__________________________________________________________
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number: 1-13418
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.)
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 May 1, 1999, Falcon Building Products, Inc. had the following
shares of its various classes of common stock outstanding:
985,438 shares of Class A Common Stock
6,721,536 shares of Class B Common Stock
838,574 shares of Class C Common Stock
17,000 shares of Class D Common Stock
Documents Incorporated herein by Reference: None
____________________________________________________________
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
MARCH 31, 1999
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>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
<S>ASSETS <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 15.8 $ 66.4
Trade receivables, net..................................... 13.4 .
Inventories, net........................................... 104.0 78.8
Other current assets....................................... 71.7 42.2
Total current assets....................................... 204.9 187.4
Property, plant and equipment, net............................. 126.6 109.8
Goodwill....................................................... 73.3 59.4
Other assets................................................... 25.2 24.8
Total assets............................................... $430.0 $381.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt............................. $ 1.9 $ 2.0
Accounts payable........................................... 76.9 58.0
Accrued liabilities........................................ 69.6 57.0
Total current liabilities.................................. 148.4 117.0
Senior indebtedness............................................ 179.5 175.7
Senior subordinated notes...................................... 267.5 264.3
Accrued employee benefit obligations........................... 15.4 13.3
Other long-term liabilities.................................... 23.7 25.8
Total liabilities.......................................... 634.5 596.1
Stockholders' equity (deficit):
Common stock............................................... 0.1 0.1
Retained deficit........................................... (199.5) (209.7)
Notes receivable arising from stock purchase plan.......... (1.8) (1.8)
Pension liability adjustment............................... (3.3) (3.3)
Total stockholders' equity (deficit)....................... (204.5) (214.7)
Total liabilities and stockholders' equity ................ $430.0 $381.4
</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
(IN MILLIONS)
(UNAUDITED)
QUARTER ENDED MARCH
31,
1999 1998
Net sales........................ $ 218.3 $ 171.4
Cost of sales.................... 179.7 146.3
Gross earnings................ 38.6 25.1
Selling and administrative
expenses......................... 21.7 14.7
Ultravent adjustment............. (12.0) .
Securitization expense........... 0.9 0.9
Operating income.............. 28.0 9.5
Net interest expense............. 10.6 10.7
Income (loss) before income
taxes............................ 17.4 (1.2)
Provision (benefit) for income
taxes............................ 7.1 (0.5)
Net income (loss)................ $ 10.3 $ (0.7)
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
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 10.3 $ (0.7)
Adjustments to reconcile net income (loss) to net cash used in
operations:
Depreciation................................................ 4.0 3.3
Amortization................................................ 1.5 1.5
Accretion of debt discount on subordinated debt............. 3.2 2.8
Deferred income tax provision............................... 4.9 .
Ultravent adjustment........................................ (12.0) .
Cash effect, excluding acquisitions, of changes in working
capital, other long term assets, accrued employee benefit
obligations, and other long-term liabilities.............. (30.6) (12.3)
Net cash used in operating activities ...................... (18.7) (5.4)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business.......................................... (26.0) .
Capital expenditures.......................................... (5.5) (4.7)
Net cash used in investing activities....................... (31.5) (4.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of indebtedness................................ (0.3) (0.2)
Other......................................................... (0.1) (0.1)
Net cash used in financing activities....................... (0.4) (0.3)
CHANGE IN CASH AND CASH EQUIVALENTS............................. (50.6) (10.4)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 66.4 29.9
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 15.8 $ 19.5
</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
MARCH 31, 1999
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements of
Falcon Building Products, Inc. (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 ended March 31, 1999 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, 1998.
(2) ACQUISITIONS
On January 22, 1999, the Company acquired the assets and business of The
Penn Ventilation Companies, Inc. ("Penn Ventilation") a manufacturer of air
moving and control equipment for commercial and industrial applications. The
consideration for Penn Ventilation consisted of $26.0 million in cash, a $3.0
million three-year interest bearing note and non-compete agreement payments
totaling $3.0 million payable over three years. The acquisition was accounted
for as a purchase and resulted in $14.6 million of goodwill that is being
amortized over 40 years. The allocation of the purchase price to both tangible
and intangible assets is still in process. Penn Ventilation is part of the
Company's Air Distribution Products segment.
(3) INVENTORIES
Inventory consists of the following (in millions):
MARCH 31, DECEMBER
1999 31, 1998
(UNAUDITED)
Raw materials and
supplies............... $ 39.7 $ 28.7
Work in process........ 15.3 12.0
Finished goods......... 49.0 38.1
$ 104.0 $ 78.8
(4) ACCOUNTS RECEIVABLE
Included in the Company's financial statements as of March 31, 1999, in
other current assets, is a net residual interest of $48.7 million associated
with $134.0 million of receivables sold under the accounts receivable
securitization program as of that date, compared to $22.5 million associated
with the $106.7 million of receivables sold as of December 31, 1998. The
expense incurred on the sale of receivables under this program is presented as
Securitization expense in the Condensed Consolidated Statement of Income. The
accounts receivable shown on the Condensed Consolidated Balance Sheet relate
primarily to Penn Ventilation, which are expected to be sold under the Company's
accounts receivable securitization program in the second quarter of 1999.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS _ (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(5) RESTRUCTURING AND OTHER CHARGES
In the third and fourth quarters of 1998, the Company recorded
restructuring and other charges totaling $8.8 million, $7.9 million related to
the reorganization of its Plumbing Fixtures business (the "Reorganization Plan")
and $0.9 million related to the consolidation of two Air Distribution Products
manufacturing plants. Of the $8.8 million of restructuring and other charges
recorded, $3.1 million were non-cash charges and $5.7 million were cash charges.
Approximately $2.3 million of the cash charges have been expended through March
31, 1999.
(6) LONG-TERM DEBT
Senior indebtedness consists of the following (in millions):
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
Bank Credit Facility
Revolver........... $ . $ .
Term............... 173.5 173.5
Total.............. 173.5 173.5
Other................ 7.9 4.2
Less: Current Portion (1.9) (2.0)
Senior indebtedness $ 179.5 $ 175.7
At March 31, 1999, the Company was in compliance with all covenants of the
Bank Credit Facility. Availability under the revolving portion of this facility
was $121.0 million at March 31, 1999.
Senior Subordinated Notes consist of the following (in millions):
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
Notes................ $ 145.0 $ 145.0
Discount Notes....... 122.5 119.3
$ 267.5 $ 264.3
(7) COMMITMENTS AND CONTINGENCIES
As further discussed in the Company's Annual Report on Form 10-K, in 1997
the Company recorded a pre-tax charge of $32.8 million ($20.0 million, net of
income tax) for an estimate of its share of the cost of a Corrective Action
Program in the United States, resolution of litigation in Canada and the United
States including class action litigation, legal fees and other costs related to
an issue regarding high temperature plastic venting. In April of 1999 the first
full heating season covered by the Corrective Action Program was completed. The
detailed, company specific information regarding the estimated replacement cost
and the number of units replaced resulting from the Company's experience during
the heating season enabled the Company to revise certain assumptions including a
reduction in both the estimated replacement cost and the number of units to be
replaced over the life of the program. The revision of the above assumptions
resulted in a $12 million pre-tax reduction of the previously established
reserve in the first quarter of 1999.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) 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)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 1999
(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........ $ 12.2 $ 1.9 $ 1.7 $ . $ 15.8
Trade receivables, net........... . 13.4 . . 13.4
Inventories, net................. . 104.0 . . 104.0
Other current assets............. 0.3 22.7 48.7 . 71.7
Total current assets............. 12.5 142.0 50.4 . 204.9
Property, plant and equipment, net... 0.5 126.1 . . 126.6
Goodwill............................. . 73.3 . . 73.3
Investment in and advances
to/from subsidiaries............. 216.1 (127.6) (44.0) (44.5) .
Other long-term assets............... 21.0 4.2 . . 25.2
Total assets..................... $ 250.1 $ 218.0 $ 6.4 $ (44.5) $ 430.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt... $ 1.0 $ 0.9 $ . $ . $ 1.9
Accounts payable................. 0.2 76.7 . . 76.9
Accrued liabilities.............. 6.2 63.1 0.3 . 69.6
Total current liabilities........ 7.4 140.7 0.3 . 148.4
Long-term debt....................... 440.0 7.0 . . 447.0
Other long-term liabilities.......... 6.4 32.7 . . 39.1
Total liabilities................ 453.8 180.4 0.3 . 634.5
Stockholders' equity (deficit):
Common stock..................... 0.1 . . . 0.1
Additional paid-in capital....... . 42.9 6.5 (49.4) .
Retained earnings (deficit)...... (199.5) (4.5) (0.4) 4.9 (199.5)
Pension adjustment liability..... (2.5) (0.8) . . (3.3)
Other............................ (1.8) . . . (1.8)
Total stockholders' equity
(deficit)........................ (203.7) 37.6 6.1 (44.5) (204.5)
Total liabilities and stockholders'
equity........................... $ 250.1 $ 218.0 $ 6.4 $ (44.5) $ 430.0
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1998
(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........ $ 62.7 $ 0.9 $ 2.8 $ . $ 66.4
Inventories, net................. . 78.8 . . 78.8
Other current assets............. 0.5 19.2 22.5 . 42.2
Total current assets............. 63.2 98.9 25.3 . 187.4
Property, plant and equipment, net... 0.5 109.3 . . 109.8
Goodwill............................. . 59.4 . . 59.4
Investment in and advances
to/from subsidiaries............. 163.2 (109.6) (18.9) (34.7) .
Other long-term assets............... 21.8 3.0 . . 24.8
Total assets..................... $248.7 $161.0 $ 6.4 $(34.7) $381.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt... $ 1.0 $ 1.0 $ . $ . $ 2.0
Accounts payable................. 0.1 57.9 . . 58.0
Accrued liabilities.............. 18.4 38.3 0.3 . 57.0
Total current liabilities........ 19.5 97.2 0.3 . 117.0
Long term debt....................... 436.8 3.2 . . 440.0
Other long-term liabilities.......... 6.3 32.8 . . 39.1
Total liabilities................ 462.6 133.2 0.3 . 596.1
Stockholders' equity (deficit):
Common stock..................... 0.1 . . . 0.1
Additional paid-in capital....... . 42.9 6.5 (49.4) .
Retained earnings (deficit)...... (209.7) (14.3) (0.4) 14.7 (209.7)
Pension liability adjustment..... (2.5) (0.8) . . (3.3)
Other............................ (1.8) . . . (1.8)
Total stockholders' equity
(deficit)........................ (213.9) 27.8 6.1 (34.7) (214.7)
Total liabilities and stockholders'
equity........................... $248.7 $161.0 $ 6.4 $(34.7) $381.4
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended March 31, 1999
(in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales................................ $ . $ 218.3 $ . $ . $ 218.3
Cost of sales............................ . 179.7 . . 179.7
Gross earnings....................... . 38.6 . . 38.6
Selling and administrative expenses...... 2.1 19.6 . . 21.7
Ultravent adjustment..................... . (12.0) . . (12.0)
Securitization expense................... 1.6 . (0.7) . 0.9
Operating income (loss).............. (3.7) 31.0 0.7 . 28.0
Corporate allocation..................... (14.1) 14.1 . . .
Net interest expense..................... 9.9 0.1 0.6 . 10.6
Income before income taxes............... 0.5 16.8 0.1 . 17.4
Provision for income taxes............... 0.1 7.0 . . 7.1
Income before equity in income of
consolidated subsidiaries............ 0.4 9.8 0.1 . 10.3
Equity in income of consolidated
subsidiaries......................... 9.9 . . (9.9) .
Net income (loss)........................ $ 10.3 $ 9.8 $ 0.1 $ (9.9) $ 10.3
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended March 31, 1998
(in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales................................ $ _ $ 171.4 $ _ $ _ $ 171.4
Cost of sales............................ _ 146.3 _ _ 146.3
Gross earnings....................... _ 25.1 _ _ 25.1
Selling and administrative expenses...... 1.5 13.2 _ _ 14.7
Securitization expenses.................. 1.1 _ (0.2) _ 0.9
Operating income (loss).............. (2.6) 11.9 0.2 _ 9.5
Net interest expense..................... 10.3 _ 0.4 _ 10.7
Income (loss) before income taxes........ (12.9) 11.9 (0.2) _ (1.2)
Provision (benefit) for income taxes..... (5.3) 4.8 _ _ (0.5)
Income (loss) before equity in income of
consolidated subsidiaries............ (7.6) 7.1 (0.2) _ (0.7)
Equity in income of consolidated
subsidiaries......................... 6.9 _ _ (6.9) _
Net income (loss)........................ $ (0.7) $ 7.1 $ (0.2) $ (6.9) $ (0.7)
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1999
(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........................... $ (7.3) $ 14.8 $ (26.2) $ . $ (18.7)
Cash flows used in investing activities:
Purchase of business................. . (26.0) . . (26.0)
Capital expenditures................. (0.1) (5.4) . . (5.5)
Net cash used in investing
activities........................... (0.1) (31.4) . . (31.5)
Cash flows from (used in) financing
activities:
Advances (to) from affiliate......... (43.0) 17.9 25.1 . .
Net payments on debt................. . (0.3) . . (0.3)
Other................................ (0.1) . . . (0.1)
Net cash from (used in) financing
activities........................... (43.1) 17.6 25.1 . (0.4)
Change in cash and cash equivalents...... (50.5) 1.0 (1.1) . (50.6)
Cash and cash equivalents, beginning of
period............................... 62.7 0.9 2.8 . 66.4
Cash and cash equivalents, end of period. $ 12.2 $ 1.9 $ 1.7 $ . $ 15.8
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1998
(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.......................... $ (3.3) $ 19.3 $ (21.4) $ . $ (5.4)
Cash flows used in investing activities:
Capital expenditures................. (0.3) (4.4) _ _ (4.7)
Net cash used in investing
activities........................... (0.3) (4.4) _ _ (4.7)
Cash flows from (used in) financing
activities:
Advances (to) from affiliate......... (7.6) (14.1) 21.7 _ _
Net payments on debt................. _ (0.2) _ _ (0.2)
Other................................ (0.1) _ _ _ (0.1)
Net cash from (used in) financing
activities........................... (7.7) (14.3) 21.7 _ (0.3)
Change in cash and cash equivalents...... (11.3) 0.6 0.3 _ (10.4)
Cash and cash equivalents, beginning of
period............................... 29.1 0.7 0.1 _ 29.9
Cash and cash equivalents, end of period. $ 17.8 $ 1.3 $ 0.4 $ _ $ 19.5
</TABLE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
(9) BUSINESS SEGMENT INFORMATION
The Company has three operating segments: Air Distribution Products, Air
Power Products and Plumbing Fixtures. In January 1999 the Company acquired Penn
Ventilation (see Note 2), which is included as part of the Air Distribution
Products segment.
QUARTER ENDED
MARCH 31,
1999 1998
(IN MILLIONS)
(UNAUDITED)
NET SALES:
Air Distribution Products........ $ 69.1 $ 45.3
Air Power Products............... 112.4 89.7
Plumbing Fixtures................ 36.8 36.4
Total.......................... $218.3 $171.4
SEGMENT PROFITABILITY:(A)
Air Distribution Products........ $ 7.9 $ 5.5
Air Power Products............... 12.9 6.0
Plumbing Fixtures................ 2.8 4.3
Total.......................... $ 23.6 $ 15.8
RECONCILIATION OF SEGMENT
PROFITABILITY TO INCOME
(LOSS) BEFORE INCOME TAXES:
Total segment profitability....... $ 23.6 $ 15.8
Corporate......................... (1.7) (1.2)
Non-cash retiree medical.......... (0.1) (0.1)
Ultravent adjustment.............. 12.0 .
Depreciation and amortization..... (4.9) (4.1)
Net interest expense.............. (10.6) (10.7)
Securitization expense............ (0.9) (0.9)
Income (loss) before incomes taxes $ 17.4 $ (1.2)
MARCH 31, DECEMBER 31,
1999 1998
(IN MILLIONS)
(UNAUDITED)
SEGMENT ASSETS(B):
Air Distribution Products........ $172.3 $110.3
Air Power Products............... 201.8 166.7
Plumbing Fixtures................ 105.1 100.0
Total Segment Assets........... $479.2 $377.0
RECONCILIATION OF SEGMENT ASSETS TO
TOTAL ASSETS:
Total Segment Assets.............. $479.2 $377.0
Securitized Receivables........... (134.0) (106.7)
Corporate and other(c)............ 84.8 111.1
Total Assets................... $430.0 $381.4
(a)Profitability represents income before interest expense and income taxes,
excluding the following charges: (i) depreciation and amortization expense;
(ii) the Ultravent. adjustment; (iii) securitization expense; and (iv) non-
cash charges.
(b)Segment assets include accounts receivable sold under the securitization
program.
(c)Corporate and other represents corporate assets, primarily consisting of
cash, deferred financing fees and residual interest in accounts receivable
sold under the securitization program.
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 March 31, 1999 as compared to the quarter
ended March 31, 1998 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, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1999 1998
% OF
AMOUNT SALES AMOUNT SALES
<S> <C> <C> <C> <C>
Net Sales:
Air Distribution
Products............. $ 69.1 31.6% $ 45.3 26.4%
Air Power Products....... 112.4 51.5 89.7 52.3
Plumbing Fixtures........ 36.8 16.9 36.4 21.3
Total Net Sales....... $218.3 100.0% $171.4 100.0%
Profitability: (a)
Air Distribution
Products.............. $ 7.9 3.6% $ 5.5 3.2%
Air Power Products....... 12.9 5.9 6.0 3.5
Plumbing Fixtures........ 2.8 1.3 4.3 2.5
Segment total ........ 23.6 10.8 15.8 9.2
Corporate................ (1.7) (0.8) (1.2) (0.7)
Total................. $ 21.9 10.0% $ 14.6 8.5%
</TABLE>
(a)Profitability represents income before interest expense and income taxes,
excluding the following charges: (i) depreciation and amortization expense;
(ii) the Ultravent. adjustment; (iii) securitization expense; and (iv) non-
cash charges.
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net Sales
Air Distribution Products net sales increased $23.8 million to $69.1
million, an increase of 52.5% over 1998 results. Excluding the effect of
acquisitions in 1998 and 1999, net sales increased $8.2 million. This increase
was primarily due to increased volume in all product lines as a result of
increased market penetration, slightly offset by reduced pricing.
Air Power Products net sales increased $22.7 million to $112.4 million, or
25.3% over 1998 results. This increase was primarily due to increased volume of
compressor/tool products and generators due to increased market penetration, and
greater consumer awareness of the need for portable alternative power. These
increases were partially offset by decreased volume of pressure washers.
Plumbing Fixtures net sales increased $0.4 million to $36.8 million in 1999
versus $36.4 million in 1998, primarily due to product mix.
Profitability
Air Distribution Products profitability increased $2.4 million or 43.6%
over 1998. Excluding the effect of acquisitions in 1998 and 1999, profitability
increased $2.0 million. This increase was primarily due to increased volume and
cost reduction programs, partially offset by reduced pricing and increased
distribution costs.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Air Power Products profitability increased $6.9 million to $12.9 million,
an increase of 115.0% over 1998 results. This increase is primarily due to
increased volume, as well as reduced direct material costs and cost reduction
programs. Additionally, Air Power Products sold its OEM healthcare pump line
which resulted in a gain of $0.4 million.
Plumbing Fixtures profitability decreased $1.5 million to $2.8 million or
34.9% from 1998. This decrease was primarily due to manufacturing
inefficiencies, primarily in the Texas china products plant.
Depreciation and amortization increased from 1998 primarily as a result of
acquisitions.
As discussed in Note 7 to the Company's Financial Statements, the Company
reduced its accrual for its share of a Corrective Action Program and other
related costs by $12 million in the first quarter. In April of 1999 the first
full heating season covered by the Corrective Action Program was completed. The
detailed, company specific information regarding the estimated replacement cost
and the number of units replaced resulting from the Company's experience during
the heating season enabled the Company to revise certain assumptions including a
reduction in both the estimated replacement cost and the number of units to be
replaced over the life of the program.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $18.7 million for the quarter
ended March 31, 1999, compared to $5.4 million for the comparable 1998 period.
The change of $13.3 million was primarily due to an increase in working capital
requirements to support the growth in overall sales volume.
As discussed in Note 2 to the Company's Condensed Consolidated Financial
Statements, the Company acquired the assets and business of Penn Ventilation on
January 22, 1999. The consideration for Penn Ventilation consisted of $26.0
million in cash, a $3.0 million three-year interest bearing note and non-compete
agreement payments totaling $3.0 million payable over three years.
The Company believes that it will meet its working capital and capital
expenditure needs in 1999 through a combination of operating cash flow,
availability under its Bank Credit Facility and funds available through the
accounts receivable securitization program.
YEAR 2000 READINESS PROGRAM
The Company and each of its operating subsidiaries have implemented a Year
2000 readiness program with the objective of having all of their significant
business systems, including those that affect facilities and manufacturing
activities, functioning properly with respect to the Year 2000 issues before
January 1, 2000. Executive management continues to regularly monitor the status
of the Company's Year 2000 remediation plans. In addition, the Company is
engaged in assessing the Year 2000 issue with significant suppliers and
customers.
The assessment phase of the Year 2000 readiness program, which identified
the business systems that may require remediation or replacement and established
priorities for repair or replacement, has been completed.
The second phase of the Year 2000 readiness program, which involves the
actual remediation and replacement of business systems, is currently in
progress. The Company and its operating subsidiaries are using both internal
and external resources to complete this process. Systems ranked highest in
priority have either been remediated or replaced or scheduled for remediation or
replacement. The Company's objective is to complete substantially all
remediation and replacement of internal business systems by the second quarter
of 1999, and to complete final testing by the third quarter of 1999.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
As part of the Year 2000 readiness program, significant service providers,
vendors, suppliers and customers that are believed to be critical to business
operations after January 1, 2000, have been identified and steps have been
undertaken to reasonably ascertain their stage of Year 2000 readiness through
questionnaires, interviews, on-site visits and other available means. These
activities are intended to provide a means of managing risk, but cannot
eliminate the potential for disruption due to third party failure.
Because of the number of business systems used by the Company, in addition
to the significant number of third parties that the Company depends on, the
Company presently believes that it is possible that it may experience some
disruption in its business due to the Year 2000 issue. More specifically,
because of the interdependent nature of business systems, the Company and its
operating subsidiaries could be materially adversely affected if utilities,
private businesses and governmental entities with which they do business or that
provide essential services are not Year 2000 compliant.
The possible consequences of the Company or third parties not being fully
Year 2000 compliant by January 1, 2000 include, among other things, delays in
the delivery of products, delays in the receipt of supplies, invoice and
collection errors, inventory and supply obsolescence, and possible temporary
plant closings. Consequently, the business and results of operations of the
Company could be materially adversely affected by a temporary inability of the
Company and its operating subsidiaries to conduct their businesses in the
ordinary course for a period of time after January 1, 2000. The Company does
not currently have a comprehensive contingency plan with respect to the Year
2000 issue, but intends to establish such a plan during the remainder of 1999 as
part of its Year 2000 readiness program. Failure to meet critical milestones
identified in the Company's plans would precipitate alternative actions,
including an acceleration of any contingency plan.
It is currently estimated that the aggregate cost of the Company's Year
2000 readiness program will be approximately $1.3 million, of which
approximately $1.0 million has been expensed through March 31, 1999. These
costs are being expensed as incurred and are being funded through operating cash
flow. The costs associated with the replacement of computerized systems or
equipment, substantially all of which would be capitalized, are not included in
the above estimates.
The estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events. Risks to completing
the Company's Year 2000 readiness plan include the availability of resources,
our ability to discover and correct the potential Year 2000 sensitive problems
which could have a serious impact on specific facilities, and the ability of
suppliers to bring their systems into Year 2000 compliance.
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
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: May 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 15
<ALLOWANCES> (1)
<INVENTORY> 104
<CURRENT-ASSETS> 205
<PP&E> 244
<DEPRECIATION> (117)
<TOTAL-ASSETS> 430
<CURRENT-LIABILITIES> 148
<BONDS> 447
0
0
<COMMON> 0
<OTHER-SE> (205)
<TOTAL-LIABILITY-AND-EQUITY> 430
<SALES> 218
<TOTAL-REVENUES> 218
<CGS> 180
<TOTAL-COSTS> 180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 17
<INCOME-TAX> 7
<INCOME-CONTINUING> 10
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
May 21, 1999
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):
QUARTER ENDED MARCH 31,
1999 1998
Net sales......................... $218.3 $171.4
Operating income..................$ 28.0 $ 9.5
Net interest expense (a)..........$ 10.0 $ 10.0
Cash interest expense (a).........$ 6.6 $ 7.0
EBITDA (b)........................$ 20.9 $ 13.7
EBITDA - for the four quarters
ended.........................$ 84.3 $ 70.2
Ratio of EBITDA to interest
expense (c)................... 2.1 x 1.5 x
Ratio of EBITDA to cash interest
expense(c).................... 3.0 x 2.1 x
Leverage Ratios:
Senior debt to EBITDA (d)...... 2.0 x 2.2 x
Total debt to EBITDA (d)....... 5.1 x 5.9 x
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents operating earnings before a non-recurring Ultravent
adjustment, restructuring charges 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 for 1998 are calculated for the nine months ended March 31, 1998
(the period following the recapitalization).
(d) Senior debt and total debt is net of unencumbered cash. Ratios are
calculated using EBITDA for the four quarters ended March 31, 1999 and 1998,
respectively.
For the quarter ended March 31, 1999 net sales increased $46.9 million to $218.3
million, or 27.4% over 1998. The Warrior Glass and Penn Ventilation
acquisitions contributed $14.9 million to the increase. The remaining sales
growth was primarily due to increased volume of compressor/tool products and
generators. Compressor sales benefited from increased sales to Sears and new
account penetration at The Home Depot, while generator sales were driven by
greater consumer awareness of the need for portable alternative power, as well
as storm activity late in 1998 and early 1999 that depleted inventory levels at
many retailers. Continued strength in the housing market along with wholesaler
consolidation has continued to benefit our Air Distribution business, primarily
residential and light commercial vents and registers as well as duct products.
Additionally, sales in Plumbing Fixtures were slightly ahead of last year,
primarily due to a shift in product mix.
EBITDA and EBITDA margins of $20.9 million and 9.6%, respectively, increased
from $13.7 million and 8.0%, respectively, in 1998 despite lower profitability
in our Plumbing Fixtures business. Excluding the Plumbing Fixtures results,
EBITDA grew to $18.1 million with margins of 10.0%, compared to $9.3 million and
6.9%, respectively, in 1998. This increase was primarily due to the increased
sales volume in Air Power and Air Distribution Products along with increased
plant productivity and significant cost reduction programs, as well as an
increase in sales of higher margin units in each of our Air Power product lines.
Additionally, Air Power Products sold its OEM healthcare pump line which
resulted in a gain of $0.4 million in 1999. The two acquisitions completed in
Air Distribution Products contributed $0.4 million to the increase. EBITDA in
Plumbing Fixtures decreased $1.5 million due to manufacturing inefficiencies,
primarily in the Texas china operations.
As further discussed in the Company's Annual Report on Form 10-K, in 1997 the
Company recorded a pre-tax charge of $32.8 million ($20.0 million, net of income
tax) for an estimate of its share of the cost of a Corrective Action Program in
the United States, resolution of litigation in Canada and the United States
including class action litigation, legal fees and other costs related to an
issue regarding high temperature plastic venting. In April of 1999 the first
full heating season covered by the Corrective Action Program was completed. The
detailed, company specific information regarding the estimated replacement cost
and the number of units replaced resulting from the Company's experience during
the heating season enabled the Company to revise certain assumptions including a
reduction in both the estimated replacement cost and the number of units to be
replaced over the life of the program. The revision of the above assumptions
resulted in a $12 million pre-tax reduction of the previously established
reserve in the first quarter of 1999.
The Company continues to have significant liquidity to fund operations and make
new investments. At March 31, 1999, the Company had $15.8 million of
unrestricted cash and $121.0 million of borrowing availability under its
revolving credit facility.
As discussed in the Company's Annual Report of Form 10-K, in December 1998, the
Company sold to its stockholders an option to purchase Mansfield Plumbing
Products, Inc., ("Mansfield") its Plumbing Fixtures segment. We are in the
process of securing separate financing for Mansfield that would facilitate the
exercise of the option. Net cash proceeds from the exercise of the option will
be approximately $54 million, which would be used to reduce senior indebtedness.
Additionally, the Company would receive a $20 million Subordinated Note and
enter into a management services agreement which provides Falcon with a fee of
approximately $2 million.
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, acquisition candidates and strategic transactions
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.
