ASSOCIATED MATERIALS, LLC - FORM 10-Q - May 3, 2016

Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED MATERIALS, LLCside-4216xex312.htm
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED MATERIALS, LLCside-4216xex311.htm
EX-32.1 - EXHIBIT 32.1 - ASSOCIATED MATERIALS, LLCside-4216xex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2016
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: 000-24956
 
Associated Materials, LLC
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
 
75-1872487
(State or Other Jurisdiction of
Incorporation of Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3773 State Rd., Cuyahoga Falls, Ohio
 
44223
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code (330) 929 -1811
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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  ý Although the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, the registrant has filed all such Exchange Act reports for the preceding 12 months.
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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý  (Do not check if a smaller reporting company)
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  ý
As of May 3, 2016, all of the registrant’s membership interests outstanding were held by an affiliate of the registrant.


ASSOCIATED MATERIALS, LLC
Report for the Quarter ended April 2, 2016
 


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements

ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
 
April 2,
2016
 
January 2,
2016
Assets
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,071

 
$
9,394

Accounts receivable, net
131,066

 
127,043

Inventories
133,313

 
123,374

Income taxes receivable
1,724

 
1,612

Deferred income taxes
1,502

 
1,502

Prepaid expenses and other current assets
14,887

 
14,163

Total current assets
288,563

 
277,088

Property, plant and equipment, at cost
190,263

 
186,495

Less accumulated depreciation
99,883

 
95,701

Property, plant and equipment, net
90,380

 
90,794

Goodwill
308,139

 
302,908

Other intangible assets, net
396,823

 
397,953

Other assets
4,538

 
4,593

Total assets
$
1,088,443

 
$
1,073,336

 
 
 
 
Liabilities and Member's Deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
97,540

 
$
91,563

Accrued liabilities
92,353

 
83,630

Deferred income taxes
1,231

 
436

Income taxes payable
419

 
36

Total current liabilities
191,543

 
175,665

Deferred income taxes
83,390

 
82,102

Other liabilities
113,310

 
113,123

Long-term debt
931,495

 
916,807

Commitments and contingencies


 


Member’s deficit
(231,295
)
 
(214,361
)
Total liabilities and member’s deficit
$
1,088,443

 
$
1,073,336

See accompanying notes to Condensed Consolidated Financial Statements.


1

ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Net sales
$
236,281

 
$
220,366

Cost of sales
183,228

 
178,463

Gross profit
53,053

 
41,903

Selling, general and administrative expenses
59,433

 
58,470

Loss from operations
(6,380
)
 
(16,567
)
Interest expense
20,883

 
20,706

Foreign currency (gain) loss
(383
)
 
516

Loss before income taxes
(26,880
)
 
(37,789
)
Income tax expense
1,132

 
533

Net loss
(28,012
)
 
(38,322
)
Other comprehensive (loss) income:
 
 
 
Pension and other postretirement benefit adjustments, net of tax
17

 
148

Foreign currency translation adjustments, net of tax
11,018

 
(11,586
)
Total comprehensive loss
$
(16,977
)
 
$
(49,760
)
See accompanying notes to Condensed Consolidated Financial Statements.


2

ASSOCIATED MATERIALS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Operating Activities
 
Net loss
$
(28,012
)
 
$
(38,322
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
9,806

 
9,879

Deferred income taxes
767

 
727

Provision for losses on accounts receivable
682

 
771

Amortization of deferred financing costs and premium on senior notes
914

 
906

Gain on sale of assets
(11
)
 
—

Stock-based compensation expense
43

 
25

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,640
)
 
(2,141
)
Inventories
(7,869
)
 
(17,839
)
Accounts payable and accrued liabilities
13,296

 
20,729

Income taxes receivable / payable
350

 
(164
)
Other assets and liabilities
(1,554
)
 
(1,242
)
Net cash used in operating activities
(15,228
)
 
(26,671
)
Investing Activities
 
 
 
Capital expenditures
(1,975
)
 
(6,069
)
Proceeds from the sale of assets
86

 
6

Net cash used in investing activities
(1,889
)
 
(6,063
)
Financing Activities
 
 
 
Borrowings under ABL facilities
38,789

 
44,570

Payments under ABL facilities
(50,900
)
 
(13,749
)
Promissory note proceeds
27,500

 
—

Financing costs
(1,624
)
 
—

Net cash provided by financing activities
13,765

 
30,821

Effect of exchange rate changes on cash and cash equivalents
29

 
9

Net decrease in cash and cash equivalents
(3,323
)
 
(1,904
)
Cash and cash equivalents at beginning of period
9,394

 
5,963

Cash and cash equivalents at end of period
$
6,071

 
$
4,059

Supplemental information:
 
 
 
Cash paid for interest
$
1,080

 
$
952

Cash paid for income taxes
$
3

 
$
44

Property additions of $211 thousand and $733 thousand that remain unpaid as of April 2, 2016 and April 4, 2015, respectively, were excluded from "Capital expenditures" in the Investing Activities section above.
See accompanying notes to Condensed Consolidated Financial Statements.



3

ASSOCIATED MATERIALS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED APRIL 2, 2016
(UNAUDITED)
1. Basis of Presentation
Associated Materials, LLC (the “Company”) is a 100% owned subsidiary of Associated Materials Incorporated, formerly known as AMH Intermediate Holdings Corp. (“Holdings”). Holdings is a wholly owned subsidiary of Associated Materials Group, Inc., formerly known as AMH Investment Holdings Corp. (“Parent”), which is controlled by investment funds affiliated with Hellman & Friedman LLC (“H&F”). Holdings and Parent do not have material assets or operations other than their direct and indirect ownership, respectively, of the membership interest of the Company. Approximately 97% of the capital stock of Parent is owned by investment funds affiliated with H&F.
The condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these interim condensed consolidated financial statements contain all of the normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the quarters ended April 2, 2016 and April 4, 2015. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended January 2, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 22, 2016 (“Annual Report”). A detailed description of the Company’s significant accounting policies and management judgments is located in the audited financial statements included in its Annual Report.
The Company is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States (“U.S.”) and Canada. The Company was founded in 1947 when it first introduced residential aluminum siding under the Alside® name. The Company provides a comprehensive offering of exterior building products, including vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories, which are produced at the Company’s 11 manufacturing facilities. The Company also sells complementary products that it sources from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors, equipment and tools. The Company also provides installation services. The Company distributes these products through its extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom the Company refers to as its “contractor customers.” This dual-distribution network consists of 122 company-operated supply centers, through which the Company sells directly to its contractor customers, and its direct sales channel, through which the Company sells to more than 275 independent distributors, dealers and national account customers.
Because most of the Company’s building products are intended for exterior use, sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, the Company has historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. Therefore, the results of operations for any interim period are not necessarily indicative of the results of operations for a full year.
Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than an asset, consistent with the presentation of debt discounts. The recognition and measurement of debt issuance costs are not affected by the new guidance. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 provides that, given the absence of authoritative guidance in ASU 2015-03 with respect to presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, an entity is permitted to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. During fiscal 2016, ASU 2015-03 and ASU 2015-05 became effective and accordingly, debt issuance costs of $8.7 million were reclassified from other assets to long-term debt on the January 2, 2016 Condensed Consolidated Balance Sheet


4

Recent Accounting Pronouncements

In March 2016, the FASB issued a modified standard on stock compensation. This standard makes several modifications to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. It also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective commencing with our 2017 fiscal year and requires enhanced disclosures. The Company is currently assessing the potential impact of the new requirements under the standard

In February 2016, the FASB issued a new standard on leases. The new standard requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. The amendment is effective commencing with our 2019 fiscal year and requires enhanced disclosures. We are evaluating the timing of adoption of this guidance.

In November 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our balance sheet. We are evaluating the timing of adoption of this guidance.
In August 2015, the FASB issued an amendment to defer for one year the effective date of the new standard on revenue recognition issued in May 2014. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standard is effective commencing with our 2018 fiscal year and requires enhanced disclosures. We are evaluating the timing of adoption of this guidance.
In July 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or net realizable value. The guidance is effective in 2017 with early adoption permitted. We are evaluating the timing of adoption of this guidance.
In August 2014, the FASB issued a standard on the presentation of “Going Concern” in the financial statements. The standard requires management to evaluate whether there are any conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, and, if present, provide enhanced disclosures. The standard is effective with our 2017 fiscal year. We are evaluating the timing of adoption of this guidance.
2. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments. The allowance for doubtful accounts is based on review of the overall condition of accounts receivable balances and review of significant past due accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts receivable that are not expected to be collected within one year, net of the related allowance for doubtful accounts, are included in “Other Assets” in the Condensed Consolidated Balance Sheets.
Allowance for doubtful accounts consists of the following (in thousands):
 
April 2,
2016
 
January 2,
2016
Allowance for doubtful accounts, current
$
2,957

 
$
3,204

Allowance for doubtful accounts, non-current
5,187

 
4,401

 
$
8,144

 
$
7,605

3. Inventories

5

Inventories are valued at the lower of cost (first in, first out) or market. Inventories consist of the following (in thousands):
 
April 2,
2016
 
January 2,
2016
Raw materials
$
32,034

 
$
31,024

Work in process
10,906

 
10,900

Finished goods
90,373

 
81,450

 
$
133,313

 
$
123,374

4. Goodwill and Other Intangible Assets
The Company reviews goodwill for impairment on an annual basis at the beginning of the fourth quarter, or an interim basis if there are indicators of potential impairment. The Company did not recognize any impairment losses of its goodwill during the quarters ended April 2, 2016 and April 4, 2015.
The changes in the carrying amount of goodwill are as follows (in thousands):  
 
Goodwill
Balance at January 2, 2016
$
302,908

Foreign currency translation
5,231

Balance at April 2, 2016
$
308,139

At April 2, 2016 and January 2, 2016, accumulated goodwill impairment losses were $228.5 million, exclusive of foreign currency translation.
The Company’s other intangible assets consist of the following (in thousands):  
 
April 2, 2016
 
January 2, 2016
 
Cost
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Cost
 
Accumulated
Amortization
 
Net
Carrying
Value
Amortized customer bases
$
316,743

 
$
135,837

 
$
180,906

 
$
313,821

 
$
128,230

 
$
185,591

Amortized non-compete agreements
20

 
20

 
—

 
20

 
19

 
1

Total amortized intangible assets
316,763

 
135,857

 
180,906

 
313,841

 
128,249

 
185,592

Non-amortized trade names (1)
215,917

 
—

 
215,917

 
212,361

 
—

 
212,361

Total intangible assets
$
532,680

 
$
135,857

 
$
396,823

 
$
526,202

 
$
128,249

 
$
397,953

(1) The balances at April 2, 2016 and January 2, 2016 include accumulated impairment charges of $169.6 million, of which $89.7 million were recorded in the second half of 2014 and $79.9 million were recorded in 2011.
The Company’s non-amortized intangible assets consist of the Alside®, Revere®, Gentek®, Preservation® and Alpine® trade names and are subject to testing for impairment on an annual basis at the beginning of the fourth quarter, or an interim basis if indicators of potential impairment are present. The Company did not recognize any impairment losses related to its other intangible assets during the quarters ended April 2, 2016 and April 4, 2015.
Finite-lived intangible assets, which consist of customer bases and non-compete agreements, are amortized over their estimated useful lives. The estimated average amortization period for customer bases and non-compete agreements is 13 years and 3 years, respectively. Amortization expense related to other intangible assets was $6.2 million and $6.3 million for the quarters ended April 2, 2016 and April 4, 2015, respectively. Amortization expense is estimated to be approximately $25 million per year for fiscal years 2016, 2017, 2018, 2019 and 2020.
5. Restructuring Costs
U.S. Distribution and Corporate Functions
During the quarter ended October 3, 2015, the Company announced a restructuring plan focused on realigning certain costs within its U.S. distribution business and select corporate functions. The restructuring plan included the closure of four underperforming company-operated supply centers in the U.S. and the elimination of its roofing product offering in 11 U.S. supply centers. Supply center closures were completed by the end of the fourth quarter 2015.

6

Manufacturing
The Company discontinued its use of the warehouse facility adjacent to the Ennis manufacturing plant during the second quarter of 2009 and recorded a restructuring liability related to the discontinued use of the warehouse facility. The restructuring liability is re-measured when changes in the expected amount and timing of cash flows related to taxes and insurance over the remaining lease term change.
Changes in the restructuring liabilities are as follows (in thousands):
 
Quarter Ended April 2, 2016
 
Distribution
 
Manufacturing
 
Total
Balance at January 2, 2016
$
1,654

 
$
1,147

 
$
2,801

Accretion of related lease obligations
—

 
115

 
115

Payments
(298
)
 
(337
)
 
(635
)
Balance at April 2, 2016
$
1,356

 
$
925

 
$
2,281

 
 
 
 
 
 
 
Quarter Ended April 4, 2015
 
Distribution
 
Manufacturing
 
Total
Balance at January 3, 2015
$
—

 
$
1,960

 
$
1,960

Accretion of related lease obligations
—

 
114

 
114

Payments
—

 
(364
)
 
(364
)
Balance at April 4, 2015
$
—

 
$
1,710

 
$
1,710

The remaining restructuring liability is included in “Accrued Liabilities” and “Other Liabilities” in the Condensed Consolidated Balance Sheets and will continue to be paid until April 2020 and July 2020, the lease expiration dates for the Ennis warehouse facility and the last of the supply center closures, respectively. For the quarters ended April 2, 2016 and April 4, 2015, there were no changes in the restructuring liabilities that impacted selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Loss.

7

6. Product Warranty Costs
Consistent with industry practice, the Company provides homeowners with limited warranties on certain products, primarily related to window and siding product categories.
Changes in the warranty reserve are as follows (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Balance at the beginning of the period
$
85,112

 
$
89,940

Provision for warranties issued and changes in estimates for pre-existing warranties
1,327

 
1,250

Claims paid
(1,503
)
 
(1,328
)
Foreign currency translation
566

 
(616
)
Balance at the end of the period
$
85,502

 
$
89,246

On February 13, 2013, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement”) for a class action lawsuit filed by plaintiffs and a putative nationwide class of homeowners regarding certain warranty related claims for steel and aluminum siding, which became effective on September 2, 2013. The Company expects to incur additional warranty costs associated with the Settlement; however, the Company does not believe the incremental costs, which currently cannot be estimated for recognition purposes, have been or will be material.
7. Executive Officers’ Separation and Hiring Costs
Separation and hiring costs related to the Company’s executive officers include payroll taxes, certain benefits and related professional fees, all of which are recorded as a component of selling, general and administrative expenses. During 2014, the Company recorded $2.0 million of separation and hiring costs, primarily related to the resignations of Jerry W. Burris, the former President and Chief Executive Officer and David S. Nagle, the former Chief Operations Officer, AMI Distribution and Services, as well as the hiring of Dana R. Snyder, who was named Interim Chief Executive Officer prior to the appointment of Brian C. Strauss as President and Chief Executive Officer in May 2014. For the quarter ended April 2, 2016, there was $0.1 million of separation and hiring costs and $0.3 million of remaining payables related to 2014 executive restructuring activities.
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
 
April 2,
2016
 
January 2,
2016
9.125% Senior Secured Notes, due 2017
$
830,000

 
$
830,000

Borrowings under the ABL facilities
80,724

 
92,800

Promissory note, related parties
27,500

 
—

Plus: Unamortized premium
2,340

 
2,684

Less: Deferred financing costs, net of amortization
(9,069
)
 
(8,677
)
Total long-term debt
$
931,495

 
$
916,807

9.125% Senior Secured Notes, due 2017
In October 2010, the Company and its wholly owned subsidiary, AMH New Finance, Inc. (“AMHNF” and, together with the Company, collectively, the “Issuers”) issued and sold $730.0 million of 9.125% Senior Secured Notes due November 1, 2017 (the “existing notes”). The existing notes bear interest at a rate of 9.125% per annum, payable on May 1 and November 1 of each year.
On May 1, 2013, the Issuers issued and sold an additional $100.0 million in aggregate principal amount of 9.125% Senior Secured Notes due November 1, 2017 (the “new notes” and, together with existing notes, the “9.125% notes”) at an issue price of 106.00% of the principal amount of the new notes in a private placement. The Company used the net proceeds of the offering to repay the outstanding borrowings under its ABL facilities (as defined below) and for other general corporate purposes. The new notes were issued as additional notes under the same indenture, dated as of October 13, 2010, governing the

8

existing notes, as supplemented by a supplemental indenture (collectively, the “Indenture”). On October 31, 2013, all of the new notes were exchanged for 9.125% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933, as amended. The new notes are consolidated with and form a single class with the existing notes and have the same terms as to status, redemption, collateral and otherwise (other than issue date, issue price and first interest payment date) as the existing notes. The debt premium related to the issuance of the new notes is being amortized into interest expense over the life of the new notes. The effective interest rate of the new notes, including the premium, is 7.5% as of April 2, 2016.
The 9.125% notes, at par value of $830.0 million, have an estimated fair value, classified as a Level 1 measurement, of $653.6 million and $576.4 million based on quoted market prices as of April 2, 2016 and January 2, 2016, respectively.
The Company may from time to time, in its sole discretion, purchase, redeem or retire the 9.125% notes in privately negotiated or open market transactions, by tender offer or otherwise. On April 15, 2014, Parent filed a request with the SEC to withdraw the Registration Statement on Form S-1 filed by Parent on July 15, 2013 for a proposed IPO of its common stock. The registration statement was withdrawn because a determination has been made not to proceed with an IPO of Parent’s common stock at the time.
Guarantees. The 9.125% notes are unconditionally guaranteed, jointly and severally, by each of the Issuers’ 100% owned direct and indirect domestic subsidiaries (“guarantors”) that guarantee our obligations under the ABL facilities.
Collateral. The 9.125% notes and the guarantees are secured by a first-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets located in the United States (other than the ABL collateral, in which the 9.125% notes and the guarantees have a second-priority lien, and certain other excluded assets), including equipment, owned real property valued at $5.0 million or more and all present and future shares of capital stock of each of the Issuers’ and each guarantor’s material directly 100% owned domestic subsidiaries and 65% of the present and future shares of capital stock, of each of the Issuers’ and each guarantor’s directly owned foreign restricted subsidiaries (other than Canadian subsidiaries), in each case subject to the Rule 3-16 exclusion described below, certain other exceptions and customary permitted liens. In addition, the 9.125% notes and the guarantees are secured by a second-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets, which assets also secure the Issuers’ obligations under the ABL facilities, including accounts receivable, inventory, related general intangibles, certain other related assets and the proceeds thereof.
The capital stock and other securities of any subsidiary will be excluded from the collateral securing the 9.125% notes and the guarantees to the extent that the pledge of such capital stock and other securities would result in the Company being required to file separate financial statements of such subsidiary with the SEC pursuant to Rule 3-16 or Rule 3-10 of Regulation S-X under the Securities Act of 1933, as amended. Rule 3-16 of Regulation S-X requires the presentation of a company’s standalone, audited financial statements if that company’s capital stock or other securities are pledged to secure the securities of another issuer, and the greatest of the principal amount, par value, book value and market value of the pledged stock or securities equals or exceeds 20% of the principal amount of the securities secured by such pledge. Accordingly, the collateral securing the 9.125% notes and the guarantees may in the future exclude the capital stock and securities of the Company’s subsidiaries, in each case to the extent necessary to not be subject to such requirement.
Optional Redemption. The Issuers have the option to redeem the 9.125% notes, in whole or in part, at any time on or after November 1, 2013 at redemption prices (expressed as percentages of principal amount of the 9.125% notes to be redeemed) of 106.844%, 104.563%, 102.281% and 100.000% during the 12-month periods commencing on November 1, 2013, 2014, 2015 and 2016, respectively, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable redemption date.
Change of Control. Upon the occurrence of a change of control, as defined in the Indenture, the Issuers must give holders of notes the opportunity to sell the Issuers their 9.125% notes at 101% of their face amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
Covenants. The Indenture contains covenants limiting the Issuers’ ability and the ability of their restricted subsidiaries to, among other things: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell all or substantially all assets; enter into transactions with affiliates; and enter into agreements that would restrict our subsidiaries to pay dividends or make other payments to us. These covenants are subject to important exceptions and qualifications as described in the Indenture. Most of these covenants will cease to apply for so long as the 9.125% notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s Rating Services.
ABL Facilities
In October 2010, the Company and certain of its subsidiaries (as “U.S. borrowers” and “Canadian borrowers” and, collectively, the “borrowers”) entered into the ABL facilities in the amount of $225.0 million (comprised of a $150.0 million

9

U.S. facility and a $75.0 million Canadian facility, the “U.S facility” and the “Canadian facility,” respectively) pursuant to a revolving credit agreement dated October 13, 2010, which was subsequently amended and restated on April 18, 2013 (as amended, the “Amended and Restated Revolving Credit Agreement”) to, among other things, extend the maturity date of the revolving credit agreement from October 13, 2015 to the earlier of (i) April 18, 2018 and (ii) 90 days prior to the maturity date of the existing notes. Subsequently, we terminated the tranche B revolving credit commitments of $12.0 million and wrote off $0.5 million of deferred financing fees related to the ABL facilities.
Interest Rate and Fees. At the Company’s option, the U.S. and Canadian tranche A revolving credit loans under the Amended and Restated Revolving Credit Agreement governing the ABL facilities bear interest at the rate equal to (1) the London Interbank Offered Rate (“LIBOR”) (for eurodollar loans under the U.S. facility) or the Canadian Dealer Offered Rate (“CDOR”) (for loans under the Canadian facility), plus an applicable margin of 2.25% as of April 2, 2016, or (2) the alternate base rate (for alternate base rate loans under the U.S. facility, which is the highest of a prime rate, the Federal Funds Effective Rate plus 0.50% and a one-month LIBOR rate plus 1.0% per annum) or the alternate Canadian base rate (for loans under the Canadian facility, which is the higher of a Canadian prime rate and the 30-day CDOR plus 1.0%), plus an applicable margin of 1.25% as of April 2, 2016, in each case, which interest rate margin may vary in 25 basis point increments between three pricing levels determined by reference to the average excess availability in respect of the U.S. and Canadian tranche A revolving credit loans. In addition to paying interest on outstanding principal under the ABL facilities, the Company is required to pay a commitment fee in respect of the U.S. and Canadian tranche A revolving credit loans, payable quarterly in arrears, of 0.375%.
Borrowing Base. Availability for borrowings under each of the U.S. facility and the Canadian facility is subject to a borrowing base, which is based on (i) the U.S borrowers’ eligible accounts receivable and inventory, with respect to the U.S. facility and (ii) the Canadian borrowers’ eligible accounts receivable, inventory and, equipment and real property, in each case, after adjusting for customary reserves and, in the case of the Canadian facility, certain payables established or modified from time to time by and at the permitted discretion of the administrative agent thereunder. To the extent that the value of the components in a borrowing base decline, the applicable borrowing base will decrease and the availability under the ABL facilities may decrease below the $213.0 million of aggregate commitments. In addition, if the amount of outstanding borrowings and letters of credit under the U.S. facility or the Canadian facility exceeds the applicable borrowing base or the applicable revolving credit commitments, we are required to prepay borrowings in an amount sufficient to eliminate the excess.
Guarantors. All obligations under the U.S. facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material U.S. restricted subsidiary of us and by our direct parent, other than certain excluded subsidiaries (“U.S. guarantors”). All obligations under the Canadian facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material Canadian restricted subsidiary of us, other than certain excluded subsidiaries (“Canadian guarantors” and, together with U.S. guarantors, “ABL guarantors”) and the U.S. guarantors.
Security. All obligations of the U.S. borrowers and the U.S. guarantors under the ABL facilities are secured by a security interest in substantially all of our present and future property and assets, including a first-priority security interest in our capital stock and a second-priority security interest in the capital stock of each of our direct, material wholly-owned restricted subsidiaries (the “U.S ABL Collateral”. The Canadian security agreement provides that all obligations of the Canadian borrowers and the Canadian guarantors are secured by the U.S. ABL Collateral and a security interest in substantially all of our Canadian assets, including a first-priority security interest in the capital stock of the Canadian borrowers and each direct, material wholly-owned restricted subsidiary of the Canadian borrowers and Canadian guarantors.
Covenants, Representations and Warranties. The Amended and Restated Revolving Credit Agreement, contains customary representations and warranties and customary affirmative and negative covenants, including, with respect to negative covenants, among other things, restrictions on indebtedness, liens, investments, fundamental changes, asset sales, dividends and other distributions, prepayments or redemption of junior debt, transactions with affiliates and negative pledge clauses. There are no financial covenants included in the Amended and Restated Revolving Credit Agreement, other than a springing fixed charge coverage ratio of at least 1.00 to 1.00, which, pursuant to Amendment No. 3 (as defined below), will be tested only when excess availability is less than (1) for the period commencing on and including February 19, 2016 through and including April 21, 2016, $10.0 million, (2) for the period commencing on and including April 22, 2016 through and including May 19, 2016, $7.5 million, (3) for the period commencing on and including May 20, 2016 through and including June 3, 2016, $10.0 million and (4) for the period commencing on and including June 4, 2016 and thereafter, the greater of (i) 10.0% of the sum of (x) the lesser of (A) the U.S. borrowing base and (B) the U.S. revolving credit commitments and (y) the lesser of (A) the Canadian borrowing base and (B) the Canadian revolving credit commitments and (ii) $20.0 million, in each case for a period of five consecutive business days until the 30th consecutive day when excess availability exceeds the above threshold.

10

On February 19, 2016, we entered into Amendment No. 3 to Amended and Restated Revolving Credit Agreement (“Amendment No. 3”), which permitted, among other things:
•
for the period commencing on and including February 19, 2016 through April 21, 2016, for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days (or upon the occurrence and continuance of an event of default), and
•
for the period commencing on and including April 22, 2016 through and including May 19, 2016, for a cash dominion period to commence, only if excess availability is less than $7.5 million for a period of five consecutive business days (or upon the occurrence and continuance of an event of default), and
•
for the period commencing on and including May 20, 2016 through and including June 3, 2016, for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days.
In addition, Amendment No. 3 includes a provision which reduces excess availability in certain circumstances by adding an availability block (i) for the period commencing on and including February 19, 2016 through and including April 21, 2016 $10.0 million, (ii) for the period commencing on and including April 22, 2016 through and including May 19, 2016 $7.5 million, and commencing on and including May 20, 2016 through April 18, 2018 $10.0 million, which would increase to $20.0 million for the period beginning on and including May 20, 2016 through April 18, 2018 in the event all or any portion of the principal of the Sponsor Secured Note (as defined below) is repaid prior to the Amended and Restated Revolving Credit Agreement maturity date.
The fixed charge coverage ratio was 1.05:1.00 for the four consecutive fiscal quarter test period ended April 2, 2016 based upon consolidated adjusted EBITDA of $101.0 million in accordance with the Credit Agreement. The Company has not triggered such fixed charge coverage ratio covenant as of April 2, 2016, as excess availability of $40.6 million as of such date was in excess of the covenant trigger threshold. The Company currently does not expect to trigger the fixed charge coverage ratio test for fiscal year 2016. Should the current economic conditions or other factors described herein cause our results of operations to deteriorate beyond our expectations, we may trigger such covenant and, if so triggered, may not be able to satisfy such covenant and be forced to refinance such debt or seek a waiver. Even if new financing is available, it may not be available on terms that are acceptable to us. If we are required to seek a waiver, we may be required to pay significant amounts to the lenders under our ABL facilities to obtain such a waiver.
As of April 2, 2016, there was $80.7 million drawn under the Company’s ABL facilities and $40.6 million available for additional borrowings. The weighted average per annum interest rate applicable to borrowings under the U.S. portion and the Canadian portion of the ABL facilities was 2.9% and 4.6%, respectively, as of April 2, 2016. The Company had letters of credit outstanding of $12.3 million as of April 2, 2016 primarily securing insurance policy deductibles, certain lease facilities and the Company’s purchasing card program.
In addition to the financial covenant described above, certain incurrences of debt and investments require compliance with financial covenants under the Amended and Restated Revolving Credit Agreement and the Indenture. The breach of any of these covenants could result in a default under the Amended and Restated Revolving Credit Agreement and the Indenture, and the lenders or note holders, as applicable, could elect to declare all amounts borrowed due and payable. See Part 1, Item 1A. “Risk Factors” in our Annual Report. We were in compliance with such financial covenants as of April 2, 2016.
First Lien Promissory Note
On February 19, 2016, the Company, the other borrowers, AMHNF and Holdings, and H&F Finco LLC (“H&F Finco”), an affiliate of Hellman & Friedman LLC, entered into a first lien promissory note (the “Sponsor Secured Note”), $20.0 million to the U.S. borrowers, AMHNF and Holdings and $7.5 million to the Canadian borrowers. The Sponsor Secured Note bears interest at the LIBOR rate plus 4.25%, with a LIBOR floor of 1%, and matures at the earlier of (i) June 18, 2018 and (ii) 30 days prior to the maturity date of the Company’s 9.125% notes. Prepayment of the Sponsor Secured Note is required if (i) excess availability on the date of such payment (prior to giving effect thereto) is no less than $60.0 million and (ii) excess availability on the date of such payment (immediately after giving effect thereto) and the projected daily average excess availability for the thirty-day period immediately following the date of such payment is, in each case, no less than $32.5 million. The Sponsor Secured Note is subject to the same covenants and events of default contained in the Amended and Restated Revolving Credit Agreement and certain additional customary covenants and events of default.
The Sponsor Secured Note is guaranteed by the same guarantors and to the same extent as such guarantors guarantee the obligations of the Company under the Amended and Restated Revolving Credit Agreement. The obligations of the Company, AMHNF, Holdings and the guarantors under the Sponsor Secured Note are secured on a pari passu basis to the liens and assets

11

securing the obligations under the Amended and Restated Revolving Credit Agreement (the “ABL Shared Collateral”), subject to the applicable intercreditor agreement. Concurrently with entering into the Sponsor Secured Note, the Company, the other borrowers, AMHNF, Holdings and the guarantors under the Sponsor Secured Note entered into a revolving loan intercreditor agreement with H&F Finco, as the subordinated debt representative and UBS AG, Stamford Branch and UBS AG Canada Branch, as the senior representatives which subordinates the lien of H&F Finco to the lien of the senior representative and the senior lenders under the Amended and Restated Revolving Credit Agreement in respect of any right of payment from the proceeds of any sale or disposition of ABL Shared Collateral.    


9. Income Taxes
The Company's provision for income taxes in interim periods is computed by applying the appropriate estimated annual effective tax rates to income or loss before income taxes for the period. The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate and records the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
The components of the effective tax rate are as follows (in thousands, except percentage):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Loss before income taxes
$
(26,880
)
 
$
(37,789
)
Income tax expense
1,132

 
533

Effective tax rate
(4.2
)%
 
(1.4
)%
The effective tax rates for the quarters ended April 2, 2016 and April 4, 2015 vary from the statutory rate, primarily as a result of operating losses in the U.S. with no tax benefit recognized due to the valuation allowance against net U.S. deferred tax assets.
10. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, are as follows (in thousands):
 
Defined Benefit Pension and Other Postretirement Plans
 
Foreign Currency Translation
 
Accumulated Other Comprehensive Loss
Balance at January 2, 2016
$
(18,901
)
 
$
(68,006
)
 
$
(86,907
)
Other comprehensive income before reclassifications, net of tax of $0
—

 
11,018

 
11,018

Amounts reclassified from accumulated other comprehensive loss, net of tax of $14
17

 
—

 
17

Balance at April 2, 2016
$
(18,884
)
 
$
(56,988
)
 
$
(75,872
)
 
Defined Benefit Pension and Other Postretirement Plans
 
Foreign Currency Translation
 
Accumulated Other Comprehensive Loss
Balance at January 3, 2015
(23,781
)
 
(36,842
)
 
(60,623
)
Other comprehensive loss before reclassifications, net of tax of $0
—

 
(11,586
)
 
(11,586
)
Amounts reclassified from accumulated other comprehensive loss, net of tax of $17
148

 
—

 
148

Balance at April 4, 2015
(23,633
)
 
(48,428
)
 
(72,061
)

12

Reclassifications out of accumulated other comprehensive loss consist of the following (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Defined Benefit Pension and Other Postretirement Plans:
 
 
 
Amortization of unrecognized prior service costs
$
6

 
$
7

Amortization of unrecognized cumulative actuarial net loss
25

 
158

Total before tax
31

 
165

Tax expense
(14
)
 
(17
)
Net of tax
$
17

 
$
148

Amortization of prior service costs and actuarial losses are included in the computation of net periodic benefit cost for the Company’s pension and other postretirement benefit plans.
11. Stock Plans
In April 2015, the board of directors of Associated Materials Group, Inc. (“Parent”) and Parent’s stockholders approved an amendment and restatement to the Parent’s 2010 Stock Incentive Plan (“2010 Plan”) to increase the maximum number of shares which may be issued under the 2010 Plan by 1,500,000 from 7,550,076 to 9,050,076 shares of Parent common stock.
In June 2015, Parent’s board of directors modified certain time-based and performance-based options held by eligible participants to reduce the exercise price of such options. The number of options repriced was 4.5 million to 17 employees under the senior leadership team, with a weighted average exercise price prior to repricing of $9.23 and an average remaining contractual life of 8.8 years. The compensation cost related to this repricing resulted in additional unrecognized non-cash expense of $0.3 million that may be recognized over the remaining life of the options, subject to vesting conditions.

12. Retirement Plans
The Company sponsors defined benefit pension plans that cover hourly workers at its West Salem, Ohio plant, and hourly union employees at its Woodbridge, New Jersey plant, as well as a defined benefit retirement plan covering U.S. salaried employees, which was frozen in 1998 and subsequently replaced with a defined contribution plan (such plans collectively, the “Domestic Plans”). The Company also sponsors a defined benefit pension plan covering the Canadian salaried employees and hourly union employees at the Lambeth, Ontario plant, a defined benefit pension plan for the hourly union employees at its Burlington, Ontario plant and a defined benefit pension plan for the hourly union employees at its Pointe Claire, Quebec plant (such plans collectively, the “Foreign Plans”). In 2014, the pension plans for Pointe Claire and Burlington were amended to reflect an increase in benefits, effective November 15, 2015 and September 1, 2016, respectively. Also, the Pointe Claire plan was amended to disallow a lump sum payment feature that triggered settlement losses recorded in previous years.
The Company also provides postretirement benefits other than pension (“OPEB plans”) including health care or life insurance benefits to certain U.S. and Canadian retirees and in some cases, their spouses and dependents. The Company’s postretirement benefit plans in the U.S. include an unfunded health care plan for hourly workers at the Company’s former steel siding plant in Cuyahoga Falls, Ohio. With the closure of this facility in 1991, no additional employees are eligible to participate in this plan. There are three other U.S. unfunded plans covering either life insurance or health care benefits for small frozen groups of retirees. The Company’s foreign postretirement benefit plan provides life insurance benefits to active members at its Pointe Claire, Quebec plant and a closed group of Canadian salaried retirees. The actuarial valuation measurement date for the defined pension plans and postretirement benefits other than pension is December 31.

13

Components of net periodic benefit cost for the Company’s defined benefit pension plans and OPEB plans are as follows (in thousands):
 
Quarters Ended
 
April 2, 2016
 
April 4, 2015
 
Domestic
Plans
 
Foreign
Plans
 
OPEB Plans
 
Domestic
Plans
 
Foreign
Plans
 
OPEB Plans
Service cost
$
316

 
$
620

 
$
3

 
$
331

 
$
641

 
$
4

Interest cost
827

 
770

 
31

 
806

 
791

 
43

Expected return on assets
(854
)
 
(832
)
 
—

 
(973
)
 
(938
)
 
—

Amortization of unrecognized:
 
 
 
 
 
 
 
 
 
 
 
Prior service costs (credits)
3

 
5

 
(2
)
 
3

 
6

 
(2
)
Cumulative actuarial net loss (gain)
21

 
49

 
(45
)
 
104

 
59

 
(5
)
Net periodic benefit cost
$
313

 
$
612

 
$
(13
)
 
$
271

 
$
559

 
$
40

Although changes in market conditions, current pension law and uncertainties regarding significant assumptions used in the actuarial valuations may have a material impact on future required contributions to the Company’s pension plans, the Company currently does not expect funding requirements to have a material adverse impact on current or future liquidity.
The actuarial valuations require significant estimates and assumptions to be made by management, primarily the funding interest rate, discount rate and expected long-term return on plan assets. These assumptions are all susceptible to changes in market conditions. The funding interest rate and discount rate are based on representative bond yield curves maintained and monitored by independent third parties. In determining the expected long-term rate of return on plan assets, the Company considers historical market and portfolio rates of return, asset allocations and expectations of future rates of return.
13. Commitments and Contingencies
The Company is involved from time to time in litigation arising in the ordinary course of business, none of which, individually or in the aggregate, after giving effect to its existing insurance coverage, is expected to have a material adverse effect on its financial position, results of operations or liquidity.
From time to time, the Company is also involved in proceedings and potential proceedings relating to environmental, product liability and other matters, the claims of which are administered by the Company in the ordinary course of business. The Company maintains pollution and remediation insurance, as well as product liability insurance to provide coverage for these types of claims. Although it is difficult to estimate the Company’s potential exposure to these matters, the Company believes that the resolution of such matters will not have a material adverse effect on its financial position, results of operations or liquidity.
Environmental Claims
The Woodbridge, New Jersey facility is currently the subject of an investigation and/or remediation before the New Jersey Department of Environmental Protection (“NJDEP”) under ISRA Case No. E20030110 for the Company’s wholly owned subsidiary Gentek Building Products, Inc. (“Gentek”). The facility is currently leased by Gentek. Previous operations at the facility resulted in soil and groundwater contamination in certain areas of the property. In 1999, the property owner and Gentek signed a remediation agreement with NJDEP, pursuant to which the property owner and Gentek agreed to continue an investigation/remediation that had been commenced pursuant to a Memorandum of Agreement with NJDEP. Under the remediation agreement, NJDEP required posting of a remediation funding source of $0.1 million, which is currently satisfied by a $0.3 million standby letter of credit that was provided by Gentek to NJDEP. During 2014, the delineation studies were completed and in early 2015 the Company was presented with several remedial plans. Based on the alternatives presented, the Company identified what it believed to be the most likely option and recorded the minimum liability for that option, which totaled $1.0 million as of January 3, 2015, the balance of which remains unchanged as of April 2, 2016. The Company believes this matter will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Environmental claims, product liability claims and other claims are administered by the Company in the ordinary course of business, and the Company maintains pollution and remediation and product liability insurance covering certain types of claims. Although it is difficult to estimate the Company’s potential exposure to these matters, the Company believes that the resolution of these matters will not have a material adverse effect on its financial position, results of operations or liquidity.

14



15

14. Business Segments
The Company is in the business of manufacturing and distributing exterior residential building products. The Company has a single operating segment and a single reportable segment. The Company’s chief operating decision maker is considered to be the Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the single operating segment level.
The following table sets forth a summary of net sales by principal product offering (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Vinyl windows
$
86,634

 
$
82,254

Vinyl siding products
38,585

 
35,165

Metal products
29,820

 
28,407

Third-party manufactured products
52,227

 
47,499

Other products and services
29,015

 
27,041

 
$
236,281

 
$
220,366


16

15. Subsidiary Guarantors
The Company’s payment obligations under its 9.125% notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis, by its domestic 100% owned subsidiaries, Gentek Holdings, LLC and Gentek Building Products, Inc. (together, the “Subsidiary Guarantors”). AMH New Finance, Inc. is a co-issuer of the 9.125% notes and is a domestic 100% owned subsidiary of the Company having no operations, revenues or cash flows for the periods presented.
Associated Materials Canada Limited, Gentek Canada Holdings Limited and Gentek Buildings Products Limited Partnership are Canadian companies and do not guarantee the 9.125% notes. In the opinion of management, separate financial statements of the respective Subsidiary Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Subsidiary Guarantors.
ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
April 2, 2016
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,249

 
$
—

 
$
26

 
$
796

 
$
—

 
$
6,071

Accounts receivable, net
99,578

 
—

 
6,286

 
25,202

 
—

 
131,066

Intercompany receivables
335,181

 
—

 
68,728

 
1,794

 
(405,703
)
 
—

Inventories
88,936

 
—

 
8,461

 
35,916

 
—

 
133,313

Income taxes receivable
—

 
—

 
198

 
1,526

 
—

 
1,724

Deferred income taxes
244

 
—

 
1,258

 
—

 
—

 
1,502

Prepaid expenses and other current assets
12,366

 
—

 
969

 
1,552

 
—

 
14,887

Total current assets
541,554

 
—

 
85,926

 
66,786

 
(405,703
)
 
288,563

Property, plant and equipment, net
63,047

 
—

 
1,285

 
26,048

 
—

 
90,380

Goodwill
203,841

 
—

 
16,713

 
87,585

 
—

 
308,139

Other intangible assets, net
280,115

 
—

 
32,521

 
84,187

 
—

 
396,823

Intercompany receivable
—

 
832,340

 
—

 
—

 
(832,340
)
 
—

Other assets
3,589

 
—

 
85

 
864

 
—

 
4,538

Total assets
$
1,092,146

 
$
832,340

 
$
136,530

 
$
265,470

 
$
(1,238,043
)
 
$
1,088,443

Liabilities and Member's Deficit
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
67,200

 
$
—

 
$
7,381

 
$
22,959

 
$
—

 
$
97,540

Intercompany payables
1,794

 
—

 
—

 
403,909

 
(405,703
)
 
—

Accrued liabilities
81,125

 
—

 
4,364

 
6,864

 
—

 
92,353

Deferred income taxes
767

 
—

 
—

 
464

 
—

 
1,231

Income taxes payable
34

 
—

 
—

 
385

 
—

 
419

Total current liabilities
150,920

 
—

 
11,745

 
434,581

 
(405,703
)
 
191,543

Deferred income taxes
50,149

 
—

 
11,920

 
21,321

 
—

 
83,390

Other liabilities
76,513

 
—

 
19,625

 
17,172

 
—

 
113,310

Deficit in subsidiaries
141,185

 
—

 
234,425

 
—

 
(375,610
)
 
—

Long-term debt
904,674

 
832,340

 
—

 
26,821

 
(832,340
)
 
931,495

Member’s deficit
(231,295
)
 
—

 
(141,185
)
 
(234,425
)
 
375,610

 
(231,295
)
Total liabilities and member’s deficit
$
1,092,146

 
$
832,340

 
$
136,530

 
$
265,470

 
$
(1,238,043
)
 
$
1,088,443



17

ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS
For The Quarter Ended April 2, 2016
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/
Eliminations
 
Consolidated
Net sales
$
195,331

 
$
—

 
$
32,308

 
$
47,857

 
$
(39,215
)
 
$
236,281

Cost of sales
156,216

 
—

 
29,895

 
36,332

 
(39,215
)
 
183,228

Gross profit
39,115

 
—

 
2,413

 
11,525

 
—

 
53,053

Selling, general and administrative expenses
47,257

 
—

 
1,703

 
10,473

 
—

 
59,433

(Loss) income from operations
(8,142
)
 
—

 
710

 
1,052

 
—

 
(6,380
)
Interest expense, net
20,817

 
—

 
—

 
66

 
—

 
20,883

Foreign currency (gain)
—

 
—

 
—

 
(383
)
 
—

 
(383
)
Loss before income taxes
(28,959
)
 
—

 
710

 
1,369

 
—

 
(26,880
)
Income tax expense (benefit)
778

 
—

 
(19
)
 
373

 
—

 
1,132

Loss before equity loss from subsidiaries
(29,737
)
 
—

 
729

 
996

 
—

 
(28,012
)
Equity income from subsidiaries
1,725

 
—

 
996

 
—

 
(2,721
)
 
—

Net (loss) income
(28,012
)
 
—

 
1,725

 
996

 
(2,721
)
 
(28,012
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments, net of tax
17

 
—

 
35

 
40

 
(75
)
 
17

Foreign currency translation adjustments, net of tax
11,018

 
—

 
11,018

 
11,018

 
(22,036
)
 
11,018

Total comprehensive income (loss)
$
(16,977
)
 
$
—

 
$
12,778

 
$
12,054

 
$
(24,832
)
 
$
(16,977
)

18

ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For The Quarter Ended April 2, 2016
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
(988
)
 
$
—

 
$
3,324

 
$
(17,564
)
 
$
—

 
$
(15,228
)
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
(1,057
)
 


 
(80
)
 
(838
)
 
—

 
(1,975
)
Proceeds from the sale of assets
82

 


 


 
4

 
—

 
86

Payments on loans to affiliates
—

 
—

 
(3,370
)
 
—

 
3,370

 
—

Receipts on loans to affiliates
—

 
—

 
—

 
(7,000
)
 
7,000

 
—

Net cash provided by (used in) investing activities
(975
)
 
—

 
(3,450
)
 
(7,834
)
 
10,370

 
(1,889
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Borrowings under ABL facilities
15,000

 


 


 
23,789

 
—

 
38,789

Payments under ABL facilities
(44,900
)
 


 


 
(6,000
)
 
—

 
(50,900
)
Promissory note, related parties
20,000

 
—

 
—

 
7,500

 
—

 
27,500

Financing costs
(1,614
)
 
 
 
 
 
(10
)
 
 
 
(1,624
)
Borrowings from affiliates
10,370

 
—

 
—

 
—

 
(10,370
)
 
—

Repayments to affiliates
—

 
—

 
—

 
—

 
—

 
—

Net cash (used in) provided by financing activities
(1,144
)
 
—

 
—

 
25,279

 
(10,370
)
 
13,765

Effect of exchange rate changes on cash and cash equivalents


 


 


 
29

 
—

 
29

Net decrease in cash and cash equivalents
(3,107
)
 
—

 
(126
)
 
(90
)
 
—

 
(3,323
)
Cash and cash equivalents at beginning of period
8,356

 


 
152

 
886

 
—

 
9,394

Cash and cash equivalents at end of period
$
5,249

 
$
—

 
$
26

 
$
796

 
$
—

 
$
6,071

 

19

ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
January 2, 2016
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,356

 
$
—

 
$
152

 
$
886

 
$
—

 
$
9,394

Accounts receivable, net
103,506

 
—

 
6,903

 
16,634

 
—

 
127,043

Intercompany receivables
352,323

 
—

 
67,591

 
1,794

 
(421,708
)
 
—

Inventories
88,440

 
—

 
5,527

 
29,407

 
—

 
123,374

Income taxes receivable
—

 
—

 
178

 
1,434

 
—

 
1,612

Deferred income taxes
243

 
—

 
1,258

 
1

 
—

 
1,502

Prepaid expenses and other current assets
12,114

 
—

 
955

 
1,094

 
—

 
14,163

Total current assets
564,982

 
—

 
82,564

 
51,250

 
(421,708
)
 
277,088

Property, plant and equipment, net
65,277

 
—

 
1,303

 
24,214

 
—

 
90,794

Goodwill
203,841

 
—

 
16,713

 
82,354

 
—

 
302,908

Other intangible assets, net
285,115

 
—

 
32,633

 
80,205

 
—

 
397,953

Intercompany receivable
—

 
832,684

 
—

 
—

 
(832,684
)
 
—

Other assets
3,572

 
—

 
1

 
1,020

 
—

 
4,593

Total assets
$
1,122,787

 
$
832,684

 
$
133,214

 
$
239,043

 
$
(1,254,392
)
 
$
1,073,336

Liabilities and Member's Deficit
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
68,213

 
$
—

 
$
4,183

 
$
19,167

 
$
—

 
$
91,563

Intercompany payables
1,794

 
—

 
—

 
419,914

 
(421,708
)
 
—

Accrued liabilities
71,446

 
—

 
4,876

 
7,308

 
—

 
83,630

Deferred income taxes
—

 
—

 
—

 
436

 
—

 
436

Income taxes payable
36

 
—

 
—

 
—

 
—

 
36

Total current liabilities
141,489

 
—

 
9,059

 
446,825

 
(421,708
)
 
175,665

Deferred income taxes
50,147

 
—

 
11,920

 
20,035

 
—

 
82,102

Other liabilities
76,641

 
—

 
19,676

 
16,806

 
—

 
113,123

Deficit in subsidiaries
153,964

 
—

 
246,523

 
—

 
(400,487
)
 
—

Long-term debt
914,907

 
832,684

 
—

 
1,900

 
(832,684
)
 
916,807

Member’s deficit
(214,361
)
 
—

 
(153,964
)
 
(246,523
)
 
400,487

 
(214,361
)
Total liabilities and member’s deficit
$
1,122,787

 
$
832,684

 
$
133,214

 
$
239,043

 
$
(1,254,392
)
 
$
1,073,336


    

20

ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE LOSS
For The Quarter Ended April 4, 2015
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/
Eliminations
 
Consolidated
Net sales
$
179,638

 
$
—

 
$
30,162

 
$
47,248

 
$
(36,682
)
 
$
220,366

Cost of sales
148,967

 
—

 
28,806

 
37,372

 
(36,682
)
 
178,463

Gross profit
30,671

 
—

 
1,356

 
9,876

 
—

 
41,903

Selling, general and administrative expenses
47,657

 
—

 
844

 
9,969

 
—

 
58,470

(Loss) income from operations
(16,986
)
 
—

 
512

 
(93
)
 
—

 
(16,567
)
Interest expense, net
18,788

 
—

 
1,661

 
257

 
—

 
20,706

Foreign currency loss
—

 
—

 
—

 
516

 
—

 
516

(Loss) income before income taxes
(35,774
)
 
—

 
(1,149
)
 
(866
)
 
—

 
(37,789
)
Income tax expense (benefit)
726

 
—

 
24

 
(217
)
 
—

 
533

(Loss) income before equity income (loss) from subsidiaries
(36,500
)
 
—

 
(1,173
)
 
(649
)
 
—

 
(38,322
)
Equity income (loss) from subsidiaries
(1,822
)
 
—

 
(649
)
 
—

 
2,471

 
—

Net (loss) income
(38,322
)
 
—

 
(1,822
)
 
(649
)
 
2,471

 
(38,322
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments, net of tax
148

 
—

 
58

 
48

 
(106
)
 
148

Foreign currency translation adjustments, net of tax
(11,586
)
 
—

 
(11,586
)
 
(11,586
)
 
23,172

 
(11,586
)
Total comprehensive loss
$
(49,760
)
 
$
—

 
$
(13,350
)
 
$
(12,187
)
 
$
25,537

 
$
(49,760
)

21


ASSOCIATED MATERIALS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For The Quarter Ended April 4, 2015
(Unaudited, in thousands)
 
Company
 
Co-Issuer
 
Subsidiary
Guarantors
 
Non-Guarantor
Subsidiaries
 
Reclassification/ Eliminations
 
Consolidated
Net cash (used in) provided by operating activities
$
(20,313
)
 
$
—

 
$
1,707

 
$
(8,065
)
 
$
—

 
$
(26,671
)
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
(5,408
)
 
—

 
(65
)
 
(596
)
 
—

 
(6,069
)
Proceeds from the sale of assets
5

 
—

 
—

 
1

 
 
 
6

Payments on loans to affiliates
—

 
—

 
(1,642
)
 
—

 
1,642

 
—

Receipts on loans to affiliates
2,000

 
—

 
—

 
—

 
(2,000
)
 
—

Net cash used in investing activities
(3,403
)
 
—

 
(1,707
)
 
(595
)
 
(358
)
 
(6,063
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Borrowings under ABL facilities
31,400

 
—

 
—

 
13,170

 
—

 
44,570

Payments under ABL facilities
(11,200
)
 
—

 
—

 
(2,549
)
 
—

 
(13,749
)
Borrowings from affiliates
1,642

 
—

 
—

 
—

 
(1,642
)
 
—

Repayments to affiliates
—

 
—

 
—

 
(2,000
)
 
2,000

 
—

Net cash provided by financing activities
21,842

 
—

 
—

 
8,621

 
358

 
30,821

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
—

 
9

 
—

 
9

Net decrease in cash and cash equivalents
(1,874
)
 
—

 
—

 
(30
)
 
—

 
(1,904
)
Cash and cash equivalents at beginning of period
5,933

 
—

 
—

 
30

 
—

 
5,963

Cash and cash equivalents at end of period
$
4,059

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4,059



22

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A. “Risk Factors” in our Annual Report and under Part II, Item 1A. “Risk Factors” or elsewhere in this report.
Overview
Associated Materials, LLC (“we,” “us”, “our” or “our Company”) is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States and Canada. We were founded in 1947 when we first introduced residential aluminum siding under the Alside® name. We provide a comprehensive offering of exterior building products, including vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories, which we produce at our 11 manufacturing facilities. We also sell complementary products that we source from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors and equipment and tools. We also provide installation services. We distribute these products through our extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom we refer to as our “contractor customers.” This dual distribution network consists of 122 company-operated supply centers, through which we sell directly to our contractor customers, and our direct sales channel. Through our direct sales channel we sell to more than 275 independent distributors, dealers and national account customers. The products we sell are primarily marketed under our brand names, including Alside®, Revere®, Gentek®, Preservation® and Alpine®.
Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have typically utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters.
Our net sales for the quarter ended April 2, 2016 were $236.3 million, representing an increase of $15.9 million, or 7.2%, compared to $220.4 million for the same period in 2015. Our net sales improved across all product lines. Compared to the same period in 2015, sales growth was primarily driven by higher sales in our third-party manufactured products, vinyl window and vinyl siding products. The increase in net sales for third-party manufactured products was due to higher sales volume while the increase in our vinyl window and vinyl siding products was due to a combination of higher sales volume, selling prices and product mix. Vinyl windows, vinyl siding, metal products and third-party manufactured products comprised approximately 37%, 16%, 13% and 22%, respectively, of our net sales for the quarter ended April 2, 2016, which is consistent with the prior period.
Our gross profit for the quarter ended April 2, 2016 was $53.1 million, or 22.5% of net sales, compared to $41.9 million, or 19.0% of net sales, for the same period in 2015. The $11.2 million, or 26.6%, increase in gross profit was due to higher sales volume, improved pricing and lower raw material costs across our manufactured product.
SG&A expenses for the quarter ended April 2, 2016 were $59.4 million, or 25.2% of net sales, compared to $58.5 million, or 26.5% of net sales, for the same period in 2015. The $1.0 million, or 1.6%, increase in SG&A expenses was primarily due to increases in employee compensation expense attributable to higher sales and supply center headcount that was added to support our increased sales. Additionally, sales commission expense has increased related to the increase in overall sales volume compared from prior year. A significant portion of our selling, general and administrative (“SG&A”) expenses are fixed costs such as payroll and benefit costs for our supply center employees, corporate employees and sales representatives, the building lease costs of our supply centers and warehouses, delivery and sales vehicle costs, other administrative expenses and costs related to the operation of our supply centers and corporate office. Other than fixed costs, our SG&A expenses include incentives and commissions, marketing costs, and certain delivery charges such as fuel costs incurred to deliver product to our customers.

23

 
Results of Operations
The following table sets forth our results of operations for the periods indicated (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Net sales (1)
$
236,281

 
$
220,366

Cost of sales
183,228

 
178,463

Gross profit
53,053

 
41,903

Selling, general and administrative expenses
59,433

 
58,470

Loss from operations
(6,380
)
 
(16,567
)
Interest expense
20,883

 
20,706

Foreign currency (gain) loss
(383
)
 
516

Loss before income taxes
(26,880
)
 
(37,789
)
Income tax expense
1,132

 
533

Net loss
$
(28,012
)
 
$
(38,322
)
Other Data:
 
 
 
EBITDA (2)
$
3,809

 
$
(7,204
)
Adjusted EBITDA (2)
3,263

 
(6,397
)
 
(1)
The following table presents a summary of net sales by principal product offering as a percentage of net sales (dollars in thousands):
 
Quarters Ended
 
April 2,
2016
% of
Net
Sales
 
April 4,
2015
% of
Net
Sales
Vinyl windows
$
86,634

36.7
%
 
$
82,254

37.3
%
Vinyl siding products
38,585

16.3
%
 
35,165

16.0
%
Metal products
29,820

12.6
%
 
28,407

12.9
%
Third-party manufactured products
52,227

22.1
%
 
47,499

21.6
%
Other products and services
29,015

12.3
%
 
27,041

12.2
%
 
$
236,281

100.0
%
 
$
220,366

100.0
%
(2)
EBITDA is calculated as net income plus interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted to reflect certain adjustments that are used in calculating covenant compliance under the Amended and Restated Revolving Credit Agreement governing our senior secured asset-based revolving credit facilities (the “ABL facilities”), the Indenture and the Sponsor Secured Note. We consider EBITDA and Adjusted EBITDA to be important indicators of our operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (i) assess our ability to service our debt or incur debt and meet our capital expenditure requirements; (ii) internally measure our operating performance; and (iii) determine our incentive compensation programs. EBITDA and Adjusted EBITDA have not been prepared in accordance with U.S. general accepted accounting principles (“GAAP”). Adjusted EBITDA as presented by us may not be comparable to similarly titled measures reported by other companies. EBITDA and Adjusted EBITDA are not measures determined in accordance with GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results or net cash provided by operating activities (as determined in accordance with GAAP) as a measure of our liquidity.

24

The reconciliation of our net loss to EBITDA and Adjusted EBITDA is as follows (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Net loss
$
(28,012
)
 
$
(38,322
)
Interest expense
20,883

 
20,706

Income tax expense
1,132

 
533

Depreciation and amortization
9,806

 
9,879

EBITDA
3,809

 
(7,204
)
Purchase accounting related adjustments (a)
(852
)
 
(877
)
Executive officer separation and hiring costs (b)
145

 
42

Bank audit fees (c)
—

 
32

Gain on disposal of assets
(11
)
 
—

Stock-based compensation expense (d)
43

 
25

Non-cash expense adjustments (e)
—

 
100

Other normalizing and unusual items (f)
512

 
969

Foreign currency (gain) loss (g)
(383
)
 
516

Adjusted EBITDA
$
3,263

 
$
(6,397
)
 
(a)
Represents the elimination of the impact of purchase accounting adjustments recorded as a result of a series of mergers completed on October 13, 2010, which include the following (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Pension expense adjustment
$
(621
)
 
$
(631
)
Amortization related to fair value adjustment of leased facilities
(55
)
 
(68
)
Amortization related to warranty liabilities
(176
)
 
(178
)
Purchase accounting related adjustments (a)
$
(852
)
 
$
(877
)
(b)
Represents separation and hiring costs, including payroll taxes and certain benefits and professional fees.
(c)
Represents bank audit fees incurred under our current ABL facilities and prior ABL facility.
(d)
Represents equity-based compensation related to restricted shares or deferred stock units issued to certain of our directors and officers.
(e)
Represents the non-cash expense related to warranties provision in excess of claims paid.
(f)
Represents the following (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Professional fees and other costs (i)
$
224

 
$
841

Accretion on lease liability (ii)
115

 
114

Excess severance costs (iii)
173

 
14


$
512

 
$
969

(i)
Represents management’s estimate of unusual consulting and advisory fees and other costs associated with corporate strategic initiatives. For the quarter ended April 4, 2015, we incurred costs of $0.5 million, related to the launch of the new window platform in 2015. This initiative was complete as of the quarter ended April 2, 2016.
(ii)
Represents accretion on the liability recorded at present value for future lease costs in connection with the warehouse facility adjacent to our Ennis manufacturing plant, which we discontinued using during 2009.

25

(iii)
Represents management’s estimates for excess severance expense due primarily to unusual changes within non-executive management.
(g)
Represents foreign currency (gain) loss recognized in the Condensed Consolidated Statements of Comprehensive Loss, including (gain) loss on foreign currency exchange hedging agreements.
Quarter Ended April 2, 2016 Compared to Quarter Ended April 4, 2015
Net sales were $236.3 million for the quarter ended April 2, 2016, an increase of $15.9 million, or 7.2%, compared to $220.4 million for the quarter ended April 4, 2015. Our net sales improved across all product lines. Compared to the same period in 2015, sales growth was primarily driven by higher sales in third-party manufactured products, vinyl window and vinyl siding products. Our net sales increased $4.7 million, or 10.0% for third-party manufactured products. Vinyl window sales this quarter were higher by $4.4 million, or 5.3% primarily due to unit volume growth of approximately 2%. Vinyl siding sales were higher by $3.4 million, or 9.7% with unit volume growth of approximately 9% compared to the prior year quarter. Also contributing to the top line growth was a $2.0 million, or 7.8% increase in net sales for our Installed Sales Solutions (“ISS”) business, and a $1.4 million, or 5.0% increase in metal products, compared to the same period in 2015. On a constant currency basis compared to quarter ended April 4, 2015, our net sales for the quarter ended April 2, 2016 were higher by $2.3 million, or 8.2%.
Gross profit for the quarter ended April 2, 2016 was $53.1 million, or 22.5% of net sales, compared to gross profit of $41.9 million, or 19.0% of net sales, for the quarter ended April 4, 2015. Compared to the prior year quarter, we achieved an approximate 350 basis point increase in gross profit margin as a percent of net sales. The increase in gross profit was primarily due to lower raw material costs of $5.5 million, improved pricing and operational efficiencies of $4.3 million and higher volume impacts of $3.7 million which was driven by strong performance in our integrated product offerings. These gross profit increases were partially offset by higher plant fixed costs of $1.1 million. For the quarter ended April 2, 2016, a weaker Canadian dollar negatively impacted our gross profit by $1.6 million compared to the prior year quarter.
SG&A expenses were $59.4 million, or 25.2% of net sales, for the quarter ended April 2, 2016, compared to $58.5 million, or 26.5% of net sales, for the quarter ended April 4, 2015. The increase of SG&A expenses of $1.0 million was primarily due a $0.7 million increase in employee compensation expense mainly attributable to higher sales and supply center headcount that was added to support the growth of our ISS business and supply center operations, as well as higher commission costs of $0.2 million. Compared to the prior year quarter, SG&A expenses were favorably impacted by $0.7 million due to a weaker Canadian dollar in 2016.
Loss from operations was $6.4 million for the quarter ended April 2, 2016 and $16.6 million for the quarter ended April 4, 2015.
Interest expense was $20.9 million and $20.7 million for the quarters ended April 2, 2016 and April 4, 2015, respectively. The $0.2 million increase in interest expense was primarily related to higher interest rates on the ABL facilities.
Income tax expense of $1.1 million and $0.5 million for the quarters ended April 2, 2016 and April 4, 2015 reflected negative effective income tax rates of 4.2% and 1.4%, respectively, for the quarters then ended. The lower than statutory effective tax rate for both periods was primarily a result of operating losses in the U.S. with no tax benefit recognized due to the valuation allowance against net U.S. deferred tax assets.
Net loss for the quarter ended April 2, 2016 was $28.0 million compared to net loss of $38.3 million for the quarter ended April 4, 2015. Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we have historically had losses or small profits in the first quarter of each calendar year.
Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than an asset, consistent with the presentation of debt discounts. The recognition and measurement of debt issuance costs are not affected by the new guidance. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 provides that, given the absence of authoritative guidance in ASU 2015-03 with respect to presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, an entity is permitted to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance

26

costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. During fiscal 2016, ASU 2015-03 and ASU 2015-05 became effective and accordingly, debt issuance costs of $8.7 million were reclassified from other assets to long-term debt on the January 2, 2016 Condensed Consolidated Balance Sheet.
Recent Accounting Pronouncements

In March 2016, the FASB issued a modified standard on stock compensation. This standard makes several modifications to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. It also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective commencing with our 2017 fiscal year and requires enhanced disclosures. The Company is currently assessing the potential impact of the new requirements under the standard

In February 2016, the FASB issued a new standard on leases. The new standard requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. The amendment is effective commencing with our 2019 fiscal year and requires enhanced disclosures. We are evaluating the timing of adoption of this guidance.

In November 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our balance sheet. We are evaluating the timing of adoption of this guidance.
In August 2015, the FASB issued an amendment to defer for one year the effective date of the new standard on revenue recognition issued in May 2014. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standard is effective commencing with our 2018 fiscal year and requires enhanced disclosures. We are evaluating the timing of adoption of this guidance.
In July 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or net realizable value. The guidance is effective in 2017 with early adoption permitted. We are evaluating the timing of adoption of this guidance.
In August 2014, the FASB issued a standard on the presentation of “Going Concern” in the financial statements. The standard requires management to evaluate whether there are any conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, and, if present, provide enhanced disclosures. The standard is effective with our 2017 fiscal year. We are evaluating the timing of adoption of this guidance.

Liquidity and Capital Resources
Cash Flows
The following sets forth a summary of our cash flows for the periods indicated (in thousands):
 
Quarters Ended
 
April 2,
2016
 
April 4,
2015
Net cash used in operating activities
$
(15,228
)
 
$
(26,671
)
Net cash used in investing activities
(1,889
)
 
(6,063
)
Net cash provided by financing activities
13,765

 
30,821

As of April 2, 2016, we had cash and cash equivalents of $5.3 million in the United States and $0.8 million in Canada. We had available borrowing capacity of $40.6 million under our ABL facilities, after giving effect to outstanding letters of credit and borrowing base limitations. We expect that current cash and cash equivalents, cash generated from operating activities and borrowing capacity under the ABL facilities will be our principal sources of liquidity. In addition, if needed, we can use our available baskets under our existing indebtedness to seek access to other working capital sources, if needed. It is our intention to pursue efforts to refinance our existing long term debt. However, based on our current level of operations and cash flow projections, as well as our potential, id needed, to seek other working capital sources prior to the completion of such refinancing, we believe that these sources will provide adequate liquidity to maintain our operations and capital expenditure

27

requirements and service our debt for the next 12 months. Should economic conditions or market factors deteriorate beyond our expectations, we may not generate sufficient cash flow from operations or may not have future borrowings available to us under the ABL facility in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Cash Flows from Operating Activities
Net cash used in operating activities was $15.2 million for the quarter ended April 2, 2016, compared to $26.7 million for the quarter ended April 4, 2015. The $11.4 million increase in cash was primarily driven by improved operating results of $10.2 million and improvements in working capital of $1.2 million, compared to the prior year quarter.
Change in accounts receivable was a use of cash of $3.6 million for the quarter ended April 2, 2016, compared to a use of cash of $2.1 million for the quarter ended April 4, 2015. The $1.5 million net decrease in cash flow from accounts receivable reflected higher sales in the first quarter of 2016 compared to the prior year quarter, partially offset by improvements in the timing of collections from customers. Change in inventory was a use of cash of $7.9 million for the quarter ended April 2, 2016, compared to a use of cash of $17.8 million for the quarter ended April 4, 2015. The lower use of cash in the current year quarter was primarily driven by improvement in working capital initiatives during the first quarter of 2016. Change in accounts payable and accrued liabilities was a source of cash of $13.3 million for the quarter ended April 2, 2016, compared to a source of cash of $20.7 million for the quarter ended April 4, 2015. The decrease of $7.4 million in cash flows from accounts payable and accrued liabilities was primarily due to the reduction of inventory purchases compared to the prior year quarter.
Cash Flows from Investing Activities
Net cash used in investing activities consisted of $2.0 million and $6.1 million of capital expenditures during the quarters ended April 2, 2016 and April 4, 2015, respectively. The capital expenditures for the current year quarter related to various investments at our manufacturing facilities, while the capital expenditures for the prior year quarter primarily related to investments in our new window platform.
Cash Flows from Financing Activities
Net cash provided by financing activities for the quarter ended April 2, 2016 included borrowings of $38.8 million under our ABL facilities and proceeds from the promissory note of $27.5 million offset by repayments of $50.9 million. Net cash provided by financing activities for the quarter ended April 4, 2015 included borrowings of $44.6 million under our ABL facilities offset by repayments of $13.7 million.
Description of Our Indebtedness
9.125% Senior Secured Notes due 2017
In October 2010, our Company and our wholly-owned subsidiary, AMH New Finance, Inc. (“AMHNF” and collectively, the “Issuers”) issued and sold $730.0 million of 9.125% Senior Secured Notes due November 1, 2017 (the “existing notes”). The existing notes bear interest at a rate of 9.125% per annum, payable May 1 and November 1 of each year.
On May 1, 2013, the Issuers issued and sold an additional $100.0 million in aggregate principal amount of 9.125% Senior Secured Notes due November 1, 2017 (the “new notes” and, together with the existing notes, the “9.125% notes”) at an issue price of 106.00% of the principal amount of the new notes in a private placement. We used the net proceeds of the offering to repay the outstanding borrowings under our ABL facilities and for other general corporate purposes. The new notes were issued as additional notes under the same indenture, dated as of October 13, 2010, governing the existing notes, as supplemented by a supplemental indenture (the “Indenture”). On October 31, 2013, all of the new notes were exchanged for 9.125% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933, as amended. The new notes are consolidated with and form a single class with the existing notes and have the same terms as to status, redemption, collateral and otherwise (other than issue date, issue price and first interest payment date) as the existing notes. The debt premium related to the issuance of the new notes is being amortized into interest expense over the life of the new notes. The unamortized premium of $2.7 million is included in the long-term debt balance for the 9.125% notes. The effective interest rate of the new notes, including the premium, is 7.5% as of January 2, 2016.
The 9.125% notes, at par value of 830.0 million, have an estimated fair value, classified as a Level 1 measurement, of $653.6 million and $576.4 million based on quoted market prices as of April 2, 2016 and January 2, 2016, respectively.
We may from time to time, in our sole discretion, purchase, redeem or retire the 9.125% notes in privately negotiated or open market transactions, by tender offer or otherwise. On April 15, 2014, Parent filed a request with the SEC to withdraw the Registration Statement on Form S-1 filed by Parent on July 15, 2013 for a proposed IPO of its common stock. The registration

28

statement was withdrawn because a determination has been made not to proceed with an IPO of Parent’s common stock at the time.
Guarantees. The 9.125% notes are unconditionally guaranteed, jointly and severally, by each of the Issuers’ 100% owned direct and indirect domestic subsidiaries (“guarantors”) that guarantee our obligations under the ABL facilities.
Collateral. The 9.125% notes and the guarantees are secured by a first-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets located in the United States (other than the ABL collateral, in which the 9.125% notes and the guarantees have a second-priority lien, and certain other excluded assets), including equipment, owned real property valued at $5.0 million or more and all present and future shares of capital stock of each of the Issuers’ and each guarantor’s material directly 100% owned domestic subsidiaries and 65% of the present and future shares of capital stock, of each of the Issuers’ and each guarantor’s directly owned foreign restricted subsidiaries (other than Canadian subsidiaries), in each case subject to the Rule 3-16 exclusion described below, certain other exceptions and customary permitted liens. In addition, the 9.125% notes and the guarantees are secured by a second-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets, which assets also secure the Issuers’ obligations under the ABL facilities, including accounts receivable, inventory, related general intangibles, certain other related assets and the proceeds thereof.
The capital stock and other securities of any subsidiary will be excluded from the collateral securing the 9.125% notes and the guarantees to the extent that the pledge of such capital stock and other securities would result in the Company being required to file separate financial statements of such subsidiary with the SEC pursuant to Rule 3-16 or Rule 3-10 of Regulation S-X under the Securities Act of 1933, as amended. Rule 3-16 of Regulation S-X requires the presentation of a company’s standalone, audited financial statements if that company’s capital stock or other securities are pledged to secure the securities of another issuer, and the greatest of the principal amount, par value, book value and market value of the pledged stock or securities equals or exceeds 20% of the principal amount of the securities secured by such pledge. Accordingly, the collateral securing the 9.125% notes and the guarantees may in the future exclude the capital stock and securities of the Company’s subsidiaries, in each case to the extent necessary to not be subject to such requirement.
Optional Redemption. The Issuers have the option to redeem the 9.125% notes, in whole or in part, at any time on or after November 1, 2013 at redemption prices (expressed as percentages of principal amount of the 9.125% notes to be redeemed) of 106.844%, 104.563%, 102.281% and 100.000% during the 12-month periods commencing on November 1, 2013, 2014, 2015 and 2016, respectively, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable redemption date.
Change of Control. Upon the occurrence of a change of control, as defined in the Indenture, the Issuers must give holders of notes the opportunity to sell the Issuers their 9.125% notes at 101% of their face amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
Covenants. The Indenture contains covenants limiting the Issuers’ ability and the ability of their restricted subsidiaries to, among other things: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell all or substantially all assets; enter into transactions with affiliates; and enter into agreements that would restrict our subsidiaries to pay dividends or make other payments to us. These covenants are subject to important exceptions and qualifications as described in the Indenture. Most of these covenants will cease to apply for so long as the 9.125% notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s.
ABL Facilities
In October 2010, the Company certain of its subsidiaries (as “U.S. borrowers” and “Canadian borrowers” and, collectively, the “borrowers”) entered into the ABL facilities in the amount of $225.0 million (comprised of a $150.0 million U.S. facility and a $75.0 million Canadian facility. the “U.S. facility” and the “Canadian facility,” respectively) pursuant to a revolving credit agreement dated October 13, 2010, which was subsequently amended and restated on April 18, 2013 (as amended, the “Amended and Restated Revolving Credit Agreement”) to, among other things, extend the maturity date of the revolving credit agreement from October 13, 2015 to the earlier of (i) April 18, 2018 and (ii) 90 days prior to the maturity date of the existing notes. Subsequently, we terminated the tranche B revolving credit commitments of $12.0 million and wrote off $0.5 million of deferred financing fees related to the ABL facilities.

29

Interest Rate and Fees. At our option, the U.S. and Canadian tranche A revolving credit loans under the Amended and Restated Revolving Credit Agreement governing the ABL facilities bear interest at the rate equal to (1) the London Interbank Offered Rate (“LIBOR”) (for eurodollar loans under the U.S. facility) or the Canadian Dealer Offered Rate (“CDOR”) (for loans under the Canadian facility), plus an applicable margin of 2.25% as of April 2, 2016, or (2) the alternate base rate (for alternate base rate loans under the U.S. facility, which is the highest of a prime rate, the Federal Funds Effective Rate plus 0.50% and a one-month LIBOR rate plus 1.0% per annum) or the alternate Canadian base rate (for loans under the Canadian facility, which is the higher of a Canadian prime rate and the 30-day CDOR plus 1.0%), plus an applicable margin of 1.25% as of April 2, 2016, in each case, which interest rate margin may vary in 25 basis point increments between three pricing levels determined by reference to the average excess availability in respect of the U.S. and Canadian tranche A revolving credit loans. In addition to paying interest on outstanding principal under the ABL facilities, we are required to pay a commitment fee in respect of the U.S. and Canadian tranche A revolving credit loans, payable quarterly in arrears, of 0.375%.
Borrowing Base. Availability for borrowings under each of the U.S. facility and the Canadian facility is subject to a borrowing base, which is based on (i) the U.S borrowers’ eligible accounts receivable and inventory, with respect to the U.S. facility and (ii) the Canadian borrowers’ eligible accounts receivable, inventory and, equipment and real property, in each case, after adjusting for customary reserves and, in the case of the Canadian facility, certain payables established or modified from time to time by and at the permitted discretion of the administrative agent thereunder. To the extent that the value of the components in a borrowing base decline, the applicable borrowing base will decrease and the availability under the ABL facilities may decrease below the $213.0 million of aggregate commitments. In addition, if the amount of outstanding borrowings and letters of credit under the U.S. facility or the Canadian facility exceeds the applicable borrowing base or the applicable revolving credit commitments, we are required to prepay borrowings in an amount sufficient to eliminate the excess.
Guarantors. All obligations under the U.S. facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material U.S. restricted subsidiary of us and by our direct parent, other than certain excluded subsidiaries (“U.S. guarantors”). All obligations under the Canadian facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material Canadian restricted subsidiary of us, other than certain excluded subsidiaries (“Canadian guarantors” and, together with U.S. guarantors, “ABL guarantors”) and the U.S. guarantors.
Security. All obligations of the U.S. borrowers and the U.S. guarantors under the ABL facilities are secured by a security interest in substantially all of our present and future property and assets, including a first-priority security interest in our capital stock and a second-priority security interest in the capital stock of each of our direct, material wholly-owned restricted subsidiaries (the “U.S ABL Collateral”. The Canadian security agreement provides that all obligations of the Canadian borrowers and the Canadian guarantors are secured by the U.S. ABL Collateral and a security interest in substantially all of our Canadian assets, including a first-priority security interest in the capital stock of the Canadian borrowers and each direct, material wholly-owned restricted subsidiary of the Canadian borrowers and Canadian guarantors.
Covenants, Representations and Warranties. The Amended and Restated Revolving Credit Agreement, contains customary representations and warranties and customary affirmative and negative covenants, including, with respect to negative covenants, among other things, restrictions on indebtedness, liens, investments, fundamental changes, asset sales, dividends and other distributions, prepayments or redemption of junior debt, transactions with affiliates and negative pledge clauses. There are no financial covenants included in the Amended and Restated Revolving Credit Agreement, other than a springing fixed charge coverage ratio of at least 1.00 to 1.00, which, pursuant to Amendment No. 3 (as defined below), will be tested only when excess availability is less than (1) for the period commencing on and including February 19, 2016 through and including April 21, 2016, $10.0 million, (2) for the period commencing on and including April 22, 2016 through and including May 19, 2016, $7.5 million, (3) for the period commencing on and including May 20, 2016 through and including June 3, 2016, $10.0 million and (4) for the period commencing on and including June 4, 2016 and thereafter, the greater of (i) 10.0% of the sum of (x) the lesser of (A) the U.S. borrowing base and (B) the U.S. revolving credit commitments and (y) the lesser of (A) the Canadian borrowing base and (B) the Canadian revolving credit commitments and (ii) $20.0 million, in each case for a period of five consecutive business days until the 30th consecutive day when excess availability exceeds the above threshold.
On February 19, 2016, we entered into Amendment No. 3 to Amended and Restated Revolving Credit Agreement (“Amendment No. 3”), which permitted, among other things:
•
for the period commencing on and including February 19, 2016 through April 21, 2016, for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days (or upon the occurrence and continuance of an event of default), and
•
for the period commencing on and including April 22, 2016 through and including May 19, 2016, for a cash dominion period to commence, only if excess availability is less than $7.5 million for a period of five consecutive business days (or upon the occurrence and continuance of an event of default), and

30

•
for the period commencing on and including May 20, 2016 through and including June 3, 2016, for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days.
In addition, Amendment No. 3 includes a provision which reduces excess availability in certain circumstances by adding an availability block (i) for the period commencing on and including February 19, 2016 through and including April 21, 2016 $10.0 million, (ii) for the period commencing on and including April 22, 2016 through and including May 19, 2016 $7.5 million, and commencing on and including May 20, 2016 through April 18, 2018 $10.0 million, which would increase to $20.0 million for the period beginning on and including May 20, 2016 through April 18, 2018 in the event all or any portion of the principal of the Sponsor Secured Note (as defined below) is repaid prior to the Amended and Restated Revolving Credit Agreement maturity date.
The fixed charge coverage ratio was 1.05:1.00 for the four consecutive fiscal quarter test period ended April 2, 2016 based upon consolidated adjusted EBITDA of $101.0 million in accordance with the Credit Agreement. We have not triggered such fixed charge coverage ratio covenant as of April 2, 2016, as excess availability of $40.6 million as of such date was in excess of the covenant trigger threshold. We do not expect to trigger such covenant for fiscal year 2016. Should the current economic conditions or other factors described herein cause our results of operations to deteriorate beyond our expectations, we may trigger such covenant and, if so triggered, may not be able to satisfy such covenant and be forced to refinance such debt or seek a waiver. Even if new financing is available, it may not be available on terms that are acceptable to us. If we are required to seek a waiver, we may be required to pay significant amounts to the lenders under our ABL facilities to obtain such a waiver.
As of April 2, 2016, there was $80.7 million drawn under our ABL facilities and $40.6 million available for additional borrowings. The weighted average per annum interest rate applicable to borrowings under the U.S. portion and the Canadian portion of the ABL facilities was 2.9% and 4.6%, respectively, as of April 2, 2016. We had letters of credit outstanding of $12.3 million as of April 2, 2016 primarily securing insurance policy deductibles, certain lease facilities and our purchasing card program.
In addition to the financial covenant described above, certain incurrences of debt and investments require compliance with financial covenants under the Amended and Restated Revolving Credit Agreement and the Indenture. The breach of any of these covenants could result in a default under the Amended and Restated Revolving Credit Agreement and the Indenture, and the lenders or note holders, as applicable, could elect to declare all amounts borrowed due and payable. See Part 1, Item 1A. “Risk Factors” in our Annual Report. We were in compliance with such financial covenants as of April 2, 2016.
EBITDA is calculated by reference to net income plus interest and amortization of other financing costs, provision for income taxes, depreciation and amortization. Consolidated EBITDA, as defined in the Amended and Restated Revolving Credit Agreement and the Indenture, is calculated by adjusting EBITDA to reflect adjustments permitted in calculating covenant compliance under these agreements. Consolidated EBITDA will be referred to as Adjusted EBITDA herein. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate our ability to comply with our financial covenant.
First Lien Promissory Note
On February 19, 2016, the Company, the other borrowers, AMHNF and Holdings, and H&F Finco LLC (“H&F Finco”), an affiliate of Hellman & Friedman LLC, entered into a first lien promissory note (the “Sponsor Secured Note”), $20.0 million to the U.S. borrowers, AMHNF and Holdings and $7.5 million to the Canadian borrowers. The Sponsor Secured Note bears interest at the LIBOR rate plus 4.25%, with a LIBOR floor of 1%, and matures at the earlier of (i) June 18, 2018 and (ii) 30 days prior to the maturity date of the Company’s 9.125% notes. Prepayment of the Sponsor Secured Note is permitted if (i) excess availability on the date of such payment (prior to giving effect thereto) is no less than $60.0 million and (ii) excess availability on the date of such payment (immediately after giving effect thereto) and the projected daily average excess availability for the thirty-day period immediately following the date of such payment is, in each case, no less than $32.5 million. The Sponsor Secured Note is subject to the same covenants and events of default contained in the Amended and Restated Revolving Credit Agreement and certain additional customary covenants and events of default.
The Sponsor Secured Note is guaranteed by the same guarantors and to the same extent as such guarantors guarantee the obligations under our Amended and Restated Revolving Credit Agreement. Our obligations, including those of AMHNF, Holdings and the guarantors under the Sponsor Secured Note are secured on a pari passu basis to the liens and assets securing the obligations under the Amended and Restated Revolving Credit Agreement (the “ABL Shared Collateral”), subject to the applicable intercreditor agreement. Concurrently with entering into the Sponsor Secured Note, we, the other borrowers, AMHNF, Holdings and the guarantors under the Sponsor Secured Note entered into a revolving loan intercreditor agreement with H&F Finco, as the subordinated debt representative and UBS AG, Stamford Branch and UBS AG Canada Branch, as the senior representatives which subordinates the lien of H&F Finco to the lien of the senior representative and the senior lenders

31

under the Amended and Restated Revolving Credit Agreement in respect of any right of payment from the proceeds of any sale or disposition of ABL Shared Collateral.
Effects of Inflation
The principal raw materials used by us are vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware, and packaging materials, as well as diesel fuel, all of which have historically been subject to price changes. Raw material pricing on our key commodities has fluctuated significantly over the past several years. Our freight costs may also fluctuate based on changes in gasoline and diesel fuel costs related to our trucking fleet. Our ability to maintain gross margin levels on our products during periods of rising raw material costs and freight costs depends on our ability to obtain selling price increases. Furthermore, the results of operations for individual quarters can and have been negatively impacted by a delay between the timing of raw material cost increases and price increases on our products. There can be no assurance that we will be able to maintain the selling price increases already implemented or achieve any future price increases. At April 2, 2016, we had no raw material hedge contracts in place.
Forward-Looking Statements
All statements (other than statements of historical facts) included in this report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
•
declines in remodeling and home building industries, economic conditions and changes in interest rates, foreign currency exchange rates and other conditions;
•
our substantial level of indebtedness;
•
our ability to comply with certain financial covenants in our debt instruments and the restrictions such covenants impose on our ability to operate our business;
•
our ability to generate sufficient cash, or access capital resources, to service all our debt obligations, working capital needs and planned capital expenditures;
•
deteriorations in availability of consumer credit, employment trends, levels of consumer confidence and spending and consumer preferences;
•
increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products;
•
our substantial fixed costs;
•
delays in the development of new or improved products or our inability to successfully develop new or improved products;
•
changes in raw material costs and availability of raw materials and finished goods;
•
consolidation of our customers;
•
increases in union organizing activity;
•
changes in weather conditions;
•
our history of operating losses;
•
our ability to attract and retain qualified personnel;
•
in the event of default under our debt instruments, the ability of creditors under our debt instruments to foreclose on our collateral;
•
any impairment of goodwill or other intangible assets;
•
future recognition of our deferred tax assets;
•
increases in mortgage rates, changes in mortgage interest deductions and the reduced availability of financing;
•
our exposure to foreign currency exchange risk;
•
our control by investment funds affiliated with Hellman & Friedman, LLC; and
•
the other factors discussed under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016, filed with the Securities and Exchange Commission on March 22, 2016 (“Annual Report”) and elsewhere in this report.
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information

32

currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The occurrence of the events described under Part 1, Item 1A. “Risk Factors” in our Annual Report and elsewhere in this report could have a material adverse effect on our business, results of operations and financial condition.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statement to actual results or to changes in our expectations.

33

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
From time to time, we may have outstanding borrowings under our ABL facilities and may incur additional borrowings for general corporate purposes, including working capital and capital expenditures. As of April 2, 2016, the interest rate applicable to outstanding loans under the U.S. and Canadian tranche A revolving facilities was, at our option, equal to either a United States or Canadian adjusted base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 1.75% to 2.25%, with the applicable margin in each case depending on our quarterly average “excess availability” as defined in the credit facilities.
As of April 2, 2016, we had borrowings outstanding of $80.7 million under the ABL facilities. The effect of a 1.00% increase or decrease in interest rates would increase or decrease the total annual interest expense by $0.8 million.
We have $830.0 million aggregate principal amount of 9.125% notes outstanding as of April 2, 2016 that bear a fixed interest rate of 9.125% and mature in 2017. The fair value of our 9.125% notes is sensitive to changes in interest rates. In addition, the fair value is affected by our overall credit rating, which could be impacted by changes in our future operating results. These 9.125% notes have an estimated fair value of $653.6 million based on quoted market prices as of April 2, 2016.
Foreign Currency Exchange Risk
Our revenues are generated primarily from domestic customers and are realized in U.S. dollars. However, we realize revenues from sales made through our Canadian distribution centers in Canadian dollars. Our Canadian manufacturing facilities acquire raw materials and supplies from U.S. vendors, which results in foreign currency transactional gains and losses upon settlement of the obligations. Payment terms among Canadian manufacturing facilities and these vendors are short-term in nature. We may, from time to time, enter into foreign exchange forward contracts with maturities of less than three months to reduce our exposure to fluctuations in the Canadian dollar. As of April 2, 2016, we were a party to foreign exchange forward contracts for Canadian dollars, the value of which was $0.1 million of gain.
A 10% strengthening or weakening from the levels experienced during the quarter ended April 2, 2016 of the U.S. dollar relative to the Canadian dollar would have resulted in a $1.4 million decrease or increase, respectively, in comprehensive loss for the quarter ended April 2, 2016.
Commodity Price Risk
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects of Inflation” for a discussion of the market risk related to our principal raw materials (vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware and packaging materials) and diesel fuel.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
During the fiscal period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal period covered by this report, the disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the quarter ended April 2, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


34

PART II. OTHER INFORMATION
Items 2, 3, 4 and 5 are not applicable or the answer to such items is none; therefore, the items have been omitted and no reference is required in this Quarterly Report on Form 10-Q.
Item 1.
Legal Proceedings
We are involved from time to time in litigation arising in the ordinary course of business, none of which, individually or in the aggregate, after giving effect to existing insurance coverage, is expected to have a material adverse effect on our financial position, results of operations or liquidity. From time to time, we are also involved in proceedings and potential proceedings relating to environmental and product liability matters.
Environmental Claims
The Woodbridge, New Jersey facility is currently the subject of an investigation and/or remediation before the New Jersey Department of Environmental Protection (“NJDEP”) under ISRA Case No. E20030110 for our wholly owned subsidiary, Gentek Building Products, Inc. (“Gentek”). The facility is currently leased by Gentek. Previous operations at the facility resulted in soil and groundwater contamination in certain areas of the property. In 1999, the property owner and Gentek signed a remediation agreement with NJDEP, pursuant to which the property owner and Gentek agreed to continue an investigation/remediation that had been commenced pursuant to a Memorandum of Agreement with NJDEP. Under the remediation agreement, NJDEP required posting of a remediation funding source of $0.1 million, which is currently satisfied by a $0.3 million standby letter of credit that was provided by Gentek to NJDEP. During 2014, the delineation studies were completed and in early 2015 the Company was presented with several remedial plans. Based on the alternatives presented, the Company identified what it believed to be the most likely option and recorded the minimum liability for that option, which totaled $1.0 million as of January 2, 2016, the balance of which remains unchanged as of April 2, 2016. We believe this matter will not have a material adverse effect on our financial position, results of operations or liquidity.
Environmental claims, product liability claims and other claims are administered by us in the ordinary course of business, and we maintain pollution and remediation and product liability insurance covering certain types of claims. Although it is difficult to estimate our potential exposure to these matters, we believe that the resolution of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 1A.
Risk Factors
There have been no material changes to the risk factors disclosed in Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2016 filed with the Securities and Exchange Commission on March 22, 2016, which include detailed discussions of risk factors that could materially affect our business, financial condition or results of operations and are incorporated herein by reference.
Item 6.
Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference.

35

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
ASSOCIATED MATERIALS, LLC
 
 
 
(Registrant)
 
 
 
 
Date:
May 3, 2016
By:
/s/ Scott F. Stephens
 
 
 
Scott F. Stephens
 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)


36


EXHIBIT INDEX
 
Exhibit
Number
  
Description
 
 
 
3.1
 
Certificate of Formation of Associated Materials, LLC (incorporated by reference to Exhibit 3.1 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 25, 2008).
 
 
 
3.2
 
Amended and Restated Limited Liability Company Agreement of Associated Materials, LLC (incorporated by reference to Exhibit 3.2 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 21, 2014).
 
 
 
10.1
 
Amendment No. 3 to Amended and Restated Revolving Credit Agreement and US Security Agreement, dated February 19, 2016, among Associated Materials Incorporated, Associated Materials, LLC, Gentek Holdings, LLC, Gentek Building Products, Inc., AMH New Finance, Inc., Associated Materials Canada Limited, Gentek Canada Holdings Limited, Gentek Building Products Limited Partnership and several lenders and agents thereto (incorporated by reference to Exhibit 10.35 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 22, 2016).
 
 
 
10.2
 
First Lien Promissory Note, dated February 19, 2016, among Associated Materials Incorporated, Associated Materials, LLC, Gentek Holdings, LLC, Gentek Building Products, Inc., AMH New Finance, Inc., Associated Materials Canada Limited, Gentek Canada Holdings Limited, Gentek Building Products Limited Partnership and H&F Finco LLC. (incorporated by reference to Exhibit 10.36 to Associated Materials, LLC’s Annual Report on Form 10-K, filed with the SEC on March 22, 2016).
 
 
 
31.1
  
Certification of the Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of the Principal Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1†
  
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
†
This document is being furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986.

37

ASSOCIATED MATERIALS, LLC Reports

Also read