Norcraft Companies, Inc. ("we", the “Company” or “Norcraft”) (NYSE:NCFT), a leading manufacturer of kitchen and bathroom cabinetry in the United States and Canada, today reported financial results for the second quarter ended June 30, 2014.

“We are encouraged by our continued improvement on multiple fronts with growth in our net sales, net income and cash flow providing momentum into the back half of 2014,” stated Mark Buller, Chairman and Chief Executive Officer of the Company. “Our ongoing shift in product mix towards higher end products remains on track for all our divisions as a result of our strategic growth initiatives. Our improved Adjusted EBITDA reflects our vigilant focus on costs, with our net income further benefiting from this focus and our dramatic reduction in interest expense. We are pleased with our progress during the quarter and excited to continue leveraging our well-positioned platform to further drive profits and cash flow.”

FINANCIAL RESULTS

Second Quarter of 2014 Compared with Second Quarter of 2013

In the second quarter of 2014, net sales increased $7.3 million, or 8.1%, to $97.6 million, as compared to $90.3 million in the second quarter of 2013. Sales increased in nearly all the Company’s divisions, driven largely by mix/price gains and promotional activity during the quarter.

Income from operations in the second quarter of 2014 increased $2.1 million, or 23.1%, to $11.2 million from $9.1 million for the second quarter of 2013. The increase was mainly attributable to higher sales and improvement in labor efficiency and leverage of fixed manufacturing costs. These positive factors were partly offset by moderately higher material costs and increased incentive stock compensation expense from stock options issued in connection with the Company’s recently completed initial public offering.

Net income of $4.8 million, or $0.23 per diluted share, in the second quarter of 2014 represented an increase of $3.0 million compared to $1.8 million in the second quarter of 2013.

Adjusted EBITDA in the second quarter of 2014 increased $2.3 million, or 18.2%, to $14.9 million, as compared to $12.6 million for the same quarter of 2013 (Adjusted EBITDA is a non-GAAP measure defined in the table below).

At June 30, 2014, the Company had cash of $46.5 million and total long-term debt of $149.6 million, as compared to cash of $39.1 million and total long-term debt of $150.0 million at December 31, 2013.

CONFERENCE CALL AND WEBCAST

The Company will host a conference call and webcast to discuss its results for the second quarter of 2014 at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) on August 13, 2014. Investors who wish to participate in the call should dial 1-877-705-6003 (inside the U.S.) or 1-201-493-6725 (outside the U.S.) at least 5 minutes prior to the start of the call. The live webcast will be available on the Investors section of the Company’s website at www.norcraftcompanies.com. Replays of the call will be available through September 13, 2014 and can be accessed at 1-877-870-5176 (U.S. callers) or 1-858-384-5517 (outside the U.S.) and entering the pass code 13587066.

ABOUT NORCRAFT COMPANIES

Norcraft is a leading manufacturer of kitchen and bathroom cabinetry in the United States and Canada. Norcraft provides its customers with a single source for a broad range of high-quality cabinetry, including stock and semi-custom cabinets manufactured in both framed and frameless (full access) construction. Norcraft markets its products through seven main brands: Mid Continent Cabinetry, Norcraft Cabinetry, UltraCraft, StarMark Cabinetry, Fieldstone Cabinetry, Brookwood and Urban Effects.

FORWARD LOOKING STATEMENTS AND INFORMATION

Statements in this press release regarding activities, events or developments that management expects, believes or anticipates will or may occur in the future are forward looking statements. Forward looking statements may give management’s current expectations and projections relating to the financial condition, results of operations, plans, objectives, future performance and business of the Company. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘believe’’ and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

These forward looking statements are based on management’s expectations and beliefs concerning future events affecting the Company. They are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control. Although management believes that the expectations reflected in its forward looking statements are reasonable, management does not know whether its expectations will prove correct. Such expectations can be affected by inaccurate assumptions that management might make or by known or unknown risks and uncertainties. Many factors that could cause actual results to differ materially from these forward looking statements including, but not limited to, the risks outlined under the “Risk Factors’’ section of the Company's 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2014.

Because of these factors, investors should not place undue reliance on any of these forward looking statements. Further, any forward looking statement speaks only as of the date on which it is made and, except as required by law, the Company undertakes no obligation to update any forward looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

       

Norcraft Companies, Inc.

Consolidated Balance Sheets

(dollar amounts in thousands, except share and per share data)

 
June 30, December 31,
2014 2013
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 46,468 $ 39,106
Trade accounts receivable, net 28,957 21,449
Inventories 24,649 22,591
Prepaid and other current assets 2,074   2,590  
Total current assets 102,148 85,736
Non-current assets:
Property, plant and equipment, net 24,953 25,208
Goodwill 88,462 88,466
Intangible assets, net 57,767 60,108
Display cabinets, net 6,321 5,864
Other assets 118   84  
Total non-current assets 177,621   179,730  
Total assets $ 279,769   $ 265,466  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,875 $ 1,500
Accounts payable 12,543 8,523
Accrued tax distributions 1,007 —
Accrued expenses 22,367   21,203  
Total current liabilities 37,792 31,226
Non-current liabilities:
Long-term debt 147,750 148,500
Unamortized discount on long-term debt (692 ) (746 )
Deferred tax liabilities and other liabilities 37,991   36,560  
Total non-current liabilities 185,049   184,314  
Total liabilities 222,841 215,540
Commitments and contingencies — —
Equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 17,311,573 issued and outstanding at June 30, 2014 and December 31, 2013 173 173
Additional paid-in capital 52,846 51,795
Accumulated deficit (7,658 ) (13,703 )
Accumulated other comprehensive income 709   845  
Total Norcraft Companies, Inc. equity 46,070 39,110
Noncontrolling interests 10,858   10,816  
Total equity 56,928   49,926  
Total liabilities and equity $ 279,769   $ 265,466  
 
       

Norcraft Companies, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands, except share and per share data)

(unaudited)

 
Three Months Ended Six Months Ended
June 30, June 30,
2014     2013 2014     2013
Net sales $ 97,601 $ 90,284 $ 181,631 $ 167,632
Cost of sales 70,582   66,054   133,124   123,632  
Gross profit 27,019 24,230 48,507 44,000
Selling, general and administrative expenses 15,868   15,175   30,542   29,031  
Income from operations 11,151 9,055 17,965 14,969
Other expense:
Interest expense, net 2,226 6,470 4,402 12,917
Amortization of deferred financing costs 163 780 305 1,560
Expense related to tax receivable agreements 2,832 — 4,475 —
Other expense, net 41   2   100   12  
Total other expense 5,262   7,252   9,282   14,489  
Income before income taxes 5,889 1,803 8,683 480
Income tax expense 1,133   —   1,570   —  
Net income 4,756 1,803 7,113 480
Less: net income attributable to noncontrolling interests 724   —   1,068   —  
Net income attributable to Norcraft Companies, Inc. 4,032 1,803 6,045 480
 
Other comprehensive income (loss):
Foreign currency translation adjustment 229 (316 ) (155 ) (507 )
Less: other comprehensive income (loss) attributable to noncontrolling interest 28   —   (19 ) —  
Other comprehensive income (loss) attributable to Norcraft Companies, Inc. 201 (316 ) (136 ) (507 )
 
Comprehensive income (loss) 4,985 1,487 6,958 (27 )
Less: comprehensive income attributable to noncontrolling interests 752   —   1,049   —  
Comprehensive income (loss) attributable to Norcraft Companies, Inc. $ 4,233   $ 1,487   $ 5,909   $ (27 )
 
 
Net income per share attributable to Norcraft Companies, Inc.
Basic and diluted $ 0.23   $ 0.35  
   

Norcraft Companies, Inc.

Consolidated Statements of Cash Flows

(dollar amounts in thousands)

(unaudited)

 
Six Months Ended
June 30,
2014     2013
Cash flows from operating activities:
Net income $ 7,113 $ 480
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment 2,035 2,218
Amortization:
Customer relationships 2,234 2,233
Deferred financing costs 305 1,560
Display cabinets 2,151 2,172
Discount amortization/accreted interest 54 (20 )
Provision for uncollectible accounts receivable 47 83
Provision for obsolete and excess inventories 256 338
Provision for warranty claims 2,805 1,677
Stock compensation expense 1,051 9
Deferred income tax expense 1,425 —
Gain on disposal of assets (35 ) (2 )
Change in operating assets and liabilities:
Trade accounts receivable (7,592 ) (8,301 )
Inventories (2,342 ) (3,936 )
Prepaid expenses 515 287
Other assets (33 ) 150
Accounts payable and accrued expenses 2,411   7,344  
Net cash provided by operating activities 12,400 6,292
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 36 3
Purchase of property, plant and equipment (1,864 ) (2,168 )
Additions to display cabinets (2,608 ) (1,976 )
Net cash used in investing activities (4,436 ) (4,141 )
Cash flows from financing activities:
Payment of financing costs (198 ) —
Repayment of long-term debt (375 ) —
Proceeds from issuance of member interests —   3  
Net cash provided by (used in) financing activities (573 ) 3
Effect of exchange rates on cash and cash equivalents (29 ) (39 )
Net increase in cash and cash equivalents 7,362 2,115
Cash and cash equivalents, beginning of the period 39,106   23,019  
Cash and cash equivalents, end of period $ 46,468   $ 25,134  
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,489 $ 12,714
Cash paid during the period for income taxes $ 90 $ —
Supplemental disclosure of non-cash transactions:
Change in accrual for tax receivable agreements $ 4,475 $ —
Unpaid tax distributions to noncontrolling interests $ 1,007 $ —
 

Norcraft Companies, Inc.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(dollar amounts in thousands)

EBITDA is net income (loss) before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is EBITDA before the effect of the footnoted items in the table below. The Company believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company's operating performance compared to that of other companies in the industry, as their calculation eliminates the effects of financing, income taxes and the accounting effects of capital spending, as these items may vary for different companies for reasons unrelated to overall operating performance. The Company also believes these financial metrics provide information relevant to investors regarding the Company's ability to service and/or incur debt. Neither EBITDA nor Adjusted EBITDA is a presentation made in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Accordingly, when analyzing the Company's operating performance, investors should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for net income (loss), cash flows from operating activities or other operation statement or cash flow statement data prepared in accordance with U.S. GAAP. The Company's calculation of EBITDA and Adjusted EBITDA are not necessarily comparable to those of other similarly titled measures reported by other companies. The calculations of EBITDA and Adjusted EBITDA are shown below:

    Three Months Ended     Six Months Ended     Twelve Months
June 30, June 30, Ended June 30,
2014     2013 2014     2013 2014
Net income (loss) $ 4,756 $ 1,803 $ 7,113 $ 480 $ (8,540 )
Interest expense, net 2,226 6,470 4,402 12,917 16,748
Depreciation 1,004 1,106 2,035 2,218 4,155
Amortization of deferred financing costs 163 780 305 1,560 1,744
Amortization of customer relationships 1,117 1,117 2,234 2,233 4,467
Display cabinet amortization 1,066 1,036 2,151 2,172 4,309
Income tax expense 1,133 — 1,570 — 2,449
State taxes 38   13   113   25   196  
Non-GAAP EBITDA $ 11,503   $ 12,325   $ 19,923   $ 21,605   $ 25,528  
Stock compensation expense 525 — 1,051 — 1,397 (1)
Management fees — 250 — 500 369 (2)
Restructuring costs associated with initial public offering — — — — 1,540 (3)
Expense related to tax receivable agreements 2,832 — 4,475 — 4,475 (4)
Loss on debt extinguishment —   —   —   —   12,499   (5)
Non-GAAP adjusted EBITDA $ 14,860   $ 12,575   $ 25,449   $ 22,105   $ 45,808  
 

(1) Prior to completion of the Company's initial public offering, the Company's board of directors adopted the Norcraft Companies, Inc. 2013 Incentive Plan. Stock compensation expense related to this plan was $0.5 million, $1.1 million and $1.4 million during the three, six and twelve months ended June 30, 2014, respectively.

(2) In connection with the Company's initial public offering, the Company terminated the Management and Monitoring Agreement, which included a $1.0 million annual management fee. Certain expense reimbursement and indemnification obligations survived the termination of the Management and Monitoring Agreement. See the "Related Party Transactions" footnote in Part IV, Item 15 of the Company's 2013 Annual Report on Form 10-K.

(3) Net income (loss) during the twelve months ended June 30, 2014 included the effect of the restructuring costs associated with the Company's initial public offering in the amount of $1.5 million, which decreased net income (loss) and correspondingly decreased EBITDA, but the effect has been backed out for Adjusted EBITDA.

(4) Net income (loss) during the three, six and twelve months ended June 30, 2014 included expense related to tax receivable agreements in the amount of $2.8 million, $4.5 million and $4.5 million, respectively, which decreased net income and correspondingly decreased EBITDA, but the effect has been backed out for Adjusted EBITDA.

(5) Net income (loss) during the twelve months ended June 30, 2014 included the effect of a loss on debt extinguishment in the amount of $12.5 million, which decreased net income (loss) and correspondingly decreased EBITDA, but the effect has been backed out for Adjusted EBITDA.