UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
ý | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| | EXCHANGE ACT OF 1934. |
| | |
| | For the Quarterly Period Ended September 30, 2001 |
| | |
| | Or |
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| | EXCHANGE ACT OF 1934. |
For the transition period from __________ to __________.
Commission file number 333-59485
HENRY COMPANY |
(Exact Name of Registrant as Specific in Its Charter) |
| | |
California | | 95-3618402 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
2911 Slauson Avenue, Huntington Park, California | | 90255 |
(Address of Principal Executive Offices) | | (Zip Code) |
| | |
(323) 583-5000 |
Registrant's Telephone Number, Including Area Code |
| | |
| | |
| | |
| | |
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. |
Indicate by check X whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ýNo o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 30, 2001, there were 221,500 shares of the registrant's common stock and 6,000 shares of Class A Common Stock, no par value, outstanding.
HENRY COMPANY
FORM 10-Q
TABLE OF CONTENTS
September 30, 2001
Part I. Financial Information
Item 1. Consolidated Financial Statements
HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
| | December 31, 2000 | | September 30, 2001 | |
| | | | (Unaudited) | |
ASSETS: | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 1,046,115 | | $ | 139,622 | |
Trade accounts receivable, net of allowance for doubtful accounts of $2,044,158 and $2,711,679 for 2000 and 2001, respectively | | 25,253,299 | | 35,402,087 | |
Inventories | | 18,013,098 | | 15,386,127 | |
Receivables from affiliate | | 2,123,910 | | 993,682 | |
Notes receivable | | 763,947 | | 1,010,925 | |
Prepaid expenses and other current assets | | 1,492,074 | | 2,249,151 | |
Income tax receivable | | 133,935 | | 82,263 | |
Deferred income taxes | | 5,257,223 | | 5,255,251 | |
| | | | | |
Total current assets | | 54,083,601 | | 60,519,108 | |
| | | | | |
Property and equipment, net | | 34,180,641 | | 30,949,353 | |
Cash surrender value of life insurance, net | | 5,087,384 | | 3,176,607 | |
Intangibles, net | | 26,820,922 | | 24,788,530 | |
Notes receivable | | 271,600 | | 25,523 | |
Note receivable from affiliate | | 1,863,072 | | 1,863,072 | |
Deferred income taxes | | 2,754,746 | | 4,559,685 | |
Other assets | | 225,603 | | 252,335 | |
| | | | | |
Total assets | | $ | 125,287,569 | | $ | 126,134,213 | |
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT): | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 6,143,253 | | $ | 7,285,107 | |
Accrued expenses | | 8,990,604 | | 12,367,127 | |
Income taxes payable | | — | | 242,287 | |
Book overdrafts | | 4,516,278 | | 1,794,953 | |
Deferred income taxes | | 130,342 | | 130,342 | |
Notes payable, current portion | | 51,596 | | 373,003 | |
Borrowings under lines of credit | | 13,454,094 | | 14,495,572 | |
| | | | | |
Total current liabilities | | 33,286,167 | | 36,688,391 | |
| | | | | |
Notes payable | | 464,618 | | 3,551,200 | |
Environmental reserve | | 3,301,546 | | 3,252,057 | |
Deferred income taxes | | 8,063,613 | | 7,758,381 | |
Deferred warranty revenue | | 2,278,821 | | 2,468,951 | |
Deferred compensation | | 937,908 | | 808,193 | |
Series B Senior Notes | | 81,400,000 | | 81,400,000 | |
| | | | | |
Total liabilities | | 129,732,673 | | 135,927,173 | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Redeemable convertible preferred stock | | 1,919,433 | | 2,042,021 | |
| | | | | |
Shareholders' equity (deficit): | | | | | |
Common stock | | 4,691,080 | | 4,691,080 | |
Additional paid-in capital | | 2,364,308 | | 2,241,720 | |
Cumulative translation adjustment | | (497,228 | ) | (1,017,703 | ) |
Accumulated deficit | | (12,922,697 | ) | (17,750,078 | ) |
| | | | | |
Total shareholders' deficit | | (6,364,537 | ) | (11,834,981 | ) |
| | | | | |
Total liabilities and shareholders' equity (deficit) | | $ | 125,287,569 | | $ | 126,134,213 | |
The accompanying notes are an integral part of these consolidated financial statements.
HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2000 | | 2001 | | 2000 | | 2001 | |
| | | | | | | | | |
Net sales | | $ | 56,374,757 | | $ | 56,208,104 | | $ | 149,467,826 | | $ | 150,262,383 | |
Cost of sales | | 39,581,694 | | 39,661,801 | | 108,857,793 | | 108,799,740 | |
| | | | | | | | | |
Gross profit | | 16,793,063 | | 16,546,303 | | 40,610,033 | | 41,462,643 | |
| | | | | | | | | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | | 12,844,075 | | 12,958,542 | | 37,333,058 | | 37,718,970 | |
Restructuring charges | | 237,200 | | 305,186 | | 237,200 | | 305,186 | |
Amortization of intangibles | | 636,705 | | 638,495 | | 1,910,115 | | 1,910,933 | |
| | | | | | | | | |
Operating income | | 3,075,083 | | 2 ,644,080 | | 1,129,660 | | 1,527,554 | |
Other expense (income): | | | | | | | | | |
Interest expense | | 2,524,835 | | 2,624,378 | | 7,241,604 | | 7,601,217 | |
Interest and other income, net | | (60,565 | ) | (35,800 | ) | (174,891 | ) | (142,652 | ) |
| | | | | | | | | |
Income (loss) before provision (benefit) for income taxes | | 610,813 | | 55,502 | | (5,937,053 | ) | (5,931,011 | ) |
Provision (benefit) for income taxes | | 682,232 | | 461,528 | | (1,100,326 | ) | (1,103,630 | ) |
| | | | | | | | | |
Net loss | | $ | (71,419 | ) | $ | (406,026 | ) | $ | (4,836,727 | ) | $ | (4,827,381 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
(UNAUDITED)
| Common Stock | | | | | | | | | |
| | | | | Cumulative | | | | | |
| Issued | | | | Additional | | Translation | | Accumulated | | | |
| Shares | | Amount | | Paid-in Capital | | Adjustment | | Deficit | | Total | |
| | | | | | | | | | | | |
Balance, December 31, 2000 | | 227,500 | | $ | 4,691,080 | | $ | 2,364,308 | | $ | (497,228 | ) | $ | (12,922,697 | ) | $ | (6,364,537 | ) |
Accretion on redeemable convertible preferred stock | — | | — | | (122,588 | ) | — | | — | | (122,588 | ) |
Comprehensive loss: | | | | | | | | | | | | |
Net loss | — | | — | | — | | — | | (4,827,381 | ) | (4,827,381 | ) |
Other comprehensive loss: | | | | | | | | | | | | |
Change in cumulative translation adjustment | — | | — | | — | | (520,475 | ) | — | | (520,475 | ) |
| | | | | | | | | | | | |
Total comprehensive loss | — | | — | | — | | — | | — | | (5,347,856 | ) |
| | | | | | | | | | | | |
Balance, September 30, 2001 | | 227,500 | | $ | 4,691,080 | | $ | 2,241,720 | | $ | (1,017,703 | ) | $ | (17,750,078 | ) | $ | (11,834,981 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
| | 2000 | | 2001 | |
| | | | | |
Cash flows from operating activities: | | | | | |
Net loss | | $ | (4,836,727 | ) | $ | (4,827,381 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation and amortization | | 3,758,706 | | 3,816,953 | |
Provision for doubtful accounts | | 193,614 | | 667,521 | |
Deferred income taxes | | (1,516,440 | ) | (2,108,199 | ) |
Noncompetition and goodwill amortization | | 1,974,067 | | 1,911,050 | |
Loss (gain) on disposal of property and equipment | | 221,045 | | (2,600 | ) |
Gain on sale of investment | | (86,542 | ) | --- | |
Changes in operating assets and liabilities, net of assets acquired: | | | | | |
Accounts receivable | | (15,841,372 | ) | (10,816,309 | ) |
Inventories | | (3,956,977 | ) | 2,626,971 | |
Receivables from affiliates | | (320,665 | ) | 1,130,228 | |
Notes receivable | | (18,224 | ) | (901 | ) |
Other assets | | 233,828 | | (783,809 | ) |
Income tax receivable | | 229,034 | | 51,672 | |
Accounts payable and accrued expenses | | 7,963,544 | | 4,711,175 | |
Deferred warranty revenue | | 412,954 | | 190,130 | |
Deferred compensation | | (141,187 | ) | (129,715 | ) |
| | | | | |
Net cash used in operating activities | | (11,731,342 | ) | (3,563,214 | ) |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | | (2,383,311 | ) | (872,046 | ) |
Proceeds from the disposal of property and equipment | | 15,955 | | 2,600 | |
Proceeds from the sale of investment | | 204,423 | | --- | |
Investment in affiliate | | 7,080 | | --- | |
Net cash used in investing activities | | (2,155,853 | ) | (869,446 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Net borrowings under line-of-credit agreements | | 14,434,054 | | 1,041,478 | |
Repayments under notes payable agreements | | (146,363 | ) | (92,011 | ) |
Borrowings under notes payable agreements | | 22,095 | | 3,500,000 | |
Increase (decrease) in book overdrafts | | 1,286,063 | | (2,721,325 | ) |
Cash surrender value of life insurance | | (231,118 | ) | 1,910,777 | |
| | | | | |
Net cash provided by financing activities | | 15,364,731 | | 3,638,919 | |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | | (12,422 | ) | (112,752 | ) |
| | | | | |
Net increase (decrease) in cash and cash equivalents | | 1,465,114 | | (906,493 | ) |
| | | | | |
Cash and cash equivalents, beginning of period | | 685,044 | | 1,046,115 | |
| | | | | |
Cash and cash equivalents, end of period | | $ | 2,150,158 | | $ | 139,622 | |
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements:
The accompanying unaudited condensed consolidated financial statements of Henry Company, a California corporation (the "Company"), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with quarterly reporting guidelines. The year-end condensed balance sheet data was derived from the Company's audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and footnotes as of and for the year ended December 31, 2000 as included in the Company's Annual Report on Form 10-K. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the operating results for the full fiscal year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets". SFAS No. 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company will adopt SFAS No. 142 on January 1, 2002, the beginning of fiscal year 2002. In connection with the adoption of SFAS No. 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on the Company's financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. All provisions of this statement will be effective at the beginning of fiscal 2003. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends Accounting Principals Board (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that the long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS No. 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement also retains APB No. 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of this Statement will be effective at the beginning of fiscal 2002. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
The Company is currently reviewing the requirements of Emerging Issues Task Force Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." This Statement addresses whether certain consideration from a vendor to a reseller of the vendor's products is an adjustment to selling prices or cost. The provisions of this Statement will be effective at the beginning of 2002. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
3. Inventories:
Inventories consist of the following:
| December 31, 2000 | | September 30, 2001 | |
| | | | |
Raw materials | $ | 8,296,980 | | $ | 7,294,970 | |
Finished goods | 9,716,118 | | 8,091,157 | |
| | | | |
| $ | 18,013,098 | | $ | 15,386,127 | |
| | | | | | | |
4. Property and Equipment:
Property and equipment consists of the following:
| December 31, 2000 | | September 30, 2001 | |
| | | | |
Buildings | $ | 14,856,607 | | $ | 14,685,343 | |
Machinery and equipment | 27,579,944 | | 27,604,905 | |
Office furniture and equipment | 6,953,666 | | 7,000,638 | |
Automotive equipment | 1,349,267 | | 1,353,172 | |
Leasehold improvements | 2,928,565 | | 2,929,263 | |
Other assets | 454,834 | | 486,535 | |
| | | | |
| 54,122,883 | | 54,059,856 | |
Less, accumulated depreciation and amortization | (24,582,232 | | (28,207,137 | |
| | | | |
| 29,540,651 | | 25,852,719 | |
| | | | |
Land | 3,262,550 | | 3,225,093 | |
Construction-in-progress | 1,377,440 | | 1,871,541 | |
| | | | |
| $ | 34,180,641 | | $ | 30,949,353 | |
5. Long-term Debt and Credit Facilities:
In April 1998, the Company privately issued and sold $85,000,000 of Series B Senior Notes (the "Senior Notes") due in 2008. Interest on the Senior Notes is payable semi-annually at 10% per annum. In October 1998, the Company completed an exchange offer for all of the Senior Notes. The terms of the new Senior Notes are identical in all material respects to the original private issue. The proceeds from the offering were used to (i) retire existing Henry Company bank debt, (ii) retire existing Henry Company subordinated shareholder debt, (iii) acquire Monsey Bakor, (iv) retire a substantial portion of Monsey Bakor's then-existing bank debt with (v) the remainder providing additional working capital. In 1999, the Company repurchased and retired $3.6 million of the Senior Notes which resulted in a gain of $0.6 million, net of income taxes.
Long-term debt consists of the following at September 30, 2001:
| | December 31, 2000 | | September 30,
2001 | |
10.0% Series B Senior Notes due 2008 | | $ | 81,400,000 | | $ | 81,400,000 | |
Various term notes payable to third parties with interest rates ranging from 5.5% to 9.25%, maturing from 2001 to 2013 | | 13,970,308 | | 18,419,775 | |
| | | | | |
| | 95,370,308 | | 99,819,775 | |
Less, current maturities | | 13,505,690 | | 14,868,575 | |
| | | | | |
| | $ | 81,864,618 | | $ | 84,951,200 | |
| | | | | | | | |
The Company's Senior Notes are guaranteed by the Company's United States subsidiary (the "Subsidiary Guarantor"). The guarantee obligations of the Subsidiary Guarantor are full, unconditional and joint and several. See Note 8 for the Guarantor Condensed Consolidating Financial Statements.
In August 2001, the Company entered into a replacement credit facility agreement with two new financial institutions, and received funding. The replacement credit facility provides for a $25 million revolving credit facility and a $10 million term loan. Upon closing, $3.5 million of the term loan was funded. The replacement credit facility expires in August 2006 and is collateralized by substantially all of the Company’s United States assets. Borrowings on the line of credit bear interest at the prime rate with an option to borrow based on the LIBOR rate. The prime rate was 6.0% at September 30, 2001. At September 30, 2001, $11,112,055 was outstanding under this line. The Company also has a Canadian bank line of credit, subject to annual confirmation, aggregating $4,440,000 with interest charged at prime plus 0.5%. At September 30, 2001, $3,383,517 was outstanding under this Canadian line.
6. Income Taxes:
The significant components of the provision (benefit) for income taxes are as follows:
| | Nine Months Ended September 30, 2000 | | Nine Months Ended September 30, 2001 | |
| | | | | |
Current: | | | | | |
Federal | | $ | (1,112,400 | ) | $ | — | |
State | | (196,260 | ) | — | |
Foreign | | $ | 496,641 | | 1,032,425 | |
| | | | | |
| | (811,759 | ) | 1,032,425 | |
| | | | | |
Deferred: | | | | | |
Federal | | (226,607 | ) | (1,682,742 | ) |
State | | (61,960 | ) | (331,849 | ) |
Foreign | | — | | (121,464 | ) |
| | | | | |
| | (288,567 | ) | (2,136,055 | ) |
| | | | | |
| | $ | (1,100,326 | ) | $ | (1,103,630 | ) |
The Company's effective tax rate differs from the federal statutory tax rate for the nine month periods ended September 30, 2000 and 2001 as follows:
| | Nine Months Ended September 30, 2000 | | Nine Months Ended September 30, 2001 | |
| | | | | |
Provision (benefit) for income taxes at the federal statutory tax rate | | (34.0 | )% | (34.0 | )% |
State taxes, net of federal tax benefit | | (6.0 | ) | (4.4 | ) |
Foreign income taxes | | 8.4 | | 15.4 | |
Nondeductible intangibles | | 15.2 | | 2.5 | |
Other, net | | (2.1 | ) | 1.9 | |
| | | | | |
| | (18.5 | )% | (18.6 | )% |
Income (loss) before income taxes of the Company's Canadian operations was ($718,197) and $317,091 for the nine month periods ended September 30, 2000 and 2001, respectively.
7. Related Party Transactions:
During the nine month periods ended September 30, 2000 and 2001, the Company has charged the Henry Wine Group approximately $581,250 each period for reimbursement of administrative services provided by the Company pursuant to an administrative services agreement that was effective as of January 1, 1998.
8. Restructuring:
In the third quarter of 2000, the Company announced a realignment of its cost structure designed to increase operating efficiencies and improve profitability. The realignment resulted in a $237,200 restructuring charge for the nine months ended September 30, 2000 and a $305,186 charge for the nine months ended September 30, 2001. These expenses reflected severance payments to employees that have been terminated due to the permanent elimination of their positions and costs associated with plant closings.
9. Guarantor Condensed Consolidating Financial Statements:
The Company's United States subsidiary, Kimberton Enterprises, Inc. (the "Guarantor Subsidiary") is an unconditional guarantor, on a full, joint and several basis, of the Company's debt represented by the Senior Notes. The Company's Canadian subsidiaries are not guarantors of the Senior Notes.
Condensed consolidating financial statements of the Guarantor are combined with the Henry Company and are presented below. Separate financial statements of the Guarantor Subsidiary are not presented and the Guarantor Subsidiary is not filing separate reports under the Exchange Act because the Subsidiary Guarantor has fully and unconditionally guaranteed the Senior Notes on a full, joint and several basis under the guarantees and management has determined that separate financial statements and other disclosures concerning the Guarantor Subsidiary are not material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
ASSETS: | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 137,805 | | $ | 1,817 | | — | | $ | 139,622 | |
Accounts receivable, net | | 30,828,722 | | 4,573,365 | | — | | 35,402,087 | |
Inventories | | 11,664,341 | | 3,721,786 | | — | | 15,386,127 | |
Receivables from affiliate | | 7,507,337 | | 3,599,768 | | $ | (10,113,423 | ) | 993,682 | |
Notes receivable | | 1,010,925 | | — | | — | | 1,010,925 | |
Prepaid expenses and other current assets | | 2,141,688 | | 107,463 | | — | | 2,249,151 | |
Income tax receivable | | — | | 82,263 | | — | | 82,263 | |
Deferred income taxes | | 5,218,525 | | 36,726 | | — | | 5,255,251 | |
| | | | | | | | | |
Total current assets | | 58,509,343 | | 12,123,188 | | (10,113,423 | ) | 60,519,108 | |
| | | | | | | | | |
Property and equipment, net | | 25,572,834 | | 5,376,519 | | — | | 30,949,353 | |
Investment in subsidiaries | | 8,564,729 | | — | | (8,564,729 | ) | — | |
Cash surrender value of life insurance, net | | 3,176,607 | | — | | — | | 3,176,607 | |
Intangibles, net | | 22,532,630 | | 2,255,900 | | — | | 24,788,530 | |
Notes receivable | | 25,523 | | — | | — | | 25,523 | |
Note receivable from affiliate | | 1,863,072 | | — | | — | | 1,863,072 | |
Deferred income taxes | | 4,559,685 | | — | | — | | 4,559,685 | |
Other assets | | 252,335 | | — | | — | | 252,335 | |
| | | | | | | | | |
Total assets | | $ | 125,056,758 | | $ | 19,755,607 | | $ | (18,678,152 | ) | $ | 126,134,213 | |
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities: | | | | | | | | | |
Accounts payable | | $ | 5,173,296 | | $ | 2,111,811 | | — | | $ | 7,285,107 | |
Accrued expenses | | 11,339,732 | | 1,027,395 | | — | | 12,367,127 | |
Book overdrafts | | 1,192,021 | | 602,932 | | — | | 1,794,953 | |
Intercompany payables | | 3,599,768 | | 6,513,655 | | $ | (10,113,423 | ) | — | |
Income taxes payable | | — | | 242,287 | | — | | 242,287 | |
Deferred income taxes | | 130,342 | | — | | — | | 130,342 | |
Notes payable, current portion | | 373,003 | | — | | — | | 373,003 | |
Borrowings under lines of credit | | 11,112,055 | | 3,383,517 | | — | | 14,495,572 | |
| | | | | | | | | |
Total current liabilities | | 32,920,217 | | 13,881,597 | | (10,113,423 | ) | 36,688,391 | |
| | | | | | | | | |
Notes payable | | 3,551,200 | | — | | — | | 3,551,200 | |
Environmental reserve | | 3,252,057 | | — | | — | | 3,252,057 | |
Deferred income taxes | | 6,174,828 | | 1,583,553 | | — | | 7,758,381 | |
Deferred warranty revenue | | 2,238,674 | | 230,277 | | — | | 2,468,951 | |
Deferred compensation | | 808,193 | | — | | — | | 808,193 | |
Series B Senior Notes | | 81,400,000 | | — | | — | | 81,400,000 | |
| | | | | | | | | |
Total liabilities | | 130,345,169 | | 15,695,427 | | (10,113,423 | ) | 135,927,173 | |
| | | | | | | | | |
Redeemable convertible preferred stock | | 2,042,021 | | — | | — | | 2,042,021 | |
| | | | | | | | | |
Shareholder equity (deficit): | | | | | | | | | |
Common stock | | 4,691,080 | | 7,194,402 | | (7,194,402 | ) | 4,691,080 | |
Additional paid-in capital | | 2,241,720 | | — | | — | | 2,241,720 | |
Cumulative translation adjustment | | — | | (1,605,703 | ) | 588,000 | | (1,017,703 | ) |
Accumulated deficit | | (14,263,232 | ) | (1,528,519 | ) | (1,958,327 | ) | (17,750,078 | ) |
| | | | | | | | | |
Total shareholders' equity (deficit) | | (7,330,432 | ) | 4,060,180 | | (8,564,729 | ) | (11,834,981 | ) |
| | | | | | | | | |
Total liabilities and shareholders' equity (deficit) | | $ | 125,056,758 | | $ | 19,755,607 | | $ | (18,678,152 | ) | $ | 126,134,213 | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net sales | | $ | 130,851,759 | | $ | 26,601,839 | | $ | (7,191,215 | ) | $ | 150,262,383 | |
Cost of sales | | 95,526,495 | | 20,464,460 | | (7,191,215 | ) | 108,799,740 | |
| | | | | | | | | |
Gross profit | | 35,325,264 | | 6,137,379 | | — | | 41,462,643 | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | | 32,187,405 | | 5,531,565 | | — | | 37,718,970 | |
Restructuring charges | | 305,186 | | — | | — | | 305,186 | |
Amortization of intangibles | | 1,820,717 | | 90,216 | | — | | 1,910,933 | |
| | | | | | | | | |
Operating income | | 1,011,956 | | 515,598 | | — | | 1,527,554 | |
Other expense (income): | | | | | | | | | |
Interest expense | | 7,402,710 | | 198,507 | | — | | 7,601,217 | |
Interest and other income, net | | (142,652 | ) | — | | — | | (142,652 | ) |
| | | | | | | | | |
Loss before provision (benefit) for income taxes | | (6,248,102 | ) | 317,091 | | — | | (5,931,011 | ) |
Provision (benefit) for income taxes | | (2,014,591 | ) | 910,961 | | — | | (1,103,630 | ) |
| | | | | | | | | |
Net loss | | $ | (4,233,511 | ) | $ | (593,870 | ) | — | | $ | (4,827,381 | ) |
| | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net sales | | $ | 49,045,970 | | $ | 9,682,352 | | $ | (2,520,218 | ) | $ | 56,208,104 | |
Cost of sales | | 34,780,273 | | 7,401,746 | | (2,520,218 | ) | 39,661,801 | |
| | | | | | | | | |
Gross profit | | 14,265,697 | | 2,280,606 | | --- | | 16,546,303 | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | | 11,150,058 | | 1,808,484 | | --- | | 12,958,542 | |
Restructuring charges | | 305,186 | | | | | | 305,186 | |
Amortization of intangibles | | 608,423 | | 30,072 | | --- | | 638,495 | |
| | | | | | | | | |
Operating income | | 2,202,030 | | 442,050 | | --- | | 2,644,080 | |
| | | | | | | | | |
Other expense (income): | | | | | | | | | |
Interest expense | | 2,567,229 | | 57,149 | | --- | | 2,624,378 | |
Interest and other income, net | | (35,800 | ) | --- | | --- | | (35,800 | ) |
| | | | | | | | | |
Income (loss) before provision (benefit) for income taxes | | (329,399 | ) | 384,901 | | --- | | 55,502 | |
Provision for income taxes | | 36,378 | | 425,150 | | --- | | 461,528 | |
| | | | | | | | | |
Net loss | | $ | (365,777 | ) | $ | (40,249 | ) | $ | --- | | $ | (406,026 | ) |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (3,808,254 | ) | $ | 245,040 | | — | | $ | (3,563,214 | ) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | | (735,525 | ) | (136,521 | ) | — | | (872,046 | ) |
Proceeds from the disposal of property and equipment | | — | | 2,600 | | — | | 2,600 | |
| | | | | | | | | |
Net cash used in investing activities | | (735,525 | ) | (133,921 | ) | — | | (869,446 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Net borrowings (repayments) under line-of-credit agreements | | 1,294,068 | | (252,590 | ) | — | | 1,041,478 | |
Repayments under notes payable agreements | | (92,011 | ) | — | | — | | (92,011 | ) |
Borrowings under notes payable agreements | | 3,500,000 | | | | | | 3,500,000 | |
Increase (decrease) in book overdrafts | | (2,975,526 | ) | 254,201 | | — | | (2,721,325 | ) |
Cash surrender value of life insurance | | 1,910,777 | | — | | — | | 1,910,777 | |
| | | | | | | | | |
Net cash provided by financing activities | | 3,637,308 | | 1,611 | | — | | 3,638,919 | |
| | | | | | | | | |
Effect of changes in exchange rate on cash and cash equivalents | | — | | (112,752 | ) | — | | (112,752 | ) |
| | | | | | | | | |
Net decrease in cash and cash equivalents | | (906,471 | ) | (22 | ) | — | | (906,493 | ) |
Cash and cash equivalents, beginning of period. | | 1,044,276 | | 1,839 | | — | | 1,046,115 | |
| | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 137,805 | | $ | 1,817 | | — | | $ | 139,622 | |
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
| | Henry Company (Parent Corporation) and Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
ASSETS: | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 1,044,276 | | $ | 1,839 | | — | | $ | 1,046,115 | |
Accounts receivable, net | | 22,201,195 | | 3,052,104 | | — | | 25,253,299 | |
Inventories, net | | 14,257,986 | | 3,755,112 | | — | | 18,013,098 | |
Receivables from affiliate | | 7,000,818 | | 2,486,652 | | $ | (7,363,560 | ) | 2,123,910 | |
Notes receivable | | 763,947 | | — | | — | | 763,947 | |
Prepaid expenses and other current assets | | 1,364,281 | | 127,793 | | — | | 1,492,074 | |
Income tax receivable | | — | | 133,935 | | — | | 133,935 | |
Deferred income taxes | | 5,218,525 | | 38,698 | | — | | 5,257,223 | |
| | | | | | | | | |
| | | | | | | | | |
Total current assets | | 51,851,028 | | 9,596,133 | | (7,363,560 | ) | 54,083,601 | |
| | | | | | | | | |
Property and equipment, net | | 28,169,355 | | 6,011,286 | | — | | 34,180,641 | |
Investment in subsidiaries | | 8,564,729 | | — | | (8,564,729 | ) | — | |
Cash surrender value of life insurance, net | | 5,087,384 | | — | | — | | 5,087,384 | |
Intangibles, net | | 24,353,674 | | 2,467,248 | | — | | 26,820,922 | |
Notes receivable | | 271,600 | | — | | — | | 271,600 | |
Note receivable from affiliate | | 1,863,072 | | — | | — | | 1,863,072 | |
Deferred income taxes | | 2,754,746 | | — | | — | | 2,754,746 | |
Other assets | | 225,603 | | — | | — | | 225,603 | |
| | | | | | | | | |
Total assets | | $ | 123,141,191 | | $ | 18,074,667 | | $ | (15,928,289 | ) | $ | 125,287,569 | |
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
LIABILITIES AND | | | | | | | | | |
SHAREHOLDERS' EQUITY (DEFICIT): | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | | $ | 4,886,168 | | $ | 1,257,085 | | — | | $ | 6,143,253 | |
Accrued expenses | | 8,033,860 | | 956,744 | | — | | 8,990,604 | |
Book overdrafts | | 4,167,547 | | 348,731 | | — | | 4,516,278 | |
Intercompany payables | | 2,486,652 | | 4,876,908 | | $ | (7,363,560 | ) | — | |
Deferred income taxes | | 130,342 | | — | | — | | 130,342 | |
Notes payable, current portion | | 51,596 | | — | | — | | 51,596 | |
Borrowings under line of credit | | 9,817,987 | | 3,636,107 | | — | | 13,454,094 | |
| | | | | | | | | |
Total current liabilities | | 29,574,152 | | 11,075,575 | | (7,363,560 | ) | 33,286,167 | |
Notes payable | | 464,618 | | — | | — | | 464,618 | |
Environmental reserve | | 3,301,546 | | — | | — | | 3,301,546 | |
Deferred income taxes | | 6,395,322 | | 1,668,291 | | — | | 8,063,613 | |
Deferred warranty revenue | | 2,122,546 | | 156,275 | | — | | 2,278,821 | |
Deferred compensation | | 937,908 | | — | | — | | 937,908 | |
Series B Senior notes | | 81,400,000 | | — | | — | | 81,400,000 | |
| | | | | | | | | |
Total liabilities | | 124,196,092 | | 12,900,141 | | (7,363,560 | ) | 129,732,673 | |
| | | | | | | | | |
Redeemable convertible preferred stock | | 1,919,433 | | — | | — | | 1,919,433 | |
| | | | | | | | | |
Shareholders' equity (deficit): | | | | | | | | | |
Common stock | | 4,691,080 | | 7,194,402 | | (7,194,402 | ) | 4,691,080 | |
Additional paid-in capital | | 2,364,308 | | — | | — | | 2,364,308 | |
Cumulative translation adjustment | | — | | (1,085,228 | ) | 588,000 | | (497,228 | ) |
Accumulated deficit | | (10,029,722 | ) | (934,648 | ) | (1,958,327 | ) | (12,922,697 | ) |
| | | | | | | | | |
Total shareholders' equity (deficit) | | (2,974,334 | ) | 5,174,526 | | (8,564,729 | ) | (6,364,537 | ) |
| | | | | | | | | |
Total liabilities and shareholders' equity (deficit) | | $ | 123,141,191 | | $ | 18,074,667 | | $ | (15,928,289 | ) | $ | 125,287,569 | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net sales | | $ | 130,393,329 | | $ | 26,562,755 | | $ | (7,488,258 | ) | $ | 149,467,826 | |
Cost of sales | | 95,264,170 | | 21,081,881 | | (7,488,258 | ) | 108,857,793 | |
| | | | | | | | | |
Gross profit | | 35,129,159 | | 5,480,874 | | — | | 40,610,033 | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | | 31,395,559 | | 5,937,499 | | — | | 37,333,058 | |
Restructuring charges | | 237,200 | | — | | — | | 237,200 | |
Amortization of intangibles | | 1,816,488 | | 93,627 | | — | | 1,910,115 | |
| | | | | | | | | |
Operating income (loss) | | 1,679,912 | | (550,252 | ) | — | | 1,129,660 | |
Other expense (income): | | | | | | | | | |
Interest expense | | 7,073,659 | | 167,945 | | — | | 7,241,604 | |
Interest and other income, net | | (174,891 | ) | — | | — | | (174,891 | ) |
| | | | | | | | | |
Loss before provision (benefit) for income taxes | | (5,218,856 | ) | (718,197 | ) | — | | (5,937,053 | ) |
Provision (benefit) for income taxes | | (1,596,967 | ) | 496,641 | | — | | (1,100,326 | ) |
| | | | | | | | | |
Net loss | | $ | (3,621,889 | ) | $ | (1,214,838 | ) | — | | $ | (4,836,727 | ) |
| | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net sales | | $ | 48,694,259 | | $ | 10,517,630 | | $ | (2,837,132 | ) | $ | 56,374,757 | |
Cost of sales | | 33,945,156 | | 8,473,670 | | (2,837,132 | ) | 39,581,694 | |
| | | | | | | | | |
Gross profit | | 14,749,103 | | 2,043,960 | | --- | | 16,793,063 | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | | 10,769,625 | | 2,074,450 | | --- | | 12,844,075 | |
Restructuring charges | | 237,200 | | | | | | 237,200 | |
Amortization of intangibles | | 605,496 | | 31,209 | | --- | | 636,705 | |
| | | | | | | | | |
Operating income (loss) | | 3,136,782 | | (61,699 | ) | --- | | 3,075,083 | |
| | | | | | | | | |
Other expense (income): | | | | | | | | | |
Interest expense | | 2,474,969 | | 49,866 | | --- | | 2,524,835 | |
Interest and other income, net | | (60,565 | ) | --- | | --- | | (60,565 | ) |
| | | | | | | | | |
Income (loss) before provision for income taxes | | 722,378 | | (111,565 | ) | --- | | 610,813 | |
Provision for income taxes | | 457,562 | | 224,670 | | --- | | 682,232 | |
| | | | | | | | | |
Net income (loss) | | $ | 264,816 | | $ | (336,235 | ) | $ | --- | | $ | (71,419 | ) |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
| | Henry Company (Parent Corporation) And Guarantor Subsidiary | | Nonguarantor Subsidiaries | | Consolidated Elimination Entries | | Consolidated Total | |
| | | | | | | | | |
Net cash used in operating activities | | $ | (9,568,573 | ) | $ | (2,162,769 | ) | — | | $ | (11,731,342 | ) |
| | | | | | | | | |
Cash flows from investing activites: | | | | | | | | | |
Capital expenditures | | (1,789,960 | ) | (593,351 | ) | — | | (2,383,311 | ) |
Proceeds from the disposal of property and equipment | | 15,955 | | — | | — | | 15,955 | |
Proceeds from the sale of investment | | 204,423 | | — | | — | | 204,423 | |
Investment in affiliate | | 7,080 | | — | | — | | 7,080 | |
| | | | | | | | | |
Net cash used in investing activities | | (1,562,502 | ) | (593,351 | ) | — | | (2,155,853 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Net borrowings under line-of-credit agreements | | 13,166,619 | | 1,267,435 | | — | | 14,434,054 | |
Repayments under notes payable agreements | | (92,010 | ) | (54,353 | ) | — | | (146,363 | ) |
Borrowings under notes payable agreements | | 22,095 | | — | | — | | 22,095 | |
Increase (decrease) in book overdrafts | | (269,323 | ) | 1,555,386 | | — | | 1,286,063 | |
Cash surrender value of life insurance | | (231,118 | ) | — | | — | | (231,118 | ) |
| | | | | | | | | |
Net cash provided by financing activities | | 12,596,263 | | 2,768,468 | | — | | 15,364,731 | |
Effect of changes in exchange rate on cash and cash equivalents | | — | | (12,422 | ) | — | | (12,422 | ) |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 1,465,188 | | (74 | ) | — | | 1,465,114 | |
Cash and cash equivalents, beginning of period | | 683,138 | | 1,906 | | — | | 685,044 | |
| | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 2,148,326 | | $ | 1,832 | | — | | $ | 2,150,158 | |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS |
The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001 of which this commentary is a part, the unaudited condensed consolidated financial statements and the related notes thereto.
General
The Company manages its business through two reportable segments or primary business units with separate management teams, infrastructures, marketing strategies and customers. The Company's reportable segments are: the Henry Building Products Division, which develops, manufactures and markets roof and driveway coatings and paving products, industrial emulsions, air barriers, and specialty products; and the Resin Technology Division, which develops, manufactures and sells polyurethane foam for roofing and commercial construction. The Company evaluates the performance of its operating segments based on net sales, gross profit and operating income. Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable segments is shown below.
| | Nine Months Ended September 30, 2000 | | Nine Months Ended September 30, 2001 | |
| | Henry Building Products Division | | Resin Technology Division | | Total | | Henry Building Products Division | | Resin Technology Division | | Total | |
| | | | | | | | | | | | | |
Net sales | | $ | 132,671,053 | | $ | 16,796,773 | | $ | 149,467,826 | | $ | 133,044,046 | | $ | 17,218,297 | | $ | 150,262,383 | |
Gross profit | | 37,679,985 | | 2,930,048 | | 40,610,033 | | 38,334,861 | | 3,127,782 | | 41,462,643 | |
Operating income | | 819,467 | | 310,193 | | 1,129,660 | | 1,247,712 | | 279,842 | | 1,527,554 | |
Depreciation and amortization | | 5,607,457 | | 125,316 | | 5,732,773 | | 5,584,987 | | 143,016 | | 5,728,003 | |
Total assets | | 123,342,942 | | 12,860,861 | | 136,203,803 | | 116,656,802 | | 13,019,387 | | 126,134,213 | |
Capital expenditures | | 2,251,071 | | 132,240 | | 2,383,311 | | 828,765 | | 43,281 | | 872,046 | |
| | | | | | | | | | | | | | | | | | | |
The Company is domiciled in the United States with foreign operations based in Canada which were acquired in April 1998. Prior to the April 1998 acquisition of Monsey Bakor, the Company had no foreign operations. Summarized geographic data related to the Company's operations for the nine month period ended September 30, 2000 and 2001 are as follows:
| | Net Sales September 30, 2000 | | Long-lived Assets September 30, 2000 | | Net Sales September 30, 2001 | | Long-lived Assets September 30, 2001 | |
| | | | | | | | | |
United States | | $ | 122,905,071 | | $ | 63,323,778 | | $ | 123,660,544 | | $ | 57,982,686 | |
Canada | | 26,562,755 | | 8,573,442 | | 26,601,839 | | 7,632,419 | |
| | | | | | | | | |
Total | | $ | 149,467,826 | | $ | 71,897,220 | | $ | 150,262,383 | | $ | 65,615,105 | |
Results of Operations
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HENRY COMPANY
Consolidated Statements of Operations Data:
| | Three Months Ended September 30 ($ in millions) | | Nine Months Ended September 30 ($ in millions) | |
| | 2000 | | % of sales | | 2001 | | % of sales | | 2000 | | % of sales | | 2001 | | % of sales | | |
| | | | | | | | | | | | | | | | | | |
Net sales | | $ | 56.4 | | 100.0 | % | $ | 56.2 | | 100.0 | % | $ | 149.5 | | 100.0 | % | $ | 150.3 | | 100.0 | % | |
Cost of sales | | 39.6 | | 70.2 | % | 39.7 | | 70.6 | % | 108.9 | | 72.8 | % | 108.8 | | 72.4 | % | |
Gross Profit | | 16.8 | | 29.8 | % | 16.5 | | 29.4 | % | 40.6 | | 27.2 | % | 41.5 | | 27.6 | % | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | 12.9 | | 22.9 | % | 13.0 | | 23.1 | % | 37.4 | | 25.0 | % | 37.7 | | 25.1 | % | |
Restructuring charges | | 0.2 | | 0.4 | % | 0.3 | | 0.5 | % | 0.2 | | 0.1 | % | 0.3 | | 0.2 | % | |
Amortization of intangibles | | 0.6 | | 1.1 | % | 0.6 | | 1.1 | % | 1.9 | | 1.3 | % | 1.9 | | 1.3 | % | |
| | | | | | | | | | | | | | | | | | |
Operating income | | 3.1 | | 5.5 | % | 2.6 | | 4.6 | % | 1.1 | | (0.7 | )% | 1.6 | | (1.1 | )% | |
| | | | | | | | | | | | | | | | | | |
Interest expense | | 2.5 | | 4.9 | % | 2.6 | | 4.6 | % | 7.2 | | 4.8 | % | 7.6 | | 5.1 | % | |
Interest and other income, net | | --- | | --- | | --- | | --- | | (0.2 | ) | (0.1 | )% | (0.1 | ) | (0.1 | )% | |
Income (loss) before provision (benefit) for income taxes | | 0.6 | | 1.1 | % | 0.1 | | (0.2 | )% | (5.9 | ) | (3.9 | )% | (5.9 | ) | (3.9 | )% | |
Provision (benefit) for income taxes | | 0.7 | | 1.2 | % | 0.5 | | 0.9 | % | (1.1 | ) | (0.7 | )% | (1.1 | ) | (0.7 | )% | |
| | | | | | | | | | | | | | | | | | |
Net loss | | $ | (0.1 | ) | (0.2 | )% | $ | (0.4 | ) | (0.7 | )% | $ | (4.8 | ) | (3.2 | )% | $ | (4.8 | ) | (3.2 | )% | |
| | | | | | | | | | | | | | | | | | | | | | | |
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 2000
NET SALES. The Company's net sales decreased to $56.2 million for the three months ended September 30, 2001, a decrease of $0.2 million, or 0.4%, from $56.4 million for the three months ended September 30, 2000. The decrease was primarily due to the loss of a shipping day and lower sales volume in September attributable to the events of September 11.
GROSS PROFIT. The Company's gross profit decreased to $16.5 million for the three months ended September 30, 2001, a decrease of $0.3 million, or 1.8%, from $16.8 million for the three months ended September 30, 2000. The decrease was due to lower sales volume, partially offset by price increases on solvent-based products. Gross profit as a percentage of net sales decreased to 29.4% for the three months ended September 30, 2001 from 29.8% for the three months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $13.0 million for the three months ended September 30, 2001, an increase of $0.1 million, or 0.8%, from $12.9 million for the three months ended September 30, 2000. Selling, general and administrative expenses as a percentage of sales increased to 23.1% for the three months ended September 30, 2001 from 22.9% for the three months ended September 30, 2000. The increase was primarily due to higher employee medical costs.
RESTRUCTURING CHARGES. Restructuring charges amounted to $0.3 million for the three months ended September 30, 2001. These charges relate to plant closures and the reorganization of certain operational and marketing functions and the related severance costs.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles remained static at $0.6 million for both the three month periods ended September 30, 2001 and 2000. Amortization expense is primarily due to the amortization of intangibles resulting from the acquisition of Monsey Bakor in 1998.
OPERATING INCOME. The Company's operating income decreased to $2.6 million for the three month period ended September 30, 2001, a decrease of $0.5 million, or 16.1%, from $3.1 million for the three months ended September 30, 2000. The decrease of $0.5 million was primarily attributable to lower sales, and higher selling, general and administrative expenses.
INTEREST EXPENSE. Interest expense increased to $2.6 million for the three months ended September 30, 2001, an increase of $0.1 million, or 4.0%, from $2.5 million for the three months ended September 30, 2000. The increase was primarily due to additional working capital borrowings required to support the operating expenses of the Company.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to $0.5 million for the three months ended September 30, 2001, or 28.6%, from a provision for income taxes of $0.7 million for the three months ended September 30, 2000. The decrease in provision for income taxes is primarily related to the Company's decreased operating income for the three months ended September 30, 2001.
NET LOSS. The net loss increased to $0.4 million for the three months ended September 30, 2001, an increase of $0.3 million, or 300% from a loss of $0.1 million for the three months ended September 30, 2000. The increase was primarily due to decreased sales and other factors discussed above.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
NET SALES. The Company's net sales increased to $150.3 million for the six months ended September 30, 2001, an increase of $0.8 million, or 0.5%, from $149.5 million for the nine months ended September 30, 2000. The increase was primarily due to price increases on solvent-based products associated with increased costs of petroleum-based raw materials.
GROSS PROFIT. The Company's gross profit increased to $41.5 million for the nine months ended September 30, 2001, an increase of $0.9 million, or 2.2%, from $40.6 million for the nine months ended September 30, 2000. Gross profit as a percentage of net sales increased to 27.6% for the nine months ended September 30, 2001 from 27.2% for the nine months ended September 30, 2000. The increase was due to price increases on solvent-based products and improved cost containment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $37.7 million for the nine months ended September 30, 2001, an increase of $0.3 million, or 0.8%, from $37.4 million for the nine months ended September 30, 2000. The increase of $0.3 million was primarily due to sales promotion activity, the Company’s continued support of its national brand strategy, and higher employee medical costs. Selling, general and administrative expenses as a percentage of sales increased to 25.1% for the nine months ended September 30, 2001 from 25.0% for the nine months ended September 30, 2000.
RESTRUCTURING CHARGES. Restructuring charges amounted to $0.3 million for the nine months ended September 30, 2001. These charges relate to plant closures and the reorganization of certain operational and marketing functions and the related severance costs.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles remained static at $1.9 million for both the nine month periods ended September 30, 2001 and 2000. Amortization expense is primarily due to the amortization of intangibles resulting from the acquisition of Monsey Bakor in 1998.
OPERATING INCOME. The Company's operating income increased to $1.6 million for the nine months September 30, 2001, an increase of $0.5 million, or 45.5%, from $1.1 million for the nine months ended September 30, 2000. The increase was attributable to higher sales and higher gross profit, offset by increased selling, general, and administrative expenses.
INTEREST EXPENSE. Interest expense increased to $7.6 million for the nine months ended September 30, 2001, an increase of $0.4 million, or 5.6%, from $7.2 million for the nine months ended September 30, 2000. The increase was primarily due to increased working capital borrowings required to support the operating expenses of the Company.
BENEFIT FROM INCOME TAXES. The benefit for income taxes remained static at $1.1 million for both the nine month periods ended September 30, 2001 and 2000.
NET LOSS. The Company's net loss remained static at $4.8 million for both the nine month periods ended September 30, 2001 and 2000. Increased sales and gross profit were offset by increased selling, general and administrative expenses and increased interest expense, as discussed above.
Liquidity and Capital Resources
The Company's historical requirements for capital have been primarily for working capital, capital expenditures and acquisitions. Henry Company's primary sources of capital to finance such needs have been cash flow from operations and borrowings under bank credit facilities and the Series B Senior Notes. In August 2001, the Company entered into a replacement credit facility agreement with two new financial institutions, and received funding. The replacement credit facility provides for a $25 million revolving credit facility and a $10 million term loan. Upon closing, $3.5 million of the term loan was funded. The facility expires in August 2006 and is collateralized by substantially all of the Company's United States assets. Borrowings on the line of credit bear interest at the prime rate with an option to borrow based on the LIBOR rate. At September 30, 2001, $11.1 was outstanding under this line. The Company also maintains a credit line with a Canadian bank. Balances outstanding under this line were $3.4 million at September 30, 2001.
Cash flows for the Nine Months Ended September 30, 2000 Compared to The Nine Months Ended September 30, 2001
The Company's net cash used in operations was ($11.7) million and ($3.6) million for the nine months ended September 30, 2000 and 2001, respectively. The decrease in cash used in operations from September 30, 2000 to September 30, 2001 of $8.1 million was primarily attributable to decreased cash used in accounts receivable and inventories. Cash flows used in investing activities were ($2.2) million and ($0.9) million for the nine months ended September 30, 2000 and 2001, respectively. The decrease in cash used in investing activities was due primarily to a decrease in capital expenditures of $1.5 million. Cash flows provided by financing activities during the nine months ended September 30, 2000 and the nine months ended September 30, 2001 were $15.4 million and $3.6 million, respectively. The decrease of $11.8 million from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 was primarily due to decreased borrowings under the line of credit agreement.
The Company believes that available cash and cash equivalents, cash generated from operations and available borrowings under the Company's various credit facilities will be sufficient to finance working capital, capital expenditures, and scheduled principal and interest payments for the next twelve months. There can be no assurance, however, that such resources will be sufficient to meet the Company's anticipated working capital and capital expenditure requirements or that the Company will not require additional financing within this time frame.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets". SFAS No. 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company will adopt SFAS No. 142 on January 1, 2002, the beginning of fiscal year 2002. In connection with the adoption of SFAS No. 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on the Company's financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. All provisions of this statement will be effective at the beginning of fiscal 2003. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends Accounting Principals Board (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that the long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS No. 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement also retains APB No. 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of this Statement will be effective at the beginning of fiscal 2002. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
The Company is currently reviewing the requirements of Emerging Issues Task Force Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." This Statement addresses whether certain consideration from a vendor to a reseller of the vendor's products is an adjustment to selling prices or cost. The provisions of this Statement will be effective at the beginning of 2002. The Company is in the process of determining the impact of this standard on the Company's financial results when effective.
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to ratings agencies and bondholders during presentations about the Company are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "hopes," and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the construction materials industry, among other things. These statements are not guaranties of future performance, and the Company has no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal important risk factors that could cause the Company's actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions where the Company operates or may commence operations, employment growth or unemployment rates, fluctuations in asphalt or other raw material costs, labor costs, the impact of weather, product liability and asbestos litigation, reliance on key personnel, environmental matters, costs and effects of unanticipated legal or administrative proceedings or governmental regulation and capital or credit market conditions affecting the Company's cost of capital; as well as competition, and unanticipated delays in the Company's operations. See the Company's Amendment No. 2 to Registration Statement on Form S-4 filed September 11, 1998 (Registration No. 333-59485) for a further discussion of risks and uncertainties applicable to the Company's business.
The Company undertakes no obligation to update any forward-looking statements in this Report on Form 10-Q or elsewhere.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in the notes to the Company's December 31, 2000 audited financial statements and management's discussion and analysis included in the Company's Annual Report on Form 10-K.
Part II. Other Information
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Election of Directors
The board of directors, consisting of Messrs. Warner W. Henry, Terrill M. Gloege, Frederick H. Muhs, Paul H. Beemer, Jeffrey A. Wahba, Donald M. Ford, Joseph A. Mooney, Jr. and Mrs. Carol F. Henry, was re-elected in its entirety to serve as directors until the next annual meeting of shareholders or until otherwise replaced. One hundred percent (100%) of the votes cast by the shareholders were voted in favor of the reelection of each director.
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) Exhibits
The registrant has filed herewith the following exhibits:
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarterly period ended September 30, 2001:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2001 | HENRY COMPANY |
| |
| /s/ Jeffrey A. Wahba |
| |
| By: JEFFREY A. WAHBA |
| Its: Vice President, Secretary |
| and Chief Financial Officer |
