UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-26991
American Builders & Contractors Supply Co., Inc.
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 5033 39-1413708
(State or other jurisdiction of (Primary Standard (I.R.S. Employer Identification No.)
incorporation or organization) Industrial Classification
Code Number)
One ABC Parkway
Beloit, Wisconsin 53511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (608) 362-7777
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. [X] Yes[_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.01 par value, 147.04 shares as of August 1, 2002
Index
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 2002 and December 31, 2001
Condensed consolidated statements of income and retained earnings - Three
months ended June 30, 2002 and 2001; Six months ended June 30, 2002
and 2001
Condensed consolidated statements of cash flows - Six months ended June 30,
2002 and 2001
Notes to condensed consolidated financial statements - June 30, 2002
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
Signatures
1
Part I. Financial Information
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
June 30, December 31,
ASSETS 2002 2001
----------- ------------
Current assets:
Cash $ 3,143 $ 6,114
Accounts receivable 201,363 167,253
Inventories 226,650 157,810
Prepaid expenses and other 2,905 3,017
----------- ------------
Total current assets 434,061 334,194
Property and equipment, net 77,832 66,965
Net receivable from affiliates 11,928 4,907
Goodwill 36,551 36,551
Other intangible assets 4,849 4,875
Security deposits 869 796
Other assets 1,525 1,345
----------- ------------
$ 567,615 $ 449,633
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 191,044 $ 99,646
Accrued payroll and benefits 10,810 12,569
Accrued liabilities 18,313 15,082
Current portion of long-term debt 5,507 10,245
----------- ------------
Total current liabilities 225,674 137,542
Long-term debt 265,283 236,929
Contingent liabilities (Note 2)
Stockholder's equity:
Common stock --- ---
Additional paid-in capital 3,779 3,779
Retained earnings 72,879 71,383
----------- ------------
Total stockholder's equity 76,658 75,162
----------- ------------
$ 567,615 $ 449,633
=========== ============
See notes to unaudited condensed consolidated financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
2
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Retained Earnings (Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 390,312 $ 370,828 $ 656,675 $ 618,311
Cost of sales 292,102 281,504 492,424 469,434
----------- ------------ ----------- -----------
Gross profit 98,210 89,324 164,251 148,877
Operating expenses 81,995 71,849 148,667 131,868
Amortization of intangible assets 92 400 184 800
----------- ------------ ----------- -----------
82,087 72,249 148,851 132,668
----------- ------------ ----------- -----------
Operating income 16,123 17,075 15,400 16,209
Other income (expense):
Interest income 164 117 279 226
Interest expense (3,588) (4,996) (7,015) (10,671)
----------- ----------- ----------- -----------
(3,424) (4,879) (6,736) (10,445)
----------- ----------- ----------- -----------
Income before provision for income taxes 12,699 12,196 8,664 5,764
Provision for income taxes 154 51 368 181
----------- ----------- ----------- -----------
Net income 12,545 12,145 8,296 5,583
Retained earnings at beginning of period 67,134 27,985 71,383 35,399
Distributions to sole stockholder (6,800) (3,600) (6,800) (4,452)
----------- ----------- ----------- -----------
Retained earnings at end of period $ 72,879 $ 36,530 $ 72,879 $ 36,530
=========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
3
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six months ended June 30,
------------------------------
2002 2001
--------- ----------
Operating activities
Net income $ 8,296 $ 5,583
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 7,434 7,387
Amortization 184 800
Amortization of deferred financing costs 154 163
Provision for doubtful accounts 4,585 4,024
Loss on disposal of property and equipment 128 160
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable (36,469) (55,298)
Inventories (66,102) (47,130)
Prepaid expenses and other 112 3
Other assets (245) 15
Accounts payable 91,398 108,314
Accrued liabilities 1,441 1,372
--------- ----------
Cash provided by operating activities 10,916 25,393
Investing activities
Additions to property and equipment (13,859) (9,029)
Proceeds from disposal of property and equipment 331 418
Acquisitions of businesses (5,892) ---
--------- ----------
Cash used in investing activities (19,420) (8,611)
Financing activities
Net borrowings (payments) under line of credit 21,778 (10,774)
Payments on long-term debt (2,111) (1,296)
Change in net receivable from affiliates (7,021) (2,122)
Distributions to stockholder (6,800) (4,452)
Payments of debt financing costs (313) ---
--------- ----------
Cash provided by (used in) financing activities 5,533 (18,644)
--------- ----------
Net decrease in cash (2,971) (1,862)
Cash at beginning of period 6,114 5,009
--------- ----------
Cash at end of period $ 3,143 $ 3,147
========= ==========
See notes to unaudited condensed consolidated financial statements.
4
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting primarily of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended
June 30, 2002 are not indicative of the results that may be expected for the
year ending December 31, 2002 due to the seasonality of the business. For
further information, refer to the consolidated financial statements and
footnotes thereto included in American Builders & Contractors Supply Co., Inc.'s
(ABC, or together with its subsidiaries, the Company) Annual Report on Form 10-K
for the year ended December 31, 2001.
2. Contingent Liabilities
At June 30, 2002 and December 31, 2001, the Company had guaranteed debt of
the stockholder in the amounts of $1,298,000 and $1,602,000, respectively.
Certain assets owned by the Company serve as collateral as part of an overall
guaranty of this debt by the Company. The Company also had outstanding letters
of credit in the amount of $5,064,000 at June 30, 2002 and December 31, 2001,
with respect to debt of the Company's stockholder and affiliates.
3. Guarantor Subsidiaries
The following tables present condensed consolidating financial information
for the three months and six months ended June 30, 2002 and 2001 for: (a) ABC
and (b) on a combined basis, the guarantors of the Senior Subordinated Notes,
which include all of the wholly owned subsidiaries of the Company (Subsidiary
Guarantors). Separate financial statements of the Subsidiary Guarantors are not
presented because the guarantors are jointly, severally and unconditionally
liable under the guarantees, and the Company believes separate financial
statements and other disclosures regarding the Subsidiary Guarantors are not
material to investors.
5
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheet
June 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
-------------------------------------------------------------------
Assets
Current assets:
Cash $ 3,222 $ (79) $ - $ 3,143
Accounts receivable 198,175 15,742 (12,554) 201,363
Inventories 227,025 2,479 (2,854) 226,650
Intercompany advances 363 (363) - -
Prepaid expenses and other 1,728 1,177 - 2,905
---------------------------------------------------------
Total current assets 430,513 18,956 (15,408) 434,061
Property and equipment, net 71,573 6,259 - 77,832
Investment in subsidiaries 3,956 - (3,956) -
Receivable from affiliates 11,928 - - 11,928
Goodwill 36,551 - - 36,551
Other intangible assets 4,342 507 - 4,849
Security deposits 1,372 (503) - 869
Other assets 1,239 286 - 1,525
---------------------------------------------------------
$ 561,474 $ 25,505 $ (19,364) $ 567,615
=========================================================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 192,203 $ 11,395 $ (12,554) $ 191,044
Accrued payroll and benefits 10,271 539 - 10,810
Accrued liabilities 16,460 1,853 - 18,313
Current portion of long-term debt 4,257 1,250 - 5,507
---------------------------------------------------------
Total current liabilities 223,191 15,037 (12,554) 225,674
Long-term debt 261,625 3,658 - 265,283
Contingent liabilities
Stockholder's equity:
Common stock - - - -
Additional paid-in capital 3,779 1 (1) 3,779
Retained earnings 72,879 6,809 (6,809) 72,879
---------------------------------------------------------
Total stockholder's equity 76,658 6,810 (6,810) 76,658
---------------------------------------------------------
$ 561,474 $ 25,505 $ (19,364) $ 567,615
=========================================================
6
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheet
December 31, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
--------------------------------------------------------------
Assets
Current assets:
Cash $ 6,040 $ 74 $ - $ 6,114
Accounts receivable 166,746 8,337 (7,830) 167,253
Inventories 158,067 2,183 (2,440) 157,810
Intercompany advances (1,880) 1,880 - -
Prepaid expenses and other 2,042 975 - 3,017
---------------------------------------------------------
Total current assets 331,015 13,449 (10,270) 334,194
Property and equipment, net 65,318 1,647 - 66,965
Investment in subsidiaries 4,186 - (4,186) -
Receivable from affiliates 4,907 - - 4,907
Goodwill 36,551 - - 36,551
Other intangible assets 4,336 539 - 4,875
Security deposits 796 - - 796
Other assets 1,310 35 - 1,345
---------------------------------------------------------
$ 448,419 $ 15,670 $ (14,456) $ 449,633
=========================================================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 100,908 $ 6,568 $ (7,830) $ 99,646
Accrued payroll and benefits 12,161 408 - 12,569
Accrued liabilities 14,014 1,068 - 15,082
Current portion of long-term debt 9,245 1,000 - 10,245
---------------------------------------------------------
Total current liabilities 136,328 9,044 (7,830) 137,542
Long-term debt 236,929 - - 236,929
Commitments and contingent liabilities
Stockholder's equity:
Common stock - - - -
Additional paid-in capital 3,779 1 (1) 3,779
Retained earnings 71,383 6,625 (6,625) 71,383
---------------------------------------------------------
Total stockholder's equity 75,162 6,626 (6,626) 75,162
---------------------------------------------------------
$ 448,419 $ 15,670 $ (14,456) $ 449,633
=========================================================
7
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Three Months ended June 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------------
Net sales $ 384,578 $ 24,582 $ (18,848) $ 390,312
Cost of sales 289,869 20,732 (18,499) 292,102
---------------------------------------------------------------------
Gross profit 94,709 3,850 (349) 98,210
Operating expenses 79,317 2,748 (70) 81,995
Amortization of intangible assets 76 16 - 92
---------------------------------------------------------------------
79,393 2,764 (70) 82,087
---------------------------------------------------------------------
Operating income 15,316 1,086 (279) 16,123
Other income (expense):
Interest income 164 - - 164
Interest expense (3,547) (41) - (3,588)
---------------------------------------------------------------------
(3,383) (41) - (3,424)
---------------------------------------------------------------------
Income before provision for income
taxes and equity in earnings of subsidiaries 11,933 1,045 (279) 12,699
Provision for income taxes 153 1 - 154
---------------------------------------------------------------------
11,780 1,044 (279) 12,545
Equity in earnings of subsidiaries 765 - (765) -
---------------------------------------------------------------------
Net income $ 12,545 $ 1,044 $ (1,044) $ 12,545
=====================================================================
8
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Three Months ended June 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------------
Net sales $ 369,850 $ 17,661 $ (16,683) $ 370,828
Cost of sales 283,126 14,569 (16,191) 281,504
---------------------------------------------------------------------
Gross profit 86,724 3,092 (492) 89,324
Operating expenses 70,093 1,756 - 71,849
Amortization of intangible assets 400 - - 400
---------------------------------------------------------------------
70,493 1,756 - 72,249
---------------------------------------------------------------------
Operating income 16,231 1,336 (492) 17,075
Other income (expense):
Interest income 117 - - 117
Interest expense (4,996) - - (4,996)
---------------------------------------------------------------------
(4,879) - - (4,879)
---------------------------------------------------------------------
Income before provision for income
taxes and equity in earnings of subsidiaries 11,352 1,336 (492) 12,196
Provision for income taxes 46 5 - 51
---------------------------------------------------------------------
11,306 1,331 (492) 12,145
Equity in earnings of subsidiaries 839 - (839) -
---------------------------------------------------------------------
Net income $ 12,145 $ 1,331 $ (1,331) $ 12,145
=====================================================================
9
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Six Months ended June 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------------
Net sales $ 649,352 $ 39,750 $ (32,427) $ 656,675
Cost of sales 490,895 33,472 (31,943) 492,424
---------------------------------------------------------------------
Gross profit 158,457 6,278 (484) 164,251
Operating expenses 143,864 4,873 (70) 148,667
Amortization of intangible assets 152 32 - 184
---------------------------------------------------------------------
144,016 4,905 (70) 148,851
---------------------------------------------------------------------
Operating income 14,441 1,373 (414) 15,400
Other income (expense):
Interest income 279 - - 279
Interest expense (6,951) (64) - (7,015)
---------------------------------------------------------------------
(6,672) (64) - (6,736)
---------------------------------------------------------------------
Income before provision for income taxes
and equity in earnings of subsidiaries 7,769 1,309 (414) 8,664
Provision for income taxes 367 1 - 368
---------------------------------------------------------------------
7,402 1,308 (414) 8,296
Equity in earnings of subsidiaries 894 - (894) -
---------------------------------------------------------------------
Net income $ 8,296 $ 1,308 $ (1,308) $ 8,296
=====================================================================
10
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Six Months ended June 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------------
Net sales $ 616,647 $ 30,769 $ (29,105) $ 618,311
Cost of sales 472,530 25,405 (28,501) 469,434
---------------------------------------------------------------------
Gross profit 144,117 5,364 (604) 148,877
Operating expenses 128,587 3,281 - 131,868
Amortization of intangible assets 800 - - 800
---------------------------------------------------------------------
129,387 3,281 - 132,668
---------------------------------------------------------------------
Operating income 14,730 2,083 (604) 16,209
Other income (expense):
Interest income 226 - - 226
Interest expense (10,671) - - (10,671)
---------------------------------------------------------------------
(10,445) - - (10,445)
---------------------------------------------------------------------
Income before provision for income taxes
and equity in earnings of subsidiaries 4,285 2,083 (604) 5,764
Provision for income taxes 177 4 - 181
---------------------------------------------------------------------
4,108 2,079 (604) 5,583
Equity in earnings of subsidiaries 1,475 - (1,475) -
---------------------------------------------------------------------
Net income $ 5,583 $ 2,079 $ (2,079) $ 5,583
=====================================================================
11
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Cash Flows
for the Six Months ended June 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
--------------------------------------------------------------
Operating activities
Net income $ 8,296 $ 1,308 $ (1,308) $ 8,296
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 7,180 254 - 7,434
Amortization 152 32 - 184
Amortization of deferred financing costs 154 - - 154
Provision for doubtful accounts 4,585 - - 4,585
Loss on disposal of property and equipment 123 5 - 128
Change in operating assets and liabilities:
Accounts receivable (33,788) (7,405) 4,724 (36,469)
Inventories (66,220) (296) 414 (66,102)
Prepaid expenses and other 314 (202) - 112
Other assets (2,741) 2,496 - (245)
Accounts payable 91,295 4,827 (4,724) 91,398
Accrued liabilities 525 916 - 1,441
--------------------------------------------------------------
Cash provided by operating activities 9,875 1,935 (894) 10,916
Investing activities
Additions to property and equipment (12,908) (951) - (13,859)
Proceeds from disposal of property and equipment 302 29 - 331
Acquisitions of businesses (5,892) - - (5,892)
Investment in subsidiaries (894) - 894 -
--------------------------------------------------------------
Cash used in investing activities (19,392) (922) 894 (19,420)
Financing activities
Net borrowings under line of credit 21,778 - - 21,778
Payments on long-term debt (2,069) (42) - (2,111)
Change in net receivable from affiliates (7,021) - - (7,021)
Distributions to sole stockholder (5,676) (1,124) - (6,800)
Payments of debt financing costs (313) - - (313)
--------------------------------------------------------------
Cash provided by (used in) financing activities 6,699 (1,166) - 5,533
--------------------------------------------------------------
Net decrease in cash (2,818) (153) - (2,971)
Cash at beginning of period 6,040 74 - 6,114
--------------------------------------------------------------
Cash at end of period $ 3,222 $ (79) $ - $ 3,143
==============================================================
12
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Cash Flows
for the Six Months ended June 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
-----------------------------------------------------------
Operating activities
Net income $ 5,583 $ 2,079 $ (2,079) $ 5,583
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 7,282 105 - 7,387
Amortization 800 - - 800
Amortization of deferred financing costs 163 - - 163
Provision for doubtful accounts 4,016 8 - 4,024
Loss on disposal of property and equipment 160 - - 160
Change in operating assets and liabilities:
Accounts receivable (54,970) (4,930) 4,602 (55,298)
Inventories (47,910) 176 604 (47,130)
Prepaid expenses and other (88) 91 - 3
Other assets (2,702) 2,717 - 15
Accounts payable 109,397 3,519 (4,602) 108,314
Accrued liabilities 1,421 (49) - 1,372
------------------------------------------------------------
Cash provided by operating activities 23,152 3,716 (1,475) 25,393
Investing activities
Additions to property and equipment (8,960) (69) - (9,029)
Proceeds from disposal of property and equipment 418 - - 418
Investment in subsidiaries (1,475) - 1,475 -
------------------------------------------------------------
Cash used in investing activities (10,017) (69) 1,475 (8,611)
Financing activities
Net payments under line of credit (10,774) - - (10,774)
Payments on long-term debt (1,296) - - (1,296)
Change in net receivable from affiliates (2,122) - - (2,122)
Distributions to sole stockholder (535) (3,917) - (4,452)
------------------------------------------------------------
Cash used in financing activities (14,727) (3,917) - (18,644)
------------------------------------------------------------
Net decrease in cash (1,592) (270) - (1,862)
Cash at beginning of period 4,651 358 - 5,009
------------------------------------------------------------
Cash at end of period $ 3,059 $ 88 $ - $ 3,147
============================================================
13
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
4. Comprehensive Income
The Company's comprehensive income for the three and six month periods ended
June 30, 2002 and 2001, as required to be reported by Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
130, was identical to the actual income reported for those periods.
5. Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company has adopted the new rules on accounting for goodwill and other
intangible assets as of January 1, 2002. As required by SFAS No. 142, the
results of operations for periods prior to its adoption have not been restated.
Had these provisions been adopted effective January 1, 2001, the proforma net
income would have been $12,469,000 and $6,231,000 for the three and six month
periods ended June 30, 2001, respectively.
In connection with the adoption of SFAS No. 142, the Company completed the
first step of the transitional goodwill impairment test, which requires the
Company to compare the fair value of its reporting units to the carrying value
of the net assets of the respective reporting units as of January 1, 2002. Based
on this analysis, the Company has concluded that no impairment existed at the
time of adoption, and, accordingly, no impairment charge is necessary.
The gross carrying value and accumulated amortization by major class of
other intangible assets are as follows (in thousands):
June 30, 2002 December 31, 2001
-------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------------ ---------------- ----------------
Non-compete agreements $4,650 $1,581 $4,650 $1,410
Deferred financing costs 4,245 2,848 3,933 2,694
Other 400 17 400 4
------------- ------------------ ---------------- ----------------
$9,295 $4,446 $8,983 $4,108
============= ================== ================ ================
The Company does not have any intangible assets deemed to have indefinite
lives. Amortization expense expected to be recognized for each of the next five
years ending December 31, is as follows:
2002 $ 682,000
2003 695,000
2004 695,000
2005 639,000
2006 558,000
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company. ABC is a distributor of exterior building products and is the
largest wholesale distributor of roofing products and one of the largest
wholesale distributors of vinyl siding materials in the United States, operating
235 distribution centers located in 44 states as of June 30, 2002. Since January
1, 2002, the Company has completed three acquisitions with eleven locations net
of consolidations, opened ten distribution centers and closed one distribution
center.
Provision for Income Taxes. ABC and its subsidiaries are operated as
Subchapter S corporations under the Internal Revenue Code. As a result, these
entities do not incur federal and state income taxes (except with respect to
certain states) and, accordingly, no discussion of income taxes is included in
"Results of Operations" below. Federal and state income taxes (except with
respect to certain states) on the income of such corporations are incurred and
paid directly by the Company's sole stockholder. Such corporations have
historically made periodic distributions to the stockholder with respect to such
tax liabilities. The Company entered into the Tax Allocation Agreement with the
sole stockholder, pursuant to which he will receive distributions from the
Company with respect to taxes associated with the Company's income.
Special Note Regarding Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information currently available to the Company at the
time such statements were made. When used in this MD&A, the words
"anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to the Company are intended to identify
forward-looking statements, which include statements relating to, among other
things: (i) the ability of the Company to continue to successfully compete in
the roofing and vinyl siding products market; (ii) the continued effectiveness
of the Company's sales and marketing strategy; and (iii) the ability of the
Company to continue to successfully develop and launch new distribution
centers. Actual results could differ materially from those projected in the
forward-looking statements as a result of the matters discussed herein and
certain economic and business factors, some of which may be beyond the control
of the Company.
Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three and six months ended
June 30, 2002 and 2001:
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
2002 2001 2002 2001
-------- ------- -------- -------
Income statement data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.9 75.9 75.0 75.9
-------- ------- -------- -------
Gross profit 25.1 24.1 25.0 24.1
Operating expenses 21.0 19.4 22.7 21.4
Amortization of intangible assets 0.0 0.1 0.0 0.1
-------- ------- -------- -------
Total operating expenses 21.0 19.5 22.7 21.5
-------- ------- -------- -------
Operating income 4.1% 4.6% 2.3% 2.6%
======== ======= ======== =======
15
Comparison of the Three and Six Month Periods Ended June 30, 2002 to the Three
and Six Month Periods Ended June 30, 2001
The Company's results of operations are affected by the seasonal nature of
the roofing and siding business. See "Seasonality."
Net sales for the three months ended June 30, 2002 increased by 5.3% to
$390.3 million from $370.8 million for the three months ended June 30, 2001. Net
sales for the six months ended June 30, 2002 increased by 6.2% to $656.7 million
from $618.3 million for the six months ended June 30, 2001. Comparable
distribution center sales were level for the three months ended June 30, and
increased 1.9% for the six months ended June 30.
Gross profit for the three months ended June 30, 2002 increased by 9.9%, to
$98.2 million from $89.3 million for the three months ended June 30, 2001,
primarily as a result of profits associated with increased sales. Gross profit,
as a percent of net sales, for the three months ended June 30, increased to
25.1% in 2002, from 24.1% in 2001. Gross profit for the six months ended June
30, 2002 increased by 10.3% to $164.3 million from $148.9 million for the six
months ended June 30, 2001, primarily as a result of profits associated with
increased sales. Gross profit, as a percent of net sales, for the six months
ended June 30, increased to 25.0% in 2002 from 24.1% in 2001. For both the three
and six month periods, gross profit, as a percentage of net sales, increased
primarily due to a higher percentage of distribution center warehouse sales
versus "direct" sales (product shipped from the vendor directly to the
customer's job site), which have significantly lower gross profit margins.
Operating expenses increased by $10.2 million to $82.0 million from $71.8
million for the three months ended June 30, 2002 and 2001, respectively. As a
percent of net sales, distribution center operating expenses for the three
months ended June 30, increased to 21.0% in 2002 from 19.4% in 2001. For the six
months ended June 30, distribution center operating expenses increased by $16.8
million to $148.7 million in 2002, from $131.9 million in 2001. As a percent of
net sales, distribution center operating expenses for the six months ended June
30, increased to 22.7% in 2002 from 21.4% in 2001. The increase in operating
expenses for both the three and six month periods is primarily due to the higher
percentage of distribution center warehouse sales, which require greater
operating expenses.
Operating income for the three months ended June 30, 2002 decreased by $1.0
million to $16.1 million from $17.1 million for the same period in 2001.
Operating income for the six months ended June 30, decreased by $0.8 million to
$15.4 million in 2002 from $16.2 million in 2001. The decrease for the three and
six months ended June 30, is a result of the factors discussed above.
Interest expense for the three months ended June 30, 2002 decreased by $1.4
million or 28.2% to $3.6 million from $5.0 million for the three months ended
June 30, 2001. For the six months ended June 30, interest expense decreased by
$3.7 million or 34.3% to $7.0 million in 2002 from $10.7 million in 2001. The
decrease for the three and six month periods is due primarily to decreased rates
on the Company's LIBOR and prime rate borrowings, as well as a reduction in the
Company's average borrowing levels.
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Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by operating
activities was $10.9 million and $25.4 million for the six months ended June 30,
2002 and 2001, respectively. The decrease was due primarily to increases in
inventory purchases related to the increased number of distribution centers,
partially offset by an increase in net income and a smaller increase in accounts
receivable and accounts payable due to slower sales growth during the second
quarter of 2002 as compared to 2001.
Cash Flows from Investing Activities. Net cash used in investing activities
increased to $19.4 million from $8.6 million for the six months ended June 30,
2002 and 2001, respectively, due to the acquisitions of businesses as well as an
increase in additions to property and equipment.
Cash Flows from Financing Activities. Net cash provided by (used in)
financing activities was $5.5 million and $(18.6) million for the six months
ended June 30, 2002 and 2001, respectively, primarily due to increased
borrowings made under the line of credit being partially offset by the increases
in receivables from affiliates and distributions made to the stockholder.
Liquidity. The Company's principal sources of funds are anticipated to be
cash flows from operating activities and borrowings under its revolving credit
agreement. The Company believes that these funds will provide the Company with
sufficient liquidity and capital resources for the Company to meet its financial
obligations, as well as to provide funds for the Company's working capital,
capital expenditures, and other needs for the foreseeable future. No assurances
can be given, however, that this will be the case.
Seasonality
Because of cold weather conditions in many of the markets in which the
Company does business and the seasonal nature of the roofing and siding business
generally, the Company's revenues vary substantially throughout the year, with
its lowest revenues typically occurring in the months of December through
February.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2002.
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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.
American Builders & Contractors Supply
Co., Inc.
August 12, 2002 /s/ Kendra A. Story
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Date: Kendra A. Story
Chief Financial Officer and Director
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