EXHIBIT 99.1
May 21, 1999
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,
1999 1998
Net sales......................... $218.3 $171.4
Operating income..................$ 28.0 $ 9.5
Net interest expense (a)..........$ 10.0 $ 10.0
Cash interest expense (a).........$ 6.6 $ 7.0
EBITDA (b)........................$ 20.9 $ 13.7
EBITDA - for the four quarters
ended.........................$ 84.3 $ 70.2
Ratio of EBITDA to interest
expense (c)................... 2.1 x 1.5 x
Ratio of EBITDA to cash interest
expense(c).................... 3.0 x 2.1 x
Leverage Ratios:
Senior debt to EBITDA (d)...... 2.0 x 2.2 x
Total debt to EBITDA (d)....... 5.1 x 5.9 x
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents operating earnings before a non-recurring Ultravent
adjustment, restructuring charges 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 for 1998 are 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, 1999 and 1998,
respectively.
For the quarter ended March 31, 1999 net sales increased $46.9 million to $218.3
million, or 27.4% over 1998. The Warrior Glass and Penn Ventilation
acquisitions contributed $14.9 million to the increase. The remaining sales
growth was primarily due to increased volume of compressor/tool products and
generators. Compressor sales benefited from increased sales to Sears and new
account penetration at The Home Depot, while generator sales were driven by
greater consumer awareness of the need for portable alternative power, as well
as storm activity late in 1998 and early 1999 that depleted inventory levels at
many retailers. Continued strength in the housing market along with wholesaler
consolidation has continued to benefit our Air Distribution business, primarily
residential and light commercial vents and registers as well as duct products.
Additionally, sales in Plumbing Fixtures were slightly ahead of last year,
primarily due to a shift in product mix.
EBITDA and EBITDA margins of $20.9 million and 9.6%, respectively, increased
from $13.7 million and 8.0%, respectively, in 1998 despite lower profitability
in our Plumbing Fixtures business. Excluding the Plumbing Fixtures results,
EBITDA grew to $18.1 million with margins of 10.0%, compared to $9.3 million and
6.9%, respectively, in 1998. This increase was primarily due to the increased
sales volume in Air Power and Air Distribution Products along with increased
plant productivity and significant cost reduction programs, as well as an
increase in sales of higher margin units in each of our Air Power product lines.
Additionally, Air Power Products sold its OEM healthcare pump line which
resulted in a gain of $0.4 million in 1999. The two acquisitions completed in
Air Distribution Products contributed $0.4 million to the increase. EBITDA in
Plumbing Fixtures decreased $1.5 million due to manufacturing inefficiencies,
primarily in the Texas china operations.
As further discussed in the Company's Annual Report on Form 10-K, in 1997 the
Company recorded a pre-tax charge of $32.8 million ($20.0 million, net of income
tax) for an estimate of its share of the cost of a Corrective Action Program in
the United States, resolution of litigation in Canada and the United States
including class action litigation, legal fees and other costs related to an
issue regarding high temperature plastic venting. In April of 1999 the first
full heating season covered by the Corrective Action Program was completed. The
detailed, company specific information regarding the estimated replacement cost
and the number of units replaced resulting from the Company's experience during
the heating season enabled the Company to revise certain assumptions including a
reduction in both the estimated replacement cost and the number of units to be
replaced over the life of the program. The revision of the above assumptions
resulted in a $12 million pre-tax reduction of the previously established
reserve in the first quarter of 1999.
The Company continues to have significant liquidity to fund operations and make
new investments. At March 31, 1999, the Company had $15.8 million of
unrestricted cash and $121.0 million of borrowing availability under its
revolving credit facility.
As discussed in the Company's Annual Report of Form 10-K, in December 1998, the
Company sold to its stockholders an option to purchase Mansfield Plumbing
Products, Inc., ("Mansfield") its Plumbing Fixtures segment. We are in the
process of securing separate financing for Mansfield that would facilitate the
exercise of the option. Net cash proceeds from the exercise of the option will
be approximately $54 million, which would be used to reduce senior indebtedness.
Additionally, the Company would receive a $20 million Subordinated Note and
enter into a management services agreement which provides Falcon with a fee of
approximately $2 million.
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, acquisition candidates and strategic transactions
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.
We thank you for your continued support and confidence.
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.