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RONA Announces Results for First Quarter 2008 Sales up 3.8%. Unfavourable economic and weather conditions for construction and renovation activities especially in the eastern part of the country. Same-store sales down 5.2%, excluding the decline in the price of forest products and the effect of statutory holidays. Net earnings of $1.0 million, or $0.01 per share, compared to $9.0 million or $0.08 per share in 2007. Numerous promising initiatives introduced under the PEP program (Productivity, Efficiency, Profitability). Recruitment of nine new dealer-owners in two months, representing estimated annual retail sales of close to $50 million. BOUCHERVILLE, QUEBEC--(MARKET WIRE)--May 13, 2008 -- RONA (Toronto:RON.TO - News), the largest Canadian distributor and retailer
of hardware, renovation and gardening products announced
a 3.8% increase in sales in the first quarter of 2008. Same-store
sales declined by 5.2% in the first quarter of 2008, excluding
price deflation for building materials of 0.5% and negative
1.3% effect related to changes in statutory holidays. Operating
income in the first quarter of 2008 was down by 18.2%, and
net earnings stood at $1.0 million, or $0.01 per share,
compared to $9.0 million or $0.08 per share in 2007. Economic
and weather conditions that were especially unfavourable
to construction/renovation activities, particularly in Eastern
Canada, largely explain this drop in same-store sales and
profits. Results were also affected by a decline in starts
of single family homes in Canada and a temporary slowdown
in the demand for building materials in Alberta.
Under its PEP program (Productivity, Efficiency, Profitability), Phase 1 of the 2008-2011 strategic plan, RONA nonetheless introduced numerous promising initiatives in first quarter 2008, with the following results: - 130 basis point improvement in gross margin - Over 10% growth in sales of private brand products and installation services - $83 million, or 9%, reduction in inventories on a comparable basis versus first quarter 2007 In addition, RONA stepped up training for employees in order to offer the best service and the best shopping experience in the industry. These training sessions covered sales support on several innovative products and services such as the Project Guide service, RONA by Design, installation services, credit and financing solutions, and the all-new line of RONA ECO products. Encouraging results were seen very quickly in the stores. "The results for first quarter 2008 reflect the strong drop in consumer confidence in the country's economic growth. Results were also affected by weather conditions that were particularly unfavourable to construction and renovation activity in Ontario and Quebec, where we get nearly 70% of our sales," explained RONA President and CEO Robert Dutton. "Because of the significant seasonality of our activities, only 15% of our annual sales and 5% of our earnings are on average generated in the first quarter of the year. So we have very little room to manoeuvre at the beginning of the year to compensate for these difficult market conditions." "Despite these unfavourable market conditions, we persevered with the extensive optimization plan we call the PEP program - for Productivity, Efficiency and Profitability - which is the first phase of our 2008-2011 strategic plan. The results of these efforts are very encouraging for the coming quarters. This, combined with the various initiatives to boost sales and stimulate customer loyalty, will allow us to mitigate for the current slowdown in our industry," Dutton said. FINANCIAL HIGHLIGHTS Consolidated sales Consolidated sales in first quarter 2008 stood at $911.5 million, $33.0 million or 3.8% more than the $878.5 million posted in 2007. The growth can be mainly attributed to acquisitions, store openings, and the recruitment of new affiliate dealer-owners. Excluding the contributions of our acquisitions - Noble Trade, Dick's Lumber, Centre de Renovation Andre Lessard and Best-MAR - consolidated sales dropped by 3.5%. Sales generated by new stores opened in the last 12 months could not compensate for the drop in same-store sales, which decreased by 5.2% in first quarter 2008, excluding the 0.5% decline in the price of forest products and the negative effect of statutory holidays, estimated at 1.3%. A new statutory holiday ("Family Day") was introduced in Ontario, and the Easter weekend fell in the first quarter this year, rather than the second quarter. As mentioned, this decrease stems from an ongoing decline in the level of consumer confidence in Canada, weather conditions that were especially unfavourable to construction/renovation activities in the eastern part of the country, and a temporary drop in the demand for building materials in Alberta. RONA's loyalty-building and sales-boosting activities, combined with employee efforts to offer the best service and shopping experience in the industry, have helped increase our average shopping basket, but the factors cited above created downward pressure on the number of transactions in stores. Sales declined in most product categories, indicating a general drop in renovation projects during the first quarter. We should mention, however, that sales of the RONA private brand increased by over 10%. This growth can be explained by the popularity of the RONA by Design projects, which include a number of private brand products. The strong demand for our Project Guide service is also influencing our private brand sales and our sale of installation services. Gross margin In the first quarter of 2008, the Company's gross margin improved by 130 basis points, increasing from 28.4% in 2007 to 29.7% in 2008. This growth is the result of an improvement in purchasing conditions with our suppliers, a reduction of store losses (shrinkage), an increase in sales of private label products and better management of product categories. Consolidated operating income Operating income was $33.4 million in the first quarter of 2008, down $7.5 million or 18.2% from 2007. Our EBITDA margin dropped from 4.65% in 2007 to 3.66% in 2008, a decrease of 99 basis points. This decline is the result of downward pressure on sales in the construction/renovation industry due to lower consumer confidence levels and the effect of unfavourable weather conditions on sales. New stores that have not yet reached their full potential also contributed to the decline in operating income and EBITDA margin. These factors could not be compensated by a rapid adjustment in the Company's cost structure at the beginning of the year, since this is the time of the year with the lowest sales, when variable costs are hard to adjust: the first quarter historically represents only about 15% of annual sales and 5% of annual earnings. But these results mask a number of efficiency improvements posted under the PEP program that is the first phase of the 2008-2011 strategic plan. In the first quarter, this program allowed us to improve our gross margin, reduce inventory levels, excluding acquisitions and new stores, optimize the network of existing stores and distribution centres, and improve the results from recent store openings. Net earnings Net earnings for the first quarter of 2008 were $1.0 million, or $0.01 per share, compared to $9.0 million in 2007 or $0.08 per share. The factors that affected operating income also apply to the change in net earnings, along with the increase in fixed costs related to the expansion of the network, particularly depreciation and financial costs related to recent store openings and acquisitions. Since the first quarter represents only about 15% of sales and 5% of earnings for the year, it is to be expected that the effect of these charges is more pronounced at the beginning of the year than in the other quarters. Treasury and financial position Operations generated $27.2 million in first quarter 2008, compared to $26.0 million in the same quarter of 2007. Net of the increase in working capital related to the growth and development of the retail and distribution network, operations required $125.9 million, compared to $131.6 million in 2007. Same-store and distribution centre inventories declined by $83 million compared to first quarter 2007. During the first quarter of 2008, we invested $42.1 million in fixed assets, compared to $42.8 million in 2007. These investments related to the expansion of our retail network, namely, the construction of new stores as well as repairs, renovations and upgrades of existing stores to reflect our new concepts, especially for stores flying the Reno-Depot banner. Significant investments were also approved for the continuous improvement of information systems in order to increase our operational effectiveness. The Company practised disciplined financial management for the entire quarter and strictly monitored investments in fixed assets. Non-strategic assets were also put up for sale this quarter. RONA's balance sheet remains very strong. On March 30, 2008, the ratio of total debt to capital was 38.0%, compared to 35.1% at the end of the corresponding quarter in 2007. RONA's equity/asset ratio stood at 48.8% at the end of the first quarter 2008, compared to 49.4% at the same date in 2007. The Company's operations produce significant cash flow. With relatively low debt and long-term fixed rates on most of our long-term debt, we have significant liquidity and can access $170 million in additional debt at competitive rates. Our financial resources are sufficient to pursue disciplined development in our four growth vectors: growth of the existing store network, construction of new corporate and franchise stores, recruitment of new affiliate stores and acquisitions. In 2008, our capital spending program will be in the area of $240 million. Of this sum, approximately $180 million will be allocated to store construction, upgrades and renovations and property acquisitions. About $20 million will be spent expanding the distribution network to sustain the rapid growth of our network in the western part of the country. Finally, some $40 million will go to the ongoing improvement of our information systems. OUTLOOK Consumer confidence has been shaken for the last few quarters and especially since the beginning of 2008, due to fears of a recession in the United States, the major softening of the manufacturing sector in Eastern Canada and the rise in prices for items such as fuel. This situation, combined with the temporary slowdown in the demand for building materials in Alberta and the predicted drop in starts of single family homes in Canada, will continue to put downward pressure on sales in our industry. The numerous optimization measures introduced under the PEP program in Phase 1 of our 2008-2011 strategic plan and the various initiatives undertaken to boost sales and stimulate customer loyalty will continue to produce gains over the next quarters and their effect will gradually increase. These measures will allow us to mitigate for the negative effects arising from the downward pressure on sales in our industry. We are keeping our sights on our 2008-2011 financial objectives, but achieving our goal of low single-digit growth in average earnings per share in the first half of the plan is turning out to be a bigger challenge than expected, given our first quarter results and the greater-than-anticipated slowdown in the Canadian economy. We are nevertheless optimistic about the fundamental factors that support the demand for and interest in renovation projects, and we are already preparing for the recovery of our sector. SUBSEQUENT EVENTS On April 23, 2008, at our Annual Shareholders Meeting, RONA announced the recruitment of nine independent dealer-owners in the two months following the publication of our year-end results on February 20. These dealers, who now fly the RONA banner, come from various purchasing groups in Western Canada and Quebec and represent estimated annual retail sales of some $50 million. Eight of these dealers own stores ranging from 2,000 to 24,000 square feet, and one plans to build a proximity store of 52,000 square feet. At the end of April, RONA made the decision to close two big-box stores and consolidate the sale volume from these stores to neighbouring RONA stores. Strong growth in recent years leading to store openings, the recruitment of independent dealers and acquisitions has made it necessary to consolidate operations in order to increase the overall efficiency of the RONA network. This decision is consistent with the efficiency improvement initiatives taken under the PEP program (Productivity, Efficiency and Profitability) launched at the beginning of the year. The operations of the Scarborough store, acquired in the transaction with Reno-Depot in 2003 and located at 1970 Eglinton, will be transferred to other RONA big-box stores in the area. The operations of the Richmond store, located at 3000 Sexsmith Street in Richmond BC will be transferred to a RONA affiliate in the area, Mack Foster Building Supplies, located at 7111 Elmbridge Road, and to nearby corporate stores. The employees from the Scarborough store will be relocated to other nearby RONA stores. The employees from the Richmond store will be offered jobs in stores in the area. In this situation, RONA's priority is to treat the employees with the greatest respect. ADDITIONAL INFORMATION The Management Discussion and Analysis and Financial Statements for first quarter 2008 can be viewed on the RONA website at www.rona.ca in the Investor Relations section and at www.sedar.com. The reader will find the Company's Annual Report, as well as other information about RONA, including the Annual Information Form, at the RONA and SEDAR websites. CONFERENCE CALL WITH THE FINANCIAL COMMUNITY On Tuesday, May 13, 2008 at 11:00 AM (EDST), RONA will hold a conference call for the financial community. To join the call, please dial 514-861-4190 or 1-877-677-7769. To listen online, please go to http://events.startcast.com/events/153/B0023. NON-GAAP PERFORMANCE MEASURE In this press release, as in our internal management, we use the concept of earnings before income taxes, interest, depreciation, amortization and non-controlling interest (EBITDA), which we also refer to as operating income. This measure corresponds to "Earnings before the following items" in our consolidated financial statements. While EBITDA does not have a meaning standardized by generally accepted accounting principles in Canada (GAAP), it is widely used in our industry and financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. Given that it is not standardized, EBITDA cannot be compared from one company to the next. Still, we establish it in the same way for the segments identified, and, unless expressly mentioned, our method does not change over time. EBITDA must not be considered separately or as a substitute for other performance measures calculated according to GAAP but rather as additional information. FORWARD-LOOKING STATEMENTS This press release includes "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical facts included in this press release, including statements regarding the prospects of the industry and prospects, plans, financial position and business strategy of the Company, may constitute forward-looking statements within the meaning of the Canadian securities legislation and regulations. Investors and others are cautioned that undue reliance should not be placed on any forward-looking statements. For more information on the risks, uncertainties and assumptions that would cause the Company's actual results to differ from current expectations, please also refer to the Company's public filings available at www.sedar.com and www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in the Management Discussion and Analysis under the "Risks and Uncertainties" section and in the "Risk Factors" section of the Company's current Annual Information Form. The forward-looking statements in this press release reflect the Company's expectations as of May 12, 2008, and are subject to change after this date. The Company expressly disclaims any obligation or intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by the applicable securities laws. ABOUT RONA RONA is the largest Canadian distributor and retailer of hardware, home renovation and gardening products. RONA operates a network of over 680 corporate, franchise and affiliate stores of various sizes and formats. With over 27,000 employees working under its family of banners in every region of Canada and more than 15 million square feet of retail space, the RONA store network generates over $6.3 billion in annual retail sales.
RONA inc.
Consolidated Financial Statements
March 30, 2008 and April 1, 2007
RONA inc.
Consolidated Earnings
For the thirteen-week periods ended March 30, 2008 and April 1, 2007
(Unaudited, in thousands of dollars, except earnings per share)
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2008 2007
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Sales $911,534 $878,496
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Earnings before the following items 33,401 40,850
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Interest on long-term debt 7,662 6,247
Interest on bank loans 258 784
Depreciation and amortization 25,247 21,605
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33,167 28,636
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Earnings before income taxes
and non-controlling interest 234 12,214
Income taxes 70 3,678
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Earnings before non-controlling interest 164 8,536
Non-controlling interest (851) (491)
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Net earnings and comprehensive income $1,015 $9,027
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Net earnings per share (Note 13)
Basic $0.01 $0.08
Diluted $0.01 $0.08
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The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
For the thirteen-week periods ended March 30, 2008 and April 1, 2007
(Unaudited, in thousands of dollars)
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2008 2007
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Consolidated Retained Earnings
Balance, beginning of period,
as previously reported $892,967 $709,467
Financial instruments - recognition and measurement - (1,589)
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Restated balance, beginning of period 892,967 707,878
Net earnings 1,015 9,027
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Balance, end of period $893,982 $716,905
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Consolidated Contributed Surplus
Balance, beginning of period $11,045 $9,182
Compensation cost relating to stock option plans 379 471
Exercise of stock options - (219)
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Balance, end of period $11,424 $9,434
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The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Cash Flows
For the thirteen-week periods ended March 30, 2008 and April 1, 2007
(Unaudited, in thousands of dollars)
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2008 2007
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Operating activities
Net earnings $1,015 $9,027
Non-cash items
Depreciation and amortization 25,247 21,605
Derivative financial instruments 568 (1,224)
Future income taxes 78 (4,281)
Compensation cost relating to stock option plans 379 471
Non-controlling interest (851) (491)
Other items 797 879
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27,233 25,986
Changes in working capital items (153,105) (157,543)
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Cash flows from operating activities (125,872) (131,557)
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Investing activities
Business acquisitions (Note 3) (2,128) (3,023)
Advances to joint ventures and other advances 5,943 4,025
Fixed assets (42,135) (42,780)
Other assets (2,102) (1,493)
Disposal of assets 3,031 1,270
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Cash flows from investing activities (37,391) (42,001)
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Financing activities
Bank loans and revolving credit 152,723 123,038
Other long-term debt 1,977 922
Repayment of other long-term debt
and redemption of preferred shares (3,018) (9,742)
Issue of common shares 556 2,220
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Cash flows from financing activities 152,238 116,438
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Net decrease in cash (11,025) (57,120)
Cash, beginning of year 2,866 58,486
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Cash (outstanding cheques), end of year $(8,159) $1,366
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Supplementary information
Interest paid $15,124 $6,668
Income taxes paid $23,883 $37,462
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The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Balance Sheets
March 30, 2008, April 1, 2007 and December 30, 2007
(In thousands of dollars)
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2008 2007 2007
March 30 April 1 December 30
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(Unaudited) (Unaudited)
Assets
Current assets
Cash $- $1,366 $2,866
Accounts receivable 298,362 266,320 237,043
Income taxes receivable 29,575 22,254 5,684
Inventory (Note 4) 966,932 943,878 856,326
Prepaid expenses 49,481 27,165 27,913
Derivative financial instruments
(Note 10) 139 - 1,168
Future income taxes 10,520 15,627 12,279
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1,355,009 1,276,610 1,143,279
Investments 12,143 14,793 11,901
Fixed assets 795,742 662,102 816,919
Fixed assets held for sale (Note 5) 42,317 - -
Goodwill 457,547 317,399 454,882
Trademarks 4,058 1,326 4,145
Other assets 28,045 25,321 28,685
Future income taxes 22,499 18,438 22,635
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$2,717,360 $2,315,989 $2,482,446
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Liabilities
Current liabilities
Outstanding cheques $8,159 $- $-
Bank loans 18,997 27,813 19,574
Accounts payable and accrued
liabilities 492,079 485,485 421,446
Derivative financial instruments
(Note 10) 607 1,158 1,067
Future income taxes 3,217 971 3,650
Instalments on long-term debt 40,146 25,883 34,239
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563,205 541,310 479,976
Long-term debt 753,859 565,431 602,537
Other long-term liabilities 25,382 21,282 24,526
Future income taxes 22,396 20,491 23,781
Non-controlling interest 25,362 22,980 26,420
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1,390,204 1,171,494 1,157,240
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Shareholders' equity
Capital stock (Note 6) 421,750 418,156 421,194
Retained earnings 893,982 716,905 892,967
Contributed surplus 11,424 9,434 11,045
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1,327,156 1,144,495 1,325,206
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$2,717,360 $2,315,989 $2,482,446
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The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Notes to Interim Consolidated Financial Statements
March 30, 2008 and April 1, 2007
(Unaudited, in thousands of dollars, except amounts per share)1. Basis of presentation The accompanying unaudited interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. They are also consistent with the policies outlined in the Company's audited financial statements for the year ended December 30, 2007. The interim financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 30, 2007. The interim operating results do not necessarily reflect the results for the full fiscal year. Accordingly, the comparative balance sheet at as April 1, 2007 is also included to reflect seasonal fluctuations that characterize the hardware, renovation and home garden industry. When necessary, the financial statements include amounts based on estimated information and management's best judgments. 2. Changes in accounting policies At the beginning of the interim period the Company retroactively adopted without restatement of prior period financial statements the following new recommendations of the Canadian Institute of Chartered Accountants' (CICA) Handbook: Financial instruments - Disclosures and presentation Section 3862, Financial Instruments - Disclosures describes the required disclosures related to the significance of financial instruments on the entity's financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. Section 3863, Financial Instruments - Presentation establishes standards for presentation of financial instruments and non-financial derivatives. These Sections complement the principles of recognition, measurement and presentation of financial instruments of Section 3855, Financial Instruments - Recognition and Measurement and Section 3865, Hedges and replace the presentation standards of Section 3861, Financial Instruments - Disclosure and Presentation. Capital disclosures Section 1535, Capital Disclosures establishes standards for disclosing information about the entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital. Inventories Section 3031, Inventories, replaces Section 3030 of the same title and prescribes the basis and method for measuring inventories. It allows for the reversal of any previous write-down of inventories as a result of an increase in value. Finally, the Section prescribes new requirements on the disclosure of the accounting policies adopted, carrying amounts, amounts recognized as an expense, the amount of any write-down and the amount of any reversal of a write-down. The adoption of the new recommendations had no material impact on the results, financial position and cash flows of the Company. 3. Business acquisitions During the period ended March 30, 2008, the Company acquired one company (two companies in 2007), operating in the corporate and franchised stores segment, by way of an asset purchase (share and asset purchases in 2007). Taking direct acquisition costs into account, this acquisition was for a total consideration of $5,389 ($3,133 in 2007). The Company financed this acquisition from its existing credit facilities. The results of operations of this company are consolidated from the date of acquisition. The preliminary purchase price allocation of the acquisitions was established as follows:
2008 2007
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Current assets $3,975 $6,424
Fixed assets 634 2,378
Goodwill 2,665 841
Future income taxes - 163
Current liabilities (1,885) (3,149)
Long-term debt - (3,524)
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5,389 3,133
Less: Accrued direct acquisition costs (162) -
Balance of purchase price (3,099) (110)
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Cash consideration paid $2,128 $3,023
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--------------------------------------------------------------------------The Company expects that an amount of $1,725 of goodwill will be deductible for tax purposes. 4. Inventory For the thirteen-week period ended March 30, 2008, $640,738 of inventory was expensed in the consolidated results ($629,313 as at April 1, 2007). The amount includes a depreciation charge of $7,790 ($7,438 as at April 1, 2007). 5. Fixed assets held for sale The Company has decided to dispose of land and buildings in the corporate and franchised store segment which are no longer used in operations, and accordingly, established a detailed plan to sell. The Company expects to dispose of these assets in the current year. 6. Capital stock Issued and fully paid: The following tables present changes in the number of outstanding common shares and their aggregate stated value:
March 30, 2008
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Number of shares Amount
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Balance, beginning of period 115,412,766 $418,246
Issuance in exchange for common share
subscription deposits 197,854 3,350
Issuance in exchange for cash 20,764 290
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Balance before elimination of reciprocal
shareholdings 115,631,384 421,886
Elimination of reciprocal shareholdings (72,396) (435)
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Balance, end of period 115,558,988 421,451
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Deposits on common share subscriptions,
net of eliminations of joint ventures (a) 299
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$421,750
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April 1, 2007
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Number of shares Amount
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Balance, beginning of period 114,935,569 $413,542
Issuance in exchange for common share
subscription deposits 120,715 2,513
Issuance under stock option plans 334,327 1,859
Issuance in exchange for cash 2,350 55
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Balance before elimination of reciprocal
shareholdings 115,392,961 417,969
Elimination of reciprocal shareholdings (56,841) (341)
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Balance, end of period 115,336,120 417,628
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Deposits on common share subscriptions,
net of eliminations of joint ventures (a) 528
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$418,156
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December 30, 2007
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Number of shares Amount
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Balance, beginning of year 114,935,569 $413,542
Issuance in exchange for common share
subscription deposits 120,715 2,513
Issuance under stock option plans 339,327 1,876
Issuance in exchange for cash 17,155 315
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Balance before elimination of reciprocal
shareholdings 115,412,766 418,246
Elimination of reciprocal shareholdings (70,319) (401)
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Balance, end of year 115,342,447 417,845
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Deposits on common share subscriptions,
net of eliminations of joint ventures (a) 3,349
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$421,194
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(a) Deposits on common share subscriptions represent amounts received
during the year from affiliated and franchised merchants in accordance
with commercial agreements. These deposits are exchanged for common
shares on an annual basis.Stock option plan of May 1, 2002 The Company adopted a stock option plan for designated senior executives which was approved by the shareholders on May 1, 2002. A total of 2,920,000 options were granted at that date. Options granted under the plan may be exercised since the Company made a public share offering on November 5, 2002. The Company can grant options for a maximum of 3,740,000 common shares. As at March 30, 2008 the 2,920,000 options granted have an exercise price of $3.47 and of this number, 1,449,500 options (1,444,500 options as at April 1, 2007) were exercised. The fair value of each option granted was estimated at the grant date using the Black-Scholes option-pricing model. Calculations were based upon a market price of $3.47, an expected volatility of 30%, a risk-free interest rate of 4.92%, an expected life of four years and 0% expected dividend. The fair value of options granted was $1.10 per option according to this method. No compensation cost was expensed with respect to this plan for the thirteen-week periods ended March 30, 2008 and April 1, 2007. Stock option plan of October 24, 2002 On October 24, 2002, the Board of Directors approved another stock option plan for designated senior executives of the Company and for certain designated directors. The total number of common shares which may be issued pursuant to the plan will not exceed 10% of the common shares issued and outstanding less the number of shares subject to options granted under the stock option plan of May 1, 2002. These options become vested at 25% per year, if the market price of the common share has traded, for at least 20 consecutive trading days during the twelve-month period preceding the grant anniversary date, at a price equal to or higher than the grant price plus a premium of 8% compounded annually. On March 8, 2007, the Board of Directors approved certain modifications to the plan. These modifications were also approved by the shareholders at the annual shareholders' meeting on May 8, 2007. These modifications establish that this plan is no longer applicable to the designated directors of the Company and also provide for the replacement of the terms and conditions for granting options under the plan by a more flexible mechanism for setting the terms and conditions for granting options. The Board of Directors will adopt the most appropriate terms and conditions relative to each type of grant. For the options granted on March 8, 2007 and February 29, 2008, the Board approved the option grants with vesting over a four-year period following the anniversary date of the grants at 25 % per year. As at March 30, 2008, the 1,944,052 options (1,700,852 options as at April 1, 2007) granted have exercise prices ranging from $14.18 to $26.87 ($14.29 to $26.87 as at April 1, 2007) and of this number, 85,100 options (85,100 options as at April 1, 2007) have been exercised and 180,300 options (95,200 options as at April 1, 2007) have been forfeited. The fair value of stock options granted was estimated at the grant date using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions for the stock options granted during the period:
March 30, April 1,
2008 2007
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Weighted average fair value per option granted $4.42 $8.50
Risk-free interest rate 3.25% 3.90%
Expected volatility in stock price 26% 26%
Expected annual dividend 0% 0%
Expected life (years) 6 6Compensation cost expensed with respect to this plan was $379 for the thirteen-week period ended March 30, 2008 ($471 as at April 1, 2007). A summary of the situation of the Company's stock option plans and the changes that occurred during the periods then ended is presented below:
March 30, 2008
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Weighted average
Options exercise price
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Balance, beginning of period 2,922,552 $11.31
Granted 243,200 14.18
Forfeited (16,600) 21.24
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Balance, end of period 3,149,152 11.48
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Options exercisable, end of period 2,054,569 $7.06
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April 1, 2007
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Options Weighted average
exercise price
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Balance, beginning of period 3,162,479 $10.16
Granted 196,000 23.58
Exercised (334,327) 4.90
Forfeited (28,100) 19.62
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Balance, end of period 2,996,052 11.53
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Options exercisable, end of period 1,896,600 $6.20
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December 30, 2007
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Options Weighted average
exercise price
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Balance, beginning of year 3,162,479 $10.16
Granted 196,000 23.58
Exercised (339,327) 4.88
Forfeited (96,600) 20.94
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Balance, end of year 2,922,552 11.31
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Options exercisable, end of year 2,011,194 $6.70
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--------------------------------------------------------------------------The following table summarizes information relating to stock options outstanding as at March 30, 2008:
Options Options
Exercise price Expiration date outstanding exercisable
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$3.47 December 31, 2012 1,470,500 1,470,500
$14.18 February 29, 2018 243,200 -
$14.29 December 16, 2013 432,550 432,550
$20.27 December 22, 2014 411,250 103,750
$21.21 February 24, 2016 372,000 -
$21.78 September 1, 2016 17,576 4,394
$23.58 March 8, 2017 173,500 43,375
$23.73 April 5, 2015 11,000 -
$26.87 February 24, 2016 17,576 -
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3,149,152 2,054,569
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--------------------------------------------------------------------------7. Guarantees In the normal course of business, the Company reaches agreements that could meet the definition of "guarantees" in AcG-14. The Company guarantees mortgages for an amount of $2,238. The terms of these loans extend until 2012 and the net carrying amount of the assets held as security, which mainly include land and buildings, is $5,971. Pursuant to the terms of inventory repurchase agreements, the Company is committed towards financial institutions to buy back the inventory of certain customers at an average of 62% of the cost of the inventory to a maximum of $57,246. In the event of recourse, this inventory would be sold in the normal course of the Company's operations. These agreements have undetermined periods but may be cancelled by the Company with a 30-day advance notice. In the opinion of management, the likelihood that significant payments would be incurred as a result of these commitments is low. 8. Vendor rebates In accordance with EIC-144 Accounting by a customer (including a reseller) for certain consideration received from a vendor, the Company must disclose the amount recognized for which the full requirements for vendor rebate entitlement have not yet been met. For the thirteen-week period ended March 30, 2008, the Company recognized an amount of $4,481 ($6,234 as at April 1, 2007) which was estimated based on the attainment of specified requirements to receive the rebates. 9. Capital disclosures The Company maintains a level of capital that is sufficient to meet several objectives, including an acceptable debt to capital ratio to provide access to adequate funding sources to support current operations, pursue its internal growth strategy and undertake targeted acquisitions. Total debt includes bank loans and long-term debt. The Company's capital includes total debt and equity. As at March 30, 2008, the Company's debt to capital ratio is 38.0% (35.1% as at April 1, 2007). The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Company may issue new shares or sell assets to reduce debt. The Company's credit facilities include certain covenants affecting, among others, the leverage ratio and the interest coverage ratios. These ratios are submitted to the Board of Directors each quarter and, as at March 30, 2008, the Company is in compliance with the ratios. Other than covenants related to its credit facilities, the Company is not subject to any other externally imposed capital requirements. 10. Financial instruments The carrying amounts and fair values of financial instruments were as follows:
March 30, 2008 April 1, 2007 December 30, 2007
---------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
---------------------------------------------------------------------------
Financial assets
held for trading
Cash $- $- $1,366 $1,366 $2,866 $2,866
Derivative financial
instruments 139 139 - - 1,168 1,168
Loans and receivables
Accounts receivable 298,362 298,362 266,320 266,320 237,043 237,043
Redeemable preferred
shares 1,071 1,071 1,400 1,400 1,071 1,071
Financial liabilities
Bank loans 18,997 18,997 27,813 27,813 19,574 19,574
Accounts payable
and accrued
liabilities 492,079 492,079 485,485 485,485 421,446 421,446
Revolving credit 313,500 313,500 118,009 118,009 160,200 160,200
Debentures 395,909 343,821 395,529 393,942 395,821 372,145
Mortgage loans and
balance of
purchase price 64,354 64,354 54,287 54,287 60,438 60,438
Preferred shares 5,000 5,000 6,000 6,000 5,000 5,000
Financial liabilities
held for trading
Outstanding cheques 8,159 8,159 - - - -
Derivative financial
instruments 607 607 1,158 1,158 1,067 1,067
---------------------------------------------------------------------------
---------------------------------------------------------------------------The following methods and assumptions were used to determine the estimated fair value of each class of financial instruments: - The fair value of accounts receivable, bank loans and accounts payable and accrued liabilities is comparable to their carrying amount, given the short maturity periods; - The fair value of loans and advances, substantially all of which have been granted to dealer-owners, has not been determined because such transactions have been conducted to maintain or to develop favourable trade relationships and do not necessarily reflect terms and conditions which would have been negotiated with arm's length parties. Moreover, the Company holds sureties on certain investments which provide it with potential recourse regarding the operations of the dealer-owners in question; - The fair value of the revolving credit, mortgage loans and balance of purchase price is equivalent to their carrying amount given that significant loans bear interest at rates that fluctuate with the market rate; - The fair value of debentures was determined using market prices; - The fair value of class C preferred shares, Series 1 and class D preferred shares, included in long-term debt, approximates their redemption value; - The fair value of derivative instruments was determined by comparing the original rates of the derivatives with rates prevailing at the revaluation date for contracts having equal values and maturities. The revenues, expenses, gains and losses resulting from financial assets and liabilities recorded in net earnings are as follows:
2008 2007
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Interest on accounts receivable $(710) $(1,226)
Interest on long-term loans and advances (1,064) (841)
Dividends on redeemable preferred shares (26) (21)
Interest on cash and bank loans 258 784
Interest on long - term debt 7,662 6,247
Loss (gain) on fair value of derivative
financial instruments 3,632 (275)
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--------------------------------------------------------------------------Credit risk Credit risk relates to the risk that a party to a financial instrument will not fulfil some or all of its obligations, thereby causing the Company to sustain a financial loss. The main risks relate to accounts receivable and the Company's loans and advances receivable. The Company may also be exposed to credit risk from its cash and its forward exchange contracts, which is managed by dealing with reputable financial institutions. To manage credit risk from accounts receivable and loans and advances receivable, the Company has mortgages on some movable and immovable property owned by the debtors as well as guarantees. It examines their financial stability on a regular basis. The Company records allowances, determined on a client-per-client basis, at the balance sheet date to account for potential losses. As at March 30, 2008, the aging of accounts receivable is as follows:
Current $234,586
Past due 0-30 days 27,999
Past due 31-120 days 14,080
Past due over 121 days 15,607
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Trade accounts receivable 292,272
Less allowance for doubtful accounts 11,683
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$280,589
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The following table provides the change in allowance for doubtful accounts
for trade accounts receivable:
Balance as at December 30, 2007 $10,181
Variance in allowance for doubtful accounts 1,502
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Balance as at March 30, 2008 $11,683
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--------------------------------------------------------------------------Liquidity risk Liquidity risk is the risk that the Company will be unable to fulfil its obligations on a timely basis or at a reasonable cost. The Company manages its liquidity risk by monitoring its operating requirements and using various funding sources to ensure its financial flexibility. The Company prepares budget and cash forecasts to ensure that it has sufficient funds to fulfil its obligations. In recent years, the Company financed the growth of its capacity and sales primarily through cash flows from operations, used its revolving credit on a regular basis and issued debentures to finance working capital requirements and acquisitions. The following table presents the financial liability instalments payable when contractually due, excluding future interest payments but including accrued interest as at March 30, 2008:
Carrying Less than 1 - 2 3 - 4 5 years
amount 1 year years years and more
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Revolving credit $313,500 $- $- $313,500 $-
Debentures 400,000 - - - 400,000
Mortgage loans
and balance of
purchase price 64,624 32,782 13,576 10,591 7,675
Obligations under
capital leases 15,925 6,390 7,713 1,704 118
Preferred shares 5,000 1,000 2,000 2,000 -
Bank loans 18,997 18,997 - - -
Accounts payable
and accrued
liabilities 492,079 492,079 - - -
Derivative
Financial
instruments 607 607 - - -
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Total $1,310,732 $551,855 $23,289 $327,795 $407,793
--------------------------------------------------------------------------
--------------------------------------------------------------------------Exchange risk The Company is exposed to exchange risk as a result of its U.S. dollar purchases. To limit the impact of fluctuations of the Canadian dollar over the U.S. dollar on net earnings, the Company uses forward exchange contracts. The Company does not use derivative financial instruments for speculative or trade purposes. As at March 30, 2008, the par value of forward exchange contracts is US$17,100. The average rate of these contracts is 1.0119 and they expire on various dates until July 2008. On March 30, 2008, a 1% increase or decrease in the exchange rate of the Canadian dollar compared to the U.S. dollar, assuming that all other variables are constant, would have resulted in a $203 increase or decrease in the Company's net earnings for the thirteen-week period ended March 30, 2008. Interest rate risk In the normal course of business, the Company is exposed to interest rate fluctuation risk as a result of the floating-rate loans and debts receivable and loans payable. The Company manages its interest rate fluctuation exposure by allocating its financial debt between fixed and floating-rate instruments. On March 30, 2008, a 25-basis-point increase or decrease in interest rates, assuming that all other variables are constant, would have resulted in a $137 increase or decrease in the Company's net earnings for the thirteen-week period ended March 30, 2008. 11. Employee future benefits As at March 30, 2008, the Company has eight defined contribution pension plans and four defined benefit pension plans. The net pension expense for the benefit plans is as follows:
2008 2007
--------------------------------------------------------------------------
Costs recognized for defined contribution
pension plans $2,176 $2,084
Costs recognized for defined benefit pension
plans 197 326
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Net employee future benefit costs $2,373 $2,410
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--------------------------------------------------------------------------12. Segmented information The Company has two reportable segments: distribution and corporate and franchised stores. The distribution segment relates to the supply activities to affiliated, franchised and corporate stores. The corporate and franchised stores segment relates to the retail operations of the corporate stores and the Company's share of the retail operations of the franchised stores in which the Company has an interest. The accounting policies that apply to the reportable segments are the same as those described in accounting policies. The Company evaluates performance according to earnings before interest, depreciation and amortization, rent, income taxes and non-controlling interest, i.e. sales less chargeable expenses. The Company accounts for intersegment operations at fair value.
2008 2007
--------------------------------------------------------------------------
Segment sales (a)
Corporate and franchised stores xccd $683,029 $641,750
Distribution 491,401 494,973
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Total 1,174,430 1,136,723
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Intersegment sales and royalties (a)
Corporate and franchised stores - -
Distribution (262,896) (258,227)
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Total (262,896) (258,227)
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Sales (a)
Corporate and franchised stores 683,029 641,750
Distribution 228,505 236,746
--------------------------------------------------------------------------
Total 911,534 878,496
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Earnings before interest, depreciation and
amortization, rent, income taxes and
non-controlling interest (a)
Corporate and franchised stores 47,690 50,265
Distribution 19,860 20,700
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Total 67,550 70,965
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Earnings before interest, depreciation and
amortization, income taxes and
non-controlling interest (a)
Corporate and franchised stores 19,265 24,802
Distribution 14,136 16,048
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Total 33,401 40,850
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Acquisition of fixed assets
Corporate and franchised stores 38,498 39,446
Distribution 4,271 4,558
--------------------------------------------------------------------------
Total 42,769 44,004
--------------------------------------------------------------------------
Goodwill
Corporate and franchised stores 2,665 841
Distribution - -
--------------------------------------------------------------------------
Total $2,665 $841
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Total assets
Corporate and franchised stores 2,259,783 1,840,657
Distribution 457,577 475,332
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Total $2,717,360 $2,315,989
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--------------------------------------------------------------------------
(a) During the period, the Company reviewed its segmented information
analysis method and, as a result, modified the presentation of such
information between segments. The 2007 comparable period was adjusted
accordingly.13. Earnings per share The table below shows the calculation of basic and diluted net earnings per share:
2008 2007
--------------------------------------------------------------------------
Net earnings $1,015 $9,027
--------------------------------------------------------------------------
Number of shares (in thousands)
Weighted average number of shares used to
compute basic net earnings per share 115,544.5 115,129.1
Effect of dilutive stock options (a) 1,147.8 1,635.1
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Weighted average number of shares used to
compute diluted net earnings per share 116,692.3 116,764.2
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Net earnings per share - basic $0.01 $0.08
Net earnings per share - diluted $0.01 $0.08
--------------------------------------------------------------------------
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(a) As at March 30, 2008, 1,246,102 common share stock options (658,152
options as at April 1, 2007) were excluded from the calculation of
diluted net earnings per share since the unrecognized future
compensation cost of these options has an antidilutive effect.14. Effect of new accounting standards not yet implemented In February 2008, the CICA published Section 3064 Goodwill and Intangible Assets which replaces Section 3062 of the same title. The Section applies to fiscal years beginning on or after October 1, 2008. In the coming quarters, the Company will determine the effect of adopting this new section in its consolidated financial statements. Contact: Contacts:
Media:
RONA inc.
Eva Boucher-Hartling
Director, External Communications
514-599-5900, ext. 5114
eva.boucher-hartling@rona.ca
Financial Community:
RONA inc.
Stephane Milot
Senior Director, Investor Relations
514-599-5951
stephane.milot@rona.ca
Source: RONA INC.
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