hours worked in our 26 Ontario plants
with no lost time injuries during the first six months of calendar 2002. In
fact, we received a rebate from the Ontario Workplace Safety Insurance Board in
2002, recognizing reductions in injury related absenteeism from previous years.
SOCIAL
Royal's businesses are members of the communities in which they operate,
striving to strengthen communities while maximizing profits. In 2002, Royal and
its employees continued to contribute to community causes, donating to health
care, educational and religious causes.
Just one of the ways in which Royal Group contributed to communities in
2002 was through organization and co-sponsorship of the first annual Royal
Run/Walk, in support of the EOH Meta Center. The Meta Center serves
developmentally disadvantaged people in Ontario, with facilities and programs
that enrich their lives. The first annual Royal/Run Walk took place in Royal's
new industrial complex in Woodbridge, Ontario, with over 800 participants
raising in excess of $95,000 for the Center. While Royal Group and its employees
certainly made financial contributions to the Center through the event, equally
important are the Royal volunteers' time allocations to the Center. It is this
combined Corporate and Employee contribution which defines Royal's commitment to
the communities in which it operates.
Other examples of community contributions include sponsorship of numerous
Habitat for Humanity projects and contributions to the Saint Claire of Assisi
Society serving the spiritual and social needs of the Toronto area. In 2002, the
contributions of Vic De Zen, and Royal Group to community causes were recognized
by the Canadian Governor General awarding Mr. De Zen the Order of Canada. The
Order of Canada is the highest award that a Canadian citizen can receive.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 19
MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
Royal Group Technologies Limited ("the Group") is substantially engaged in the
manufacture and distribution of polymer-based home improvement, consumer and
construction products for sale primarily in the North American renovation,
remodeling and new construction industries. The Group is a vertically
integrated, innovative, technology-based growth company and strives to be a low
cost producer within its industry.
Currently the Group operates substantially in the seasonal North American
renovation and new construction markets. Accordingly, approximately three-fifths
of the Group's net sales and two thirds of its net earnings occur in its last
two quarters. As such, sales, and net earnings as a percentage of sales have
historically been significantly different on a by-quarter basis, as compared to
an annualized amount or rate. For the purposes of the following discussion the
terms "EBITDA" and "operating margin" are used interchangeably.
Earnings before interest, tax, depreciation, amortization and minority
interest (EBITDA) is not a recognized measure under Canadian generally accepted
accounting principles (GAAP). Management believes that in addition to net income
(loss), EBITDA is a useful supplemental 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 income
(loss) determined in accordance with GAAP as an indicator of Royal Group's
performance or (ii) cash flows from operating, investing and financing
activities as a measure of liquidity and cash flows. Royal Group's method of
calculating EBITDA may differ from other companies and, accordingly, Royal
Group's EBITDA may not be comparable to measures used by other companies. For a
reconciliation between EBITDA and net income for the years ended December 31,
2000, 2001 and 2002, see Operating Margin sections of Management's Discussion
and Analysis.
RESULTS FROM OPERATIONS
The following discussion has been prepared by management and is a review of the
Group's operating results and financial position for the years ended September
30, 2002, 2001 and 2000, which are based upon accounting principles generally
accepted in Canada. All amounts are in Canadian dollars unless specified
otherwise. This discussion and analysis of the Group's operations have been
derived from and should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto appearing in this Annual Report
starting on page number 26. For fiscal 2002, the Group adopted Section 3062, of
the CICA Handbook regarding Goodwill and other Intangible Assets. Accordingly,
goodwill no longer has an impact on earnings through amortization; instead any
impairment loss will be charged against earnings. The Group performed the
impairment test for goodwill and concluded that the fair value of its operating
segments exceeded the carrying amount of assets, including that recorded for
goodwill as of both October 1, 2001 and September 30, 2002. This change in
accounting policy resulted in no goodwill being amortized in fiscal 2002,
whereas in fiscal 2001 $5.9 million ($0.06 per share) of goodwill was amortized.
STATEMENTS OF EARNINGS
2002 2001 2000
------------ ------------ ------------
Net Sales $ 1,915,230 $ 1,669,036 $ 1,549,481
Cost of sales, operating expenses and other income 1,554,672 1,353,109 1,171,082
------------ ------------ ------------
Operating margin (EBITDA) 360,558 315, 927 378,399
Operating margin percentage 18.8% 18.9% 24.4%
Amortization 118,308 104,632 83,335
Interest and financing charges 54,081 56,546 46,592
------------ ------------ ------------
Earnings from operations 188,169 154,749 248,472
Income taxes 55,675 38,001 79,246
------------ ------------ ------------
Earnings before minority interest 132,494 116,748 169,226
Minority interest 3,334 (690) 109
------------ ------------ ------------
Net earnings 129,160 117,438 169,117
============ ============ ============
Earnings per share:
Basic $ 1.40 $ 1.29 $ 1.95
Diluted $ 1.38 $ 1.27 $ 1.89
------------ ------------ ------------
Weighted average number of outstanding shares - Basic 92,574,936 90,869,248 86,929,410
------------ ------------ ------------
Weighted average number of outstanding shares - Diluted 93,515,736 92,802,214 89,614,144
------------ ------------ ------------
20 | Royal Group Technologies Limited ANNUAL REPORT 2002
[GRAPH OF SALES BY PRODUCT LINE]
[GRAPH OF SALES BY GEOGRAPHIC REGION]
YEAR ENDED SEPTEMBER 30, 2002 AS COMPARED TO
THE YEAR ENDED SEPTEMBER 30, 2001
NET SALES
Consolidated net sales for the year ended September 30, 2002 increased 15% or
$246 million to a record $1.9 billion, from sales of $1.7 billion in 2001. The
overall sales increase was primarily due to the Marley Mouldings LLC ("Marley")
acquisition, as well as unit volume increases in the majority of product lines
and slightly higher average selling prices offset by a decline in Window
Covering and RBS & Foreign Operations sales. Excluding Marley, net sales for
fiscal 2002 grew organically by 6% over 2001.
The following table summarises net sales by segment (in $millions):
NET SALES BY SEGMENT
2002 2001 % change
------ ------ --------
Product segment:
Home Improvement Products 1,002 756 33%
Consumer Products 513 491 4%
Construction Products 237 211 13%
RBS/Foreign Operations 105 122 (14%)
------ ------ ------
1,857 1,580 18%
====== ====== ======
Support segment:
Materials 434 371 17%
Service 118 205 (42%)
Machinery & Tooling 63 87 (28%)
------ ------ ------
615 663 (7)%
====== ====== ======
Intra-Group elimination (557) (574)
====== ====== ======
Consolidated net sales 1,915 1,669 15%
====== ====== ======
Product segment:
Product segment sales for the year ended September 30, 2002 increased 18% or
$277 million to $1,857 million from $1,580 million in 2001. The increase was led
by Home Improvement Products increasing 33% from the prior year. The increase
was attributable to both the acquisition of Marley and higher unit volumes sold
in custom profiles and exterior cladding, as well as some modest selling price
increases. Consumer Products contributed $21.7 million to the overall Group's
sales growth. It was led by 15% growth in Outdoor Products and 11% growth in
Housewares & Furniture. Much of the growth in Outdoor Products was due to market
penetration in areas such as fencing and decking products as certain
applications of pressure treated wood are being phased out. The growth in
Housewares & Furniture sales was due to unit volume increases and new product
line introductions. Detracting from the Consumer Products growth was a 3%
decrease in Window Coverings sales. Competition from Asia in the ready-made
market segment led to some price decreases for certain Window Covering product
lines. Continuing in fiscal 2003, the Window Coverings Division will focus on
shifting toward higher margin, cut-to-fit and custom Window Covering programs.
Construction Products increased 13% from the prior year, due to higher unit
volumes sold in Pipe & Fittings coupled with modest selling price increases for
Pipe & Fittings, as well as moderate unit volume increases from Commercial
Doors. Offsetting the overall Product segment revenue growth was the $17.5
million (14%) decrease in net sales from Royal Building Systems & Foreign
Operations. Economic conditions in South America and particularly in Argentina
led to lower unit volumes being sold. Management continues to build on foreign
growth by manufacturing other core building products in addition to the Royal
Building Systems(TM) profiles with its existing infrastructure.
Support segment:
Support segment sales for the year ended September 30, 2002 decreased, as
expected, 7% or $47.8 million to $615.6 million from $663.4 million in 2001.
This segment represents materials, machinery & tooling and services provided
predominately to the Product segment. The decrease in net sales was primarily
due to the completion of our industrial complex in the Toronto area and related
added capacity expansion in the prior fiscal year. The decrease was partially
offset by increased sales of materials due to higher demands from the Product
segment.
For fiscal 2003, Support segment sales are expected to decrease again as the
sale of certain non-strategic business units occurred in the latter part of
2002. Partially offsetting this expected decrease will be an increase in
material sales to support the projected increases in Product segment sales.
Geographic Sales distribution:
During fiscal 2002, sales to non-Canadian customers, including foreign-based
sales and exports from Canadian operations, increased to 70.5% of total sales
from 66.6% in 2001. Much of this increase was due to the Marley acquisition.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 21
MANAGEMENT'S DISCUSSION & ANALYSIS
In light of current economic conditions, an overall net sales growth rate
consistent with fiscal 2002 is expected, emanating from continued growth in
demand for our current product lines and contributions from the introduction of
new products and/or product applications.
OPERATING MARGIN:
Overall:
A one-time non-cash charge of $23.5 million resulting from a comprehensive
review of all operating assets was recorded in fiscal 2002. Principally, the
charge represents the write-off of first generation recycling equipment and
tooling, as well as certain equipment previously used in production of certain
window coverings. The first generation recycling equipment have recently been
replaced by second generation technologies which have enabled entry into more
efficient production of products such as roof tiles, window & door components,
decking and railing.
The Group's overall operating margin for the year ended September 30, 2002
increased by $44.7 million or 14.1% to $360.6 million compared to $315.9 million
last year. EBITDA as a percentage of sales decreased slightly to 18.8% from
18.9% last year. Raw material costs as a percentage of sales decreased to 42.6%
from 43.4% last year due primarily to the average resin cost for the year being
lower than the previous year. For fiscal 2003, management expects the raw
material cost percentage to be in the range of 41.5 to 42.5%.
Labor and overhead costs as a percentage of sales were 13.6% and 10.3%
respectively, and compare to 13.6% and 9.6% last year. Higher variable costs and
lower fixed cost absorption were due to lower than expected sales volumes,
particularly in the Window Coverings division. In addition, higher amortization
cost contributed to the increase in overhead rates. For fiscal 2003,
Management's focus is to improve on capacity utilization to lower labor and
overhead costs as a percentage of sales.
Selling and distribution costs as a percentage of sales increased to 13.4%
from 12.5% due to increased transportation costs, the inclusion of Marley sales
involving more in-store sales oriented costs and costs associated with
introduction of new products or marketing programs. In particular, significant
selling costs were incurred in preparation for the roll-out of new custom and
cut-to-fit window covering programs. General and administration cost remained
constant at 6.3% of sales for both years.
Product segment EBITDA for the year ended September 30, 2002 increased by
$41 million or 27% to $194.4 million compared to $153.4 million last year.
EBITDA as a percentage of sales increased to 10.5% from 9.7% last year. The
increase was primarily due to lower average raw material cost.
Support segment EBITDA for the year ended September 30, 2002 increased $3.6
million or 2% to $166.1 million from $162.5 million in 2001. EBITDA as a
percentage of sales increased to 27% from 24.5% last year. This increase was
primarily due to lower average resin costs. In addition, the Materials division,
which has higher operating margins, now makes up a larger percentage of the
Support segment with the sale of certain non-strategic businesses.
For fiscal 2003, Management anticipates the Group's overall EBITDA as a
percentage of sales to be approximately 21%, returning to historical levels of
23 to 24% over the next few years.
AMORTIZATION EXPENSE:
Amortization expense as a percentage of sales was 6.2%, slightly lower than the
6.3% experienced last year. This expense increased to $118.3 million from $104.6
million for last year due to added capacities in both operating segments, the
capital expenditure program undertaken during the past two years, and the Marley
acquisition. Partially offsetting this increase, was the absence of goodwill
amortization in fiscal 2002 (as discussed earlier).
In the Products segment, amortization expense as a percentage of sales was
4.5% for both fiscal 2002 and 2001. This expense increased by $12.7 million from
$71.1 million for the same period last year due primarily to the inclusion of
Marley.
In the Support segment amortization expense as a percentage of sales was
5.6%, greater than the 5.0% experienced last year. This expense increased by
$1.0 million from $33.5 million for last year due primarily to added capacities
in the recycling division and manufacturing facility additions.
INTEREST AND FINANCING CHARGES
As anticipated, interest and financing charges decreased as a percentage of
sales, to 2.8% from 3.4% last year. Interest expense decreased by $2.5 million
from $56.5 million due to the Group's effective interest rates being lower than
those experienced in 2001 and the lower level of loan utilization for working
capital and capital spending purposes. Partially offsetting the decrease was the
reduction in capitalized interest costs in fiscal 2002 to $3.6 million as
compared to the $8.2 million that had been capitalized in fiscal 2001. During
the year, the Group's capital expenditures and the acquisition of Marley were
financed from cash flow from operations.
INCOME TAX EXPENSE
In fiscal 2002, income tax expense as a percentage of earnings before income
taxes increased to 29.6% from 24.6%. The increase was due to a $9 million one-
time tax reduction in fiscal 2001 resulting from favourable provincial tax
legislation passed in June 2001. For fiscal 2003, management expects an overall
income tax rate of approximately 29%.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings in 2002, increased $11.8 million to $129.2 million or 7% of net
sales up from $117.4 million or 7% of net sales for the previous year. Fully
diluted earnings per share for fiscal 2002 was $1.38 compared to $1.27 in fiscal
2001. The average number of shares outstanding for fiscal 2002 on a fully
diluted basis was approximately 93.5 million or 0.7 million greater than in
fiscal 2001. Royal adopted Section 3062 of the CICA Handbook in fiscal 2002 and
no longer amortizes goodwill, which represented approximately $5.9 million or
$0.06 per share during fiscal 2001.
EBITDA EBIT NET EARNINGS
(in millions of dollars) (in millions of dollars) (in millions of dollars)
[GRAPH] [GRAPH] [GRAPH]
22 Royal Group Technologies Limited ANNUAL REPORT 2002
CONSOLIDATED CONSOLIDATED INVESTING ACTIVITIES WORKING CAPITAL PROPERTY, PLANT
CASH FLOW FREE CASH FLOW (in millions of dollars) AND EQUIPMENT
(in millions of dollars) (in millions of dollars) Consolidated Capital [GRAPH] (in millions of dollars)
[GRAPH] [GRAPH] Expenditures [GRAPH]
Net Debt to Total
Capitalization (%)
[GRAPH]
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
In fiscal 2002, the Group generated cash flow of $286.4 million, an increase of
$30.9 million over $255.5 million generated in the prior year. During the three
years ended September 30, 2002, the Group's cash flow aggregated $822.3 million.
Cash flow from operations and debt proceeds were used to finance working capital
expansion, acquisitions and capital spending. Also contributing to positive cash
flow in fiscal 2002 was the proceeds from the sale of non- strategic assets. For
2002, $68.0 million was generated from the sale of non-strategic assets
including the sale of excess real estate, a corporate plane and divestiture of
certain businesses within the Support segment.
WORKING CAPITAL
A summary of the Group's consolidated working capital position at September
30 is set out below :
2002 2001
---- ----
Working Capital (in millions of dollars) 167.5 179.8
Current ratio 1.22X 1.28x
Working capital was $167.5 million at September 30, 2002, $12.3 million less
than the prior year's $179.8 million. As a measure of asset management,
receivable days were 62 at September 30, 2002, representing a slight improvement
from 63 days last year. Days inventory increased by 3 days to 141 from 138 days
last year. Slightly higher days inventory occurred primarily as a result of
larger customers reducing inventories on hand and a build up of Consumer
Products inventory as sales for the last quarter were softer than anticipated.
The method used to calculate days receivable and days inventory was changed
during fiscal 2002 to better reflect the monthly movements and the seasonal
aspects of the Group. Management's focus for fiscal 2003 is to balance
production efficiencies with inventory carrying costs. This should lead to an
overall lower days inventory.
CAPITAL SPENDING
Overall capital spending including acquisitions, for the years ended September
30, 2002 & 2001 is summarised below:
(in millions of dollars) 2002 2001
- ------------------------ ---- ----
Capital expenditures 133.3 208.1
Acquisitions 149.2 4.9
Total capital spending 282.5 213.0
For the year ended September 30, 2002, capital expenditures amounted to $133.3
million compared to $208.1 million for the same period last year. Approximately
$98 million was expended in the Product segment, with the remaining $35 million
expended in the Support segment for added capacities in the materials division.
During 2002, the Group acquired 100% equity interests in certain businesses
for an aggregate consideration of $149.2 million. The largest of the
acquisitions was the purchase of Marley, which accounted for approximately 95%
of the total cost of the acquisitions for the year.
For fiscal 2003, excluding possible business acquisitions, the Group
antici- pates capital spending to be approximately $130 million, composed of $90
million for additional equipment and $40 million for tooling necessary to
produce new products.
LONG TERM DEBT AND FINANCIAL INSTRUMENTS
The Group has an authorized $700 million revolving, unsecured bank credit
facility with a syndicate of banks, of which a net of $38.0 million was drawn at
September 30, 2002 and $345.8 million was committed as back-up liquidity to
outstandings on the Group's commercial paper program at September 30, 2002. The
bank credit facility can be used for working capital requirements, acquisitions
and capital expenditures. The Group is authorizing a $400 million commercial
paper program in Canada. In addition the Group has an authorized $400 million
medium term note program in Canada. This program is unsecured, ranking pari
passu with the bank credit facility. At September 30, 2002, the funded debt to
total capitalization was 38.0%, an improvement from the prior year's 41.4%.
Management believes that the Group's anticipated cash flow from operations
and available credit under its existing financing arrangements are sufficient to
meet its working capital and capital spending requirements, as well as debt
service requirements, including the seasonal natures thereof.
Royal Group Technologies Limited ANNUAL REPORT 2002 23
MANAGEMENT'S DISCUSSION & ANALYSIS
YEAR ENDED SEPTEMBER 30, 2001 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2000
Consolidated net sales for the year ended September 30, 2001 increased 8% or
$119.6 million to $1.7 billion, from sales of $1.6 billion in 2000. The sales
increase was primarily due to unit volume increases in all major product lines
and despite industry-wide market contractions experienced in some product areas.
The effects of acquisitions completed during the year were offset against the
prior year divestiture of our residential door manufacturer.
Products segment sales for the year ended September 30, 2001 increased 6%
or $96 million to $1,580 million from $1,484 million in 2000. RBS & Foreign
Operations led the way with a 8% increase over the prior year. This was due to
higher volumes sold in building systems. Home Improvement Products grew by 7%,
which was led by an increase in Exterior Cladding of 13% or $28 million over the
prior year. This was primarily due to higher unit volumes and slightly higher
selling prices. Home Improvement Products rate of growth continued to outpace
the 2001 growth forecasts for the North American repair and remod- eling
industry. Construction Products increased 6% over the prior year on account of a
5% increase in pipe & fittings despite lower unit prices in pipe products.
Consumer Products increased 6% over the prior year with housewares & furniture
up 37%.
Support segment sales for the year ended September 30, 2001 decreased 10%
or $71 million to $663.4 million from $734.4 million in 2000. This expected
decrease was primarily due to the completion of our industrial complex in
Woodbridge and related added capacity expansion. The decrease was partially
offset by increased third party sales of machinery and equipment during the last
6 months of the fiscal year.
During fiscal 2001, sales to non-Canadian customers, including
foreign-based sales and exports from Canadian operations increased slightly to
66.6% of total sales from 66.4% for the same period in 2000. Increases in sales
volume rates of the building system increased in foreign markets to 11% from 9%
last year.
Earnings during fiscal 2001 were negatively impacted by the following:
higher variable costs and lower fixed cost absorption, due to lower than
expected sales volumes; the unusually abrupt increase in raw material costs,
which reached their peak during last summer; and a special charge of $32 million
resulting from a comprehensive review of major operations prompted by the
increasing severity of the economic slowdown. Specifically the charge represents
allowances for doubtful receivables in Window Coverings and Argentina, and
inventory provisions and allowances for slow moving goods, as a result of the
economic slowdown, as well as the write down to net realizable value of
inventory of lower margin product lines to be discontinued.
The Group's overall operating margin, excluding the $32 million charge, for
the year ended September 30, 2001 decreased by $30.5 million or 8% to $347.9
million compared to $378.4 million in 2000. EBITDA as a percentage of sales
decreased to 20.8% from 24.4% last year.
Raw material costs as a percentage of sales increased slightly to 43.4%
from 43.0% last year due primarily to a change in sales mix during the year from
higher margin products. As average resin cost declined during the year, the
Group was still working through higher cost inventory from prior year when resin
costs peaked last summer.
Labor and overhead costs as a percentage of sales were 13.6% and 9.6%
respectively, compared to 12.8% and 8.7% last year. Higher variable costs and
lower fixed cost absorption were due to lower than expected sales volumes,
particularly in the fourth quarter. In addition higher amortization cost due to
added capacities and costs associated with moving production facilities into the
new industrial complex, increased overhead cost.
Selling and distribution costs as a percentage of sales increased to 12.5%
from 11.0% due to increased transportation and warehousing cost and higher
allowance for doubtful accounts as a result of the economic environment. General
and administration cost as a percentage of sales increased to 6.3% from 5.9%
last year due to a higher level of expenditures in anticipation of achieving
higher sales volumes.
Product segment EBITDA for the year ended September 30, 2001, excluding the
$32 million charge, decreased by $53.3 million or 22% to $185.4 million compared
to $238.7 million last year. EBITDA as a percentage of sales decreased to 11.7%
from 16.1% last year. The decrease was due to higher raw material costs due to
the change in product mix and higher variable and lower fixed cost absorption as
a result of lower than expected sales volumes.
Support segment EBITDA for the year ended September 30, 2001 increased
$22.8 million or 16.3% to $162.5 million from $139.7 million in 2000. EBITDA as
a percentage of sales increased to 24.5% from 19.0% last year. This increase was
primarily due to lower average resin costs and a change in mix.
Amortization expense as a percentage of sales was 6.3% slightly higher than
the 5.4% experienced last year. This expense increased by $21.3 million from
$83.3 million for the same period last year due to capital expenditure programs
undertaken in both operating segments during the past two years.
In the Products segment, amortization expense as a percentage of sales was
4.5%, higher than the 3.9% experienced last year. This expense increased by
$12.9 million from $58.2 million last year due primarily to added capacities in
custom profiles and window covering product lines.
In the Support segment, amortization expense as a percentage of sales was
5.0%, higher than the 3.4% experienced last year. This expense increased by $8.3
million from $25.2 million last year due primarily to added capacities in the
material processing and recycling companies and manufacturing facility
additions.
As anticipated, interest and financing charges increased as a percentage of
sales to 3.4% from 3.0% last year. Interest expense increased by $10 million
from $46.6 million due to a higher level of loan utilization for working capital
and capital spending purposes, as the Group's effective interest rates were
relatively consistent with those experienced in 2000. During the year, the
Group's capital expenditure program was financed with cash flow from operations
and operating line proceeds.
In fiscal 2001, income tax expense as a percentage of earnings before
income taxes decreased to 24.6% from the 31.9% in 2000. The rate reduction was
primarily due to favourable provincial tax legislation passed in June 2001
resulting in a $9 million tax reduction.
Net earnings in 2001, excluding the $32 million charge, were $141.5 or 9%
of sales compared to $169.1 or 10.9% of net sales for the previous year. On a
fully diluted basis, net earnings per share, before the charge, for fiscal 2001
was $1.52 compared to $1.89 in fiscal 2000. During the year and in accordance
with The Canadian Institute of Chartered Accountants, the Group adopted the
treasury method in calculating fully diluted earnings per share. The change was
applied on a retroactive basis, with the effect of reducing September 30, 2000
reported diluted earnings per share by $0.01 to $1.89. The average number of
shares outstanding for fiscal 2001 on a fully diluted basis was approximately
92.8 million or 3.2 million higher than in fiscal 2000.
24 Royal Group Technologies Limited ANNUAL REPORT 2002
RISKS AND UNCERTAINTIES
The Group operates in many markets each of which involves various risk factors,
uncertainties and other factors affecting the Group specifically or the markets
generally. The Group's future performance could be affected by these factors,
which in some cases have affected, and which in the future could affect, the
Group's actual results and could cause the Group's actual results for 2002 and
beyond to differ materially from those expressed in any forward- looking
statements made by or on behalf of the Group. These risks and uncertainties
include fluctuations in the level of renovation, remodeling and construction
activity, changes in the Group's product costs and pricing, an inability to
achieve or delays in achieving savings related to the cost reductions or
revenues related to sales price increases, consolidation and restructuring
programs, changes the Group's product mix, the growth rate of the markets in
which the Group's products are sold, market acceptance and demand for the
Group'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 (particularly in
developing countries), 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, changes in
environmental regulation and currency risk exposure. Certain of these risks and
uncertainties are described in more detail below:
- - The Group's business is substantially related to the North American
renovation, remodeling and construction markets, both residential and
industrial/commercial. Therefore, the demand for the products manufactured
and distributed by the Group is affected by changes in the general state of
the North American economy, including renovation and remodeling, new housing
starts and the level of construction activity in general.
- - The price and availability of raw materials, and in particular PVC resin,
represents a substantial portion of the cost of manufacturing the Group's
products. Historically, there have been fluctuations in these raw mate-
rials' prices and in some instances price movements have been volatile and
affected by circumstances beyond the Group's control. There can be no
assurance that the Group can pass on increases from normal market
fluctuations in the price of PVC resin to its customers through increases in
selling price, or otherwise absorb such costs increases without signif-
icantly affecting its margins. In addition, the industry has occasionally
found certain raw materials to be in short supply.
- - As the Group continues to expand the scope of its activities in foreign
markets, it becomes exposed to a greater risk of foreign exchange fluc-
tuations. The Group attempts to minimize risks associated with currency
fluctuations through matchings of the currency of debt financing and the
currency of certain raw material purchases to the currency of sales or asset
acquisitions. This, however, is not always economically practical and the
Group may not be able to offset all of its foreign market risks. While the
Group has not entered into significant market instruments with respect to
foreign exchange hedging in the past, it may, if deemed necessary, do so in a
prudent fashion, in the future. The Group does not purchase derivative
instruments beyond those needed to hedge foreign currency requirements.
- - Low cost foreign competitors continue to be a threat to the Group's cost
structure, particularly in its consumer product lines. The Group attempts to
minimize risks associated with this by striving to reduce costs when feasible
and/or offer enhanced customer services.
- - The Group provides trade credit to its customers in the normal course of
business. The Group carries out credit evaluations of its customers and
provides an allowance for potential credit losses, which, when realized, have
for the most part been within the range of management's expecta- tions. The
Group's credit risk is minimized by the product and geographic diversity of
its customer base. The Group's credit risk is further minimized in certain
product areas through the selective use from time to time of trade credit
insurance.
CRITICAL ACCOUNTING POLICIES
The preparation of the Group's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make use of
certain estimates and assumptions that affect the reported amounts in the
consolidated financial statements and the accompanying notes. These estimates
and assumptions are based on management's best knowledge of current events and
actions that the Group may undertake in the future. Actual results could differ
from those estimates. Estimates are used when accounting for items, the more
critical of which are: allowances for doubtful accounts receivable, inventory
obsolescence, and income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED:
Refer to Note 18e(ii) in the Notes to Consolidated Financial Statements on page
37 of this report, for the discussion of recent accounting pronouncements
issued but not yet adopted.
REVENUE RECOGNITION:
Revenue is recognized when the price is fixed or determinable, collectibility is
reasonably assured and upon shipment to or receipt by customers depending on
contractual terms.
ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE:
In order for management to establish the appropriate allowances for doubtful
accounts receivable, estimates are made with regards to general economic
conditions, interpreting customer aging trends and the probability of default by
individual customers. The failure to estimate correctly could result in bad
debts being either higher or lower than the determined provision as of the date
of the balance sheet.
INVENTORY OBSOLESCENCE:
In order for management to establish the appropriate provision for inventory,
estimates are made with regards to general economic conditions, interpreting
inventory turns, identifying slow moving items, customer demand patterns and
market acceptance of our products. The failure to estimate correctly could
result in inventory being either higher or lower than the determined valuation
as of the date of the balance sheet.
INCOME TAXES:
In order for management to establish the appropriate income tax asset and
liability valuation, estimates are made with regards to the realization of
future tax assets and increase of future tax liabilities. The ultimate
realization of future tax assets or assessments of future tax liabilities is
dependent upon the generation of future taxable income during the years in which
those temporary differences become deductible. The failure to estimate correctly
could result in some portion of the net income tax position not being realized.
OUTLOOK
Management anticipates organic sales growth of approximately 10% per
year for the fiscal years 2003 through 2005, with 2005 sales reaching
approximately $2.5 billion. EBITDA margins are expected to steadily increase
over the three-year period, reaching 23 to 24% in 2005, as manufacturing
capacity is increasingly utilized. Returns on invested capital are also
anticipated to steadily increase over the three-year period, rising to low
double digit levels, as a result of improving net profitability and declining
capital expenditures.
Royal Group Technologies Limited ANNUAL REPORT 2002 25
REPORT TO THE SHAREHOLDERS
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
Preparation of the consolidated financial statements accompanying this annual
report and the presentation of all other information in this report is the
responsibility of management. The financial statements have been prepared in
accordance with appropriate and generally accepted accounting principles and
reflect management's best estimates and judgements. All other financial
information in the report is consistent with that contained in the financial
statements. The Company maintains appropriate systems of internal control,
policies and procedures which provide management with reasonable assurance that
assets are safeguarded and that financial records are reliable and form a proper
basis for preparation of financial statements.
The Board of Directors ensures that management fulfills its responsibilities
for financial reporting and internal control through an Audit Committee which is
comprised solely of independent directors. The Audit Committee reviewed the
consolidated financial statements with management and external auditors and
recommended their approval by the Board of Directors.
The consolidated financial statements have been audited by KPMG LLP,
Chartered Accountants. Their report stating the scope of their audit and their
opinion on the consolidated financial statements is presented below.
[SIGNATURE] [SIGNATURE]
Vic De Zen Ron Goegan
Chairman and Chief Executive Officer Director and Chief Financial Officer
November 15, 2002 November 15, 2002
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Royal Group Technologies
Limited as at September 30, 2002 and 2001 and the consolidated statements of
earnings, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at September 30,
2002 and 2001 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
[KPMG LLP]
Chartered Accountants
Toronto, Canada
November 15, 2002
26 Royal Group Technologies Limited ANNUAL REPORT 2002
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and 2001
(In thousands of Canadian dollars)
2002 2001
----------- -----------
ASSETS
Current assets:
Accounts receivable (note 4) $ 390,332 $ 370,030
Inventories (note 5) 495,710 420,597
Prepaid expenses 26,295 30,609
----------- -----------
912,337 821,236
Property, plant and equipment (note 6) 1,637,049 1,604,499
Future income tax assets (note 14) 8,824 22,847
Goodwill and other assets (note 7) 275,757 245,729
----------- -----------
$ 2,833,967 $ 2,694,311
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 9) $ 383,785 $ 405,367
Accounts payable and accrued liabilities (note 8) 257,324 211,472
Term debt due within one year (note 9) 103,754 24,635
----------- -----------
744,863 641,474
Term debt (note 9) 443,042 544,861
Future income tax liabilities (note 14) 126,891 127,487
Minority interest 18,249 18,802
Shareholders' equity:
Capital stock (note 10) 632,697 608,776
Retained earnings 904,389 775,229
Currency translation adjustments (36,164) (22,318)
----------- -----------
1,500,922 1,361,687
----------- -----------
$ 2,833,967 $ 2,694,311
=========== ===========
See accompanying notes to consolidated financial statements.
On behalf of the Board:
[SIGNATURE] [SIGNATURE]
Vic De Zen Ron Goegan
Chairman, & C.E.O. Director & C.F.O.
Royal Group Technologies Limited ANNUAL REPORT 2002 27
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
2002 2001
----------- -----------
Net sales $ 1,915,230 $ 1,669,036
Cost of sales and operating expenses 1,554,672 1,353,109
----------- -----------
Earnings before the undernoted 360,558 315,927
Amortization charges (note 12) 118,308 104,632
Interest and financing charges (note 13) 54,081 56,546
----------- -----------
Earnings before income taxes and minority interest 188,169 154,749
Income taxes (note 14) 55,675 38,001
----------- -----------
Earnings before minority interest 132,494 116,748
Minority interest 3,334 (690)
----------- -----------
Net earnings $ 129,160 $ 117,438
=========== ===========
Earnings per share (note 11):
Basic $ 1.40 $ 1.29
Diluted $ 1.38 $ 1.27
=========== ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years ended September 30, 2002 and 2001
(in thousands of Canadian dollars)
2002 2001
----------- -----------
Retained earnings, beginning of year $ 775,229 $ 657,791
Net earnings 129,160 117,438
----------- -----------
Retained earnings, end of year $ 904,389 $ 775,229
=========== ===========
See accompanying notes to consolidated financial statements.
28 Royal Group Technologies Limited ANNUAL REPORT 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
2002 2001
--------- ---------
Cash provided by (used in):
Operating activities:
Earnings before minority interest $ 132,494 $ 116,748
Items not affecting cash (note 16) 153,942 138,779
Change in non-cash working capital (note 16) (35,920) (110,425)
--------- ---------
250,516 145,102
Financing activities:
Increase (decrease) in bank indebtedness (21,582) 74,821
Repayments of term debt (24,556) (2,538)
Change in minority interest 815 (294)
Proceeds from issuance of shares under stock option plan 23,921 3,064
--------- ---------
(21,402) 75,053
Investing activities:
Acquisition of property, plant and equipment, net (133,326) (208,088)
Acquisitions of other businesses (149,217) (4,913)
Proceeds from (investments in) non-strategic assets 67,970 (2,641)
Investment in other assets (693) (1,797)
--------- ---------
(215,266) (217,439)
Effect of exchange rate changes (13,848) (2,716)
--------- ---------
Change in cash, being cash, end of year $ -- $ --
========= =========
Cash flow, being earnings before minority interest
plus items not affecting cash $ 286,436 $ 255,527
Supplemental cash flow information:
Interest and financing charges paid $ 52,891 $ 58,693
Income taxes paid 34,183 41,160
========= =========
See accompanying notes to consolidated financial statements.
Royal Group Technologies Limited ANNUAL REPORT 2002 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles, the more
significant of which are outlined below. A reconciliation to accounting
principles generally accepted in the United States is shown in note 18.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Royal Group
Technologies Limited (the "Company"), its subsidiaries and its proportionate
share of the accounts of its joint ventures. Investments in joint ventures have
been proportionately consolidated based on the Company's ownership interest. All
significant intercompany profits, transactions and balances have been eliminated
on consolidation.
Investments over which the Company is able to exercise significant influence
are accounted for using the equity method and investments where the Company does
not control or exercise significant influence are accounted for using the cost
method.
(b) Use of estimates:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. These estimates and assumptions are based on
management's best knowledge of current events and actions that the Company may
undertake in the future. Actual results could differ from these estimates.
(c) Inventories:
Inventories are stated at the lower of cost, using the first-in, first-out
method, and replacement cost for raw materials and work in process, and net
realizable value for finished goods.
(d) Property, plant and equipment:
Property, plant and equipment is stated at cost less accumulated amortization.
Interest costs relating to major capital expenditures are capitalized when
interest costs are incurred before the capital asset is placed into productive
use. Amortization is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
Buildings 20 - 40 years
Plant equipment 10 - 15 years
Dies and moulds 4 - 10 years
Office and computer equipment 3 - 10 years
Aircraft and transport equipment 5 - 20 years
(e) Goodwill and other assets:
In August 2001, the Accounting Standards Board of The Canadian Institute of
Chartered Accountants ("CICA") issued Handbook Section 3062, Goodwill and Other
Intangible Assets. The Company has adopted this effective October 1, 2001. In
accordance with the requirements of Section 3062, this change in accounting
policy has not been applied retroactively and the amounts presented for prior
periods have not been restated.
Section 3062 replaces the requirement to amortize goodwill with a
requirement to test for impairment at least annually. Any impairment loss would
be charged against current period earnings and shown as a separate line item in
the statement of earnings. As of the date of adoption of Section 3062, the
Company had unamortized goodwill in the amount of $187,378 which is no longer
being amortized. This change in accounting policy resulted in no amortization
expense related to goodwill being recorded in the year ended September 30, 2002,
whereas $5,893 of amortization expense related to goodwill was recorded during
the year ended September 30, 2001. The Company completed the impairment
assessment and no impairment loss has been recorded in the year ended September
30, 2002.
The standard also specifies the criteria that intangible assets must meet to
be recognized and reported apart from goodwill. The Company evaluated existing
intangible assets including estimates of remaining useful lives. No
reclassifications were required and patents continue to be amortized on a
straight-line basis over 5 to 17 years.
Deferred financing costs are amortized over the life of the related debt
instruments.
(f) Revenue recognition:
Revenue is recognized when the price is fixed or determinable, collectibility is
reasonably assured and upon shipment to or receipt by customers depending on
contractual terms.
(g) Foreign currency translation:
The accounts of the Company's foreign operations that are considered to be
self-sustaining are translated into Canadian dollars using the current rate
method. Assets and liabilities are translated at the rates in effect at the
balance sheet date and revenue and expenses are translated at average exchange
rates for the year. Gains or losses arising from the translation of the
financial statements of self-sustaining foreign operations are deferred in a
"Currency Translation Adjustment" account in shareholders' equity until there is
a realized reduction in the net investment.
Gains and losses on the translation of the U.S. dollar-denominated Senior
Notes (note 9) are considered to be a hedge of the U.S. dollar net investment in
the self-sustaining operations and are offset against the exchange gains or
losses arising on translation of the financial statements of the foreign
operation and are included in the Currency Translation Adjustment.
Monetary assets and liabilities denominated in U.S. dollars have been
translated into Canadian dollars at the rate of exchange in effect at the
balance sheet date. All revenue and expenses denominated in U.S. dollars are
translated at average rates in effect during the year. Translation gains and
losses are included in the consolidated statements of operations, except those
relating to the translation of long-term debt (the Senior Notes (note 9)), which
are deferred and amortized on a straight-line basis over the term of the debt.
The accounts of the Company's foreign operations that are considered to be
integrated are translated into Canadian dollars using the temporal method.
(h) Research and development:
The Company carries on various applied research and development ("R&D")
programs, certain of which are partially funded by governments, including
investment tax credits. R&D expenditures are charged to earnings in the period
in which they are incurred. Funding received is accounted for using the cost
reduction approach. Total R&D expenditures were approximately $21,688 (2001 -
$19,043), of which $12,143 (2001 - $12,056) was expensed to cost of sales.
(i) Stock option plan:
The Company has a stock option plan which is described in note 10. No
compensation expense is recognized for this plan when stock or stock options are
issued to employees and key operating personnel. Any consideration paid by
employees on exercise of stock options or purchase of stock is credited to
capital stock. (See note 18 for the potential effect of compensation expense.)
(j) Income taxes:
The Company applies the asset and liability method, whereby future tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Future income tax assets and
liabilities are measured using enacted or substantively enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on future income
tax assets and liabilities of a change in tax laws and rates is recognized in
income in the period that includes the date of enactment or substantive
enactment date.
In assessing the realizability of future income tax assets, management
considers whether it is more likely than not that some portion of all of the
future income tax assets will not be realized. The ultimate realization of
future income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of future income tax
liabilities, projected future taxable income, the character of the tax asset and
tax planning strategies in making this assessment. Based upon projections of
future taxable income over the periods in which the future income tax assets are
deductible, management believes the Company will realize the benefits of these
assets.
(k) Comparative figures:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
30 Royal Group Technologies Limited ANNUAL REPORT 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
2. BUSINESS DEVELOPMENT:
Acquisitions of other businesses:
During 2002, the Company acquired 100% equity interest in certain businesses for
aggregate consideration of $149,217 in cash. The largest of the acquisitions was
the purchase of the business of Marley Mouldings LLC ("Marley"). Marley is the
largest U.S. manufacturer and marketer of mouldings and millwork made from
polyvinylchloride and polystyrene using cellular foam extrusion technology.
These acquisitions were accounted for by the purchase method and are summarized
as follows:
<Table>
<Caption>
Marley Other Total
-------- -------- --------
Working capital $ 20,512 $ 445 $ 20,957
Property, plant and equipment 72,257 7,873 80,130
Other assets 7,314 -- 7,314
Goodwill 40,816 -- 40,816
-------- -------- --------
Total purchase price $140,899 $ 8,318 $149,217
======== ======== ========
</Table>
During 2001, the Company acquired 100% equity interest in certain businesses for
aggregate consideration of $4,913 in cash. These acquisitions were accounted for
by the purchase method and are summarized as follows:
<Table>
Working capital $2,952
Property, plant and equipment 1,961
------
Total purchase price 4,913
======
</Table>
3. INTEREST IN JOINT VENTURES:
The Company's proportionate interest in joint ventures includes the following:
<Table>
<Caption>
2002 2001
------- -------
Current assets $13,606 $ 8,366
Property, plant and equipment 13,150 10,507
------- -------
Total assets 26,756 18,873
Current liabilities 6,700 4,407
Long-term liabilities 2,171 3,230
Total liabilities 8,871 7,637
------- -------
Shareholders' equity $17,885 $11,236
======= =======
</Table>
<Table>
<Caption>
2002 2001
------- -------
Sales $51,207 $35,823
Net earnings 5,919 3,451
Cash provided from operations $10,133 $ 4,445
Acquisition of property, plant and equipment 762 4,205
</Table>
4. ACCOUNTS RECEIVABLE:
<Table>
<Caption>
2002 2001
--------- ---------
Trade $ 381,064 $ 341,995
Taxes and other 18,535 35,553
Allowance for doubtful accounts (9,267) (7,518)
--------- ---------
$ 390,332 $ 370,030
========= =========
</Table>
5. INVENTORIES:
<Table>
<Caption>
2002 2001
-------- --------
Raw materials and work in process $175,050 $162,759
Finished goods 320,660 257,838
-------- --------
$495,710 $420,597
======== ========
</Table>
6. PROPERTY, PLANT AND EQUIPMENT:
<Table>
<Caption>
2002 2001
---------- ----------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------- ------------ ---------- ----------
Land $ 106,443 $ -- $ 106,443 $ 101,260
Buildings 581,125 105,003 476,122 473,106
Plant equipment 1,172,516 351,736 820,780 764,104
Dies and moulds 232,044 112,308 119,736 107,413
Office and computer equipment 54,804 35,071 19,733 22,064
Aircraft and transport equipment 35,630 19,797 15,833 39,421
---------- ---------- ---------- ----------
2,182,562 623,915 1,558,647 1,507,368
Assets not in use 78,402 -- 78,402 97,131
---------- ---------- ---------- ----------
$2,260,964 $ 623,915 $1,637,049 $1,604,499
========== ========== ========== ==========
</Table>
Assets not in use are expected to either be placed into productive use during
fiscal 2003 or disposed of during the next eighteen months. Assets not in use,
consist of land and buildings under construction of $24,776 (2001 - $24,799) and
plant equipment under construction of $53,626 (2001 - $72,332). Capital
expenditures during the year include $3,616 (2001 - $8,230) of capitalized
interest costs.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
7. GOODWILL AND OTHER ASSETS:
<Table>
<Caption>
2002 2001
--------- ---------
Goodwill, net of accumulated amortization
(2001 - $32,317) $226,203 $187,378
Patents, net of accumulated amortization of
$5,089 (2001 - $3,551) 13,253 7,339
Deferred financing costs, net of accumulated
amortization of $1,896 (2001 - $1,878) 2,067 2,059
--------- ---------
241,523 196,776
Investments 34,234 48,953
--------- ---------
$275,757 $245,729
========= =========
</Table>
Investments include the Company's holdings in associated companies and other
business ventures accounted for by the equity and cost methods.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<Table>
<Caption>
2002 2001
--------- ---------
Trade $202,215 $152,083
Taxes and other 55,109 59,389
--------- ---------
$257,324 $211,472
========= =========
</Table>
9. BANK INDEBTEDNESS AND TERM DEBT:
The Company has an authorized $700,000 (2001 - $700,000) revolving, unsecured
bank credit facility with a syndicate of banks, of which $63,152 was drawn at
September 30, 2002 (2001 - $147,118) and $345,830 (2001 - $281,000) was
committed as backup liquidity to outstanding amounts on the Company's commercial
paper program.
The Company may elect at any time to term out any drawn amount under the
364-day facility which shall then be outstanding on a non-revolving,
non-amortized basis, and be repayable in full within two years of the term-out.
The costs of the term-out would be the same as the current facility drawn
amounts.
The bank credit facility is for working capital requirements, acquisitions,
capital expenditures, and commercial paper backup liquidity lines and bears
interest at prime or at 0.675% (2001 - 0.675%) over bankers' acceptance rates or
LIBOR, plus a standby fee of 0.125% (2001 - 0.125%) on the undrawn portion of
the facility, payable quarterly in arrears. Additionally, utilization fees are
determined quarterly in arrears of 0.05% (2001 -0.05%) if 1/3 to 2/3 of the
facility is drawn and 0.10% (2001 - 0.10%) if greater than 2/3 of the facility
is drawn. The drawn fee and the standby fee are subject to variation if the
Company's term credit rating is adjusted.
The Company has an authorized $400,000 (2001 - $300,000) commercial paper
program in Canada. On September 30, 2002, $345,830 (2001 - $281,000) was issued
and outstanding, bearing rates at approximately 0.06% to 0.07% (2001 - 0.06% to
0.07%) over bankers' acceptance rates, plus a commission at 0.125%. The Company
typically issues current debt first under its commercial paper program and the
balance, if any, under its bank credit facility. This program is supported by
the bank credit facility.
The Company has an authorized $400,000 (2001 - $400,000) medium-term note
program in Canada. This program is unsecured, ranking pari passu with the bank
credit facility. On April 13, 2000, the Company issued $150,000 of notes bearing
a coupon rate of 6.90%, payable semi-annually in arrears, maturing April 13,
2010, at which time the notes are due in full.
The Company is subject to covenants under its various lending agreements.
The Company has private placements of unsecured senior notes outstanding as
follows:
o U.S. $50,000, bearing interest at 6.84%, due November 14, 2002. The Company
repaid these notes in full on the due date, borrowing on its bank facility;
o U.S. $60,000, bearing interest at 7.17% with equal annual principal
repayments due from August 2003 to 2006;
o U.S. $25,000, bearing interest at 7.31%, due August 2006; and
o U.S. $115,000, bearing interest at 7.10%, due November 2007.
9. BANK INDEBTEDNESS AND TERM DEBT (CONTINUED):
<Table>
<Caption>
2002 2001
--------- ---------
Bank indebtedness:
Commercial paper $345,830 $281,000
Bankers' acceptances advances -- 65,000
LIBOR advances (U.S. $40,000; 2001 - U.S. $52,000) 63,152 82,118
--------- ---------
408,982 428,118
Less cash 25,197 22,751
--------- ---------
Bank indebtedness $383,785 $405,367
========= =========
</Table>
<Table>
<Caption>
2002 2001
--------- ---------
Term debt:
Medium-term notes outstanding $ 150,000 $ 150,000
Senior notes outstanding (U.S. $250,000;
2001 - U.S. $265,000) 394,700 418,463
Other term debt requiring periodic principal repayments 6,344 7,137
Deferred foreign exchange loss (4,248) (6,104)
--------- ---------
546,796 569,496
Term debt due within one year (103,754) (24,635)
--------- ---------
Term debt $ 443,042 $ 544,861
========= =========
</Table>
Term debt principal repayments, using the year-end exchange rates, for the next
five fiscal years are as follows:
<Table>
2003 $103,754
2004 24,830
2005 24,830
2006 64,300
2007 1,033
Thereafter 328,049
--------
$546,796
========
</Table>
10. CAPITAL STOCK:
Authorized share capital of the Company consists of the following:
(a) Unlimited preference shares:
Preference shares are issuable in series, with the designation of rights,
privileges, restrictions and conditions to be determined by the Board of
Directors prior to the issue of the first shares of a series. None of these
shares are issued or outstanding.
(b) Unlimited subordinate voting shares and multiple voting common shares:
(i) Subordinate voting shares:
Each share is entitled to one vote per share at all meetings of
shareholders and shall participate equally as to dividends with each
multiple voting share.
(ii) Multiple voting shares:
Each share is entitled to 20 votes per share at all meetings of
shareholders and shall participate equally as to dividends with each
subordinate voting share. Each share may be converted at any time into a
fully paid subordinate voting share on a one-for-one basis, at the
shareholder's option.
In the event that either the subordinate voting shares or the multiple voting
shares are subdivided or consolidated, the other class shall be similarly
changed to preserve the relative position of each class. Under certain
conditions, the sale or transfer of multiple voting shares shall cause such
shares to be changed to subordinate voting shares.
32 | Royal Group Technologies Limited ANNUAL REPORT 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
10. CAPITAL STOCK (CONTINUED):
<Table>
<Caption>
SUBORDINATE VOTING MULTIPLE VOTING TOTAL TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ----------- ---------- -----------
Issued and outstanding, September 30, 2000 73,137,868 $ 587,302 17,635,444 $ 18,410 90,773,312 $ 605,712
Conversion 1,700,000 1,775 (1,700,000) (1,775) -- --
Issued for cash under stock option plan 284,688 3,064 -- -- 284,688 3,064
---------- ----------- ---------- ----------- ---------- -----------
Issued and outstanding, September 30, 2001 75,122,556 592,141 15,935,444 16,635 91,058,000 608,776
Issued for cash under stock option plan 2,159,617 23,921 -- -- 2,159,617 23,921
---------- ----------- ---------- ----------- ---------- -----------
Issued and outstanding, September 30, 2002 77,282,173 $ 616,062 15,935,444 $ 16,635 93,217,617 $ 632,697
========== =========== ========== =========== ========== ===========
</Table>
The Company maintains a stock option plan to allow management and key operating
personnel to purchase subordinate voting shares, substantially exercisable as to
half on or after three years from the date of issue, the balance after six years
from the date of issue. The maximum number of subordinate voting shares reserved
to be issued for options cannot exceed 15,850,000 and all options expire nine
years after the date of issue.
The number of stock options has varied as follows:
<Table>
<Caption>
2002 2001
------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------
Balance, beginning of year 9,752,838 $ 24.28 9,794,654 $ 24.34
Granted 2,216,779 26.16 580,000 21.95
Exercised (2,159,617) 11.47 (284,688) 11.16
Cancelled (146,483) 32.46 (337,128) 33.11
--------- --------- --------- ---------
Balance, end of year 9,663,517 27.45 9,752,838 24.28
--------- --------- --------- ---------
Options exercisable, end of year 3,962,694 $ 22.35 5,252,719 $ 17.41
========= ========= ========= =========
</Table>
The following table summarizes information about options outstanding at
September 30, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------------
RANGE OF EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES PER SHARE OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ ----------- -------------------------- ---------------- ----------- ----------------
$ 7.15 -- $17.63 1,316,394 1.4 $ 11.73 1,273,943 $ 11.61
$18.38 -- $29.90 4,360,623 6.3 25.43 1,893,094 24.51
$30.00 -- $36.00 1,799,750 5.1 32.61 549,000 32.74
$36.10 -- $46.60 2,186,750 4.4 36.70 246,657 38.10
--------- --------- --------- -------
9,663,517 27.45 3,962,694 22.35
========= ========= ========= =======
</Table>
11. EARNINGS PER SHARE:
Basic and diluted earnings per share have been calculated using the weighted
average and maximum dilutive number of shares, using the treasury stock method.
<Table>
<Caption>
2002 2001
--------------------------- --------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE COMMON AVERAGE COMMON
NUMBER OF SHARE NUMBER OF SHARE
COMMON SHARES AMOUNT COMMON SHARES AMOUNT
------------- ------- ------------- -------
Basic net earnings per common share 92,574,936 $ 1.40 90,869,248 $ 1.29
Dilutive effect of stock options 940,800 0.02 1,932,966 0.02
----------- ------- ------------ -------
Diluted net earnings per common share 93,515,736 1.38 92,802,214 1.27
=========== ======= ============ =======
</Table>
Dilutive effect of stock options exclude the effect of 5,156,100
(2001-5,047,483) "out of the money" options, as they are anti-dilutive.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
12. AMORTIZATION CHARGES:
<Table>
<Caption>
2002 2001
--------- ---------
Property, plant and equipment $ 116,223 $ 97,170
Goodwill (note 1(e)) - 5,893
Patents 2,085 1,569
--------- ---------
$ 118,308 $ 104,632
========= =========
</Table>
13. INTEREST AND FINANCING CHARGES:
<Table>
<Caption>
2002 2001
-------- --------
Interest expense:
Operating $ 12,751 $ 18,634
Term 36,368 31,856
Bank and financing charges 2,736 3,152
Amortization of deferred financing costs
and foreign exchange loss 2,226 2,904
-------- --------
$ 54,081 $ 56,546
======== ========
</Table>
14. INCOME TAXES:
Total income tax expense for the year ended September 30, 2002 was allocated as
follows:
<Table>
<Caption>
2002 2001
---------- ----------
Earnings before income taxes:
Canadian operations $ 205,127 $ 189,973
Foreign operations (16,958) (35,224)
---------- ----------
$ 188,169 $ 154,749
========== ==========
Current income tax expense:
Canadian operations $ 42,552 $ 40,552
Foreign operations (304) (9,201)
---------- ----------
42,248 31,351
Future income tax expense:
Canadian operations 17,752 8,935
Foreign operations (4,325) (2,285)
---------- ----------
13,427 6,650
---------- ----------
$ 55,675 $ 38,001
========== ==========
</Table>
Income tax expense attributable to earnings differs from the amounts computed by
applying the combined federal and provincial income tax rate of 33.12% (2001 -
34.2%) to pretax earnings as a result of the following:
<Table>
<Caption>
2002 2001
--------- ---------
Earnings before income taxes and minority interest $ 188,169 $ 154,749
--------- ---------
Expected income taxes based on an effective
manufacturing and processing income tax rate
of approximately 33.12% (2001 - 34.2%) $ 62,322 $ 52,924
Changes in income taxes attributed to:
Amortization of non-deductible goodwill
(2002 - nil; 2001 - $1,563) and future
income tax assets 307 2,382
Adjustment to future income tax assets and liabilities
for enacted changes in tax laws and rates (1,407) (9,000)
Reduction due to income earned in foreign jurisdictions (7,107) (6,679)
Non-taxable income and other 1,560 (1,626)
--------- ---------
$ 55,675 $ 38,001
========= =========
</Table>
In accordance with the Canadian income tax accounting standard (note 1(j)), the
effects of substantively enacted changes in federal or provincial income tax
rates on future income tax assets and liabilities are included in the Company's
consolidated financial statements. The effect of the enacted changes in the
provincial income tax rates is reported as a $1,407 (2001 - $9,000) reduction to
future income tax expense in fiscal 2002.
The Company has been granted tax incentives for its Poland and China
subsidiaries. These incentives are subject to certain conditions with which the
Company expects to comply.
The tax effects of temporary differences that give rise to significant
portions of the future income tax assets and liabilities at September 30, 2002
are presented below:
<Table>
<Caption>
2002 2001
--------- ---------
Future income tax assets:
Share issue costs $ 682 $ 2,453
Non-capital loss carryforwards 7,442 18,082
Other, including refundable taxes 1,700 3,312
9,824 23,847
--------- ---------
Less valuation allowance 1,000 1,000
--------- ---------
Future income tax assets $ 8,824 $ 22,847
--------- ---------
Future income tax liabilities:
Capital, intangible and other assets $(110,917) $(123,641)
Other (15,974) (3,846)
--------- ---------
Future income tax liabilities $(126,891) $(127,487)
========= =========
</Table>
15. SEGMENT REPORTING DATA:
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 Company's significant operating segments are:
(i) Product segment:
This segment represents production and sale of products predominately to the
renovation and retrofit market, which include custom profiles,
siding/roofing, window coverings, housewares and furniture, outdoor
products, pipe/fittings, commercial doors and various applications of the
building system used to construct a broad array of structures.
(ii) Support segment:
This segment represents materials, machinery, tooling and services provided
predominately to the product segment. It includes PVC resin and chemical
additives manufactured and utilized to produce compounds, as well as a
variety of recycled plastics and materials. Property management, equipment
and tooling construction and maintenance, 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 earnings before amortization and interest and
return on invested capital. The Company sells to a broad range of customers,
none of which accounted for more than 5.4% of net sales (2001 - 2.3%).
34 | Royal Group Technologies Limited ANNUAL REPORT 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
15. SEGMENT REPORTING DATA (CONTINUED):
The accounting policies for each of the segments are the same as those described
in Note 1. Inter-segment transactions are negotiated as if the transactions were
to third parties at market prices.
<Table>
<Caption>
2002 PRODUCT SUPPORT INTRA-GROUP CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
NET SALES $ 1,856,587 $ 615,643 $ (557,000) $ 1,915,230
EARNINGS BEFORE AMORTIZATION AND INTEREST 194,440 166,118 360,558
AMORTIZATION CHARGES 83,792 34,516 118,308
ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT AND GOODWILL 219,416 34,856 254,272
PROPERTY, PLANT AND EQUIPMENT 866,589 770,460 1,637,049
GOODWILL 187,045 39,158 226,203
TOTAL ASSETS 1,814,376 1,019,591 2,833,967
</Table>
<Table>
<Caption>
2002 PRODUCT SUPPORT INTRA-GROUP CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
Net sales $ 1,579,844 $ 663,442 $ (574,250) $ 1,669,036
Earnings before amortization and interest 153,382 162,545 315,927
Amortization charges 71,135 33,497 104,632
Acquisition of property, plant and equipment and goodwill 123,779 84,309 208,088
Property, plant and equipment 725,715 878,784 1,604,499
Goodwill 147,175 40,203 187,378
Total assets 1,518,816 1,175,495 2,694,311
</Table>
Virtually all intra-group sales relate to materials, machinery, tooling and
service transactions of the support segment.
Certain information with respect to geographic regions is presented below:
<Table>
<Caption>
2002 TOTAL CANADA U.S. OTHER FOREIGN
SALES
- ---- ---------- ------------------------------------------------
MANUFACTURED BY:
CANADIAN OPERATIONS $1,141,013 60% $ 564,051 $ 557,652 $ 19,310
U.S. OPERATIONS 651,044 34% 113 643,360 7,571
FOREIGN OPERATIONS 123,173 6% -- 146 123,027
$1,915,230 $ 564,164 $1,201,158 $ 149,908
100% 29% 63% 8%
PROPERTY, PLANT AND EQUIPMENT $1,637,049 $1,133,144 $ 336,263 $ 167,642
GOODWILL 226,203 84,674 131,016 10,513
</Table>
<Table>
<Caption>
2002 TOTAL CANADA U.S. OTHER FOREIGN
SALES
- ---- ---------- ------------------------------------------------
MANUFACTURED BY:
CANADIAN OPERATIONS $1,081,524 65% $ 557,475 $ 491,554 $ 32,495
U.S. OPERATIONS 447,697 27% -- 443,736 3,961
FOREIGN OPERATIONS 139,815 8% -- 4,194 135,621
$1,669,036 $ 557,475 $ 939,484 $ 172,077
100% 33% 56% 11%
PROPERTY, PLANT AND EQUIPMENT $1,604,499 $1,167,958 $ 268,346 $ 168,195
GOODWILL 187,378 84,620 92,245 10,513
</Table>
Royal Group Technologies Limited ANNUAL REPORT 2002 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
16. SUPPLEMENTARY CASH FLOW INFORMATION
(a) Items not affecting cash:
<Table>
<Caption>
2002 2001
--------- ----------
Amortization charges $ 118,308 $ 104,632
Amortization of deferred financing costs and
foreign exchange loss 2,226 2,904
Future income taxes 13,427 6,650
Other 19,981 24,593
--------- ----------
$ 153,942 $ 138,779
========= ==========
</Table>
(b) Change in non-cash working capital:
<Table>
<Caption>
2002 2001
---------- ----------
Accounts receivable $ (12,813) $ (5,538)
Inventories (47,879) (13,301)
Prepaid expenses 4,330 (1,178)
Accounts payable and accrued liabilities 20,442 (90,408)
---------- ----------
$ (35,920) $ (110,425)
========== ==========
</Table>
The changes noted above are exclusive of non-cash working capital acquired
through acquisitions.
17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
(a) Foreign exchange:
The Company has significant investments denominated in U.S. dollars, which
gives rise to a risk that its investments may be adversely impacted by
fluctuations in foreign exchange as measured against the Canadian dollar.
The Company uses U.S. dollar-denominated loans to hedge its U.S.
dollar-denominated investments. Any exchange gain or loss on these loans is
offset against the exchange loss or gain arising on translation of the
respective financial statements of the foreign operations included in the
currency translation adjustments caption shown as a separate component of
shareholders' equity.
(b) Derivative financial instruments:
The Company does not hold or issue financial instruments for trading
purposes and does not hold any derivative instruments.
(c) Concentration of credit risk:
Concentration of credit risks in accounts receivable are limited due to the
large number of customers comprising the Company's customer base throughout
the world. The Company performs ongoing credit evaluations of its customers
and establishes an allowance for doubtful accounts based on credit risk
applicable to particular customers, historical trends and other relevant
information.
(d) Fair values of financial instruments:
The fair values of accounts receivable, bank indebtedness, accounts payable
and accrued liabilities as recorded in the consolidated balance sheets
approximate their carrying amounts due to the short-term maturities of these
instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates of term debt are determined by references to
current market prices for debt with similar terms and risks. As at September
30, 2002, the fair value of the Company's senior notes exceeded the book
value of these obligations by $57,003 (2001 -$43,707) using year-end
exchange rates and discount rates ranging from 1.94% to 3.22%. As at
September 30, 2002, the fair value of the Company's medium-term notes
exceeded the book value of these obligations by $18,534 (2001 - nil) using a
discount rate of 5.15%.
18. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES:
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"). In
certain respects, accounting principles generally accepted in the United States
of America ("U.S. GAAP") differ from Canadian GAAP. The following is a summary
of the effect of significant differences in GAAP on the consolidated financial
statements.
(a) Description of GAAP differences:
(i) Foreign exchange on term debt:
Canadian GAAP requires that unrealized gains and losses on the
translation of long-term debt denominated in foreign currencies at
current exchange rates be deferred and amortized over the term of the
debt. Under U.S. GAAP, such gains and losses are charged to earnings
as period costs.
(ii) Substantively enacted tax laws and rates:
Canadian GAAP permits the recognition of the impact of substantively
enacted changes in tax laws and rates on the measurement of future
income tax assets and liabilities in the period those tax laws and
rates have been substantively enacted. U.S. GAAP does not recognize
the concept of substantively enacted tax laws and rates and only
allows recognition of the impact of a tax rate reduction on future
income tax assets and liabilities once it is passed into a law.
(iii) Derivative instruments and hedging activities:
Canadian GAAP does not require the reporting of derivative instruments
on the consolidated balance sheet at fair value. In the U.S., the
Financial Accounting Standards Board Statement 133 ("SFAS 133"),
Derivative Financial Instruments and Hedging Activities as amended by
SFAS 137, requires that the Company report all derivative instruments
on the consolidated balance sheet at fair value. Management has
determined that the impact of the adoption of FASB SFAS No. 133 on its
U.S. GAAP disclosure is not material.
(iv) Comprehensive income:
The Financial Accounting Standards Board in the United States issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a
full set of general purpose financial statements. SFAS 130 requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements.
(v) Incorporated joint ventures:
U.S. GAAP requires investments in incorporated joint ventures to be
accounted for under the equity method, while under Canadian GAAP, the
accounts of incorporated joint ventures are proportionately
consolidated. However, under rules promulgated by the SEC, a foreign
registrant may, subject to the provision of additional information,
continue to follow proportional consolidation for purposes of
registration and other filings notwithstanding the departure from U.S.
GAAP. Consequently, the additional information regarding the Company's
interest in joint ventures is presented in note 3.
(b) Net earnings in accordance with U.S. GAAP:
<Table>
<Caption>
2002 2001
--------- ---------
Net earnings in accordance with Canadian GAAP $ 129,160 $ 117,438
Impact on net earnings of U.S. GAAP adjustments:
Foreign exchange on term debt (note 18(a)(i)) 1,856 2,334
Tax effect of adjustments (614) (798)
Substantively enacted tax laws and rates (note 18(a)(ii)) -- 4,336
--------- ---------
Net earnings based on U.S. GAAP 130,402 123,310
Foreign currency translation adjustment (13,846) 4,963
--------- ---------
Comprehensive income based on U.S. GAAP $ 116,556 $ 128,273
========= =========
Earnings per share:
Basic $ 1.41 $ 1.36
Diluted 1.39 1.33
</Table>
36 | Royal Group Technologies Limited ANNUAL REPORT 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2002 and 2001
(In thousands of Canadian dollars, except per share amounts)
18. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED):
(c) Shareholders' equity in accordance with U.S. GAAP:
<Table>
<Caption>
2002 2001
---------- ----------
Shareholders' equity in accordance with Canadian GAAP $1,500,922 $1,361,687
Foreign exchange on term debt (note 18 (a)(i)) (4,248) (6,104)
Tax effect of adjustments 1,583 2,197
Substantively enacted tax laws and rates (note 18(a)(ii)) -- --
---------- ----------
Shareholders' equity in accordance with U.S. GAAP $1,498,257 $1,357,780
========== ==========
</Table>
(d) Effect on consolidated balance sheets and consolidated statements of
earnings: The application of U.S. GAAP would result in the following
presentation of these captions on the consolidated balance sheets and
consolidated statements of earnings:
<Table>
<Caption>
2002 2001
--------- ----------
Term debt $ 551,044 $ 575,600
Net future income tax liabilities 116,484 102,552
Tax provision 56,289 34,463
Interest and financing charges 52,225 54,146
--------- ----------
</Table>
(e) Other disclosures:
(i) Accounting for employee stock options:
U.S. GAAP encourages but does not require companies to record
compensation cost for stock option plans at fair value. The Company
accounts for stock options using the intrinsic value method as permitted
under U.S. GAAP. The United States accounting pronouncement, Financial
Accounting Standards Board No. 123 ("SFAS 123") does, however, require
the disclosure of pro forma earnings and earnings per share information
as if the Company had accounted for its employee stock options issued in
1995 and subsequent years under the fair value method. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions by year:
<Table>
<Caption>
Assumptions 2002 2001
--------- ---------
Risk-free interest rate 4.7% 5.4%
Expected life (in years) 4.9 4.0
Expected volatility 42.7% 34.7%
--------- ---------
Weighted average fair value of options granted $ 11.49 $ 7.78
========= =========
</Table>
Had compensation cost for the plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the method described
in SFAS 123, the Company's U.S. GAAP net earnings and net earnings per share
would have been reduced to the pro forma amounts indicated below:
<Table>
<Caption>
2002 2001
---------- ----------
Net earnings:
As reported $ 130,402 $ 123,310
Pro forma 120,751 117,018
Basic net earnings per share:
As reported 1.41 1.36
Pro forma 1.29 1.28
Diluted net earnings per share:
As reported 1.39 1.33
Pro forma 1.29 1.26
========== ==========
</Table>
18. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED):
(ii) Recent accounting pronouncements issued but not yet adopted:
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires an entity to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. The statement is effective for
fiscal years beginning after June 15, 2002. The Company does not expect
the adoption of SFAS No. 143 to have any impact.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to
a component of an entity that either has been disposed of (by sale,
abandonment, or in distribution to owners) or is classified as held for
sale. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company will adopt SFAS No.
144 for the fiscal year beginning October 1, 2002.
In July 2002, the FASB released SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires that a
liability be recognized for costs associated with exit or disposal
activities only when the liability is incurred, that is, when it meets
the definition of a liability under the FASB's conceptual framework.
SFAS 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities and
provides additional guidance for the recognition and measurement of
certain costs that are often associated with exit or disposal
activities. These costs are one-time termination benefits, contract
termination benefits, and other associated costs. The statement is
effective for exit and disposal activities initiated after December 31,
2002.
Effective October 1, 2002, the Company will adopt the new CICA
Handbook Section 3870 with respect to the accounting for stock-based
compensation and other stock-based payments. The new section requires
that a fair value based method of accounting be applied to all
stock-based payments to non-employees, and to employee awards that are
direct awards of stock, call for settlement in cash or other assets, or
are stock appreciation rights that call for settlement by the issuance
of equity instruments. The new recommendations are applied prospectively
to all stock-based payments granted on or after January 1, 2002 except
grants outstanding at January 1, 2002 that call for settlement in cash
or other assets or stock appreciation rights that call for settlement in
equity instruments. For such grants, the new recommendations are applied
retroactively, without restatement. The new standard will permit the
Company to continue its existing policy of recording no compensation
cost on the grant of stock options to employees with the addition of pro
forma information. As a result, the Company does not believe the
adoption of this standard will have a material impact upon the financial
statements.
The CICA Handbook Section 1650, amended November 2001 and effective
January 1, 2002, eliminates the deferral and amortization of unrealized
translation gains and losses on foreign currency denominated monetary
items that have a fixed or ascertainable life beyond the end of the
fiscal year. This amendment would require these gains and losses to be
included in income for the period. This amendment will be adopted by the
Company effective October 1, 2002 and applied retroactively with
restatement. The adoption of this section will result in the reversal of
the GAAP difference described in note 18(a)(i).
19. COMMITMENT AND CONTINGENCIES:
The Company has a long-term agreement for the annual purchase of up to 400
million pounds of vinyl chloride monomer from a North American supplier. The
contract is at market prices reflecting considerations for volume and term and
has a minimum duration of two years.
The Company has contingent liabilities under standby letters of credit
amounting to approximately $13,800 (2001 - $14,800) and U.S. $3,287 (2001 - U.S.
$4,700).
20. RELATED PARTY TRANSACTIONS:
During the year, the Company disposed of a corporate airplane and certain
non-strategic land parcels to shareholders for aggregate net cash proceeds of
$22,800, which was fair market value.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 37
SUPPLEMENTARY FINANCIAL INFORMATION
TWELVE-YEAR SUMMARY OF STATEMENTS OF EARNINGS(1)
For the years ended September 30
(In thousands of Canadian dollars, except per share amounts)
<Table>
<Caption>
2002 2001 2000 1999 1998 1997
-------- ---------- --------- --------- ---------- ---------
Net sales 1,915,230 1,669,036 1,549,481 1,282,004 1,050,103 848,741
Cost of sales and
operating expenses (1,554,672) (1,353,109) (1,179,107) (952,902) (799,103) (649,313)
Other income -- -- 8,025 -- -- --
Operating margin (EBITDA) 360,558 315,927 378,399 329,102 251,000 199,428
Percentage 18.8% 18.9% 24.4% 25.7% 23.9% 23.5%
Amortization charges (118,308) (104,632) (83,335) (67,134) (50,033) (43,624)
Interest and
financing charges (54,061) (56,546) (46,592) (31,377) (17,617) (9,155)
Earnings from operations 188,169 154,749 248,472 230,591 183,350 146,649
Management shareholder bonuses -- -- -- -- -- --
Unusual items -- -- -- -- (2,900) --
Earnings before income taxes
and minority interest 188,169 154,749 248,472 230,591 180,450 146,649
Income taxes (55,675) (38,001) (79,246) (79,182) (64,712) (52,721)
Earnings before
minority interest 132,494 116,748 169,226 151,409 115,738 93,928
Minority interest (3,334) 690 (109) (1,440) 355 (2,265)
Net earnings(1) 129,160 117,438 169,117 149,969 116,093 91,663
Earnings per share:
Basic $ 1.40 $ 1.29 $ 1.95 $ 1.75 $ 1.38 $ 1.13
Diluted(2) $ 1.38 $ 1.27 $ 1.89 $ 1.68 $ 1.32 $ 1.06
</Table>
<Table>
<Caption>
1996 1995 1994 1993 1992 1991
-------- ---------- --------- --------- ---------- ---------
Net sales 675,092 535,053 466,810 368,388 316,564 266,317
Cost of sales and
operating expenses (522,650) (423,444) (360,557) (286,904) (244,589) (212,128)
Other income -- -- -- -- -- --
Operating margin (EBITDA) 152,442 111,609 106,253 81,484 71,975 54,189
Percentage 22.6% 20.9% 22.8% 22.1% 22.5% 20.3%
Amortization charges (36,932) (28,095) (23,902) (20,552) (18,536) (17,841)
Interest and
financing charges (8,191) (9,895) (17,597) (20,387) (19,771) (25,002)
Earnings from operations 107,319 73,619 64,754 40,545 33,689 11,346
Management shareholder bonuses -- -- (8,079) (5,446) (1,979) (1,578)
Unusual items -- -- 5,815 -- -- --
Earnings before income taxes
and minority interest 107,319 73,619 62,490 35,099 31,689 9,768
Income taxes (38,772) (26,142) (18,982) (12,666) (10,527) (1,377)
Earnings before
minority interest 68,547 47,477 43,508 22,433 21,162 8,391
Minority interest (1,394) (864) (2,168) (734) (722) (195)
Net earnings(1) 67,153 46,613 41,340 21,699 20,440 8,196
Earnings per share:
Basic $ 0.87 $ 0.66 -- -- -- --
Diluted(2) $ 0.81 $ 0.59 -- -- -- --
</Table>
(1) 1994-91 pre IPO net earnings and operating margin are unadjusted on a
pro-forma basis. Royal commenced trading on the Toronto StockExchange in
November 1994.
2) Fiscal 1997-2000 fully diluted net earnings per share restated for adoption
of the Treasury Method of calculating fully diluted weighted average number
of shares in 2001.
38 Royal Group Technologies Limited ANNUAL REPORT 2002
QUARTERLY DATA(1)
[GRAPH OF QUARTERLY NET SALES]
[GRAPH OF QUARTERLY NET EARNINGS]
[GRAPH OF QUARTERLY NET BASIC EPS]
(In thousands of Canadian dollars, except per share amounts)
Currently the Company operates substantially in the North American
renovation, remodeling and construction markets, which are seasonal.
Accordingly, approximately three-fifths of Royal's net sales and operating
margin and two thirds of its net earnings occur in its last two quarters. As
such, sales, operating margins and net earnings as a percentage of sales have
historically been significantly different in the first two quarters, or on a
by-quarter basis, as compared to an annualized amount or rate.
<Table>
<Caption>
Q1 Q2 Q3 Q4 TOTAL
--------- -------- -------- -------- ----------
Corporate Operating Results - Fiscal 2002
Net sales 384,220 404,744 579,330 546,936 1,915,230
Operating margin (EBITDA) 78,300 81,563 124,234 76,461 360,558
Net earnings 24,867 26,207 56,382 21,704 129,160
Basic net earnings per share $0.27 $0.28 $0.61 $0.23 $1.40
Diluted net earnings per share $0.27 $0.28 $0.60 $0.23 $1.38
--------- -------- -------- -------- ----------
Corporate Operating Results - Fiscal 2001
Net sales 353,648 334,043 506,949 474,396 1,669,036
Operating margin (EBITDA) 72,407 32.214 115,117 96.189 315,927
Net earnings (loss) 22,725 (5,134) 49,873 49,974 117,438
Basic net earnings (loss) per share $0.25 ($0.06) $0.55 $0.55 $1.29
Diluted net earnings (loss) per share(2) $0.25 ($0.06) $0.54 $0.54 $1.27
--------- -------- -------- -------- ----------
Corporate Operating Results - Fiscal 2000
Net sales 320,128 334,508 459,835 435,010 1,549,481
Operating margin (EBITDA) 74,524 76,727 119,930 107,218 378,399
Net earnings 29,737 29,405 56,768 53,207 169,117
Basic net earnings per share $0.35 $0.34 $0.66 $0.60 $1.95
Diluted net earnings per share(2) $0.33 $0.33 $0.64 $0.58 $1.89
--------- -------- -------- -------- ----------
Corporate Operating Results - Fiscal 1999
Net sales 260,700 272,063 371,628 377,614 1,282,004
Operating margin (EBITDA) 59,477 63,631 99,282 106,712 329,102
Net earnings 25,083 25,445 47,715 51,726 149,969
Basic net earnings per share $0.29 $0.30 $0.56 $0.60 $1.75
Diluted net earnings per share(2)(3) -- -- -- -- $1.68
--------- -------- -------- -------- ----------
Corporate Operating Results - Fiscal 1998
Net sales 211,436 229,344 304,098 305,225 1,050,103
Operating margin (EBITDA) 46,346 47,558 78,180 78,916 251,000
Net earnings 18,402 19,028 39,725 41,838 118,993(4)
Basic net earnings per share $0.22 $0.23 $0.47(4) $0.49 $1.41(4)
Diluted net earnings per share(2)(3) -- -- -- -- $1.35(4)
--------- -------- -------- -------- ----------
</Table>
(1) Quarterly information is unaudited.
(2) 2000 quarterly and fiscal 1998-2000 fully diluted net earnings per share
restated for adoption of the Treasury Method of calculating fully diluted
weighted average number of shares in 2001.
(3) Restated quarterly fully diluted net earnings per share for 1998 and 1999
not available.
(4) Prior to $2,900 (or $0.03 per share) write down of non-core land in 1998.
Royal Group Technologies Limited ANNUAL REPORT 2002 | 39
SUPPLEMENTARY FINANCIAL INFORMATION
SALES BY PRODUCT LINE
<Table>
<Caption>
SEGMENTS ANNUAL NET SALES (IN MILLIONS OF DOLLARS)(1)
- -------- -----------------------------------------------------------------------
`02 `01 `00 `99 `98 `97 `96
----- ----- ----- ----- ----- ---- ----
HOME IMPROVEMENT PRODUCTS
Custom Profiles 702 518 488 419 347 330 287
Exterior Cladding 300 238 210 179 152 123 107
Residential Doors -- -- 8 25 19 19 18
CONSUMER PRODUCTS
Window Coverings 252 260 261 234 192 163 128
Outdoor Products 144 126 127 85 65 26 8
Housewares & Furniture 117 105 77 49 42 0 0
CONSTRUCTION PRODUCTS
Pipe & Fittings 212 187 178 149 114 106 78
Commercial Doors 25 24 22 20 16 13 0
ROYAL BUILDING SYSTEMS/FOREIGN OPERATIONS 105 122 113 82 77 44 28
----- ----- ----- ----- ----- ---- ----
TOTAL PRODUCT SEGMENT 1,857 1,580 1,484 1,242 1,024 824 654
===== ===== ===== ===== ===== ==== ====
Materials 434 371 392 293 194 171 134
Machinery & Tooling 63 87 79 93 90 37 22
Service 118 205 263 153 107 72 51
TOTAL SUPPORT SEGMENT 615 663 734 539 391 280 207
Intra-Group eliminations (557) (574) (669) (499) (365) (255) (186)
----- ----- ----- ----- ----- ---- ----
CONSOLIDATED NET SALES 1,915 1,669 1,549 1,282 1,050 849 675
===== ===== ===== ===== ===== ==== ====
</Table>
(1) Certain product line sales figures for prior years have been restated to
reflect the new presentation of product line sales data adopted in fiscal
2001.
40 | Royal Group Technologies Limited ANNUAL REPORT 2002
OUTSTANDING SHARE INFORMATION
as at September 30, 2002 and 2001
<Table>
<Caption>
2002 2001
---------- ----------
Multiple Voting Shares 15,935,444 15,935,444
Subordinate Voting Shares 77,282,173 75,122,556
---------- ----------
Total shares outstanding 93,217,617 91,058,000
</Table>
Total options outstanding as at September 30, 2002 are 9,663,517 (2001 -
9,752,838).
Dividend Policy: Royal's policy is to retain its earnings to finance growth and
development of its business. Royal does not expect to pay dividends in the
foreseeable future. The Board of Directors will review this policy from time to
time in the context of Royal's earnings, financial position and other relevant
factors.
DEBT RATINGS
<Table>
<Caption>
RATING AGENCY COMMERCIAL PAPER MEDIUM TERM NOTES
-------------- ---------------- -----------------
DBRS R-1 (low) A (low)
S&P n/a BBB
</Table>
TRADING DATA (STOCK SYMBOL: RYG)
<Table>
<Caption>
High Low Close Volume
(TSX) (TSX) (TSX) (000's)
TSX+NYSE
------ ------ ------ ---------
FISCAL 2002
FOURTH QUARTER 31.97 13.06 13.70 25,607
THIRD QUARTER 32.20 28.67 31.48 16,953
SECOND QUARTER 32.40 28.05 30.15 14,460
FIRST QUARTER 29.49 21.90 29.38 17,216
------ ------ ------ --------
TOTAL 74,236
Fiscal 2001
Fourth Quarter 30.00 19.94 23.95 12,763
Third Quarter 29.50 20.00 27.95 12,739
Second Quarter 27.20 18.55 23.25 12,135
First Quarter 31.40 16.10 18.75 12,740
------ ------ ------ --------
Total 50,377
</Table>
ROYAL GROUP'S SHARE PERFORMANCE
CUMULATIVE TOTAL RETURN ON INVESTMENT OF $C100
(September 1997 through September 2002)
[GRAPH OF ROYAL GROUP'S SHARE PERFORMANCE]
Royal Group Technologies Limited ANNUAL REPORT 2002 | 41
OUR SYSTEM OF CORPORATE GOVERNANCE
Ensuring sound business practices is a critical element of our accountability to
our stakeholders. Royal Group continues to implement a series of checks and
balances to further ensure good corporate governance.
Our Board, which is currently composed of four Independent, Non-Management
Directors and five Management Directors, plays an active role in governance. We
intend to add independent Directors during 2003, with the intention to have a
majority of Independent Directors before year end.
The Audit Committee of the Board of Directors is composed entirely of
Independent Directors, who are responsible for the appointment of the external
audit firm, approval of financial statements and forward-looking financial
guidance. Reports are now presented regularly to the Audit Committee,
highlighting Stakeholders' expectations, as well as questions or concerns. Our
approach to ensuring appropriate checks and balances is being augmented to
include our expanding internal auditing group, which reviews all of our key
financial statements.
Since 1987 KPMG LLP has provided external auditing services to Royal Group. A
number of safeguards have been established to ensure their independence from
Royal, including an independent review of their audit findings with the Audit
Committee.
Each of the members of the Board of Directors owns shares in Royal Group, with
total holdings of the Board representing 18% of total shares outstanding. No
loans are made to Directors or Management to purchase shares.
In light of recent corporate accounting scandals, legislative reforms have been
proposed to restore investor confidence, including certification of key
financial statements by the C.E.O. and C.F.O. Both Royal's C.E.O. and C.F.O.
intend to certify the statements in this report as part of our annual filings
with securities regulators in the United States, which are to be made in
February 2003.
Further information on Royal Group's approach to corporate governance can be
found on Royal's web site in the Investor Relations section and in the 2002
Management Information Circular.
[Signature] [Signature]
Vic De Zen Douglas Dunsmuir
Chairman and C.E.O. Director and President
January 1, 2003 January 1, 2003
42 | Royal Group Technologies Limited ANNUAL REPORT 2002
CORPORATE INFORMATION
<Table>
<Caption>
SIGNIFICANT
MANUFACTURING OPERATIONS
BOARD OF DIRECTORS TRANSFER AGENT AND REGISTRAR OUTSIDE OF CANADA & U.S.A.
- ------------------ ---------------------------- --------------------------
Vic De Zen Information regarding your shareholdings Product Segment:
Royal Group Technologies Limited may be obtained by writing or calling the Argentina:
Chairman and transfer agents: Royal Group Technologies del Sur S.A.
Chief Executive Officer Avenida 520, Ruta #2
Computershare Trust Company of Canada Km. 55, Abasto 1903 Parque Industrial
Douglas Dunsmuir 100 University Avenue, 9th Floor La Plata
Royal Group Technologies Limited Toronto, Ontario M5J 2Y1 Buenos Aires, Argentina
President Tel: 1-800-663-9097 or (416) 981-9633 Tel: (54-11) 4314-8997
Facsimile: (416) 981-9507 Fax: (54-11) 4813-2667
Gwain Cornish E-mail: caregistryinfo@computershare.com E-mail: info@royalhousing.com.ar
Royal Group Technologies Limited
Senior Vice President Co-Transfer Agent (U.S.A.) Brasil:
Computershare Trust Company Inc. Royal DoBrasil Technologies S.A.
Ron Goegan 12039 W. Alameda Parkway, Site 2-2 Ax Ceara 330- Conj. 401
Royal Group Technologies Limited Lakewood, CO 80228 CEP 90240-510-Porto Alegre
Chief Financial Officer Tel: (303) 956-5400 RS-Brasil
Fax: (303) 986-2444 Tel: (55-51) 3326-1608
Mario Cadorette Fax: (55-51) 3325-5583
Royal Window Coverings (Canada) Inc. SHAREHOLDER INQUIRIES E-mail: info@royalbrasil.com.br
President Responses to shareholder inquiries as well
as information published by the Company for China:
Gregory Sorbara* its shareholders and others, including Royal Building Systems (Shanghai) Limited
M.P.P., Vaughan, King, Aurora annual reports, quarterly reports and 328 Rongle Dong Lu
annual information forms may be obtained Songjiang Industrial Zone
Ronald Slaght* from: Songjiang, Shanghai 201613
Lenczner Slaght Royce Smith Griffin China
Barristers, Partner Investor Relations Tel: (86-21) 5774-3802
Royal Group Technologies Limited Fax: (86-21) 5774-2340
Ralph Brehn* 1 Royal Gate Blvd., E-mail: srbs@public.sta.net.cn
Retired former President Woodbridge, Ontario L4L 8Z7
of Hunter Douglas Canada Ltd. Telephone: (905) 264-0701 Colombia:
Facsimile: (905) 264-0702 Royalco S.A.
Irvine Hollis E-mail: info@royalgrouptech.com Via a Mamonal Km. 5
Former President of Duracell Inc. Web site: www.royalgrouptech.com Presently Management Consultant,
I Hollis Management Sector Puerta de Hierro
Consultants Inc. ANNUAL MEETING Apartado 6397
Management Consultant The annual meeting of shareholders of Royal Cartagena, Colombia
Group Technologies Limited will be held Tel: (57-1) 622-2266
* Member of Audit Committee February 20, 2003. The notice of and proxy Fax: (57-1) 622-9246
materials were mailed to shareholders with E-mail: info@royalcosa.com
EXECUTIVE OFFICERS this report.
Mexico:
Vic De Zen STOCK EXCHANGE LISTINGS Royal Building Systems de Mexico, S.A.
Chairman and Subordinate Voting Shares are listed on de C.V.
Chief Executive Officer The Toronto Stock Exchange Calle Adair, Lote 6, Manzana 4
and the New York Stock Exchange. Parque de la Pequena y Mediana Industria
Douglas Dunsmuir Symbol: RYG Puerto Industrial de Altamira
President Altamira, Tamaulipas,
INDEX LISTINGS C.P. 89609 Mexico
Gwain Cornish S&P/TSX Composite Index Tel: (52-55) 26-25-15-00
Senior Vice President S&P/TSX 60 Index Fax: (52-55) 53-43-05-80
E-mail: atencionaclientes@royalmex.com.mx
Ron Goegan AUDITORS
Chief Financial Officer KPMG LLP, Chartered Accountants Poland:
Suite 3300, Commerce Court West Royal Europa Sp. z.o.o
Lu Galasso 199 Bay Street ul. Royal 1
Vice President and Director of Taxation Toronto, Ontario M5L 1B2 59-320 Polkowice Dolne
Poland
Tel: (48-76) 847-0080
Fax: (48-76) 847-0086
E-mail: info@royaleuropa.com
Support Segment:
AMUT S.P.A.
Novara, Italy
Ariostea S.P.A.
Reggio Emilia, Italy
Ce rapport est egalement publie en
francais.
</Table>
Royal Group Technologies Limited ANNUAL REPORT 2002 43
THE ROYAL FAMILY OF BRANDS
[LOGOS -- ROYAL FAMILY OF BRANDS]
Home Improvements Consumer Products
[LOGO -- ROYAL FAMILY OF BRANDS]
BUILDING A BETTER WORLD(TM)
With a strategic focus on quality and innovation, Royal has emerged as a leader
in the home improvement, consumer and construction products industries.
You will increasingly see the Royal Crown, in conjunction with the
Royal family of brands, identifying our products.
Look for the Royal Crown as a symbol identifying quality and innovation
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 "expects", "should continue", "believes",
"anticipates", "estimated" and "intends" or similar formulations. By their
nature, these forward-looking statements involve known and unknown risks,
uncertainties and other factors affecting Royal specifically or its industry
generally that could cause actual performance and financial results to differ
materially from those contemplated by the forward-looking statements. These
risks and uncertainties include 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 revenues related to sales price increases, consolidation and
restructuring programs, 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 (particularly markets in
developing countries), 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, changes in
environmental 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 January 1, 2003 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.
Designed and Produced by: Artifex Design Group Inc., Printing: Mediavision
International Inc., Translation: Espace-Temps Inc.
[LOGO ROYAL GROUP TECHNOLOGIES]