BOUCHERVILLE, QUEBEC -- 02/20/08 --
RONA inc. (TSX: RON), the largest Canadian retailer and distributor of hardware, renovation and gardening products announced a sales increase of 7.1% in 2007 on a comparable basis (average weekly sales, to adjust for the additional week in 2006). The year's operating income stood at $400.2 million, up 6.3% on a comparable basis. Net earnings were $185.1 million, or $1.59 per share, diluted, down 2.9% from 2006. On a comparable basis, net earnings actually declined slightly. Finally, results were affected at year-end by a major slowdown in the sales of building materials and by a non-recurring after-tax expense of $1.4 million recorded for an in-depth study of the Company's supply chain, which produced recommendations that will result in efficiency improvements beginning in 2008.
RONA ended its 7-07 Program with annualized sales of over $6.2 billon. At the beginning of this program, launched at the end of 2005, RONA achieved sustained growth in retail sales, but market conditions much more difficult than foreseen when the program was launched, slowed advances in all four of the Company's growth vectors.
RONA's President and CEO Robert Dutton, stated: "In light of the increasing downward pressure on sales throughout the retail industry and a decrease in single-family housing starts last year, RONA did not achieve its objective of $7 billion in annualized retail sales in 2007, as outlined in the 7-07 Program. But for the last two years, this program really helped us improve our positioning and enhance our awareness, especially in Western Canada and Ontario," he said. "We also integrated 3,000 new employees into the RONA network, completed six major acquisitions, recruited nearly 100 dynamic independent dealer-owners and opened 18 new stores, including six in Western Canada and seven in Ontario. We also surpassed our sales objectives for RONA private brand products and introduced a number of innovative, value-added services, including the Project Guide.
As we go forward with these promising initiatives, we will officially launch our new 2008-2011 Strategic Plan next week, breathing fresh life into our improvement and development projects."
"RONA is taking positive action in the face of the widespread economic uncertainty that has been affecting consumer confidence for the last few months. In order to continue to improve our competitive position and take advantage of an eventual recovery in our sector, we have implemented a series of measures to stimulate sales and improve efficiency. We plan to pursue our development accordingly in the coming quarters, and to make it an important focus of our 2008-2011 Strategic Plan. We will also continue to invest in employee training and development, in order to be the industry benchmark for quality service and shopping experience. Finally, RONA will continue to innovate and attract customers with innovative concepts and services that allow us to offer a complete solution for all the home renovation and decoration needs of Canadian consumers," Dutton concluded.
FISCAL YEAR
RONA's fiscal year ends on the last Sunday of each year and usually has 52 weeks. For interim disclosure purposes, the quarters end on the last Sunday of March, June, September and December and have 13 weeks. Fiscal 2005 ended on December 25 while fiscal 2006 ended on December 31 and fiscal 2007 ended December 30. Giving fiscal 2006 53 weeks and the fourth quarter of 2006 14 weeks. In this Press release we have sometimes made appropriate adjustments to make the comparison exercise with fiscal 2006 or its last quarter more meaningful by comparing the figures on a weekly average basis. These adjustments are explicitly noted, where applicable.
HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 30, 2007
Sales up 5.1%
RONA's consolidated sales include wholesale distribution sales, retail sales of the corporate stores, and RONA's share of sales from franchise stores.
Consolidated sales for 2007 stood at $4,785.1 million, or 5.1% higher than the $4,551.9 million posted in 2006. Brought down to a weekly basis to eliminate the difference in the length of the two years, consolidated sales actually rose by 7.1%. This growth stems largely from acquisitions and store openings. Excluding contributions from major acquisitions, such as Noble Trade, Curtis Lumber, and Mountain Building Centres, weekly consolidated sales rose by 2.9%. This organic growth comes from sales generated by new stores opened over the last 12 months and the acquisition of affiliate stores.
Excluding the drop in average price of forest products and the impact of the 53rd week in 2006, same-store sales decreased by 0.8% over the year. This decline reflects the slowdown in our entire sector over the last two years. The Canadian market is experiencing significant regional disparities, however, which is reflected in our retail network sales. Same-store sales increased in Western Canada, thanks to strong economic growth in the region. On the other hand, in Quebec and Ontario, they decreased following heavy losses in manufacturing jobs in the industrial heartland of Canada over the last two years, which grew even more pronounced in 2007.
OPERATING INCOME UP 4.3%
Operating income reached $400.2 million in 2007, up 4.3% over 2006. On a comparable basis, operating income increased 6.3% compared to 2006.
The operating margin was stable at 8.4%. Although gross margins were maintained in 2007, the operating margin was under pressure, especially at the end of the year, when same-store sales decreased, since some operating costs are difficult to compress in the short term. In addition, we made extensive efforts to stimulate sales and traffic in stores across the RONA network. These unfavourable elements were counterbalanced by efficiency improvements implemented during the year. Efficiency improvements are also part of a long-term trend that reflects sustained investment in our infrastructure and distribution technology as well as purchasing and operating synergies achieved through the integration of the companies we have acquired over the years.
The evolution of our operating margin also reflects two factors related to our income mix. On one hand, the Company's growing presence in the retail sector pushes that margin up, since operating margins are higher in this sector than in distribution. On the other hand, our breakthrough in the construction materials segment, through acquisitions over the last two years, has had an inverse impact on our operating margin, since this segment generates margins lower than our consolidated margin. That said, these acquisitions produce a return on investment that is equally good. Finally, RONA is still seeking to increase operating margins through efficiency improvement initiatives.
Net earnings
Net earnings for 2007 stood at $185.1 million, or $1.59 per share, diluted, compared to $190.6 million in 2006, or $1.64 per share, diluted. This drop stems mainly from the extra week in 2006. On a comparable number of weeks (based on average weekly sales), net earnings for 2007 were actually down slightly compared to 2006. Net earnings were also affected by a non-recurring expense of $1.4 million at the end of 2007 for an exhaustive study of the Company's supply chain. This study has already allowed us to undertake an extensive optimization exercise for the supply chain, which will significantly improve our operational efficiency starting in 2008.
Certain investments dedicated to the expansion of the RONA network contribute only gradually to our earnings but generate full depreciation and interest expenses immediately. Despite the general slowdown in the growth of the renovation and construction industry, RONA is continuing to invest in several development projects that will guarantee the Company a stronger position in the coming years.
Our net earnings varied over the year: the second and third quarters showed an increase in net earnings, but the gains were erased by the first and fourth quarter results. The expansion of our activities in the construction materials sector added to the seasonal changes in our sales.
FINANCIAL HIGHLIGHTS FOR THE QUARTER ENDED DECEMBER 30, 2007
Sales down 4.8%
Consolidated sales for the quarter stood at $1,087.0 million, 4.8% less than a year before. On a comparable basis (weekly average), consolidated sales increased 2.6%. This growth stemmed from corporate and franchise sales. On a weekly basis, organic growth of consolidated sales (consolidated sales less major acquisitions) was -1.9%.
Excluding the impact of the extra week in 2006 and the 0.4% decline in the average price of forest products, same-store sales decreased by 2.1% this quarter.
Operating income down 12.5%
In fourth quarter 2007, our operating income stood at $75.9 million, down 12.5% from the corresponding quarter in the previous year. Excluding the impact of the extra week, the operating income would have been down by 5.7%.
The operating income represents 7.0% of quarterly sales, compared to 7.6% for the year before. This decline is mainly attributable to a non-recurring expense of $2.1 million incurred and recorded at the end of 2007 for an in-depth study of the Company's supply chain, and to the effect of the additional week in 2006 which absorbed a larger portion of the fixed costs during the fourth quarter 2006. The operating margin was also under pressure, especially at the end of the year, when same-store sales decreased - some operating costs are difficult to compress in the short term. In addition, we made extensive efforts to stimulate sales and traffic in stores across the RONA network.
Net earnings
Net earnings for the quarter were $30.5 million, or $0.26 per share after dilution, compared to $38.1 million in 2006, or $0.33 per share after dilution. This decline is mainly due to the extra week in 2006, as well as a non-recurring after-tax expense of $1.4 million recorded in the quarter for an exhaustive study of RONA's supply chain. This study has already allowed us to undertake an extensive optimization exercise for the supply chain, which will significantly improve our operational efficiency beginning in 2008. Finally, a full range of activities was undertaken during the quarter to stimulate sales in what turned out to be a very difficult business climate.
In addition, as mentioned in the analysis of our annual results, certain investments dedicated to the expansion of the RONA network contribute only gradually to our earnings but generate full depreciation and interest expenses immediately. Because of this, several new stores that opened during the quarter created short-term downward pressure on the Company's net earnings.
CASH FLOWS AND FINANCIAL POSITION
In 2007, operations generated cash flows of $286.2 million compared to $283.3 million for the year before. Net of changes in working capital associated with the growth and development of the retail and distribution networks, operations generated cash flows of $276.8 million, against $283.4 million in 2006.
Acquisitions resulted in a net cash outflow of $228.5 million, or 35.3% more than in 2006. Acquisitions in 2007 strengthened our network in Ontario and Western Canada, mainly in the specialized store segment.
In 2007, we disbursed $233.7 million in capital investments, in keeping with the capital budget unveiled a year ago. These investments were dedicated mainly to the expansion of our retail network through constructing new stores and retrofitting, renovating and upgrading existing stores to reflect our new concepts. As we do each year, we made substantial investments in ongoing improvements to our information systems with a view to boosting operating efficiency.
The investments and acquisitions made in 2007 were mainly financed through cash flows generated through operations. Moreover, we also increased our long-term debt by a net amount of $121.4 million, mostly from our existing credit facilities.
Our balance sheet remains strong. On December 30, 2007, the total debt/capital ratio stood at 33.1%, compared to 30.9% at the close of 2006. The Company plans to improve this ratio by focusing on a disciplined use of its capital and additional efficiency improvement measures, thus increasing our financial flexibility in the coming quarters.
Our working capital (excluding installments on long-term debt) stood at $697.5 million at year-end, compared to $663.2 million a year earlier. This increase is a consequence of network growth, both organic and acquired. Inventory stood at $856.3 million at year-end, up 8.3% over the previous year related to expansion through acquisitions and the opening of many new stores at the end of the year.
The equity/assets ratio reached 53.4% at the end of 2007, compared to 53.8% on the same date in 2006.
Our operations generate strong cash flows. With a relatively low debt load and fixed rates on most of our long-term debt, that is, our $400 million debenture, we have good liquidity and access to over $300 million in additional credit at competitive rates. Last July we extended the maturity of our renewable credit facility by one year, from October 6, 2011 to October 6, 2012. RONA has sufficient resources to pursue disciplined growth along its four growth vectors: same-store sales growth, new store construction, dealer recruitment, and acquisitions.
In 2008, our capital spending program will amount to approximately $240 million. Of this sum, about $180 million will be spent on the construction, refit or renovation of stores and acquisition of land. Another $20 million will be spent to expand the distribution network in order to support the rapid expansion of our network in the west. Finally, some $40 million will be spent on ongoing improvements to our information systems.
OUTLOOK
RONA management believes that the slowdown in our sector over the past quarters is the result of economic conditions. RONA's long-term development has the benefit of favourable structural factors, notably that Canada's working population, age 25 to 55, is showing a growing interest in home renovation and gardening, and the baby boomers, who account for about 30% of the population, are approaching early retirement and retire in better physical and financial shape than any previous generation.
In Canada, the existing housing stock is also aging: over 80% of homes are more than 15 years old and will require major maintenance work in the near future. Moreover, new housing starts, housing resales and the average selling price of homes have all seen big increases in the last three years. The Canadian market is, therefore, seeing many new owners with greater borrowing power, representing a highly favourable environment for the home improvement business.
The American economy has been experiencing a major correction in the real estate market over the past few quarters. Housing starts and resales have dropped significantly, and the average price of homes has stopped increasing. The situation is very different in Canada, where all of RONA's sales are based. The drop in housing starts is much less pronounced than in the United States, and resales are still climbing despite CMHC predictions of a drop. The number of housing starts remains at historically high levels, and resales have reached new records, boosting housing prices in many regions.
Nevertheless, the reduction in starts of single-family homes, combined with a slowdown in the growth of housing resales and the negative impact of the stronger Canadian dollar, is influencing the behaviour of Canadian consumers in relation to renovation projects. While consumer confidence is high compared to historic levels, it continued to sag in January 2008 after the significant decline at the end of 2007. Canadian consumers seem worried about the short-term economic prospects. In addition, the rise of the Canadian dollar also seems to have encouraged some consumers to spend their disposable income abroad. RONA management believes that these two factors could partly explain current downward pressure on same-store sales in our industry. It is worth noting, however, that high volumes of housing resales and residential construction have historically led to significant renovation expenditures in the following years. This anxiety about spending on certain consumer goods may quickly dissipate when the economic uncertainty settles down.
Despite everything in the short term, the issues mentioned above are cutting into the growth of our market. In this context, and leaving aside the 2008-2011 Strategic Plan that we will unveil shortly after the publication of this Press release, we have already undertaken vigorous measures to reinvigorate our sales and profitability. These numerous incremental measures can be implemented quickly and they will affect all areas of our operations:
- Various measures and campaigns will be implemented to energize sales in the existing network, in both affiliate dealer-owners and our own network of corporate and franchise stores. Our first priority is to improve service in our stores. We have a number of strong promotion and loyalty levers - from the RONA credit card and gift cards to Air Miles(TM) and our Olympic Games promotions - that could be used more often and differently.
- We also plan to improve and speed up the launch of our new stores and the integration process for new affiliate dealer-owners and acquisitions, in order to accelerate their contribution to the expansion of our network. Finally we will proceed with the sale of certain non-strategic assets.
- We are setting up recruitment efforts to accelerate expansion of our network.
- Various initiatives will improve our consolidated gross margin: for example, reducing inventory loss related to theft and breakage ("shrink") across the supply chain, optimizing supply synergies, etc.
- We are implementing a series of measures to increase our operational efficiency at every level: optimization of merchandise flows, inventory reduction, refinement of distribution and transport operations processes, etc.
- We are reviewing some long-established corporate stores that chronically underperform. Depending on their strategic potential, these stores will be restructured.
- We will continue to innovate by developing new store concepts and sales approaches.
Within our 2008-2011 planning horizon, RONA aims to be recognized as the industry leader in terms of service quality, operational efficiency and innovation, and sustainable development. RONA management intends to energetically pursue consolidation of the Canadian renovation market and to continue to increase our market share while maximizing earnings and return on investment.
ADDITIONAL INFORMATION
The MD&A and unaudited financial statements for 2007 and fourth quarter 2007 can be consulted on the Company's website at www.rona.ca, in the Investor Relations section, and at www.sedar.com. The Company's Annual Report can also be found on its website and on the SEDAR website, along with other information about RONA, including its Annual Information Form.
CONFERENCE CALL WITH THE FINANCIAL COMMUNITY
On Wednesday, February 20, 2008 at 11:30 AM (EST), RONA will hold a conference call for the financial community. To join the call, please dial 514-861-0443 or 1 866 542-4146. To follow the call online, go to http://events.startcast.com/events/153/B0019.
RONA 2008 INVESTORS DAY
RONA will unveil its 2008-2011 Strategic Plan within the framework of its 2008 Investors Day, which will be held February 27, 2008, in Montreal. For the corporate investors and financial analysts who would like to attend this event, please contact Elaine Pelletier by email at elaine.pelletier@rona.ca or by telephone at (514) 599-5900 extension 8215. For those who won't be able to attend the event and meet with the management team, a live Internet audio broadcast of the presentations will be accessible at www.rona.ca, or via conference call in listen-only mode by dialing (514) 861-1681 or 1 866 299-8690. The presentation slides will be posted on our website prior to the event.
NON-GAAP PERFORMANCE MEASURE
In this Press release, as in our internal management, we use the concept of earnings before interest, 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 generally accepted accounting principles in Canada (GAAP), it is widely used in our industry and in 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 INFORMATION
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 at www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in this 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 of February 19, 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
As the largest Canadian distributor and retailer of hardware, home renovation and gardening products, RONA offers a complete solution for all home improvement and decorating needs. RONA operates a network of close to 680 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 $6.2 billion in annual retail sales.
RONA
Consolidated Financial Statements
December 30, 2007 and December 31, 2006
RONA inc.
Consolidated Earnings
Years ended December 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars, except earnings per share)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Fourth Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Sales $1,087,035 $1,141,338 $4,785,106 $4,551,936
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings before
the following items 75,940 86,747 400,207 383,882
--------------------------------------------------------------------------
Interest on long-term debt 6,599 4,707 28,270 18,728
Interest on bank loans 894 639 3,329 3,417
Depreciation and amortization
(Notes 10, 11 and 12) 23,397 22,293 90,901 74,545
--------------------------------------------------------------------------
30,890 27,639 122,500 96,690
--------------------------------------------------------------------------
Earnings before income taxes
and non-controlling interest 45,050 59,108 277,707 287,192
Income taxes (Note 4) 13,925 19,202 88,130 92,202
--------------------------------------------------------------------------
Earnings before
non-controlling interest 31,125 39,906 189,577 194,990
Non-controlling interest 636 1,793 4,488 4,406
--------------------------------------------------------------------------
Net earnings and
comprehensive income $30,489 $38,113 $185,089 $190,584
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings per share (Note 23)
Basic $0.26 $0.33 $1.61 $1.66
Diluted $0.26 $0.33 $1.59 $1.64
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
Years ended December 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Consolidated Retained Earnings
Balance, beginning of year, as previously reported $709,467 $518,883
Financial instruments - recognition
and measurement (Note 2) (1,589) -
--------------------------------------------------------------------------
Restated balance, beginning of year 707,878 518,883
Net earnings 185,089 190,584
--------------------------------------------------------------------------
Balance, end of year $892,967 $709,467
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated Contributed Surplus
Balance, beginning of year $9,182 $6,618
Compensation cost relating to stock option plans 2,082 2,490
Exercise of stock options (219) (177)
Gain on disposal of the Company's common shares
by a joint venture, net of income taxes of $59 - 251
Balance, end of year $11,045 $9,182
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
RONA inc.
Consolidated Cash Flows
Years ended December 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Fourth Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Operating activities
Net earnings $30,489 $38,113 $185,089 $190,584
Non-cash items
Depreciation and amortization 23,397 22,293 90,901 74,545
Derivative financial instruments 819 - (2,483) -
Future income taxes 2,032 9,218 1,894 8,933
Net loss (gain) on
disposal of assets 152 (179) 1,041 (1,594)
Compensation cost relating to
Stock option plans 537 722 2,082 2,490
Non-controlling interest 636 1,793 4,488 4,406
Other items 731 1,382 3,158 3,957
--------------------------------------------------------------------------
58,793 73,342 286,170 283,321
Changes in working
capital items (Note 5) 69,294 (60,852) (9,361) 116
--------------------------------------------------------------------------
Cash flows from
operating activities 128,087 12,490 276,809 283,437
--------------------------------------------------------------------------
Investing activities
Business acquisitions (Note 6) (53,162) (15,945) (228,502) (168,872)
Advances to joint ventures
and other advances (7,666) (4,628) (2,795) (5,295)
Other investments - - (588) (1,310)
Fixed assets (73,175) (79,771) (233,662) (232,173)
Other assets (3,489) (1,698) (9,414) (10,889)
Disposal of assets 9,895 516 17,028 6,852
--------------------------------------------------------------------------
Cash flows from
investing activities (127,597) (101,526) (457,933) (411,687)
--------------------------------------------------------------------------
Financing activities
Bank loans and revolving credit 16,488 (251,723) 156,128 (199,808)
Other long-term debt 807 402,685 1,740 406,302
Financing costs - (6,826) - (6,826)
Repayment of other long-term
debt and redemption
of preferred shares (17,601) (9,672) (36,472) (21,488)
Issue of common shares 1,160 797 5,318 4,701
Issue of equity securities
to non-controlling interest - - 750 735
Cash dividends paid by a
subsidiary to non-controlling
interest (1,960) - (1,960) -
Redemption of equity securities
from non-controlling interest - - - (1,000)
--------------------------------------------------------------------------
Cash flows from
financing activities (1,106) 135,261 125,504 182,616
--------------------------------------------------------------------------
Net increase (decrease) in cash (616) 46,225 (55,620) 54,366
Cash, beginning of year 3,482 12,261 58,486 4,120
--------------------------------------------------------------------------
Cash, end of year $2,866 $58,486 $2,866 $58,486
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplementary information
Interest paid $2,933 $1,095 $28,555 $15,791
Income taxes paid $23,782 $23,136 $100,952 $80,116
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
RONA inc.
Consolidated Balance Sheets
December 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Assets
Current assets
Cash $2,866 $58,486
Accounts receivable (Note 7) 237,043 205,808
Income taxes receivable 5,684 -
Inventory 856,326 790,496
Prepaid expenses 27,913 23,454
Derivative financial instruments (Note 18) 1,168 -
Future income taxes (Note 4) 12,279 10,859
--------------------------------------------------------------------------
1,143,279 1,089,103
Investments (Note 8) 11,901 17,642
Fixed assets (Note 10) 816,919 634,131
Goodwill 454,882 316,558
Trademarks (Note 11) 4,145 1,380
Other assets (Note 12) 28,685 30,314
Future income taxes (Note 4) 22,635 19,254
--------------------------------------------------------------------------
$2,482,446 $2,108,382
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities
Current liabilities
Bank loans (Note 13) $19,574 $21,221
Accounts payable and accrued liabilities 421,446 394,103
Income taxes payable - 7,242
Derivative financial instruments (Note 18) 1,067 -
Future income taxes (Note 4) 3,650 3,314
Instalments on long-term debt (Note 14) 34,239 29,511
--------------------------------------------------------------------------
479,976 455,391
Long-term debt (Note 14) 602,537 455,310
Other long-term liabilities (Note 15) 24,526 20,386
Future income taxes (Note 4) 23,781 19,402
Non-controlling interest 26,420 23,527
--------------------------------------------------------------------------
1,157,240 974,016
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 16) 421,194 415,717
Retained earnings 892,967 709,467
Contributed surplus 11,045 9,182
--------------------------------------------------------------------------
1,325,206 1,134,366
--------------------------------------------------------------------------
$2,482,446 $2,108,382
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
RONA inc.
Notes to Consolidated Financial Statements
December 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars, except amounts per share)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Governing statutes and nature of operations
The Company, incorporated under Part 1A of the Companies Act (Quebec), is a distributor and a retailer of hardware, home improvement and gardening products in Canada.
2. Changes in accounting policies
On January 1, 2007, in accordance with applicable transitional provisions, 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
Section 3855, Financial Instruments - Recognition and Measurement and Section 3861, Financial Instruments - Disclosure and Presentation describe standards for the classification, recognition, measurement, disclosure and presentation of financial instruments (including derivatives) and non-financial derivatives in the financial statements.
The adoption of these new standards resulted in the following changes in the classification and measurement of the Company's financial instruments, previously recorded at cost:
- Cash is classified as a "financial asset held for trading" and is measured at fair value. All changes in fair value are recognized in earnings. This change had no impact on the Company's consolidated financial statements.
- Accounts receivable, long-term loans and advances and redeemable preferred shares (included in investments) are classified as "loans and receivables" and are recognized at cost which, at initial measurement, corresponds to fair value. Subsequent revaluations of accounts receivable are recorded at amortized cost which generally corresponds to initial measurement less any allowance for doubtful accounts. Subsequent revaluations of long-term loans and advances and redeemable preferred shares are recognized at amortized cost using the effective interest method less any amortization. This change had no impact on the Company's consolidated financial statements.
- Bank loans and accounts payable and accrued liabilities are classified as "other financial liabilities". They are initially measured at fair value and subsequent revaluations are recognized at amortized cost using the effective interest method. This change had no impact on the Company's consolidated financial statements.
- Long-term debt is classified as "other financial liabilities". With the exception of the revolving credit, long-term debt is measured at amortized cost, which corresponds to the initially recognized amount plus accumulated amortization of financing costs. The initially recognized amount corresponds to the principal amount of the debt less applicable financing costs. This change resulted in a decrease of $4,824 in deferred financing costs (previously included in other assets), a decrease of $4,870 in long-term debt and an increase of $46 ($31 net of future income taxes) in opening retained earnings.
- The Company uses derivative financial instruments to manage foreign exchange risk. The Company does not use derivative financial instruments for speculative or trading purposes. The derivatives are classified as "liabilities held for trading" and are measured at fair value.
The Company also adopted the following accounting policies:
- Transaction costs related to other financial liabilities are recorded as a reduction in the carrying amount of the related financial liability.
- The Company records as a separate asset or liability only those derivatives embedded in hybrid financial instruments issued, acquired or substantially modified by the Company as of December 29, 2002 when these hybrid instruments are not recorded as held for trading and remained outstanding at January 1, 2007. Embedded derivatives that are not closely related to the host contracts must be separated from the host contract, classified as a financial instrument held for trading and measured at fair value with changes in fair value recognized in earnings. The Company has not identified any embedded derivatives to be separated other than derivatives embedded in purchase contracts concluded in a foreign country and settled in a foreign currency that is not the conventional currency of either of the two principal parties to the contract. Although the payments are made in a foreign currency that is routinely used in the economic environment where the transaction occurred, the Company has decided to separate the embedded derivatives. This change resulted in an increase in current liabilities of $2,382 and a decrease in retained earnings of $2,382 ($1,620 net of future income taxes) at January 1, 2007. For the thirteen-week and fifty-two-week periods ended December 30, 2007, this change resulted in an increase (decrease) of the following items:
Fourth Year-to-
Quarter date
--------------------------------------------------------------------------
Earnings before interest, depreciation
and amortization, income taxes and
non-controlling interest $(1,425) $4,219
Net earnings (969) 2,868
Net earnings per share $(0.01) $0.03
Net earnings per share - diluted $(0.01) $0.03
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Comprehensive income
Section 1530, Comprehensive Income describes standards for the presentation of comprehensive income and its components. Comprehensive income is the change in shareholders' equity, which results from transactions and events from sources other than the Company's shareholders. The adoption of the new Section had no impact on the Company's consolidated financial statements.
Equity
Section 3251, Equity describes standards for the presentation of equity and changes in equity in the period. The adoption of the new recommendation had no impact on the Company's consolidated financial statements.
Accounting changes
In accordance with applicable transitional provisions, the Company adopted the new recommendations of CICA Handbook, Section 1506, Accounting Changes. This section establishes the criteria for changing accounting policies together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. In addition, the new standard requires the communication of the new primary sources of GAAP that are issued but not yet adopted by the Company (Note 24).
3. Accounting policies
Accounting estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts recorded in the financial statements and notes to financial statements. These estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future. Actual results may differ from those estimates.
Principles of consolidation
These financial statements include the accounts of the Company and its subsidiaries. Moreover, the Company includes its share in the assets, liabilities and earnings of joint ventures in which the Company has an interest. This share is accounted for using the proportionate consolidation method.
Revenue recognition
The Company recognizes revenue at the time of sale in stores or upon delivery of the merchandise, when the sale is accepted by the customer and when collection is reasonably assured.
Inventory valuation
Inventory is valued at the lower of cost and net realizable value. Cost is determined using the average cost method.
Vendor rebates
The Company records cash consideration received from vendors as a reduction in the price of vendors' products and reflects it as a reduction to cost of goods sold and related inventory when recognized in the consolidated statements of earnings and consolidated balance sheets.
Fixed assets
Fixed assets are recorded at cost including capitalized interest, if applicable. Depreciation commences when the assets are put into use and is recognized using the straight-line method and the following annual rates in order to depreciate the cost of these assets over their estimated useful lives.
Rates
---------------------------------------------------------------
Parking lots 8% and 12.5%
Buildings 4% and 5%
Leasehold improvements 5% to 33%
Furniture and equipment 10% to 30%
Computer hardware and software 10% to 33%
Impairment of long-lived assets
Fixed assets are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impairment loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.
Goodwill and trademarks
Goodwill is the excess of the cost of acquired enterprises over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that it is impaired. The impairment test consists of a comparison of the fair value of the Company's reporting units with their carrying amount. When the carrying amount of a reporting unit exceeds the fair value, the Company compares the fair value of goodwill related to the reporting unit to its carrying value and recognizes an impairment loss equal to the excess. The fair value of a reporting unit is calculated based on evaluations of discounted cash flows.
Trademarks having finite lives are amortized on a straight-line basis over periods ranging from five to seven years and are also tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of the asset exceeds the future undiscounted cash flows expected from the asset. The loss is determined by comparing the fair value of the asset to its carrying value. The fair value is calculated based on evaluations of discounted cash flows.
Other assets
Pre-opening expenses are amortized on a straight-line basis over a period of three years beginning at the start of operations.
Financing costs relate to credit facilities and are amortized on a straight-line basis over the financing term over a period of six years.
Costs related to sale and leaseback agreements are amortized over the lease term according to the straight-line method.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of assets and liabilities. They are measured by applying enacted or substantively enacted tax rates and laws at the date of the financial statements for the years in which the temporary differences are expected to reverse.
Other long-term liabilities
Other long-term liabilities consist of a deferred gain on a sale and leaseback transaction and deferred lease obligations. They are amortized using the straight-line method over the terms of the leases.
Deferred lease obligations result from the recognition, by the Company, of the rental expense on a straight-line basis over the lease term when leases contain a predetermined fixed escalation of the minimum rent.
Stock option plans
The Company accounts for options issued according to the fair value based method. Compensation cost should be measured at the grant date and should be recognized over the applicable stock option vesting period. Any consideration received from employees when options are exercised or stock is purchased is credited to share capital as well as the related compensation cost recorded as contributed surplus.
Foreign currency translation
Monetary items on the balance sheet are translated at the exchange rates in effect at year-end, while non-monetary items are translated at the historical rates of exchange. Revenues and expenses are translated at the rates of exchange in effect on the transaction date or at the average exchange rates for the period. Gains or losses resulting from the translation are included in earnings for the year.
Employee future benefits
The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets.
The Company has adopted the following accounting policies for the defined benefit plans:
- The actuarial determination of the accrued benefit obligations for pension uses the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation and retirement ages of employees;
- For the purpose of calculating the expected return on plan assets, those assets are valued at fair value;
- Past service costs from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of employees active at the date of amendments;
- Actuarial gains (losses) arise from the difference between actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of the active employees. The average remaining service period of the active employees covered by the pension plan is 16 years (17 years at December 31, 2006);
- The transitional obligation is amortized on a straight-line basis over a period of 10 years, which is the average remaining service period of employees expected to receive benefits under the benefit plan in 2000.
For defined contribution plans, the pension expense recorded in earnings is the amount of contributions the Company is required to pay for services rendered by employees.
Earnings per share and information pertaining to number of shares
Earnings per share are calculated by dividing net earnings available for common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated taking into account the dilution that would occur if the securities or other agreements for the issuance of common shares were exercised or converted into common shares at the later of the beginning of the period or the issuance date. The treasury stock method is used to determine the dilutive effect of the stock options. This method assumes that proceeds of the stock options during the year are used to redeem common shares at their average price during the period.
Fiscal year
The Company's fiscal year ends on the last Sunday of December. The fiscal years ended December 30, 2007 and December 31, 2006 include 52 and 53 weeks of operations, respectively.
4. Income taxes
2007 2006
--------------------------------------------------------------------------
Current $86,236 $83,269
Future 1,894 8,933
--------------------------------------------------------------------------
$88,130 $92,202
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Future income taxes arise mainly from the changes in temporary differences.
The Company's effective income tax rate differs from the statutory income tax rate in Canada. This difference arises from the following items:
2007 2006
--------------------------------------------------------------------------
Federal statutory income tax rate 22.1% 22.1%
Statutory rate of various provinces 9.8 10.0
--------------------------------------------------------------------------
Combined statutory income tax rate 31.9 32.1
Non-deductible costs 0.4 0.4
Other (0.6) (0.4)
--------------------------------------------------------------------------
Effective income tax rate 31.7% 32.1%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Future income tax assets and liabilities result from differences between the carrying amounts and tax bases of the following:
2007 2006
--------------------------------------------------------------------------
Future income tax assets
Current
Non-capital loss carry-forwards $2,024 $2,765
Direct costs related to business acquisitions 674 688
Provisions not deducted and other 9,581 7,406
--------------------------------------------------------------------------
$12,279 $10,859
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Long-term
Non-capital loss carry-forwards $5,754 $4,317
Share issue expenses - 563
Fixed assets and pre-opening expenses 7,152 6,709
Deferred gain on sale and leaseback transaction 4,137 4,415
Goodwill 1,101 1,239
Deferred revenue and other 4,491 2,011
--------------------------------------------------------------------------
$22,635 $19,254
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Future income tax liabilities
Current
Incentive payments received $2,065 $2,442
Other 1,585 872
--------------------------------------------------------------------------
$3,650 $3,314
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Long-term
Fixed assets and pre-opening expenses $15,822 $15,441
Goodwill 3,544 2,444
Pension plans 2,079 1,020
Other 2,336 497
--------------------------------------------------------------------------
$23,781 $19,402
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Cash flow information
The changes in working capital items are detailed as follows:
2007 2006
--------------------------------------------------------------------------
Accounts receivable $11 801 $41,032
Inventory (18,451) 14,004
Prepaid expenses (3,740) (9,104)
Accounts payable and accrued liabilities 13,700 (48,969)
Income taxes (receivable) payable (12,671) 3,153
--------------------------------------------------------------------------
$(9,361) $116
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Business acquisitions
During 2007, the Company acquired seven companies (fourteen in 2006), operating in the corporate and franchised stores segment, by way of share or asset purchases. Taking direct acquisition costs into account, these acquisitions were for a total consideration of $253,704 ($188,430 in 2006). 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:
2007 2006
--------------------------------------------------------------------------
Current assets $93,823 $137,128
Fixed assets 40,403 39,734
Goodwill 138,817 64,221
Trademarks 2,981 1,514
Other assets 118 327
Future income taxes 1,240 (578)
Current liabilities (18,636) (43,691)
Long-term debt (5,042) (6,312)
Non-controlling interest - (3,913)
--------------------------------------------------------------------------
253,704 188,430
Less: Accrued direct acquisition costs (1,044) (1,409)
Balance of purchase price (24,158) (18,149)
--------------------------------------------------------------------------
Cash consideration paid $228,502 $168,872
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company expects that an amount of $104,519 of goodwill will be deductible for tax purposes.
7. Accounts receivable
2007 2006
--------------------------------------------------------------------------
Trade accounts
Affiliated and franchised stores $49,451 $49,955
Joint ventures 8,176 12,896
Other (retail customers) 153,502 121,434
Advances to joint ventures, varying
from prime to prime plus 3% 8,377 5,582
Other accounts receivable 13,254 14,181
Portion of investments receivable within one year 4,283 1,760
--------------------------------------------------------------------------
$237,043 $205,808
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Investments
2007 2006
--------------------------------------------------------------------------
Joint ventures, at cost
Preferred shares, dividend rate of 6% $1,071 $4,594
Mortgages, weighted average rate of 9.5%
(9.1% in 2006) maturing on various dates until 2015 693 766
Companies subject to significant influence
Shares, at equity value 2,387 2,631
Preferred shares, at cost, redeemable
over ten years, maturing in 2011 320 400
Advances and loans, at cost
Mortgages and term notes, weighted average
rate of 5.7%
(7.1% in 2006), maturing at various dates until 2016 11,071 10,374
Other 642 637
--------------------------------------------------------------------------
16,184 19,402
Portion receivable within one year 4,283 1,760
--------------------------------------------------------------------------
$11,901 $17,642
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The consolidated statement of earnings includes dividend income of $82 ($287 in 2006) and interest income of $2,885 ($2,651 in 2006).
9. Information on joint ventures
Interests in joint ventures may not be comparable from one year to another since the Company can dispose of its interests and can purchase interests in new joint ventures. Moreover, the latter may not have a complete financial year.
The Company's share in the assets, liabilities, earnings and cash flows relating to its interests in joint ventures is as follows:
2007 2006
--------------------------------------------------------------------------
Current assets $14,459 $16,357
Long-term assets 19,177 9,531
Current liabilities 16,250 11,017
Long-term liabilities 5,719 6,432
Sales 57,599 70,284
Earnings before interest, depreciation
and amortization, income taxes
and non-controlling interest 2,746 3,582
Net earnings 749 1,221
Cash flows from operating activities 6,919 119
Cash flows from investing activities (9,411) (2,218)
Cash flows from financing activities 2,841 894
The Company's sales include sales to joint ventures at fair value in the amount of $91,456 ($118,308 in 2006).
The Company's share in the commitments of these joint ventur
