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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- -
For the quarterly period ended September 27, 2003
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or
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-24956
ASSOCIATED MATERIALS INCORPORATED
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
3773 State Rd. Cuyahoga Falls, Ohio 44223
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (330) 929-1811
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Not Applicable
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 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 such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of November 10, 2003, the Registrant had 100 shares of Common Stock
outstanding, all of which is held by an affiliate of the Registrant.
ASSOCIATED MATERIALS INCORPORATED
REPORT FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2003
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)............................................. 1
September 27, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations (Unaudited)................................... 2
Quarter ended September 27, 2003
Quarter ended September 30, 2002
Nine months ended September 27, 2003
One hundred sixty-five days ended September 30, 2002 One hundred eight
days ended April 18, 2002 - Predecessor
Condensed Consolidated Statements of Cash Flows (Unaudited)................................... 3
Nine months ended September 27, 2003
One hundred sixty-five days ended September 30, 2002
One hundred eight days ended April 18, 2002 - Predecessor
Notes to Condensed Consolidated Financial Statements (Unaudited).............................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 22
Item 4. Controls and Procedures................................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 23
Item 6. Exhibits and Reports on Form 8-K........................................................ 23
SIGNATURES.......................................................................................... 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSOCIATED MATERIALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 27, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 7,938 $ 13,022
Accounts receivable, net ...................... 145,049 67,861
Inventory ..................................... 108,436 60,369
Income taxes receivable ....................... -- 4,675
Deferred income taxes ......................... 5,389 3,653
Other current assets .......................... 8,232 4,604
-------- --------
Total current assets .......................... 275,044 154,184
Property, plant and equipment, net ..................... 130,522 99,113
Goodwill ............................................... 245,017 197,461
Trademarks and trade names, net ........................ 97,873 97,504
Patents, net ........................................... 6,443 6,186
Other assets ........................................... 12,030 11,089
-------- --------
Total assets .................................. $766,929 $565,537
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................... $ 69,072 $ 31,319
Accrued liabilities ................................. 58,563 34,319
Income taxes payable ................................ 6,809 --
-------- --------
Total current liabilities ..................... 134,444 65,638
Deferred income taxes .................................. 50,886 58,976
Other liabilities ...................................... 42,996 20,746
Long-term debt ......................................... 345,000 242,408
Stockholder's equity ................................... 193,603 177,769
-------- --------
Total liabilities and stockholder's equity .... $766,929 $565,537
======== ========
See accompanying notes.
-1-
ASSOCIATED MATERIALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Three Months Nine Months 165 108
Ended Ended Ended Days Ended Days Ended
September 27, September 30, September 27, September 30, April 18,
2003 2002 2003 2002 2002
------------ ------------- ------------- -------------- -----------
Predecessor
-----------
Net sales ................................. $ 223,806 $ 176,673 $ 515,113 $ 290,633 $ 180,230
Cost of sales ............................. 159,587 122,780 365,926 202,071 130,351
--------- --------- --------- --------- ---------
Gross profit .............................. 64,219 53,893 149,187 88,562 49,879
Selling, general and administrative expense 38,270 34,557 103,284 56,224 43,272
--------- --------- --------- --------- ---------
Income from operations .................... 25,949 19,336 45,903 32,338 6,607
Interest expense, net ..................... 9,706 6,002 20,627 10,983 2,068
Foreign currency gain ..................... (199) -- (199) -- --
Merger transaction costs .................. -- -- -- -- 9,319
Debt extinguishment costs ................. -- -- -- 7,579 --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes .................... 16,442 13,334 25,475 13,776 (4,780)
Income taxes .............................. 6,823 5,535 10,572 5,718 977
--------- --------- --------- --------- ---------
Income (loss) from continuing operations .. 9,619 7,799 14,903 8,058 (5,757)
Loss from discontinued operations ......... -- -- -- (521) --
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ 9,619 $ 7,799 $ 14,903 $ 7,537 $ (5,757)
========= ========= ========= ========= =========
See accompanying notes.
-2-
ASSOCIATED MATERIALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
165 108
Nine Months Days Days
Ended Ended Ended
September 27, September 30, April 18,
2003 2002 2002
-----------------------------------------
Predecessor
-----------
OPERATING ACTIVITIES
Income (loss) from continuing operations .................. $ 14,903 $ 8,058 $ (5,757)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization .................... 8,874 4,246 3,969
Tax benefit from stock option exercise ........... -- -- 113
Cost of sales expense related to an inventory fair
value purchase accounting adjustment ............ 1,402 1,891 --
Debt extinguishment costs ........................ -- 7,579 --
Amortization of deferred financing costs ......... 4,953 953 --
Changes in operating assets and liabilities:
Accounts receivable, net ................ (33,303) (15,942) (6,246)
Inventories ............................. (10,457) (6,661) (5,170)
Income taxes ............................ 9,914 (1,794) (616)
Accounts payable and accrued liabilities 21,500 38,574 (4,326)
Other ................................... 693 57 (225)
--------- --------- ---------
Net cash provided by (used in) operating activities ....... 18,479 36,961 (18,258)
INVESTING ACTIVITIES
Acquisition of Predecessor's equity ....................... -- (366,386) --
Acquisition of Gentek Holdings, net of cash acquired ...... (111,032) -- --
Proceeds from sale of AmerCable ........................... -- 28,332 --
Proceeds from sale of assets .............................. -- 35 220
Additions to property, plant and equipment ................ (9,587) (6,681) (3,817)
--------- --------- ---------
Net cash used in investing activities ..................... (120,619) (344,700) (3,597)
FINANCING ACTIVITIES
Equity contribution from Associated Materials Holdings Inc. -- 164,807 --
Proceeds from issuance of 9 3/4% senior subordinated notes -- 165,000 --
Proceeds from borrowings under term loan .................. 190,000 125,000 --
Repayments of term loan ................................... (86,500) (38,500) --
Redemption of 9 1/4% senior subordinated notes ............ (908) (74,092) --
Debt extinguishment costs ................................. -- (7,579) --
Financing costs ........................................... (5,571) (12,844) --
Dividends paid ............................................ -- -- (339)
Stock options ............................................. -- -- 94
--------- --------- ---------
Net cash provided by (used in) financing activities ....... 97,021 321,792 (245)
--------- --------- ---------
Net increase (decrease) in cash from continuing operations (5,119) 14,053 (22,100)
Effect of exchange rates on cash .......................... 35 -- --
Net cash used in discontinued operations .................. -- (1,076) --
Cash at beginning of period ............................... 13,022 6,769 28,869
--------- --------- ---------
Cash at end of period ..................................... $ 7,938 $ 19,746 $ 6,769
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest .................................... $ 13,198 $ 3,326 $ 4,479
========= ========= =========
Cash paid for income taxes ................................ $ 510 $ 6,357 $ 2,254
========= ========= =========
See accompanying notes.
-3-
ASSOCIATED MATERIALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2003
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Associated
Materials Incorporated (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial reporting, the instructions to Form 10-Q, and Rule 10-01 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. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto included
in its annual report on Form 10-K for the year ended December 31, 2002. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. Certain prior period amounts have been
reclassified to conform to the current period presentation.
The Company elected to change its fiscal year from a calendar year
ending on December 31st to a 52 / 53 week fiscal year that ends on the Saturday
closest to December 31st. The third quarter of fiscal 2003 began on June 29,
2003 and ended on September 27, 2003. The Company's 2003 fiscal year end will be
January 3, 2004.
The Company's 2003 results of operations include the results of Gentek
Holdings, Inc. ("Gentek Holdings") subsequent to its acquisition, which was
completed on August 29, 2003 (see Note 2). The Company's 2002 results of
operations prior to the date of the merger transaction with Harvest Partners,
Inc. ("Harvest Partners") (see Note 3) are presented as the results of the
Predecessor. The results of operations, including the merger transaction with
Harvest Partners and results thereafter, are presented as the results of the
Successor. In addition, the Company completed the sale of its AmerCable division
on June 24, 2002. AmerCable's results through April 18, 2002 are included in the
results of continuing operations of the Predecessor. Subsequent to April 18,
2002, AmerCable's results are presented as discontinued operations of the
Successor as it was the Successor's decision to divest this division.
The Company is a manufacturer of exterior residential building
products, which are distributed through company-owned distribution centers and
independent distributors across the United States and Canada. The Company
produces a broad range of vinyl siding and accessories, vinyl windows, and
aluminum and steel siding and accessories as well as vinyl fencing, decking and
railing and vinyl garage doors. Because most of the Company's building products
are intended for exterior use, the Company's sales and operating profits tend to
be lower during periods of inclement weather. Therefore, the results of
operations for any interim period are not necessarily indicative of the results
of operations for a full year.
NOTE 2 - ACQUISITION OF GENTEK HOLDINGS, INC.
On August 29, 2003, the Company completed the acquisition of all of the
issued and outstanding shares of Gentek Holdings and repaid all of the
indebtedness and related accrued interest of Gentek Holdings and its
subsidiaries for an aggregate purchase price of approximately $112.1 million,
which included $1.1 million of cash acquired, a working capital adjustment and
customary transaction fees. Additionally, the Company paid $5.6 million of
financing costs of which $1.1 million was paid to Harvest Partners.
Gentek Holdings, which was privately held, is the parent of Gentek
Building Products, Inc. and Gentek Building Products Limited (collectively,
"Gentek"). Gentek manufacturers and distributes vinyl siding and accessories,
vinyl windows, and aluminum and steel siding and accessories under the Revere(R)
and Gentek(R) brand names. Gentek markets its products to professional
contractors on a wholesale basis through thirteen company-owned distribution
centers in the mid-Atlantic region of the United States, twenty company-owned
distribution centers in Canada and independent distributors in the United
States. The Company completed the acquisition to expand its presence in the
independent distributor market channel and to achieve potential synergy
opportunities related to the vertical integration of the metals products
manufactured by Gentek and sold in the Company's Alside supply centers and
related to raw material savings from the increased purchasing leverage.
-4-
In connection with the acquisition, the Company amended and restated
its existing credit facility by adding a term loan facility to borrow an
additional $113.5 million and expanding its revolving facility from $40 million
to $70 million, including a new Canadian subfacility of $15 million.
The acquisition has been accounted for using the purchase method of
accounting. The total purchase price has been allocated to the tangible and
intangible assets and liabilities acquired based upon their estimated fair
values as follows (in thousands):
Cash $ 1,088
Accounts receivable.............................................. 43,529
Inventory........................................................ 38,460
Other current assets............................................. 3,947
Deferred income taxes............................................ 1,736
-----------
Total current assets.................................... 88,760
Property, plant and equipment.................................... 28,650
Goodwill......................................................... 47,556
Trademarks and trade names....................................... 1,568
Patents.......................................................... 853
Deferred income taxes............................................ 8,128
-----------
Total assets................................... $ 175,515
===========
Accounts payable................................................. $ 26,179
Accrued liabilities.............................................. 13,258
Income taxes payable............................................. 1,434
-----------
Total current liabilities............................... 40,871
Other liabilities................................................ 22,042
Long-term debt................................................... 7,500
Stockholder's equity............................................. 105,102
-----------
Total liabilities and stockholder's equity..... $ 175,515
===========
The purchase price allocation is preliminary, based on facts currently
known to the Company and is subject to adjustment as the final valuation for the
fair value of the acquired tangible property, plant and equipment, intangible
assets and warranty liability related to certain steel siding has not been
completed. As a result, the actual allocation is subject to the completion of
these valuations and therefore may differ. The purchase consideration of $112.1
million was financed through the additional term loans and revolving loans under
the amended and restated credit facility.
NOTE 3 - PRO FORMA INFORMATION
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly-owned
subsidiary of Associated Materials Holdings Inc. ("Holdings"), which is
controlled by affiliates of Harvest Partners, Inc. The completion of the
aforementioned transactions constitute the merger transaction with Harvest
Partners. The merger was accounted for using the purchase method of accounting.
The total consideration of $366.5 million was allocated to tangible and
intangible assets acquired and liabilities assumed based on fair values at the
date of the acquisition based on valuation estimates and certain assumptions.
The purchase consideration of $366.5 million, financing costs of $13.0 million,
tender offer of the $74.0 million of 9 1/4% notes and debt extinguishment costs
of $7.6 million were financed through: (1) the issuance of $165 million of 9
3/4% senior subordinated notes due 2012 ("9 3/4% notes"), (2) $125 million from
a new $165 million credit facility ("credit facility"), (3) $164.8 million cash
contribution from Holdings and (4) cash of approximately $6.3 million,
representing a portion of the Company's total cash of $6.8 million on hand at
the time of the acquisition.
On June 24, 2002, the Company completed the sale of its AmerCable
division to AmerCable Incorporated, a newly formed entity controlled by Wingate
Partners III, L.P. and members of AmerCable's management for net proceeds of
approximately $28.3 million and the assumption of certain liabilities pursuant
to an asset purchase agreement. The Company used the net proceeds to repay a
portion of its credit facility.
-5-
The following pro forma information for the quarter and nine months
ended September 27, 2003 was prepared as if the acquisition of Gentek Holdings
occurred as of the beginning of each period presented. The following pro forma
information for the quarter and nine months ended September 30, 2002 were
prepared as if the merger transaction with Harvest Partners, the sale of
AmerCable and the acquisition of Gentek Holdings occurred as of the beginning of
each period presented. On a pro forma basis, the Company would have had (in
thousands):
Quarter Ended Nine Months Ended
September 27, September 30, September 27, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $281,911 $254,266 $705,153 $647,438
Net income $ 12,517 $ 10,811 $ 18,241 $ 13,125
The pro forma information is not necessarily indicative of the results
that would have occurred had the merger transaction with Harvest Partners, sale
of AmerCable and acquisition of Gentek Holdings occurred at the beginning of the
periods presented, nor is it necessarily indicative of future results. The pro
forma results of operations include inventory fair value adjustments consisting
of $1.4 million for the quarter and nine months ended September 27, 2003 related
to the acquisition of Gentek Holdings and $3.3 million for the quarter and nine
months ended September 30, 2002 related to the acquisition of Gentek Holdings
and merger transaction with Harvest Partners. However, the pro forma results of
operations for all periods presented exclude the effect of non-recurring
expenses of accelerated amortization of previously capitalized deferred
financing fees and certain financing costs paid in conjunction with the
amendment to the credit facility totaling $3.9 million.
NOTE 4 - INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Inventories consisted of the following (in thousands):
September 27, December 31,
2003 2002
-------- --------
Raw materials .................... $ 29,331 $ 13,545
Work-in-process .................. 5,275 3,928
Finished goods and purchased stock 73,830 42,896
-------- --------
$108,436 $ 60,369
======== ========
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $245.0 million consists of the purchase price for the
acquisition of Gentek Holdings and the merger transaction with Harvest Partners
in excess of the fair value of the tangible and intangible net assets acquired.
As the purchase price for the acquisition of Gentek is preliminary, the value of
goodwill and intangible assets is subject to adjustment. The Company has
determined that one trademark and the Alside trade name totaling $74.7 million
have indefinite useful lives. The remaining $25.6 million of trademarks are
being amortized on a straight-line basis over their estimated remaining useful
lives of 15 years. Patents are being amortized on a straight-line basis over
their estimated remaining useful lives of 10 years. Amortization expense related
to trademarks and patents was approximately $0.4 million and $0.2 million,
respectively, for the quarter ended September 27, 2003. Amortization expense
related to trademarks and patents was approximately $0.7 million and $0.2
million, respectively, for the quarter ended September 30, 2002. Amortization
expense related to trademarks and patents was approximately $1.2 million and
$0.5 million, respectively, for the nine months ended September 27, 2003.
Accumulated amortization related to trademarks and patents was approximately
$2.4 million and $1.1 million, respectively, as of September 27, 2003 and
approximately $1.2 million and $0.6 million, respectively, as of December 31,
2002.
-6-
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 27, December 31,
2003 2002
-------- --------
9 3/4% notes .................. $165,000 $165,000
Term loan under credit facility 180,000 76,500
9 1/4% notes .................. -- 908
-------- --------
$345,000 $242,408
======== ========
The Company's $165 million of 9 3/4% notes are due in 2012 and pay
interest semi-annually in April and October. In connection with the acquisition
of Gentek, the Company amended its existing credit facility by adding a term
loan facility to borrow $190 million, which was utilized for the Gentek
acquisition and repayment of the Company's existing $76.5 million of term loans
and expanded its revolving facility from $40 million to $70 million, including a
new Canadian subfacility of $15 million. The term loans are due in August 2010
with minimum principal amortization of 1% per year with quarterly payments of
the unamortized principal in the final year of the loan and bears interest at
the London Interbank Offered Rate ("LIBOR") plus 2.75% payable quarterly at the
end of each calendar quarter. The revolving credit facility expires in 2007 and
bears interest at LIBOR plus 3.00% payable quarterly at the end of each calendar
quarter. There were no amounts outstanding against the revolving portion of the
credit facility at September 27, 2003.
The term loan under the Company's amended credit facility was
considered to be "substantially different" as defined by FASB Emerging Issues
Task Force ("EITF") 96-19, "Debtor's Accounting for a Modification or Exchange
of Debt Instruments" as a result of the amendment. The Company recorded
accelerated amortization of previously capitalized deferred financing fees and
certain financing costs paid in conjunction with the amendment to the credit
facility totaling $3.9 million, which is included in interest expense.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage of interest expense. The Company was in compliance with its
covenants as of September 27, 2003. On an annual basis, the Company is required
to make principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2002 were sufficient such that no additional principal
payments were required in 2003 under the excess cash flow provision. The Company
records as a current liability those principal payments that are estimated to be
due within 12 months under the excess cash flow provision of the credit facility
when the likelihood of those payments becomes probable.
NOTE 7 - STOCK PLANS
The Company measures stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 -
"Accounting for Stock Issued to Employees." The Company follows the disclosure
provisions required under Financial Accounting Standard Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation." Pro forma information regarding net income is required by SFAS
No. 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that statement using a minimum value
approach for companies with private equity. FASB SFAS No. 148 - "Accounting for
Stock-Based Compensation" requires this information to be disclosed on a
quarterly basis. The pro forma effect on net income for the quarter and nine
months ended September 27, 2003, quarter and 165 days ended September 30, 2002
and 108 days ended April 18, 2002 would have been (in thousands):
-7-
Nine
Quarter Quarter Months 165 Days 108 Days
Ended Ended Ended Ended Ended
September 27, September 30, September 27, September 30, April 18,
2003 2002 2003 2002 2002
------------- ------------- ------------- ------------- ---------
Predecessor
-----------
Net income (loss) as reported .. $ 9,619 $ 7,799 $ 14,903 $ 7,537 $ (5,757)
Pro forma stock based employee
compensation cost, net of tax (33) (32) (99) (204) (65)
-------- -------- -------- -------- --------
Pro forma net income (loss) .... $ 9,586 $ 7,767 $ 14,804 $ 7,333 $ (5,822)
======== ======== ======== ======== ========
NOTE 8 - INCOME TAXES
As a result of relocating the Company's corporate office from Texas to
Ohio in April 2002, the Successor's state and local income tax rate increased,
raising the Company's total effective tax rate to 41.5% from 38.5%. In addition,
the Predecessor's tax provision included an estimate for merger transaction
costs that were not deductible for income tax purposes.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income differs from net income due to foreign currency
translation adjustments as follows:
Nine
Quarter Quarter Months 165 Days 108 Days
Ended Ended Ended Ended Ended
September 27, September 30, September 27, September 30, April 18,
2003 2002 2003 2002 2002
------------ ------------ ------------- ------------ -----------
Predecessor
-----------
Net income (loss) as reported $ 9,619 $ 7,799 $14,903 $ 7,537 $(5,757)
Foreign currency translation
adjustments .............. 931 -- 931 -- --
------- ------- ------- ------- -------
Comprehensive income (loss) . $10,550 $ 7,799 $15,834 $ 7,537 $(5,757)
======= ======= ======= ======= =======
NOTE 10 - RECENTLY ADOPTED ACCOUNTING STANDARDS
On January 1, 2003, the Company adopted the provisions of FASB SFAS No.
145,- "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of
SFAS No. 145 related to the rescission of SFAS No. 4 require that any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods be reclassified and no longer be presented as an extraordinary
item. As a result of adopting this standard, the Company reclassified debt
extinguishment costs recorded in the second quarter of 2002. The debt
extinguishment costs include $4.9 million for the premium paid to extinguish
substantially all of the Successor's assumed 9 1/4% notes and $2.7 million for
the financing fees related to an interim credit facility utilized for the merger
transaction with Harvest Partners, which was repaid shortly thereafter.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires that certain financial instruments,
which under previous guidance were accounted for as equity, must now be
accounted for as liabilities. The financial instruments affected include
mandatorily redeemable preferred stock, certain financial instruments that
require or may require the issuer to buy back some of its shares in exchange for
cash or other assets and certain obligations that can be settled with shares of
stock. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and must be applied to the Company's existing
financial instruments effective July 1, 2003. On October 29, 2003, the FASB
deferred the provisions of paragraphs 9 and 10 and related guidance in the
-8-
appendices of this pronouncement as they apply to mandatorily redeemable
noncontrolling interests. Adoption of the effective or deferred provisions of
SFAS No. 150 did not and are expected not to have a material effect on the
Company's financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46")
- - "Consolidation of Variable Interest Entities." Companies were required to
adopt the provisions of this interpretation immediately for all new variable
interest entities and at the end of the interim period beginning after December
15, 2003 for all variable interest entities in which an enterprise acquired an
interest in that entity before February 1, 2003. As the Company does not have an
interest in any variable interest entities, the adoption of this interpretation
did not have a material effect on the Company's financial position, results of
operations or cash flows.
NOTE 11 - SUBSIDIARY GUARANTORS
The Company's payment obligations under the 9 3/4% notes are fully and
unconditionally guaranteed, jointly and severally (collectively, the "Subsidiary
Guarantees") on a senior subordinated basis, by its domestic wholly-owned
subsidiaries: Gentek Holdings, Inc., Gentek Building Products Inc. and Alside,
Inc. Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or
operations. Gentek Building Products Limited (the "Non-Guarantor Subsidiary") is
a Canadian company and does not guarantee the Company's 9 3/4% notes. The
operations and cash flows of Gentek Holdings, Inc., Gentek Building Products,
Inc. and Gentek Building Products Limited are presented since the date of their
acquisition on August 29, 2003. As such, no consolidating statements of
operations or cash flows are presented for the three and nine months ended
September 30, 2002 as the Company's only guaranteeing subsidiary for those
periods did not have any assets, liabilities or operations. The balance sheet
information includes all subsidiaries as of September 27, 2003. No consolidating
balance sheet is presented as of December 31, 2002 as the Company's only
guaranteeing subsidiary as of that date did not have any assets or liabilities.
In the opinion of management, separate financial statements of the respective
Guarantor Subsidiaries would not provide additional material information, which
would be useful in assessing the financial composition of the Guarantor
Subsidiaries. None of the Guarantor Subsidiaries has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness.
-9-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING BALANCE SHEET
September 27, 2003
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Eliminations Consolidated
------ ------------ ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ....... $ 7,830 $ (2,224) $ 2,332 $ -- $ 7,938
Accounts receivable, net ........ 95,444 25,571 24,034 -- 145,049
Intercompany receivables ........ 1,847 -- 1,281 (3,128) --
Inventory ....................... 70,146 15,239 23,051 -- 108,436
Deferred income taxes ........... 3,653 1,736 -- -- 5,389
Other current assets ............ 4,318 1,227 2,687 -- 8,232
--------- --------- --------- --------- ---------
Total current assets ...... 183,238 41,549 53,385 (3,128) 275,044
Property, plant and equipment, net . 101,677 7,245 21,600 -- 130,522
Goodwill ........................... 197,461 44,726 2,830 -- 245,017
Trademarks and trade names, net .... 96,287 724 862 -- 97,873
Patents, net ....................... 5,587 856 -- -- 6,443
Investment in subsidiaries ......... 107,148 20,000 -- (127,148) --
Other assets ....................... 11,639 -- 391 -- 12,030
--------- --------- --------- --------- ---------
Total assets .............. $ 703,037 $ 115,100 $ 79,068 $(130,276) $ 766,929
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................ $ 44,387 $ 8,823 $ 15,862 $ -- $ 69,072
Intercompany payables ........... -- 3,128 -- (3,128) --
Accrued liabilities ............. 42,501 7,887 8,175 -- 58,563
Income taxes payable ............ 4,998 220 1,591 -- 6,809
--------- --------- --------- --------- ---------
Total current liabilities 91,886 20,058 25,628 (3,128) 134,444
Deferred income taxes .............. 58,976 (6,979) (1,111) -- 50,886
Other liabilities .................. 21,072 10,933 10,991 -- 42,996
Long-term debt ..................... 337,500 -- 7,500 -- 345,000
Stockholders' equity ............... 193,603 91,088 36,060 (127,148) 193,603
--------- --------- --------- --------- ---------
Total liabilities and
stockholder's equity .... $ 703,037 $ 115,100 $ 79,068 $(130,276) $ 766,929
========= ========= ========= ========= =========
-10-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 27, 2003
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Elimination Consolidated
--------- --------- --------- --------- ---------
Net sales ................................... $ 196,722 $ 13,651 $ 18,185 $ (4,752) $ 223,806
Cost of sales ............................... 137,407 11,808 15,124 (4,752) 159,587
--------- --------- --------- --------- ---------
Gross profit ................................ 59,315 1,843 3,061 -- 64,219
Selling, general and administrative expense 35,132 1,652 1,486 -- 38,270
--------- --------- --------- --------- ---------
Income from operations ...................... 24,183 191 1,575 -- 25,949
Interest expense, net ....................... 9,647 -- 59 -- 9,706
Foreign currency gain ....................... -- -- (199) -- (199)
--------- --------- --------- --------- ---------
Income from continuing operations before
income taxes ........................... 14,536 191 1,715 -- 16,442
79
Income taxes ................................ 6,032 712 -- 6,823
--------- --------- --------- --------- ---------
Income before equity income from subsidiaries 8,504 112 1,003 -- 9,619
Equity income from subsidiaries ............. 1,115 -- (1,115) --
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ 9,619 $ 112 $ 1,003 $ (1,115) $ 9,619
========= ========= ========= ========= =========
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 27, 2003
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Elimination Consolidated
--------- --------- --------- --------- ---------
Net sales ................................... $ 488,029 $ 13,651 $ 18,185 $ (4,752) $ 515,113
Cost of sales ............................... 343,746 11,808 15,124 (4,752) 365,926
--------- --------- --------- --------- ---------
Gross profit ................................ 144,283 1,843 3,061 -- 149,187
Selling, general and administrative expense 100,146 1,652 1,486 -- 103,284
--------- --------- --------- --------- ---------
Income from operations ...................... 44,137 191 1,575 -- 45,903
Interest expense, net ....................... 20,568 -- 59 -- 20,627
Foreign currency gain ....................... -- -- (199) -- (199)
--------- --------- --------- --------- ---------
Income from continuing operations before
income taxes ........................... 23,569 191 1,715 -- 25,475
Income taxes ................................ 9,781 79 712 -- 10,572
--------- --------- --------- --------- ---------
Income before equity income from subsidiaries 13,788 112 1,003 -- 14,903
Equity income from subsidiaries ............. 1,115 -- -- (1,115) --
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ 14,903 $ 112 $ 1,003 $ (1,115) $ 14,903
========= ========= ========= ========= =========
-11-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 27, 2003
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassificatio
Parent Subsidiaries Subsidiary Elimination Consolidated
------ ------------ ---------- ----------- ------------
Net cash provided by (used in) operating activities $ 21,705 $ (3,048) $ (178) $ -- $ 18,479
INVESTING ACTIVITIES
Acquisition of Gentek Holdings, net of cash acquired (111,032) -- -- -- (111,032)
Additions to property, plant and equipment ......... (9,422) (74) (91) -- (9,587)
--------- --------- --------- ----------- ---------
Net cash used in investing activities .............. (120,454) (74) (91) -- (120,619)
FINANCING ACTIVITIES
Proceeds from borrowings under term loan ........... 182,500 -- 7,500 -- 190,000
Repayments of term loan ............................ (86,500) -- -- -- (86,500)
Redemption of 9 1/4% senior subordinated notes ..... (908) -- -- -- (908)
Financing costs .................................... (5,571) -- -- -- (5,571)
Intercompany transactions .......................... 4,036 898 (4,934) -- --
--------- --------- --------- ----------- ---------
Net cash provided by financing activities .......... 93,557 898 2,566 -- 97,021
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash from continuing
operations ....................................... (5,192) (2,224) 2,297 -- (5,119)
Effect of exchange rates on cash ................... -- -- 35 -- 35
Cash at beginning of period ........................ 13,022 -- -- -- 13,022
--------- --------- --------- ----------- ---------
Cash at end of period .............................. $ 7,830 $ (2,224) $ 2,332 $ -- $ 7,938
========= ========= ========= =========== =========
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
On August 29, 2003, the Company completed the acquisition of all of the
issued and outstanding shares of capital stock of Gentek Holdings, Inc. ("Gentek
Holdings") and repaid all of the indebtedness and accrued interest of Gentek
Holdings and its subsidiaries for an aggregate purchase price of approximately
$112.1 million, which included $1.1 million of cash acquired, a working capital
adjustment and customary transaction fees.
Gentek Holdings, which was privately held, is the parent of Gentek
Building Products, Inc. and Gentek Building Products Limited (collectively,
"Gentek"). Gentek manufacturers and distributes vinyl siding and accessories,
vinyl windows and aluminum and steel siding and accessories under the Revere(R)
and Gentek(R) brand names. Gentek markets its products to professional
contractors on a wholesale basis through thirteen company-owned distribution
centers in the mid-Atlantic region of the United States, twenty company-owned
distribution centers in Canada and independent distributors in the United
States.
In connection with the acquisition, the Company amended its existing
credit facility by adding a term loan facility to borrow an additional $113.5
million and expanding its revolving facility from $40 million to $70 million,
including a new Canadian subfacility of $15 million.
RESULTS OF OPERATIONS
The Company's results of operations include the results of Gentek
subsequent to its acquisition on August 29, 2003.
On April 19, 2002, a cash tender offer for the Company's then
outstanding common stock for $50 per share and a cash tender offer for
approximately $74.0 million of the Company's then outstanding 9 1/4% notes were
completed. As a result, the Company became a privately held, wholly owned
subsidiary of Associated Materials Holdings Inc., which is controlled by
affiliates of Harvest Partners, Inc. ("Harvest Partners").
The Company's results of operations prior to the date of the merger
transaction with Harvest Partners are presented as the results of the
Predecessor. The results of operations, including the merger transaction with
Harvest Partners and results thereafter, are presented as the results of the
Successor. In addition, the Company completed the sale of its AmerCable division
on June 24, 2002. AmerCable's results through April 18, 2002 are included in the
continuing operations of the Predecessor. Subsequent to April 18, 2002,
AmerCable's results are presented as discontinued operations of the Successor as
it was the Successor's decision to divest the division.
The following table sets forth for the periods indicated the results of
the Company's operations by segment:
-13-
ASSOCIATED MATERIALS INCORPORATED
CONDENSED CONSOLIDATED PREDECESSOR / SUCCESSOR STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Three Nine 108 165 Nine
Months Months Months Days Days Months
Ended Ended Ended Ended Ended Ended
September September September April September September
27, 30, 27, 18, 30, 30,
2003 2002 2003 2002 2002 2002
------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR COMBINED
----------- --------- --------
Net sales
Building products ................. $ 223,806 $ 176,673 $ 515,113 $ 161,959 $ 290,633 $ 452,592
AmerCable ......................... -- -- -- 18,271 -- 18,271
--------- --------- --------- --------- --------- ---------
Total .................... 223,806 176,673 515,113 180,230 290,633 470,863
Gross profit
Building products ................. 64,219 53,893 149,187 47,102 88,562 135,664
AmerCable ......................... -- -- -- 2,777 -- 2,777
--------- --------- --------- --------- --------- ---------
Total .................... 64,219 53,893 149,187 49,879 88,562 138,441
Selling, general and administrative expense
Building products ................. 38,270 34,557 103,284 41,080 56,224 97,304
AmerCable ......................... -- -- -- 2,192 -- 2,192
--------- --------- --------- --------- --------- ---------
Total .................... 38,270 34,557 103,284 43,272 56,224 99,496
Income from operations
Building Products ................. 25,949 19,336 45,903 6,022 32,338 38,360
AmerCable ......................... -- -- -- 585 -- 585
--------- --------- --------- --------- --------- ---------
Total .................... 25,949 19,336 45,903 6,607 32,338 38,945
Interest, net (a) ......................... 9,706 6,002 20,627 2,068 10,983 13,051
Foreign currency gain ...................... (199) -- (199) -- -- --
Merger transaction costs (b) ............... -- -- -- 9,319 -- 9,319
Debt extinguishment costs (c) ............. -- -- -- -- 7,579 7,579
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes ................... 16,442 13,334 25,475 (4,780) 13,776 8,996
Income taxes ............................... 6,823 5,535 10,572 977 5,718 6,695
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing operations 9,619 7,799 14,903 (5,757) 8,058 2,301
Loss from discontinued operations .......... -- -- -- -- (521) (521)
--------- --------- --------- --------- --------- ---------
Net income (loss) ......................... $ 9,619 $ 7,799 $ 14,903 $ (5,757) $ 7,537 $ 1,780
========= ========= ========= ========= ========= =========
-14-
Three Three Nine 108 165 Nine
Months Months Months Days Days Months
Ended Ended Ended Ended Ended Ended
September September September April September September
27, 30, 27, 18, 30, 30,
2003 2002 2003 2002 2002 2002
---------------------------------------------------------------
PREDECESSOR SUCCESSOR COMBINED
Reconciliation of net income (loss)
to EBITDA (d) (e):
Net income (loss)............................ 9,619 $7,799 $ 14,903 $(5,757) $ 7,537 $ 1,780
Interest - Continuing operations............. 9,706 6,002 20,627 2,068 10,983 13,051
- Discontinued operations (f)....... - - - - 1,213 1,213
Taxes - Continuing operations............. 6,823 5,535 10,572 977 5,718 6,695
- Discontinued operations........... - - - - (370) (370)
Depreciation and Amortization................
- Continuing operations............. 3,362 2,849 8,874 3,969 4,246 8,215
- Discontinued operations........... - - - - 318 318
-------- -------- -------- ------- ------- -------
EBITDA....................................... $ 29,510 $ 22,185 $ 54,976 $ 1,257 $29,645 $30,902
========= ======== ======== ======= ======= =======
(a) The 2003 periods include accelerated amortization of previously
capitalized deferred financing fees and certain financing costs paid in
conjunction with the amendment to the credit facility totaling $3.9
million as a result of amending and restating the Company's credit
facility for the Gentek Holdings acquisition.
(b) Merger transaction costs include investment banking and legal fees
incurred by the Predecessor in conjunction with the strategic review
process and subsequent merger transaction with Harvest Partners.
(c) Debt extinguishment costs include $4.9 million for the extinguishment
of substantially all of the Successor's assumed 9 1/4% senior
subordinated notes and $2.7 million for the expense of financing fees
related to an interim credit facility utilized for the merger, which
was repaid shortly thereafter.
(d) EBITDA is calculated as net income (loss) plus interest, taxes,
depreciation and amortization. The Company considers EBITDA to be an
important indicator of its operational strength and performance of its
business. The Company has included EBITDA because it believes it is
used by certain investors as one measure of a company's ability to
service its debt. EBITDA should be considered in addition to, not as a
substitute for the Company's net income or loss or to cash flows as
well as other measures of financial performance in accordance with
accounting principles generally accepted in the United States. EBITDA
has not been prepared in accordance with accounting principles
generally accepted in the United States. Therefore, EBITDA as presented
by the Company, may not be comparable to similarly titled measures
reported by other companies. The Company has changed the way it
describes EBITDA in connection with the adoption by the SEC of
Regulation G and other rules affecting non-GAAP financial measures.
Accordingly, EBITDA as used in this report has not been adjusted for
items that may impact its comparability to prior periods, including
items such as AmerCable's results of operations, merger transaction
costs, debt extinguishment costs and certain cost of sales expenses
relating to inventory fair value adjustments recorded at the time of
the merger transaction with Harvest Partners and the acquisition of
Gentek.
(e) AmerCable's EBITDA is calculated as its net income (loss) plus
interest, taxes, depreciation and amortization. For the periods through
the date of its sale, AmerCable's EBITDA is calculated as follows:
January April 19, January
1, 2002 2002 1, 2002
To To To
April June 24, June 24,
18, 2002 2002 2002
----------- --------- --------
PREDECESSOR SUCCESSOR COMBINED
Reconciliation of net income (loss) to EBITDA:
----------------------------------------------
Net income (loss)......................................... $ 359 $ (521) $ (162)
Interest - Discontinued operations (g).................... - 1,213 1,213
Taxes - Continuing operations.......................... 226 - 226
- Discontinued operations............... - (370) (370)
Depreciation and Amortization.............................
- Continuing operations................. 635 - 635
- Discontinued operations............... - 318 318
------- ----- -------
EBITDA.................................................... $ 1,220 $ 640 $ 1,860
======= ===== =======
-15-
(f) As mentioned above, the 2003 results include the results of Gentek
subsequent to its acquisition on August 29, 2003. A reconciliation of
EBITDA excluding the impact of the Gentek acquisition for the quarter
and nine months ended September 27, 2003 is as follows:
Three Nine
Months Months
Ended Ended
September 27, September 27,
2003 2003
-------------- ---------------
Reconciliation of EBITDA excluding the impact of the Gentek
-----------------------------------------------------------
acquisition:
------------
EBITDA as presented above................................. $ 29,510 $ 54,976
Less EBITDA from the impact of the Gentek...............
acquisition calculated as:
Net income....................................... 1,099 1,099
Interest......................................... 59 59
Taxes............................................ 779 779
Depreciation and Amortization.................... 485 485
------- -------
EBITDA from the impact of the Gentek
acquisition...................................... 2,422 2,422
------- -------
EBITDA excluding impact of Gentek acquisition............. $27,088 $52,554
======= =======
EBITDA from the impact of the Gentek acquisition includes a cost of
sales adjustment of $1.4 million related to an inventory fair value
adjustment recorded at the time of the acquisition. Management believes
the presentation of non-GAAP financial measures that exclude the
operations of Gentek provides useful information to investors regarding
the Company's results of operations as these non-GAAP financial
measures allow investors to better evaluate ongoing business
performance, and factors that influenced performance during the periods
under report.
(g) Includes accelerated amortization of $0.8 million of debt issuance
costs as a result of using the proceeds from the sale of AmerCable to
permanently reduce the credit facility.
-16-
Quarter Ended September 27, 2003 Compared to Quarter Ended September 30, 2002
- -----------------------------------------------------------------------------
As discussed below, results of operations include the Company's ongoing
building products operations, which include the Company's Alside division and
Gentek subsequent to its acquisition on August 29, 2003.
Net sales were $223.8 million for the quarter ended September 27, 2003,
a 26.7% increase over $176.7 million for the same period in 2002. The 2003
results include $27.1 million of net sales contributed by the Gentek
acquisition. Excluding the impact of the Gentek acquisition, net sales from
continuing operations increased 11.3%. The increase in sales was primarily
driven by an increase in window sales along with sales from the Company's Gentek
subsidiary. Gross profit for the quarter ended September 27, 2003 was $64.2
million, or 28.7% of net sales, compared to $53.9 million, or 30.5% of net
sales, for the same period in 2002. The decrease in gross profit margin
percentage is due to lower margin window sales comprising a larger proportion of
total sales in 2003 and the inclusion of Gentek's operations for the month of
September, which includes a cost of sales expense of $1.4 million relating to an
inventory fair value adjustment recorded at the time of the Gentek acquisition.
Additionally, Gentek's gross margin percentage is typically lower than Alside's
as a larger proportion of Gentek's sales are to independent distributors versus
contractors through company-owned distribution centers. Selling, general and
administrative ("SG&A") expense increased to $38.3 million, or 17.1% of net
sales, for the quarter ended September 27, 2003 compared to $34.6 million, or
19.6% of net sales, for the same period in 2002. The increase in selling,
general and administrative expense is primarily a result of three new supply
centers added in 2003 along with the acquisition of Gentek. Income from
operations was $25.9 million for the quarter ended September 27, 2003 compared
to $19.3 million for the same period in 2002.
EBITDA for the quarter ended September 27, 2003 was $29.5 million
compared to $22.2 million for the same period in 2002. EBITDA for the third
quarter of 2003 includes a cost of sales expense of $1.4 million relating to an
inventory fair value adjustment recorded at the time of the Gentek acquisition.
Excluding the impact of the Gentek acquisition, EBITDA for the third quarter of
2003 was $27.1 million.
Successor and Predecessor Results
The Successor had net sales and net income of $223.8 million and $9.6
million, respectively, for the quarter ended September 27, 2003. Interest
expense during this period was $9.7 million and consisted primarily of interest
on the 9 3/4% notes, term loan and revolving loans under the credit facility,
amortization of deferred financing costs and accelerated amortization of
previously capitalized deferred financing fees and certain financing costs paid
in conjunction with the amendment to the credit facility totaling $3.9 million
as a result of amending and restating the Company's credit facility for the
Gentek Holdings acquisition. Net gains on foreign currency transactions totaled
$0.2 million. As a result of relocating the Company's corporate office from
Texas to Ohio in 2002, the Successor's state and local income tax rate
increased, raising the Company's total effective tax rate to 41.5% from 38.5%.
The Successor recorded an income tax provision of $6.8 million, representing the
41.5% effective tax rate. The Successor had net sales and net income of $176.7
million and $7.8 million, respectively, for the quarter ended September 30,
2002. Interest expense during this period was $6.0 million and consisted
primarily of interest on the 9 3/4% notes, term loan under the credit facility
and amortization of deferred financing costs. The Successor recorded an income
tax provision of $5.5 million, representing the 41.5% effective tax rate.
Nine Months Ended September 27, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002
- ----
Net sales were $515.1 million for the nine months ended September 27,
2003, a 13.8% increase over $452.6 million for the same period in 2002. The 2003
results include $27.1 million of net sales contributed by the Gentek
acquisition. Excluding the impact of the Gentek acquisition, net sales from
continuing operations increased 7.8%. The increase in sales was primarily driven
by an increase in window sales along with sales from the Company's Gentek
subsidiary. Gross profit increased to $149.2 million, or 29.0% of net sales, for
the nine months ended September 27, 2003 compared to $135.7 million, or 30.0% of
net sales, for the same period in 2002. The decrease in gross profit margin
percentage was primarily due to lower margin window sales comprising a larger
proportion of total sales in 2003 compared to the same period in 2002. SG&A
expense increased to $103.3 million, or 20.1% of net sales, for the nine months
ended September 27, 2003 compared to $97.3 million, or 21.5% of net sales, for
the same period in 2002. SG&A expense increased for the year-to-date period
primarily as a result of the three new supply centers added in 2003 along with
the seven new supply centers added in 2002, which had nine full months of
-17-
expense in 2003. Income from operations was $45.9 million for the nine months
ended September 27, 2003 compared to $38.4 million for the same period in 2002.
EBITDA for the nine months ended September 27, 2003 was $55.0 million
compared to $30.9 million for the same period in 2002. EBITDA for the nine
months ended September 27, 2003 includes a cost of sales expense of $1.4 million
relating to an inventory fair value adjustment recorded at the time of the
acquisition of Gentek. Excluding the impact of the Gentek acquisition, EBITDA
for the nine months ended September 27, 2003 was $52.6 million. EBITDA for the
nine months ended September 30, 2002 includes $1.9 million of EBITDA relating to
the AmerCable division, merger transaction costs of $9.3 million, debt
extinguishment costs of $7.6 million and a cost of sales expense of $1.9 million
relating to an inventory fair value adjustment recorded at the time of the
merger transaction with Harvest Partners.
Successor and Predecessor Results
The Successor had net sales and net income of $515.1 million and $14.9
million, respectively, for the nine months ended September 27, 2003. Interest
expense during this period was $20.6 million and consisted primarily of interest
on the 9 3/4% notes, term loan and revolving loans under the credit facility,
amortization of deferred financing costs and accelerated amortization of
previously capitalized deferred financing fees and certain financing costs paid
in conjunction with the amendment to the credit facility totaling $3.9 million
as a result of amending and restating the Company's credit facility for the
Gentek acquisition. The Successor recorded an income tax provision of $10.6
million, representing the 41.5% effective tax rate.
The Successor had net sales and net income of $290.6 million and $7.5
million, respectively, for the period from April 19, 2002 to September 30, 2002.
Interest expense during this period was $11.0 million and consisted primarily of
interest on the 9 3/4% notes, term loan and revolving loans under the credit
facility, an interim credit facility temporarily utilized for the merger
transaction with Harvest Partners and amortization of deferred financing costs.
As a result of relocating the Company's corporate office from Texas to Ohio, the
Successor's state and local income tax rate increased, raising the Company's
total effective tax rate to 41.5% from 38.5%. The Successor recorded an income
tax provision of $5.7 million, representing the 41.5% effective tax rate. The
Successor's results include debt extinguishment costs of $7.6 million, including
$4.9 million for the premium paid to extinguish $74.0 million of the Successor's
assumed 9 1/4% notes and $2.7 million for financing fees related to an interim
credit facility utilized for the merger transaction with Harvest Partners, which
was repaid shortly thereafter and loss from discontinued operations of $0.5
million, net of tax, for the Company's AmerCable division.
The Predecessor had net sales and a net loss of $180.2 million and $5.8
million for the period from January 1, 2002 to April 18, 2002. Interest expense
was $2.1 million and consisted primarily of interest on the Company's 9 1/4%
notes for the time period from January 1, 2002 to April 18, 2002. The
Predecessor's results include $9.3 million of transaction costs consisting of
investment banking and legal fees associated with the merger transaction with
Harvest Partners. The Predecessor recorded an income tax provision of $1.0
million, representing the 38.5% effective rate and an estimate for merger
transaction costs that were not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 2003, the Company had cash and cash equivalents of
$7.9 million and available borrowing capacity of approximately $65.5 million
under the revolving portion of its credit facility. Outstanding letters of
credit against the credit facility as of September 27, 2003, totaled $4.5
million securing various insurance letters of credit.
Net cash provided by operations was $18.5 million for the nine months
ended September 27, 2003 primarily reflecting the operating results for the
period offset by the seasonal increases of accounts receivable and inventory
during the summer selling period, partially offset by a seasonal increase in
accounts payable.
For the 165 days ended September 30, 2002 net cash provided by
operations of the Successor was $37.0 million. For the one hundred eight days
ended April 18, 2002, net cash used in operations of the Predecessor was $18.3
million. Cash flows from operations of the Predecessor also include the working
capital needs of AmerCable for the period from January 1, 2002 to April 18,
2002. AmerCable's cash flows for the period from April 19, 2002 to June 24, 2002
are shown as net cash used in discontinued operations. The net $18.7 million of
cash provided by operations ($37.0 million of cash provided by the Successor
less $18.3 million of cash used by the Predecessor) for
-18-
the nine months ended September 30, 2002 primarily reflects the operating
results for the period offset by the seasonal increases of accounts receivable
and inventory, partially offset by a seasonal increase in accounts payable.
Capital expenditures totaled $9.6 million for the nine months ended
September 27, 2003 and were primarily to replace vinyl siding extrusion and
handling equipment at the Company's Ennis, Texas manufacturing location and
expenditures related to opening three new supply centers. Cash flows from
investing activities also include the net acquisition amount paid for Gentek of
$111.0 million, net of cash acquired.
For the 165 days ended September 30, 2002, capital expenditures of the
Successor totaled $6.7 million. For the one hundred eight days ended April 18,
2002, capital expenditures of the Predecessor totaled $3.8 million, which
includes AmerCable's capital expenditures of $1.9 million. The combined capital
expenditures of the Successor and Predecessor, excluding AmerCable, totaled $8.6
million for the nine months ended September 30, 2002. Capital expenditures in
the 2002 period were primarily for the production of new casement window
tooling, related production line expenditures and leasehold improvements for the
opening of seven new supply centers.
Cash flows from the Successor's investing activities also include the
merger transaction with Harvest Partners totaling $366.4 million and net
proceeds from the sale of AmerCable totaling $28.3 million.
The purchase consideration of the Gentek acquisition was $112.1 million
($111.0 million, net of cash acquired). In addition, the Company paid $5.6
million of financing costs, repaid $76.5 million of existing Company term loans
and $0.6 million of accrued interest under the Company's existing credit
facility. The Gentek acquisition purchase consideration, financing costs and the
repayment of term loans and accrued interest were financed by cash flows from
financing activities for the nine months ended September 27, 2003 including
borrowings of $190.0 million under the term loan portion and $10.2 million under
the revolving loan portion of the Company's amended and restated credit
facility. The Company repaid the $10.2 million of borrowings under the revolving
loan portion of its credit facility and $10.0 million of term loans using cash
flows from operations and net cash settlements that occurred subsequent to the
close of the Gentek acquisition. Additionally, cash flows from financing
activities include the redemption of the remaining outstanding 9 1/4% notes of
$0.9 million. The $0.9 million of 9 1/4% notes were redeemed at 104.625% of the
principal amount of such notes plus accrued and unpaid interest through the date
of redemption.
Cash flows from the Successor's financing activities for the 165 days
ended September 30, 2002 include: (1) the issuance of $165 million of 9 3/4%
notes due 2012, (2) $125 million from the credit facility, (3) $164.8 million
cash contribution from Associated Materials Holdings Inc. and (4) cash of
approximately $6.0 million, representing a portion of the Company's total cash
on hand of $6.8 million to finance the merger transaction with Harvest Partners
of $366.4 million, financing costs of $12.8 million, tender offer of the 9 1/4%
notes of $74.0 million and debt extinguishment costs of $7.6 million. The tender
offer premium paid for the 9 1/4% notes was approximately $7.3 million, of which
$4.9 million is included as debt extinguishment costs representing the portion
of the premium in excess of the fair market value of the 9 1/4% notes. Upon
completion of the merger transaction with Harvest Partners, the Company was then
obligated to make a change of control offer for the approximate $1.0 million of
remaining outstanding 9 1/4% notes at a price of 101% of the principal amount
thereof, plus accrued and unpaid interest. The change of control offer was
completed on June 21, 2002 with an additional approximate $0.1 million of the 9
1/4% notes being tendered. The Company permanently reduced borrowings under the
term loan by $38.5 million using the net proceeds from the sale of AmerCable and
operating cash flows. For the 108 days ended April 18, 2002, cash flows from
financing activities include the payment of dividends of $0.3 million partially
offset by cash received from stock option exercises of $0.1 million.
The Company's 9 3/4% notes pay interest semi-annually in April and
October. The Company's amended and restated credit facility includes $180.0
million of outstanding term loans due through 2010 that bear interest at the
London Interbank Offered Rate ("LIBOR") plus 2.75%, payable quarterly at the end
of each calendar quarter, and up to $70 million of available borrowings provided
by revolving loans (including a new Canadian subfacility of $15 million), which
expire in 2007. The revolving credit facility expires in 2007 and bears interest
at LIBOR plus 3.00% payable quarterly at the end of each calendar quarter.
The credit facility and the indenture governing the 9 3/4% notes
contain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness, make loans or advances to subsidiaries
and other entities, invest in capital expenditures, sell assets or declare
dividends. In addition, under the credit facility the Company is required to
achieve certain financial ratios relating to leverage, coverage of fixed charges
and coverage
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of interest expense. The Company was in compliance with these covenants as of
September 27, 2003. On an annual basis, the Company is required to make
principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2002 were sufficient such that no additional principal
payments were required in 2003 under the excess cash flow provision. The Company
records as a current liability those principal payments that are estimated to be
due within twelve months under the excess cash flow provision of the credit
facility when the likelihood of those payments becomes probable.
The Company guaranteed $3.0 million of a secured note in connection
with the sale of a portion of its ownership interest in Amercord, Inc. Ivaco,
Inc., pursuant to the terms of the note, agreed to indemnify the Company for 50%
of any loss under the guarantee. The guarantee was exercised by Amercord's
lender, and the Company has settled with this lender for its portion of the
liability for approximately $1.2 million, which was fully paid in April 2003.
The Company retains a right to any collateral proceeds that secure the note;
however, the Company believes that the value of such collateral is not
sufficient to cover any significant portion of the Company's liability.
The Company believes that for the foreseeable future cash flows from
operations and its borrowing capacity under its amended and restated credit
facility will be sufficient to satisfy its obligations to pay principal and
interest on its outstanding debt, maintain current operations, and provide
sufficient capital for presently anticipated capital expenditures. There can be
no assurances, however, that the cash generated by the Company will be
sufficient for these purposes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation have not been
material to its operating results for each of the past three years, including
interim periods. The Company's principal raw material, vinyl resin, has been
subject to rapid price changes. Through price increases, the Company has
historically been able to pass on significant resin cost increases. The results
of operations for individual quarters can and have been negatively impacted by a
delay between the time of vinyl resin cost increases and price increases in the
Company's products. However, over longer periods of time, the impact of the cost
increases in vinyl resin has historically not been material. Resin prices have
increased in 2003, but remained relatively flat during the third quarter. The
Company increased prices for its vinyl siding and vinyl windows in April 2003 to
offset the increase in resin costs. While the Company expects that any
additional significant resin cost increases in 2003 will be offset by price
increases to its customers, there can be no assurances that the Company will be
able to pass on any future price increases.
CERTAIN FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this report regarding the prospects of the industry and the Company's prospects,
plans, financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, it does not assure that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from the forward-looking
statements:
- changes in home building industry, economic, interest rates
and other conditions;
- changes in availability of consumer credit, employment trends,
levels of consumer confidence and consumer preferences;
- changes in raw material costs and availability;
- ability to profit from the Gentek acquisition, including the
Company's ability to grow the Gentek brands and the
achievement of anticipated synergies;
- changes in national and regional trends in new housing starts;
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- changes in weather conditions;
- the Company's ability to comply with certain financial
covenants in the loan documents;
- increases in competition from other manufacturers of vinyl
building products as well as alternative building products;
- increases in the Company's indebtedness;
- increases in costs of environmental compliance; and
- the other factors discussed under the heading "Risk Factors"
in the Company's annual report on Form 10-K for the year ended
December 31, 2002 and elsewhere in this report.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements included in this report. These forward-looking statements speak only
as of the date of this report. The Company does not intend to update these
statements unless the securities laws require it to do so.
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\
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has outstanding borrowings under the term loan portion of
its credit facility. Interest under the credit facility is based on the variable
London Interbank Offered Rate (LIBOR). At September 27, 2003, the Company had
borrowings of $180.0 million under the term loan. The effect of a 1/8% increase
or decrease in interest rates would increase or decrease total interest expense
for the nine months ended September 27, 2003 by approximately $0.2 million.
FOREIGN CURRENCY EXCHANGE RISK
The Company's revenues are primarily from domestic customers and are
realized in U.S. dollars. However, since the acquisition of Gentek, the Company
now realizes revenues from sales made through Gentek's Canadian distribution
centers in Canadian dollars. The Company's Canadian manufacturing facilities
acquire raw materials and supplies from U.S. vendors, which results in foreign
currency transactional gains and losses. However payment terms among the
Canadian manufacturing facilities and these vendors are short-term in nature.
Accordingly, the Company believes its direct foreign currency exchange risk is
not material. In the past, the Company has hedged against foreign currency
exchange rate fluctuations on specific sales or equipment purchasing contracts.
At September 27, 2003, the Company had no currency hedges in place.
COMMODITY PRICE RISK
See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Effects of Inflation" for a discussion of
the market risk related to the Company's principal raw material, vinyl resin and
other commodity raw materials, steel and aluminum.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this quarterly report
(the "Evaluation Date"). Based on their evaluation as of the Evaluation
Date, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within required time
periods.
There have been no changes to the Company's internal control over
financial reporting during the quarter ended September 27, 2003 that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which, after giving effect to the Company's
existing insurance coverage, is expected to have a material adverse effect on
the Company.
From time to time, the Company is involved in a number of proceedings
and potential proceedings relating to environmental and product liability
matters. The Company handles these claims in the ordinary course of business and
maintains product liability insurance covering certain types of claims. Although
it is difficult to estimate the Company's potential exposure to these matters,
the Company believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
31.1 Certification of the Chief Executive Officer pursuant
to Rule 13a-14 of the Exchange Act, as adopted,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of the Chief Financial Officer pursuant
to Rule 13a-14 of the Exchange Act, as adopted,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
- ------------------------
Report Date Description
- ----------- -----------
July 31, 2003 The Company submitted a current report on Form 8-K
filing under Items 7 and 9 a copy of the Stock
Purchase Agreement, dated July 31, 2003, by and
between the Company and Gentek Holdings, Inc. and
furnishing under Item 9 a copy of the press release
announcing that the Company had entered into a
definitive agreement to acquire Gentek Holdings, Inc.
(Items 7 and 9).
August 1, 2003 The Company furnished a current report on Form 8-K to
report its financial results for the second quarter
ended June 28, 2003 (Items 7, 9 and 12).
August 1, 2003 The Company furnished a current report on Form 8-K to
report certain disclosures made during its second
quarter earnings conference call, which was held on
August 1, 2003 (Item 9).
August 29, 2003 The Company furnished a current report on Form 8-K to
report the close of the acquisition of Gentek
Holdings, Inc., which occurred on August 29, 2003
(Items 7 and 9).
September 12, 2003 The Company furnished a current report on Form 8-K to
report the completion of the acquisition of Gentek
Holdings, Inc., which occurred on August 29, 2003
(Items 2 and 7).
October 3, 2003 The Company furnished a current report on Form 8-K to
report that it had made an investor presentation on
October 2, 2003 (Item 9).
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November 3, 2003 The Company furnished a current report on Form 8-K to
report its financial results for the third quarter
ended September 27, 2003 (Items 7, 9 and 12).
November 7, 2003 The Company furnished a current report on Form 8-K/A
to amend the Form 8-K furnished on September 12, 2003
to report the completion of the acquisition of Gentek
Holdings, Inc., which occurred on August 29, 2003
(Items 2 and 7).
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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.
ASSOCIATED MATERIALS INCORPORATED
---------------------------------
(Registrant)
Date: November 12, 2003 By: /s/ Michael Caporale, Jr.
-----------------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
By: /s/ D. Keith LaVanway
-----------------------------------
D. Keith LaVanway
Vice President, Chief Financial Officer
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14 of
the Exchange Act, as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14 of
the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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