Attached files
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EX-32.2 - EXHIBIT 32.2 - ASSOCIATED MATERIALS, LLC | c08510exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED MATERIALS, LLC | c08510exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - ASSOCIATED MATERIALS, LLC | c08510exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED MATERIALS, LLC | c08510exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-24956
Associated Materials, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 75-1872487 | |
(State or Other Jurisdiction of Incorporation of Organization) | (I.R.S. Employer Identification No.) | |
3773 State Rd. Cuyahoga Falls, Ohio | 44223 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code (330) 929-1811
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 12, 2010, all of the registrants membership interests outstanding were held by
an affiliate of the Registrant.
ASSOCIATED MATERIALS, LLC
REPORT FOR THE QUARTER ENDED OCTOBER 2, 2010
REPORT FOR THE QUARTER ENDED OCTOBER 2, 2010
Page No. | ||||||||
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ASSOCIATED MATERIALS, LLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 2, | January 2, | |||||||
2010 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 54,234 | $ | 55,855 | ||||
Accounts receivable, net |
165,600 | 114,355 | ||||||
Inventories |
160,578 | 115,394 | ||||||
Income taxes receivable |
86 | | ||||||
Deferred income taxes |
11,760 | 8,646 | ||||||
Prepaid expenses |
8,148 | 8,945 | ||||||
Total current assets |
400,406 | 303,195 | ||||||
Property, plant and equipment, net |
105,577 | 109,037 | ||||||
Goodwill |
231,242 | 231,263 | ||||||
Other intangible assets, net |
94,003 | 96,081 | ||||||
Receivable from AMH II |
27,852 | 27,237 | ||||||
Other assets |
17,570 | 19,984 | ||||||
Total assets |
$ | 876,650 | $ | 786,797 | ||||
Liabilities and Members Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 148,793 | $ | 87,580 | ||||
Payable to parent |
41,458 | 23,199 | ||||||
Accrued liabilities |
68,753 | 56,925 | ||||||
Deferred income taxes |
| 2,312 | ||||||
Current portion of long-term debt |
10,500 | | ||||||
Income taxes payable |
| 1,112 | ||||||
Total current liabilities |
269,504 | 171,128 | ||||||
Deferred income taxes |
53,338 | 43,303 | ||||||
Other liabilities |
60,736 | 61,326 | ||||||
Long-term debt |
197,744 | 207,552 | ||||||
Members equity |
295,328 | 303,488 | ||||||
Total liabilities and members equity |
$ | 876,650 | $ | 786,797 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
ASSOCIATED MATERIALS, LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 329,547 | $ | 324,807 | $ | 862,106 | $ | 772,108 | ||||||||
Cost of sales |
238,508 | 226,998 | 630,770 | 566,065 | ||||||||||||
Gross profit |
91,039 | 97,809 | 231,336 | 206,043 | ||||||||||||
Selling, general and
administrative expenses |
53,186 | 53,323 | 154,256 | 153,118 | ||||||||||||
Manufacturing restructuring costs |
| | | 5,255 | ||||||||||||
Income from operations |
37,853 | 44,486 | 77,080 | 47,670 | ||||||||||||
Interest expense, net |
6,218 | 5,999 | 18,801 | 16,581 | ||||||||||||
Foreign currency loss (gain) |
31 | 112 | (21 | ) | (110 | ) | ||||||||||
Income before income taxes |
31,604 | 38,375 | 58,300 | 31,199 | ||||||||||||
Income tax provision |
12,194 | 15,444 | 21,330 | 12,660 | ||||||||||||
Net income |
$ | 19,410 | $ | 22,931 | $ | 36,970 | $ | 18,539 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
ASSOCIATED MATERIALS, LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net income |
$ | 36,970 | $ | 18,539 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
16,854 | 16,579 | ||||||
Deferred income taxes |
4,060 | (292 | ) | |||||
Provision for losses on accounts receivable |
3,149 | 8,279 | ||||||
Amortization of deferred financing costs |
2,672 | 1,846 | ||||||
Amortization of management fee |
| 375 | ||||||
Non-cash interest income |
(616 | ) | | |||||
Non-cash portion of manufacturing restructuring costs |
| 5,255 | ||||||
Debt accretion |
192 | | ||||||
Loss on sale or disposal of assets other than by sale |
43 | 57 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(53,759 | ) | (48,471 | ) | ||||
Inventories |
(44,118 | ) | 11,058 | |||||
Accounts payable and accrued liabilities |
71,325 | 78,975 | ||||||
Income taxes receivable/payable and payable to parent |
16,978 | 4,028 | ||||||
Other |
3,069 | 4,449 | ||||||
Net cash provided by operating activities |
56,819 | 100,677 | ||||||
Investing Activities |
||||||||
Additions to property, plant and equipment |
(10,302 | ) | (4,243 | ) | ||||
AMH II intercompany loan |
| (26,819 | ) | |||||
Net cash used in investing activities |
(10,302 | ) | (31,062 | ) | ||||
Financing Activities |
||||||||
Net borrowings (repayments) under ABL Facility |
500 | (32,500 | ) | |||||
Issuance of senior subordinated notes |
| 20,000 | ||||||
Financing costs |
(223 | ) | (5,014 | ) | ||||
Dividends paid to parent company |
(48,488 | ) | (28,513 | ) | ||||
Net cash used in financing activities |
(48,211 | ) | (46,027 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
73 | 732 | ||||||
Net (decrease) increase in cash and cash equivalents |
(1,621 | ) | 24,320 | |||||
Cash and cash equivalents at beginning of period |
55,855 | 6,709 | ||||||
Cash and cash equivalents at end of period |
$ | 54,234 | $ | 31,029 | ||||
Supplemental information: |
||||||||
Cash paid for interest |
$ | 12,113 | $ | 10,338 | ||||
Cash paid for income taxes |
$ | 292 | $ | 8,924 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
ASSOCIATED MATERIALS, LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 2, 2010
Note 1 Basis of Presentation
Associated Materials, LLC (the Company) is a wholly owned subsidiary of Associated Materials
Holdings, LLC (Holdings), which is a wholly owned subsidiary of AMH Holdings, LLC (AMH). AMH is
a wholly owned subsidiary of AMH Holdings II, Inc. (AMH II) which is controlled by affiliates of
Investcorp S.A. (Investcorp) and Harvest Partners, L.P. (Harvest Partners). Holdings, AMH and
AMH II do not have material assets or operations other than a direct or indirect ownership of the
membership interest of the Company. On October 13, 2010, investment funds affiliated with Hellman
& Friedman LLC completed their purchase of the Company. Refer to Note 11 Subsequent Event for
further details of the Companys new ownership and corporate capital structure.
The unaudited condensed consolidated financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, these interim condensed consolidated
financial statements contain all of the normal recurring accruals and adjustments considered
necessary for a fair presentation of the unaudited results for the quarter and nine months ended
October 2, 2010 and October 3, 2009. These financial statements should be read in conjunction with
the Companys audited financial statements and notes thereto included in its Annual Report on Form
10-K for the year ended January 2, 2010. A detailed description of the Companys significant
accounting policies and management judgments is located in the audited financial statements for the
year ended January 2, 2010, included in the Companys Form 10-K filed with the Securities and
Exchange Commission.
The Company is a leading, vertically integrated manufacturer and distributor of exterior
residential building products in the United States and Canada. The Company produces a
comprehensive offering of exterior building products, including vinyl windows, vinyl siding,
aluminum trim coil and aluminum and steel siding and accessories, which are produced at the
Companys 11 manufacturing facilities. The Company also sells complementary products that are
manufactured by third parties, such as roofing materials, insulation, exterior doors, vinyl siding
in a shake and scallop design and installation equipment and tools. Because most of the Companys
building products are intended for exterior use, the Companys 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.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) amended the guidance on
fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2
and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarified existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The amendment also revised
the guidance on employers disclosures about postretirement benefit plan assets to require that
disclosures be provided by classes of assets instead of by major categories of assets. The new
guidance is effective for the first reporting period beginning after December 15, 2009, except for
the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company adopted the provisions of the guidance
required for the period beginning in 2010; however, adoption of this amendment did not have a
material impact on the Companys consolidated financial statements.
In April 2010, the FASB issued Accounting Standards Update 2010-12 (ASU 2010-12), Income
Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts. On
March 30, 2010, the President of the United States signed the Health Care and Education
Reconciliation Act of 2010, which is a reconciliation bill that amends the Patient Protection and
Affordable Care Act that was signed on March 23, 2010 (collectively, the Acts). ASU No. 2010-12
allows entities to consider the two Acts together for accounting purposes. Upon adoption, the
elimination of the future tax deduction for prescription drug costs associated with the Companys
post-retirement medical and dental plans was not material to the Companys financial position,
results of operations or cash flows. The Company is currently evaluating the potential impact of
other sections of the legislation, but does not anticipate that the adoption would have a material
impact on the consolidated financial statements.
4
Table of Contents
Note 2 Inventories
Inventories are valued at the lower of cost (first in, first out) or market. Inventories
consist of the following (in thousands):
October 2, | January 2, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 40,324 | $ | 28,693 | ||||
Work-in-process |
9,433 | 8,552 | ||||||
Finished goods and purchased stock |
110,821 | 78,149 | ||||||
$ | 160,578 | $ | 115,394 | |||||
Note 3 Goodwill and Other Intangible Assets
Goodwill represents the purchase price in excess of the fair value of the tangible and
intangible net assets acquired in a business combination. As of October 2, 2010, goodwill of
$231.2 million consisted of $194.8 million from the April 2002 merger transaction and $36.4 million
from the acquisition of Gentek Holdings, Inc. (Gentek). As of January 2, 2010, goodwill of $231.3
million consisted of $194.8 million from the April 2002 merger transaction and $36.5 million from
the acquisition of Gentek. The impact of foreign currency translation decreased the carrying value
of Gentek goodwill by less than $0.1 million during the nine months ended October 2, 2010. None of
the Companys goodwill is deductible for income tax purposes. The Companys other intangible
assets consist of the following (in thousands):
Average | ||||||||||||||||||||||||||
Amortization | October 2, 2010 | January 2, 2010 | ||||||||||||||||||||||||
Period | Accumulated | Net Carrying | Accumulated | Net Carrying | ||||||||||||||||||||||
(in Years) | Cost | Amortization | Value | Cost | Amortization | Value | ||||||||||||||||||||
Trademarks |
15 | $ | 28,070 | $ | 15,477 | $ | 12,593 | $ | 28,070 | $ | 14,087 | $ | 13,983 | |||||||||||||
Patents |
10 | 6,230 | 5,247 | 983 | 6,230 | 4,781 | 1,449 | |||||||||||||||||||
Customer base |
7 | 5,205 | 4,788 | 417 | 5,137 | 4,498 | 639 | |||||||||||||||||||
Total amortized
intangible assets |
39,505 | 25,512 | 13,993 | 39,437 | 23,366 | 16,071 | ||||||||||||||||||||
Non-amortized trade
names |
80,010 | | 80,010 | 80,010 | | 80,010 | ||||||||||||||||||||
Total intangible assets |
$ | 119,515 | $ | 25,512 | $ | 94,003 | $ | 119,447 | $ | 23,366 | $ | 96,081 | ||||||||||||||
The Companys non-amortized intangible assets consist of the Alside®,
Revere® and Gentek® trade names and are tested for impairment at least
annually at the beginning of the fourth quarter.
Finite-lived intangible assets are amortized on a straight-line basis over their estimated
useful lives. Amortization expense related to intangible assets was approximately $0.7 million and
$0.8 million for the quarters ended October 2, 2010 and October 3, 2009, respectively.
Amortization expense related to intangible assets was approximately $2.1 million and $2.3 million
for the nine months ended October 2, 2010 and October 3, 2009, respectively. The foreign currency
translation impact on the cost and accumulated amortization of intangibles was less than $0.1
million for the quarter ended October 2, 2010. Amortization expense is expected to be
approximately $0.7 million for the remainder of fiscal 2010. Amortization expense for fiscal years
2011, 2012, 2013 and 2014 is estimated to be $2.7 million, $2.2 million, $1.9 million and $1.9
million, respectively.
5
Table of Contents
Note 4 Long-Term Debt
Long-term debt consists of the following (in thousands):
October 2, | January 2, | |||||||
2010 | 2010 | |||||||
9.875% notes |
$ | 197,744 | $ | 197,552 | ||||
Borrowings under the ABL Facility |
10,500 | 10,000 | ||||||
Total debt |
208,244 | 207,552 | ||||||
Less current portion of long-term debt |
10,500 | | ||||||
Total long-term debt |
$ | 197,744 | $ | 207,552 | ||||
9.875% Senior Secured Second Lien Notes due 2016
On November 5, 2009, the Company issued in a private offering $200.0 million of its 9.875%
Senior Secured Second Lien Notes due 2016. In February 2010, the Company completed the offer to
exchange all of its outstanding privately placed 9.875% Senior Secured Second Lien Notes due 2016
for newly registered 9.875% Senior Secured Second Lien Notes due 2016 (the 9.875% notes). The
9.875% notes were issued by the Company and Associated Materials Finance, Inc., a wholly owned
subsidiary of the Company (collectively, the Issuers). The 9.875% notes were originally issued
at a price of 98.757%. The net proceeds from the offering were used to discharge and redeem the
Companys outstanding 9 3/4% Senior Subordinated Notes due 2012 (the 9.75% notes) and its
outstanding 15% Senior Subordinated Notes due 2012 (the 15% notes), and to pay fees and expenses
related to the offering. As of October 2, 2010, the accreted balance of the Companys 9.875%
notes, net of the original issue discount, was $197.7 million. Interest on the 9.875% notes is
payable semi-annually in arrears on May 15th and November 15th of each year, with the first
interest payment made on May 15, 2010.
The Issuers are required to redeem the 9.875% notes no later than December 1, 2013, if as of
October 15, 2013, AMHs 11 1/4% Senior Discount Notes due 2014 (the 11.25% notes) remain
outstanding, unless discharged or defeased, or if any indebtedness incurred by the Issuers or any
of their holding companies to refinance such AMH 11.25% notes matures prior to the maturity date of
the 9.875% notes. As of October 2, 2010, AMH had $431.0 million in aggregate principal amount of
its 11.25% notes outstanding. Prior to November 15, 2012, the Issuers may redeem all or a portion
of the 9.875% notes at any time or from time to time at a price equal to 100% of the principal
amount of the 9.875% notes plus accrued and unpaid interest, plus a make-whole premium.
Beginning on November 15, 2012, the Issuers may redeem all or a portion of the 9.875% notes at a
redemption price of 107.406%. The redemption price declines to 104.938% at November 15, 2013, to
102.469% at November 15, 2014 and to 100% on November 15, 2015 for the remaining life of the 9.875%
notes. In addition, on or prior to November 15, 2012, the Issuers may redeem up to 35% of the
9.875% notes using the proceeds of certain equity offerings at a redemption price equal to 100% of
the aggregate principal amount thereof, plus a premium equal to the interest rate per annum on the
9.875% notes, plus accrued and unpaid interest, if any, to the date of redemption.
The 9.875% notes are senior obligations and rank equally in right of payment with all of the
Issuers existing and future senior indebtedness and senior in right of payment to all of the
Issuers future subordinated indebtedness. The 9.875% notes are guaranteed on a senior basis by all
of the Companys existing and future domestic restricted subsidiaries, other than Associated
Materials Finance, Inc. (the Subsidiary Guarantors), that guarantee or are otherwise obligors
under the Companys asset-based credit facility (the ABL Facility). The 9.875% notes and
guarantees are structurally subordinated to all of the liabilities of the Companys non-guarantor
subsidiaries, including all Canadian subsidiaries of the Company.
The 9.875% notes and related guarantees are secured, subject to certain permitted liens, by
second-priority liens on the assets that secure the ABL Facilitys indebtedness, namely all of the
Issuers and their U.S. subsidiaries tangible and intangible assets. The 9.875% notes are
effectively senior to all of the Companys and the Subsidiary Guarantors existing or future
unsecured indebtedness to the extent of the value of such collateral, after giving effect to
first-priority liens on such collateral securing the U.S. portion of the ABL Facility.
The indenture governing the 9.875% notes contains covenants that, among other things, limit
the ability of the Issuers and of certain restricted subsidiaries to incur additional indebtedness,
make loans or advances to or other investments in subsidiaries and other entities, sell its assets
or declare dividends. If an event of default occurs, the trustee or holders of 25% or more in
aggregate principal amount of the notes may accelerate the notes. If an event of default relates to
certain events of bankruptcy, insolvency or reorganization, the 9.875% notes will automatically
accelerate without any further action required by the trustee or holders of the 9.875% notes.
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The fair value of the 9.875% notes was $242.0 million and $197.5 million at October 2, 2010
and January 2, 2010, respectively. In accordance with the principles described in the FASB ASC 820,
Fair Value Measurements and Disclosures, the fair value of the 9.875% notes as of October 2, 2010
was measured using Level 1 inputs of quoted prices in active markets. The fair value of the 9.875%
notes as of January 2, 2010 was based upon the pricing determined in the private offering of the
9.875% notes at the time of issuance in November 2009.
ABL Facility
The Companys ABL Facility provides for a senior secured asset-based revolving credit facility
of up to $225.0 million, comprising a $165.0 million U.S. facility and a $60.0 million Canadian
facility, in each case subject to borrowing base availability under the applicable facility.
Pursuant to an amendment to the ABL Facility (the ABL Facility Amendment) entered into in
connection with the issuance of the Companys 9.875% notes, effective November 5, 2009, the
maturity date of the ABL Facility is the earliest of (i) October 3, 2013 and (ii) the date three
months prior to the stated maturity date of the 9.875% notes (as amended, supplemented or
replaced), if any such notes remain outstanding at such date taking into account any stated
maturity dates which may be contingent, conditional or alternative. As of October 2, 2010, there
was $10.5 million drawn under the ABL Facility and $166.6 million available for additional
borrowing.
The obligations of the Company, Gentek Building Products, Inc., Associated Materials Canada
Limited, and Gentek Building Products Limited Partnership as borrowers under the ABL Facility, are
jointly and severally guaranteed by Holdings and by the Companys wholly owned domestic
subsidiaries, Gentek Holdings, LLC and Associated Materials Finance, Inc. (formerly Alside, Inc.).
Such obligations and guaranties are also secured by (i) a security interest in substantially all of
the owned real and personal assets (tangible and intangible) of the Company, Holdings, Gentek
Building Products, Inc., Gentek Holdings, LLC and Associated Materials Finance, Inc. and (ii) a
pledge of up to 65% of the voting stock of Associated Materials Canada Limited and Gentek Canada
Holdings Limited. The obligations of Associated Materials Canada Limited and Gentek Building
Products Limited Partnership are further secured by a security interest in their owned real and
personal assets (tangible and intangible) and are guaranteed by Gentek Canada Holdings Limited, an
entity formed as part of the Canadian Reorganization.
The interest rate applicable to outstanding loans under the ABL Facility is, at the Companys
option, equal to either a U.S. or Canadian adjusted base rate or a Eurodollar base rate plus an
applicable margin. Pursuant to the ABL Amendment, the applicable margin related to adjusted base
rate loans ranges from 1.25% to 2.25%, and the applicable margin related to LIBOR loans ranges from
3.00% to 4.00%, with the applicable margin in each case depending on the Companys quarterly
average excess availability.
As of October 2, 2010, the per annum interest rate applicable to borrowings under the ABL
Facility was 4.75%. The weighted average interest rate for borrowings under the ABL Facility was
4.99% for the quarter ended October 2, 2010. As of October 2, 2010, the Company had letters of
credit outstanding of $7.8 million primarily securing deductibles of various insurance policies.
The Company is required to pay a commitment fee of 0.50% to 0.75% per annum on any unused amounts
under the ABL Facility.
The ABL Facility does not require the Company to comply with any financial maintenance
covenants, unless it has less than $28.1 million of aggregate excess availability at any time (or
less than $20.6 million of excess availability under the U.S. facility or less than $7.5 million of
excess availability under the Canadian facility), during which time the Company is subject to
compliance with a fixed charge coverage ratio covenant of 1.1 to 1. As of October 2, 2010, the
Company exceeded the minimum aggregate excess availability thresholds, and therefore, was not
required to comply with this maintenance covenant.
Under the ABL Facility restricted payments covenant, subject to specified exceptions,
Holdings, the Company and its restricted subsidiaries cannot make restricted payments, such as
dividends or distributions on equity, redemptions or repurchases of equity, or payments of certain
management or advisory fees or other extraordinary forms of compensation, unless prior written
notice is given and certain EBITDA and availability thresholds are met. If an event of default
under the ABL Facility occurs and is continuing, amounts outstanding under the ABL Facility may be
accelerated upon notice, in which case the obligations of the lenders to make loans and arrange for
letters of credit under the ABL Facility would cease. If an event of default relates to certain
events of bankruptcy, insolvency or reorganization of Holdings, the Company, or the other borrowers
and guarantors under the ABL Facility, the payment obligations of the borrowers under the ABL
Facility will become automatically due and payable without any further action required. As a result
of the purchase of the Company by investment funds affiliated with Hellman & Friedman LLC completed
on October 13, 2010, the payment of the Companys borrowings under the ABL Facility could have been
accelerated and made payable immediately. Accordingly, the Companys $10.5 million of borrowings
under the ABL Facility were classified within current liabilities as of October 2, 2010. In
connection with the consummation of the purchase of the Company on October 13, 2010, the
Company repaid its borrowings in its entirety and terminated the ABL Facility.
7
Table of Contents
Parent Company Indebtedness
The Companys indirect parent entities, AMH and AMH II, are holding companies with no
independent operations. As of October 2, 2010, AMH had $431.0 million in aggregate principal
amount of its 11.25% notes outstanding. Prior to March 1, 2009, interest accrued at a rate of
11.25% per annum on the 11.25% notes in the form of an increase in the accreted value of the 11.25%
notes. Since March 1, 2009, cash interest has been accruing at a rate of 11.25% per annum on the
11.25% notes and is payable semi-annually in arrears on March 1st and September 1st of each year.
In connection with a December 2004 recapitalization transaction, AMHs parent company AMH II
was formed, and AMH II subsequently issued $75 million of 13.625% Senior Notes due 2014 (the
13.625% notes). In June 2009, AMH II entered into an exchange agreement pursuant to which it
paid $20.0 million in cash and issued $13.066 million original principal amount of its 20% notes in
exchange for all of its outstanding 13.625% notes. Interest on AMH IIs 20% notes is payable in
cash semi-annually in arrears or may be added to the then outstanding principal amount of the 20%
notes and paid at maturity on December 1, 2014. The debt restructuring transaction was accounted
for in accordance with the principles described in FASB ASC 470-60, Troubled Debt Restructurings by
Debtors (ASC 470-60). As of October 2, 2010, AMH II has recorded liabilities for the $13.066
million original principal amount and $23.7 million of accrued interest related to all future
interest payments on its 20% notes in accordance with ASC 470-60. As of October 2, 2010, total AMH
II debt, including that of its consolidated subsidiaries, was approximately $676.1 million, which
includes $23.7 million of accrued interest related to all future interest payments on AMH IIs 20%
notes.
Because AMH and AMH II have no independent operations, they are dependent upon distributions,
payments and loans from the Company to service their indebtedness. In particular, AMH is dependent
on the Companys ability to pay dividends or otherwise upstream funds to it in order to service its
obligations under the 11.25% notes, and AMH II is similarly dependent on AMHs ability to further
upstream payments in order to service its obligations under the 20% notes. However, unlike AMH
IIs previously outstanding 13.625% notes, all of which were exchanged for the 20% notes in June
2009, interest on AMH IIs 20% notes may be added to the then outstanding principal amount of the
20% notes and paid at maturity on December 1, 2014. Likewise, the 9.875% notes indenture permits
the payment of dividends by the Company to AMH for the payment of interest on AMHs 11.25% notes
(or any refinancing thereof), irrespective of whether it is otherwise able to pay dividends under
the restricted payments test described above, in an aggregate amount not to exceed $125.0 million
or if the Companys leverage ratio (as defined) is equal to or less than 4.5 to 1.00. The 9.875%
notes indenture also permits dividends for the payment of principal on the 11.25% notes or the 20%
notes in an aggregate amount not to exceed $50 million when the Companys leverage ratio is equal
to or less than 4.5 to 1.00. In March 2010 and September 2010, the Company declared dividends
totaling approximately $48.5 million to fund AMHs scheduled interest payments on its 11.25% notes.
At October 2, 2010, subject to the limitations to both the Indenture for the 9.875% notes and the
ABL Facility, the Company could have upstreamed an additional $175.2 million, which is comprised of
availability under the borrowing base and the cash on hand at quarter end.
In June 2009, at the time the Company entered into the purchase agreement pursuant to which it
issued its 15% notes (which were redeemed and discharged in connection with the Companys issuance
of its 9.875% notes in November 2009), the Company entered into an intercompany loan agreement with
AMH II, pursuant to which the Company agreed to periodically make loans to AMH II in an amount not
to exceed an aggregate outstanding principal amount of approximately $33.0 million at any one time,
plus accrued interest. Interest accrues at a rate of 3% per annum and is added to the then
outstanding principal amount on a semi-annual basis. The principal amount and accrued but unpaid
interest thereon will mature on May 1, 2015. As of October 2, 2010, the principal amount of
borrowings by AMH II under this intercompany loan agreement and accrued interest thereon was $27.9
million. The Company believes that AMH II will have the ability to repay the loan in accordance
with its stated terms. Due to the related party nature and the underlying terms of the intercompany
loan with AMH II, the Company has deemed it not practical to assign and disclose a fair value
estimate.
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Note 5 Comprehensive Income
Comprehensive income differs from net income due to the reclassification of actuarial gains or
losses and prior service costs associated with the Companys pension and other postretirement plans
and foreign currency translation adjustments as follows (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 19,410 | $ | 22,931 | $ | 36,970 | $ | 18,539 | ||||||||
Unrecognized prior service cost and net loss |
241 | 262 | 723 | 773 | ||||||||||||
Foreign currency translation adjustments |
3,573 | 5,313 | 2,634 | 8,055 | ||||||||||||
Comprehensive income |
$ | 23,224 | $ | 28,506 | $ | 40,327 | $ | 27,367 | ||||||||
Note 6 Retirement Plans
The Companys Alside division sponsors a defined benefit pension plan which covers hourly
workers at its plant in West Salem, Ohio and a defined benefit retirement plan covering salaried
employees, which was frozen in 1998 and subsequently replaced with a defined contribution plan. The
Companys Gentek subsidiary sponsors a defined benefit pension plan for hourly union employees at
its Woodbridge, New Jersey plant (together with the Alside sponsored defined benefit plans, the
Domestic Plans) as well as a defined benefit pension plan covering Gentek Canadian salaried
employees and hourly union employees at the Lambeth, Ontario plant, a defined benefit pension plan
for the hourly union employees at its Burlington, Ontario plant and a defined benefit pension plan
for the hourly union employees at its Pointe Claire, Quebec plant (the Foreign Plans). Accrued
pension liabilities are included in accrued and other long-term liabilities in the accompanying
balance sheets. The actuarial valuation measurement date for the defined benefit pension plans is
December 31st. Components of defined benefit pension plan costs are as follows (in thousands):
Quarters Ended | ||||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
Domestic | Foreign | Domestic | Foreign | |||||||||||||
Plans | Plans | Plans | Plans | |||||||||||||
Net periodic pension cost |
||||||||||||||||
Service cost |
$ | 183 | $ | 515 | $ | 146 | $ | 373 | ||||||||
Interest cost |
783 | 920 | 783 | 830 | ||||||||||||
Expected return on assets |
(760 | ) | (887 | ) | (674 | ) | (704 | ) | ||||||||
Amortization of unrecognized: |
||||||||||||||||
Prior service cost |
7 | 12 | 8 | 8 | ||||||||||||
Cumulative net loss |
318 | 52 | 375 | 15 | ||||||||||||
Net periodic pension cost |
$ | 531 | $ | 612 | $ | 638 | $ | 522 | ||||||||
Nine Months Ended | ||||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
Domestic | Foreign | Domestic | Foreign | |||||||||||||
Plans | Plans | Plans | Plans | |||||||||||||
Net periodic pension cost |
||||||||||||||||
Service cost |
$ | 493 | $ | 1,712 | $ | 438 | $ | 1,051 | ||||||||
Interest cost |
2,339 | 2,710 | 2,349 | 2,339 | ||||||||||||
Expected return on assets |
(2,280 | ) | (2,606 | ) | (2,022 | ) | (1,983 | ) | ||||||||
Amortization of unrecognized: |
||||||||||||||||
Prior service cost |
21 | 34 | 24 | 22 | ||||||||||||
Cumulative net loss |
924 | 148 | 1,125 | 43 | ||||||||||||
Net periodic pension cost |
$ | 1,497 | $ | 1,998 | $ | 1,914 | $ | 1,472 | ||||||||
In March 2010, the President signed into law the Patient Protection and Affordable Care Act
(PPACA) and the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act). The
PPACA and Reconciliation Act include provisions
that will reduce the tax benefits available to employers that receive Medicare Part D
subsidies. During the first quarter of 2010, the Company recognized a $0.1 million impact on its
deferred tax asset as a result of the reduced deductibility of the subsidy.
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Table of Contents
The 2008 decline in market conditions resulted in significant decreased valuations of the
Companys pension plan assets. Based on the partial recovery of plan asset returns towards the end
of 2009, the plans actuarial valuations and current pension funding legislation, the Company does
not currently anticipate significant changes to current cash contribution levels for the remainder
of 2010. However, the Company currently anticipates additional cash contributions may be required
in 2011 to avoid certain funding-based benefit limitations as required under current pension law.
Although changes in market conditions and current pension law and uncertainties regarding
significant assumptions used in the actuarial valuations may have a material impact on future
required contributions to the Companys pension plans, the Company currently does not expect
funding requirements to have a material adverse impact on current or future liquidity.
The actuarial valuations require significant estimates and assumptions to be made by
management, primarily the funding interest rate, discount rate and expected long-term return on
plan assets. These assumptions are all susceptible to changes in market conditions. The funding
interest rate and discount rate are based on representative bond yield curves maintained and
monitored by independent third parties. In determining the expected long-term rate of return on
plan assets, the Company considers historical market and portfolio rates of return, asset
allocations and expectations of future rates of return. As disclosed in the Companys 2009 Annual
Report on Form 10-K, the sensitivity of these estimates and assumptions are not expected to have a
material impact on the Companys 2010 pension expense and funding requirements.
Note 7 Business Segments
The Company is in the single business of manufacturing and distributing exterior residential
building products. The following table sets forth for the periods presented a summary of net sales
by principal product offering (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Vinyl windows |
$ | 111,109 | $ | 114,686 | $ | 302,889 | $ | 276,717 | ||||||||
Vinyl siding products |
66,959 | 67,857 | 175,313 | 161,113 | ||||||||||||
Metal products |
53,158 | 53,571 | 141,619 | 127,017 | ||||||||||||
Third-party manufactured products |
77,925 | 66,885 | 187,817 | 158,454 | ||||||||||||
Other products and services |
20,396 | 21,808 | 54,468 | 48,807 | ||||||||||||
$ | 329,547 | $ | 324,807 | $ | 862,106 | $ | 772,108 | |||||||||
Note 8 Product Warranty Costs and Service Returns
Consistent with industry practice, the Company provides to homeowners limited warranties on
certain products, primarily related to window and siding product categories. Warranties are of
varying lengths of time from the date of purchase up to and including lifetime. Warranties cover
product failures such as stress cracks and seal failures for windows and fading and peeling for
siding products, as well as manufacturing defects. The Company has various options for remedying
product warranty claims including repair, refinishing or replacement and directly incurs the cost
of these remedies. Warranties also become reduced under certain conditions of time and change in
ownership. Certain metal coating suppliers provide warranties on materials sold to the Company that
mitigate the costs incurred by the Company. Reserves for future warranty costs are provided based
on managements estimates of such future costs using historical trends of claims experience, sales
history of products to which such costs relate, and other factors. An independent actuary assists
the Company in determining reserve amounts related to significant product failures. The provision
for warranties is reported within cost of sales in the consolidated statements of operations.
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A reconciliation of the warranty reserve activity is as follows (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at the beginning of the period |
$ | 33,661 | $ | 30,947 | $ | 33,016 | $ | 29,425 | ||||||||
Provision for warranties issued |
2,669 | 2,747 | 5,989 | 7,445 | ||||||||||||
Claims paid |
(1,113 | ) | (2,073 | ) | (4,389 | ) | (5,483 | ) | ||||||||
Foreign currency translation |
(286 | ) | 379 | 315 | 613 | |||||||||||
Balance at the end of the period |
$ | 34,931 | $ | 32,000 | $ | 34,931 | $ | 32,000 | ||||||||
Note 9 Manufacturing Restructuring Costs
During the first quarter of 2008, the Company committed to, and subsequently completed,
relocating a portion of its vinyl siding production from Ennis, Texas to its vinyl manufacturing
facilities in West Salem, Ohio and Burlington, Ontario. In addition, during 2008, the Company
transitioned the majority of distribution of its U.S. vinyl siding products to a center located in
Ashtabula, Ohio and committed to a plan to discontinue use of its warehouse facility adjacent to
its Ennis, Texas vinyl manufacturing facility.
The Company discontinued its use of the warehouse facility adjacent to the Ennis manufacturing
plant during the second quarter of 2009. As a result, the related lease costs associated with the
discontinued use of the warehouse facility were recorded as a restructuring charge of approximately
$5.3 million during the second quarter of 2009.
The following is a reconciliation of the manufacturing restructuring liability (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Beginning liability |
$ | 4,534 | $ | 5,280 | $ | 5,036 | $ | | ||||||||
Additions |
| | | 5,332 | ||||||||||||
Accretion of related lease obligations |
98 | 2 | 282 | 2 | ||||||||||||
Payments |
(270 | ) | (76 | ) | (956 | ) | (128 | ) | ||||||||
Ending liability |
$ | 4,362 | $ | 5,206 | $ | 4,362 | $ | 5,206 | ||||||||
Of the remaining restructuring liability at October 2, 2010, approximately $0.3 million is
expected to be paid during the remainder of 2010. Amounts related to the ongoing facility
obligations will continue to be paid over the lease term, which ends April 2020.
Note 10 Subsidiary Guarantors
The Companys payment obligations under its 9.875% notes are fully and unconditionally
guaranteed, jointly and severally on a senior subordinated basis, by its domestic wholly owned
subsidiaries, Gentek Holdings, LLC and Gentek Building Products, Inc. Associated Materials
Finance, Inc. (formerly Alside, Inc.) is a co-issuer of the 9.875% notes and is a domestic wholly
owned subsidiary of the Company having no operations, revenues or cash flows for the periods
presented. Associated Materials Canada Limited, Gentek Canada Holdings Limited and Gentek Buildings
Products Limited Partnership are Canadian companies and do not guarantee the Companys 9.875%
notes. The Subsidiary Guarantors of the Companys previously outstanding 9.75% notes are the same
as those for the 9.875% notes, except that Associated Materials Finance, Inc. is a co-issuer of the
9.875% notes, but was a subsidiary guarantor of the previously outstanding 9.75% notes. In the
opinion of management, separate financial statements of the respective Subsidiary Guarantors would
not provide additional material information, which would be useful in assessing the financial
composition of the Subsidiary Guarantors. None of the Subsidiary Guarantors have 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.
11
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
October 2, 2010
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
October 2, 2010
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 7,949 | $ | | $ | 71 | $ | 46,214 | $ | | $ | 54,234 | ||||||||||||
Accounts receivable, net |
107,816 | | 14,007 | 43,777 | | 165,600 | ||||||||||||||||||
Intercompany receivables |
| | 97,214 | 5,331 | (102,545 | ) | | |||||||||||||||||
Inventories |
107,987 | | 12,947 | 39,644 | | 160,578 | ||||||||||||||||||
Income taxes receivable |
| | | 86 | | 86 | ||||||||||||||||||
Deferred income taxes |
8,833 | | 717 | 2,210 | | 11,760 | ||||||||||||||||||
Prepaid expenses |
5,801 | | 1,065 | 1,282 | | 8,148 | ||||||||||||||||||
Total current assets |
238,386 | | 126,021 | 138,544 | (102,545 | ) | 400,406 | |||||||||||||||||
Property, plant and equipment, net |
68,918 | | 1,731 | 34,928 | | 105,577 | ||||||||||||||||||
Goodwill |
194,814 | | 36,428 | | | 231,242 | ||||||||||||||||||
Other intangible assets, net |
84,916 | | 9,087 | | | 94,003 | ||||||||||||||||||
Receivable from AMH II |
27,852 | | | | | 27,852 | ||||||||||||||||||
Investment in subsidiaries |
222,210 | | 97,191 | | (319,401 | ) | | |||||||||||||||||
Intercompany receivable |
| 197,744 | | | (197,744 | ) | | |||||||||||||||||
Other assets |
15,852 | | | 1,718 | | 17,570 | ||||||||||||||||||
Total assets |
$ | 852,948 | $ | 197,744 | $ | 270,458 | $ | 175,190 | $ | (619,690 | ) | $ | 876,650 | |||||||||||
Liabilities And Members Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | 88,026 | $ | | $ | 16,006 | $ | 44,761 | $ | | $ | 148,793 | ||||||||||||
Intercompany payables |
102,545 | | | | (102,545 | ) | | |||||||||||||||||
Payable to parent |
35,913 | | 5,545 | | | 41,458 | ||||||||||||||||||
Accrued liabilities |
51,188 | | 6,610 | 10,955 | | 68,753 | ||||||||||||||||||
Current portion of long-term debt |
10,500 | | | | | 10,500 | ||||||||||||||||||
Total current liabilities |
288,172 | | 28,161 | 55,716 | (102,545 | ) | 269,504 | |||||||||||||||||
Deferred income taxes |
40,310 | | 3,246 | 9,782 | | 53,338 | ||||||||||||||||||
Other liabilities |
31,394 | | 16,841 | 12,501 | | 60,736 | ||||||||||||||||||
Long-term debt |
197,744 | 197,744 | | | (197,744 | ) | 197,744 | |||||||||||||||||
Members equity |
295,328 | | 222,210 | 97,191 | (319,401 | ) | 295,328 | |||||||||||||||||
Total liabilities and members equity |
$ | 852,948 | $ | 197,744 | $ | 270,458 | $ | 175,190 | $ | (619,690 | ) | $ | 876,650 | |||||||||||
12
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Quarter Ended October 2, 2010
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Quarter Ended October 2, 2010
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | 236,192 | $ | | $ | 46,117 | $ | 91,179 | $ | (43,941 | ) | $ | 329,547 | |||||||||||
Cost of sales |
170,960 | | 45,507 | 65,982 | (43,941 | ) | 238,508 | |||||||||||||||||
Gross profit |
65,232 | | 610 | 25,197 | | 91,039 | ||||||||||||||||||
Selling, general and
administrative expenses |
42,757 | | 181 | 10,248 | | 53,186 | ||||||||||||||||||
Income from operations |
22,475 | | 429 | 14,949 | | 37,853 | ||||||||||||||||||
Interest expense, net |
6,021 | | (1 | ) | 198 | | 6,218 | |||||||||||||||||
Foreign currency loss |
| | | 31 | | 31 | ||||||||||||||||||
Income before income taxes |
16,454 | | 430 | 14,720 | | 31,604 | ||||||||||||||||||
Income tax provision |
6,008 | | 2,305 | 3,881 | | 12,194 | ||||||||||||||||||
Income (loss) before equity
income from subsidiaries |
10,446 | | (1,875 | ) | 10,839 | | 19,410 | |||||||||||||||||
Equity income from subsidiaries |
8,964 | | 10,839 | | (19,803 | ) | | |||||||||||||||||
Net income |
$ | 19,410 | $ | | $ | 8,964 | $ | 10,839 | $ | (19,803 | ) | $ | 19,410 | |||||||||||
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Nine Months Ended October 2, 2010
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Nine Months Ended October 2, 2010
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | 621,944 | $ | | $ | 126,030 | $ | 238,147 | $ | (124,015 | ) | $ | 862,106 | |||||||||||
Cost of sales |
457,130 | | 120,444 | 177,211 | (124,015 | ) | 630,770 | |||||||||||||||||
Gross profit |
164,814 | | 5,586 | 60,936 | | 231,336 | ||||||||||||||||||
Selling, general and
administrative expenses |
123,361 | | 1,285 | 29,610 | | 154,256 | ||||||||||||||||||
Income from operations |
41,453 | | 4,301 | 31,326 | | 77,080 | ||||||||||||||||||
Interest expense, net |
18,172 | | 1 | 628 | | 18,801 | ||||||||||||||||||
Foreign currency (gain) |
| | | (21 | ) | | (21 | ) | ||||||||||||||||
Income before income taxes |
23,281 | | 4,300 | 30,719 | | 58,300 | ||||||||||||||||||
Income tax provision |
8,552 | | 4,081 | 8,697 | | 21,330 | ||||||||||||||||||
Income before equity income
from subsidiaries |
14,729 | | 219 | 22,022 | | 36,970 | ||||||||||||||||||
Equity income from subsidiaries |
22,241 | | 22,022 | | (44,263 | ) | | |||||||||||||||||
Net income |
$ | 36,970 | $ | | $ | 22,241 | $ | 22,022 | $ | (44,263 | ) | $ | 36,970 | |||||||||||
13
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For The Nine Months Ended October 2, 2010
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For The Nine Months Ended October 2, 2010
(In thousands)
Subsidiary | Non-Guarantor | |||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Consolidated | ||||||||||||||||
Net cash provided by operating activities |
$ | 34,416 | $ | | $ | 1,101 | $ | 21,302 | $ | 56,819 | ||||||||||
Investing Activities |
||||||||||||||||||||
Additions to property, plant and equipment |
(7,869 | ) | | (55 | ) | (2,378 | ) | (10,302 | ) | |||||||||||
Other |
385 | | | (385 | ) | | ||||||||||||||
Net cash used in investing activities |
(7,484 | ) | | (55 | ) | (2,763 | ) | (10,302 | ) | |||||||||||
Financing Activities |
||||||||||||||||||||
Net borrowings under ABL Facility |
500 | | | | 500 | |||||||||||||||
Financing costs |
(223 | ) | | | | (223 | ) | |||||||||||||
Dividends paid to parent company |
(48,488 | ) | | | | (48,488 | ) | |||||||||||||
Dividends from non-guarantor subsidiary |
| | 20,000 | (20,000 | ) | | ||||||||||||||
Intercompany transactions |
23,361 | | (21,057 | ) | (2,304 | ) | | |||||||||||||
Net cash used in financing activities |
(24,850 | ) | | (1,057 | ) | (22,304 | ) | (48,211 | ) | |||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | | 73 | 73 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents |
2,082 | | (11 | ) | (3,692 | ) | (1,621 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
5,867 | | 82 | 49,906 | 55,855 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 7,949 | $ | | $ | 71 | $ | 46,214 | $ | 54,234 | ||||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
January 2, 2010
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
January 2, 2010
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 5,867 | $ | | $ | 82 | $ | 49,906 | $ | | $ | 55,855 | ||||||||||||
Accounts receivable, net |
81,178 | | 8,728 | 24,449 | | 114,355 | ||||||||||||||||||
Intercompany receivables |
| | 76,138 | 3,045 | (79,183 | ) | | |||||||||||||||||
Inventories |
80,654 | | 6,613 | 28,127 | | 115,394 | ||||||||||||||||||
Deferred income taxes |
8,834 | | | | (188 | ) | 8,646 | |||||||||||||||||
Prepaid expenses |
6,542 | | 1,263 | 1,140 | | 8,945 | ||||||||||||||||||
Total current assets |
183,075 | | 92,824 | 106,667 | (79,371 | ) | 303,195 | |||||||||||||||||
Property, plant and equipment, net |
73,086 | | 2,033 | 33,918 | | 109,037 | ||||||||||||||||||
Goodwill |
194,813 | | 36,450 | | | 231,263 | ||||||||||||||||||
Other intangible assets, net |
86,561 | | 9,465 | 55 | | 96,081 | ||||||||||||||||||
Receivable from AMH II |
27,237 | | | | | 27,237 | ||||||||||||||||||
Investment in subsidiaries |
197,163 | | 92,409 | | (289,572 | ) | | |||||||||||||||||
Intercompany receivable |
| 197,552 | | | (197,552 | ) | | |||||||||||||||||
Other assets |
18,185 | | | 1,799 | | 19,984 | ||||||||||||||||||
Total assets |
$ | 780,120 | $ | 197,552 | $ | 233,181 | $ | 142,439 | $ | (566,495 | ) | $ | 786,797 | |||||||||||
Liabilities And Members Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | 54,618 | $ | | $ | 9,111 | $ | 23,851 | $ | | $ | 87,580 | ||||||||||||
Intercompany payables |
79,183 | | | | (79,183 | ) | | |||||||||||||||||
Payable to parent |
21,664 | | 1,535 | | | 23,199 | ||||||||||||||||||
Accrued liabilities |
41,699 | | 6,118 | 9,108 | | 56,925 | ||||||||||||||||||
Deferred income taxes |
| | 188 | 2,312 | (188 | ) | 2,312 | |||||||||||||||||
Income taxes payable |
| | | 1,112 | | 1,112 | ||||||||||||||||||
Total current liabilities |
197,164 | | 16,952 | 36,383 | (79,371 | ) | 171,128 | |||||||||||||||||
Deferred income taxes |
39,973 | | 2,314 | 1,016 | | 43,303 | ||||||||||||||||||
Other liabilities |
31,943 | | 16,752 | 12,631 | | 61,326 | ||||||||||||||||||
Long-term debt |
207,552 | 197,552 | | | (197,552 | ) | 207,552 | |||||||||||||||||
Members equity |
303,488 | | 197,163 | 92,409 | (289,572 | ) | 303,488 | |||||||||||||||||
Total liabilities and members equity |
$ | 780,120 | $ | 197,552 | $ | 233,181 | $ | 142,439 | $ | (566,495 | ) | $ | 786,797 | |||||||||||
15
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 3, 2009
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | 233,390 | $ | | $ | 45,738 | $ | 89,673 | $ | (43,994 | ) | $ | 324,807 | |||||||||||
Cost of sales |
164,709 | | 41,682 | 64,601 | (43,994 | ) | 226,998 | |||||||||||||||||
Gross profit |
68,681 | | 4,056 | 25,072 | | 97,809 | ||||||||||||||||||
Selling, general and
administrative expenses |
42,004 | | 311 | 11,008 | | 53,323 | ||||||||||||||||||
Income from operations |
26,677 | | 3,745 | 14,064 | | 44,486 | ||||||||||||||||||
Interest expense, net |
5,783 | | | 216 | | 5,999 | ||||||||||||||||||
Foreign currency loss |
| | | 112 | | 112 | ||||||||||||||||||
Income before income taxes |
20,894 | | 3,745 | 13,736 | | 38,375 | ||||||||||||||||||
Income tax provision |
9,844 | | 2,512 | 3,088 | | 15,444 | ||||||||||||||||||
Income before equity income
from subsidiaries |
11,050 | | 1,233 | 10,648 | | 22,931 | ||||||||||||||||||
Equity income from subsidiaries |
11,881 | | 10,648 | | (22,529 | ) | | |||||||||||||||||
Net income |
$ | 22,931 | $ | | $ | 11,881 | $ | 10,648 | $ | (22,529 | ) | $ | 22,931 | |||||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 3, 2009
(In thousands)
Subsidiary | Non-Guarantor | Reclassification/ | ||||||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | 567,260 | $ | | $ | 111,017 | $ | 203,085 | $ | (109,254 | ) | $ | 772,108 | |||||||||||
Cost of sales |
415,298 | | 106,203 | 153,818 | (109,254 | ) | 566,065 | |||||||||||||||||
Gross profit |
151,962 | | 4,814 | 49,267 | | 206,043 | ||||||||||||||||||
Selling, general and
administrative expenses |
123,037 | | 2,050 | 28,031 | | 153,118 | ||||||||||||||||||
Manufacturing restructuring costs |
5,255 | | | | | 5,255 | ||||||||||||||||||
Income from operations |
23,670 | | 2,764 | 21,236 | | 47,670 | ||||||||||||||||||
Interest expense, net |
15,994 | | | 587 | | 16,581 | ||||||||||||||||||
Foreign currency (gain) |
| | | (110 | ) | | (110 | ) | ||||||||||||||||
Income before income taxes |
7,676 | | 2,764 | 20,759 | | 31,199 | ||||||||||||||||||
Income tax provision |
4,529 | | 2,789 | 5,342 | | 12,660 | ||||||||||||||||||
Income (loss) before equity
income from subsidiaries |
3,147 | | (25 | ) | 15,417 | | 18,539 | |||||||||||||||||
Equity income from subsidiaries |
15,392 | | 15,417 | | (30,809 | ) | | |||||||||||||||||
Net income |
$ | 18,539 | $ | | $ | 15,392 | $ | 15,417 | $ | (30,809 | ) | $ | 18,539 | |||||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended October 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended October 3, 2009
(In thousands)
Subsidiary | Non-Guarantor | |||||||||||||||||||
Parent | Co-Issuer | Guarantors | Subsidiaries | Consolidated | ||||||||||||||||
Net cash provided by operating activities |
$ | 62,330 | $ | | $ | 15,638 | $ | 22,709 | $ | 100,677 | ||||||||||
Investing Activities |
||||||||||||||||||||
Additions to property, plant and equipment |
(3,593 | ) | | (11 | ) | (639 | ) | (4,243 | ) | |||||||||||
AMH II intercompany loan |
(26,819 | ) | | | | (26,819 | ) | |||||||||||||
Other |
(383 | ) | | 383 | | | ||||||||||||||
Net cash (used in) provided by investing activities |
(30,795 | ) | | 372 | (639 | ) | (31,062 | ) | ||||||||||||
Financing Activities |
||||||||||||||||||||
Net repayments under ABL Facility |
(32,500 | ) | | | | (32,500 | ) | |||||||||||||
Issuance of senior subordinated notes |
20,000 | | | | 20,000 | |||||||||||||||
Financing costs |
(4,920 | ) | | | (94 | ) | (5,014 | ) | ||||||||||||
Dividends paid to parent company |
(28,513 | ) | | | | (28,513 | ) | |||||||||||||
Intercompany transactions |
14,514 | | (16,021 | ) | 1,507 | | ||||||||||||||
Net cash (used in) provided by financing activities |
(31,419 | ) | | (16,021 | ) | 1,413 | (46,027 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | | 732 | 732 | |||||||||||||||
Net increase (decrease) in cash and cash
equivalents |
116 | | (11 | ) | 24,215 | 24,320 | ||||||||||||||
Cash and cash equivalents at beginning of period |
4,964 | | 97 | 1,648 | 6,709 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 5,080 | $ | | $ | 86 | $ | 25,863 | $ | 31,029 | ||||||||||
Note 11 Subsequent Event
Subsequent to the end of the quarter, investment funds affiliated with Hellman & Friedman LLC
(the Buyer) completed their purchase of the Company. On October 13, 2010, AMH II, the then
indirect parent company of the Company, completed its merger (the Acquisition Merger) with Carey
Acquisition Corp. (Merger Sub), pursuant to the terms of the Agreement and Plan of Merger, dated
as of September 8, 2010 (the Merger Agreement), among Carey Investment Holdings Corp. (now known
as AMH Investment Holdings Corp.) (Parent), Carey Intermediate Holdings Corp. (now known as AMH
Intermediate Holdings Corp.), a wholly-owned direct subsidiary of Parent (Holdings), Merger Sub,
a wholly-owned direct subsidiary of Holdings, and AMH II, with AMH II surviving such merger as a
wholly-owned direct subsidiary of Holdings. After a series of additional mergers (the Downstream
Mergers, and together with the Acquisition Merger, the Mergers), AMH II merged with and into
the Company, with the Company surviving such merger as a wholly-owned direct subsidiary of
Holdings. As a result of the Mergers, the Company is now an indirect wholly-owned subsidiary of
Parent. Approximately 98% of the capital stock of Parent is owned by investment funds affiliated
with Hellman & Friedman LLC.
Upon consummation of the Merger, the Buyer paid consideration for the outstanding Company
equity (including in-the-money stock options and warrants outstanding immediately prior to the
consummation of the merger) consisting of $600 million in cash, less certain expenses, fees and
payments made by or on behalf of the Buyer to affiliates of Harvest Partners and Investcorp, and
management, in each case as specified in the Merger Agreement. Immediately prior to the
consummation of the Merger, all outstanding shares of preferred stock of the Company were converted
into common stock.
The Merger Agreement was unanimously approved by the Companys Board of Directors. After the
execution and delivery of the Merger Agreement by the parties thereto, the holders of all of the
outstanding voting securities in the Company executed and delivered to the Buyer a written consent
approving the Merger Agreement and the transactions contemplated thereby.
In connection with the consummation of the Merger, the Company and its then indirect parent
entities, AMH and AMH II, satisfied and discharged their obligations under the indentures governing
the 9.875% notes, the 11.25% notes and the 20% notes. In addition, the Company repaid and
terminated the ABL Facility and the outstanding principal amount of the borrowings and accrued
interest thereon under the intercompany loan agreement with AMH II was deemed repaid.
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Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Associated Materials, LLC (the Company) is a leading, vertically integrated manufacturer and
distributor of exterior residential building products in the United States and Canada. The Company
produces a comprehensive offering of exterior building products, including vinyl windows, vinyl
siding, aluminum trim coil and aluminum and steel siding and accessories, which are produced at the
Companys 11 manufacturing facilities. The Company also sells complementary products that are
manufactured by third parties, such as roofing materials, insulation, exterior doors, vinyl siding
in a shake and scallop design and installation equipment and tools that are primarily distributed
through its supply centers. Vinyl windows, vinyl siding, metal products, and third-party
manufactured products comprised approximately 35%, 20%, 16% and 22%, respectively, of the Companys
total net sales for the nine month period ended October 2, 2010. These products are generally
marketed under the Alside®, Revere® and Gentek® brand names and are ultimately sold on a wholesale
basis to approximately 50,000 professional exterior contractors (who are referred to as contractor
customers) engaged in home remodeling and new home construction, primarily through the Companys
extensive dual-distribution network, consisting of 119 company-operated supply centers, through
which it sells directly to its contractor customers, and the Companys direct sales channel,
through which it sells to approximately 250 distributors and dealers, who then sell to their
customers. It is estimated that approximately 70% of the Companys net sales are generated in the
residential repair and remodeling market and approximately 30% of the Companys net sales are
generated in the residential new construction market. The Companys supply centers provide
one-stop shopping to contractor customers by carrying the products, accessories and tools
necessary to complete their projects. In addition, the supply centers augment the customer
experience by offering product support and enhanced customer service from the point of sales to
installation and warranty service. During the nine month period ended October 2, 2010,
approximately 72% of the Companys total net sales were generated through the Companys network of
supply centers, with the remainder sold to independent distributors and dealers.
Because its exterior residential building products are consumer durable goods, the Companys
sales are impacted by, among other things, the availability of consumer credit, consumer interest
rates, employment trends, changes in levels of consumer confidence and national and regional trends
in the housing market. The Companys sales are also affected by changes in consumer preferences
with respect to types of building products. Overall, the Company believes the long-term
fundamentals for the building products industry remain strong, as homes continue to get older,
household formation is expected to be strong, demand for energy efficiency products continues and
vinyl remains an optimal material for exterior window and siding solutions, all of which the
Company believes bodes well for the demand for its products in the future.
While the exterior building products industry has trended down since 2006 across the industry,
certain recent industry forecasts and market data suggest a more favorable environment going
forward. An average of the leading housing start forecasts (National Association of Home Builders,
National Association of Realtors® and Mortgage Bankers Association) suggest
single-family housing starts will grow from 441,000 in 2009 to 932,000 in 2012, a 28.3% compound
annual growth rate. In addition, a Joint Center for Housing Studies of Harvard University study
projects that 11.8 million to 13.8 million households will be formed from 2010 through 2020. The
Company believes a stabilization of the housing environment and growth in exterior building
products, or windows and siding, specifically, will benefit its business as the Company is
well-positioned to generate growth and capture market share within the industry.
The principal raw materials used by the Company are vinyl resin, aluminum, steel, resin
stabilizers and pigments, glass, window hardware, and packaging materials, all of which are
available from a number of suppliers and have historically been subject to price changes. Raw
material pricing on certain of the Companys key commodities has fluctuated significantly over the
past several years. In response, the Company has announced price increases over the past several
years on certain of its product offerings to offset inflation in raw material pricing and
continually monitor market conditions for price changes as warranted. The Companys ability to
maintain gross margin levels on its products during periods of rising raw material costs depends on
the Companys ability to obtain selling price increases. Furthermore, the results of operations for
individual quarters can and have been negatively impacted by a delay between the timing of raw
material cost increases and price increases on the Companys products. There can be no assurance
that the Company will be able to maintain the selling price increases already implemented or
achieve any future price increases.
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Table of Contents
The Company operates with significant operating and financial leverage. Significant portions
of the Companys manufacturing, selling, general and administrative expenses are fixed costs that
neither increase nor decrease proportionately with sales. In addition, a significant portion of
the Companys interest expense is fixed. There can be no assurance that the Company will be able to
continue to reduce its fixed costs in response to a decline in its net sales. As a result, a
decline in the Companys net sales could result in a higher percentage decline in its income from
operations. Also, the Companys gross margins and gross margin percentages may not be comparable
to other companies, as some companies include all of the costs of their distribution network in
cost of sales, whereas the Company includes the operating costs of its supply centers in selling,
general and administrative expenses.
Because most of the Companys building products are intended for exterior use, sales tend to
be lower during periods of inclement weather. Weather conditions in the first quarter of each
calendar year usually result in that quarter producing significantly less net sales and net cash
flows from operations than in any other period of the year. Consequently, the Company has
historically had small profits or losses in the first quarter and reduced profits from operations
in the fourth quarter of each calendar year. To meet seasonal cash flow needs, the Company
typically utilizes its ABL Facility and repays such borrowings in periods of higher cash flow. The
Company typically generates the majority of its cash flow in the third and fourth quarters.
The Company seeks to distinguish itself from other suppliers of residential building products
and to sustain its profitability through a business strategy focused on increasing sales at
existing supply centers, selectively expanding its supply center network, increasing sales through
independent specialty distributor customers, developing innovative new products, expanding sales of
third-party manufactured products through its supply center network, and driving operational
excellence by reducing costs and increasing customer service levels. The Company continually
analyzes new and existing markets for the selection of new supply center locations.
On October 13, 2010, investment funds affiliated with Hellman & Friedman LLC completed their
purchase of the Company. In connection with the consummation of the transaction, the Company and
its then indirect parent entities satisfied and discharged their obligations under the indentures
governing the 9.875% notes, the 11.25% notes and the 20% notes. In addition, the Company repaid
and terminated the ABL Facility, and the outstanding principal amount of the borrowings and accrued
interest thereon under the intercompany loan agreement with AMH II
was deemed repaid. In connection with the closing of the transaction,
the Company entered into senior secured asset-based revolving credit
facilities, consisting of a U.S. facility and a Canadian facility,
pursuant to a Revolving Credit Agreement, dated as of October 13, 2010.
The Company borrowed $73.0 million under the U.S.
facility to finance a portion of the acquisition.
Prior to the closing of the transaction, the Company announced that it had priced an offering
of $730 million in aggregate principal amount of 9.125% senior secured notes due 2017 (the notes)
at an issue price of 100% of the principal amount of the notes. The notes were offered in a private
placement to qualified institutional buyers in the United
States, as defined in Rule 144A under the
Securities Act of 1933, as amended (the Securities Act), and outside the United States pursuant
to Regulation S under the Securities Act. The net proceeds from the offering of the notes were
used, in part, to finance the acquisition of the then indirect parent
companies of Associated Materials,
LLC by investment funds affiliated with Hellman & Friedman, LLC,
and the offering of the notes was
conditioned upon the contemporaneous closing of the acquisition. Upon completion of the offering
and the acquisition, the notes became obligations of Associated Materials, LLC.
As of the date of the filing of this report, the initial accounting of the acquisition
transaction has not been completed. Certain assets and liabilities are in the process of being
evaluated and measured at their respective fair values in accordance with Accounting Standards
Codification 805, Business Combinations. The Company has engaged external consulting firms to
complete valuation appraisals or provide information to be used in estimating the fair values of
certain assets and liabilities, such as fixed assets, intangible assets and pension liabilities.
The initial accounting of the acquisition, including debt redemption costs and other transaction
related fees and expenses, are expected to be completed and recorded during the fourth quarter of
2010.
20
Table of Contents
Results of Operations
The following table sets forth for the periods indicated the results of the Companys
operations (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 329,547 | $ | 324,807 | $ | 862,106 | $ | 772,108 | ||||||||
Cost of sales |
238,508 | 226,998 | 630,770 | 566,065 | ||||||||||||
Gross profit |
91,039 | 97,809 | 231,336 | 206,043 | ||||||||||||
Selling, general and
administrative expenses |
53,186 | 53,323 | 154,256 | 153,118 | ||||||||||||
Manufacturing restructuring
costs |
| | | 5,255 | ||||||||||||
Income from operations |
37,853 | 44,486 | 77,080 | 47,670 | ||||||||||||
Interest expense, net |
6,218 | 5,999 | 18,801 | 16,581 | ||||||||||||
Foreign currency loss (gain) |
31 | 112 | (21 | ) | (110 | ) | ||||||||||
Income before income taxes |
31,604 | 38,375 | 58,300 | 31,199 | ||||||||||||
Income tax provision |
12,194 | 15,444 | 21,330 | 12,660 | ||||||||||||
Net income |
$ | 19,410 | $ | 22,931 | $ | 36,970 | $ | 18,539 | ||||||||
The following table sets forth for the periods presented a summary of net sales by principal
product offering (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Vinyl windows |
$ | 111,109 | $ | 114,686 | $ | 302,889 | $ | 276,717 | ||||||||
Vinyl siding products |
66,959 | 67,857 | 175,313 | 161,113 | ||||||||||||
Metal products |
53,158 | 53,571 | 141,619 | 127,017 | ||||||||||||
Third-party manufactured products |
77,925 | 66,885 | 187,817 | 158,454 | ||||||||||||
Other products and services |
20,396 | 21,808 | 54,468 | 48,807 | ||||||||||||
$ | 329,547 | $ | 324,807 | $ | 862,106 | $ | 772,108 | |||||||||
Quarter Ended October 2, 2010 Compared to Quarter Ended October 3, 2009
Net sales increased 1.5% to $329.5 million for the third quarter of 2010 compared to $324.8
million for the same period in 2009 primarily due to increased sales of third-party manufactured
products and the impact of the stronger Canadian dollar in 2010, partially offset by vinyl siding
and vinyl window unit volume decreases of 9% and 3%, respectively.
Gross profit in the third quarter of 2010 was $91.0 million, or 27.6% of net sales, compared
to gross profit of $97.8 million, or 30.1% of net sales, for the same period in 2009. The decrease
in gross margin was primarily the result of an increase in the cost of certain commodities used in
manufacturing processes and a negative impact from product mix, partially offset by the Companys
continued implementation of cost reduction initiatives.
Selling, general and administrative expenses were approximately $53.2 million, or 16.1% of net
sales, for the third quarter of 2010 versus $53.3 million, or 16.4% of net sales, for the same
period in 2009. Selling, general and administrative expenses for the quarter ended October 2, 2010
includes advisory fees for strategic capital advice of approximately $0.2 million, while selling,
general and administrative expenses for the quarter ended October 3, 2009 includes employee
termination costs of approximately $1.7 million, tax restructuring costs of approximately $0.3
million and amortization related to prepaid management fees of approximately $0.1 million.
Excluding these costs, selling, general and administrative expenses for the quarter ended October
2, 2010 increased approximately $1.8 million when compared to the same period in 2009. The increase
in selling, general and administrative expenses was primarily due to increased consulting expenses
and other professional fees of approximately $0.9 million and the translation impact on Canadian
expenses as a result of a stronger Canadian dollar in 2010 of approximately $0.4 million.
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Table of Contents
Income from operations was approximately $37.9 million for the quarter ended October 2, 2010
compared to income from operations of approximately $44.5 million for the same period in 2009.
Interest expense increased approximately $0.2 million for the third quarter of 2010 compared
to the same period in 2009. The increase in interest expense was primarily due to the increased
principal amount, and related amortization of deferred financing fees, of the Companys 9.875%
notes issued in November 2009, partially offset by lower overall borrowings under the Companys
credit facilities and decreased interest rates in 2010.
The income tax provision for the third quarter of 2010 reflects an effective income tax rate
of 38.6%, compared to an effective income tax rate of 40.2% for the same period in 2009. The change
in the tax rate was primarily the result of the ability to utilize certain manufacturing deductions
available to the company in 2010.
The Company reported net income of $19.4 million during the third quarter of 2010 compared to
net income of $22.9 million for the same period in 2009.
Nine Months Ended October 2, 2010 Compared to Nine Months Ended October 3, 2009
Net sales increased 11.7% to $862.1 million for the nine months ended October 2, 2010 compared
to $772.1 million for the same period in 2009 primarily due to increased unit volumes across all
product categories and the impact of the stronger Canadian dollar in 2010. For the nine months
ended October 2, 2010 compared to the same period in 2009, vinyl window and vinyl siding unit
volumes increased by approximately 8% and 4%, respectively. Additionally, for the nine months
ended October 2, 2010 compared to the same period in 2009, sales of third-party manufactured
products increased approximately $29.4 million, or 19%.
Gross profit for the nine months ended October 2, 2010 was $231.3 million, or 26.8% of net
sales, compared to gross profit of $206.0 million, or 26.7% of net sales, for the same period in
2009. The improvement in gross profit was primarily due to favorable volume and, to a lesser
extent, from cost reduction activities, partially offset by a negative impact from product mix and
certain raw material costs.
Selling, general and administrative expenses increased approximately $1.1 million to $154.3
million, or 17.9% of net sales, for the nine months ended October 2, 2010 versus $153.1 million, or
19.8% of net sales, for the same period in 2009. Selling, general and administrative expenses for
the nine months ended October 2, 2010 includes advisory fees for strategic capital advice of
approximately $1.5 million, tax restructuring costs of approximately $0.1 million and bank audit
fees of approximately $0.1 million, while selling, general and administrative expenses for the nine
months ended October 3, 2009 includes employee termination costs of $1.7 million, amortization
related to prepaid management fees of approximately $0.4 million, tax restructuring costs of $0.3
million and bank audit fees of $0.1 million. Excluding these costs, selling, general and
administrative expenses for the nine months ended October 2, 2010 increased approximately $2.1
million when compared to the same period in 2009. The increase in selling, general and
administrative expense was primarily due to the translation impact on Canadian expenses as a result
of a stronger Canadian dollar in 2010 of approximately $2.9 million, increased consulting expenses
and professional fees of approximately $2.3 million, increased sales-related commission and benefit
accruals of approximately $1.6 million and increased product delivery costs in the Companys supply
center network of approximately $0.7 million. These increases were partially offset by reduced bad
debt expense of approximately $5.1 million, which was the result of the economic conditions that
existed during 2009.
Throughout 2009, due to economic conditions and as a cost control measure, the Company reduced
its workforce and placed a number of employees on temporary lay-off status. During the second and
third quarters, several of these employees were re-instated to an active status. During the third
quarter ended October 3, 2009, the Company determined it would not recall the remaining employees.
As a result, the Company recorded a one-time charge of $1.7 million in employee termination costs
during the third quarter ended October 3, 2009 within selling, general and administrative expense
in the consolidated statements of operations.
During the second quarter of 2009, the Company completed its plans to relocate a portion of
its vinyl siding production and distribution and discontinued its use of the warehouse facility
adjacent to the Ennis manufacturing plant. As a result, the related lease costs associated with
the discontinued use of the warehouse facility were recorded as a restructuring charge of
approximately $5.3 million for the nine months ended October 3, 2009.
Income from operations was approximately $77.1 million for the nine months ended October 2,
2010 compared to income from operations of approximately $47.7 million for the same period in 2009.
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Table of Contents
Interest expense increased $2.2 million for the nine months ended October 2, 2010 compared to
the same period in 2009. The increase in interest expense was primarily due to the increased
principal amount, and related amortization of deferred financing fees, of the Companys 9.875%
notes issued in November 2009, partially offset by lower overall borrowings under the Companys
credit facilities and decreased interest rates in 2010.
The income tax provision for the nine months ended October 2, 2010 reflects an effective
income tax rate of 36.6%, compared to an effective income tax rate of 40.6% for the same period in
2009. The change in the tax rate was primarily the result of the ability to utilize certain
manufacturing deductions available to the company in 2010.
Net income was $37.0 million for the nine months ended October 2, 2010 compared to net income
of $18.5 million for the same period in 2009.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements is included in Note 1 to the
unaudited condensed consolidated financial statements. The Company evaluates the potential impact,
if any, on its financial position, results of operations and cash flows, of all recent accounting
pronouncements, and, if significant, makes the appropriate disclosures. During the third quarter
ended October 2, 2010, no material changes resulted from the adoption of recent accounting
pronouncements.
Liquidity and Capital Resources
The following sets forth a summary of the Companys cash flows for the nine months ended
October 2, 2010 and October 3, 2009 (in thousands):
Nine Months Ended | ||||||||
October 2, | October 3, | |||||||
2010 | 2009 | |||||||
Net cash provided by operating activities |
$ | 56,819 | $ | 100,677 | ||||
Net cash used in investing activities |
(10,302 | ) | (31,062 | ) | ||||
Net cash used in financing activities |
(48,211 | ) | (46,027 | ) |
Cash Flows
At October 2, 2010, the Company had cash and cash equivalents of $54.2 million and available
borrowing capacity of approximately $166.6 million under the Companys ABL Facility. Outstanding
letters of credit as of October 2, 2010 totaled approximately $7.8 million primarily securing
deductibles of various insurance policies.
Cash Flows from Operating Activities
Net cash provided by operating activities was $56.8 million for the nine months ended October
2, 2010, compared to $100.7 million for the same period in 2009. The factors typically impacting
cash flows from operating activities during the first nine months of the year include the seasonal
increase of inventory levels and use of cash related to payments for accrued liabilities including
payments of incentive compensation and customer sales incentives. Accounts receivable was a use of
cash of $53.8 million for the nine months ended October 2, 2010, compared to $48.5 million for the
same period in 2009, resulting in a net decrease in cash flows of $5.3 million reflecting the
increased sales in the current year. Inventory was a use of cash of $44.1 million during the nine
months ended October 2, 2010, compared to a source of cash of $11.1 million during the same period
in 2009, resulting in a net decrease in cash flows of $55.2 million, which was primarily due to
increased inventory levels and rising commodity costs in the current year. Accounts payable and
accrued liabilities were a source of cash of $71.3 million for the nine months ended October 2,
2010, compared to $79.0 million for the same period in 2009, resulting in a net decrease in cash
flows of $7.7 million. Cash flows provided by operating activities for the nine months ended
October 2, 2010 includes income tax payments of $0.3 million, compared to $8.9 million of income
tax payments for the same period in 2009.
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Cash Flows from Investing Activities
During the nine months ended October 2, 2010, net cash used in investing activities consisted
of capital expenditures of $10.3 million. Capital expenditures in 2010 were primarily at supply
centers for continued operations and relocations, the continued development of the Companys new
glass insourcing process and various enhancements at plant locations. During the nine months ended
October 3, 2009, net cash used in investing activities included an intercompany loan of $26.8
million paid to AMH II by the Company and used in the AMH II debt exchange and capital expenditures
of $4.2 million. Capital expenditures in 2009 were primarily at supply centers for continued
operations and relocations, various enhancements at plant locations and several Corporate
information technology projects.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended October 2, 2010 included
dividend payments totaling $48.5 million and payments of financing costs of $0.2 million, partially
offset by net borrowings of $0.5 million under the Companys ABL Facility. Net cash used in
financing activities for the nine months ended October 3, 2009 included net repayments under the
Companys ABL Facility of $32.5 million, dividend payments totaling $28.5 million and payments of
financing costs of $5.0 million, partially offset by the $20.0 million issuance of the Companys
15% notes, which are no longer outstanding. The dividend payments in 2010 were paid to the
Companys indirect parent company to fund the scheduled interest payments on its 11.25% notes. The
dividend payments in 2009 were paid to the Companys indirect parent company to fund the scheduled
interest payment on its 13.625% notes, which are no longer outstanding.
Description of the Companys Indebtedness
9.875% Senior Secured Second Lien Notes due 2016
On November 5, 2009, the Company issued in a private offering $200.0 million of its 9.875%
Senior Secured Second Lien Notes due 2016. In February 2010, the Company completed the offer to
exchange all of its outstanding privately placed 9.875% Senior Secured Second Lien Notes due 2016
for newly registered 9.875% Senior Secured Second Lien Notes due 2016 (the 9.875% notes). The
9.875% notes were issued by the Company and Associated Materials Finance, Inc., a wholly owned
subsidiary of the Company (collectively, the Issuers). The 9.875% notes were originally issued
at a price of 98.757%. The net proceeds from the offering were used to discharge and redeem the
Companys outstanding 9 3/4% Senior Subordinated Notes due 2012 (the 9.75% notes) and its
outstanding 15% Senior Subordinated Notes due 2012 (the 15% notes), and to pay fees and expenses
related to the offering. As of October 2, 2010, the accreted balance of the Companys 9.875%
notes, net of the original issue discount, was $197.7 million. Interest on the 9.875% notes will be
payable semi-annually in arrears on May 15th and November 15th of each year, with the first
interest payment made on May 15, 2010.
The Issuers are required to redeem the 9.875% notes no later than December 1, 2013, if as of
October 15, 2013, AMHs 11 1/4% Senior Discount Notes due 2014 (the 11.25% notes) remain
outstanding, unless discharged or defeased, or if any indebtedness incurred by the Issuers or any
of their holding companies to refinance such 11.25% notes matures prior to the maturity date of the
9.875% notes. As of October 2, 2010, AMH had $431.0 million in aggregate principal amount of its
11.25% notes outstanding. Prior to November 15, 2012, the Issuers may redeem all or a portion of
the 9.875% notes at any time or from time to time at a price equal to 100% of the principal amount
of the 9.875% notes plus accrued and unpaid interest, plus a make-whole premium. Beginning on
November 15, 2012, the Issuers may redeem all or a portion of the 9.875% notes at a redemption
price of 107.406%. The redemption price declines to 104.938% at November 15, 2013, to 102.469% at
November 15, 2014 and to 100% on November 15, 2015 for the remaining life of the 9.875% notes. In
addition, on or prior to November 15, 2012, the Issuers may redeem up to 35% of the 9.875% notes
using the proceeds of certain equity offerings at a redemption price equal to 100% of the aggregate
principal amount thereof, plus a premium equal to the interest rate per annum on the 9.875% notes,
plus accrued and unpaid interest, if any, to the date of redemption.
The 9.875% notes are senior obligations and rank equally in right of payment with all of the
Issuers existing and future senior indebtedness and senior in right of payment to all of the
Issuers future subordinated indebtedness. The 9.875% notes are guaranteed on a senior basis by all
of the Companys existing and future domestic restricted subsidiaries, other than Associated
Materials Finance, Inc. (the Subsidiary Guarantors), that guarantee or are otherwise obligors
under the Companys asset-based credit facility (the ABL Facility). The 9.875% notes and
guarantees are structurally subordinated to all of the liabilities of the Companys non-guarantor
subsidiaries, including all Canadian subsidiaries of the Company.
The 9.875% notes and related guarantees are secured, subject to certain permitted liens, by
second-priority liens on the assets that secure the ABL Facilitys indebtedness, namely all of the
Issuers and their U.S. subsidiaries tangible and intangible assets. The 9.875% notes are
effectively senior to all of the Companys and the Subsidiary Guarantors existing or future
unsecured indebtedness to the extent of the value of such collateral, after giving effect to
first-priority liens on such collateral securing the U.S. portion of the ABL Facility.
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The indenture governing the 9.875% notes contains covenants that, among other things, limit
the ability of the Issuers and of certain restricted subsidiaries to incur additional indebtedness,
make loans or advances to or other investments in subsidiaries and other entities, sell its assets
or declare dividends. If an event of default occurs, the trustee or holders of 25% or more in
aggregate principal amount of the notes may accelerate the notes. If an event of default relates to
certain events of bankruptcy, insolvency or reorganization, the 9.875% notes will automatically
accelerate without any further action required by the trustee or holders of the 9.875% notes.
Covenants. The indenture governing the 9.875% notes (the 9.875% notes indenture) contains
covenants that, among other things and subject in each case to certain specified exceptions, limit
the ability of the Issuers and of certain restricted subsidiaries: (i) to incur additional
indebtedness unless the Company meets a 2 to 1 consolidated coverage ratio test, or as permitted
under specified available baskets; (ii) to make restricted payments; (iii) to incur restrictions on
subsidiaries ability to make distributions or transfer assets to the Company; (iv) to create,
incur, affirm or suffer to exist any liens, (v) to sell assets or stock of subsidiaries; (vi) to
enter into transactions with affiliates; and (vii) to merge or consolidate with, or sell all or
substantially all assets to, a third party or undergo a change of control.
Under the restricted payments covenant in the 9.875% notes indenture, the Company and its
restricted subsidiaries cannot, subject to specified exceptions, make restricted payments unless:
(i) the amount available for distribution of restricted payments under the 9.875% notes indenture
(the restricted payments basket) exceeds the aggregate amount of the proposed restricted payment;
(ii) the Company is not in default under the 9.875% notes indenture; and (iii) the consolidated
coverage ratio of the Company exceeds 2 to 1. Consolidated coverage ratio is defined in the 9.875%
notes indenture as the ratio of the Companys EBITDA to consolidated interest expense (each as
defined in such indenture). Restricted payments (with certain exceptions) and net losses erode the
restricted payment basket, while net income (by a factor of 50%), proceeds from equity issuances,
and proceeds from investments and returns of capital increase the restricted payment basket.
Restricted payments include paying dividends or making other distributions in respect of the
Companys capital stock, purchasing, redeeming or otherwise acquiring capital stock or subordinated
indebtedness of the Company and making investments (other than certain permitted investments).
Irrespective of whether it is otherwise able to pay dividends under the restricted payments
test described above, the 9.875% notes indenture permits the payment of dividends by the Company to
Holdings (and AMH) for the payment of interest on AMHs 11.25% notes (or any refinancing thereof),
in an aggregate amount not to exceed $125.0 million or if the Companys leverage ratio (as defined
in the 9.875% notes indenture) is equal to or less than 4.5 to 1.00. The 9.875% notes indenture
also permits dividends for the payment of principal on the 11.25% notes or AMH IIs 20% Senior
Notes due 2014 (the 20% notes) in an aggregate amount not to exceed $50 million when the
Companys leverage ratio is equal to or less than 4.5 to 1.00. In addition, subject to certain
limitations, the 9.875% notes indenture permits the incurrence of additional indebtedness secured
by liens senior to the liens securing the 9.875% notes or pari passu with the liens securing the
9.875% notes.
The Companys ability to make restricted payments under the 9.875% notes indenture is subject
to compliance with the other conditions to making restricted payments provided for in such
indenture, to compliance with the restricted payments covenants in the ABL Facility, and to
statutory limitations on the payment of dividends. At October 2, 2010, subject to the limitations
to both the Indenture for 9.875% notes and the ABL Facility, the Company could have upstreamed an
additional $175.2 million, which is comprised of availability under the borrowing base and the cash
on hand at quarter end.
Events of default. The 9.875% notes indenture provides for the following events of default:
(i) default for 30 days in payment of interest on the 9.875% notes; (ii) default in payment of
principal on the 9.875% notes; (iii) the failure by the Issuers or any Subsidiary Guarantor to
comply with other agreements in the Indenture or the 9.875% notes, in certain cases subject to
notice and lapse of time; (iv) certain accelerations (including failure to pay within any grace
period after final maturity) of other indebtedness of the Issuers or any significant subsidiary if
the amount accelerated (or so unpaid) exceeds $10.0 million; (v) certain events of bankruptcy or
insolvency with respect to the Issuers or any significant subsidiary; (vi) certain judgments or
decrees for the payment of money in excess of $10.0 million; and (vii) certain defaults with
respect to the subsidiary guarantees and the security documents creating a security interest in
assets to secure the obligations under the 9.875% notes, the subsidiary guarantees and other pari
passu secured indebtedness. If an event of default occurs and is continuing, the trustee or the
holders
of at least 25% in principal amount of the outstanding 9.875% notes may declare all the 9.875%
notes to be due and payable. Certain events of bankruptcy or insolvency are events of default
which will result in the 9.875% notes being due and payable immediately upon the occurrence of such
events of default.
Change of control. In the event of a change of control of the Company, as defined in the
9.875% notes indenture, holders of the 9.875% notes have the right to require the Company to
repurchase their 9.875% notes at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the repurchase date.
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The fair value of the 9.875% notes was $242.0 million and $197.5 million at October 2, 2010
and January 2, 2010, respectively. In accordance with the principles described in the FASB ASC 820,
Fair Value Measurements and Disclosures, the fair value of the 9.875% notes as of October 2, 2010
was measured using Level 1 inputs of quoted prices in active markets. The fair value of the 9.875%
notes as of January 2, 2010 was based upon the pricing determined in the private offering of the
9.875% notes at the time of issuance in November 2009.
On October 13, 2010, in connection with the consummation of the Mergers, the Company satisfied
and discharged its obligations under the 9.875% notes indenture.
Intercreditor Agreement
On November 5, 2009, in connection with the issuance of the 9.875% notes, the Company and its
subsidiaries, Wachovia Bank, N. A., as first lien agent, and the trustee under the 9.875% notes
indenture entered into an agreement (the Intercreditor Agreement) to define the rights of lenders
under the ABL Facility and certain other parties under the ABL Facility and related agreements and
the holders of the 9.875% notes with respect to the collateral securing such notes and the ABL
Facility. Pursuant to the terms of the Intercreditor Agreement, the agent under the ABL Facility
holds a first-priority security interest in the collateral, and the trustee under the 9.875% notes
indenture holds a second-priority lien in such collateral for the benefit of holders of the 9.875%
notes, equally and ratably secured with any other pari passu secured indebtedness permitted to be
incurred under the 9.875% notes indenture. If any other indebtedness is designated as other pari
passu secured indebtedness by the Company and the holders thereof, the holders or representatives
of the holders of such other pari passu secured indebtedness will also become party to the
Intercreditor Agreement. The trustee under the 9.875% notes indenture is not permitted to exercise
remedies against the collateral for a period of 180 days after a payment default, the acceleration
of the 9.875% notes or as long as the agent under the ABL Facility is exercising remedies against
the collateral. A release of collateral by the agent under the ABL Facility may result in a
release of the collateral securing the 9.875% notes without the consent of the holders of the
9.875% notes, and the rights of the trustee under the 9.875% notes indenture to exercise rights in
a bankruptcy proceeding is restricted.
On October 13, 2010, in connection with the consummation of the Mergers, the Intercreditor
Agreement was terminated.
ABL Facility
On October 3, 2008, the Company, Gentek Building Products, Inc. and Associated Materials
Canada Limited (formerly known as Gentek Building Products Limited), as borrowers, entered into the
ABL Facility with Wells Fargo Securities, LLC (formerly known as Wachovia Capital Markets, LLC) and
CIT Capital Securities LLC, as joint lead arrangers, Wachovia Bank, N.A., as agent and the lenders
party to the facility. Pursuant to a reorganization of certain Canadian subsidiaries of the
Company occurring in August and September of 2009 (the Canadian Reorganization), Gentek Building
Products Limited Partnership, a newly formed Canadian operating entity, was added as a borrower
under the Canadian portion of the ABL Facility. The ABL Facility provides for a senior secured
asset-based revolving credit facility of up to $225.0 million, comprising a $165.0 million U.S.
facility and a $60.0 million Canadian facility, in each case subject to borrowing base availability
under the applicable facility. Pursuant to an amendment to the ABL Facility (the ABL Facility
Amendment) entered into in connection with the issuance of the Companys 9.875% notes, effective
November 5, 2009, the maturity date of the ABL Facility is the earliest of (i) October 3, 2013 and
(ii) the date three months prior to the stated maturity date of the 9.875% notes (as amended,
supplemented or replaced), if any such notes remain outstanding at such date taking into account
any stated maturity dates which may be contingent, conditional or alternative. As of October 2,
2010, there was $10.5 million drawn under the ABL Facility and $166.6 million available for
additional borrowing.
The obligations of the Company, Gentek Building Products, Inc., Associated Materials Canada
Limited, and Gentek Building Products Limited Partnership as borrowers under the ABL Facility, are
jointly and severally guaranteed by Holdings and by the Companys wholly owned domestic
subsidiaries, Gentek Holdings, LLC and Associated Materials Finance, Inc.
(formerly Alside, Inc.). Such obligations and guaranties are also secured by (i) a security
interest in substantially all of the owned real and personal assets (tangible and intangible) of
the Company, Holdings, Gentek Building Products, Inc., Gentek Holdings, LLC and Associated
Materials Finance, Inc. and (ii) a pledge of up to 65% of the voting stock of Associated Materials
Canada Limited and Gentek Canada Holdings Limited. The obligations of Associated Materials Canada
Limited and Gentek Building Products Limited Partnership are further secured by a security interest
in their owned real and personal assets (tangible and intangible) and are guaranteed by Gentek
Canada Holdings Limited, an entity formed as part of the Canadian Reorganization.
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The interest rate applicable to outstanding loans under the ABL Facility is, at the Companys
option, equal to either a U.S. or Canadian adjusted base rate or a Eurodollar base rate plus an
applicable margin. Pursuant to the ABL Amendment, the applicable margin related to adjusted base
rate loans ranges from 1.25% to 2.25%, and the applicable margin related to LIBOR loans ranges from
3.00% to 4.00%, with the applicable margin in each case depending on the Companys quarterly
average excess availability.
As of October 2, 2010, the per annum interest rate applicable to borrowings under the ABL
Facility was 4.75%. The weighted average interest rate for borrowings under the ABL Facility was
4.99% for the quarter ended October 2, 2010. As of October 2, 2010, the Company had letters of
credit outstanding of $7.8 million primarily securing deductibles of various insurance policies.
The Company is required to pay a commitment fee of 0.50% to 0.75% per annum on any unused amounts
under the ABL Facility.
The Companys borrowing base under the ABL Facility, for each of the U.S. and Canadian
facilities, is generally equal to (A) 85% of eligible accounts receivable plus (B) the lesser of
(i) the sum of (x) 50% of the value of eligible raw materials inventory, other than painted coil,
plus (y) the lesser of 35% of the value of painted coil and $2.5 million plus (z) 60% of the value
of finished goods inventory, and (ii) 85% of the net orderly liquidation value of eligible
inventory, plus (C) the lesser of fixed asset availability and $24.8 million (for the U.S.
facility) or $9.0 million (for the Canadian facility), minus (D) attributable reserves. Fixed
asset availability is generally defined as equal to 85% of the net orderly liquidation value of
eligible equipment plus 70% of the appraised fair market value of eligible real property; provided
that such amount decreases by a fixed amount each month. The Companys borrowing base will
fluctuate during the course of the year based on a variety of factors impacting the Companys level
of eligible accounts receivable and inventory, including seasonal builds in inventory immediately
prior to and during the peak selling season and changes in the levels of accounts receivable, which
tend to increase during the peak selling season and are at seasonal lows during the winter months.
The Companys peak selling season is typically May through October. As of October 2, 2010, the
Companys borrowing base was $185.4 million, which was based on the borrowing base calculation
utilizing August month end account balances.
Covenants. The ABL Facility contains covenants that, among other things and subject in each
case to certain specified exceptions, limit the ability of Holdings, the Company and its
subsidiaries to: (i) merge or consolidate with, or sell equity interests, indebtedness or assets
to, a third party; (ii) wind up, liquidate or dissolve; (iii) create liens or other encumbrances on
assets; (iv) incur additional indebtedness or make payments in respect of existing indebtedness;
(v) make loans, investments and acquisitions; (vi) make certain restricted payments; (vii) enter
into transactions with affiliates; (viii) engage in any business other than the business engaged in
by the Company at the time of entry into the ABL Facility; and (ix) incur restrictions on its
subsidiaries ability to make distributions to Holdings or the Company or transfer or encumber its
subsidiaries assets. The ABL Facility also requires the Company to obtain an unqualified audit
opinion from its independent registered public accounting firm on its consolidated financial
statements for each fiscal year.
The ABL Facility does not require the Company to comply with any financial maintenance
covenants, unless it has less than $28.1 million of aggregate excess availability at any time (or
less than $20.6 million of excess availability under the U.S. facility or less than $7.5 million of
excess availability under the Canadian facility), during which time the Company is subject to
compliance with a fixed charge coverage ratio covenant of 1.1 to 1. As of October 2, 2010, the
Company exceeded the minimum aggregate excess availability thresholds, and therefore, was not
required to comply with this maintenance covenant.
Under the ABL Facility restricted payments covenant, subject to specified exceptions,
Holdings, the Company and its restricted subsidiaries cannot make restricted payments, such as
dividends or distributions on equity, redemptions or repurchases of equity, or payments of certain
management or advisory fees or other extraordinary forms of compensation, unless prior written
notice is given and, as of the date of and after giving effect to the making of the restricted
payment:
| excess availability under the ABL Facility exceeds $45.0 million for the total facility, and $24.8 million and $9.0 million for the U.S. and Canadian facilities, respectively, if the fixed asset availability (as defined) is greater than zero; or if the fixed asset availability is equal to zero, $33.8 million for the total facility, and $20.6 million and $7.5 million for the U.S. and Canadian facilities, respectively; |
| the consolidated EBITDA (as defined under the ABL Facility) of Holdings and its subsidiaries in the most recent fiscal quarter for which financial statements have been delivered (or, if such quarter is the first fiscal quarter of Holdings and its subsidiaries of such year, then the fiscal quarter immediately preceding such quarter) is at least 50% of the consolidated EBITDA of such entities for the same quarter in the prior year; and |
| no default has occurred and is continuing under the ABL Facility. |
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Excess availability is generally defined under the ABL Facility as the difference between the
borrowing base and the outstanding obligations of the borrowers (as such obligations are adjusted
for changes in the level of reserves and certain other short term payables). During the nine
months ended October 2, 2010, Holdings and the Company were not prevented from making restricted
payments by the ABL Facilitys restricted payments covenant. For the third quarter of 2010, the
consolidated EBITDA of Holdings and its subsidiaries, as determined in accordance with the ABL
Facility, exceeded 50% of the consolidated EBITDA for the third quarter of 2009.
The Companys excess availability under the ABL Facility was $166.6 million as of October 2,
2010. The excess availability will fluctuate throughout the course of the year based on a variety
of factors impacting the Companys borrowing base and outstanding borrowings and other obligations.
The borrowing base and the level of outstanding borrowings and other obligations are impacted by
the seasonality of the Companys business, as sales and earnings are typically lower during the
first quarter of each year, while working capital requirements increase prior to the peak selling
season as inventories are built in advance of the peak selling season.
Events of Default. Events of default under the ABL Facility include: (i) nonpayment of
principal or interest; (ii) failure to comply with covenants, subject to applicable grace periods;
(iii) defaults on indebtedness in excess of $7.5 million; (iv) change of control events; (v)
certain events of bankruptcy, insolvency or reorganization; (vi) any material provision of any ABL
Facility document ceasing to be valid, binding and enforceable or any assertion of such invalidity;
(vii) a guarantor denying, disaffirming or otherwise failing to perform its obligations under its
guaranty; (viii) any event of default under any other document related to the ABL Facility; and
(ix) certain undischarged judgments or decrees for the payment of money, certain ERISA events, and
certain Canadian tax events, in each case in excess of specified thresholds.
If an event of default under the ABL Facility occurs and is continuing, amounts outstanding
under the ABL Facility may be accelerated upon notice, in which case the obligations of the lenders
to make loans and arrange for letters of credit under the ABL Facility would cease. If an event of
default relates to certain events of bankruptcy, insolvency or reorganization of Holdings, the
Company, or the other borrowers and guarantors under the ABL Facility, the payment obligations of
the borrowers under the ABL Facility will become automatically due and payable without any further
action required. As a result of the purchase of the Company by investment funds affiliated with
Hellman & Friedman LLC completed on October 13, 2010, the payment of the Companys borrowings under
the ABL Facility could have been accelerated and made payable immediately. Accordingly, the
Companys $10.5 million of borrowings under the ABL Facility were classified within current
liabilities as of October 2, 2010.
On October 13, 2010, in connection with the consummation of the Mergers, the Company repaid
and terminated the ABL Facility.
Parent Company Indebtedness
The Companys indirect parent entities, AMH and AMH II, are holding companies with no
independent operations. As of October 2, 2010, AMH had $431.0 million in aggregate principal
amount of its 11.25% notes outstanding. Prior to March 1, 2009, interest accrued at a rate of
11.25% per annum on the 11.25% notes in the form of an increase in the accreted value of the 11.25%
notes. Since March 1, 2009, cash interest has been accruing at a rate of 11.25% per annum on the
11.25% notes and is payable semi-annually in arrears on March 1st and September 1st of each year.
In connection with a December 2004 recapitalization transaction, AMHs parent company AMH II
was formed, and AMH II subsequently issued $75 million of 13.625% Senior Notes due 2014 (the
13.625% notes). In June 2009, AMH II entered into an exchange agreement pursuant to which it
paid $20.0 million in cash and issued $13.066 million original principal amount of its 20% notes in
exchange for all of its outstanding 13.625% notes. Interest on AMH IIs 20% notes is payable in
cash semi-annually in arrears or may be added to the then outstanding principal amount of the
20% notes and paid at maturity on December 1, 2014. The debt restructuring transaction was
accounted for in accordance with the principles described in FASB ASC 470-60, Troubled Debt
Restructurings by Debtors (ASC 470-60). As of October 2, 2010, AMH II has recorded liabilities
for the $13.066 million original principal amount and $23.7 million of accrued interest related to
all future interest payments on its 20% notes in accordance with ASC 470-60. As of October 2,
2010, total AMH II debt, including that of its consolidated subsidiaries, was approximately $676.1
million, which includes $23.7 million of accrued interest related to all future interest payments
on AMH IIs 20% notes.
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The Company is a restricted subsidiary under each of the indentures for AMHs 11.25% notes and
AMH IIs 20% notes and is therefore subject to the covenants and events of default described
therein. Covenants and events of default with respect to AMHs 11.25% notes and AMH IIs 20% notes
are generally similar to those provided for in the Companys 9.875% notes indenture.
Because AMH and AMH II have no independent operations, they are dependent upon distributions,
payments and loans from the Company to service their indebtedness. In particular, AMH is dependent
on the Companys ability to pay dividends or otherwise upstream funds to it in order to service its
obligations under the 11.25% notes, and AMH II is similarly dependent on AMHs ability to further
upstream payments in order to service its obligations under the 20% notes. However, unlike AMH
IIs previously outstanding 13.625% notes, all of which were exchanged for the 20% notes in June
2009, interest on AMH IIs 20% notes may be added to the then outstanding principal amount of the
20% notes and paid at maturity on December 1, 2014. Likewise, the 9.875% notes indenture permits
the payment of dividends by the Company to AMH for the payment of interest on AMHs 11.25% notes
(or any refinancing thereof), irrespective of whether it is otherwise able to pay dividends under
the restricted payments test described above, in an aggregate amount not to exceed $125.0 million
or if the Companys leverage ratio (as defined) is equal to or less than 4.5 to 1.00. The 9.875%
notes indenture also permits dividends for the payment of principal on the 11.25% notes or the 20%
notes in an aggregate amount not to exceed $50 million when the Companys leverage ratio is equal
to or less than 4.5 to 1.00. In March 2010 and September 2010, the Company declared dividends
totaling approximately $48.5 million to fund AMHs scheduled interest payments on its 11.25% notes.
If the Company were unable to or were precluded from making restricted payments, either under
its debt agreements or pursuant to statutory limitations on the payment of dividends, it would not
be able to dividend or otherwise upstream sufficient funds to AMH to permit AMH to pay principal at
maturity of its 11.25% notes. At October 2, 2010, subject to the limitations to both the Indenture
for 9.875% notes and the ABL Facility, the Company could have upstreamed an additional $175.2
million, which is comprised of availability under the borrowing base and the cash on hand at
quarter end. The 20% notes mature after the 11.25% notes. Nonetheless, it is possible that AMH
would not be able to dividend or otherwise upstream sufficient funds to AMH II to allow AMH II to
make the payments due on its 20% notes at maturity. Under such scenarios, either or both of AMH or
AMH II would have to find alternative sources of liquidity to meet their respective obligations
under the 11.25% notes and 20% notes. The Company does not guarantee the 11.25% notes or the 20%
notes and has no obligation to make any payments with respect thereto.
On October 13, 2010, in connection with the consummation of the Mergers, the Company satisfied
and discharged it obligations under the indentures governing the 11.25% notes and the 20% notes.
In June 2009, at the time the Company entered into the purchase agreement pursuant to which it
issued its 15% notes (which were redeemed and discharged in connection with the Companys issuance
of its 9.875% notes in November 2009), the Company entered into an intercompany loan agreement with
AMH II, pursuant to which the Company agreed to periodically make loans to AMH II in an amount not
to exceed an aggregate outstanding principal amount of approximately $33.0 million at any one time,
plus accrued interest. Interest accrues at a rate of 3% per annum and is added to the then
outstanding principal amount on a semi-annual basis. The principal amount and accrued but unpaid
interest thereon will mature on May 1, 2015. As of October 2, 2010, the principal amount of
borrowings by AMH II under this intercompany loan agreement and accrued interest thereon was $27.9
million. The Company believes that AMH II will have the ability to repay the loan in accordance
with its stated terms. Due to the related party nature and the underlying terms of the intercompany
loan with AMH II, the Company has deemed it not practical to assign and disclose a fair value
estimate.
On October 13, 2010, in connection with the consummation of the Mergers, the outstanding
principal amount of borrowings and accrued interest thereon under the intercompany loan agreement
was deemed repaid.
9.125% Senior Secured Notes due 2017
As previously disclosed, on October 13, 2010, Merger Sub and Carey New Finance, Inc. issued
$730 million aggregate principal amount of 9.125% Senior Secured Notes due 2017, which mature on
November 1, 2017, pursuant to the Indenture, dated as of October 13, 2010 (the Indenture), among
Merger Sub, Carey New Finance, Inc. (now known as AMH New Finance, Inc.), a Delaware corporation
(Finance Sub), the Company and the guarantors named therein and Wells Fargo Bank, National
Association, as trustee. Interest on the notes will be paid on May 1st and November 1st of each
year, commencing May 1, 2011.
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In this report, references to the Issuers are collective references to (1) Merger Sub and
Finance Sub, each as a co-issuer of the notes, prior to the Mergers, and (2) Associated Materials,
LLC, as the surviving company, and Finance Sub, each as a co-issuer of the notes, following the
Mergers.
The Company may from time to time, in its sole discretion, purchase, redeem or retire the
notes in privately negotiated or open market transactions by tender offer or otherwise.
The following is a brief description of the terms of the notes and the Indenture.
Guarantees. The notes are unconditionally guaranteed, jointly and severally, by each of the
Issuers direct and indirect domestic subsidiaries that guarantees the Companys obligations under
the ABL facilities. Such subsidiary guarantors are collectively referred to herein as the
guarantors, and such subsidiary guarantees are collectively referred to herein as the
guarantees. Each guarantee is a general senior obligation of each guarantor; equal in right of
payment with all existing and future senior indebtedness of that guarantor, including its guarantee
of all obligations under the Revolving Credit Agreement (as defined below), and any other debt with
a priority security interest relative to the notes in the ABL collateral (as defined below);
secured on a first-priority basis by the notes collateral (as defined below) owned by that
guarantor and on a second-priority basis by the ABL collateral owned by that guarantor, in each
case subject to certain liens permitted under the Indenture; equal in priority as to the notes
collateral owned by that guarantor with respect to any obligations under certain other equal
ranking obligations incurred after October 13, 2010; senior in right of payment to all existing and
future subordinated indebtedness of that guarantor; effectively senior to all existing and future
unsecured indebtedness of that guarantor, to the extent of the value of the collateral (as defined
below) owned by that guarantor (after giving effect to any senior lien on such collateral), and
effectively senior to all existing and future guarantees of the obligations under the Revolving
Credit Agreement, and any other debt of that guarantor with a priority security interest relative
to the notes in the ABL collateral, to the extent of the value of the notes collateral owned by
that guarantor; effectively subordinated to (i) any existing or future guarantee of that guarantor
of the obligations under the Revolving Credit Agreement, and any other debt with a priority
security interest relative to the notes in the ABL collateral, to the extent of the value of the
ABL collateral owned by that guarantor and (ii) any existing or future indebtedness of that
guarantor that is secured by liens on assets that do not constitute a part of the collateral to the
extent of the value of such assets; and structurally subordinated to all existing and future
indebtedness and other claims and liabilities, including preferred stock, of any subsidiaries of
that guarantor that are not guarantors. Any guarantee of the notes will be released or discharged
if such guarantee is released under the Revolving Credit Agreement, and any other debt with a
priority security interest relative to the notes in the ABL collateral, except a release or
discharge by or as a result of payment under such guarantee.
Collateral. The notes and the guarantees will be secured by a first-priority lien on
substantially all of the Issuers and the guarantors present and future assets located in the
United States (other than the ABL collateral, in which the notes and the guarantees will have a
second-priority lien, and certain other excluded assets), including equipment, owned real property
valued at $5.0 million or more and all present and future shares of capital stock of each of the
Issuers and each guarantors material directly wholly-owned domestic subsidiaries and 65% of the
present and future shares of capital stock, of each of the Issuers and each guarantors directly
owned foreign restricted subsidiaries (other than Canadian subsidiaries), in each case subject to
certain exceptions and customary permitted liens. Such assets are referred to as the notes
collateral.
In addition, the notes and the guarantees will be secured by a second-priority lien on
substantially all of the Issuers and the guarantors present and future assets, which assets also
secure the Issuers obligations under the ABL facilities, including accounts receivable, inventory,
related general intangibles, certain other related assets and the proceeds thereof. Such assets are
referred to as the ABL collateral. We refer to the notes collateral and the ABL collateral
together as the collateral. The bank lenders under the Revolving Credit Agreement have a
first-priority lien securing the ABL facilities and other customary liens subject to an
intercreditor agreement (the Intercreditor Agreement) entered into between the collateral agent
under the
ABL facilities and the collateral agent under the Indenture and security documents for the
notes, until such ABL facilities and obligations are paid in full.
The liens on the collateral may be released without the consent of holders of notes if
collateral is disposed of in a transaction that complies with the Indenture and the Intercreditor
Agreement and other security documents for the notes, including in accordance with the provisions
of the Intercreditor Agreement.
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Ranking. The notes and guarantees constitute senior secured debt of the Issuers and the
guarantors. They rank equally in right of payment with all of the Issuers and the guarantors
existing and future senior debt, including their obligations under the ABL facilities; rank senior
in right of payment to all of the Issuers and the guarantors existing and future subordinated
debt; are effectively subordinated to all of the Issuers and the guarantors indebtedness and
obligations that are secured by first-priority liens under the ABL facilities to the extent of the
value of the ABL collateral; are effectively senior to the Issuers and the guarantors obligations
under the ABL facilities, to the extent of the value of the notes collateral; are effectively
senior to the Issuers and the guarantors senior unsecured indebtedness, to the extent of the
value of the collateral (after giving effect to any senior lien on the collateral); and are
structurally subordinated to all existing and future indebtedness and other liabilities, including
preferred stock, of the Companys non-guarantor subsidiaries, including the Canadian facility under
the ABL facilities (other than indebtedness and liabilities owed to the Issuers or one of the
guarantors).
Optional Redemption. Prior to November 1, 2013, the Issuers may redeem the notes, in whole or
in part, at a price equal to 100% of the principal amount thereof plus the greater of (1) 1.0% of
the principal amount of such note; and (2) the excess, if any, of (a) the present value at such
redemption date of (i) the redemption price of such note at November 1, 2013 (such redemption price
being set forth in the table below), plus (ii) all required interest payments due on such note
through November 1, 2013 (excluding accrued but unpaid interest to the redemption date), computed
using a discount rate equal to the applicable treasury rate as of such redemption date plus 50
basis points; over (b) the principal amount of such note (as of, and including unaccrued and unpaid
interest, if any, to, but excluding, the redemption date), subject to the right of holders of notes
of record on the relevant record date to receive interest due on the relevant interest payment
date.
On and after November 1, 2013, the Issuers may redeem the notes, in whole or in part, at the
redemption prices (expressed as percentages of principal amount of the notes to be redeemed) set
forth below, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable
redemption date, subject to the right of holders of notes of record on the relevant record date to
receive interest due on the relevant interest payment date, if redeemed during the twelve-month
period beginning on November 1st of each of the years indicated below:
Year | Percentage | |||
2013 |
106.844 | % | ||
2014 |
104.563 | % | ||
2015 |
102.281 | % | ||
2016 and thereafter |
100.000 | % |
In addition, until November 1, 2013, the Issuers may, at their option, on one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued under the Indenture at
a redemption price equal to 109.125% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to, but excluding the applicable redemption date, subject to the
right of holders of notes of record on the relevant record date to receive interest due on the
relevant interest payment date, with the net cash proceeds of one or more equity offerings to the
extent such net cash proceeds are received by or contributed to the Company; provided that (a) at
least 50% of the sum of the aggregate principal amount of notes originally issued under the
Indenture remains outstanding immediately after the occurrence of each such redemption and (b) that
each such redemption occurs within 120 days of the date of closing of each such equity offering.
In addition, during any twelve-month period prior to November 1, 2013, the Issuers may redeem
up to 10% of the aggregate principal amount of the notes issued under the Indenture at a redemption
price equal to 103.00% of the principal amount thereof plus accrued and unpaid interest, if any.
Change of Control. Upon the occurrence of a change of control, as defined in the Indenture,
the Issuers must give holders of notes the opportunity to sell the Issuers their notes at 101% of
their face amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase
date, subject to the right of holders of notes of record on the relevant record date to receive
interest due on the relevant interest payment date.
Asset Sale Proceeds. If the Issuers or their subsidiaries engage in asset sales, the Issuers
generally must either invest the net cash proceeds from such asset sales in the Companys business
within a period of time, pre-pay certain secured senior debt or make an offer to purchase a
principal amount of the notes equal to the excess net cash proceeds. The purchase price of the
notes will be 100% of their principal amount, plus accrued and unpaid interest.
Covenants. The Indenture contains covenants limiting the Issuers ability and the ability of
their restricted subsidiaries to, among other things:
| pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; |
| incur additional debt or issue certain disqualified stock and preferred stock; |
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| incur liens on assets; |
| merge or consolidate with another company or sell all or substantially all assets; |
| enter into transactions with affiliates; and |
| allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments to the Issuers. |
These covenants are subject to important exceptions and qualifications as described in the
Indenture. Most of these covenants will cease to apply for so long as the notes have investment
grade ratings from both Moodys Investors Service, Inc. and Standard & Poors.
Events of Default. The Indenture provides for events of default, which, if any of them occurs,
would permit or require the principal of and accrued interest on the notes to become or to be
declared due and payable.
ABL Facilities
As previously disclosed, on October 13, 2010, in connection with the consummation of the
Mergers, the Company entered into senior secured asset-based revolving credit facilities (the ABL
facilities) pursuant to a Revolving Credit Agreement, dated as of October 13, 2010 (the Revolving
Credit Agreement), among Holdings, the U.S. borrowers (as defined below), the Canadian borrowers
(as defined below), UBS Securities LLC, Deutsche Bank Securities Inc. and Wells Fargo Capital
Finance, LLC, as joint lead arrangers and joint bookrunners, UBS AG, Stamford Branch, as U.S.
administrative agent and U.S. collateral agent and a U.S. letter of credit issuer and Canadian
letter of credit issuer, UBS AG Canada Branch, as Canadian administrative agent and Canadian
collateral agent, Wells Fargo Capital Finance, LLC, as co-collateral agent, UBS Loan Finance LLC,
as swingline lender, Deutsche Bank AG New York Branch, as a U.S. letter of credit issuer, Deutsche
Bank AG Canada Branch, as a Canadian letter of credit issuer, Wells Fargo Bank, National
Association, as a U.S. letter of credit issuer and as a Canadian letter of credit issuer, and the
banks, financial institutions and other institutional lenders and investors from time to time
parties thereto.
The borrowers under the ABL facilities are the Company, each of its existing and subsequently
acquired or organized direct or indirect wholly-owned U.S. restricted subsidiaries designated as a
borrower thereunder (together with the Company, the U.S. borrowers) and each of its existing and
subsequently acquired or organized direct or indirect wholly-owned Canadian restricted subsidiaries
designated as a borrower thereunder (the Canadian borrowers, and together with the U.S.
borrowers, the borrowers). The ABL facilities provide for a five-year asset-based revolving
credit facility in the amount of $225.0 million, comprised of a $150.0 million U.S. facility (which
may be drawn in U.S. dollars) and a $75.0 million Canadian facility (which may be drawn in U.S. or
Canadian dollars), in each case subject to borrowing base availability under the applicable
facility, and include a letter of credit facility and a swingline facility. In addition, subject to
certain terms and conditions, the Revolving Credit Agreement provides for one or more uncommitted
incremental increases in the ABL facilities in an aggregate amount not to exceed $150.0 million
(which may be allocated among the U.S. facility or the Canadian facility). Proceeds of the
revolving credit loans on the initial borrowing date were used to refinance certain indebtedness of
the Company and certain of its affiliates, to pay fees and expenses incurred in connection with the
Mergers and to partially finance the Mergers. Proceeds of the ABL facilities (including letters of
credit issued thereunder) and any incremental facilities will be used for working capital and
general corporate purposes of the Company and its subsidiaries.
On October 13, 2010, the Company borrowed $73.0 million under the U.S. facility.
Interest Rate and Fees. At the option of the borrowers, the revolving credit loans under the
Revolving Credit Agreement will initially bear interest at the following:
| a rate equal to (i) the London Interbank Offered Rate, or LIBOR, with respect to eurodollar loans under the U.S. facility or (ii) the Canadian Deposit Offered Rate, or CDOR, with respect to loans under the Canadian facility, plus an applicable margin of 2.75%, which margin can vary quarterly in 0.25% increments between three pricing levels, ranging from 2.50% to 3.00%, based on excess availability, which is defined in the Revolving Credit Agreement as (a) the sum of (x) the lesser of (1) the aggregate commitments under the U.S. sub-facility at such time and (2) the then applicable U.S. borrowing base and (y) the lesser of (1) the aggregate commitments under the Canadian sub-facility at such time and (2) the then applicable Canadian borrowing base less (b) the sum of the aggregate principal amount of the revolving credit loans (including swingline loans) and letters of credit outstanding at such time; |
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| the alternate base rate which will be the highest of (i) the prime commercial lending rate published by The Wall Street Journal as the prime rate, (ii) the Federal Funds Effective Rate plus 0.50% and (iii) the one-month Published LIBOR rate plus 1.0% per annum, plus, in each case, an applicable margin of 1.75%, which margin can vary quarterly in 0.25% increments between three pricing levels, ranging from 1.50% to 2.00%, based on excess availability, as set forth in the preceding paragraph; or |
| the alternate Canadian base rate which will be the higher of (i) the annual rate from time to time publicly announced by Toronto Dominion Bank (Toronto) as its prime rate in effect for determining interest rates on Canadian Dollar denominated commercial loans in Canada and (ii) the 30-day CDOR Rate plus 1.0%, plus, in each case, an applicable margin of 1.75%, which margin can vary quarterly in 0.25% increments between three pricing levels, ranging from 1.50% to 2.00%, based on excess availability, as set forth in the second preceding paragraph. |
In addition to paying interest on outstanding principal under the ABL facilities, the Company
is required to pay a commitment fee, payable quarterly in arrears, of 0.50% if the average daily
undrawn portion of the ABL facilities is greater than 50% as of the most recent fiscal quarter or
0.375% if the average daily undrawn portion of the ABL facilities is less than or equal to 50% as
of the most recent fiscal quarter. The ABL facilities also require customary letter of credit fees.
The U.S. borrowing base is defined in the Revolving Credit Agreement as, at any time, the sum
of (i) 85% of the book value of the U.S. borrowers eligible accounts receivable; plus (ii) 85% of
the net orderly liquidation value of the U.S. borrowers eligible inventory; minus (iii) customary
reserves established or modified from time to time by and at the permitted discretion of the
administrative agent thereunder.
The Canadian borrowing base is defined in the senior secured Revolving Credit Agreement as, at
any time, the sum of (i) 85% of the book value of the Canadian borrowers eligible accounts
receivable; plus (ii) 85% of the net orderly liquidation value of the Canadian borrowers eligible
inventory; plus (iii) 85% of the net orderly liquidation value of the Canadian borrowers eligible
equipment (to amortize quarterly over the life of the new ABL facilities); plus (iv) 70% of the
appraised fair market value of the Canadian borrowers eligible real property (to amortize
quarterly over the life of the new ABL facilities); plus (v) at the option of Associated Materials,
LLC, an amount not to exceed the amount, if any, by which the U.S. borrowing base at such time
exceeds the then utilized commitments under the U.S. sub-facility; minus (vi) customary reserves
established or modified from time to time by and at the permitted discretion of the administrative
agent thereunder.
Prepayments. If, at any time, the aggregate amount of outstanding revolving credit loans,
unreimbursed letter of credit drawings and undrawn letters of credit under the U.S. facility
exceeds (i) the aggregate commitments under the U.S. facility at such time or (ii) the
then-applicable U.S. borrowing base, the U.S. borrowers will immediately repay an aggregate amount
equal to such excess.
If, at any time, the U.S. dollar equivalent of the aggregate amount of outstanding revolving
credit loans, unreimbursed letter of credit drawings and undrawn letters of credit under the
Canadian facility exceeds (i) the U.S. dollar equivalent of the aggregate commitments under the
Canadian facility at such time or (ii) the then-applicable U.S. dollar equivalent of the Canadian
borrowing base, then the Canadian borrowers will immediately repay such excess.
After the occurrence and during the continuance of a Cash Dominion Period (which is defined in
the Revolving Credit Agreement as the period when (i) excess availability (as defined above) is
less than, for a period of five consecutive business days, the greater of (a) $20.0 million and (b)
12.5% of the sum of (x) the lesser of (1) the aggregate commitments under the U.S. sub-facility at
such time and (2) the then applicable U.S. borrowing base and (y) the lesser of (1) the aggregate
commitments under the Canadian sub-facility at such time and (2) the then applicable Canadian
borrowing base or (ii) when any event of default is continuing, until the 30th consecutive day that
excess availability exceeds such threshold or such event of default ceases to be continuing, as
applicable), all amounts deposited in the blocked account maintained by the administrative agent
will be promptly applied to repay outstanding revolving credit loans and, after same have been
repaid in full, cash collateralize letters of credit.
At the option of the borrowers the unutilized portion of the commitments under the ABL
facilities may be permanently reduced and the revolving credit loans under the ABL facilities may
be voluntarily prepaid, in each case subject to requirements as to minimum amounts and multiples,
at any time in whole or in part without premium or penalty, except that any prepayment of LIBOR
rate revolving credit loans other than at the end of the applicable interest periods will be made
with reimbursement for any funding losses or redeployment costs of the lenders resulting from such
prepayment.
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Guarantors. All obligations under the U.S. facility are guaranteed by each existing and
subsequently acquired direct and indirect wholly-owned material U.S. restricted subsidiary of the
Company and the direct parent of the Company, other than certain excluded subsidiaries (the U.S.
guarantors). All obligations under the Canadian facility are guaranteed by each existing and
subsequently acquired direct and indirect wholly-owned material Canadian restricted subsidiary of
the Company, other than certain excluded subsidiaries (the Canadian guarantors, and together with
the U.S. guarantors, the ABL guarantors) and the U.S. guarantors.
Security. Pursuant to the US Security Agreement, dated as of October 13, 2010, among Holdings,
the Company, the U.S. subsidiary grantors named therein and UBS AG, Stamford Branch, as U.S.
collateral agent (the U.S. collateral agent), the US Pledge Agreement, dated as of October 13,
2010, among Holdings, the Company, the U.S. subsidiary pledgors named therein and the U.S.
collateral agent, and the Canadian Pledge Agreement, dated as of October 13, 2010, between Gentek
Building Products, Inc. and the U.S. collateral agent, all obligations of the U.S. borrowers and
the U.S. guarantors are secured by the following:
| a first-priority perfected security interest in all present and after-acquired inventory and accounts receivable of the U.S. borrowers and the U.S. guarantors and all investment property, general intangibles, books and records, documents and instruments and supporting obligations relating to such inventory, such accounts receivable and such other receivables, and all proceeds of the foregoing, including all deposit accounts, other bank and securities accounts, cash and cash equivalents (other than certain excluded deposit, securities and commodities accounts), investment property and other general intangibles, in each case arising from such inventory, such accounts receivable and such other receivables, subject to certain exceptions to be agreed and a first priority security interest in the capital stock of the Company (the U.S. first priority collateral); and |
| a second-priority security interest in the capital stock of each direct, material wholly-owned restricted subsidiary of the Company and of each guarantor of the notes and substantially all tangible and intangible assets of the Company and each guarantor of the notes (to the extent not included in the U.S. first priority collateral) and proceeds of the foregoing (the U.S. second priority collateral, and together with the U.S. first priority collateral, the U.S. ABL collateral). |
Pursuant to the Canadian Security Agreement, dated as of October 13, 2010, among the Canadian
borrowers, the Canadian subsidiary grantors named therein and UBS AG Canada Branch, as Canadian
collateral agent (the Canadian collateral agent), and the Canadian Pledge Agreement, dated as of
October 13, 2010, among the Canadian borrowers, the Canadian subsidiary pledgors named therein and
the Canadian collateral agent, all obligations of the Canadian borrowers and the Canadian
guarantors under the Canadian facility are secured by the following:
| the U.S. ABL collateral; and |
| a first-priority perfected security interest in all of the capital stock of the Canadian borrowers and the capital stock of each direct, material restricted subsidiary of the Canadian borrowers and the Canadian guarantors and substantially all tangible and intangible assets of the Canadian borrowers and Canadian guarantors and proceeds of the foregoing and all present and after-acquired inventory and accounts receivable of the Canadian borrowers and the Canadian guarantors and all investment property, general intangibles, books and records, documents and instruments and supporting obligations relating to such inventory, such accounts receivable and such other receivables, and all proceeds of the foregoing, including all deposit accounts, other bank and securities accounts, cash and cash equivalents (other than certain excluded deposit, securities and commodities accounts), investment property and other general intangibles, in each case arising from such inventory, such accounts receivable and such other receivables, subject to certain exceptions to be agreed (the Canadian ABL collateral). |
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Covenants, Representations and Warranties. The ABL facilities contain customary
representations and warranties and customary affirmative and negative covenants, including, with
respect to negative covenants, among other things, restrictions on indebtedness, liens,
investments, fundamental changes, asset sales, dividends and other distributions, prepayments or
redemption of junior debt, transactions with affiliates and negative pledge clauses. There are no
financial covenants included in the Revolving Credit Agreement other than a springing minimum fixed
charge coverage ratio (as defined below) of at least 1.00 to 1.00, which is triggered when excess
availability is less than, for a period of five consecutive business days, the greater of $20.0
million and 12.5% of the sum of (i) the lesser of (x) the aggregate commitments under the U.S.
facility at such time and (y) the then applicable U.S. borrowing base and (ii) the lesser of (x)
the aggregate commitments under the Canadian facility at such time and (y) the then applicable
Canadian borrowing base, and which applies until the 30th consecutive day that excess availability
exceeds such threshold.
Events of Default. Events of default under the Revolving Credit Agreement include, among other
things, nonpayment of principal when due, nonpayment of interest or other amounts (subject to a
five business day grace period), covenant defaults, inaccuracy of representations or warranties in
any material respect, bankruptcy and insolvency events, cross defaults and cross acceleration of
certain indebtedness, certain monetary judgments, ERISA events, actual or asserted invalidity of
material guarantees or security documents and a change of control (to include a pre- and
post-initial public offering provision).
Covenant Compliance
There are no financial covenants included in the Revolving Credit Agreement and the Indenture,
other than (A) a Consolidated EBITDA (as defined below) to consolidated fixed charges ratio (the
fixed charge coverage ratio) of at least 1.00 to 1.00 under the Revolving Credit Agreement, which
is triggered when excess availability is less than, for a period of five consecutive business days,
the greater of $20.0 million and 12.5% of the sum of (i) the lesser of (x) the aggregate
commitments under the U.S. facility at such time and (y) the then applicable U.S. borrowing base
and (ii) the lesser of (x) the aggregate commitments under the Canadian facility at such time and
(y) the then applicable Canadian borrowing base, and which applies until the 30th consecutive day
that excess availability exceeds such threshold, and (B) as otherwise described below. See Item
2Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity
and Capital ResourcesABL Facilities.
In addition to the covenant described above, certain incurrences of debt and investments
require compliance with financial covenants under the Revolving Credit Agreement and the Indenture.
The breach of any of these covenants could result in a default under the Revolving Credit Agreement
and the Indenture, and the lenders or note holders, as applicable, could elect to declare all
amounts borrowed due and payable.
EBITDA is calculated by reference to net income plus interest and amortization of other
financing costs, provision for income taxes, depreciation and amortization. Consolidated EBITDA, as
defined in the Revolving Credit Agreement and the Indenture, is calculated by adjusting EBITDA to
reflect adjustments permitted in calculating covenant compliance under these agreements.
Consolidated EBITDA will be referred to as Adjusted EBITDA herein. The Company believes that the
inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are
appropriate to provide additional information to investors to demonstrate the Companys ability to
comply with its financial covenant.
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The reconciliation of the Companys net income to EBITDA and Adjusted EBITDA is as follows (in
thousands):
Quarters Ended | Nine Months Ended | Twelve Months Ended | ||||||||||||||||||||||
October 2, | October 3, | October 2, | October 3, | October 2, | October 3, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Net income |
$ | 19,410 | $ | 22,931 | $ | 36,970 | $ | 18,539 | $ | 42,504 | $ | 19,997 | ||||||||||||
Interest expense, net |
6,218 | 5,999 | 18,801 | 16,581 | 24,971 | 23,512 | ||||||||||||||||||
Income taxes |
12,194 | 15,444 | 21,330 | 12,660 | 23,802 | 14,311 | ||||||||||||||||||
Depreciation and amortization |
5,588 | 5,634 | 16,854 | 16,579 | 22,444 | 22,158 | ||||||||||||||||||
EBITDA |
43,410 | 50,008 | 93,955 | 64,359 | 113,721 | 79,978 | ||||||||||||||||||
Debt extinguishments costs (a) |
| | | | 8,779 | | ||||||||||||||||||
Management fees (b) |
234 | 353 | 681 | 1,047 | 1,034 | 1,392 | ||||||||||||||||||
Restructuring costs (c) |
98 | 308 | 370 | 5,564 | 644 | 5,564 | ||||||||||||||||||
Impairments and write-offs (d) |
16 | 348 | 43 | 611 | 562 | 704 | ||||||||||||||||||
Employee termination costs (e) |
| 1,715 | | 1,715 | (533 | ) | 1,715 | |||||||||||||||||
Transaction expenses (f) |
189 | | 1,452 | | 1,452 | | ||||||||||||||||||
Bank fees (g) |
6 | 37 | 56 | 118 | 80 | 118 | ||||||||||||||||||
Other
normalizing and unusual items (h) |
757 | 603 | 3,046 | 3,404 | 6,071 | 3,404 | ||||||||||||||||||
Foreign currency (gain) loss (i) |
31 | 112 | (21 | ) | (110 | ) | (95 | ) | 1,371 | |||||||||||||||
Pro forma cost savings (j) |
| 1,415 | 603 | 6,630 | 1,963 | 6,630 | ||||||||||||||||||
Adjusted EBITDA (k) |
$ | 44,741 | $ | 54,899 | $ | 100,185 | $ | 83,338 | $ | 133,678 | $ | 100,876 | ||||||||||||
(a) | Represents debt extinguishments costs incurred with the redemption of the Companys previously outstanding 9.75% notes and 15% notes. | |
(b) | Represents (i) amortization of a prepaid management fee paid to Investcorp International Inc. in connection with a December 2004 recapitalization transaction of $0.1 million, $0.4 million, $0.1 million and $0.5 million for the quarter ended October 3, 2009, nine months ended October 3, 2009, twelve months ended October 2, 2010 and twelve months ended October 3, 2009, respectively, (which management fee was fully amortized as of January 2, 2010) and (ii) management fees paid to Harvest Partners. | |
(c) | Represents the following (in thousands): |
Quarters Ended | Nine Months Ended | Twelve Months Ended | ||||||||||||||||||||||
October 2, | October 3, | October 2, | October 3, | October 2, | October 3, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Manufacturing
restructuring charges
(i) |
$ | 98 | $ | 2 | $ | 282 | $ | 5,258 | $ | 355 | $ | 5,258 | ||||||||||||
Tax restructuring charges (ii) |
| 306 | 88 | 306 | 289 | 306 | ||||||||||||||||||
Total |
$ | 98 | $ | 308 | $ | 370 | $ | 5,564 | $ | 644 | $ | 5,564 | ||||||||||||
(i) | Represents lease costs associated with the Companys discontinued use of the warehouse facility adjacent to the Ennis manufacturing plant. | ||
(ii) | Represents legal and accounting fees in connection with tax restructuring projects. |
(d) | Represents impairments and write-offs of assets other than by sale principally including (i) $0.3 million, $0.6 million, $0.1 million and $0.6 million related to new product start-up issues for the quarter ended October 3, 2009, nine months ended October 3, 2009, twelve months ended October 2, 1010 and twelve months ended October 3, 2009, respectively and (ii) $0.4 million of software write-offs due to changes in the Companys information technology and business strategies for the twelve months ended October 2, 2010. | |
(e) | Represents $1.7 million reflected in the quarter, nine months and twelve months ended October 3, 2009 for employee termination costs as a result of workforce reductions in connection with the Companys overall cost reduction initiatives. During the fourth quarter of 2009, a $0.5 million adjustment was recorded to reflect actual employee termination costs. | |
(f) | Represents advisory fees incurred for strategic capital structure advice. | |
(g) | Represents bank audit fees incurred under the Companys ABL Facility. | |
(h) | Represents the following (in thousands): |
Quarters Ended | Nine Months Ended | Twelve Months Ended | ||||||||||||||||||||||
October 2, | October 3, | October 2, | October 3, | October 2, | October 3, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Professional fees (i) |
$ | 757 | $ | 396 | $ | 2,657 | $ | 969 | $ | 2,973 | $ | 969 | ||||||||||||
Excess severance costs (ii) |
| 7 | 389 | 910 | 389 | 910 | ||||||||||||||||||
Unusual bad debt expense (iii) |
| (184 | ) | | 3,578 | 656 | 3,578 | |||||||||||||||||
Normalized bonus expense (iv) |
| 384 | | (2,053 | ) | 2,053 | (2,053 | ) | ||||||||||||||||
Total |
$ | 757 | $ | 603 | $ | 3,046 | $ | 3,404 | $ | 6,071 | $ | 3,404 | ||||||||||||
(i) | Represents managements estimate of non-recurring consulting fees. | ||
(ii) | Represents managements estimates for excess severance expense due primarily to unusual changes within senior management. | ||
(iii) | Represents managements estimate of unusual bad debt expense based on historical averages from 2004 through 2008. | ||
(iv) | Represents managements estimate of bonus expense in excess of normalized bonus levels accrued disproportionately in the second half of 2009 based on the timing of revenue and earnings. |
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(i) | Represents unrealized currency transaction/translation gains, including on currency exchange hedging agreements. | |
(j) | Represents the following (in thousands): |
Quarters Ended | Nine Months Ended | Twelve Months Ended | ||||||||||||||||||||||
October 2, | October 3, | October 2, | October 3, | October 2, | October 3, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Savings from headcount
reductions (i) |
$ | | $ | | $ | | $ | 2,975 | $ | | $ | 2,975 | ||||||||||||
Insourcing glass production
savings (ii) |
| 1,075 | 462 | 2,708 | 1,490 | 2,708 | ||||||||||||||||||
Procurement savings (iii) |
| 340 | 141 | 947 | 473 | 947 | ||||||||||||||||||
Total |
$ | | $ | 1,415 | $ | 603 | $ | 6,630 | $ | 1,963 | $ | 6,630 | ||||||||||||
(i) | Represents savings from headcount reductions as a result of general economic conditions. | ||
(ii) | Represents managements estimates of cost savings that could have resulted from producing glass in-house at the Companys Cuyahoga Falls, Ohio window facility had such production started on January 4, 2009. | ||
(iii) | Represents managements estimate of cost savings that could have resulted from entering into the Companys leveraged procurement program with an outside consulting firm had such program been entered into on January 4, 2009. |
(k) | EBITDA is calculated by reference to net income plus interest and amortization of other financing costs, provision for income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted to reflect certain adjustments that are used in calculating covenant compliance under the Revolving Credit Agreement and the Indenture. The Company believes that the inclusion of supplementary adjustments to EBITDA are appropriate to provide additional information to investors about items that will impact the calculation of Adjusted EBITDA that is used to determine covenant compliance under the Revolving Credit Agreement and the Indenture. Since not all companies use identical calculations, this presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. |
Other Matters
On November 1, 2010 and November 15, 2010, the union contracts covering the hourly production
employees at the Companys West Salem, Ohio and Pointe Claire, Quebec manufacturing facilities,
respectively, expired. The terms under these labor agreements are subject to renegotiation every
three years. The hourly production employees have agreed to continue to work under the terms of the
expired contracts while contract negotiations continue.
Effects of Inflation
The principal raw materials used by the Company are vinyl resin, aluminum, steel, resin
stabilizers and pigments, glass, window hardware, and packaging materials, all of which have
historically been subject to price changes. Raw material pricing on certain of the Companys key
commodities have fluctuated significantly over the past several years. More recently, the price of
resin and aluminum has increased in response to higher demand and tight supply. In response, the
Company recently announced price increases over the past several years on certain of its product
offerings to offset inflation in raw material pricing and continually monitor market conditions for
price changes as warranted. The Companys ability to maintain gross margin levels on its products
during periods of rising raw material costs depends on the Companys ability to obtain selling
price increases. Furthermore, the results of operations for individual quarters can and have been
negatively impacted by a delay between the timing of raw material cost increases and price
increases on the Companys products. There can be no assurance that the Company will be able to
maintain the selling price increases already implemented or achieve any future price increases. At
October 2, 2010, the Company had no raw material hedge contracts in place.
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Certain Forward-Looking Statements
All statements (other than statements of historical facts) included in this report regarding
the prospects of the industry and the Companys 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, 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. Such statements reflect the
current views of the Companys management with respect to its operations, results of operations and
future financial performance. The following factors are among those that may cause actual results
to differ materially from the forward-looking statements:
| the Companys operations and results of operations; |
| declines in home building and remodeling industries, economic conditions and changes in interest rates, foreign currency exchange rates and other conditions; |
| deteriorations in availability of consumer credit, employment trends, levels of consumer confidence and spending, and consumer preferences; |
| changes in raw material costs and availability of raw materials and finished goods; |
| the unavailability, reduction or elimination of government and economic home buying and remodeling incentives; |
| the Companys ability to continuously improve organizational productivity and global supply chain efficiency and flexibility; |
| market acceptance of price increases; |
| declines in national and regional trends in home remodeling and new housing starts; |
| increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products; |
| changes in weather conditions; | ||
| consolidation of the Companys customers; |
| the Companys ability to attract and retain qualified personnel; |
| the Companys ability to comply with certain financial covenants in its ABL Facility with Wells Fargo Securities, LLC (formerly known as Wachovia Capital Markets) and CIT Capital Securities LLC, as joint lead arrangers, Wachovia Bank, N.A., as agent, and the lenders party thereto and indenture governing its 9.875% notes; |
| the Companys ability to make distributions, payments or loans to its parent companies to allow them to make required payments on their debt; |
| the ability of the Company and its parent companies to refinance indebtedness when required; |
| the addition or expiration of government incentives and credits; |
| declines in market demand; |
| increases in the Companys indebtedness; |
| increases in costs of environmental compliance or environmental liabilities; |
| increases in unanticipated warranty or product liability claims; |
| increases in capital expenditure requirements; and |
| the other factors discussed under Item 1A. Risk Factors as filed in the Companys Annual Report on Form 10-K for the year ended January 2, 2010 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 or revise these forward-looking statements, whether as a result of new information, future
events or otherwise, 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 its ABL Facility and may incur additional
borrowings from time to time for general corporate purposes, including working capital and capital
expenditures. The interest rate applicable to outstanding loans under the ABL Facility is, at the
Companys option, equal to either a United States or Canadian adjusted base rate plus an applicable
margin ranging from 1.25% to 2.25%, or LIBOR plus an applicable margin ranging from 3.00% to 4.00%,
with the applicable margin in each case depending on the Companys quarterly average excess
availability (as defined). At October 2, 2010, the Company had borrowings outstanding of $10.5
million under the ABL Facility, which were subsequently repaid on
October 13, 2010 in connection with the consummation of the
Mergers. The effect of a 1.00% increase or decrease in interest rates would
increase or decrease total annual interest expense by approximately $0.1 million.
As
of October 2, 2010, the Company had $200.0 million aggregate principal at maturity in 2016 of senior secured
second lien notes that bear a fixed interest rate of 9.875%, which
were subsequently discharged in connection with the consummation of
the Mergers and replaced by the $730 million aggregated principal
amount of 9.125% Senior Secured Notes due 2017. The fair value of the Companys 9.875%
notes is sensitive to changes in interest rates. In addition, the fair value is affected by the
Companys overall credit rating, which could be impacted by changes in the Companys future
operating results. At October 2, 2010, the fair value of the Companys 9.875% notes was $242.0
million based upon their quoted market price.
Foreign Currency Exchange Risk
The Companys revenues are primarily from domestic customers and are realized in U.S. dollars.
However, the Company realizes revenues from sales made through Genteks Canadian distribution
centers in Canadian dollars. The Companys Canadian manufacturing facilities acquire raw materials
and supplies from U.S. vendors, which results in foreign currency transactional gains and losses
upon settlement of the obligations. Payment terms among Canadian manufacturing facilities and
these vendors are short-term in nature. The Company may, from time to time, enter into foreign
exchange forward contracts with maturities of less than three months to reduce its exposure to
fluctuations in the Canadian dollar. At October 2, 2010, the Company was a party to foreign
exchange forward contracts for Canadian dollars, the value of which was immaterial. A 10%
strengthening or weakening from the levels experienced during the third quarter of 2010 of the U.S.
dollar relative to the Canadian dollar would have resulted in an approximately $1.1 million
decrease or increase, respectively, in net income for the quarter ended October 2, 2010. A 10%
strengthening or weakening from the levels experienced during the first nine months of 2010 of the
U.S. dollar relative to the Canadian dollar would have resulted in an approximately $2.2 million
decrease or increase, respectively, in net income for the nine months ended October 2, 2010.
Commodity Price Risk
See Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Effects of Inflation for a discussion of the market risk related to the Companys
principal raw materials vinyl resin, aluminum and steel.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal period covered by this report, the Companys management, with the
participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934,
as amended (the Exchange Act). Based upon this evaluation, for the reasons discussed below, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
the fiscal period covered by this report, the disclosure controls and procedures (including the
additional review necessary to confirm the fair presentation in the financial statements, in light
of the material weakness discussed below) were functioning effectively.
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As previously disclosed in the Companys Form 10-K for the year ended January 2, 2010, the
Company did not maintain effective controls over the completeness and accuracy of the income tax
provision and the related balance sheet accounts. The Companys income tax accounting in 2009 had
significant complexity due to multiple debt transactions during the year including the
restructuring of debt at an indirect parent company, the impact of repatriation of foreign earnings
and the related foreign tax credit calculations, changes in the valuation allowance for deferred
tax assets, and the related impact of the Companys tax sharing agreement. Specifically, the
Companys controls over the processes and procedures related to the calculation and review of the
annual tax provision were not adequate to ensure that the income tax provision was prepared in
accordance with generally accepted accounting principles. Additionally, these control deficiencies
could result in a misstatement of the income tax provision, the related balance sheet accounts and
note disclosures that would result in a material misstatement to the annual consolidated financial
statements that would not be prevented or detected. Accordingly, management has concluded as a
result of these control deficiencies that a material weakness in the Companys internal control
over financial reporting existed as of January 2, 2010 and continues to exist as of October 2,
2010. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a material misstatement
of the Companys annual or interim financial statements will not be prevented or detected on a
timely basis.
In light of the material weakness identified, the Company performed additional analyses to
ensure the consolidated financial statements were prepared in accordance with generally accepted
accounting principles. Accordingly, management believes that the consolidated financial statements
included in this Form 10-Q, fairly present, in all material respects, the Companys financial
position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
Income Tax Material Weakness Remediation Steps
The Company engaged an independent registered public accounting firm (other than its auditors,
Deloitte & Touche LLP) during the first three quarters of 2010 to perform additional detail reviews
of complex transactions, the income tax calculations and disclosures on a quarterly and annual
basis, and to advise the Company on matters beyond its in-house expertise. The accounting firm
performed a review of the income tax calculations and disclosures for the quarters ended April 3,
2010, July 3, 2010 and October 2, 2010.
Management will continue to evaluate the design and effectiveness of the enhanced internal
controls, and once placed in operation for a sufficient period of time, these internal controls
will be subject to appropriate testing in order to determine whether they are operating
effectively. Testing related to the annual tax provision calculations and disclosure reviews will
be conducted during the year end financial closing process.
Until the appropriate testing of the change in controls from these enhanced internal controls
is complete, management will continue to perform the evaluations and analyses believed to be
adequate to provide reasonable assurance that there are no material misstatements of the Companys
consolidated financial statements.
Other Changes
There have been no changes to the Companys internal control over financial reporting during
the quarter ended October 2, 2010 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Inherent Limitations on the Effectiveness of Internal Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control system are achieved. Because of the
inherent limitations in any internal control system, no evaluation of controls can provide absolute
assurance that all control issues, if any, within a company have been detected. Accordingly, the
Companys disclosure controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of the disclosure control system are met.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
Conditions in the housing market and economic conditions generally have affected and may continue
to affect the Companys operating performance.
The Companys business is largely dependent on home improvement (including repair and
remodeling) activity and new home construction activity levels in the United States and Canada. Low
levels of consumer confidence, downward pressure on home prices, disruptions in credit markets
limiting the ability of consumers to finance home improvements and consumer deleveraging, among
other things, have been affecting and may continue to affect investment in existing homes in the
form of renovations and home improvements. The new home construction market has also undergone a
downturn marked by declines in the demand for new homes, an oversupply of new and existing homes on
the market and a reduction in the availability of financing for homebuyers. These industry
conditions and general economic conditions have had and may continue to have an adverse impact on
the Companys business.
Continued disruption in the financial markets could negatively affect the Company.
The Company and its customers and suppliers rely on stable and efficient financial markets.
Availability of financing depends on the lending practices of financial institutions, financial and
credit markets, government policies and economic conditions, all of which are beyond the Companys
control. The credit markets and the financial services industry have recently experienced
significant disruptions, characterized by the bankruptcy and failure of several financial
institutions and severe limitations on credit availability. A prolonged continuation of adverse
economic conditions and disrupted financial markets could compromise the financial condition of the
Companys customers and suppliers. Customers may not be able to pay, or may delay payment of,
accounts receivable due to liquidity and financial performance issues or concerns affecting them or
due to their inability to secure financing. Suppliers may modify, delay or cancel projects and
reduce their levels of business with the Company. In addition, the weakened credit markets may also
impact the ability of the end consumer to obtain any needed financing to purchase the Companys
products, resulting in a reduction in overall demand, and consequently negatively impact sales
levels. Furthermore, continued disruption in the financial markets could adversely affect the
Companys ability to refinance indebtedness when required.
The Company has substantial fixed costs and, as a result, operating income is sensitive to changes
in net sales.
The Company operates with significant operating and financial leverage. Significant portions
of the Companys manufacturing, selling, general and administrative expenses are fixed costs that
neither increase nor decrease proportionately with sales. In addition, a significant portion of the
Companys interest expense is fixed. There can be no assurance that the Company would be able to
further reduce its fixed costs in response to a decline in net sales. As a result, a decline in the
Companys net sales could result in a higher percentage decline in the Companys income from
operations.
Changes in raw material costs and the availability of raw materials and finished goods could
adversely affect the Companys profit margins.
The principal raw materials used by the Company are vinyl resin, aluminum, steel, resin
stabilizers and pigments, glass, window hardware and packaging materials, all of which have
historically been subject to price changes. Raw material pricing on certain of the Companys key
commodities has fluctuated significantly over the past several years. In response, the Company has
announced price increases over the past several years on certain of its product offerings to offset
inflation in raw materials and continually monitor market conditions for price changes as
warranted. The Companys ability to maintain gross margin levels on its products during periods of
rising raw material costs depends on the Companys ability to obtain selling price increases.
Furthermore, the results of operations for individual quarters can and have been negatively
impacted by a delay between the timing of raw material cost increases and price increases on the
Companys products. There can be no assurance that the Company will be able to maintain the selling
price increases already implemented or achieve any future price increases.
Additionally, the Company relies on its suppliers for deliveries of raw materials and finished
goods. If any of the Companys suppliers were unable to deliver raw materials or finished goods to
the Company for an extended period of time, the Company may not be able to procure the required raw
materials or finished goods through other suppliers without incurring an adverse impact on its
operations. Even if acceptable alternatives were found, the process of locating and securing such
alternatives might be disruptive to the Companys business, and any such alternatives could result
in increased costs for the Company. Extended unavailability of necessary raw materials or finished
goods could cause the Company to cease manufacturing or distributing one or more of its products
for an extended period of time.
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The unavailability, reduction or elimination of government and economic incentives could adversely
affect demand for the Companys products.
In response to economic conditions and declines in the housing market, as well as public
attention to energy consumption, the federal government and various state governments have
initiated tax credits and other programs intended to promote home purchases and the investment in
energy-compliant home improvement products. There can be no assurance that government responses to
the disruptions in the financial markets will restore consumer confidence, stabilize the markets or
increase liquidity and the availability of credit, or whether any such results will be sustainable.
Nor can there be any assurance regarding the impact of such programs on the purchase of
energy-compliant home improvement products. Further, these programs are expected to wind down over
time. For example, the California first-time home buyer tax credit ended recently due to the
available funds being exhausted; the federal home buyer tax credit program required home purchase
contracts to have been signed by April 30, 2010 and closed by September 30, 2010; and the current
program of federal tax credits for energy efficiency is currently set to expire December 31, 2010.
The Company cannot ensure that the housing markets will not decline further as these programs are
phased out, and the phase-out or reduction of these programs may reduce demand for the Companys
products.
Risks associated with the Companys ability to continuously improve organizational productivity and
supply chain efficiency and flexibility could adversely affect the Companys business, either in an
environment of potentially declining market demand or one that is volatile or resurging.
The Company needs to continually evaluate its organizational productivity and supply chains
and assess opportunities to reduce costs and assets. The Company must also enhance quality, speed
and flexibility to meet changing and uncertain market conditions. The Companys success also
depends in part on refining its cost structure and supply chains to promote a consistently flexible
and low cost supply chain that can respond to market pressures to protect profitability and cash
flow or ramp up quickly to effectively meet demand. Failure to achieve the desired level of
quality, capacity or cost reductions could impair the Companys results of operations. Despite
proactive efforts to control costs and improve production in the Companys facilities, competition
could still result in lower operating margins and profitability.
The Companys business is seasonal and can be affected by inclement weather conditions, which could
affect the timing of the demand for the Companys products and cause reduced profit margins when
such conditions exist.
Markets for the Companys products are seasonal and can be affected by inclement weather
conditions. Historically, the Companys business has experienced increased sales in the second and
third quarters of the year due to increased remodeling and construction activity during those
periods.
Because much of the Companys overhead and expenses are fixed throughout the year, the
Companys operating profits tend to be lower in the first and fourth quarters. Inclement weather
conditions can affect the timing of when the Companys products are applied or installed, causing
reduced profit margins when such conditions exist.
The Companys industry is highly competitive.
The markets for the Companys products and services are highly competitive. The Company seeks
to distinguish itself from other suppliers of residential building products and to sustain its
profitability through a business strategy focused on increasing sales at existing supply centers,
selectively expanding the Companys supply center network, increasing sales through independent
specialty distributor customers, developing innovative new products, expanding sales of third-party
manufactured products through the Companys supply center network, and driving operational
excellence by reducing costs and increasing customer service levels. The Company believes that
competition in the industry is based on price, product and service quality, customer service and
product features. Sustained increases in competitive pressures could have an adverse effect on
results of operations and negatively impact sales and margins.
Consolidation of the Companys customers could adversely affect the Companys business, financial
condition and results of operations.
Though larger customers can offer efficiencies and unique product opportunities, consolidation
increases their size and importance to the Companys business. These larger customers can make
significant changes in their volume of purchases and seek price reductions. Consolidation could
adversely affect the Companys margins and profitability, particularly if it were to lose a
significant customer. In 2008, 2009 and the nine months ended October 2, 2010, sales to the
Companys largest customer and its licensees represented approximately 11%, 13% and 13% of net
sales, respectively. The loss of a substantial portion of sales to the Companys largest customers
could have a material adverse effect on its business, financial condition and results of
operations.
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The Companys failure to attract and retain qualified personnel could adversely affect its
business.
The Companys success depends in part on the efforts and abilities of its senior management
and key employees. Their motivation, skills, experience and industry contacts significantly benefit
the Companys operations and administration. The failure to attract, motivate and retain members of
the Companys senior management and key employees could have a negative effect on the Companys
results of operations. In particular, the departure of members of the Companys senior management
could cause the Company to lose customers and reduce its net sales, lead to employee morale
problems and the loss of key employees or cause production disruptions.
The Company has significant goodwill and other intangible assets, which if impaired, could require
the Company to incur significant charges.
As of October 2, 2010, the Company has approximately $231.2 million of goodwill and $94.0
million of other intangible assets, net, both of which are expected to increase significantly after
giving effect to the acquisition transactions that were completed on October 13, 2010. The value of
these assets is dependent, among other things, upon the Companys future expected operating
results. The Company is required to test for impairment of these assets annually or when factors
indicating impairment are present, which could result in a write down of all or a significant
portion of these assets. Any future write down of goodwill and other intangible assets could have
an adverse effect on the Companys financial condition, and on the results of operations for the
period in which the impairment charge is incurred.
The future recognition of the Companys deferred tax assets is uncertain, and assumptions used to
determine the amount of the Companys deferred tax asset valuation allowance are subject to
revision based on changes in tax laws and variances between future expected operating performance
and actual results.
The Companys inability to realize deferred tax assets may have an adverse effect on its
consolidated results of operations and financial condition. The Company recognizes deferred tax
assets and liabilities for the future tax consequences related to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and
for tax credits. The Company evaluates its deferred tax assets for recoverability based on
available evidence, including assumptions about future profitability.
During the fourth quarter of 2009, AMH II reduced its total valuation allowance by $10.5
million to $62.4 million. AMH IIs total valuation allowance of $62.4 million as of October 2, 2010
is based on the uncertainty of the future realization of deferred tax assets. This reflects the
Companys assessment that a portion of its deferred tax assets could expire unused if the Company
is unable to generate taxable income in the future sufficient to utilize them, or the Company
enters into one or more transactions that limit its ability to realize all of its deferred tax
assets. The assumptions used to make this determination are subject to revision based on changes in
tax laws or variances between the Companys future expected operating performance and actual
results. As a result, significant judgment is required in assessing the possible need for a
deferred tax asset valuation allowance. If the Company determines that it would not be able to
realize all or a portion of the deferred tax assets in the future, the Company would further reduce
its deferred tax asset through a charge to earnings in the period in which the determination was
made. Any such charge could have an adverse effect on the Companys consolidated results of
operations and financial condition.
The acquisition transactions completed subsequent to the end of the quarter, including the
related refinancing of the Companys debt, are expected to create tax deductions of approximately
$345 million to $360 million, although no assurances can be made that such deductions will be
sustained if audited. These tax deductions are expected to create refunds of approximately $3
million for previously paid U.S. federal income taxes with the remaining tax deductions carried
forward to reduce future taxable income. The Company expects to record additional deferred tax
assets related to these loss carryforwards, and the Company is currently evaluating whether, and to
what extent, to record a valuation allowance with respect to any such deferred tax assets.
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The Company is subject to foreign exchange risk as a result of exposures to changes in currency
exchange rates between the United States and Canada.
The Company is exposed to exchange rate fluctuations between the Canadian dollar and U.S.
dollar. The Company realizes revenues from sales made through its Canadian distribution centers in
Canadian dollars. The exchange rate of the Canadian dollar to the U.S. dollar has been at or near
historic highs in recent years. In the event that the Canadian dollar weakens in comparison to the
U.S. dollar, earnings generated from Canadian operations will translate into reduced earnings on
the Companys consolidated statement of operations reported in U.S. dollars. In addition, the
Companys Canadian subsidiary also records certain accounts receivable and accounts payable
accounts, which are denominated in U.S. dollars. Foreign currency transactional gains and losses
are realized upon settlement of these obligations.
As a result of the acquisition transactions that were completed subsequent to the end of the third
quarter, the Company is now controlled by investment funds affiliated with Hellman & Friedman LLC,
whose interests may be different than the interests of other holders of the Companys securities.
By reason of their majority ownership interest in Parent, which is the Companys indirect
parent company as a result of the completion of the acquisition transactions subsequent to the end
of the third quarter, Hellman & Friedman LLC and its affiliates have the ability to designate a
majority of the members of the Board of Directors. Hellman & Friedman LLC and its affiliates are
able to control actions to be taken by the Company, including amendments to its certificate of
incorporation and bylaws and the approval of significant corporate transactions, including mergers,
sales of substantially all of the Companys assets, distributions of the Companys assets, the
incurrence of indebtedness and any incurrence of liens on the Companys assets. The interests of
Hellman & Friedman LLC and its affiliates may be materially different than the interests of the
Companys other stakeholders. For example, Hellman & Friedman LLC and its affiliates may cause the
Company to take actions or pursue strategies that could impact its ability to make payments under
the indenture governing the Notes and the Companys new ABL Facilities or that cause a change of
control. In addition, to the extent permitted by the indenture governing the Notes and the
Companys new ABL Facilities, Hellman & Friedman LLC and its affiliates may cause the Company to
pay dividends rather than make capital expenditures.
The Company could face potential product liability claims relating to products it manufactures or
distributes.
The Company face a business risk of exposure to product liability claims in the event that the
use of its products is alleged to have resulted in injury or other adverse effects. The Company
currently maintains product liability insurance coverage, but the Company may not be able to obtain
such insurance on acceptable terms in the future, if at all, or any such insurance may not provide
adequate coverage against potential claims. Product liability claims can be expensive to defend and
can divert management and other personnel for months or years regardless of the ultimate outcome.
An unsuccessful product liability defense could have an adverse effect on the Companys business,
financial condition, results of operations or business prospects or ability to make payments on the
Companys indebtedness when due.
The Company may incur significant, unanticipated warranty claims.
Consistent with industry practice, the Company provides to homeowners limited warranties on
certain products. Warranties are provided for varying lengths of time, from the date of purchase up
to and including lifetime. Warranties cover product failures such as stress cracks and seal
failures for windows and fading and peeling for siding products, as well as manufacturing defects.
Liabilities for future warranty costs are provided for annually based on managements estimates of
such future costs, which are based on historical trends and sales of products to which such costs
relate. To the extent that the Companys estimates are inaccurate and the Company does not have
adequate warranty reserves, the Companys liability for warranty payments could have a material
impact on the Companys financial condition and results of operations.
Potential liabilities and costs from litigation could adversely affect the Companys business,
financial condition and results of operations.
The Company is, from time to time, involved in various claims, litigation matters and
regulatory proceedings that arise in the ordinary course of business and that could have a material
adverse effect on the Company. These matters may include contract disputes, personal injury claims,
warranty disputes, environmental claims or proceedings, other tort claims, employment and tax
matters and other proceedings and litigation, including class actions.
Increasingly, home builders, including the Companys customers, are subject to construction
defect and home warranty claims in the ordinary course of their business. The Companys contractual
arrangements with these customers typically include the agreement to indemnify them against
liability for the performance of the Companys products or services or the performance of other
products that the Company installs. These claims, often asserted several years after completion of
construction, frequently result in lawsuits against the home builders and many of their
subcontractors and suppliers, including the Company, requiring the Company to incur defense costs
even when its products or services may not be the principal basis for the claims.
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Although the Company intends to defend all claims and litigation matters vigorously, given the
inherently unpredictable nature of claims and litigation, the Company cannot predict with certainty
the outcome or effect of any claim or litigation matter, and there can be no assurance as to the
ultimate outcome of any such matter.
The Company maintains insurance against some, but not all, of these risks of loss resulting
from claims and litigation. The Company may elect not to obtain insurance if it believes the cost
of available insurance is excessive relative to the risks presented. The levels of insurance the
Company maintains may not be adequate to fully cover any and all losses or liabilities. If any
significant accident, judgment, claim or other event is not fully insured or indemnified against,
it could have a material adverse impact on the Companys business, financial condition and results
of operations.
On September 20, 2010, Associated Materials, LLC and Gentek Building Products, Inc. were named
as defendants in an action filed in the United States District Court for the Northern District of
Ohio, captioned Eliason v. Gentek Building Prods., Inc. The complaint was filed by three individual
plaintiffs on behalf of themselves and a putative nationwide class of owners of steel and aluminum
siding products manufactured by Associated Materials and Gentek or their predecessors. The
plaintiffs assert a breach of express and implied warranty, along with related causes of action,
claiming that an unspecified defect in the siding causes paint to peel off the metal and that
Associated Materials and Gentek have failed adequately to honor their warranty obligations to
repair, replace or refinish the defective siding. Plaintiffs seek unspecified actual and punitive
damages, restitution of monies paid to the defendants and an injunction against the claimed
unlawful practices, together with attorneys fees, costs and interest. As this action was only very
recently filed, no proceedings have yet occurred in this case. The Company plans to vigorously
defend this action, on the merits and by opposing class certification.
A material weakness in the Companys internal control over financial reporting was identified in
connection with the Companys financial statements for the year ended January 2, 2010. Material
weaknesses in the Companys internal controls over financial reporting were previously identified
in connection with the Companys financial statements for the second quarter ended July 4, 2009 and
remediated prior to the fiscal year end. If the Company fails to maintain effective internal
control over financial reporting at a reasonable assurance level, the Company may not be able to
accurately report its financial results or prevent fraud, which could have a material adverse
effect on the Companys operations, investor confidence in the Companys business and the trading
prices of the Companys securities.
Effective internal controls are necessary for the Company to provide reliable financial
reports and effectively prevent fraud. As of January 2, 2010, management determined that the
Company did not maintain effective controls over the completeness and accuracy of the income tax
provision and the related balance sheet accounts. The Companys income tax accounting in 2009 had
significant complexity due to multiple debt transactions during the year including the
restructuring of debt at a direct parent company, the impact of repatriation of foreign earnings
and the related foreign tax credit calculations and changes in the valuation allowance for deferred
tax assets. Specifically, the Companys controls over the processes and procedures related to the
calculation and review of the annual tax provision were not adequate to ensure that the income tax
provision was prepared in accordance with generally accepted accounting principles. Additionally,
these control deficiencies could result in a misstatement of the income tax provision, the related
balance sheet accounts and note disclosures that would result in a material misstatement to the
annual consolidated financial statements that would not be prevented or detected. Accordingly,
management concluded as a result of these control deficiencies that a material weakness in the
Companys internal control over financial reporting existed as of January 2, 2010. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of the Companys
annual or interim financial statements will not be prevented or detected on a timely basis.
The Company engaged an independent public accounting firm (other than its auditors, Deloitte &
Touche LLP) during the first, second and third quarters of 2010 to perform additional detail
reviews of complex transactions, the income tax calculations and disclosures and to advise
management on matters beyond its in-house expertise. The accounting firm performed a review of the
income tax calculations and disclosures for the quarters ended April 3, 2010, July 3, 2010 and
October 2, 2010.
Management will continue to evaluate the design and effectiveness of the enhanced internal
controls, and once placed in operation for a sufficient period of time, these internal controls
will be subject to appropriate testing in order to determine whether they are operating
effectively.
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Testing related to the annual tax provision calculations and disclosure reviews will be
conducted during the year-end financial close. Until the appropriate testing of the change in
controls from these enhanced internal controls is complete, management will continue to perform the
evaluations and analyses believed to be adequate to provide reasonable assurance that there are no
material misstatements of the Companys consolidated financial statements.
Management determined during the second quarter of 2009 that it did not maintain operating
effectiveness of certain internal controls over financial reporting for establishing the Companys
allowance for doubtful accounts, the deferral of revenue for specific customer shipments until
collectibility is reasonably assured, and accounting for restructuring costs. Management concluded
that as a result of these control deficiencies, a material weakness in the Companys internal
control over financial reporting existed as of July 4, 2009.
During the third quarter of 2009, management substantially completed the remediation efforts
and the following remediation actions were implemented by the Company to ensure the accuracy of its
consolidated financial statements and prevent or detect potential material misstatements on a
timely basis. The Company enhanced documentation supporting the Companys allowance for doubtful
accounts and review of past due customer accounts. In August 2009, the Company hired a Vice
President-National Credit Manager, reporting directly to the Chief Financial Officer, who works
directly with the financial reporting staff as part of the processes related to the review and
assessment of past due customer accounts, the required allowance for doubtful accounts, and the
identification of revenue for which deferral treatment is appropriate. Additionally, the Company
enhanced its internal review procedures for accounting for restructuring costs and other
non-recurring items.
During the fourth quarter of 2009, these revised internal controls and procedures were tested
and determined to be operating effectively. As a result, management concluded as of January 2, 2010
that the Company has remediated the material weakness identified during the second quarter of 2009
related to the operating effectiveness of certain internal controls over financial reporting for
establishing the Companys allowance for doubtful accounts, the deferral of revenue for specific
customer
shipments until collectibility is reasonably assured, and accounting for restructuring costs.
The Company cannot assure that additional material weaknesses in its internal control over
financial reporting will not be identified in the future. Any failure to maintain or implement
required new or improved controls, or any difficulties the Company encounters in their
implementation, could result in additional material weaknesses, and cause the Company to fail to
timely meet its periodic reporting obligations or result in material misstatements in the Companys
financial statements. The existence of a material weakness could result in errors in the Companys
financial statements that could result in a restatement of financial statements, cause the Company
to fail to meet its reporting obligations and cause investors to lose confidence in the Companys
reported financial information.
The Company is subject to various environmental statutes and regulations, which may result in
significant costs.
The Companys operations are subject to various U.S. and Canadian environmental statutes and
regulations, including those relating to: materials used in the Companys products and operations;
discharge of pollutants into the air, water and soil; treatment, transport, storage and disposal of
solid and hazardous wastes; and remediation of soil and groundwater contamination. Such laws and
regulations may also impact the cost and availability of materials used in manufacturing the
Companys products. The Companys facilities are subject to investigations by governmental
regulators, which occur from time to time. While management does not currently expect the costs of
compliance with environmental requirements to increase materially, future expenditures may increase
as compliance standards and technology change.
Also, the Company cannot be certain that it has identified all environmental matters giving
rise to potential liability. The Companys past use of hazardous materials, releases of hazardous
substances at or from currently or formerly owned or operated properties, newly discovered
contamination at any of the Companys current or formerly owned or operated properties or at
off-site locations such as waste treatment or disposal facilities, more stringent future
environmental requirements (or stricter enforcement of existing requirements), or the Companys
inability to enforce indemnification agreements, could result in increased expenditures or
liabilities which could have an adverse effect on the Companys business and financial condition.
Any final judgment in an environmental proceeding entered against the Company or its subsidiaries
that is greater than $25.0 million and is unpaid, undischarged and unstayed for a period of more
than 60 days after becoming final would be an event of default in the indenture governing the
Notes.
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Legislative or regulatory initiatives related to global warming / climate change concerns may
negatively impact the Companys business.
Recently, there has been an increasing focus and continuous debate on global climate change
including increased attention from regulatory agencies and legislative bodies. This increased focus
may lead to new initiatives directed at regulating an unspecified array of environmental matters.
Legislative, regulatory or other efforts in the United States to combat climate change could result
in future increases in the cost of raw materials, taxes, transportation and utilities for the
Company and its suppliers which would result in higher operating costs for the Company. However,
management is unable to predict at this time the potential effects, if any, that any future
environmental initiatives may have on the Companys business.
Additionally, the recent legislative and regulatory responses related to climate change could
create financial risk. Many governing bodies have been considering various forms of legislation
related to greenhouse gas emissions. Increased public awareness and concern may result in more laws
and regulations requiring reductions in or mitigation of the emission of greenhouse gases. The
Companys facilities may be subject to regulation under climate change policies introduced within
the next few years. There is a possibility that, when and if enacted, the final form of such
legislation could increase the Companys costs of compliance with environmental laws. If the
Company is unable to recover all costs related to complying with climate change regulatory
requirements, it could have a material adverse effect on the Companys results of operations.
Declining returns in the investment portfolio of the Companys defined benefit pension plans and
changes in actuarial assumptions could increase the volatility in the Companys pension expense and
require the Company to increase cash contributions to the plans.
The Company sponsors a number of defined benefit pension plans for its employees in the United
States and Canada. Pension expense for the defined benefit pension plans sponsored by the Company
is determined based upon a number of actuarial assumptions, including expected long-term rates of
return on assets and discount rates. The use of these assumptions makes the Companys pension
expense and cash contributions subject to year-to-year volatility. Declines in market conditions,
changes in pension law and uncertainties regarding significant assumptions used in the actuarial
valuations can have a material
impact on future required contributions to the Companys pension plans and could result in
additional charges to equity and an increase in future pension expense and cash contributions.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
None.
Item 6. | 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* |
* | This document is being furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986. |
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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, LLC (Registrant) |
||||
Date: November 16, 2010 | By: | /s/ Thomas N. Chieffe | ||
Thomas N. Chieffe | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Date: November 16, 2010 | By: | /s/ Stephen E. Graham | ||
Stephen E. Graham | ||||
Vice President Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) |
48