FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number: 1-13419
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
Indicate by check mark 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
20,048,275 shares of Common Stock as of April 18, 1997
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
PART I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1.3 $ 3.9
Accounts receivable, net -- --
Inventories, net 85.7 76.2
Other current assets 47.2 15.6
Total current assets 134.2 95.7
Property, plant and equipment, net 96.8 97.4
Goodwill 58.5 59.1
Other assets 9.1 9.5
Total assets $ 298.6 $ 261.7
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 15.2 $ 15.2
Accounts payable 49.7 50.1
Accrued liabilities 30.4 30.9
Total current liabilities 95.3 96.2
Long-term debt 140.3 109.1
Accrued employee benefit obligations 9.0 8.7
Other long-term liabilities 20.0 19.8
Total liabilities 264.6 233.8
Stockholders' equity:
Preferred stock, par value $1.00 per
share, 10,000,000 shares authorized,
none issued and outstanding -- --
Class A stock, par value $.01 per share,
30,000,000 shares authorized,
20,048,275 issued and outstanding at
March 31, 1997, 20,070,500 issued and
outstanding at December 31, 1996 0.2 0.2
Additional paid-in capital 18.0 18.0
Retained earnings 18.9 12.8
Pension liability adjustment (0.5) (0.5)
Unearned compensation (0.3) (0.4)
Notes receivable arising from stock
purchase plan (2.0) (2.2)
Common stock in treasury, at cost
(22,225 shares in 1997) (0.3) --
Total stockholders' equity 34.0 27.9
Total liabilities and stockholders' equity $ 298.6 $ 261.7
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED MARCH 31,
1997 1996
Net sales $ 160.2 $ 144.4
Cost of sales 133.4 119.1
Gross earnings 26.8 25.3
Selling and administrative expenses 13.1 12.8
Securitization expense 0.9 0.9
Operating income 12.8 11.6
Net interest expense 2.8 2.8
Income before income taxes 10.0 8.8
Provision for income taxes 3.9 3.4
Net income $ 6.1 $ 5.4
Net income per common share $ 0.31 $ 0.27
Average shares outstanding 20,048,275 20,070,500
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Quarter Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6.1 $ 5.4
Adjustments to reconcile net income
to net cash from operations:
Depreciation 3.4 3.4
Amortization 0.7 0.6
Cash effect of changes in working
capital, accrued employee benefit obligations,
and other long-term liabilities (41.0) (7.5)
Net cash (used in) from operating activities (30.8) 1.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.0) (4.5)
Purchase of business -- (18.8)
Other 0.2 1.1
Net cash flow used in investing activities (2.8) (22.2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility 31.2 21.4
Other (0.2) --
Net cash flow from financing activities 31.0 21.4
CHANGE IN CASH AND CASH EQUIVALENTS (2.6) 1.1
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3.9 1.1
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1.3 $ 2.2
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial
Statements of Falcon Building Products, Inc. (the
"Company"), a subsidiary of Equity Holdings Limited, an
Illinois limited partnership ("EHL"), have been prepared in
accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for a complete set
of financial statements. In the opinion of management, all
adjustments considered necessary, consisting only of normal
recurring adjustments, are included for fair presentation.
Operating results for the quarter ended March 31, 1997 are
not necessarily indicative of results that may be expected
for the full year. The unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the
audited Consolidated Financial Statements of the Company for
the year ended December 31, 1996.
(2) INVENTORIES
Inventory consists of the following (in millions):
March 31, December 31,
1997 1996
Raw materials and supplies $ 31.2 $ 30.9
Work in process 13.0 12.7
Finished goods 41.5 32.6
$ 85.7 $ 76.2
(3) LONG-TERM DEBT
Long-term debt consists of the following (in millions):
March 31, December 31,
1997 1996
Bank Credit Facility
Revolver $ 74.0 $ 39.0
Term 78.7 82.5
Total 152.7 121.5
Other 2.8 2.8
Less: Current Portion (15.2) (15.2)
Total long-term $ 140.3 $ 109.1
At March 31, 1997, the Company was in compliance with all
covenants of the Bank Credit Facility. Availability under
the revolving portion of this facility was $63.5 million at
March 31, 1997.
(4) COMMITMENT AND CONTINGENCIES
In May 1994, Underwriters' Laboratories of Canada ("ULC")
suspended its recognition of high temperature plastic venting
("HTPV") for gas appliances systems, including the Ultravent
product distributed by the Company. This action resulted from
reports of problems with high temperature plastic venting,
including improper installation, cracking, inadequate joint
adhesion, and related safety hazards, including potential for
carbon monoxide emission. In June 1994, as a result of the ULC
action, the Ontario Ministry of Consumer and Commercial Relations
("MCCR") suspended sales of HTPV in the Province of Ontario.
Other provinces of Canada have taken similar action. Pursuant to
an MCCR order, appliance systems in Ontario with HTPV have been
corrected. Most gas appliance manufacturers in Canada and the
United States no longer certify HTPV for use with their products.
As a result, the Company has discontinued sales of its high
temperature plastic vent product.
The Company is a defendant in a suit in Canada that has been
filed against 24 entities representing heating appliance
manufacturers, plastic vent manufacturers and distributors,
public utilities and listing agencies brought by the Ontario New
Home Warranty Program, which is responsible for the cost of
correcting appliances equipped with HTPV in new home construction
in Ontario. This suit seeks damages of Cdn $125 million from all
of the defendants. The Company is also a defendant in two cases
brought by appliance manufacturers. In a lawsuit filed by
Goodman Manufacturing Company ("Goodman") in Texas, the Company
has been sued along with two other defendants for reimbursement
of costs associated with its corrective action program. In the
other lawsuit, the Company and two other defendants have been
sued in Massachusetts by five furnace manufacturers which are
seeking damages and declaratory relief for costs expected to be
incurred as a result of corrective action programs to be
conducted in connection with furnace systems vented with HTPV.
The Company has filed and served its own legal action in Michigan
against Goodman, the five furnace manufacturers that have filed
suit against the Company in Massachusetts, and all other
identifiable appliance manufacturers that certified HTPV for use
with their appliance systems. In that suit, the Company is
seeking damages for costs it has incurred and declaratory relief
for costs that may be incurred in the future as a result of the
conduct of appliance manufacturers that certified their products
for use with HTPV. The Company has also been named in a class
action lawsuit which has been filed in Tennessee, regarding high
temperature plastic venting. In that case, the Company is a
defendant along with its principal competitor in the high
temperature plastic vent business, a resin supplier, and a
furnace manufacturer that has been joined as a representative of
a defendant class of all appliance manufacturers. The plaintiffs
seek damages on behalf of all persons in the United States with
appliance systems that are vented with high temperature plastic
vent manufactured from the Ultem plastic resin.
The Company is engaged in ongoing discussions with the
Consumer Product Safety Commission ("CPSC") which has been
advised of the ULC action and the actions taken by the MCCR. The
CPSC continues to investigate HTPV and has met with all of the
manufacturers of high temperature plastic vents, various
appliance manufacturers and other entities with technical
expertise. CPSC concerns focus on the heating appliance system,
the plastic resin used to manufacture the venting, and improper
installation. While no definitive action has been decided upon,
the Company is aware that the CPSC is considering a corrective
action program involving plastic venting, and it is probable that
in the near term the CPSC will mandate a corrective program which
would impact heating appliance manufacturers, plastic resin
manufacturers, and plastic venting manufacturers, including the
Company. Several appliance manufacturers have announced their
intention to take corrective action regarding gas appliance
systems equipped with plastic vent product. Company sales of
Ultravent products in the United States and Canada in 1995 and
1996 were minimal.
While it is impossible at this time to give a firm estimate
of the ultimate cost to the Company, management currently
believes that the after-tax cost to the Company of resolving the
Ultravent matter would range from a non-material amount to $20.0
million, after considering reimbursements and insurance
recoveries. With respect to this matter, the Company has filed a
lawsuit against its insurance carriers. Although no assurances
can be given, the Company believes at this time that the ultimate
resolution of these matters will not have a material effect on
the Company's financial condition, but may have a material effect
on future results of operations in the period recognized.
(5) OTHER
During the quarter, the Company entered into a merger
agreement with an affiliate of Investcorp SA ("Investcorp").
Under the merger agreement, each current shareholder of the Company
will have the right either to retain his/her shares of the Company,
subject to proration, or receive $17.75 per share in cash.
The agreement was structured such that upon completion of the
merger, Investcorp will own 88% of the equity of the Company
while existing shareholders will own 12%. The merger is subject
to certain regulatory approvals as well as approval by a majority of
Falcon's shareholders at a special meeting to be held as soon as
practicable.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of
the Company and its subsidiaries for the quarter ended March
31, 1997 as compared to the quarter ended March 31, 1996 and
should be read in conjunction with the Condensed
Consolidated Financial Statements included herein and the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The following table reflects the Company's historical
results of operations.
QUARTER ENDED MARCH 31, 1997 1996
(dollars in millions) % of % of
Amount Sales Amount Sales
Net sales $ 160.2 100.0% $ 144. 4 100.0%
Gross earnings 26.8 16.7 25.3 17.5
Operating income 12.8 8.0 11.6 8.0
Income before income taxes 10.0 6.2 8.8 6.1
Net income 6.1 3.8 5.4 3.7
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH
31, 1996
Sales for the quarter of $160.2 million were $15.8 million
or 10.9% higher than 1996. This increase was primarily due
to significant sales growth in power washers of $11.3
million, as well as increased volume in bathroom fixtures
and air power products totaling $4.6 million. These
increases were partially offset by a decline in sales of air
distribution products of $0.3 million.
Gross earnings of $26.8 million were $1.5 million or 0.6%
higher than the comparable 1996 period. This increase was
primarily due to increased volume, as well as minor pricing
gains. Gross margin declined from 17.5% in 1996 to 16.7% in
1997 as a result of lower margins realized on power washers.
Operating income increased from $11.6 million in 1996 to
$12.8 million in 1997. This increase was primarily due to
increased sales volume and decreased corporate expenses,
partially offset by increased operating costs at the
businesses.
Income before income taxes of $10.0 million was $1.2 million
higher than the comparable 1996 period due to the factors
mentioned above.
The effective tax rate was 38.4% in both periods. Net
income for the quarter was $6.1 million, an increase of $0.7
from the $5.4 million recorded in 1996 due to the
aforementioned reasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it will meet its working capital
and capital expenditure needs in 1997 through a combination
of operating cash flow, availability under its Bank Credit
Facility and through funds available through the accounts
receivable securitization program.
Net cash flow used in operating activities was $30.8 million
for the quarter ended March 31, 1997, compared to a source
of $1.9 million for the comparable 1996 period. The
decrease of $32.7 million was primarily due to the effect of
the stand-alone Falcon securitization program that was
entered into in May 1996. In addition, operating cash flow
decreased $3.9 million, due to an increase in working
capital requirements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None
b) Reports on Form 8-K
Current Report on Form 8-K dated March 20, 1997 related
to the execution of a merger agreement between Falcon
and an affiliate of Investcorp SA.
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.
FALCON BUILDING PRODUCTS, INC.
By: /s/ Sam A. Cottone
------------------
Sam A. Cottone
Senior Vice President and
Chief Financial Officer
Dated: April 30, 1997