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EX-32.2 - EXHIBIT 32.2 - ASSOCIATED MATERIALS, LLCc08510exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED MATERIALS, LLCc08510exv31w2.htm
EX-32.1 - EXHIBIT 32.1 - ASSOCIATED MATERIALS, LLCc08510exv32w1.htm
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED MATERIALS, LLCc08510exv31w1.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)
Registrant’s 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 registrant’s membership interests outstanding were held by an affiliate of the Registrant.
 
 

 

 


 

ASSOCIATED MATERIALS, LLC
REPORT FOR THE QUARTER ENDED OCTOBER 2, 2010
         
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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 Member’s 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  
Member’s equity
    295,328       303,488  
 
           
Total liabilities and member’s equity
  $ 876,650     $ 786,797  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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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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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.

 

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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 Company’s 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 Company’s 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 Company’s significant accounting policies and management judgments is located in the audited financial statements for the year ended January 2, 2010, included in the Company’s 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 Company’s 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 Company’s building products are intended for exterior use, the Company’s sales and operating profits tend to be lower during periods of inclement weather. Therefore, the results of operations for any interim period are not necessarily indicative of the results of operations for a full year.
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 Company’s 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 Company’s post-retirement medical and dental plans was not material to the Company’s 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.

 

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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 Company’s goodwill is deductible for income tax purposes. The Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s 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, AMH’s 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 Company’s existing and future domestic restricted subsidiaries, other than Associated Materials Finance, Inc. (the “Subsidiary Guarantors”), that guarantee or are otherwise obligors under the Company’s asset-based credit facility (the “ABL Facility”). The 9.875% notes and guarantees are structurally subordinated to all of the liabilities of the Company’s 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 Facility’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s borrowings under the ABL Facility could have been accelerated and made payable immediately. Accordingly, the Company’s $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.

 

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Parent Company Indebtedness
The Company’s 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, AMH’s 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 II’s 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 II’s 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 Company’s 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 AMH’s ability to further upstream payments in order to service its obligations under the 20% notes. However, unlike AMH II’s previously outstanding 13.625% notes, all of which were exchanged for the 20% notes in June 2009, interest on AMH II’s 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 AMH’s 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 Company’s 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 Company’s 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 AMH’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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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The 2008 decline in market conditions resulted in significant decreased valuations of the Company’s 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 Company’s 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 Company’s 2009 Annual Report on Form 10-K, the sensitivity of these estimates and assumptions are not expected to have a material impact on the Company’s 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 management’s 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 Company’s 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 Company’s 9.875% notes. The Subsidiary Guarantors of the Company’s 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.

 

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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
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 Member’s 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  
Member’s equity
    295,328             222,210       97,191       (319,401 )     295,328  
 
                                   
Total liabilities and member’s equity
  $ 852,948     $ 197,744     $ 270,458     $ 175,190     $ (619,690 )   $ 876,650  
 
                                   

 

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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
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)
                                                 
                    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  
 
                                   

 

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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)
                                         
                    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)
                                                 
                    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 Member’s 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  
Member’s equity
    303,488             197,163       92,409       (289,572 )     303,488  
 
                                   
Total liabilities and member’s equity
  $ 780,120     $ 197,552     $ 233,181     $ 142,439     $ (566,495 )   $ 786,797  
 
                                   

 

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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
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)
                                                 
                    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)
                                         
                    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 Company’s 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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Item 2.   Management’s 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 Company’s 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 Company’s 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 Company’s extensive dual-distribution network, consisting of 119 company-operated supply centers, through which it sells directly to its contractor customers, and the Company’s 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 Company’s net sales are generated in the residential repair and remodeling market and approximately 30% of the Company’s net sales are generated in the residential new construction market. The Company’s 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 Company’s total net sales were generated through the Company’s network of supply centers, with the remainder sold to independent distributors and dealers.
Because its exterior residential building products are consumer durable goods, the Company’s 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 Company’s 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 Company’s 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 Company’s ability to maintain gross margin levels on its products during periods of rising raw material costs depends on the Company’s 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 Company’s 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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The Company operates with significant operating and financial leverage. Significant portions of the Company’s manufacturing, selling, general and administrative expenses are fixed costs that neither increase nor decrease proportionately with sales. In addition, a significant portion of the Company’s 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 Company’s net sales could result in a higher percentage decline in its income from operations. Also, the Company’s 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 Company’s 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.

 

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Results of Operations
The following table sets forth for the periods indicated the results of the Company’s 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 Company’s 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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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 Company’s 9.875% notes issued in November 2009, partially offset by lower overall borrowings under the Company’s 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 Company’s 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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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 Company’s 9.875% notes issued in November 2009, partially offset by lower overall borrowings under the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s ABL Facility. Net cash used in financing activities for the nine months ended October 3, 2009 included net repayments under the Company’s 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 Company’s 15% notes, which are no longer outstanding. The dividend payments in 2010 were paid to the Company’s indirect parent company to fund the scheduled interest payments on its 11.25% notes. The dividend payments in 2009 were paid to the Company’s indirect parent company to fund the scheduled interest payment on its 13.625% notes, which are no longer outstanding.
Description of the Company’s 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 Company’s 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 Company’s 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, AMH’s 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 Company’s existing and future domestic restricted subsidiaries, other than Associated Materials Finance, Inc. (the “Subsidiary Guarantors”), that guarantee or are otherwise obligors under the Company’s asset-based credit facility (the “ABL Facility”). The 9.875% notes and guarantees are structurally subordinated to all of the liabilities of the Company’s 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 Facility’s 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 Company’s 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 Company’s 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 Company’s 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 AMH’s 11.25% notes (or any refinancing thereof), in an aggregate amount not to exceed $125.0 million or if the Company’s 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 II’s 20% Senior Notes due 2014 (the “20% notes”) in an aggregate amount not to exceed $50 million when the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s borrowing base will fluctuate during the course of the year based on a variety of factors impacting the Company’s 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 Company’s peak selling season is typically May through October. As of October 2, 2010, the Company’s 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 Facility’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s borrowings under the ABL Facility could have been accelerated and made payable immediately. Accordingly, the Company’s $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 Company’s 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, AMH’s 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 II’s 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 II’s 20% notes.

 

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The Company is a restricted subsidiary under each of the indentures for AMH’s 11.25% notes and AMH II’s 20% notes and is therefore subject to the covenants and events of default described therein. Covenants and events of default with respect to AMH’s 11.25% notes and AMH II’s 20% notes are generally similar to those provided for in the Company’s 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 Company’s 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 AMH’s ability to further upstream payments in order to service its obligations under the 20% notes. However, unlike AMH II’s previously outstanding 13.625% notes, all of which were exchanged for the 20% notes in June 2009, interest on AMH II’s 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 AMH’s 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 Company’s 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 Company’s 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 AMH’s 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 Company’s 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 Company’s 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 guarantor’s material directly wholly-owned domestic subsidiaries and 65% of the present and future shares of capital stock, of each of the Issuers’ and each guarantor’s 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 Company’s 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 Company’s 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 Moody’s Investors Service, Inc. and Standard & Poor’s.
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 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—ABL 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 Company’s ability to comply with its financial covenant.

 

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The reconciliation of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 management’s estimate of non-recurring consulting fees.
 
  (ii)   Represents management’s estimates for excess severance expense due primarily to unusual changes within senior management.
 
  (iii)   Represents management’s estimate of unusual bad debt expense based on historical averages from 2004 through 2008.
 
  (iv)   Represents management’s 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 management’s estimates of cost savings that could have resulted from producing glass in-house at the Company’s Cuyahoga Falls, Ohio window facility had such production started on January 4, 2009.
 
  (iii)   Represents management’s estimate of cost savings that could have resulted from entering into the Company’s 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 Company’s 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 Company’s 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 Company’s ability to maintain gross margin levels on its products during periods of rising raw material costs depends on the Company’s 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 Company’s 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 Company’s prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “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 Company’s 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 Company’s 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 Company’s 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 Company’s customers;
    the Company’s ability to attract and retain qualified personnel;
    the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 9.875% notes is sensitive to changes in interest rates. In addition, the fair value is affected by the Company’s overall credit rating, which could be impacted by changes in the Company’s future operating results. At October 2, 2010, the fair value of the Company’s 9.875% notes was $242.0 million based upon their quoted market price.
Foreign Currency Exchange Risk
The Company’s revenues are primarily from domestic customers and are realized in U.S. dollars. However, the Company realizes revenues from sales made through Gentek’s Canadian distribution centers in Canadian dollars. The Company’s Canadian manufacturing facilities acquire raw materials and supplies from U.S. vendors, which results in foreign currency transactional gains and losses 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. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects of Inflation” for a discussion of the market risk related to the Company’s principal raw 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s tax sharing agreement. Specifically, the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s consolidated financial statements.
Other Changes
There have been no changes to the Company’s internal control over financial reporting during the quarter ended October 2, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s 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 Company’s 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 Company’s operating performance.
The Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s manufacturing, selling, general and administrative expenses are fixed costs that neither increase nor decrease proportionately with sales. In addition, a significant portion of the Company’s 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 Company’s net sales could result in a higher percentage decline in the Company’s income from operations.
Changes in raw material costs and the availability of raw materials and finished goods could adversely affect the Company’s 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 Company’s 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 Company’s ability to maintain gross margin levels on its products during periods of rising raw material costs depends on the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s products.
Risks associated with the Company’s ability to continuously improve organizational productivity and supply chain efficiency and flexibility could adversely affect the Company’s 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 Company’s 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 Company’s results of operations. Despite proactive efforts to control costs and improve production in the Company’s facilities, competition could still result in lower operating margins and profitability.
The Company’s business is seasonal and can be affected by inclement weather conditions, which could affect the timing of the demand for the Company’s products and cause reduced profit margins when such conditions exist.
Markets for the Company’s products are seasonal and can be affected by inclement weather conditions. Historically, the Company’s 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 Company’s overhead and expenses are fixed throughout the year, the Company’s operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when the Company’s products are applied or installed, causing reduced profit margins when such conditions exist.
The Company’s industry is highly competitive.
The markets for the Company’s 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 Company’s supply center network, increasing sales through independent specialty distributor customers, developing innovative new products, expanding sales of third-party manufactured products through the Company’s 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 Company’s customers could adversely affect the Company’s 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 Company’s business. These larger customers can make significant changes in their volume of purchases and seek price reductions. Consolidation could adversely affect the Company’s 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 Company’s 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 Company’s largest customers could have a material adverse effect on its business, financial condition and results of operations.

 

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The Company’s failure to attract and retain qualified personnel could adversely affect its business.
The Company’s 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 Company’s operations and administration. The failure to attract, motivate and retain members of the Company’s senior management and key employees could have a negative effect on the Company’s results of operations. In particular, the departure of members of the Company’s 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 Company’s 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 Company’s financial condition, and on the results of operations for the period in which the impairment charge is incurred.
The future recognition of the Company’s deferred tax assets is uncertain, and assumptions used to determine the amount of the Company’s 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 Company’s 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 II’s 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 Company’s 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 Company’s 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 Company’s consolidated results of operations and financial condition.
The acquisition transactions completed subsequent to the end of the quarter, including the related refinancing of the Company’s 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 Company’s consolidated statement of operations reported in U.S. dollars. In addition, the Company’s 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 Company’s securities.
By reason of their majority ownership interest in Parent, which is the Company’s 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 Company’s assets, distributions of the Company’s assets, the incurrence of indebtedness and any incurrence of liens on the Company’s assets. The interests of Hellman & Friedman LLC and its affiliates may be materially different than the interests of the Company’s 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 Company’s new ABL Facilities or that cause a change of control. In addition, to the extent permitted by the indenture governing the Notes and the Company’s 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 Company’s business, financial condition, results of operations or business prospects or ability to make payments on the Company’s 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 management’s 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 Company’s estimates are inaccurate and the Company does not have adequate warranty reserves, the Company’s liability for warranty payments could have a material impact on the Company’s financial condition and results of operations.
Potential liabilities and costs from litigation could adversely affect the Company’s 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 Company’s customers, are subject to construction defect and home warranty claims in the ordinary course of their business. The Company’s contractual arrangements with these customers typically include the agreement to indemnify them against liability for the performance of the Company’s 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 Company’s 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 Company’s internal control over financial reporting was identified in connection with the Company’s financial statements for the year ended January 2, 2010. Material weaknesses in the Company’s internal controls over financial reporting were previously identified in connection with the Company’s 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 Company’s operations, investor confidence in the Company’s business and the trading prices of the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s financial statements. The existence of a material weakness could result in errors in the Company’s 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 Company’s reported financial information.
The Company is subject to various environmental statutes and regulations, which may result in significant costs.
The Company’s operations are subject to various U.S. and Canadian environmental statutes and regulations, including those relating to: materials used in the Company’s 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 Company’s products. The Company’s 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 Company’s 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 Company’s 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 Company’s inability to enforce indemnification agreements, could result in increased expenditures or liabilities which could have an adverse effect on the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s results of operations.
Declining returns in the investment portfolio of the Company’s defined benefit pension plans and changes in actuarial assumptions could increase the volatility in the Company’s 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 Company’s 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 Company’s 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) 
 

 

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