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 |
June 30, 2011 For the quarterly period ended June 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 333-114924
Norcraft Companies, L.P.
(Exact name of registrant as specified in its charter)
Delaware | 36-4231718 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | 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 registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ 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 x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Table of Contents
Norcraft Companies, L.P.
Page | ||||
PART I |
FINANCIAL INFORMATION | |||
Item 1. |
Unaudited Condensed Consolidated Financial Statements | |||
Consolidated Balance Sheet at June 30, 2011 and December 31, 2010 |
3 | |||
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 |
4 | |||
5 | ||||
Consolidated Statement of Cash Flows for the six months ended June 30, 2011 and 2010 |
6 | |||
7 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
Item 3. |
Quantitative and Qualitative Disclosures of Market Risk | 21 | ||
Item 4. |
Controls and Procedures | 21 | ||
PART II |
OTHER INFORMATION | |||
Item 1. |
Legal Proceedings | 22 | ||
Item 1A. |
Risk Factors | 22 | ||
Item 6. | Exhibits | 22 | ||
23 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheet
(dollar amounts in thousands)
June 30, 2011 (unaudited) |
December 31, 2010 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,753 | $ | 28,657 | ||||
Trade accounts receivable, net |
24,447 | 17,982 | ||||||
Inventories |
19,468 | 17,363 | ||||||
Prepaid and other current assets |
1,705 | 1,558 | ||||||
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|
|
|
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Total current assets |
68,373 | 65,560 | ||||||
Property, plant and equipment, net |
28,864 | 30,199 | ||||||
Other assets: |
||||||||
Goodwill |
88,490 | 88,483 | ||||||
Intangible assets, net |
81,210 | 76,379 | ||||||
Display cabinets, net |
5,584 | 5,016 | ||||||
Other |
665 | 754 | ||||||
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Total other assets |
175,949 | 170,632 | ||||||
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Total assets |
$ | 273,186 | $ | 266,391 | ||||
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LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,829 | $ | 7,678 | ||||
Accrued expenses |
15,476 | 16,200 | ||||||
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Total current liabilities |
25,305 | 23,878 | ||||||
Long-term debt |
240,000 | 180,000 | ||||||
Unamortized premium (discount) on bonds payable |
186 | (2,414 | ) | |||||
Other liabilities |
163 | 153 | ||||||
Commitments and contingencies |
| | ||||||
Members equity |
7,532 | 64,774 | ||||||
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Total liabilities and members equity |
$ | 273,186 | $ | 266,391 | ||||
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See notes to consolidated financial statements.
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Consolidated Statements of Operations
(dollar amounts in thousands)
(unaudited)
Three Months
Ended June 30, |
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2011 | 2010 | |||||||
Net sales |
$ | 75,037 | $ | 74,107 | ||||
Cost of sales |
53,823 | 51,321 | ||||||
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Gross profit |
21,214 | 22,786 | ||||||
Selling, general and administrative expenses |
13,470 | 13,519 | ||||||
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Income from operations |
7,744 | 9,267 | ||||||
Other expense: |
||||||||
Interest expense, net |
5,628 | 5,006 | ||||||
Amortization of deferred financing costs |
501 | 341 | ||||||
Other, net |
28 | 43 | ||||||
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Total other expense |
6,157 | 5,390 | ||||||
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Net income |
$ | 1,587 | $ | 3,877 | ||||
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Six Months
Ended June 30, |
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2011 | 2010 | |||||||
Net sales |
$ | 139,225 | $ | 135,940 | ||||
Cost of sales |
101,408 | 95,938 | ||||||
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Gross profit |
37,817 | 40,002 | ||||||
Selling, general and administrative expenses |
25,830 | 26,190 | ||||||
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Income from operations |
11,987 | 13,812 | ||||||
Other expense: |
||||||||
Interest expense, net |
10,655 | 10,051 | ||||||
Amortization of deferred financing costs |
871 | 654 | ||||||
Other, net |
52 | 73 | ||||||
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Total other expense |
11,578 | 10,778 | ||||||
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Net income |
$ | 409 | $ | 3,034 | ||||
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See notes to consolidated financial statements.
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Consolidated Statement of Changes in Members Equity and Comprehensive Income
(dollar amounts in thousands)
(unaudited)
Members Equity |
Total Comprehensive Income |
|||||||
Members equity at January 1, 2011 |
$ | 64,774 | ||||||
Issuance of members interest |
90 | |||||||
Stock compensation expense |
90 | |||||||
Distributions to member |
(58,015 | ) | ||||||
Foreign currency translation adjustment |
184 | 184 | ||||||
Net income |
409 | 409 | ||||||
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Total comprehensive income |
$ | 593 | ||||||
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Members equity at June 30, 2011 |
$ | 7,532 | ||||||
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See notes to consolidated financial statements.
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Consolidated Statement of Cash Flows
(dollar amounts in thousands)
(unaudited)
Six Months Ended June 30, |
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2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 409 | $ | 3,034 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of property, plant and equipment |
2,557 | 2,920 | ||||||
Amortization: |
||||||||
Customer relationships |
2,234 | 2,234 | ||||||
Deferred financing costs |
871 | 654 | ||||||
Display cabinets |
1,962 | 2,191 | ||||||
Discount amortization/accreted interest |
200 | 244 | ||||||
Provision for uncollectible accounts receivable |
50 | (19 | ) | |||||
Provision for obsolete and excess inventories |
16 | 205 | ||||||
Provision for warranty claims |
1,392 | 1,343 | ||||||
Stock compensation expense |
90 | 93 | ||||||
Loss (gain) on disposal of assets |
2 | (46 | ) | |||||
Change in operating assets and liabilities: |
||||||||
Trade accounts receivable |
(6,447 | ) | (5,399 | ) | ||||
Inventories |
(2,087 | ) | (2,191 | ) | ||||
Prepaid expenses |
(140 | ) | (19 | ) | ||||
Other assets |
85 | 21 | ||||||
Accounts payable and accrued expenses |
272 | 3,680 | ||||||
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Net cash provided by operating activities |
1,466 | 8,945 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of property and equipment |
4 | 47 | ||||||
Purchase of property, plant and equipment |
(1,337 | ) | (1,186 | ) | ||||
Additions to display cabinets |
(2,530 | ) | (2,144 | ) | ||||
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Net cash used in investing activities |
(3,863 | ) | (3,283 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings on senior secured second lien notes payable |
62,400 | | ||||||
Payment of financing costs |
(7,936 | ) | (512 | ) | ||||
Proceeds from issuance of member interests |
90 | 125 | ||||||
Distributions to member |
(58,015 | ) | | |||||
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Net cash used in financing activities |
(3,461 | ) | (387 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
(46 | ) | (19 | ) | ||||
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Net increase (decrease) in cash and cash equivalents |
(5,904 | ) | 5,256 | |||||
Cash and cash equivalents, beginning of the period |
28,657 | 16,731 | ||||||
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Cash and cash equivalents, end of period |
$ | 22,753 | $ | 21,987 | ||||
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Supplemental disclosure of non-cash transactions: |
||||||||
Purchase of property, plant and equipment with consideration other than cash |
$ | | $ | 201 |
See notes to consolidated financial statements.
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Table of Contents
Notes to Consolidated Financial Statements
(in thousands)
(unaudited)
1. | Basis of Presentation |
The accompanying financial statements are those of Norcraft Companies, L.P. (Norcraft). Norcraft and its subsidiaries are collectively referred to as the Company. Norcraft Holdings, L.P (Holdings) is the parent company 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, 2010, as filed with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of June 30, 2011 and 2010 and for the three and six months ended June 30, 2011 and 2010 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.
2. | Trade Accounts Receivable |
Trade accounts receivable consists of the following:
June
30, 2011 |
December
31, 2010 |
|||||||
Trade accounts receivable |
$ | 25,393 | $ | 19,108 | ||||
Less: Allowance for uncollectible accounts |
(946 | ) | (1,126 | ) | ||||
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Trade accounts receivable, net |
$ | 24,447 | $ | 17,982 | ||||
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3. | Inventories |
Inventories consist of the following:
June
30, 2011 |
December
31, 2010 |
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Raw materials and supplies |
$ | 12,232 | $ | 12,312 | ||||
Work in process |
2,582 | 2,186 | ||||||
Finished goods |
4,654 | 2,865 | ||||||
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$ | 19,468 | $ | 17,363 | |||||
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4. | Intangible Assets |
Intangible assets consist of the following:
June 30, 2011 | ||||||||||||||||
Subject to Amortization | ||||||||||||||||
Not Subject to Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Total | |||||||||||||
Goodwill |
$ | 88,490 | $ | 88,490 | ||||||||||||
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Brand names |
$ | 35,100 | $ | 35,100 | ||||||||||||
Customer relationships |
67,000 | (34,369 | ) | 32,631 | ||||||||||||
Deferred financing costs |
15,800 | (2,321 | ) | 13,479 | ||||||||||||
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$ | 35,100 | $ | 82,800 | $ | (36,690 | ) | $ | 81,210 | ||||||||
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December 31, 2010 | ||||||||||||||||
Subject to Amortization | ||||||||||||||||
Not Subject to Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Total | |||||||||||||
Goodwill |
$ | 88,483 | $ | 88,483 | ||||||||||||
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Brand names |
$ | 35,100 | $ | 35,100 | ||||||||||||
Customer relationships |
67,000 | (32,135 | ) | 34,865 | ||||||||||||
Deferred financing costs |
7,864 | (1,450 | ) | 6,414 | ||||||||||||
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$ | 35,100 | $ | 74,864 | $ | (33,585 | ) | $ | 76,379 | ||||||||
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There were no events or circumstances during the three or six months ended June 30, 2011 to indicate that the following assets not subject to amortization should be evaluated for potential impairment.
5. | Accrued Expenses |
Accrued expenses consist of the following:
June
30, 2011 |
December
31, 2010 |
|||||||
Salaries, wages and employee benefits |
$ | 6,479 | $ | 8,012 | ||||
Commissions, rebates and marketing programs |
2,791 | 2,497 | ||||||
Workers compensation |
2,025 | 1,875 | ||||||
Interest |
1,120 | 948 | ||||||
Other, including product warranty accruals |
3,061 | 2,868 | ||||||
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$ | 15,476 | $ | 16,200 | |||||
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Product warranty accrual activity is as follows:
June
30, 2011 |
June
30, 2010 |
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Beginning balance December 31 |
$ | 781 | $ | 494 | ||||
Accruals for warranties |
1,392 | 1,343 | ||||||
Claims paid |
(1,423 | ) | (1,158 | ) | ||||
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Ending balance June 30 |
$ | 750 | $ | 679 | ||||
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6. | Stock-Based Compensation |
The Company 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.
Previously, under the terms of the Plan, the Class D units generally began 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).
During the first quarter of 2010, the vesting terms for the outstanding Class D units were modified. The outstanding units, along with the newly issued units, now vest with time-based vesting over a three year period. In addition, certain units exercise prices were reduced to the fair market value of a Class A unit of Holdings. This modification was treated as forfeitures of the original units and new grants of the modified units. No compensation expense was recorded as a result of this modification.
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Table of Contents
Upon vesting, each Class D unit entitles the unit holder the option to purchase one Class A unit in Holdings. All Class D units are issued with an exercise price equal to the then fair value of Holdings Class A units as determined by the Company.
The fair value of the Class D units granted is based on the Black-Scholes option-pricing model. In accordance with Accounting Standards Codification (ASC) Topic 718, 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 and six months ended June 30, 2011.
Compensation expense related to Class D units was $0.05 million and $0.09 million for the three and six months ended June 30, 2010 and 2011, respectively. 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:
Six Months Ended June 30, 2011 |
||||||||
Units | Weighted-Average Exercise Price |
|||||||
Beginning balance |
6,811,577 | $ | 0.26 | |||||
Granted |
| |||||||
Forfeited/expired |
| |||||||
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Ending balance |
6,811,577 | $ | 0.26 | |||||
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Exercisable balance |
4,359,154 | $ | 0.20 | |||||
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The intrinsic values of the issued Class D units and exercisable Class D units at June 30, 2011 were $1.2 million and $1.0 million, respectively.
The Plan will terminate in December 2015.
7. | Long-term Debt |
Long-term debt consists of the following:
June
30, 2011 |
December
31, 2010 |
|||||||
Senior secured second lien notes payable (due in 2015 with semi-annual interest payments at 10.5%) |
$ | 240,000 | $ | 180,000 | ||||
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Long term debt |
$ | 240,000 | $ | 180,000 | ||||
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ABL Facility
In December 2009, in connection with the issuance of the senior secured second lien notes, Norcraft entered into a senior secured first-lien asset-based revolving credit facility (the ABL Facility) pursuant to a credit agreement dated as of December 9, 2009 (the ABL Credit Agreement) by and among Norcraft, as borrower, Norcraft Intermediate Holdings, L.P. and other guarantors party thereto, as guarantors, the lenders party thereto and UBS Securities LLC, as arranger, bookmanager, documentation agent and syndication agent, and UBS AG, Stamford Branch, as issuing bank, administrative agent and collateral agent and UBS Loan Finance LLC, as swingline lender. The ABL Facility provides for aggregate commitments of up to $25.0 million, including a letter of credit sub-facility and a swingline loan sub-facility, subject to a borrowing base, and has a maturity date of December 9, 2013. As of June 30, 2011, the borrowing base was approximately $20.5 million.
In May, 2011, the ABL Credit Agreement was modified and now has a maturity of September, 2015.
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Table of Contents
The ABL Credit Agreement contains negative covenants that restrict or limit the ability of Norcraft Intermediate Holdings, L.P. and its subsidiaries from, among other things, (1) selling assets, (2) altering the business that Norcraft currently conducts, (3) engaging in mergers, acquisitions and other business combinations, (4) declaring dividends or redeeming or repurchasing the Companys equity interests, (5) incurring additional debt or guarantees, (6) making loans and investments, (7) incurring liens, (8) entering into transactions with affiliates, (9) engaging in sale and leaseback transactions and (10) prepaying the senior secured second lien notes, the senior discount notes and any subordinated debt. As of June 30, 2011, the Company was in compliance with these provisions.
Indebtedness under the ABL Facility is guaranteed, on a joint and several basis, by Norcraft Intermediate Holdings, L.P., Norcraft Finance Corp., Norcraft Canada Corporation and all of Norcrafts current and future subsidiaries, subject to exceptions for foreign subsidiaries to the extent of adverse tax consequences, and is secured by a first priority security interest in substantially all of Norcrafts and the guarantors existing and future property and assets, including accounts receivable, inventory, equipment, general intangibles, intellectual property, investment property, other personal property, owned real property, cash and proceeds of the foregoing.
As of June 30, 2011, there were no borrowings outstanding, approximately $4.9 million of a letter of credit outstanding and unused commitments of $15.6 million under the ABL Facility.
The Company has no unused letters of credit.
Senior Secured Second Lien Notes
In December 2009, Norcraft and Norcraft Finance Corp., a 100% owned finance subsidiary of Norcraft, issued, on a joint and several basis, $180.0 million aggregate principal amount of 10 1/2% senior secured second lien notes (the senior secured second lien notes). Interest accrues on the senior secured second lien notes and is payable semiannually on June 15 and December 15 of each year at a rate of 10 1/2% per annum, which commenced on June 15, 2010. Proceeds from the issuance of the senior secured second lien notes were used to redeem the 9% senior subordinated notes due 2011 and to make a distribution to Holdings to allow Holdings to repurchase a portion of the 9 3/4% senior discount notes due 2012.
In May 2011, Norcraft and Norcraft Finance Corp. issued, on a joint and several basis, an additional $60.0 million aggregate principal amount of these senior secured second lien notes at a 1.04 premium, for total gross proceeds of $62.4 million. Proceeds from this issuance of the senior secured second lien notes were used to make a distribution to Holdings to allow Holdings to retire the remainder of its 9 3/4% senior discount notes due 2012 and pay related transaction and financing costs.
At any time before December 15, 2012, Norcraft may redeem up to 35% of the aggregate principal amount of the senior secured second lien notes issued under the indenture with the proceeds of qualified equity offerings at a redemption price equal to 110.5% of the principal amount, plus accrued interest.
Prior to December 15, 2012, Norcraft may redeem the senior secured second lien notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium plus accrued interest.
Norcraft may redeem the senior secured second lien notes, in whole or in part, at any time on or after December 15, 2012, at a redemption price equal to 100% of the principal amount of the senior secured second lien notes plus a premium declining ratably to par plus accrued interest.
If Norcraft experiences a change of control, Norcraft may be required to offer to purchase the senior secured second lien notes at a purchase price equal to 101% of the principal amount, plus accrued interest.
Additionally, the terms of the indenture governing the senior secured second lien notes limit Norcrafts 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 June 30, 2011, Norcraft was in compliance with these provisions.
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Table of Contents
The following represents certain condensed consolidating financial information as of June 30, 2011 and December 31, 2010 and for the periods ended June 30, 2011 and 2010 for the issuers and for Norcraft Canada Corporation, a wholly-owned subsidiary of Norcraft, which fully and unconditionally guarantees the senior secured second lien notes.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2011 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Current assets |
$ | 63,475 | $ | | $ | 4,898 | $ | | $ | 68,373 | ||||||||||
Property, plant & equipment, net |
22,207 | | 6,657 | | 28,864 | |||||||||||||||
Investments in subsidiary |
(793 | ) | | | 793 | | ||||||||||||||
Other assets |
186,336 | | 304 | (10,691 | ) | 175,949 | ||||||||||||||
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Total assets |
$ | 271,225 | $ | | $ | 11,859 | $ | (9,898 | ) | $ | 273,186 | |||||||||
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Current liabilities |
$ | 23,344 | $ | | $ | 1,961 | $ | | $ | 25,305 | ||||||||||
Long-term debt |
240,000 | | 10,691 | (10,691 | ) | 240,000 | ||||||||||||||
Unamortized premium on bonds payable |
186 | | | | 186 | |||||||||||||||
Other liabilities |
163 | | | | 163 | |||||||||||||||
Members equity (deficit) |
7,532 | | (793 | ) | 793 | 7,532 | ||||||||||||||
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Total liabilities & members equity (deficit) |
$ | 271,225 | $ | | $ | 11,859 | $ | (9,898 | ) | $ | 273,186 | |||||||||
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As of December 31, 2010 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Current assets |
$ | 61,246 | $ | | $ | 4,314 | $ | | $ | 65,560 | ||||||||||
Property, plant & equipment, net |
23,535 | | 6,664 | | 30,199 | |||||||||||||||
Investments in subsidiary |
(302 | ) | | | 302 | | ||||||||||||||
Other assets |
180,225 | | 304 | (9,897 | ) | 170,632 | ||||||||||||||
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Total assets |
$ | 264,704 | $ | | $ | 11,282 | $ | (9,595 | ) | $ | 266,391 | |||||||||
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Current liabilities |
$ | 22,191 | $ | | $ | 1,687 | $ | | $ | 23,878 | ||||||||||
Long-term debt |
180,000 | | 9,897 | (9,897 | ) | 180,000 | ||||||||||||||
Unamortized discount on bonds payable |
(2,414 | ) | | | | (2,414 | ) | |||||||||||||
Other liabilities |
153 | | | | 153 | |||||||||||||||
Members equity (deficit) |
64,774 | | (302 | ) | 302 | 64,774 | ||||||||||||||
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|
|
|||||||||||
Total liabilities & members equity (deficit) |
$ | 264,704 | $ | | $ | 11,282 | $ | (9,595 | ) | $ | 266,391 | |||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Co-issuers |
11
Table of Contents
CONDENSED CONSOLIDATED OPERATIONS STATEMENTS
For the Three Months Ended June 30, 2011 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Net sales |
$ | 70,992 | $ | | $ | 5,162 | $ | (1,117 | ) | $ | 75,037 | |||||||||
Cost of sales |
50,528 | | 4,412 | (1,117 | ) | 53,823 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
20,464 | | 750 | | 21,214 | |||||||||||||||
Equity in earnings (losses) of subsidiary |
(242 | ) | | | 242 | | ||||||||||||||
Selling, general and administrative expenses |
12,501 | | 969 | | 13,470 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from operations |
7,721 | | (219 | ) | 242 | 7,744 | ||||||||||||||
Other expense: |
||||||||||||||||||||
Interest expense, net |
5,609 | | 19 | | 5,628 | |||||||||||||||
Amortization of deferred financing costs |
501 | | | | 501 | |||||||||||||||
Other, net |
24 | | 4 | | 28 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
6,134 | | 23 | | 6,157 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 1,587 | $ | | $ | (242 | ) | $ | 242 | $ | 1,587 | |||||||||
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2010 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Net sales |
$ | 69,592 | $ | | $ | 5,299 | $ | (784 | ) | $ | 74,107 | |||||||||
Cost of sales |
47,579 | | 4,526 | (784 | ) | 51,321 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
22,013 | | 773 | | 22,786 | |||||||||||||||
Equity in earnings (losses) of subsidiary |
77 | | | (77 | ) | | ||||||||||||||
Selling, general and administrative expenses |
12,834 | | 685 | | 13,519 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from operations |
9,256 | | 88 | (77 | ) | 9,267 | ||||||||||||||
Other expense: |
||||||||||||||||||||
Interest expense, net |
4,992 | | 14 | | 5,006 | |||||||||||||||
Amortization of deferred financing costs |
341 | | | | 341 | |||||||||||||||
Other, net |
46 | | (3 | ) | | 43 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
5,379 | | 11 | | 5,390 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 3,877 | $ | | $ | 77 | $ | (77 | ) | $ | 3,877 | |||||||||
|
|
|
|
|
|
|
|
|
|
12
Table of Contents
CONDENSED CONSOLIDATED OPERATIONS STATEMENTS
For the Six Months Ended June 30, 2011 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Net sales |
$ | 131,489 | $ | | $ | 9,611 | $ | (1,875 | ) | $ | 139,225 | |||||||||
Cost of sales |
94,828 | | 8,455 | (1,875 | ) | 101,408 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
36,661 | | 1,156 | | 37,817 | |||||||||||||||
Equity in earnings (losses) of subsidiary |
(675 | ) | | | 675 | | ||||||||||||||
Selling, general and administrative expenses |
24,031 | | 1,799 | | 25,830 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from operations |
11,955 | | (643 | ) | 675 | 11,987 | ||||||||||||||
Other expense: |
||||||||||||||||||||
Interest expense, net |
10,627 | | 28 | | 10,655 | |||||||||||||||
Amortization of deferred financing costs |
871 | | | | 871 | |||||||||||||||
Other, net |
48 | | 4 | | 52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
11,546 | | 32 | | 11,578 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 409 | $ | | $ | (675 | ) | $ | 675 | $ | 409 | |||||||||
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2010 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Net sales |
$ | 127,598 | $ | | $ | 9,850 | $ | (1,508 | ) | $ | 135,940 | |||||||||
Cost of sales |
88,845 | | 8,601 | (1,508 | ) | 95,938 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
38,753 | | 1,249 | | 40,002 | |||||||||||||||
Equity in earnings (losses) of subsidiary |
44 | | | (44 | ) | | ||||||||||||||
Selling, general and administrative expenses |
25,001 | | 1,189 | | 26,190 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from operations |
13,796 | | 60 | (44 | ) | 13,812 | ||||||||||||||
Other expense: |
||||||||||||||||||||
Interest expense, net |
10,032 | | 19 | | 10,051 | |||||||||||||||
Amortization of deferred financing costs |
654 | | | | 654 | |||||||||||||||
Other, net |
76 | | (3 | ) | | 73 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other expense, net |
10,762 | | 16 | | 10,778 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 3,034 | $ | | $ | 44 | $ | (44 | ) | $ | 3,034 | |||||||||
|
|
|
|
|
|
|
|
|
|
13
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2011 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Cash flows provided by (used in) operating activities |
$ | 1,509 | $ | | $ | (43 | ) | $ | | $ | 1,466 | |||||||||
Cash flows provided by (used in) investing activities |
(4,310 | ) | | (347 | ) | 794 | (3,863 | ) | ||||||||||||
Cash flows provided by (used in) financing activities |
(3,461 | ) | | 794 | (794 | ) | (3,461 | ) | ||||||||||||
Effect of exchange rates on cash and cash equivalents |
| | (46 | ) | | (46 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
(6,262 | ) | | 358 | | (5,904 | ) | |||||||||||||
Cash and cash equivalents, beginning of period |
28,705 | | (48 | ) | | 28,657 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, end of period |
$ | 22,443 | $ | | $ | 310 | $ | | $ | 22,753 | ||||||||||
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2010 (unaudited)
Norcraft Companies, L.P. (1) |
Norcraft Finance Corp. (1) |
Norcraft Canada |
Eliminations | Consolidated Norcraft Companies, L.P. |
||||||||||||||||
Cash flows provided by (used in) operating activities |
$ | 9,311 | $ | | $ | (366 | ) | $ | | $ | 8,945 | |||||||||
Cash flows provided by (used in) investing activities |
(3,083 | ) | | (571 | ) | 371 | (3,283 | ) | ||||||||||||
Cash flows provided by (used in) financing activities |
(387 | ) | | 371 | (371 | ) | (387 | ) | ||||||||||||
Effect of exchange rates on cash and cash equivalents |
| | (19 | ) | | (19 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
5,841 | | (585 | ) | | 5,256 | ||||||||||||||
Cash and cash equivalents, beginning of period |
15,791 | | 940 | | 16,731 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, end of period |
$ | 21,632 | $ | | $ | 355 | $ | | $ | 21,987 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Co-issuers |
We generally 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.
14
Table of Contents
8. | Recently Issued Accounting Pronouncements |
In December 2010, the FASB issued Accounting Standards Codification (ASU) No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 is effective for fiscal years and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 did not have a material effect on the Companys consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (IFRS), which amends ASC 820, Fair Value Measurement. This ASU modifies the existing standard to include disclosure of all transfers between Level 1 and Level 2 asset and liability fair value categories. In addition, the ASU provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. The ASU requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. The Company does not expect such adoption will have a material impact on the Companys consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this new ASU, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is effective for publicly traded companies as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. The Company does not expect such adoption will have a material impact on the Companys consolidated financial statements.
15
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 facts 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 2010 Annual Report on Form 10-K. All of our operations are conducted through Norcraft Companies, L.P. (Norcraft) and its subsidiaries. Norcraft is an indirect wholly-owned subsidiary of Norcraft Holdings, L.P. (Holdings). The words Company, we, us and our refer to Norcraft and its subsidiaries.
We are a leader in manufacturing, assembling and finishing kitchen and bathroom cabinetry in the U.S. We provide our customers with a single source for a broad range of high-quality cabinetry, including stock, semi-custom and custom cabinets manufactured in both framed and frameless, or full access construction. We market our products through six main brands: Mid Continent Cabinetry®, Norcraft Cabinetry®, UltraCraft®, StarMark Cabinetry®, Fieldstone Cabinetry® 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. Additionally, our Winnipeg, Canada facility sells cabinets into the Canadian market under the Norcraft Canada brand.
During the three and six months ended June 30, 2011, the number of incoming orders was relatively stable, but did not show much indication of growth or recovery in overall demand. We believe that the sales increases we did experience were largely the result of increases in our own market share.
16
Table of Contents
Results of Operations
The following table outlines for the periods indicated, selected operating data as a percentage of net sales.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
71.7 | % | 69.3 | % | 72.8 | % | 70.6 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
28.3 | % | 30.7 | % | 27.2 | % | 29.4 | % | ||||||||
Selling, general and administrative expenses |
18.0 | % | 18.2 | % | 18.6 | % | 19.2 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from operations |
10.3 | % | 12.5 | % | 8.6 | % | 10.2 | % | ||||||||
Interest expense, net |
7.5 | % | 6.7 | % | 7.7 | % | 7.4 | % | ||||||||
Amortization of deferred financing costs |
0.7 | % | 0.5 | % | 0.6 | % | 0.5 | % | ||||||||
Other, net |
0.0 | % | 0.1 | % | 0.0 | % | 0.1 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
2.1 | % | 5.2 | % | 0.3 | % | 2.2 | % | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Net Sales. Net sales increased by $0.9 million, or 1.3%, from $74.1 million for the three months ended June 30, 2010 to $75.0 million for the same period of 2011. This growth was attributable to the StarMark division while there were slight decreases in net sales in the Mid Continent division, and the Winnipeg, Canada facility. The increase in sales was generally driven by an increase in the Companys market share.
Cost of Sales. Cost of sales increased by $2.5 million, or 4.9%, from $51.3 million for the three months ended June 30, 2010 to $53.8 million for same period of 2011. Cost of sales in the prior year period included a sales and use tax refund of $1.0 million. The remaining increase was attributable to the increased sales volume along with aggressive sales incentives for the three months ended June 30, 2011. Cost of sales as a percentage of net sales increased from 69.3% for the three months ended June 30, 2010 to 71.7% for the same period of 2011.
Gross Profit. Gross profit decreased by $1.6 million, or 6.9%, from $22.8 million for the three months ended June 30, 2010 to $21.2 million for the same period of 2011. The decrease in gross profit was due to the increased cost of sales described above. Gross profit as a percentage of net sales decreased from 30.7% for the three months ended June 30, 2010 to 28.3% for the same period of 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were flat at $13.5 million for the three months ended June 30, 2010 and 2011. Selling, general and administrative expenses as a percentage of net sales decreased from 18.2% for the three months ended June 30, 2010 to 18.0% for the same period of 2011.
Income from Operations. Income from operations decreased by $1.6 million, or 16.4%, from $9.3 million for the three months ended June 30, 2010 compared to $7.7 million for the same period of 2011. The decrease in income from operations was a result of factors described above. Income from operations as a percentage of net sales decreased from 12.5% for the three months ended June 30, 2010 to 10.3% for the same period of 2011.
Interest, Amortization of Deferred Financing Fees and Other Expenses. Interest, amortization of deferred financing fees and other expenses increased by $0.7 million, or 14.2%, from $5.4 million for the three months ended June 30, 2010 to $6.1 million for the same period of 2011. Interest expense increased $0.6 million mainly due to new debt financing. Interest, amortization of deferred financing fees and other expenses as a percentage of net sales increased from 7.3% for the three months ended June 30, 2010 to 8.2% for the same period of 2011.
Net Income. Net income decreased $2.3 million from $3.9 million for the three months ended June 30, 2010 compared to $1.6 million for the same period of 2011, for the reasons described above. Net income as a percentage of net sales decreased from 5.2% for the three months ended June 30, 2010 to 2.1% for the same period of 2011.
17
Table of Contents
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Net Sales. Net sales increased by $3.3 million, or 2.4%, from $135.9 million for the six months ended June 30, 2010 to $139.2 million for the same period of 2011. This growth was attributable to the StarMark division while there were decreases in net sales in the Mid Continent division, the UltraCraft division and the Winnipeg, Canada facility. The increase in sales was generally driven by an increase in the Companys market share.
Cost of Sales. Cost of sales increased by $5.5 million, or 5.7%, from $95.9 million for the six months ended June 30, 2010 to $101.4 million for same period of 2011. Cost of sales in the prior year period included a sales and use tax refund of $1.0 million. The remaining increase was attributable to the increased sales volume along with aggressive sales incentives for the six months ended June 30, 2011. Cost of sales as a percentage of net sales increased from 70.6% for the six months ended June 30, 2010 to 72.8% for the same period of 2011.
Gross Profit. Gross profit decreased by $2.2 million, or 5.5%, from $40.0 million for the six months ended June 30, 2010 to $37.8 million for the same period of 2011. The decrease in gross profit was due to the increased cost of sales described above. Gross profit as a percentage of net sales decreased from 29.4% for the six months ended June 30, 2010 to 27.2% for the same period of 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.4 million, or 1.4%, from $26.2 million for the six months ended June 30, 2010 to $25.8 million for the same period of 2011. Selling, general and administrative expenses were lower than the prior-year period because of lower corporate overhead expenses. Selling, general and administrative expenses as a percentage of net sales decreased from 19.2% for the six months ended June 30, 2010 to 18.6% for the same period of 2011.
Income from Operations. Income from operations decreased by $1.8 million, or 13.2%, from $13.8 million for the six months ended June 30, 2010 compared to $12.0 million for the same period of 2011. The decrease in income from operations was a result of factors described above. Income from operations as a percentage of net sales decreased from 10.2% for the six months ended June 30, 2010 to 8.6% for the same period of 2011.
Interest, Amortization of Deferred Financing Fees and Other Expenses. Interest, amortization of deferred financing fees and other expenses increased by $0.8 million, or 7.4%, from $10.8 million for the six months ended June 30, 2010 to $11.6 million for the same period of 2011. Interest expense increased $0.6 million mainly due to new debt financing. Interest, amortization of deferred financing fees and other expenses as a percentage of net sales increased from 8.0% for the six months ended June 30, 2010 to 8.3% for the same period of 2011.
Net Income. Net income decreased $2.6 million from $3.0 million for the six months ended June 30, 2010 compared to $0.4 million for the same period of 2011, for the reasons described above. Net income as a percentage of net sales decreased from 2.2% for the six months ended June 30, 2010 to 0.3% for the same period of 2011.
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 and, if necessary, funds borrowed under credit facilities.
Cash provided by operating activities was $1.5 million for the six months ended June 30, 2011, compared with $8.9 million for the same period of 2010, a decrease in cash provided of $7.4 million. The decrease was primarily due to a change in operating liabilities of $3.4 million, a change in operating assets of $1.0 million and a decrease in net income of $2.6 million as discussed above.
Cash used in investing activities was $3.9 million for the six months ended June 30, 2011, compared with $3.3 million for the same period of 2010, an increase in cash used of $0.6 million. Capital expenditures were $1.4 million for the six months ended June 30, 2011, compared with $1.2 million for the same period of 2010, an increase of $0.2 million. Additions to display cabinets were $2.5 million for the six months ended June 30, 2011, compared with $2.1 million for the same period of 2010, an increase of $0.4 million.
Cash used in financing activities was $3.5 million for the six months ended June 30, 2011, compared with $0.4 million in the same period of 2010, an increase in cash used of $3.1 million. This increase was due to $58.0 million of distributions to members and payment in financing costs of $7.9 million during the six months ended June 30, 2011 compared to $0.5 million payment in financing costs during the six months ended June 30, 2010. This was all offset by $62.4 million ($60.0 million principal amount at 1.04 premium) in additional borrowings of senior secured second lien notes during the six months ended June 30, 2011.
18
Table of Contents
We generally 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.
We and our subsidiaries have from time to time repurchased certain of our debt obligations and may in the future, as part of various financing and investment strategies we may elect to pursue, purchase additional outstanding indebtedness of ours, in tender offers, open market purchases, privately negotiated transactions or otherwise. We may also sell certain assets or properties and use the proceeds to reduce our indebtedness or the indebtedness. These purchases or sales, if any, could have a material positive or negative impact on our liquidity available to repay outstanding debt obligations or on our consolidated results of operations. These transactions could also require or result in amendments to the agreements governing outstanding debt obligations or changes in our leverage or other financial ratios, which could have a material positive or negative impact on our ability to comply with the covenants contained in our debt agreements. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Debt Structure
ABL Facility. In December 2009, in connection with issuance of the senior secured second lien notes, Norcraft entered into a senior secured first-lien asset-based revolving credit facility, or the ABL facility pursuant to a Credit Agreement dated as of December 9, 2009, or the ABL credit agreement, by and among Norcraft, as borrower, Norcraft Intermediate Holdings, L.P. and other guarantors party thereto, as guarantors, the lenders party thereto and UBS Securities LLC, as arranger, bookmanager, documentation agent and syndication agent, and UBS AG, Stamford Branch, as issuing bank, administrative agent and collateral agent and UBS Loan Finance LLC, as swingline lender. The ABL facility provides for aggregate commitments of up to $25.0 million, including a letter of credit sub-facility and a swingline loan sub-facility, subject to a borrowing base, and has a maturity date of December 9, 2013. As of June 30, 2011, the borrowing base was approximately $20.5 million.
In May, 2011, the ABL Credit Agreement was modified and now has a maturity of September, 2015.
The ABL credit agreement contains negative covenants that restrict or limit the ability of Norcraft Intermediate Holdings, L.P. and its subsidiaries from, among other things, (1) selling assets, (2) altering the business that Norcraft currently conducts, (3) engaging in mergers, acquisitions and other business combinations, (4) declaring dividends or redeeming or repurchasing our equity interests, (5) incurring additional debt or guarantees, (6) making loans and investments, (7) incurring liens, (8) entering into transactions with affiliates, (9) engaging in sale and leaseback transactions and (10) prepaying the senior secured second lien notes, the senior discount notes and any subordinated debt. As of June 30, 2011, the Company was in compliance with these provisions.
Indebtedness under the ABL facility is guaranteed, on a joint and several basis, by Norcraft Intermediate Holdings, L.P., Norcraft Finance Corp., Norcraft Canada Corporation and all of Norcrafts current and future subsidiaries, subject to exceptions for foreign subsidiaries to the extent of adverse tax consequences, and is secured by a first priority security interest in substantially all of Norcrafts and the guarantors existing and future property and assets, including accounts receivable, inventory, equipment, general intangibles, intellectual property, investment property, other personal property, owned real property, cash and proceeds of the foregoing.
As of June 30, 2011, there were no borrowings outstanding, approximately $4.9 million in a letter of credit outstanding and unused commitments of $15.6 million under the ABL facility.
The Company has no unused letters of credit.
Senior Secured Second Lien Notes. In December 2009, Norcraft and Norcraft Finance Corp., a 100% owned finance subsidiary of Norcraft, issued, on a joint and several basis, $180.0 million aggregate principal amount of 10 1/2% senior secured second lien notes (the senior secured second lien notes). Interest accrues on the senior secured second lien notes and is payable semiannually on June 15 and December 15 of each year at a rate of 10 1/2% per annum, which commenced on June 15, 2010. Proceeds from the issuance of the senior secured second lien notes were used to redeem the 9% senior subordinated notes due 2011 and to make a distribution to Norcraft Holdings, L.P. (Holdings) to allow Holdings to repurchase a portion of the 9 3/4% senior discount notes due 2012.
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In May 2011, Norcraft and Norcraft Finance Corp. issued, on a joint and several basis, an additional $60.0 million aggregate principal amount of these senior secured second lien notes at a 1.04 premium, for total gross proceeds of $62.4 million. Proceeds from this issuance of the senior secured second lien notes were used to make a distribution to Holdings to allow Holdings to retire the remainder of its 9 3/4% senior discount notes due 2012 and pay related transaction and financing costs.
Prior to December 15, 2012, Norcraft may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium plus accrued interest.
At any time before December 15, 2012, Norcraft may redeem up to 35% of the aggregate principal amount of the senior secured second lien notes issued under the indenture with the offerings of proceeds of qualified equity offerings at a redemption price equal to 110.5% of the principal amount, plus accrued interest.
Norcraft may redeem the senior secured second lien notes, in whole or in part, at any time on or after December 15, 2012, at a redemption price equal to 100% of the principal amount of the senior secured second lien notes plus a premium declining ratably to par plus accrued interest.
If Norcraft experiences a change of control, Norcraft may be required to offer to purchase the senior secured second lien notes at a purchase price equal to 101% of the principal amount, plus accrued interest.
Additionally, the terms of the indenture governing the senior secured second lien notes limit Norcrafts 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 June 30, 2011, Norcraft was in compliance with these provisions.
Off balance sheet arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, capital expenditures or capital resources that are material to investors.
Taxes; Distributions to our Limited Partners
Norcraft Holdings, L.P (Holdings), our parent company, is a limited partnership. 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 our senior secured second lien notes significantly restricts Norcraft and its subsidiaries from paying dividends and otherwise transferring assets to Holdings. Norcraft expects to make regular distributions to Holdings, subject to certain limitations, to permit Holdings to make further distributions to its equity holders to pay taxes on our net income allocated to them. There was no tax distribution during the six months ended June 30, 2011.
Inflation; Seasonality
Our cost of sales is 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, 2010, 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.
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
We currently do not hedge against interest rate movements or foreign currency fluctuations. The risk inherent in our market-sensitive instruments and positions is the potential loss arising from adverse changes to interest rates as discussed below.
Variable Interest Rates
Our earnings could be affected by changes in interest rates due to the impact those changes would have on interest expense from variable rate debt instruments and on interest income generated from our cash and investment balances. At June 30, 2011, the Company had no borrowings on our variable rate ABL facility; however future earnings could be affected by changes in interest rates.
Foreign Currency
We have minimal exposure to market risk from changes in foreign currency exchange rates and interest rates that could affect our results of operations and financial condition. Our largest exposure comes from the Canadian dollar, where approximately 7% of our sales during the six months ended June 30, 2011 were derived from Norcraft Canada and our revenues from such sales were denominated in Canadian dollar.
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 June 30, 2011.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2011 the Companys disclosure controls and procedures were effective to provide reasonable assurance that the 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 is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
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.
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PART II. OTHER INFORMATION
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.
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, 2010. 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 material adverse effects on our financial condition, results of operations and cash flows.
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. | |
101 | The following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed on August 15, 2011, formatted in XBRL: (i) Consolidated Balance Sheet, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Changes in Members Equity and Comprehensive Income, (iv) Consolidated Statement of Cash Flows, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text. |
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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.
NORCRAFT COMPANIES, L.P. |
(Registrant) |
/s/ Mark Buller |
/s/ Leigh Ginter | |
Mark Buller | Leigh Ginter | |
Chief Executive Officer | Chief Financial Officer | |
Date: August 15, 2011 | Date: August 15, 2011 | |
Signing on behalf of the | Signing on behalf of the | |
Registrant and as Principal | Registrant and as Principal | |
Executive Officer | Accounting Officer |
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