______________________________________________________________________
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 June 30, 1998
Commission file number: 1-13418
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-3931893
(State or Other (I.R.S.
Jurisdiction of Employer
Incorporation or Identification
Organization) No.)
233 SOUTH WACKER DRIVE
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.
As of July 31, 1998, Falcon Building Products, Inc. had the
following shares of its various classes of common stock outstanding:
985,620 shares of Class A Common Stock
6,721,536 shares of Class B Common Stock
844,174 shares of Class C Common Stock
17,000 shares of Class D Common Stock
________________________________________________________________________
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
JUNE 30, 1998
INDEX
PART I. Financial Information: ........... PAGE NO.
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.............................
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 36.0 $ 29.9
Inventories, net.......................................................... 93.5 79.5
Other current assets...................................................... 50.7 34.0
Total current assets...................................................... 180.2 143.4
Property, plant and equipment, net............................................ 105.7 101.3
Goodwill...................................................................... 60.3 57.0
Other long-term assets........................................................ 29.8 32.1
Total assets.............................................................. $ 376.0 $ 333.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt............................................ $ 2.1 $ 1.5
Accounts payable.......................................................... 55.5 34.0
Accrued liabilities....................................................... 56.3 43.2
Total current liabilities................................................. 113.9 78.7
Senior indebtedness........................................................... 176.8 175.6
Senior subordinated notes..................................................... 258.4 252.7
Accrued employee benefit obligations.......................................... 9.5 9.2
Other long-term liabilities................................................... 28.1 31.3
Total liabilities......................................................... 586.7 547.5
Stockholders' equity (deficit):
Common stock.............................................................. 0.1 0.1
Additional paid-in capital................................................ . _
Retained deficit.......................................................... (209.0) (211.8)
Other..................................................................... (1.8) (2.0)
Total stockholders' equity (deficit)...................................... (210.7) (213.7)
Total liabilities and stockholders' equity.................................... $ 376.0 $ 333.8
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales............................................ $190.9 $ 195.7 $362.3 $ 355.9
Cost of sales........................................ 156.1 158.9 302.4 290.9
Gross earnings................................... 34.8 36.8 59.9 65.0
Selling and administrative expenses.................. 16.5 15.4 31.2 29.9
Securitization expense............................... 1.0 1.2 1.9 2.1
Recapitalization expenses............................ . 36.3 . 36.3
Operating income (loss).......................... 17.3 (16.1) 26.8 (3.3)
Net interest expense................................. 10.9 4.0 21.6 6.8
Income (loss) before income taxes.................... 6.4 (20.1) 5.2 (10.1)
Provision (benefit) for income taxes................. 2.6 (1.7) 2.1 2.2
Income (loss) before extraordinary item.............. 3.8 (18.4) 3.1 (12.3)
Extraordinary item:
Early extinguishment of debt, net of income
tax benefit of $0.9 million...................... . (1.5) . (1.5)
Net income (loss).................................... $ 3.8 $ (19.9) $ 3.1 $ (13.8)
Comprehensive income (loss).......................... $ 3.8 $ (19.9) $ 3.1 $ (13.8)
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 3.1 $ (13.8)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization......................................... 9.7 8.2
Accretion of debt discount on subordinated debt....................... 5.7 0.4
Recapitalization expenses............................................. . 36.3
Early extinguishment of debt.......................................... . 1.5
Cash effect of changes in working capital balances, accrued
employee benefit obligations, and other long-term liabilities,
excluding the effects of acquisitions.............................. 2.4 (32.5)
Net cash from operating activities ..................................... 20.9 0.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses.................................................. (4.0) _
Capital expenditures.................................................... (9.6) (6.5)
Other................................................................... (0.8) (1.2)
Net cash used in investing activities................................... (14.4) (7.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facilities.................................. . 175.0
Repayment of senior credit facilities................................... . (138.8)
Issuance of senior subordinated notes................................... . 247.0
Issuance of common stock................................................ . 134.6
Retirement of common stock.............................................. . (337.5)
Payment of Recapitalization fees and expenses........................... . (52.0)
Net borrowings (repayments) on debt..................................... (0.3) 17.1
Other................................................................... (0.1) _
Net cash (used in) from financing activities............................ (0.4) 45.4
CHANGE IN CASH AND CASH EQUIVALENTS....................................... 6.1 37.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 29.9 3.9
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 36.0 $ 41.7
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements of
Falcon Building Products, Inc. ("Falcon" or the "Company"), 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 and six months ended June 30, 1998 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,
1997.
COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of Statement
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. There was no material effect on the Company's financial
statements from the adoption of SFAS No. 130 for the periods presented.
(2) INVENTORIES
Inventory consists of the following (in millions):
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
Raw materials and supplies...... $ 35.1 $ 27.8
Work in process................. 13.2 12.0
Finished goods.................. 45.2 39.7
$ 93.5 $ 79.5
(3) ACCOUNTS RECEIVABLE
Included in the Company's financial statements as of June 30, 1998, in
other current assets, is a net residual interest of $24.7 million associated
with the $107.9 million of receivables sold under the accounts receivable
securitization program as of that date, compared to $13.1 million associated
with the $88.6 million of receivables sold as of December 31, 1997. The expense
incurred on the sale of receivables under this program was $1.9 and $2.1 million
in the six months ended June 30, 1998 and 1997, respectively.
(4) ACQUISITIONS
On June 25, 1998, the Company acquired Warrior Glass & Aluminum Co., Inc.
("Warrior Glass"), a manufacturer of aluminum window wall systems used in light
commercial applications. The consideration for Warrior consisted of $4.0
million in cash and a $2.7 million four-year, non-interest bearing note. The
note was recorded at a discounted value of $2.1 million. The acquisition was
accounted for as a purchase and resulted in $4.2 million of goodwill that will
be amortized over 40 years.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(5) LONG-TERM DEBT
Senior indebtedness consists of the following (in millions):
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
Bank Credit Facility:
Revolver.............. $ . $ .
Term.................. 174.5 174.5
Total................. 174.5 174.5
Other ................... 4.4 2.6
Less: Current Portion... (2.1) (1.5
Senior indebtedness... $ 176.8 $ 175.6
At June 30, 1998, the Company was in compliance with all covenants of the
Bank Credit Facility. Availability under the revolving portion of this facility
was $119.5 million at June 30, 1998.
Senior Subordinated Notes consist of the following (in millions):
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
Notes.................... $ 145.0 $ 145.0
Discount Notes........... 113.4 107.7
$ 258.4 $ 252.7
(6) GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes and the Discount Notes
are fully and unconditionally guaranteed on a joint and several basis
(collectively, the "Guarantees") by the subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"), other than Falcon Receivable
Program, Inc., a special purpose corporation formed for the Company's accounts
receivable securitization program. The obligations of each Guarantor Subsidiary
under its Guarantee are subordinated to such subsidiary's obligations under its
guarantee of the Bank Credit Facility.
Presented below is condensed consolidating financial information for Falcon
Building Products, Inc. ("Parent Company"), the Guarantor Subsidiaries and
Falcon Receivable Program, Inc. (the "Non-Guarantor Subsidiary"). In the
Company's opinion, separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries would not provide additional
information that is material to investors. Therefore, the Guarantor
Subsidiaries are combined in the presentation below.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries account
and earnings. The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 34.6 $ 0.7 $ 0.7 $ . $ 36.0
Inventories, net.................. . 93.5 . . 93.5
Other current assets.............. 1.4 23.2 26.1 . 50.7
Total current assets.............. 36.0 117.4 26.8 . 180.2
Property, plant and equipment, net.... 0.5 105.2 . . 105.7
Goodwill.............................. . 60.3 . . 60.3
Investment in and advances
to/from subsidiaries.............. 167.4 (95.4) (20.9) (51.1) .
Other long-term assets................ 25.3 4.5 . . 29.8
Total assets...................... $ 229.2 $ 192.0 $ 5.9 $ (51.1) $ 376.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt.... $ 1.0 $ 1.1 $ . $ . $ 2.1
Accounts payable.................. 0.4 55.1 . . 55.5
Accrued liabilities............... 2.1 54.1 0.1 . 56.3
Total current liabilities......... 3.5 110.3 0.1 . 113.9
Senior indebtedness................... 431.9 3.3 . . 435.2
Other long-term liabilities........... 4.5 33.1 . . 37.6
Total liabilities..... ........... 439.9 146.7 0.1 . 586.7
Stockholders' equity (deficit):
Common stock...................... 0.1 . . . 0.1
Additional paid-in capital........ . 42.9 6.5 (49.4) .
Retained earnings (deficit)....... (209.0) 2.4 (0.7) (1.7) (209.0)
Other............................. (1.8) . . . (1.8)
Total stockholders' equity (deficit) (210.7) 45.3 5.8 (51.1) (210.7)
Total liabilities and stockholders' equity $ 229.2 $ 192.0 $ 5.9 $ (51.1) $ 376.0
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1998
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 29.1 $ 0.7 $ 0.1 $ . $ 29.9
Inventories, net.................. . 79.5 . . 79.5
Other current assets.............. 1.1 19.8 13.1 . 34.0
Total current assets.............. 30.2 100.0 13.2 . 143.4
Property, plant and equipment, net.... 0.2 101.1 . . 101.3
Goodwill.............................. . 57.0 . . 57.0
Investment in and advances
to/from subsidiaries.............. 174.4 (135.5) (7.6) (31.3) .
Other long-term assets................ 27.4 4.7 . . 32.1
Total assets...................... $ 232.2 $ 127.3 $ 5.6 $ (31.3) $ 333.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt.... $ 1.0 $ 0.5 $ . $ . $ 1.5
Accounts payable.................. 0.3 33.7 . . 34.0
Accrued liabilities............... 14.2 29.0 . . 43.2
Total current liabilities......... 15.5 63.2 . . 78.7
Long term debt........................ 426.2 2.1 . . 428.3
Other long-term liabilities........... 4.2 36.3 . . 40.5
Total liabilities................. 445.9 101.6 . . 547.5
Stockholders' equity (deficit):
Common stock...................... 0.1 . . . 0.1
Additional paid-in capital........ . 42.9 6.5 (49.4) .
Retained earnings (deficit)....... (211.8) (17.2) (0.9) 18.1 (211.8)
Other............................. (2.0) . . . (2.0)
Total stockholders' equity (deficit) (213.7) 25.7 5.6 (31.3) (213.7)
Total liabilities and stockholders' equity $ 232.2 $ 127.3 $ 5.6 $ (31.3) $ 333.8
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ . $ 190.9 $ . $ . $ 190.9
Cost of sales.............................. . 156.1 . . 156.1
Gross earnings......................... . 34.8 . . 34.8
Selling and administrative expenses........ 1.9 14.6 . . 16.5
Securitization expense..................... 1.9 . (0.9) . 1.0
Operating income (loss)................ (3.8) 20.2 0.9 . 17.3
Net interest expense....................... 10.5 . 0.4 . 10.9
Income (loss) before income taxes.......... (14.3) 20.2 0.5 . 6.4
Provision (benefit) for income taxes....... (5.1) 7.6 0.1 2.6
Income (loss) before equity in income of
consolidated subsidiaries.............. (9.2) 12.6 0.4 . 3.8
Equity in income of consolidated subsidiaries 13.0 . . (13.0) .
Net income (loss).......................... $ 3.8 $ 12.6 $ 0.4 $ (13.0) $ 3.8
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ . $ 195.7 $ . $ . $ 195.7
Cost of sales.............................. . 158.9 . . 158.9
Gross earnings......................... . 36.8 . . 36.8
Selling and administrative expenses........ 1.3 14.1 . . 15.4
Securitization expenses.................... 1.4 . (0.2) . 1.2
Recapitalization expenses.................. 36.3 . . . 36.3
Operating income (loss)................ (39.0) 22.7 0.2 . (16.1)
Net interest expense....................... 3.3 0.1 0.6 . 4.0
Income (loss) before income taxes.......... (42.3) 22.6 (0.4) . (20.1)
Provision (benefit) for income taxes....... (10.6) 8.9 . . (1.7)
Income (loss) before extraordinary item and
equity in income of consolidated
subsidiaries........................... (31.7) 13.7 (0.4) . (18.4)
Extraordinary item:
Early extinguishment of debt, net of
income tax benefit of $0.9 million..... (1.5) . . . (1.5)
Income (loss) before equity in income of
consolidated subsidiaries.............. (33.2) 13.7 (0.4) . (19.9)
Equity in income of consolidated subsidiaries 13.3 . . (13.3) .
Net income................................. $ (19.9) $ 13.7 $ (0.4) $ (13.3) $ (19.9)
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ . $ 362.3 $ . $ . $ 362.3
Cost of sales.............................. . 302.4 . . 302.4
Gross earnings......................... . 59.9 . . 59.9
Selling and administrative expenses........ 3.4 27.8 . . 31.2
Securitization expense..................... 3.0 . (1.1) . 1.9
Operating income (loss)................ (6.4) 32.1 1.1 . 26.8
Net interest expense....................... 20.7 0.1 0.8 . 21.6
Income (loss) before income taxes.......... (27.1) 32.0 0.3 . 5.2
Provision (benefit) for income taxes....... (10.4) 12.4 0.1 . 2.1
Income (loss) before equity in income of
consolidated subsidiaries.............. (16.7) 19.6 0.2 . 3.1
Equity in income of consolidated subsidiaries 19.8 . . (19.8) .
Net income (loss).......................... $ 3.1 $ 19.6 $ 0.2 $ (19.8) $ 3.1
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ . $ 355.9 $ . $ . $ 355.9
Cost of sales.............................. . 290.9 . . 290.9
Gross earnings......................... . 65.0 . . 65.0
Selling and administrative expenses........ 2.5 27.4 . . 29.9
Securitization expenses.................... 3.1 . (1.0) . 2.1
Recapitalization expenses.................. 36.3 . . . 36.3
Operating income (loss)................ (41.9) 37.6 1.0 . (3.3)
Net interest expense....................... 5.7 0.1 1.0 . 6.8
Income (loss) before income taxes.......... (47.6) 37.5 . . (10.1)
Provision (benefit) for income taxes....... (12.6) 14.8 . . 2.2
Income (loss) before extraordinary item and
equity in income of consolidated
subsidiaries........................... (35.0) 22.7 . . (12.3)
Extraordinary item:
Early extinguishment of debt, net of income
tax benefit of $0.9 million............ (1.5) . . . (1.5)
Income (loss) before equity in income of
consolidated subsidiaries.............. (36.5) 22.7 . . (13.8)
Equity in income of consolidated subsidiaries 22.7 . . (22.7) .
Net income................................. $ (13.8) $ 22.7 $ . $ (22.7) $ (13.8)
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities $ (20.9) $ 54.6 $ (12.8) $ . $ 20.9
Cash flows used in investing activities:
Purchase of business................... . (4.0) . . (4.0)
Capital expenditures................... (0.4) (9.2) . . (9.6)
Other.................................. 0.2 (1.0) . . (0.8)
Net cash used in investing activities.. (0.2) (14.2) . . (14.4)
Cash flows from (used in) financing activities:
Advances (to) from affiliate........... 26.8 (40.1) 13.3 . .
Net borrowings on debt................. . (0.3) . . (0.3)
Other.................................. (0.1) . . . (0.1)
Net cash from (used in) financing
activities.......................... 26.7 (40.4) 13.3 . (0.4)
Change in cash and cash equivalents........ 5.6 . 0.5 . 6.1
Cash and cash equivalents, beginning of
period................................. 29.1 0.7 0.1 . 29.9
Cash and cash equivalents, end of period... $ 34.7 $ 0.7 $ 0.6 $ . $ 36.0
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
(6) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities $ (21.7) $ 39.6 $ (17.8) $ . $ 0.1
Cash flows from (used in) investing activities:
Capital expenditures................... . (6.5) . . (6.5)
Other.................................. (1.8) 0.4 0.2 . (1.2)
Net cash from (used in) investing activities (1.8) (6.1) 0.2 . (7.7)
Cash flows from (used in) financing activities:
Proceeds from senior credit facilities. 175.0 . . . 175.0
Repayment of senior credit facilities.. (138.8) . . . (138.8)
Issuance of senior subordinated debt... 247.0 . . . 247.0
Issuance of common stock............... 134.6 . . . 134.6
Retirement of common stock............. (337.5) . . . (337.5)
Payment of recapitalization fees and
expenses............................ (52.0) . . . (52.0)
Advances (to) from affiliate........... 15.2 (33.3) 18.1 . .
Net borrowings (payments) on debt...... 17.2 (0.1) . . 17.1
Other.................................. . . . . .
Net cash from (used in) financing
activities......................... 60.7 (33.4) 18.1 . 45.4
Change in cash and cash equivalents........ 37.2 0.1 0.5 . 37.8
Cash and cash equivalents, beginning of
period................................. 2.6 1.3 . . 3.9
Cash and cash equivalents, end of period... $ 39.8 $ 1.4 $ 0.5 $ . $ 41.7
</TABLE>
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 and six months ended June 30, 1998 as compared
to the quarter and six months ended June 30, 1997, which 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,
1997.
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
The following table reflects the Company's historical results of operations
for the quarter ended June 30, 1998 compared to the results for the comparable
period of 1997.
QUARTER ENDED JUNE 30,
1998 1997
AMOUNT % OF AMOUNT % OF
SALES SALES
(DOLLARS IN MILLIONS)
Net sales
Air Distribution Products... $ 51.8 27.1% $ 48.5 24.8%
Plumbing Fixtures........... 40.1 21.0 39.9 20.4
Air Power Products.......... 99.0 51.9 107.3 54.8
Total..................... $190.9 100.0% $ 195.7 100.0%
Gross earnings............... $ 34.8 18.2% $ 36.8 18.8%
Operating income before
Recapitalization expenses $ 17.3 9.1% $ 20.2 10.3%
Operating income (loss)...... $ 17.3 9.1% $ (16.1) (8.2)%
Net sales for the quarter of $190.9 million were $4.8 million or 2.5% lower
than the second quarter of 1997. The increased net sales in Air Distribution
Products of $3.3 million were primarily due to increased sales volume of
residential and light commercial registers as well as strong activity in heavy
commercial products, partially offset by reduced pricing in flexible duct
product compared to the second quarter of 1997. The decrease in Air Power
Products was primarily due to a net decrease in pressure washer sales of $11.0
million due primarily to the loss of customers resulting from the Company's
adoption of a "no returns policy", partially offset by increased generator sales
of $3.8 million due to storm activity, as well as increased compressor volume of
$1.1 million.
Gross earnings of $34.8 million were $2.0 million or 5.4% lower than the
comparable 1997 period. Margins in Air Power Products improved from the second
quarter of 1997 due to plant efficiencies and cost reduction programs; however,
these improvements were partially offset by the fact that margins reflected on
pressure washer sales in the first two quarters of 1997 were based on estimated
return costs that were lower than those actually experienced later in the year.
Second quarter results continue to be affected by manufacturing inefficiencies
in Plumbing Fixtures. The Company has instituted cost controls, revised process
flows, implemented management changes and committed additional capital for cost
reduction programs in order to improve its manufacturing costs. Gross margin
declined to 18.2% in 1998 from 18.8% in 1997 due to the above mentioned factors
in addition to the lower pricing for flexible duct products.
The operating loss in the second quarter of 1997 included $36.3 million of
expenses recorded in connection with the Recapitalization. Excluding the
effects of the Recapitalization in June 1997, operating income decreased $2.9
million to $17.3 million in 1998 from $20.2 million in 1997. This decrease was
primarily due to the net decrease in sales volume and reduced pricing mentioned
above, together with an increased investment in managerial and technical
personnel.
Net interest expense increased to $10.9 million from $4.0 million in 1997
due to the new debt structure that resulted from the Recapitalization in June
1997.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The following table reflects the Company's historical results of operations
for the six months ended June 30, 1998 compared to the results for the
comparable period of 1997.
SIX MONTHS ENDED JUNE 30,
1998 1997
AMOUNT % OF AMOUNT % OF
SALES SALES
(DOLLARS IN MILLIONS)
Net sales
Air Distribution Products... $ 97.1 26.8% $ 90.3 25.4%
Plumbing Fixtures........... 76.5 21.1 78.6 22.1
Air Power Products.......... 188.7 52.1 187.0 52.5
Total..................... $ 362.3 100.0% $ 355.9 100.0%
Gross earnings............... $ 59.9 16.5% $ 65.0 18.3%
Operating income before
Recapitalization expenses $ 26.8 7.4% $ 33.0 9.3%
Operating income (loss)...... $ 26.8 7.4% $ (3.3) (0.9)%
Net sales for the first six months of 1998 were $362.3 million, an increase
of $6.4 million over 1997 comparable results. Air Distribution Products
continues to benefit from strong activity in residential and light commercial as
well as heavy commercial products, partially offset by reduced pricing in
flexible duct products. The decrease in Plumbing Fixtures is due primarily to
unfavorable weather conditions affecting wholesaler and contractor demand in the
first quarter, primarily on the West Coast. The increase in Air Power Products
is primarily due to continued strong sales of compressors and generators
totaling $18.5 million, partially offset by a lower volume of pressure washers
of $14.7 million due to the loss of customers resulting from the Company's
implementation of a "no returns policy". Decreased volume of tools and
accessories of $1.0 million and $1.1 million of automotive product no longer
sold also contributed to the decline.
Gross earnings of $59.9 million were $5.1 million or 7.8% lower than the
comparable 1997 period. As previously discussed, margins in Air Power Products
were lower than in 1997 due to estimated return costs used in the 1997 period
that were lower than actually experienced later in the year, partially offset by
plant efficiencies and cost reduction programs. Margins in Plumbing Fixtures
have been adversely affected by manufacturing inefficiencies. The Company has
instituted cost controls, revised process flows, implemented management changes
and committed additional capital for cost reduction programs in order to improve
its manufacturing costs. Gross margin declined from 18.3% to 16.5% due to above
mentioned factors in addition to the lower pricing for flexible duct products.
The operating loss for 1997 included $36.3 million of costs associated with
the Recapitalization. Excluding the Recapitalization expenses, operating income
for the six months ended June 30, 1998 was $6.2 million lower than the
comparable 1997 period. This decrease is primarily due to the factors mentioned
above.
Interest expense increased from $6.8 million in 1997 to $21.6 million in
1998 due to the change in debt structure that resulted from the
Recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that operating cash flows, availability under the Bank
Credit Facility and funds available under its accounts receivable securitization
program will be sufficient to pay interest on outstanding debt, meet current
maturities, pay income taxes, fund capital expenditures and meet other operating
needs for the foreseeable future.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Net cash flow from operating activities amounted to $20.9 million in the
first six months of 1998 compared to $0.1 million in the first six months of
1997. The increase of $20.8 million was due primarily to a reduced level of
investment in working capital during the first six months of 1998 versus the
comparable period in 1997, as well as the effects of the asset securitization
program. Additionally, the 1997 period reflects the prepayment of a management
advisory fee.
As discussed in Note 4 to the Company's Condensed Consolidated Financial
Statements, the Company acquired Warrior Glass on June 25, 1998. The
consideration for Warrior consisted of $4.0 million in cash and a $2.7 million
four-year, non-interest bearing note. The note was recorded at a discounted
value of $2.1 million.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 - Letter to Bondholders
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
Executive Vice President
and Chief Financial Officer
Dated: August 14, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 94
<CURRENT-ASSETS> 180
<PP&E> 214
<DEPRECIATION> (108)
<TOTAL-ASSETS> 376
<CURRENT-LIABILITIES> 114
<BONDS> 435
0
0
<COMMON> 0
<OTHER-SE> (211)
<TOTAL-LIABILITY-AND-EQUITY> 376
<SALES> 362
<TOTAL-REVENUES> 362
<CGS> 302
<TOTAL-COSTS> 302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 5
<INCOME-TAX> 2
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
August 14, 1998
Dear Falcon Building Products, Inc. Bondholders:
A copy of the Falcon Building Products, Inc (the "Company") Form 10-Q is
enclosed. A summary of the unaudited financial results follows (dollars in
millions):
PERIODS ENDED JUNE 30
1998 1997(E)
SIX SIX
QUARTER MONTHS QUARTER MONTHS
Net sales
Air Distribution Products........ $51.8 $97.1 $48.5 $90.3
Plumbing Fixtures................ 40.1 76.5 39.9 78.6
Air Power Products............... 99.0 188.7 107.3 187.0
Total.........................$190.9 $362.3 $195.7 $355.9
Operating income before $ 17.3 $ 26.8 $ 20.2 $ 33.0
recapitalization expenses...........
Net interest expense (a)............$ 10.2 $ 20.2 $ 3.8 $ 6.4
Cash interest expense (a)...........$ 7.2 $ 14.2 $ 3.2 $ 5.6
EBITDA (b)..........................$ 21.7 $ 35.4 $ 24.9 $ 42.3
EBITDA _ for the four quarters $ 67.0 . $ 83.4 .
ended...............................
Ratio of EBITDA to interest expense 1.7 . . .
(c).................................
Ratio of EBITDA to cash interest 2.3 . . .
expense(c).......................
Leverage Ratios: . . .
Senior debt to EBITDA (d)........ 2.1 . . .
Total debt to EBITDA (d)......... 6.0 . . .
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents operating earnings before non-recurring recapitalization
and Ultravent expenses, non-cash inventory reserves, and depreciation and
amortization expense. EBITDA is presented as management believes it provides
useful information regarding a company's ability to incur and/or service
debt. However, EBITDA should not be considered in isolation or as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity.
(c) Ratios calculated for the twelve months ended June 30, 1998.
(d) Senior debt and total debt is net of unencumbered cash.
(e) Ratios have not been provided for the 1997 period due to non-comparability
of information due to the Merger and recapitalization financing in June 1997.
For the quarter ended June 30, 1998, net sales amounted to $190.9 million, a
decrease of $4.8 million or 2.5% below the second quarter of 1997, while sales
for the six months ended June 30, 1998 amounted to $362.3 million, an increase
of $6.4 million over the 1997 period. Sales for the quarter and six months
benefited from continued strong activity in residential and commercial vent,
register and diffuser product sales. The Company also benefited from increased
compressor and generator sales during 1998 for both the three and six-month
periods compared to 1997. Increased compressor volume is the result of
penetration gains at home improvements centers, while increased generator volume
has resulted from severe weather and storm activity in coastal areas during the
first quarter and Midwestern floods during the second quarter of 1998. Pressure
washer volumes were down approximately $11.0 million and $14.7 million for the
three and six months in 1998, respectively, compared with 1997 as the
implementation of the Company's "no-return" policy resulted in a smaller
customer base for this product line in 1998.
EBITDA and EBITDA margins of $21.7 million and 11.4%, respectively, for the
second quarter of 1998 have decreased from the second quarter of 1997 levels of
$24.9 million and 12.7%, respectively. EBITDA for the six months ended June 30,
1998 amounted to $35.4 million, a $6.9 million decrease from the first six
months of 1997, while EBITDA margins decreased from 11.9% in 1997 to 9.7% in
1998.
First half results continue to be affected by manufacturing inefficiencies in
Plumbing Fixtures. The Company has instituted cost controls, revised process
flows, implemented management changes and committed capital for cost reduction
programs to improve its manufacturing costs and plant efficiencies. While the
Company expects long term benefits from these actions, it is likely that
operating results for the third and fourth quarters will continue to be
adversely impacted until these improvements are fully integrated into the
manufacturing process. Incoming order rates for Plumbing Fixtures for the third
quarter of 1998 continue to reflect a strong demand for the Company's product.
In Air Power Products, the unfavorable comparison to 1997 is the result of: a)
lower margins as a result of implementing a "no returns" policy for pressure
washers in 1998, and b) higher margins reflected on pressure washer sales in the
first two quarters of 1997, which were based upon anticipated return rates and
related costs that ultimately developed to be significantly higher than those
originally assumed. This subsequent adverse development in pressure washer
returns resulted in the recognition of significant charges in the fourth quarter
of 1997. Additionally, pricing within the Company's flexible duct product line
contributed to the reduced operating profit in the second quarter and year-to-
date periods of 1998 versus 1997. Pricing for this product line came under
pressure in the second half of 1997, with pricing in 1998 remaining consistent
with the fourth quarter of 1997.
The consolidated statement of income reflects an increased level of interest
expense for the current quarter and year-to-date over the 1997 periods due to
the merger financing entered into in June 1997.
At June 1998 quarter end we completed the acquisition of Warrior Glass, a
manufacturer of aluminum window wall systems used in light commercial
applications. This operation, which has annualized sales of approximately $10
million, will expand our Air Distribution Accessories product line as this
business's operation and distribution channel utilizes various products
currently offered by the Company. Total consideration paid for Warrior amounted
to approximately $6.0 million and is projected to be accretive in 1998.
The Company continues to have significant liquidity to fund operations and make
new investments. At June 30, 1998, the Company had $36.0 million of
unrestricted cash and $125.0 million of borrowing availability under its
revolving credit facility.
Falcon's business strategy continues to focus on strengthening the Company's
market leadership positions through domestic and international market expansion,
new products and product line extensions, expansion of our distribution network,
and strategic and complementary acquisitions. We continue to work on and
evaluate a number of projects and acquisition candidates to expand our product
offerings, customers and geographic base, although we intend to remain
disciplined in our acquisition approach in the current highly competitive
environment.
We thank you for your continued support and confidence.
WILLIAM K. HALL
CHAIRMAN, PRESIDENT & CHIEF
EXECUTIVE OFFICER
Forward-looking statements in this letter are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Act of 1995. Investors are
cautioned that actual results may differ substantially from such forward-looking
statements. Forward-looking statements involve risks and uncertainties,
including but not limited to, changes in general economic conditions,
fluctuations in interest rates, increases in raw materials and labor costs,
levels of competition and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
