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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2002 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(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 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 such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date covered by this report.
Title of Each Class Outstanding at August 5, 2002
- ------------------- -----------------------------
Common 3,441,551 shares
FORM 10-Q
PART I. Item 1. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of dollars)
June 30, December 31,
2002 2001
--------- ------------
ASSETS (Unaudited) (Note A)
CURRENT ASSETS
Cash and cash equivalents $ 19,042 $ 16,804
Short-term investments 1,416
Accounts receivable, net 55,921 39,768
Inventories 94,806 93,923
Prepaid expenses & other current assets 13,806 19,368
--------- ---------
TOTAL CURRENT ASSETS 183,575 171,279
Insurance for asbestos-related liabilities 59,508 60,787
Goodwill, net 11,300 23,773
Other assets 18,523 17,420
Property, plant and equipment, net 150,197 150,659
--------- ---------
TOTAL ASSETS $423,103 $423,918
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 27,909 $ 28,501
Accrued expenses 57,151 48,253
Notes payable 16,211 11,646
Current portion of long-term debt 1,092 1,038
--------- ---------
TOTAL CURRENT LIABILITIES 102,363 89,438
Long-term debt 124,822 125,123
Asbestos-related liabilities 68,627 68,627
Other liabilities 49,968 51,530
Noncontrolling interests 7,133 11,952
STOCKHOLDERS' EQUITY
Common stock, par value $0.01-authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,548 19,548
Retained earnings 73,020 80,752
Accumulated other comprehensive loss (7,292) (7,966)
Less cost of shares in treasury (15,132) (15,132)
--------- ---------
70,190 77,248
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $423,103 $423,918
========= =========
See accompanying notes to consolidated condensed financial statements.
2
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands of dollars, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------
Net sales $ 121,315 $ 97,662 $ 223,735 $ 195,015
Interest and other income 1,917 948 2,707 1,269
--------- --------- --------- ---------
123,232 98,610 226,442 196,284
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold 87,901 72,065 162,703 145,706
Selling, general and administrative
expenses 29,090 24,730 56,474 51,946
Interest expense 2,852 2,730 5,558 5,244
--------- --------- --------- ---------
119,843 99,525 224,735 202,896
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND OTHER ITEMS 3,389 (915) 1,707 (6,612)
Income tax (benefit) 1,288 (316) 649 (2,381)
Noncontrolling interests (456) (81) (188) 1,560
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE
ACCOUNTING CHANGE 1,645 (680) 870 (2,671)
Cumulative effect of accounting change (7,742)
--------- --------- --------- ---------
Net earnings (loss) $ 1,645 $ (680) $ (6,872) $ (2,671)
========= ========= ========= =========
Net earnings (loss) per common share
before cumulative effect of accounting
change, basic and diluted $ .48 $ (.20) $ .25 $ (.77)
Cumulative effect of accounting change (2.25)
--------- --------- --------- ---------
Net earnings (loss) per common share,
basic and diluted $ .48 $ (.20) $ (2.00) $ (.77)
========= ========= ========= =========
Weighted average number of common
and equivalent shares outstanding 3,442 3,449 3,442 3,469
========= ========= ========= =========
Dividends declared per common share $ .125 $ .125 $ .25 $ .25
See accompanying notes to consolidated condensed financial statements.
3
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Six Months Ended
June 30,
2002 2001
---------------------
OPERATING ACTIVITIES
Net loss ................................................ $ (6,872) $ (2,671)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ...................... 8,731 9,843
Deferred income taxes .............................. 2,119 (1,832)
Cumulative effect of accounting change ............. 7,742
Changes in operating assets and liabilities:
Accounts receivable ......................... (15,676) 5,244
Inventories ................................. 199 (8,376)
Prepaid expenses and other assets ........... 3,519 2,342
Accounts payable and accrued expenses ....... 7,971 (8,293)
Noncontrolling interests .................... 188 (1,560)
Other liabilities ........................... (1,886) (1,117)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES ............................................ 6,035 (6,420)
INVESTING ACTIVITIES
Purchase of short-term investments ...................... (1,471)
Proceeds from sales of short-term investments ........... 1,416 12,097
Investments in property, plant and equipment ............ (7,045) (15,389)
Proceeds from sale of property, plant and equipment ..... 648
Purchase of additional partnership interests in K&M ..... (2,066)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES ................... (5,629) (6,181)
FINANCING ACTIVITIES
Net short-term borrowings ............................... 4,217 19,284
Payments on long-term debt .............................. (519) (4,642)
Purchase of treasury shares ............................. (1,066)
Dividends paid .......................................... (860) (866)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES .......................................... 2,838 12,710
Effect of foreign exchange rate changes on cash ............ (1,006) 528
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ................. 2,238 637
Cash and cash equivalents at beginning of period ........... 16,804 16,859
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ............................................. $ 19,042 $ 17,496
======== ========
See accompanying notes to consolidated condensed financial statements
4
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly-owned subsidiaries
("ABI" or "American Biltrite") as well as entities over which it has voting
control have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with 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. In the opinion of management, all adjustments (consisting of normal
recurring adjustments and the cumulative effect of the change in accounting for
goodwill) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Certain amounts appearing in the prior year's consolidated condensed financial
statements have been reclassified to conform to the current year's
presentations.
Note B - Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 applies to all business combinations completed after June
30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141
also establishes new criteria for determining whether intangible assets should
be recognized separately from goodwill. SFAS No. 142 provides that goodwill and
intangible assets with indefinite lives will not be amortized, but rather will
be tested for impairment on an annual basis. Adoption of SFAS No. 141 did not
have an impact on the consolidated results of operations or financial position
of the Company. SFAS No. 142 was effective for the Company as of January 1,
2002. During the first quarter of 2002, the Company performed an impairment test
of goodwill and concluded that there was impairment of goodwill related to both
Congoleum and Janus Flooring. The Company compared the implied fair value of
their goodwill to the carrying value of goodwill. It was determined that based
on the fair value of both Congoleum and Janus Flooring, there should be no
goodwill recorded.
5
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note B - Changes in Accounting Principles (continued)
Congoleum recorded an impairment loss of $10.5 million during the first quarter
of 2002 based on this change in accounting principle. American Biltrite's share,
55%, in this impairment loss resulted in a charge of $5.8 million plus a charge
of $1.9 million for an impairment loss related to Janus Flooring goodwill for a
total charge of $7.7 million during the first quarter of 2002.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS No. 142 occurred as of January 1, 2001 (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) before cumulative
effect of accounting change:
As reported $1,645 $ (680) $ 870 $(2,671)
Goodwill amortization 351 728
------ ------- ------ -------
As adjusted $1,645 $ (329) $ 870 $(1,943)
====== ====== ===== =======
Basic earnings (loss) per share before
cumulative effect of accounting change:
As reported $ .48 $ (.20) $ .25 $ (.77)
Goodwill amortization .10 .21
------ ------ ------ -------
As adjusted $ .48 $ (.10) $ .25 $ (.56)
====== ====== ====== =======
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") was issued. The Company adopted SFAS No. 144
effective January 1, 2002. Among other things, SFAS No. 144 significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. Adoption of this pronouncement did not have an effect on the
Company's consolidated financial position or results of operations.
In November 2001, Emerging Issues Task Force (EITF) issue 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products" ("EITF 01-09"), was issued. The Company adopted EITF 01-09 effective
January 1, 2002 as required. This issue addresses the manner in which companies
account for sales incentives to their customers. The Company's current
accounting policies for the recognition of costs related to these programs,
which is to accrue for costs as benefits are earned by the Company's customers,
are already in accordance with the consensus reached in this issue. The Company
has reclassified amounts previously recorded in selling, general and
administrative expense as a reduction in sales. The impact for the
6
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note B - Changes in Accounting Principles (continued)
six months ended June 30, 2002 and 2001 was a reduction of sales and selling,
general and administrative expenses of $2.1 million and $2.7 million,
respectively.
Note C - Inventories
Inventories at June 30, 2002 and December 31, 2001 consisted of the following
(in thousands):
June 30, December 31,
2002 2001
-----------------------------
Finished goods $67,900 $69,527
Work-in-process 11,575 11,382
Raw materials and supplies 15,331 13,014
------- -------
$94,806 $93,923
======= =======
Note D - Commitments and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described in the following footnote. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts, and the
matters may remain unresolved for several years. On the basis of information
furnished by counsel and others, the Company does not believe that these
matters, individually or in the aggregate, will have a material adverse effect
on its business or financial condition.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's balance sheet as shown in the
following table. Due to the relative magnitude and wide range of estimates of
these liabilities and due to the fact that recourse related to these liabilities
is limited to Congoleum, these matters are discussed separately following
matters for which American Biltrite has actual or potential direct liability.
7
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately 535 pending claims involving
approximately 1,471 individuals as of June 30, 2002. The claimants allege
personal injury from exposure to asbestos or asbestos-containing products.
Activity related to asbestos claims was as follows:
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
------------------ -------------------
Beginning claims 464 330
New claims 94 189
Settlements (4) (15)
Dismissals (19) (40)
--- ---
Ending claims 535 464
=== ===
ABI estimates that its range of probable and estimable undiscounted losses for
asbestos related claims is $15.6 million to $27.8 million before considering
insurance recoveries, which ABI expects will fully cover the liability. ABI has
concluded that no amount within this range is more likely than any other, and
has recorded a $15.6 million liability for asbestos related claims and a $15.6
million asset for expected insurance coverage.
ABI reported in its December 31, 2001 Form 10-K that it has been named as a
Potentially Responsible Party ("PRP") within the meaning of the federal
Comprehensive Environmental Response Compensation and Liability Act, as amended,
with respect to two sites in two separate states. There have been no new
developments relating to these sites during the six month period ended June 30,
2002. ABI also received notice by the present owner of a former ABI plant with
regard to notice by the Maine Department of Environmental Protection ("MDEP") to
clean up a dumpsite. ABI has submitted a Site Investigation Work Plan to the
MDEP.
With regard to the Olin Corporation ("Olin") site in Wilmington, MA, including
the six month period ending June 30, 2002, ABI has made periodic payments of
$1.9 million for reimbursement of response costs incurred by Olin with regard to
the site and reimbursement for Olin's internal costs since January 1, 1999, each
as provided under the settlement agreement. These periodic payments are in
addition to the $2.5 million payment made by ABI that was due at the time ABI
entered into the settlement agreement and related to ABI's share of alleged past
response costs incurred by Olin through December 31, 1998 with regard to the
site. Olin has estimated that the response cost for all of 2002 will be
approximately $2.5 million with ABI's allocated share being
8
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
$340,000. ABI has estimated that beyond 2002 the total response costs will be in
the range of $16.3 million to $28.5 million. As of June 30, 2002, ABI has
estimated its share of potential further liability for the Olin site to be in
the range of $2.3 million to $4 million before any recoveries from insurance.
ABI has been named by the United States Environmental Protection Agency ("EPA")
as a PRP along with seven other PRPs with respect to three neighborhood sites
("Sites") in Atlanta, Georgia where properties within the boundaries of the
Sites contain lead in the surface soil in concentrations that exceed EPA's
residential lead screening level. The EPA has requested that ABI sign an
administrative consent order. ABI is reviewing the EPA notification letter and
the administrative consent order while assessing its responsibility with respect
to the Sites.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), as amended, and similar state laws. In two
instances, although not named as a PRP, Congoleum has received a request for
information. These pending proceedings currently relate to seven disposal sites
in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which
recovery from generators of hazardous substances is sought for the cost of
cleaning up the contaminated waste sites. Congoleum's ultimate liability in
connection with those sites depends on may factors, including the volume of
material contributed to the site, the number of other PRPs and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, Congoleum can be held jointly and severally liable
for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 51 companies, substantially all of which are financially solvent. Two
removal actions were substantially complete as of December 31, 1998; however the
groundwater remediation phase has not begun and the remedial
investigation/feasibility study related to the groundwater remediation has not
been approved. The PRPs group estimates that future costs of groundwater
remediation, based on engineering and consultant studies conducted, would be
approximately $26 million. Congoleum's proportionate share, based on waste
disposed at the site, was estimated to be approximately 6.1%.
9
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Estimated total cleanup costs, including
capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.
Although the outcome of these matters could result in significant expenses or
judgments, management does not believe based on present facts and circumstances
that their disposition will have a material adverse effect on the financial
position of Congoleum.
Congoleum is one of many defendants in approximately 10,994 pending claims
(including workers' compensation cases) involving approximately 32,885
individuals as of June 30, 2002, alleging personal injury from exposure to
asbestos or asbestos-containing products. There were 6,563 claims at December
31, 2001 that involved approximately 23,139 individuals. Activity related to
asbestos claims was as follows:
Six Months Ended Year Ended
June 30, 2002 December 31, 2001
------------- -----------------
Beginning claims 6,563 1,754
New claims 4,843 5,048
Settlements (42) (40)
Dismissals (370) (199)
------ -----
Ending claims 10,994 6,563
====== =====
The total indemnity costs incurred to settle claims during the six months ended
June 30, 2002 and twelve months ended December 31, 2001 were $1.0 million and
$1.1 million, respectively, which were paid by Congoleum's insurance carriers,
as were the related defense costs. Costs per claim vary depending on a number of
factors, including the nature of the alleged exposure and the jurisdiction where
the claim was litigated. As of June 30, 2002, Congoleum has incurred
asbestos-related claims of $12.6 million, to resolve claims of over 33,700
claimants, substantially all of which have been paid by Congoleum's insurance
carriers. The average indemnity cost per resolved claimant is $374. Over 99% of
claims incurred by Congoleum have settled, on average, for amounts less than
$105 per claimant.
Nearly all claims allege that various diseases were caused by exposure to
asbestos-containing products, including sheet vinyl and resilient tile
manufactured by Congoleum (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with Congoleum).
10
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
Congoleum discontinued the manufacture of asbestos-containing sheet vinyl
products in 1983 and asbestos-containing tile products in 1974. In general,
governmental authorities have determined that asbestos-containing sheet and tile
products are nonfriable (i.e., cannot be crumbled by hand pressure) because the
asbestos was encapsulated in the products during the manufacturing process.
Thus, governmental authorities have concluded that these products do not pose a
health risk when they are properly maintained in place or properly removed so
that they remain nonfriable. Congoleum has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
Congoleum regularly evaluates its estimated liability to defend and resolve
current and reasonably anticipated future asbestos-related claims. It reviews,
among other things, recent and historical settlement and trial results, the
incidence of past and recent claims, the number of cases pending against it, and
asbestos litigation developments that may impact the exposure of Congoleum. One
such development, the declarations of bankruptcy by several companies that are
typically lead defendants in asbestos-related cases, is likely to have a
negative impact on Congoleum's claim experience. The estimates developed are
highly uncertain due to the limitations of the available data and the difficulty
of forecasting the numerous variables that can affect the range of the
liability.
During the fourth quarter of fiscal 2001, Congoleum updated its evaluation of
the range of potential defense and indemnity costs for asbestos-related
liabilities and the insurance coverage in place to cover these costs. As a
result of Congoleum's analysis, Congoleum has determined that its range of
probable and estimable undiscounted losses for asbestos-related claims through
the year 2049 is $53.3 million to $195.6 million before considering insurance
recoveries. As discussed previously, it is very difficult to forecast a
liability for Congoleum's ultimate exposure for asbestos-related claims as there
are multiple variables that can affect the timing, severity, and quantity of
claims. Therefore, Congoleum has concluded that no amount within that range is
more likely than any other, and therefore has determined that the amount of the
gross liability it should record for asbestos-related claims is equal to $53.3
million in accordance with accounting principles generally accepted in the
United States. Of this amount, $53 million has been reflected in the balance
sheet as a long-term liability and $0.3 million in accrued expenses as of
December 31, 2001 and June 30, 2002.
During the period that Congoleum produced asbestos-containing products,
Congoleum purchased primary and excess insurance policies providing in excess of
$1 billion coverage for bodily injury asbestos claims. To date, substantially
all claims and defense costs have been paid through primary insurance coverage.
At June 30, 2002, Congoleum had $0.5 million in remaining primary insurance
coverage for bodily injury asbestos claims. Once all primary coverage is
exhausted, Congoleum expects defense and indemnity costs to be covered by its
excess insurance policies. However, it is likely that Congoleum will share in
these costs. The first layer of excess insurance policies provides for $135
million in coverage. Of this layer, approximately 25% to 33% (depending on the
method used to allocate losses) was underwritten by carriers who are presently
insolvent. Congoleum anticipates that it will have to pay some or all of the
portion of costs for resolving
11
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
asbestos-related claims that are allocable to such insolvent carriers, and that
it may, in turn, be able to recover a portion of such payments from the estates
or insurance guaranty funds responsible for the obligations of these carriers.
The same factors that affect developing forecasts of potential defense and
indemnity costs for asbestos-related liabilities also affect estimates of the
total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. Congoleum has filed suit regarding insurance
coverage issues against certain of its primary insurance carriers, the carriers
comprising its first layer of excess insurance, state guaranty funds
representing insolvent carriers, and its insurance brokers and has begun
settlement negotiations with several of these parties.
Congoleum has determined, based on its review of its insurance policies and the
advice of legal counsel, that approximately $45.2 million at December 31, 2001
and $43.9 million at June 30, 2002 of the estimated $53.3 million gross
liability is probable of recovery. This determination was made after considering
the terms of the available insurance coverage, the financial viability of the
insurance companies and the status of negotiations with its carriers. This
insurance receivable has been recorded in other long-term assets as of December
31, 2001 and June 30, 2002.
Since many uncertainties exist surrounding asbestos litigation, Congoleum will
continue to evaluate its asbestos-related estimated liability and corresponding
estimated insurance assets as well as the underlying assumptions used to derive
these amounts. It is reasonably possible that Congoleum's total exposure to
asbestos-related claims may be greater than the recorded liability and that
insurance recoveries may be less than the recorded asset. These uncertainties
may result in Congoleum incurring future charges to income to adjust the
carrying value of recorded liabilities
12
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note D - Commitments and Contingencies (continued)
and assets. Additionally, since Congoleum has recorded an amount representing
the low end of the range of exposure for asbestos-related claims, it is possible
that over time another amount within the range will be a better estimate of the
actual losses. Although the resolution of these claims is anticipated to take
decades, amounts recorded for the liability are not discounted, and the effect
on results of operations in any given year from a revision to these estimates
could be material.
Note E - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
six month periods ended June 30, 2002 and 2001 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) $1,645 $(680) $(6,872) $(2,671)
Foreign currency translation adjustments 810 839 674 (169)
------ ----- ------ -------
Total comprehensive income (loss) $2,455 $ 159 $(6,198) $(2,840)
====== ===== ======== =======
Note F - Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding.
13
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note G - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division which produces flooring and rubber products.
Congoleum, which manufactures vinyl and vinyl composition floor coverings with
distribution primarily through floor covering distributors, retailers and
contractors for commercial and residential use, represents the majority of the
Company's flooring products segment. The tape products segment consists of two
production facilities in the United States and finishing and sales facilities in
Belgium, Singapore and Italy. The tape products segment manufactures paper,
film, HVAC, electrical, shoe and other tape products for use in industrial and
automotive markets. The jewelry segment reflects the results of K&M Associates
L.P., a national costume jewelry supplier to mass merchandisers and department
stores. The Company's Canadian division produces flooring, rubber products,
including materials used by footwear manufacturers, and other industrial
products.
Segment Profit and Assets
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------------- -----------------------
Revenues
Revenues from external customers:
Flooring products $ 69,865 $ 56,085 $ 129,756 $ 109,249
Tape products 22,447 21,491 41,717 44,126
Jewelry 18,650 9,678 33,098 19,691
Canadian division 10,353 10,408 19,164 21,949
--------- --------- --------- ---------
Total revenues from external
customers 121,315 97,662 223,735 195,015
--------- --------- --------- ---------
Intersegment revenues:
Flooring products 70 78 160 189
Tape products 38 42 76 70
Jewelry
Canadian division 2,941 2,285 5,946 4,110
--------- --------- --------- ---------
Total intersegment revenues 3,049 2,405 6,182 4,369
--------- --------- --------- ---------
124,364 100,067 229,917 199,384
Reconciling items
Intersegment revenues (3,049) (2,405) (6,182) (4,369)
--------- --------- --------- ---------
Total consolidated revenues $ 121,315 $ 97,662 $ 223,735 $ 195,015
========= ========= ========= =========
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FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
Note G - Industry Segments (continued)
(In thousands) Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------ -------------------
Segment profit (loss)
Flooring products $ 883 $ 62 $ (645) $(6,036)
Tape products 1,088 (70) 1,133 551
Jewelry 1,697 (99) 1,843 (216)
Canadian division 322 (93) 518 480
------- ----- ------- -------
Total segment profit (loss) 3,990 (200) 2,849 (5,221)
Reconciling items
Corporate items (593) (604) (1,100) (1,280)
Intercompany profit (8) (111) (42) (111)
------- ----- ------- -------
Total consolidated profit
(loss) before income taxes
and other items $ 3,389 $(915) $ 1,707 $(6,612)
======= ===== ======= =======
June 30, Dec. 31,
2002 2001
---- ----
Segment assets
Flooring products $ 285,867 $ 291,989
Tape products 59,581 57,417
Jewelry 39,489 39,109
Canadian division 34,893 32,660
--------- ---------
Total segment assets 419,830 421,175
Reconciling items
Corporate items 20,124 16,793
Intersegment accounts receivable (16,618) (13,859)
Intersegment profit in inventory (233) (191)
--------- ---------
Total consolidated assets $ 423,103 $ 423,918
========= =========
Certain amounts at December 31, 2001 have been reclassified to conform to the
current year's presentation.
15
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2002
Results of Operations
Net sales for the second quarter of 2002 were $121.3 million compared to $97.7
million in the second quarter of 2001, an increase of $23.6 million or 24.2%.
Net sales for the first six months of 2002 were $223.7 million, up $28.7 million
or 14.7% from the first half of 2001. Second quarter sales improved over prior
year in all segments, with most of the increase coming from flooring and
jewelry. Flooring sales increased due to new product introductions, higher sales
of remodel and builder products, and an increase in inventory by a major
distributor to improve product availability. Jewelry sales increased due to an
earlier and larger back-to-school program, expansion of other programs with a
leading mass merchandiser and sales of licensed product lines acquired in July
2001. The year-to-date sales increase is due to the higher second quarter sales,
as well as first quarter sales increases in flooring (initial stock shipments to
a major retailer) and jewelry (sales of licensed product lines).
Cost of products sold as a percentage of net sales was 72.5% in the second
quarter of 2002 versus 73.8% in the second quarter of 2001. For the six months
ended June 30, 2002, cost of products sold as a percentage of net sales were
72.7% compared with 74.7% during the same period one year earlier. This
improvement is primarily due to a greater proportion of higher margin jewelry
sales in the overall mix and increased volume in the flooring segment.
Selling, general and administrative expenses as a percentage of sales were 24.0%
in the second quarter of 2002 compared to 25.3% in the second quarter of 2001.
For the six months ended June 30, 2002, selling, general and administrative
expenses as a percentage of sales were 25.2%, down from 26.6% in the first half
of 2001. The decrease from corresponding prior year periods in these costs as a
percentage of sales is primarily due to the increase in sales together with
ongoing cost reduction efforts and the elimination of goodwill amortization
expense in 2002.
Interest and other income for the three and six months ended June 30, 2002
increased from comparable year earlier periods primarily due to higher service
income in the jewelry segment.
For the three months ended June 30, 2002, the Company had net earnings of $1.6
million versus a loss of $0.7 million in the same period one year earlier. All
segments reported income this year versus losses last year. For the first six
months of 2002, net income (before a required accounting change) was $0.9
million versus a net loss of $2.7 million in the year earlier period. This
reflects improved results in all segments versus last year, with the largest
improvements in flooring and jewelry.
16
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2002
Liquidity and Capital Resources
Cash and cash equivalents, including short term investments, increased $0.8
million in the first six months of 2002 to $19.0 million, compared with a
decline of $10.0 million in the first six months of 2001. The generation of cash
versus utilization one year earlier was primarily due to reduced inventory
requirements, lower capital spending, slower settlement of accrued liabilities,
and improved operating results, partly offset by higher receivables. Working
capital at June 30, 2002 was $81.2 million, down slightly from $81.8 million at
December 31, 2001. The ratio of current assets to current liabilities at June
30, 2002 was 1.8, down slightly from 1.9 at December 31, 2001.
Capital expenditures in the first half of 2002 were $7 million. It is
anticipated that capital spending for the full year 2002 will be in the range of
$15 - $17 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse effect on the
consolidated financial position of the Company and that they will be paid over a
period of three to ten years, the actual timing and amount of such payments may
differ significantly from the Company's assumptions. Although the effect of
future government regulation could have a significant effect on the Company's
costs, the Company is not aware of any pending legislation which could have a
material adverse effect on its consolidated results of operations or financial
position. There can be no assurances that such costs could be passed along to
its customers.
Cash requirements for capital expenditures, working capital, debt service and
the current authorization to repurchase $3.0 million of ABI's Common Stock and
$5.3 million of Congoleum's Common Stock are expected to be financed from
operating activities and borrowings under existing bank lines of credit, which
at ABI are presently $41.6 million and at Congoleum are $20.0 million. During
the first half of 2001, ABI repurchased $1.1 million of its Common Stock.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments but does not consider this interest rate market
risk exposure to be material to its consolidated financial condition or results
of operations. The Company invests primarily in highly liquid debt instruments
with strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities.
17
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2002
Substantially all of the Company's outstanding long-term debt as of June 30,
2002 consisted of indebtedness with a fixed rate of interest, which is not
subject to change based upon changes in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. Foreign currency exchange rate movements also affect the Company's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors. For foreign currency
exposures existing at June 30, 2002, a 10% unfavorable movement in currency
exchange rates in the near term would not materially affect ABI's consolidated
operating results, financial position or cash flow.
The Company does not currently use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in interest rates, foreign currency exchange rates, commodity prices or
equity prices.
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FORM 10-Q
PART II. OTHER INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
June 30, 2002
Item 4. Submission of Matters to a Vote of Security Holders:
At the Annual Meeting of Stockholders held on May 8, 2002, the following
action was taken:
Four nominees were elected as Class III Directors who will hold office
until the Annual Meeting of Stockholders in 2005 and until their
successors are duly elected and qualify.
Witheld From
Name Votes For All Nominees
---- --------- ------------
Mark N. Kaplan 3,023,734 85,846
Natalie S. Marcus 3,023,534 86,046
William M. Marcus 3,021,934 87,646
Kenneth I. Watchmaker 3,023,734 85,846
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99) Certification of CEO and CFO 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
There were no reports on Form 8-K filed for the three months ended June
30, 2002.
SIGNATURE
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 BILTRITE INC.
----------------------
(Registrant)
Date: August 12, 2002 BY: /s/ Howard N. Feist III
--------------------------------
Howard N. Feist III
Vice President-Finance
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