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RONA Announces Results for Third Quarter 2008 The Efficiency and Profitability Improvement Program Completely Mitigates the Effects of the Struggling Economy BOUCHERVILLE, QUEBEC--(MARKET WIRE)--Nov 11, 2008 -- RONA (Toronto:RON.TO - News) Financial Highlights - Consolidated sales rose 2.3% despite a 2.3% drop in same-store sales. - Sales and operating income in the distribution sector increased by 9.2% and 16.4%, respectively. - In line with the objectives introduced under the PEP program, gross margin increased by 30 basis points in the third quarter and by 90 basis points since the start of the year. Excluding unusual items affecting the gross margin, the increases were 40 basis points and 100 basis points respectively. - Disciplined balance sheet management led to an $80-million decrease in comparable inventories, a 24% drop in capital asset investments and a $124.7-million reduction in the net debt. - Net earnings totalled $53.4 million, or $0.46 per share, compared with $59.4 million, or $0.51 per share, in 2007. By excluding unusual items of $6.4 million after-tax, or $0.05 per share, accounted for during the quarter, diluted net earnings per share remained stable at $0.51. RONA (Toronto:RON.TO - News), the largest Canadian distributor and retailer of hardware, home renovation and gardening products, announced a 2.3% increase in its consolidated sales, which stood at $1,381.7 million in the third quarter of 2008, compared to $1,350.5 million in 2007. Same-store sales nonetheless decreased by 2.3% in the quarter, reflecting a drop in consumer spending related to the decline in consumer confidence. Operating income was $115.5 million in the third quarter of 2008, down 5.0% from the corresponding quarter of 2007. The EBITDA margin decreased by 65 basis points to 8.36%. Unusual items related to the cost of store closures and the cancellation of future commitments accounted for in the third quarter of 2008 amounted to $8.5 million before interest, taxes, depreciation and amortization. Excluding these unusual items, operating income was $124.0 million, up 2.0% from 2007, while the EBITDA margin dropped only 3 basis points, from 9.01% in 2007 to 8.98% in 2008. Net earnings reached $53.4 million or $0.46 per share in the third quarter of 2008, representing a 10.2% decrease over 2007. Excluding unusual items of $6.4 million after-tax, or $0.05 per share, net earnings were $59.8 million, or 0.6% higher than the $59.4 million net earnings recorded in 2007. Excluding unusual items, diluted net earnings per share remained stable at $0.51. "Given that the economic context proved much more difficult than anticipated since the start of the year, we are proud of the numerous efficiency and profitability improvements posted under our PEP program (productivity, efficiency, profitability). In the third quarter, this program made it possible for us to completely mitigate the negative effects arising from lower consumer confidence levels in Canada as well as from the decline in construction and renovation activities, especially in Alberta and Ontario. The diversity of our activities and the results of our ongoing efforts in recruiting independent dealer-owners have also served us well in this quarter, with our distribution sector posting a 9.2% increase in sales and a 16.4% increase in operating income," explained RONA President and CEO Robert Dutton. "The current business environment is highly favourable to the ongoing consolidation of our market in Canada, especially through the recruitment of independent dealers that want to join a strong brand with a very promising plan for the future. Since the start of the year, we have recruited 25 independent dealers, representing annual retail sales of close to $110 million. We have a strong pipeline of prospects and we will continue to develop this growth vector vigorously in the upcoming quarters," Mr. Dutton added. "With all the uncertainty surrounding the global financial crisis, we will continue to be disciplined in our other development activities and in managing the company's balance sheets, by placing even greater focus on our PEP program," concluded Mr. Dutton. While the PEP program has helped to largely offset the negative effects related to the more difficult conditions than expected since the beginning of the year, the extent of the current global financial crisis brings a high degree of uncertainty in terms of future consumer activity. RONA management estimates that the expected decline in the economic environment over the next quarters could prevent it from achieving its low-single-digit-growth objective for earnings per share on average in the first half of the 2008-2011 business plan. Management is nevertheless optimistic about the fundamental factors that support the demand and popularity of renovation projects and expects to actively pursue the various efficiency improvement measures underway to stimulate sales and improve efficiency in the PEP program over the next quarters. Finally, management estimates that current market conditions represent major potential for consolidating Canada's construction and renovation market, especially through recruitment of independent dealers. FINANCIAL HIGHLIGHTS, THIRD QUARTER 2008 Economic conditions Overall, conditions were relatively favourable to renovation activity in Quebec and very favourable in the Atlantic Provinces in third quarter 2008. RONA generates almost 50% of its sales in these two regions. However, inflationary pressures continued to affect construction and renovation activities in Western Canada, particularly in Alberta, which is still wrestling with a high inventory of unsold new houses. In Ontario, single-family-home construction and renovation activities were affected by the economic difficulties of this province, which has been greatly affected by the slowdown in the automobile sector. At the end of September, 2008, single-unit housing starts experienced a 15.6% decline in Canada's urban areas, according to CMHC estimates. The decline was particularly severe in Alberta, where single-unit housing starts were down by 46.5%, while they decreased by 9.5% in Ontario and only 4.4% in Quebec. In the Atlantic Provinces, single-unit housing starts experienced an 18.6% increase, reflecting strong economic growth in Nova Scotia and Newfoundland. The economic situation changed significantly at the end of the third quarter. With the current ongoing global financial crisis, economic uncertainty has reached new heights, with the result that consumer confidence was hit hard according to the most recent survey published by the Conference Board of Canada. The consumer confidence index decreased by 11.9 points, or 13.9% in early October, compared with the previous month. In the United States, the confidence index declined by 18.2% in the most recent survey published by the University of Michigan. Given the circumstances and expected decline of the consumer price index, the Bank of Canada lowered its key interest rate by 75 basis points over the last few weeks. According to the most recent Bank of Canada Monetary Policy Report published in October 2008, Canada's GDP should grow by only 0.6% in 2008, instead of 1.0 % predicted in its July report, 1.4% in its April report or 1.8% predicted in January. Canada's GDP grew by 2.7% in 2007. The Bank of Canada has also revised its prediction for 2009 from 2.3%, according to its July report, to 0.6% in its most recent report. The current interest rate environment remains favourable to high housing start and resale levels. However, access to credit is becoming more and more limited, the value of consumer stock market investments significantly declined, and as we mentioned earlier, consumer confidence and expected GDP growth are at very low levels. The most recent statistics on housing starts, resales and house price variation show greater consumer caution and lower activity in certain areas of the country, particularly Alberta and Ontario. We should mention that single-family-home renovation and construction started to slow down in Eastern Canada in 2007 following the rise of the Canadian dollar. It is worth recalling that trends are still favourable to renovation in Canada. Over 65% of Canada's homes are over 25 years old, the Baby Boom generation (roughly 30% of the population) is making major investments in their homes and secondary dwellings, and interest in home decoration and gardening remains strong. There is also a major trend taking shape toward outdoor living, calling for decoration of exterior home areas. Finally, more and more Canadians are looking for one-stop solutions for their home renovation projects and unbeatable service in a store with a friendly atmosphere in a location near their residence. By taking account of these trends, RONA is creating new store formats, choosing appropriate products and developing innovative services. The current business environment is very favourable for consolidation of Canada's construction and renovation market, especially through recruitment of independent dealers. We might add that RONA's recruitment results so far this year clearly show that when times are tough, many store owners are eager to join the ranks of a purchasing group that has a strong awareness, a dynamic team and a promising development plan. Consolidated sales Consolidated sales in the third quarter of 2008 stood at $1,381.7 million, a $31.2 million or 2.3% increase over the $1,350.5 million figure in 2007. This growth can be attributed to store openings, the recruitment of new affiliate dealer-owners, acquisitions and the growth of distribution sales. Excluding the contributions of our acquisitions - Dick's Lumber, Centre de Renovation Andre Lessard and Best-MAR - consolidated sales dropped by only 0.3%. The strong increase in distribution sector sales and the sales generated by new stores opened in the last 12 months have almost completely compensated for the drop in same-store sales and the loss of sales from stores closed during these last few months. During the third quarter of 2008, same-store sales fell by 2.3%, excluding the 0.7% drop in the average price of forest products. Same-store sales include a positive effect related to statutory holidays, evaluated at 0.5%. As mentioned earlier, this decrease in same-store sales stems from an ongoing decline in the level of consumer confidence in Canada, as well as a decline in construction and resale of single-unit homes, especially in Alberta. Despite lower figures for in-store transactions, due to the factors mentioned above, RONA's loyalty-building and sales-boosting activities, combined with employee efforts to offer the best service and shopping experience in our industry, have helped increase our average shopping basket. Sales declined in most product categories, indicating a general decline in consumer activity during this quarter. We should mention, however, that sales of the RONA private brand increased by over 6%. Installation sales increased more than 20% during the third quarter. Gross margin During the third quarter of 2008, the Company's gross margin improved by 30 basis points, increasing from 28.4% in 2007 to 28.7% in 2008. This growth stems from better product-category management, increased sales of private brand products and continued improvement of purchasing conditions with our suppliers. Excluding the effect of unusual items on the gross margin, it increased by 40 basis points. As expected, the increase in gross margin is less pronounced in the second half of 2008 than in the first half, reflecting the seasonality of our activities. Furthermore, given the strong distribution sector growth during the quarter, the relative weight of this sector in calculating the consolidated gross margin has increased. The gross margin of our distribution activities was about one third of the retail sector's gross margin; this increased weight of distribution masked a more significant improvement in the retail sector's gross margin. Unusual items As part of a vast program to improve efficiency and optimize the existing RONA stores network, the Company made a decision to close four non-performing stores and transfer the business volume from these stores to other nearby RONA corporate stores and affiliates. Operating losses in these stores had amounted to several million dollars. Two are big-box stores: one in Richmond, British Columbia, and the other in Scarborough, Ontario. The other two are small proximity stores operating under the Cashway banner in Ontario. During the third quarter of 2008, the Company also accounted for unusual costs related to cancellation of future commitments. At the end of the third quarter, the total estimated annual cost for these various unusual items, including a pre-tax gain of $1.4 million posted in second quarter 2008, was $18.8 million, $5.8 million of which was already booked in second quarter 2008. In total for the third quarter, unusual costs of $9.3 million were accounted for, of which $8.5 million affected operating income, and $0.8 million affected amortization, depreciation and financial costs. After taxes, third quarter unusual costs were $6.4 million. Remaining costs, estimated at $3.7 million, will be booked by the end of fiscal 2008. This decision will allow the Company to eliminate operating losses and transfer business volume to corporate stores and affiliates in better locations with much greater potential for growth and profit. This decision represents a very good return on investment, since the payback period to recover the above-mentioned costs will be very short. Consolidated operating income Operating income, including the unusual items mentioned above, was $115.5 million in third quarter 2008, down $6.1 million or 5.0% from the $121.6 million figure posted in 2007. The EBITDA margin declined 65 basis points, from 9.01% in 2007 to 8.36% in 2008. This decline is largely attributable to the unusual items and downward pressure on same-store sales. Excluding unusual items, operating income was $124.0 million in third quarter 2008, up $2.4 million, or 2.0% from 2007. The EBITDA margin dropped only 3 basis points, from 9.01% in 2007 to 8.98% in 2008. The numerous efficiency improvements posted under the PEP program that is the first Phase of the 2008-2011 strategic plan made it possible to compensate for the negative effect of downward pressure on sales in the construction and renovation industry. This is due to lower consumer confidence levels and the results of recently opened stores that have not yet reached their full potential. During the third quarter, the PEP program has, among other things, allowed us to improve our gross margin, reduce inventory levels, optimize the network of existing stores, improve logistics, accelerate recruitment of independent dealers and improve the process for opening new stores. Net earnings Net earnings, including the unusual items in the third quarter of 2008 dropped by $6 million or 10.2% to $53.4 million, or $0.46 diluted earnings per share, compared to $59.4 million in 2007, or $0.51 diluted earnings per share. The factors that affected operating income also apply to the change in net earnings. Excluding the unusual items mentioned above, net earnings reached $59.8 million in the third quarter of 2008, or $0.51 diluted earnings per share, compared to $59.4 million in 2007, or $0.51 diluted earnings per share. This is an increase of $0.4 million or 0.6%, reflecting the major efforts throughout this quarter to stimulate sales and improve efficiency in operations to compensate for the negative effects of downward pressure on sales in the construction and renovation industry. FINANCIAL HIGHLIGHTS, NINE-MONTH PERIOD ENDED SEPTEMBER 28, 2008 Consolidated sales Consolidated sales for the nine-month period ended September 28, 2008, stood at $3,766.5 million, a $68.4 million or 1.9% increase over the $3,698.1 million figure in 2007. This growth can be mainly attributed to store openings, the recruitment of new affiliate dealer-owners and acquisitions. Excluding the contributions of our acquisitions - Noble Trade, Dick's Lumber, Centre de Renovation Andre Lessard and Best-MAR - consolidated sales declined by 2.1%. Sales generated by new stores opened and recruited in the last 12 months have not compensated for the drop in sales from store closures and same-store sales, which declined by 4.7% during the nine-month period ended September 28, 2008, excluding the 0.6% decline in the average price of forest products. As mentioned above, this decrease in sales (excluding acquisitions) stems from an ongoing decline in the level of consumer confidence in Canada, as well as a sharp decline in construction and resale of single-unit homes, especially in Alberta. Despite lower figures for in-store transactions, due to the factors mentioned above, RONA's loyalty-building and sales-boosting activities, combined with employee efforts to offer the best service and shopping experience in our industry, have helped increase our average shopping basket. Sales declined in most product categories, indicating a general drop in consumer activity since the year began. Private brand products and sales of installation services, however, as mentioned in the analysis of third quarter results, experienced strong growth since the beginning of the year. Gross margin For the nine-month period ended September 28, 2008, the Company's gross margin improved by 90 basis points, from 28.3% in 2007 to 29.2% in 2008. This growth is the result of better product-category management, increased private-brand-product sales and better terms and purchasing conditions from our suppliers. Excluding the effect of unusual items on the margin, it increased by 100 basis points since the beginning of 2008. Unusual items As part of a vast program to improve efficiency and optimize the existing RONA stores network, as mentioned in the analysis of third quarter results, the Company made a decision to close four non-performing stores and transfer the business volume from these stores to other nearby RONA corporate stores and affiliates. During the second quarter, the Company sold off some non core assets, earning a pre-tax gain of $1.4 million. During the third quarter of 2008, the Company also accounted for unusual costs related to cancellation of future commitments. For the nine-month period ended September 28, 2008, net unusual costs of $15.1 million were booked, $11.4 million of which affected EBITDA and $3.7 million affected amortization and depreciation and financial costs. After taxes, the unusual costs for the nine-month period ended September 28, 2008, were $10.4 million. Consolidated operating income Operating income, including unusual items, was $306.2 million for the nine-month period ended September 28, 2008, down $18.1 million, or 5.6% from the $324.3 million figure posted in 2007. EBITDA declined 64 basis points, from 8.77% in 2007 to 8.13% in 2008. This decline is largely attributable to unusual items and downward pressure on same-store sales. Excluding related unusual items posted in the second and third quarters of 2008, operating income was $317.6 million for the nine-month period ended September 28, 2008, down $6.7 million, or 2.1%, over that of 2007. The EBITDA margin declined 34 basis points from 8.77% in 2007 to 8.43% in 2008. This decline is largely the result of current downward pressure on sales in the construction and renovation industry due to lower consumer confidence levels. This had a more substantial impact on first quarter results than on second- and third- quarter results, since the first three months are the time of year when store traffic is lowest and variable costs are very difficult to reduce. The decline can also be attributed to results from recently opened stores that have not yet reached their full potential. Rising transportation costs and an unfavourable variance related to the exchange rate items explain the rest of the decline. However, as mentioned in the analysis of third-quarter results, the numerous efficiency improvements posted under the PEP program that is the first phase of the 2008-2011 strategic plan have helped offset the negative effects of these three factors. Since the beginning of the year, the PEP program has, among other things, allowed us to improve our gross margin, reduce inventory levels, optimize the network of existing stores, improve logistics, accelerate recruitment of independent dealers and improve the process for opening new stores. Net earnings Net earnings, including unusual items for the nine-month period ended September 28, 2008, dropped by 13.0% to $134.5 million, or $1.15 diluted earnings per share, compared to $154.6 million, or $1.32 diluted earnings per share in 2007. The factors affecting operating earnings also affected the net earnings variation. Additional factors include higher fixed costs related to growing our network, particularly amortization related to recent store openings and acquisitions. Excluding the unusual items mentioned in the analysis of third-quarter results, net earnings were $144.9 million for the nine-month period ended September 28, 2008, or $1.24 diluted earnings per share, compared to $154.6 million, or $1.32 diluted earnings per share in 2007. This decline of $9.7 million or 6.2%, reflecting downward pressure on sales in the construction and renovation industry, was partly compensated for by the improved efficiency measures introduced this year. TREASURY AND FINANCIAL POSITION Operations generated $84.3 million in third quarter 2008, compared to $89.9 million in the same quarter of 2007. Excluding variations in working capital items, operations generated $111.3 million, compared to $110.5 million in 2007. During the third quarter of 2008 same-store and distribution centre inventories decreased by $80 million. During the third quarter of 2008, we invested $39.7 million in fixed assets, compared to $52.3 million in 2007. These investments related to the expansion of our retail network, i.e., 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. We also invested in our information systems, in order to increase operational efficiency. The Company practised disciplined financial management for the entire quarter and strictly monitored investments in fixed assets. For the nine-month period ended September 28, 2008, operations generated $222.1 million, compared to $227.4 in 2007. Excluding variations in working capital items, operations generated $260.6 million, compared to $148.7 million in 2007. During each of the last three quarters same-store and distribution centre inventories decreased. After nine months of activity, RONA has invested $129.7 million in fixed assets - $30.8 million or 19.2% less than the $160.5 million invested in 2007. During the second quarter of the current fiscal year, RONA decided to reduce the Company's capital spending program by 20% in 2008, in view of market conditions that were more difficult than expected. Accordingly capital spending held at approximately $200 million for 2008, which is $40 million less than the amount planned at the beginning of this year. Of this amount, $160 million will be allocated to store construction, improvements or renovations, and property acquisition, while some $40 million will be allocated for ongoing upgrades to our information systems. Given our significant improvements in managing merchandise flows and lowering inventories, we have postponed expansion of the Calgary distribution centre. Non-core assets were also sold off during the second quarter, generating an additional $12.8 million inflow. Due to the substantial funds generated by disciplined management of our working capital and capital spending during the third quarter and since the beginning of the year, the Company's net debt on September 28, 2008, was $509.6 million. This is a decrease of $124.7 million, or 19.7% compared to third quarter 2007. This is also a decline of $72.6 million, or 12.5%, compared to the beginning of third quarter 2008, and $143.9 million, or 22.0%, compared to early 2008. RONA's balance sheet remains very strong. On September 28, 2008, the ratio of total debt to capital was 26.9%, compared to 33.0% at the end of the corresponding quarter in 2007. The ratio of shareholders' equity to total assets at the end of the third quarter was 54.8%, compared to 52.1% on the same date in 2007. RONA has access to $650 million in revolving credit since July 11, 2008. At the end of the third quarter, $68 million had been drawn on this facility. The Company's operations produce significant cash flow. With relatively low debt and long-term fixed rates on most of our long-term debt, RONA also has significant liquidity and can borrow many millions more at advantageous rates. Our financial resources are therefore sufficient to pursue disciplined development on our four growth vectors: growing sales in our existing store network, construction of new corporate and franchise stores, recruitment of new affiliate stores and acquisitions. OUTLOOK As we mentioned in the section on economic conditions, the economic situation changed significantly towards the end of the third quarter. With the current ongoing global financial crisis, economic uncertainty has reached new heights, with the result that consumer confidence was hit hard according to the most recent surveys. With the Bank of Canada recently dropping the key interest rate by 75 basis points, the current interest rate environment remains favourable to high housing starts and resale levels. However, access to credit is becoming more and more limited, the value of consumer stock market investments declined significantly, and consumer confidence and expected GDP growth are at very low levels. While the PEP program has helped to largely offset the negative effects related to the most difficult conditions since the beginning of the year, the extent of the current global financial crisis brings a high degree of uncertainty in terms of future consumer activity. RONA management estimates that the expected decline in the economic environment over the next quarters could prevent it from achieving its low-single-digit-growth objective for earnings per share on average in the first half of the 2008-2011 business plan. Management is nevertheless optimistic about the fundamental factors that support the demand for and popularity of renovation projects and expects to actively pursue the various efficiency improvement measures underway to stimulate sales and improve efficiency in the PEP program over the next quarters. Finally, management estimates that current market conditions represent major potential for consolidating Canada's construction and renovation market, especially through recruitment of independent stores. ADDITIONAL INFORMATION The Management Discussion and Analysis (MD&A) and the financial statements for the third quarter of 2008 can be found in the "Investor Relations" section of the Company's website at www.rona.ca, and at www.sedar.com. The Company's Annual Report can also be found on the RONA website, along with other information about RONA, including its Annual Information Form, which can also be found on the SEDAR website. TELEPHONE CONFERENCE WITH THE FINANCIAL COMMUNITY On Tuesday, November 11, 2008, at 11:15 a.m. (EST), RONA will hold a telephone conference for the financial community. To join the conference, please dial 514 861-4190 or 1 877 677-7769. To listen to the call online, please go to: http://events.startcast.com/events6/153/C0001/Default.aspx NON-GAAP PERFORMANCE MEASURE In this Press Release, as in our internal management, we use the concept of "earnings before interest, income taxes, 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 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 from, or as a substitute for, other performance measures calculated according to GAAP, but rather as additional information. In the second and third quarters, RONA accounted for unusual items related to the cost of store closures and gains on disposal of assets. This document contains variance analyses of EBITDA, EBITDA margin, net earnings and earnings per share excluding these unusual items. While these measures do not have a meaning standardized by GAAP, the management of the Company believes they represent good indicators of the operating performance of existing activities. 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 MD&A 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 at November 11, 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 700 franchise, affiliate and corporate 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
Consolidated Financial Statements
September 28, 2008 and September 30, 2007
RONA inc.
Consolidated Earnings
For the thirteen and thirty-nine-week periods ended September 28, 2008 and
September 30, 2007
(Unaudited, in thousands of dollars, except earnings per share)
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Third Quarter Year-to-date
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2008 2007 2008 2007
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Sales $1,381,722 $1,350,475 $3,766,510 $3,698,071
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Earnings before
the following
items (Note 3) 115,502 121,639 306,187 324,267
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Interest on
long-term debt 6,490 7,261 22,412 21,671
Interest on bank
loans 567 793 1,544 2,435
Depreciation and
amortization
(Note 3) 27,539 23,487 81,899 67,504
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34,596 31,541 105,855 91,610
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Earnings before
income taxes and
non-controlling
interest 80,906 90,098 200,332 232,657
Income taxes 24,920 28,730 61,703 74,205
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Earnings before
non-controlling
interest 55,986 61,368 138,629 158,452
Non-controlling
interest 2,618 1,958 4,127 3,852
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Net earnings and
comprehensive
income $53,368 $59,410 $134,502 $154,600
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Net earnings per
share (Note 14)
Basic $0.46 $0.52 $1.16 $1.34
Diluted $0.46 $0.51 $1.15 $1.32
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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 thirty-nine-week periods ended September 28, 2008 and September 30,
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 134,502 154,600
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Balance, end of period $1,027,469 $862,478
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Consolidated Contributed Surplus
Balance, beginning of period $11,045 $9,182
Compensation cost relating to stock option plans 1,138 1,545
Exercise of stock options - (219)
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Balance, end of period $12,183 $10,508
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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 and thirty-nine-week periods ended September 28, 2008 and
September 30, 2007
(Unaudited, in thousands of dollars)
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Third Quarter Year-to-date
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2008 2007 2008 2007
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Operating activities
Net earnings $53,368 $59,410 $134,502 $154,600
Non-cash items
Depreciation and
amortization 27,539 23,487 81,899 67,504
Derivative financial
instruments 86 328 181 (3,302)
Future income taxes (138) 2,341 (37) (138)
Net loss (gain)
on disposal of
assets (379) 1,070 (1,870) 889
Compensation cost
relating to stock
option plans 380 537 1,138 1,545
Non-controlling
interest 2,618 1,958 4,127 3,852
Other items 813 772 2,206 2,427
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84,287 89,903 222,146 227,377
Changes in working
capital items 27,011 20,582 38,440 (78,655)
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Cash flows from
operating activities 111,298 110,485 260,586 148,722
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Investing activities
Business acquisitions
(Note 4) (173) (4,679) (4,059) (175,340)
Advances to joint
ventures and other
advances 228 231 8,157 4,871
Other investments - - (2,440) (588)
Fixed assets (39,703) (52,343) (129,682) (160,487)
Other assets (2,123) (2,694) (6,295) (5,925)
Disposal of assets 1,770 4,213 17,619 7,133
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Cash flows from
investing activities (40,001) (55,272) (116,700) (330,336)
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Financing activities
Bank loans and
revolving credit (54,089) (105,932) (106,164) 139,640
Other long-term debt - - 1,977 933
Repayment of other
long-term debt
and redemption of
preferred shares (5,740) (4,318) (18,042) (18,871)
Issue of common
shares 1,428 846 4,398 4,158
Issue of equity
securities to non
controlling interest - - - 750
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Cash flows from
financing activities (58,401) (109,404) (117,831) 126,610
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Net increase
(decrease) in cash 12,896 (54,191) 26,055 (55,004)
Cash, beginning
of period 16,025 57,673 2,866 58,486
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Cash, end of period $28,921 $3,482 $28,921 $3,482
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Supplementary
information
Interest paid $12,975 $14,299 $31,624 $25,622
Income taxes paid $15,459 $14,490 $67,253 $77,170
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The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Consolidated Balance Sheets
September 28, 2008, September 30, 2007 and December 30, 2007
(In thousands of dollars)
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2008 2007 2007
September 28 September 30 December 30
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(Unaudited) (Unaudited)
Assets
Current assets
Cash $28,921 $3,482 $2,866
Accounts receivable 329,488 304,710 237,043
Income taxes receivable 11,197 - 5,684
Inventory (Note 5) 846,078 871,954 856,326
Prepaid expenses 54,880 39,890 27,913
Derivative financial
instruments (Note 11) 194 2,360 1,168
Future income taxes 12,092 14,230 12,279
-------------------------------------------------------------------------
1,282,850 1,236,626 1,143,279
Investments 9,644 12,852 11,901
Fixed assets 836,683 743,544 816,919
Fixed assets held for sale (Note 6) 35,848 - -
Goodwill 456,345 437,878 454,882
Trademarks 3,884 3,539 4,145
Other assets 28,051 26,393 28,685
Future income taxes 22,406 19,889 22,635
-------------------------------------------------------------------------
$2,675,711 $2,480,721 $2,482,446
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank loans $9,601 $20,096 $19,574
Accounts payable and accrued
liabilities 586,830 468,130 421,446
Income taxes payable - 4,173 -
Derivative financial instruments
(Note 11) 274 1,441 1,067
Future income taxes 4,239 2,827 3,650
Instalments on long-term debt 26,363 31,032 34,239
-------------------------------------------------------------------------
627,307 527,699 479,976
Long-term debt 502,553 586,639 602,537
Other long-term liabilities 27,222 23,319 24,526
Future income taxes 22,739 22,239 23,781
Non-controlling interest 30,646 27,745 26,420
-------------------------------------------------------------------------
1,210,467 1,187,641 1,157,240
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 7) 425,592 420,094 421,194
Retained earnings 1,027,469 862,478 892,967
Contributed surplus 12,183 10,508 11,045
-------------------------------------------------------------------------
1,465,244 1,293,080 1,325,206
-------------------------------------------------------------------------
$2,675,711 $2,480,721 $2,482,446
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
RONA inc.
Notes to Interim Consolidated Financial Statements
September 28, 2008 and September 30, 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 September 30, 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 2008 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. Store closing costs Exit and disposal costs and write-down of assets In April 2008, management approved a detailed plan to close four of its stores included in the corporate and franchised stores segment by the end of the year. During the thirteen and thirty-nine-week period ended September 28, 2008, the Company recognized the following costs:
Third Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Lease obligations $4,231 $- $4,231 $-
Inventory write-down 157 2,114
Termination benefits 38 - 264 -
-------------------------------------------------------------------------
Total recorded in
earnings before the
following items 4,426 - 6,609 -
Fixed assets write-down 554 - 2,857 -
-------------------------------------------------------------------------
Total costs $4,980 $- $9,466 $-
-------------------------------------------------------------------------
-------------------------------------------------------------------------Additional estimated costs of $3,204 relating to store closures, principally lease obligations, will be recorded by the Company when the criteria for recognition have been met. The liability for exit and disposal costs and write-down of assets is as follows:
2008 2007
-------------------------------------------------------------------------
Balance, beginning of period $- $-
Costs recognized:
Lease obligations 4,231 -
Termination benefits 264 -
Less: cash payments (468) -
-------------------------------------------------------------------------
Balance, end of period $4,027 $-
-------------------------------------------------------------------------
-------------------------------------------------------------------------Other closing costs During the thirteen and thirty-nine week periods ended September 28, 2008, in addition to the exit and disposal costs and write-down of assets, the Company recorded operating costs, including interest and depreciation, for the liquidation of the assets of these stores in the amount of $1,690 and $4,101. The Company estimated that additional costs of $525 will be incurred in the next quarter to complete the liquidation of these stores' assets. 4. Business acquisitions During the thirty-nine-week period ended September 28, 2008, the Company acquired two companies (four companies in 2007), operating in the corporate and franchised stores segment, by way of asset purchases (share and asset purchases in 2007). Taking direct acquisition costs into account, these acquisitions were for a total consideration of $5,623 ($183,929 in 2007). The Company financed these acquisitions from its existing credit facilities. The results of operations of these companies are consolidated from their date of acquisition. The preliminary purchase price allocation of the acquisitions was established as follows:
2008 2007
-------------------------------------------------------------------------
Current assets $5,708 $62,104
Fixed assets 4,618 10,507
Goodwill 2,816 121,812
Trademarks - 2,321
Future income taxes - 755
Current liabilities (4,411) (10,046)
Long-term debt (3,108) (3,524)
-------------------------------------------------------------------------
5,623 183,929
Less : Accrued direct acquisition costs (64) (258)
Balance of purchase price (1,500) (8,331)
-------------------------------------------------------------------------
Cash consideration paid $4,059 $175,340
-------------------------------------------------------------------------
-------------------------------------------------------------------------On September 28, 2008, based on additional information obtained concerning the purchase price allocation of acquisitions of the fourth quarter of 2007, the Company reduced Goodwill by $1,353, reduced other net assets acquired by $1,520 and reduced Balance of purchase price, accordingly. The Company expects that an amount of $953 of goodwill will be deductible for tax purposes. 5. Inventory For the thirteen and thirty-nine-week periods ended September 28, 2008, $985,504 and $2,667,915 of inventory was expensed in the consolidated results ($966,644 and $2,651,558 as at September 30, 2007). These amounts include an inventory write-down charge of $15,159 and $38,912 ($13,837 and $34,587 as at September 30, 2007). 6. 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 within the next twelve-month period. 7. Capital stock Issued and fully paid: The following tables present changes in the number of outstanding common shares and their aggregate stated value:
September 28, 2008
-------------------------------------------------------------------------
Number of
shares Amount
-------------------------------------------------------------------------
Balance, beginning of period 115,412,766 $418,246
Issuance in exchange for common share
subscription deposits 197,854 3,349
Issuance under stock option plans 89,000 309
Issuance in exchange for cash 117,140 1,538
-------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 115,816,760 423,442
Elimination of reciprocal shareholdings (72,396) (435)
-------------------------------------------------------------------------
Balance, end of period 115,744,364 423,007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 2,585
-------------------------------------------------------------------------
$425,592
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2007
-------------------------------------------------------------------------
Number of
shares Amount
-------------------------------------------------------------------------
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 339,327 1,876
Issuance in exchange for cash 4,127 95
-------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 115,399,738 418,026
Elimination of reciprocal shareholdings (56,841) (341)
-------------------------------------------------------------------------
Balance, end of period 115,342,897 417,685
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 2,409
-------------------------------------------------------------------------
$420,094
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 30, 2007
-------------------------------------------------------------------------
Number of
shares Amount
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 115,412,766 418,246
Elimination of reciprocal shareholdings (70,319) (401)
-------------------------------------------------------------------------
Balance, end of year 115,342,447 417,845
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 3,349
-------------------------------------------------------------------------
$421,194
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 September 28, 2008 the 2,920,000 options granted have an exercise price of $3.47 and of this number, 1,538,500 options (1,449,500 options as at September 30, 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 thirty-nine-week periods ended September 28, 2008 and September 30, 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, approved by the shareholders at the annual shareholders' meeting on May 8, 2007, establish that this plan is no longer applicable to the designated directors of the Company and 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 September 28, 2008, the 1,944,052 options (1,700,852 options as at September 30, 2007) granted have exercise prices ranging from $14.18 to $26.87 ($14.29 to $26.87 as at September 30, 2007) and of this number, 85,100 options (85,100 options as at September 30, 2007) have been exercised and 226,425 options (149,050 options as at September 30, 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:
September 28, September 30,
2008 2007
-------------------------------------------------------------------------
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 costs expensed with respect to this plan were $380 and $1,138 for the thirteen and thirty-nine-week periods ended September 28, 2008 ($537 and $1,545 as at September 30, 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:
September 28, 2008
----------------------------------------------------------------------
Weighted
average
exercise
Options price
----------------------------------------------------------------------
Balance, beginning of period 2,922,552 $11.31
Granted 243,200 14.18
Exercised (89,000) 3.47
Forfeited (62,725) 20.33
----------------------------------------------------------------------
Balance, end of period 3,014,027 11.59
----------------------------------------------------------------------
----------------------------------------------------------------------
Options exercisable, end of period 1,965,569 $7.22
----------------------------------------------------------------------
----------------------------------------------------------------------
September 30, 2007
----------------------------------------------------------------------
Weighted
average
exercise
Options price
----------------------------------------------------------------------
Balance, beginning of period 3,162,479 $10.16
Granted 196,000 23.58
Exercised (339,327) 4.88
Forfeited (81,950) 20.85
----------------------------------------------------------------------
Balance, end of period 2,937,202 11.36
----------------------------------------------------------------------
----------------------------------------------------------------------
Options exercisable, end of period 1,895,994 $6.24
----------------------------------------------------------------------
----------------------------------------------------------------------
December 30, 2007
----------------------------------------------------------------------
Weighted
average
exercise
Options price
----------------------------------------------------------------------
Balance, beginning of year 3,162,479 $10.16
Granted 196,000 23.58
Exercised (339,327) 4.88
Forfeited (96,600) 20.94
----------------------------------------------------------------------
Balance, end of year 2,922,552 11.31
----------------------------------------------------------------------
----------------------------------------------------------------------
Options exercisable, end of year 2,011,194 $6.70
----------------------------------------------------------------------
----------------------------------------------------------------------
The following table summarizes information relating to stock options
outstanding as at September 28, 2008:
Options Options
Exercise price Expiration date outstanding exercisable
--------------------------------------------------------------------------
$3.47 December 31, 2012 1,381,500 1,381,500
$14.18 February 29, 2018 233,700 -
$14.29 December 16, 2013 432,550 432,550
$20.27 December 22, 2014 397,750 103,750
$21.21 February 24, 2016 358,500 -
$21.78 September 1, 2016 17,576 4,394
$23.58 March 8, 2017 169,375 43,375
$23.73 April 5, 2015 5,500 -
$26.87 February 24, 2016 17,576 -
--------------------------------------------------------------------------
3,014,027 1,965,569
--------------------------------------------------------------------------
--------------------------------------------------------------------------8. 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 $1,985. 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 $5,888. 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 $63,446. 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. 9. 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 thirty-nine-week period ended September 30, 2008, the Company recognized an amount of $4,703 ($8,085 as at September 30, 2007) which was estimated based on the attainment of specified requirements to receive the rebates. 10. 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 September 28, 2008, the Company's debt-to-capital ratio is 26.9% (33.0% as at September 30, 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 September 28, 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. 11. Financial instruments The carrying amounts and fair values of financial instruments were as follows:
September 28, September 30, December 30,
2008 2007 2007
--------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
--------------------------------------------------------------------------
Financial assets
held for trading
Cash $28,921 $28,921 $3,482 $3,482 $2,866 $2,866
Derivative
financial
instruments 194 194 2,360 2,360 1,168 1,168
Loans and
receivables
Accounts
receivable 329,488 329,488 304,710 304,710 237,043 237,043
Redeemable
preferred shares - - 1,400 1,400 1,071 1,071
Financial
liabilities
Bank loans 9,601 9,601 20,096 20,096 19,574 19,574
Accounts payable
and accrued
liabilities 586,830 586,830 468,130 468,130 421,446 421,446
Revolving credit 64,009 64,009 142,329 142,329 160,200 160,200
Debentures 396,090 300,542 395,734 371,407 395,821 372,145
Mortgage loans
and balance of
purchase price 51,323 51,323 57,499 57,499 60,438 60,438
Preferred shares 5,000 5,000 6,000 6,000 5,000 5,000
Financial liabilities
held for trading
Derivative financial
instruments 274 274 1,441 1,441 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:
Third Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Interest on accounts
receivable $(683) $(644) $(2,273) $(2,372)
Interest on long-term
loans and advances (559) (735) (2,804) (2,158)
Dividends on redeemable
preferred shares - (21) (29) (63)
Interest on cash and
bank loans 567 793 1,544 2,435
Interest on long
- term debt 6,490 7,261 22,412 21,671
Loss (gain) on fair
value of derivative
financial instruments (417) (519) 1,670 (3,647)
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 only 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 September 28, 2008, the aging of accounts receivable is as follows:
Current $271,500
Past due 0 - 30 days 32,196
Past due 31-120 days 17,055
Past due over 121 days 13,987
-----------------------------------------------------------
Trade accounts receivable 334,738
Less allowance for doubtful accounts 13,604
-----------------------------------------------------------
$321,134
-----------------------------------------------------------
-----------------------------------------------------------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 3,423 ----------------------------------------------------------- Balance as at September 28, 2008 $13,604 ----------------------------------------------------------- ----------------------------------------------------------- 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, increase in sales, working capital requirements and acquisitions primarily through cash flows from operations, a debenture issue and the use of its revolving credit on a regular basis. The following table presents the financial liability instalments payable when contractually due, excluding future interest payments but including accrued interest as at September 28, 2008:
Less
Carrying than 1-2 3-4 5 years
amount 1 year years years and more
-------------------------------------------------------------------------
Revolving credit $64,009 $- $- $64,009 $-
Debentures 400,000 - - - 400,000
Mortgage loans and
balance of purchase
price 51,575 20,295 11,737 12,779 6,764
Obligations under capital
leases 12,989 5,429 6,322 1,139 99
Preferred shares 5,000 1,000 2,000 2,000 -
Bank loans 9,601 9,601 - - -
Accounts payable and
accrued liabilities 586,830 586,830 - - -
Derivative financial
instruments 274 274 - - -
-------------------------------------------------------------------------
Total $1,130,278 $623,429 $20,059 $79,927 $406,863
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 September 28, 2008, the par value of forward exchange contracts is US $26,400. The average rate of these contracts is 1.0432 and they expire on various dates until April 2009. On September 28, 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 $72 decrease or increase in the Company's net earnings for the thirteen and thirty-nine-week periods ended September 28, 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 September 28, 2008, a 25-basis-point increase or decrease in interest rates, assuming that all other variables are constant, would have resulted in a $24 and $212 decrease or increase in the Company's net earnings for the thirteen and thirty-nine-week periods ended September 28, 2008. 12. Employee future benefits As at September 28, 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:
Third Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Cost recognized for
defined contribution
pension plans $2,077 $2,074 $6,388 $6,346
Cost recognized for
defined benefit
pension plans 342 329 880 983
-------------------------------------------------------------------------
Net employee future
benefit costs $2,419 $2,403 $7,268 $7,329
-------------------------------------------------------------------------
-------------------------------------------------------------------------13. 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.
Third Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Segment sales (a)
Corporate and
franchised
stores $1,061,863 $1,057,494 $2,874,911 $2,825,523
Distribution 635,271 619,788 1,843,654 1,830,466
-------------------------------------------------------------------------
Total 1,697,134 1,677,282 4,718,565 4,655,989
-------------------------------------------------------------------------
Intersegment sales
and royalties (a)
Corporate and
franchised
stores - - - -
Distribution (315,412) (326,807) (952,055) (957,918)
-------------------------------------------------------------------------
Total (315,412) (326,807) (952,055) (957,918)
-------------------------------------------------------------------------
Sales (a)
Corporate and
franchised
stores 1,061,863 1,057,494 2,874,911 2,825,523
Distribution 319,859 292,981 891,599 872,548
-------------------------------------------------------------------------
Total 1,381,722 1,350,475 3,766,510 3,698,071
-------------------------------------------------------------------------
Earnings before
interest,
depreciation and
amortization, rent,
income taxes and
non-controlling
interest (a)
Corporate and
franchised stores 126,623 130,273 333,684 343,657
Distribution 27,022 23,812 79,275 77,440
-------------------------------------------------------------------------
Total 153,645 154,085 412,959 421,097
-------------------------------------------------------------------------
Earnings before
interest,
depreciation and
amortization, income
taxes and
non-controlling
interest (a)
Corporate and
franchised stores 94,260 103,396 244,049 263,301
Distribution 21,242 18,243 62,138 60,966
-------------------------------------------------------------------------
Total 115,502 121,639 306,187 324,267
-------------------------------------------------------------------------
Acquisition of fixed
assets
Corporate and
franchised stores 29,938 48,905 109,860 154,615
Distribution 13,733 3,575 24,440 15,225
-------------------------------------------------------------------------
Total 43,671 52,480 134,300 169,840
-------------------------------------------------------------------------
Goodwill
Corporate and
franchised stores (1,500) (239) 1,463 121,812
Distribution - - - -
-------------------------------------------------------------------------
Total (1,500) (239) 1,463 121,812
-------------------------------------------------------------------------
Total assets
Corporate and
franchised
stores 2,197,905 2,054,373
Distribution 477,806 426,348
-------------------------------------------------------------------------
Total $2,675,711 $2,480,721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) During the first quarter of 2008, 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.14. Earnings per share The table below shows the calculation of basic and diluted net earnings per share:
Third Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings $53,368 $59,410 $134,502 $154,600
-------------------------------------------------------------------------
Number of shares
(in thousands)
Weighted average
number of shares
used to compute
basic net
earnings per
share 115,668.5 115,342.4 115,609.3 115,270.2
Effect of
dilutive stock
options (a) 1,049.0 1,397.5 1,091.7 1,497.7
-------------------------------------------------------------------------
Weighted average
number of shares
used to compute
diluted net
earnings per
share 116,717.5 116,739.9 116,701.0 116,767.9
-------------------------------------------------------------------------
Net earnings per
share - basic $0.46 $0.52 $1.16 $1.34
Net earnings per
share - diluted $0.46 $0.51 $1.15 $1.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) As at September 28, 2008, 1,199,977 common share stock options
(613,152 options as at September 30, 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.15. Effect of new accounting standards not yet implemented Goodwill and intangible assets 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 or first quarter 2009 for the Company. The new section confirms that at the time of initial recognition, an intangible asset can only be recognized as such if it meets both the definition of an intangible asset and the recognition criteria. Furthermore, Section 3064 provides guidance for the recognition of internally generated intangible assets. The Company is currently evaluating the impact of the new section on its consolidated financial statements. Based on analyses to date, certain assets included on the Company's balance sheet will no longer meet the requirements of the new section, notably, pre-opening expenses for stores and distribution centres (included in Other assets), advertising costs for store openings and costs incurred for the sponsorship of the Olympic and Paralympic Games (included in Prepaid expenses). In first quarter 2009, the balances in these asset accounts as at December 31, 2007, will be restated and included in Retained Earnings (at the beginning of first quarter 2008) and the results of operations of 2008 will also be restated to conform to the 2009 presentation. International Financial Reporting Standards (IFRS) In February 2008, the Accounting Standards Board confirmed that Canadian GAAP for publicly accountable enterprises will be replaced by IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company will convert its Canadian GAAP to IFRS in the first quarter of 2011 when the Company will prepare both the current and comparative information using IFRS. The Company expects this transition to have an impact on its accounting policies, financial reporting and information systems. The Company is currently evaluating the impact of these new standards on its consolidated financial statements. Contact: Contacts:
Media:
RONA Inc.
Eva Boucher-Hartling
Director, External Communications
514-599-5114
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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