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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2008
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: 000-24956
Associated Materials, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 75-1872487 | |
(State or Other Jurisdiction of Incorporation of Organization) | (I.R.S. Employer Identification No.) | |
3773 State Rd. Cuyahoga Falls, Ohio | 44223 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code (330) 929 -1811 |
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 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. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filero | Non-accelerated filerþ (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of May 9, 2008, all of the Registrant’s membership interests outstanding were held by an affiliate of the Registrant.
ASSOCIATED MATERIALS, LLC
REPORT FOR THE QUARTER ENDED MARCH 29, 2008
REPORT FOR THE QUARTER ENDED MARCH 29, 2008
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASSOCIATED MATERIALS, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) | ||||||||
March 29, | December 29, | |||||||
2008 | 2007 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,334 | $ | 21,603 | ||||
Accounts receivable, net | 121,523 | 138,653 | ||||||
Inventories | 154,471 | 137,015 | ||||||
Deferred income taxes | 9,983 | 9,983 | ||||||
Income taxes receivable | 2,146 | — | ||||||
Other current assets | 11,832 | 11,686 | ||||||
Total current assets | 304,289 | 318,940 | ||||||
Property, plant and equipment, net | 130,673 | 133,531 | ||||||
Goodwill | 231,243 | 231,213 | ||||||
Other intangible assets, net | 101,583 | 102,424 | ||||||
Other assets | 7,303 | 7,831 | ||||||
Total assets | $ | 775,091 | $ | 793,939 | ||||
Liabilities and Member’s Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 72,653 | $ | 80,082 | ||||
Payable to parent | 5,029 | 5,029 | ||||||
Accrued liabilities | 50,439 | 64,618 | ||||||
Income taxes payable | — | 11,661 | ||||||
Total current liabilities | 128,121 | 161,390 | ||||||
Deferred income taxes | 50,881 | 50,837 | ||||||
Other liabilities | 47,197 | 47,615 | ||||||
Long-term debt | 255,368 | 226,000 | ||||||
Member’s equity | 293,524 | 308,097 | ||||||
Total liabilities and member’s equity | $ | 775,091 | $ | 793,939 | ||||
See accompanying notes to consolidated financial statements.
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ASSOCIATED MATERIALS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Net sales | $ | 200,878 | $ | 218,164 | ||||
Cost of sales | 156,265 | 170,448 | ||||||
Gross profit | 44,613 | 47,716 | ||||||
Selling, general and administrative expense | 50,128 | 49,100 | ||||||
Manufacturing restructuring costs | 845 | — | ||||||
Loss from operations | (6,360 | ) | (1,384 | ) | ||||
Interest expense, net | 5,867 | 6,993 | ||||||
Foreign currency (gain) loss | 78 | (6 | ) | |||||
Loss before income taxes | (12,305 | ) | (8,371 | ) | ||||
Income tax benefit | (4,552 | ) | (3,733 | ) | ||||
Net loss | $ | (7,753 | ) | $ | (4,638 | ) | ||
See accompanying notes to consolidated financial statements.
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ASSOCIATED MATERIALS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Operating Activities | ||||||||
Net loss | $ | (7,753 | ) | $ | (4,638 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 5,653 | 5,426 | ||||||
Amortization of deferred financing costs | 524 | 632 | ||||||
Amortization of management fee | 125 | 125 | ||||||
Non-cash portion of manufacturing restructuring costs | 718 | — | ||||||
Loss on sale of assets | 44 | — | ||||||
Changes in operating assets and liabilities, adjusted for the effects of the acquisition of supply center: | ||||||||
Accounts receivable, net | 16,008 | 4,585 | ||||||
Inventories | (19,114 | ) | (12,259 | ) | ||||
Accounts payable and accrued liabilities | (20,166 | ) | (6,148 | ) | ||||
Income taxes | (13,843 | ) | (9,069 | ) | ||||
Other | (56 | ) | 753 | |||||
Net cash used in operating activities | (37,860 | ) | (20,593 | ) | ||||
Investing Activities | ||||||||
Additions to property, plant and equipment | (4,248 | ) | (1,793 | ) | ||||
Acquisition of supply center | — | (801 | ) | |||||
Proceeds from sale of assets | 22 | — | ||||||
Net cash used in investing activities | (4,226 | ) | (2,594 | ) | ||||
Financing Activities | ||||||||
Net increase in revolving line of credit | 29,368 | 18,737 | ||||||
Dividends | (4,118 | ) | (3,973 | ) | ||||
Net cash provided by financing activities | 25,250 | 14,764 | ||||||
Effect of exchange rate changes on cash | (433 | ) | (12 | ) | ||||
Net decrease in cash | (17,269 | ) | (8,435 | ) | ||||
Cash at beginning of period | 21,603 | 15,015 | ||||||
Cash at end of period | $ | 4,334 | $ | 6,580 | ||||
Supplemental information: | ||||||||
Cash paid for interest | $ | 1,219 | $ | 2,077 | ||||
Cash paid for income taxes | $ | 9,290 | $ | 5,405 | ||||
See accompanying notes to consolidated financial statements.
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ASSOCIATED MATERIALS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 29, 2008
(Unaudited)
Note 1 — Basis of Presentation
Associated Materials, LLC (the “Company”) is a wholly owned subsidiary of Associated Materials Holdings, LLC (“Holdings”), which is a wholly owned subsidiary of AMH Holdings, LLC (“AMH”). AMH is a wholly owned subsidiary of AMH Holdings II, Inc. (“AMH II”) which is controlled by affiliates of Investcorp S.A. and Harvest Partners, Inc. Holdings, AMH and AMH II do not have material assets or operations other than a direct or indirect ownership of the membership interest of the Company.
The unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these interim consolidated financial statements contain all of the normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three months ended March 29, 2008 and March 31, 2007. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 29, 2007. A detailed description of the Company’s significant accounting policies and management judgments is located in the audited financial statements for the year ended December 29, 2007, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.
The Company is a leading, vertically integrated manufacturer and North American distributor of exterior residential building products. The Company’s core products are vinyl windows, vinyl siding, aluminum trim coil, and aluminum and steel siding and accessories. Because most of the Company’s building products are intended for exterior use, the Company’s sales and operating profits tend to be lower during periods of inclement weather. Therefore, the results of operations for any interim period are not necessarily indicative of the results of operations for a full year.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, however, this statement does not require any new fair value measurements. In February 2008, the FASB issued a staff position that delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Except for the delay for nonfinancial assets and liabilities, SFAS No. 157 is effective for fiscal years beginning after December 15, 2007 and interim periods within such years. The adoption of the effective portions of this standard in 2008 did not have a material effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007. The Company elected not to apply the provisions of SFAS No. 159 to its eligible financial instruments upon adoption in 2008.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired and liabilities assumed in the transaction at the acquisition date, the immediate recognition of acquisition-related transaction costs and the recognition of contingent consideration arrangements at their acquisition date fair value. SFAS No. 141(R) is effective for acquisitions that occur on or after the beginning of the fiscal year commencing on or after December 15, 2008. SFAS No. 141(R) will impact the Company’s financial position and results of operations for any business combinations entered into after the date of adoption.
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Note 2 – Inventories
Inventories are valued at the lower of cost (first in, first out) or market. Inventories consist of the following (in thousands):
March 29, | December 29, | |||||||
2008 | 2007 | |||||||
Raw materials | $ | 26,280 | $ | 31,886 | ||||
Work-in-process | 16,193 | 10,075 | ||||||
Finished goods and purchased stock | 111,998 | 95,054 | ||||||
$ | 154,471 | $ | 137,015 | |||||
Note 3 – Goodwill and Other Intangible Assets
Goodwill represents the purchase price in excess of the fair value of the tangible and intangible net assets acquired in a business combination. Goodwill of $231.2 million as of both March 29, 2008 and December 29, 2007 consists of $194.8 million from the April 2002 merger transaction and $36.4 million from the acquisition of Gentek Holdings, Inc. (“Gentek”). None of the Company’s goodwill is deductible for income tax purposes. The Company’s other intangible assets consist of the following (in thousands):
Average | ||||||||||||||||||||||||||||
Amortization | March 29, 2008 | December 29, 2007 | ||||||||||||||||||||||||||
Period | Accumulated | Net Carrying | Accumulated | Net Carrying | ||||||||||||||||||||||||
(in Years) | Cost | Amortization | Value | Cost | Amortization | Value | ||||||||||||||||||||||
Trademarks and trade names | 15 | $ | 108,080 | $ | 10,761 | $ | 97,319 | $ | 108,080 | $ | 10,283 | $ | 97,797 | |||||||||||||||
Patents | 10 | 6,230 | 3,695 | 2,535 | 6,230 | 3,540 | 2,690 | |||||||||||||||||||||
Customer base and other | 7 | 5,203 | 3,474 | 1,729 | 5,298 | 3,361 | 1,937 | |||||||||||||||||||||
Total other intangible assets | $ | 119,513 | $ | 17,930 | $ | 101,583 | $ | 119,608 | $ | 17,184 | $ | 102,424 | ||||||||||||||||
The Company has determined that trademarks and trade names totaling $80.0 million (included in the trademarks and trade names caption in the table above) consisting of the Alside®, Revere® and Gentek® trade names have indefinite useful lives. Amortization expense related to other intangible assets was approximately $0.8 million for each of the quarters ended March 29, 2008 and March 31, 2007.
Note 4 – Long-Term Debt
Long-term debt consists of the following (in thousands):
March 29, | December 29, | |||||||
2008 | 2007 | |||||||
9 3/4% notes | $ | 165,000 | $ | 165,000 | ||||
Term loan under credit facility | 61,000 | 61,000 | ||||||
Revolving loans under credit facility | 29,368 | — | ||||||
Total debt | $ | 255,368 | $ | 226,000 | ||||
The Company’s second amended and restated credit facility includes a term loan facility and a revolving facility of $90 million of available borrowings including a $20 million Canadian subfacility. The term loan facility is due in August 2010 and the revolving credit facility expires in April 2009.
The credit facility and the indenture governing the 9 3/4% notes contain restrictive covenants that, among other things, limit the Company’s ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, invest in capital expenditures, sell its assets or declare dividends. In addition, under the credit facility the Company is required to achieve certain financial ratios relating to leverage, coverage of fixed charges and coverage of interest expense. If the Company is not in compliance with these certain financial ratio covenant requirements, and the non-compliance is not cured or waived, the Company
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would be in default and the credit facility lenders could cause repayment of the credit facility to be accelerated, in which case amounts outstanding under the credit facility would become immediately due and payable. In addition, the 9 3/4% notes would become due and payable upon an acceleration of the Company’s credit facility. The Company was in compliance with its covenants as of March 29, 2008.
In March 2004, the Company’s indirect parent company, AMH, issued $446 million aggregate principal at maturity in 2014 of 11 1/4% senior discount notes. The accreted value of the 11 1/4% notes as of March 29, 2008 was approximately $403.5 million. In December 2004, the Company’s indirect parent company, AMH II, issued $75 million of 13 5/8% senior notes due 2014. The accreted value of the 13 5/8% notes as of March 29, 2008 was approximately $84.4 million. Because AMH and AMH II are holding companies with no operations, they must receive distributions, payments or loans from subsidiaries to satisfy obligations on the 11 1/4% notes and the 13 5/8% notes. An acceleration of the Company’s credit facility and the 9 3/4% notes as a result of a future default would have a material adverse effect on the Company’s ability to make such distributions, payments or loans to its direct and indirect parent companies. The Company does not guarantee the 11 1/4% notes or the 13 5/8% notes and has no obligation to make any payments with respect thereto. Total AMH II debt, including that of its consolidated subsidiaries, was approximately $743.3 million as of March 29, 2008.
Note 5 – Comprehensive Loss
Comprehensive loss differs from net loss due to the reclassification of actuarial gains or losses and prior service costs associated with the Company’s pension and other postretirement plans and foreign currency translation adjustments as follows (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Net loss as reported | $ | (7,753 | ) | $ | (4,638 | ) | ||
Reclassification adjustments for actuarial gains or losses and prior service costs, net of tax | 96 | 143 | ||||||
Foreign currency translation adjustments | (2,799 | ) | 532 | |||||
Comprehensive loss | $ | (10,456 | ) | $ | (3,963 | ) | ||
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Note 6 – Retirement Plans
The Company’s Alside division sponsors a defined benefit pension plan which covers hourly workers at its plant in West Salem, Ohio and a defined benefit retirement plan covering salaried employees, which was frozen in 1998 and subsequently replaced with a defined contribution plan. The Company’s Gentek subsidiary sponsors a defined benefit pension plan for hourly union employees at its Woodbridge, New Jersey plant (together with the Alside sponsored defined benefit plans, the “Domestic Plans”) as well as a defined benefit pension plan covering Gentek Canadian salaried employees and hourly union employees at the Lambeth, Ontario Canada plant, a defined benefit pension plan for the hourly union employees at its Burlington, Ontario Canada plant and a defined benefit pension plan for the hourly union employees at its Pointe Claire, Quebec Canada plant (the “Foreign Plans”). Accrued pension liabilities are included in accrued and other long-term liabilities in the accompanying balance sheets. The actuarial valuation measurement date for the defined benefit pension plans is December 31. Components of defined benefit pension plan costs are as follows (in thousands):
Quarter | Quarter | |||||||||||||||
Ended | Ended | |||||||||||||||
March 29, | March 31, | |||||||||||||||
2008 | 2007 | |||||||||||||||
Domestic | Foreign | Domestic | Foreign | |||||||||||||
Plans | Plans | Plans | Plans | |||||||||||||
Net periodic pension cost | ||||||||||||||||
Service cost | $ | 134 | $ | 549 | $ | 136 | $ | 494 | ||||||||
Interest cost | 747 | 796 | 718 | 635 | ||||||||||||
Expected return on assets | (875 | ) | (931 | ) | (832 | ) | (754 | ) | ||||||||
Amortization of prior service costs | 7 | 8 | — | 7 | ||||||||||||
Amortization of unrecognized net loss | 150 | 26 | 176 | 4 | ||||||||||||
Net periodic pension cost | $ | 163 | $ | 448 | $ | 198 | $ | 386 | ||||||||
Note 7 – Business Segments
The following table sets forth for the periods presented a summary of net sales by principal product offering (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Vinyl windows | $ | 69,688 | $ | 74,489 | ||||
Vinyl siding products | 44,134 | 53,085 | ||||||
Metal products | 39,344 | 41,110 | ||||||
Third party manufactured products | 32,933 | 34,177 | ||||||
Other products and services | 14,779 | 15,303 | ||||||
$ | 200,878 | $ | 218,164 | |||||
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Note 8 – Product Warranty Costs and Service Returns
Consistent with industry practice, the Company provides to homeowners limited warranties on certain products, primarily related to window and siding product categories. Warranties are of varying lengths of time from the date of purchase up to and including lifetime. Warranties cover product failures such as stress cracks and seal failures for windows and fading and peeling for siding products, as well as manufacturing defects. The Company has various options for remedying product warranty claims including repair, refinishing or replacement and directly incurs the cost of these remedies. Warranties also become reduced under certain conditions of time and change in ownership. Certain metal coating suppliers provide warranties on materials sold to the Company that mitigate the costs incurred by the Company. Reserves for future warranty costs are provided based on management’s estimates of such future costs using historical trends of claims experience, sales history of products to which such costs relate, and other factors. An independent actuary assists the Company in determining reserve amounts related to significant product failures.
A reconciliation of warranty reserve activity is as follows for the three months ended March 29, 2008 and March 31, 2007 (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Balance at the beginning of the period | $ | 28,684 | $ | 25,035 | ||||
Provision for warranties issued | 1,990 | 2,191 | ||||||
Claims paid | (1,428 | ) | (1,639 | ) | ||||
Balance at the end of the period | $ | 29,246 | $ | 25,587 | ||||
Note 9 – Manufacturing Restructuring Costs
In the first quarter of 2008, the Company committed to a plan to discontinue use of the warehouse facility adjacent to its Ennis, Texas vinyl siding manufacturing facility and began using a third party distribution center located in Ashtabula, Ohio to distribute its vinyl siding and certain other products to the majority of its domestic supply centers and to certain independent distributors. In addition, the Company committed to relocating certain vinyl siding production from Ennis, Texas to its vinyl manufacturing facilities in West Salem, Ohio and Burlington, Ontario. During the first quarter of 2008, the Company incurred costs of $0.8 million associated with these restructuring efforts, which was comprised of asset impairment costs and costs incurred to relocate manufacturing equipment. The warehouse that is adjacent to the Ennis, Texas manufacturing facility is currently leased by the Company. The Company expects to record lease costs, net of anticipated sublease income, associated with the discontinued use of the warehouse adjacent to the Ennis, Texas vinyl manufacturing facility of approximately $4.0 million during its fiscal 2008 third quarter. In addition, the Company anticipates incurring additional impairment costs related to inventory and fixed assets, moving costs associated with relocating certain production equipment, and other transition related costs of approximately $3.0 million during the remainder of fiscal 2008. The Company anticipates the relocation of the vinyl siding production to be completed by the end of the second quarter and the transition of distribution operations by the end of the third quarter.
Note 10 – Subsidiary Guarantors
The Company’s payment obligations under the 9 3/4% notes are fully and unconditionally guaranteed, jointly and severally on a senior subordinated basis, by its domestic wholly-owned subsidiaries: Gentek Holdings LLC, Gentek Building Products Inc. and Alside, Inc. Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or operations. Gentek Building Products Limited is a Canadian company and does not guarantee the Company’s 9 3/4% notes. In the opinion of management, separate financial statements of the respective Guarantor Subsidiaries would not provide additional material information, which would be useful in assessing the financial composition of the Guarantor Subsidiaries. None of the Guarantor Subsidiaries has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in event of default on the Subsidiary Guarantee other than its subordination to senior indebtedness.
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
March 29, 2008
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
March 29, 2008
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,308 | $ | 646 | $ | 380 | $ | — | $ | 4,334 | ||||||||||
Accounts receivable, net | 77,704 | 14,657 | 29,162 | — | 121,523 | |||||||||||||||
Intercompany receivables | — | 32,613 | 19,400 | (52,013 | ) | — | ||||||||||||||
Inventories | 98,196 | 16,708 | 39,567 | — | 154,471 | |||||||||||||||
Deferred income taxes | 6,886 | 2,674 | 423 | — | 9,983 | |||||||||||||||
Income taxes receivable | — | 4,183 | 2,562 | (4,599 | ) | 2,146 | ||||||||||||||
Other current assets | 8,883 | 1,043 | 1,906 | — | 11,832 | |||||||||||||||
Total current assets | 194,977 | 72,524 | 93,400 | (56,612 | ) | 304,289 | ||||||||||||||
Property, plant and equipment, net | 89,496 | 3,433 | 37,744 | — | 130,673 | |||||||||||||||
Goodwill | 194,814 | 36,429 | — | — | 231,243 | |||||||||||||||
Other intangible assets, net | 90,530 | 10,401 | 652 | — | 101,583 | |||||||||||||||
Investment in subsidiaries | 168,191 | 86,037 | — | (254,228 | ) | — | ||||||||||||||
Other assets | 6,801 | 23 | 479 | — | 7,303 | |||||||||||||||
Total assets | $ | 744,809 | $ | 208,847 | $ | 132,275 | $ | (310,840 | ) | $ | 775,091 | |||||||||
Liabilities And Member’s Equity | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 37,872 | $ | 13,076 | $ | 21,705 | $ | — | $ | 72,653 | ||||||||||
Intercompany payables | 52,013 | — | — | (52,013 | ) | — | ||||||||||||||
Payable to parent | 5,029 | — | — | — | 5,029 | |||||||||||||||
Accrued liabilities | 33,327 | 9,451 | 7,661 | — | 50,439 | |||||||||||||||
Income taxes payable | 4,599 | — | — | (4,599 | ) | — | ||||||||||||||
Total current liabilities | 132,840 | 22,527 | 29,366 | (56,612 | ) | 128,121 | ||||||||||||||
Deferred income taxes | 44,233 | 4,320 | 2,328 | — | 50,881 | |||||||||||||||
Other liabilities | 21,012 | 13,809 | 12,376 | — | 47,197 | |||||||||||||||
Long-term debt | 253,200 | — | 2,168 | — | 255,368 | |||||||||||||||
Member’s equity | 293,524 | 168,191 | 86,037 | (254,228 | ) | 293,524 | ||||||||||||||
Total liabilities and member’ s equity | $ | 744,809 | $ | 208,847 | $ | 132,275 | $ | (310,840 | ) | $ | 775,091 | |||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 29, 2008
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 29, 2008
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | 139,884 | $ | 43,819 | $ | 54,331 | $ | (37,156 | ) | $ | 200,878 | |||||||||
Cost of sales | 109,102 | 42,362 | 41,957 | (37,156 | ) | 156,265 | ||||||||||||||
Gross profit | 30,782 | 1,457 | 12,374 | — | 44,613 | |||||||||||||||
Selling, general and administrative expense | 36,983 | 4,129 | 9,016 | — | 50,973 | |||||||||||||||
Manufacturing restructuring costs | 751 | — | 94 | — | 845 | |||||||||||||||
Income (loss) from operations | (6,952 | ) | (2,672 | ) | 3,264 | — | (6,360 | ) | ||||||||||||
Interest expense, net | 5,835 | (7 | ) | 39 | — | 5,867 | ||||||||||||||
Foreign currency loss | — | — | 78 | — | 78 | |||||||||||||||
Income (loss) before income taxes | (12,787 | ) | (2,665 | ) | 3,147 | — | (12,305 | ) | ||||||||||||
Income taxes (benefit) | (4,756 | ) | (822 | ) | 1,026 | — | (4,552 | ) | ||||||||||||
Income (loss) before equity income from subsidiaries | (8,031 | ) | (1,843 | ) | 2,121 | — | (7,753 | ) | ||||||||||||
Equity income from subsidiaries | 278 | 2,121 | — | (2,399 | ) | — | ||||||||||||||
Net income (loss) | $ | (7,753 | ) | $ | 278 | $ | 2,121 | $ | (2,399 | ) | $ | (7,753 | ) | |||||||
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 29, 2008
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 29, 2008
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiaries | Subsidiary | Consolidated | |||||||||||||
Net cash used in operating activities | $ | (21,456 | ) | $ | (366 | ) | $ | (16,038 | ) | $ | (37,860 | ) | ||||
Investing Activities | ||||||||||||||||
Additions to property, plant and equipment | (2,364 | ) | (61 | ) | (1,823 | ) | (4,248 | ) | ||||||||
Proceeds from sale of assets | 18 | 4 | — | 22 | ||||||||||||
Net cash used in investing activities | (2,346 | ) | (57 | ) | (1,823 | ) | (4,226 | ) | ||||||||
Financing Activities | ||||||||||||||||
Net increase in revolving line of credit | 27,200 | — | 2,168 | 29,368 | ||||||||||||
Dividends | (4,118 | ) | — | — | (4,118 | ) | ||||||||||
Intercompany transactions | (2,379 | ) | 698 | 1,681 | — | |||||||||||
Net cash provided by financing activities | 20,703 | 698 | 3,849 | 25,250 | ||||||||||||
Effect of exchange rate changes on cash | — | — | (433 | ) | (433 | ) | ||||||||||
Net increase (decrease) in cash | (3,099 | ) | 275 | (14,445 | ) | (17,269 | ) | |||||||||
Cash at beginning of period | 6,407 | 371 | 14,825 | 21,603 | ||||||||||||
Cash at end of period | $ | 3,308 | $ | 646 | $ | 380 | $ | 4,334 | ||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 29, 2007
(In thousands)
CONDENSED CONSOLIDATING BALANCE SHEET
December 29, 2007
(In thousands)
Guarantor | Non-Guarantor | Reclassification | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | /Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 6,407 | $ | 371 | $ | 14,825 | $ | — | $ | 21,603 | ||||||||||
Accounts receivable, net | 92,314 | 17,999 | 28,340 | — | 138,653 | |||||||||||||||
Intercompany receivables | — | 33,341 | 21,052 | (54,393 | ) | — | ||||||||||||||
Inventories | 85,876 | 14,083 | 37,056 | — | 137,015 | |||||||||||||||
Deferred income taxes | 6,886 | 2,674 | 423 | — | 9,983 | |||||||||||||||
Income taxes receivable | — | 3,375 | — | (3,375 | ) | — | ||||||||||||||
Other current assets | 8,683 | 878 | 2,125 | — | 11,686 | |||||||||||||||
Total current assets | 200,166 | 72,721 | 103,821 | (57,768 | ) | 318,940 | ||||||||||||||
Property, plant and equipment, net | 92,920 | 3,592 | 37,019 | — | 133,531 | |||||||||||||||
Goodwill | 194,814 | 36,399 | — | — | 231,213 | |||||||||||||||
Other intangible assets, net | 91,098 | 10,559 | 767 | — | 102,424 | |||||||||||||||
Investment in subsidiaries | 170,682 | 86,692 | — | (257,374 | ) | — | ||||||||||||||
Other assets | 7,831 | — | — | — | 7,831 | |||||||||||||||
Total assets | $ | 757,511 | $ | 209,963 | $ | 141,607 | $ | (315,142 | ) | $ | 793,939 | |||||||||
Liabilities And Member’s Equity | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 42,268 | $ | 9,981 | $ | 27,833 | $ | — | $ | 80,082 | ||||||||||
Intercompany payables | 54,393 | — | — | (54,393 | ) | — | ||||||||||||||
Payable to parent | 5,029 | — | — | — | 5,029 | |||||||||||||||
Accrued liabilities | 43,299 | 11,476 | 9,843 | — | 64,618 | |||||||||||||||
Income taxes payable | 13,573 | — | 1,463 | (3,375 | ) | 11,661 | ||||||||||||||
Total current liabilities | 158,562 | 21,457 | 39,139 | (57,768 | ) | 161,390 | ||||||||||||||
Deferred income taxes | 44,126 | 4,316 | 2,395 | — | 50,837 | |||||||||||||||
Other liabilities | 20,726 | 13,508 | 13,381 | — | 47,615 | |||||||||||||||
Long-term debt | 226,000 | — | — | — | 226,000 | |||||||||||||||
Member’s equity | 308,097 | 170,682 | 86,692 | (257,374 | ) | 308,097 | ||||||||||||||
Total liabilities and member’ s equity | $ | 757,511 | $ | 209,963 | $ | 141,607 | $ | (315,142 | ) | $ | 793,939 | |||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2007
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 31, 2007
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | 154,963 | $ | 41,366 | $ | 52,944 | $ | (31,109 | ) | $ | 218,164 | |||||||||
Cost of sales | 120,968 | 39,375 | 41,214 | (31,109 | ) | 170,448 | ||||||||||||||
Gross profit | 33,995 | 1,991 | 11,730 | — | 47,716 | |||||||||||||||
Selling, general and administrative expense | 37,296 | 4,413 | 7,391 | — | 49,100 | |||||||||||||||
Income (loss) from operations | (3,301 | ) | (2,422 | ) | 4,339 | — | (1,384 | ) | ||||||||||||
Interest expense, net | 6,913 | (22 | ) | 102 | — | 6,993 | ||||||||||||||
Foreign currency gain | — | — | (6 | ) | — | (6 | ) | |||||||||||||
Income (loss) before income taxes | (10,214 | ) | (2,400 | ) | 4,243 | — | (8,371 | ) | ||||||||||||
Income taxes (benefit) | (3,922 | ) | (1,262 | ) | 1,451 | — | (3,733 | ) | ||||||||||||
Income (loss) before equity income from subsidiaries | (6,292 | ) | (1,138 | ) | 2,792 | — | (4,638 | ) | ||||||||||||
Equity income from subsidiaries | 1,654 | 2,792 | — | (4,446 | ) | — | ||||||||||||||
Net income (loss) | $ | (4,638 | ) | $ | 1,654 | $ | 2,792 | $ | (4,446 | ) | $ | (4,638 | ) | |||||||
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 31, 2007
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Quarter Ended March 31, 2007
(In thousands)
(Unaudited)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiaries | Subsidiary | Consolidated | |||||||||||||
Net cash used in operating activities | $ | (11,341 | ) | $ | (2,702 | ) | $ | (6,550 | ) | $ | (20,593 | ) | ||||
Investing Activities | ||||||||||||||||
Additions to property, plant and equipment | (1,296 | ) | (256 | ) | (241 | ) | (1,793 | ) | ||||||||
Acquisition of supply center | (801 | ) | — | — | (801 | ) | ||||||||||
Net cash used in investing activities | (2,097 | ) | (256 | ) | (241 | ) | (2,594 | ) | ||||||||
Financing Activities | ||||||||||||||||
Net increase in revolving line of credit | 12,000 | — | 6,737 | 18,737 | ||||||||||||
Dividends | (3,973 | ) | — | — | (3,973 | ) | ||||||||||
Intercompany transactions | 1,596 | 1,319 | (2,915 | ) | — | |||||||||||
Net cash provided by financing activities | 9,623 | 1,319 | 3,822 | 14,764 | ||||||||||||
Effect of exchange rate changes on cash | — | — | (12 | ) | (12 | ) | ||||||||||
Net decrease in cash | (3,815 | ) | (1,639 | ) | (2,981 | ) | (8,435 | ) | ||||||||
Cash at beginning of period | 10,014 | 1,692 | 3,309 | 15,015 | ||||||||||||
Cash at end of period | $ | 6,199 | $ | 53 | $ | 328 | $ | 6,580 | ||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a leading, vertically integrated manufacturer and North American distributor of exterior residential building products. The Company’s core products are vinyl windows, vinyl siding, aluminum trim coil, and aluminum and steel siding and accessories. During 2007, vinyl windows comprised approximately 35%, vinyl siding comprised approximately 24%, metal products, which includes aluminum and steel products, comprised approximately 18%, and third party manufactured products comprised approximately 17% of the Company’s total net sales. These products are marketed under the Alside®, Revere® and Gentek® brand names and sold on a wholesale basis to more than 50,000 professional contractors engaged in home repair and remodeling and new home construction principally through the Company’s North American network of 128 supply centers. Approximately 65% of the Company’s products are sold to contractors engaged in the home repair and remodeling market with 35% sold to the new construction market. The supply centers provide “one-stop” shopping to the Company’s contractor customers, carrying products, accessories and tools necessary to complete a vinyl window or siding project. In addition, the supply centers provide high quality product literature, product samples and installation training to these customers.
Because its exterior residential building products are consumer durable goods, the Company’s sales are impacted by the availability of consumer credit, consumer interest rates, employment trends, changes in levels of consumer confidence, national and regional trends in new housing starts and general economic conditions. The Company’s sales are also affected by changes in consumer preferences with respect to types of building products. Overall, the Company believes the long-term fundamentals for the building products industry remain strong as the population continues to age, homes continue to get older, household formation continues to be strong and vinyl remains the optimal material for exterior cladding and window solutions, all of which bodes well for the demand for the Company’s products in the future. In the short term, however, the Company believes the building products industry will continue to be negatively impacted by a housing market that has weakened considerably. Beginning in 2006 and continuing through 2008, sales of existing single-family homes have decreased from levels experienced over the past few years, the inventory of homes available for sale has increased, and housing appreciation has deteriorated. In addition, the pace of new home construction has slowed dramatically, as evidenced by declines in single-family housing starts and announcements from home builders of significant decreases in their orders. Recently, increased delinquencies on sub-prime mortgages, increased foreclosure rates and tightening consumer credit markets have further hampered the housing market. The Company expects the overall weakness in the U.S housing market to continue throughout 2008 and potentially into 2009. These factors increase the variability of demand for building products in the short-term.
Due to the high price of oil and natural gas, strong overall consumption of raw materials and speculation in the commodities markets, the Company, along with the entire building products industry, has experienced significant inflation in key raw material commodity costs — particularly for vinyl resin, aluminum and steel, as well as in other raw materials such as microingredients used in the Company’s vinyl products. Over the past several years the Company implemented several price increases on certain of its products in response to the increase in commodity costs, and announced additional price increases in the first quarter of 2008 in response to rising vinyl resin prices. The Company continually monitors market conditions for additional price increases as warranted. The Company’s ability to maintain gross margin levels on its products during periods of rising raw material costs depends on the Company’s ability to obtain selling price increases. Furthermore, the results of operations for individual quarters can and have been negatively impacted by a delay between the timing of raw material cost increases and price increases on the Company’s products. There can be no assurance that the Company will be able to maintain the selling price increases already implemented or achieve any future price increases.
The Company operates with significant operating and financial leverage. Significant portions of the Company’s manufacturing, selling, general and administrative expenses are fixed costs that neither increase nor decrease proportionately with sales. In addition, a significant portion of the Company’s interest expense is fixed. There can be no assurance that the Company will be able to reduce its fixed costs in response to a decline in its net sales. As a result, a decline in the Company’s net sales could result in a higher percentage decline in its income from operations. Also, the Company’s gross margins and gross margin percentages may not be comparable to other companies as some companies include all of the costs of their distribution network in cost of sales whereas the Company includes the operating costs of its supply centers in selling, general and administrative expenses.
Because most of the Company’s building products are intended for exterior use, sales tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, the Company has historically had small profits or losses in the first quarter and reduced profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs, during the periods of reduced sales and net cash flows from operations the Company typically
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makes borrowings under the revolving loan portion of its credit facility and repays such borrowings in periods of higher cash flow. The Company typically generates the majority of its cash flow in the third and fourth quarters.
The Company seeks to distinguish itself from other suppliers of residential building products and to sustain its profitability through a business strategy focused on increasing sales at existing supply centers, selectively expanding its supply center network, increasing sales through independent specialty distributor customers, developing innovative new products, expanding sales of third party manufactured products through its supply center network, and driving operational excellence by reducing costs and increasing customer service levels. The Company continually analyzes new and existing markets for the selection of new supply center locations. Presently, the Company plans to open one new supply center in 2008.
Results of Operations
The following table sets forth for the periods indicated the results of the Company’s operations (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Net sales | $ | 200,878 | $ | 218,164 | ||||
Cost of sales | 156,265 | 170,448 | ||||||
Gross profit | 44,613 | 47,716 | ||||||
Selling, general and administrative expense | 50,128 | 49,100 | ||||||
Manufacturing restructuring costs | 845 | — | ||||||
Loss from operations | (6,360 | ) | (1,384 | ) | ||||
Interest expense, net | 5,867 | 6,993 | ||||||
Foreign currency (gain) loss | 78 | (6 | ) | |||||
Loss before income taxes | (12,305 | ) | (8,371 | ) | ||||
Income tax benefit | (4,552 | ) | (3,733 | ) | ||||
Net loss | $ | (7,753 | ) | $ | (4,638 | ) | ||
Other Data: | ||||||||
EBITDA(a) | $ | (785 | ) | $ | 4,048 | |||
Adjusted EBITDA(a) | 263 | 4,866 |
The following table sets forth for the periods presented a summary of net sales by principal product offering (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Vinyl windows | $ | 69,688 | $ | 74,489 | ||||
Vinyl siding products | 44,134 | 53,085 | ||||||
Metal products | 39,344 | 41,110 | ||||||
Third party manufactured products | 32,933 | 34,177 | ||||||
Other products and services | 14,779 | 15,303 | ||||||
$ | 200,878 | $ | 218,164 | |||||
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(a) | EBITDA is calculated as net loss plus interest, taxes, depreciation and amortization. Adjusted EBITDA excludes certain items. The Company considers adjusted EBITDA to be an important indicator of its operational strength and performance of its business. The Company has included adjusted EBITDA because it is a key financial measure used by management to (i) assess the Company’s ability to service its debt and / or incur debt and meet the Company’s capital expenditure requirements; (ii) internally measure the Company’s operating performance; and (iii) determine the Company’s incentive compensation programs. In addition, the Company’s credit facility has certain covenants that use ratios utilizing this measure of adjusted EBITDA. EBITDA and adjusted EBITDA have not been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Adjusted EBITDA as presented by the Company may not be comparable to similarly titled measures reported by other companies. EBITDA and adjusted EBITDA are not measures determined in accordance with GAAP and should not be considered as alternatives to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of the Company’s operating results or cash flows from operations (as determined in accordance with GAAP) as a measure of the Company’s liquidity. The reconciliation of the Company’s net loss to EBITDA and adjusted EBITDA is as follows (in thousands): |
Quarter Ended | Quarter Ended | |||||||
March 29, 2008 | March 31, 2007 | |||||||
Net loss | $ | (7,753 | ) | $ | (4,638 | ) | ||
Interest expense, net | 5,867 | 6,993 | ||||||
Income tax benefit | (4,552 | ) | (3,733 | ) | ||||
Depreciation and amortization | 5,653 | 5,426 | ||||||
EBITDA | (785 | ) | 4,048 | |||||
Foreign currency (gains) loss | 78 | (6 | ) | |||||
Separation costs(b) | — | 699 | ||||||
Amortization of management fee(c) | 125 | 125 | ||||||
Manufacturing restructuring costs(d) | 845 | — | ||||||
Adjusted EBITDA | $ | 263 | $ | 4,866 | ||||
(b) | For the quarter ended March 31, 2007, the amount represents separation costs, including payroll taxes, related to the resignation of Mr. Deighton, former Chief Operating Officer of the Company. | |
(c) | Represents amortization of a prepaid management fee of $6 million paid to Investcorp International Inc. in connection with the December 2004 recapitalization transaction. The Company is expensing the prepaid management fee based on the services provided over the life of the agreement, as defined in the Management Advisory Agreement with Investcorp International Inc. In accordance with the Management Advisory Agreement, the Company recorded $4 million as expense for the year ended December 31, 2005, with the remaining unamortized amount to be expensed equally over the remaining four-year term of the agreement. | |
(d) | During the quarter ended March 29, 2008, the Company committed to a plan to discontinue use of its warehouse facility adjacent to its Ennis, Texas vinyl manufacturing facility and began using a third party distribution center located in Ashtabula, Ohio. In addition, the Company committed to relocating certain vinyl siding production from Ennis, Texas to its vinyl manufacturing facilities in West Salem, Ohio and Burlington, Ontario. For the quarter ended March 29, 2008, the amount represents asset impairment costs and costs incurred to relocate manufacturing equipment. |
Quarter Ended March 29, 2008 Compared to Quarter Ended March 31, 2007
Net sales decreased 7.9% to $200.9 million for the first quarter of 2008 compared to $218.2 million for the same period in 2007 primarily due to decreased unit volumes across all product categories, partially offset by the benefit from the stronger Canadian dollar. During the first quarter of 2008 compared to the same period in 2007, vinyl window unit volumes decreased by 6%, while vinyl siding unit volumes decreased by 21%. The siding unit volume decrease is comprised of a decrease in U.S. vinyl siding unit volumes of 26% and a decrease in Canadian vinyl siding unit volumes of 12%. The Company believes that the U.S. vinyl siding market continues to be impacted by the weakness in the housing market and the economy as a whole, while the decline experienced in the Canadian market during the quarter was primarily weather related. The Company believes vinyl window unit volumes have remained stronger than vinyl siding unit volumes as replacement windows are viewed by consumers as less discretionary due to the high cost of energy, and therefore have been less impacted by the current market conditions.
Gross profit in the first quarter of 2008 was $44.6 million, or 22.2% of net sales, compared to gross profit of $47.7 million, or 21.9% of net sales, for the same period in 2007. The increase in gross profit as a percentage of net sales was primarily a
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result of the impact of cost reduction initiatives started in the prior year and the benefit of the stronger Canadian dollar, partially offset by reduced leverage of fixed manufacturing costs due to lower sales volumes and increased freight costs.
Selling, general and administrative expense increased to $51.0 million, or 25.4% of net sales, for the first quarter of 2008 versus $49.1 million, or 22.5% of net sales, for the same period in 2007. Selling, general and administrative expense for the quarter ended March 31, 2007 includes $0.7 million of separation costs related to the resignation of the Company’s former Chief Operating Officer. Excluding these costs, the increase in selling, general and administrative expense was due primarily to the translation impact on Canadian expenses and increased building and truck lease expenses in the Company’s supply center network, partially offset by reduced consulting expenses. The Company incurred a loss from operations of $6.4 million for the first quarter of 2008 compared to a loss from operations of $1.4 million for the same period in 2007.
In the first quarter of 2008, the Company committed to a plan to discontinue use of the warehouse facility adjacent to its Ennis, Texas vinyl siding manufacturing facility and began using a third party distribution center located in Ashtabula, Ohio to distribute its vinyl siding and certain other products to the majority of its domestic supply centers and to certain independent distributors. In addition, the Company committed to relocating certain vinyl siding production from Ennis, Texas to its vinyl manufacturing facilities in West Salem, Ohio and Burlington, Ontario. During the first quarter of 2008, the Company incurred costs of $0.8 million associated with these restructuring efforts, which was comprised of asset impairment costs and costs incurred to relocate manufacturing equipment. The warehouse that is adjacent to the Ennis, Texas manufacturing facility is currently leased by the Company. The Company expects to record lease costs, net of anticipated sublease income, associated with the discontinued use of the warehouse adjacent to the Ennis, Texas vinyl manufacturing facility of approximately $4.0 million during its fiscal 2008 third quarter. In addition, the Company anticipates incurring additional impairment costs related to inventory and fixed assets, moving costs associated with relocating certain production equipment, and other transition related costs of approximately $3.0 million during the remainder of fiscal 2008. The Company anticipates the relocation of the vinyl siding production to be completed by the end of the second quarter and the transition of distribution operations by the end of the third quarter. The Company expects these restructuring efforts to reduce its manufacturing and freight costs and improve its customer service levels.
Interest expense decreased $1.1 million for the first quarter of 2008 compared to the same period in 2007. The decrease in interest expense was primarily due to lower overall borrowings on the term loan and lower interest rates under the credit facility.
The income tax provision for the first quarter of 2008 reflects an effective income tax rate of 37.0%, compared to an effective income tax rate of 44.6% for the same period in 2007. The decrease in the effective income tax rate in 2008 is primarily due to an improved ability to utilize foreign tax credits to offset the taxes due on earnings from the Company’s Canadian subsidiary and a reduction in Canadian corporate tax rates.
The Company reported a net loss of $7.8 million for the quarter ended March 29, 2008 compared to a net loss of $4.6 million for the same period in 2007.
EBITDA for the first quarter of 2008 was a loss of $0.8 million compared to EBITDA of $4.0 million for the same period in 2007. Adjusted EBITDA for the first quarter of 2008 was $0.3 million compared to adjusted EBITDA of $4.9 million for the same period in 2007. Adjusted EBITDA for the first quarter of 2008 excludes manufacturing restructuring costs of $0.8 million, amortization related to prepaid management fees of $0.1 million, and foreign currency losses of $0.1 million. Adjusted EBITDA for the first quarter of 2007 excludes separation costs of $0.7 million related to the resignation of the Company’s former Chief Operating Officer and amortization related to prepaid management fees of $0.1 million.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, however, this statement does not require any new fair value measurements. In February 2008, the FASB issued a staff position that delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Except for the delay for nonfinancial assets and liabilities, SFAS No. 157 is effective for fiscal years beginning after December 15, 2007 and interim periods within such years. The adoption of the effective portions of this standard in 2008 did not have a material effect on the Company’s consolidated financial statements.
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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007. The Company elected not to apply the provisions of SFAS No. 159 to its eligible financial instruments upon adoption in 2008.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired and liabilities assumed in the transaction at the acquisition date, the immediate recognition of acquisition-related transaction costs and the recognition of contingent consideration arrangements at their acquisition date fair value. SFAS No. 141(R) is effective for acquisitions that occur on or after the beginning of the fiscal year commencing on or after December 15, 2008. SFAS No. 141(R) will impact the Company’s financial position and results of operations for any business combinations entered into after the date of adoption.
Liquidity and Capital Resources
The following sets forth a summary of the Company’s cash flows for the quarters ended March 29, 2008 and March 31, 2007 (in thousands):
Quarter | Quarter | |||||||
Ended | Ended | |||||||
March 29, | March 31, | |||||||
2008 | 2007 | |||||||
Cash used in operating activities | $ | (37,860 | ) | $ | (20,593 | ) | ||
Cash used in investing activities | (4,226 | ) | (2,594 | ) | ||||
Cash provided by financing activities | 25,250 | 14,764 |
Cash Flows
At March 29, 2008, the Company had cash and cash equivalents of $4.3 million and available borrowing capacity of approximately $53.4 million under the revolving portion of its credit facility. Outstanding letters of credit as of March 29, 2008 totaled $7.2 million securing various insurance letters of credit.
Net cash used in operating activities was $37.9 million for the quarter ended March 29, 2008 compared to net cash used in operating activities of $20.6 million for the same period in 2007. The factors typically impacting cash flows from operating activities during the first three months of the year include the Company’s operating results, the seasonal increase of inventory levels, and use of cash related to payments for accrued liabilities including payments of EBITDA-based incentive compensation and customer sales incentives. Accounts receivable was a source of cash of $16.0 million for the quarter ended March 29, 2008 compared to $4.6 million for the same period in 2007 resulting in a net increase in cash flows of $11.4 million, which was primarily due to the decline in first quarter sales in 2008 as compared to the same period in 2007. Inventories increased $19.1 million during the quarter ended March 29, 2008 compared to a $12.3 million increase during the same period in 2007. The inventory growth for the quarter ended March 29, 2008 was due to the increase in inventory levels as part of the transition to the new third party distribution center and increasing commodity prices. Accounts payable and accrued liabilities were a use of cash of $20.2 million for the quarter ended March 29, 2008 compared to $6.1 million for the same period in 2007, resulting in a net decrease in cash flows of $14.0 million, which was primarily due to the timing of payments and inventory purchases during the first quarter of 2008. Cash flows used in operating activities for the quarter ended March 29, 2008 includes income tax payments of $9.3 million, while net cash used in operating activities for the same period in 2007 reflects $5.4 million of income tax payments.
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Cash Flows from Investing Activities
During the quarter ended March 29, 2008, net cash used in investing activities included capital expenditures of $4.2 million. Capital expenditures in 2008 were primarily to expand capacity at the Company’s Burlington and West Salem manufacturing facilities and improve capabilities at its window facilities. During the quarter ended March 31, 2007, net cash used in investing activities included capital expenditures of $1.8 million and cash paid to acquire a supply center of $0.8 million. Capital expenditures in 2007 were primarily to improve capabilities in the Company’s vinyl siding and metal manufacturing operations. The Company estimates total capital expenditures for 2008 to be in the range of $12 million to $15 million.
Cash Flows from Financing Activities
Net cash provided by financing activities for the quarter ended March 29, 2008 includes borrowings on the revolving loan portion of the Company’s credit facility of $29.4 million, partially offset by dividend payments of $4.1 million. Net cash provided by financing activities for the quarter ended March 31, 2007 includes borrowings on the revolving loan portion of the Company’s credit facility of $18.7 million, partially offset by dividend payments of $4.0 million. The dividends in 2008 and 2007 were paid to the Company’s direct and indirect parent companies to fund AMH II’s scheduled interest payment on its 13 5/8% notes.
Description of the Company’s Outstanding Indebtedness
The Company entered into a second amended and restated credit facility dated December 22, 2004 which included a term loan facility of $175 million and a revolving facility of $80 million of available borrowings including a $20 million Canadian subfacility. The term loan facility is due in August 2010 and the revolving credit facility expires in April 2009. Under the term loan facility, the Company is required to make minimum quarterly principal amortization payments of 1% per year, which was satisfied for the duration of the facility with the principal repayments made in 2005. Also, on an annual basis, beginning with 2005, the Company is required to make principal payments on the term loan based on a percentage of excess cash flows as defined in the second amended and restated credit facility. The Company will be required to make quarterly payments of the unamortized principal in the final year of the loan. The Company will record as a current liability those principal payments, if any, that are estimated to be due within twelve months under the excess cash flow provision of the credit facility when the likelihood of those payments becomes probable. As of March 29, 2008, no principal payments were required to be made within the next twelve months under the excess cash flow provision of the credit facility. The Company had $29.4 million of borrowings outstanding on the revolving loan portion of its credit facility as of March 29, 2008.
In 2006, the Company entered into an amendment to the credit facility that amended certain covenants that require the Company to achieve certain financial ratios relating to leverage, coverage of fixed charges and coverage of interest expense and increased the revolving credit facility from $80 million to $90 million in anticipation of potentially higher working capital requirements due to higher commodity costs. As a result, interest margins on each of the term loan facility and the revolving credit facility increased by 0.25%. Effective with this amendment, the term facility bears interest at London Interbank Offered Rates (“LIBOR”) plus 2.50% payable quarterly at the end of each calendar quarter and the revolving credit facility bears interest at LIBOR plus a margin of 2.50% to 3.25% based on the Company’s leverage ratio, as defined in the amended and restated credit facility.
The Company’s 9 3/4% notes due in 2012 pay interest semi-annually in April and October. The 9 3/4% notes are general unsecured obligations of the Company subordinated in right of payment to senior indebtedness and senior in right of payment to any current or future subordinated indebtedness of the Company. The Company’s payment obligations under the 9 3/4% notes are fully and unconditionally guaranteed, jointly and severally on a senior subordinated basis, by its domestic wholly-owned subsidiaries: Gentek Holdings, LLC, Gentek Building Products Inc. and Alside, Inc. Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or operations. Gentek Building Products Limited is a Canadian company and does not guarantee the Company’s 9 3/4% notes.
The credit facility and the indenture governing the 9 3/4% notes contain restrictive covenants that, among other things, limit the Company’s ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, invest in capital expenditures, sell its assets or declare dividends. In addition, under the credit facility the Company is required to achieve certain financial ratios relating to leverage, coverage of fixed charges and coverage of interest expense. If the Company is not in compliance with these certain financial ratio covenant requirements, and the non-compliance is not cured or waived, the Company would be in default and the credit facility lenders could cause repayment of the credit facility to be accelerated, in which case amounts outstanding under the credit facility would become immediately due and payable. In addition, the 9 3/4% notes would
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become due and payable upon an acceleration of the Company’s credit facility. The Company was in compliance with its covenants as of March 29, 2008.
All obligations of the Company under the credit facility are jointly and severally guaranteed by AMH, Holdings and all of the Company’s direct and indirect wholly owned domestic subsidiaries. In addition, all obligations of Gentek under the credit facility also are jointly and severally guaranteed by Gentek’s wholly owned Canadian subsidiary. All obligations of the Company under the credit facility are secured by a pledge of the Company’s membership interest, the membership interest of Holdings and the capital stock of the Company’s domestic subsidiaries (and up to 66-2/3% of the voting stock of “first tier” foreign subsidiaries), and a security interest in substantially all of the Company’s owned real and personal assets (tangible and intangible) and the owned real and personal assets (tangible and intangible) of the domestic guarantors under the credit facility. In addition, all obligations of Gentek under the credit facility are secured by the capital stock and owned real and personal assets (tangible and intangible) owned by Gentek and its Canadian subsidiary.
In March 2004, the Company’s indirect parent company, AMH, issued $446 million aggregate principal at maturity in 2014 of 11 1/4% senior discount notes. Interest accrues at a rate of 11 1/4% on the notes in the form of an increase in the accreted value of the notes prior to March 1, 2009. Thereafter, cash interest of 11 1/4% on the notes accrues and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2009. The notes mature on March 1, 2014. The notes are structurally subordinated to all existing and future debt and other liabilities of AMH’s existing and future subsidiaries, including the Company and Holdings. The accreted value of the 11 1/4% notes as of March 29, 2008 was approximately $403.5 million.
In December 2004, the Company’s indirect parent company, AMH II, issued $75 million of 13 5/8% senior notes due 2014. The notes accrue interest at 13 5/8% payable semi-annually on July 30 and January 30. Through January 30, 2010, AMH II must pay a minimum of 10% interest on each semi-annual payment date in cash, allowing the remaining 3 5/8% to accrue to the value of the note. On January 31, 2010, AMH II is required to redeem a principal amount of approximately $15 million of notes in order to prevent the notes from being treated as having “significant original issue discount” within the meaning of section 163(i)(2) of the Internal Revenue Code (“IRC”). The accreted value of the 13 5/8% notes as of March 29, 2008 was approximately $84.4 million.
Because AMH and AMH II are holding companies with no operations, they must receive distributions, payments or loans from subsidiaries to satisfy obligations under the 11 1/4% notes and the 13 5/8% notes. The Company does not guarantee the 11 1/4% notes or the 13 5/8% notes and has no obligation to make any payments with respect thereto. Furthermore, the terms of the indenture governing the Company’s 9 3/4% notes and senior credit facility significantly restrict the Company and its subsidiaries from paying dividends and otherwise transferring assets to AMH and the indenture governing AMH’s 11 1/4% notes further restricts AMH from making payments to AMH II. Delaware law may also restrict the Company’s ability to make certain distributions. If the Company is unable to distribute sufficient funds to its parent companies to allow them to make required payments on their indebtedness, AMH or AMH II may be required to refinance all or a part of their indebtedness, borrow additional funds or seek additional capital. AMH or AMH II may not be able to refinance their indebtedness or borrow funds on acceptable terms. If a default occurs under the 13 5/8% notes, the holders of such notes could elect to declare such indebtedness due and payable and exercise their remedies under the indenture governing the 13 5/8% notes, which could have a material adverse effect on the Company. Total AMH II debt, including that of its consolidated subsidiaries, was approximately $743.3 million as of March 29, 2008.
The Company believes its cash flows from operations, its borrowing capacity under its second amended and restated credit facility or its ability to obtain alternative financing would be sufficient to satisfy its obligations to pay principal and interest on its outstanding debt, maintain current operations and provide sufficient capital for presently anticipated capital expenditures. There can be no assurances, however, that the cash generated by the Company and available under the amended and restated credit facility will be sufficient for these purposes or that the Company would be able to refinance its indebtedness on acceptable terms.
Effects of Inflation
The Company’s principal raw materials — vinyl resin, aluminum, and steel — have historically been subject to significant price changes. Raw material pricing on the Company’s key commodities have increased significantly over the past several years as a result of strong overall consumption and higher energy costs. Vinyl resin prices as published by the Chemical Data Index during the first quarter of 2008 were approximately 37% higher on average than during the same period in 2007 and 5% higher than the fourth quarter of 2007. Further, vinyl resin prices are forecasted to continue to rise during 2008. London Metal Exchange pricing for aluminum has also experienced significant price changes. Aluminum costs during the first quarter of 2008 were approximately
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2% lower on average than during the same period in 2007 but 12% higher than the fourth quarter of 2007, with prices expected to remain volatile in 2008. The Company implemented several price increases over the past several years on certain of its products in response to the increase in commodity costs, and announced additional price increases in the first quarter of 2008 in response to rising vinyl resin prices. The Company continues to monitor the cost of raw materials and market pricing conditions to assess the ability for additional price increases. There can be no assurance that the Company will be able to maintain the selling price increases already implemented, or achieve any future price increases. In addition, there may be a delay from quarter to quarter between the timing of raw material cost increases and price increases on the Company’s products. At March 29, 2008, the Company had no raw material hedge contracts in place.
Certain Forward-Looking Statements
All statements other than statements of historical facts included in this report regarding the prospects of the industry and the Company’s prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it does not assure that these expectations will prove to be correct. Such statements reflect the current views of the Company’s management with respect to its operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
• | the Company’s operations and results of operations; | ||
• | changes in home building industry, economic conditions, interest rates, foreign currency exchange rates and other conditions; | ||
• | changes in availability of consumer credit, employment trends, levels of consumer confidence and consumer preferences; | ||
• | changes in raw material costs and availability; | ||
• | market acceptance of price increases; | ||
• | changes in national and regional trends in new housing starts and home remodeling; | ||
• | changes in weather conditions; | ||
• | the Company’s ability to comply with certain financial covenants in the credit facility and indenture governing its indebtedness; | ||
• | the Company’s ability to make distributions, payments or loans to its parent companies to allow them to make required payments on their debt; | ||
• | increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products; | ||
• | shifts in market demand; | ||
• | increases in the Company’s indebtedness; | ||
• | increases in costs of environmental compliance; | ||
• | increases in capital expenditure requirements; | ||
• | potential conflict between existing Alside and Gentek distribution channels; | ||
• | the other factors discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 29, 2007 and elsewhere in this report. |
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All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements included in this report. These forward-looking statements speak only as of the date of this report. The Company does not intend to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require it to do so.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company has outstanding borrowings under the term loan portion of its credit facility and may borrow under the revolving credit facility from time to time for general corporate purposes, including working capital and capital expenditures. Interest under the credit facility is based on LIBOR. At March 29, 2008, the Company had borrowings of $61.0 million under the term loan and $29.4 million under the revolver. The effect of a 1.0% increase or decrease in interest rates would increase or decrease total interest expense for the quarter ended March 29, 2008 by approximately $0.2 million.
The Company has $165.0 million of senior subordinated notes due 2012 that bear a fixed interest rate of 9 3/4%. The fair value of the Company’s 9 3/4% notes is sensitive to changes in interest rates. In addition, the fair value is affected by the Company’s overall credit rating, which could be impacted by changes in the Company’s future operating results.
Foreign Currency Exchange Risk
The Company’s revenues are primarily from domestic customers and are realized in U.S. dollars. However, the Company realizes revenues from sales made through Gentek’s Canadian distribution centers in Canadian dollars. The Company’s Canadian manufacturing facilities acquire raw materials and supplies from U.S. vendors, which results in foreign currency transactional gains and losses upon settlement of the obligations. Payment terms among Canadian manufacturing facilities and these vendors are short-term in nature. The Company may, from time to time, enter into foreign exchange forward contracts with maturities of less than three months to reduce its exposure to fluctuations in the Canadian dollar. At March 29, 2008, the Company was a party to foreign exchange forward contracts for Canadian dollars, the value of which was immaterial at March 29, 2008.
Commodity Price Risk
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Effects of Inflation” for a discussion of the market risk related to the Company’s principal raw materials – vinyl resin, aluminum and steel.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
During the fiscal period covered by this report, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal period covered by this report, the disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
During the quarter ended March 29, 2008, the Company completed an implementation of a new accounting software application covering its Gentek subsidiaries which has materially changed its internal control over financial reporting. There have been no other changes to the Company’s internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
a) Exhibits
Exhibit | ||
Number | Description | |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* | This document is being furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASSOCIATED MATERIALS, LLC (Registrant) | ||||
Date: May 13, 2008 | By: | /s/ Thomas N. Chieffe | ||
Thomas N. Chieffe | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
By: | /s/ Cynthia L. Sobe | |||
Cynthia L. Sobe | ||||
Vice President – Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) | ||||
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