(NY) 08218/001/10Q/EDGAR/may0901_10q.txt
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (D) OF THE SECURITIES ACT OF 1934
For the quarterly period ended March 31, 2001
--------------------------------
Commission File Number: 333-76683
Formica Corporation
(Exact name of registrant as specified in its charter)
Delaware 34-1046753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
David T. Schneider
Vice President and Chief Financial Officer
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Indicate by checkmark 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
--- ---
Shares Outstanding as
Title of March 31, 2001
----- ----------------------
Common Stock, $.01 par value per share 100 Shares Outstanding
FORMICA CORPORATION
Index
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 3
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Part I. Financial Information
Item 1: Financial Statements
FORMICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
2001 2000
----------- -----------
ASSETS (Unaudited) (Audited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 4.6 $ 3.4
Accounts receivable, net 118.6 112.2
Inventories 164.1 157.2
Prepaid expenses and other current assets 20.2 19.1
Deferred income taxes 23.5 24.0
---------- -----------
Total current assets 331.0 315.9
PROPERTY, PLANT AND EQUIPMENT, net 357.4 370.3
OTHER ASSETS:
Intangible assets, net 160.2 168.6
Other non-current assets 25.3 24.6
---------- -----------
Total assets $ 873.9 $ 879.4
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 34.3 $ 29.7
Accounts payable 63.6 68.3
Accrued expenses and other current liabilities 65.6 79.5
---------- ------------
Total current liabilities 163.5 177.5
LONG-TERM DEBT 477.9 440.9
DEFERRED INCOME TAXES 124.1 130.0
OTHER LIABILITIES 37.9 39.7
---------- ------------
Total liabilities 803.4 788.1
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - par value $.01 per share -
authorized 1,000 shares, none issued or
outstanding - -
Common stock - par value $.01 per share -
authorized 2,000 shares, issued and
outstanding 100 shares 0.1 0.1
Additional paid-in capital 217.0 217.0
Accumulated deficit (99.9) (91.9)
Accumulated other comprehensive loss (46.7) (33.9)
----------- -----------
Total stockholders' equity 70.5 91.3
----------- -----------
Total liabilities and stockholders' equity $ 873.9 $ 879.4
=========== ============
See notes to the condensed consolidated financial statements.
Page 1
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions)
Three Months Ended
March 31,
----------------------
2001 2000
-------- --------
NET SALES $194.1 $146.3
COST OF PRODUCTS SOLD 147.1 106.7
INVENTORY MARKDOWN FROM RESTRUCTURING --- 1.9
------- ------
Gross profit 47.0 37.7
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 46.6 39.7
PROVISION FOR RESTRUCTURING 0.2 4.1
COST OF TERMINATED ACQUISITIONS --- 0.4
------- ------
Operating income (loss) 0.2 (6.5)
INTEREST EXPENSE (13.1) (10.0)
OTHER INCOME 2.1 0.6
------- ------
LOSS BEFORE PROVISION FOR INCOME TAXES (10.8) (15.9)
INCOME TAX BENEFIT (PROVISION) 2.8 (0.9)
-------- -------
Net loss $ (8.0) $(16.8)
======== ======
See notes to the condensed consolidated financial statements.
Page 2
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Three Months Ended
March 31,
------------------------
2001 2000
-------- --------
CASH USED IN OPERATIONS $ (36.3) $ (3.6)
INVESTING ACTIVITIES:
Capital expenditures and investments, net (6.4) (2.8)
------- --------
Net cash used in investing activities (6.4) (2.8)
FINANCING ACTIVITIES:
Net borrowings under lines of credit 47.4 8.4
Repayments of debt (3.2) (1.7)
------- --------
Net cash provided by financing activities 44.2 6.7
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (0.3) (0.8)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1.2 (0.5)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 3.4 7.8
------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 4.6 $ 7.3
======= ========
See notes to the condensed consolidated financial statements.
Page 3
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the interim financial statements reflect all
material adjustments of a normal recurring nature considered necessary
for a fair presentation of the financial position, results of operations
and cash flow. In addition, management is required to make estimates and
assumptions that affect the amounts reported and related disclosures.
Estimates, by their nature, are based on judgments and available
information. Operating results reported for the interim periods are not
necessarily indicative of the results that may be expected for the entire
year and any other subsequent interim periods.
Earnings per share data are not presented because the common stock of
Formica Corporation ("Formica" or the "Company") is not publicly traded
and the Company is a wholly-owned subsidiary of FM Holdings, Inc.
("Holdings"). Holdings is a wholly-owned subsidiary of Laminates
Acquisition Co. ("Laminates"), thereby Laminates is the ultimate parent
of Formica.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation. For further information,
refer to the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 2000 included in the Company's
Form 10-K filed with the Securities and Exchange Commission (the "SEC").
(2) ACQUISITION:
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired
Perstorp Surface Materials AB ("PSM") from Perstorp AB (Sweden) for
approximately $177.5 million (including approximately $2 million of
transaction costs). DSH was a wholly-owned subsidiary of Holdings (the
parent company of Formica) whose sole asset was its investment in PSM. On
May 26, 2000, Holdings contributed all of the stock of DSH to Formica.
The acquisition was accounted for on an as-if pooling basis because it
was a combination of entities under common control. Accordingly,
Formica's results of operations reflect the acquisition and related
purchase accounting by DSH on March 31, 2000 for all periods beginning
April 1, 2000 and thereafter.
The following unaudited pro forma consolidated results of operations for
the three months ended March 31, 2001 and 2000 assume the acquisition had
occurred at the beginning of 2000 (in millions):
Three months ended
March 31, March 31,
2001 2000
------------ ------------
Net sales $ 194.1 $ 201.4
Net loss (8.0) (19.9)
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of 2000,
or of future results.
(3) INVENTORIES:
Major classes of inventories are as follows:
March 31, December 31,
2001 2000
--------- ------------
(in millions)
Finished goods $ 89.7 $ 88.2
Work-in-process 16.1 14.4
Raw materials 58.3 54.6
------- -------
Total 164.1 157.2
======= =======
Page 4
(4) LONG-TERM DEBT:
As of March 31, 2001, Formica had $512.2 million of indebtedness
outstanding compared to $470.6 million as of December 31, 2000. The
increase of $41.6 million was primarily the result of additional
borrowings under the Company's revolving credit facility during the three
months ended March 31, 2001. The Company's credit facility contains
financial covenants requiring the Company to maintain minimum EBITDA,
minimum coverage of interest expense and fixed charges and a maximum
leverage ratio. The Company was in compliance with the financial
covenants as of March 31, 2001. The Company's continued compliance with
debt covenants is dependent upon future economic performance which may be
affected by economic, financial, competitive, legislative, regulatory and
other factors beyond the Company's control.
(5) RESTRUCTURING:
Prior to May 1, 1998, the management of the Company formulated a plan to
restructure certain operations and provided a restructuring provision of
$6.6 million included as part of its purchase accounting. The remaining
balance of this restructuring provision related to severance payments at
March 31, 2001 is $0.2 million and will be substantially completed in
2001.
On March 1, 2000, the Company's management committed to a formal plan to
restructure certain operating activities in North America and provided
for a restructuring provision of $6.0 million of which approximately $0.6
million was remaining at December 31, 2000, consisting of $0.3 million of
facility closing costs and $0.3 million of severance and severance
related items. The Company's management evaluated the restructuring
reserve balance at March 31, 2001 and determined that approximately $0.2
million was necessary for the remaining facility closing costs in North
America. Therefore, approximately $0.3 million of the reserve balance was
reversed and included in income as an offset to the original provision
for restructuring during the three months ended March 31, 2001. The
change in estimate was attributable to lower than anticipated
severance-related costs. During the three months ended March 31, 2001,
the Company utilized $0.1 million of its restructuring reserve for
facility closing costs. In addition, the Company incurred an additional
$0.2 million of restructuring-related expenses for the North America
operations during the three months ended March 31, 2001. Under the
current timetable, the Company projects the restructuring plan will be
completed by mid-year 2001.
On June 1, 2000, the Company's management committed to a formal plan to
restructure certain of its operations within Europe and provided for a
restructuring provision of $1.5 million of which approximately $1.0
million was remaining at December 31, 2000, consisting of $0.6 million of
severance and severance- related items and $0.4 million of facility
closure costs. During the three months ended March 31, 2001, the Company
utilized $0.4 million of its restructuring reserve including translation
effects for severance and severance related items and facility closure
costs. The remaining reserve balance at March 31, 2001 was $0.6 million
consisting primarily of severance-related items and facility closure
costs. In addition, the Company incurred an additional $0.3 million of
restructuring-related expenses for the European distribution operations
as a result of the integration of the PSM operations during the three
months March 31, 2001. Under the current timetable, the Company projects
that the restructuring plan will be substantially completed by mid-year
2001.
As a result of the PSM acquisition, management committed to a formal plan
to restructure certain operating activities primarily in Europe with the
purpose of formulating a structure for the combined organization. Balance
sheet reserves of $12.7 million for organizational restructuring were
established as part of purchase accounting of which approximately $7.8
million was remaining at December 31, 2000, consisting primarily of
severance related items. During the three months ended March 31, 2001,
the Company utilized $1.2 million of the reserve including translation
effects primarily on severance-related items. The remaining balance of
the restructuring provision was $6.6 million at March 31, 2001 consisting
primarily of severance-related items. The restructuring plan is expected
to be substantially completed by the end of 2001.
(6) CONTINGENT MATTERS:
The Company is involved in various proceedings relating to environmental
matters. It is the Company's policy to accrue liabilities for remedial
investigations and clean-up activities when it is probable that such
liabilities have been incurred and when they can be reasonably estimated.
In the ordinary course of business, the Company has been or is the
subject of or party to various pending litigation and claims. Currently,
the
Page 5
Company has been named as a potentially responsible party at several
Superfund sites and has reserved approximately $3.8 million at March 31,
2001 and December 31, 2000, respectively, for these matters to recognize
a reasonable estimate of the probable liability. While it is not possible
to predict with certainty the outcome of any potential litigation or
claims, the Company believes any known contingencies, individually or in
the aggregate, will not have a material adverse impact on its financial
position or results of operations. However, depending on the amount and
timing of an unfavorable resolution of this contingency, it is possible
that the Company's future cash flows could be materially affected in a
particular quarter.
Formica's operations are subject to federal, state, local and foreign
environmental laws and regulations governing both the environment and the
work place. The Company believes that it is currently in substantial
compliance with such laws and the regulations promulgated thereunder.
On April 5, 1999, the Company received a subpoena covering the period
from January 1, 1994 until April 1, 1999 from a federal grand jury in
connection with an investigation into possible antitrust violations in
the United States market for high-pressure laminate. The Company has
produced documents and provided other information in response to the
subpoena, and a number of present or former Formica employees have
appeared for testimony before the grand jury or have been interviewed by
the Staff of the Antitrust Division of the U.S. Department of Justice in
connection with the investigation. On May 1, 2001, the Company was
informed by the Staff of the Antitrust Division of the U.S. Department of
Justice that the investigation had been closed.
Manufacturers of high-pressure laminate ("HPL"), including Formica
Corporation, have been named as defendants in purported class action
complaints filed in federal and certain state courts. The complaints,
which all make similar allegations, allege that HPL manufacturers in the
United States engaged in a contract, combination or conspiracy in
restraint of trade in violation of state and federal antitrust laws and
seek damages of an unspecified amount. The actions remain in their early
stages. Formica Corporation intends to defend vigorously against the
allegations of the complaints. The Company is unable to determine at this
time if this matter will have any effect on its financial position,
results of operations or cash flows.
Formica is involved in pending litigation in the usual course of
business. In the opinion of management, such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Formica continually evaluates its estimated
legal liabilities as a matter of policy. The Company's estimated range of
liability is based on known claims. There can be no assurances that
Formica will not become involved in future proceedings, litigation or
investigations, that such liabilities will not be material or that
indemnification pursuant to certain indemnification rights will be
available.
(7) COMPREHENSIVE LOSS:
Total comprehensive loss was $20.8 million and $18.8 million for the
three months ended March 31, 2001 and 2000, respectively. The difference
between comprehensive loss and net loss results from foreign currency
translation adjustments.
(8) RELATED PARTY TRANSACTIONS:
In order to fund normal working capital requirements, the Company has
entered into certain borrowing arrangements with Laminates. These
arrangements are short-term in nature and generally bear no interest. At
March 31, 2001 and December 31, 2000, there was approximately $0.9
million outstanding under these arrangements.
DLJ Capital Funding, Inc., an affiliate of DLJ Merchant Banking Partners
II L.P. and its affiliates (DLJ Merchant Banking), has and will receive
customary fees and reimbursement of expenses in connection with the
arrangement and syndication of the Credit Facility and as a lender
thereunder.
Formica and its subsidiaries may from time to time enter into financial
advisory or other investment banking relationships with Credit Suisse
First Boston Corporation (an affiliate of DLJ Merchant Banking) or one of
its affiliates whereby Credit Suisse First Boston Corporation or its
affiliates will receive customary fees and will be entitled to
reimbursement for all related reasonable disbursements and out-of-pocket
expenses. Formica expects that any arrangement will include provisions
for the indemnification of Credit Suisse First Boston Corporation against
a variety of liabilities, including liabilities under the federal
securities laws.
Page 6
(9) CHANGES IN ACCOUNTING ESTIMATES:
Effective January 1, 2001, the Company made certain changes in accounting
estimates relating to its depreciable asset lives which resulted in an
increase in depreciation expense charges totaling approximately $0.5
million for the three-month period ended March 31, 2001. The annual
impact of this change for 2001 is expected to result in increased
depreciation expenses of approximately $1.8 million. The change in
accounting estimates resulted from a review by management of certain
assets' depreciable lives.
(10) SEGMENT INFORMATION:
The Company is principally engaged in a single line of business: the
design, manufacture and distribution of decorative surfacing products.
Substantially all revenues result from the sale of decorative surfaces
and related products through domestic and international distributors and
direct accounts. The Company's operations are managed on a geographic
basis and, therefore, reportable segments are based on geographic areas.
The Company's market presence in Europe, the Americas and Asia was
increased as a result of the PSM acquisition. The Company measures
segment results as operating income (loss), which is defined as income
(loss) before interest expense, other income (expense) and income taxes.
Depreciation and amortization expense is included in the measure of
segment results. Segment revenues are defined as net sales to external
customers of each segment. All intercompany sales and expenses have been
eliminated in determining segment revenues and segment profit (loss).
Three Months Ended
March 31,
------------------------------
2001 2000
--------- ---------
(in millions)
Segment revenues:
United States $ 78.5 $ 82.8
Americas - Other 22.2 11.7
Europe 73.3 35.0
Asia 20.1 16.8
--------- ---------
Total $ 194.1 $ 146.3
========= =========
Segment profit (loss):
Americas $ (4.0) $ (11.1)
Europe 1.8 2.7
Asia 2.4 1.9
--------- ---------
Total $ 0.2 $ (6.5)
========= =========
Depreciation and amortization
included in segment profit (loss):
Americas $ 9.6 $ 8.9
Europe 4.9 2.2
Asia 1.2 1.0
--------- ---------
Total $ 15.7 $ 12.1
========= =========
A reconciliation of total segment
profit (loss) to loss before
provision for income taxes is as follows:
Segment profit (loss) $ 0.2 $ (6.5)
Interest expense (13.1) (10.0)
Other income 2.1 0.6
--------- ----------
Loss before provision for
income taxes $ (10.8) $ (15.9)
========= =========
Page 7
(10) SEGMENT INFORMATION continued:
March 31, December 31,
2001 2000
--------- ------------
Total assets:
United States $ 419.6 $ 418.7
Americas - Other 74.8 76.6
Europe 296.0 301.3
Asia 83.5 82.8
--------- ---------
Total $ 873.9 $ 879.4
========= =========
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is engaged in the design, manufacture and distribution of
decorative surfacing products. Formica was founded in 1913 and created
the world's first decorative laminate in 1927. In May 1985, a group
led by management and Shearson Lehman purchased Formica from American
Cyanamid Company. In 1989, Formica was sold to FM Acquisition
Corporation in a buyout led by Dillon, Read & Company. In January
1995, BTR Nylex Ltd., an Australian company and a subsidiary of BTR
plc, acquired Formica. In May 1998, Laminates Acquisition Co.
("Laminates") acquired Formica.
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired
Perstorp Surface Materials AB ("PSM") from Perstorp AB (Sweden). DSH
was a wholly-owned subsidiary of Holdings (the parent company of
Formica) whose sole asset was its investment in PSM. On May 26, 2000,
Holdings contributed all of the stock of DSH to Formica. Accordingly,
Formica's results of operations reflect the acquisition and related
purchase accounting by DSH on March 31, 2000 for all periods beginning
April 1, 2000 and thereafter.
Results of Operations
The Company's net loss for the three months ended March 31, 2001 was
$8.0 million compared to a net loss of $16.8 million for the three
months ended March 31, 2000. Earnings before interest expense (not
net of interest income), income tax expense, and depreciation and
amortization expenses (EBITDA) for 2001 was $18.0 million compared to
$6.2 million for 2000, an increase of $11.8 million. Excluding the
2001 charges of $0.2 million for the costs of restructuring and $0.3
million for acquisition related expenses as well as the 2000 charges
of $6.0 million for the costs of restructuring and $0.4 million for
the cost of a terminated acquisition, Adjusted EBITDA therefore was
$18.5 million in 2001 compared to $12.6 million in 2000, an increase
of $5.9 million or 46.8%.
First Quarter of 2001 Compared to First Quarter of 2000
Net Sales. Net sales for 2001 were $194.1 million, compared
to net sales of $146.3 million for 2000, an increase of $47.8 million,
or 32.7%. This increase is primarily due to the inclusion of PSM sales
in 2001 partially offset by lower volumes and the impact of unfavorable
foreign exchange translation. Net sales in the Americas increased to
$100.7 million in 2001 from $94.5 million in 2000, an increase of $6.2
million, or 6.6%. This increase is primarily due to the inclusion of
PSM sales and higher selling prices offset by lower HPL and flooring
volumes from the slowdown in the economy and customer destocking
activity. Net sales in Europe increased $38.3 million to $73.3 million
in 2001 from $35.0 million in 2000, primarily due to the inclusion of
PSM offset by lower HPL volumes and the effects of foreign exchange
translations. Net sales in Asia increased to $20.1 million in 2001
from $16.8 million in 2000, an increase of $3.3 million, or 19.6%,
resulting primarily from the inclusion of PSM sales offset by the
impact of unfavorable foreign exchange translation.
Gross Profit. Gross profit for 2001 was $47.0 million,
compared to gross profit of $37.7 million for 2000, an increase of
$9.3 million, or 24.7%. Gross profit as a percentage of net sales in
2001 decreased to 24.2% from 25.8% in 2000. Excluding the $1.9 million
charge in the 2000 period related to the markdown in inventory from
the restructuring of the North America operations, gross profit
increased $7.4 million or 18.7%.
Gross Profit in the Americas increased to $24.3 million in
2001 from $23.3 million in 2000, or 4.3%. Excluding the $1.9 million
inventory markdown in 2000, gross profit in the Americas decreased
$0.9 million. Gross profit as a percentage of net sales for the
Americas decreased to 24.1% in 2001 from 26.7% in 2000, principally as
a result of higher costs for raw materials and labor and increased
transportation and energy costs partially offset by higher selling
prices. Gross profit in Europe and Asia increased $8.3 million to
$22.7 million in 2001 from $14.4 million in 2000, primarily due to the
inclusion of the PSM business. As a percentage of net sales, gross
profit in Europe and Asia decreased to 24.3% in 2001 from 27.8% in
2000, principally as a result of higher raw material, transportation
and energy costs and the effects of foreign exchange translation.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses for 2001 were $46.6 million compared to
$39.7 million for 2000, an increase of $6.9 million. Selling, general
and administrative expenses as a percentage of net sales decreased to
24.0% in 2001 from 27.1% in 2000. Excluding the $0.3 million of
acquisition related costs, selling, general and administrative
expenses were $46.3 million in the 2001 period compared to $39.7
million in 2000. The increase was primarily related to the inclusion
of PSM in 2001.
Page 9
Restructuring Charge. (See Note 5 to the Condensed Consolidated
Financial Statements) The provision for restructuring for 2001
totaled $0.2 million compared to $4.1 million in 2000. During the
quarter ended March 31, 2001, the Company incurred $0.2 million of
restructuring-related expenses for the North America operations
offset by approximately $0.3 million relating to the reversal of the
North America restructuring reserve balance accruals due to lower
than anticipated costs. In addition, the Company incurred in 2001 an
additional $0.3 million of restructuring-related expenses for the
European distribution operations. In 2000, the Company provided for a
restructuring provision of $6.0 million, which included $1.9 million
for the markdown of inventory discussed above for the North America
operations.
Cost of Terminated Acquisition. During the quarter ended
March 31, 2000, the Company incurred a $0.4 million charge relating to
expenses from the cost of a terminated acquisition, primarily for
legal and other professional fees.
Operating Income (Loss). The operating income for 2001 was
$0.2 million compared to an operating loss of $6.5 million for 2000.
Included in the 2001 period are restructuring charges of $0.2 million
and $0.3 million of acquisition related costs. The 2000 period
includes a restructuring charge of $6.0 million and the cost of a
terminated acquisition of $0.4 million. After taking into account the
2001 and 2000 charges, operating income was $0.7 million in 2001
compared to an operating loss of $0.1 million in 2000, for the reasons
stated above.
EBITDA. EBITDA increased to $18.0 million in 2001 compared to
$6.2 million in 2000. After taking into account the 2001 period
restructuring and acquisition related charges and the 2000 period
restructuring and the cost of a terminated acquisition (described
above), EBITDA, as adjusted, was $18.5 million in 2001 compared to
$12.6 million in 2000.
Interest Expense. Interest expense increased $3.1 million to
$13.1 million in 2001 from $10.0 million for 2000. The increase in
interest expense is primarily due to the additional debt incurred in
the second quarter of 2000 for the acquisition of PSM.
Income Taxes. In the 2001 period, the Company recognized an
income tax benefit of $2.8 million compared to an income tax expense
of $0.9 million in 2000. The increased income tax benefit is the
result of the Company no longer providing for a valuation allowance
against its net operating losses.
Net Loss. Net loss was $8.0 million in 2001 compared to a net
loss of $16.8 million in 2000, due to the reasons described above.
Liquidity and Capital Resources
Formica's principal sources of liquidity are cash flows from
operations, borrowings under the Credit Facility (Second Amended and
Restated Credit Agreement dated May 26, 2000) and local credit
facilities obtained by some of Formica's foreign subsidiaries.
Formica's principal uses of cash will be debt service requirements,
capital expenditures and any future acquisitions.
As of March 31, 2001, Formica had $512.2 million of indebtedness
outstanding compared to $470.6 million as of December 31, 2000.
Formica's significant debt service obligations could, under certain
circumstances, have material consequences to security holders.
In connection with our acquisition by Laminates in 1998, Formica's
parent raised approximately $137.1 million through the issuance of
common and preferred stock to the DLJMB Funds, the institutional
investors and Messrs. Langone and Schneider. The Laminates 8%
Preferred Stock has an 8% cumulative dividend that is paid in cash
when, as and if declared by the Laminates board. The Holdings 15%
Senior Exchangeable Preferred Stock due 2008 has a 15% cumulative
dividend, which is not payable in cash until May 2003 and is
exchangeable at Holdings' option for 15% subordinated debentures of
Holdings. Dividends from Formica, which are restricted by the
provisions of the Credit Facility and the indenture governing the
Notes described below, are the primary source of funding for payments
with respect to Holdings and Laminates securities.
Notes
In February 1999, Formica issued $215 million of 10 7/8% Senior
Subordinated Notes which mature in 2009. Interest on the Notes is
payable semiannually in cash. The Notes and related indenture place
certain restrictions on Formica and its subsidiaries, including the
ability to pay dividends, issue preferred stock, repurchase capital
stock, incur and pay indebtedness, sell assets and make certain
restricted investments.
Page 10
Credit Facility
The Credit Facility includes a $120 million revolving credit
facility, an $85 million term loan and a $140 million term loan. The
$120 million revolving credit facility may be increased by up to $25
million at the request of Formica, with the consent of the banks
providing the increased commitments, and will terminate on May 1,
2004. At March 31, 2001, $66.3 million was outstanding against the
revolving credit facility. In addition, as of March 31, 2001, Formica
had outstanding approximately $25 million in letters of credit under
the Credit Facility to provide credit enhancement and support for
certain of its credit facilities. The $85 million and $140 million
term loans will mature in 2004 and 2006, respectively. The term loans
outstanding under the Credit Facility totaled $207.5 million at March
31, 2001 and amortize over the life of the Credit Facility.
Borrowings under the Credit Facility generally bear interest based on
a margin over the base rate or, at Formica's option, the
reserve-adjusted LIBO rate. The applicable margin varies based upon
Formica's ratio of consolidated debt to EBITDA. Formica's obligations
under the Credit Facility are guaranteed by Laminates, Holdings and
all existing or future domestic subsidiaries of Formica (the
"subsidiary guarantors") and are secured by substantially all of the
assets of Formica and the subsidiary guarantors, including a pledge of
capital stock of all existing and future subsidiaries of Formica
(provided that, with a single exception, no more than 65% of the
voting stock of any foreign subsidiary shall be pledged) and a pledge
by FM Holdings, Inc. of the stock of Formica and by Laminates
Acquisition Co. of the stock of FM Holdings, Inc.
The Credit Facility contains financial covenants requiring the Company
to maintain minimum EBITDA, minimum coverage of interest expense and
fixed charges and a maximum leverage ratio. The Company was in
compliance with the financial covenants as of March 31, 2001. The
Company's continued compliance with debt covenants is dependent upon
future economic performance which may be affected by economic,
financial, competitive, legislative, regulatory and other factors
beyond the Company's control.
Local Credit Facilities
Formica maintains various local credit facilities in foreign countries
(primarily in Asia) that provide for borrowings in local currencies of
which approximately $23.4 million was outstanding as of March 31,
2001. Formica may replace the availability of these facilities (in
local currencies) under the Credit Facility and will maintain some of
these credit facilities to provide financing for its subsidiaries in
these countries. Formica expects that these facilities, together with
the Credit Facility and operating cash flow in these countries, will
be sufficient to fund expected liquidity needs in these countries.
Working Capital
Working capital was $167.5 million at March 31, 2001 compared to
$138.4 million at December 31, 1999. The increase was primarily the
result of higher accounts receivable and inventory levels and lower
accrued expenses and other current liabilities at March 31, 2001.
Management believes that Formica will continue to require working
capital levels consistent with past experience and that current
levels of working capital, together with borrowing capacity available
under the Credit Facility and the continued effort by management to
manage working capital, will be sufficient to meet expected liquidity
needs in the near term.
Capital Expenditures
Formica has spent approximately $6.4 million on capital expenditures
during the three months ended March 31, 2001, and anticipates that it
will spend approximately an additional $11.6 million during the
remainder of the year. The Credit Facility contains restrictions on
its ability to make capital expenditures. Based on present estimates,
Formica believes that the amount of capital expenditures permitted
under the Credit Facility will be adequate to complete its investment
program and maintain the properties and businesses of its current
operations.
Source of Funds
Formica anticipates that its operating cash flow, together with
borrowings under the Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and debt
service obligations as they become due. However, Formica's ability to
make scheduled payments of principal of, to pay interest on or to
refinance the indebtedness and to satisfy its other debt obligations
will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control.
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Formica continues to evaluate acquisitions that will complement or
expand its decorative surfaces businesses or that will enable it to
expand into new markets. In connection with any future acquisitions,
Formica may require additional funding which may be provided in the
form of additional debt, equity financing or a combination thereof.
There can be no assurance, however, that any such additional financing
will be available on acceptable terms.
Formica will continue from time to time to explore additional
auxiliary financing methods and other means to lower its cost of
capital, which could include stock issuance or debt financing and the
application of the proceeds therefrom to the payment of bank debt or
other indebtedness.
Cash used by operations was $36.3 million for the three months ended
March 31, 2001, compared to $3.6 million for the three months ended
March 31, 2000. The increase in cash used by operations is due to an
increase in accounts receivable and inventories and a decrease in
accrued expenses and other liabilities. Net cash used in investing
activities was $6.4 million and $2.8 million for the three months
ended March 31, 2001 and 2000, respectively, primarily from increased
capital expenditures. Net cash provided by financing activities was
$44.2 million and $6.7 million for the three months ended March 31,
2001 and 2000, respectively, which included additional net borrowings
under our credit facility discussed above.
Effect of Inflation; Seasonality
Formica does not believe that inflation has had a material impact on
its financial position or results of operations. Formica's operations
are modestly influenced by seasonal fluctuations.
Common European Currency
The Treaty on European Economic and Monetary Union provides for the
introduction of a single European currency, the Euro, in substitution
for the national currencies of the member states of the European Union
that adopt the Euro. In May 1998 the European Council determined: (i)
the 11 member states that met the requirement for the Monetary Union,
and (ii) the currency exchange rates amongst the currencies for the
member states joining the Monetary Union.
The transitory period for the Monetary Union started on January 1,
1999. According to Council Resolution of July 7, 1997, the
introduction of the Euro will be made in three steps: (i) a transitory
period from January 1, 1999 to December 31, 2001, in which current
accounts may be opened and financial statements may be drawn in Euros,
and local currencies and Euros will coexist; (ii) from January 1, 2002
to June 30, 2002, in which local currencies will be exchanged for
Euros; and (iii) from July 1, 2002 after which local currencies will
disappear.
Formica cannot give assurance as to the effect of the adoption of the
Euro on its payment obligations under loan agreements for borrowings
in currencies to be replaced by the Euro or on its commercial
agreements in those currencies. However, the Company has not
experienced nor does it anticipate any problems resulting from the
adoption of the Euro.
Market Risk
Interest Rate Risk
The Company utilizes both fixed and variable rate debt obligations to
finance its operations. At March 31, 2001, approximately 58% of the
Company's total debt was at variable interest rates. A one-half
percentage point increase in interest would increase the annual amount
of interest paid by approximately $1.5 million. Although the Company
will continue to monitor its exposure to interest rate fluctuations,
the Company cannot assure that interest rate fluctuations will not
harm its business in the future.
Foreign Currency Exchange Rate Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, including fluctuations in the functional currency of
foreign operations. The functional currency of operations outside the
United States is the respective local currency. Foreign currency
translation effects are included in accumulated other comprehensive
loss in stockholders' equity. Our operating results are thus subject
to significant fluctuations based upon changes in the exchange rates
of other currencies in relation to the U.S. dollar. Although the
Company will continue to monitor its exposure to currency
fluctuations, the Company cannot assure that exchange rate
fluctuations will not harm its business in the future.
Forward-Looking Information
This report (as well as other public filings, press releases
and discussions with Company management) contains and incorporates by
reference certain forward-looking statements. These
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statements are subject to risks and uncertainties and other factors,
which could cause actual results to differ from those anticipated.
Forward-looking statements include the information concerning:
o our future operating performance, including sales growth
and cost savings and synergies following our acquisitions
of Fountainhead, STEL and Perstorp Surface Materials and
our related restructurings and capital investment program
and
o our belief that we have sufficient cash flows to support
working capital needs, capital expenditures and debt
service requirements and
In addition, statements that include the words "believes,"
"expects," "anticipates," intends," "estimates," "will," "should,"
"may," or other similar expressions are forward-looking statements.
For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
What Factors Could Affect the Outcome of Our Forward- Looking
Statements?
You should understand that the following important factors,
in addition to those discussed elsewhere in this Form 10-Q could
affect the future results of Formica and could cause those results or
other outcomes to differ materially from those expressed in our
forward-looking statements.
Industry and Market Factors
o changes in economic conditions generally or in the markets
served by the Company
o fluctuations in raw material and energy prices
o product specifier preferences and spending patterns and
o competition from other decorative surfaces producers
Operating Factors
o our ability to combine our recently acquired businesses
while maintaining current operating performance levels
during the integration period(s) and the challenges
inherent in diverting our management's focus and resources
from other strategic opportunities and from operational
matters
o our ability to implement our cost savings plans without
adversely impacting our net sales and
o our ability to attract, hire and retain suitable personnel
Relating to our Debt and the Notes
We have substantial debt, which could limit our cash
available for other uses and harm our competitive position. In
connection with our acquisitions, we incurred significant
indebtedness. The level of our indebtedness could have important
consequences to us, including:
o limiting our ability to obtain additional debt financing in
the future for working capital, capital expenditures or
acquisitions
o limiting cash flow available for general corporate
purposes, including acquisitions, because a substantial
portion of our cash flow from operations must be dedicated
to debt service
o limiting our flexibility in reacting to competitive and
other changes in the industry and economic conditions
generally and
o exposing us to risks inherent in interest rate fluctuations
because some of our borrowings may be at variable rates of
interest, which could result in higher interest expense in
the event of increases in interest rates
You should read the section called "Risk Factors" in the
Registration Statements on Form S-1 (file no. 333-76683) that we filed
with the SEC, for additional information about risks that may cause
our actual results and experience to differ materially from those
contained in forward-looking statements.
Recent Accounting Pronouncements
Statement of Financial Accounting Standard (SFAS) No.133
In June 1998, SFAS No. 133-"Accounting for Derivative Instruments and
Hedging Activities" was issued ("SFAS No. 133"). In June 1999, SFAS
No. 137-"Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133" was
issued which deferred the
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effective date of SFAS No. 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. In June 2000, SFAS No. 138 was issued,
which amended SFAS No. 133. These SFAS's require all derivatives to
be measured at fair value and recognized as assets or liabilities on
the balance sheet. Changes in the fair value of derivatives should be
recognized in either net income or other comprehensive income,
depending on the designated purpose of the derivative. The Company
adopted SFAS No. 133, and the corresponding amendments of SFAS No.
138 on January 1, 2001, and such adoption did not have a material
impact on the Company's consolidated financial position, results of
operations or cash flows.
Contingent Matters
Refer to Note 6 of the Notes to Condensed Consolidated Financial
Statements for a discussion of legal contingencies.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under Item
2--Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Part II. Other Information
Item 1. Legal Proceedings
o See Note 6 of the Notes to Condensed Consolidated Financial
Statements for a discussion of legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
o Formica did not file any reports on Form 8-K during the three
months ended March 31, 2001.
The following exhibit is included herein:
(12) Computation of Ratio of Earnings to Fixed Charges Page E-1
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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.
Formica Corporation
-----------------------------
(Registrant)
/s/ David T. Schneider
-----------------------------
(David T. Schneider -
Chief Financial Officer)
May 9, 2001
-----------------------------
(Date)
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