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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-13419
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two North Riverside Plaza
Chicago, Illinois 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
20,070,500 shares of Common Stock as of October 28, 1996
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FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
PART I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
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FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED) (RESTATED)
ASSETS
Current assets:
Cash and cash equivalents $ 4.6 $ 1.1
Accounts receivable, net -- 5.1
Inventories, net 72.0 56.9
Other current assets 38.9 9.7
Total current assets 115.5 72.8
Property, plant and equipment, net 93.8 88.7
Goodwill 53.0 39.4
Other long-term assets 9.8 9.9
Total assets $ 272.1 $ 210.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 15.2 $ 12.7
Accounts payable 52.6 37.5
Accrued liabilities 35.5 27.2
Total current liabilities 103.3 77.4
Long-term debt 126.0 110.9
Accrued employee benefit obligations 8.4 9.0
Other long-term liabilities 14.9 15.7
Total liabilities 252.6 213.0
Stockholders' equity:
Preferred stock, par value $1.00 per share,
10,000,000 shares authorized, none issued
and outstanding -- --
Class A stock, par value $.01 per share,
30,000,000 shares authorized, 20,070,500
shares issued and outstanding at September
30, 1996, 6,070,500 shares issued and
outstanding at December 31, 1995 0.2 0.1
Class B stock, par value $.01 per share,
14,000,000 shares authorized, none issued
and outstanding at September 30, 1996,
14,000,000 shares issued and outstanding at
December 31, 1995 -- 0.1
Additional paid-in capital 18.0 18.0
Retained earnings (deficit) 4.3 (17.2)
Pension liability adjustment (0.4) (0.4)
Unearned compensation (0.4) (0.6)
Notes receivable arising from stock purchase
plan (2.2) (2.2)
Total stockholders' equity (deficit) 19.5 (2.2)
Total liabilities and stockholders' equity $ 272.1 $ 210.8
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
Net Sales
Air Distribution Products $ 51.1 $ 41.8 $140.9 $124.3
Plumbing Fixtures 41.9 36.2 119.4 111.9
Air Power Products 69.7 42.0 215.1 113.3
Total 162.7 120.0 475.4 349.5
Cost of sales 133.9 100.3 390.9 284.1
Gross earnings 28.8 19.7 84.5 65.4
Selling, general and
administrative expenses 12.1 9.1 38.3 28.9
Securitization expenses 1.0 0.9 3.0 2.3
Operating income 15.7 9.7 43.2 34.2
Net interest expense 2.7 2.6 8.3 7.5
Income before income taxes 13.0 7.1 34.9 26.7
Provision for income taxes 5.0 2.7 13.4 10.3
Net income $ 8.0 $ 4.4 $ 21.5 $ 16.4
Net Income Per Share (a) $ 0.40 $ 0.22 $ 1.07 $ 0.82
(a) Based on shares outstanding of 20,070,500 in each period.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21.5 $ 16.4
Adjustments to reconcile net income to net cash
from operations:
Depreciation and amortization 12.1 11.1
Cash effect of changes in other working capital
balances, accrued employee benefit
obligations, and other long-term liabilities,
excluding the effects of acquisitions (14.8) (16.2)
Net cash from operating activities 18.8 11.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses (18.8) (10.4)
Capital expenditures (13.1) (10.2)
Other (0.5) (1.2)
Net cash used in investing activities (32.4) (21.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on debt 17.1 15.1
Net cash from financing activities 17.1 15.1
CHANGE IN CASH AND CASH EQUIVALENTS 3.5 4.6
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1.1 2.2
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4.6 $ 6.8
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements of
Falcon Building Products, Inc. (the "Company"), a subsidiary of Equity
Holdings Limited ("EHL"), have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for a complete set
of financial statements. In the opinion of management, all adjustments
considered necessary, consisting only of normal recurring adjustments,
are included for fair presentation. Operating results for the quarter
ended September 30, 1996 are not necessarily indicative of results that
may be expected for the full year. The unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company for the year ended
December 31, 1995. Certain amounts in the 1995 Balance Sheet have been
reclassified to be consistent with the 1996 presentation.
(2) INVENTORIES
Inventory consists of the following (in millions):
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
Raw materials and supplies $ 32.3 $ 21.6
Work in process 13.0 10.0
Finished goods 26.7 25.3
$ 72.0 $ 56.9
(3) LONG-TERM DEBT
Long-term debt consists of the following (in millions):
SEPTEMBER 30, DECEMBER 31,
1996 1995
Bank Credit Facility
Revolver $ 52.0 $ 26.0
Term 86.3 95.0
Total 138.3 121.0
Other 2.9 2.6
Less: Current Portion (15.2) (12.7)
Total long-term $126.0 $110.9
At September 30, 1996, the Company was in compliance with all covenants
of the Bank Credit Facility. Availability under the revolving portion of
this facility was $86.9 million at September 30, 1996.
(4) STOCKHOLDERS' EQUITY
In May 1996, the Company's Class B stock was transferred from Eagle
Industries, Inc. ("Eagle") to EHL, another affiliate of Samuel Zell. As
a result of the transfer, the Class B shares were automatically converted
into Class A shares pursuant to provisions of the Company's charter.
(5) ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
Since January 1994, the Company participated in Eagle's securitization
program, selling its receivables to Eagle, which in turn sold certain of
its receivables, including those acquired from the Company, to a "Master
Trust". Due to the number of business divestitures at Eagle during the
first quarter of 1996, Eagle decided to terminate its securitization
program. Eagle coordinated the termination of its program with the
Company to allow the Company to establish it own securitization program.
In April 1996, the Company entered into receivable sale agreements with a
financial institution and its affiliate (collectively, the "Bank Group")
whereby it will sell, with limited recourse, on a continuous basis, an
undivided interest in all of its accounts receivable for cash, while
maintaining a residual interest in the receivables. Under these
agreements, which expire in 1999, the maximum amount of proceeds which
may be accessed at any one time is $85 million, subject to change based
on the level of eligible receivables. To establish this new
securitization program, the Company: (1) acquired a special purpose
company from Eagle to facilitate the establishment of the Falcon
securitization program; 2) acquired from the Master Trust the receivables
it had previously sold to Eagle; (3) immediately sold these re-acquired
receivables through the special purpose company to the Bank Group; and
(4) sold the receivables of two of its subsidiaries which were not
previously participating in the Eagle securitization program through the
special purpose company to the Bank Group. The Company paid $69 million
to acquire its receivables from the Master Trust utilizing the $55
million of proceeds received from selling these receivables to the Bank
Group plus a $14 million draw on the Company's revolving credit facility.
This $14 million represented the Company's residual interest in the
receivables sold to the Bank Group. Additionally, the Company received
$11 million in cash and retained a residual interest of $3 million from
the initial sale of the receivables from subsidiaries not previously
participating in the Eagle securitization program. The residual interest
at September 30, 1996 was $24.6 million and is reflected in other current
assets in the Company's financial statements.
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FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of the Company and its
subsidiaries for the quarter ended September 30, 1996 as compared to the
quarter ended September 30, 1995 and should be read in conjunction with the
Condensed Consolidated Financial Statements included herein and the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
The following table reflects the Company's results of operations for the
quarter ended September 30, 1996, compared to the results of 1995 (dollars in
millions):
QUARTER ENDED SEPTEMBER 30,
1996 1995
AMOUNT % OF SALES AMOUNT % OF SALES
Net sales $162.7 100.0% $120.0 100.0%
Gross Earnings 28.8 17.7 19.7 16.4
Operating income 15.7 9.6 9.7 8.1
Income before income
taxes 13.0 8.0 7.1 5.9
Net income 8.0 4.9 4.4 3.7
Net sales for the quarter were $162.7 million, an increase of $42.7 million
over the third quarter of 1995. Excluding sales from acquisitions of $16.6
million, sales increased $26.1 million, of which $19.1 million was due to
increased volume in all three base product categories while new air power
products accounted for $7.0 million of the increase.
Gross earnings increased $9.1 million from $19.7 million in 1995 to $28.8
million in 1996. Excluding acquisitions, increased margins and gross
earnings were realized in all major product categories as a result of a
modest price increase in air distribution products and a decline in major raw
material costs from 1995 levels.
Third quarter operating income was $15.7 million, an increase of $6.0 million
from the $9.7 million recorded in the third quarter of 1995. The gain in
gross earnings of $9.1 million, noted above, was partially offset by an
increase in selling, general and administrative expense of $3.0 million. The
operating cost increases were primarily the result of increased marketing and
advertising expenses associated with the growth in retail activity.
Operating expenses as a percent of sales declined from 7.6% in 1995 to 7.4%
in 1996.
Income before income taxes of $13.0 million was $5.9 million higher than the
comparable 1995 results due to the factors noted above.
Net income was $8.0 million for the quarter, an increase of $3.6 million over
1995 results of $4.4 million, resulting from the factors noted above,
partially offset by an increase in the effective tax rate to 38.4% from the
38.0% used in 1995. The change in the effective tax rate reflects the
current actual distribution of income by state and the difference in state
tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
The following table reflects the Company's results of operations for the nine
months ended September 30, 1996, compared to the results of 1995 (dollars in
millions):
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
AMOUNT % OF SALES AMOUNT % OF SALES
Net sales $475.4 100.0% $349.5 100.0%
Gross Earnings 84.5 17.8 65.4 18.7
Operating income 43.2 9.1 34.2 9.8
Income before
income taxes 34.9 7.3 26.7 7.6
Net income 21.5 4.5 16.4 4.7
Year-to-date net sales were $475.4 million, an increase of $125.9 million
over 1995 comparable results. Acquisitions accounted for $87.0 million of
the increase, primarily from pressure washer sales at Ex-Cell Manufacturing
Company, Inc. New product sales from air power products totaled $13.0
million for the period with the majority of the increase in electric
generators. Increased sales volume and mix variances in 1996 added an
incremental $26.8 million to 1995 sales levels with increases recorded in all
product categories. Excluding acquisitions, sales increased 8% in air
distribution products, 4% in plumbing products and 21% in air power products
during the comparison period.
Gross earnings increased $19.1 million to $84.5 million from 1995 results,
primarily due to the increase volume. Gross margin declined from 18.7% to
17.8%, reflecting the difficult pricing environment being encountered in
plumbing products and the lower margins realized on sales from acquisitions.
Operating income increased $9.0 million to $43.2 million, as a result of the
increase in gross earnings of $19.1 million, partially offset by increased
securitization expense of $0.7 million and increased selling, general and
administrative expenses of $9.4 million. As a percent of sales, selling,
general and administrative expenses remained constant at 8%. The increased
securitization expense resulted from an increase in both the effective
interest rate and in average securitized trade receivables during the nine
month period.
Income before income taxes was $34.9 million, up from 1995 year-to-date of
$26.7 million. The $9.0 million increase in operating income noted above was
partially offset by increased interest expense of $0.8 million resulting from
increased debt used to fund acquisitions.
Net income was $21.5 million as a result of the factors noted above adjusted
for income taxes. The effective tax rate used in both periods was
approximately 38.4%.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it will meet its working capital and capital
expenditure requirements in 1996 through a combination of operating cash
flows, availability under its senior credit facility and through funds
available under its accounts receivable securitization program. As discussed
in Note 5 to the Company's financial statements, the retained residual
interest in the receivables under the new securitization program is reflected
in other current assets in the Company's financial statements.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 Press Release regarding the election of a new Director dated
September 9, 1996.
b) Reports on Form 8-K
None.
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.
FALCON BUILDING PRODUCTS, INC.
By: /s/ Sam A. Cottone
-------------------
Sam A. Cottone
Senior Vice President and
Chief Financial Officer
Dated: October 29, 1996
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
MONDAY, SEPTEMBER 9, 1996
FALCON BUILDING PRODUCTS ELECTS
INSILCO EXECUTIVE TO BOARD
CHICAGO, IL, September 9, 1996 - Falcon Building Products, Inc. (NYSE:FB) has
elected Robert L. Smialek, the president and chief executive officer of
Insilco Corporation, to its Board of Directors. Insilco Corporation
(Nasdaq:INSL) is a diversified manufacturer of industrial components serving
the telecommunications, electronics and automotive markets.
"Bob brings extensive engineering and manufacturing experience to the Falcon
board. He has developed and implemented a strong growth strategy during his
three years at the helm of Insilco," said William K. Hall, Falcon's president
and chief executive officer. "Since Bob joined Insilco in 1993 as president
and chief executive officer, earnings have improved from a substantial loss
to positive levels. We expect Bob to make significant contributions to
Falcon's future success."
Smialek, 52, has a BS, MD and Ph.D. from Case Western Reserve University. He
began his career at General Electric, starting as a research metallurgist in
the GE Lighting Business Group in 1969 and working in a variety of
engineering and manufacturing positions through 1988 in the GE Consumer
Electronics Division and at GE Medical Systems. After two years as a group
vice president at Tracor Instruments Group, a division of Tracor, Inc., in
1990 Smialek joined Siebe PLC, a London, England-based company where he rose
to president and chief operating officer of the Temperature and Controls
Group based in Dublin, Ohio and became a member of its Board of Directors.
Headquartered in Chicago, Falcon Building Products is a leading North
American manufacturer and supplier of highly engineered building products
serving residential, light commercial and consumer markets.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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