[Royal Group Technologies Limited logo]
June 13, 2006
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Nili Shah
Branch Chief
Re: Royal Group Technologies Limited ("Royal", "we" or the "Company")
Form 40-F for the Fiscal Year ended December 31, 2005
File No. 1-14242
Dear Ms. Shah:
We hereby acknowledge receipt of the comment letter dated May 19, 2006 (the
"Comment Letter") from the staff (the "Staff") of the Securities and Exchange
Commission (the "Commission") concerning the above captioned Annual Report on
Form 40-F for the fiscal year ended December 31, 2005.
We submit this letter in response to the Comment Letter. For ease of reference,
we have reproduced the text of the comments in bold-face below, followed by our
responses.
Note 4. Discontinued operations and asset held for sale, page 20
- ----------------------------------------------------------------
1. In your response dated March 30, 2006, you included attachment 7C, which
provided your analysis as to whether a number of operations met the
criteria for assets held for sale and discontinued operations
presentation as of September 30, 2005. Please update us on the status of
each of the five operations you discuss in this attachment as of
December 31, 2005. As part of your response, please update us on your
consideration of paragraphs 30-37, 41-43, and 46 of SFAS 144 with
respect to these five operations as of December 31, 2005.
1 Royal Gate Blvd., Woodbridge, Ontario, Canada L4L 8Z7
Tel.: (905) 264-0701 Fax: (905) 264-0702
Response:
The following is an update on the status of each of the five operations
identified by the Company as either Assets held for Sale or Discontinued
Operations
A. BUSINESSES SOLD
1. Baron Metal Industries Inc. ("Baron")
On November 22, 2005, the Company agreed to an offer made to them by
CS Management Inc. (the "offeror") to purchase the shares of Baron
(the "Purchase Offer") for proceeds of Cdn $27.0 million. As of
December 31, 2005, the Company's investment in Baron had a carrying
value of Cdn $16.6 million. There was no support to suggest that its
fair value less costs to sell was lower than its carrying amount.
The Company will no longer be recognizing in its ongoing operations
sales from commercial steel doors and frame products into the world
marketplace. This would indicate that the resultant operations and
cash flows previously generated as a direct result of this type of
sale will no longer be recognized into the results of operations of
the Company. The Company will not have any continuing involvement
with the operations after disposal. On April 7, 2006 the company
completed the sale of Baron. See Appendix A for consideration of
SFAS 144.
Conclusion: Reclassify as assets held for sale at its carrying
amount and apply discontinued operations treatment to results of
operations.
2. 1284825 Ontario Limited ("1284825") - 1284825 owner of Royal
Alliance Inc. ("Gracious")
On October 25, 2005, the Company agreed to an offer made to them by
Enzo Macri Holdings Corp. and Vito Galloro Holdings Corp. (the
"offerors") to purchase the shares of Gracious (the "Purchase
Offer") for proceeds of Cdn $35.1 million. As of December 31, 2005,
the Company's investment in Gracious had a carrying value of Cdn
$68.8 million. There was support to suggest that its fair value less
costs to sell was lower than its carrying amount by Cdn $33.7
million therefore a write-down on the investment was taken. The
Company will no longer be recognizing in its ongoing operations
sales from housewares, and garden furniture. The Company will have
continuing cash flows from the disposed of operations in the form of
note repayments however; these repayments are not the result of a
migration or continuation of activities but are the result of
providing financing terms on the sale. This would indicate that the
resultant operations and cash flows previously generated as a direct
result of this type of sale will no longer be recognized in to the
results of operations of the Company. The Company will not have any
continuing involvement with the operations after disposal. On
January 12, 2006, the company completed the sale of 1284825. See
Appendix A for consideration of SFAS 144.
2
Conclusion: Reclassify as assets held for sale at its fair value
less costs to sell and apply discontinued operations treatment to
results of operations.
3. Ontario Water Products Inc. ("OWP")
On January 5, 2006, the Company agreed to a draft share purchase
agreement made to them by Terasen Waterworks (Supply) Inc., (the
"offeror") to purchase the shares of OWP (the "Draft Share Purchase
Agreement") for proceeds of Cdn $26.2 million. As of December 31,
2005, the Company's investment in OWP had a carrying value Cdn $18.3
million. There was no support to suggest that its fair value less
costs to sell was lower than its carrying amount. The Company will
continue to recognize in its ongoing operations revenues from
distribution activities associated with water and sewer products
used in the construction industry in Ontario. This would indicate
that the resultant operations and cash flows previously generated as
a direct result of this type of sale will continue to be recognized
into the results of operations of the Company. The Company will not
have any continuing involvement with the operations after disposal.
On May 31, 2006, the company completed the sale of OWP. See Appendix
A for consideration of SFAS 144.
Conclusion: Reclassify as assets held for sale at its carrying
amount.
B. BUSINESSES HELD FOR SALE
4. Roadex Transport Ltd. ("Roadex")
On January 6, 2006, the Company received a proposal by Ryder
Integrated Logistics (the "offerors") to enter into a Logistics
Services Request for Proposal to purchase the Roadex Equipment (the
"Logistics Proposal") for proceeds of Cdn $3.0 million. As of
December 31, 2005, the Company's investment in Roadex had a carrying
value of Cdn $2.3 million. There was no support to suggest that its
fair value less costs to sell was lower than its carrying amount.
The Company will continue to recognize in its ongoing operations
expenditures from freight services. This would indicate that the
resultant operations and cash flows previously generated as a direct
result of this type of sale will continue to be recognized in to the
results of operations of the Company. The Company will not have any
continuing involvement with the operations after disposal. See
Appendix A for consideration of SFAS 144.
Conclusion: Reclassify as assets held for sale at its carrying
amount.
5. American Building Products Corporation ("ABP") and Royal Europa
Sp.Zo.o ("Europa"), collectively ("Poland Operation")
On January 23, 2006, the Company agreed to revisions to the original
Letter of Intent provided July 25, 2005, by Bogdan Fusiek (the
"offeror") to purchase the shares of ABP and Europa (the "Letter of
Intent") for proceeds of US $7.6 million (Cdn $8.9
3
million). As of December 31, 2005, the Company's investment in
Poland Operations had a carrying value of Cdn $54.9 million. There
was support to suggest that its fair value less costs of sell was
lower than its carrying amount by Cdn $46.0 million therefore a
write-down on the investment was taken. The Company will no longer
be recognizing in its ongoing operations sales from RBS products
into the Poland region marketplace. This would indicate that the
resultant operations and cash flows previously generated as a direct
result of this type of sale will no longer be recognized into the
results of operations of the Company. The Company will not have any
continuing involvement with the operations after disposal. See
Appendix A for consideration of SFAS144.
Conclusion: Reclassify as assets held for sale at its fair value
less costs to sell and apply discontinued operations treatment to
results of operations.
Note 17. Income taxes, page 38
- ------------------------------
2. We note that you increased your valuation allowance in 2005 from $1,000
to $27,002 to fully provide for your net US deferred tax assets. Please
explain to us in detail the circumstances that changed in 2005 that
resulted in the need for this additional valuation allowance. As part
of your response, please specifically address what has changed since
your letter dated January 27, 2006, which asserted the realizability of
your net US deferred tax asset as of December 31, 2004.
Response:
In our letter dated January 27, 2006, we responded to two questions
regarding our support for recording the benefit of the US losses at
December 31, 2004. Our responses addressed the facts and circumstances
in front of the Company at that time. There have been significant
changes in the Company's circumstances since December 31, 2004 and
therefore the Company's accounting for the US losses changed
accordingly. The discussion below outlines the changes and their impact
on the accounting treatment for the US losses.
As noted above, there were significant changes in Company's
circumstances since December 31, 2004. The changes relevant to valuing
the losses are as follows: (i) During fiscal 2005, the US region
incurred further losses and thereby increased the period in which the
US region incurred losses by another year, (ii) As at year-end,
management made the decision to unwind the US financing structure and
that unwind was completed by March 15, 2006 and prior to the release of
the December 31, 2005 financial statements.
Additional Year of Losses
In fiscal 2005, the US group recorded further losses of $26.3 million
of which $11.3 million relate to the US financing structure. FAS 109
(23) states that forming a conclusion
4
that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years. The
additional losses in 2005 extend the loss period in the US group from
September 2002 to December 2005. Given the history of losses in the US
group, FAS 109(23) indicates that it will be very difficult to conclude
that a valuation allowance is not needed in respect of US tax
attributes.
Change in Tax Planning Strategies
At the time of our previous response dated January 27, 2006, the
Company had a significant loan made to the US group under a financing
structure. Due to annual maintenance, income tax and related compliance
costs, at fiscal year end 2005, management had made the decision to
unwind the financing structure. In our previous response we noted that
if the Company were to adopt the strategy to forgive the loan,
sufficient taxable income would arise in the US group and that such
income would consume the ordinary business losses in the US. The
financing structure was unwound on March 15, 2006 and the inter-company
loan was contributed to the capital of the US group. The unwind was
completed without creating any Canadian or US taxable income. As a
consequence, the Company no longer has any prudent and feasible tax-
planning strategies to utilize the US losses. Thus the arguments under
FAS 109(22) that were available to the Company at December 31, 2004
could no longer be made and the Company did not have a tax-planning
strategy that could result in the entire consumption of the US losses.
Quantifying the Impact of Changes in Circumstance
FAS 109(25) states that the weight given to the potential effect of
negative and positive evidence should be commensurate with the extent
to which such evidence can be objectively verified. As communicated to
you in our prior letters, the US group owns appreciated land and
buildings that if sold, could result in taxable income to the group.
This continues to be viewed as positive evidence. The amount of the
expected gain on the sale of all appreciated property as previously
represented to you was approximately US$24,659,606. However, it is
unclear that at this time that the Company is willing to sell the
appreciated US real estate because the real estate is currently used to
house the Company's US business.
Given that the only positive objective evidence identified was not
substantial when weighed against the negative evidence, the Company
concluded that a valuation allowance should be taken. Given that the
negative objective evidence substantially outweighs the positive, it
was reasonable to take a substantial valuation allowance against the
favourable US timing differences. The US net tax asset is comprised of
a future tax liability in respect of differences between book and tax
cost and a future tax asset related to losses and other timing
differences. In addition, the future tax liabilities will reverse in
the periods that the future tax assets will expire reducing the US
future tax asset to nil.
5
Therefore the Company took the position that amount of the valuation
allowance should be equal to the amount of the net US tax asset.
Note 18. Segment reporting data, page 41
- ----------------------------------------
3. We note that your chief operating decision maker evaluates performance
based on pre-tax earnings before amortization and interest. Please
disclose this profit and loss measure by segment in future filings. See
paragraph 29 of SFAS 131.
Response:
Effective June 30, 2006, the Company will disclose pre-tax earning
before amortization and interest as part of the segment reporting data.
4. We note your response to prior comment 3 in our letter dated April 12,
2006. Please be advised of the following:
o In determining operating segments, we expect companies to consider
the total mix of information received by the chief operating
decision maker (CODM). We would further expect that if a CODM
receives information regarding a portion of the company, he uses it
in some form to assess performance and allocate resources.
Accordingly, we would consider custom window profiles, interior and
exterior mouldings, pipes and fittings, building systems, deck fence
& railing, and outdoor storage to each represent and operating
segment.
o In determining whether your operating segments are economically
similar for the purposes of aggregating into one reportable segment,
you should consider only historical economic indicators based on the
guidance in paragraph 74 of SFAS 131, which specially precludes the
use of expectations of long-term economic performance.
o With respect to the aggregation of custom window profiles with
interior and exterior mouldings, we expect you to continue to re-
evaluate the aggregation of these two operating segments in future
periods. If, in the future, your actual revenue growth for these two
operating segments trend in a materially different manner or if
gross margin percentages and changes in gross margin percentages are
materially different from your projections, we expect separate
presentation of these two operating segments.
o With respect to the aggregation of deck fence & railing with outdoor
storage, we caution you that, based on your projections of gross
margin percentages and changes in gross margin percentages, these
two operating segments appear to be diverging in future years such
that they do not appear to be economically similar. Accordingly,
separate presentation of these two operating segments in the future
may be warranted.
6
o With respect to the aggregation of pipes and fittings with building
systems, we note that you will separately present building systems
if it becomes material. Accordingly, we have no further comments at
this time. Please note that we will continue to monitor each of the
points above and may have comments in this area in the future.
Response:
The company will continue to monitor each of these issues and will
make the necessary adjustments when the situation warrants.
5. We have reviewed your response to comment 5 in our letter dated April
12, 2006, as well as your revised segment disclosures in your 2005 Form
40-F. We note that your market capitalization continues to remain below
the book value of your equity. In response 3 of your letter dated
October 27, 2005, you cite four reasons your market capitalization is
less than the book value of your equity. However, despite new
management, new corporate governance, and the elimination of the
multiple voting share structure, this continuing difference suggests an
impairment charge may be warranted. In addition, we note a decline in
consolidated operating income and operating cash flows, as well as a
decline in the revenues and gross profit of the majority of your
reportable segments.
Accordingly, please provide us with an impairment analysis for each
reporting unit as of year-end that supports your estimate that goodwill
was recoverable for each one of your components. In addition, please
summarize the following for us:
o The amount of goodwill at each reporting unit at December 31, 2005.
o The estimated fair value and the carrying amount of each reporting
unit as of December 31, 2005.
o Your assumptions, such as discount rates, cash flows, expected
growth rates, and any others, used in determining your estimate of
fair value for each of your reporting units, as well as your basis
for the assumptions used. Your response should reconcile and
explain, in detail, any differences between your projected growth
rates in revenues and cash flows. Please also be advised that these
assumptions should be consistent with those used for internal
planning purposes. Accordingly, please address why your projections
indicate recoverability of your goodwill, but at the same time,
indicate that your deferred tax asset is no longer realizable.
o A sensitivity analysis showing the effect of a 1% change in each of
these assumptions.
7
Response:
Attached in Appendix B is the information you have requested above,
including our calculation of the Enterprise Value (Fair Market
Value) of each reporting unit and our Goodwill Impairment Analysis
of Each Reporting Unit.
The impairment analysis at December 31, 2005 is based on the
Company's new segments adopted for fiscal 2005 and management's
strategic plan developed in 2005. The assumption used in the
calculation of the reporting units enterprise value (fair market
value) are based on management's new strategic plan developed in
2005 and the new segments adopted for 2005. These are consistent
with the assumptions used by management for internal planning
purposes. These assumptions differ from our historical rates for
growth in revenues and cash flows due to the fact that they are
based on changes planned in the businesses as a result of
management's restructuring and improvements identified in the new
strategic plan.
Projections used in the Company's goodwill impairment test are based
on the results of the total company, including both Canada and the
U.S. operations, and a 5-year time period. The assumptions and
projections used in determining that the Company's deferred tax
asset is no longer realizable are based on the results of the U.S.
operations only and the requirements of FAS 109. This includes
negative evidence such as cumulative actual losses in recent years
and actions available to us in prior periods to utilize the deferred
tax assets that are no longer available to the Company. This is
discussed further in Item 2 of this response letter.
Appendix B includes the revised fair market value of each reporting
unit based on a 1% change in the discount rate used, as requested
above.
* * * * *
8
We would like to express our appreciation to the Staff for providing their
comments and reviewing our responses.
Sincerely,
/s/ James G. Lawn
James G. Lawn
Chief Financial Officer
Attachments
cc: Scott Bates, Royal Group Technologies Limited
Audit Committee, Royal Group Technologies Limited
Gus Rodriguez, Securities and Exchange Commission
Jennifer Mazin, Shearman & Sterling LLP
Scott Wetmore, KPMG LLP
9
Appendix A - Consideration of SFAS 144
Period End December 31, 2005
BALANCE SHEET - LONG-LIVED ASSETS TO BE DISPOSED OF BY SALE
A1. Recognition Criteria
Financial Accounting Standard ("FAS") Section 144 Paragraph 30- A long-lived
asset (disposal group) to be sold shall be classified as held for sale in the
period in which all of the following criteria are met:
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
(a) management, having the authority to YES YES YES YES YES
approve the action, commits to a plan to
sell the asset (disposal group);
---------------------------------------------------------------------------------------------
(b) the asset (disposal group) is available YES YES YES YES YES
for immediate sale in its present
condition subject only to terms that are
usual and customary for sales of such
assets (disposal groups);
---------------------------------------------------------------------------------------------
(c) an active program to locate a buyer and YES YES YES YES YES
other actions required to complete the
plan to sell the asset (disposal group)
have been initiated;
---------------------------------------------------------------------------------------------
(d) the sale of the asset (disposal group) YES YES YES YES YES
is probable, and transfer of the asset
(disposal group) is expected to qualify
for recognition as a completed sale,
within one year, except as permitted by
paragraph 31;
---------------------------------------------------------------------------------------------
(e) the asset (disposal group) is being YES YES YES YES YES
actively marketed for sale at a price
that is reasonable in relation to its
current fair value; and
---------------------------------------------------------------------------------------------
(f) actions required to complete the plan YES YES YES YES YES
indicate that is unlikely that
significant changes to the plan will be
made or that the plan will be withdrawn.
---------------------------------------------------------------------------------------------
FAS Section 144 Paragraph 31 - Events or circumstances beyond an entity's
control may extend the period required to complete the sale of a long-lived
asset (disposal group) beyond one year.
FAS Section 144 Paragraph 32 - A long-lived asset (disposal group) that is newly
acquired and that will be sold rather than held and used shall be classified as
held for sale at the acquisition date only if the one-year requirement in
paragraph 30(d) is met and any other criteria in paragraph 30 that are not met
at that date are probable of being met within a short period following the
acquisition (usually within three months).
Page 1 of 4
Appendix A - Consideration of SFAS 144
Period End December 31, 2005
FAS Section 144 Paragraph 33 - If the criteria in paragraph 30 are met after the
balance sheet date but before issuance of the financial statements, a long-lived
asset shall continue to be classified as held and used in those financial
statements when issued.
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
P31 Completion of sale likely to extend NO - sold NO - sold NO - sold NO NO
beyond one year? in 2006 in 2006 in 2006
-------------------------------------------------------------------------------------------------
P32 Newly acquired? NO NO NO NO NO
-------------------------------------------------------------------------------------------------
P33 Criteria met after balance sheet date? No - NO - NO - NO - NO -
prior to prior to prior to prior to prior to
-------------------------------------------------------------------------------------------------
B1. Measurement Criteria
FAS Section 144 Paragraph 34 - A long-lived asset (disposal group) classified as
held for sale shall be measured at the lower of its carrying amount or fair
value less cost to sell.
FAS Section 144 Paragraph 35 - Costs to sell are the incremental direct costs to
transact a sale, that is, the costs that result directly from and are essential
to a sale transaction and that would not have been incurred by the entity had
the decision to sell not been made.
FAS Section 144 Paragraph 36 - The carrying amounts of any assets that are not
covered by this Statement, including goodwill, that are included in a disposal
group classified as held for sale shall be adjusted in accordance with other
applicable generally accepted accounting principles prior to measuring the fair
value less costs to sell of the disposal group.
FAS Section 144 Paragraph 37 - A loss shall be recognized for any initial or
subsequent write-down to fair value less cost to sell.
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
P34 Investment - Lower of its carrying Carrying Fair Carrying Carrying Fair
amount or fair value less costs to sell. amount value amount amount value
-------------------------------------------------------------------------------------------------
P35 Costs to sell? YES YES YES YES YES
-------------------------------------------------------------------------------------------------
P36 Carrying amount of other assets NO YES - NO NO YES -
adjusted? goodwill goodwill
-------------------------------------------------------------------------------------------------
P37 Initial or subsequent write-down to fair NO - sold YES - NO - sold NO - YES - fair
value? April 7, sold May 31, March 31, value -
2006. January 2006. 2006 - March 31,
12, 2006. Offer Cdn 2006 -
$3.0 Offer Cdn
million, $8.0
Investment million,
Cdn $2.0 Investment
million. Cdn $53.9
million.
-------------------------------------------------------------------------------------------------
REPORTING DISCONTINUED OPERATIONS
C1. Recognition Criteria
FAS Section 144 Paragraph 41 - For the purposes of this Statement, a component
of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity.
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
Page 2 of 4
P41 Entity a component? YES YES YES YES YES
-------------------------------------------------------------------------------------------------
Page 3 of 4
Appendix A - Consideration of SFAS 144
Period End December 31, 2005
FAS Section 144 Paragraph 42 - The results of operations of a component of an
entity that either has been disposed of or is classified as held for sale shall
be reported in discontinued operations in accordance with paragraph 43 if both
of the following conditions are met:
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
(a) the operations and cash flows of the YES YES NO NO YES
component have been (or will be)
eliminated from the ongoing operations
of the entity as a result of the
disposal transaction; and
-------------------------------------------------------------------------------------------------
(b) the entity will not have any significant YES YES YES YES YES
continuing involvement in the operations
of the component after the disposal
transaction.
-------------------------------------------------------------------------------------------------
FAS Section 144 Paragraph 43 -
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
In a period in which a component of an YES YES N/A N/A YES
entity either has been disposed of or is
classified as held for sale, the income
statement of a business enterprise for
current and prior periods shall report
the results of operations of the
component, including any gain or loss
recognized in accordance with paragraph
37, in discontinued operations.
-------------------------------------------------------------------------------------------------
FAS Section 144 Paragraph 46 -
-------------------------------------------------------------------------------------------------
Criteria Baron Gracious OWP Roadex Poland
-------------------------------------------------------------------------------------------------
A long-lived asset classified as held YES YES YES YES YES
for sale shall be presented separately
in the statement of financial position.
-------------------------------------------------------------------------------------------------
The assets and liabilities of a disposal YES YES YES YES YES
group classified as held for sale shall
be presented separately in the asset and
liability sections, respectively, of the
statement of financial position. Those
assets and liabilities shall not be
offset and presented as a single amount.
-------------------------------------------------------------------------------------------------
The major classes of assets and Notes to Notes to Notes to Notes to Notes to
liabilities classified as held for sale financial financial financial financial financial
shall be separately disclosed either on statement statement statement statement statement
the face of the statement of financial (4A) (4A) (4B) (4B) (4A).
position or in the notes to financial
statements.
-------------------------------------------------------------------------------------------------
Page 4 of 4
APPENDIX B
ROYAL GROUP TECHNOLOGIES LIMITED
GOODWILL IMPAIRMENT ANALYSIS OF REPORTING UNITS
All figures are based on numbers and calculations as at December 31, 2005
(in thousands of Canadian dollars)
Interior & Deck, Window
Custom Exterior Building Construction Fence & Outdoor Covering
Name of Reporting Unit Profiles Mouldings Product Products Railing Storage Products Materials Support Total
-------- ---------- -------- ------------ ------- ------- -------- --------- ------- --------
Book Value of Goodwill (1) 88,736 20,592 20,248 20,342 7,552 6,335 11,824 9,400 9,326 194,355
Carrying Value (2) 335,806 77,620 129,481 186,191 44,221 43,676 120,972 138,561 28,642 1,405,170
Estimated Fair Value 822,000 231,000 227,000 228,000 85,000 71,000 133,000 298,000 294,000 2,389,000
(6)
Assumptions:
Discount Rate (3) 11.07% 11.07% 11.07% 11.07% 11.07% 11.07% 11.07% 11.07% 11.07%
Final Year EBITDA Multiplier 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
Net Free Cash Flow - 5 year
(4,5)
2006 55,300 3,800 11,000 9,500 (5,900) (7,600) 3,000 33,100 31,900 134,100
2007 77,700 10,100 20,500 22,300 5,900 (2,000) 12,500 35,800 46,000 228,800
2008 86,500 22,100 22,500 27,300 11,400 9,900 15,600 34,500 37,000 266,800
2009 85,000 22,600 24,900 25,900 10,600 10,500 14,900 30 600 37,500 262,500
2010 89,000 23,500 25,400 26,900 11,000 10,800 15,500 32,100 39,100 273,300
Sensitivity Analysis -
Estimated Fair Value based
on a discount rate of 12.0%: 793,000 222,000 219,000 220,000 81,000 68,000 128,000 288,000 285,000 2,304,000
Notes:
(1) Goodwill of the old segments has been allocated to the new segments based on
the relative estimated fair values of the new segments as at December 31,
2005.
(2) Invested Capital is used as a basis for determining carrying value for the
purposes of goodwill impairment test.
(3) This is the mid-point in the range of discount rates calculated.
(4) Annual net free cash flows is based on 12 month fiscal year ending December
31.
(5) The starting point for the calculation of net free cash flow is EBITDA.
2006 - 2009 EBITDA based on original forecast adjusted for various
initiatives developed through the strategic planning process. EBITDA growth
rate for 2010 is 5%. Growth rate for capital spending after 2008 is 3%.
2006 - 2009 growth rate for net free cash flow varies for each reporting
unit due to other variables used in determining this calculation, such as
the allocation of depreciation, capital expenditures and changes in working
capital.
(6) While the Invested Capital exceeds the estimated FMV of the Support
Reporting Unit (primarily Real Estate), the Company has recently had a
valuation done on its real estate portfolio, which valued them at $624.8
million. In addition, several properties have been sold in 2006 and all have
been sold at values comparable to the market prices as per the recent
valuation.
Appendix B Goodwill Impairment Page 1
APPENDIX B
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Custom Profiles
- ---------------------------------------
Net free cash flow (FCF) $ 55.3 $ 77.7 $ 86.5 $ 85.0 $ 89.0
Final year EBITDA $ 151.5
EBITDA multiplier 6.0
----------
0 0 0 0 $ 909
==========
Final year EBITDA 151.5
EBITDA multiplier 5.0
----------
0 0 0 0 $ 758
==========
Final year EBITDA 151.5
EBITDA multiplier 7.0
----------
0 0 0 0 $ 1,061
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 293 $ 284 $ 277
Present value of terminal value 564 538 516
0 0 0
-----------------------------------
$ 857 $ 822 $ 793
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 763 $ 857 $ 951
----------
11.07% $ 733 $ 822 $ 912
----------
12.00% $ 707 $ 793 $ 879
----------------------------------------------------
Appendix B Enterprise Value Page 1
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Mouldings
- ---------------------------------------
Net free cash flow (FCF) $ 3.8 $ 10.1 $ 22.1 $ 22.6 $ 23.5
Final year EBITDA $ 49.1
EBITDA multiplier 6.0
----------
0 0 0 0 $ 295
==========
Final year EBITDA $ 49.1
EBITDA multiplier 5.0
----------
0 0 0 0 $ 246
==========
Final year EBITDA $ 49.1
EBITDA multiplier 7.0
----------
0 0 0 0 $ 344
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 58 $ 56 $ 55
Present value of terminal value 183 174 167
0 0 0
-----------------------------------
$ 241 $ 231 $ 222
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 211 $ 241 $ 272
----------
11.07% $ 202 $ 231 $ 260
----------
12.00% $ 194 $ 222 $ 250
----------------------------------------------------
Appendix B Enterprise Value Page 2
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Building Product Segment
- ---------------------------------------
Net free cash flow (FCF) $ 11.0 $ 20.5 $ 22.5 $ 24.9 $ 25.4
Final year EBITDA $ 43.0
EBITDA multiplier 6.0
----------
0 0 0 0 $ 258
==========
Final year EBITDA $ 43.0
EBITDA multiplier 5.0
----------
0 0 0 0 $ 215
==========
Final year EBITDA $ 43.0
EBITDA multiplier 7.0
----------
0 0 0 0 $ 301
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 77 $ 74 $ 72
Present value of terminal value 160 153 146
0 0 0
-----------------------------------
$ 237 $ 227 $ 219
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 210 $ 237 $ 263
----------
11.07% $ 201 $ 227 $ 201
----------
12.00% $ 194 $ 219 $ 194
----------------------------------------------------
Appendix B Enterprise Value Page 3
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Construction Products Segment
- ---------------------------------------
Net free cash flow (FCF) $ 9.5 $ 22.3 $ 27.3 $ 25.9 $ 26.9
Final year EBITDA $ 41.8
EBITDA multiplier 6.0
----------
0 0 0 0 $ 251
==========
Final year EBITDA $ 41.8
EBITDA multiplier 5.0
----------
0 0 0 0 $ 209
==========
Final year EBITDA $ 41.8
EBITDA multiplier 7.0
----------
0 0 0 0 $ 293
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 82 $ 80 $ 78
Present value of terminal value 156 148 142
0 0 0
-----------------------------------
$ 238 $ 228 $ 220
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 212 $ 238 $ 264
----------
11.07% $ 203 $ 228 $ 253
----------
12.00% $ 196 $ 220 $ 244
----------------------------------------------------
Appendix B Enterprise Value Page 4
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
DFR
- ---------------------------------------
Net free cash flow (FCF) $ (5.9) $ 5.9 $ 11.4 $ 10.6 $ 11.0
Final year EBITDA $ 17.8
EBITDA multiplier 6.0
----------
0 0 0 0 $ 107
==========
Final year EBITDA $ 17.8
EBITDA multiplier 5.0
----------
0 0 0 0 $ 89
==========
Final year EBITDA $ 17.8
EBITDA multiplier 7.0
----------
0 0 0 0 $ 125
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 22 $ 21 $ 21
Present value of terminal value 66 63 61
0 0 0
-----------------------------------
$ 89 $ 85 $ 81
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 78 $ 89 $ 100
----------
11.07% $ 74 $ 85 $ 95
----------
12.00% $ 71 $ 81 $ 91
----------------------------------------------------
Appendix B Enterprise Value Page 5
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Outdoor Storage
- ---------------------------------------
Net free cash flow (FCF) $ (7.6) $ (2.0) $ 9.9 $ 10.5 $ 10.8
Final year EBITDA $ 16.6
EBITDA multiplier 6.0
----------
0 0 0 0 $ 100
==========
Final year EBITDA $ 16.6
EBITDA multiplier 5.0
----------
0 0 0 0 $ 83
==========
Final year EBITDA $ 16.6
EBITDA multiplier 7.0
----------
0 0 0 0 $ 116
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 13 $ 12 $ 11
Present value of terminal value 62 59 57
0 0 0
-----------------------------------
$ 75 $ 71 $ 68
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 64 $ 75 $ 85
----------
11.07% $ 61 $ 71 $ 81
----------
12.00% $ 59 $ 68 $ 77
----------------------------------------------------
Appendix B Enterprise Value Page 5
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Window Coverings
- ---------------------------------------
Net free cash flow (FCF) $ 3.0 $ 12.5 $ 15.6 $ 14.9 $ 15.5
Final year EBITDA $ 25.2
EBITDA multiplier 6.0
----------
0 0 0 0 $ 151
==========
Final year EBITDA $ 25.2
EBITDA multiplier 5.0
----------
0 0 0 0 $ 126
==========
Final year EBITDA $ 25.2
EBITDA multiplier 7.0
----------
0 0 0 0 $ 176
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 45 $ 43 $ 42
Present value of terminal value 94 89 86
0 0 0
-----------------------------------
$ 138 $ 133 $ 128
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 123 $ 138 $ 154
----------
11.07% $ 118 $ 133 $ 147
----------
12.00% $ 113 $ 128 $ 142
----------------------------------------------------
Appendix B Enterprise Value Page 7
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Material
- ---------------------------------------
Net free cash flow (FCF) $ 33.1 $ 35.8 $ 34.5 $ 30.6 $ 32.1
Final year EBITDA $ 49.3
EBITDA multiplier 6.0
----------
0 0 0 0 $ 296
==========
Final year EBITDA $ 49.3
EBITDA multiplier 5.0
----------
0 0 0 0 $ 246
==========
Final year EBITDA $ 49.3
EBITDA multiplier 7.0
----------
0 0 0 0 $ 345
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 126 $ 123 $ 120
Present value of terminal value 184 175 168
0 0 0
-----------------------------------
$ 310 $ 298 $ 288
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 279 $ 310 $ 341
----------
11.07% $ 269 $ 298 $ 327
----------
12.00% $ 260 $ 288 $ 316
----------------------------------------------------
Appendix B Enterprise Value Page 8
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Other
- ---------------------------------------
Net free cash flow (FCF) $ 31.9 $ 46.0 $ 37.0 $ 37.5 $ 39.1
Final year EBITDA $ 43.3
EBITDA multiplier 6.0
----------
0 0 0 0 $ 260
==========
Final year EBITDA $ 43.3
EBITDA multiplier 5.0
----------
0 0 0 0 $ 216
==========
Final year EBITDA $ 43.3
EBITDA multiplier 7.0
----------
0 0 0 0 $ 303
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 145 $ 141 $ 138
Present value of terminal value 161 154 147
0 0 0
-----------------------------------
$ 306 $ 294 $ 285
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 279 $ 306 $ 333
----------
11.07% $ 269 $ 294 $ 320
----------
12.00% $ 260 $ 285 $ 309
----------------------------------------------------
Appendix B Enterprise Value Page 9
ROYAL GROUP TECHNOLOGIES LIMITED
ENTERPRISE VALUE
($ Millions)
2006 2007 2008 2009 2010
Total Segments
- ---------------------------------------
Net free cash flow (FCF) $ 134.1 $ 228.9 $ 266.9 $ 262.5 $ 273.3
Final year EBITDA $ 437.6
EBITDA multiplier 6.0
----------
0 0 0 0 $ 2,626
==========
Final year EBITDA $ 437.6
EBITDA multiplier 5.0
----------
0 0 0 0 $ 2,188
==========
Final year EBITDA $ 437.6
EBITDA multiplier 7.0
----------
0 0 0 0 $ 3,063
==========
-----------------------------------
Weighted Cost of Capital/Discount rates 10.00% 11.07% 12.00%
-----------------------------------
Enterprise Value: Terminal value multiplier of 6
Present value of 5 year cash flow $ 861 $ 835 $ 814
Present value of terminal value 1,630 1,553 1,490
0 0 0
-----------------------------------
$ 2,491 $ 2,388 $ 2,304
===================================
Enterprise Value:
----------------------------------------------------
Terminal value multiplier
Discount rates 5.0 6.0 7.0
----------------------------------------------------
10.00% $ 2,219 $ 2,491 $ 2,763
----------
11.07% $ 2,130 $ 2,388 $ 2,647
----------
12.00% $ 2,056 $ 2,304 $ 2,552
----------------------------------------------------
Appendix B Enterprise Value Page 10