Attached files
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EX-32.2 - EXHIBIT 32.2 - ASSOCIATED MATERIALS, LLC | c91393exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED MATERIALS, LLC | c91393exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - ASSOCIATED MATERIALS, LLC | c91393exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED MATERIALS, LLC | c91393exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 3, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-24956
Associated
Materials, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 75-1872487 | |
(State or Other Jurisdiction of Incorporation of Organization) | (I.R.S. Employer Identification No.) | |
3773 State Rd. Cuyahoga Falls, Ohio | 44223 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code (330) 929-1811
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of October 26, 2009, all of the registrants membership interests outstanding were held by
an affiliate of the Registrant.
ASSOCIATED MATERIALS, LLC
REPORT FOR THE QUARTER ENDED OCTOBER 3, 2009
REPORT FOR THE QUARTER ENDED OCTOBER 3, 2009
Page No. | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
20 | ||||||||
31 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ASSOCIATED MATERIALS, LLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 3, | January 3, | |||||||
2009 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 31,029 | $ | 6,709 | ||||
Accounts receivable, net |
160,840 | 116,878 | ||||||
Inventories |
133,789 | 141,170 | ||||||
Deferred income taxes |
12,183 | 12,183 | ||||||
Prepaid expenses |
8,458 | 10,486 | ||||||
Total current assets |
346,299 | 287,426 | ||||||
Property, plant and equipment, net |
108,822 | 115,156 | ||||||
Goodwill |
231,285 | 231,358 | ||||||
Other intangible assets, net |
96,854 | 99,131 | ||||||
Receivable from AMH II |
27,035 | | ||||||
Other assets |
15,100 | 12,218 | ||||||
Total assets |
$ | 825,395 | $ | 745,289 | ||||
Liabilities and Members Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 123,549 | $ | 54,520 | ||||
Payable to parent |
9,307 | 9,326 | ||||||
Accrued liabilities |
70,017 | 54,449 | ||||||
Income taxes payable |
10,609 | 6,982 | ||||||
Total current liabilities |
213,482 | 125,277 | ||||||
Deferred income taxes |
46,815 | 46,427 | ||||||
Other liabilities |
58,815 | 53,655 | ||||||
Long-term debt |
208,500 | 221,000 | ||||||
Members equity |
297,783 | 298,930 | ||||||
Total liabilities and members equity |
$ | 825,395 | $ | 745,289 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
ASSOCIATED MATERIALS, LLC
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 324,807 | $ | 342,678 | $ | 772,108 | $ | 858,368 | ||||||||
Cost of sales |
226,998 | 256,092 | 566,065 | 648,177 | ||||||||||||
Gross profit |
97,809 | 86,586 | 206,043 | 210,191 | ||||||||||||
Selling, general and
administrative expense |
53,323 | 55,898 | 153,118 | 158,888 | ||||||||||||
Manufacturing restructuring costs |
| | 5,255 | 1,783 | ||||||||||||
Income from operations |
44,486 | 30,688 | 47,670 | 49,520 | ||||||||||||
Interest expense, net |
5,999 | 5,594 | 16,581 | 17,376 | ||||||||||||
Foreign currency gain (loss) |
(112 | ) | (238 | ) | 110 | (328 | ) | |||||||||
Income before income taxes |
38,375 | 24,856 | 31,199 | 31,816 | ||||||||||||
Income taxes |
15,444 | 9,366 | 12,660 | 12,038 | ||||||||||||
Net income |
$ | 22,931 | $ | 15,490 | $ | 18,539 | $ | 19,778 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
ASSOCIATED MATERIALS, LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
Operating Activities |
||||||||
Net income |
$ | 18,539 | $ | 19,778 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
16,579 | 17,119 | ||||||
Deferred income taxes |
(292 | ) | | |||||
Provision for losses on accounts receivable |
8,279 | 6,072 | ||||||
Amortization of deferred financing costs |
1,846 | 1,571 | ||||||
Amortization of management fee |
375 | 375 | ||||||
Non-cash portion of manufacturing restructuring costs |
5,255 | 1,577 | ||||||
Loss on sale or disposal of assets other than by sale |
57 | 1,967 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(48,471 | ) | (51,966 | ) | ||||
Inventories |
11,058 | (34,116 | ) | |||||
Accounts payable and accrued liabilities |
78,975 | 50,410 | ||||||
Income taxes payable |
4,028 | (3,503 | ) | |||||
Other |
4,449 | (277 | ) | |||||
Net cash provided by operating activities |
100,677 | 9,007 | ||||||
Investing Activities |
||||||||
Additions to property, plant and equipment |
(4,243 | ) | (9,774 | ) | ||||
AMH II intercompany loan |
(26,819 | ) | | |||||
Proceeds from sale of assets |
| 25 | ||||||
Net cash used in investing activities |
(31,062 | ) | (9,749 | ) | ||||
Financing Activities |
||||||||
Net repayments under ABL Facility |
(32,500 | ) | | |||||
Issuance of senior subordinated notes |
20,000 | | ||||||
Financing costs |
(5,014 | ) | | |||||
Dividends paid |
(28,513 | ) | (8,311 | ) | ||||
Net cash used in financing activities |
(46,027 | ) | (8,311 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
732 | (581 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
24,320 | (9,634 | ) | |||||
Cash and cash equivalents at beginning of period |
6,709 | 21,603 | ||||||
Cash and cash equivalents at end of period |
$ | 31,029 | $ | 11,969 | ||||
Supplemental information: |
||||||||
Cash paid for interest |
$ | 10,338 | $ | 11,536 | ||||
Cash paid for income taxes |
$ | 8,924 | $ | 15,541 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
ASSOCIATED MATERIALS, LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 3, 2009
Note 1 Basis of Presentation
Associated Materials, LLC (the Company) is a wholly owned subsidiary of Associated Materials
Holdings, LLC (Holdings), which is a wholly owned subsidiary of AMH Holdings, LLC (AMH). AMH is
a wholly owned subsidiary of AMH Holdings II, Inc. (AMH II) which is controlled by affiliates of
Investcorp S.A. and Harvest Partners, Inc. Holdings, AMH and AMH II do not have material assets or
operations other than a direct or indirect ownership of the membership interest of the Company.
The unaudited condensed consolidated financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, these interim condensed consolidated
financial statements contain all of the normal recurring accruals and adjustments considered
necessary for a fair presentation of the unaudited results for the quarter and nine months ended
October 3, 2009 and September 27, 2008. These financial statements should be read in conjunction
with the Companys audited financial statements and notes thereto included in its Annual Report on
Form 10-K for the year ended January 3, 2009. A detailed description of the Companys significant
accounting policies and management judgments is located in the audited financial statements for the
year ended January 3, 2009, included in the Companys Form 10-K filed with the Securities and
Exchange Commission.
The Company is a leading, vertically integrated manufacturer and North American distributor of
exterior residential building products. The Companys core products are vinyl windows, vinyl
siding, aluminum trim coil, and aluminum and steel siding and accessories. Because most of the
Companys building products are intended for exterior use, the Companys 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.
In
preparing the third quarter 2009 interim financial statements, the Company determined that it
should have reflected the $26.8 million loan to AMH II as an investing activity rather than a
financing activity in its second quarter 2009 interim financial statements. The Company has
appropriately reflected this amount as an investing activity in the third quarter interim financial
statements. The Company considered the quantitative and qualitative aspects of this correction in
presentation and does not believe that this presentation error materially misstated its second
quarter 2009 unaudited condensed consolidated financial statements.
Certain prior period amounts within the unaudited condensed consolidated statement of cash
flows and Note 8 have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In the third quarter of 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC). The ASC is the single official source of
authoritative, nongovernmental GAAP, other than guidance issued by the SEC. The adoption of the ASC
did not have any impact on the financial statements included herein.
In October 2009, the FASB approved for issuance Emerging Issues Task Force (EITF) issue
08-01, Revenue Arrangements with Multiple Deliverables. This statement provides principles for
allocation of consideration among its multiple-elements, allowing more flexibility in identifying
and accounting for separate deliverables under an arrangement. The EITF introduces an estimated
selling price method for valuing the elements of a bundled arrangement if vendor-specific objective
evidence or third-party evidence of selling price is not available, and significantly expands
related disclosure requirements. This standard is effective on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted.
The Company does not expect the adoption of this statement to have a material effect on its
consolidated financial statements or disclosures.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, (ASU 2009-05). ASU 2009-05 provides guidance on measuring the fair
value of liabilities and is effective for the first interim or annual reporting period beginning
after its issuance. The Companys adoption of ASU 2009-05 did not have an effect on its disclosure
of the fair value of its liabilities.
4
Table of Contents
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,
(SFAS No. 168). While SFAS No. 168 was not intended to change U.S. generally accepted accounting
principles, it has changed the way the Company references these accounting principles in its
consolidated financial statements and accompanying notes. SFAS No. 168 became effective for interim
or annual reporting periods ending after September 15, 2009. Although the adoption of SFAS No. 168
has changed the Companys disclosures, there have not been any changes to the content of the
Companys financial statements or disclosures as a result of implementing SFAS No. 168.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments
to FASB Interpretation No. 46(R), (SFAS No. 167). This statement amends the timing, and
considerations, of analyses performed to determine if the Companys variable interests give it a
controlling financial interest in a variable interest entity, as well as requires additional
disclosures. SFAS No. 167 is effective as of the first annual reporting period beginning after
November 15, 2009, for interim periods within the first annual reporting period and thereafter. The
Company does not expect the adoption of SFAS No. 167 to have a material effect on its consolidated
financial statements or disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting
for Transfers of Financial Assetsan amendment of FASB Statement No. 140, (SFAS No. 166). SFAS
No. 166 was issued to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement, if any, in transferred financial assets. The
requirements of SFAS No. 166 must be applied as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company does not expect the application of SFAS No. 166 to have a
material effect on its consolidated financial statements or disclosures.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent
Events, (SFAS No. 165). SFAS No. 165 establishes general standards of accounting and disclosures
for events that occur after the balance sheet date, but before financial statements are issued.
Application of SFAS No. 165 is required for interim or annual financial periods ending after
June 15, 2009. The Company evaluated for subsequent events through the date these financial
statements were issued on October 26, 2009 and concluded that there were no significant subsequent
events requiring recognition or disclosure.
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, (FSP 107-1). FSP 107-1 amends Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, and requires
disclosures about fair value of financial instruments for interim and annual reporting periods. FSP
107-1 is effective for interim reporting periods ending after June 15, 2009. The Companys adoption
of FSP 107-1 did not result in additional disclosure.
Note 2 Inventories
Inventories are valued at the lower of cost (first in, first out) or market. Inventories
consist of the following (in thousands):
October 3, | January 3, | |||||||
2009 | 2009 | |||||||
Raw materials |
$ | 34,262 | $ | 25,779 | ||||
Work-in-process |
11,494 | 17,316 | ||||||
Finished goods and purchased stock |
88,033 | 98,075 | ||||||
$ | 133,789 | $ | 141,170 | |||||
5
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Note 3 Goodwill and Other Intangible Assets
Goodwill represents the purchase price in excess of the fair value of the tangible and
intangible net assets acquired in a business combination. As of October 3, 2009, goodwill of
$231.3 million consisted of $194.8 million from the April 2002 merger transaction that resulted in
the Companys acquisition by Harvest Partners, Inc. and $36.5 million from the August 2003
acquisition of Gentek Holdings, Inc. (Gentek). As of January 3, 2009, goodwill of $231.4 million
consisted of $194.8 million from the April 2002 merger transaction that resulted in the Companys
acquisition by Harvest Partners, Inc. and $36.6 million from the August 2003 acquisition of Gentek.
None of the Companys goodwill is deductible for income tax purposes. The
impact of foreign currency translation decreased the carrying value of Gentek goodwill by
approximately $0.1 million for the nine months ended October 3, 2009. The Companys other
intangible assets consist of the following (in thousands):
Average | ||||||||||||||||||||||||||||
Amortization | October 3, 2009 | January 3, 2009 | ||||||||||||||||||||||||||
Period | Accumulated | Net Carrying | Accumulated | Net Carrying | ||||||||||||||||||||||||
(in Years) | Cost | Amortization | Value | Cost | Amortization | Value | ||||||||||||||||||||||
Trademarks and
trade names |
15 | $ | 108,080 | $ | 13,611 | $ | 94,469 | $ | 108,080 | $ | 12,187 | $ | 95,893 | |||||||||||||||
Patents |
10 | 6,230 | 4,626 | 1,604 | 6,230 | 4,160 | 2,070 | |||||||||||||||||||||
Customer base |
7 | 5,073 | 4,292 | 781 | 4,836 | 3,668 | 1,168 | |||||||||||||||||||||
Total other
intangible assets |
$ | 119,383 | $ | 22,529 | $ | 96,854 | $ | 119,146 | $ | 20,015 | $ | 99,131 | ||||||||||||||||
The Company has determined that trademarks and trade names totaling $80.0 million
(included in the trademarks and trade names caption in the table above) consisting of the
Alside®, Revere® and Gentek® trade names have indefinite useful
lives and are tested for impairment at least annually. Amortization expense related to other
intangible assets was approximately $0.8 million for each of the quarters ended October 3, 2009 and
September 27, 2008, and $2.3 million and $2.4 million for the nine month periods ended October 3,
2009 and September 27, 2008, respectively. The foreign currency translation impact on the cost and
accumulated amortization of intangibles was approximately $0.1 million and $0.2 million for the
quarter and nine months ended October 3, 2009, respectively. Amortization expense is expected to
be $0.8 million for the remainder of fiscal 2009. Amortization expense for fiscal years 2010,
2011, 2012 and 2013 is estimated to be $2.7 million, $2.7 million, $2.2 million and $1.9 million,
respectively.
Note 4 Long-Term Debt
Long-term debt consists of the following (in thousands):
October 3, | January 3, | |||||||
2009 | 2009 | |||||||
9 3/4% notes |
$ | 165,000 | $ | 165,000 | ||||
15% notes |
20,000 | | ||||||
Borrowings under the ABL Facility |
23,500 | 56,000 | ||||||
Total long-term debt |
$ | 208,500 | $ | 221,000 | ||||
On October 3, 2008, the Company, Gentek Building Products, Inc. and Gentek Building Products
Limited, as borrowers, entered into an asset-based credit facility
with Wells Fargo Securities, LLC (formerly known as Wachovia Capital
Markets, LLC) and CIT Capital Securities LLC, as joint lead arrangers, Wachovia Bank, N.A., as agent and the
lenders party to the facility (the ABL Facility). One of the Companys joint lead arrangers
under the ABL Facility, CIT Capital Securities LLC, is a subsidiary of CIT Group, Inc. (CIT) who
incurred significant rating downgrades due to liquidity concerns. Subsidiaries of CIT are also
lenders under both the U.S. and Canadian facilities described below.
CITs and its subsidiaries aggregate commitments represent 21.1%
of the total commitments under the Companys facilities.
CIT recently announced that
it had commenced a restructuring of its capital structure. Under the plan, CIT launched exchange
offers for certain unsecured notes. CIT announced that if it does not achieve the objectives of
the exchange offers, it may decide to initiate a voluntary filing under Chapter 11 of the U.S.
Bankruptcy Code. As a result, CIT is concurrently soliciting bondholders and other holders of CIT
debt to approve a prepackaged plan of reorganization. It is uncertain whether CITs comprehensive
restructuring efforts will be successful. The Company continues to closely monitor this situation
and does not believe it will have a material impact on the Companys financial condition or ability
to fund operations.
Effective August 21, 2009, the Company formed Gentek Canada Holdings Limited, a Canadian
corporation wholly owned by Gentek Building Products, Inc. The Company also formed Gentek Building
Products Limited Partnership, a Canadian limited partnership wholly owned by Gentek Building
Products Limited as the limited partner and Gentek Canada Holdings Limited as the general partner.
The operations of Gentek Building Products Limited were sold to Gentek Building Products Limited
Partnership in accordance with the asset purchase agreement dated September 5, 2009. In addition,
the corporate name of Gentek Building Products Limited was legally changed to Associated Materials
Canada Limited on September 6, 2009. Associated Materials Canada Limited, Gentek Canada Holdings
Limited and Gentek Building Products Limited Partnership are collectively known as the Canadian
Entities.
Gentek Building Products Limited Partnership was added as a borrower under the
Canadian portion of the credit facilities and Gentek Canada Holdings Limited was added
as a guarantor of the Canadian portion of the credit facilities.
The obligations of
the Company, Gentek Building Products, Inc., Associated Materials Canada Limited, and Gentek
Building Products Limited Partnership as borrowers under the credit facilities, are jointly and
severally guaranteed by Holdings and by the Companys wholly owned domestic subsidiaries,
Gentek Holdings, LLC and Alside, Inc. Such obligations and guaranties are also secured by
(i) a security interest in substantially all of the owned real and personal assets (tangible
and intangible) of the Company, Holdings, Gentek Building Products, Inc., Gentek Holdings, LLC and
Alside, Inc. and (ii) a pledge of up to 65% of the voting stock of Associated Materials
Canada Limited and Gentek Canada Holdings Limited. The obligations of Alside, Inc. and Gentek
Building Products Limited Partnership are further secured by a security interest in their owned
real and personal assets (tangible and intangible) and are guaranteed
by Gentek Canada Holdings Limited.
6
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The ABL Facility provides for a senior secured asset-based revolving credit facility of up to
$225.0 million, comprising a $165.0 million U.S. facility and a $60.0 million Canadian facility, in
each case subject to borrowing base availability under the
applicable facility. The entire principal amount (if any) outstanding under the ABL Facility
is due and payable in full at maturity on October 3, 2013, except in the event that the Companys
obligations under its 9 3/4% notes due 2012 remain outstanding as of the date six months prior to
their stated maturity, April 15, 2012, in which case the ABL Facility will be due and payable on
October 15, 2011. As of October 3, 2009, there was $23.5 million drawn under the ABL Facility and
$143.0 million available for additional borrowing.
The ABL Facility does not require the Company to comply with any financial maintenance
covenants, unless it has less than $28.1 million of aggregate excess availability at any time (or
less than $20.6 million of excess availability under the U.S. facility or less than $7.5 million of
excess availability under the Canadian facility), during which time the Company is subject to
compliance with a fixed charge coverage ratio covenant of 1.1 to 1. As of October 3, 2009, the
Company exceeded the minimum aggregate excess availability thresholds, and therefore, was not
required to comply with this maintenance covenant.
The weighted average interest rate for borrowings under the ABL Facility was 4.4% for the
quarter ended October 3, 2009. For the year ended January 3, 2009, the weighted average interest
rate for borrowings under the ABL Facility and prior credit facility was 5.6%. As of October 3,
2009, the per annum interest rate applicable to borrowings under the ABL Facility was 4.5%. As of
October 3, 2009, the Company had letters of credit outstanding of $8.3 million primarily securing
deductibles of various insurance policies.
Under the ABL Facility restricted payments covenant, subject to specified exceptions,
Holdings, the Company and its restricted subsidiaries cannot make restricted payments, such as
dividends or distributions on equity, redemptions or repurchases of equity, or payments of certain
management or advisory fees or other extraordinary forms of compensation, unless prior written
notice is given and certain EBITDA and availability thresholds are
met. Less restrictive availability tests apply for intercompany
transfers.
In June 2009, the Company issued $20.0 million of its 15% senior subordinated notes due 2012
in a private placement to certain institutional investors as part of a note exchange by AMH II
described below. Net proceeds were approximately $15 million from the issuance of the 15% notes,
net of funding fees and other transaction expenses.
As of October 3, 2009, the Company had $165.0 million and $20.0 million in aggregate principal
amount of its 9 3/4% notes and 15% notes, respectively, due 2012 outstanding. The 9 3/4% notes and
15% notes rank pari passu with each other and are subordinated in right of payment to all
unsubordinated indebtedness of the Company. The 9 3/4% notes, which mature on April 15, 2012, pay
interest semi-annually in arrears on April 15th and October 15th. The 15%
notes mature on July 15, 2012 and pay interest quarterly in arrears on January 15th,
April 15th, July 15th and October 15th. The 9 3/4% notes are
redeemable at the Companys option, currently at a redemption price of 101.625% plus accrued and
unpaid interest to the redemption date. This redemption price declines to 100% on April 15, 2010
for the remaining life of the notes. The 15% notes are redeemable at the Companys option, at an
initial redemption price of 101% plus accrued and unpaid interest to the redemption date, with the
redemption price declining to 100% on December 22, 2009. The Companys payment obligations under
the 9 3/4% notes and 15% notes are fully and unconditionally guaranteed, jointly and severally on a
senior subordinated basis, by its domestic wholly owned subsidiaries: Gentek Holdings, LLC, Gentek
Building Products, Inc. and Alside, Inc. The Canadian Entities do not guarantee the Companys 9
3/4% or 15% notes. Upon a change of control of the Company, as defined, holders of the 9 3/4%
notes and the 15% notes have the right to require the Company to repurchase their notes at a
purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest.
The indentures governing the 9 3/4% notes and 15% notes contain restrictive covenants that,
among other things, limit the Companys ability to incur additional indebtedness, make loans or
advances to subsidiaries and other entities, invest in capital expenditures, sell its assets or
declare dividends. Events of default are generally similar with respect to each of the 9 3/4%
notes and the 15% notes.
The fair value of the 9 3/4% notes was $161.3 million and $129.9 million at October 3, 2009
and January 3, 2009, respectively. In accordance with the principles described in the FASB ASC 820,
Fair Value Measurements and Disclosures (SFAS No. 157), the fair value of the 9 3/4% notes was
measured using Level 1 inputs of quoted prices in active markets as of the respective measurement
dates. The fair value of the Companys 15% notes is not based upon quoted market prices as the
notes were issued in a private placement and price quotations are not available. The Company
estimates the fair value of the Companys 15% notes at October 3, 2009 to be approximately $20.0
million based upon market and income approach valuations estimated by an external source. The fair
value of the 15% notes was measured using Level 3 unobservable inputs, which is the lowest level of
input that is significant to the fair value measurement.
7
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The Companys indirect parent entities, AMH and AMH II, are holding companies with no
independent operations. As of October 3, 2009, AMH had $431.0 million in aggregate principal
amount of its 11 1/4% senior discount notes due 2014
outstanding. Interest accrued at a rate of 11 1/4% per annum 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% per annum on the notes accrues and is payable semi-annually in arrears on March 1st
and September 1st of each year, with the first payment of cash interest under the 11
1/4% notes paid on September 1, 2009. During the second quarter of 2009, AMH II purchased $15.0
million par value of AMHs 11 1/4% notes directly from the AMH debtholders with funds loaned from
the Company for approximately $5.9 million. In exchange for the purchased 11 1/4% notes, AMH II
was granted additional equity interest in AMH. As a result, AMH recorded a gain on debt
extinguishment of $8.9 million for the nine months ended October 3, 2009.
In connection with a December 2004 recapitalization transaction, AMHs parent company AMH II
was formed, and AMH II subsequently issued $75 million of 13 5/8% senior notes due 2014. In June
2009, AMH II entered into an exchange agreement pursuant to which it paid $20.0 million in cash and
issued $13.066 million original principal amount of its 20% senior notes due 2014 in exchange for
all of its outstanding 13 5/8% senior notes due 2014. Interest on AMH IIs 20% notes is payable in
cash semi-annually in arrears or may be added to the then outstanding principal amount of the 20%
notes and paid at maturity on December 1, 2014. In accordance with the principles described in
FASB ASC 470-60, Troubled Debt Restructurings by Debtors
(SFAS No. 15), AMH II recorded a troubled
debt restructuring gain of approximately $19.2 million for the nine months ended October 3, 2009.
As of October 3, 2009, AMH II has recorded liabilities for the $13.066 million original principal
amount and $32.7 million of accrued interest related to all future interest payments on the
Companys 15% notes due 2012 and AMH IIs 20% notes due 2014. As of October 3, 2009, total AMH II
debt, including that of its consolidated subsidiaries, was approximately $685.3 million, which
includes $32.7 million of accrued interest related to all future interest payments on the Companys
15% notes and AMH IIs 20% notes.
AMH and AMH II have no independent operations, and as a result they are dependent upon
distributions, payments and loans from the Company to service their indebtedness. In particular,
AMH is dependent on the Companys ability to pay dividends or otherwise upstream funds to it in
order to service its obligations under the 11 1/4% notes, and AMH II is similarly dependent on
AMHs ability to further upstream funds in order to service its obligations under the 20% notes.
The Company does not guarantee the 11 1/4% notes or the 20% notes and has no obligation to make any
payments with respect thereto. In January 2009, the Company declared a dividend of approximately
$4.3 million to fund the January 2009 payment of AMH IIs scheduled interest on its 13 5/8% senior
notes, which are no longer outstanding. In September 2009, the Company declared a dividend of
approximately $24.2 million to fund the September 2009 payment of AMHs scheduled interest on its
11 1/4% senior notes.
In June 2009, at the time the Company entered into the purchase agreement pursuant to which it
issued its 15% notes, the Company entered into an intercompany loan agreement with AMH II, pursuant
to which the Company agreed to periodically make loans to AMH II in an amount not to exceed an
aggregate outstanding principal amount of approximately $33.0 million at any one time, plus accrued
interest. Interest accrues at a rate of 3% per annum and will be added to the then outstanding
principal amount on a semi-annual basis. The principal amount and accrued but unpaid interest
thereon will mature on May 1, 2015. As of October 3, 2009, the principal amount of borrowings by
AMH II under this intercompany loan agreement and accrued interest thereon was $27.0 million.
The Company believes that AMH II will have the ability to repay the loan in accordance
with its stated terms. Due
to the related party nature and the underlying terms of the intercompany loan with AMH II, the
Company has deemed it not practical to assign and disclose a fair value estimate.
The ratio of earnings
to fixed charges for the nine months ended October 3, 2009 is 2.23x.
Note 5 Comprehensive Income
Comprehensive income differs from net income due to the reclassification of actuarial gains or
losses and prior service costs associated with the Companys pension and other postretirement plans
and foreign currency translation adjustments as follows (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 22,931 | $ | 15,490 | $ | 18,539 | $ | 19,778 | ||||||||
Unrecognized prior service cost and net loss |
262 | 180 | 773 | 456 | ||||||||||||
Foreign currency translation adjustments |
5,313 | (1,595 | ) | 8,055 | (3,708 | ) | ||||||||||
Comprehensive income |
$ | 28,506 | $ | 14,075 | $ | 27,367 | $ | 16,526 | ||||||||
8
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Note 6 Retirement Plans
The Companys 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
Companys Gentek subsidiary sponsors a defined benefit pension plan for hourly
union employees at its Woodbridge, New Jersey plant (together with the Alside sponsored
defined benefit plans, the Domestic Plans) as well as a defined benefit pension plan covering
Gentek Canadian salaried employees and hourly union employees at the Lambeth, Ontario plant, a
defined benefit pension plan for the hourly union employees at its Burlington, Ontario plant and a
defined benefit pension plan for the hourly union employees at its Pointe Claire, Quebec plant (the
Foreign Plans). Accrued pension liabilities are included in accrued and other long-term
liabilities in the accompanying balance sheets. The actuarial valuation measurement date for the
defined benefit pension plans is December 31st. Components of defined benefit pension
plan costs are as follows (in thousands):
Quarters Ended | ||||||||||||||||
October 3, 2009 | September 27, 2008 | |||||||||||||||
Domestic | Foreign | Domestic | Foreign | |||||||||||||
Plans | Plans | Plans | Plans | |||||||||||||
Net periodic pension cost |
||||||||||||||||
Service cost |
$ | 146 | $ | 373 | $ | 134 | $ | 565 | ||||||||
Interest cost |
783 | 830 | 747 | 820 | ||||||||||||
Expected return on assets |
(674 | ) | (704 | ) | (875 | ) | (959 | ) | ||||||||
Amortization of unrecognized: |
||||||||||||||||
Prior service costs |
8 | 8 | 7 | 8 | ||||||||||||
Cumulative net loss |
375 | 15 | 150 | 27 | ||||||||||||
Net periodic pension cost |
$ | 638 | $ | 522 | $ | 163 | $ | 461 | ||||||||
Nine Months Ended | ||||||||||||||||
October 3, 2009 | September 27, 2008 | |||||||||||||||
Domestic | Foreign | Domestic | Foreign | |||||||||||||
Plans | Plans | Plans | Plans | |||||||||||||
Net periodic pension cost |
||||||||||||||||
Service cost |
$ | 438 | $ | 1,051 | $ | 402 | $ | 1,659 | ||||||||
Interest cost |
2,349 | 2,339 | 2,241 | 2,406 | ||||||||||||
Expected return on assets |
(2,022 | ) | (1,983 | ) | (2,625 | ) | (2,814 | ) | ||||||||
Amortization of unrecognized: |
||||||||||||||||
Prior service costs |
24 | 22 | 21 | 24 | ||||||||||||
Cumulative net loss |
1,125 | 43 | 450 | 79 | ||||||||||||
Net periodic pension cost |
$ | 1,914 | $ | 1,472 | $ | 489 | $ | 1,354 | ||||||||
The late 2008 decline in market conditions has resulted in decreased valuations of the
Companys pension plan assets. Based on actuarial valuations and current pension funding
legislation, the Company does not currently anticipate significant changes to current cash
contribution levels for the remainder of 2009. However, the Company currently anticipates
additional cash contributions will be required in 2010 to avoid certain funding-based benefit
limitations as required under current pension law. Although additional declines in market
conditions, changes in current pension law and uncertainties regarding significant assumptions used
in the actuarial valuations may have a material impact on future required contributions to the
Companys pension plans, the Company currently does not expect funding requirements to have a
material adverse impact on current or future liquidity.
The actuarial valuations require significant estimates and assumptions to be made by
management, primarily the funding interest rate, discount rate and expected long-term return on
plan assets. These assumptions are all susceptible to changes in market conditions. The funding
interest rate and discount rate are based on representative bond yield curves maintained and
monitored by independent third parties. In determining the expected long-term rate of return on
plan assets, the Company considers historical market and portfolio rates of return, asset
allocations and expectations of future rates of return. As disclosed in the Companys 2008 Annual
Report on Form 10-K, the sensitivity of these estimates and assumptions are not expected to have a
material impact on the Companys 2009 pension expense and funding requirements.
9
Table of Contents
Note 7 Business Segments
The Company is in the single business of manufacturing and distributing exterior residential
building products. The following table sets forth for the periods presented a summary of net sales
by principal product offering (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Vinyl windows |
$ | 114,686 | $ | 108,551 | $ | 276,717 | $ | 282,174 | ||||||||
Vinyl siding products |
67,857 | 82,044 | 161,113 | 196,493 | ||||||||||||
Metal products |
53,571 | 65,723 | 127,017 | 166,856 | ||||||||||||
Third party manufactured products |
66,885 | 65,366 | 158,454 | 156,486 | ||||||||||||
Other products and services |
21,808 | 20,994 | 48,807 | 56,359 | ||||||||||||
$ | 324,807 | $ | 342,678 | $ | 772,108 | $ | 858,368 | |||||||||
Note 8 Product Warranty Costs and Service Returns
Consistent with industry practice, the Company provides to homeowners limited warranties on
certain products, primarily related to window and siding product categories. Warranties are of
varying lengths of time from the date of purchase up to and including lifetime. Warranties cover
product failures such as stress cracks and seal failures for windows and fading and peeling for
siding products, as well as manufacturing defects. The Company has various options for remedying
product warranty claims including repair, refinishing or replacement and directly incurs the cost
of these remedies. Warranties also become reduced under certain conditions of time and change in
ownership. Certain metal coating suppliers provide warranties on materials sold to the Company that
mitigate the costs incurred by the Company. Reserves for future warranty costs are provided based
on managements estimates of such future costs using historical trends of claims experience, sales
history of products to which such costs relate, and other factors. An independent actuary assists
the Company in determining reserve amounts related to significant product failures. The provision
for warranties is reported within cost of sales in the consolidated statements of operations.
A reconciliation of the warranty reserve activity is as follows for the quarter and nine
months ended October 3, 2009 and September 27, 2008 (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Balance at the beginning of the period |
$ | 30,947 | $ | 29,933 | $ | 29,425 | $ | 28,684 | ||||||||
Provision for warranties issued |
2,747 | 2,504 | 7,445 | 7,269 | ||||||||||||
Claims paid |
(2,073 | ) | (1,778 | ) | (5,483 | ) | (5,120 | ) | ||||||||
Foreign currency translation |
379 | (97 | ) | 613 | (271 | ) | ||||||||||
Balance at the end of the period |
$ | 32,000 | $ | 30,562 | $ | 32,000 | $ | 30,562 | ||||||||
Note 9 Manufacturing Restructuring Costs
During the nine months ended September 27, 2008, the Company incurred costs of $1.8 million
related to relocating a portion of its vinyl siding production and distribution. These costs were
comprised of asset impairment costs, costs incurred to relocate manufacturing equipment, costs
associated with the transition of distribution operations, and inventory markdown costs. The
inventory markdown costs of $0.9 million were recorded within cost of sales in the statement of
operations during the second quarter of 2008. The Company discontinued its use of the warehouse
facility adjacent to the Ennis manufacturing plant during the second quarter of 2009. As a result,
the related lease costs associated with the discontinued use of the warehouse facility were
recorded as a restructuring charge of approximately $5.3 million during the second quarter of 2009.
10
Table of Contents
The following is a reconciliation of the beginning and ending balances of the manufacturing
restructuring liability for the quarter ended October 3, 2009 (in thousands):
Quarter Ended | ||||
October 3, 2009 | ||||
Beginning liability |
$ | 5,280 | ||
Additions |
| |||
Accretion of related lease obligations |
2 | |||
Payments |
(76 | ) | ||
Ending liability as of October 3, 2009 |
$ | 5,206 | ||
Of the remaining restructuring liability at October 3, 2009, approximately $0.2 million is
expected to be paid during the remainder of 2009. Amounts related to the ongoing facility
obligations will continue to be paid over the lease term, which ends April 2020.
Note 10 Employee Termination Costs
Throughout 2009, due to economic conditions and as a cost control measure, the Company reduced
its workforce and placed a number of employees on temporary lay-off status. During the second and
third quarters, several of these employees were re-instated to an active status. During the third
quarter ended October 3, 2009, the Company determined it would not recall the remaining employees.
As a result, the Company recorded a one-time charge of $1.7 million in employee termination costs
during the third quarter ended October 3, 2009 within selling, general and administrative expense
in the consolidated statements of operations. The employee termination costs are expected to be
paid over the next 12 months.
Note 11 Subsidiary Guarantors
The Companys payment obligations under the 9 3/4% notes and 15% notes are fully and
unconditionally guaranteed, jointly and severally on a senior subordinated basis, by its domestic
wholly owned subsidiaries: Gentek Holdings, LLC, Gentek Building Products, Inc. and Alside, Inc.
Alside, Inc. is a wholly owned subsidiary having no assets, liabilities or operations. The Canadian
Entities do not guarantee the Companys 9 3/4% or 15% notes. In the opinion of management, separate
financial statements of the respective Guarantor Subsidiaries would not provide additional material
information, which would be useful in assessing the financial composition of the Guarantor
Subsidiaries. None of the Guarantor Subsidiaries have any significant legal restrictions on the
ability of investors or creditors to obtain access to its assets in event of default on the
Subsidiary Guarantee other than its subordination to senior indebtedness.
11
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
October 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
October 3, 2009
(In thousands)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 5,080 | $ | 86 | $ | 25,863 | $ | | $ | 31,029 | ||||||||||
Accounts receivable, net |
105,959 | 13,955 | 40,926 | | 160,840 | |||||||||||||||
Inventories |
93,274 | 8,820 | 31,695 | | 133,789 | |||||||||||||||
Deferred income taxes |
9,196 | 2,482 | 505 | | 12,183 | |||||||||||||||
Prepaid expenses |
6,237 | 1,019 | 1,202 | | 8,458 | |||||||||||||||
Intercompany receivables |
| 73,519 | 6,156 | (79,675 | ) | | ||||||||||||||
Income taxes receivable |
| | 1,434 | (1,434 | ) | | ||||||||||||||
Total current assets |
219,746 | 99,881 | 107,781 | (81,109 | ) | 346,299 | ||||||||||||||
Property, plant and equipment, net |
73,246 | 2,145 | 33,431 | | 108,822 | |||||||||||||||
Goodwill |
194,815 | 36,470 | | | 231,285 | |||||||||||||||
Other intangible assets, net |
87,131 | 9,590 | 133 | | 96,854 | |||||||||||||||
Receivable from AMH II |
27,035 | | | | 27,035 | |||||||||||||||
Other assets |
13,080 | | 2,020 | | 15,100 | |||||||||||||||
Investment in subsidiaries |
192,664 | 89,023 | | (281,687 | ) | | ||||||||||||||
Total assets |
$ | 807,717 | $ | 237,109 | $ | 143,365 | $ | (362,796 | ) | $ | 825,395 | |||||||||
Liabilities and Members Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 76,666 | $ | 14,145 | $ | 32,738 | $ | | $ | 123,549 | ||||||||||
Payable to parent |
9,307 | | | | 9,307 | |||||||||||||||
Accrued liabilities |
51,982 | 6,524 | 11,511 | | 70,017 | |||||||||||||||
Income taxes payable |
7,709 | 4,334 | | (1,434 | ) | 10,609 | ||||||||||||||
Intercompany payables |
79,675 | | | (79,675 | ) | | ||||||||||||||
Total current liabilities |
225,339 | 25,003 | 44,249 | (81,109 | ) | 213,482 | ||||||||||||||
Deferred income taxes |
41,119 | 3,524 | 2,172 | | 46,815 | |||||||||||||||
Other liabilities |
34,976 | 15,918 | 7,921 | | 58,815 | |||||||||||||||
Long-term debt |
208,500 | | | | 208,500 | |||||||||||||||
Members equity |
297,783 | 192,664 | 89,023 | (281,687 | ) | 297,783 | ||||||||||||||
Total liabilities and members equity |
$ | 807,717 | $ | 237,109 | $ | 143,365 | $ | (362,796 | ) | $ | 825,395 | |||||||||
12
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 3, 2009
(In thousands)
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended October 3, 2009
(In thousands)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 233,390 | $ | 45,738 | $ | 89,673 | $ | (43,994 | ) | $ | 324,807 | |||||||||
Cost of sales |
164,709 | 41,682 | 64,601 | (43,994 | ) | 226,998 | ||||||||||||||
Gross profit |
68,681 | 4,056 | 25,072 | | 97,809 | |||||||||||||||
Selling, general and
administrative expense |
42,004 | 311 | 11,008 | | 53,323 | |||||||||||||||
Income from operations |
26,677 | 3,745 | 14,064 | | 44,486 | |||||||||||||||
Interest expense, net |
5,783 | | 216 | | 5,999 | |||||||||||||||
Foreign currency loss |
| | 112 | | 112 | |||||||||||||||
Income before income taxes |
20,894 | 3,745 | 13,736 | | 38,375 | |||||||||||||||
Income taxes |
9,844 | 2,512 | 3,088 | | 15,444 | |||||||||||||||
Income before equity income
from subsidiaries |
11,050 | 1,233 | 10,648 | | 22,931 | |||||||||||||||
Equity income from subsidiaries |
11,881 | 10,648 | | (22,529 | ) | | ||||||||||||||
Net income |
$ | 22,931 | $ | 11,881 | $ | 10,648 | $ | (22,529 | ) | $ | 22,931 | |||||||||
13
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 3, 2009
(In thousands)
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended October 3, 2009
(In thousands)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 567,260 | $ | 111,017 | $ | 203,085 | $ | (109,254 | ) | $ | 772,108 | |||||||||
Cost of sales |
415,298 | 106,203 | 153,818 | (109,254 | ) | 566,065 | ||||||||||||||
Gross profit |
151,962 | 4,814 | 49,267 | | 206,043 | |||||||||||||||
Selling, general and
administrative expense |
123,037 | 2,050 | 28,031 | | 153,118 | |||||||||||||||
Manufacturing restructuring costs |
5,255 | | | | 5,255 | |||||||||||||||
Income from operations |
23,670 | 2,764 | 21,236 | | 47,670 | |||||||||||||||
Interest expense, net |
15,994 | | 587 | | 16,581 | |||||||||||||||
Foreign currency gain |
| | 110 | | 110 | |||||||||||||||
Income before income taxes |
7,676 | 2,764 | 20,759 | | 31,199 | |||||||||||||||
Income taxes |
4,529 | 2,789 | 5,342 | | 12,660 | |||||||||||||||
Income (loss) before equity
income from subsidiaries |
3,147 | (25 | ) | 15,417 | | 18,539 | ||||||||||||||
Equity income from subsidiaries |
15,392 | 15,417 | | (30,809 | ) | | ||||||||||||||
Net income |
$ | 18,539 | $ | 15,392 | $ | 15,417 | $ | (30,809 | ) | $ | 18,539 | |||||||||
14
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended October 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended October 3, 2009
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiaries | Subsidiary | Consolidated | |||||||||||||
Net cash provided by operating activities |
$ | 62,330 | $ | 15,638 | $ | 22,709 | $ | 100,677 | ||||||||
Investing Activities |
||||||||||||||||
Additions to property, plant and equipment |
(3,593 | ) | (11 | ) | (639 | ) | (4,243 | ) | ||||||||
AMH II intercompany loan |
(26,819 | ) | | | (26,819 | ) | ||||||||||
Other |
(383 | ) | 383 | | | |||||||||||
Net cash provided by (used in) investing activities |
(30,795 | ) | 372 | (639 | ) | (31,062 | ) | |||||||||
Financing Activities |
||||||||||||||||
Net repayments under ABL Facility |
(32,500 | ) | | | (32,500 | ) | ||||||||||
Issuance of senior subordinated notes |
20,000 | | | 20,000 | ||||||||||||
Financing costs |
(4,920 | ) | | (94 | ) | (5,014 | ) | |||||||||
Dividends paid |
(28,513 | ) | | | (28,513 | ) | ||||||||||
Intercompany transactions |
14,514 | (16,021 | ) | 1,507 | | |||||||||||
Net cash provided by (used in) financing activities |
(31,419 | ) | (16,021 | ) | 1,413 | (46,027 | ) | |||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | 732 | 732 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
116 | (11 | ) | 24,215 | 24,320 | |||||||||||
Cash and cash equivalents at beginning of period |
4,964 | 97 | 1,648 | 6,709 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 5,080 | $ | 86 | $ | 25,863 | $ | 31,029 | ||||||||
15
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
January 3, 2009
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
January 3, 2009
(In thousands)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 4,964 | $ | 97 | $ | 1,648 | $ | | $ | 6,709 | ||||||||||
Accounts receivable, net |
82,479 | 13,251 | 21,148 | | 116,878 | |||||||||||||||
Inventories |
92,802 | 14,892 | 33,476 | | 141,170 | |||||||||||||||
Deferred income taxes |
9,196 | 2,482 | 505 | | 12,183 | |||||||||||||||
Prepaid expenses |
7,887 | 1,194 | 1,405 | | 10,486 | |||||||||||||||
Intercompany receivables |
| 57,426 | 7,742 | (65,168 | ) | | ||||||||||||||
Income taxes receivable |
| | 1,057 | (1,057 | ) | | ||||||||||||||
Total current assets |
197,328 | 89,342 | 66,981 | (66,225 | ) | 287,426 | ||||||||||||||
Property, plant and equipment, net |
80,567 | 2,975 | 31,614 | | 115,156 | |||||||||||||||
Goodwill |
194,814 | 36,544 | | | 231,358 | |||||||||||||||
Other intangible assets, net |
88,828 | 9,970 | 333 | | 99,131 | |||||||||||||||
Other assets |
10,448 | 19 | 1,751 | | 12,218 | |||||||||||||||
Investment in subsidiaries |
169,112 | 65,508 | | (234,620 | ) | | ||||||||||||||
Total assets |
$ | 741,097 | $ | 204,358 | $ | 100,679 | $ | (300,845 | ) | $ | 745,289 | |||||||||
Liabilities and Members Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 32,150 | $ | 5,191 | $ | 17,179 | $ | | $ | 54,520 | ||||||||||
Payable to parent |
9,326 | | | | 9,326 | |||||||||||||||
Accrued liabilities |
37,030 | 9,252 | 8,167 | | 54,449 | |||||||||||||||
Income taxes payable |
6,494 | 1,545 | | (1,057 | ) | 6,982 | ||||||||||||||
Intercompany payables |
65,168 | | | (65,168 | ) | | ||||||||||||||
Total current liabilities |
150,168 | 15,988 | 25,346 | (66,225 | ) | 125,277 | ||||||||||||||
Deferred income taxes |
40,710 | 3,486 | 2,231 | | 46,427 | |||||||||||||||
Other liabilities |
30,289 | 15,772 | 7,594 | | 53,655 | |||||||||||||||
Long-term debt |
221,000 | | | | 221,000 | |||||||||||||||
Members equity |
298,930 | 169,112 | 65,508 | (234,620 | ) | 298,930 | ||||||||||||||
Total liabilities and members equity |
$ | 741,097 | $ | 204,358 | $ | 100,679 | $ | (300,845 | ) | $ | 745,289 | |||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended September 27, 2008
(In thousands)
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended September 27, 2008
(In thousands)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 235,903 | $ | 67,664 | $ | 102,362 | $ | (63,251 | ) | $ | 342,678 | |||||||||
Cost of sales |
174,783 | 66,023 | 78,537 | (63,251 | ) | 256,092 | ||||||||||||||
Gross profit |
61,120 | 1,641 | 23,825 | | 86,586 | |||||||||||||||
Selling, general and
administrative expense |
42,423 | 3,130 | 10,345 | | 55,898 | |||||||||||||||
Income (loss) from operations |
18,697 | (1,489 | ) | 13,480 | | 30,688 | ||||||||||||||
Interest expense (income), net |
5,543 | (2 | ) | 53 | | 5,594 | ||||||||||||||
Foreign currency loss |
| | 238 | | 238 | |||||||||||||||
Income (loss) before income taxes |
13,154 | (1,487 | ) | 13,189 | | 24,856 | ||||||||||||||
Income taxes |
3,841 | 1,948 | 3,577 | | 9,366 | |||||||||||||||
Income (loss) before equity
income from subsidiaries |
9,313 | (3,435 | ) | 9,612 | | 15,490 | ||||||||||||||
Equity income from subsidiaries |
6,177 | 9,612 | | (15,789 | ) | | ||||||||||||||
Net income |
$ | 15,490 | $ | 6,177 | $ | 9,612 | $ | (15,789 | ) | $ | 15,490 | |||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 27, 2008
(In thousands)
UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 27, 2008
(In thousands)
Guarantor | Non-Guarantor | Reclassification/ | ||||||||||||||||||
Parent | Subsidiaries | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 588,866 | $ | 168,697 | $ | 249,529 | $ | (148,724 | ) | $ | 858,368 | |||||||||
Cost of sales |
443,729 | 163,957 | 189,215 | (148,724 | ) | 648,177 | ||||||||||||||
Gross profit |
145,137 | 4,740 | 60,314 | | 210,191 | |||||||||||||||
Selling, general and
administrative expense |
119,206 | 8,079 | 31,603 | | 158,888 | |||||||||||||||
Manufacturing restructuring costs |
1,136 | | 647 | | 1,783 | |||||||||||||||
Income (loss) from operations |
24,795 | (3,339 | ) | 28,064 | | 49,520 | ||||||||||||||
Interest expense (income), net |
17,185 | (12 | ) | 203 | | 17,376 | ||||||||||||||
Foreign currency loss |
| | 328 | | 328 | |||||||||||||||
Income (loss) before income taxes |
7,610 | (3,327 | ) | 27,533 | | 31,816 | ||||||||||||||
Income taxes |
1,778 | 2,007 | 8,253 | | 12,038 | |||||||||||||||
Income (loss) before equity
income from subsidiaries |
5,832 | (5,334 | ) | 19,280 | | 19,778 | ||||||||||||||
Equity income from subsidiaries |
13,946 | 19,280 | | (33,226 | ) | | ||||||||||||||
Net income |
$ | 19,778 | $ | 13,946 | $ | 19,280 | $ | (33,226 | ) | $ | 19,778 | |||||||||
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ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 27, 2008
(In thousands)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 27, 2008
(In thousands)
Guarantor | Non-Guarantor | |||||||||||||||
Parent | Subsidiaries | Subsidiary | Consolidated | |||||||||||||
Net cash provided by (used in) operating activities |
$ | 8,877 | $ | (4,573 | ) | $ | 4,703 | $ | 9,007 | |||||||
Investing Activities |
||||||||||||||||
Additions to property, plant and equipment |
(5,747 | ) | (115 | ) | (3,912 | ) | (9,774 | ) | ||||||||
Proceeds from sale of assets |
20 | 5 | | 25 | ||||||||||||
Net cash used in investing activities |
(5,727 | ) | (110 | ) | (3,912 | ) | (9,749 | ) | ||||||||
Financing Activities |
||||||||||||||||
Dividends |
(8,311 | ) | | | (8,311 | ) | ||||||||||
Intercompany transactions |
4,605 | 4,601 | (9,206 | ) | | |||||||||||
Net cash provided by (used in) financing activities |
(3,706 | ) | 4,601 | (9,206 | ) | (8,311 | ) | |||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | (581 | ) | (581 | ) | ||||||||||
Net decrease in cash and cash equivalents |
(556 | ) | (82 | ) | (8,996 | ) | (9,634 | ) | ||||||||
Cash and cash equivalents at beginning of period |
6,407 | 371 | 14,825 | 21,603 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 5,851 | $ | 289 | $ | 5,829 | $ | 11,969 | ||||||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The Company is a leading, vertically integrated manufacturer and North American distributor of
exterior residential building products. The Companys core products are vinyl windows, vinyl
siding, aluminum trim coil, and aluminum and steel siding and accessories. In addition, the
Company distributes third party manufactured products primarily through its supply centers.
Vinyl windows, vinyl siding, metal products, and third-party manufactured products comprised approximately 36%, 21%,
16% and 21%, respectively, of the Companys total net sales for the nine months ended October 3, 2009.
These
products are generally marketed under the Alside®, Revere® and Gentek® 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 Companys network of 122 supply centers, as well as
through approximately 250 independent distributors across the United States and Canada.
Approximately 65% of the Companys products are sold to contractors engaged in the home repair and
remodeling market with approximately 35% sold to the new construction market. The supply centers
provide one-stop shopping to the Companys 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.
During the nine month period ended October 3, 2009, approximately 72% of
the Companys total net sales were generated
through the network of supply centers, with the remainder sold to independent
distributors and dealers.
Because its exterior residential building products are consumer durable goods, the Companys
sales are impacted by, among other things, 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 Companys sales are also affected by
changes in consumer preferences with respect to types of building products. Overall, the Company
believes the long-term fundamentals for the building products industry remain strong as the
population continues to age, homes continue to get older, household formation is expected to be
strong and vinyl remains the optimal material for exterior cladding and window solutions, all of
which the Company believes bodes well for the demand for its products in the future. In the short
term, however, the Company believes the building products industry will continue to be negatively
impacted by the weak housing market. Since 2006, sales of existing single-family homes have
decreased from peak levels previously experienced, the inventory of homes available for sale has
increased, and in many areas, home values have declined significantly. In addition, the pace of
new home construction has slowed dramatically, as evidenced by declines in 2006 through 2009 in
single-family housing starts and announcements from home builders of significant decreases in their
orders. Increased delinquencies on sub-prime and other mortgages, increased foreclosure rates and
tightening consumer credit markets have further hampered the housing market. The Companys sales
volumes are dependent on the strength in the housing market, including both residential remodeling
and new residential construction activity. Continued reduced levels of existing homes sales and
housing price depreciation has had a significant negative impact on the Companys remodeling sales.
In addition, a reduced number of new housing starts has a negative impact on the Companys new
construction sales. As a result of the continuation in the prolonged housing market downturn,
competition in the building products market may intensify, which could result in lower sales
volumes and reduced selling prices for the Companys products and lower gross margins. In the
event that the Companys expectations regarding the outlook for the housing market result in a
reduction in its forecasted sales and operating income, and related growth rates, the Company may
be required to record an impairment of certain of its assets, including goodwill and intangible
assets. Moreover, the prolonged downturn in the housing market and the general economy may have
other consequences to the Company, including further accounts receivable write-offs due to
financial distress of customers and lower of cost or market reserves related to the Companys
inventories.
The Company, along with the entire building products industry, has experienced significant
fluctuations over the past three years in key raw material commodity costs particularly for vinyl
resin, aluminum and steel, as well as in other raw materials such as microingredients used in the
Companys vinyl products. In response, the Company announced price increases over the past several
years on certain of its product offerings to offset the inflation of raw materials, and continually
monitors market conditions for price changes as warranted. The Companys ability to maintain gross
margin levels on its products during periods of rising raw material costs depends on the Companys
ability to obtain selling price increases. Furthermore, the results of operations for individual
quarters can and have been negatively impacted by a delay between the timing of raw material cost
increases and price increases on the Companys products. There can be no assurance that the Company
will be able to maintain the selling price increases already implemented or achieve any future
price increases.
The Company operates with significant operating and financial leverage. Significant portions
of the Companys manufacturing, selling, general and administrative expenses are fixed costs that
neither increase nor decrease proportionately with sales. In addition, a significant portion of
the Companys interest expense is fixed. There can be no assurance that the Company will be able to
continue to reduce its fixed costs in response to a further decline in net sales. As a result, a
continued decline in the Companys net sales could result in a higher percentage decline in its
income from operations. Also, the Companys gross margins and gross margin percentages may not be
comparable to other companies as some companies
include all of the costs of their distribution network in cost of sales whereas the Company
includes the operating costs of its supply centers in selling, general and administrative expenses.
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Table of Contents
Because most of the Companys 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 utilizes its ABL
Facility and repays such borrowings in periods of higher cash flow. The Company typically
generates the majority of its cash flow in the third and fourth quarters.
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, selectively expanding its supply center network, increasing sales through
independent specialty distributor customers, developing innovative new products, expanding sales of
third party manufactured products through its supply center network, and driving operational
excellence by reducing costs and increasing customer service levels. The Company continually
analyzes new and existing markets for the selection of new supply center locations.
Results of Operations
The following table sets forth for the periods indicated the results of the Companys
operations (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 324,807 | $ | 342,678 | $ | 772,108 | $ | 858,368 | ||||||||
Cost of sales |
226,998 | 256,092 | 566,065 | 648,177 | ||||||||||||
Gross profit |
97,809 | 86,586 | 206,043 | 210,191 | ||||||||||||
Selling, general and
administrative expense |
53,323 | 55,898 | 153,118 | 158,888 | ||||||||||||
Manufacturing restructuring
costs |
| | 5,255 | 1,783 | ||||||||||||
Income from operations |
44,486 | 30,688 | 47,670 | 49,520 | ||||||||||||
Interest expense, net |
5,999 | 5,594 | 16,581 | 17,376 | ||||||||||||
Foreign currency gain (loss) |
(112 | ) | (238 | ) | 110 | (328 | ) | |||||||||
Income before income taxes |
38,375 | 24,856 | 31,199 | 31,816 | ||||||||||||
Income taxes |
15,444 | 9,366 | 12,660 | 12,038 | ||||||||||||
Net income |
$ | 22,931 | $ | 15,490 | $ | 18,539 | $ | 19,778 | ||||||||
Other Data: |
||||||||||||||||
EBITDA (a) |
$ | 50,008 | $ | 36,171 | $ | 64,359 | $ | 66,311 | ||||||||
Adjusted EBITDA (a) |
52,191 | 36,296 | 72,128 | 71,132 |
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The following table sets forth for the periods presented a summary of net sales by principal
product offering (in thousands):
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Vinyl windows |
$ | 114,686 | $ | 108,551 | $ | 276,717 | $ | 282,174 | ||||||||
Vinyl siding products |
67,857 | 82,044 | 161,113 | 196,493 | ||||||||||||
Metal products |
53,571 | 65,723 | 127,017 | 166,856 | ||||||||||||
Third party manufactured products |
66,885 | 65,366 | 158,454 | 156,486 | ||||||||||||
Other products and services |
21,808 | 20,994 | 48,807 | 56,359 | ||||||||||||
$ | 324,807 | $ | 342,678 | $ | 772,108 | $ | 858,368 | |||||||||
(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 Companys ability to service its debt and / or incur debt and meet the Companys capital expenditure requirements; (ii) internally measure the Companys operating performance; and (iii) determine the Companys incentive compensation programs. In addition, the Companys ABL Facility has certain covenants that apply ratios utilizing this measure of adjusted EBITDA. EBITDA and adjusted EBITDA have not been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Adjusted EBITDA as presented by the Company may not be comparable to similarly titled measures reported by other companies. EBITDA and adjusted EBITDA are not measures determined in accordance with GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of the Companys operating results or cash flows from operations (as determined in accordance with GAAP) as a measure of the Companys liquidity. |
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The reconciliation of the Companys net income to EBITDA and adjusted EBITDA is as follows (in thousands): |
Quarters Ended | Nine Months Ended | |||||||||||||||
October 3, | September 27, | October 3, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 22,931 | $ | 15,490 | $ | 18,539 | $ | 19,778 | ||||||||
Interest expense, net |
5,999 | 5,594 | 16,581 | 17,376 | ||||||||||||
Income taxes |
15,444 | 9,366 | 12,660 | 12,038 | ||||||||||||
Depreciation and amortization |
5,634 | 5,721 | 16,579 | 17,119 | ||||||||||||
EBITDA |
50,008 | 36,171 | 64,359 | 66,311 | ||||||||||||
Amortization of management fee (b) |
125 | 125 | 375 | 375 | ||||||||||||
Manufacturing restructuring costs
(c) |
| | 5,255 | 2,642 | ||||||||||||
Bank audit fees (d) |
37 | | 118 | | ||||||||||||
Loss upon disposal of assets other
than by sale (e) |
| | | 1,804 | ||||||||||||
Tax restructuring costs (f) |
306 | | 306 | | ||||||||||||
Employee termination costs (g) |
1,715 | | 1,715 | | ||||||||||||
Adjusted EBITDA (h) |
$ | 52,191 | $ | 36,296 | $ | 72,128 | $ | 71,132 | ||||||||
(b) | Represents amortization of a prepaid management fee paid to Investcorp International Inc. in connection with the December 2004 recapitalization transaction. | |
(c) | During the first quarter of 2008, the Company committed to, and subsequently completed, relocating a portion of its vinyl siding production from Ennis, Texas to its vinyl manufacturing facilities in West Salem, Ohio and Burlington, Ontario. In addition, during 2008, the Company transitioned the majority of distribution of its U.S. vinyl siding products to a center located in Ashtabula, Ohio and committed to a plan to discontinue use of its warehouse facility adjacent to its Ennis, Texas vinyl manufacturing facility. For the nine months ended September 27, 2008, the amounts recorded represent asset impairment costs, inventory markdown costs, and costs incurred to relocate manufacturing equipment. Inventory markdown costs of $0.9 million are included in cost of sales in the statement of operations for the nine months ended September 27, 2008. The Company discontinued its use of the warehouse facility adjacent to the Ennis manufacturing plant during the second quarter of 2009. As a result, the related lease costs associated with the discontinued use of the warehouse facility were recorded as a restructuring charge of approximately $5.3 million for the nine months ended October 3, 2009. | |
(d) | Represents bank audit fees incurred under the Companys ABL Facility. | |
(e) | As part of the Companys ongoing efforts to improve its internal controls, the Company enhanced its controls surrounding the physical verification of property, plant and equipment during the second quarter of 2008. For the nine months ended September 27, 2008, the amounts recorded represent the loss upon disposal of assets other than by sale as a result of executing these enhanced controls. | |
(f) | Represents legal and accounting fees incurred in connection with a tax restructuring project. | |
(g) | During the third quarter of 2009, the Company recorded one-time employee termination costs resulting from workforce reductions in connection with the Companys overall cost reduction initiatives. | |
(h) | Prior year adjusted EBITDA amounts have been reclassified to conform to the current years presentation, which, in conformity with the computation of adjusted EBITDA under the Companys current credit facility, excludes any adjustment for foreign currency gain or loss. |
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Table of Contents
Quarter Ended October 3, 2009 Compared to Quarter Ended September 27, 2008
Net sales decreased 5.2% to $324.8 million for the third quarter of 2009 compared to $342.7
million for the same period in 2008 primarily due to decreased unit volumes, principally in vinyl
siding and metal products, and the impact of the weaker Canadian dollar in 2009. During the third
quarter of 2009 compared to the same period in 2008, vinyl siding unit volumes decreased by
approximately 15%, while vinyl window unit volumes increased approximately 2%.
Gross profit in the third quarter of 2009 was $97.8 million, or 30.1% of net sales, compared
to gross profit of $86.6 million, or 25.3% of net sales, for the same period in 2008. The increase
in gross profit as a percentage of net sales was primarily a result of cost reduction initiatives,
improved operational efficiencies and procurement savings.
Selling, general and administrative expense decreased to $53.3 million, or 16.4% of net sales,
for the third quarter of 2009 versus $55.9 million, or 16.3% of net sales, for the same period in
2008. Selling, general and administrative expense for the quarter ended October 3, 2009 includes
employee termination costs of $1.7 million and tax restructuring costs of $0.3 million. Excluding
these items, selling, general and administrative expense for the quarter ended October 3, 2009
decreased $4.6 million compared to the same period in 2008. The decrease in selling, general and
administrative expense was primarily due to higher bad debt expense in the third quarter of 2008 by
approximately $2.8 million as a result of the poor economic conditions experienced in the prior
year. In addition, the decrease in selling, general and administrative expense was also due to
decreased personnel costs as a result of reduced headcount of approximately $1.6 million, decreased
product delivery costs in the Companys supply center network of approximately $0.8 million and the
translation impact on Canadian expenses as a result of the weaker Canadian dollar in 2009 of
approximately $0.5 million, partially offset by increased EBITDA-based incentive compensation
programs and other sales-related accruals of approximately $1.4 million.
Throughout 2009, the Company initiated certain restructuring activities designed to achieve
operational efficiencies by reducing the Companys overall cost structure. These activities
included reducing the Companys workforce. During the third quarter ended October 3, 2009, the
Company determined the headcount reductions made over the past several months will be permanent.
As a result, the Company recorded a one-time restructuring charge of $1.7 million in employee
termination costs within selling, general and administrative expense for the third quarter ended
October 3, 2009.
Income from operations was $44.5 million during the third quarter of 2009 compared to $30.7
million for the same period in 2008.
Interest expense increased $0.4 million for the third quarter of 2009 compared to the same
period in 2008. The increase in interest expense was primarily due to the accrued interest, and
related amortization of deferred financing fees, on the Companys 15% senior subordinated notes
issued at the end of the second quarter of 2009, partially offset by lower overall borrowings under
the Companys credit facilities and decreased interest rates during 2009.
The income tax provision for the third quarter of 2009 reflects an effective income tax rate
of 40.2%, compared to an effective income tax rate of 37.7% for the same period in 2008. The
increase in the effective income tax rate is primarily due to the completion of certain tax audits
and the related adjustments recorded in the third quarter of 2008.
Net income was $22.9 million for the quarter ended October 3, 2009 compared to $15.5 million
for the same period in 2008.
EBITDA for the third quarter of 2009 was $50.0 million compared to EBITDA of $36.2 million for
the same period in 2008. Adjusted EBITDA for the third quarter of 2009 was $52.2 million compared
to adjusted EBITDA of $36.3 million for the same period in 2008. Adjusted EBITDA for the third
quarter of 2009 excludes employee termination costs of $1.7 million, tax restructuring costs of
$0.3 million, amortization related to prepaid management fees of $0.1 million and bank audit fees
of less than $0.1 million. Adjusted EBITDA for the third quarter of 2008 excludes amortization
related to prepaid management fees of $0.1 million.
24
Table of Contents
Nine Months Ended October 3, 2009 Compared to Nine Months Ended September 27, 2008
Net sales decreased 10.0% to $772.1 million for the nine months ended October 3, 2009 compared
to $858.4 million for the same period in 2008 primarily due to decreased unit volumes across all
product categories, principally in vinyl siding, vinyl windows and metal products, and the impact
of the weaker Canadian dollar in 2009. For the nine months ended October 3, 2009 compared to the
same period in 2008, vinyl siding unit volumes decreased by approximately 18% and vinyl window unit
volumes decreased by approximately 4%.
Gross profit for the nine months ended October 3, 2009 was $206.0 million, or 26.7% of net
sales, compared to gross profit of $210.2 million, or 24.5% of net sales, for the same period in
2008. The increase in gross profit as a percentage of net sales was primarily a result of cost
reduction initiatives, improved operational efficiencies and procurement savings.
Selling, general and administrative expense decreased to $153.1 million, or 19.8% of net
sales, for the nine months ended October 3, 2009 versus $158.9 million, or 18.5% of net sales, for
the same period in 2008. Selling, general and administrative expense for the nine months ended
October 3, 2009 includes employee termination costs of $1.7 million, tax restructuring costs of
$0.3 million and bank audit fees of $0.1 million, while selling, general and administrative expense
for the nine months ended September 27, 2008 includes a loss upon the disposal of assets other than
by sale of $1.8 million. Excluding these items, selling, general and administrative expense for
the nine months ended October 3, 2009 decreased $6.1 million compared to the same period in 2008.
The decrease in selling, general and administrative expense was primarily due to the translation
impact on Canadian expenses as a result of the weaker Canadian dollar in 2009 of approximately $4.0
million, decreased personnel costs as a result of reduced headcount of approximately $2.4 million,
and decreased product delivery costs in the Companys supply center network of approximately $2.0
million, partially offset by increased bad debt expense of approximately $2.2 million recorded
during 2009 as a result of current economic conditions.
Throughout 2009, due to economic conditions and as a cost control measure, the Company reduced
its workforce and placed a number of employees on temporary lay-off status. During the second and
third quarters, several of these employees were re-instated to an active status. During the third
quarter ended October 3, 2009, the Company determined it would not recall the remaining employees.
As a result, the Company recorded a one-time charge of $1.7 million in employee termination costs
during the third quarter ended October 3, 2009 within selling, general and administrative expense
in the consolidated statements of operations.
During the nine months ended September 27, 2008, the Company incurred costs of $1.8 million
related to relocating a portion of its vinyl siding production and distribution. These costs were
comprised of asset impairment costs, costs incurred to relocate manufacturing equipment and costs
associated with the transition of distribution operations. In addition, the Company recorded $0.9
million of inventory markdown costs associated with these restructuring efforts within cost of
goods sold for the nine months ended September 27, 2008. The Company discontinued its use of the
warehouse facility adjacent to the Ennis manufacturing plant during the second quarter of 2009. As
a result, the related lease costs associated with the discontinued use of the warehouse facility
were recorded as a restructuring charge of approximately $5.3 million for the nine months ended
October 3, 2009.
Income from operations was $47.7 million for the nine months ended October 3, 2009 compared to
$49.5 million for the same period in 2008.
Interest expense decreased $0.8 million for the nine months ended October 3, 2009 compared to
the same period in 2008. The decrease in interest expense was primarily due to lower overall
borrowings under the credit facilities and decreased interest rates during 2009. On June 26, 2009,
the Company issued $20.0 million in principal amount of its 15% senior subordinated notes.
The income tax provision for the nine months ended October 3, 2009 reflects an effective
income tax rate of 40.6%, compared to an effective income tax rate of 37.8% for the same period in
2008. The increase in the effective income tax rate is primarily due to the completion of certain
tax audits and the related adjustments recorded in the third quarter of 2008.
Net income was $18.5 million for the nine months ended October 3, 2009 compared to $19.8
million for the same period in 2008.
EBITDA for the nine months ended October 3, 2009 was $64.4 million compared to EBITDA of $66.3
million for the same period in 2008. Adjusted EBITDA for the nine months ended October 3, 2009 was
$72.1 million compared to adjusted EBITDA of $71.1 million for the same period in 2008. Adjusted
EBITDA for the nine months ended October 3, 2009 excludes manufacturing restructuring costs of $5.3
million, employee termination costs of $1.7 million, amortization related to prepaid management
fees of $0.4 million, tax restructuring costs of $0.3 million and bank audit fees of $0.1 million.
Adjusted EBITDA for the nine months ended September 27, 2008 excludes manufacturing restructuring costs
of $2.6 million, loss upon the disposal of assets other than by sale of $1.8 million and
amortization related to prepaid management fees of $0.4 million.
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Table of Contents
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements is included in Note 1 to the
unaudited condensed consolidated financial statements. The Company evaluates the potential impact, if any, on its
financial position, results of operations and cash flows, of all recent accounting pronouncements,
and, if significant, makes the appropriate disclosures. During the third quarter, no material
changes resulted from the adoption of recent accounting pronouncements.
Liquidity and Capital Resources
The following sets forth a summary of the Companys cash flows for the nine months ended
October 3, 2009 and September 27, 2008 (in thousands):
Nine Months Ended | ||||||||
October 3, | September 27, | |||||||
2009 | 2008 | |||||||
Cash provided by operating activities |
$ | 100,677 | $ | 9,007 | ||||
Cash used in investing activities |
(31,062 | ) | (9,749 | ) | ||||
Cash used in financing activities |
(46,027 | ) | (8,311 | ) |
Cash Flows
At October 3, 2009, the Company had cash and cash equivalents of $31.0 million and available
borrowing capacity of approximately $143.0 million under the revolving portion of its credit
facility. Outstanding letters of credit as of October 3, 2009 totaled $8.3 million primarily
securing deductibles of various insurance policies.
Cash Flows from Operating Activities
Net cash provided by operating activities was $100.7 million for the nine months ended October
3, 2009, compared to $9.0 million for the same period in 2008. The factors typically impacting
cash flows from operating activities during the first nine months of the year include the Companys
operating results, the seasonal increase of inventory levels, and use of cash related to payments
for accrued liabilities including payments of incentive compensation and customer sales incentives.
Accounts receivable was a use of cash of $48.5 million for the nine months ended October 3, 2009,
compared to $52.0 million for the same period in 2008, resulting in a net increase in cash flows of
$3.5 million. Inventory was a source of cash of $11.1 million during the nine months ended October
3, 2009, compared to a use of cash of $34.1 million during the same period in 2008, resulting in a
net increase in cash flows of $45.2 million, which was primarily due to reduced inventory levels
and declining commodity costs. Accounts payable and accrued liabilities were a source of cash of
$79.0 million for the nine months ended October 3, 2009, compared to $50.4 million for the same
period in 2008, resulting in a net increase in cash flows of $28.6 million, which was primarily due
to improved vendor terms in 2009, reduced inventory purchase requirements during the fourth quarter
of 2008 and the decline of commodity prices towards the end of 2008. Cash flows provided by
operating activities for the nine months ended October 3, 2009 includes income tax payments of $8.9
million, compared to $15.5 million of income tax payments for the same period in 2008.
Cash Flows from Investing Activities
During the nine months ended October 3, 2009, net cash used in investing activities included
an intercompany loan of $26.8 million paid to AMH II by the Company in June 2009 for use in the AMH
II debt exchange and capital expenditures of $4.2 million. Capital expenditures in 2009 were
primarily at supply centers for continued operations and relocations, various enhancements at plant
locations and several corporate information technology projects. During the nine months ended
September 27, 2008, net cash used in investing activities included capital expenditures of $9.8
million. Capital expenditures in 2008 were primarily to expand capacity at the Companys
Burlington and West Salem manufacturing facilities and improve capabilities at its window
facilities.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended October 3, 2009 included net
repayments under the Companys ABL Facility of $32.5 million, payments of financing costs of $5.0
million and dividend payments of $28.5 million, partially offset by the $20.0 million issuance of
the Companys new 15% notes. Net cash used in financing activities for the nine months ended September 27, 2008 includes dividend payments of $8.3 million. The
dividends in 2009 were paid to the Companys direct and indirect parent companies to fund their
scheduled interest payments on their 11 1/4% notes and 13 5/8% notes. The dividends in 2008 were
paid to the Companys indirect parent company to fund its scheduled interest payments on its 13
5/8% notes, which are no longer outstanding.
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Description of the Companys Outstanding Indebtedness
On October 3, 2008, the Company, Gentek Building Products, Inc. and Gentek Building Products
Limited, as borrowers, entered into an asset-based credit facility
with Wells Fargo Securities, LLC (formerly known as Wachovia Capital Markets,
LLC) and CIT Capital Securities LLC, as joint lead arrangers, Wachovia Bank, N.A., as agent and the
lenders party to the facility (the ABL Facility). One of the Companys joint lead arrangers
under the ABL Facility, CIT Capital Securities LLC, is a subsidiary of CIT Group, Inc. (CIT) who
incurred significant rating downgrades due to liquidity concerns. Subsidiaries of CIT are also
lenders under both the U.S. and Canadian facilities described below.
CITs and its subsidiaries aggregate commitments represent
21.1% of the total commitments under the Companys facilities.
CIT recently announced that
it had commenced a restructuring of its capital structure. Under the plan, CIT launched exchange
offers for certain unsecured notes. CIT announced that if it does not achieve the objectives of
the exchange offers, it may decide to initiate a voluntary filing under Chapter 11 of the U.S.
Bankruptcy Code. As a result, CIT is concurrently soliciting bondholders and other holders of CIT
debt to approve a prepackaged plan of reorganization. It is uncertain whether CITs comprehensive
restructuring efforts will be successful. The Company continues to closely monitor this situation
and does not believe it will have a material impact on the Companys financial condition or ability
to fund operations.
Effective August 21, 2009, the Company formed Gentek Canada Holdings Limited, a Canadian
corporation wholly owned by Gentek Building Products, Inc. The Company also formed Gentek Building
Products Limited Partnership, a Canadian limited partnership wholly owned by Gentek Building
Products Limited as the limited partner and Gentek Canada Holdings Limited as the general partner.
The operations of Gentek Building Products Limited were sold to Gentek Building Products Limited
Partnership in accordance with the asset purchase agreement dated September 5, 2009. In addition,
the corporate name of Gentek Building Products Limited was legally changed to Associated Materials
Canada Limited on September 6, 2009. Associated Materials Canada Limited, Gentek Canada Holdings
Limited and Gentek Building Products Limited Partnership are collectively known as the Canadian
Entities.
Gentek Building Products Limited Partnership was added as a borrower under the
Canadian portion of the credit facilities and Gentek Canada Holdings Limited was added
as a guarantor of the Canadian portion of the credit facilities.
The obligations of
the Company, Gentek Building Products, Inc., Associated Materials Canada Limited, and Gentek
Building Products Limited Partnership as borrowers under the credit facilities, are jointly and
severally guaranteed by Holdings and by the Companys wholly owned domestic subsidiaries,
Gentek Holdings, LLC and Alside, Inc. Such obligations and guaranties are also secured by
(i) a security interest in substantially all of the owned real and personal assets (tangible
and intangible) of the Company, Holdings, Gentek Building Products, Inc., Gentek Holdings, LLC and
Alside, Inc. and (ii) a pledge of up to 65% of the voting stock of Associated Materials
Canada Limited and Gentek Canada Holdings Limited. The obligations of Alside, Inc. and Gentek
Building Products Limited Partnership are further secured by a security interest in their owned
real and personal assets (tangible and intangible) and are guaranteed
by Gentek Canada Holdings Limited.
The ABL Facility provides for a senior secured asset-based revolving credit facility of up to
$225.0 million, comprising a $165.0 million U.S. facility and a $60.0 million Canadian facility, in
each case subject to borrowing base availability under the applicable facility. As of October 3,
2009, there was $23.5 million drawn under the ABL Facility.
As of October 3, 2009, the per annum interest rate applicable to borrowings under the ABL
Facility was 4.5% and the weighted average interest rate for the quarter ended October 3, 2009 was
4.4%.
The Companys borrowing base under the ABL Facility will fluctuate during the course of the
year based on a variety of factors impacting the Companys level of eligible accounts receivable
and inventory, including seasonal builds in inventory immediately prior to and during the peak
selling season and changes in the levels of accounts receivable, which tend to increase during the
peak selling season and are at seasonal lows during the winter months. The Companys peak selling
season is typically May through October. As of October 3, 2009, the Companys borrowing base was
$174.8 million, which was based on the borrowing base calculation utilizing August month end
account balances. The Companys excess availability under the ABL Facility was $143.0 million as of
October 3, 2009.
The ABL Facility does not require the Company to comply with any financial maintenance
covenants, unless it has less than $28.1 million of aggregate excess availability at any time (or
less than $20.6 million of excess availability under the U.S. facility or less than $7.5 million of
excess availability under the Canadian facility), during which time the Company is subject to
compliance with a fixed charge coverage ratio covenant of 1.1 to 1. As of October 3, 2009, the
Company exceeded the minimum aggregate excess availability thresholds, and therefore, was not
required to comply with this maintenance covenant.
Under the ABL Facility restricted payments covenant, subject to specified exceptions,
Holdings, the Company and its restricted subsidiaries cannot make restricted payments, such as
dividends or distributions on equity, redemptions or repurchases of equity, or payments of certain
management or advisory fees or other extraordinary forms of compensation, unless prior written
notice is given and certain EBITDA and availability thresholds are met. Less restrictive availability tests apply for intercompany
transfers. During the quarter ended
October 3, 2009, Holdings and the Company were not prevented from making restricted payments by the
ABL Facilitys restricted payments covenant.
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As of October 3, 2009, the Company had $165.0 million and $20.0 million in aggregate principal
amount of its 9 3/4% notes and 15% notes, respectively, due 2012 outstanding. The 9 3/4% notes and
15% notes rank pari passu with each other, and are subordinated in right of payment to all unsubordinated indebtedness of the Company.
The 9 3/4% notes, which mature on April 15, 2012, pay interest semi-annually in arrears on April
15th and October 15th. The 15% notes mature on July 15, 2012 and pay
interest quarterly in arrears on January 15th, April 15th, July
15th and October 15th. The 9 3/4% notes are redeemable at the Companys
option, currently at a redemption price of 101.625% plus accrued and unpaid interest to the
redemption date. This redemption price declines to 100% on April 15, 2010 for the remaining life
of the notes. The 15% notes are redeemable at the Companys option, at an initial redemption price
of 101% plus accrued and unpaid interest to the redemption date, with the redemption price
declining to 100% on December 22, 2009. The Companys payment obligations under the 9 3/4% notes
and 15% notes are fully and unconditionally guaranteed, jointly and severally on a senior
subordinated basis, by its domestic wholly owned subsidiaries: Gentek Holdings, LLC, Gentek
Building Products, Inc. and Alside, Inc. The Canadian Entities do not guarantee the Companys 9
3/4% or 15% notes. Upon a change of control of the Company, as defined, holders of the 9 3/4%
notes and the 15% notes have the right to require the Company to repurchase their notes at a
purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest.
The indentures governing the 9 3/4% notes and 15% notes contain covenants that, among other
things and subject in each case to certain specified exceptions, limit the ability of the Company
and of certain restricted subsidiaries: (i) to incur additional indebtedness unless the Company
meets a 2-to-1 consolidated coverage ratio test, or as permitted under specified available baskets;
(ii) to make restricted payments; (iii) to incur restrictions on subsidiaries ability to make
distributions or transfer assets to the Company; (iv) to sell assets or stock of subsidiaries; (v)
to enter into transactions with affiliates; and (vi) to merge or consolidate with, or sell all or
substantially all assets to, a third party or undergo a change of control.
At October 3, 2009, the amount of the restricted payments basket under the 9 3/4% notes and
15% notes indentures, net of restricted payments made through that date, was approximately $46.2
million. The Companys ability to make restricted payments under the 9 3/4% notes and 15% notes
indentures is subject to compliance with the other conditions to making restricted payments
provided for in the 9 3/4% notes and 15% notes indentures, to compliance with the restricted
payments covenants in the ABL Facility, and to statutory limitations on the payment of dividends.
The Companys indirect parent entities, AMH and AMH II, are holding companies with no
independent operations. As of October 3, 2009, AMH had $431.0 million in aggregate principal
amount of its 11 1/4% senior discount notes due 2014 outstanding. Interest accrued at a rate of 11
1/4% per annum 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% per annum on the notes accrues and is payable
semi-annually in arrears on March 1st and September 1st of each year, with
the first payment of cash interest under the 11 1/4% notes paid on September 1, 2009. During the
second quarter of 2009, AMH II purchased $15.0 million par value of AMHs 11 1/4% notes directly
from the AMH debtholders with funds loaned from the Company for approximately $5.9 million. In
exchange for the purchased 11 1/4% notes, AMH II was granted additional equity interest in AMH. As
a result, AMH recorded a gain on debt extinguishment of $8.9 million for the nine months ended
October 3, 2009.
In connection with a December 2004 recapitalization transaction, AMHs parent company AMH II
was formed, and AMH II subsequently issued $75 million of 13 5/8% senior notes due 2014. In June
2009, AMH II entered into an exchange agreement pursuant to which it paid $20.0 million in cash and
issued $13.066 million original principal amount of its 20% senior notes due 2014 in exchange for
all of its outstanding 13 5/8% senior notes due 2014. Interest on AMH IIs 20% notes is payable in
cash semi-annually in arrears or may be added to the then outstanding principal amount of the 20%
notes and paid at maturity on December 1, 2014. In accordance with the principles described in
FASB ASC 470-60, Troubled Debt Restructurings by Debtors
(SFAS No. 15), AMH II recorded a debt
restructuring gain of approximately $19.2 million for the nine months ended October 3, 2009. As of
October 3, 2009, AMH II has recorded liabilities for the $13.066 million original principal amount
and $32.7 million of accrued interest related to all future interest payments on the Companys 15%
notes due 2012 and AMH IIs 20% notes due 2014. As of October 3, 2009, total AMH II debt,
including that of its consolidated subsidiaries, was approximately $685.3 million, which includes
$32.7 million of accrued interest related to all future interest payments on the Companys 15%
notes and AMH IIs 20% notes.
AMH and AMH II have no independent operations, and as a result they are dependent upon
distributions, payments and loans from the Company to service their indebtedness. In particular,
AMH is dependent on the Companys ability to pay dividends or otherwise upstream funds to it in
order to service its obligations under the 11 1/4% notes, and AMH II is similarly dependent on
AMHs ability to further upstream funds in order to service its obligations under the 20% notes.
If the Company were unable to generate sufficient earnings, or were precluded from making
restricted payments, either under its debt agreements or pursuant to statutory limitations on the
payment of dividends, it would not be able to dividend or otherwise upstream sufficient funds to
AMH to permit AMH to service its 11 1/4% notes. Similarly, if AMH did not have sufficient access
to earnings of the Company, or were likewise precluded from making restricted payments, it would
not be able to dividend or otherwise upstream sufficient funds to AMH II to allow AMH II to service
its 20% notes. Under such scenarios, either or both of AMH or AMH II would have to find
alternative sources of liquidity to meet their respective obligations under the 11 1/4% notes and 20% notes. However, unlike AMH IIs 13 5/8% notes, all of which were
exchanged for 20% notes in June 2009, AMH IIs 20% notes do not require any cash payments to be
made until maturity on December 1, 2014. The Company does not guarantee the 11 1/4% notes or the
20% notes and has no obligation to make any payments with respect thereto.
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In June 2009, at the time the Company entered into the purchase agreement pursuant to which it
issued its 15% notes, the Company entered into an intercompany loan agreement with AMH II, pursuant
to which the Company agreed to periodically make loans to AMH II in an amount not to exceed an
aggregate outstanding principal amount of approximately $33.0 million at any one time, plus accrued
interest. Interest accrues at a rate of 3% per annum and will be added to the then outstanding
principal amount on a semi-annual basis. The principal amount and accrued but unpaid interest
thereon will mature on May 1, 2015. As of October 3, 2009, the principal amount of borrowings by
AMH II under this intercompany loan agreement and accrued interest thereon was $27.0 million. Due
to the related party nature and the underlying terms of the intercompany loan with AMH II, the
Company has deemed it not practical to assign and disclose a fair value estimate.
AMH made its first semi-annual cash interest payment on its outstanding 11 1/4% notes on
September 1, 2009. The Company believes its cash flows from operations and its borrowing capacity
under the ABL Facility will be sufficient to satisfy its obligations to pay principal and interest
on its outstanding debt, maintain current operations and provide sufficient capital, as well as pay
dividends or make other upstream payments sufficient for AMH to be able to service its debt
obligations through 2010. However, as discussed under Overview above, the building products
industry continues to be negatively impacted by a weak housing market, with a number of factors
contributing to lower current demand for the Companys products, including reduced numbers of
existing home sales and new housing starts and depreciation in housing prices. If these trends
continue, the Companys ability to generate cash sufficient to meet its existing indebtedness
obligations could be adversely affected, and the Company could be required either to find alternate
sources of liquidity or to refinance its existing indebtedness in order to avoid defaulting on its
debt obligations.
The ability of the Company to generate sufficient funds and have sufficient
restricted payments capability both to service its own debt obligations and to allow the Company to
pay dividends or make other upstream payments sufficient for AMH to be able to service its
increased obligations will be dependant in large part on the impact of building products industry
conditions on the Companys business, profitability and cash flows and on the ability of the
Company and/or its parent companies to refinance its and/or their indebtedness. There can be no
assurance that the Company or AMH would be able to obtain any necessary consents or waivers in the
event either of them is unable to service or were to otherwise default under their debt
obligations, or that either of them or AMH II would be able to successfully refinance their
indebtedness. The ability to refinance any indebtedness may be made more difficult to the extent
that current building products industry and credit market conditions continue to persist. The
inability of either of the Company or AMH to service or either of them and/or AMH II to refinance
their indebtedness would likely have a material adverse effect on each of the Company, AMH and AMH
II.
As previously disclosed by the Company, AMH II and its direct and indirect subsidiaries
(including the Company and AMH) are continuing to explore ways to optimize their capital structure,
which could include various liability management transactions and/or the refinancing of certain
debt securities during the remainder of 2009 or thereafter.
Effects of Inflation
The principal raw materials used by the Company are vinyl resin, aluminum, steel, resin
stabilizers and pigments, glass, window hardware, and packaging materials, all of which are
available from a number of suppliers. The Company, along with the entire building products
industry, has experienced significant fluctuations over the past three years in key raw material
commodity costs. In response, the Company announced price increases over the past several years on
certain of its product offerings to offset the inflation of raw materials, and continually monitors
market conditions for price changes as warranted. The Companys ability to maintain gross margin levels on
its products during periods of rising raw material costs depends on the Companys ability to obtain
selling price increases. Furthermore, the results of operations for individual quarters can and
have been negatively impacted by a delay between the timing of raw material cost increases and
price increases on the Companys products. There can be no assurance that the Company will be able
to maintain the selling price increases already implemented or achieve any future price increases.
At October 3, 2009, the Company had no raw material hedge contracts in place.
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Certain Forward-Looking Statements
All statements other than statements of historical facts included in this report regarding the
prospects of the industry and the Companys 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. Such statements reflect the current views of the Companys management with
respect to its operations, results of operations and future financial performance. The following
factors are among those that may cause actual results to differ materially from the forward-looking
statements:
| the Companys operations and results of operations; |
| changes in home building and remodeling industries, economic conditions, interest rates, foreign currency exchange rates and other conditions; |
| changes in availability of consumer credit, employment trends, levels of consumer confidence and spending, and consumer preferences; |
| changes in raw material costs and availability; |
| market acceptance of price increases; |
| changes in national and regional trends in new housing starts and home remodeling; |
| changes in weather conditions; |
| the Companys ability to comply with certain financial covenants in its ABL Facility and indentures governing its 9 3/4% notes and 15% notes; |
| the Companys ability to make distributions, payments or loans to its parent companies to allow them to make required payments on their debt; |
| the ability of the Company and its parent companies to refinance indebtedness when required; |
| increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products; |
| shifts in market demand; |
| increases in the Companys indebtedness; |
| increases in costs of environmental compliance; |
| increases in unanticipated warranty or product liability claims; |
| increases in capital expenditure requirements; |
| potential conflict between existing Alside and Gentek distribution channels; and |
| the other factors discussed under Item 1A. Risk Factors as filed in the Companys Annual Report on Form 10-K for the year ended January 3, 2009 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 or revise these forward-looking statements, whether as a result of new information,
future events or otherwise, unless the securities laws require it to do so.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
The Company has outstanding borrowings under its ABL Facility and may incur additional
borrowings from time to time for general corporate purposes, including working capital and capital
expenditures. The interest rate applicable to outstanding loans under the ABL Facility is, at the
Companys option, equal to either a United States or Canadian adjusted base rate plus an applicable
margin ranging from 0.75% to 1.75%, or LIBOR plus an applicable margin ranging from 2.50% to 3.50%,
with the applicable margin in each case depending on the Companys quarterly average excess
availability (as defined). At October 3, 2009, the Company had borrowings outstanding of $23.5
million under the ABL Facility. The effect of a 1.00% increase or decrease in interest rates would
increase or decrease total annual interest expense by approximately $0.2 million.
The Company has $165.0 million and $20.0 million of senior subordinated notes due 2012 that bear a
fixed interest rate of 9 3/4% and 15%, respectively. The fair values of the Companys 9 3/4% notes
and 15% notes are sensitive to changes in interest rates. In addition, the fair values are affected
by the Companys overall credit rating, which could be impacted by changes in the Companys future
operating results. At October 3, 2009, the fair value of the Companys 9 3/4% notes was $161.3
million based upon their quoted market price. The fair value of the Companys 15% notes is not
based upon quoted market prices as the notes were issued in a private placement and price
quotations are not available. The Company estimates the fair value of the 15% notes at October 3,
2009 to be approximately $20.0 million based upon market and income approach valuations estimated
by an external source.
Foreign Currency Exchange Risk
The Companys revenues are primarily from domestic customers and are realized in U.S. dollars.
However, the Company realizes revenues from sales made through Genteks Canadian distribution
centers in Canadian dollars. The Companys Canadian manufacturing facilities acquire raw materials
and supplies from U.S. vendors, which results in foreign currency transactional gains and losses
upon settlement of the obligations. Payment terms among Canadian manufacturing facilities and these
vendors are short-term in nature. The Company may, from time to time, enter into foreign exchange
forward contracts with maturities of less than three months to reduce its exposure to fluctuations
in the Canadian dollar. At October 3, 2009, the Company was a party to foreign exchange forward
contracts for Canadian dollars, the value of which was immaterial at October 3, 2009.
Commodity Price Risk
See Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Effects of Inflation for a discussion of the market risk related to the Companys
principal raw materials vinyl resin, aluminum and steel.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal period covered by this report, the Companys management, with the
participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) (the Exchange Act) 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 the time periods specified by the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Based upon this evaluation, for the reasons discussed below, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the
fiscal period covered by this report, the disclosure controls and procedures (including the
additional review necessary to confirm the fair presentation in the financial statements, in light
of the material weaknesses discussed below) were functioning effectively.
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Changes in Internal Control over Financial Reporting
As previously disclosed in the Companys Form 10-Q for the quarter ended July 4, 2009,
management determined during the second quarter of 2009 that it did not maintain operating
effectiveness of certain internal controls over financial reporting for establishing the Companys
allowance for doubtful accounts, the deferral of revenue for specific customer shipments until
collectibility is reasonably assured, and accounting for restructuring costs. Management
concluded that as a result of these control deficiencies, a material weakness in the Companys
internal control over financial reporting existed as of July 4, 2009. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis.
During the third quarter of 2009, management substantially completed the remediation efforts
and the following remediation actions have been implemented by the Company to ensure the accuracy
of the Companys consolidated financial statements and prevent or detect potential material
misstatements on a timely basis. The Company has enhanced documentation supporting the Companys
allowance for doubtful accounts and review of past due customer accounts. In August 2009, the
Company hired a Vice President National Credit Manager, reporting directly to the Chief
Financial Officer, who works directly with the financial reporting staff as part of the processes
related to the review and assessment of past due customer accounts, the required allowance for
doubtful accounts, and the identification of revenue for which deferral treatment is appropriate.
Additionally, the Company has enhanced its internal review procedures for accounting for
restructuring costs and other non-recurring items.
Management will continue to evaluate the design and effectiveness of the enhanced internal
controls and procedures, and once placed in operation for a sufficient period of time, these
internal controls and procedures will be subject to appropriate testing in order to determine
whether they are operating effectively. Until the appropriate testing is complete, management will
continue to perform the evaluations and analyses believed to be adequate to provide reasonable
assurance that there are no material misstatements of the Companys consolidated financial
statements.
Except as noted above, there have been no changes to the Companys internal control over
financial reporting during the quarter ended October 3, 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
Inherent Limitations on the Effectiveness of Internal Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control system are achieved. Because of the
inherent limitations in any internal control system, no evaluation of controls can provide absolute
assurance that all control issues, if any, within a company have been detected. Accordingly, the
Companys disclosure controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of the disclosure control system are met.
PART II. OTHER INFORMATION
Item 6. | Exhibits |
Exhibit | ||||
Number | Description | |||
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14
of the Exchange Act, as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14
of the Exchange Act, as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* |
|||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* |
* | This document is being furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASSOCIATED MATERIALS, LLC (Registrant) |
||||
Date: October 26, 2009 | By: | /s/ Thomas N. Chieffe | ||
Thomas N. Chieffe | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Date: October 26, 2009 | By: | /s/ Stephen E. Graham | ||
Stephen E. Graham | ||||
Vice President Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal 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* |
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32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* |
* | This document is being furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986. |