Exhibit 99.1
ROYAL GROUP
TECHNOLOGIES
BUILDING ON A
SOLID FOUNDATION
2001 ANNUAL REPORT
COMPANY PROFILE
o Royal's operations are located primarily in Canada and the U.S., with
international locations in South America, Europe and Asia. The operations,
which operate as individual profit centers, are arranged into two segments:
The Products Segment and the Support Segment.
o 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
that are oriented to the renovation trade.
ii) Consumer Products consist of a broad range of extruded and injection
molded products including window coverings, outdoor storage solutions,
fencing, decking, gazebos, 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.
o 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, plant
construction, and property management services provided to the Group.
o Royal's mission is to provide industry leading products to renovate,
improve or construct a building, while striving to enhance the environment
through recycling and maximize returns for shareholders.
o Royal Group is a public company with its Subordinate Voting Shares
trading on the Toronto Stock Exchange and New York Stock Exchange.
(ROYAL GROUP LOGO)
ROYAL GROUP
TECHNOLOGIES
PRODUCTS SEGMENT SUPPORT SEGMENT
HOME IMPROVEMENT
o CUSTOM PROFILES
o SIDING/ROOFING
MATERIALS
CONSUMER
o WINDOW COVERINGS
o OUTDOOR PRODUCTS MACHINERY & TOOLING
o HOUSEWARES AND FURNITURE
CONSTRUCTION
o PIPE AND FITTINGS
o COMMERCIAL DOORS SERVICES
RBS & FOREIGN OPERATIONS
CONTENTS
FINANCIAL HIGHLIGHTS 1
MESSAGE FROM THE CHAIRMAN 2
OPERATIONS REVIEW PRODUCTS SEGMENT 5
OPERATIONS REVIEW SUPPORT SEGMENT 14
SOCIAL, ENVIRONMENTAL AND EMPLOYEE RESPONSIBILITIES 16
MANAGEMENT DISCUSSION & ANALYSIS 18
FINANCIAL STATEMENTS 24
NOTES TO FINANCIALS 28
SUPPLEMENTARY FINANCIAL INFORMATION 36
SUPPLEMENTARY INFORMATION 39
DIRECTORS AND OFFICERS 40
SHAREHOLDER & CORPORATE INFORMATION 40
FINANCIAL HIGHLIGHTS
Years ended September 30, 2001, 2000 and 1999
(In thousands of Canadian dollars, except per share amounts)
2001 2000 1999
---------- ---------- ----------
CORPORATE OPERATING RESULTS
Net sales $1,669,036 $1,549,481 $1,282,004
EBITDA 315,927 378,399 329,102
Earnings from operations 154,759 248,472 230,591
Net earnings 117,438 169,117 149,969
Cash flow(1) 255,527 280,334 243,844
PER SHARE DATA
Diluted net earnings $ 1.27 $ 1.89(4) $ 1.68(4)
Basic net earnings $ 1.29 $ 1.95 $ 1.75
Basic cash flow(1) $ 2.81 $ 3.22 $ 2.84
CORPORATE FINANCIAL POSITION
Working capital 179,762 197,004 181,218
Property, plant and equipment 1,604,499 1,455,027 1,159,362
Goodwill and other assets 245,729 248,857 238,005
Shareholders' equity 1,361,687 1,236,222 913,201
Invested capital(2) 2,355,352 2,133,923 1,680,695
CORPORATE FINANCIAL RATIOS
EBITDA margin 19% 24% 26%
Return on sales 7% 11% 12%
Current ratio 1.28x 1.32x 1.45x
Funded debt(3) to invested capital 41% 41% 45%
Return on invested capital 7.1% 10.5% 11.5%
- -----------
(1) Earnings before minority interest plus items not affecting cash
(2) Aggregate of shareholders' equity, minority interest, and funded debt less
cash on hand
(3) For the purposes of the calculation, funded debt is reduced by cash on hand
(4) Restated for Treasury Method adopted in fiscal 2001.
[CONSOLIDATED NET SALES BAR CHART 1995-2001]
[CONSOLIDATED NET EARNINGS BAR CHART 1995-2001]
[CONSOLIDATED CASH FLOW BAR CHART 1995-2001]
1
MESSAGE FROM THE CHAIRMAN
In fiscal 2001, Royal Group Technologies achieved sales of almost $1.7 billion,
representing an 8% increase over the previous year, in spite of difficult
economic conditions. However, for the first time in our seven-year history as a
public company, we were unable to generate growth in net earnings, as sales
growth was insufficient to offset the negative impacts of lingering higher raw
material costs and higher costs associated with our recent manufacturing
expansion program. Still, we were able to generate operating cash flow in excess
of capital expenditures, in spite of the difficult economic environment and
completion of the expansion program.
[PHOTO OF VIC DE ZEN]
Vic De Zen
Chairman, President and C.E.O.
We expect demand for new products to gain momentum as these products garner
greater consumer awareness.
ACHIEVING GROWTH IN TOUGH MARKETS
Sales grew by 8% during fiscal 2001, through successful execution of strategies
to increase market share and introduce new products. We are particularly proud
of this achievement, given that expenditures on home renovation in the United
States contracted during the year, with industry use of PVC, our main raw
material, actually declining by over 7%. We view the slowdown in our markets as
temporary, caused by a combination of lower consumer confidence and significant
inventory reductions by distributors.
During the current economic slowdown we have worked hard to service our
existing customers, to introduce ourselves to potential new customers and to
introduce new products. Our goal has been to outperform competitors that have
been weakened by the slowdown. These initiatives have served to increase our
customer base and position us for accelerating growth as the economy stabilizes.
These strategies are not new to us, as we have employed them successfully in
previous economic downturns.
During fiscal 2001, we continued to broaden each of our home improvement,
consumer, construction and Royal Building Systems(TM) product offerings.
Marketed through our existing window fabricator network, we executed a
successful launch of RoyalEco(TM) basement windows. We added gazebos, pet care
products and an innovative deck railing system to our consumer product lines,
which are sold through retail home improvement stores. We added an innovative
pipe-fitting to our construction product line, which prevents fire from
migrating through pipes. By introducing new products through existing
distribution channels, we facilitated rapid penetration of the markets and
strengthened relationships with customers.
A series of strategic acquisitions have now been completed, broadening our
product lines, increasing distribution and presenting new opportunities to
cross-sell our products. Subsequent to September 30, 2001, we acquired the
business of Marley Mouldings, a manufacturer of cellular-foam extrusions,
including trim moldings and components for window and door frames. Marley's
products complement our products currently being sold through home improvement
retail stores and building product suppliers. In addition, Marley's extensive
sales and marketing team serves to strengthen Royal's position with customers,
particularly in the U.S.
In 2002, we will continue to introduce many new products, including a
decorative column for homes, an attractive line of home office furniture and a
roof tile simulating the look of cedar shakes. Again, we will leverage our
existing customer base with these new products.
INCREASING FOCUS ON CASH FLOW, DEBT REDUCTION AND INCREASING RETURNS
In June, we completed construction of our new, four million square foot
industrial complex in Woodbridge, Ontario. We have now consolidated 24 existing
plants into 14 larger ones, providing us with opportunities to improve operating
efficiency as we increase volume throughput in the facilities. The new complex,
in conjunction with recent expansions in various other plants, provides us with
sufficient manufacturing infrastructure to expand sales to $3 billion.
During fiscal 2001, a comprehensive review of operations was undertaken to
identify actions that will improve returns on invested capital and reduce debt.
The review considered the improved manufacturing throughput rates being
experienced in the new industrial complex, due to technological advancements
enabled by plant moves.
2
As a result of the review, we have trimmed capital expenditure plans for 2002
and initiated sales of non-strategic assets. The assets identified for sale
primarily relate to undeveloped land adjacent to the new industrial complex, and
also include additional manufacturing facilities made redundant by the increased
throughput of the new industrial complex. We expect the proceeds of sales to be
between $80 and $90 million. Asset sales are expected to be completed over the
next 18 months, with the proceeds to be used to reduce debt. We will continue to
leave no stone unturned as we search for ways to generate more profit with less
capital employed.
[CAPITAL EXPENDITURES BAR CHART 1995-2003]
BUILDING ON A SOLID FOUNDATION
Royal is built on a solid foundation. Our broad product offering, vertical
integration, manufacturing capabilities and technological edge, provide us a
powerful base to generate sales growth, increasing profitability and improving
returns. Most importantly, we have developed a strong, broad and deep management
team, experienced in our industry and with a proven ability to shepherd the
Group through a variety of economic conditions.
Although the near term economic outlook remains subdued, there are a series
of factors that should act as catalysts for growth in our core North American
home renovation and improvement markets, including:
o Nearly half of all owner occupied homes in the United States are over 35
years old and will increasingly require renovation;
o Over 31 million homes have been sold in North America in the last five
years, with renovation and improvement activity most likely to occur in the
first years of occupancy; and
o Low mortgage rates have spurred a refinancing boom with renovation
historically accounting for a portion of funds liberated through
refinancing.
When you combine these catalysts for market growth with the opportunities we
have to gain market share and introduce new products, we believe that Royal is
positioned for accelerating growth. The strategies we continue to employ to
achieve industry-leading growth include:
o Leverage of existing North American distribution channels with new
products;
o Utilization of unique RoyalEco(TM)technology to develop products that can
displace those made from conventional materials;
o Garnering market share in North America through exploitation of vertical
integration; and
o Introduction of existing products in international markets.
[IMPROVEMENT SPENDING INCREASES WITH AGE OF HOME* LINE CHART]
*Source = Joint Center for Housing Studies at Harvard University
During fiscal 2002, accelerating sales growth, increasing profitability,
declining capital expenditures and sales of nonstrategic assets, are expected to
produce strong cash flow, enabling the reduction of net debt to total
capitalization to a range of 36% to 38% by September 30, 2002. Looking further
ahead, we expect to achieve sales growth of 10% to 15% per year over the next
four years, with a sales target of $3 billion in 2005. Over the next four years,
as current manufacturing infrastructure is utilized to produce increasing sales
volumes, returns on invested capital are expected to return to the double-digit
levels experienced in the late 1990s.
Although the year ahead promises to be challenging, we are confident that
Royal will be able to leverage its solid customer relationships, broad product
line and technological edge to seize new opportunities for the creation of
shareholder value. Thank you for your support as we continue building on Royal's
solid foundation.
[Signature]
Vic De Zen
January 7, 2002
3
[PHOTO OF HOUSE SHOWING ROYAL CEDAR SERIES(TM)]
[PHOTO OF ROYALECO(TM) BASEMENT WINDOWS]
[PHOTO OF CUSTOM PROFILES]
4
PRODUCTS SEGMENT
Home Improvement Products
CUSTOM PROFILES
Royal's custom profile products are primarily supplied to the fabricators of
windows and doors, with some profiles utilized in other markets such as the
electrical and furniture industries. Royal commands the dominant share of the
billion dollar plus North American vinyl window profile market.
Sales of our custom profile products continued to outpace the market for
vinyl window profiles in 2001, with sales of $520 million being recorded, up 7%
from the previous year. Sales growth is primarily attributable to market share
gains, as new window fabricator customers increasingly recognized Royal's
growing technological edge.
While the market for vinyl window profiles was flat in 2001, as consumers
retrenched in the face of economic uncertainty, increasing energy consciousness
provides opportunities for Royal's energy efficient vinyl window systems. The
State of California recently adopted an energy code for new construction,
imposing strict guidelines on the energy performance of windows. This code,
combined with similar ones being drafted by other States, are expected to
stimulate demand for energy efficient vinyl windows.
During the year, there continued to be consolidation of North American
vinyl window fabricators. National window fabricator networks are beginning to
emerge and are increasingly turning to Royal for supply of vinyl window
profiles, as Royal, unlike its competitors, has numerous custom profile plants
located across North America to rapidly respond to the needs of customers.
Royal's ability to quickly develop tooling for window systems specifically
tailored to regional markets further enhances Royal's competitive position.
In 2001, a number of strategic initiatives were completed that served to
strengthen our custom profile products' position in the market. These
initiatives include the roll out of the RoyalEco(TM) basement window system,
which was introduced through Royal's large network of vinyl window fabricators.
The RoyalEco(TM) basement window is easier to install and more durable than
basement windows made from conventional materials. The system has served to
allow us entry into a new segment of the market, it has enhanced relationships
with existing vinyl window fabricator customers and it has attracted new
customers.
As this report goes to print, Royal is the only supplier to the window
fabrication industry having broad capabilities, including vinyl extrusion,
injection molding, cellular foam extrusion and ABS composite extrusion.
Subsequent to our yearend, we established industry-leading cellular foam
expertise through the acquisition of the business of Marley Mouldings and we
acquired ABS composite expertise through the acquisition of certain assets of
Complast, Inc. in a joint venture with ThermoView Industries.
[CUSTOM PROFILES 5-YEAR SALES GROWTH BAR CHART 1997-2001]
Over the past five years, Royal's custom profiles have grown at a compounded
average annual rate of 13%, exceeding estimated vinyl window profile industry
growth of 7%.
[N.A. VINYL WINDOW PROFILE MARKET DATA PIE CHART]
The combination of our strengthening strategic position and increasing
demand for energy efficient windows, positions Royal for a greater share of a
growing market.
SIDING/ROOFING
Royal's siding and roofing product lines enjoyed a solid year of growth in 2001,
posting sales of $233 million, representing an 11% increase over the previous
year. We are particularly proud of this achievement, given that the North
American market for vinyl siding contracted by an estimated 8% during the year.
5
PRODUCT SEGMENT
Home Improvement Products
The future for Royal's siding and roofing products looks bright, with many
opportunities to continue to expand market share and product offerings.
[SIDING/ROOFING 5-YEAR SALES GROWTH BAR CHART 1997-2001]
Over the past five years, Royal's siding and roofing products have growth at a
compounded average annual rate of 17%, exceeding estimated vinyl siding industry
growth of 5%.
[N.A. VINYL SIDING MARKET DATA PIE CHART]
[PHOTO OF BUILDING]
Over the past five years, Royal's siding and roofing products have grown at a
compounded average annual rate of 17%, exceeding estimated vinyl siding
industry growth of 5%.
In 2001, a series of new distributors for our products were added in the United
States. These distributors made Royal their supplier of choice, primarily as a
result of our demonstrated commitment to the vinyl siding industry. Recent
product developments, marketing initiatives and our new state-of-the-art
manufacturing plant in Woodbridge, have all served to positively differentiate
Royal from competitors.
During the year, we also successfully developed a series of new products
being introduced in 2002. These products include our WindLock 240(TM) system,
which provides various Royal siding products the highest wind up lift rating in
the industry, making them the least likely to blow off a home in a wind storm.
In 2002 we will also introduce the Royal Designer Shake(TM), an innovative
siding panel that replicates the authentic look of a cedar shake.
Royal's DuraSlate(TM) roofing products, manufactured using RoyalEco(TM)
technology, enjoyed strong growth in 2001, with distribution being expanded
throughout North America. There are now over 140 distributor branches for
roofing products offering DuraSlate(TM) and over 1500 contractors who have
installed it. We expect to achieve a Class A fire rating for the DuraSlate(TM)
roof tiles very shortly, enabling the tiles to be sold to a wider marketplace,
including Europe.
6
[PHOTO OF HOUSE WITH CEDAR SOLID(TM) SIDING]
[PHOTO OF CEDAR SOLID(TM) SIDING]
[PHOTO OF DURA SLATE(TM) ROOF TILES]
7
[PHOTO OF WOOD ADVANTAGE(TM) VINYL BLINDS]
[PHOTO OF DECKING]
[PHOTO OF FENCING]
8
PRODUCTS SEGMENT
Consumer Products
WINDOW COVERINGS
Difficult market conditions created a tough environment for window coverings in
2001. We estimate that Royal's target market shrank by 1% over the previous
year, as some home owners elected to forego covering windows in the face of a
weakening economy. Market shrinkage for our products is also attributable to an
increasing preference for alternative window covering fashions, such as wood
blinds.
[WINDOW COVERINGS 5-YEAR SALES GROWTH BAR CHART 1997-2001]
Over the past five years, Royal's window coverings products have grown at a
compounded average annual rate of 15%, exceeding estimated industry growth of
3%.
[N.A. HARD WINDOW COVERINGS AND DRAPERY HARDWARE MARKET DATA PIE CHART]
Unlike many other Royal products, such as window profiles, siding or
roofing where replacement is imperative, window covering purchases can be
deferred. This easing of demand is not a new experience for Royal. In 1991, as
the Gulf War raged and the economy sagged, window covering sales fell. Pent up
demand for window coverings presented itself as the economy recovered in 1992
and 1993, with Royal's window covering sales rapidly growing.
The window coverings group has just introduced a new "cut-down machine"
that enables blinds to be cut to size in a store while a customer waits. This
new machine, manufactured by Royal Machine, is now being offered to various
retail stores selling Royal blinds. Homeowners are pleased with increased
service at retail stores that are able to customize vertical and horizontal
blinds in just minutes.
In response to growing demand for wood horizontal blinds, a series of
innovative products have recently been introduced. These products include
Plantation Vinyl(TM) blinds made of extruded foam simulating wood, Wood
Royal(TM) blinds extruded with laminated wood particles and our
Wood-Advantage(TM) made of an extruded PVC/wood composite that is painted and
stained to a fine finish.
Other recent product developments include the LaserSheer(TM) system, which
allows consumers to use PVC blinds for room darkening with a sheer attachment to
give a clean and soft look to their interior. In addition, LaserDrape(TM) has
been introduced to the commercial market, offering an easy and much less
expensive method to hang curtains and draperies.
Recent product introductions combined with increasing distribution
throughout the world, position our window coverings for renewed growth in the
years ahead.
OUTDOOR PRODUCTS
Outdoor Products includes a broad offering of PVC outdoor storage solutions,
fencing, decking and the recently introduced Gazebo product line. We have
focussed on developing and introducing a broad line of affordable, durable,
maintenance-free products to improve backyards.
The roll outs of our pre-assembled fencing and easy to assemble decking
program in 2001 were very successful, with over 500 stores now carrying these
products. Homeowners erecting fences themselves had a strong reception to the
product line, recognizing both the ease of installation and maintenance our
product line offers.
During the year, a number of point of purchase product differentiation
programs were initiated, to assist store personnel and consumers to understand
the Royal advantage. These programs have proven to be very successful, with most
stores increasing the number of stock keeping units carried over the course of
the year and consumers increasingly specifying Royal products.
In 2002, we will introduce a mini garage system, complete with a roll up
door. This product responds to feedback we have had from consumers asking for a
storage system that they can back into with a trailer loaded with personal
water-craft, snowmobiles or motorcycles. We will also introduce a number of new,
ornate styles of fencing and a deck railing, to complement the highly successful
pre-assembled fencing
9
PRODUCTS SEGMENT
Consumer Products
[PHOTO OF BUSINESS ORGANIZATION SYSTEM FROM GRACIOUS LIVING]
[PHOTO OF MARTHA'S VINEYARD(TM) PATIO FURNITURE]
[PHOTO OF PREMIER(TM) OUTDOOR STORAGE BUILDING]
[OUTDOOR PRODUCTS 5-YEAR SALES GROWTH BAR GRAPH]
Over the past five years, Royal's outdoor product sales have grown at a
compounded average annual rate of 73%.
[N.A. OUTDOOR STORAGE PRODUCTS MARKET DATA PIE CHART]
products introduced in 2001. Finally, we will broaden the size offerings of
Gazebos.
New retail home improvement chain stores will be carrying Royal's outdoor
storage systems in 2002, including Canadian Tire. This new distribution,
combined with new product offerings, positions the outdoor products group for
growth in the years to come.
HOUSEWARES AND FURNITURE
Gracious Living experienced another year of strong growth in 2001, posting sales
of $105 million, representing a 37% increase over the previous year. Growth was
achieved through a combination of successful new product introductions and
broadening retail chain store distribution. Gracious Living's products are now
marketed in over 6000 stores throughout North America up from 5000 last year,
including Walmart, Lowes, Home Depot, Target and Canadian Tire.
Growth was further enhanced by execution of strategies to increase the
number of departments within stores displaying products. For example, Walmart
now carries indoor storage solutions in houseware, office and furniture
departments.
During the year, Gracious Living continued to broaden its line of indoor
storage products targeted at the $US 3 billion indoor storage and organization
market. Our line of garden furniture was also broadened, with the launch of the
highly fashionable collection of Martha's Vineyard(TM) chairs and tables. The
Pets Royale(TM) line of dog houses and feeding systems was rolled out through a
broadening network of distributors during the year.
A series of new products were developed and successfully introduced during
the year, including Blue Mountain(TM) snow shovels and office furniture. Our
office furniture line includes durable, affordable, colorful and functional
office chairs, tables, storage containers and computer stations. The office
furniture is being rolled out through the large network of retail stores
currently carrying office storage products.
Armed with a broad customer base and a number of exciting new products,
Gracious Living is poised for considerable growth in the years ahead.
10
PRODUCTS SEGMENT
Construction Products
[PHOTO OF MUNICIPAL PIPE]
[PHOTO OF QUICKSTOP(TM) FIRE PROTECTION]
[PHOTO OF ELECTRICAL PIPING]
PIPE AND FITTINGS
Royal's pipe and fittings product lines include municipal water and sewer
systems, in-home plumbing products, electrical conduit systems and an increasing
array of niche products. Our pipe and fitting products gained share of
traditional markets, in an increasingly sluggish environment. Overall pipe and
fitting sales expanded to $187 million in fiscal 2001, up 5% from the previous
year.
While the market for traditional plastic pipe and fittings was sluggish
during fiscal 2001, there is increasing demand brewing for replacement of
municipal systems made from conventional materials. Both concrete and iron pipe
systems are breaking down at an alarming rate across North America. According to
the Environmental Protection Agency in the United States, 54,000 drinking water
systems will require a $150 billion investment over the next 20 years to ensure
provision of safe drinking water, presenting opportunities for Royal's complete
line of durable, PVC drinking water pipe and fittings systems.
During 2001, a broad line of fire protection pipe-fittings were introduced
under the name QuickStop(TM). These pipe-fittings are easily installed between
floors and rooms, to prevent fire from passing from one room to the next.
QuickStop(TM) fittings expand to seal an opening when exposed to the heat of a
fire. Royal's unique, patented fittings require less maintenance for
installation and provide a more effective fire stopping solution than
conventional methods. A series of other fire stopping products are now being
developed, for introduction into the estimated $100 million fire protection
market in North America.
[PIPE AND FITTINGS 5-YEAR SALES GROWTH BAR CHART]
Over the past five years, Royal's pipe and fittings sales have grown at a
compounded average annual rate of 19%, exceeding estimated industry growth of
1%.
[N.A. PLASTIC PIPE AND FITTINGS MARKET DATA PIE CHART]
A fiber optic cable protection system, known as Kortech(TM), was also
introduced during the year. Kortech(TM) boasts industry leading light weight for
ease of installation, flexibility and core smoothness to facilitate ease of
cable insertion.
These exciting new products, combined with growing demand for traditional
plastic pipe products, present solid opportunities for future growth.
11
PRODUCTS SEGMENT
Royal Building Systems and Foreign Operations
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.
At our plants in Argentina, China, Colombia, Mexico and Poland, window
profiles are produced in addition to Royal Building Systems(TM). In Mexico,
window coverings are produced and in Poland siding is produced.
Sales of Royal Building Systems(TM) and other products manufactured by
foreign operations increased to $131 million in 2001, up 16% from the previous
year.
Royal Building Systems(TM) has developed into one of the premier building
technologies on the market today, as a wider network of customers are turning to
Royal to meet their ever demanding construction needs. Royal's global
penetration and emphasis on providing innovative solutions has enabled it to
take advantage of projects undertaken by some of the world's leading
organizations such as Marriott Hotels, Ericsson, Raytheon, the US Military,
Sunoco and BMW.
In international markets, the System continues to provide comprehensive
infrastructure solutions for entire communities. This emphasis on "community"
building is exemplified by Veracruz 2000 in Mexico, where the System will be
utilized to build 700 housing units, 5 stores, 2 social centers, a hospital, a
church, a fire station and a municipal office. In North America, the System will
be used with greater frequency in automotive applications (e.g. car washes,
automobile dealerships), agricultural, commercial, industrial and recreational
facilities.
[RBS/FOREIGN VENTURES 5-YEAR SALES GROWTH BAR CHART]
As a means to diversify and fuel growth in upcoming years, Royal Building
Systems(TM) has been refined to serve three sectors of the market.
o 64 mm (2") panel; this wall system offers a more competitively priced
package for large scale social housing projects worldwide. All
international plants will be in possession of requisite tooling for this
product by the second quarter of fiscal 2002.
o Royal RENEW Paneling System(TM); used to retrofit the interior of walls
built using conventional construction, and is ideally suited for the
vehicle wash and agricultural markets
o Royal Telecom Shelters; this program initially pioneered in Argentina,
Mexico and China is now being customized to suit the $475 million market
for telecommunication shelters in the US and Canada. The product has been
well received at recent trade shows.
These new product introductions, combined with a global presence
established over the last ten years, positions the System and other products for
exciting growth in the years ahead.
[PHOTO OF SIDING]
[PHOTO OF HOUSE WINDOW]
International growth opportunities for Royal's products include siding, window
profiles and window coverings manufactured by Royal's foreign operations.
[PHOTO OF LUXURY RESORT, GRAND CAYMAN, B.W.I.]
12
[PHOTO OF CONSTRUCTION WORKER ASSEMBLING ROYAL BUILDING SYSTEM]
[PHOTO OF A CAR WASH]
[PHOTO OF AN INDUSTRIAL/COMMERCIAL BUILDING]
[PHOTO OF A RESIDENTIAL BUILDING]
[PHOTO OF AN AGRICULTURAL FIELD]
[PHOTO OF TELECOM STRUCTURES]
[PHOTO OF ROYAL RENEW PANELING SYSTEM]
[PHOTO OF PROTOTYPE SOCIAL HOUSING STRUCTURE IN BRAZIL USING 64mm (2") WALL
PANEL]
ROYAL BUILDING SYSTEMS(TM)
CONTINUES TO SUCCESSFULLY
EXPAND ITS APPLICATION AND
PROJECTS AROUND THE GLOBE.
13
SUPPORT SEGMENT
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, plant
construction, and property management services provided to the Group.
MATERIALS
In 2001, a number of raw material initiatives were undertaken by the Support
Segment to further improve the efficiency and cost structure of the entire
Group. These initiatives include development of new lubricant and stabilizer
materials that enhance the processibility of compounds utilized in the Group's
extrusion and molding operations. In addition, we continued to develop a series
of compounds that served to enable the introduction of proprietary new products.
Capacity to produce PVC resin was expanded to 465 million pounds per year,
through the addition of another reactor at our Royal Polymers PVC resin plant.
In addition, a number of continuous improvement programs have been undertaken at
Royal Polymers to further enhance the productivity of the plant in future years.
MACHINERY AND TOOLING
During 2001, we completed construction of Royal Tooling, located in our new
industrial complex in Woodbridge, Ontario. This plant will primarily fabricate
molds that will be utilized in Gracious Living and Royal Dynamic's injection
molding operations. Manufacture of our own molds will allow us to more rapidly
respond to opportunities to develop products for the market, help control mold
development costs and assist to retain our proprietary mold technology.
In our new industrial complex, we are beginning to achieve higher output
rates per extrusion machine than in our old plants. The improvements have
resulted from technology developed and installed at the time of the plant moves,
by our Royal Machine manufacturing operations.
SERVICES
In fiscal 2000, we completed construction of a warehouse and distribution
complex that serves as the hub of our new four million square foot industrial
complex located in Woodbridge, Ontario.
[PHOTO OF RESEARCH, DEVELOPMENT AND TESTING]
During the course of fiscal 2001, the distribution centre began to
coordinate shipments of a variety of products to customers. For example, outdoor
storage sheds, fencing, decking and patio furniture are now consolidated at the
centre and sent on the same truck to a specific big box retail store. The
consolidation of shipments is serving to increase customer service and is
expected to reduce the distribution costs in the future.
Our facilities throughout North America are maintained by our property
management services group, which strives to contribute to improve efficiency and
reduce operating costs. In 2001, the property management group initiated a
series of cost reduction programs, including consolidation of electrical
services to establish greater volume discounts.
The Support Segment continues to provide Royal with a competitive edge over
less integrated competitors. Royal's competitive position will be enhanced
further through initiatives undertaken by the Support Segment in 2001.
14
[PHOTO OF ADVANCED TOOLING DEVELOPMENT]
[PHOTO OF FORMULATION TECHNOLOGY]
[PHOTO OF COMPOUND MANUFACTURING]
15
SOCIAL, ENVIRONMENTAL AND EMPLOYEE RESPONSIBILITY
Our mission statement reflects our belief that we must measure our progress in
several ways, including profitability, and social responsibility. In order to
achieve sustainable growth, the needs of all our stakeholders must be satisfied.
In 2001, we continued to contribute to a better environment, to care for our
employees and made contributions to the communities in which we operate.
ENVIRONMENT
Royal's patented RoyalEco(TM) technology enables the manufacture of building
products from a series of waste streams, including automobile trim, carpet and
construction site waste. During fiscal 2001, a variety of new products utilizing
the technology were successfully commercialized, including the RoyalEco(TM)
basement window system, a retaining system for the edges of patio stones and
complete doors for storage sheds and garages.
The RoyalEco(TM) technology makes a substantial contribution to improvement
of the environment by diverting waste from landfill sites. During fiscal 2001,
the technology was refined to enable waste from blue box programs and
construction sites to be included as raw material. Royal continues to be one of
the largest recyclers of rigid PVC in the world, with a facility now capable of
recycling over 150 million pounds per year of PVC scrap. The scrap is generated
by a series of post industrial sources, including customers, again diverting
material that would otherwise end up in land fill sites.
In addition to contributing to improvement of the environment, recycling
initiatives assist Royal to access new markets.
SOCIAL
Royal's businesses are members of the communities in which they operate,
striving to strengthen society while maximizing profits. Royal continued to
contribute to community causes. Royal and its employees donated to health care,
educational, sports and religious causes. Some examples of these contributions
included:
o Providing blood to the Red Cross through blood donation clinics conducted
at Royal in December.
o In conjunction with Habitat for Humanity International and The Home Depot,
Royal built several homes in the State of New Jersey. In addition to
supplying materials for this project, a number of employees participated in
building the homes. These homes provide needy families a durable,
affordable, maintenance-free home.
o Contributions were made to the Saint Claire of Assisi Society, serving the
spiritual and social needs of the Toronto area. Contributions were also
made to the E.O.H. Meta Center for the developmentally disabled, serving
Ontario, Canada.
[PHOTO OF FAMILY]
EMPLOYEES
In fiscal 2001, Royal employed approximately 8600 people, up by over 4000 people
in the last five years. During a year when many corporations were trimming their
workforces, Royal maintained employment, as a result of increasing demand for
its products. Employees at all levels of the Company are offered opportunities
for advancement as Royal continues to grow.
Over 800 employees at various levels within the company participate in
Royal's stock option program, which has been designed to link their interests
with those of shareholders. A similarly diverse group of employees also
participate in a profit sharing program.
16
[PHOTO OF TREES]
[PHOTO OF HABITAT FOR HUMANITY VOLUNTEERS HARD AT WORK BUILDING A HOME FROM THE
ROYAL BUILDING SYSTEM(TM)]
[PHOTO OF CONDOMINIUM COMPLEX, GRAND CAYMAN, B.W.I., SURVIVES TROPICAL STORM]
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
Royal is substantially engaged in the manufacture and distribution of
polymer-based home improvement, consumer and construction products for sale in
the North American renovation, remodeling and new construction industries, and
more recently in international markets. Royal is a vertically integrated,
innovative, technology based growth company and a low cost producer in its
industry.
RESULTS FROM OPERATIONS
The following discussion has been prepared by management and is a review of the
Company's operating results and financial position for the years ended September
30, 2001, 2000 and 1999 and based upon accounting principles generally accepted
in Canada. All amounts are in Canadian dollars unless specified otherwise. This
discussion and analysis of the Company's operations have been derived from and
should be read in conjunction with the Consolidated Financial Statements and
accompanying notes thereto appearing elsewhere in this Annual Report. During
fiscal 2001, the Company adopted Section 3500, of the CICA Handbook, Earnings
Per Share. This section requires the use of the treasury method in calculating
fully diluted earnings per share. The change was applied retroactively with the
affect of reducing reported diluted net earnings per share by $0.01 to $1.89 at
September 30, 2000 and by $0.04 to $1.68 at September 30, 1999.
The following table discloses the Company's Statements of Earnings (in
thousands of Canadian dollars, except per share amounts) for the years ended
September 30, 2001, 2000, and 1999.
STATEMENTS OF EARNINGS
2001 2000 1999
----------- ----------- -----------
Net Sales $ 1,669,036 $ 1,549,481 $ 1,282,004
Cost of sales, operating expenses and other income 1,353,109 1,171,082 952,902
EBITDA 315, 927 378,399 329,102
EBITDA percentage 18.9% 24.4% 25.7%
Amortization 104,632 83,335 67,134
Interest and financing charges 56,546 46,592 31,377
Earnings from operations 154,749 248,472 230,591
Income taxes 38,001 79,246 79,182
Earnings before minority interest 116,748 169,226 151,409
Minority interest (690) 109 1,440
Net Earnings 117,438 169,117 149,969
Basic Net Earnings Per Share $ 1.29 $ 1.95 $ 1.75
Diluted Net Earnings Per Share $ 1.27 $ 1.89 $ 1.68
Weighted average number of outstanding shares - Basic 90,869,248 86,929,410 85,862,042
Weighted average number of outstanding shares - Diluted 92,802,214 89,614,144 89,195,000
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 earlier quarters, or 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.
18
[EBITDA BAR CHART 1995-2001]
[EBIT BAR CHART 1995-2001]
[NET EARNINGS BAR CHART 1995-2001]
[SALES BY PRODUCT LINE (PERCENTAGE) PIE CHARTS 1998-2001]
YEAR ENDED SEPTEMBER 30, 2001 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2000
NET SALES
OVERALL NET SALES:
Consolidated net sales for the year ended September 30, 2001 increased 8% or
$119.6 million to a record $1.67 billion, from sales of $1.55 billion in 2000.
The overall 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 effect of acquisitions completed during the year was
offset against the prior year divestiture of our residential door manufacturer
in the prior year.
The following table summarizes net sales by segment (in millions):
NET SALES BY SEGMENT
2001 2000 %change
------ ------ -------
Home Improvement Products 753 706 7%
Consumer Products 490 465 5%
Construction Products 211 200 6%
RBS/Foreign Operations 131 113 16%
Product Segment 1,585 1,484 7%
Materials 371 392 (5%)
Machinery & Tooling 86 79 9%
Service 206 263 (22%)
Support Segment 663 734 (10%)
Intra Group Elimination (579) (669)
Consolidated 1,669 1,549 8%
PRODUCT SEGMENT:
Product segment sales for the year ended September 30, 2001 increased 7% or $101
million to $1,585 million from $1,484 million in 2000. RBS and foreign
operations led the way with a 16% increase over the prior year. This was due to
higher volumes sold in building systems. Home improvement products grew by 7%,
which was lead by an increase in siding and roofing of 11% or $23 million over
the prior year. This was due primarily 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 remodeling
industry. Construction products increased 6% over the prior year on account of a
5% increase in pipe and fittings despite lower unit prices in pipe products.
Consumer products increased 5% over the prior year with housewares and furniture
up 37%.
SUPPORT SEGMENT:
This segment represents materials, machinery and tooling and services provided
predominately to the product segment. Support segment sales for the year ended
September 30, 2001 decreased 10% or $71.3 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.
GEOGRAPHIC SALES DISTRIBUTION:
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.
In light of current economic conditions an overall organic net sales growth rate
slightly higher than experienced in fiscal 2001 is expected for 2002, emanating
from continued growth in demand for our current product lines, including
contributions from the introduction of new products and/or applications.
OPERATING MARGIN:
OVERALL:
Earnings during the fiscal year were negatively impacted by the following:
higher variable costs and lower fixed cost adsorption, 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, for the
unexpected bankruptcy of retail accounts, in addition to inventory provisions
and allowances for slow moving goods, as
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
a result of the economic slow down, 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 (or "EBITDA"), excluding the $32
million additional charge, for the year ended September 30, 2001, decreased by
$30.5 million or 8% to $347.9 million compared to $378.4 million last year.
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. For fiscal 2002, management expects an overall lower
raw material cost percentage.
Labour 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 forth 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, general and
administration cost as a percentage of sales increased by 1.9% to 18.8% from
16.9% last year. 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 costs 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.
For fiscal 2002, management believes the Group's overall EBITDA as a
percentage of sales should return to historical averages.
AMORTIZATION EXPENSE:
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 added capacities in both operating
segments capital during the past two years.
In the product 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 for the same period 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 for the same period last year due primarily to added
capacities in the material processing and recycling companies and manufacturing
facility additions.
INTEREST AND FINANCING CHARGES
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 a 2:1 ratio of cash flow
from operations and operating line proceeds. It is expected that on a dollar
basis, interest costs will peak in fiscal 2002. Management anticipates its
effective overall interest rate to be approximately 6% for fiscal 2002.
INCOME TAX EXPENSE
In fiscal 2001, income tax expense as a percentage of earnings before income
taxes decreased to 24.6% from 31.9%. The rate reduction is due primarily to
favourable provincial tax legislation passed in June 2001 resulting in a $9
million tax reduction. Prior to this reduction the rate was 30.4% in line with
expectations. For fiscal 2002, management expects an overall consolidated tax
rate of approximately 30%.
NET EARNINGS AND EARNINGS PER SHARE
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 Company 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 net 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.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
In fiscal 2001, the Company generated cash flow of $255.5 million or $2.75 per
share on a fully diluted basis, a decrease of $24.8 million from $280.3 or $3.13
per share on a fully diluted basis generated in the prior year. During the three
years ended September 30, 2001, the company's cash flow aggregated $780 million.
Cash flow from operations and debt proceeds were used to finance working capital
expansion and capital spending.
WORKING CAPITAL
A summary of the Company's consolidated working capital position at September 30
is set out below:
2001 2000
------ ------
Working Capital (in millions of dollars) 179.8 197.0
Current ratio 1.28x 1.32x
20
[BASIC NET EARNINGS BAR GRAPH 1995-2001]
[DILUTED NET EARNINGS BAR GRAPH 1995-2001]
[BASIC CASH FLOW BAR GRAPH 1995-2001]
[SALES BY REGION (PERCENTAGE) PIE CHARTS 1998-2001]
As a measure of asset management, 73 days receivable experience at September 30,
2001 was unchanged from last year while days inventory slightly increased 5 days
from 133 days last year. Slightly higher days inventory occurred primarily due
to larger customers reducing inventories on hand and a build-up in some foreign
locations pending the release of orders. Management is committed to reducing
inventory days during fiscal 2002.
CAPITAL SPENDING
Overall capital spending including acquisitions, for the years ended September
30, 2001 & 2000 is summarized below:
(in millions of dollars) 2001 2000
------ ------
Capital expenditures 208.1 373.7
Acquisitions 4.9 0.8
Total capital spending 213.0 374.5
For the year ended September 30, 2001, capital expenditures amounted to $208
million compared to $374 million for the same period last year. During 2001,
approximately $123.8 was expended in the product segment, including $55.7 for
added capacities in custom profiles. The remaining $84.3 million was expended in
the support segment for added capacities in materials including recycling
technology.
During 2001, the Company acquired 100% equity interests in 3 distributors
in the products segment for aggregate consideration of $4.9.
For fiscal 2002, excluding possible business acquisitions and the sale of
non-strategic assets the Company anticipates a net investment in capital assets
in the range of $110 to $125 million, primarily for added manufacturing
capacities in the products segment.
The company purchased Marley Mouldings subsequent to year-end for U.S. $88
million cash. It also announced a plan to divest certain nonstrategic assets for
expected proceeds of $80 to $90 million.
LONG TERM DEBT AND FINANCIAL INSTRUMENTS
The Company has an authorized $700 million revolving, unsecured bank credit
facility with a syndicate of banks, of which $147 million was drawn at September
30, 2001 and $281 million was committed as back-up liquidity to outstandings on
the Company's commercial paper program. The bank credit facility can be used for
working capital requirements, acquisitions and capital expenditures. The Company
has an authorized $300 million commercial paper program in Canada. On September
30, 2001, $281 million was issued and outstanding. In addition the Company has
an authorized $400 million medium term note program in Canada. This program is
unsecured, ranking pari passu with the bank facility, with $150 million issued
and outstanding. At year-end the funded debt to total capitalization was 41%,
unchanged from last year.
Management believes that the Company'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 for fiscal 2002, including the seasonal
natures thereof.
BUSINESS DEVELOPMENT
In December 2001, the Company acquired the assets and business of Marley
Moulding LLC ("Marley"), for a cash price of U.S. $88 million based on the net
tangible assets having a value of U.S. $60 million. Marley is the largest U.S.
manufacturer and marketer of mouldings and millwork made from polyvinylchloride
and polystyrene using cellular/foam extrusion technology. Based in Marion,
Virginia, its sales for the twelve months ended September 30, 2001, were
approximately U.S. $100 million.
The acquisition will be accounted for by the purchase method, and is
expected to result in an increase of goodwill and other intangible assets of
approximately U.S. $28 million. This transaction will be financed using existing
bank facilities.
YEAR ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1999
Consolidated net sales for the year ended September 30, 2000 increased 21% or
$267.5 million to $1.55 billion, up from $1.28 billion in 1999. The overall
sales increase was primarily due to unit volume increases in all major product
lines, with slightly higher average selling prices experienced in custom,
siding, and pipe product lines. Acquisitions completed during 2000 and 1999
accounted for only $18.5 million or 7% of the sales growth in 2000.
Product segment sales for the year ended September 30, 2000 increased 19.5%
or $242 million to $1,484 million from $1,242 million in 1999. The
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
increase was lead by consumer and construction product lines increasing 26% and
18% respectively over the prior year. The former increase was due to higher unit
volumes sold in both outdoor products and housewares and furniture. The latter
was due to higher volumes sold at higher average selling prices in pipe
products. Home improvement products grew by 13%, which was lead by custom
profiles up 16.5% or $69 million from prior year primarily due to higher unit
volumes, with some higher selling prices. Excluding residential doors, home
improvement products (custom profiles, siding and roofing) grew substantially
organically by 16.7% significantly outpacing the NAHB's 1.1%, 2000 growth
forecast for the North American repair and remodeling industry.
Support segment sales for the year ended September 30, 2000 increased 36%
or $195.9 million to $734.8 million from $538.9 million in 1999. This
significant increase was primarily due to increased sales, both internal and
external sales in the material processing companies, resulting from the
expansion of capacities in the segment and a full year of sales activity for the
resin facility.
During fiscal 2000, sales to non-Canadian customers, including
foreign-based sales and exports from Canadian operations decreased to 66.4% of
total sales from 69.9% for the same period in 1999. Increases in sales volume
rates to Canadian customers outpaced both the United States and International
markets as higher volumes sold in both the pipe and fittings and housewares and
furniture product lines, which are typically more regional markets.
The Group's overall operating margin (or EBITDA) for the year ended
September 30, 2000 increased by $49.3 million or 15% to $378.4 million compared
to $329.1 million last year. EBITDA as a percentage of sales decreased to 24.4%
from 25.7% last year. Raw material costs as a percentage of sales increased to
43% from 40% last year due primarily to higher resin costs during the year. Over
the last 18 months the resin industry experienced both the fastest and steepest
increase in resin prices recorded in the last ten years. During fiscal 2000,
despite our vertical integration and selling price increases, unit raw material
cost increased by approximately $60 million. In the earlier part of the year,
the Company was able to overcome this increase with higher unit volumes sold and
slightly higher selling prices. This was not the case for the last quarter of
the year, when the overall rates of growth declined and resin unit cost remained
high.
Labour and overhead costs as a percentage of sales were 12.8% and 8.7%
respectively, compared to 13.3% and 8.6% last year. Labour efficiencies were
gained by higher unit volumes, while higher amortization cost and costs
associated with moving production facilities into the new industrial complex
north of Toronto, slightly increased overhead cost. Selling, general and
administration cost as a percentage of sales decreased by 0.8% to 16.9% from
17.7% last year. Selling costs decreased to 11.0% from 11.2% while general and
administration cost decreased to 5.9% from 6.5% last year. Fiscal 2000
experienced selling, general and administration cost decreases due to lower unit
cost through greater utilization of plant capacities.
Product segment EBITDA for the year ended September 30, 2000 increased by
$27.6 million or 13% to $238.7 million compared to $211.1 million last year.
EBITDA as a percentage of sales decreased to 16.1% from 17% last year. The
decrease was primarily due to higher average raw material unit cost.
Support segment EBITDA for the year ended September 30, 2000 increased $21.7
million or 18% to $139.7 million from $118 million in 1999. EBITDA as a
percentage of sales decreased to 18.9% from 21.9% last year. This decrease was
primarily due to the aforementioned resin cost increase. Some of the higher
resin cost impact was recovered with higher average selling price to the product
segment.
Other income earned in fiscal 2000 primarily represents the gain on the sale
of Steelwood Doors Inc., a non-strategic operating company.
Amortization expense as a percentage of sales was 5.4%, slightly higher than
the 5.2% experienced last year. This expense increased by $16.2 million from
$67.1 million in the prior year due to added capacities in both operating
segments through both acquisitions and the capital expenditure program
undertaken during the period.
Product segment amortization expense as a percentage of sales was 3.9%,
slightly higher than the 3.8% experienced last year. This expense increased by
$10.8 million from $47.4 million in the prior year due primarily to added
capacities in custom profiles and building system product lines.
Support segment amortization expense as a percentage of sales was 3.4%,
slightly lower than the 3.6% experienced last year. This expense increased by
$5.4 million from $19.7 million in the prior year due primarily to added
capacities in the material processing companies and manufacturing facility
additions.
As anticipated, interest and financing charges increased as a percentage of
sales to 3.0% from 2.4% last year. Interest expense increased by $15.2 million
from $31.4 million due to higher level of loan utilization for working capital
and capital spending purposes, as the Group's interest rates were relatively
consistent with those experienced in 1999. During the year, Company's capital
expenditure program was financed with equal portions of cash flow from
operations and debt proceeds.
In fiscal 2000, income tax expense as a percentage of earnings before
income taxes decreased to 31.9% from 34.4% due mainly to; the adoption of the
new accounting recommendation from the Canadian Institute of Chartered
Accountants, section 3465, Accounting for Income Taxes, income earned in foreign
jurisdictions with a lower effective tax rate and various income tax initiatives
implemented throughout the year.
Net earnings in 2000 increased by $19.1 million or 12.8% to a record $169.1
million or 10.9% of sales from $150 million or 11.7% of net sales for the
previous year. On a fully diluted basis, net earnings per share for fiscal 2000
was $1.89. This is an improvement over the fiscal 1999 fully diluted net
earnings per share of $1.68.
RISKS AND UNCERTAINTIES
Royal operates in many markets each of which involves various known and unknown
risk factors and uncertainties and other factors affecting Royal specifically or
the markets generally. Royal's future performance could be affected by these
important factors, which in some cases have affected, and which in the future
could affect, Royal's actual results and could cause Royal's
22
[WORKING CAPITAL BAR CHART 1995-2001]
[PROPERTY, PLANT AND EQUIPMENT BAR CHART 1995-2001]
[TOTAL ASSETS BAR CHART 1995-2001]
[FUNDED DEBT TO CAPITAL (PERCENTAGE) PIE CHARTS 1998-2001]
actual results for 2002 and beyond to differ materially from those expressed in
any forward-looking statements made by or on behalf of Royal. These risks and
uncertainties include fluctuations in the level of renovation, remodeling and to
a lesser extent construction activity, changes in Royal's product costs and
pricing, an inability to achieve or delays in achieving savings related to the
cost reductions, consolidation and restructuring programs, changes in Royal's
product mix, the growth rate of the markets in which Royal's products are sold,
market acceptance and demand for Royal's products, changes in availability or
prices for raw materials, pricing competition, difficulty in developing and
introducing new products, failure to penetrate new markets effectively
(particularly in developing countries), 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.
o Royal'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 Royal 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.
o The price and availability of raw materials, and in particular PVC resin,
represents a substantial portion of the cost of manufacturing Royal's
products. Historically, there have been fluctuations in these raw
material's prices and in some instances price movements have been volatile
and affected by circumstances beyond Royal's control. There can be no
assurance that Royal 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 significantly
affecting its margins. In addition, the industry has occasionally found
certain raw materials to be in short supply.
o As the Company continues to expand the scope of its activities in foreign
markets, it becomes exposed to a greater risk of foreign exchange
fluctuations. The company 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. While Royal 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 Company
does not purchase derivative instruments beyond those needed to hedge
foreign currency requirements.
OUTLOOK FOR 2002 AND 2003
During fiscal 2002, accelerating sales growth, increasing profitability,
declining capital expenditures and sales of non-strategic assets, are expected
to produce strong cash flow, enabling the reduction of net debt to total
capitalization to a range of 36% to 38% by year-end. Looking further ahead,
Management expects to achieve sales growth of 10% to 15% per year over the next
four years, with a sales target of $3 billion in 2005. Over the next four years,
as current manufacturing infrastructure is utilized to produce increasing sales
volumes, returns on invested capital are expected to return to the double-digit
levels experienced in the late 1990's.
23
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.
/s/ Vic De Zen /s/ Gary Brown
- ----------------------------------- -----------------------------------
Chairman, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
November 16, 2001 November 16, 2001
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Royal Group Technologies
Limited as at September 30, 2001 and 2000 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,
2001 and 2000 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain
significant respects from accounting principles generally accepted in the United
States of America. Application of accounting principles generally accepted in
the United States of America would have affected the financial statements for
the years ended September 30, 2001 and 2000, to the extent summarized in note 19
to the consolidated financial statements.
[KPMG LLP SIGNATURE]
Chartered Accountants
Toronto, Canada
November 16, 2001
24
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
(In thousands of Canadian dollars)
2001 2000
---------- ----------
ASSETS
Current assets:
Accounts receivable (note 4) $ 370,030 $ 363,939
Inventories (note 5) 420,597 421,686
Prepaid expenses and deposits 30,609 28,701
821,236 814,326
Property, plant and equipment (note 6) 1,604,499 1,455,027
Future income tax assets (note 14) 22,847 20,826
Goodwill and other assets (note 7) 245,729 248,857
---------- ----------
$2,694,311 $2,539,036
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 9) $ 405,367 $ 330,546
Accounts payable and accrued liabilities (note 8) 211,472 286,297
Term debt due within one year (note 9) 24,635 479
641,474 617,322
Term debt (note 9) 544,861 547,210
Future income tax liabilities (note 14) 127,487 118,816
Minority interest 18,802 19,466
Shareholders' equity:
Capital stock (note 10) 608,776 605,712
Retained earnings 775,229 657,791
Currency translation adjustments (22,318) (27,281)
---------- ----------
1,361,687 1,236,222
---------- ----------
$2,694,311 $2,539,036
========== ==========
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Vic De Zen /s/ Gary Brown
- ----------------------------------- -----------------------------------
Vic De Zen Gary Brown
Chairman, President & C.E.O. Executive Vice President, C.F.O. &
Director
25
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended September 30, 2001 and 2000
(In thousands of Canadian dollars, except per share amounts)
2001 2000
---------- ----------
Net sales $1,669,036 $1,549,481
Cost of sales and operating expenses 1,353,109 1,179,107
Other income -- 8,025
Earnings before the undernoted 315,927 378,399
Amortization charges (note 12) 104,632 83,335
Interest and financing charges (note 13) 56,546 46,592
Earnings before income taxes and minority interest 154,749 248,472
Income taxes (note 14) 38,001 79,246
Earnings before minority interest 116,748 169,226
Minority interest (690) 109
---------- ----------
Net earnings $ 117,438 $ 169,117
========== ==========
Basic net earnings per share (note 11) $ 1.29 1.95
========== ==========
Diluted net earnings per share (notes 1(k) and 11) $ 1.27 1.89
========== ==========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years ended September 30, 2001 and 2000
(in thousands of Canadian dollars)
2001 2000
---------- ----------
Retained earnings, beginning of year $ 657,791 $ 488,674
Net earnings 117,438 169,117
---------- ----------
Retained earnings, end of year $ 775,229 $ 657,791
========== ==========
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2001 and 2000
(In thousands of Canadian dollars, except per share amounts)
2001 2000
---------- ----------
Cash provided by (used in):
Operating activities:
Earnings before minority interest $ 116,748 $ 169,226
Items not affecting cash (note 16) 138,779 111,108
Change in non-cash working capital items (note 17) (110,425) (171,419)
145,102 108,915
Financing activities:
Increase in bank indebtedness 74,821 160,232
Term debt proceeds -- 150,000
Term debt repayments (2,538) (180,208)
Issuance of shares, net of share issue costs -- 149,900
Issuance of shares under stock option plan 3,064 2,578
Dividends paid to minority interest (294) --
75,053 282,502
Investing activities:
Acquisition of property, plant and equipment, net (208,088) (373,699)
Acquisitions of other businesses (4,913) (819)
Increase in investments (2,641) (14,208)
Increase in other assets (1,797) (3,234)
(217,439) (391,960)
Effect of exchange rate changes (2,716) 543
Change in cash, being cash, end of year $ -- $ --
Cash flow, being earnings before minority interest
plus items not affecting cash $ 255,527 $ 280,334
Basic cash flow per share (note 11) $ 2.81 $ 3.22
Diluted cash flow per share (notes 1(k) and 11) $ 2.75 $ 3.13
Supplemental cash flow information:
Interest and financing charges paid $ 58,693 $ 52,506
Income taxes paid 41,160 63,148
See accompanying notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2001 and 2000
(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 19.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Royal Group
Technologies Limited, 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.
(b) Use of estimates:
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the year.
Actual results could differ from those estimates.
(c) Inventories:
Inventories are stated at the lower of cost, determined 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
significant 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 using the following annual rates:
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:
Goodwill is amortized on a straight-line basis over 40 years. Goodwill is
regularly evaluated by reviewing the returns of the related business, taking
into account the risk associated with the investment. Any permanent impairment
of goodwill would be written off against earnings.
Patents and deferred financing costs are amortized on a straight-line basis
over 5 to 17 years for the former and over the life of the debt instrument for
the latter. 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.
(f) Foreign currency translation:
Financial statements of self-sustaining foreign operations are translated using
the current rate method. Adjustments arising from this translation are deferred
and recorded as currency translation adjustments included as a separate
component of shareholders' equity and are included in earnings only upon a
reduction in the investment.
Foreign currency transactions are translated using the temporal method.
Translation gains and losses are included in earnings, except for unrealized
gains and losses arising from the translation of long-term monetary liabilities,
which are deferred and amortized over the remaining life of the related item.
(g) 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 $19,043 (2000 -
$19,100) of which $12,056 (2000 - $9,050) was expensed to cost of sales.
(h) Start-up costs:
Costs incurred in establishing new facilities, including pre-operating costs,
are charged to earnings in the period in which they are incurred.
(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 management and key operating personnel. Any consideration paid by
management and key personnel on exercise of stock options or purchase of stock
is credited to capital stock.
(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 enactment date.
(k) Change in accounting policies:
During the current fiscal year, The Canadian Institute of Chartered Accountants
("CICA") revised Section 3500, of the CICA Handbook, Earnings Per Share. This
section requires the use of the treasury method in calculating fully diluted
earnings per share. The change in accounting 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.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
2. BUSINESS DEVELOPMENT:
Acquisitions of other businesses:
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:
Working capital $2,952
Property, plant and equipment 1,961
------
Total purchase price $4,913
======
During 2000, the Company acquired either 100% or controlling equity interest in
certain businesses for aggregate consideration of $819 in cash. These
acquisitions were accounted for by the purchase method and are summarized as
follows:
Working capital, and property, plant and equipment $ 3,951
Term debt (3,475)
Future income tax liabilities (71)
Minority interest (1)
--------
404
Goodwill 415
--------
Total purchase price $ 819
========
3. INTEREST IN JOINT VENTURES:
The Company's proportionate interest in joint ventures includes current assets
of $8,366 (2000 - $5,554), property, plant and equipment of $10,507 (2000 -
$6,786), current liabilities of $4,407 (2000 - $3,123) and long-term liabilities
of $3,230 (2000 - $1,974). Operating results of the Company include sales of
$35,823 (2000 - $29,080) and net earnings of $3,451 (2000 - $3,107) from its
proportionate interest in joint venture operations. Cash provided from
operations of $4,445 (2000 - $3,136) and acquisitions of property, plant and
equipment of approximately $4,205 (2000 - $1,636) relate to its proportionate
interest in joint venture operations during the year.
4. ACCOUNTS RECEIVABLE:
2001 2000
-------- ---------
Trade $ 341,995 $ 344,804
Taxes and other 35,553 24,332
Allowance for doubtful accounts (7,518) (5,197)
--------- ---------
$ 370,030 $ 363,939
========= =========
5. INVENTORIES:
2001 2000
-------- ---------
Raw materials and work-in-process $162,759 $ 154,208
Finished goods 257,838 267,478
-------- ---------
$420,597 $ 421,686
======== =========
6. PROPERTY, PLANT AND EQUIPMENT:
2001 2000
---------- ----------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---------- ------------ ---------- ----------
Land $ 101,260 $ -- $ 101,260 $ 80,199
Buildings 555,778 82,672 473,106 337,594
Plant equipment 1,026,862 262,758 764,104 696,993
Dies and moulds 199,552 92,139 107,413 79,568
Office and computer equipment 48,430 26,366 22,064 17,796
Aircraft and transport equipment 62,972 23,551 39,421 39,013
---------- ---------- ---------- ----------
1,994,854 487,486 1,507,368 1,251,163
Assets not in use 97,131 -- 97,131 203,864
---------- ---------- ---------- ----------
$2,091,985 $ 487,486 $1,604,499 $1,455,027
========== ========== ========== ==========
Assets not in use are expected to either be placed into productive use during
fiscal 2002 or disposed of during the next eighteen months. Assets not in use,
consist of land and buildings under construction of $24,799 (2000 - $139,400)
and plant equipment under construction of $72,332 (2000 - $64,464). Capital
expenditures during the year include $8,230 (2000 - $15,362) of capitalized
interest costs.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
7. GOODWILL AND OTHER ASSETS:
2001 2000
-------- --------
Goodwill, net of accumulated amortization
of $32,317 (2000 - $ 26,424) $187,378 $192,264
Patents, net 7,339 7,453
Deferred financing costs, net 2,059 2,352
-------- --------
196,776 202,069
Investments 48,953 46,788
-------- --------
$245,729 $248,857
======== ========
Investments include the Company's holdings in associated companies and other
business ventures accounted for by the equity and cost methods, and investments
in marketable securities.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
2001 2000
-------- --------
Trade $152,083 $230,402
Taxes and other 59,389 55,895
-------- --------
$211,472 $286,297
======== ========
9. BANK INDEBTEDNESS AND TERM DEBT:
The Company has an authorized $700 million (2000 - $700 million) revolving,
unsecured bank credit facility with a syndicate of banks, of which $147,118 was
drawn at September 30, 2001 (2000 - $264,154) and $281,000 (2000 - $100,000) was
committed as back-up liquidity to outstandings 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 back-up liquidity lines and bears
interest at prime or at 0.675% (2000 - 0.625%) over bankers' acceptance rates or
LIBOR, plus a standby fee of 0.125% (2000 - 0.125%) on the undrawn portion of
the facility, payable quarterly in arrears. Additionally, utilization fees are
determined quarterly in arrears of 0.05% (2000 - 0.05%) if 1/3 to 2/3 of the
facility is drawn and 0.10% (2000 - 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 $300 million commercial paper program in
Canada. On September 30, 2001, $281,000 (2000 - $100,000) was issued and
outstanding, bearing rates at approximately 0.06 - 0.07% (2000 - 0.03 - 0.04%)
over bankers' acceptance rates, plus a commission at 0.125%. The Company issues
current debt first under its commercial paper program and the balance, if any,
under its bank facility. This program is supported by the bank facility and
became active on September 26, 2000.
The Company has an authorized $400 million (2000 - $400 million) medium
term note program in Canada. This program is unsecured, ranking pari passu with
the bank facility. On April 13, 2000, the Company issued $150 million 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 2002
o U.S. $75,000 bearing interest at 7.17% with equal annual principal
repayments due from August 2002 to 2006
o U.S. $25,000 bearing interest at 7.31%, due August 2006
o U.S. $115,000 bearing interest at 7.10%, due November 2007
2001 2000
-------- --------
Bank indebtedness:
Bankers' acceptances advances $ 65,000 $192,000
LIBOR advances (U.S. $52,000; 2000 -
U.S. $48,000) 82,118 72,154
Commercial paper outstandings 281,000 100,000
-------- --------
428,118 364,154
Less cash 22,751 33,608
-------- --------
Bank indebtedness $405,367 $330,546
======== ========
2001 2000
--------- ---------
Term debt:
Medium term notes outstanding $ 150,000 $ 150,000
Senior notes outstanding (U.S $265,000;
2000 - U.S. $265,000) 418,463 398,348
Other term debt requiring periodic
principal repayments 7,137 7,779
Deferred foreign exchange loss (6,104) (8,438)
--------- ---------
569,496 547,689
Term debt due within one year (24,635) (479)
--------- ---------
Term debt $ 544,861 $ 547,210
========= =========
Term debt principal repayments for the next five fiscal years are as follows:
2002 $ 24,635
2003 103,739
2004 24,814
2005 24,780
2006 and thereafter 391,528
--------
$569,496
========
10. CAPITAL STOCK:
Authorized share capital of the Company consists of the following:
(a) Unlimited number of 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 number of 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.
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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
10. CAPITAL STOCK (CONT'D):
SUBORDINATE VOTING MULTIPLE VOTING
--------------------- ---------------------- TOTAL TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- --------- ---------- -------- ---------- ---------
Issued and outstanding, September 30, 1999 68,505,995 $ 432,298 17,635,444 $ 18,410 86,141,439 $ 450,708
Issued for cash, net of share issue costs
(net of taxes of $2,526) 4,500,000 152,426 -- -- 4,500,000 152,426
Issued for cash under stock option plan 130,400 2,578 -- -- 130,400 2,578
Fractional shares issued relating
to Royal Ecoproducts amalgamation 1,473 -- -- -- 1,473 --
---------- --------- ---------- -------- ---------- ---------
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
========== ========= ========== ======== ========== =========
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 10,636,000 and all options expire nine
years after the date of issue.
The number of stock options has varied as follows:
2001 2000
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------
Balance, beginning of year 9,794,654 $ 24.34 9,515,954 $ 23.92
Granted 580,000 21.95 732,500 31.46
Exercised (284,688) 11.16 (130,400) 20.69
Cancelled (337,128) 33.11 (323,400) 29.44
--------- --------- --------- ---------
Balance, end of year 9,752,838 $ 24.28 9,794,654 $ 24.34
--------- --------- --------- ---------
Options exercisable, end of
year 5,252,719 $ 17.41 1,409,572 $ 27.11
========= ========= ========= =========
The following table summarizes information about options outstanding at
September 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES PER SHARE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- --------- ----------- ---------
$ 7.15 - $17.63 3,363,860 2.3 years $ 11.28 3,243,335 $ 11.08
18.38 - 29.90 2,489,244 5.6 years 24.95 1,356,122 24.73
30.00 - 36.00 1,648,400 5.8 years 32.83 527,200 32.70
36.10 - 46.60 2,251,334 5.4 years 36.71 126,062 37.61
--------- ------- --------- -------
9,752,838 $ 24.28 5,252,719 $ 17.41
========= ======= ========= =======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
11. EARNINGS PER SHARE:
Basic and diluted net earnings per share and cash flow per share have been
calculated using the weighted average and maximum dilutive number of shares
outstanding during the year of 90,869,248 (2000 - 86,929,410) and 92,802,214
(2000 - 89,614,144), respectively. The difference between basic and diluted
number of shares is due to the Company's stock option program.
12. AMORTIZATION CHARGES:
2001 2000
-------- --------
Property, plant and equipment $ 97,170 $ 76,383
Goodwill 5,893 5,763
Patents 1,569 1,189
-------- --------
$104,632 $ 83,335
======== ========
13. INTEREST AND FINANCING CHARGES:
2001 2000
-------- --------
Interest expense:
Operating $ 18,634 $ 17,878
Term 31,856 24,465
Bank and financing expense 3,152 2,841
Amortization of deferred financing costs
and foreign exchange loss 2,904 1,408
-------- --------
$ 56,546 $ 46,592
======== ========
14. INCOME TAXES:
Total income tax expense for the year ended September 30, 2001 was allocated as
follows:
2001 2000
-------- --------
Earnings before income taxes:
Canadian operations $189,973 $239,791
Foreign operations (35,224) 8,681
-------- --------
$154,749 $248,472
======== ========
Current income tax expense:
Canadian operations $ 40,552 $ 46,297
Foreign operations (9,201) 4,803
-------- --------
31,351 51,100
Future income tax expense:
Canadian operations 8,935 26,114
Foreign operations (2,285) 2,032
-------- --------
6,650 28,146
-------- --------
$ 38,001 $ 79,246
======== ========
14. INCOME TAXES
Income tax expense attributable to earnings differs from the amounts computed by
applying the combined federal and provincial income tax rate of 34.2% (2000
- - 35.5%) to pretax earnings as a result of the following:
2001 2000
-------- --------
Earnings before income taxes and minority interest $154,749 $248,472
-------- --------
Expected income taxes based on an effective
manufacturing and processing income tax rate
of approximately 34.2% (2000 - 35.5%) $ 52,924 $ 88,207
Changes in income taxes attributed to:
Amortization of non-deductible goodwill and
future income tax assets 2,382 2,157
Adjustment to future income tax assets and
liabilities for enacted changes in tax laws
and rates (9,000) (1,900)
Reduction due to income earned in foreign
jurisdictions (6,679) (5,869)
Non-taxable income and other (1,626) (3,349)
-------- --------
$ 38,001 $ 79,246
======== ========
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.
On June 29, 2001, the Ontario government legislated changes to its
provincial corporate income tax rates that will be implemented over a five-year
period commencing October 1, 2001. The effect of the substantively enacted
changes in the provincial income tax rates is reported as a $9 million reduction
to future income tax expense in fiscal 2001.
The tax effects of temporary differences that give rise to significant
portions of the future income tax assets and liabilities at September 30, 2001
are presented below:
2001 2000
--------- ---------
Future income tax assets:
Share issue costs $ 2,453 $ 3,578
Non-capital loss carryforwards 18,082 12,427
Other, including refundable taxes 3,312 5,821
--------- ---------
23,847 21,826
Less valuation allowance (1,000) (1,000)
--------- ---------
Future income tax assets 22,847 20,826
========= =========
Future income tax liabilities:
Capital, intangible and other assets (123,641) (117,737)
Other (3,846) (1,079)
--------- ---------
Future income tax liabilities $(127,487) $(118,816)
========= =========
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.
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.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
15. SEGMENT REPORTING INFORMATION:
Operating segments are defined as components of an enterprise about which
separate financial information is available and which are evaluated regularly by
the chief operating decision maker 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 and 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. Real estate
construction, equipment, transportation, research and development,
distribution and other support services 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 2.3% of net sales (2000 - 3.3%).
The accounting policies for each of the segments are the same as those
described in note 1. Intersegment transactions are negotiated as if the
transactions were to third parties, at market prices.
Virtually all intra-group sales relate to materials, machinery and tooling
and services transactions of the support segment.
2001 PRODUCT SUPPORT INTRA-GROUP CONSOLIDATED
- ---- ---------- ---------- ------------ ------------
NET SALES $1,584,594 $ 663,442 $ (579,000) $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
TOTAL ASSETS 1,518,816 1,175,495 2,694,311
2000 PRODUCT SUPPORT INTRA-GROUP CONSOLIDATED
- ---- ---------- ---------- ------------ ------------
Net sales $ 1,483,724 $ 734,757 $ (669,000) $ 1,549,481
Earnings before amortization and interest 238,684 139,715 378,399
Amortization charges 58,170 25,165 83,335
Acquisition of property, plant and equipment and goodwill 162,082 212,032 374,114
Property, plant and equipment 661,809 793,218 1,455,027
Total assets 1,418,323 1,120,713 2,539,036
Certain information with respect to geographic regions is presented below:
2001 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
---------- --- ---------- -------- --------
$1,669,036 100% $ 557,475 $939,484 $172,077
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
2000 TOTAL CANADA U.S. OTHER FOREIGN
- ---- ---------- -----------------------------------------
SALES
-----------------------------------------
Manufactured by:
Canadian operations $ 991,080 64% $ 520,649 $436,034 $ 34,397
U.S. operations 445,620 29% -- 442,008 3,612
Foreign operations 112,781 7% -- 1,694 111,087
---------- --- ---------- -------- --------
$1,549,481 100% $ 520,649 $879,736 $149,096
34% 57% 9%
Property, plant and equipment $1,455,027 $1,095,143 $223,015 $136,869
Goodwill 192,264 87,160 94,300 10,804
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
16. ITEMS NOT AFFECTING CASH:
2001 2000
--------- ---------
Amortization charges $ 104,632 $ 83,335
Amortization of deferred financing costs and
foreign exchange loss 2,904 1,408
Future income taxes 6,650 28,146
Other 24,593 (1,781)
--------- ---------
$ 138,779 $ 111,108
========= =========
17. CHANGE IN NON-CASH WORKING CAPITAL ITEMS:
2001 2000
--------- ---------
Accounts receivable $ (5,538) $ (69,370)
Inventories (13,301) (144,012)
Prepaid expenses and deposits (1,178) (17,858)
Accounts payable and accrued liabilities (90,408) 59,821
--------- ---------
$(110,425) $(171,419)
========= =========
The changes noted above are exclusive of non-cash working capital acquired
through acquisitions.
18. 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.
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, 2001,
the fair value of the Company's senior notes exceeded the book value of these
obligations by $43,707 (2000 - $1,053) at year-end exchange rates. As at
September 30, 2001, the fair value of the Company's medium term notes
approximate book value.
(b) Derivative financial instruments:
The Company does not hold or issue financial instruments for trading purposes
and does not hold any significant 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.
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES:
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canadian ("Canadian GAAP"). In
certain respects, the United States ("U.S. GAAP") differ from those in Canada.
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) Substantially enacted tax laws and rates:
Canadian GAAP permits the recognition of the impact of substantially
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 substantially enacted.
U.S. GAAP does not recognize the concept of substantially 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 ("FAS 130") which
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. FAS 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.
(b) Net earnings in accordance with U.S. GAAP:
2001 2000
--------- ---------
Net earnings in accordance with Canadian GAAP $ 117,438 $ 169,117
Impact on net earnings of U.S. GAAP adjustments:
Foreign exchange on term debt (note 19(a)(i)) 2,334 (4,343)
Tax effect of adjustments (798) 1,542
Substantially enacted tax laws and rates
(note 19(a)(ii)) 4,336 (4,336)
--------- ---------
Net earnings based on U.S. GAAP 123,310 161,980
Foreign currency translation adjustment 4,963 2,600
--------- ---------
Comprehensive income based on U.S. GAAP $ 128,273 $ 164,580
========= =========
Basic net earnings per share $ 1.36 $ 1.86
========= =========
Diluted net earnings per share 1.33 1.81
========= =========
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2001 and 2000
(in thousands of Canadian dollars, except per share amounts)
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONT'D):
(c) Shareholders' equity in accordance with U.S. GAAP:
2001 2000
---------- ----------
Shareholders' equity in accordance with
Canadian GAAP $1,361,687 $1,236,222
Foreign exchange on term debt (note 19(a)(i)) (6,104) (8,438)
Tax effect of adjustments 2,197 2,995
Substantially enacted tax laws and rates
(note 19(a)(ii)) -- (4,336)
---------- ----------
Shareholders' equity in accordance with U.S. GAAP $1,357,780 $1,226,443
========== ==========
(d) Effect on consolidated balance sheets and consolidated statements of
earnings: The application of U.S. GAAP would result in the following
presentation on these captions on the consolidated balance sheets and
consolidated statements of earnings:
2001 2000
-------- --------
Term debt $575,600 $556,127
Net future income tax liabilities 102,552 99,331
Tax provision 34,463 82,040
Interest and financing charges 54,146 44,211
(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:
Assumptions 2001 2000
- ----------- ------- -------
Risk-free interest rate 5.4% 6.1%
Expected life (in years) 4.0 4.4
Expected volatility 34.7% 35.8%
======= =======
Weighted average fair value of options granted
during the year $ 7.78 $ 12.13
======= =======
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:
2001 2000
--------- ---------
Net earnings:
As reported $ 123,310 $ 161,980
Pro forma 117,018 151,399
Basic net earnings per share:
As reported 1.36 1.86
Pro forma 1.28 1.74
Diluted net earnings per share:
As reported 1.33 1.81
Pro forma 1.26 1.69
(ii) New accounting standards:
In June 2001, the FASB issued SFAS No. 141 "Business Combinations".
SFAS No. 141 requires that the purchase method be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method will no longer be permitted. There will be no impact of the adoption
of SFAS No. 141. Canadian GAAP will be substantially the same method of
accounting for business combinations as U.S. GAAP.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangibles". SFAS No. 142 requires that new and existing goodwill no
longer be amortized, but instead be reviewed for impairment. SFAS No. 142
is effective in the year commencing October 1, 2001. Canadian and U.S. GAAP
will be substantially the same method of accounting for the amortization of
goodwill. Under the new standard goodwill amortization of $5,893 charged in
fiscal 2001 will no longer be amortized.
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, 2001. 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 provides
guidance on how a long-lived asset that is used as part of a group should
be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived
asset that will be disposed of other than by sale. The Company is required
to adopt SFAS No. 144 no later that the year beginning after December 15,
2001. Management does not expect the adoption of SFAS No. 144 for
long-lived assets held for use to have a material impact on the Company's
financial statements.
20. 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 five years.
The Company has contingent liabilities under standby letters of credit
amounting to approximately $14,800 (2000 - $6,800) and U.S. $4,700 (2000 - U.S.
$3,400).
21. SUBSEQUENT EVENT:
On November 14, 2001, the Company signed an Asset Purchase Agreement to acquire
the assets and business of Marley Moulding 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.
Based in Marion, Virginia, its sales for the twelve months ended September 30,
2001, were approximately U.S. $100 million.
The purchase, subject to regulatory approval, is expected to close November
30, 2001 for a cash price of U.S. $88 million based on the net tangible assets
having a value of U.S. $60 million. The acquisition will be accounted for by the
purchase method, and is expected to result in an increase of goodwill and other
intangible assets of approximately U.S. $28 million.
35
SUPPLEMENTARY FINANCIAL INFORMATION
ELEVEN-YEAR SUMMARY OF STATEMENTS OF EARNINGS(3)
For the years ended September 30
(In thousands of Canadian dollars, except per share amounts)
2001 2000 1999 1998 1997 1996 1995
--------- --------- --------- --------- ------- ------- -------
Net Sales 1,669,036 1,549,481 1,282,004 1,050,103 848,741 675,092 535,053
Cost of sales and
operating expenses (1,353,109) (1,179,107) (952,902) (799,103) (649,313) (522,650) (423,444)
Other income -- 8,025 -- -- -- -- --
Operating margin 315,927 378,399 329,102 251,000 199,428 152,442 111,609
Percentage 18.9% 24.4% 25.7% 23.9% 23.5% 22.6% 20.9%
Amortization (104,632) (83,335) (67,134) (50,033) (43,624) (36,932) (28,095)
Interest and
financing charges (56,546) (46,592) (31,377) (17,617) (9,155) (8,191) (9,895)
Earnings from
operations 154,749 248,472 230,591 183,350 146,649 107,319 73,619
Management
shareholder bonuses -- -- -- -- -- -- --
Unusual items -- -- -- (2,900) -- -- --
Earnings before
income taxes
and minority interest 154,749 248,472 230,591 180,450 146,649 107,319 73,619
Income taxes (38,001) (79,246) (79,182) (64,712) (52,721) (38,772) (26,142)
Earnings before
minority interest 116,748 169,226 151,409 115,738 93,928 68,547 47,477
Minority interest 690 (109) (1,440) 355 (2,265) (1,394) (864)
Net earnings(3) 117,438 169,117 149,969 116,093 91,663 67,153 46,613
Basic Net EPS(3) $1.29 $1.95 $1.75 $1.38 $1.13 $0.87 $0.66
Fully Diluted Net
EPS(4) $1.27 $1.89 $1.68 $1.32 $1.06 $0.81 $0.59
1994 1993 1992 1991
-------- ------- ------- -------
Net Sales 466,810 368,388 316,564 266,317
Cost of sales and
operating expenses (360,557) (286,904) (244,589) (212,128)
Other income -- -- -- --
Operating margin 106,253 81,484 71,975 54,189
Percentage 22.8% 22.1% 22.5% 20.3%
Amortization (23,902) (20,552) (18,536) (17,841)
Interest and
financing charges (17,597) (20,387) (19,771) (25,002)
Earnings from
operations 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 62,490 35,099 31,689 9,768
Income taxes (18,982) (12,666) (10,527) (1,377)
Earnings before
minority interest 43,508 22,433 21,162 8,391
Minority interest (2,168) (734) (722) (195)
Net earnings(3) 41,340 21,699 20,440 8,196
Basic Net EPS(3) -- -- -- --
Fully Diluted Net
EPS(4) -- -- -- --
- ------------
(1) Quarterly information is unaudited.
(2) Prior to $2,900 (or $0.03 per share) write down of non-core land in fiscal
1998.
(3) 1994-90 pre IPO net earnings and operating margin are unadjusted on a
pro-forma basis. Royal commenced trading on the Toronto Stock Exchange in
November 1994.
(4) 2000 quarterly and 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.
(5) Restated quarterly fully diluted net earnings per share for 1997-1999 not
available.
36
QUARTERLY DATA(1)
(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.
Q1 Q2 Q3 Q4 TOTAL
--------- --------- --------- --------- ---------
Corporate Operating Results - Fiscal 2001
Net sales 353,648 334,043 506,949 474,396 1,669,036
Operating margin 72,407 32.214 115,117 96.189 315,927
Earnings from operations 34,531 (7,370) 73,407 54,181 154,749
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
Fully diluted net earnings (loss) per
share(4) $ 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 74,524 76,727 119,930 107,218 378,399
Earnings from operations 44,890 44,852 86,647 72,083 248,472
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
Fully diluted net earnings per share(4) $ 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 59,477 63,631 99,282 106,712 329,102
Earnings from operations 39,144 40,181 74,525 76,741 230,591
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
Fully diluted net earnings per share(4)(5) -- -- -- -- $ 1.68
Corporate Operating Results - Fiscal 1998
Net sales 211,436 229,344 304,098 305,225 1,050,103
Operating margin 46,346 47,558 78,180 78,916 251,000
Earnings from operations 31,040 31,806 60,138 60,366 183,350
Net earnings 18,402 19,028 39,725(2) 41,838 118,993(2)
Basic net earnings per share $ 0.22 $ 0.23 $ 0.47(2) $ 0.49 $ 1.41(2)
Fully diluted net earnings per share(4)(5) -- -- -- -- $ 1.35(2)
Corporate Operating Results - Fiscal 1997
Net sales 174,492 175,539 240,098 258,612 848,741
Operating margin 36,448 35,992 60,910 66,078 199,428
Earnings from operations 23,322 23,228 47,096 53,003 146,649
Net earnings 13,975 14,473 30,488 32,727 91,663
Basic net earnings per share $ 0.17 $ 0.18 $ 0.38 $ 0.40 $ 1.13
Fully diluted net earnings per share(4)(5) -- -- -- -- $ 1.06
[BAR CHART OF QUARTERLY NET SALES 1997-2001]
[BAR CHART OF QUARTERLY NET EARNINGS 1997-2001]
[BAR CHART OF QUARTERLY NET BASIC EPS 1997-2001]
See page 36 for footnotes.
37
ROYAL AT A GLANCE
ANNUAL NET SALES (IN MILLIONS OF DOLLARS)+
-------------------------------------------------------
SEGMENTS `01 `00 `99 `98 `97 `96
----- ----- ----- ----- ----- -----
HOME IMPROVEMENT PRODUCTS
Custom Profiles 520 488 419 347 330 287
Siding and Roofing 233 210 179 152 123 107
Residential Doors 0 8 25 19 19 18
CONSUMER PRODUCTS
Window Coverings 261 261 234 192 163 128
Outdoor Products 124 127 85 65 26 8
Housewares & Furniture 105 77 49 42 0 0
CONSTRUCTION PRODUCTS
Pipe and Fittings 187 178 149 114 106 78
Commercial Doors 24 22 20 16 13 0
ROYAL BUILDING SYSTEMS AND FOREIGN OPERATIONS 131 113 82 77 44 28
TOTAL PRODUCT SEGMENT 1,585 1,484 1,242 1,024 824 654
Materials 371 392 293 194 171 134
Machinery & Tooling 86 79 93 90 37 22
Service 206 263 153 107 72 51
TOTAL SUPPORT SEGMENT 663 734 539 391 280 207
Intra Group Eliminations (579) (669) (499) (365) (255) (186)
CONSOLIDATED NET SALES 1,669 1,549 1,282 1,050 849 675
- -------------
+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.
[TRADEMARK LOGOS OF GRACIOUS LIVING, ROYAL YARDMATE, BROCK DECK SYSTEMS, ROYAL
WOODLAND, TRIPLE CROWN FENCE, ROYAL BUILDING SYSTEMS, DURA SLATE, JOURNEYMEN,
LASERLITE, ROYAL QUICKSTOP, NOVO, SHOWPLACE, AND RESIDENTIAL]
38
OUTSTANDING SHARE INFORMATION
as at September 30, 2001 and 2000
2001 2000
---------- ----------
Multiple Voting Shares 15,935,444 17,635,444
Subordinate Voting Shares 75,122,556 73,137,868
---------- ----------
Total shares outstanding 91,058,000 90,773,312
========== ==========
Total options outstanding as at September 30, 2001 are 9,752,838 (2000 -
9,794,654).
Dividend Policy: Royal's policy is to retain its earnings to finance growth and
development of its business and 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.
TRADING DATA (STOCK SYMBOL: RYG)
Volume
High Low Close (000's)
(TSE) (TSE) (TSE) TSE+NYSE
----- ----- ----- --------
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
======
Fiscal 2000
Fourth Quarter 36.15 28.50 30.00 10,437
Third Quarter 36.50 28.00 35.20 8,309
Second Quarter 32.90 26.00 31.50 9,380
First Quarter 35.20 24.75 30.75 10,596
------
Total 38,722
======
[LINE GRAPH OF ROYAL GROUP'S SHARE PERFORMANCE
CUMULATIVE TOTAL RETURN ON INVESTMENT OF $C100
(NOVEMBER 1994 THROUGH SEPTEMBER 2001)]
39
CORPORATE INFORMATION
SIGNIFICANT
MANUFACTURING OPERATIONS
BOARD OF DIRECTORS' TRANSFER AGENT AND REGISTRAR OUTSIDE OF CANADA & U.S.A.
- ------------------- ---------------------------- --------------------------
Vic De Zen Information regarding your PRODUCT SEGMENT:
Royal Group Technologies Limited shareholdings may be obtained Argentina:
Chairman, President and by writing or calling the transfer Royal Group Technologies del Sur S.A.
Chief Executive Officer agents: Avenida 520, Ruta #2
Km. 55, Abasto 1903 Parque Industrial
Douglas Dunsmuir Computershare Trust Company of Canada La Plata
Royal Group Technologies Limited 100 University Avenue, 9th Floor Buenos Aires, Argentina
Executive Vice President Toronto, Ontario M5J 2Y1 Tel: (54-11) 4314-8997
and General Counsel Tel: 1-800-663-9097 or (416) 981-9633 Fax: (54-11) 4314-6010
Facsimile: (416) 981-9507 E-mail: info@royalhousing.com.ar
Gwain Cornish E-mail: caregistryinfo@computershare.com
Royal Group Technologies Limited China:
Senior Vice President Co-Transfer Agent (U.S.A.) Shanghai Royal Building Systems Limited
Computershare Trust Company Inc. 328 Rongle Dong Lu
Ron Goegan 12039 W. Alameda Parkway, Site 2-2 Songjiang Industrial Zone
Royal Group Technologies Limited Lakewood, CO 80228 Songjiang, Shanghai 201613
Chief Financial Officer Tel: (303) 956-5400 China
Fax: (303) 986-2444 Tel: (86-21) 5774-3802
Mario Cadorette Fax: (86-21) 5774-2340
Royal Window Coverings (Canada) Inc. SHAREHOLDER INQUIRIES E-mail: srbs@public.sta.net.cn
President Responses to shareholder inquiries as
well as information published by the Colombia:
Gregory Sorbara* Company for its shareholders and others, Royalco S.A.
The Sorbara Group, Partner including annual reports, quarterly Via Mamonal Km.5
reports and annual information forms may Sector Puerta de Hierro
Ronald Slaght* be obtained from: Apartado 6397
Lenczner Slaght Royce Smith Griffen Cartagena, Colombia
Barristers, Partner Investor Relations Tel: (57-1) 622-2266
Royal Group Technologies Limited Fax: (57-1) 622-9246
Ralph Brehn* 1 Royal Gate Blvd., E-mail: info@royalcosa.com
Retired former President Woodbridge, Ontario L4L 8Z7
of Hunter Douglas Canada Ltd. Telephone: (905) 264-0701 Mexico:
Facsimile: (905) 264-0702 Royal Building Systems de Mexico,
Irvine Hollis E-mail: info@royplas.com S.A. de C.V.
Former President of Duracell Inc. Web site: www.royalgrouptech.com Calle Adair, Lote 6, Manzana 4
Presently Management Consultant, Parque de la Pequena y Mediana Industria
I Hollis Management ANNUAL MEETING Puerto Industrial de Altamira
Consultants Inc. The annual meeting of shareholders of Altamira, Tamaulipas,
Management Consultant Royal Group Technologies Limited will C.P. 89609 Mexico
be held February 20, 2002. The notice Tel: (52-55) 26-25-15-00
* Member of Audit Committee of and proxy materials were mailed to Fax: (52-55) 53-43-05-80
shareholders with this report. E-mail: iremes@royalmex.com.mx
EXECUTIVE OFFICERS'
STOCK EXCHANGE LISTINGS Poland:
Vic De Zen Subordinate Voting Shares are Royal Europa Sp. z.o.o
Chairman, President and listed on The Toronto Stock Exchange ul. Royal 1
Chief Executive Officer and the New York Stock Exchange. 59-320 Polkowice Dolne
Symbol: RYG Poland
Douglas Dunsmuir Tel: (48-76) 847-0080
Executive Vice President INDEX LISTINGS Fax: (48-76) 847-0086
and General Counsel TSE100 Index E-mail: royaleuropa@cuprum.com.pl
TSE300 Index
Gwain Cornish Morgan Stanley World Index SUPPORT SEGMENT:
Senior Vice President AMUT S.P.A.
AUDITORS Novara, Italy
Ron Goegan KPMG LLP, Chartered Accountants
Chief Financial Officer Suite 3300, Commerce Court West Ariostici S.P.A.
199 Bay Street Reggio Emilia, Italy
Lu Galasso Toronto, Ontario M5L 1B2
Vice President and Director of Taxation
Ce rapport est egalement publie
1 Gary Brown held the positions of Executive en francais.
Vice President, C.F.O. and Director during
fiscal 2001. Mr Brown retired in
November 2001.
40
BUILDING A BETTER WORLD
Royal's mission is to provide industry leading products to renovate, improve or
construct a building, while striving to enhance the environment through
recycling and maximize returns for shareholders.
[PHOTO OF FAMILY AND BUILDING]
The information in this document contains certain forward-looking statements
with respect to Royal Group Technologies Limited, its subsidiaries and
affiliates. 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 construction
activity, changes in product costs and pricing, an inability to achieve or
delays in achieving savings related to the cost reductions, 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 contracts, 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.
Statements made in this document are made as of January 7, 2002 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: Colour
Innovations Inc., Translation: SLS Translation Inc., Printed in Canada.
[LOGO -- ROYAL GROUP TECHNOLOGIES]