Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - ASSOCIATED MATERIALS, LLC | side-7415xex321.htm |
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED MATERIALS, LLC | side-7415xex312.htm |
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED MATERIALS, LLC | side-7415xex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 4, 2015
or
¨ | 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 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 ¨ No ý Although the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, the registrant has filed all such Exchange Act reports for the preceding 12 months.
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 ý No ¨
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 | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ý (Do not check if a smaller reporting company) | 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 ¨ No ý
As of August 4, 2015, all of the registrant’s membership interests outstanding were held by an affiliate of the registrant.
ASSOCIATED MATERIALS, LLC
Report for the Quarter ended July 4, 2015
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
July 4, 2015 | January 3, 2015 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 4,029 | $ | 5,963 | |||
Accounts receivable, net | 163,915 | 125,121 | |||||
Inventories | 164,578 | 145,532 | |||||
Income taxes receivable | 135 | 144 | |||||
Deferred income taxes | 2,439 | 2,439 | |||||
Prepaid expenses and other current assets | 11,798 | 15,859 | |||||
Total current assets | 346,894 | 295,058 | |||||
Property, plant and equipment, at cost | 184,828 | 178,014 | |||||
Less accumulated depreciation | 90,039 | 84,114 | |||||
Property, plant and equipment, net | 94,789 | 93,900 | |||||
Goodwill | 311,194 | 317,257 | |||||
Other intangible assets, net | 418,554 | 437,300 | |||||
Other assets | 15,875 | 18,662 | |||||
Total assets | $ | 1,187,306 | $ | 1,162,177 | |||
Liabilities and Member’s Deficit | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 140,421 | $ | 94,768 | |||
Accrued liabilities | 77,027 | 81,734 | |||||
Deferred income taxes | 2,116 | 1,292 | |||||
Income taxes payable | 1,779 | 1,782 | |||||
Total current liabilities | 221,343 | 179,576 | |||||
Deferred income taxes | 86,858 | 88,330 | |||||
Other liabilities | 123,849 | 129,016 | |||||
Long-term debt | 949,456 | 903,404 | |||||
Commitments and contingencies | |||||||
Member’s deficit | (194,200 | ) | (138,149 | ) | |||
Total liabilities and member’s deficit | $ | 1,187,306 | $ | 1,162,177 |
See accompanying notes to Condensed Consolidated Financial Statements.
1
ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Net sales | $ | 331,249 | $ | 319,875 | $ | 551,615 | $ | 516,464 | |||||||
Cost of sales | 250,234 | 247,862 | 428,697 | 410,036 | |||||||||||
Gross profit | 81,015 | 72,013 | 122,918 | 106,428 | |||||||||||
Selling, general and administrative expenses | 62,166 | 60,266 | 120,636 | 118,931 | |||||||||||
Income (loss) from operations | 18,849 | 11,747 | 2,282 | (12,503 | ) | ||||||||||
Interest expense | 21,156 | 20,759 | 41,862 | 41,079 | |||||||||||
Foreign currency loss | 601 | 278 | 1,117 | 616 | |||||||||||
Loss before income taxes | (2,908 | ) | (9,290 | ) | (40,697 | ) | (54,198 | ) | |||||||
Income tax expense | 2,230 | 1,318 | 2,763 | 2,759 | |||||||||||
Net loss | (5,138 | ) | (10,608 | ) | (43,460 | ) | (56,957 | ) | |||||||
Other comprehensive income (loss): | |||||||||||||||
Pension and other postretirement benefit adjustments, net of tax | 151 | 5 | 299 | 8 | |||||||||||
Foreign currency translation adjustments, net of tax | (1,379 | ) | 10,211 | (12,965 | ) | 1,157 | |||||||||
Total comprehensive loss | $ | (6,366 | ) | $ | (392 | ) | $ | (56,126 | ) | $ | (55,792 | ) |
See accompanying notes to Condensed Consolidated Financial Statements.
2
ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended | |||||||
July 4, 2015 | June 28, 2014 | ||||||
Operating Activities | |||||||
Net loss | $ | (43,460 | ) | $ | (56,957 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 19,927 | 21,267 | |||||
Deferred income taxes | 905 | 1,256 | |||||
Provision for losses on accounts receivable | 1,151 | 946 | |||||
Amortization of deferred financing costs and premium on senior notes | 1,805 | 1,874 | |||||
Loss on sale or disposal of assets | 3 | 18 | |||||
Stock based compensation expense | 75 | 354 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (41,453 | ) | (36,287 | ) | |||
Inventories | (21,253 | ) | (46,526 | ) | |||
Accounts payable and accrued liabilities | 42,651 | 30,511 | |||||
Income taxes receivable / payable | 151 | 1,593 | |||||
Other assets and liabilities | 819 | (6,480 | ) | ||||
Net cash used in operating activities | (38,679 | ) | (88,431 | ) | |||
Investing Activities | |||||||
Capital expenditures | (9,901 | ) | (5,245 | ) | |||
Proceeds from the sale of assets | 8 | 7 | |||||
Net cash used in investing activities | (9,893 | ) | (5,238 | ) | |||
Financing Activities | |||||||
Borrowings under ABL facilities | 99,731 | 121,242 | |||||
Payments under ABL facilities | (53,053 | ) | (41,128 | ) | |||
Net cash provided by financing activities | 46,678 | 80,114 | |||||
Effect of exchange rate changes on cash and cash equivalents | (40 | ) | (417 | ) | |||
Net decrease in cash and cash equivalents | (1,934 | ) | (13,972 | ) | |||
Cash and cash equivalents at beginning of period | 5,963 | 20,815 | |||||
Cash and cash equivalents at end of period | $ | 4,029 | $ | 6,843 | |||
Supplemental information: | |||||||
Cash paid for interest | $ | 39,772 | $ | 38,636 | |||
Cash paid for income taxes | $ | 1,777 | $ | 171 | |||
Property additions of $945 thousand and $1,289 thousand that remained unpaid as of July 4, 2015 and June 28, 2014, respectively, were excluded from “Capital expenditures” in the Investing Activities section above. |
See accompanying notes to Condensed Consolidated Financial Statements.
3
ASSOCIATED MATERIALS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER AND SIX MONTHS ENDED JULY 4, 2015
(UNAUDITED)
1. Basis of Presentation
Associated Materials, LLC (the “Company”) is a 100% owned subsidiary of Associated Materials Incorporated, formerly known as AMH Intermediate Holdings Corp. (“Holdings”). Holdings is a wholly owned subsidiary of Associated Materials Group, Inc., formerly known as AMH Investment Holdings Corp. (“Parent”), which is controlled by investment funds affiliated with Hellman & Friedman LLC (“H&F”). Holdings and Parent do not have material assets or operations other than their direct and indirect ownership, respectively, of the membership interests of the Company. Approximately 97% of the capital stock of Parent is owned by investment funds affiliated with H&F.
The condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) 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 GAAP 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 quarters and six months ended July 4, 2015 and June 28, 2014. 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 3, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 23, 2015 (“Annual Report”). A detailed description of the Company’s significant accounting policies and management judgments is located in the audited financial statements included in its Annual Report.
The Company is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States (“U.S.”) and Canada. The Company was founded in 1947 when it first introduced residential aluminum siding under the Alside® name. The Company offers a comprehensive range of exterior building products, including vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories, which are produced at the Company’s 11 manufacturing facilities. The Company also sells complementary products that it sources from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors, equipment and tools. The Company also provides installation services. The Company distributes these products through its extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom the Company refers to as its “contractor customers.” This dual-distribution network consists of 124 company-operated supply centers, through which the Company sells directly to its contractor customers, and its direct sales channel, through which the Company sells to more than 275 independent distributors, dealers and national account customers.
Because most of the Company’s building products are intended for exterior use, sales and operating profits 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 losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. Therefore, the results of operations for any interim period are not necessarily indicative of the results of operations for a full fiscal year.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2015 presentation.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value (“NRV”). The new guidance eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin) under the current lower of cost or market guidance. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. It is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2016. The Company does not believe that the adoption of the provisions of ASU 2015-11 will have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2015, the FASB issued ASU No. 2015-07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The
4
new guidance requires an entity to disclose the fair value of investments measured using the net asset value practical expedient so that the financial statement user can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. ASU 2015-07 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. The Company does not believe that the adoption of the provisions of ASU 2015-07 will have a material impact on its consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If the arrangement contains a software license, then the customer should account for the fees related to the software license element consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. An entity may apply the guidance retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. The Company does not believe that the adoption of the provisions of ASU 2015-05 will have a material impact on its consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than an asset, consistent with the presentation of debt discounts. The recognition and measurement of debt issuance costs are not affected by the new guidance. ASU 2015-03 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. An entity is required to apply ASU 2015-03 on a retrospective basis and comply with the applicable disclosures, which include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, the debt issuance cost asset and the debt liability). The Company does not believe that the adoption of the provisions of ASU 2015-03 will have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide certain disclosures if it concludes that substantial doubt exists. ASU 2014-15 is effective for all entities for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. The Company does not believe that the adoption of the provisions of ASU 2014-15 will have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The comprehensive new revenue recognition standard supersedes all existing revenue guidance under GAAP and international financial reporting standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard establishes the following five steps that require companies to exercise judgment when considering the terms of any contract, including all relevant facts and circumstances:
Step 1: Identify the contract(s) with the customer,
Step 2: Identify the separate performance obligations in the contract,
Step 3: Determine the transaction price,
Step 4: Allocate the transaction price to the separate performance obligations, and
Step 5: Recognize revenue when each performance obligation is satisfied.
The new standard also requires significantly more interim and annual disclosures. The new standard allows for either full retrospective or modified retrospective adoption. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning after December 15, 2016. In July 2015, the FASB confirmed its decision to defer the effective date of the new revenue standard by one year. The Company is currently assessing the potential impact of the new requirements under the standard.
2. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments. The allowance for doubtful accounts is based on review of the overall condition of accounts receivable balances and review of significant past due accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the
5
potential for recovery is considered remote. Accounts receivable that are not expected to be collected within one year, net of the related allowance for doubtful accounts, are included in “Other assets” in the Condensed Consolidated Balance Sheets.
Allowance for doubtful accounts on accounts receivable consists of the following (in thousands):
July 4, 2015 | January 3, 2015 | ||||||
Allowance for doubtful accounts, current | $ | 3,564 | $ | 3,542 | |||
Allowance for doubtful accounts, non-current | 4,682 | 4,549 | |||||
$ | 8,246 | $ | 8,091 |
3. Inventories
Inventories are valued at the lower of cost (first in, first out) or market. Inventories consist of the following (in thousands):
July 4, 2015 | January 3, 2015 | ||||||
Raw materials | $ | 36,895 | $ | 29,300 | |||
Work-in-progress | 13,317 | 16,442 | |||||
Finished goods | 114,366 | 99,790 | |||||
$ | 164,578 | $ | 145,532 |
4. Goodwill and Other Intangible Assets
The Company reviews goodwill for impairment on an annual basis at the beginning of the fourth quarter, or an interim basis if there are indicators of potential impairment. The Company did not recognize any impairment losses of its goodwill during the quarters and six months ended July 4, 2015 and June 28, 2014.
The changes in the carrying amount of goodwill are as follows (in thousands):
Goodwill | |||
Balance at January 3, 2015 | $ | 317,257 | |
Foreign currency translation | (6,063 | ) | |
Balance at July 4, 2015 | $ | 311,194 |
At each of the periods ended July 4, 2015 and January 3, 2015, accumulated goodwill impairment losses were $228.5 million, exclusive of foreign currency translation.
The Company’s other intangible assets consist of the following (in thousands):
July 4, 2015 | January 3, 2015 | ||||||||||||||||||||||
Cost | Accumulated Amortization | Net Carrying Value | Cost | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
Amortized customer bases | $ | 318,449 | $ | 117,890 | $ | 200,559 | $ | 321,836 | $ | 106,655 | $ | 215,181 | |||||||||||
Amortized non-compete agreements | 20 | 18 | 2 | 20 | 16 | 4 | |||||||||||||||||
Total amortized intangible assets | 318,469 | 117,908 | 200,561 | 321,856 | 106,671 | 215,185 | |||||||||||||||||
Non-amortized trade names (1) | 217,993 | — | 217,993 | 222,115 | — | 222,115 | |||||||||||||||||
Total intangible assets | $ | 536,462 | $ | 117,908 | $ | 418,554 | $ | 543,971 | $ | 106,671 | $ | 437,300 |
(1) Balances at July 4, 2015 and January 3, 2015 include impairment charges of $169.6 million, of which $89.7 million were recorded in the second half of 2014 and $79.9 million recorded were recorded in 2011.
The Company’s non-amortized intangible assets consist of the Alside®, Revere®, Gentek®, Preservation® and Alpine® trade names and are subject to testing for impairment on an annual basis at the beginning of the fourth quarter, or an interim basis if indicators of potential impairment are present. The Company did not recognize any impairment losses related to its other intangible assets during the quarters and six months ended July 4, 2015 and June 28, 2014.
Finite-lived intangible assets, which consist of customer bases and non-compete agreements, are amortized on a straight-line basis over their estimated useful lives. The estimated average amortization period for customer bases and non-compete agreements is 13 years and 3 years, respectively. Amortization expense related to other intangible assets was $6.2 million and
6
$12.5 million for the quarter and six months ended July 4, 2015, respectively, and $4.3 million and $10.7 million for the quarter and six months ended June 28, 2014, respectively.
5. Manufacturing Restructuring Costs
The Company discontinued its use of the warehouse facility adjacent to the Ennis manufacturing plant during the second quarter of 2009 and recorded a restructuring liability related to the discontinued use of the warehouse facility. During the quarter ended March 29, 2014, the Company re-measured its restructuring liability due to changes in the expected amount and timing of cash flows related to taxes and insurance over the remaining lease term. As a result, the Company decreased the restructuring liability and recognized a benefit of $0.3 million within selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Loss.
Changes in the manufacturing restructuring liability are as follows (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Balance at the beginning of the period | $ | 1,710 | $ | 2,166 | $ | 1,960 | $ | 2,772 | |||||||
Decrease | — | — | — | (331 | ) | ||||||||||
Accretion of related lease obligations | 38 | 128 | 152 | 252 | |||||||||||
Payments | (121 | ) | (185 | ) | (485 | ) | (584 | ) | |||||||
Balance at the end of the period | $ | 1,627 | $ | 2,109 | $ | 1,627 | $ | 2,109 |
The remaining restructuring liability is included in “Accrued liabilities” and “Other liabilities” in the Condensed Consolidated Balance Sheets and will continue to be paid over the lease term, which ends in April 2020.
6. Product Warranty Costs
Consistent with industry practice, the Company provides homeowners with limited warranties on certain products, primarily related to window and siding product categories.
Changes in the warranty reserve are as follows (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Balance at the beginning of the period | $ | 89,246 | $ | 92,638 | $ | 89,940 | $ | 93,207 | |||||||
Provision for warranties issued and changes in estimates for pre-existing warranties | 1,457 | 1,547 | 2,707 | 2,826 | |||||||||||
Claims paid | (1,735 | ) | (1,728 | ) | (3,063 | ) | (3,188 | ) | |||||||
Foreign currency translation | (67 | ) | 434 | (683 | ) | 46 | |||||||||
Balance at the end of the period | $ | 88,901 | $ | 92,891 | $ | 88,901 | $ | 92,891 |
On February 13, 2013, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement”) for a class action lawsuit filed by plaintiffs and a putative nationwide class of homeowners regarding certain warranty-related claims for steel and aluminum siding, which became effective on September 2, 2013. The Company expects to incur additional warranty costs associated with the Settlement; however, the Company does not believe the incremental costs, which currently cannot be estimated for recognition purposes, have been or will be material.
7. Executive Officers’ Separation and Hiring Costs
Separation and hiring costs related to the Company’s executive officers include payroll taxes, certain benefits and related professional fees, all of which are recorded as a component of selling, general and administrative expenses. For the quarter and six months ended July 4, 2015, the Company recorded $0.1 million of separation and hiring costs. For the quarter and six months ended June 28, 2014, the Company recorded $0.8 million and $2.8 million, respectively, of separation and hiring costs, primarily related to the resignations of Jerry W. Burris, the former President and Chief Executive Officer and David S. Nagle, the former Chief Operations Officer, AMI Distribution and Services, as well as the hiring of Dana R. Snyder as Interim Chief Executive Officer and the appointment of Brian C. Strauss as President and Chief Executive Officer in May 2014. As of July 4, 2015, the remaining balance payable to the Company’s former executives for separation costs was $0.4 million, which will be paid at various dates through 2016.
7
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
July 4, 2015 | January 3, 2015 | ||||||
9.125% Senior Secured Notes due 2017 | $ | 833,356 | $ | 834,004 | |||
Borrowings under the ABL facilities | 116,100 | 69,400 | |||||
Total long-term debt | $ | 949,456 | $ | 903,404 |
9.125% Senior Secured Notes due 2017
In October 2010, the Company and its wholly owned subsidiary, AMH New Finance, Inc. (collectively, the “Issuers”) issued and sold $730.0 million of 9.125% Senior Secured Notes due November 1, 2017 (the “existing notes”). The existing notes bear interest at a rate of 9.125% per annum, payable on May 1 and November 1 of each year, and are unconditionally guaranteed, jointly and severally, by each of the Issuers’ direct and indirect domestic subsidiaries that guarantees the Company’s obligations under its senior secured asset-based revolving credit facilities (the “ABL facilities”).
On May 1, 2013, the Issuers issued and sold an additional $100.0 million in aggregate principal amount of 9.125% Senior Secured Notes due November 1, 2017 (the “new notes” and, together with existing notes, the “9.125% notes”) at an issue price of 106.00% of the principal amount of the new notes in a private placement. The Company used the net proceeds of the offering to repay the outstanding borrowings under its ABL facilities and for other general corporate purposes. The new notes were issued as additional notes under the same indenture, dated as of October 13, 2010, governing the existing notes, as supplemented by a supplemental indenture (collectively, the “Indenture”). On October 31, 2013, all of the new notes were exchanged for 9.125% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933, as amended. The new notes are consolidated with and form a single class with the existing notes and have the same terms as to status, redemption, collateral and otherwise (other than issue date, issue price and first interest payment date) as the existing notes. The debt premium related to the issuance of the new notes is being amortized into interest expense over the life of the new notes. The unamortized premium of $3.4 million is included in the long-term debt balance for the 9.125% notes. The effective interest rate of the new notes, including the premium, is 7.5% as of July 4, 2015.
The 9.125% notes, at par value of $830.0 million, have an estimated fair value, classified as a Level 1 measurement, of $693.1 million and $652.8 million based on quoted market prices as of July 4, 2015 and January 3, 2015, respectively.
The Company may from time to time, in its sole discretion, purchase, redeem or retire the 9.125% notes in privately negotiated or open market transactions, by tender offer or otherwise.
ABL Facilities
In October 2010, the Company entered into the ABL facilities in the amount of $225.0 million (comprised of a $150.0 million U.S. facility and a $75.0 million Canadian facility) pursuant to a revolving credit agreement dated October 13, 2010, which was subsequently amended and restated on April 18, 2013 (the “Amended and Restated Revolving Credit Agreement”) to, among other things, extend the maturity date of the revolving credit agreement from October 13, 2015 to the earlier of (i) April 18, 2018 and (ii) 90 days prior to the maturity date of the existing notes. Subsequently, the Company terminated the tranche B revolving credit commitments of $12.0 million and wrote off $0.5 million of deferred financing fees related to the ABL facilities.
At the Company’s option, the U.S. and Canadian tranche A revolving credit loans under the Amended and Restated Revolving Credit Agreement governing the ABL facilities bear interest at the rate equal to (1) the London Interbank Offered Rate (“LIBOR”) (for eurodollar loans under the U.S. facility) or the Canadian Dealer Offered Rate (“CDOR”) (for loans under the Canadian facility), plus an applicable margin of 2.25% as of July 4, 2015, or (2) the alternate base rate (for alternate base rate loans under the U.S. facility, which is the highest of a prime rate, the Federal Funds Effective Rate plus 0.50% and a one-month LIBOR rate plus 1.0% per annum) or the alternate Canadian base rate (for loans under the Canadian facility, which is the higher of a Canadian prime rate and the 30-day CDOR plus 1.0%), plus an applicable margin of 1.25% as of July 4, 2015, in each case, which interest rate margin may vary in 25 basis point increments between three pricing levels determined by reference to the average excess availability in respect of the U.S. and Canadian tranche A revolving credit loans. In addition to paying interest on outstanding principal under the ABL facilities, the Company is required to pay a commitment fee in respect of the U.S. and Canadian tranche A revolving credit loans, payable quarterly in arrears, of 0.375%.
8
The Amended and Restated Revolving Credit Agreement contains 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 Amended and Restated Revolving Credit Agreement, other than a springing fixed charge coverage ratio of at least 1.00 to 1.00, which will be tested only when excess availability is less than the greater of (i) 10.0% of the sum of (x) the lesser of (A) the U.S. tranche A borrowing base and (B) the U.S. tranche A revolving credit commitments and (y) the lesser of (A) the Canadian tranche A borrowing base and (B) the Canadian tranche A revolving credit commitments and (ii) $20.0 million for a period of five consecutive business days until the 30th consecutive day when excess availability exceeds the above threshold.
On March 23, 2015, the Amended and Restated Revolving Credit Agreement was amended to permit, among other things, for the period commencing on and including April 3, 2015 through and including June 5, 2015, for the fixed charge coverage ratio to be tested or for a cash dominion period to commence only if excess availability is less than $15.0 million for a period of five consecutive business days. In addition, such amendment includes a provision for weekly borrowing base certificate reporting for the period commencing on and including April 12, 2015 through and including June 10, 2015 in lieu of delivery of a borrowing base certificate after each fiscal month.
The fixed charge coverage ratio was 0.50:1.00 for the four consecutive fiscal quarter test period ended July 4, 2015. The Company has not triggered such fixed charge coverage ratio covenant as of July 4, 2015, as excess availability of $44.3 million, as of such date was in excess of the covenant trigger threshold. The Company currently does not expect to trigger the fixed charge coverage ratio test for fiscal year 2015.
As of July 4, 2015, there was $116.1 million drawn under the Company’s ABL facilities and $64.3 million available for additional borrowings. The weighted average per annum interest rate applicable to borrowings under the U.S. portion and the Canadian portion of the ABL facilities was 2.6% and 4.5%, as of July 4, 2015. The Company had letters of credit outstanding of $12.4 million as of July 4, 2015 primarily securing insurance policy deductibles, certain lease facilities and the Company’s purchasing card program.
9. Income Taxes
The Company’s provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate and records the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
The components of the effective tax rate are as follows (in thousands, except percentage):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Loss before income taxes | $ | (2,908 | ) | $ | (9,290 | ) | $ | (40,697 | ) | $ | (54,198 | ) | |||
Income tax expense | 2,230 | 1,318 | 2,763 | 2,759 | |||||||||||
Effective tax rate | (76.7 | )% | (14.2 | )% | (6.8 | )% | (5.1 | )% |
The effective tax rates for the quarters and six months ended July 4, 2015 and June 28, 2014 vary from the statutory rate, primarily as a result of operating losses in the U.S. with no tax benefit recognized due to the valuation allowance against net U.S. deferred tax assets, and income tax expense on foreign income.
9
10. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, for the six months ended July 4, 2015 and June 28, 2014, respectively, are as follows (in thousands):
Defined Benefit Pension and Other Postretirement Plans | Foreign Currency Translation | Accumulated Other Comprehensive Loss | |||||||||
Balance at January 3, 2015 | $ | (23,781 | ) | $ | (36,842 | ) | $ | (60,623 | ) | ||
Other comprehensive loss before reclassifications, net of tax of $0 | — | (12,965 | ) | (12,965 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $31 | 299 | — | 299 | ||||||||
Balance at July 4, 2015 | $ | (23,482 | ) | $ | (49,807 | ) | $ | (73,289 | ) |
Defined Benefit Pension and Other Postretirement Plans | Foreign Currency Translation | Accumulated Other Comprehensive Loss | |||||||||
Balance at December 28, 2013 | $ | (3,513 | ) | $ | (14,403 | ) | $ | (17,916 | ) | ||
Other comprehensive income before reclassifications, net of tax of $0 | — | 1,157 | 1,157 | ||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $10 | 8 | — | 8 | ||||||||
Balance at June 28, 2014 | $ | (3,505 | ) | $ | (13,246 | ) | $ | (16,751 | ) |
Reclassifications out of accumulated other comprehensive loss for the quarters and six months ended July 4, 2015 and June 28, 2014, respectively, consist of the following (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Defined Benefit Pension and Other Postretirement Plans: | |||||||||||||||
Amortization of unrecognized prior service costs | $ | 6 | $ | 6 | $ | 13 | $ | 12 | |||||||
Amortization of unrecognized cumulative actuarial net loss | 159 | 3 | 317 | 6 | |||||||||||
Total before tax | 165 | 9 | 330 | 18 | |||||||||||
Tax expense | (14 | ) | (4 | ) | (31 | ) | (10 | ) | |||||||
Net of tax | $ | 151 | $ | 5 | $ | 299 | $ | 8 |
Amortization of prior service costs and actuarial losses are included in the computation of net periodic benefit cost for the Company’s pension and other postretirement benefit plans.
11. Stock Plans
In April 2015, the board of directors of Associated Materials Group, Inc. (“Parent”) and Parent’s stockholders approved an amendment and restatement to the Parent’s 2010 Stock Incentive Plan (“2010 Plan”) to increase the maximum number of shares which may be issued under the 2010 Plan by 1,500,000 from 7,550,076 to 9,050,076 shares of Parent common stock.
In June 2015, Parent’s board of directors modified certain time-based and performance-based options held by eligible participants to reduce the exercise price of such options. The number of options repriced was 4.5 million to 17 employees under the senior leadership team, with a weighted average exercise price prior to repricing of $9.23 and an average remaining contractual life of 8.8 years. The compensation cost related to this repricing resulted in additional unrecognized non-cash expense of $0.3 million that may be recognized over the remaining life of the options, subject to vesting conditions.
12. Retirement Plans
The Company sponsors defined benefit pension plans that cover hourly workers at its West Salem, Ohio plant, and hourly union employees at its Woodbridge, New Jersey plant, as well as a defined benefit retirement plan covering U.S. salaried employees, which was frozen in 1998 and subsequently replaced with a defined contribution plan (such plans collectively, the “Domestic Plans”). The Company also sponsors a defined benefit pension plan covering the Canadian salaried employees and hourly union employees at the Lambeth, Ontario plant, a defined benefit pension plan for the hourly union employees at its
10
Burlington, Ontario plant and a defined benefit pension plan for the hourly union employees at its Pointe Claire, Quebec plant (such plans collectively, the “Foreign Plans”). In 2014, the pension plans for Pointe Claire and Burlington were amended to reflect an increase in benefits, effective November 15, 2015 and September 1, 2016, respectively. Also, the Pointe Claire plan was amended to disallow a lump sum payment feature that triggered settlement losses recorded in previous years.
The Company also provides postretirement benefits other than pension (“OPEB Plans”) including health care or life insurance benefits to certain U.S. and Canadian retirees and in some cases, their spouses and dependents. The Company’s postretirement benefit plans in the U.S. include an unfunded health care plan for hourly workers at the Company’s former steel siding plant in Cuyahoga Falls, Ohio. With the closure of this facility in 1991, no additional employees are eligible to participate in this plan. There are three other U.S. unfunded plans covering either life insurance or health care benefits for small frozen groups of retirees. The Company’s foreign postretirement benefit plan provides life insurance benefits to active members at its Pointe Claire, Quebec plant and a closed group of Canadian salaried retirees. The actuarial valuation measurement date for the defined benefit pension plans and postretirement benefits other than pension is December 31.
Components of net periodic benefit cost for the Company’s Domestic Plans, Foreign Plans and OPEB Plans are as follows (in thousands):
Quarters Ended | |||||||||||||||||||||||
July 4, 2015 | June 28, 2014 | ||||||||||||||||||||||
Domestic Plans | Foreign Plans | OPEB Plans | Domestic Plans | Foreign Plans | OPEB Plans | ||||||||||||||||||
Service cost | $ | 331 | $ | 649 | $ | 2 | $ | 323 | $ | 606 | $ | 3 | |||||||||||
Interest cost | 806 | 802 | 44 | 788 | 924 | 49 | |||||||||||||||||
Expected return on assets | (973 | ) | (952 | ) | — | (1,018 | ) | (1,095 | ) | — | |||||||||||||
Amortization of unrecognized: | |||||||||||||||||||||||
Prior service costs (credits) | 3 | 5 | (2 | ) | 3 | 5 | (2 | ) | |||||||||||||||
Cumulative actuarial net loss (gains) | 104 | 60 | (5 | ) | — | 14 | (11 | ) | |||||||||||||||
Net periodic benefit cost | $ | 271 | $ | 564 | $ | 39 | $ | 96 | $ | 454 | $ | 39 |
Six Months Ended | |||||||||||||||||||||||
July 4, 2015 | June 28, 2014 | ||||||||||||||||||||||
Domestic Plans | Foreign Plans | OPEB Plans | Domestic Plans | Foreign Plans | OPEB Plans | ||||||||||||||||||
Service cost | $ | 662 | $ | 1,290 | $ | 6 | $ | 645 | $ | 1,197 | $ | 6 | |||||||||||
Interest cost | 1,612 | 1,593 | 87 | 1,576 | 1,827 | 98 | |||||||||||||||||
Expected return on assets | (1,946 | ) | (1,890 | ) | — | (2,036 | ) | (2,164 | ) | — | |||||||||||||
Amortization of unrecognized: | |||||||||||||||||||||||
Prior service costs (credits) | 6 | 11 | (4 | ) | 6 | 10 | (4 | ) | |||||||||||||||
Cumulative actuarial net loss (gains) | 208 | 119 | (10 | ) | — | 28 | (22 | ) | |||||||||||||||
Net periodic benefit cost | $ | 542 | $ | 1,123 | $ | 79 | $ | 191 | $ | 898 | $ | 78 |
Although changes in market conditions, 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.
13. Commitments and Contingencies
The Company is involved from time to time in litigation arising in the ordinary course of business, none of which, individually or in the aggregate, after giving effect to its existing insurance coverage, is expected to have a material adverse effect on its financial position, results of operations or liquidity. From time to time, the Company is also involved in proceedings and potential proceedings relating to environmental and product liability matters.
11
Environmental Claims
The Woodbridge, New Jersey facility is currently the subject of an investigation and/or remediation before the New Jersey Department of Environmental Protection (“NJDEP”) under ISRA Case No. E20030110 for the Company’s wholly owned subsidiary Gentek Building Products, Inc. (“Gentek”). The facility is currently leased by Gentek. Previous operations at the facility resulted in soil and groundwater contamination in certain areas of the property. In 1999, the property owner and Gentek signed a remediation agreement with NJDEP, pursuant to which the property owner and Gentek agreed to continue an investigation/remediation that had been commenced pursuant to a Memorandum of Agreement with NJDEP. Under the remediation agreement, NJDEP required posting of a remediation funding source of $0.1 million, which is currently satisfied by a $0.3 million standby letter of credit that was provided by Gentek to the NJDEP. During 2014, the delineation studies were completed and in early 2015 the Company was presented with several remedial plans. Based on the alternatives presented, the Company identified what it believed to be the most likely option and recorded the minimum liability for that option, which totaled $1.0 million as of January 3, 2015, the balance of which remains unchanged as of July 4, 2015. The Company believes this matter will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Environmental claims, product liability claims and other claims are administered by the Company in the ordinary course of business, and the Company maintains pollution and remediation and product liability insurance covering certain types of claims. Although it is difficult to estimate the Company’s potential exposure to these matters, the Company believes that the resolution of these matters will not have a material adverse effect on its financial position, results of operations or liquidity.
14. Business Segments
The Company is in the business of manufacturing and distributing exterior residential building products. The Company has a single operating segment and a single reportable segment. The Company’s chief operating decision maker is considered to be the Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the single operating segment level.
The following table sets forth a summary of net sales by principal product offering (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Vinyl windows | $ | 117,387 | $ | 106,390 | $ | 199,641 | $ | 176,030 | |||||||
Vinyl siding products | 58,353 | 59,628 | 93,518 | 93,722 | |||||||||||
Metal products | 41,837 | 40,500 | 70,244 | 67,807 | |||||||||||
Third-party manufactured products | 80,971 | 84,283 | 128,470 | 127,195 | |||||||||||
Other products and services | 32,701 | 29,074 | 59,742 | 51,710 | |||||||||||
$ | 331,249 | $ | 319,875 | $ | 551,615 | $ | 516,464 |
15. Subsidiary Guarantors
The Company’s payment obligations under its 9.125% notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis, by its domestic 100% owned subsidiaries, Gentek Holdings, LLC and Gentek Building Products, Inc. (together, the “Subsidiary Guarantors”). AMH New Finance, Inc. is a co-issuer of the 9.125% notes and is a domestic 100% 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 9.125% notes. In the opinion of management, separate financial statements of the respective Subsidiary Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Subsidiary Guarantors.
12
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
July 4, 2015
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 3,194 | $ | — | $ | — | $ | 835 | $ | — | $ | 4,029 | |||||||||||
Accounts receivable, net | 123,256 | — | 9,151 | 31,508 | — | 163,915 | |||||||||||||||||
Intercompany receivables | 331,936 | — | 53,839 | 1,794 | (387,569 | ) | — | ||||||||||||||||
Inventories | 113,536 | — | 9,316 | 41,726 | — | 164,578 | |||||||||||||||||
Income taxes receivable | 68 | — | 67 | — | — | 135 | |||||||||||||||||
Deferred income taxes | 487 | — | 1,952 | — | — | 2,439 | |||||||||||||||||
Prepaid expenses and other current assets | 9,562 | — | 779 | 1,457 | — | 11,798 | |||||||||||||||||
Total current assets | 582,039 | — | 75,104 | 77,320 | (387,569 | ) | 346,894 | ||||||||||||||||
Property, plant and equipment, net | 66,136 | — | 1,353 | 27,300 | — | 94,789 | |||||||||||||||||
Goodwill | 203,841 | — | 16,713 | 90,640 | — | 311,194 | |||||||||||||||||
Other intangible assets, net | 295,121 | — | 32,858 | 90,575 | — | 418,554 | |||||||||||||||||
Intercompany receivable | — | 833,356 | — | — | (833,356 | ) | — | ||||||||||||||||
Other assets | 14,521 | — | 17 | 1,337 | — | 15,875 | |||||||||||||||||
Total assets | $ | 1,161,658 | $ | 833,356 | $ | 126,045 | $ | 287,172 | $ | (1,220,925 | ) | $ | 1,187,306 | ||||||||||
LIABILITIES AND MEMBER'S DEFICIT | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 103,086 | $ | — | $ | 3,198 | $ | 34,137 | $ | — | $ | 140,421 | |||||||||||
Intercompany payables | 1,794 | — | — | 385,775 | (387,569 | ) | — | ||||||||||||||||
Accrued liabilities | 64,724 | — | 4,464 | 7,839 | — | 77,027 | |||||||||||||||||
Deferred income taxes | 905 | — | — | 1,211 | — | 2,116 | |||||||||||||||||
Income taxes payable | — | — | — | 1,779 | — | 1,779 | |||||||||||||||||
Total current liabilities | 170,509 | — | 7,662 | 430,741 | (387,569 | ) | 221,343 | ||||||||||||||||
Deferred income taxes | 51,012 | — | 13,295 | 22,551 | — | 86,858 | |||||||||||||||||
Other liabilities | 81,176 | — | 22,428 | 20,245 | — | 123,849 | |||||||||||||||||
Deficit in subsidiaries | 140,305 | — | 222,965 | — | (363,270 | ) | — | ||||||||||||||||
Long-term debt | 912,856 | 833,356 | — | 36,600 | (833,356 | ) | 949,456 | ||||||||||||||||
Member’s deficit | (194,200 | ) | — | (140,305 | ) | (222,965 | ) | 363,270 | (194,200 | ) | |||||||||||||
Total liabilities and member’s deficit | $ | 1,161,658 | $ | 833,356 | $ | 126,045 | $ | 287,172 | $ | (1,220,925 | ) | $ | 1,187,306 |
13
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
For The Quarter Ended July 4, 2015
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | 262,272 | $ | — | $ | 42,578 | $ | 77,477 | $ | (51,078 | ) | $ | 331,249 | ||||||||||
Cost of sales | 201,659 | — | 41,001 | 58,652 | (51,078 | ) | 250,234 | ||||||||||||||||
Gross profit | 60,613 | — | 1,577 | 18,825 | — | 81,015 | |||||||||||||||||
Selling, general and administrative expenses | 49,194 | — | 2,526 | 10,446 | — | 62,166 | |||||||||||||||||
Income (loss) from operations | 11,419 | — | (949 | ) | 8,379 | — | 18,849 | ||||||||||||||||
Interest expense, net | 19,276 | — | 1,662 | 218 | — | 21,156 | |||||||||||||||||
Foreign currency loss | — | — | — | 601 | — | 601 | |||||||||||||||||
(Loss) income before income taxes | (7,857 | ) | — | (2,611 | ) | 7,560 | — | (2,908 | ) | ||||||||||||||
Income tax expense | 179 | — | 53 | 1,998 | — | 2,230 | |||||||||||||||||
(Loss) income before equity income from subsidiaries | (8,036 | ) | — | (2,664 | ) | 5,562 | — | (5,138 | ) | ||||||||||||||
Equity income from subsidiaries | 2,898 | — | 5,562 | — | (8,460 | ) | — | ||||||||||||||||
Net (loss) income | (5,138 | ) | — | 2,898 | 5,562 | (8,460 | ) | (5,138 | ) | ||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Pension and other postretirement benefit adjustments, net of tax | 151 | — | 60 | 50 | (110 | ) | 151 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | (1,379 | ) | — | (1,379 | ) | (1,379 | ) | 2,758 | (1,379 | ) | |||||||||||||
Total comprehensive (loss) income | $ | (6,366 | ) | $ | — | $ | 1,579 | $ | 4,233 | $ | (5,812 | ) | $ | (6,366 | ) |
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS
For The Six Months Ended July 4, 2015
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | 441,910 | $ | — | $ | 72,740 | $ | 124,725 | $ | (87,760 | ) | $ | 551,615 | ||||||||||
Cost of sales | 350,626 | — | 69,807 | 96,024 | (87,760 | ) | 428,697 | ||||||||||||||||
Gross profit | 91,284 | — | 2,933 | 28,701 | — | 122,918 | |||||||||||||||||
Selling, general and administrative expenses | 96,851 | — | 3,370 | 20,415 | — | 120,636 | |||||||||||||||||
(Loss) income from operations | (5,567 | ) | — | (437 | ) | 8,286 | — | 2,282 | |||||||||||||||
Interest expense, net | 38,064 | — | 3,323 | 475 | — | 41,862 | |||||||||||||||||
Foreign currency loss | — | — | — | 1,117 | — | 1,117 | |||||||||||||||||
(Loss) income before income taxes | (43,631 | ) | — | (3,760 | ) | 6,694 | — | (40,697 | ) | ||||||||||||||
Income tax expense | 905 | — | 77 | 1,781 | — | 2,763 | |||||||||||||||||
(Loss) income before equity income from subsidiaries | (44,536 | ) | — | (3,837 | ) | 4,913 | — | (43,460 | ) | ||||||||||||||
Equity income from subsidiaries | 1,076 | — | 4,913 | — | (5,989 | ) | — | ||||||||||||||||
Net (loss) income | (43,460 | ) | — | 1,076 | 4,913 | (5,989 | ) | (43,460 | ) | ||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Pension and other postretirement benefit adjustments, net of tax | 299 | — | 118 | 98 | (216 | ) | 299 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | (12,965 | ) | — | (12,965 | ) | (12,965 | ) | 25,930 | (12,965 | ) | |||||||||||||
Total comprehensive loss | $ | (56,126 | ) | $ | — | $ | (11,771 | ) | $ | (7,954 | ) | $ | 19,725 | $ | (56,126 | ) |
14
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended July 4, 2015
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/Eliminations | Consolidated | ||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (33,721 | ) | $ | — | $ | 6,787 | $ | (11,745 | ) | $ | — | $ | (38,679 | ) | ||||||||
INVESTING ACTIVITIES | |||||||||||||||||||||||
Capital expenditures | (8,731 | ) | — | (81 | ) | (1,089 | ) | — | (9,901 | ) | |||||||||||||
Proceeds from the sale of assets | 7 | — | — | 1 | — | 8 | |||||||||||||||||
Payments on loans to affiliates | — | — | (6,706 | ) | (25,000 | ) | 31,706 | — | |||||||||||||||
Receipts on loans to affiliates | 2,000 | — | — | 7,500 | (9,500 | ) | — | ||||||||||||||||
Net cash used in investing activities | (6,724 | ) | — | (6,787 | ) | (18,588 | ) | 22,206 | (9,893 | ) | |||||||||||||
FINANCING ACTIVITIES | |||||||||||||||||||||||
Borrowings under ABL facilities | 48,200 | — | — | 51,531 | — | 99,731 | |||||||||||||||||
Payments under ABL facilities | (34,700 | ) | — | — | (18,353 | ) | — | (53,053 | ) | ||||||||||||||
Borrowings from affiliates | 31,706 | — | — | — | (31,706 | ) | — | ||||||||||||||||
Repayments to affiliates | (7,500 | ) | — | — | (2,000 | ) | 9,500 | — | |||||||||||||||
Net cash provided by financing activities | 37,706 | — | — | 31,178 | (22,206 | ) | 46,678 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | (40 | ) | — | (40 | ) | |||||||||||||||
Net (decrease) increase in cash and cash equivalents | (2,739 | ) | — | — | 805 | — | (1,934 | ) | |||||||||||||||
Cash and cash equivalents at beginning of period | 5,933 | — | — | 30 | — | 5,963 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 3,194 | $ | — | $ | — | $ | 835 | $ | — | $ | 4,029 |
15
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
January 3, 2015
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 5,933 | $ | — | $ | — | $ | 30 | $ | — | $ | 5,963 | |||||||||||
Accounts receivable, net | 98,945 | — | 6,411 | 19,765 | — | 125,121 | |||||||||||||||||
Intercompany receivables | 356,421 | — | 61,740 | 1,794 | (419,955 | ) | — | ||||||||||||||||
Inventories | 100,487 | — | 10,969 | 34,076 | — | 145,532 | |||||||||||||||||
Income taxes receivable | — | — | 144 | — | — | 144 | |||||||||||||||||
Deferred income taxes | 487 | — | 1,952 | — | — | 2,439 | |||||||||||||||||
Prepaid expenses and other current assets | 13,422 | — | 996 | 1,441 | — | 15,859 | |||||||||||||||||
Total current assets | 575,695 | — | 82,212 | 57,106 | (419,955 | ) | 295,058 | ||||||||||||||||
Property, plant and equipment, net | 62,977 | — | 1,474 | 29,449 | — | 93,900 | |||||||||||||||||
Goodwill | 203,841 | — | 16,713 | 96,703 | — | 317,257 | |||||||||||||||||
Other intangible assets, net | 305,127 | — | 33,084 | 99,089 | — | 437,300 | |||||||||||||||||
Intercompany receivable | — | 834,004 | — | — | (834,004 | ) | — | ||||||||||||||||
Other assets | 17,246 | — | 45 | 1,371 | — | 18,662 | |||||||||||||||||
Total assets | $ | 1,164,886 | $ | 834,004 | $ | 133,528 | $ | 283,718 | $ | (1,253,959 | ) | $ | 1,162,177 | ||||||||||
Liabilities and Member's Deficit | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 67,160 | $ | — | $ | 6,679 | $ | 20,929 | $ | — | $ | 94,768 | |||||||||||
Intercompany payables | 1,794 | — | — | 418,161 | (419,955 | ) | — | ||||||||||||||||
Accrued liabilities | 70,439 | — | 4,683 | 6,612 | — | 81,734 | |||||||||||||||||
Deferred income taxes | — | — | — | 1,292 | — | 1,292 | |||||||||||||||||
Income taxes payable | 46 | — | — | 1,736 | — | 1,782 | |||||||||||||||||
Total current liabilities | 139,439 | — | 11,362 | 448,730 | (419,955 | ) | 179,576 | ||||||||||||||||
Deferred income taxes | 51,012 | — | 13,295 | 24,023 | — | 88,330 | |||||||||||||||||
Other liabilities | 84,048 | — | 22,395 | 22,573 | — | 129,016 | |||||||||||||||||
Deficit in subsidiaries | 128,532 | — | 215,008 | — | (343,540 | ) | — | ||||||||||||||||
Long-term debt | 900,004 | 834,004 | — | 3,400 | (834,004 | ) | 903,404 | ||||||||||||||||
Member’s deficit | (138,149 | ) | — | (128,532 | ) | (215,008 | ) | 343,540 | (138,149 | ) | |||||||||||||
Total liabilities and member’s deficit | $ | 1,164,886 | $ | 834,004 | $ | 133,528 | $ | 283,718 | $ | (1,253,959 | ) | $ | 1,162,177 |
16
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
For The Quarter Ended June 28, 2014
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | 251,215 | $ | — | $ | 45,778 | $ | 79,125 | $ | (56,243 | ) | $ | 319,875 | ||||||||||
Cost of sales | 201,020 | — | 42,595 | 60,490 | (56,243 | ) | 247,862 | ||||||||||||||||
Gross profit | 50,195 | — | 3,183 | 18,635 | — | 72,013 | |||||||||||||||||
Selling, general and administrative expenses | 48,100 | — | 1,104 | 11,062 | — | 60,266 | |||||||||||||||||
Income from operations | 2,095 | — | 2,079 | 7,573 | — | 11,747 | |||||||||||||||||
Interest expense, net | 20,292 | — | — | 467 | — | 20,759 | |||||||||||||||||
Foreign currency loss | — | — | — | 278 | — | 278 | |||||||||||||||||
(Loss) income before income taxes | (18,197 | ) | — | 2,079 | 6,828 | — | (9,290 | ) | |||||||||||||||
Income tax (benefit) expense | (378 | ) | — | (36 | ) | 1,732 | — | 1,318 | |||||||||||||||
(Loss) income before equity income from subsidiaries | (17,819 | ) | — | 2,115 | 5,096 | — | (10,608 | ) | |||||||||||||||
Equity income from subsidiaries | 7,211 | — | 5,096 | — | (12,307 | ) | — | ||||||||||||||||
Net (loss) income | (10,608 | ) | — | 7,211 | 5,096 | (12,307 | ) | (10,608 | ) | ||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Pension and other postretirement benefit adjustments, net of tax | 5 | — | 13 | 14 | (27 | ) | 5 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | 10,211 | — | 10,211 | 10,211 | (20,422 | ) | 10,211 | ||||||||||||||||
Total comprehensive (loss) income | $ | (392 | ) | $ | — | $ | 17,435 | $ | 15,321 | $ | (32,756 | ) | $ | (392 | ) |
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
For The Six Months Ended June 28, 2014
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/ Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | 408,154 | $ | — | $ | 76,440 | $ | 123,819 | $ | (91,949 | ) | $ | 516,464 | ||||||||||
Cost of sales | 335,338 | — | 71,545 | 95,102 | (91,949 | ) | 410,036 | ||||||||||||||||
Gross profit | 72,816 | — | 4,895 | 28,717 | — | 106,428 | |||||||||||||||||
Selling, general and administrative expenses | 95,899 | — | 2,046 | 20,986 | — | 118,931 | |||||||||||||||||
(Loss) income from operations | (23,083 | ) | — | 2,849 | 7,731 | — | (12,503 | ) | |||||||||||||||
Interest expense, net | 40,264 | — | 1 | 814 | — | 41,079 | |||||||||||||||||
Foreign currency loss | — | — | — | 616 | — | 616 | |||||||||||||||||
(Loss) income before income taxes | (63,347 | ) | — | 2,848 | 6,301 | — | (54,198 | ) | |||||||||||||||
Income tax expense (benefit) | 1,256 | — | (63 | ) | 1,566 | — | 2,759 | ||||||||||||||||
(Loss) income before equity income from subsidiaries | (64,603 | ) | — | 2,911 | 4,735 | — | (56,957 | ) | |||||||||||||||
Equity income from subsidiaries | 7,646 | — | 4,735 | — | (12,381 | ) | — | ||||||||||||||||
Net (loss) income | (56,957 | ) | — | 7,646 | 4,735 | (12,381 | ) | (56,957 | ) | ||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Pension and other postretirement benefit adjustments, net of tax | 8 | — | 25 | 28 | (53 | ) | 8 | ||||||||||||||||
Foreign currency translation adjustments, net of tax | 1,157 | — | 1,157 | 1,157 | (2,314 | ) | 1,157 | ||||||||||||||||
Total comprehensive (loss) income | $ | (55,792 | ) | $ | — | $ | 8,828 | $ | 5,920 | $ | (14,748 | ) | $ | (55,792 | ) |
17
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For The Six Months Ended June 28, 2014
(Unaudited, in thousands)
Company | Co-Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Reclassification/Eliminations | Consolidated | ||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (76,034 | ) | $ | — | $ | 5,938 | $ | (18,335 | ) | $ | — | $ | (88,431 | ) | ||||||||
INVESTING ACTIVITIES | |||||||||||||||||||||||
Capital expenditures | (4,528 | ) | — | (249 | ) | (468 | ) | — | (5,245 | ) | |||||||||||||
Proceeds from the sale of assets | 5 | — | — | 2 | — | 7 | |||||||||||||||||
Payments on loans to affiliates | — | — | (5,689 | ) | — | 5,689 | — | ||||||||||||||||
Net cash used in investing activities | (4,523 | ) | — | (5,938 | ) | (466 | ) | 5,689 | (5,238 | ) | |||||||||||||
FINANCING ACTIVITIES | |||||||||||||||||||||||
Borrowings under ABL facilities | 94,700 | — | — | 26,542 | — | 121,242 | |||||||||||||||||
Payments under ABL facilities | (20,700 | ) | — | — | (20,428 | ) | — | (41,128 | ) | ||||||||||||||
Borrowings from affiliates | 5,689 | — | — | — | (5,689 | ) | — | ||||||||||||||||
Net cash provided by financing activities | 79,689 | — | — | 6,114 | (5,689 | ) | 80,114 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | (417 | ) | — | (417 | ) | |||||||||||||||
Net decrease in cash and cash equivalents | (868 | ) | — | — | (13,104 | ) | — | (13,972 | ) | ||||||||||||||
Cash and cash equivalents at beginning of period | 7,566 | — | — | 13,249 | — | 20,815 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 6,698 | $ | — | $ | — | $ | 145 | $ | — | $ | 6,843 |
18
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A. “Risk Factors” in our Annual Report and under Part II, Item 1A. “Risk Factors” or elsewhere in this report.
Overview
Associated Materials, LLC (“we,” “us,” “our” or “our Company”) is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States and Canada. We were founded in 1947 when we first introduced residential aluminum siding under the Alside® name. We offer a comprehensive range of exterior building products, including vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories, which we produce at our 11 manufacturing facilities. We also sell complementary products that we source from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors and equipment and tools. We also provide installation services. We distribute these products through our extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom we refer to as our “contractor customers.” This dual distribution network consists of 124 company-operated supply centers, through which we sell directly to our contractor customers, and our direct sales channel. Through our direct sales channel we sell to more than 275 independent distributors, dealers and national account customers. The products we sell are primarily marketed under our brand names, including Alside®, Revere®, Gentek®, Preservation® and Alpine®.
Because most of our building products are intended for exterior use, our sales and operating profits 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, we have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have generally utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters.
Net sales for the quarter ended July 4, 2015 were $331.2 million, representing an increase of $11.3 million, or 3.6%, compared to $319.9 million for the same period in 2014. The sales growth was primarily driven by higher sales of our integrated products, particularly in our vinyl windows business, which was attributable to a combination of higher sales volume and average selling prices.
Gross profit for the quarter ended July 4, 2015 was $81.0 million, or 24.5% of net sales, compared to $72.0 million, or 22.5% of net sales, for the same period in 2014. Compared to the prior year quarter, we achieved an approximate 200 basis point increase in gross profit margin as a result of our continued focus on driving profitability through our integrated product offerings. The $9.0 million improvement in gross profit was predominantly attributable to the continued improvement in our windows business, which resulted from higher sales volume and average selling prices, as well as improved operational execution, compared to the prior year quarter. Furthermore, we also incurred fewer costs related to the continued roll out of our new window platform on the West Coast in the current year, compared to the launch on the East Coast in the prior year.
Selling, general and administrative (“SG&A”) expenses for the quarter ended July 4, 2015 were $62.2 million, compared to $60.3 million of net sales for the same period in 2014, reflecting 18.8% of net sales for each period. The $1.9 million, or 3.2%, increase in SG&A expenses was primarily due to an increase in costs associated with the performance-based incentive program resulting from improved operating results in 2015 and higher employee compensation expense to support the growth of our ISS business, supply center operations and other corporate initiatives.
Income from operations was $18.8 million for the quarter ended July 4, 2015, increased $7.1 million, compared to $11.7 million for the quarter ended June 28, 2014.
Our results for the quarter ended July 4, 2015 were significantly impacted by a weaker Canadian dollar, compared to the prior year quarter. Foreign currency translation negatively impacted net sales, gross profit and operating income by approximately $9 million, $7 million and $5 million, respectively. Furthermore, the quarter ended July 4, 2015 included one less sales day, compared to the quarter ended June 28, 2014.
19
Results of Operations
The following table sets forth our results of operations for the periods indicated (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Net sales (1) | $ | 331,249 | $ | 319,875 | $ | 551,615 | $ | 516,464 | |||||||
Cost of sales | 250,234 | 247,862 | 428,697 | 410,036 | |||||||||||
Gross profit | 81,015 | 72,013 | 122,918 | 106,428 | |||||||||||
Selling, general and administrative expenses | 62,166 | 60,266 | 120,636 | 118,931 | |||||||||||
Income (loss) from operations | 18,849 | 11,747 | 2,282 | (12,503 | ) | ||||||||||
Interest expense | 21,156 | 20,759 | 41,862 | 41,079 | |||||||||||
Foreign currency loss | 601 | 278 | 1,117 | 616 | |||||||||||
Loss before income taxes | (2,908 | ) | (9,290 | ) | (40,697 | ) | (54,198 | ) | |||||||
Income tax expense | 2,230 | 1,318 | 2,763 | 2,759 | |||||||||||
Net loss | $ | (5,138 | ) | $ | (10,608 | ) | $ | (43,460 | ) | $ | (56,957 | ) | |||
Other Data: | |||||||||||||||
EBITDA (2) | $ | 28,296 | $ | 22,158 | $ | 21,092 | $ | 8,148 | |||||||
Adjusted EBITDA (2) | 30,526 | 27,540 | 24,129 | 20,675 |
(1) | The following table presents a summary of net sales by principal product offering as a percentage of net sales (dollars in thousands): |
Quarters Ended | Six Months Ended | ||||||||||||||||||||||
July 4, 2015 | % of Net Sales | June 28, 2014 | % of Net Sales | July 4, 2015 | % of Net Sales | June 28, 2014 | % of Net Sales | ||||||||||||||||
Vinyl windows | $ | 117,387 | 35.4 | % | $ | 106,390 | 33.3 | % | $ | 199,641 | 36.2 | % | $ | 176,030 | 34.1 | % | |||||||
Vinyl siding products | 58,353 | 17.6 | % | 59,628 | 18.6 | % | 93,518 | 17.0 | % | 93,722 | 18.1 | % | |||||||||||
Metal products | 41,837 | 12.6 | % | 40,500 | 12.7 | % | 70,244 | 12.7 | % | 67,807 | 13.1 | % | |||||||||||
Third-party manufactured products | 80,971 | 24.4 | % | 84,283 | 26.3 | % | 128,470 | 23.3 | % | 127,195 | 24.6 | % | |||||||||||
Other products and services | 32,701 | 10.0 | % | 29,074 | 9.1 | % | 59,742 | 10.8 | % | 51,710 | 10.1 | % | |||||||||||
$ | 331,249 | 100.0 | % | $ | 319,875 | 100.0 | % | $ | 551,615 | 100.0 | % | $ | 516,464 | 100.0 | % |
(2) | EBITDA is calculated as net income plus interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted to reflect certain adjustments that are used in calculating covenant compliance under the Amended and Restated Revolving Credit Agreement governing our senior secured asset-based revolving credit facilities (the “ABL facilities”) and the indenture governing our 9.125% Senior Secured Notes due November 1, 2017 (the “Indenture”). We consider EBITDA and Adjusted EBITDA to be important indicators of our operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (i) assess our ability to service our debt or incur debt and meet our capital expenditure requirements; (ii) internally measure our operating performance; and (iii) determine our incentive compensation programs. EBITDA and Adjusted EBITDA have not been prepared in accordance with U.S. general accepted accounting principles (“GAAP”). Adjusted EBITDA as presented by us may not be comparable to similarly titled measures reported by other companies. EBITDA and Adjusted EBITDA are not measures determined in accordance with GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results or net cash provided by operating activities (as determined in accordance with GAAP) as a measure of our liquidity. |
20
The reconciliation of our net loss to EBITDA and Adjusted EBITDA is as follows (in thousands):
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Net loss | $ | (5,138 | ) | $ | (10,608 | ) | $ | (43,460 | ) | $ | (56,957 | ) | |||
Interest expense | 21,156 | 20,759 | 41,862 | 41,079 | |||||||||||
Income tax expense | 2,230 | 1,318 | 2,763 | 2,759 | |||||||||||
Depreciation and amortization | 10,048 | 10,689 | 19,927 | 21,267 | |||||||||||
EBITDA | 28,296 | 22,158 | 21,092 | 8,148 | |||||||||||
Purchase accounting related adjustments (a) | (874 | ) | (958 | ) | (1,751 | ) | (1,904 | ) | |||||||
Restructuring costs (b) | — | — | — | (331 | ) | ||||||||||
Executive officer separation and hiring costs (c) | 110 | 765 | 152 | 2,748 | |||||||||||
Bank audit fees (d) | 44 | (4 | ) | 76 | 26 | ||||||||||
Loss on disposal or write-off of assets | 3 | 7 | 3 | 18 | |||||||||||
Stock-based compensation expense (e) | 50 | 77 | 75 | 354 | |||||||||||
Non-cash expense adjustments (f) | (100 | ) | — | — | — | ||||||||||
Other normalizing and unusual items (g) | 2,396 | 5,217 | 3,365 | 11,000 | |||||||||||
Foreign currency loss (h) | 601 | 278 | 1,117 | 616 | |||||||||||
Run-rate cost savings (i) | — | — | — | — | |||||||||||
Adjusted EBITDA | $ | 30,526 | $ | 27,540 | $ | 24,129 | $ | 20,675 |
(a) | Represents the elimination of the impact of purchase accounting adjustments recorded as a result of a series of mergers completed on October 13, 2010, which include the following (in thousands): |
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Pension expense adjustment | $ | (634 | ) | $ | (658 | ) | $ | (1,265 | ) | $ | (1,310 | ) | |||
Amortization related to fair value adjustment of leased facilities | (62 | ) | (119 | ) | (130 | ) | (232 | ) | |||||||
Amortization related to warranty liabilities | (178 | ) | (181 | ) | (356 | ) | (362 | ) | |||||||
Total | $ | (874 | ) | $ | (958 | ) | $ | (1,751 | ) | $ | (1,904 | ) |
(b) | Represents a decrease in manufacturing restructuring charges recorded during the quarter ended March 29, 2014 as a result of the re-measurement of the restructuring liability related to the warehouse facility adjacent to our Ennis manufacturing plant, which we discontinued using during 2009. |
(c) | Represents separation and hiring costs, including payroll taxes and certain benefits and professional fees. For the quarter and six months ended June 28, 2014, the costs were primarily related to the resignations of Mr. Burris, our former President and Chief Executive Officer and Mr. Nagle, our former Chief Operations Officer, AMI Distribution and Services, as well as the hiring of Mr. Snyder as Interim Chief Executive Officer and the appointment of Mr. Strauss as President and Chief Executive Officer in May 2014. |
(d) | Represents bank audit fees incurred under our ABL facilities. |
(e) | Represents equity-based compensation related to restricted shares or deferred stock units issued to certain of our directors and officers. |
(f) | Represents the non-cash expense related to warranties claims paid in excess of warranty provision. |
21
(g) | Represents the following (in thousands): |
Quarters Ended | Six Months Ended | ||||||||||||||
July 4, 2015 | June 28, 2014 | July 4, 2015 | June 28, 2014 | ||||||||||||
Professional fees and other costs (i) | $ | 1,086 | $ | 3,951 | $ | 1,927 | $ | 9,475 | |||||||
Accretion on lease liability (ii) | 38 | 128 | 152 | 253 | |||||||||||
Excess severance costs (iii) | 58 | 87 | 72 | 183 | |||||||||||
Insurance deductible due to flood damage (iv) | — | 100 | — | 100 | |||||||||||
Payroll costs due to change of employment classification (v) | — | 928 | — | 928 | |||||||||||
Excess legal expense (vi) | 1,214 | 23 | 1,214 | 61 | |||||||||||
Total | $ | 2,396 | $ | 5,217 | $ | 3,365 | $ | 11,000 |
(i) | Represents management’s estimate of unusual consulting and advisory fees and other costs associated with corporate strategic initiatives. For the quarter and six months ended June 28, 2014, we incurred costs of $3.2 million and $7.9 million, respectively, related to the launch of our new window platform on the East Coast in 2014. We incurred costs of $0.5 million and $1.0 million, respectively, for the quarter and six months ended July 4, 2015 related to the continued roll out of the new window platform on the West Coast. |
(ii) | Represents accretion on the liability recorded at present value for future lease costs in connection with the warehouse facility adjacent to our Ennis manufacturing plant, which we discontinued using during 2009. |
(iii) | Represents management’s estimates for excess severance expense, primarily due to unusual changes within non-executive management. |
(iv) | Represents expenses incurred related to flood damage at our corporate headquarters building in May 2014. |
(v) | Represents additional payroll costs that were incurred related to a change of employment classification from exempt to non-exempt for certain non-managerial U.S. supply center-based employees. |
(vi) | Represents excess legal expense incurred primarily in connection with the defense of actions filed by plaintiffs. The expense for the quarter and six months ended July 4, 2015 represents legal costs for a lawsuit that we expect to settle in the second half of 2015. |
(h) | Represents foreign currency loss recognized in the Condensed Consolidated Statements of Comprehensive Loss, including (gain) loss on foreign currency exchange hedging agreements. |
(i) | Represents our estimate of run-rate cost savings related to actions taken or to be taken within 12 months after the consummation of any acquisition, amalgamation, merger or operational change and prior to or during such period, calculated on a pro forma basis as though such cost savings had been realized on the first day of the period for which Adjusted EBITDA is being calculated, net of the amount of actual benefits realized during such period from such actions and net of the further adjustments required by the ABL facilities and the Indenture, as described below. |
Run-rate cost savings include actions around operational and engineering improvements, procurement savings and reductions in SG&A expenses. The run-rate cost savings were estimated to be approximately $9 million and $10 million for the six months ended July 4, 2015 and June 28, 2014, respectively. Our ABL facilities and the Indenture permit us to include run-rate cost savings in our calculation of Adjusted EBITDA in an amount, taken together with the amount of certain restructuring costs, up to 10% of Consolidated EBITDA, as defined in such debt instruments. As such, only $6.2 million of the approximately $9 million of cost savings identified for the four consecutive fiscal quarters ended July 4, 2015 and $9.6 million of the approximately $10 million for the four consecutive fiscal quarters ended June 28, 2014 have been included in the calculation of Adjusted EBITDA under the ABL facilities and the Indenture. However, as the 10% threshold is calculated using Consolidated EBITDA for the four consecutive fiscal quarter covenant test period, we are not presenting any run-rate cost savings when calculating Adjusted EBITDA for the quarters or six months ended July 4, 2015 and June 28, 2014.
Quarter Ended July 4, 2015 Compared to Quarter Ended June 28, 2014
Net sales were $331.2 million for the quarter ended July 4, 2015, an increase of $11.3 million, or 3.6%, compared to $319.9 million for the same period in 2014. Excluding the unfavorable impact of foreign currency fluctuation of approximately $9 million, net sales would have increased 6% as compared to the same period in 2014. The sales growth was primarily driven by higher sales of our integrated products. Net sales increased $11.0 million, or 10.3% for vinyl windows and $3.9 million, or 14.6% for our Installed Sales Solutions (“ISS”) business, compared to the prior year quarter. The increase in net sales for our vinyl window products was attributable to a combination of higher sales volume and average selling prices. Window unit volume increased approximately 6%, primarily as a result of growth in the new construction market. Higher average selling prices for windows were achieved through both price increases that we implemented at the beginning of 2015, and favorable
22
product mix attained, in part, from the launch of our new window platform since early 2014. Also contributing to the overall net sales growth for the quarter was a $1.3 million, or 3.3%, increase in metal product sales. Compared to the prior year quarter, we experienced lower sales of $3.3 million, or 3.9%, in third-party manufactured products, primarily in roofing, and $1.3 million, or 2.1%, in vinyl siding sales.
Gross profit for the quarter ended July 4, 2015 was $81.0 million, or 24.5% of net sales, compared to gross profit of $72.0 million, or 22.5% of net sales, for the same period in 2014. Compared to the prior year quarter, we achieved an approximate 200 basis point increase in gross profit margin as a result of our continued focus on driving profitability through our integrated products. The $9.0 million improvement in gross profit was primarily due to higher average selling prices of $7.2 million, favorable product mix of $2.5 million and higher sales volume of $2.3 million, compared to the prior year quarter. In addition, compared to the same period in 2014, we achieved operational efficiencies of approximately $2 million, primarily in our window plants, and incurred $2.6 million fewer costs related to the continued roll out of our new window platform on the West Coast in the current year, compared to the launch on the East Coast in the prior year. Increases in gross profit were partially offset by the negative impact of foreign currency fluctuation of approximately $7 million due to a weaker Canadian dollar in 2015 compared to the prior year period.
SG&A expenses were $62.2 million for the quarter ended July 4, 2015, compared to $60.3 million for the same period in 2014, reflecting 18.8% of net sales for each period. The $1.9 million, or 3.2%, increase in SG&A expenses was primarily due to a $2.5 million increase in costs associated with the performance-based incentive program and a $2.1 million increase in employee compensation expense to support the growth of our ISS business, supply center operations and other corporate initiatives. We also incurred $1.2 million in legal costs for a lawsuit that we expect to settle in the second half of 2015. These increases in SG&A expenses were partially offset by lower marketing-related costs of $1.1 million, decreased executive officers’ separation and hiring costs of $0.7 million and lower professional fees of $0.5 million, compared to the prior year period. Also, there was a prior period charge of $0.9 million for additional payroll costs related to a change of employment classification from exempt to non-exempt for certain non-managerial U.S. supply center-based employees. Compared to the prior year quarter, SG&A expenses were favorably impacted by approximately $2 million due to a weaker Canadian dollar in 2015.
Income from operations was $18.8 million and $11.7 million for the quarters ended July 4, 2015 and June 28, 2014, respectively.
Interest expense was $21.2 million and $20.8 million for the quarters ended July 4, 2015 and June 28, 2014, respectively. The $0.4 million increase in interest expense was primarily related to borrowings on the ABL facilities.
The income tax expense of $2.2 million and $1.3 million for the quarters ended July 4, 2015 and June 28, 2014, reflected negative effective income tax rates of 76.7% and 14.2%, respectively. The effective tax rate for both periods vary from the statutory rate, primarily as a result of operating losses in the U.S. with no tax benefit recognized due to the valuation allowance against net U.S. deferred tax assets, and income tax expense on foreign income.
Net loss for the quarter ended July 4, 2015 was $5.1 million compared to a net loss of $10.6 million for the same period in 2014.
Six Months Ended July 4, 2015 Compared to Six Months Ended June 28, 2014
Net sales were $551.6 million for the six months ended July 4, 2015, an increase of $35.1 million, or 6.8%, compared to $516.5 million for the same period in 2014. Excluding the unfavorable impact of foreign currency fluctuation of approximately $13 million, net sales would have increased 9% as compared to the same period in 2014. The sales growth was primarily driven by higher sales of our integrated products. Net sales increased $23.6 million, or 13.4% for vinyl windows and $8.2 million, or 17.0% for our ISS business, compared to the prior year period. The increase in net sales for our vinyl window products was attributable to a combination of higher sales volume and average selling prices. Window unit volume increased approximately 9%, which reflected growth from both new construction and repair and remodel markets. Higher average selling prices for windows were achieved through both price increases that we implemented at the beginning of 2015, and favorable product mix attained, in part, from the launch of our new window platform in early 2014. Also contributing to the overall net sales growth are a $2.4 million, or 3.6% increase in metal product sales and a $1.3 million, or 1.0% increase in net sales for third-party manufactured products. Vinyl siding sales was relatively flat compared to the prior year period.
Gross profit for the six months ended July 4, 2015 was $122.9 million, or 22.3% of net sales, compared to gross profit of $106.4 million, or 20.6% of net sales, for the same period in 2014. Compared to the prior year period, we achieved an approximate 170 basis point increase in gross profit margin as a result of our continued focus on driving profitability through our integrated products. The $16.5 million improvement in gross profit was primarily due to higher average selling prices of $9.6 million, higher sales volume of $7.7 million and favorable product mix of $5.9 million, compared to the prior year quarter. In addition, compared to the same period in 2014, we achieved operational efficiencies of approximately $2 million, primarily in our window plants and incurred $5.5 million fewer costs related to the continued roll out of our new window platform on the
23
West Coast in the current year, compared to the launch on the East Coast in the prior year. Increases in gross profit were partially offset by higher material costs of $3.3 million and negative impact of foreign currency fluctuation of approximately $11 million due to a weaker Canadian dollar in 2015, compared to the prior year period.
SG&A expenses were $120.6 million, or 21.9% of net sales, for the six months ended July 4, 2015, compared to $118.9 million, or 23.0% of net sales, for the same period in 2014. The $1.7 million, or 1.4%, increase in SG&A expenses was primarily due to a $4.0 million increase in employee compensation expense to support the growth of our ISS business, supply center operations and other corporate initiatives. Also contributing to the unfavorable variance was a $2.9 million increase in costs associated with the performance-based incentive program resulting from improved operating results in 2015. Further, we incurred $1.2 million in legal costs for a lawsuit that we expect to settle in the second half of 2015. These increases in SG&A expenses were partially offset by a $2.6 million decrease in executive officers’ separation and hiring costs, lower marketing-related costs of $2.2 million, and a reduction of professional fees of $0.9 million, compared to the prior year period. Also, there was a prior year charge of $0.9 million for additional payroll costs related to a change of employment classification from exempt to non-exempt for certain non-managerial U.S. supply center-based employees. Compared to the prior year period, SG&A expenses were favorably impacted by approximately $3 million due to a weaker Canadian dollar in 2015.
Income from operations was $2.3 million for the six months ended July 4, 2015, compared to a loss from operations of $12.5 million for the six months ended June 28, 2014.
Interest expense was $41.9 million and $41.1 million for the six months ended July 4, 2015 and June 28, 2014, respectively. The $0.8 million increase in interest expense was primarily related to borrowings on the ABL facilities.
The income tax expense for each six-month period ended July 4, 2015 and June 28, 2014 was $2.8 million, which reflected negative effective income tax rates of 6.8% and 5.1%, respectively. The lower than statutory effective tax rate for both periods was primarily a result of operating losses in the U.S. with no tax benefit recognized due to the valuation allowance against net U.S. deferred tax assets, and income tax expense on foreign income.
Net loss for the six months ended July 4, 2015 was $43.5 million compared to a net loss of $57.0 million for the same period in 2014.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value (“NRV”). The new guidance eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin) under the current lower of cost or market guidance. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. It is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2016. We do not believe that the adoption of the provisions of ASU 2015-11 will have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2015, the FASB issued ASU No. 2015-07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU 2015-07 requires an entity to disclose the fair value of investments measured using the net asset value practical expedient so that the financial statement user can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. ASU 2015-07 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. We do not believe that the adoption of the provisions of ASU 2015-07 will have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If the arrangement contains a software license, then the customer should account for the fees related to the software license element consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. An entity may apply the guidance retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. We do not believe that the adoption of the provisions of ASU 2015-05 will have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as
24
a direct deduction from the carrying amount of that debt liability rather than an asset, consistent with the presentation of debt discounts. The recognition and measurement of debt issuance costs are not affected by the new guidance. ASU 2015-03 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. An entity is required to apply ASU 2015-03 on a retrospective basis and comply with the applicable disclosures, which include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, the debt issuance cost asset and the debt liability). We do not believe that the adoption of the provisions of ASU 2015-03 will have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide certain disclosures if it concludes that substantial doubt exists. ASU 2014-15 is effective for all entities for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. We do not believe that the adoption of the provisions of ASU 2014-15 will have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The comprehensive new revenue recognition standard supersedes all existing revenue guidance under GAAP and international financial reporting standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard establishes the following five steps that require companies to exercise judgment when considering the terms of any contract, including all relevant facts and circumstances:
Step 1: Identify the contract(s) with the customer,
Step 2: Identify the separate performance obligations in the contract,
Step 3: Determine the transaction price,
Step 4: Allocate the transaction price to the separate performance obligations, and
Step 5: Recognize revenue when each performance obligation is satisfied.
The new standard also requires significantly more interim and annual disclosures. The new standard allows for either full retrospective or modified retrospective adoption. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning after December 15, 2016. In July 2015, the FASB confirmed its decision to defer the effective date of the new revenue standard by one year. We are currently assessing the potential impact of the new requirements under the standard.
Liquidity and Capital Resources
Cash Flows
The following sets forth a summary of our cash flows for the periods indicated (in thousands):
Six Months Ended | |||||||
July 4, 2015 | June 28, 2014 | ||||||
Net cash used in operating activities | $ | (38,679 | ) | $ | (88,431 | ) | |
Net cash used in investing activities | (9,893 | ) | (5,238 | ) | |||
Net cash provided by financing activities | 46,678 | 80,114 |
As of July 4, 2015, we had cash and cash equivalents of $3.2 million and $0.8 million in the United States and Canada, respectively. As of July 4, 2015, we had available borrowing capacity of $64.3 million under our ABL facilities, after giving effect to outstanding letters of credit and borrowing base limitations. We believe that our borrowing capacity under the ABL facilities and current cash and cash equivalents provide adequate liquidity to maintain our operations and capital expenditure requirements and service our debt obligations for the next 12 months.
Cash Flows from Operating Activities
Net cash used in operating activities was $38.7 million for the six months ended July 4, 2015, compared to $88.4 million for the same period in 2014. The $49.7 million decrease in the use of cash was primarily driven by improvement in working capital of $38.1 million and a lower net loss, compared to the prior year period.
Change in accounts receivable was a use of cash of $41.5 million for the six months ended July 4, 2015, compared to $36.3 million for the six months ended June 28, 2014. The net decrease in cash flow from accounts receivable of $5.2 million
25
reflected higher sales for the first six months of 2015 compared to the prior year period. Change in inventory was a use of cash of $21.3 million for the six months ended July 4, 2015, compared to $46.5 million for six months ended June 28, 2014. The lower use of cash in the current year period was primarily driven by working capital initiatives during 2015 and the timing of inventory builds for seasonal demands for the second half of the year. During 2014, we increased inventory at our supply centers to ensure that we had a variety of products to better service our contractor customers, which led to higher inventory levels at the end of 2014, the consequence of which was a relatively lower use of cash for the six months ended July 4, 2015, compared to the six months ended June 28, 2014. Change in accounts payable and accrued liabilities was a source of cash of $42.7 million for the six months ended July 4, 2015, compared to a source of cash of $30.5 million for the six months ended June 28, 2014. The increase in cash flows of $12.2 million from accounts payable and accrued liabilities was primarily due to working capital initiatives and the timing of inventory purchases. Change in other assets and liabilities was a source of cash of $0.8 million for the six months ended July 4, 2015, compared to a use of cash of $6.5 million for the six months ended June 28, 2014. The increase in cash flows of $7.3 million was primarily due to timing of prepayments.
Cash Flows from Investing Activities
Net cash used in investing activities consisted of $9.9 million and $5.2 million of capital expenditures during the six months ended July 4, 2015 and June 28, 2014, respectively. The capital expenditures for the current year period related to various investments at our manufacturing facilities, while the capital expenditures for the prior year period primarily related to investments in our new window platform that was launched on the East Coast in early 2014.
Cash Flows from Financing Activities
Net cash provided by financing activities for the six months ended July 4, 2015 included borrowings of $99.7 million under our ABL facilities offset by repayments of $53.1 million. Net cash provided by financing activities for the six months ended June 28, 2014, included borrowings of $121.2 million under our ABL facilities. These inflows were partially offset by repayments of $41.1 million under our ABL facilities.
Description of Our Indebtedness
9.125% Senior Secured Notes due 2017
In October 2010, our Company and our wholly owned subsidiary, AMH New Finance, Inc. (collectively, the “Issuers”) issued and sold $730.0 million of 9.125% Senior Secured Notes due November 1, 2017 (the “existing notes”). The existing notes bear interest at a rate of 9.125% per annum, payable on May 1 and November 1 each year, and are unconditionally guaranteed, jointly and severally, by each of the Issuers’ direct and indirect domestic subsidiaries that guarantees our obligations under the senior secured asset-based revolving credit facilities (the “ABL facilities”).
On May 1, 2013, the Issuers issued and sold an additional $100.0 million in aggregate principal amount of 9.125% Senior Secured Notes due November 1, 2017 (the “new notes” and, together with the existing notes, the “9.125% notes”) at an issue price of 106.00% of the principal amount of the new notes in a private placement. We used the net proceeds of the offering to repay the outstanding borrowings under our ABL facilities and for other general corporate purposes. The new notes were issued as additional notes under the same indenture, dated October 13, 2010, governing the existing notes, as a supplemented by a supplemental indenture (collectively, the “Indenture”). On October 31, 2013, all of the new notes were exchanged for 9.125% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933, as amended. The new notes are consolidated with and form a single class with the existing notes and have the same terms as to status, redemption, collateral and otherwise (other than issue date, issue price and first interest payment date) as the existing notes. The debt premium related to the issuance of the new notes is being amortized into interest expense over the life of the new notes. The unamortized premium of $3.4 million is included in the long-term debt balance for the 9.125% notes. The effective interest rate of the new notes, including the premium, is 7.5% as of July 4, 2015.
The 9.125% notes, at par value of $830.0 million, have an estimated fair value, classified as a Level 1 measurement, of $693.1 million and $652.8 million based on quoted market prices as of July 4, 2015 and January 3, 2015, respectively.
We may from time to time, in our sole discretion, purchase, redeem or retire the 9.125% notes in privately negotiated or open market transactions, by tender offer or otherwise.
ABL Facilities
In October 2010, we entered into the ABL facilities in the amount of $225.0 million (comprised of a $150.0 million U.S. facility and a $75.0 million Canadian facility) pursuant to a revolving credit agreement dated October 13, 2010, which was subsequently amended and restated on April 18, 2013 (the “Amended and Restated Revolving Credit Agreement”) to, among other things, extend the maturity date of the revolving credit agreement from October 13, 2015 to the earlier of (i) April 18,
26
2018 and (ii) 90 days prior to the maturity date of the existing notes. Subsequently, we terminated the tranche B revolving credit commitments of $12.0 million and wrote off $0.5 million of deferred financing fees related to the ABL facilities.
At our option, the U.S. and Canadian tranche A revolving credit loans under the Amended and Restated Revolving Credit Agreement governing the ABL facilities bear interest at the rate equal to (1) the London Interbank Offered Rate (“LIBOR”) (for eurodollar loans under the U.S. facility) or the Canadian Dealer Offered Rate (“CDOR”) (for loans under the Canadian facility), plus an applicable margin of 2.25% as of July 4, 2015, or (2) the alternate base rate (for alternate base rate loans under the U.S. facility, which is the highest of a prime rate, the Federal Funds Effective Rate plus 0.50% and a one-month LIBOR rate plus 1.0% per annum) or the alternate Canadian base rate (for loans under the Canadian facility, which is the higher of a Canadian prime rate and the 30-day CDOR plus 1.0%), plus an applicable margin of 1.25% as of July 4, 2015, in each case, which interest rate margin may vary in 25 basis point increments between three pricing levels determined by reference to the average excess availability in respect of the U.S. and Canadian tranche A revolving credit loans. In addition to paying interest on outstanding principal under the ABL facilities, we are required to pay a commitment fee in respect of the U.S. and Canadian tranche A revolving credit loans, payable quarterly in arrears, of 0.375%.
As of July 4, 2015, there was $116.1 million drawn under our ABL facilities and $64.3 million available for additional borrowings. The weighted average per annum interest rate applicable to borrowings under the U.S. portion and the Canadian portion of the ABL facilities was 2.6% and 4.5%, respectively, as of July 4, 2015. We had letters of credit outstanding of $12.4 million as of July 4, 2015, primarily securing insurance policy deductibles, certain lease facilities and our purchasing card program.
Covenant Compliance
There are no financial maintenance covenants included in the Amended and Restated Revolving Credit Agreement and the Indenture, other than a springing fixed charge coverage ratio of at least 1.00 to 1.00 under the Amended and Restated Credit Agreement, which is triggered as of the end of the most recently ended four consecutive fiscal quarter period for which financial statements have been delivered prior to such date of determination only when excess availability is less than, the greater of (i) 10.0% of the sum of (x) the lesser of (A) the U.S. tranche A borrowing base and (B) the U.S tranche A revolving credit commitments and (y) the lesser of (A) the Canadian tranche A borrowing base and (B) the Canadian tranche A revolving credit commitments and (ii) $20.0 million for a period of five consecutive business days until the 30th consecutive day when excess availability exceeds the above threshold. The Amended and Restated Revolving Credit Agreement and the Indenture permit us to include run-rate cost savings in our calculation of Consolidated EBITDA in an amount, taken together with the amount of certain restructuring costs, up to 10% of Consolidated EBITDA for the relevant test period.
On March 23, 2015, the Amended and Restated Revolving Credit Agreement was amended to permit, among other things, for the period commencing on and including April 3, 2015 through and including June 5, 2015, for the fixed charge coverage ratio to be tested or for a cash dominion period to commence only if excess availability is less than $15.0 million for a period of five consecutive business days. In addition, such amendment includes a provision for weekly borrowing base certificate reporting for the period commencing on and including April 12, 2015 through and including June 10, 2015 in lieu of delivery of a borrowing base certificate after each fiscal month.
The fixed charge coverage ratio was 0.50:1.00 for the four consecutive fiscal quarter test period ended July 4, 2015. We have not triggered such fixed charge coverage ratio covenant as of July 4, 2015, as excess availability of $44.3 million as of such date was in excess of the covenant trigger threshold. We do not expect to trigger such covenant for fiscal year 2015. Should the current economic conditions or other factors described herein cause our results of operations to deteriorate beyond our expectations, we may trigger such covenant and, if so triggered, may not be able to satisfy such covenant and be forced to refinance such debt or seek a waiver. Even if new financing is available, it may not be available on terms that are acceptable to us. If we are required to seek a waiver, we may be required to pay significant amounts to the lenders under our ABL facilities to obtain such a waiver.
In addition to the financial covenant described above, certain incurrences of debt and investments require compliance with financial covenants under the Amended and Restated Revolving Credit Agreement and the Indenture. The breach of any of these covenants could result in a default under the Amended and Restated Revolving Credit Agreement and the Indenture, and the lenders or note holders, as applicable, could elect to declare all amounts borrowed due and payable. See Part I, Item 1A. “Risk Factors” in our Annual Report. We were in compliance with such financial covenants as of July 4, 2015.
Effects of Inflation
The principal raw materials used by us are vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware, and packaging materials, as well as diesel fuel, all of which have historically been subject to price changes. Raw material pricing on our key commodities has fluctuated significantly over the past several years. Our freight costs may also fluctuate based on changes in gasoline and diesel fuel costs related to our trucking fleet. Our ability to maintain gross margin levels on our products during periods of rising raw material costs and freight costs depends on our ability to obtain selling price
27
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 our products. There can be no assurance that we will be able to maintain the selling price increases already implemented or achieve any future price increases. At July 4, 2015, we had no raw material hedge contracts in place.
Forward-Looking Statements
All statements (other than statements of historical facts) included in this report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our 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:
• | declines in remodeling and home building industries, economic conditions and changes in interest rates, foreign currency exchange rates and other conditions; |
• | our substantial level of indebtedness; |
• | our ability to comply with certain financial covenants in the Indenture and ABL facilities and the restrictions such covenants impose on our ability to operate our business; |
• | our ability to generate sufficient cash, or access capital resources, to service all our debt obligations, working capital needs and planned capital expenditures; |
• | deteriorations in availability of consumer credit, employment trends, levels of consumer confidence and spending and consumer preferences; |
• | increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products; |
• | our substantial fixed costs; |
• | delays in the development of new or improved products or our inability to successfully develop new or improved products; |
• | changes in raw material costs and availability of raw materials and finished goods; |
• | consolidation of our customers; |
• | increases in union organizing activity; |
• | changes in weather conditions; |
• | our history of operating losses; |
• | our ability to attract and retain qualified personnel; |
• | in the event of default under the Indenture or the ABL facilities, the ability of creditors under the Indenture and the ABL facilities to foreclose on the capital stock of our operating subsidiaries; |
• | any impairment of goodwill or other intangible assets; |
• | future recognition of our deferred tax assets; |
• | increases in mortgage rates, changes in mortgage interest deductions and the reduced availability of financing; |
• | our exposure to foreign currency exchange risk; |
• | our control by investment funds affiliated with Hellman & Friedman, LLC; and |
• | the other factors discussed under Part I, Item 1A. “Risk Factors” in our Annual Report and elsewhere in this report. |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The occurrence of the events described under Part 1, Item 1A. “Risk Factors” in our Annual Report and elsewhere in this report could have a material adverse effect on our business, results of operations and financial condition.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of
28
activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statement to actual results or to changes in our expectations.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
From time to time, we may have outstanding borrowings under our ABL facilities and may incur additional borrowings for general corporate purposes, including working capital and capital expenditures. As of July 4, 2015, the interest rate applicable to outstanding loans under the U.S. and Canadian tranche A revolving facilities was, at our option, equal to either a United States or Canadian adjusted base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 1.75% to 2.25%, with the applicable margin in each case depending on our quarterly average “excess availability” as defined in the credit facilities.
As of July 4, 2015, we had borrowings outstanding of $116.1 million under the ABL facilities. The effect of a 1.00% increase or decrease in interest rates would increase or decrease the total annual interest expense by $1.2 million.
We have $830.0 million aggregate principal amount of 9.125% notes outstanding as of July 4, 2015 that bear a fixed interest rate of 9.125% and mature in 2017. The fair value of our 9.125% notes is sensitive to changes in interest rates. In addition, the fair value is affected by our overall credit rating, which could be impacted by changes in our future operating results. These 9.125% notes have an estimated fair value of $693.1 million based on quoted market prices as of July 4, 2015.
Foreign Currency Exchange Risk
Our revenues are generated primarily from domestic customers and are realized in U.S. dollars. However, we realize revenues from sales made through our Canadian distribution centers in Canadian dollars. Our 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. We may, from time to time, enter into foreign exchange forward contracts with maturities of less than three months to reduce our exposure to fluctuations in the Canadian dollar. As of July 4, 2015, we were 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 six month ended July 4, 2015 of the U.S. dollar relative to the Canadian dollar would have resulted in an approximate $5 million decrease or increase, respectively, in comprehensive loss for the six months ended July 4, 2015.
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 our principal raw materials (vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware and packaging materials) and diesel fuel.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
During the fiscal period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our 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 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the quarter ended July 4, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
Items 2, 3, 4 and 5 are not applicable or the answer to such items is none; therefore, the items have been omitted and no reference is required in this Quarterly Report on Form 10-Q.
Item 1. | Legal Proceedings |
We are involved from time to time in litigation arising in the ordinary course of business, none of which, individually or in the aggregate, after giving effect to existing insurance coverage, is expected to have a material adverse effect on our financial position, results of operations or liquidity. From time to time, we are also involved in proceedings and potential proceedings relating to environmental and product liability matters.
Environmental Claims
The Woodbridge, New Jersey facility is currently the subject of an investigation and/or remediation before the New Jersey Department of Environmental Protection (“NJDEP”) under ISRA Case No. E20030110 for our wholly owned subsidiary, Gentek Building Products, Inc. (“Gentek”). The facility is currently leased by Gentek. Previous operations at the facility resulted in soil and groundwater contamination in certain areas of the property. In 1999, the property owner and Gentek signed a remediation agreement with NJDEP, pursuant to which the property owner and Gentek agreed to continue an investigation/remediation that had been commenced pursuant to a Memorandum of Agreement with NJDEP. Under the remediation agreement, NJDEP required posting of a remediation funding source of $0.1 million, which is currently satisfied by a $0.3 million standby letter of credit that was provided by Gentek to the NJDEP. During 2014, the delineation studies were completed and in early 2015 the Company was presented with several remedial plans. Based on the alternatives presented, the Company identified what it believed to be the most likely option and recorded the minimum liability for that option, which totaled $1.0 million as of January 3, 2015, the balance of which remains unchanged as of July 4, 2015. We believe this matter will not have a material adverse effect on our financial position, results of operations or liquidity.
Environmental claims, product liability claims and other claims are administered by us in the ordinary course of business, and we maintain pollution and remediation and product liability insurance covering certain types of claims. Although it is difficult to estimate our potential exposure to these matters, we believe that the resolution of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended January 3, 2015 filed with the Securities and Exchange Commission on March 23, 2015, which include detailed discussions of risk factors that could materially affect our business, financial condition or results of operations and are incorporated herein by reference.
Item 6. | Exhibits |
See Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | August 4, 2015 | By: | /s/ Scott F. Stephens |
Scott F. Stephens | |||
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
31
EXHIBIT INDEX
Exhibit Number | Description | |
3.1 | Certificate of Formation of Associated Materials, LLC (incorporated by reference to Exhibit 3.1 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 25, 2008). | |
3.2 | Amended and Restated Limited Liability Company Agreement of Associated Materials, LLC (incorporated by reference to Exhibit 3.2 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 21, 2014). | |
31.1 | Certification of the Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Principal Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1† | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS† | XBRL Instance Document. | |
101.SCH† | XBRL Taxonomy Extension Schema Document. | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document. | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document. |
† | 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. |
32