<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
------------------
For Quarterly Period Ended June 30, 1996
Commission File Number 0-21856
ABT BUILDING PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3684348
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Neenah Center, Neenah, Wisconsin 54956
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 751-8611
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No .
As of the close of business on August 13, 1996, the registrant had
outstanding 10,414,160 shares of Common Stock.
<PAGE>
ABT BUILDING PRODUCTS CORPORATION and Subsidiaries
INDEX
Part I: Financial Statements Page Number
Unaudited Balance Sheets June 30, 1996
and December 31, 1995 3
Unaudited Statements of Income for the three
months and six months ended June 30, 1996
and June 30, 1995 4
Unaudited Statements of Cash Flows for the six
months ended June 30, 1996 and June 30,
1995 5
Condensed Notes to Unaudited Financial
Statements 6 - 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 16
Part II: Other Information 17
Signature Page 18
<PAGE>
ABT Buildinq Products Corporation and Subsidiaries
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
(unaudited)
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 2,317 $ 1,719
Accounts receivable, less allowances of
$2,452 and $2,824, respectively 25,961 43,498
Inventories 48,717 49,288
Prepaid expenses 1,838 2,759
Deferred tax assets 645 1,567
--------- ---------
Total Current Assets 79,478 98,831
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land 2,960 2,987
Buildings and improvements 27,029 27,286
Machinery and equipment 95,111 96,476
Furniture and fixtures 3,808 3,517
Construction in progress 5,802 16,986
--------- ---------
134,710 147,252
Less-Accumulated depreciation (16,156) (21,381)
--------- ---------
Net property, plant and equipment 118,554 125,871
OTHER ASSETS, Net 2,724 3,019
GOODWILL, Net 10,011 9,808
--------- ---------
Total Assets $ 210,767 $ 237,529
========= =========
Liabilities & Stockholders' Equity
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 123 $ 49
Accounts Payable 14,941 18,016
Accrued Expenses 8,652 12,883
--------- ---------
Total Current Liabilities 23,716 30,948
LONG-TERM DEBT 84,506 91,404
OTHER LONG TERM LIABILITIES 6,189 6,294
DEFERRED INCOME TAXES 8,236 10,744
STOCKHOLDERS' EQUITY
Common stock 122 122
Additional paid-in capital 61,830 61,778
Cumulative translation adjustment (71) (332)
Retained earnings 53,485 65,518
Less: Treasury Shares (27,246) (28,947)
--------- ---------
Total Stockholders' Equity 88,120 98,139
--------- ---------
Total Liabilities and Stockholders' Equity $ 210,767 $ 237,529
========= =========
</TABLE>
See accompanying notes to the financial statements
3
<PAGE>
ABT Building Products Corporation and Subsidiaries
Statements of Income (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996 1995 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 62,892 $ 82,549 $ 116,604 $ 156,911
COST OF SALES 45,567 58,080 83,143 111,380
-------- -------- --------- ---------
Gross profit 17,325 24,469 33,461 45,531
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,548 11,892 14,058 22,074
-------- -------- --------- ---------
Operating income 9,777 12,577 19,403 23,457
OTHER INCOME (EXPENSE) (1,454) (1,850) (2,224) (3,724)
-------- -------- --------- ---------
Income before income taxes 8,323 10,727 17,179 19,733
PROVISION FOR INCOME TAXES 3,290 4,175 6,737 7,700
-------- -------- --------- ---------
Net Income $ 5,033 $ 6,552 $ 10,442 $ 12,033
======== ======== ========= =========
INCOME PER COMMON SHARE $ 0.43 $ 0.57 $ 0.89 $ 1.05
======== ======== ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 11,571 11,547 11,715 11,440
======== ======== ========= =========
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
ABT Building Products Corporation and Subsidiaries
Statements of Cash Flows (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 10,442 $ 12,033
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation and amortization 3,746 6,216
Deferred income taxes 805 1,586
Cumulative translation adjustment 160 (261)
Changes in certain assets and liabilities
Accounts receivable (9,319) (17,537)
Inventories (912) (571)
Other assets 741 (1,460)
Accounts payable and accrued expenses (5,291) 7,411
-------- --------
Net cash provided by operating activities 372 7,417
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of net assets (47,083) --
Capital expenditures (7,647) (13,086)
-------- --------
Net cash used in investing activities (54,730) (13,086)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (25,573) (19,076)
Proceeds from line of credit 87,500 25,900
Exercise of stock options 189 (52)
Payments for the purchase of treasury shares (7,671) (1,701)
-------- --------
Net cash provided by financing activities 54,445 5,071
-------- --------
Net increase (decrease) in cash 87 (598)
Cash and Cash equivalents, beginning of period 224 2,317
-------- --------
Cash and Cash equivalents, end of period $ 311 $ 1,719
======== ========
</TABLE>
5
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(1) GENERAL
The accompanying unaudited interim consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995. In the opinion of management, these statements contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position of the Company (as defined below). Results
on the interim basis are not necessarily indicative of results which may be
expected for the full year.
(2) BASIS OF PRESENTATION
The consolidated balance sheets at June 30,1996, and December 31, 1995, and
the consolidated statements of operations and cash flows for the six months
ended June 30,1996 and 1995, include the accounts of ABT BUILDING PRODUCTS
CORPORATION, a Delaware corporation ("ABT"), and its wholly owned subsidiaries
ABTco, Inc. ("ABTco"), KenTech Plastics, Inc. ("KenTech") and ABT Canada,
Limited ("ABT Canada") (collectively referred to as the "Company").
(3) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Inventory costs include material, labor,
and manufacturing overhead.
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------- -------
<S> <C> <C>
Finished products and work in process $31,957 $31,559
Raw Materials 9,205 10,084
Operating parts and supplies 7,555 7,645
------- -------
$48,717 $49,288
======= =======
</TABLE>
6
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(4) LONG-TERM DEBT
Long-term debt as of December 31,1995, and June 30,1996, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------- -------
<S> <C> <C>
Total debt-
Revolving line of credit $34,500 $41,400
Term Loan 50,000 50,000
Capital lease obligations 129 53
------- -------
84,629 91,453
Less -- Current maturities (123) (49)
------- -------
Total long-term debt $84,506 $91,404
======= =======
</TABLE>
(5) STOCKHOLDERS' EQUITY
Stockholders' Equity as of December 31,1995, and June 30,1996, consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-In Translation Retained Treasury
Stock Capital Adjustment Earnings Shares
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1995 $ 122 $ 61,830 $ (71) $ 53,485 $(27,246)
Cumulative Translation Adjustment -- -- (261) -- --
Exercise of Stock Options -- (62) -- -- --
Purchase of Treasury Shares -- -- -- -- (1,701)
Net Income through June 30, 1996 -- -- -- 12,033 --
-------- -------- -------- -------- --------
$ 122 $ 61,778 $ (332) $ 65,518 $(28,947)
======== ======== ======== ======== ========
</TABLE>
Commencing in the third quarter of 1994, the Board of Directors authorized
the repurchase of up to 2,200,000 shares of the Company's Common Stock in open
market transactions. At June 30,1996, the Company had repurchased 1,797,000
shares for a total cost of $28,947,245. The cost to repurchase the treasury
shares has been recorded as a reduction of stockholders' equity.
7
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(6) COMMITMENTS AND CONTINGENCIES
Under the terms of the asset purchase agreements between the Company and
the predecessor owners of the operations conducted by ABTco and ABT Canada, such
entities agreed to indemnify the Company for certain liabilities or obligations
arising on or prior to the change in ownership, including liabilities related to
environmental, product liability and litigation matters. In connection with such
transactions, as well as the acquisition of KenTech, the Company assumed various
liabilities and obligations, including obligations under product warranties with
respect to products manufactured prior to the change in ownership.
Litigation
On August 30,1995, the Company completed negotiations with Michigan
environmental authorities regarding a consent judgment providing for an odor
emissions abatement program at its Alpena, Michigan facility. The program
provides for phased installation of controls to effect a staged reduction of the
facility's emissions of odors into the air. It is estimated that capital
expenditures of approximately $6 million to $12 million will be required over
the next three to four years in order to attain compliance with the program. It
is the Company's position that costs incurred in complying with the consent
judgment will be borne in whole or in part by Abitibi-Price Corporation ("APC")
as the prior owner of the Alpena facility. Accordingly, on November 27,1995, the
Company commenced an action against APC and its corporate parent in the Circuit
Court for the County of Oakland, Michigan, ABT BUILDING PRODUCTS CORPORATION and
ABTco. Inc. v. Abitibi-Price Corporation and Abitibi-Price. Inc. (Case No.
95-508819-CK), seeking to recover damages incurred in connection with the
remediation, correction and control of odor emissions at the Alpena facility.
The complaint initially asserted claims for breach of contract, fraudulent
non-disclosure and fraudulent misrepresentation. The Company has determined not
to pursue the claims for fraudulent non-disclosure and fraudulent
misrepresentation, and a stipulated order to that effect was filed on May
9,1996. The Company is proceeding with its claims for breach of contract.
The Company and ABTco have been named as defendants in a class action and a
separate putative class action arising from hardboard siding manufactured,
distributed, or sold by them or by APC. Those actions are Foster et al. v.
ABTco, Inc., ABT BUILDING PRODUCTS CORPORATION, Abitibi-Price Inc. and
Abitibi-Price Corporation, Docket No. 96-0069-AH-M, which is currently pending
in the United States District Court for the Southern District of Alabama (The
"Alabama Action"); and Fyola et al. v. ABT BUILDING PRODUCTS CORPORATION, ABTco,
Inc. and Abitibi-Price Corporation, Docket No. 95-12854, which is currently
pending in United States District Court for the Western District of Pennsylvania
(The "Pennsylvania Action").
8
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On December 21, 1995, plaintiffs Thomas and Linda Foster brought the
Alabama Action on behalf of themselves and a class generally composed of all
individuals and entities (i) that own or owned property in the United States on
which hardboard siding manufactured, distributed, or sold by the Company, ABTco
or APC has been installed and (ii) that have already suffered (or will suffer
within the warranty period) alleged damage because, according to plaintiffs,
such siding prematurely rots, buckles, swells; cracks, or otherwise
deteriorates. Plaintiffs and the class are seeking damages in unspecified
amounts and an award of attorneys' fees. The complaint alleges that the
"aggregate amount in controversy nationwide is in the millions of dollars."
Plaintiffs also requested injunctive relief, including relief that would require
defendants, among other things, to cease and desist from manufacturing,
distributing, advertising and marketing allegedly defective siding without
disclosing its supposedly defective nature.
Plaintiffs have moved to remand the Alabama Action to the Circuit Court of
Choctaw County, Alabama, from which defendants had previously removed the
action. The United States District Court for the Southern District of Alabama
has not yet decided that motion. On or about July 10, 1996, plaintiffs filed an
amended complaint that is substantially similar to plaintiff's initial
complaint, except the amended complaint expressly states that plaintiffs do not
seek any award of punitive or treble damages, statutory attorneys' fees, or
injunctive or equitable relief.
Counsel for plaintiffs in that Alabama Action has indicated in
correspondence that plaintiffs' counsel is considering filing an additional
putative class action in an unspecified state court. According to plaintiffs'
counsel, that additional putative class action would be based upon substantially
the same allegations as the Alabama Action, would involve substantially the same
parties as the Alabama Action, and would involve substantially the same requests
by plaintiffs for relief as the Alabama Action (except that, according to
plaintiffs' counsel, plaintiffs in the additional putative class action would
not seek any statutory attorneys' fees, consequential damages for structural
damages to plaintiffs' homes, or equitable relief). So far as the Company is
aware, plaintiffs' counsel has not actually filed any such additional putative
class action.
On August 8, 1995, plaintiffs Glenn Fyola, Patricia Fyola, Joyce D'Antonio,
and Kenneth Hyre filed the Pennsylvania Action on behalf of themselves and a
putative class composed of residential homeowners who reside in Pennsylvania and
whose homes have or had for their exterior siding a hardboard product which was
allegedly manufactured, distributed, or sold by the Company, ABTco or APC.
Plaintiffs allege that hardboard exterior siding on their homes has prematurely
rotted, warped, buckled
9
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
and deteriorated. Plaintiffs are seeking compensatory and punitive damages in
unspecified amounts, including economic damages, treble damages under the
Pennsylvania Unfair Trade Practices and Consumer Protection Law, and an award of
attorneys' fees from the Company, ABTco, and APC.
The Company filed a third-party complaint dated November 21, 1995 against
additional defendants APC and Maronda Homes, Inc. In its third-party complaint,
the Company alleges that the hardboard siding at issue was manufactured by APC.
The Company also asserts that to the extent any hardboard siding involved in the
case was manufactured by ABTco and to the extent any such siding exhibited any
abnormal condition, that abnormal condition was caused by improper installation
of the siding by Maronda Homes, Inc. and its failure to follow applicable
building codes and application instructions. The Company's third-party complaint
asks that, should the Company be held liable to plaintiffs or the putative class
in any respect, judgments be entered against APC and Maronda Homes, Inc. holding
each of them liable to plaintiffs or to the Company.
The Company intends to defend the Alabama Action and the Pennsylvania
Action vigorously.
The Company and certain officers were defendants in litigation in the
Circuit Court for the County of Oakland, Michigan, filed on December 12, 1995
(Pinckney Molded Plastics Inc. v ABT BUILDING PRODUCTS CORPORATION et al.). On
May 1, 1996, the Company, and each of the other defendants, entered into a
settlement agreement with the plaintiff, Pinckney Molded Plastics, Inc. In
connection with the settlement agreement, the parties executed a Stipulation and
Order of Dismissal With Prejudice to the Circuit Court for the County of
Oakland, Michigan, which the court signed on July 8 and filed on July 10, 1996.
The settlement did not have a material impact on the financial condition of the
Company.
In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of business, none of which, in management's
opinion is expected to have a material adverse effect on the Company's operating
results or financial condition.
10
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(7) SUPPLEMENTAL CASH FLOW DISCLOSURE
In addition to the information provided in the statements of cash flows,
the following is a supplemental disclosure of cash flow information (in
thousands):
<TABLE>
<CAPTION>
For Six
Year Ended Months Ended
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Cash paid during period for-
Interest................................. $ 4,834 $ 2,279
Income taxes............................. 10,833 5,387
</TABLE>
(8) ACQUISITIONS
On April 3,1995, the Company acquired KenTech, located in Hopkinsville,
Kentucky. The purchase price of KenTech was $14.1 million, which was funded from
drawings on the Company's revolving line of credit. The transaction was
accounted for under the purchase method of accounting, and, accordingly, the
Company's consolidated financial statements as of December 31,1995 reflect the
results of operations of KenTech from the date of acquisition. The allocation of
the purchase price was based on estimates of the fair value of the net assets
acquired. This allocation is as follows:
<TABLE>
<S> <C>
Value assigned to assets and liabilities:
Cash $ 166
Accounts receivable 3,616
Inventories 4,237
Prepaid expenses 38
Property, plant and equipment 10,463
Other assets 1,412
Accounts payable and accrued liabilities (4,040)
Other liabilities (1,825)
-------
Total purchase price $14,067
=======
</TABLE>
On May 31,1995, the Company acquired through its wholly-owned subsidiary,
ABT Canada, the Vinyl Division of EMCO Limited, located in Acton, Ontario. The
purchase price of the Vinyl Division was $33.0 million, which was funded from
drawings on the Company's revolving line of credit. The transaction was
accounted for under the
11
<PAGE>
ABT BUILDING PRODUCTS CORPORATION AND SUBSIDIARIES
Condensed Notes to Financial Statements
(8) ACQUISITIONS (CONTINUED)
purchase method of accounting, and, accordingly, the Company's consolidated
financial statements as of December 31,1995 reflect the results of operations of
the Vinyl Division from the date of acquisition. The allocation of the purchase
price was based on estimates of the fair value of the net assets acquired. This
allocation is as follows:
<TABLE>
<S> <C>
Value assigned to assets and liabilities:
Accounts receivable $ 4,541
Inventories 8,057
Prepaid expenses 276
Property, plant and equipment 22,022
Other assets 7,463
Accounts payable and accrued liabilities (8,721)
Other liabilities (622)
-------
Total purchase price $33,016
=======
</TABLE>
Presented below is the unaudited summarized pro forma statement of
operations for the six months ended June 30,1995. The statement gives effect to
the purchase of KenTech and the Vinyl Division as if such transactions had taken
place on January 1, 1995. These results include certain adjustments, primarily
for depreciation, interest and other expenses related to the acquisitions, and
are not necessarily indicative of what the results would have been had the
transactions actually occurred on such dates (in thousands, except per share
data).
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1995
----
<S> <C>
Net sales $140,149
Net income 9,799
Earnings per common share $ 0.84
Average common shares outstanding 11,715
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATION
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
NET SALES
Net sales increased by $19.6 million (31.3%) from $62.9 million for the
quarter ended June 30, 1995 to $82.5 million in the 1996 quarter. This increase
is attributable to increased sales in all of the Company's product lines.
The increase in Plastics sales of $11.7 million was primarily due to the
impact of two acquisitions during 1995. KenTech Plastics, a manufacturer of
plastic shutters and exterior accessories, was acquired in April of 1995. In
June 1995, the Company acquired the Vinyl Siding Division of EMCO, Ltd., a
manufacturer of vinyl siding and accessories. Combined, the two acquisitions
increased net sales by approximately $11.2 million in the 1996 quarter. Plastic
sales were also favorably impacted by new plastic moulding product
introductions. Unit volume shipments for mouldings increased 28% over the same
period last year.
The increase in Hardboard-based Siding sales of $5.2 million was primarily
the result of price increases implemented during the first quarter of 1996. The
average selling price increased 12% over the same period last year. Shipments of
Hardboard-based Siding increased 2% for the three months ended June 30, 1996
when compared to the same period last year.
The increase in Interior Hardboard sales of $2.7 million was primarily the
result of new product introductions and price increases implemented during this
year. Unit volume shipments were 12% ahead of the same period last year and the
average selling price increased 4% when compared with the same period last year.
GROSS PROFIT
Gross profit increased by $7.1 million (41.2%) from $17.3 million for the
three months ended June 30, 1995 to $24.4 million in the 1996 quarter. The 1995
acquisitions were the principal contributors to the increase in gross profit.
Price increases implemented on Hardboard-based Siding and Interior Hardboard
products, new plastic moulding product introductions and lower thermoplastic
resin costs also contributed to the gross profit increases. The Company
maintains ongoing cost reduction programs at its manufacturing facilities in an
effort to reduce costs and maximize production efficiencies. Gross profit as a
percentage of net sales increased from 27.5% for the three months ended June 30,
1995 to 29.6% for the 1996 quarter primarily due to price increases implemented
during 1996 and the impact of continuing cost reduction programs, including
lower resin costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $4.3 million
(57.5%) from $7.5 million for the three months ended June 30, 1995 to $11.8
million in the 1996 quarter. Selling, general and administrative expenses
increased $2.6 million as a result of the 1995 acquisitions, $0.4 million of the
increase represents legal fees incurred as a result of certain litigation ( see
Certain Litigation below ), with the balance of the increase primarily due to
increases in promotional expenses, allowances and bonuses, directly related to
the increase in sales and profitability over the 1995 period. Selling, general
and administrative costs as a percentage of net sales increased from 12.0% for
the three months ended June 30, 1995 to 14.4% for the 1996 quarter. The increase
is due to higher selling, general and administrative expenses as a percentage of
net sales for the 1995 acquisitions, as well as, the increase in legal fees.
OPERATING INCOME
Operating Income increased by $2.8 million (28.6%) from $9.8 million for
the three months ended June 30, 1995 to $12.6 million for the 1996 quarter. The
improvement is the result of the operating income generated by the 1995
acquisitions, as well as selling price increases, new product introductions and
continuing cost reduction programs.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995 (Continued)
OTHER INCOME (EXPENSE)
Interest expense increased by $0.4 million for the three month period ended
June 30,1996 when compared to the same period last year. The increase is
attributable to higher outstanding indebtedness, partially offset by a slight
decline in the Company's weighted average interest rate on outstanding
borrowings during the three months ended June 30, 1996 as compared to the 1995
quarter
NET INCOME
Net Income increased by $1.5 million (30.2%) from $5.0 million for the
three months ended June 30, 1995 to $6.5 million for the 1996 quarter. The
increase is attributable to the factors discussed above.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
NET SALES
Net sales increased by $40.3 million (34.6%) from $116.6 million for the
six months ended June 30, 1995 to $156.9 million for the same period in 1996.
This increase is attributable to increased sales in all of the Company's product
lines.
The increase in Plastics sales of $27.7 million was primarily due to the
impact of two acquisitions during 1995 (previously discussed). Combined, the two
acquisitions increased net sales by approximately $26.4 million in the 1996
period. Plastic sales were also favorably impacted by new plastic moulding
product introductions. Unit volume shipments for mouldings increased 22% over
the same period last year.
The increase in Hardboard-based Siding sales of $10.1 million was the
result of prices increases implemented during the first quarter of 1996 as well
as an increase in demand for the product line ( see Significant Business Trends
below). The average selling price increased 9% over the same period last year.
Shipments of Hardboard-based Siding increased 9% for the six months ended June
30, 1996 when compared to the same period last year.
The increase in Interior Hardboard sales of $2.5 million was primarily the
result of new product introductions and price increases implemented during this
year. Unit volume shipments were 6% ahead of the same period last year and the
average selling price increased 2% when compared with the same period last year.
GROSS PROFIT
Gross profit increased by $12.1 million (36.1 %) from $33.4 million for the
six months ended June 30, 1995 to $45.5 million for the same period in 1996. The
1995 acquisitions were the principal contributors to the increase in gross
profit. Price increases implemented on Hardboard-based Siding and Interior
Hardboard products, the demand for the company's Hardboard-based Siding product
line, new plastic moulding product introductions and lower thermoplastic resin
costs also contributed to gross profit. The Company maintains ongoing cost
reduction programs at its manufacturing facilities in an effort to reduce costs
and maximize production efficiencies. Gross profit as a percentage of net sales
increased from 28.7% for the period ended June 30, 1995 to 29.0% for the 1996
period primarily due to price increases implemented during 1996, the increase in
demand for the Hardboard-based Siding product line, and the impact of continuing
cost reduction programs, including lower resin costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $8.0 million
(57.0%) from $14.1 million for the six months ended June 30, 1995 to $22.1
million for the 1996 period. Selling, general and administrative expenses
increased $5.6 million as a result of the 1995 acquisitions, $0.5 million of the
increase represents legal fees incurred as a result of certain litigation ( see
Certain Litigation below ), with the balance of the increase primarily due to
increases in promotional expenses, allowances and bonuses, directly related to
the increase in sales and profitability over the 1995 period. Selling, general
and administrative costs as a percentage of net sales increased from 12.1 % for
the six months ended June 30,
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
(Continued)
SELLING' GENERAL AND ADMINISTRATIVE EXPENSES (continued)
1995 to 14.1 % for the 1996 period. The increase is due to higher selling,
general and administrative expenses as a percentage of net sales for the 1995
acquisitions, as well as, the increase in legal fees.
OPERATING INCOME
Operating Income increased by $4.1 million (20.9%) from $19.4 million for
the six months ended June 30, 1995 to $23.5 million for the 1996 period. The
improvement is the result of the operating income generated by the 1995
acquisitions, as well as selling price increases, new product introductions and
continuing cost reduction programs.
OTHER INCOME (EXPENSE)
Interest expense increased by $1.5 million for the six month period ended
June 30,1996 when compared to the same period last year. The increase is
attributable to higher outstanding indebtedness, partially offset by a slight
decline in the Company's weighted average interest rate on outstanding
borrowings during the six months ended June 30, 1996 as compared to the 1995
period.
NET INCOME
Net Income increased by $1.6 million (15.2%) from $10.4 million for the six
months ended June 30, 1995 to $12.0 million for the 1996 period. The increase is
attributable to the factors discussed above.
SIGNIFICANT BUSINESS TRENDS
Management believes that the level of housing starts and expenditures for
home improvements have a significant influence on the Company's ability to
generate sales, particularly in relation to demand for its siding products. The
level of housing starts in the United States increased from 1.0 million in 1991
to 1.4 million in 1994 and maintained that level as of June 1996. The level of
housing starts in Canada decreased from 0.156 million in 1991 to 0.112 million
at June 30, 1996. Although management is unable to predict future levels of
housing starts, management believes that introduction of new products and
acquisitions of product lines will allow the Company to maintain levels of
production and sales should housing starts decline.
The cost of thermoplastic resins (polystyrene, polypropylene, polyethylene
and polyvinyl chloride) used in the Company's Plastics operations increased
substantially during 1995 before declining somewhat during the fourth quarter
of 1995 and the first quarter of 1996. Management believes that selling price
increases, continued cost reductions programs and increased production
efficiencies will counteract to some extent the impact of raw material price
increases.
Two of the Company's largest hardboard-based siding product competitors
recently discontinued the production of certain "oriented strand board" ("OSB")
siding products. The discontinuation of these siding products has created an
increase in demand for the Company's hardboard-based siding products
manufactured at the Roaring River, NC facility.
Management also believes that continued penetration into the mass
merchandiser market will have a significant influence on the Company's level of
business activity. Management believes that this market will continue to grow in
importance to the Company.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $67.9 million with a
current ratio of 3.2 to 1.0 as compared with working capital of $55.8 million
and a current ratio of 3.4 to 1.0 at December 31, 1995. The increase in working
capital and the change in the current ratio were primarily due to the increase
in accounts receivable, partially offset by an increase in accounts payable at
June 30, 1996. The increases in accounts receivable and accounts payable were a
result of the increase in business activity in the second quarter of 1996 versus
the last quarter of 1995.
Long-term debt increased from $84.5 million at December 31, 1995 to $91.4
million as of June 30, 1996. The increase of $6.9 million was primarily due to
the increases in working capital and fixed assets, offset, in part, by cash
generated by operations. The Company has a line of credit totaling $175 million
15
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
consisting of a $30 million primary revolving credit facility, a secondary
revolving credit facility of $95 million and a term loan facility. On April 3,
1995 the Company borrowed $50 million under the term loan facility. The term
loan requires quarterly payments of interest only for the first two years and
interest and principal (16 quarterly installments of $3.125 million) over the
next four years. As of June 30, 1996, the interest rate on the $50.0 million
term loan was 7.99% and the weighted average interest rate on the outstanding
revolving loans of $41.4 million was 6.3%.
In November 1995, the Board of Directors approved plans for the
construction of a facility which will manufacture a fiber-reinforced cement
plank or panel. This product, which will have a Class 1 fire rating and will be
both moisture and insect resistant, will initially be produced as exterior
siding in a wide variety of simulated woodgrain surfaces, including fir and
cedar. On December 12, 1995 the Company executed an agreement with J.M. Voith AG
to provide the primary production equipment for the facility. It is anticipated
that the plant will be completed in the second half of 1997. The estimated cost
of construction is $55 million.
Capital expenditures during the six months ended June 30, 1996 amounted to
approximately $13.1 million, and were incurred primarily for improvements of the
Company's manufacturing facilities, including $4.4 million related to the
construction of the fiber cement facility.
Management believes that the Company's cash on hand, anticipated funds from
operations and available borrowings under the revolving credit facility will be
sufficient to cover both its short-term and long-term working capital, capital
expenditure and debt service requirements.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to federal and state government
regulations pertaining to air emissions, waste water discharge and solid waste
disposal. While environmental compliance costs in the future will depend on
regulatory developments that cannot be predicted, the Company believes that
compliance will be achieved with a combination of capital expenditures and
modifications to its production processes. As discussed more fully in Note 6 of
the Notes to the Financial Statements, the Company entered into a consent decree
with respect to odor emissions at its Alpena, Michigan facility requiring
estimated expenditures of $6 million to $12 million over the next three to four
years. The Company has instituted litigation to recover such costs from the
former owner of the facility. The Company does not anticipate that costs
relating to environmental activities will have a material adverse impact on its
financial condition or operating results.
CERTAIN LITIGATION
In recent years, a number of lawsuits have been brought against
manufacturers of OSB and hardboard-based siding products alleging various design
and production defects and breach of express or implied warranties. Such
litigation has resulted in substantial settlements by certain competitors of the
Company. The Company has recently been named as a defendant in similar
litigation (see Note 6 of the Notes to the Financial Statements). The Company
believes that its hardboard-based siding products are free of defects and, when
properly installed and maintained, are suitable for their intended purposes and
meet all applicable quality standards. Nevertheless, no assurance can be given
that the Company will not be required to expend significant resources to defend
against claims of this nature.
SEASONALITY
The Company's quarterly results of operations are moderately seasonal due
to increases in construction activity that typically occur in the second and
third quarters and, to a lesser extent, the first quarter, thereby increasing
sales and gross profits in such periods as compared to the fourth quarter.
INFLATION
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
16
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Part II: Other Information
Item 1. Legal proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
None
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1996
ABT BUILDING PRODUCTS CORPORATION
/s/ Michael A. Lupo
----------------------------------
Michael A. Lupo
(Executive Vice President & CFO)
