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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 August 3, 2002
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 1-11577
FALCON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-0730877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9387 DIELMAN INDUSTRIAL DRIVE 63132
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
(314) 991-9200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of September 4, 2002, the registrant had 8,902,199 shares of common
stock, $.02 par value, outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
--------------------
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Earnings
-----------------------------------
(Unaudited)
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
-------------------------------- -------------------------------
Aug. 3, July 28, Aug. 3, July 28,
(In thousands, except per share data) 2002 2001 2002 2001
------------- -------------- ------------- --------------
Net sales $ 70,811 $ 77,024 $ 201,747 $ 230,320
Cost of sales, including nonrecurring items 54,260 64,578 154,177 179,687
------------- -------------- ------------- --------------
Gross margin 16,551 12,446 47,570 50,633
Selling, general and administrative expenses 11,277 13,958 34,464 41,505
Special and nonrecurring items - 12,000 639 12,000
------------- -------------- ------------- --------------
Operating profit 5,274 (13,512) 12,467 (2,872)
Interest expense, net 4,532 4,180 12,861 12,760
Minority interest in consolidated subsidiary (31) (13) (15) (110)
------------- -------------- ------------- --------------
Earnings (loss) before income taxes 773 (17,679) (379) (15,522)
Income tax expense (benefit) 439 (6,607) 98 (5,310)
------------- -------------- ------------- --------------
Net earnings (loss) $ 334 $ (11,072) $ (477) $ (10,212)
============= ============== ============= ==============
Basic and diluted earnings (loss) per share $ 0.04 $ (1.25) $ (0.05) $ (1.16)
============= ============== ============= ==============
See accompanying notes to consolidated financial statements.
2
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands, except share data) (Unaudited)
Aug. 3, November 3,
Assets 2002 2001
- ------ ---------- -----------
Current assets:
Cash and cash equivalents $ 2,873 $ 1,670
Accounts receivable, less allowances
of $826 and $949, respectively 31,826 35,268
Inventories 61,642 49,224
Prepayments and other current assets 8,402 6,977
---------- -----------
Total current assets 104,743 93,139
---------- -----------
Property, plant and equipment:
Land 3,498 3,392
Buildings and improvements 21,113 20,345
Machinery and equipment 49,060 44,953
---------- -----------
73,671 68,690
Less: accumulated depreciation 30,508 26,156
---------- -----------
Net property, plant and equipment 43,163 42,534
---------- -----------
Other assets, net of accumulated amortization:
Goodwill 117,474 117,474
Other 14,465 14,320
---------- -----------
Total other assets 131,939 131,794
---------- -----------
Total Assets $ 279,845 $ 267,467
========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 26,636 $ 20,101
Customer deposits 9,652 10,953
Accrued liabilities 11,739 18,303
Current maturities of long-term debt 14,683 11,510
---------- -----------
Total current liabilities 62,710 60,867
Long-term obligations:
Long-term debt 144,406 136,461
Minority interest in consolidated subsidiary 662 677
Other 10,045 9,421
---------- -----------
Total liabilities 217,823 207,426
---------- -----------
Stockholders' equity:
Common stock, $.02 par value: authorized 20,000,000 shares;
issued 9,915,117 shares 198 198
Additional paid-in capital 47,376 47,376
Treasury stock, at cost (1,012,918 and 1,117,151 shares, respectively) (11,949) (13,468)
Accumulated other comprehensive loss (4,584) (6,460)
Retained earnings 30,981 32,395
---------- -----------
Total stockholders' equity 62,022 60,041
---------- -----------
Total Liabilities and Stockholders' Equity $ 279,845 $ 267,467
========== ===========
See accompanying notes to consolidated financial statements.
3
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------------
(In thousands) Aug. 3, July 28,
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net earnings (loss) $ (477) $ (10,212)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,566 8,548
Minority interest in consolidated subsidiary (15) (110)
Special and nonrecurring items, net of tax benefit - 11,160
Change in assets and liabilities:
Accounts receivable 3,151 4,414
Inventories (11,638) (7,611)
Prepayments and other current assets (1,425) (549)
Other assets (1,554) (2,327)
Accounts payable and customer deposits 5,011 3,757
Accrued liabilities (6,290) (6,889)
Other liabilities 755 372
--------------- ---------------
Cash provided by (used in) operating activities (5,916) 553
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,638) (4,891)
--------------- ---------------
Cash used in investing activities (3,638) (4,891)
--------------- ---------------
Cash flows from financing activities:
Common stock issuances 379 475
Cash dividends - (1,055)
Repayment of long-term debt (6,782) (2,816)
Proceeds from long-term debt 17,160 6,763
--------------- ---------------
Cash provided by financing activities 10,757 3,367
--------------- ---------------
Increase (decrease) in cash and cash equivalents 1,203 (971)
Cash and cash equivalents-beginning of period 1,670 3,929
--------------- ---------------
Cash and cash equivalents-end of period $ 2,873 $ 2,958
=============== ===============
Supplemental cash flow information:
Cash paid for interest $ 15,484 $ 14,993
=============== ===============
Cash paid for taxes $ 439 $ 949
=============== ===============
See accompanying notes to consolidated financial statements.
4
Falcon Products, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
For the Thirty-Nine Weeks Ended August 3, 2002
----------------------------------------------
Note 1 - Interim Results
The financial statements contained herein are unaudited. In the opinion
of management, these financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the results of the interim periods presented. Reference
is made to the footnotes to the consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended November 3,
2001, filed with the Securities and Exchange Commission.
Note 2 - Special and Nonrecurring Items
During the first quarter of 2002, the Company recorded a pre-tax charge
of $0.6 million, $0.4 million after-tax, for special and nonrecurring items.
This charge is a result of the Company executing its strategic initiative to
close its Statesville, North Carolina facility and transfer production into
the Company's other plants. The initiative was announced during the third
quarter of 2001 and was completed in February 2002.
During the third quarter of 2001, the Company recorded a pre-tax charge
of $18.0 million, $11.2 million after-tax, for special and nonrecurring
items. The charges are a result of the Company's strategic initiatives to
consolidate its manufacturing operations and eliminate several duplicative
and non-performing product lines. The Company announced plans to close its
Statesville, North Carolina facility and downsize its Zacatecas, Mexico
facility and transfer production into the Company's other plants. This
charge includes costs associated with asset write-downs and dispositions,
real estate holding exit costs, employee severance and other related costs
associated with exiting the closed facilities. Cost of sales includes a $6.0
million charge to write-down the carrying value of inventory.
A summary of the 2002 activity related to the strategic initiative is as
follows:
In thousands
Liability, November 3, 2001 $ 2,836
Charges to operations:
Facility shut-down costs 639
Cash paid:
Facility shut-down costs (1,415)
Severance and other costs (1,264)
-------
Liability, August 3, 2002 $ 796
=======
5
Note 3 - Inventories
Inventories consisted of the following:
August 3, November 3,
In thousands 2002 2001
--------- -----------
Raw materials....................... $42,985 $ 33,501
Work in process..................... 11,884 9,054
Finished goods...................... 6,773 6,669
--------- -----------
$61,642 $ 49,224
========= ===========
Note 4 - Earnings Per Share
The following table reconciles net earnings (loss) and weighted average
shares outstanding to the amounts used to calculate basic and diluted
earnings per share:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------------- ----------------------------------
In thousands, Aug. 3, July 28, Aug. 3, July 28,
except per-share data 2002 2001 2002 2001
----------- --------------- -------------- --------------
Net earnings (loss)............................... $ 334 $ (11,072) $ (477) $ (10,212)
Weighted average shares outstanding............... 8,946 8,842 8,941 8,828
Assumed exercise of options....................... - - - -
----------- --------------- -------------- --------------
Weighted average diluted shares
outstanding................................ 8,946 8,842 8,941 8,828
=========== =============== ============== ==============
Basic earnings (loss) per share................... $ 0.04 $ (1.25) $ (0.05) $ (1.16)
=========== =============== ============== ==============
Diluted earnings (loss) per share................. $ 0.04 $ (1.25) $ (0.05) $ (1.16)
=========== =============== ============== ==============
Basic earnings (loss) per share were computed by dividing net earnings
(loss) by the weighted average shares of common stock outstanding during the
period. Diluted earnings (loss) per share were computed assuming the options
issued and outstanding were exercised. Outstanding options to purchase
shares were not included in the computation of diluted earnings (loss) per
share if the shares were antidilutive or if the exercise price was greater
than the average market price of the common stock.
6
Note 5 - Comprehensive Income
Comprehensive income includes, in addition to net earnings (loss), the
change in stockholders' equity during the period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
stockholders' equity except those resulting from investments by owners and
distributions to owners.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ -------------------------------
Aug. 3, July 28, Aug. 3, July 28,
2002 2001 2002 2001
----------- ------------ ------------ --------------
Net earnings (loss) $ 334 $(11,072) $ (477) $(10,212)
Translation adjustments 810 - 1,331 454
Cash flow hedge 305 - 545 -
----------- ------------ ----------- -------------
Comprehensive income (loss) $1,449 $(11,072) $1,399 $ (9,758)
=========== ============ =========== =============
Note 6 - Recently Issued Accounting Standards
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
approved the issuance of Statements of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method
of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. SFAS No. 141 also
includes new criteria to recognize intangible assets separately from
goodwill. The requirements of SFAS No. 141 are effective for any business
combination accounted for by the purchase method that is completed after
June 30, 2001. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company adopted SFAS
No. 142 on November 4, 2001. Upon adoption, the Company did not have an
impairment charge and eliminated the amortization of goodwill, which totaled
$0.9 million and $2.6 million during the third quarter of 2001 and the first
thirty-nine weeks of 2001, respectively. Adjusted for the elimination of
goodwill, basic and diluted earnings per share for the third quarter and
thirty-nine weeks ended July 28, 2001, would have been ($1.16) and ($0.87),
respectively.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 replaces EITF Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
7
Note 7 - Derivative Instruments
The Company uses interest rate swap agreements to manage the relative
mix of the Company's debt between fixed and variable rate instruments. At
August 3, 2002, the Company had no interest rate swap agreements.
Note 8 - Guarantor Subsidiaries
In June 1999, the Company entered into a $120 million senior secured
credit facility (the "Senior Secured Credit Facility") with a group of
financial institutions.
All of the Company's domestic subsidiaries have guaranteed the Senior
Secured Credit Facility. A first priority security interest in substantially
all of the Company's properties and assets of its domestic subsidiaries,
including a pledge of all of the stock of the Company's domestic
subsidiaries and 66% of the stock of its foreign subsidiaries, secures the
Senior Secured Credit Facility.
The Company's senior subordinated notes are fully and unconditionally
(as well as jointly and severally) guaranteed on an unsecured, senior
subordinated basis by each subsidiary of the Company (the "Guarantor
Subsidiaries") other than Howe Europe a/s, Falcon Products (Shenzhen)
Limited, Falcon Mimon, a.s., Falcon De Juarez, S.A. de C.V. and Industrial
Mueblera Shelby Williams, S.A. de C.V. (the "Non-Guarantor Subsidiaries").
Each of the Guarantor Subsidiaries and Non-Guarantor Subsidiaries is wholly
owned by the Company, except for Falcon Mimon, a.s., and Epic Furniture
Group, which are owned 87.4% and 80%, respectively.
The following condensed consolidating financial statements of the
Company include the combined accounts of the Company and its Guarantor
Subsidiaries and the combined accounts of the Non-Guarantor Subsidiaries.
Given the size of the Non-Guarantor Subsidiaries, relative to the Company
and its Guarantor Subsidiaries on a consolidated basis, separate financial
statements of the respective Company and its Guarantor Subsidiaries are not
presented because management has determined that such information is not
material is assessing the Company and its Guarantor Subsidiaries.
8
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended August 3, 2002
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Net sales $ - $ 67,946 $ 6,896 $ (4,031) $ 70,811
Cost of sales - 51,640 6,651 (4,031) 54,260
Selling, general and administrative expenses - 10,370 907 - 11,277
---------------------------------------------------------------------------
Operating profit (loss) - 5,936 (662) - 5,274
Equity in earnings of subsidiary 334 - - (334) -
Interest expense, net - 4,493 39 - 4,532
Minority interest in consolidated subsidiary - (31) - - (31)
---------------------------------------------------------------------------
Earnings (loss) before income taxes 334 1,474 (701) (334) 773
Income tax expense (benefit) - 627 (188) - 439
---------------------------------------------------------------------------
Net earnings (loss) $ 334 $ 847 $ (513) $ (334) $ 334
===========================================================================
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended July 28, 2001
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Net sales $ - $ 75,239 $ 4,557 $ (2,772) $ 77,024
Cost of sales, including nonrecurring items - 62,494 4,856 (2,772) 64,578
Selling, general and administrative expenses - 13,674 284 - 13,958
Special and nonrecurring items - 12,000 - - 12,000
---------------------------------------------------------------------------
Operating profit - (12,929) (583) - (13,512)
Equity in earnings (loss) of subsidiary (11,072) - - 11,072 -
Interest expense, net - 4,134 46 - 4,180
Minority interest in consolidated subsidiary - (13) - - (13)
---------------------------------------------------------------------------
Earnings (loss) before income taxes (11,072) (17,050) (629) 11,072 (17,679)
Income tax expense (benefit) - (6,349) (258) - (6,607)
---------------------------------------------------------------------------
Net earnings (loss) $ (11,072) $(10,701) $ (371) $ 11,072 $(11,072)
===========================================================================
9
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirty-Nine Weeks Ended August 3, 2002
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
--------------------------------------------------------------------------
Net sales $ - $ 193,258 $ 21,382 $ (12,893) $ 201,747
Cost of sales - 147,265 19,805 (12,893) 154,177
Selling, general and administrative expenses - 32,139 2,325 - 34,464
Special and nonrecurring items - 639 - - 639
--------------------------------------------------------------------------
Operating profit (loss) - 13,215 (748) - 12,467
Equity in earnings (loss) of subsidiary (477) - - 477 -
Interest expense, net - 12,763 98 - 12,861
Minority interest in consolidated subsidiary - (15) - - (15)
--------------------------------------------------------------------------
Earnings (loss) before income taxes (477) 467 (846) 477 (379)
Income tax expense (benefit) - 279 (181) - 98
--------------------------------------------------------------------------
Net earnings (loss) $ (477) $ 188 $ (665) $ 477 $ (477)
==========================================================================
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirty-Nine Weeks Ended July 28, 2001
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Net sales $ - $224,147 $ 14,013 $ (7,840) $ 230,320
Cost of sales, including nonrecurring items - 174,245 13,282 (7,840) 179,687
Selling, general and administrative expenses - 40,194 1,311 - 41,505
Special and nonrecurring items - 12,000 - - 12,000
---------------------------------------------------------------------------
Operating loss - (2,292) (580) - (2,872)
Equity in earnings (loss) of subsidiary (10,212) - - 10,212 -
Interest expense, net - 12,626 134 - 12,760
Minority interest in consolidated subsidiary - (110) - - (110)
---------------------------------------------------------------------------
Earnings (loss) before income taxes (10,212) (14,808) (714) 10,212 (15,522)
Income tax expense (benefit) - (4,961) (349) - (5,310)
---------------------------------------------------------------------------
Net earnings (loss) $ (10,212) $ (9,847) $ (365) $ 10,212 $ (10,212)
===========================================================================
10
Falcon Products, Inc.
Consolidating Balance Sheet
As of August 3, 2002
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 1,583 $ 1,290 $ - $ 2,873
Accounts receivable - 27,531 4,295 - 31,826
Inventories - 52,797 8,845 - 61,642
Other current assets - 7,631 771 - 8,402
---------------------------------------------------------------------------
Total current assets - 89,542 15,201 - 104,743
Property, plant and equipment, net - 28,590 14,573 - 43,163
Investment in subsidiaries 62,022 - - (62,022) -
Goodwill and other assets - 131,939 - - 131,939
---------------------------------------------------------------------------
Total assets $62,022 $ 250,071 $ 29,774 $(62,022) $ 279,845
===========================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 56,840 $ 5,870 $ - $ 62,710
Long-term debt - 143,002 1,404 - 144,406
Other long-term liabilities - 10,538 169 - 10,707
Intercompany payable (receivable) - (12,274) 12,274 - -
---------------------------------------------------------------------------
Total liabilities - 198,106 19,717 - 217,823
Total stockholders' equity 62,022 51,965 10,057 (62,022) 62,022
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $62,022 $ 250,071 $ 29,774 $(62,022) $ 279,845
===========================================================================
11
Falcon Products, Inc.
Consolidating Balance Sheet
As of November 3, 2001
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
---------------------------------------------------------------------------
Assets
Cash and cash equivalents $ - $ 1,505 $ 165 $ - $ 1,670
Accounts receivable - 32,740 2,528 - 35,268
Inventories - 44,532 4,692 - 49,224
Other current assets - 6,068 909 - 6,977
---------------------------------------------------------------------------
Total current assets - 84,845 8,294 - 93,139
Property, plant and equipment, net - 30,460 12,074 - 42,534
Investment in subsidiaries 60,041 - - (60,041) -
Goodwill and other assets - 131,794 - - 131,794
---------------------------------------------------------------------------
Total assets $ 60,041 $ 247,099 $ 20,368 $ (60,041) $ 267,467
===========================================================================
Liabilities and Stockholders' Equity
Current liabilities $ - $ 57,284 $ 3,583 $ - $ 60,867
Long-term debt - 135,110 1,351 - 136,461
Other long-term liabilities - 10,098 - - 10,098
Intercompany payable (receivable) - (4,712) 4,712 - -
---------------------------------------------------------------------------
Total liabilities - 197,780 9,646 - 207,426
Total stockholders' equity 60,041 49,319 10,722 (60,041) 60,041
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 60,041 $ 247,099 $ 20,368 $ (60,041) $ 267,467
===========================================================================
12
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended August 3, 2002
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
----------------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $ (8,452) $ 2,536 $ - $(5,916)
Cash flows from investing activities
Additions to property, plant and equipment, net - (1,434) (2,204) - (3,638)
Cash received from (contributed to) subsidiary (379) 379 - - -
----------------------------------------------------------------------------
Cash used in investing activities (379) (1,055) (2,204) - (3,638)
Cash flows from financing activities
Common stock issuances 379 - - - 379
Additions to long-term debt, net - 9,585 793 - 10,378
----------------------------------------------------------------------------
Cash provided by financing activities 379 9,585 793 - 10,757
----------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ 78 $ 1,125 $ - $ 1,203
============================================================================
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended July 28, 2001
Parent Total Total
Company Guarantor Non-Guarantor Eliminations Total
----------------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $ 1,070 $ (517) $ - $ 553
Cash flows from investing activities
Additions to property, plant and equipment, net - (4,236) (655) - (4,891)
Cash received from (contributed to) subsidiary 580 (580) - - -
----------------------------------------------------------------------------
Cash provided by (used in) investing activities 580 (4,816) (655) - (4,891)
Cash flows from financing activities
Common stock issuances 475 - - - 475
Cash dividends (1,055) - - - (1,055)
Additions to long-term debt, net - 3,445 502 - 3,947
---------------------------------------------------------------------------
Cash provided by (used in) financing activities (580) 3,445 502 - 3,367
---------------------------------------------------------------------------
Net change in cash and cash equivalents $ - $ (301) $ (670) $ - $ (971)
===========================================================================
13
Item 2. - Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
Certain information presented herein includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. However, there can be no assurance that the Company's actual
results will not differ materially from its expectations. The matters
referred to in forward-looking statements may be affected by risks and
uncertainties affecting the Company's business.
RESULTS OF OPERATIONS
General
The following table sets forth, for the periods presented, certain
information relating to the operating results of the Company, expressed as a
percentage of net sales:
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
--------------------------------------------------------
Aug. 3, July 28, Aug. 3, July 28,
2002 2001 2002 2001
------------- ------------- ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including nonrecurring items 76.6 83.8 76.4 78.0
------------- ------------- ------------ ------------
Gross margin 23.4 16.2 23.6 22.0
Selling, general and administrative expenses 15.9 18.1 17.1 18.0
Special and nonrecurring items - 15.6 0.3 5.2
------------- ------------- ------------ ------------
Operating profit 7.5 (17.5) 6.2 (1.2)
Interest expense, net 6.4 5.4 6.4 5.5
------------- ------------- ------------ ------------
Earnings (loss) before income taxes 1.1 (22.9) (0.2) (6.7)
Income tax expense 0.6 (8.5) - (2.3)
------------- ------------- ------------ ------------
Net earnings (loss) 0.5% (14.4)% (0.2)% (4.4)%
============= ============= ============ ============
Thirteen weeks ended August 3, 2002, compared to the thirteen weeks ended
July 28, 2001
During the third quarter of 2001, the Company recorded a pre-tax charge
of $18.0 million, $11.2 million after-tax, for special and nonrecurring
items. The charges are a result of the Company's strategic initiatives to
consolidate its manufacturing operations and eliminate several duplicative
and non-performing product lines. The Company announced plans to close its
Statesville, North Carolina facility and downsize its Zacatecas, Mexico
facility and transfer production into the Company's other plants. This
charge includes costs associated with asset write-downs and dispositions,
real estate holding exit costs, employee severance and other related costs
associated with exiting the closed facilities. Cost of sales includes a $6.0
million charge to write-down the carrying value of inventory.
14
Net earnings were $334 thousand in the third quarter of 2002 compared
to a net loss of $11.1 million in the same period of 2001. Net earnings
(loss) per share were $0.04 in 2002, and $(1.25) in 2001. Weighted average
shares outstanding were 8.9 million and 8.8 million shares in the third
quarter of 2002 and 2001, respectively.
Net sales for the third quarter of 2002 were $70.8 million, a decrease
of 8.1% from the 2001 third quarter net sales of $77.0 million. The decrease
is a result of the continuation of the soft hospitality market, which has
led to a decline in new construction and a deferral of hotel refurbishments.
The decrease is also a result of the Company's decision to discontinue
non-profitable business with certain buying clubs and a purchasing group and
a decline in sales to the contract office market related to weak market
conditions.
Cost of sales was $54.3 million in the third quarter of 2002, a
decrease of 16.0% from $64.6 million in the third quarter of 2001, or a
decrease of 7.4% from $58.6 million, excluding the nonrecurring charge, in
the third quarter of 2001. Gross margin was $16.6 million for the third
quarter of 2002, as compared to $12.4 million in the same quarter of 2001
and $18.4 million, excluding the nonrecurring charge, in the third quarter
of 2001. Gross margin as a percentage of net sales was 23.4% in 2002 as
compared to 16.2% in 2001, or 23.9% in 2001, excluding the nonrecurring
charge. The decline in gross margin is a result of the decline in sales,
which reduced fixed overhead absorption at the manufacturing plants and
unfavorable product mix and pricing pressures, primarily in the hospitality
market. The decline was offset by the implemented cost reduction activities
at the manufacturing plants, including the closing of the Statesville, NC
facility, which was completed during February 2002.
Selling, general and administrative expenses were $11.3 million in the
third quarter of 2002, compared to $14.0 million in the third quarter of
2001. Selling, general and administrative expenses as a percentage of net
sales were 15.9% for the third quarter of 2002, compared to 18.1% for the
third quarter of 2001. The reduction of selling, general and administrative
expenses was a result of cost reduction activities, the elimination of
goodwill amortization and lower variable selling costs due to lower sales.
The effective tax rate differs from the statutory tax rate due to
non-deductible permanent tax items and state, local and foreign taxes.
Thirty-nine weeks ended August 3, 2002, compared to the thirty-nine weeks
ended July 28, 2001
As previously discussed, during the first quarter of 2002, the Company
recorded a pre-tax charge of $0.6 million, $0.4 million after-tax, for
special and nonrecurring items. Also, during the third quarter of 2001, the
Company recorded a pre-tax charge of $18.0 million, $11.2 million after-tax,
for special and nonrecurring items. Cost of sales in 2001 includes a $6.0
million charge to write-down the carrying value of inventory.
The Company reported a net loss of $477 thousand in the first nine
months of 2002, and a net loss of $10.2 million in the first nine months of
2001. Net earnings (loss) per share were $(0.05) and $(1.16) in the first
thirty-nine weeks of 2002 and 2001, respectively. Weighted average shares
outstanding were 8.9 million and 8.8 million shares in the first nine months
of 2002 and 2001, respectively.
15
Net sales for the first nine months of 2002 were $201.7 million, a
decrease of 12.4% from the first nine months of 2001 net sales of $230.3
million. The decrease is a result of the continuation of the soft
hospitality market, which has led to a decline in new construction and a
deferral of hotel refurbishments. The decrease is also a result of the
Company's decision to discontinue non-profitable business with certain
buying clubs and a purchasing group and a decline in sales to the contract
office market related to weak market conditions.
Cost of sales was $154.2 million in the first nine months of 2002, a
decrease of 14.2% from $179.7 million in the first nine-months of 2001, or a
decrease of 11.2% from $173.7 million, excluding the nonrecurring charge, in
the first nine-months of 2001. Gross margin was $47.6 million for the first
nine-months of 2002, $50.6 million in the first nine-months of 2001 and
$56.6 million, excluding the nonrecurring charge, in the first nine-months
of 2001. Gross margin as a percentage of net sales was 23.6% in 2002,
compared to 22.0% in 2001 and 24.6% in 2001, excluding the nonrecurring
charge. The decline in gross margin is a result of the decline in sales,
which reduced fixed overhead absorption at the manufacturing plants and
unfavorable product mix and pricing pressures, primarily in the hospitality
market. The decline was offset by the implemented cost reduction activities
at the manufacturing plants, including the closing of the Statesville, NC
facility.
Selling, general and administrative expenses were $34.5 million in the
first nine-months of 2002, compared to $41.5 million in the first
nine-months of 2001. Selling, general and administrative expenses as a
percentage of net sales were 17.1% for the first nine-months of 2002,
compared to 18.0% for the first nine-months of 2001. The reduction of
selling, general and administrative expenses was a result of cost reduction
activities, the elimination of goodwill amortization and lower variable
selling costs due to lower sales.
The effective tax rate differs from the statutory tax rate due to
non-deductible permanent tax items and state, local and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at August 3, 2002, was $42.0 million
compared with $32.3 million at November 3, 2001. The Company's ratio of
current assets to current liabilities was 1.7 to 1.0 at August 3, 2002,
compared with 1.5 to 1.0 at November 3, 2001.
Inventories were $61.6 million at August 3, 2002, compared to $49.2
million at November 3, 2001, a 25.2% increase. The increase in inventories
is primarily due to increased stocking levels of raw material items and
component parts in part due to the Company's plant consolidation efforts, as
well as a decrease in inventory consumption because of the decline in sales
volume and a seasonal increase due to the timing of the Company's business
cycle.
Based on the Company's review of the goodwill impairment indicators,
the Company has determined that an additional impairment review is not
currently required. The Company's impairment review process is based on an
approach that uses estimates of future revenues and expenses, as well as
appropriate discount rates. These estimates are consistent with the plans
and estimates that the Company uses to manage the business. The estimates
used assume that the Company will gain market share in the future and that
the commercial furniture market would experience a gradual recovery and a
return to growth from the current trends. If the Company fails to achieve
the assumed revenue growth rates or assumed gross margin, the Company may
incur charges for impairment of goodwill in the future.
Cash flow activity for the first nine-months of fiscal 2002 is
presented in the Consolidated Statements of Cash Flows. During the
thirty-nine weeks ended August 3, 2002, the Company used $5.9 million of
cash in its operating activities. Cash used in operating activities during
the first nine-months of 2002 primarily relates to the increase in
inventories and a reduction of accrued liabilities related to a semi-annual
interest payment for the Company's Senior Subordinated Notes, partially
offset by a reduction in the level of accounts receivable balances. During
the first nine-months of 2002, the
16
Company invested $3.6 million for capital expenditures, primarily for
equipment replacement and investment in productivity improvement programs.
The Company has a $25.0 million revolving line of credit agreement with
a group of financial institutions. The revolving line of credit bears
interest at the Company's option, at the Prime Rate, Federal Funds Rate or
LIBOR adjusted for a spread based on the Company's leverage ratio. During
the thirty-nine weeks ended August 3, 2002, the Company borrowed against the
revolver and had $16.7 million outstanding at August 3, 2002. Approximately
$4.9 million of the total commitment under the revolving line of credit
agreement is currently used to support outstanding standby letters of
credit.
The Company's most restrictive debt covenant is the Maximum
Consolidated Leverage Ratio ("Ratio") as defined in the agreement. The Ratio
requirement is 5.95 at August 3, 2002, but changes to 5.50 at November 2,
2002. At August 3, 2002, the Company's Ratio is 5.82. The Company believes
it will remain in compliance with this covenant at November 2, 2002.
The Company expects that it will meet its ongoing working capital and
capital requirements from a combination of existing cash, internally
generated funds and available borrowings under its revolving credit
facility. The Company's operating cash flows constitute its primary internal
source of liquidity.
OTHER DATA
EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA is commonly used to analyze companies
on the basis of operating performance, leverage and liquidity. EBITDA is not
intended to represent cash flow for the period, nor has it been presented as
an alternative to operating income as an indicator of operating performance
and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
EBITDA, excluding the special and nonrecurring charge, was $19.0
million for the first nine-months of 2002, a 17.7% decrease from $23.1
million, for the first nine-months of 2001. EBITDA margins, excluding
special and nonrecurring items, decreased to 9.4% of net sales for the first
nine-months of 2002 from 10.0% for the first nine-months of 2001.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates
and foreign exchange rates. The Company's net exposure to interest rate risk
consists of floating-rate instruments based on LIBOR rates.
17
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
-----------------
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage against potential claims in an amount it
believes to be adequate. There are no material pending legal proceedings,
other than routine litigation incidental to the business, to which the
Company is a party or of which any of the Company's property is the subject.
Item 2. - Changes in Securities
---------------------
None.
Item 3. - Defaults Upon Senior Securities
-------------------------------
None.
Item 4. - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. - Other Information
-----------------
None.
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 99.1 - Certificate of Principal Executive Officer.
Exhibit 99.2 - Certificate of Principal Financial Officer.
(b) Reports on Form 8-K
Changes in Registrant's Certifying Accountants.
18
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.
FALCON PRODUCTS, INC.
Date: September 4, 2002 /s/ Franklin A. Jacobs
----------------------
Franklin A. Jacobs
Chief Executive Officer
and Chairman of the Board
Date: September 4, 2002 /s/ Michael J. Dreller
----------------------
Michael J. Dreller
Vice President and
Chief Financial Officer
19