EXHIBIT 99.1
May 15, 1998
Dear Falcon Building Products, Inc. Bondholders:
A copy of the Falcon Building Products, Inc (the "Company") Form 10-Q is
enclosed. A summary of the unaudited financial results follows (dollars in
millions):
QUARTER ENDED MARCH 31,
1998 1997(e)
Net sales................................. $171.4 $160.2
Operating income.......................... 9.5 12.8
Net interest expense (a).................. 10.0 2.6
Cash interest expense (a)................. 7.0 2.6
EBITDA (b)................................ 13.7 17.5
EBITDA _ for the four quarters ended...... 70.2 -
Ratio of EBITDA to interest expense (c)... 1.5 x -
Ratio of EBITDA to cash interest expense(c) 2.1 x -
Leverage Ratios:
Senior debt to EBITDA (d).............. 2.2 x -
Total debt to EBITDA (d)............... 5.9 x -
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents operating earnings before non-recurring recapitalization
and Ultravent expenses, non-cash inventory reserves, and depreciation and
amortization expense. EBITDA is presented as management believes it provides
useful information regarding a company's ability to incur and/or service
debt. However, EBITDA should not be considered in isolation or as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity.
(c) Ratios calculated for the nine months ended March 31, 1998 (the period
following the recapitalization).
(d) Senior debt and total debt is net of unencumbered cash. Ratios are
calculated using EBITDA for the four quarters ended March 31, 1998.
(e) Ratios have not been provided for the 1997 period due to non-comparability
of information due to the Merger and recapitalization financing in June 1997.
For the quarter ended March 31, 1998, net sales increased $11.2 million, or 7%
over the first quarter of 1997. Severe weather and storm activity in coastal
areas positively impacted generator sales in 1998 with volume up $7.4 million
over the first quarter of 1997. However, the excessively wet weather in the
western United States negatively impacted order and shipping volumes in Plumbing
Fixtures, as net sales for the first quarter of 1998 were $2.2 million below the
level achieved in 1997. Additionally, the Company benefited from strong demand
for its residential and light commercial vents and registers as well as strong
demand in heavy commercial products as Air Distribution products' more central
U.S. market strength was not significantly impacted by coastal weather patterns.
Sales of the Company's compressor products for the first quarter of 1998
increased $7.1 million over 1997 as redesigned, more price competitive units
experienced strong demand, particularly through Sears. Pressure washer volumes
were down approximately $3.8 million in 1998 compared to the first quarter of
1997, as the implementation of the Company's "no-returns" policy resulted in a
smaller customer base for this product line in 1998.
EBITDA and EBITDA margins of $13.7 million and 8.0%, respectively, for the first
quarter of 1998 have decreased from the first quarter of 1997 levels of $17.5
million and 10.9%, respectively. In Air Power Products, the unfavorable
comparison to 1997 is the result of: a) lower margins as a result of
implementing a "no returns" policy for pressure washers in 1998, and b) higher
margins reflected on pressure washer sales in the first two quarters of 1997,
which were based upon anticipated return rates and related costs that ultimately
developed to be significantly higher than those originally assumed. This
subsequent adverse development in pressure washer returns resulted in the
recognition of significant charges in the fourth quarter of 1997. First quarter
results continue to be affected by manufacturing inefficiencies in Plumbing
Fixtures. The Company has instituted cost controls, revised process flows,
implemented management changes and committed additional capital for cost
reduction programs in order to improve its manufacturing costs. While the
Company expects long term benefits from these actions, it is likely that the
results for the second quarter will continue to be adversely impacted until
these improvements are fully integrated into the manufacturing process.
Additionally, pricing within the Company's flexible duct product line
contributed to the reduced operating profit in the first quarter of 1998 versus
1997. Pricing for this product line came under pressure in the second half of
1997, with pricing in 1998 remaining consistent with the fourth quarter of 1997.
The consolidated statement of income reflects an increased level of interest
expense for the current quarter over 1997 due to the merger financing entered
into in June 1997.
The Company continues to have significant liquidity to fund operations and make
new investments. At March 31, 1998, the Company had $19.5 million of
unrestricted cash and $120.0 million of borrowing availability under its
revolving credit facility.
Falcon's business strategy continues to focus on strengthening the Company's
market leadership positions through domestic and international market expansion,
new products and product line extensions, expansion of our distribution network,
and strategic and complementary acquisitions. We continue to work on and
evaluate a number of projects and acquisition candidates to expand our product
offerings, customers and geographic base, although we intend to remain
disciplined in our acquisition approach in the current highly competitive
environment.
In March 1998 the Company filed a Form 15 with the Securities and Exchange
Commission ("SEC") that formally terminated its obligation to file reports under
the equity securities requirements. The Company will continue to file reports
with the SEC, however, pursuant to provisions in its indentures.
We thank you for your continued support and confidence.
/s/ William K. Hall
William K. Hall
Chairman, President & Chief
Executive Officer
Forward-looking statements in this letter are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Act of 1995. Investors are
cautioned that actual results may differ substantially from such forward-looking
statements. Forward-looking statements involve risks and uncertainties,
including but not limited to, changes in general economic conditions,
fluctuations in interest rates, increases in raw materials and labor costs,
levels of competition and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission.