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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 October 2, 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: 333-115543
AMH HOLDINGS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 16-1693178
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(State or Other Jurisdiction of Incorporation of Organization) (I.R.S. Employer Identification No.)
3773 State Rd. Cuyahoga Falls, Ohio 44223
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (800) 257-4335
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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 November 15, 2004, the Registrant had 1,672,352 shares of Class A
common stock and 19,118 shares of Class B common stock outstanding.
AMH HOLDINGS, INC.
REPORT FOR THE QUARTER AND NINE MONTHS ENDED OCTOBER 2, 2004
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets........................................... 1
October 2, 2004 (Unaudited) and January 3, 2004
Consolidated Statements of Operations (Unaudited)..................... 2
Quarters ended October 2, 2004 and September 27, 2003
Nine months ended October 2, 2004 and September 27, 2003
Consolidated Statements of Cash Flows (Unaudited)..................... 3
Nine months ended October 2, 2004 and September 27, 2003
Notes to Consolidated Financial Statements (Unaudited)................ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
Item 4. Controls and Procedures......................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 6. Exhibits........................................................ 18
SIGNATURES.................................................................. 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
October 2, January 3,
2004 2004
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 3,720 $ 4,282
Accounts receivable, net ....................... 160,897 106,975
Inventory ...................................... 128,368 97,907
Deferred income taxes .......................... 7,019 7,019
Other current assets ........................... 6,723 5,564
--------- ---------
Total current assets ......................... 306,727 221,747
Property, plant and equipment, net ................ 143,880 140,846
Goodwill .......................................... 235,021 230,283
Other intangible assets, net ...................... 113,771 116,136
Other assets ...................................... 18,272 9,621
--------- ---------
Total assets ............................. $ 817,671 $ 718,633
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 82,405 $ 49,881
Accrued liabilities ............................ 57,590 53,234
Income taxes payable ........................... 5,729 4,934
--------- ---------
Total current liabilities .................... 145,724 108,049
Deferred income taxes ............................. 50,202 58,028
Other liabilities ................................. 47,532 41,587
Long-term debt .................................... 582,182 305,000
Stockholders' equity (deficit) .................... (7,969) 205,969
--------- ---------
Total liabilities and stockholders' equity $ 817,671 $ 718,633
========= =========
See accompanying notes.
-1-
AMH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ----------- -------------
Net sales ................................. $ 314,408 $ 223,806 $ 820,331 $ 515,113
Cost of sales ............................. 227,347 159,587 599,590 365,926
--------- --------- --------- ---------
Gross profit .............................. 87,061 64,219 220,741 149,187
Selling, general and administrative expense 48,716 38,270 156,648 103,284
--------- --------- --------- ---------
Income from operations .................... 38,345 25,949 64,093 45,903
Interest expense, net ..................... 13,409 9,706 35,615 20,627
Foreign currency (gain) loss .............. (35) (199) 580 (199)
--------- --------- --------- ---------
Income before taxes ....................... 24,971 16,442 27,898 25,475
Income taxes .............................. 9,911 6,823 11,797 10,572
--------- --------- --------- ---------
Net income ................................ $ 15,060 $ 9,619 $ 16,101 $ 14,903
========= ========= ========= =========
See accompanying notes.
-2-
AMH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Nine Months
Ended Ended
October 2, September 27,
2004 2003
---------- -------------
OPERATING ACTIVITIES
Net income ........................................................... $ 16,101 $ 14,903
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................... 15,565 8,874
Cost of sales expense related to an inventory fair value purchase
accounting adjustment ......................................... - 1,402
Tax benefit of stock option exercise ............................ 2,586 -
Amortization of debt discount and deferred financing costs ...... 18,233 4,953
Changes in operating assets and liabilities:
Accounts receivable, net ...................................... (52,977) (33,303)
Inventories ................................................... (29,807) (10,457)
Income taxes .................................................. (3,843) 9,914
Accounts payable and accrued liabilities ...................... 36,954 21,500
Other ......................................................... (2,818) 693
--------- ---------
Net cash provided by (used in) operating activities .................. (6) 18,479
INVESTING ACTIVITIES
Acquisition of Gentek Holdings, net of cash acquired ................. - (112,521)
Additions to property, plant and equipment ........................... (16,970) (9,587)
--------- ---------
Net cash used in investing activities ................................ (16,970) (122,108)
FINANCING ACTIVITIES
Proceeds from issuance of 11 1/4% senior discount notes .............. 258,265 -
Proceeds from borrowings under term loan ............................. - 190,000
Repayments of term loan .............................................. - (86,500)
Net increase in revolving line of credit ............................. 2,376 -
Options exercised .................................................... 1,760 -
Redemption of preferred stock ........................................ (177,844) -
Redemption of common stock ........................................... (125) -
Common stock dividend ................................................ (57,684) -
Financing costs ...................................................... (10,327) (4,082)
Redemption of 9 1/4% senior subordinated notes ....................... - (908)
--------- ---------
Net cash provided by financing activities ............................ 16,421 98,510
--------- ---------
Net decrease in cash ................................................. (555) (5,119)
Effect of exchange rate changes on cash .............................. (7) 35
--------- ---------
Cash at beginning of period .......................................... 4,282 13,022
--------- ---------
Cash at end of period ................................................ $ 3,720 $ 7,938
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest ............................................... $ 13,249 $ 13,198
========= =========
Cash paid for income taxes ........................................... $ 13,020 $ 510
========= =========
See accompanying notes.
-3-
AMH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER AND NINE MONTHS ENDED OCTOBER 2, 2004
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
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"), which in turn has no material assets or
operations other than its 100% ownership of Associated Materials Incorporated
("AMI"), collectively referred to as the "Company". On March 4, 2004
stockholders and option holders of Holdings became stockholders and option
holders of AMH pursuant to the terms of a restructuring agreement (see Note 2).
The unaudited financial statements of AMH 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 AMI'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. for the entire 2004 periods presented, which was acquired on
August 29, 2003 (see Note 3).
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.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2 - RESTRUCTURING AGREEMENT AND ISSUANCE OF SENIOR DISCOUNT NOTES
On March 4, 2004, AMH, Holdings and the stockholders entered into a
restructuring agreement pursuant to which all of the stockholders of Holdings
contributed their capital stock in Holdings to AMH in exchange for equivalent
capital stock in AMH. Subsequently, AMH contributed all of the capital stock of
Holdings in exchange for 1,000 shares of class A common stock of Holdings.
Following this exchange, all of the former stockholders of Holdings became the
stockholders of AMH, and AMH became the sole stockholder of Holdings. Holdings
continued to be the sole stockholder of AMI.
In addition, 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 of approximately $14.5 million to certain
members of AMI's senior management. The management bonus is included in the
Company's selling, general and administrative expense for the nine months ended
October 2, 2004.
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
-4-
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
maintains distinct separation of the Revere(R) and Gentek(R) brands from the
Company's Alside(R) brand by continuing to offer differentiated products,
marketing support and sales support.
The following pro forma information for the quarter and nine months ended
September 27, 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 Nine Months
Ended Ended
September 27, September 27,
2003 2003
------------- -------------
Net sales....................................................... $ 281,911 $ 705,153
Net income...................................................... $ 12,517 $ 18,241
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):
October 2, January 3,
2004 2004
---------- ----------
Raw materials.................................................. $ 27,782 $ 24,586
Work-in-process................................................ 9,796 6,307
Finished goods and purchased stock............................. 90,790 67,014
---------- ----------
$ 128,368 $ 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 $235.0 million
including $197.5 million from the purchase price for the April 2002 merger
transaction and $37.5 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 October 2, 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 $ 4,244 $ 105,036 $ 109,280 $ 2,844 $ 106,436
Patents...................... 10 6,550 1,600 4,950 6,550 1,110 5,440
Customer base................ 7 4,503 718 3,785 4,628 368 4,260
----------- ----------- ----------- ----------- ----------- -----------
Total other intangible
assets............... $ 120,333 $ 6,562 $ 113,771 $ 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 October 2, 2004 and September 27, 2003, respectively and $2.4
million and $1.7 million for the nine months ended October 2, 2004 and September
27, 2003, respectively.
-5-
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
October 2, January 3,
2004 2004
---------- ----------
11 1/4% senior discount notes .................... $274,806 $ -
9 3/4% notes ..................................... 165,000 165,000
Term loan under credit facility .................. 140,000 140,000
Revolving loans under credit facility ............ 2,376 -
-------- --------
$582,182 $305,000
======== ========
AMH's $446 million aggregate principal at maturity 11 1/4% senior discount
notes are due in 2014. AMH received total gross proceeds of $258.3 million in
connection with the issuance. 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 are structurally subordinated to all existing and
future debt and other liabilities of AMH's existing and future subsidiaries,
including AMI and Holdings. The indenture governing the 11 1/4% senior discount
notes contains restrictive covenants that, among other things, limit AMH's
ability, and the ability of its subsidiaries, to incur additional indebtedness,
make certain restricted payments, pay dividends or make other distributions or
repurchase or redeem AMH's stock, make investments, sell assets, incur liens
(except with respect to its subsidiaries), issue capital stock of restricted
subsidiaries, enter into agreements restricting its subsidiaries' ability to pay
dividends, enter into sale/leaseback transactions, enter into transactions with
affiliates, and consolidate, merge or sell all or substantially all of its
assets.
AMI'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, AMI 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 AMI'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 bear 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. In connection with the offering of the 11 1/4% notes, as described
above in note 2, on March 18, 2004, AMI amended its credit facility. The
amendment to the credit facility provides, among other things, for the guaranty
by AMH of the obligations of AMI and Gentek Building Products Limited under the
credit facility and the pledge of the stock of Holdings to secure and guaranty
the credit facility.
The credit facility and the indenture governing the 9 3/4% notes contain
restrictive covenants that, among other things, limit AMI'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 AMI is required to achieve certain
financial ratios relating to leverage, coverage of fixed charges and coverage of
interest expense. AMI was in compliance with its covenants as of October 2,
2004. On an annual basis, AMI 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
-6-
disclosed on a quarterly basis. The pro forma effect on net income for the
quarters and six months ended October 2, 2004 and September 27, 2003 would have
been (in thousands):
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ---------- -------------
Net income as reported .............................. $ 15,060 $ 9,619 $ 16,101 $ 14,903
Pro forma stock based employee compensation cost, net
of tax ........................................... (48) (33) (129) (99)
-------- -------- -------- --------
Pro forma net income ................................ $ 15,012 $ 9,586 $ 15,972 $ 14,804
======== ======== ======== ========
NOTE 8 - INCOME TAXES
The Company participates in a tax sharing agreement with its direct and
indirect subsidiaries, Holdings and AMI. The Company has recorded income taxes
at its estimated full fiscal year effective tax rate of approximately 42.3% on
the income before taxes for the nine months ended October 2, 2004. This resulted
in an effective tax rate of 39.7% for the quarter ended October 2, 2004. AMH's
effective rate differs from the effective rate of AMI due to a portion of the
interest accretion on AMH's 11 1/4% senior discount notes not being deductible
for income tax purposes and due to limitations on the ability of the Company to
file consolidated income tax returns in certain states. The Company recorded
income taxes for the quarter and nine months ended September 27, 2003 at its
then estimated full fiscal year effective tax rate of approximately 41.5%.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income differs from net income due to foreign currency
translation adjustments as follows (in thousands):
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
--------- ------------- ---------- -------------
Net income as reported ..................... $15,060 $ 9,619 $16,101 $14,903
Foreign currency translation adjustments.... 2,399 931 1,266 931
------- ------- ------- -------
Comprehensive income ....................... $17,459 $10,550 $17,367 $15,834
======= ======= ======= =======
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 Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ---------- -------------
NET PERIODIC PENSION COST
Service cost ................ $ 113 $ 52 $ 321 $ 158
Interest cost ............... 649 514 1,905 1,544
Expected return on assets ... (704) (516) (2,112) (1,599)
Amortization of unrecognized:
Cumulative net loss ...... 88 107 228 321
------- ------- ------- -------
Net periodic pension cost ... $ 146 $ 157 $ 342 $ 424
======= ======= ======= =======
The Company has made its expected 2004 contributions to the Domestic Plans
of $0.3 million.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On February 19, 2004, AMH was incorporated. AMH has no material assets or
operations other than its 100% ownership of Holdings, AMI'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.
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 third quarter of 2004 single-family housing starts and existing
home sales continued at historically strong levels. In addition, short-term
interest rates increased, but mortgage interest rates decreased. The Company
believes it can sustain additional short-term interest rate increases without 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 interest rate increases. Overall, the Company
believes the fundamentals for the building products industry remain 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. The Company typically generates the majority of
its cash flow in the fourth quarter.
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
-8-
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 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.
RESULTS OF OPERATIONS
The Company's 2004 results of operations include the results of Gentek,
which was acquired on August 29, 2003. Operating results for the 2003 periods
presented include the results of Gentek subsequent to the acquisition date.
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):
-9-
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ---------- -------------
Net sales ................................. $ 314,408 $ 223,806 $ 820,331 $ 515,113
Gross profit .............................. 87,061 64,219 220,741 149,187
Selling, general and administrative expense 48,716 38,270 156,648 103,284
--------- --------- --------- ---------
Income from operations .................... 38,345 25,949 64,093 45,903
Interest expense, net ..................... 13,409 9,706 35,615 20,627
Foreign currency (gain) loss .............. (35) (199) 580 (199)
--------- --------- --------- ---------
Income before income taxes ................ 24,971 16,442 27,898 25,475
Income taxes .............................. 9,911 6,823 11,797 10,572
--------- --------- --------- ---------
Net income ................................ $ 15,060 $ 9,619 $ 16,101 $ 14,903
========= ========= ========= =========
Other Data:
EBITDA (a)(b) ............................. $ 43,702 $ 29,510 $ 79,078 $ 54,976
Adjusted EBITDA (a)(b) .................... 43,702 30,912 93,576 56,378
(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 Nine Months Nine Months
Ended Ended Ended Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---------- ------------- ----------- -------------
Reconciliation of net income to EBITDA and Adjusted
EBITDA:
Net income ........................................ $15,060 $ 9,619 $16,101 $14,903
Interest .......................................... 13,409 9,706 35,615 20,627
Taxes ............................................. 9,911 6,823 11,797 10,572
Depreciation and amortization ..................... 5,322 3,362 15,565 8,874
------- ------- ------- -------
EBITDA ............................................ 43,702 29,510 79,078 54,976
Cost of sales adjustment .......................... - 1,402 - 1,402
Management bonus (c) .............................. - - 14,498 -
------- ------- ------- -------
Adjusted EBITDA ................................... $43,702 $30,912 $93,576 $56,378
======= ======= ======= =======
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(b) The 2004 results of operations include the results of Gentek for the full
periods presented. The results of operations for the quarter and nine
months ended September 27, 2003 include the results of Gentek for the
period subsequent to its acquisition on August 29, 2003. A reconciliation
of Gentek's net income to EBITDA and adjusted EBITDA for the quarter and
nine months ended October 2, 2004 and September 27, 2003 is as follows (in
thousands):
Quarter
and
Quarter Nine Months Nine Months
Ended Ended Ended
October 2, October 2, September 27,
2004 2004 2003
---------- ---------- -------------
Reconciliation of Gentek's net income to EBITDA
Net income .................................... $ 6,508 $10,873 $ 1,099
Interest ...................................... 154 292 59
Taxes ......................................... 3,247 6,185 779
Depreciation and amortization ................. 1,794 5,374 485
------- ------- -------
Gentek's EBITDA ............................... 11,703 22,724 2,422
Cost of sales adjustment ...................... - - 1,402
------- ------- -------
Gentek's adjusted EBITDA ...................... $11,703 $22,724 $ 3,824
======= ======= =======
(c) Represents a management bonus paid in connection with the completion on
March 4, 2004 of AMH's offering of senior discount notes.
-11-
Quarter Ended October 2, 2004 Compared to Quarter Ended September 27, 2003
Net sales increased 40.5% to $314.4 million during the third quarter of
2004 compared to $223.8 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 $97.7 million of net sales
in the third quarter of 2004 compared to $27.1 million of net sales for the same
period in 2003. Gross profit in the third quarter of 2004 was $87.1 million, or
27.7% of net sales, compared to gross profit of $64.2 million, or 28.7% of net
sales, in the third quarter of 2003. The decrease in gross profit margin
percentage was primarily due to the impact of the results contributed by Gentek
as Gentek's gross margin percentage is typically lower than Alside's. Also
contributing to the lower gross margin percentage were increased costs of the
Company's key raw materials - vinyl resin, aluminum and steel. Selling, general
and administrative expense increased to $48.7 million, or 15.5% of net sales,
for the third quarter of 2004 versus $38.3 million, or 17.1% of net sales, for
the same period in 2003. The increase in selling, general and administrative
expense was a result of the impact of the acquisition of Gentek, the result of
adding three new Alside supply centers in 2004, one new Gentek supply center in
2004 and increases in expenses at existing supply centers to support the
increased sales. Income from operations was $38.3 million in the third quarter
of 2004 compared to $25.9 million for the same period in 2003.
Interest expense increased $3.7 million during the third quarter of 2004
compared to the same period in 2003. The increase in interest expense is due to
$6.9 million of accretion on AMH's 11 1/4% senior discount notes issued on March
4, 2004, 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.
This was partially offset by the fact that the 2003 period included $3.9 million
of accelerated amortization of previously capitalized deferred financing fees
and certain financing costs paid in conjunction with the amendment to the credit
facility for the Gentek acquisition. Subsequent to the AMH transactions
described above, the Company agreed to participate in a tax sharing agreement
with Holdings and AMI beginning in 2004. The Company has recorded income taxes
at its estimated full fiscal year effective tax rate of approximately 42.3% on
the income before taxes for the nine months ended October 2, 2004, which
resulted in an effective tax rate of 39.7% for the quarter ended October 2,
2004. The Company recorded income taxes for the quarter ended September 27, 2003
at its then estimated full fiscal year effective tax rate of approximately
41.5%. The increase in the Company's estimated full fiscal year effective tax
rate was primarily due to a portion of the interest accretion on AMH's 11 1/4%
senior discount notes not being deductible for income tax purposes and due to
limitations on the ability of the Company to file consolidated income tax
returns in certain states, which was partially offset by the inclusion of Gentek
for the full quarter of 2004 versus a partial period of 2003 as the effective
tax rate for Gentek's Canadian subsidiary was less than the effective tax rate
in the United States.
Net income increased to $15.1 million for the quarter ended October 2,
2004 compared to $9.6 million for the quarter ended September 27, 2003. The
increase in net income is a result of the increased sales and operating income
from the Alside division, the $6.5 million of full quarter net income
contributed by Gentek for the quarter ended October 2, 2004, as compared to $1.1
million of net income contributed by Gentek for the same period in 2003.
EBITDA for the third quarter of 2004 was $43.7 million compared to $29.5
million for the same period in 2003. Adjusted EBITDA for the third quarter of
2003 was $30.9 million. There were no adjustments to EBITDA for the third
quarter of 2004. Adjusted EBITDA for the quarter ended September 27, 2003
excluded a cost of sales expense of $1.4 million relating to an inventory fair
value adjustment recorded at the time of the acquisition of Gentek. Gentek
contributed $11.7 million of EBITDA in the third quarter of 2004 and $2.4
million and $3.8 million of EBITDA and adjusted EBITDA, respectively, for the
same period in 2003.
Nine Months Ended October 2, 2004 Compared to Nine Months Ended September 27,
2003
Net sales increased 59.3% to $820.3 million for the nine months ended
October 2, 2004 compared to $515.1 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 $256.8
million of net sales for the nine months ended October 2, 2004 compared to $27.1
million of net sales for the same period in 2003. Gross profit for the nine
months ended October 2, 2004 was $220.7 million, or 26.9% of net sales, compared
to gross profit of $149.2 million, or 29.0% of net sales, for the same period of
2003. The decrease in gross profit margin percentage was primarily due to the
impact of the results contributed by Gentek along with the impact from the
increased costs of vinyl resin, aluminum and steel. Selling, general and
administrative expense increased to $156.6 million, or 19.1% of net sales, for
the nine months ended October 2, 2004 as compared to $103.3 million, or 20.1% 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
-12-
management bonus relating to AMH's offering of senior discount notes, the impact
of the acquisition of Gentek, the result of adding three new Alside supply
centers and one Gentek supply center in 2004 along with three new supply centers
in 2003, which had a full nine months of expense in 2004, as well as increased
expenses at existing supply centers to support the increased sales. Income from
operations was $64.1 million for the nine months ended October 2, 2004 compared
to $45.9 million for the same period in 2003.
Interest expense increased $15.0 million for the nine months ended October
2, 2004 compared to the same period in 2003. The increase in interest expense
was due to $16.2 million of accretion on AMH's 11 1/4% senior discount notes
issued on March 4, 2004, 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. This was partially offset by the fact that interest expense for the
nine months ended September 27, 2003 included $3.9 million of accelerated
amortization of previously capitalized deferred financing fees and certain
financing costs paid in conjunction with the amendment to the credit facility
for the Gentek acquisition. The Company has recorded income taxes at its
estimated full fiscal year effective tax rate of approximately 42.3% on the
income before taxes for the nine months ended October 2, 2004. The Company
recorded income taxes for the nine months ended September 27, 2003 at its then
estimated full fiscal year effective tax rate of approximately 41.5%. The
increase in the Company's effective tax rate was primarily due to a portion of
the interest accretion on AMH's 11 1/4% senior discount notes not being
deductible for income tax purposes and due to limitations on the ability of the
Company to file consolidated income tax returns in certain states, which was
partially offset by the inclusion of Gentek for the full nine months of 2004
versus a partial period of 2003 as the effective tax rate for Gentek's Canadian
subsidiary was less than the effective tax rate in the United States.
Net income increased to $16.1 million for the nine months ended October 2,
2004 compared to $14.9 million for the same period in 2003. The increase in net
income was a result of the increased sales and operating income from the Alside
division, the $10.9 million of net income contributed by Gentek, as compared to
$1.1 million of net income contributed by Gentek for the same period in 2003,
which was partially offset by the increase in interest expense and income taxes.
EBITDA for the nine months ended October 2, 2004 was $79.1 million
compared to $55.0 million for the same period in 2003. Adjusted EBITDA for the
nine months ended October 2, 2004 was $93.6 million compared to $56.4 million
for the same period in 2003. As compared to EBITDA, Adjusted EBITDA for the nine
months ended October 2, 2004 excluded a bonus paid to certain 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. Adjusted EBITDA for
the nine months ended September 27, 2003 excluded a cost of sales expense of
$1.4 million relating to an inventory fair value adjustment recorded at the time
of the acquisition of Gentek. Gentek contributed $22.7 million of EBITDA for the
nine months ended October 2, 2004, and $2.4 million and $3.8 million of EBITDA
and adjusted EBITDA, respectively, for the same period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
The following sets forth a summary of the Company's cash flows for the
nine months ended October 2, 2004 and September 27, 2003 (in thousands):
Nine Months Nine Months
Ended Ended
October 2, September 27,
2004 2003
---------- -------------
Cash provided by (used in) operating activities.... $ (6) $ 18,479
Cash used in investing activities ................. (16,970) (122,108)
Cash provided by financing activities ............. 16,421 98,510
CASH FLOWS
At October 2, 2004, the Company had cash and cash equivalents of $3.7
million and available borrowing capacity of approximately $61.4 million under
the revolving portion of AMI's credit facility. Outstanding letters of credit as
of October 2, 2004, totaled $6.2 million securing various insurance letters of
credit.
-13-
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operations was breakeven for the nine months ended
October 2, 2004 and net cash provided by operations was $18.5 million for the
nine months ended September 27, 2003. The cash used in operations for the nine
months ended October 2, 2004 reflects the operating results for the period,
which included increased inventory due to increased raw material costs and
expanded third party manufactured product offerings at the Company's supply
centers and seasonal increases in accounts receivable. This was offset by
increased accounts payable, primarily due to the increase in inventory, and
accrued liabilities, which is primarily due to increased accrued customer
incentives, commissions and profit sharing due to the increased sales and
earnings. Additionally, the Company made estimated federal income tax payments
in the third quarter of 2004, however no estimated payments were required in the
same period in 2003. The net cash provided by operations for the nine months
ended September 27, 2003 primarily reflected the operating results for the
period offset by the seasonal increases of accounts receivable and inventory
during the summer selling period, primarily offset by a seasonal increase in
accounts payable. The Company expects to generate $35 to $40 million of positive
cash flow from operations through reductions of working capital in the fourth
quarter of 2004.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures totaled $17.0 million and $9.6 million for the nine
months ended October 2, 2004 and September 27, 2003, respectively. Capital
expenditures for Gentek were $1.6 million and $0.2 million in the 2004 and 2003
periods, respectively. 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
investing activities for the nine months ended September 27, 2003 also include
the net acquisition amount paid for Gentek of $112.5 million, net of cash
acquired.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities for the nine months ended October 2,
2004 included proceeds from the issuance of the senior discount notes of $258.3
million, borrowings on the revolving portion of AMI's credit facility of $2.4
million, proceeds from the exercise of stock options of $1.8 million, redemption
of the Company's preferred and common stock of $178.0 million, common stock
dividends of $57.7 million and financing costs of $10.3 million, consisting
primarily of banking and legal fees paid in connection with the issuance of
AMH's 11 1/4% senior discount notes. The increased levels of inventory and
accounts receivable have led to continued borrowings on the revolving portion of
AMI's credit facility. The Company believes there will be no outstanding
borrowings on the revolving portion of AMI's credit facility by the end of the
fourth quarter of 2004. In addition, the Company intends to repay a portion of
the borrowings on the term loan portion of AMI's credit facility in the fourth
quarter of 2004.
For the nine months ended September 27, 2003, the purchase consideration
of the Gentek acquisition was $113.6 million ($112.5 million, net of cash
acquired). In addition, the Company paid $4.1 million of financing costs, repaid
$76.5 million of existing Company term loans and $0.6 million of accrued
interest under the Company's existing credit facility. The Gentek acquisition
purchase consideration, financing costs and the repayment of term loans and
accrued interest were financed by cash flows from financing activities for the
nine months ended September 27, 2003 including borrowings of $190.0 million
under the term loan portion and $10.2 million under the revolving loan portion
of the Company's amended and restated credit facility. The Company repaid the
$10.2 million of borrowings under the revolving loan portion of its credit
facility and $10.0 million of term loans using cash flows from operations and
net cash settlements that occurred subsequent to the close of the Gentek
acquisition. Additionally, cash flows from financing activities included the
redemption of the remaining outstanding 9 1/4% notes of $0.9 million. The $0.9
million of 9 1/4% notes were redeemed at 104.625% of the principal amount of
such notes plus accrued and unpaid interest through the date of redemption.
DESCRIPTION OF THE COMPANY'S OUTSTANDING INDEBTEDNESS
AMH's $446 million principal at maturity 11 1/4% senior discount notes are
due in 2014. AMH received total gross proceeds of $258.3 million in connection
with the issuance. 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 are structurally subordinated to all existing and
future debt and other
-14-
liabilities of AMH's existing and future subsidiaries, including AMI and
Holdings. The indenture governing the 11 1/4% senior discount notes contain
restrictive covenants that, among other things, limit AMH's ability, and the
ability of its subsidiaries, to incur additional indebtedness, make certain
restricted payments, pay dividends or make other distributions or repurchase or
redeem AMH's stock, make investments, sell assets, incur liens (except with
respect to its subsidiaries), issue capital stock of restricted subsidiaries,
enter into agreements restricting its subsidiaries' ability to pay dividends,
enter into sale/leaseback transactions, enter into transactions with affiliates,
and consolidate, merge or sell all or substantially all of its assets. On
October 29, 2004, AMH completed an offer to exchange the entire principal amount
at maturity of its outstanding 11 1/4% senior discount notes for an equal amount
at maturity of notes with substantially equivalent terms that have been
registered under the Securities Act of 1933.
AMI's 9 3/4% notes pay interest semi-annually in April and October. AMI's
credit facility as of October 2, 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 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
AMI's credit facility totaled $2.4 million at October 2, 2004. AMI'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 AMI'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 AMI is required to achieve certain
financial ratios relating to leverage, coverage of fixed charges and coverage of
interest expense. AMI was in compliance with these covenants as of October 2,
2004. On an annual basis, AMI 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 AMI's 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'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 increased significantly for the quarter
and nine months ended October 2, 2004 have risen significantly. The Company
believes the impact of the raw material price increases has led to a decrease in
gross margin of approximately $2 million for the nine months ended October 2,
2004. The Company has announced two vinyl siding and two aluminum price
increases in 2004, which have partially offset the raw material inflation.
Historically vinyl resin costs seasonally decrease in the fourth quarter of the
year as a result of reduced seasonal demand in the resin market. However, the
Company believes vinyl resin costs will remain at or slightly above the levels
at the end of the third quarter. The Company believes aluminum costs will remain
at their current levels or slightly increase for the remainder of 2004. The
Company believes that due to the high price of oil and natural gas, as well as
expected continued strong demand, costs for vinyl resin, aluminum and steel may
continue to increase in 2005. The Company has announced price increases among
all of its product offerings, which it believes will partially 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 and there may be a delay from quarter to quarter. At October 2, 2004,
the Company had no raw material hedge contracts in place.
-15-
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 conditions, interest
rates, foreign currency exchange 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;
- 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
AMI'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.
-16-
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 AMI's 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 October 2, 2004, AMI had
borrowings of $140.0 million under the term loan and $2.4 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 nine months ended October 2, 2004 by approximately $0.1 million.
AMH has $274.8 million of senior discount notes due 2014 that bear an
interest rate of 11 1/4%. 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. AMI 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 11
1/4% senior discount and 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 October 2, 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 October 2, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
-17-
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
(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
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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.
AMH HOLDINGS, INC.
------------------
(Registrant)
Date: November 16, 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 - Finance,
Chief Financial Officer,
Assistant Treasurer and Assistant 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
-20-