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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 2004
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 INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1872487
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of Organization)
3773 State Rd. Cuyahoga Falls, Ohio 44223
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (330) 929 -1811
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 14, 2004, the Registrant had 100 shares of Common Stock
outstanding, all of which is held by an affiliate of the Registrant.
ASSOCIATED MATERIALS INCORPORATED
REPORT FOR THE QUARTER AND SIX MONTHS ENDED JULY 3, 2004
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets............................................... 1
July 3, 2004 (Unaudited) and January 3, 2004
Consolidated Statements of Operations (Unaudited)......................... 2
Quarters ended July 3, 2004 and June 28, 2003
Six months ended July 3, 2004 and June 28, 2003
Consolidated Statements of Cash Flows (Unaudited)......................... 3
Six months ended July 3, 2004 and June 28, 2003
Notes to Consolidated Financial Statements (Unaudited).................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 20
Item 4. Controls and Procedures.............................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 21
Item 6. Exhibits and Reports on Form 8-K..................................... 21
SIGNATURES...................................................................... 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSOCIATED MATERIALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
July 3, January 3,
2004 2004
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 2,655 $ 4,282
Accounts receivable, net ............................ 152,471 106,975
Inventory ........................................... 122,327 97,907
Deferred income taxes ............................... 7,019 7,019
Other current assets ................................ 6,853 5,564
-------- --------
Total current assets .............................. 291,325 221,747
Property, plant and equipment, net ..................... 142,726 140,846
Goodwill ............................................... 230,411 230,283
Other intangible assets, net ........................... 114,497 116,136
Other assets ........................................... 9,035 9,621
-------- --------
Total assets .................................. $787,994 $718,633
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................... $ 81,633 $ 49,881
Accrued liabilities ................................. 47,401 53,234
Income taxes payable ................................ 3,133 4,934
-------- --------
Total current liabilities ......................... 132,167 108,049
Deferred income taxes .................................. 57,837 58,028
Other liabilities ...................................... 40,021 41,587
Long-term debt ......................................... 331,159 305,000
Stockholder's equity ................................... 226,810 205,969
-------- --------
Total liabilities and stockholder's equity .... $787,994 $718,633
======== ========
See accompanying notes.
-1-
ASSOCIATED MATERIALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales....................................... $ 301,602 $ 180,363 $ 505,923 $ 291,307
Cost of sales................................... 218,277 123,563 372,243 206,339
----------- ----------- ----------- -----------
Gross profit.................................... 83,325 56,800 133,680 84,968
Selling, general and administrative expense..... 48,040 33,704 107,932 65,014
----------- ----------- ----------- -----------
Income from operations.......................... 35,285 23,096 25,748 19,954
Interest expense, net........................... 6,254 5,483 12,266 10,921
Foreign currency loss........................... 609 - 615 -
----------- ----------- ----------- -----------
Income before taxes............................. 28,422 17,613 12,867 9,033
Income taxes.................................... 11,703 7,309 5,247 3,749
----------- ----------- ----------- -----------
Net income...................................... $ 16,719 $ 10,304 $ 7,620 $ 5,284
=========== =========== =========== ===========
See accompanying notes.
-2-
ASSOCIATED MATERIALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Six Months
Ended Ended
July 3, June 28,
2004 2003
---------- ----------
OPERATING ACTIVITIES
Net income...................................................... $ 7,620 $ 5,284
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.............................. 10,243 5,512
Amortization of deferred financing costs................... 731 689
Changes in operating assets and liabilities:
Accounts receivable, net................................. (45,693) (19,218)
Inventories.............................................. (25,060) (10,410)
Income taxes............................................. (1,762) 3,641
Accounts payable and accrued liabilities................. 26,730 10,514
Other.................................................... (2,771) (269)
----------- -----------
Net cash used in operating activities........................... (29,962) (4,257)
INVESTING ACTIVITIES
Additions to property, plant and equipment...................... (12,196) (5,841)
---------- ----------
Net cash used in investing activities........................... (12,196) (5,841)
FINANCING ACTIVITIES
Net increase in revolving line of credit........................ 26,159 -
Equity contribution from Holdings............................... 14,498 -
Financing costs................................................. (168) -
Redemption of 9 1/4% senior subordinated notes..................... - (908)
---------- ----------
Net cash provided by (used in) financing activities............. 40,489 (908)
---------- ----------
Net decrease in cash............................................ (1,669) (11,006)
Effect of exchange rate changes on cash......................... 42 -
---------- ----------
Cash at beginning of period..................................... 4,282 13,022
---------- ----------
Cash at end of period........................................... $ 2,655 $ 2,016
========== ==========
Supplemental information:
Cash paid for interest.......................................... $ 11,442 $ 9,240
========== ==========
Cash paid for income taxes...................................... $ 7,005 $ 108
========== ==========
See accompanying notes.
-3-
ASSOCIATED MATERIALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER AND SIX MONTHS ENDED JULY 3, 2004
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of Associated Materials Incorporated
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial reporting, the
instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in its annual report
on Form 10-K for the year ended January 3, 2004. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have been
included.
The Company's 2004 results of operations include the results of Gentek
Holdings, Inc., which was acquired on August 29, 2003 (see Note 3). The Company
is a wholly owned subsidiary of Associated Materials Holdings Inc. ("Holdings").
The Company is a leading, vertically integrated manufacturer and North
American distributor of exterior residential building products. The Company's
core products are vinyl windows, vinyl siding, aluminum trim coil, aluminum and
steel siding and accessories, and vinyl fencing, decking and railing. Because
most of the Company's building products are intended for exterior use, the
Company's sales and operating profits tend to be lower during periods of
inclement weather. Therefore, the results of operations for any interim period
are not necessarily indicative of the results of operations for a full year.
NOTE 2 - AMH HOLDINGS, INC.
On February 19, 2004, AMH Holdings, Inc. ("AMH") was incorporated. AMH has
no material assets or operations other than its 100% ownership of Holdings, the
Company's parent company. Stockholders and option holders of Holdings became
stockholders and option holders of AMH on March 4, 2004 and are no longer
stockholders and option holders of Holdings. On March 4, 2004, AMH completed an
offering of $446 million aggregate principal at maturity of 11 1/4% senior
discount notes. The total gross proceeds were approximately $258.3 million. In
connection with the note offering, certain options to acquire preferred and
common shares were exercised and the proceeds from the note offering were used
to redeem all of AMH's preferred stock including accrued and unpaid dividends,
pay a dividend to AMH's common stockholders and pay a bonus to certain members
of the Company's senior management. Through Holdings, AMH contributed $14.5
million to the Company to pay the bonus to certain members of the Company's
senior management. The management bonus is included in the Company's selling,
general and administrative expense for the six months ended July 3, 2004.
Interest accrues at a rate of 11 1/4% on the notes in the form of an increase in
the accreted value of the notes prior to March 1, 2009. Thereafter, cash
interest of 11 1/4% on the notes accrues and is payable semi-annually in arrears
on March 1 and September 1 of each year, commencing on September 1, 2009. The
notes mature on March 1, 2014. The notes are structurally subordinated to all
existing and future debt and other liabilities of AMH's existing and future
subsidiaries, including the Company and Holdings.
NOTE 3 - PRO FORMA INFORMATION
On August 29, 2003, the Company acquired all of the issued and outstanding
shares of the capital stock of Gentek Holdings, Inc., the parent Company of
Gentek Building Products, Inc. and Gentek Building Products Limited,
collectively referred to as "Gentek". Gentek manufactures and distributes vinyl
windows, vinyl siding, aluminum trim coil, and aluminum and steel siding and
accessories under the Revere(R) and Gentek(R) brand names. Gentek markets its
products to professional contractors on a wholesale basis through company-owned
distribution centers in the mid-Atlantic region of the United States and
throughout Canada, as well as to independent distributors in the United States.
The acquisition was completed to expand the Company's presence in the
independent distributor market channel, to capitalize on synergy opportunities
related to the vertical integration of the metals products manufactured by
Gentek and sold in the Company's Alside supply centers, and to benefit from raw
material savings resulting from increased purchasing leverage. The Company
intends to maintain distinct separation of the Revere(R) and Gentek(R) brands
from the Company's Alside(R) brand by continuing to offer differentiated product
sales and marketing support.
-4-
The acquisition was accounted for using the purchase method of accounting. The
purchase price allocation is preliminary, based on facts currently known to the
Company and is subject to adjustment as the final valuation for the fair value
of the warranty liability related to certain steel siding has not been
completed. As a result, the actual allocation is subject to completion and
therefore may differ.
The following pro forma information for the quarter and six months ended
June 28, 2003 was prepared as if the acquisition of Gentek Holdings occurred as
of the beginning of each period. On a pro forma basis, the Company would have
had (in thousands):
Quarter Six Months
Ended Ended
June 28, June 28,
2003 2003
--------- ----------
Net sales................................................................ $ 257,615 $ 423,241
Net income............................................................... $ 10,158 $ 3,484
The pro forma information is not necessarily indicative of the results
that would have occurred had the acquisition of Gentek occurred at the beginning
of each period presented, nor is it necessarily indicative of future results.
The pro forma results of operations include $1.4 million of expenses related to
an inventory fair value adjustment recorded at the time of the Gentek
acquisition.
NOTE 4 - INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Inventories consisted of the following (in thousands):
July 3, January 3,
2004 2004
---------- ----------
Raw materials............................................................ $ 27,805 $ 24,586
Work-in-process.......................................................... 8,255 6,307
Finished goods and purchased stock....................................... 86,267 67,014
---------- ----------
$ 122,327 $ 97,907
========== ==========
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the purchase price in excess of the fair value of the
tangible and intangible net assets acquired and consists of $230.4 million
including $197.5 million from the purchase price for the April 2002 merger
transaction and $32.9 million from the acquisition of Gentek. None of the
Company's goodwill is deductible for income tax purposes. The Company's other
intangible assets consist of the following (in thousands):
Average July 3, 2004 January 3, 2004
Amortization --------------------------------------- ---------------------------------------
Period Accumulated Net Carrying Accumulated Net Carrying
(in Years) Cost Amortization Value Cost Amortization Value
------------ ----------- ------------ ------------ ----------- ------------ ------------
Trademarks and trade names........ 15 $ 109,280 $ 3,778 $ 105,502 $ 109,280 $ 2,844 $ 106,436
Patents........................... 10 6,550 1,437 5,113 6,550 1,110 5,440
Customer base..................... 7 4,503 621 3,882 4,628 368 4,260
----------- ----------- ---------- ----------- ---------- ----------
Total other intangible assets..... $ 120,333 $ 5,836 $ 114,497 $ 120,458 $ 4,322 $ 116,136
=========== =========== ========== =========== ========== ==========
The Company has determined that trademarks and trade names totaling $81.1
million consisting primarily of the Alside(R), Revere(R) and Gentek(R) trade
names have indefinite useful lives. Amortization expense related to other
intangible assets was approximately $0.8 million and $0.6 million for the
quarters ended July 3, 2004 and June 28, 2003, respectively and $1.6 million and
$1.1 million for the six months ended July 3, 2004 and June 28, 2003,
respectively.
-5-
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
July 3, January 3,
2004 2004
---------- ----------
9 3/4% notes............................................................. $ 165,000 $ 165,000
Term loan under credit facility.......................................... 140,000 140,000
Revolving loans under credit facility.................................... 26,159 -
---------- ----------
$ 331,159 $ 305,000
========== ==========
The Company's $165 million of 9 3/4% notes are due in 2012 and pay
interest semi-annually in April and October. In connection with the acquisition
of Gentek, the Company amended its existing credit facility by adding a term
loan facility to borrow $190 million, which was utilized for the Gentek
acquisition and repayment of the Company's existing $76.5 million of term loans,
and expanded its revolving facility from $40 million to $70 million, including a
new Canadian subfacility of $15 million. The term loans are due in August 2010
with minimum principal amortization of 1% per year with quarterly payments of
the unamortized principal in the final year of the loan and bears interest at
the London Interbank Offered Rate ("LIBOR") plus 2.75% payable quarterly at the
end of each calendar quarter. The revolving credit facility expires in 2007 and
bears interest at LIBOR plus up to 3.00% payable quarterly at the end of each
calendar quarter.
The credit facility and the indenture governing the 9 3/4% notes contain
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell its assets or declare dividends.
In addition, under the credit facility the Company is required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense. The Company was in compliance with its covenants
as of July 3, 2004. On an annual basis, the Company is required to make
principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2003 were sufficient such that no additional principal
payments were required in 2004 under the excess cash flow provision. The Company
records as a current liability those principal payments that are estimated to be
due within twelve months under the excess cash flow provision of the credit
facility when the likelihood of those payments becomes probable.
NOTE 7 - STOCK PLANS
The Company measures stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 -
"Accounting for Stock Issued to Employees." The Company follows the disclosure
provisions required under Financial Accounting Standard Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation." Pro forma information regarding net income is required by SFAS
No. 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that statement using a minimum value
approach for companies with private equity. FASB SFAS No. 148 - "Accounting for
Stock-Based Compensation" requires this information to be disclosed on a
quarterly basis. The pro forma effect on net income for the quarters and six
months ended July 3, 2004 and June 28, 2003 would have been (in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
-------- -------- ---------- ----------
Net income as reported ........................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284
Pro forma stock based employee compensation cost, net of tax... (53) (33) (81) (65)
-------- -------- ---------- ----------
Pro forma net income........................................... $ 16,666 $ 10,271 $ 7,539 $ 5,219
======== ======== ========== ==========
NOTE 8 - INCOME TAXES
The Company has recorded income taxes at its estimated full fiscal year
effective tax rate of approximately 41.5% on the income before taxes for the
quarters and six months ended July 3, 2004 and June 28, 2003.
-6-
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income differs from net income due to foreign currency
translation adjustments as follows (in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ---------- ----------
Net income as reported ................................... $ 16,719 $ 10,304 $ 7,620 $ 5,284
Foreign currency translation adjustments.................. (272) - (1,133) -
----------- ----------- ---------- ----------
Comprehensive income...................................... $ 16,447 $ 10,304 $ 6,487 $ 5,284
=========== =========== ========== ==========
NOTE 10 - RETIREMENT PLANS
The Company's Alside division sponsors a defined benefit pension plan
which covers hourly workers at its plant in West Salem, Ohio and a defined
benefit retirement plan covering salaried employees, which was frozen in 1998
and subsequently replaced with a defined contribution plan. The Company's Gentek
subsidiary sponsors a defined benefit pension plan for the hourly union
employees at its Woodbridge, New Jersey plant (together with the Alside
sponsored defined benefit plans, the "Domestic Plans"). Accrued pension
liabilities are included in other liabilities in the accompanying balance
sheets. Gentek plan information is presented subsequent to the date of its
acquisition on August 29, 2003. The actuarial valuation measurement date for the
defined benefit pension plans is December 31. Components of the Domestic Plan
costs are as follows (in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET PERIODIC PENSION COST
Service cost....................... $ 104 $ 53 $ 208 $ 106
Interest cost...................... 628 515 1,256 1,030
Expected return on assets.......... (704) (549) (1,408) (1,083)
Amortization of unrecognized:
Cumulative net loss ............ 70 107 140 214
-------- --------- ---------- ----------
Net periodic pension cost.......... $ 98 $ 126 $ 196 $ 267
========= ========= ========== ==========
The Company expects to make $0.3 million of contributions to the Domestic
Plans in 2004.
NOTE 11 - SUBSIDIARY GUARANTORS
The Company's payment obligations under the 9 3/4% notes are fully and
unconditionally guaranteed, jointly and severally (collectively, the "Subsidiary
Guarantees") on a senior subordinated basis, by its domestic wholly-owned
subsidiaries: Gentek Holdings, Inc., Gentek Building Products Inc. and Alside,
Inc. Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or
operations. Gentek Building Products Limited (the "Non-Guarantor Subsidiary") is
a Canadian company and does not guarantee the Company's 9 3/4% notes. The
operations and cash flows of Gentek Holdings, Inc., Gentek Building Products,
Inc. and Gentek Building Products Limited are only presented for the quarter and
six months ended July 3, 2004, since Gentek was acquired on August 29, 2003. As
such, no consolidating statements of operations or cash flows are presented for
the quarter or six months ended June 28, 2003, as the Company's only
guaranteeing subsidiary for that period did not have any assets, liabilities or
operations. In the opinion of management, separate financial statements of the
respective Guarantor Subsidiaries would not provide additional material
information, which would be useful in assessing the financial composition of the
Guarantor Subsidiaries. None of the Guarantor Subsidiaries has any significant
legal restrictions on the ability of
-7-
investors or creditors to obtain access to its assets in event of default on the
Subsidiary Guarantee other than its subordination to senior indebtedness.
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING BALANCE SHEET
July 3, 2004
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Eliminations Consolidated
----------- ------------ ------------- ----------------- ------------
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,411 $ 1,030 $ 214 $ - $ 2,655
Accounts receivable, net.............. 99,678 25,207 27,586 - 152,471
Intercompany receivables.............. - 843 8,227 (9,070) -
Inventory............................. 79,859 14,143 28,325 - 122,327
Deferred income taxes................. 3,925 3,094 - - 7,019
Other current assets.................. 5,152 663 1,038 - 6,853
----------- ----------- ----------- ------------ ----------
Total current assets................ 190,025 44,980 65,390 (9,070) 291,325
Property, plant and equipment, net....... 105,261 5,484 31,981 - 142,726
Goodwill................................. 197,461 32,950 - - 230,411
Other intangible assets, net............. 100,154 12,856 1,487 - 114,497
Deferred income taxes.................... - 5,897 - (5,897) -
Investment in subsidiaries............... 116,314 46,941 - (163,255) -
Other assets............................. 8,843 - 192 - 9,035
----------- ----------- ----------- ------------ ----------
Total assets.................... $ 718,058 $ 149,108 $ 99,050 $ (178,222) $ 787,994
=========== =========== =========== ============= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................... $ 47,913 $ 13,794 $ 19,926 $ - $ 81,633
Intercompany payables................. 9,070 - - (9,070) -
Accrued liabilities................... 32,015 8,337 7,049 - 47,401
Income taxes payable.................. 2,537 166 430 - 3,133
----------- ----------- ----------- ------------ ----------
Total current liabilities........... 91,535 22,297 27,405 (9,070) 132,167
Deferred income taxes.................... 60,425 - 3,309 (5,897) 57,837
Other liabilities........................ 20,288 10,497 9,236 - 40,021
Long-term debt........................... 319,000 - 12,159 - 331,159
Stockholder's equity..................... 226,810 116,314 46,941 (163,255) 226,810
----------- ----------- ----------- ------------- ----------
Total liabilities and
stockholder's equity.......... $ 718,058 $ 149,108 $ 99,050 $ (178,222) $ 787,994
=========== =========== =========== ============= ==========
-8-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING BALANCE SHEET
January 3, 2004
(In thousands)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Eliminations Consolidated
----------- ------------ ------------- ----------------- ------------
ASSETS
Current assets:
Cash and cash equivalents............. $ 2,399 $ 2,982 $ - $ (1,099) $ 4,282
Accounts receivable, net.............. 75,533 17,106 14,336 - 106,975
Intercompany receivables.............. - 4,116 2,553 (6,669) -
Inventory............................. 60,909 14,418 22,580 - 97,907
Deferred income taxes................. 3,925 3,094 - - 7,019
Other current assets.................. 4,546 650 368 - 5,564
----------- ----------- ----------- ----------- -----------
Total current assets................ 147,312 42,366 39,837 (7,768) 221,747
Property, plant and equipment, net....... 99,750 6,616 34,480 - 140,846
Goodwill................................. 197,461 32,822 - - 230,283
Other intangible assets, net............. 101,272 13,201 1,663 - 116,136
Investment in subsidiaries............... 112,938 44,671 - (157,609) -
Deferred income taxes.................... - 5,798 - (5,798) -
Other assets............................. 9,503 - 118 - 9,621
----------- ----------- ----------- ----------- -----------
Total assets.................... $ 668,236 $ 145,474 $ 76,098 $ (171,175) $ 718,633
=========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................... $ 30,045 $ 10,213 $ 10,722 $ (1,099) $ 49,881
Intercompany payables................. 6,669 - - (6,669) -
Accrued liabilities................... 36,241 10,302 6,691 - 53,234
Income taxes payable.................. 3,761 389 784 - 4,934
----------- ----------- ----------- ----------- -----------
Total current liabilities........... 76,716 20,904 18,197 (7,768) 108,049
Deferred income taxes.................... 60,425 - 3,401 (5,798) 58,028
Other liabilities........................ 20,126 11,632 9,829 - 41,587
Long-term debt........................... 305,000 - - - 305,000
Stockholder's equity..................... 205,969 112,938 44,671 (157,609) 205,969
----------- ----------- ----------- ------------ -----------
Total liabilities and
stockholder's equity.......... $ 668,236 $ 145,474 $ 76,098 $ (171,175) $ 718,633
=========== =========== =========== ============ ===========
-9-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended July 3, 2004
(In thousands)
(Unaudited)
Non-
Guarantor Guarantor Reclassification/
Parent Subsidiaries Subsidiary Elimination Consolidated
------ ------------ ---------- ----------------- ------------
Net sales......................................... $212,763 $48,610 $ 60,033 $ (19,804) $ 301,602
Cost of sales..................................... 148,425 41,316 48,340 (19,804) 218,277
-------- ------- -------- --------- ---------
Gross profit...................................... 64,338 7,294 11,693 - 83,325
Selling, general and administrative expense....... 36,462 5,803 5,775 - 48,040
-------- ------- -------- --------- ---------
Income from operations............................ 27,876 1,491 5,918 - 35,285
Interest expense, net............................. 6,151 7 96 - 6,254
Foreign currency loss............................. - - 609 - 609
-------- ------- -------- --------- ---------
Income from continuing operations before
income taxes................................. 21,725 1,484 5,213 - 28,422
Income taxes...................................... 9,015 264 2,424 - 11,703
-------- ------- -------- --------- ---------
Income before equity income from subsidiaries..... 12,710 1,220 2,789 - 16,719
Equity income from subsidiaries................... 4,009 2,789 - (6,798) -
-------- ------- -------- --------- ---------
Net income........................................ $ 16,719 $ 4,009 $ 2,789 $ (6,798) $ 16,719
======== ======= ======== ========= =========
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended July 3, 2004
(In thousands)
(Unaudited)
Non-
Guarantor Guarantor Reclassification/
Parent Subsidiaries Subsidiary Elimination Consolidated
------ ------------ ---------- ----------------- ------------
Net sales ........................................ $353,194 $88,380 $ 98,836 $ (34,487) $ 505,923
Cost of sales .................................... 250,494 75,710 80,526 (34,487) 372,243
-------- ------- -------- --------- ---------
Gross profit ..................................... 102,700 12,670 18,310 - 133,680
Selling, general and administrative expense ...... 85,250 11,392 11,290 - 107,932
-------- ------- -------- --------- ---------
Income from operations ........................... 17,450 1,278 7,020 - 25,748
Interest expense, net ............................ 12,128 7 131 - 12,266
Foreign currency loss ............................ - - 615 - 615
-------- ------- -------- --------- ---------
Income from continuing operations
before income taxes ......................... 5,322 1,271 6,274 - 12,867
Income taxes ..................................... 2,207 167 2,873 - 5,247
-------- ------- -------- --------- ---------
Income before equity income from subsidiaries .... 3,115 1,104 3,401 - 7,620
Equity income from subsidiaries .................. 4,505 3,401 - (7,906) -
-------- ------- -------- --------- ---------
Net income ....................................... $ 7,620 $ 4,505 $ 3,401 $ (7,906) $ 7,620
======== ======= ======== ========= =========
-10-
ASSOCIATED MATERIALS INCORPORATED AND SUBSIDIARES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended July 3, 2004
(In thousands)
(Unaudited)
Guarantor Non-Guarantor Reclassification/
Parent Subsidiaries Subsidiary Elimination Consolidated
---------- ------------ ------------- ----------------- ------------
Net cash provided by (used in) operating activities.. $ (19,910) $ (5,335) $ (5,816) $ 1,099 $ (29,962)
INVESTING ACTIVITIES
Additions to property, plant and equipment........... (11,063) (721) (412) - (12,196)
---------- ------------ ------------- --------------- ------------
Net cash used in investing activities................ (11,063) (721) (412) - (12,196)
FINANCING ACTIVITIES
Net increase in revolving line of credit............. 14,000 - 12,159 - 26,159
Equity contribution from Holdings.................... 14,498 - - - 14,498
Financing costs...................................... (67) - (101) - (168)
Intercompany transactions............................ 1,554 4,104 (5,658) - -
---------- ------------ ------------- --------------- ------------
Net cash provided by financing activities............ 29,985 4,104 6,400 - 40,489
---------- ------------ ------------- --------------- ------------
Net increase (decrease) in cash from continuing
operations........................................... (988) (1,952) 172 1,099 (1,669)
Effect of exchange rates on cash..................... - - 42 - 42
Cash at beginning of period.......................... 2,399 2,982 - (1,099) 4,282
---------- ------------ ------------- --------------- ------------
Cash at end of period................................ $ 1,411 $ 1,030 $ 214 $ - $ 2,655
========== ============ ============= =============== ============
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading, vertically integrated manufacturer and North
American distributor of exterior residential building products. The Company's
core products are vinyl windows, vinyl siding, aluminum trim coil, aluminum and
steel siding and accessories, and vinyl fencing, decking and railing. Vinyl
windows and vinyl siding together comprise approximately 60% of the Company's
total net sales. These products are marketed under the Alside(R), Revere(R) and
Gentek(R) brand names and sold on a wholesale basis to more than 50,000
professional contractors engaged in home remodeling and new home construction
principally through the Company's North American network of 125 supply centers.
Approximately two-thirds of the Company's products are sold to contractors
engaged in the home repair and remodeling market with one-third sold to the new
construction market. The supply centers provide "one-stop shopping" to the
Company's contractor customers, carrying products, accessories and tools
necessary to complete a vinyl window or siding project. In addition, the supply
centers provide high quality product literature, product samples and
installation training to these customers.
Because its exterior residential building products are consumer durable
goods, the Company's sales are impacted by the availability of consumer credit,
consumer interest rates, employment trends, changes in levels of consumer
confidence, national and regional trends in new housing starts and general
economic conditions. The Company's sales are also affected by changes in
consumer preferences with respect to types of building products.
During the second quarter of 2004 single-family housing starts decreased,
but existing home sales continued to be very strong. In addition, short-term
interest rates recently increased 25 basis points and the Federal Reserve has
indicated interest rates would continue to increase throughout 2004 and 2005.
The Company believes interest rates can increase by a few hundred basis points
and not have a significant negative impact on its net sales. The Company also
believes that increased interest rates could result in homeowners remaining in
and remodeling their current homes thus benefiting the Company's remodeling
sales. Additionally, the Company believes increasing consumer confidence should
offset any significant negative impact of the interest rate increases.
Overall, the Company believes the fundamentals for the building products
industry remains strong.
The Company operates with significant operating and financial leverage.
Significant portions of the Company's manufacturing, selling, general and
administrative expenses are fixed costs that neither increase nor decrease
proportionately with sales. In addition, a significant portion of the Company's
interest expense is fixed. There can be no assurance that the Company will be
able to reduce its fixed costs in response to a decline in its net sales. As a
result, a decline in the Company's net sales could result in a higher percentage
decline in its income from operations and its net income.
Because most of the Company's building products are intended for exterior
use, sales tend to be lower during periods of inclement weather. Weather
conditions in the first quarter of each calendar year usually result in that
quarter producing significantly less net sales and net cash flows from
operations than in any other period of the year. Consequently, the Company has
historically had small profits or losses in the first quarter and reduced
profits from operations in the fourth quarter of each calendar year. To meet
seasonal cash flow needs during the periods of reduced sales and net cash flows
from operations, the Company typically makes borrowings under the revolving loan
portion of its credit facility.
On August 29, 2003, the Company completed the acquisition of Gentek
Holdings, Inc. ("Gentek Holdings") and repaid all of the indebtedness and
accrued interest of Gentek Holdings and its subsidiaries for an aggregate
purchase price of approximately $114.3 million, which included $1.1 million of
cash acquired, a working capital adjustment and customary transaction fees.
Gentek Holdings, which was privately held, is the parent of Gentek
Building Products, Inc. and Gentek Building Products Limited (collectively,
"Gentek"). Gentek manufactures and distributes vinyl windows, vinyl siding and
accessories, aluminum trim coil, and aluminum and steel siding and accessories
under the Revere(R) and Gentek(R) brand names. Gentek markets its products to
professional contractors on a wholesale basis through company-owned distribution
centers in the mid-Atlantic region of the United States and throughout Canada,
as well as to independent distributors in the United States.
The Gentek acquisition has provided the Company with a number of
significant cost savings and other
-12-
operational opportunities, including increased purchasing leverage, insourcing
of distributed metal products, and operational best practices. The Company
believes that the Gentek acquisition will provide synergy opportunities of
approximately $11 million. The Company has implemented many of the actions
necessary to drive these opportunities and expects to realize approximately$6
million of the benefits in 2004 with the remainder expected in 2005.
In connection with the acquisition, the Company amended its existing
credit facility by adding a term loan facility to borrow an additional $113.5
million and expanding its revolving credit facility from $40 million to $70
million, including a new Canadian subfacility of $15 million.
The Company seeks to distinguish itself from other suppliers of
residential building products and to sustain its profitability through a
business strategy focused on increasing sales at existing supply centers,
expanding its supply center network where the Company already has a supply
center presence, increasing sales through independent specialty distributor
customers, realizing synergies from the Gentek acquisition, developing
innovative new products, and driving operational excellence by reducing costs,
increasing customer service levels and reducing lead times.
AMH HOLDINGS, INC.
On February 19, 2004, AMH Holdings, Inc. ("AMH") was incorporated. AMH has
no material assets or operations other than its 100% ownership of Associated
Materials Holdings, Inc. ("Holdings"), the Company's parent company.
Stockholders and option holders of Holdings became stockholders and option
holders of AMH on March 4, 2004 and are no longer stockholders and option
holders of Holdings. On March 4, 2004, AMH completed an offering of $446 million
aggregate principal at maturity of 11 1/4% senior discount notes. The total
gross proceeds were approximately $258.3 million. In connection with the note
offering, certain options to acquire preferred and common shares were exercised
and the proceeds from the note offering were used to redeem all of AMH's
preferred stock including accrued and unpaid dividends, pay a dividend to AMH's
common stockholders and pay a bonus to certain members of the Company's senior
management. Through Holdings, AMH contributed $14.5 million to the Company to
pay the management bonus. The management bonus is included in the Company's
selling, general and administrative expense for the six months ended July 3,
2004. Interest accrues at a rate of 11 1/4% on the notes in the form of an
increase in the accreted value of the notes prior to March 1, 2009. Thereafter,
cash interest of 11 1/4% on the notes accrues and is payable semi-annually in
arrears on March 1 and September 1 of each year, commencing on September 1,
2009. The notes mature on March 1, 2014. The AMH notes are structurally
subordinated to all existing and future debt and other liabilities of AMH's
existing and future subsidiaries, including the Company and Holdings.
RESULTS OF OPERATIONS
The Company's 2004 results of operations include the results of Gentek,
which was acquired on August 29, 2003. Gentek's results as compared to Alside's
results typically have a lower gross profit margin percentage as a larger
proportion of Gentek's net sales are to independent distributors versus to
contractors through company-owned distribution centers. Additionally, a portion
of Gentek's sales are from manufacturing and distributing aluminum trim coil and
aluminum and steel siding and accessories, which generate lower gross profit
margins than vinyl products. Gentek's selling, general and administrative
expense as a percentage of net sales is typically lower than Alside's as Gentek
does not have as large of a proportion of fixed costs associated with operating
company-owned distribution centers. The Company anticipates that on a
consolidated basis, its gross profit margin percentage and its selling, general
and administrative expense as a percentage of net sales will decrease as
compared to periods prior to the Gentek acquisition.
The following table sets forth for the periods indicated the results of
the Company's operations (in thousands):
-13-
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------- ---------- ---------- ----------
Net sales............................................. $ 301,602 $ 180,363 $ 505,923 $ 291,307
Gross profit.......................................... 83,325 56,800 133,680 84,968
Selling, general and administrative expense........... 48,040 33,704 107,932 65,014
--------- ---------- ---------- ----------
Income from operations................................ 35,285 23,096 25,748 19,954
Interest expense, net ................................ 6,254 5,483 12,266 10,921
Foreign currency loss................................. 609 - 615 -
--------- ---------- ---------- ----------
Loss before income taxes.............................. 28,422 17,613 12,867 9,033
Income taxes.......................................... 11,703 7,309 5,247 3,749
--------- ---------- ---------- ----------
Net income............................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284
========= ========== ========== ==========
Other Data:
EBITDA (a)(b)......................................... $ 39,813 $ 25,891 $ 35,376 $ 25,466
Adjusted EBITDA (a)(b)................................ 39,813 25,891 49,874 25,466
(a) EBITDA is calculated as net income plus interest, taxes,
depreciation and amortization. Adjusted EBITDA excludes certain
items. The Company considers Adjusted EBITDA to be an important
indicator of its operational strength and performance of its
business. The Company has included Adjusted EBITDA because it is a
key financial measure used by management to (i) assess the Company's
ability to service its debt and / or incur debt and meet the
Company's capital expenditure requirements; (ii) internally measure
the Company's operating performance; and (iii) determine the
Company's incentive compensation programs. In addition, the
Company's credit facility has certain covenants that use ratios
utilizing this measure of Adjusted EBITDA. The definition of EBITDA
under the indenture governing the 9 3/4% notes due 2012 excludes
certain items. Adjusted EBITDA has not been prepared in accordance
with accounting principles generally accepted in the United States
("GAAP"). Adjusted EBITDA as presented by the Company may not be
comparable to similarly titled measures reported by other companies.
As Adjusted EBITDA is not a measure determined in accordance with
GAAP, it should not be considered as an alternative to, or more
meaningful than, net income (as determined in accordance with GAAP),
as a measure of the Company's operating results or cash flows from
operations (as determined in accordance with GAAP). The
reconciliation of net income to EBITDA and Adjusted EBITDA is as
follows (in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
-------- -------- ---------- ----------
Reconciliation of net income to EBITDA and Adjusted
EBITDA (c) :
Net income ............................................ $ 16,719 $ 10,304 $ 7,620 $ 5,284
Interest .............................................. 6,254 5,483 12,266 10,921
Taxes ................................................. 11,703 7,309 5,247 3,749
Depreciation and amortization ......................... 5,137 2,795 10,243 5,512
-------- -------- ---------- ----------
EBITDA ................................................ 39,813 25,891 35,376 25,466
Management bonus (c) .................................. - - 14,498 -
-------- -------- ---------- ----------
Adjusted EBITDA ....................................... $ 39,813 $ 25,891 $ 49,874 $ 25,466
======== ======== ========== ==========
-14-
(b) The 2004 results of operations include the results of Gentek. A
reconciliation of Gentek's net income to EBITDA for the quarter and six
months ended July 3, 2004 is as follows (in thousands):
Quarter Six Months
Ended Ended
July 3, July 3,
2004 2004
------- ----------
Reconciliation of Gentek's net income to EBITDA
Net income.......................................... $ 3,900 $ 4,365
Interest............................................ 102 138
Taxes............................................... 2,609 2,938
Depreciation and amortization ...................... 1,739 3,580
------- ----------
Gentek's EBITDA..................................... $ 8,350 $ 11,021
======= ==========
(c) Represents a management bonus paid in connection with the completion on
March 4, 2004 of AMH's offering of senior discount notes.
-15-
Quarter Ended July 3, 2004 Compared to Quarter Ended June 28, 2003
Net sales increased 67.2% to $301.6 million during the second quarter of
2004 compared to $180.4 million for the same period in 2003, driven by increased
vinyl window, vinyl siding and third-party manufactured product sales at Alside
along with net sales from Gentek, which contributed $93.8 million of net sales
in the second quarter of 2004. Gross profit in the second quarter of 2004 was
$83.3 million, or 27.6% of net sales, compared to gross profit of $56.8 million,
or 31.5% of net sales, in the second quarter of 2003. The decrease in gross
profit margin percentage is primarily due to the impact of the results
contributed by Gentek as Gentek's gross margin percentage is typically lower
than Alside's. Selling, general and administrative expense increased to $48.0
million, or 15.9% of net sales, for the second quarter of 2004 versus $33.7
million, or 18.7% of net sales, for the same period in 2003. The increase in
selling, general and administrative expense is a result of the impact of the
acquisition of Gentek, as well as the result of adding two new Alside supply
centers in 2004. Income from operations was $35.3 million in the second quarter
of 2004 compared to $23.1 million for the same period in 2003.
Interest expense increased 14.1% during the second quarter of 2004
compared to the same period in 2003. The increase in interest expense is due to
additional borrowings on the term loan as a result of the Gentek acquisition, as
well as additional borrowings on the revolving loan portion of the credit
facility to meet the seasonal working capital needs of the Company. Due to the
seasonal nature of the Company's operating results, the Company has recorded an
income tax provision on its income before taxes for the quarters ended July 3,
2004 and June 28, 2003 at its estimated full fiscal year effective rate of
approximately 41.5%.
Net income increased to $16.7 million for the quarter ended July 3, 2004
compared to $10.3 million for the quarter ended June 28, 2003. The increase in
net income is a result of the increased sales and operating income from the
Alside division and the $3.9 million of net income contributed by Gentek.
EBITDA for the second quarter of 2004 was $39.8 million compared to $25.9
million for the same period in 2003. Gentek contributed $8.4 million of EBITDA
in the second quarter of 2004. There were no adjustments to EBITDA for the
second quarter of 2004 or 2003.
Six Months Ended July 3, 2004 Compared to Six Months Ended June 28, 2003
Net sales increased 73.7% to $505.9 million for the six months ended July
3, 2004 compared to $291.3 million for the same period in 2003, driven by
increased vinyl window,vinyl siding and third-party manufactured product sales
at Alside along with net sales from Gentek, which contributed $159.2 million of
net sales for the six months ended July 3, 2004. Gross profit for the six months
ended July 3, 2004 was $133.7 million, or 26.4% of net sales, compared to gross
profit of $85.0 million, or 29.2% of net sales, for the same period of 2003. The
decrease in gross profit margin percentage is primarily due to the impact of the
results contributed by Gentek. Selling, general and administrative expense
increased to $107.9 million, or 21.3% of net sales, for the six months ended
July 3, 2004 as compared to $65.0 million, or 22.3% of net sales, for the same
period in 2003. The increase in selling, general and administrative expense is a
result of the $14.5 million management bonus relating to AMH's offering of
senior discount notes, the impact of the acquisition of Gentek, as well as the
result of adding two new Alside supply centers in 2004 along with three new
supply centers in 2003, which had a full six months of expense in 2004. Income
from operations was $25.7 million for the six months ended July 3, 2004 compared
to $20.0 million for the same period in 2003.
Interest expense increased 12.3% for the six months ended July 3, 2004
compared to the same period in 2003. The increase in interest expense is due to
additional borrowings on the term loan as a result of the Gentek acquisition, as
well as additional borrowings on the revolving loan portion of the credit
facility to meet the seasonal working capital needs of the Company. Due to the
seasonal nature of the Company's operating results, the Company has recorded an
income tax provision on its income before taxes for the six months ended July 3,
2004 and June 28, 2003 at its estimated full fiscal year effective rate of
approximately 41.5%.
Net income increased to $7.6 million for the six months ended July 3, 2004
compared to $5.3 million for the six months ended June 28, 2003. The increase in
net income is a result of the increased sales and operating income from the
Alside division and the $4.4 million of net income contributed by Gentek.
EBITDA for the six months ended July 3, 2004 was $35.4 million compared to
$25.5 million for the same period in 2003. Gentek contributed $11.0 million of
EBITDA for the six months ended July 3, 2004. Adjusted EBITDA for the six months
ended July 3, 2004 was $49.9 million compared to $25.5 million for the same
period in 2003. As compared to EBITDA, Adjusted EBITDA for the six months ended
July 3, 2004 excludes a bonus paid to certain
-16-
members of Company management totaling approximately $14.5 million related to
the completion of the offering of senior discount notes on March 4, 2004 by AMH.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth a summary of the Company's cash flows for the six
months ended July 3, 2004 and June 28, 2003 (in thousands):
Six Months Six Months
Ended Ended
July 3, June 28,
2004 2003
---------- ----------
Cash used in operating activities.................. $ (29,962) $ (4,257)
Cash used in investing activities.................. (12,196) (5,841)
Cash provided by (used in) financing activities.... 40,489 (908)
CASH FLOWS
At July 3, 2004, the Company had cash and cash equivalents of $2.7 million
and available borrowing capacity of approximately $37.6 million under the
revolving portion of its credit facility. Outstanding letters of credit as of
July 3, 2004, totaled $6.2 million securing various insurance letters of credit.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operations was $30.0 million and $4.3 million for the six
months ended July 3, 2004 and June 28, 2003, respectively. The cash used in
operations for both periods reflects the operating results for the period, the
seasonal increase of inventory and accounts receivable levels, as well as
payments of accrued profit sharing and customer sales incentives. Additionally,
cash used in operations for the six months ended July 3, 2004 includes the
seasonal operating needs of Gentek.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures totaled $12.2 million and $5.8 million for the six
months ended July 3, 2004 and June 28, 2003, respectively. Capital expenditures
in the 2004 period include $1.1 million of capital expenditures for Gentek.
Capital expenditures in 2004 were primarily to increase extrusion capacity at
the Company's West Salem, Ohio manufacturing location and to increase capacity
at two of the Company's window manufacturing facilities. Capital expenditures in
the 2003 period were primarily to replace vinyl siding extrusion and handling
equipment at the Company's Ennis, Texas manufacturing location. The Company's
estimate for total capital expenditures for 2004 is approximately $21 million
reflecting additional spending to meet capacity requirements at the Company's
window manufacturing facilities.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities for the six months ended July 3, 2004
include borrowings on the revolving portion of the Company's credit facility of
$26.2 million, a capital contribution from Holdings of $14.5 million and $0.2
million paid for financing costs. Cash flows from financing activities for the
six months ended June 28, 2003 reflect the redemption of the remaining
outstanding 9 1/4% notes of $0.9 million. The increase in borrowings on the
revolving portion of the credit facility for the six months ended July 3, 2004
of $26.2 million as compared to the same period in the prior year is due to the
increased working capital requirements as a result of the increased sales, as
well as Gentek's seasonal working capital needs. The Company believes there will
be no outstanding borrowings on the revolving portion of its credit facility by
the end of the third quarter of 2004. In addition, the Company intends to
repay a portion of the borrowings on the term loan portion of its credit
facility in the third and fourth quarters of 2004.
DESCRIPTION OF THE COMPANY'S OUTSTANDING INDEBTEDNESS
The Company's 9 3/4% notes pay interest semi-annually in April and
October. The Company's credit facility as of April 3, 2004 includes $140 million
of outstanding term loans due through 2010 that bear interest at the London
Interbank Offered Rate (LIBOR) plus 2.75%, payable quarterly at the end of each
calendar quarter, and up to $70
-17-
million of available borrowings provided by revolving loans (including a
Canadian subfacility of $15 million), which expire in 2007 and bear interest at
LIBOR plus up to 3.00%. Outstanding borrowings on the revolving portion of the
Company's credit facility totaled $26.2 million at July 3, 2004. No interest was
paid on the credit facility in the second quarter of 2003 due to the fiscal
quarter ending before June 30, 2003. The Company's payment obligations under the
9 3/4% notes are fully and unconditionally guaranteed, jointly and severally on
a senior subordinated basis, by its domestic wholly-owned subsidiaries: Gentek
Holdings, Inc., Gentek Building Products Inc. and Alside, Inc. Alside, Inc. is a
wholly owned subsidiary having no assets, liabilities or operations. Gentek
Building Products Limited is a Canadian company and does not guarantee the
Company's 9 3/4% notes.
The credit facility and the indenture governing the 9 3/4% notes contain
restrictive covenants that, among other things, limit the Company's ability to
incur additional indebtedness, make loans or advances to subsidiaries and other
entities, invest in capital expenditures, sell its assets or declare dividends.
In addition, under the credit facility the Company is required to achieve
certain financial ratios relating to leverage, coverage of fixed charges and
coverage of interest expense. The Company was in compliance with these covenants
as of July 3, 2004. On an annual basis, the Company is required to make
principal payments on the term loan under its credit facility based on a
percentage of excess cash flows as defined in the credit facility. The payments
on the term loan in 2003 and 2002 were sufficient such that no additional
principal payments were required under the excess cash flow provision. The
Company records as a current liability those principal payments that are
estimated to be due within twelve months under the excess cash flow provision of
the credit facility when the likelihood of those payments becomes probable. The
Company may need to refinance all or a portion of its indebtedness on or before
their respective maturity dates. There can be no assurance that the Company will
be able to refinance any of its indebtedness on commercially reasonable terms or
at all.
The Company believes that for the foreseeable future cash flows from
operations and its borrowing capacity under its credit facility will be
sufficient to satisfy its obligations to pay principal and interest on its
outstanding debt, maintain current operations, and provide sufficient capital
for presently anticipated capital expenditures. There can be no assurances,
however, that the cash generated by the Company will be sufficient for these
purposes.
EFFECTS OF INFLATION
The Company believes that the effects of inflation have not been material
to its operating results for each of the past three years, including interim
periods. The Company's principal raw materials, vinyl resin, aluminum, and steel
have historically been subject to significant price changes. Raw material
pricing on the Company's key commodities continued to increase significantly in
the second quarter of 2004. The Company believes that for the remainder of 2004,
vinyl resin prices will decrease slightly based on historical seasonal trends.
However, the Company believes aluminum costs will remain at their current levels
or slightly increase for the remainder of 2004. The Company has announced price
increases among all of its product offerings, which it believes will offset the
impact of the raw material inflation. While the Company expects that any
additional significant raw material price increases in 2004 will be offset by
price increases to its customers, there can be no assurances that the Company
will be able to pass on any future price increases including the announced
price increases. At July 3, 2004, the Company had no raw material hedge
contracts in place.
CERTAIN FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
report regarding the prospects of the industry and the Company's prospects,
plans, financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "intend," "estimate," "anticipate," "believe," "predict," "potential"
or "continue" or the negatives of these terms or variations of them or similar
terminology. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, it does not assure that these
expectations will prove to be correct. The following factors are among those
that may cause actual results to differ materially from the forward-looking
statements:
- changes in home building industry, economic, interest rates and
other conditions;
- changes in availability of consumer credit, employment trends,
levels of consumer confidence and consumer preferences;
- changes in raw material costs and availability and the Company's
ability to pass on price increases to its customers to offset
changes in raw material costs;
-18-
- changes in national and regional trends in new housing starts;
- changes in weather conditions;
- the Company's ability to comply with certain financial covenants in
the loan documents governing its indebtedness;
- increases in competition from other manufacturers of vinyl and metal
exterior residential building products as well as alternative
building products;
- increases in the Company's indebtedness;
- increases in costs of environmental compliance;
- increases in capital expenditure requirements;
- potential conflict between existing Alside and new Gentek
distribution channels;
- the achievement of anticipated synergies and operational
efficiencies from the Gentek acquisition; and
- the other factors discussed under the heading "Risk Factors" in the
Company's annual report on Form 10-K for the year ended January 3,
2004 and elsewhere in this report.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements included in this report. These forward-looking statements speak only
as of the date of this report. The Company does not intend to update these
statements unless the securities laws require it to do so.
-19-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has outstanding borrowings under the term loan and revolving
loan portions of its credit facility and may borrow under the revolving credit
facility from time to time for general corporate purposes, including working
capital and capital expenditures. Interest under the credit facility is based on
the variable London Interbank Offered Rate (LIBOR). At July 3, 2004, the Company
had borrowings of $140.0 million under the term loan and $26.2 million under the
revolving loan portions of its credit facility. The effect of a 1/8% increase or
decrease in interest rates would increase or decrease total interest expense for
the six months ended July 3, 2004 by approximately $0.1 million.
The Company has $165.0 million of senior subordinated notes due 2012 that
bear a fixed interest rate of 9 3/4%. The fair value of the Company's 9 3/4%
notes is sensitive to changes in interest rates. In addition, the fair value is
affected by the Company's overall credit rating, which could be impacted by
changes in the Company's future operating results.
FOREIGN CURRENCY EXCHANGE RISK
The Company's revenues are primarily from domestic customers and are
realized in U.S. dollars. However, since the acquisition of Gentek, the Company
now realizes revenues from sales made through Gentek's Canadian distribution
centers in Canadian dollars. The Company's Canadian manufacturing facilities
acquire raw materials and supplies from U.S. vendors, which results in foreign
currency transactional gains and losses. However, payment terms among Canadian
manufacturing facilities and these vendors are short-term in nature.
Accordingly, the Company believes its direct foreign currency exchange risk is
not material. At July 3, 2004, the Company had no currency hedges in place.
COMMODITY PRICE RISK
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Effects of Inflation" for a discussion of the market
risk related to the Company's principal raw materials, vinyl resin, aluminum and
steel.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this quarterly report (the "Evaluation Date").
Based on their evaluation as of the Evaluation Date, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within required time periods.
There have been no changes to the Company's internal control over financial
reporting during the quarter ended July 3, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which, after giving effect to the Company's
existing insurance coverage, is expected to have a material adverse effect on
the Company.
From time to time, the Company is involved in a number of proceedings and
potential proceedings relating to environmental and product liability matters.
The Company handles these claims in the ordinary course of business and
maintains product liability insurance covering certain types of claims. Although
it is difficult to estimate the Company's potential exposure to these matters,
the Company believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
* This document is being furnished in accordance with SEC Release Nos.
33-8212 and 34-47551.
(b) Reports on Form 8-K
Report Date Description
- ------------ -----------
May 10, 2004 The Company furnished a current report on Form 8-K to
report its financial results for the first quarter ended April
3, 2004 (Items 7 and 12).
May 10, 2004 The Company furnished a current report on Form 8-K to
report unaudited pro forma consolidated financial statements of
the Company for the twelve months ended April 3, 2004
(Items 7 and 9).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASSOCIATED MATERIALS INCORPORATED
(Registrant)
Date: August 17, 2004 By: /s/ Michael Caporale, Jr.
-----------------------------
Michael Caporale, Jr.
President, Chief Executive Officer and
Director
(Principal Executive Officer)
By: /s/ D. Keith LaVanway
--------------------------------------
D. Keith LaVanway
Vice President - Chief Financial Officer
Treasurer and Secretary
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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