SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 1-13612
CONGOLEUM CORPORATION
(Exact name of Registrant as specified in Its Charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices, including Zip Code)
Telephone number: (609) 584-3000
(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 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 1, 2002
------------------------ ---------------------------------
Class A Common Stock 3,651,190
Class B Common Stock 4,608,945
Page 1 of 18
CONGOLEUM CORPORATION
Index
Page PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001................ .................................3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 (unaudited)........................4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 2001 and the six months ended
June 30, 2002 (unaudited)..............................................5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited)...............................6
Notes to Unaudited Condensed Consolidated Financial Statements.........7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 17
Item 2. Changes in Securities.................................................17
Item 3. Defaults Upon Senior Securities.......................................17
Item 4. Submission of Matters to a Vote of Security Holders...................17
Item 5. Other Information.................................................... 17
Item 6. Reports on Form 8-K...................................................17
Signatures....................................................................18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
---- ----
(Unaudited)
(Dollars in thousands)
Current assets:
Cash and cash equivalents ....................................................... $ 18,825 $ 15,257
Short-term investments .......................................................... -- 1,416
Accounts and notes receivable, net .............................................. 27,349 17,932
Inventories ..................................................................... 55,614 55,782
Prepaid expenses and other current assets ....................................... 3,847 6,403
Deferred income taxes ........................................................... 4,538 6,375
--------- ---------
Total current assets ........................................................ 110,173 103,165
Property, plant and equipment, net ................................................... 94,953 95,904
Insurance for asbestos-related liabilities ........................................... 43,884 45,163
Goodwill, net ........................................................................ -- 10,523
Deferred income taxes ................................................................ 1,035 1,334
Other assets ......................................................................... 9,561 9,324
--------- ---------
Total assets ................................................................ $ 259,606 $ 265,413
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 17,866 $ 17,911
Accrued expenses ................................................................ 35,312 29,585
Accrued taxes ................................................................... 358 353
Deferred income taxes ........................................................... 3,511 3,597
--------- ---------
Total current liabilities ................................................... 57,047 51,446
Long-term debt ....................................................................... 99,699 99,674
Asbestos-related liabilities ......................................................... 53,003 53,003
Other liabilities .................................................................... 12,401 12,607
Accrued pension liability ............................................................ 13,930 14,658
Accrued postretirement benefit obligation ............................................ 8,801 8,972
--------- ---------
Total liabilities ........................................................... 244,881 240,360
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01 per share; 20,000,000 shares
authorized; 4,736,950 shares issued as of June 30, 2002 and December 31, 2001 .. 47 47
Class B common stock, par value $0.01 per share; 4,608,945 shares
authorized, issued and outstanding as of June 30, 2002 and December 31, 2001 .... 46 46
Additional paid-in capital ........................................................... 49,105 49,105
Retained deficit ..................................................................... (20,549) (10,221)
Accumulated minimum pension liability adjustment ..................................... (6,111) (6,111)
--------- ---------
22,538 32,866
Less Class A common stock held in Treasury, at cost; 1,085,760 shares at
June 30, 2002 and December 31, 2001 ............................................. 7,813 7,813
--------- ---------
Total stockholders' equity .................................................. 14,725 25,053
--------- ---------
Total liabilities and stockholders' equity .................................. $ 259,606 $ 265,413
========= =========
The accompanying notes are an integral part
of the condensed financial statements.
3
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2002 2001 2002 2001
(In thousands, except
per share amounts)
Net sales ....................................................... $ 67,976 $ 54,393 $ 125,902 $ 105,976
Cost of sales ................................................... 51,609 40,663 95,674 83,273
Selling, general and administrative expenses .................... 13,516 11,841 26,668 25,020
-------- -------- --------- ---------
Income (loss) from operations .......................... 2,851 1,889 3,560 (2,317)
Other income (expense):
Interest income ............................................ 62 155 119 431
Interest expense ........................................... (2,095) (2,060) (4,159) (4,157)
Other income ............................................... 456 458 808 828
-------- -------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change ............. 1,274 442 328 (5,215)
Provision (benefit) for income taxes ....................... 432 287 133 (1,693)
-------- -------- --------- ---------
Net income (loss) before accounting change ............. 842 155 195 (3,522)
Cumulative effect of accounting change ..................... -- -- (10,523) --
-------- -------- --------- ---------
Net income (loss) .......................................... $ 842 $ 155 $ (10,328) $ (3,522)
======== ======== ========= =========
Net income (loss) per common share before
cumulative effect of accounting change,
basic & diluted .................................... $ .10 $ .02 $ .02 $ (.43)
Cumulative effect of accounting change ................. -- -- (1.27) --
-------- -------- --------- ---------
Net income (loss) per common share, basic and diluted .. $ .10 $ .02 $ (1.25) $ (.43)
======== ======== ========= =========
Weighted average number of common
shares outstanding ................................ 8,260 8,260 8,260 8,260
======== ======== ========= =========
The accompanying notes are an integral part
of the condensed financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Common Stock Accumulated
par value $0.01 Additional Minimum
----------------- Paid-in Retained Pension Liability Treasury Comprehensive
Class A Class B Capital Deficit Adjustment Stock Total Loss
------- ------- ------- ------- ---------- ----- ----- ----
Balance, December 31, 2000 ........ $ 47 $ 46 $ 49,105 $ (8,581) $(3,494) $(7,813) $29,310
Minimum pension liability
adjustment, net of tax
benefit of $1,504 ............... (2,617) (2,617) $ (2,617)
Net loss .......................... (1,640) (1,640) (1,640)
--------
Net comprehensive loss ............ $ (4,257)
------------------------------------------------------------------------------- ========
Balance, December 31, 2001 ........ 47 46 49,105 (10,221) (6,111) (7,813) 25,053
Net loss .......................... (10,328) (10,328) $(10,328)
--------
Net comprehensive loss ............ $(10,328)
------------------------------------------------------------------------------- ========
Balance, June 30, 2002 ............ $ 47 $ 46 $ 49,105 $(20,549) $(6,111) $(7,813) $14,725
======= ======= ======== ======== ======= ======= =======
The accompanying notes are an integral part
of the condensed financial statements.
5
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
(In thousands)
Cash flows from operating activities:
Net loss ........................................................... $(10,328) $ (3,522)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ................................................... 5,256 5,933
Amortization ................................................... 280 409
Deferred income taxes .......................................... 2,050 (1,627)
Cumulative effect of accounting change ......................... 10,523 --
Changes in certain assets and liabilities:
Accounts and notes receivable ............................. (9,417) 4,261
Inventories ............................................... 168 (3,167)
Prepaid expenses and other assets ......................... 3,343 2,504
Accounts payable .......................................... (45) (3,665)
Accrued expenses .......................................... 5,732 (2,748)
Other liabilities ......................................... (1,105) (981)
-------- --------
Net cash provided by (used in) operating activities .. 6,457 (2,603)
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................... (4,305) (4,632)
Purchase of short-term investments ............................. -- (1,471)
Maturities of short-term investments ........................... 1,416 12,097
-------- --------
Net cash (used in) provided by investing activities .. (2,889) 5,994
-------- --------
Net increase in cash and cash equivalents ............................... 3,568 3,391
Cash and cash equivalents:
Beginning of period ................................................ 15,257 12,637
-------- --------
End of period ...................................................... $ 18,825 $ 16,028
======== ========
The accompanying notes are an integral part
of the condensed financial statements.
6
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with 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. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of the Company's financial position have been
included. Operating results for the three and six month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002. For further information, refer to the consolidated
financial statements and related footnotes included in the Company's Annual
Report on form 10-K for the year ended December 31, 2001.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior year's condensed consolidated
financial statements have been reclassified to conform to the current year's
presentation.
2. Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 applies to all business
combinations completed after June 30, 2001 and requires the use of the purchase
method of accounting. SFAS No. 141 also establishes new criteria for determining
whether intangible assets should be recognized separately from goodwill. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001,
however, companies with fiscal years beginning after March 15, 2001 may elect to
adopt the statement early. SFAS No. 142 provides that goodwill and intangible
assets with indefinite lives will not be amortized, but rather will be tested
for impairment on an annual basis. Adoption of SFAS No. 141 did not have an
impact on the results of operations or financial position of Congoleum
Corporation. SFAS No. 142 was effective for the Company as of January 1, 2002.
During the first quarter of 2002, the Company performed a transitional
impairment test of goodwill and concluded that there was an impairment. The
Company compared the implied fair value of goodwill to the carrying value of
goodwill and it was determined that based on the fair value of the Company's
assets and liabilities, there should be no goodwill recorded. Accordingly, the
Company recorded an impairment loss of $10.5 million during the first quarter of
2002, which has been recorded as a cumulative effect of a change in accounting
principle.
7
The impact of the adoption of SFAS 142 on the Company's financial
statements also resulted in the elimination of $216 thousand of goodwill
amortization expense or $.03 per share for the six months ended June 30, 2002.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of January 1, 2001:
(In thousands, except per share amounts)
For the Six Months Ended
June 30, June 30,
2002 2001
----------- -----------
Net loss before cumulative effect of
accounting change:
As reported $ (195) $ (3,522)
Goodwill amortization -- 216
As adjusted $ (195) $ (3,306)
Loss per share before cumulative effect of
accounting change:
As reported $ (.02) $ (0.43)
Goodwill amortization -- .03
As adjusted $ (.02) $ (0.40)
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") was issued. Congoleum adopted SFAS No. 144 effective January 1, 2002.
Among other things, SFAS No. 144 significantly changes the criteria that would
have to be met to classify an asset as held-for-sale. Adoption of this
pronouncement did not have an effect on the Company's consolidated financial
position or results of operations.
In November 2001, Emerging Issues Task Force (EITF) issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or Reseller of the
Vendor's Products ("EITF 01-9"), was issued. Congoleum adopted EITF 01-9
effective January 1, 2002 as required. This issue addresses the manner in which
companies account for sales incentives to their customers. The Company's current
accounting policies for the recognition of costs related to these programs,
which is to accrue for costs as benefits are earned by the Company's customers,
are already in accordance with the consensus reached in this issue. The Company
has reclassified amounts previously recorded in selling, general and
administrative expense as a reduction in net sales. The impact for the six
months ending June 30, 2002 and 2001 was a reduction of net sales and of
selling, general and administrative expenses of $2.1 million and $2.7 million,
respectively.
8
3. Inventories
A summary of the major classifications of inventories stated at the lower
of LIFO cost or market is as follows:
June 30, December 31,
(Dollars in thousands) 2002 2001
------------ -------------
Finished goods.................. $43,185 $43,680
Work-in-process................. 3,961 4,425
Raw materials and supplies...... 8,468 7,677
------- -------
$55,614 $55,782
======= =======
4. Income (Loss) Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding.
In December 2001, the Company offered its eligible option holders to
exchange all options then outstanding and granted to them under the 1995 Plan or
the Company's 1999 Stock Option Plan for Non-Employee Directors, as amended (the
"1999 Plan"), for new stock options to be granted under those plans not earlier
than six months and one day after the date the Company canceled any options
tendered to and accepted by it pursuant to the offer to exchange. On January 4,
2002, the Company accepted and canceled 667,500 options that had been previously
granted under the 1995 Plan and 9,500 options that had been previously granted
under the 1999 Plan that were tendered to and accepted by the Company pursuant
to the offer to exchange.
On July 11, 2002, the Company issued 665,500 options under the 1995 Plan
and 9,500 options under the 1999 Plan at an exercise price of $2.05 per share
pursuant to the exchange. The new options granted under the 1995 Plan will
generally vest annually in equal installments over a five-year period beginning
on the first anniversary of the date of grant, and the new options granted under
the 1999 Plan will generally vest 100% six months from the date of grant.
5. Commitments and Contingencies
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in numerous actions associated with waste disposal sites, asbestos-related
claims and general liability claims. These actions include possible obligations
to remove or mitigate the effects on the environment of wastes deposited at
various sites, including Superfund sites and certain of the Company's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future costs and timing
of payments are indeterminable due to such unknown factors as the magnitude of
clean-up costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's liability in proportion to other
potentially responsible parties and the extent to which costs may be recoverable
from insurance.
9
The Company records a liability for environmental remediation,
asbestos-related claim costs and general liability claims when a clean-up
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and clean-ups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
The recorded liabilities are not discounted for delays in future payments and
are not reduced by the amount of estimated insurance recoveries. Such estimated
insurance recoveries are considered probable of recovery.
The Company is named, together with a large number (in most cases,
hundreds) of other companies, as a potentially responsible party ("PRP") in
pending proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended, and similar state laws.
In two instances, although not named as a PRP, the Company has received a
request for information. These pending proceedings currently relate to seven
disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware
in which recovery from generators of hazardous substances is sought for the cost
of cleaning up the contaminated waste sites. The Company's ultimate liability in
connection with those sites depends on many factors, including the volume of
material contributed to the site, the number of other PRP's and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, the Company can be held jointly and severally
liable for all environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 51 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998; however, the groundwater remediation phase has not begun
and the remedial investigation/feasibility study related to the groundwater
remediation has not been approved. The PRP group estimated that future costs of
groundwater remediation, based on engineering and consultant studies conducted,
would be approximately $26 million. Congoleum's proportionate share, based on
waste disposed at the site, was estimated to be approximately 6.1%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.
Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of the Company.
The Company is one of many defendants in approximately 10,994 pending
claims (including workers' compensation cases) involving approximately 32,885
individuals as of June 30, 2002, alleging personal injury or death from exposure
to asbestos or asbestos-containing products. There were 6,563 claims at December
31, 2001 that involved approximately 23,139 individuals. Activity related to
asbestos claims was as follows:
10
Six months ended Year ended
June 30, December 31,
2002 2001
-------------------------------------------------------------------------
Beginning claims................ 6,563 1,754
New claims...................... 4,843 5,048
Settlements..................... (42) (40)
Dismissals...................... (370) (199)
-------------------------------------------------------------------------
Ending claims................... 10,994 6,563
====== =====
The total indemnity costs incurred to settle claims during the six months
ending June 30, 2002 and twelve months ending December 31, 2001 were $1.0
million and $1.1 million, respectively, which were paid by the Company's
insurance carriers, as were the related defense costs. Costs per claim vary
depending on a number of factors, including the nature of the alleged exposure
and the jurisdiction where the claim was litigated. As of June 30, 2002, the
Company has incurred asbestos-related claims of $12.6 million, to resolve claims
of over 33,700 claimants, substantially all of which have been paid by the
Company's insurance carriers. The average indemnity cost per resolved claimant
is $374. Over 99% of claims incurred by the Company have settled, on average,
for amounts less than $105 per claimant.
Nearly all claims allege that various diseases were caused by exposure to
asbestos-containing products, including sheet vinyl and resilient tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet vinyl products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing sheet and tile products are nonfriable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
The Company regularly evaluates its estimated liability to defend and
resolve current and reasonably anticipated future asbestos-related claims. It
reviews, among other things, recent and historical settlement and trial results,
the incidence of past and recent claims, the number of cases pending against it,
and asbestos litigation developments that may impact the exposure of the
Company. One such development, the declarations of bankruptcy by several
companies that were typically lead defendants in asbestos-related cases, is
likely to have a negative impact on the Company's claim experience. The
estimates developed are highly uncertain due to the limitations of the available
data and the difficulty of forecasting the numerous variables that can affect
the range of the liability.
During the fourth quarter of fiscal 2001, the Company updated its
evaluation of the range of potential defense and indemnity costs for
asbestos-related liabilities and the insurance coverage in
11
place to cover these costs. As a result of the Company's analysis, the Company
has determined that its range of probable and estimable undiscounted losses for
asbestos-related claims through the year 2049 is $53.3 million to $195.6 million
before considering the effects of insurance recoveries. As discussed previously,
it is very difficult to forecast a liability for the Company's ultimate exposure
for asbestos-related claims as there are multiple variables that can affect the
timing, severity, and quantity of claims. Therefore, the Company has concluded
that no amount within that range is more likely than any other, and therefore
has determined that the amount of the gross liability it should record for
asbestos-related claims is equal to $53.3 million in accordance with accounting
principles generally accepted in the United States. Of this amount, $53.0
million has been reflected in the balance sheet as a long-term liability and
$0.3 million in accrued expenses as of December 31, 2001 and June 30, 2002.
During the period that Congoleum produced asbestos-containing products,
the Company purchased primary and excess insurance policies providing in excess
of $1 billion coverage for bodily injury asbestos claims. To date, substantially
all claims and defense costs have been paid through primary insurance coverage.
At June 30, 2002, the Company had approximately $0.5 million in remaining
primary insurance coverage for bodily injury asbestos claims. Once all primary
coverage is exhausted, the Company expects defense and indemnity costs to be
covered by its excess insurance policies. However, it is likely that the Company
will share in these costs. The first layer of excess insurance policies provides
for $135 million in coverage. Of this layer, approximately 25% to 33% (depending
on the method used to allocate losses) was underwritten by carriers who are
presently insolvent. The Company anticipates that it will have to pay some or
all of the portion of costs for resolving asbestos-related claims that are
allocable to such insolvent carriers, and that it may, in turn, be able to
recover a portion of such payments from the estates or insurance guaranty funds
responsible for the obligations of these carriers.
The same factors that affect developing forecasts of potential defense and
indemnity costs for asbestos-related liabilities also affect estimates of the
total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. Congoleum has filed suit regarding insurance
coverage issues against certain of its primary insurance carriers, the carriers
comprising its first layer of excess insurance, state guaranty funds
representing insolvent carriers, and its insurance brokers and has begun
settlement negotiations with several of these parties.
The Company has determined, based on its review of its insurance policies
and the advice of legal counsel, that approximately $45.2 million at December
31, 2001 and $43.9 million at June 30, 2002 of the estimated $53.3 million gross
liability is probable of recovery. This determination was made after considering
the terms of the available insurance coverage, the financial viability of the
insurance companies and the status of negotiations with its carriers. This
insurance receivable has been recorded in other long-term assets as of December
31, 2001 and June 30, 2002.
Since many uncertainties exist surrounding asbestos litigation, the
Company will continue to evaluate its asbestos-related estimated liability and
corresponding estimated insurance assets as well
12
as the underlying assumptions used to derive these amounts. It is reasonably
possible that the Company's total liability for asbestos-related claims may be
greater than the recorded liability and that insurance recoveries may be less
than the recorded asset. These uncertainties may result in the Company incurring
future charges to income to adjust the carrying value of recorded liabilities
and assets. Additionally, since the Company has recorded an amount representing
the low end of the range of exposure for asbestos-related claims, it is possible
that over time another amount within the range will be a better estimate of the
actual losses. Although the resolution of these claims is anticipated to take
decades, amounts recorded for the liability are not discounted, and the effect
on results of operations in any given year from a revision to these estimates
could be material.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three and six months ended June 30, 2002 as compared to three and six months
ended June 30, 2001.
Net sales for the second quarter of 2002 were $68.0 million, as compared
to $54.4 million in the second quarter of 2001, an increase of $13.6 million or
25.0%. This increase in sales was primarily due to three factors. First was
sales of the Company's DuraStone product line, which was introduced in August
2001. Second was an increase in sales of the Company's existing sheet products
for the remodel and builder markets. The third factor was an increase in
inventory by the Company's largest distributor to improve product availability
in certain locations. Year-to-date net sales for the first six months of 2002
were $125.9 million, an increase of $19.9 million or 18.8% from the first six
months of 2001. The year-to-date increase is generally due to the second quarter
sales increase, together with the first quarter sales of DuraStone. The Company
also had the benefit of initial shipments of do-it-yourself tile to a major home
center in the first quarter of 2002. Sales to this customer in the second
quarter were offset by the decline in sales to another major home center that is
phasing out the Congoleum line.
Gross profit for the second quarter of 2002 was $16.4 million, up $2.7
million from $13.7 million in the second quarter of 2001. Gross profit as a
percent of net sales decreased to 24.1% in the second quarter of 2002 from 25.2%
in the second quarter of 2001. Gross profit dollars increased as a result of the
higher sales, but margins declined due to costs of expanding sales and a less
profitable mix. Gross profit for the first six months of 2002 was $30.2 million
(24.0% of net sales), as compared to $22.7 million (21.4% of net sales) in the
first half of 2001. The improvement in year-to-date gross profit margin for the
first six months of 2002 was due to higher production volumes and improved
manufacturing efficiency, partly offset by the costs of expanding sales and less
profitable mix.
Selling, general and administrative expenses were $13.5 million in the
second quarter of 2002, up 14.1% from the second quarter of 2001. As a percent
of net sales, selling, general and administrative expenses were 19.9% in the
second quarter of 2002, as compared to 21.8% in the second quarter of 2001. For
the six months ended June 30, 2002, selling, general and administrative expenses
were $26.7 million (21.2% of net sales), as compared to $25.0 million (23.6% of
net sales) in the same period one year earlier. Expenses in 2002 have increased
as a result of higher sales volume and demand for displays and marketing
materials, as well as increased medical benefit costs.
Income from operations for the second quarter of 2002 was $2.9 million, as
compared to $1.9 million in the second quarter of 2001. Operating income for the
first six months of 2002 was $3.6 million, compared to a loss of $2.3 million in
the first half of 2001. The improved results for the second quarter of 2002
versus 2001 are due to increased sales, partly offset by lower margins and
increased selling, general and administrative expenses.
14
The provision for income taxes for the six months ended June 30, 2002
represents an effective tax rate of 41.0%. This is indicative of the Company
estimate of its full year effective tax rate.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased $2.2 million
for the six months ended June 30, 2002 to $18.8 million. Working capital at June
30, 2002 was $53.1 million, up from $51.7 million at December 31, 2001. The
ratio of current assets to current liabilities at June 30, 2002 was 1.9 compared
to 2.0 at December 31, 2001. Cash provided by operations was $6.5 million for
the first six months of 2002, compared to cash used by operations of $2.6
million in the first six months of 2001. The increase in cash provided by
operations in the first six months of 2002 versus the first six months of 2001
was primarily due to higher net income (before non-cash charges for an
accounting change), refunds of taxes paid in previous periods, timing of
payments of accrued expenses, and the lack of an inventory increase partly
offset by increased receivables resulting from higher sales.
Capital expenditures were $4.3 million for the first six months of 2002.
Total 2002 capital spending is expected to be approximately $10.0 million.
The Company has recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse effect on the
financial position of the Company and that they will be paid over a period of
five to ten years, the timing and amount of such payments may differ
significantly from the Company's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's costs,
the Company is not aware of any pending legislation which could have a material
adverse effect on its results of operations or financial position. There can be
no assurances that such costs could be passed along to its customers.
In 1998, the Company's Board of Directors approved a new plan to
repurchase up to $5.0 million of the Company's common stock. As of June 30,
2002, the Company had repurchased 777,665 shares of its common stock for an
aggregate cost of $4.3 million pursuant to this plan. The Company is presently
restricted from making further purchases by the terms of its 8 5/8% Senior Note
indenture.
The Company's principal sources of liquidity are net cash provided by
operating activities and borrowings under its Amended and Restated Financing
Agreement. The Company believes that these sources will be adequate to fund
working capital requirements, debt service payments and planned capital
expenditures through the foreseeable future.
The Company maintains defined benefit pension plans for its employees.
Recent rates of return on the investments maintained by these plans have been
below both actual longer term and assumed rates of returns. Due to the funding
status of these plans, these lower rates of returns may result in increased
reported pension expense, increased funding requirements, and/or increased
charges to other comprehensive income to record minimum pension liabilities.
15
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions, within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) the future
cost and timing of payments associated with and availability of insurance
coverage for asbestos-related personal injury claims, as well as other
environmental, product and general liability claims, (ii) increases in raw
material prices, (iii) increased competitive activity from companies in the
flooring industry, some of which have greater resources and broader distribution
channels than the Registrant, (iv) unfavorable developments in the national
economy or in the housing industry in general, (v) shipment delays, depletion of
inventory and increased production costs resulting from unforeseen disruptions
of operations at any of the Registrant's facilities or distributors, (vi)
product warranty claims, and (vii) changes in distributors of the Company's
products.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities.
Substantially all of the Company's outstanding long-term debt as of June 30,
2002 consisted of indebtedness with a fixed rate of interest which is not
subject to change based upon changes in prevailing market interest rates. Under
its current policies, the company does not use derivative financial instruments,
derivative commodity instruments or other financial instruments to manage its
exposure to changes in interest rates, foreign currency exchange rates,
commodity prices or equity prices.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
At the Annual Meeting of Stockholders held on May 8, 2002, the
following actions were taken:
Three nominees were elected as Class C Directors who will hold
office until the Annual Meeting of Stockholders in 2005 and until
their successors are duly elected and qualify.
Name Votes For Votes Withheld
---- --------- --------------
Roger S. Marcus 11,845,411 17,529
Cyril C. Baldwin, Jr. 11,845,426 17,514
John N. Irwin III 11,845,653 17,287
The following persons are the other directors of the Company
whose term of office as a director continued after the meeting:
William M. Marcus C. Barnwell Straut
Richard G. Marcus Mark N. Kaplan
Mark S. Newman
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 99: Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
17
CONGOLEUM CORPORATION
SIGNATURE
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.
CONGOLEUM CORPORATION
(Registrant)
Date: August 12, 2002 By: /s/ H. N. Feist III
----------------------------
(signature)
Howard N. Feist III
Chief Financial Officer
(Principal Financial & Accounting Officer)
18