Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
¨ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file numbers: 333-119696 and 333-114924
Norcraft Holdings, L.P.
Norcraft Companies, L.P.
(Exact name of registrants as specified in their charters)
Delaware | 75-3132727 | |
Delaware | 36-4231718 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
3020 Denmark Avenue, Suite 100
Eagan, MN 55121
(Address of Principal Executive Offices)
(800) 297-0661
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ¨ No x.
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 ¨ No ¨.
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
This Form 10-Q is a combined quarterly report being filed separately by two registrants: Norcraft Holdings, L.P. and Norcraft Companies, L.P. Unless the context indicates otherwise, any reference in this report to Holdings refers to Norcraft Holdings, L.P. and any reference to Norcraft refers to Norcraft Companies, L.P., the wholly-owned operating subsidiary of Holdings. The Company, we, us and our refer to Norcraft Holdings, L.P., together with Norcraft Companies, L.P.
Table of Contents
Norcraft Holdings, L.P. Norcraft Companies, L.P.
Table of Contents
Page | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1. | Unaudited Condensed Consolidated Financial Statements | |||
Consolidated Balance Sheets at September 30, 2009 and December 31, 2008 |
3 | |||
4 | ||||
5 | ||||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 |
6 | |||
7 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
Item 3. | Quantitative and Qualitative Disclosures of Market Risk | 23 | ||
Item 4. | Controls and Procedures | 23 | ||
PART II | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 25 | ||
Item 1A. |
Risk Factors | 25 | ||
Item 6. | Exhibits | 25 | ||
SIGNATURES | 26 |
This combined Form 10-Q is separately filed by Norcraft Holdings, L.P. and Norcraft Companies, L.P. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.
2
Table of Contents
PART I. FINANCIAL INFORMATION
(dollar amounts in thousands)
(unaudited)
Norcraft Holdings, L.P. | Norcraft Companies, L.P. | ||||||||||||
September 30, 2009 |
December 31, 2008 |
September 30, 2009 |
December 31, 2008 | ||||||||||
ASSETS | |||||||||||||
Current assets: |
|||||||||||||
Cash and cash equivalents |
$ | 59,356 | $ | 59,406 | $ | 55,108 | $ | 59,406 | |||||
Restricted cash |
5,618 | | 5,618 | | |||||||||
Trade accounts receivable, net |
20,825 | 18,535 | 20,825 | 18,535 | |||||||||
Inventories |
18,248 | 20,599 | 18,248 | 20,599 | |||||||||
Prepaid expenses |
995 | 1,810 | 995 | 1,810 | |||||||||
Total current assets |
105,042 | 100,350 | 100,794 | 100,350 | |||||||||
Property, plant and equipment, net |
32,839 | 35,629 | 32,839 | 35,629 | |||||||||
Other assets: |
|||||||||||||
Goodwill |
88,421 | 88,421 | 88,421 | 88,421 | |||||||||
Customer relationships, net |
40,448 | 43,798 | 40,448 | 43,798 | |||||||||
Brand names |
35,100 | 35,100 | 35,100 | 35,100 | |||||||||
Deferred financing costs, net |
2,823 | 4,584 | 1,418 | 2,820 | |||||||||
Display cabinets, net |
5,785 | 7,069 | 5,785 | 7,069 | |||||||||
Other |
66 | 62 | 66 | 62 | |||||||||
Total other assets |
172,643 | 179,034 | 171,238 | 177,270 | |||||||||
Total assets |
$ | 310,524 | $ | 315,013 | $ | 304,871 | $ | 313,249 | |||||
LIABILITIES AND MEMBERS EQUITY (DEFICIT) |
|||||||||||||
Current liabilities: |
|||||||||||||
Current portion of long-term debt |
$ | | $ | 459 | $ | | $ | | |||||
Accounts payable |
7,036 | 6,688 | 7,036 | 6,688 | |||||||||
Accrued expenses |
19,778 | 20,268 | 18,819 | 16,433 | |||||||||
Total current liabilities |
26,814 | 27,415 | 25,855 | 23,121 | |||||||||
Long-term debt |
266,000 | 266,000 | 148,000 | 148,000 | |||||||||
Other liabilities |
496 | 459 | 496 | 459 | |||||||||
Commitments and contingencies |
| | | | |||||||||
Members equity subject to put request |
9,637 | 25,305 | | | |||||||||
Members equity (deficit) |
7,577 | (4,166 | ) | 130,520 | 141,669 | ||||||||
Total liabilities and members equity (deficit) |
$ | 310,524 | $ | 315,013 | $ | 304,871 | $ | 313,249 | |||||
See notes to consolidated financial statements.
3
Table of Contents
Consolidated Statements of Operations
(dollar amounts in thousands)
(unaudited)
Norcraft Holdings, L.P. | |||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Net sales |
$ | 64,672 | $ | 84,020 | $ | 186,877 | $ | 264,869 | |||||
Cost of sales |
44,387 | 58,884 | 133,155 | 186,732 | |||||||||
Gross profit |
20,285 | 25,136 | 53,722 | 78,137 | |||||||||
Selling, general and administrative expenses |
11,940 | 15,076 | 37,105 | 49,254 | |||||||||
Income from operations |
8,345 | 10,060 | 16,617 | 28,883 | |||||||||
Other expense: |
|||||||||||||
Interest expense, net |
6,315 | 6,097 | 18,977 | 18,384 | |||||||||
Amortization of deferred financing costs |
289 | 385 | 1,761 | 1,147 | |||||||||
Other, net |
28 | 63 | 96 | 123 | |||||||||
Total other expense |
6,632 | 6,545 | 20,834 | 19,654 | |||||||||
Net income (loss) |
$ | 1,713 | $ | 3,515 | $ | (4,217 | ) | $ | 9,229 | ||||
Norcraft Companies, L.P. | |||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Net sales |
$ | 64,672 | $ | 84,020 | $ | 186,877 | $ | 264,869 | |||||
Cost of sales |
44,387 | 58,884 | 133,155 | 186,732 | |||||||||
Gross profit |
20,285 | 25,136 | 53,722 | 78,137 | |||||||||
Selling, general and administrative expenses |
11,940 | 15,076 | 37,105 | 49,254 | |||||||||
Income from operations |
8,345 | 10,060 | 16,617 | 28,883 | |||||||||
Other expense: |
|||||||||||||
Interest expense, net |
3,429 | 3,227 | 10,319 | 9,949 | |||||||||
Amortization of deferred financing costs |
169 | 266 | 1,402 | 797 | |||||||||
Other, net |
28 | 63 | 96 | 123 | |||||||||
Total other expense |
3,626 | 3,556 | 11,817 | 10,869 | |||||||||
Net income |
$ | 4,719 | $ | 6,504 | $ | 4,800 | $ | 18,014 | |||||
See notes to consolidated financial statements.
4
Table of Contents
Consolidated Statements of Changes in Members Equity (Deficit) and Comprehensive Income (Loss)
(dollar amounts in thousands)
(unaudited)
Norcraft Holdings, L.P. | ||||||||||||
Members Equity (Deficit) |
Accumulated other comprehensive income (loss) |
Total comprehensive income (loss) |
||||||||||
Members equity (deficit) at December 31, 2008 |
$ | (4,166 | ) | $ | (158 | ) | ||||||
Stock compensation expense |
117 | |||||||||||
Accretion on members interest subject to put request |
15,668 | |||||||||||
Contribution from member |
4 | |||||||||||
Foreign currency translation adjustment |
171 | 171 | 171 | |||||||||
Net loss |
(4,217 | ) | (4,217 | ) | ||||||||
Total comprehensive loss |
$ | (4,046 | ) | |||||||||
Members equity at September 30, 2009 |
$ | 7,577 | $ | 13 | ||||||||
Norcraft Companies, L.P. | |||||||||||
Members Equity (Deficit) |
Accumulated other comprehensive income (loss) |
Total comprehensive income (loss) | |||||||||
Members equity (deficit) at December 31, 2008 |
$ | 141,669 | $ | (158 | ) | ||||||
Stock compensation expense |
117 | ||||||||||
Distribution to member |
(16,237 | ) | |||||||||
Foreign currency translation adjustment |
171 | 171 | 171 | ||||||||
Net income |
4,800 | 4,800 | |||||||||
Total comprehensive income |
$ | 4,971 | |||||||||
Members equity at September 30, 2009 |
$ | 130,520 | $ | 13 | |||||||
See notes to consolidated financial statements.
5
Table of Contents
Consolidated Statements of Cash Flows
(dollar amounts in thousands)
(unaudited)
Norcraft Holdings, L.P. | Norcraft Companies, L.P. | |||||||||||||||
Nine Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income (loss) |
$ | (4,217 | ) | $ | 9,229 | $ | 4,800 | $ | 18,014 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||
Depreciation and amortization of property, plant and equipment |
4,330 | 4,714 | 4,330 | 4,714 | ||||||||||||
Amortization: |
||||||||||||||||
Customer relationships |
3,350 | 3,350 | 3,350 | 3,350 | ||||||||||||
Deferred financing costs |
1,761 | 1,147 | 1,402 | 797 | ||||||||||||
Display cabinets |
4,136 | 5,192 | 4,136 | 5,192 | ||||||||||||
Provision for uncollectible accounts receivable |
685 | 965 | 685 | 965 | ||||||||||||
Provision for obsolete and excess inventory |
878 | 234 | 878 | 234 | ||||||||||||
Provision for warranty claims |
1,567 | 2,604 | 1,567 | 2,604 | ||||||||||||
Accreted interest on senior notes |
| 7,228 | | | ||||||||||||
Stock compensation expense |
117 | 166 | 117 | 166 | ||||||||||||
Loss on disposal of assets |
118 | 14 | 118 | 14 | ||||||||||||
Change in operating assets and liabilities: |
||||||||||||||||
Trade accounts receivable |
(2,778 | ) | (83 | ) | (2,778 | ) | (83 | ) | ||||||||
Inventories |
1,530 | 1,011 | 1,530 | 1,011 | ||||||||||||
Prepaid expenses |
819 | 491 | 819 | 491 | ||||||||||||
Other assets |
(4 | ) | (118 | ) | (4 | ) | (118 | ) | ||||||||
Accounts payable and accrued expenses |
(1,642 | ) | 753 | 1,234 | (206 | ) | ||||||||||
Net cash provided by operating activities |
10,650 | 36,897 | 22,184 | 37,145 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Proceeds from sale of property and equipment |
9 | 5 | 9 | 5 | ||||||||||||
Purchase of property, plant and equipment |
(1,810 | ) | (2,421 | ) | (1,810 | ) | (2,421 | ) | ||||||||
Additions to display cabinets |
(2,852 | ) | (3,382 | ) | (2,852 | ) | (3,382 | ) | ||||||||
Net cash used in investing activities |
(4,653 | ) | (5,798 | ) | (4,653 | ) | (5,798 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||||||
Transfer to restricted cash |
(5,618 | ) | | (5,618 | ) | | ||||||||||
Payments on term loans to former equity holders |
(459 | ) | (1,959 | ) | | | ||||||||||
Repurchase of members interests |
| (68 | ) | | (68 | ) | ||||||||||
Contributions from (distributions to) members |
4 | (2,336 | ) | (16,237 | ) | (4,543 | ) | |||||||||
Net cash used in financing activities |
(6,073 | ) | (4,363 | ) | (21,855 | ) | (4,611 | ) | ||||||||
Effect of exchange rates on cash |
26 | (26 | ) | 26 | (26 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(50 | ) | 26,710 | (4,298 | ) | 26,710 | ||||||||||
Cash and cash equivalents, beginning of the period |
59,406 | 28,409 | 59,406 | 28,409 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 59,356 | $ | 55,119 | $ | 55,108 | $ | 55,119 | ||||||||
See notes to consolidated financial statements.
6
Table of Contents
Norcraft Holdings, L.P. Norcraft Companies, L.P.
Notes to Consolidated Financial Statements
(in thousands)
(unaudited)
1. | Basis of Presentation |
The accompanying financial statements are those of Norcraft Holdings, L.P. (Holdings) and one of its wholly owned subsidiaries Norcraft Companies, L.P. (Norcraft). Holdings and Norcraft are collectively referred to as the Company.
The consolidated financial statements of Holdings include the accounts of its 100% owned subsidiaries, Norcraft Intermediate Holdings, L.P., which is the immediate parent of Norcraft, and Norcraft Capital Corp. In August 2004, Holdings and Norcraft Capital Corp. issued $118.0 million of 9 3/4% senior discount notes for gross proceeds of $80.3 million. Holdings and Norcraft Capital Corp. are the sole obligors of these notes. In March 2009, Norcraft distributed approximately $5.7 million to Holdings to enable it to make cash interest payments on the Senior Discount Notes. On April 3, 2009, as described in Note 8 below, Norcraft distributed an additional $10.0 million to Holdings to enable it to make future cash interest payments on these notes. On September 1, 2009, a cash interest payment of approximately $5.7 million was made for these notes out of the $10.0 million. Other than the foregoing debt obligations, cash, related deferred issuance costs, related interest and amortization expense, all other assets, liabilities, income, expenses and cash flows of the consolidated financial statements of Holdings presented for all periods represent those of its wholly-owned subsidiary Norcraft.
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the interim consolidated financial statements and accompanying notes included herein should be read in conjunction with the more detailed information contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of September 30, 2009 and 2008 and for the three and nine months ended September 30, 2009 and 2008 include all normal recurring adjustments which management considers necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods.
Unless separately stated, the information included in the notes herein relate to both Holdings and Norcraft.
2. | Restricted Cash |
Approximately $5.6 million of cash has restricted availability because it is used to collateralize approximately $5.4 million in outstanding letters of credit.
3. | Trade Accounts Receivable |
Trade accounts receivable consists of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Trade accounts receivable |
$ | 21,927 | $ | 20,557 | ||||
Less: Allowance for uncollectible accounts |
(1,102 | ) | (2,022 | ) | ||||
Trade accounts receivable, net |
$ | 20,825 | $ | 18,535 | ||||
4. | Inventories |
Inventories consist of the following:
September 30, | December 31, | |||||
2009 | 2008 | |||||
Raw materials and supplies |
$ | 12,135 | $ | 14,648 | ||
Work in process |
2,678 | 2,942 | ||||
Finished goods |
3,435 | 3,009 | ||||
$ | 18,248 | $ | 20,599 | |||
7
Table of Contents
5. | Intangible Assets |
Intangible assets subject to amortization consist of the following:
Norcraft Holdings, L.P. | ||||||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||
Customer relationships |
$ | 67,000 | $ | (26,552 | ) | $ | 67,000 | $ | (23,202 | ) | ||||
Deferred financing costs |
16,386 | (13,563 | ) | 16,386 | (11,802 | ) | ||||||||
Total |
$ | 83,386 | $ | (40,115 | ) | $ | 83,386 | $ | (35,004 | ) | ||||
Norcraft Companies, L.P. | ||||||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||
Customer relationships |
$ | 67,000 | $ | (26,552 | ) | $ | 67,000 | $ | (23,202 | ) | ||||
Deferred financing costs |
12,853 | (11,435 | ) | 12,853 | (10,033 | ) | ||||||||
Total |
$ | 79,853 | $ | (37,987 | ) | $ | 79,853 | $ | (33,235 | ) | ||||
Intangible assets not subject to amortization consist of the following:
September 30, 2009 |
December 31, 2008 | |||||
Goodwill |
$ | 88,421 | $ | 88,421 | ||
Brand names |
35,100 | 35,100 | ||||
Total |
$ | 123,521 | $ | 123,521 | ||
6. | Accrued Expenses |
Accrued expenses consist of the following:
Norcraft Holdings, L.P. | ||||||
September 30, | December 31, | |||||
2009 | 2008 | |||||
Salaries, wages and employee benefits |
$ | 5,575 | $ | 6,104 | ||
Commissions, rebates and marketing programs |
2,614 | 3,145 | ||||
Workers compensation |
2,559 | 2,510 | ||||
Interest |
6,512 | 6,055 | ||||
Other, including product warranty accruals |
2,518 | 2,454 | ||||
$ | 19,778 | $ | 20,268 | |||
Norcraft Companies, L.P. | ||||||
September 30, 2009 |
December 31, 2008 | |||||
Salaries, wages and employee benefits |
$ | 5,575 | $ | 6,104 | ||
Commissions, rebates and marketing programs |
2,614 | 3,145 | ||||
Workers compensation |
2,559 | 2,510 | ||||
Interest |
5,553 | 2,220 | ||||
Other, including product warranty accruals |
2,518 | 2,454 | ||||
$ | 18,819 | $ | 16,433 | |||
8
Table of Contents
Product warranty accrual activity is as follows for Norcraft Holdings, L.P. and Norcraft Companies, L.P.:
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Beginning Balance December 31 |
$ | 635 | $ | 776 | ||||
Accruals for warranties |
1,567 | 2,604 | ||||||
Claims paid |
(1,656 | ) | (2,735 | ) | ||||
Ending Balance September 30 |
$ | 546 | $ | 645 | ||||
Product warranty accrual is a component of the Other category in the accrued expenses tables above.
7. | Stock-Based Compensation |
Holdings has a management incentive plan, (the Plan) which provides for the grants of incentive Class D limited partnership units in Holdings to selected employees of the Company. Under the terms of the Plan, the Class D units generally begin to vest on December 31 of the first full year following the date of grant, with 50% of the units typically vesting over a five year period (time-based vesting) and 50% vesting over a five year period subject to the Company meeting certain performance based criteria in each of those years (probability-based vesting). Upon vesting, each Class D unit entitles the unit holder the option to purchase one Class A unit in Holdings. All Class D units will be issued with an exercise price equal to the fair value on the date of grant of Holdings Class A units. The fair value of Holdings Class A units is determined based on a formula with various inputs which are designed to estimate the fair market value of the Company divided by the number of units outstanding.
The fair value of the Class D units granted is based on the Black-Scholes option-pricing model. In accordance with Statement of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 718, Compensation Stock Compensation, the Company is required to incorporate a volatility factor in the fair value calculation. The volatility factor is developed through the use of a sample of peer group companies consisting of publicly-traded companies that operate in the Companys same industry. The Company did not grant any incentive Class D units during the three or nine months ended September 30, 2009.
Compensation expense related to Class D units was negligible for the three months ended September 30, 2009 and $0.1 million for the nine months ended September 30, 2009. This same compensation expense was ($0.4) million and $0.2 million for the three and nine months ended September 30, 2008, respectively. During the three months ended June 30, 2009, management determined that the likelihood of meeting performance based criteria in 2009 was not probable, and as such, reversed the related expense that had been recorded in 2009. During the three months ended September 30, 2008, management determined that the likelihood of meeting the performance based criteria in 2008 was not probable, and as such, reversed the related expense that had been recorded in 2008. Because individuals receiving these Class D unit awards are employees of Norcraft, the compensation expense is recorded at the Norcraft level.
A summary of Class D Unit activity under the Plan is as follows:
Nine Months Ended September 30, 2009 | ||||||
Units | Weighted-Average Exercise Price | |||||
Beginning balance |
4,841,323 | $ | 0.73 | |||
Granted |
| $ | | |||
Exercised |
| $ | | |||
Forfeited/expired |
(114,103 | ) | $ | 2.22 | ||
Ending balance |
4,727,220 | $ | 0.69 | |||
Exercisable balance |
4,221,824 | $ | 0.56 | |||
The intrinsic values of the issued Class D units and exercisable Class D units at September 30, 2009 were $1.0 million.
9
Table of Contents
8. | Long-term Debt |
Long-term debt consists of the following:
Norcraft Holdings, L.P. | Norcraft Companies, L.P. | |||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Senior subordinated notes (due in 2011 with semi-annual interest payments at 9%) |
$ | 148,000 | $ | 148,000 | $ | 148,000 | $ | 148,000 | ||||
Unsecured notes (due in 2009 with interest at 8.45%) |
| 459 | | | ||||||||
Senior discount notes (due in 2012 with interest payable at 9.75%) |
118,000 | 118,000 | | | ||||||||
Total debt |
266,000 | 266,459 | 148,000 | 148,000 | ||||||||
Less current portion |
| 459 | | | ||||||||
Long term debt |
$ | 266,000 | $ | 266,000 | $ | 148,000 | $ | 148,000 | ||||
We anticipate that the funds generated by operations and current available cash balances will be sufficient to meet working capital requirements, make required member tax distributions and to finance capital expenditures over the next 12 to 18 months.
Senior Secured Credit Facility
Norcraft had a senior credit facility, as amended, with a syndicate of financial institutions providing for up to $60 million in borrowings available through a revolving loan facility which would have matured on May 2, 2011 and had no scheduled amortization or commitment reductions. On March 27, 2009, Norcraft elected to terminate this senior credit facility.
The senior credit facility contained covenants, which, among other things, limited: (i) additional indebtedness; (ii) dividends; (iii) capital expenditures and (iv) acquisitions, mergers and consolidations. Indebtedness under the senior credit facility was secured by substantially all of Norcrafts assets, including its real and personal property, inventory, accounts receivable, intellectual property and other intangibles. The facility also contained certain financial covenants, including maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge coverage ratio.
In addition, the senior credit facility was guaranteed by Norcraft Intermediate Holdings and collateralized by its assets (including Norcrafts equity interests), as well as guaranteed by and collateralized by the equity interests and substantially all of the assets of Norcrafts subsidiaries.
Commitment fees were due quarterly at a rate of 0.375% of any unused commitments.
Approximately $5.4 million of letters of credit were outstanding at December 31, 2008. Following the termination of the senior credit facility, the Company collateralized the letter of credit obligations with approximately $5.6 million of restricted cash.
Senior Subordinated Notes
On October 21, 2003, Norcraft and Norcraft Finance Corp., a 100% owned finance subsidiary of Norcraft, issued, on a joint and several basis, $150.0 million, 9% senior subordinated notes due in 2011 (the Senior Subordinated Notes). Norcraft Finance Corp. was formed on September 26, 2003 and has no operations. Interest accrues on the Senior Subordinated Notes and is payable semiannually on May 1 and November 1 of each year at a rate of 9% per annum. The Senior Subordinated Notes are subordinated to all existing and future senior debt.
Norcraft has the option to redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest. On August 21, 2007, Norcraft repurchased and cancelled $2.0 million of its Senior Subordinated Notes at a purchase price of $2.0 million plus accrued interest of $55,000.
If Norcraft experiences a change of control, it may be required to offer to purchase the Senior Subordinated Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest.
Additionally, the terms of the indenture governing the Senior Subordinated Notes limit the Companys ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions.
10
Table of Contents
Holdings Senior Discount Notes
On August 17, 2004, Holdings and Norcraft Capital Corp., a 100% owned finance subsidiary of Holdings, issued, on a joint and several basis, $118.0 million aggregate principal amount at maturity ($80.3 million gross proceeds) of 9 3/4% senior discount notes due 2012 (the Senior Discount Notes). The net proceeds of this offering were used to make a distribution to Holdings limited partners. Norcraft Capital Corp. was formed on August 12, 2004 and has no operations. Interest accrued on the Senior Discount Notes in the form of an increase in the accreted value of the note prior to September 1, 2008. Since that time, cash interest on the Senior Discount Notes accrues and is payable semiannually in arrears on March 1 and September 1 of each year at a rate of 9 3 /4% per annum. The first cash interest payment was made on March 1, 2009. Holdings has no independent operating assets or liabilities other than its investment in its subsidiaries.
Holdings may redeem the Senior Discount Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium, declining ratably to par, plus accrued and unpaid interest.
If Holdings experiences a change in control, it may be required to offer to purchase the Senior Discount Notes at a purchase price equal to 101% of the accreted value plus accrued and unpaid interest.
Additionally, the terms of the indenture governing the Senior Discount Notes limit Holdings ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions.
The Senior Discount Notes are structurally subordinated to all debt and liabilities, including trade payables, of Holdings subsidiaries, including Norcraft, and are effectively subordinated to any of Holdings future secured debt to the extent of the value of the assets securing such debt. Holdings subsidiaries may not have sufficient funds or assets to permit payments to Holdings in amounts sufficient to permit Holdings to pay all or any portion of its indebtedness and other obligations, including its obligations on the Senior Discount Notes. As of September 30, 2009, the aggregate debt of Holdings subsidiary (other than Norcraft Capital Corp., which has no additional debt) was $148.0 million.
Holdings currently relies on distributions from Norcraft in order to pay cash interest on the Senior Discount Notes. In March 2009, Norcraft distributed approximately $5.7 million to Holdings to enable it to make cash interest payments on the Senior Discount Notes. On April 3, 2009, Norcraft distributed an additional $10.0 million to Holdings to enable it to make future cash interest payments on the Senior Discount Notes. On September 1, 2009, a cash interest payment of approximately $5.7 million was made for the Senior Discount Notes out of the $10.0 million. Pursuant to restrictions in the indenture governing the Senior Subordinated Notes, subject to certain exceptions, Norcraft is generally limited to making distributions to Holdings and its equity holders equal to approximately 50% of Norcrafts cumulative consolidated net income, and up to an additional $10.0 million of other distributions. The previous distributions have been made pursuant to the cumulative consolidated net income test. However, the incurrence of the impairment charge with respect to goodwill and other intangibles described in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 results in Norcrafts cumulative consolidated net income (after considering previous distributions) being negative for the foreseeable future and therefore, significantly restricts the amount of cash that Norcraft may distribute to Holdings and its equity holders. The Company currently anticipates that such permitted distributions, together with funds from the recent distribution made to Holdings, will be sufficient to allow Holdings to make cash interest payments on the Senior Discount Notes through the end of 2010. No assurances can be made that such distributions will be available, however, and if Norcraft is not permitted to make additional cash distributions to Holdings, Holdings will be required to raise additional proceeds through equity or debt financings in order to fund such obligations. Such financing may not be available on acceptable terms or at all.
Unsecured Notes
In September 2006, Holdings repurchased the equity interests of two former equity holders. Consideration for these repurchases was in the form of $2.0 million in cash and $5.9 million in unsecured notes payable (the Unsecured Notes). Principal on the Unsecured Notes is payable in three equal, annual payments. The first principal payment of $2.0 million was paid during September 2007 and the second principal payment of $2.0 million was paid during September 2008. On December 31, 2008, Holdings converted the unpaid principal amount and accrued interest of one of the unsecured notes for $1,532,279 into 1,298,541.398 Class A units of Holdings at a conversion price of $1.18 per unit. The remaining note accrued interest at 8.45%, which was payable quarterly. On September 30, 2009, the final principal and interest payment was paid in the amount of approximately $0.5 million.
11
Table of Contents
The following represents certain condensed consolidating financial information as of September 30, 2009 and December 31, 2008 and for the periods ended September 30, 2009 and 2008 for the issuers and for Norcraft Canada Corporation, a wholly-owned subsidiary of Norcraft, which fully and unconditionally guarantees the Senior Subordinated Notes. The issuers of the Senior Subordinated Notes are Norcraft Companies, L.P and Norcraft Finance Corp. and the issuers of the Senior Discount Notes are Norcraft Holdings, L.P and Norcraft Capital Corp. In addition, the terms and conditions of the Senior Subordinated Notes limit Norcrafts ability to pay dividends or other payments to Holdings. In this regard, the net assets of Norcraft are restricted assets of Holdings. As such, condensed financial information for Holdings (the parent company) is also presented. The information presented follows the equity method of accounting except for consolidated amounts.
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2009 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. | |||||||||||||||||||||
Current assets |
$ | 96,815 | $ | | $ | 3,979 | $ | | $ | 100,794 | $ | 4,248 | $ | | $ | 105,042 | ||||||||||||
Property, plant & equipment, net |
28,233 | | 4,606 | | 32,839 | | | 32,839 | ||||||||||||||||||||
Investments in subsidiary |
(1,331 | ) | | | 1,331 | | 130,520 | (130,520 | ) | | ||||||||||||||||||
Other assets |
179,987 | | 213 | (8,962 | ) | 171,238 | 1,405 | | 172,643 | |||||||||||||||||||
Total assets |
$ | 303,704 | $ | | $ | 8,798 | $ | (7,631 | ) | $ | 304,871 | $ | 136,173 | $ | (130,520 | ) | $ | 310,524 | ||||||||||
Current liabilities |
$ | 24,688 | $ | | $ | 1,167 | $ | | $ | 25,855 | $ | 959 | $ | | $ | 26,814 | ||||||||||||
Long-term debt |
148,000 | | 8,962 | (8,962 | ) | 148,000 | 118,000 | | 266,000 | |||||||||||||||||||
Other liabilities |
496 | | | | 496 | | | 496 | ||||||||||||||||||||
Members equity subject to put request |
| | | | | 9,637 | | 9,637 | ||||||||||||||||||||
Members equity (deficit) |
130,520 | | (1,331 | ) | 1,331 | 130,520 | 7,577 | (130,520 | ) | 7,577 | ||||||||||||||||||
Total liabilities & members equity (deficit) |
$ | 303,704 | $ | | $ | 8,798 | $ | (7,631 | ) | $ | 304,871 | $ | 136,173 | $ | (130,520 | ) | $ | 310,524 | ||||||||||
As of December 31, 2008 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. |
|||||||||||||||||||||||
Current assets |
$ | 98,732 | $ | | $ | 1,618 | $ | | $ | 100,350 | $ | | $ | | $ | 100,350 | ||||||||||||||
Property, plant & equipment, net |
30,982 | | 4,647 | | 35,629 | | | 35,629 | ||||||||||||||||||||||
Investments in subsidiary |
(1,000 | ) | | | 1,000 | | 141,669 | (141,669 | ) | | ||||||||||||||||||||
Other assets |
183,855 | | 213 | (6,798 | ) | 177,270 | 1,764 | | 179,034 | |||||||||||||||||||||
Total assets |
$ | 312,569 | $ | | $ | 6,478 | $ | (5,798 | ) | $ | 313,249 | $ | 143,433 | $ | (141,669 | ) | $ | 315,013 | ||||||||||||
Current liabilities |
$ | 22,441 | $ | | $ | 680 | $ | | $ | 23,121 | $ | 4,294 | $ | | $ | 27,415 | ||||||||||||||
Long-term debt |
148,000 | | 6,798 | (6,798 | ) | 148,000 | 118,000 | | 266,000 | |||||||||||||||||||||
Other liabilities |
459 | | | | 459 | | | 459 | ||||||||||||||||||||||
Members equity subject to put request |
| | | | | 25,305 | | 25,305 | ||||||||||||||||||||||
Members equity (deficit) |
141,669 | | (1,000 | ) | 1,000 | 141,669 | (4,166 | ) | (141,669 | ) | (4,166 | ) | ||||||||||||||||||
Total liabilities & members equity (deficit) |
$ | 312,569 | $ | | $ | 6,478 | $ | (5,798 | ) | $ | 313,249 | $ | 143,433 | $ | (141,669 | ) | $ | 315,013 | ||||||||||||
(1) Co-issuers |
12
Table of Contents
CONDENSED CONSOLIDATING OPERATIONS STATEMENTS
For the Three Months Ended September 30, 2009 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. | ||||||||||||||||||||
Net sales |
$ | 61,285 | $ | | $ | 4,132 | $ | (745 | ) | $ | 64,672 | $ | | $ | | $ | 64,672 | ||||||||||
Cost of sales |
41,502 | | 3,630 | (745 | ) | 44,387 | | | 44,387 | ||||||||||||||||||
Gross profit |
19,783 | | 502 | | 20,285 | | | 20,285 | |||||||||||||||||||
Equity in earnings (losses) of subsidiary |
1 | | | (1 | ) | | 4,719 | (4,719 | ) | | |||||||||||||||||
Selling, general and administrative expenses |
11,444 | | 496 | | 11,940 | | | 11,940 | |||||||||||||||||||
Income (loss) from operations |
8,340 | | 6 | (1 | ) | 8,345 | 4,719 | (4,719 | ) | 8,345 | |||||||||||||||||
Other expense (income): |
|||||||||||||||||||||||||||
Interest expense, net |
3,422 | | 7 | | 3,429 | 2,886 | | 6,315 | |||||||||||||||||||
Amortization of deferred financing costs |
169 | | | | 169 | 120 | | 289 | |||||||||||||||||||
Other, net |
30 | | (2 | ) | | 28 | | | 28 | ||||||||||||||||||
Total other expense, net |
3,621 | | 5 | | 3,626 | 3,006 | | 6,632 | |||||||||||||||||||
Net income (loss) |
$ | 4,719 | $ | | $ | 1 | $ | (1 | ) | $ | 4,719 | $ | 1,713 | $ | (4,719 | ) | $ | 1,713 | |||||||||
For the Three Months Ended September 30, 2008 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. | |||||||||||||||||||||
Net sales |
$ | 82,925 | $ | | $ | 1,480 | $ | (385 | ) | $ | 84,020 | $ | | $ | | $ | 84,020 | |||||||||||
Cost of sales |
57,639 | | 1,630 | (385 | ) | 58,884 | | | 58,884 | |||||||||||||||||||
Gross profit |
25,286 | | (150 | ) | | 25,136 | | | 25,136 | |||||||||||||||||||
Equity in earnings (losses) of subsidiary |
(390 | ) | | | 390 | | 6,504 | (6,504 | ) | | ||||||||||||||||||
Selling, general and administrative expenses |
14,835 | | 241 | | 15,076 | | | 15,076 | ||||||||||||||||||||
Income (loss) from operations |
10,061 | | (391 | ) | 390 | 10,060 | 6,504 | (6,504 | ) | 10,060 | ||||||||||||||||||
Other expense (income): |
||||||||||||||||||||||||||||
Interest expense, net |
3,228 | | (1 | ) | | 3,227 | 2,870 | | 6,097 | |||||||||||||||||||
Amortization of deferred financing costs |
266 | | | | 266 | 119 | | 385 | ||||||||||||||||||||
Other, net |
63 | | | | 63 | | | 63 | ||||||||||||||||||||
Total other expense, net |
3,557 | | (1 | ) | | 3,556 | 2,989 | | 6,545 | |||||||||||||||||||
Net income (loss) |
$ | 6,504 | $ | | $ | (390 | ) | $ | 390 | $ | 6,504 | $ | 3,515 | $ | (6,504 | ) | $ | 3,515 | ||||||||||
13
Table of Contents
CONDENSED CONSOLIDATING OPERATIONS STATEMENTS
For the Nine Months Ended September 30, 2009 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. |
|||||||||||||||||||||||
Net sales |
$ | 179,880 | $ | | $ | 9,345 | $ | (2,348 | ) | $ | 186,877 | $ | | $ | | $ | 186,877 | |||||||||||||
Cost of sales |
126,897 | | 8,606 | (2,348 | ) | 133,155 | | | 133,155 | |||||||||||||||||||||
Gross profit |
52,983 | | 739 | | 53,722 | | | 53,722 | ||||||||||||||||||||||
Equity in earnings (losses) of subsidiary |
(502 | ) | | | 502 | | 4,800 | (4,800 | ) | | ||||||||||||||||||||
Selling, general and administrative expenses |
35,873 | | 1,232 | | 37,105 | | | 37,105 | ||||||||||||||||||||||
Income (loss) from operations |
16,608 | | (493 | ) | 502 | 16,617 | 4,800 | (4,800 | ) | 16,617 | ||||||||||||||||||||
Other expense (income): |
||||||||||||||||||||||||||||||
Interest expense, net |
10,306 | | 13 | | 10,319 | 8,658 | | 18,977 | ||||||||||||||||||||||
Amortization of deferred financing costs |
1,402 | | | | 1,402 | 359 | | 1,761 | ||||||||||||||||||||||
Other, net |
100 | | (4 | ) | | 96 | | | 96 | |||||||||||||||||||||
Total other expense, net |
11,808 | | 9 | | 11,817 | 9,017 | | 20,834 | ||||||||||||||||||||||
Net income (loss) |
$ | 4,800 | $ | | $ | (502 | ) | $ | 502 | $ | 4,800 | $ | (4,217 | ) | $ | (4,800 | ) | $ | (4,217 | ) | ||||||||||
For the Nine Months Ended September 30, 2008 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. | |||||||||||||||||||||
Net sales |
$ | 261,843 | $ | | $ | 4,637 | $ | (1,611 | ) | $ | 264,869 | $ | | $ | | $ | 264,869 | |||||||||||
Cost of sales |
183,018 | | 5,325 | (1,611 | ) | 186,732 | | | 186,732 | |||||||||||||||||||
Gross profit |
78,825 | | (688 | ) | | 78,137 | | | 78,137 | |||||||||||||||||||
Equity in earnings (losses) of subsidiary |
(1,336 | ) | | | 1,336 | | 18,014 | (18,014 | ) | | ||||||||||||||||||
Selling, general and administrative expenses |
48,605 | | 649 | | 49,254 | | | 49,254 | ||||||||||||||||||||
Income (loss) from operations |
28,884 | | (1,337 | ) | 1,336 | 28,883 | 18,014 | (18,014 | ) | 28,883 | ||||||||||||||||||
Other expense (income): |
||||||||||||||||||||||||||||
Interest expense, net |
9,950 | | (1 | ) | | 9,949 | 8,435 | | 18,384 | |||||||||||||||||||
Amortization of deferred financing costs |
797 | | | | 797 | 350 | | 1,147 | ||||||||||||||||||||
Other, net |
123 | | | | 123 | | | 123 | ||||||||||||||||||||
Total other expense, net |
10,870 | | (1 | ) | | 10,869 | 8,785 | | 19,654 | |||||||||||||||||||
Net income (loss) |
$ | 18,014 | $ | | $ | (1,336 | ) | $ | 1,336 | $ | 18,014 | $ | 9,229 | $ | (18,014 | ) | $ | 9,229 | ||||||||||
14
Table of Contents
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2009 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. |
||||||||||||||||||||||||
Cash flows provided by (used in) operating activities |
$ | 23,257 | $ | | $ | (1,073 | ) | $ | | $ | 22,184 | $ | 4,703 | $ | (16,237 | ) | $ | 10,650 | |||||||||||||
Cash flows provided by (used in) investing activities |
(6,257 | ) | | (560 | ) | 2,164 | (4,653 | ) | | | (4,653 | ) | |||||||||||||||||||
Cash flows provided by (used in) financing activities |
(21,855 | ) | | 2,164 | (2,164 | ) | (21,855 | ) | (455 | ) | 16,237 | (6,073 | ) | ||||||||||||||||||
Effect of exchange rates on cash |
| | 26 | | 26 | | | 26 | |||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(4,855 | ) | | 557 | | (4,298 | ) | 4,248 | | (50 | ) | ||||||||||||||||||||
Cash and cash equivalents, beginning of period |
59,366 | | 40 | | 59,406 | | | 59,406 | |||||||||||||||||||||||
Cash and cash equivalents, end of period |
$ | 54,511 | $ | | $ | 597 | $ | | $ | 55,108 | $ | 4,248 | $ | | $ | 59,356 | |||||||||||||||
For the Nine Months Ended September 30, 2008 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
Norcraft Holdings, L.P. |
Eliminations | Consolidated Norcraft Holdings, L.P. |
||||||||||||||||||||||||
Cash flows provided by (used in) operating activities |
$ | 38,119 | $ | | $ | (974 | ) | $ | | $ | 37,145 | $ | 4,363 | $ | (4,611 | ) | $ | 36,897 | |||||||||||||
Cash flows provided by (used in) investing activities |
(6,852 | ) | | (427 | ) | 1,481 | (5,798 | ) | | | (5,798 | ) | |||||||||||||||||||
Cash flows provided by (used in) financing activities |
(4,611 | ) | | 1,481 | (1,481 | ) | (4,611 | ) | (4,363 | ) | 4,611 | (4,363 | ) | ||||||||||||||||||
Effect of exchange rates on Cash |
| | (26 | ) | | (26 | ) | | | (26 | ) | ||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
26,656 | | 54 | | 26,710 | | | 26,710 | |||||||||||||||||||||||
Cash and cash equivalents, beginning of period |
28,318 | | 91 | | 28,409 | | | 28,409 | |||||||||||||||||||||||
Cash and cash equivalents, end of period |
$ | 54,974 | $ | | $ | 145 | $ | | $ | 55,119 | $ | | $ | | $ | 55,119 | |||||||||||||||
(1) Co-issuers |
15
Table of Contents
9. | Accounting Changes |
In April 2008, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification Topic (ASC) 350-30-35-1.A, Determination of the Useful Life of Intangible Assets (ASC 350-30-35-1.A). ASC 350-30-35-1.A amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350-30, Goodwill and Other Intangible Assets (ASC 350-30). The intent of ASC 350-30-35-1.A is to improve the consistency between the useful life of a recognized intangible asset under ASC 350-30 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. ASC 350-30-35-1.A is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 350-30-35-1.A did not have a material effect on the Companys consolidated financial statements.
In April 2009, the FASB issued ASC 35-16C, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with ASC 35, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. ASC 35-16C is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The adoption of ASC 35-16C did not have a material effect on the Companys consolidated financial statements.
In April 2009, the FASB issued guidance that requires interim reporting period disclosure about the fair value of certain financial instruments, effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
On April 9, 2009, the FASB issued guidance which is intended to provide greater clarity to investors about the credit and noncredit component of an Other-Than-Temporary Impairment event and to more effectively communicate when an Other-Than-Temporary Impairment event has occurred. The guidance applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
In May 2009, the FASB issued ACS 855, Subsequent Events. ACS 855 is intended to establish general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions of ACS 855 for the quarter ended June 30, 2009. The adoption of ACS 855 did not have a material effect on the Companys consolidated financial statements.
In June 2009, the FASB issued guidance that establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Use of the new Codification is effective for interim and annual periods ending after September 15, 2009. The Company has used the new Codification in reference to GAAP in this quarterly report on Form 10-Q and such use has not impacted the consolidated results of the Company.
16
Table of Contents
10. | Subsequent Events |
The Company has evaluated its September 30, 2009 financial statements for subsequent events through November 9, 2009, the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
17
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Uncertainty of Forward Looking Statements and Information
This report contains forward looking statements. All statements other than statements of historical acts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward looking statements. Forward looking statements give our current expectations and projections relating to the financial condition, results of operations, plans, objectives, future performance and business of our company. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.
These forward looking statements are based on our expectations and beliefs concerning future events affecting us. They are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe that the expectations reflected in our forward looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.
Because of these factors, we caution that investors should not place undue reliance on any of our forward looking statements. Further, any forward looking statement speaks only as of the date on which it is made and except as required by law we undertake no obligation to update any forward looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
Overview
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the accompanying notes included elsewhere in this quarterly report. Additionally, the following discussion should be read together with the Selected Financial Data and our consolidated financial statements and the accompanying notes included in our 2008 Annual Report on Form 10-K. All of our operations are conducted through Norcraft Companies, L.P. (Norcraft). Norcraft is an indirect wholly-owned subsidiary of Norcraft Holdings, L.P. (Holdings). The words Company, we, us and our refer to Holdings together with Norcraft.
We are a leader in manufacturing, assembling and finishing kitchen and bathroom cabinetry in the United States. We provide our customers with a single source for a broad range of high-quality cabinetry, including stock, semi-custom and custom cabinets. Our cabinets are manufactured in both framed and full access construction. We market our products through six brands: Mid Continent Cabinetry, Norcraft Cabinetry, UltraCraft, StarMark, Fieldstone and Brookwood. The Mid Continent and Norcraft brands correspond to the Mid Continent division, while the UltraCraft brand corresponds to that division and the StarMark, Fieldstone and Brookwood brands correspond to the StarMark division.
As discussed below, during the three and nine months ended September 30, 2009, we continued to experience a slow-down in the number of incoming orders due to the industry-wide contraction in the U.S. housing market and the general economic slow-down. Additionally, the contraction in the market has caused us to be more aggressive with pricing and sales promotions. These sales incentives have reduced our gross profit margin percentages.
18
Table of Contents
Results of Operations
The following table outlines for the periods indicated, selected operating data as a percentage of net sales.
Norcraft Holdings, L.P. | ||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales |
68.6 | % | 70.1 | % | 71.2 | % | 70.5 | % | ||||
Gross profit |
31.4 | % | 29.9 | % | 28.8 | % | 29.5 | % | ||||
Selling, general and administrative expenses |
18.5 | % | 17.9 | % | 19.9 | % | 18.6 | % | ||||
Income from operations |
12.9 | % | 12.0 | % | 8.9 | % | 10.9 | % | ||||
Interest expense, net |
9.8 | % | 7.3 | % | 10.2 | % | 6.9 | % | ||||
Amortization of deferred financing costs |
0.5 | % | 0.4 | % | 0.9 | % | 0.4 | % | ||||
Other, net |
0.0 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||
Net income (loss) |
2.6 | % | 4.2 | % | (2.3 | )% | 3.5 | % | ||||
Norcraft Companies, L.P | ||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales |
68.6 | % | 70.1 | % | 71.2 | % | 70.5 | % | ||||
Gross profit |
31.4 | % | 29.9 | % | 28.8 | % | 29.5 | % | ||||
Selling, general and administrative expenses |
18.5 | % | 17.9 | % | 19.9 | % | 18.6 | % | ||||
Income from operations |
12.9 | % | 12.0 | % | 8.9 | % | 10.9 | % | ||||
Interest expense, net |
5.3 | % | 3.9 | % | 5.5 | % | 3.8 | % | ||||
Amortization of deferred financing costs |
0.3 | % | 0.3 | % | 0.7 | % | 0.3 | % | ||||
Other, net |
0.0 | % | 0.1 | % | 0.1 | % | 0.0 | % | ||||
Net income |
7.3 | % | 7.7 | % | 2.6 | % | 6.8 | % | ||||
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
Net Sales. Net sales decreased by $19.3 million, or 23.0%, from $84.0 million for the three months ended September 30, 2008 to $64.7 million for the same period of 2009. The decrease in sales has primarily been caused by the industry-wide slow-down in the U.S. housing market and general economic slow-down, despite our aggressive sales incentives and pricing which were initiated in response to the slow-down. Various customers, channels and product lines have been impacted differently by the industry slow-down because of price points, geographies and various other factors. The decline in sales is attributable to decreases in sales in all divisions, with Mid Continent making up just over half of the overall decrease in net sales, StarMark making up just over a quarter and UltraCraft making up the remainder.
Cost of Sales. Cost of sales decreased by $14.5 million, or 24.6%, from $58.9 million for the three months ended September 30, 2008 to $44.4 million for same period of 2009. The decrease was primarily attributable to our decreased sales volume. Cost of sales as a percentage of net sales decreased from 70.1% for the three months ended September 30, 2008 to 68.6% for the same period of 2009.
Gross Profit. Gross profit decreased by $4.8 million, or 19.3%, from $25.1 million for the three months ended September 30, 2008 to $20.3 million for the same period of 2009. Gross profit as a percentage of net sales increased from 29.9% for the three months ended September 30, 2008 to 31.4% for the same period of 2009. Gross profit was positively impacted primarily by a one-time sales and use tax refund in the amount of $1.1 million.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $3.1 million, or 20.8%, from $15.1 million for the three months ended September 30, 2008 to $12.0 million for the same period of 2009. Selling, general and administrative expenses were lower than the prior-year period mainly due to lower sales and marketing expenses. Selling, general and administrative expenses as a percentage of net sales increased from 17.9% for the three months ended September 30, 2008 to 18.5% for the same period of 2009.
19
Table of Contents
Income from Operations. Income from operations decreased by $1.7 million, or 17.0%, from $10.0 million for the three months ended September 30, 2008 compared to $8.3 million for the same period of 2009. The decrease in income from operations was a result of factors described above. Income from operations as a percentage of net sales increased from 12.0% for the three months ended September 30, 2008 to 12.9% for the same period of 2009.
Interest, Amortization of Deferred Financing Fees and Other Expenses. Holdings consolidated interest, amortization of deferred financing fees and other expenses increased by $0.1 million, or 1.3%, from $6.5 million for the three months ended September 30, 2008 to $6.6 million for the same period of 2009. Interest expense increased $0.2 million due to less interest income net against interest expense. The average debt balance was $266.2 million and $268.0 million during the three months ended September 30, 2009 and 2008, respectively. The borrowing rates on the Senior Subordinated Notes and the Senior Discount Notes are fixed at 9.0% and 9.75%, respectively. Amortization of deferred financing charges decreased by $0.1 million from $0.4 million for the three months ended September 30, 2008 to $0.3 million for the same period of 2009. Interest, amortization of deferred financing fees and other expenses for Holdings as a percentage of net sales increased from 7.1% for the three months ended September 30, 2008 to 10.9% for the same period of 2009.
Interest, amortization of deferred financing fees and other expenses increased for Norcraft by $0.1 million, or 2.0%, from $3.5 million for the three months ended September 30, 2008 to $3.6 million for the same period of 2009. Interest, amortization of deferred financing fees and other expenses for Norcraft as a percentage of net sales increased from 4.3% for the three months ended September 30, 2008 to 5.6% for the same period of 2009.
Net Income (Loss). Holdings net income (loss) decreased by $1.8 million from $3.5 million for the three months ended September 30, 2008 compared to $1.7 million for the same period of 2009, for the reasons described above. Net income as a percentage of net sales for Holdings decreased from 4.2% for the three months ended September 30, 2008 to 2.6% for the same period of 2009.
Norcrafts net income decreased $1.8 million from $6.5 million for the three months ended September 30, 2008 compared to $4.7 million for the same period of 2009, for the reasons described above. Net income (loss) as a percentage of net sales for Norcraft decreased from 7.7% for the three months ended September 30, 2008 to 7.3% for the same period of 2009.
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
Net Sales. Net sales decreased by $77.9 million, or 29.4%, from $264.8 million for the nine months ended September 30, 2008 to $186.9 million for the same period of 2009. The decrease in sales has primarily been caused by the industry-wide slow-down in the U.S. housing market and general economic slow-down, despite our aggressive sales incentives and pricing which were initiated in response to the slow-down. Various customers, channels and product lines have been impacted differently by the industry slow-down because of price points, geographies and various other factors. The decline in sales is attributable to decreases in sales in all divisions, with Mid Continent making up just over half of the overall decrease in net sales, StarMark making up just over a quarter and UltraCraft making up the remainder.
Cost of Sales. Cost of sales decreased by $53.5 million, or 28.7%, from $186.7 million for the nine months ended September 30, 2008 to $133.2 million for same period of 2009. The decrease was primarily attributable to our decreased sales volume. Cost of sales as a percentage of net sales increased from 70.5% for the nine months ended September 30, 2008 to 71.2% for the same period of 2009.
Gross Profit. Gross profit decreased by $24.4 million, or 31.2%, from $78.1 million for the nine months ended September 30, 2008 to $53.7 million for the same period of 2009. Gross profit as a percentage of net sales decreased from 29.5% for the nine months ended September 30, 2008 to 28.8% for the same period of 2009. Gross profit margin was negatively impacted primarily by lost leverage on reduced sales volume and fixed manufacturing costs. Additionally, aggressive sales incentives and pricing in response to the slow-down in our market and the general economy also reduced gross profit margin. However, in the third quarter of 2009, gross profit was positively impacted by a one-time sales and use tax refund in the amount of $1.1 million.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $12.2 million, or 24.7%, from $49.3 million for the nine months ended September 30, 2008 to $37.1 million for the same period of 2009. Selling, general and administrative expenses were lower than the prior-year period mostly due to lower sales and marketing expenses. Selling, general and administrative expenses as a percentage of net sales increased from 18.6% for the nine months ended September 30, 2008 to 19.9% for the same period of 2009.
20
Table of Contents
Income from Operations. Income from operations decreased by $12.2 million, or 42.5%, from $28.8 million for the nine months ended September 30, 2008 compared to $16.6 million for the same period of 2009. The decrease in income from operations was a result of factors described above. Income from operations as a percentage of net sales decreased from 10.9% for the nine months ended September 30, 2008 to 8.9% for the same period of 2009.
Interest, Amortization of Deferred Financing Fees and Other Expenses. Holdings consolidated interest, amortization of deferred financing fees and other expenses increased by $1.2 million, or 6.0%, from $19.6 million for the nine months ended September 30, 2008 to $20.8 million for the same period of 2009. Interest expense increased $0.6 million from increased indebtedness, mainly attributable to the increase in the Senior Discount Notes due to accretion. The average debt balance was $266.2 million and $265.3 million during the nine months ended September 30, 2009 and 2008, respectively. The borrowing rates on the Senior Subordinated Notes and the Senior Discount Notes are fixed at 9.0% and 9.75%, respectively. Amortization of deferred financing charges increased $0.7 million related to the termination of the Amended and our senior secured credit facility. Interest, amortization of deferred financing fees and other expenses for Holdings as a percentage of net sales increased from 7.4% for the nine months ended September 30, 2008 to 11.2% for the same period of 2009.
Interest, amortization of deferred financing fees and other expenses increased for Norcraft by $1.0 million, or 8.7%, from $10.8 million for the nine months ended September 30, 2008 to $11.8 million for the same period of 2009. Interest, amortization of deferred financing fees and other expenses for Norcraft as a percentage of net sales increased from 4.1% for the nine months ended September 30, 2008 to 6.3% for the same period of 2009.
Net Income (Loss). Holdings net income (loss) decreased by $13.4 million from $9.2 million for the nine months ended September 30, 2008 compared to a loss of $4.2 million for the same period of 2009, for the reasons described above. Net income (loss) as a percentage of net sales for Holdings decreased from 3.5% for the nine months ended September 30, 2008 to (2.3)% for the same period of 2009.
Norcrafts net income decreased $13.2 million from $18.0 million for the nine months ended September 30, 2008 compared to $4.8 million for the same period of 2009, for the reasons described above. Net income as a percentage of net sales for Norcraft decreased from 6.8% for the nine months ended September 30, 2008 to 2.6% for the same period of 2009.
Liquidity and Capital Resources
Cash Flows
Our primary cash needs are working capital, capital expenditures, display cabinets, members tax distributions and debt service. We finance these cash requirements through internally-generated cash flow.
Cash provided by operating activities of Holdings was $10.7 million for the nine months ended September 30, 2009, compared with $36.9 million for the same period of 2008, a decrease of $26.2 million. The decrease was primarily due to a decrease in net income (loss) of $13.4 million as discussed above, $7.2 million less accreted interest borrowings on senior notes through September 30, 2009 compared to September 30, 2008, a change in cash used by operating assets of $1.7 million and a change in cash used by operating liabilities of $2.4 million.
Cash provided by operating activities of Norcraft was $22.2 million for the nine months ended September 30, 2009, compared with $37.1 million for the same period of 2008, a decrease of $14.9 million. The decrease was primarily due to a decrease in net income (loss) of $13.2 million as discussed above.
Cash used in investing activities was $4.7 million for the nine months ended September 30, 2009, compared with $5.8 million for the same period of 2008, a decrease of $1.1 million. Capital expenditures were $1.8 million for the nine months ended September 30, 2009, compared with $2.4 million for the same period of 2008, a decrease of $0.6 million. Also, additions to display cabinets were $2.9 million for the nine months ended September 30, 2009, compared with $3.4 million for the same period of 2008, a decrease of $0.5 million.
Cash used in financing activities of Holdings was $6.1 million for the nine months ended September 30, 2009, compared with $4.4 million used in the same period of 2008, an increase of $1.7 million. This increase was mostly due to a transfer to restricted cash of $5.6 million, offset by lower distributions to members of $2.3 million and lower payments on term loans to former equity holders of $1.5 million.
Cash used in financing activities of Norcraft was $21.8 million for the nine months ended September 30, 2009, compared with $4.6 million used in the same period of 2008, an increase of $17.2 million. This increase was mostly due to distributions to members of $11.7 million and a transfer to restricted cash of $5.6 million. The $5.6 million is used to collateralize approximately $5.4 million in outstanding letters of credit.
21
Table of Contents
Debt Structure
We have $266.0 million of outstanding debt, consisting of $148.0 million in Senior Subordinated Notes (with semi-annual interest payments at 9%) and $118.0 million in Senior Discount Notes (due in 2012, with interest payable at 9.75%). Please see Part I, Item 1, Notes to Consolidated Financial Statements, Note 8, Long Term Debt for details.
Norcraft had an amended senior credit facility which contained covenants, which, among other things, limited: (i) additional indebtedness; (ii) dividends; (iii) capital expenditures and (iv) acquisitions, mergers and consolidations. Indebtedness under the amended senior credit facility was secured by substantially all of Norcrafts assets, including its real and personal property, inventory, accounts receivable, intellectual property and other intangibles. The facility also contained certain financial covenants, including maximum leverage ratio, minimum interest coverage ratio and minimum fixed charge coverage ratio. On March 27, 2009, we elected to terminate the senior secured credit facility.
On October 21, 2003, Norcraft and Norcraft Finance Corp., a 100% owned finance subsidiary of Norcraft, issued, on a joint and several basis, $150 million, 9% senior subordinated notes due in 2011 (the Senior Subordinated Notes). Norcraft Finance Corp. was formed on September 26, 2003 and has no operations. Interest accrues on the Senior Subordinated Notes and is payable semiannually on May 1 and November 1 of each year at a rate of 9% per annum. The Senior Subordinated Notes are subordinated to all existing and future senior debt.
Norcraft has the option to redeem the notes, in whole or part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest. On August 21, 2007, Norcraft repurchased and cancelled $2.0 million of its Senior Subordinated Notes at a purchase price of $2.0 million plus accrued interest of $55,000.
If Norcraft experiences a change of control, we may be required to offer to purchase the Senior Subordinated Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest.
Additionally, the terms of the indenture governing the Senior Subordinated Notes limit the Companys ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions. As of September 30, 2009, the Company was in compliance with these requirements.
On August 17, 2004, Holdings and Norcraft Capital Corp., a 100% owned finance subsidiary of Holdings, issued, on a joint and several basis, $118.0 million aggregate principal amount at maturity ($80.3 million gross proceeds) of 9 3/4% Senior Discount Notes due 2012. The net proceeds of this offering were used to make a distribution to Holdings limited partners. Norcraft Capital Corp. was formed on August 12, 2004 and has no operations. Interest accrued on the Senior Discount Notes in the form of an increase in the accreted value of the note prior to September 1, 2008. Since that time, cash interest on the Senior Discount Notes accrues and is payable semiannually in arrears on March 1 and September 1 of each year at a rate of 9 3/4% per annum. The first cash interest payment was made on March 1, 2009. Holdings has no independent operating assets or liabilities other than its investment in its subsidiaries.
Holdings may redeem the Senior Discount Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium, declining ratably to par, plus accrued and unpaid interest.
If Holdings experiences a change in control, it may be required to offer to purchase the Senior Discount Notes at a purchase price equal to 101% of the accreted value plus accrued and unpaid interest.
Additionally, the terms of the indenture governing the Senior Discount Notes limit Holdings ability to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and make various other payments. The terms also include cross-default provisions. As of September 30, 2009, the Company was in compliance with these requirements.
Holdings currently relies on distributions from Norcraft in order to pay cash interest on the Senior Discount Notes. In March 2009, Norcraft distributed approximately $5.7 million to Holdings to enable it to make cash interest payments on the Senior Discount Notes. On April 3, 2009, Norcraft distributed an additional $10.0 million to Holdings to enable it to make future cash interest payments on the Senior Discount Notes. On September 1, 2009, a cash interest payment of approximately $5.7 million was made for the Senior Discount Notes out of the $10.0 million. Pursuant to restrictions in the indenture governing the Senior Subordinated Notes, subject to certain exceptions, Norcraft is generally limited to making distributions to Holdings and its equity holders equal to approximately 50% of Norcrafts cumulative consolidated net income, and up to an additional $10.0 million of other distributions. The previous distributions have been made pursuant to the cumulative consolidated net income test. However, the incurrence of the impairment charge with respect to goodwill and other intangibles described above will result in Norcrafts cumulative consolidated net income (after considering previous distributions) being negative
22
Table of Contents
for the foreseeable future and therefore, significantly restrict the amount of cash that Norcraft may distribute to Holdings and its equity holders. We currently anticipate that such permitted distributions, together with funds from the recent distribution made to Holdings, will be sufficient to allow Holdings to make cash interest payments on the Senior Discount Notes through the end of 2010. No assurances can be made that such distributions will be available, however, and if Norcraft is not permitted to make additional cash distributions to Holdings, Holdings will be required to raise additional proceeds through equity or debt financings in order to fund such obligations. Such financing may not be available on terms acceptable to us or at all.
We continually explore various sources of liquidity to ensure financing flexibility, including issuing new or refinancing existing debt, and raising equity through private or public offerings. We anticipate that the funds generated by operations and current available cash balances will be sufficient to meet working capital requirements, make required member tax distributions and to finance capital expenditures over the next 12 to 18 months. There can be no assurance, however, that our business will generate sufficient cash flow from operations, that anticipated net sales growth and operating improvements will be realized or that future equity or debt financing will be sufficient to enable us to service our indebtedness or to fund our other liquidity needs.
Taxes; Distributions to our Limited Partners
We are a limited partnership. As such, our income is allocated to our limited partners for inclusion in their respective tax returns. Accordingly, no liability or provision for federal income taxes and deferred income taxes attributable to our operations are included in our financial statements. We are subject to various state and local taxes.
The indenture governing the Senior Subordinated Notes significantly restrict Norcraft and its subsidiaries from paying dividends and otherwise transferring assets to Holdings. Norcraft may, however, make distributions to Holdings, subject to certain limitations, to permit it to make further distributions to its equity holders to pay taxes on our net income allocated to them.
Inflation; Seasonality
Our costs of sales are subject to inflationary pressures and price fluctuations of the raw materials we use. We have generally been able over time to recover the effects of inflation and price fluctuations through sales price increases.
Our sales have historically been moderately seasonal and have been strongest in April through October which coincides with construction seasonality.
Critical Accounting Polices
In our Annual Report on Form 10-K for the year ended December 31, 2008, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors. The estimates and assumptions are evaluated on an ongoing basis and actual results have been within the Companys expectations. We have not changed these policies from those previously disclosed in our annual report.
During the fourth quarter of 2008, our actual earnings and expected future earnings decreased to a level that required us to perform additional analysis under ASC 350, Intangibles Goodwill and Other, to quantify the amount of impairment of goodwill and other intangible assets. This analysis resulted in a total impairment charge of $73.9 million, of which, $60.0 million was attributable to goodwill and $13.9 million was attributable to brand names. Based on updated assessments, the Company has determined that there are no impairments to be recorded during the third quarter or nine months ended September 30, 2009.
Item 3. | Quantitative and Qualitative Disclosures of Market Risk |
The Company had a $60.0 million revolving credit facility which had a variable rate of interest and had the potential to expose the Company to fluctuations in the interest rate market. On March 27, 2009, the Company elected to terminate this facility.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures as of September 30, 2009. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of September 30, 2009 to provide reasonable assurance that the
23
Table of Contents
information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and also for the purpose of ensuring that material information required to be in the reports is made known to management and others, as appropriate, to allow timely decisions regarding required disclosures.
Limitations on the Effectiveness of Controls
The Companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
As part of our evaluation of the effectiveness of internal controls over financial reporting described above, we made certain improvements to our internal controls. However, there were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
Table of Contents
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
During the ordinary course of business, we have become and may in the future become subject to pending and threatened legal actions and proceedings. All of the current legal actions and proceedings that we are a party to are of an ordinary or routine nature incidental to our operations, the resolution of which should not have a material adverse effect on our financial condition, results of operations or cash flows. We are not currently a party to any product liability claims. The majority of the pending legal proceedings involve claims for workers compensation. These claims are generally covered by insurance, but there can be no assurance that our insurance coverage will be adequate to cover any such liability.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. The materialization of any risks and uncertainties identified in Part I, Item 2, Uncertainty of Forward Looking Statements and Information contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows.
Item 6. | Exhibits |
31.1 | Certification by Mark Buller pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by Leigh Ginter pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by Mark Buller pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification by Leigh Ginter pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
25
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORCRAFT HOLDINGS, L.P. | ||
(Registrant) | ||
NORCRAFT COMPANIES, L.P. | ||
(Registrant) | ||
/S/ MARK BULLER |
/S/ LEIGH GINTER | |
Mark Buller | Leigh Ginter | |
Chief Executive Officer | Chief Financial Officer | |
Date: November 9, 2009 | Date: November 9, 2009 | |
Signing on behalf of the Registrant and as Principal Executive Officer | Signing on behalf of the Registrant and as Principal Accounting Officer |
26