congoleum
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Congoleum worksheetTRANSCRIPT
Congoleurn Corporation (Abridged)
1969 1970 1971 1972 1973 1974 1975 1976 1977 1978Net sales (millions $) 189.90 187.70 250.60 345.20 385.70 377.1 395.90 294.80 388.60 575.80Royalty revenues (included in net sales) - - - 4.00 5.50 7.00 10.10 13.20 17.80Net income (millions $) 7.60 7.00 12.10 23.40 22.20 7.8 9.60 15.70 24.70 41.70Earnings per share 0.70 0.65 1.07 1.67 1.89 0.05 0.83 1.36 2.13 3.58Dividends per share 0.02 0.09 0.13 0.20 0.27 0.27 0.33 0.40 0.67Stock price ($)
High 17.50 11.60 24.00 30.90 24.60 14.90 9.20 12.90 14.60 26.30Low 7.50 3.90 10.10 20.70 8.50 2.40 3.00 8.00 8.80 12.00
Working capital (millions $) 35.20 49.00 53.50 69.60 88.10 92.80 81.10 76.80 78.00 110.10Long-term debt (millions $) 31.70 42.60 40.00 42.10 59.30 74.60 52.30 16.60 16.10 14.90Net worth (millions $) 58.90 59.10 73.30 99.50 116.30 113.80 120.30 132.60 153.10 187.50
Note: Congoleum acquired Curtis Noll Corporation on October 31, 1977 on a purchase basis. Its performance is consolidated withCongoleurn after October 31, 1977. Certain operations were discontinued in 1976. Results for 1969 to 1975 have not been adjustedfor discontinued operations.
Exhibit 1 Ten Year Historical Financial Data
Congoleum Corporation (Abridged)
1976 1977 1978
RevenuesNet sales $284,735 $375,466 $558,633
10,080 13,163 17,197Total revenues 294,815 388,629 575,830
Cost of Sales and Operating ExpensesCost of sales 224,028 285,770 385,851
Selling and administrative expenses 37,805 55,023 108,648Operating income 32,982 47,836 81,331
Other Income and ExpenseInterest expense (2,064) (1,734) (1,266)
Miscellaneous income 3,821 3,538 4,281
Total other income and expense 1,757 1,804 3,015Income from continuing operations
before income taxes 34,739 49,460 84,346
Provision for Income Taxes 17,400 24,906 42,600Income from continuing operations 17,339 24,740 41,746Loss from discontinued operations (19,500) - -
Patent infringement settlement 17,885 - 0
Net income $15,724 $24,740 $41,746
Per ShareIncome from continuing operations 1.50 2.13 3.58Loss from discontinued operations (1.69) - -
Patent infringement settlement 1.55 - -
Net income 1.36000 2.13000 3.58000
patents expire from 1980 through 1987, although most expire by 1984.
Note: The statements above reflect the addition of Curtis Noll Corporation only after October 31, 1977, the date ofacquisition. The acquisition was accounted for as a purchase. Restating the results of 1977 and 1976 as if Nollwere included yields the following:
Year Ended December 311976 1977
Total revenues $416,000 $497,300Income from continuing operations 19,592 27,725Net income 17,977 27,725Earnings per share 1.56 2.39
Exhibit 2 Historical Income Statements (in thousands except per share data)
Royaltiesa
aRoyalties are from licenses of the companys resilient flooring patents, as well as license agreements for know-how. These
Congoleum Corporation (Abridged)
Year Ended December 311977 1978
Current AssetsCash and temporary investments $12,369 $77,254Receivables 55,053 40,424Shipbuilding contracts in progress 18,936 24,058Inventories 73,318 75,258
Other 5,679 3,511
Total current assets 165,355
Property, Plant and Equipment 131,621
Accumulated depreciation and amortization (60,472)
Net 71,149
Other AssetsGoodwill 18,520 18,520Other 11,356 13,250
Total $266,380
Current LiabilitiesCurrent maturities of long-term debt $2,055 $460Accounts payable 38,391 41,578Accrued liabilities 28,928 30,102
Income taxes 17,985 38,267Total current liabilities 87,359 110,397
Long-term debt 16,067 14,949Defferred income taxes and other liabilities 9,886 10,221
Common stock 5,859 5,859Surplus 11,846 11,345Retained earnings 137,256 171,229
Treasury stock (1,893) (948)Net worth 153,068 187,485
Total Liabilities and Equity $266,380 $323,052
Exhibit 3 Consolidated Balance Sheets (in thousands)
20,505b
135,627c
(64,850)d
70,777e
$323,052 f
Replacement cost data: a$79,518, b$224,765, c$282,267, d$188,281, e$93,986, f$352,710.
Congoleum Corporation (Abridged)
Year Ended December 31 9 Months1974 1975 1976 1977 1978 1978 1979
Revenues by segmentHome furnishings $143 $153 $180 $198 $225 $170 $177 Shipbuilding 107 126 115 167 211 158 181
Automotive and industrial distribution 79 85 95 105 115 86 89
$329 $364 $390 $470 $551 $414 $447
Home furnishings $22 $27 $34 $42 $58 $43 $40 Shipbuilding (11) 1 2 10 19 13 28
Automotive and industrial distribution 6 7 8 9 10 7 8
$17 $35 $44 $61 $87 $63 $76 Identifiable assets by segment
Home furnishings $93 $93 $97 $92 $93 NA NAShipbuilding 37 38 42 54 59 NA NA
48 51 56 62 64 NA NA
$178 $183 $195 $208 $216 NA NA
expenses, or provisions for income taxes.
Exhibit 4 Product Line Data
Operating income (loss) by segmenta
Automotive and industrial distributionb
a0perating income does not include an allocation of interest income or expense, miscellaneous and other unallocable expenses, corporate office
bThe pro forma amounts for the automotive and industrial distribution segment include the results of Curtis Noll Corporation.
Congoleurn Corporation (Abridged)
Number of Shares Weighted Number of Total NumberSubject to Average Other Shares of Shares
Options and Stock Exercise Beneficially BeneficiallyAppreciation Rights Price Owned Owned
Byron C. Radaker(Chairman, CEO) 47,250 $11.87 12,750 60,000Eddy G. Nicholson(Vice Chairman, COO) 27,750 11.31 11,250 39,000Harry F. Pearson(Executive Vice President) 17,000 15.38 47,492 64,492
All directors and officers as a group 164,699 13.07 293,023 457,722
Officers of Congoleum expected to assume equivalent positions in the new firm.
It was proposed that Radaker and Nicholson be allowed to purchase 7% and 5% respectivelyof the new firm's equity, subject to the right of the firm to repurchase the equity if their employmentis terminated before 1984. Stock in the new venture was also reserved for other key employees.
Radaker and Nicholson wouId be employed under five-year contracts which specified a basesalary, incentive compensation, and entitlements in the event of termination. Current and proposedcompensation compared as follows:
Radaker Nicholson
1979 compensation $370,000 $295,000 1980 compensation per contract
Maximurn 500,000 380,000Minimum 375,000 290,000
Exhibit 5 Management Stock and Option Ownership in Congoleum Corporation, Autumn 1979
Congoleum Corporation (Abridged)
Premium/Price Senior Sub. Senior Sub.
Acquisition One Day Debt Debt Debt Debtof Stock Prior to Offer as a Multiple of Total Total Total Total
Company Acquired Date or Assets Announcements Net Income Book Value Debt Debt Cap. Cap.
Houdaille Industries 10/28/78 S 93% 13.9x 2.0x 65.5% 34.5% 56.0% 29.6%Bliss & Laughlin 8/10/79 A 23 8.7 1.7Carrier Corp. 9/1 6/78 A 39 10.2 1.6Gardner-Denver 1/22/79 A 46 12.2 2.1Washington Steel 3/12/79 A 34 7.3 1.3Eltra Corp. 6/29/79 A 25 11.6 1.5Studebaker-Worthington 7/25/79 A 17 10.7 1.4Marathon Manufacturing 8/13/79 A 13 11.4 2.1Congoleum A/S 50 9.4 2.4 68.6 31.4 60.4 27.6
Exhibit 6 Data on Comparable Leveraged Buyouts and Other Acquisitions
Congoleurn Corporation (Abridged)
1979 Estimated Results by Segment
Home Automotive and Total Furnishings Bath Iron Industrial Corporate
Segment Works Distribution Consolidated
$56.1 $29.0 $11.9 $97.0
1.1 1.3 0.7 3.1 Pretax income 55.0 27.7 11.2 93.9
Taxes (48%) 26.4 13.3 5.4 45.1
Net income $28.6 $14.4 $5.8 $45.8
Valuation Based on Assumed Price-Earnings Ratio
Low High Low High Low High Low HighAssumed price-eamings rato 9.0x 1 0.0x 5.0x 6.0x 10.0x 11.0xDerived valuation $257.4 $286.0 $72.0 $86.4 $58.0 $63.8 $387.4 $436.2Plus:
95.1 95.1Less:
Estimated long-term debt and currentmaturity of long-term debt on 12/31/79 15.6 15.6Unfunded vested pension liabilities
(as of 12/31/78) 34.5 34.5
Net break-up value $432.4 $481.2Per share (based on 12,201,000 fully diluted
shares) $35.44 $39.43
Segment was reduced by $2.7 million attributable to the Kinder Division. This operation has been assumed to be sold for $10 million by theend of 1979.
Exhibit 7 Valuation Based on a Break-up Price Estimated by Lazard Freres ($ millions)
Operating incomea
Corporate office and otherb
Estimated excess cash on 12/31/79c
aFrorn Congoleum's internal reporting of quarterly operating income and performance report. Operating income for the Home Furnishings
bAllocated based on 1979 estimated sales (excluding $36.0 million attributable to Kinder and excluding royalty payments).
cTotal cash at year-end estimated at $103.1 million minus $8 million. Excess cash is, therefore, estimated at $95.1 million.
Congoleum Corporation (Abridged)
data)
These data are from an internal forecast by Congoleum prepared in the summerof 1978, and subsequently made available to First Boston Corp.
1979 1980 1981
For the year ended December 31
Revenues $596 $680 $737 Operating income 86 97 112 Net income 45 51 60 Net income per share 3.80 4.35 5.00 Dividends per share 0.90 1.10 1.30
At December 31
Cash and temporary investments 93 136 182 Working capital 140 169 209 Long-term debt 15 14 14 Stockholders' investment 220 259 304
Exhibit 8 Forecast of Congoleum Operations (in millions except per share
Congoleum Corporation (Abridged)
5-YearExpected LT Debt 1979Growth P/E % Cap. ROE
Home FurnishingsArmstrong Cork 17.5% 5.8 1.00 18.2% 11.6%GAF Corp 14 6 1.15 35 10.4
ShipbuildingTodd Shipyards 21 5.3 1.00 69 22.0
Automotive and industrial distributionGenuine Parts 16 10.4 0.95 5 19.2General Automotive Parts 16 9.6 0.75 7 19.0Barnes Group 12.5 5.1 0.85 18 20.6
Congoleurn 22.5 7.9 1.25 7 23.0
Exbibit 9 Financial Data on Market Segment Competitors
βa
aThe risk-free rate was assumed to be 9.5% and the market premium 8.6%.
1982-1984ExpectedDiv. Yield
3.2%2.6
2.0
2.52.42.7
3.0
Congoleum Corporation (Abridged)
Exhibit 10 Average or Comparable Debt Yields by Quality, September 1979
Ratio ofDebt
to TotalS & P Rating Yield Firm Name Capital (%)
AAA 9.35AA 9.54A 9.78
BBB 10.49
BB 13.76 Action Industries 56.9011.06 Control Data 21.1011.86 Sun Chemical 47.6010.59 Talley Industries 43.00
B 13.32 APL Corp. 57.9012.70 Arrow Electronics 49.7011.98 Charter Company 50.4012.46 Columbia Pictures 41.3012.87 Texas Intemational Airlines 51.00
CCC 16.11 Altec Corp. 70.8013.32 General Host 74.4017.22 Grolier Inc. NA14.26 LTV Corp. 73.8015.02 Rapid American Corp. 75.70
Congoleum Corporation (Abridged)
Quality, September 1979
Ratio ofDebt
Yield to TotalMoodys Rating (%) Firm Name Capital
Aaa NRAa 9.60A 10.34
Baa 10.49
(S & P Rating)
BB 10.0 Control Data 21.110.8 Evans Products 36.810.0 Fairmont Foods 39.011.5 Flexi-Van Corp. 64.0
B 12.1 Eastern Airlines 68.111.5 Humana Inc. 72.112.5 Norin Corp. 49.512.6 Petro-Lewis 67.2
CCC 18.2 Chrysler Corp. 33.811.9 Continental Copper Steel 45.014.0 Susquehanna Corp. 25.315.0 United Brands 33.314.0 Warnaco 35.013.0 Wheeling Pittsburgh Steel 33.7
Exhibit 11 Average or Comparable Preferred Stock Dividend Yields by
Congoleum Corporation (Abridged)
Cost of stock ($38 x 12.2 mm shares) $463.6
Expenses 7.0Purchase price $470.6
Stockholders' investment 12/31/78 187.5Claim settlement 3.5Proceeds from exercise of stock options 5.0
Estimated 1979 additions to retained earnings 37.7Stockholders' investment 12/31/79 233.7
Less: Unfunded pension liabilities 34.5
Adjusted stockholders' investment 12/31/79 199.2
$271.4
Allocation of purchase premiumInventory write-up from recapture of LIFO reserve $4.2Fixed assets 83.4Patents 150.0
Goodwill 33.8
Purchase premium $271.4
level" opinion of the fair market value of inventories as of June 30, 1979 and the shipbuilding contractbacklog and patents and patent licensing agreement at December 31, 1979. Their report concludedthat the net realizable value of the inventories was $83,633,000, of the backlog was $73,500,000, andof the patents and patent licensing agreement was $174,000,000. The book value of inventories atJune 30, 1979 was $50,000,000. Shipbuilding contract backlog and patents and patent licensingagreements had been carried on the books at nominal values.
Exhibit 12 Sources and Allocation of Purchase Premiuma (in millions)
Purchase premiuma
aAfter the July 16, 1979 bid, First Boston retained American Appraisal Company to render a "comfort
Congoleum Corporation (Abridged)
Buyout 1978-1984 ($ millions)
1980-1978 1984
Line # Actual 1979E 1980 1981 1982 1983 1984 Totals
1 Operating income (Exhibit 15) 95.5 105.9 111.5 132.2 158.7 175.9 166.12 Less: corporate expenses 7.5 8.6 4.3 5.1 5.9 6.8 7.6
3 depreciation & amortization 6.7 7.5 35.51 36.26 37.07 37.95 21.234 Earnings before interest & taxes 81.3 89.8 71.7 90.8 115.7 131.1 137.3
5 (3.0) (5.7) 42.92 40.55 37.33 34.12 29.876 Profit before taxes 84.3 95.5 28.8 50.3 78.4 97.0 107.40
7 Less: tax (@ 48%) 40.5 45.8 13.8 24.1 37.6 46.6 51.68 Profit after taxes 43.8 49.7 15.0 26.2 40.8 50.5 55.8
Adjustments:
9 35.51 36.26 37.07 37.95 21.2310 Less capital expenditures (15) (16.2) (17.5) (18.9) (20.4)11 Less investment in working capital required (2) (14) (23.3) (11.2) (12.8)12 Less preferred dividends (3.5) (3.5) (3.5) (3.5) (3.5) (17.5)13 Less principal repayments (17.14) (24.75) (24.52) (36.75) (24.55) (127.7)
14 12.84 3.91 10.02 18.06 15.83 60.815 Add: dividends, interest, and principal 63.56 68.80 65.35 74.37 57.96 330.016 Free cash flow (to all capital) 76.40 72.71 75.37 92.43 73.79 390.817 Less: Bank & preexisting interest
and principal 35.85 33.46 30.86 40.74 25.28 166.218 Free cash flow (to nonbank buyout participants) 40.55 39.25 44.51 51.69 48.51 224.619 Net working capital 120 122 136 159.3 170.5 183.320 Change in net working capital 2 14 23.3 11.2 12.8
1980-1984.
over the years 1980-1984.
financial risk, and increasing the free cash flow. Does not reflect income from the reinvestment of surplus cash.
Exhibit 13 Income and Cash Flow Forecast for Congoleum Reflecting the Terms of the Proposed Leveraged
Less: interest expense (net)a
Add back depreciation + amortizationb
Free cash flow (to common stock)c
aWith no leveraged buyout, Congoleum's net interest expenses were expected to be $(2.0),$(2.0),$(2.1),$(2.1), and $(3.0) million over the years
bWith no leveraged buyout, Congoleum's depreciation and amortization expenses were expected to be $7.5, $8.3, $9.0, $9.9, and $10.9 million
cBecause of covenants prohibiting dividends, these free cash flows would be reinvested (presumably in cash and marketable securities), reducing
Congoleum Corporation (Abridged)
savings of $5 million annually is assumed as a result of Congoleurn being a private company.
Value Remaining(millions) Life
Chemical embossing process $40 4 YearsCode keycutter 40 10 YearsFuture value of U.S. royalties 30 4 Years
Future value of foreign royalties 40 10 YearsTotal $150
Amortization of patents will be the same for book and tax purposes.
million. Of this, 50% is assumed to relate to plant, and will be depreciated over 20 years. The other50%, related to equipment, will be depreciated over seven years. All subsequent capital expenditureswill be depreciated over 20 years. For book purposes, the fixed asset base will be $154.0 million. Theother policies above will apply.
Interest Expense and Principal Repayments
$16.666 million annually starting in 1980.
on January 30, 1981.
starting on January 20, 1989.
the buyout is projected to be $120 million.
Note: By 1980, a pattern of leveraged buyouts had emerged such that the firms were taken public again within a fewyears--usually when the various value-creating effects were diminished. The end of 1984 was one such horizon forCongoleum.
17
Exhibit 14 Assumptions for Financial Projections
Corporate Expenses $8.6 million in 1979, growing at 8% thereafter from 1980 to 1984. A
Depreciation and Amortization The amortization of patents was proposed as follows:
Depreciation of Plant and Equipment For tax purposes the fixed asset base will be $200.2
Bank Debt Assume 14% interest on principal of $120 million. Principal is to be amortized at
Senior Notes 111/4% interest on principal of $115 million, amortized at 7,636,000 per year starting
Subordinated Notes 121/4% interest on principal of $92 million, amortized at 7,636,000 per year
Covenants Prohibit the payment of dividends on other than the preferred stock.
Taxes The corporate income tax rate is assumed to be 48%.
Capital Expenditures Assumed to be $15 million in 1980 and increasing 8% annually thereafter.
Minimum Working Capital 20% of nonroyalty sales. Net working capital immediately following
Required Cash Assumed to be 2.5% of the nonroyalty sales.
Congoleurn Corporation (Abridged)
These data are from projections made by First Boston Corporation, and assume the buyout is complete.
Actual1978 1979 1980 1981 1982 1983 1984
Revenues
1. Home furnishings net $207.9 $234.9 $217.9 $241.9 $273.3 $308.8 $349.0
2. Home furnishings royalties 17.2 20.6 24.8 29.7 35.7 42.8 21.4
3. Total home furnishings 225.1 255.5 242.7 271.6 309.0 351.6 370.44. Shipbuilding 211.0 230.4 247.9 279.2 345.1 345.1 345.15. Automotive--expediter 78.8 90.6 104.2 119.8 137.8 158.5 182.3
6. Automotive--conventional 45.0 45.0 40.0 40.0 40.0 40.0 40.0
7. Total automotive 123.8 135.6 144.2 159.8 177.8 198.5 222.3
8. Total revenues $559.9 $621.5 $634.8 $710.6 $831.9 $895.2 $937.8
Operating Income
9. Home furnishings net $43.7 $42.0 $39.2 $48.4 $57.4 $64.8 $73.3
10. Home furnishings royalties 17.2 20.6 24.8 29.7 35.7 42.8 21.4
11. Total home furnishings 60.9 62.6 64.0 78.1 93.1 107.6 94.712. Shipbuilding 21.7 31.5 33.9 38.5 47.7 47.7 47.713. Automotive-expediter NA 11.8 13.6 15.6 17.9 20.6 23.7
14. Automotive--conventional NA 0 0 0 0 0 0
15. Total automotive 12.9 11.8 13.6 15.6 17.9 20.6 23.7
16. Total operating income $95.5 $105.9 $111.5 $132.2 $158.7 $175.9 $166.1
Note: Neither depreciations nor corporate-level expenses are reflected in operating income, nor is income from the reinvestment of surpluscash.
Exhibit 15 Projected Operating Income 1979-1984