UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017March 31, 2018

Commission file number 1-14982

HUTTIG BUILDING PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

(314) 216-2600

(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of Common Stock outstanding on September 30, 2017March 31, 2018 was 25,879,81226,070,616 shares.

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PART IPART 1 FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In Millions, Except Per Share Data)

See notes to condensed consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(In Millions)

See notes to condensed consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(In Millions, Except Share Data)

See notes to condensed consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In Millions)

See notes to condensed consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Huttig Building Products, Inc. and its subsidiary (the “Company” or “Huttig”) were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

The condensed consolidated results of operations and resulting cash flows for the interim periods presented are not necessarily indicative of the results that might be expected for the full year. Due to the seasonal nature of Huttig’s business, operating profitability is usually lower in the Company’s first and fourth quarters than in the second and third quarters.

2. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue form Contracts with Customers (Topic 606) and all of the related amendments.  We adopted the standard using the full retrospective method which did not require a cumulative effect adjustment to retained earnings. As a result of this adoption, there was no material impact on our revenue recognition practices, income from continuing operations after taxes, net income or earnings per share.  See Note 3 for further discussion, including additional required qualitative and quantitative disclosures of our revenue recognition policies.    

Accounting Standards Issued But Not Yet Adopted

In March 2016,January 2017, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting", which simplified2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the income tax consequences, accountingTest for forfeituresGoodwill Impairment”. ASU 2017-04 eliminates the two-step process that required identification of potential impairment and classification ona separate measure of the Statementsactual impairment. The annual assessment of Consolidated Cash Flows. Huttig adopted this standardgoodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. This guidance will be effective in the first quarter of 2017, which had an immaterial2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact to theon our consolidated financial statements and related disclosures.statements.

In February 2016, the FASB issued accounting guidance, "Leases", which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statement of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This standard will be adopted on a modified retrospective basis. Huttig is required to adopt the standard in the first quarter of 2019. The Company is currently evaluatingWhile we continue to evaluate the impacteffect of adopting this guidance will have on theour consolidated financial statements and related disclosures.

In May 2014, the FASB issued accounting guidance, "Revenue from Contracts with Customers", which has been further clarified and amended. The core principle ofdisclosures, we expect our operating leases to be subject to the new standard is for companiesstandard. We expect to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration toright-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenueincrease our total assets and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. In August 2015, the FASB amended the guidance to allow for the deferral of the effective date of this standard. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Accordingly, Huttig is required to adopt this standard in the first quarter of fiscal year 2018. The Company is in process of implementing this guidance, including assembling an implementation team and performing a review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company is continuing to evaluate the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

liabilities.

3. COMPREHENSIVE INCOME

Comprehensive income refers to net income adjusted by gains and losses that in conformity with GAAP are excluded from net income. Other comprehensive items are amounts that are included in shareholders’ equity in the condensed consolidated balance sheets. The Company has no comprehensive income items and therefore comprehensive net income (loss) is equal to net income (loss) for all periods presented.REVENUE

Revenue is recognized when performance obligations with our customer are satisfied.  A performance obligation is a promise to transfer a distinct good to the customer and is the unit of account in ASC Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  All of our contracts have a single performance obligation as the promise to transfer the individual good is not separately identifiable from other promises and is, therefore, not distinct.  Our performance obligations are satisfied at a point in time and revenue is recognized when the customer accepts the delivery of our product or takes possession of our product with rights and rewards of ownership. 

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods.  We report revenue, including our direct sales, on a net basis, which includes gross revenue adjustments for estimated returns, cash payment discounts based on the satisfaction of outstanding receivables, and volume purchase rebates.

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As it relates to direct sales, we are the principal of these arrangements as we are responsible for fulfilling the promise to provide specific goods to our customers including product specifications, pricing and modifications before it is delivered to our customers. 

The following table disaggregates our revenue by product classification:

4. DEBT

Debt consisted of the following (in millions):

Credit AgreementFacility — In July 2017, the Company amended and extended its asset-based senior secured revolving credit facility (“credit facility”) with Wells Fargo Capital Finance, Bank of America and JP MorganJPMorgan Chase.  The amendment, among other things, increased the borrowing capacity from $160 million to $250 million, reduced the interest rate, reduced the minimum fixed charge coverage ratio and extended the maturity to July 14, 2022. The amended facility may be increased to $300 million, through an uncommitted $50 million accordion feature, subject to certain conditions. Borrowing availability under the credit facility is based on eligible accounts receivable, inventory and real estate. The real estate component of the borrowing base amortizes monthly over 12.5 years on a straight-line basis.  Borrowings under the credit facility are collateralized by substantially all of the Company’s assets, and the Company is subject to certain operating limitations applicable to a loan of this type, which, among other things, place limitations on indebtedness, liens, investments, mergers and acquisitions, dispositions of assets, cash dividends and transactions with affiliates.

At September 30, 2017,March 31, 2018, the Company had revolving credit borrowings of $99.6$142.6 million outstanding at a weighted average interest rate of 2.5%3.4% per annum, letters of credit outstanding totaling $3.2$3.6 million, primarily used as collateral for health and workers’ compensation insurance and $69.7$43.9 million of excess committed borrowing capacity.availability.  The Company pays an unused commitment fee of 0.25% per annum. In addition, the Company had $3.9$4.1 million of capital lease and other obligations outstanding at September 30, 2017.March 31, 2018.

The sole financial covenant in the credit facility is the minimum fixed charge coverage ratio (the “FCCR”) of  1.00:1.00, which must be tested by the Company if the excess committed borrowing availability falls below an amount in a range between $17.5 million to $31.3 million, which amounts dependdepending on the Company’sour borrowing base, andbase. The FCCR must also be tested on a pro forma basis prior to consummation of certain significant transactions outside the ordinary course of the Company’s business, as defined in the credit agreement. At September 30, 2017,In the company’s fixed charge coverage ratio exceeds 1.00:1.00. At September 30, 2017,first quarter of 2018 the minimum FCCR was not required to be tested as excess committed borrowing availability was greater than the minimum threshold. However, if the Company’s fixed charge coverage ratio exceeds 1.00:1.00.excess borrowing availability would have fallen below that threshold, we would not have met the minimum FCCR.  

5. CONTINGENCIES

The Company carries insurance policies on insurable risks with coverage and other terms that it believes to be appropriate. The Company generally has self-insured retention limits and has obtained fully insured layers of coverage above such self-insured retention limits. Accruals for self-insurance losses are made based on claims experience. Liabilities for existing and unreported claims are accrued for when it is probable that future costs will be incurred and can be reasonably estimated.

Legal and Environmental Matters

The Company accrues expenses for contingencies when it is probable that an asset has been impaired or a liability has been incurred and management can reasonably estimate the expense. Contingencies for which the Company has made accruals include

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environmental and other legal matters. It is possible, however, that actual expenses could exceed our accrual by a material amount which could have a material adverse effect on the Company’s future liquidity, financial condition or operating results in the period in which any such additional expenses are incurred or recognized.

Environmental Matters

As described in Note 7 — “Commitments and Contingencies” to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017,  the Company was previously identified as a potentially responsible party in connection with the cleanup of contamination at a formerly owned property in Montana. On February 18, 2015, the Montana Department of Environmental Quality (the “DEQ”) issued an amendment to the unilateral administrative order of the DEQ outlining the final remediation of the property in its Record of Decision (the “ROD”).  Under the ROD, the DEQ estimated the remediation costs of the property to be $8.3 million. Since the ROD was issued, the Company has incurred costs which reduced the accrual to $7.1 million at December 31, 2016.

The Company spent $3.9 million in the first nine months of 2017 implementingIn September 2015, the remedial action work plan (the “RAWP”(“RAWP”). was approved.

The Company paid $0.3 million in the first three months of 2018 implementing the RAWP.  The Company estimates the total remaining cost of implementing the RAWP to be $3.2 million at September 30, 2017.March 31, 2018. As of September 30, 2017,March 31, 2018, the Company believes the accrual represents a reasonable best estimate of the total remaining remediation costs, based on facts, circumstances, and information currently available to Huttig.  However, there are currently unknown variables relating to the actual levels of contaminants and amounts of soil that will ultimately require treatment or removal and as part of the remediation process, additional soil and groundwater sampling, and bench and pilot testing is required to ensure the remediation will achieve the projected outcome required by the DEQ.  Potential indemnification or other claims we may be able to assert against third parties and possible insurance coverage have also been considered but any potential recoveries have not been recognized at this time. The ultimate final amount of remediation costs and expenditures are difficult to estimate with certainty and as a result, the amount of actual costs and expenses ultimately incurred by Huttig with respect to this property could be lower than, or exceed the amount accrued as of September 30, 2017March 31, 2018 by a material amount.  If actual costs are materially higher, the incremental expenses over the amount currently accrued could have a material adverse effect on our liquidity, financial condition and operating results.  

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In addition, some of the Company’s current and former distribution centers are located in areas of current or former industrial activity where environmental contamination may have occurred, and for which the Company, among others, could be held responsible. The Company currently believes that there are no material environmental liabilities at any of its distribution center locations.

Legal Matters

The Company is also involved in litigation in Colorado, Illinois, and Texas filed by PrimeSource Building Products, Inc. (“PrimeSource”) against the Company and eleven of its employees in December 2016.employees.  

The complaints allege, among other things, that certain former employees of PrimeSource have breached their contracts with PrimeSource (including non-competition, non‑interferencesolicitation and non-disclosure covenants) and fiduciary duties to PrimeSource, and that the former employees have misappropriated, and are using, trade secrets of PrimeSource on behalf of Huttig.the Company.  The complaints seek injunctive relief, compensatory damages, and with respect to certain counts, punitive damages.

On July 26, 2017, the Company and certain of the employee defendants filed counterclaims in the Illinois cases alleging, among others things, that PrimeSource has asserted and is maintaining its trade secret misappropriation claims in bad faith, tortiously interfered with the Company’s business relationships, and filed sham litigation and engaged in other exclusionary and predatory conduct in violation of Section 2 of the Sherman Act.

On December 9, 2017, the United States District Court of the Northern District of Illinois Eastern Division (the “Court”) ruled the evidence at the hearing failed to show a likelihood of success on the majority of PrimeSource’s claims against Huttig and the Court denied PrimeSource’s request to shut down the Huttig-Grip expansion, but granted partial injunctive relief restricting four Huttig employees from working in activities related to the Huttig-Grip expansion and in part enjoining Huttig from selling products to a list of customers that were not pre-existing customers prior to November 2016, but allows Huttig to sell all products to a list of customers that were pre-existing prior to November 2016. The injunction ends May 2018. Trial has not been scheduled for the Illinois and Texas cases. Trial is set for July 2018 for the Colorado case.

While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this litigation, and the Company is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome, the Company believes that PrimeSource’s claims lack merit.  The Company has retained outside counsel, and is vigorously defending itself against the lawsuits.  AsDuring the first three months of September 30, 2017,2018, the Company incurred approximately $2.5$0.7 million in expenses related to the PrimeSource litigation, and expects to continue to incur such litigation expenses.

The Company accrues expenses for contingencies when it is probable that an asset has been impaired or a liability has been incurred and management can reasonably estimate the expense. Contingencies for which the Company has made accruals include environmental, product liability and other legal matters. It is possible, however, that actual expenses could exceed our accrual by a material amount which could have a material adverse effect on the Company’s future liquidity, financial condition or operating results in the period in which any such additional expenses are incurred or recognized.litigation.

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6. EARNINGS (LOSS) PER SHARE

The Company calculates its basic (loss) income per share by dividing net (loss) income allocated to common shares outstanding by the weighted average number of common shares outstanding. Although the Company does not currently pay dividends, holders of unvestedUnvested shares of restricted stock have a right to participate in dividends on the same basis as common shares. As a result, these share-based awards meet the definition of participating securities and the Company applies the two-class method to compute earnings per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. In periods in which the Company has net losses, the losses are not allocated to participating securities because the participating security holders are not obligated to share in such losses.  The following table presents the number of participating securities and earnings allocated to those securities (in millions).

The diluted earnings per share calculations include the effect of the assumed exercise using the treasury stock method for both stock options and unvested restricted stock units, except when the effect would be anti-dilutive.  The following table presents the number of common shares used in the calculation of net income (loss) per share from continuing operations (in millions).

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7. INCOME TAXES

The Company’s effective tax rate for continuing operations was 41%a benefit of 69% and 57% in the third quarter of 2017 and 34% in the third quarter of 2016.  The Company’s effective tax rate for continuing operations was 23% and 37% in the ninethree month period ended September 30,March 31, 2018 and 2017, and 2016, respectively.

The first quarter 2018 tax rate for the first nine months of 2017 was impacted by the vesting of restricted stock during the quarter which provided for additional income tax deduction in excess of the compensation deducteddeduction for US GAAP purposes. This excess tax benefit increased the tax benefit reported on the first quarter loss.  As of September 30, 2017,March 31, 2018, the Company has $6.4$7.1 million valuation allowance primarily relating to certain state net operating loss carryforwards that are not likely to be realized in the future periods.

8. STOCK-BASED EMPLOYEE COMPENSATION

The Company recognized $0.5$0.6 million and $0.4$0.5 million in non-cash, stock-based compensation expense in the thirdfirst quarter of 20172018 and third quarter of 2016, respectively. The Company recognized $1.6 million and $1.2 million in non-cash stock-based compensation expense in the nine-month periods ended September 30, 2017, and September 30, 2016, respectively. During the first ninethree months of 2017,2018, the Company granted an aggregate of 404,793406,475 shares of restricted stock at a fair marketweighted average value of $6.64$6.84 per share under its 2005 Executive Incentive Compensation Plan, as amended and restated. Most restricted shares vest in three equal installments on the first, second and third anniversaries of the grant date or cliff vest in five years. During the first ninethree months of 2017,2018, the Company granted 27,696an aggregate of 33,732 shares of restricted stock under its Non-Employee Directors’ Restricted Stock Plan, as amended, at an average fair market value of $8.68$7.12 per share. The directors’ restricted shares vest on the date of the 2018 Annual Meeting.over one year. The unearned compensation expense is being amortized into expense on a straight-line basis over the requisite service period for the entire award. As of September 30,March 31, 2018 and 2017, and 2016, the total compensation expense not yet recognized related to all outstanding restricted stock/unit awards was $4.0$5.2 million and $2.6$4.9 million, respectively.

9. RIGHTS AGREEMENT

On May 18, 2016, the Board of Directors (the “Board”) of the Company entered into a rights agreement (the “Rights Agreement”) with Computershare Trust Company, N.A. and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, $0.01 par value per share, of the Company.  The dividend was payable upon the close of business on May 31, 2016 to the stockholders of record upon the close of business on that date.  The Board adopted the Rights Agreement to protect stockholdershareholder value by attempting to reduce the risk that the Company’s ability to use its net operating losses to reduce potential future federal income tax obligations may become substantially limited. The Company’s stockholdersshareholders approved the Rights Agreement at the 2017 Annual Meeting of Stockholders, held on April 25, 2017.

Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (“Preferred Shares”), of the Company at a price of $13.86 per one one-hundredth of a

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Preferred Share, subject to adjustment.  As a result of the Rights Agreement, any person or group that acquires beneficial ownership of 4.99% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group.  

In connection with the entry into the Rights Agreement, on May 18, 2016, the Company filed with the Secretary of State of the State of Delaware an Amended and Restated Certificate of Designation of Series A Junior Participating Preferred Stock to create the Preferred Shares.

10. DISCONTINUED OPERATIONS

The Company recorded no after tax income or loss from discontinued operations in the nine months of 2017. The Company recorded income of $4.3 million in the first nine months of 2016 primarily as a result of payments received from settlement agreements with insurers, as well as with Crane Co., in connection with the declaratory action filed in the United States District court for the Eastern District of Missouri.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Relevant to Forward-looking Information for the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “believe,” “estimate,” “project” or similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words.  Statements made in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K looking forward in time, including, but not limited to, statements regarding our current views with respect to financial performance, future growth in the housing market, distribution channels, sales, favorable supplier relationships, inventory levels, the ability to meet customer needs, enhanced competitive posture, no material financial impact from litigation or contingencies, including environmental proceedings, are included pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

These statements present management’s expectations, beliefs, plans and objectives regarding our future business and financial performance. We cannot guarantee that any forward-looking statements will be realized or achieved. These forward-looking statements are based on current projections, estimates, assumptions and judgments, and involve known and unknown risks and uncertainties. We disclaim any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

There are a number of factors, some of which are beyond our control that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. These factors include, but are not limited to: the strength of construction, home improvement and remodeling markets and the recovery of the homebuilding industry to levels consistent with the Historical Average; the cyclical nature of our industry; the uncertainties resulting from changes to United States and foreign laws, regulations and policies including the federal Tax Cuts and Jobs Act of 2017; the cost of environmental compliance, including actual expenses we may incur to resolve proceedings we are involved in arising out of the formerly owned facility in Montana; any limitations on our ability to utilize our deferred tax assets to reduce future taxable income and tax liabilities; our ability to comply with, and the restrictive effect of, the financial covenant applicable under our credit facility; the loss of a significant customer; deterioration of our customers’ creditworthiness or our inability to forecast such deteriorations; commodity prices; risks associated with our private brands; termination of key supplier relationships; risks of international suppliers; competition with existing or new industry participants; goodwill impairment;  the seasonality of our operations; significant uninsured claims; federal and state transportation regulations; fuel cost increases; our failure to attract and retain key personnel; deterioration in our relationship with our unionized employees, including work stoppages or other disputes; funding requirements for multi-employer pension plans for our unionized employees; product liability claims and other legal proceedings including the PrimeSource litigation; the integration of any business we acquire and the liabilities of such businesses; and those set forth under Part I, Item 1A-“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. These factors may not constitute all factors that could cause actual results to differ from those discussed in any forward-looking statement. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results

Overview

HuttigThe Company is a distributor of a broad array of building material products used principally in new residential construction, home improvement, and remodeling and repair projects.  We distribute our products through 27 distribution centers serving 41 states and sell primarily to building materials dealers, national buying groups, home centers and industrial users, including makers of manufactured homes.

The following table sets forth our sales by product classification as a percentage of total sales:

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Industry Conditions

New housing activity in 20172018 is still below the historical average of 1.4 million total housing starts from 1959 to 20162017 based on statistics tracked by the United States Census Bureau. Total housing starts were approximately 1.2 million in 2016.2017. Through September 30, 2017,March 31, 2018, based on the most recent data provided by the United States Census Bureau, total new housing starts were approximately 3%8% above 20162017 levels for the corresponding nine-monththree-month period.

Various factors historically have caused our results of operations to fluctuate from period to period. These factors include levels of residential construction, the mix of single family and multi-family starts as a percent of the total residential construction, home improvement and remodeling activity, weather, prices of commodity wood and steel products, interest rates, competitive pressures, availability of credit and other local, regional and national economic conditions. Many of these factors are cyclical or seasonal in nature. We anticipate that further fluctuations in operating results from period to period will continue in the future. Our results in the first and fourth quarter of each year are generally adversely affected by winter weather patterns in the Midwest, Northeast and Northwest, which typically result in seasonal decreases in levels of construction activity in these areas. As much of our overhead and expenses remain relatively fixed throughout the year, our operating profits tend to be lower during the first and fourth quarters.

We believe we have the product offerings, distribution channels, personnel, systems infrastructure and financial and competitive resources necessary for continued operations. Our future revenues, costs and profitability, however, are all likely to be influenced by a number of risks and uncertainties, including those discussed underuncertainties.

Strategic Initiatives

Our strategy is to increase shareholder value through the “Cautionary Statement” below.growth and diversification of our business.  To accomplish this, we developed strategic initiatives that require investments in our infrastructure, our people and technology platform.

To accelerate this growth and diversification, we continue to make strategic capital and operating investments to execute our product line expansion and market segment penetration. The national expansion of our Huttig-Grip product line, which is sourced both domestically and internationally, expands the breadth and geographical coverage of our private label specialty building product lines. Through our investments in automated, high-capacity pre-finish door lines and segment-focused sales resources, further penetration of the home improvement, repair and remodel market diversifies our business to be less dependent on new home construction, reinforces our position as the largest, value-add door fabricator to the professional residential construction market in the country, and accelerates our growth in higher value, and higher gross margin products.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in accordance with GAAP, which requires management to make estimates and assumptions. Management bases these estimates and assumptions on historical results and known trends as well as management forecasts. Actual results could differ from these estimates and assumptions and these differences may be material. For a discussion of our significant accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 20162017 in Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies.” During the three months ended September 30, 2017,March 31, 2018, there were no material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

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Results of Operations

Three Months Ended September 30, 2017March 31, 2018 Compared to Three Months Ended September 30, 2016March 31, 2017

Net sales were $199.6$198.0 million in 2017,the first quarter of 2018, which was $6.8$22.3 million, or 413 percent, higher than in 2016.the first quarter of 2017.  The increase in net sales was dueprimarily attributed to the generalan 8 percent increase in housingnew residential construction activity which was up 1 percent overas well as growth derived from the prior year.execution of our strategies.

Millwork product sales were flatincreased 4 percent in 2017 at $97.6the first quarter of 2018 to $95.3 million, compared to 2016.$91.9 million in the first quarter of 2017. Building products sales increased 726 percent in the first quarter of 2018 to $85.5 million, compared to $68.1 million in the first quarter of 2017, primarily attributed to $82.6 million primarily due to increases inhigher sales of ourthe Huttig-Grip products.product line. Wood product sales increased 510 percent in 2017the first quarter of 2018 to $19.4 million.$17.2 million, compared to $15.7 million in the first quarter of 2017.

Gross margin was $41.3$38.7 million in 2017,the first quarter of 2018, compared to $41.4$35.5 million in 2016.the first quarter of 2017.  The increase in gross margin was largely due to higher overall sales volumes. As a percentage of sales, gross margin was 20.719.5 percent in 2017,the first quarter of 2018, compared to 21.520.2 percent in 2016.the first quarter of 2017. The reduction in gross margin percentage decreasepercent was primarily dueattributed to increased production variances on lower production millworkan increase in direct sales duringvolume, as well as the three months ended September 30, 2017. Production variances occur when there is a mismatch between planned and actual numberproportional increase in building product sales as compared to the growth of units produced.other higher margin product categories.

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Operating expenses increased $4.6$2.2 million to $38.2$39.2 million in 2017,the first quarter of 2018, compared to $33.6$37.0 million in 2016.the first quarter of 2017.  The increase was primarily due todriven by higher personnel costs, which increased $1.7 million, as a result of hiring additional sales and warehouse personnel related to the execution of our Huttig-Grip Division and repair and remodelstrategic growth initiatives.  The increase was also impacted by legal fees incurred defending our Huttig-Grip Division’s right to compete in the fastener market. As a percentage of sales, operating expenses increaseddecreased to 19.119.8 percent in 2017the first quarter of 2018 compared to 17.421.1 percent in 2016.the first quarter of 2017.

Net interest expense was $0.9$1.1 million in 2017 and $0.5the first quarter of 2018 compared to $0.6 million in 2016.the first quarter of 2017.  The increase was primarily due to higher average debt andoutstanding borrowings on our credit facility as well as higher borrowinginterest rates in 2017the first quarter of 2018 compared to 2016.the first quarter of 2017.

Income tax expenseWe recognized a benefit from taxes of $0.9$1.1 million was recognizedand $1.2 million for the quarterquarters ended September 30, 2017.  Income tax expense of $2.5 million was recognized for the third quarter of 2016.March 31, 2018 and 2017, respectively. See Note 7 – “Income Taxes” of the Notes to the Condensed Consolidated Financial Statements (unaudited) in Item 1 for more information.

As a result of the foregoing factors, we reported incomea net loss of $0.5 million from continuing operations of $1.3 million infor the third quarter of 2017ended March 31, 2018, compared to $4.8a net loss of $0.9 million in the third quarter of 2016.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Net sales were $574.0 million in 2017, which was $24.5 million, or 4 percent, higher than in 2016.  The increase was primarily due to higher levels of construction activity, which was up 3 percent over the prior year, and the completion of the BenBilt Building Systems acquisition in the second quarter of 2016.

Millwork sales increased 6 percent in 2017 to $288.8 million, primarily due to increased construction activity and the acquisition. Building products sales increased 5 percent in 2017 to $229.6 million also primarily due to increased construction activity.  Wood product sales decreased 1 percent in 2017 to $55.6 million as we continue to de-emphasize this lower margin category.

Gross margin increased 3 percent to $119.0 million in 2017 compared to $115.6 million in 2016.  As a percentage of sales, gross margin was 20.7 percent in the nine-month period ended September 30, 2017, compared to 21.0 percent in the corresponding nine-month period in 2016. The gross margin percentage decrease was primarily due to increased production variances on millwork sales and a higher proportion of direct sales in our overall mix during the nine months ended September 30, 2017.

Operating expenses increased $18.6 million to $113.3 million in 2017, compared to $94.7 million in 2016.  The increase was primarily due to costs incurred as a result of hiring additional sales and warehouse personnel related to our Huttig-Grip Division and repair and remodel growth initiatives. The increase was also impacted by the BenBilt Building Systems operating expenses for nine months in 2017 compared to the post-acquisition period in 2016 and a general increase in costs which outpaced sales growth for the respective nine month periods.  As a percentage of sales, operating expenses increased to 19.7 percent in 2017 compared to 17.2 percent in 2016, as the Company increased headcount to service anticipated sales growth.

Net interest expense increased to $2.2 million in 2017, compared to $1.6 million in 2016.  The increase was primarily due to higher average debt and higher borrowing rates in 2017 compared to 2016.

Income tax expense of $0.8 million was recognized for the nine-month periodfirst quarter ended September 30,March 31, 2017.  Income tax expense of $7.1 million was recognized in the nine-month period ended September 30, 2016.  See Note 7 – “Income Taxes” of the Notes to Condensed Consolidated Financial Statements (unaudited) in Item 1 for more information.

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As a result of the foregoing factors, we reported income from continuing operations of $2.7 million in 2017, compared to $12.2 million in 2016.

Discontinued Operations

We recorded no after tax loss or income discontinued operations in the first nine months of 2017. We recorded $4.3 million after-tax income in the first nine months of 2016 primarily as a result of payments received from settlement agreements with insurers, as well as with Crane Co., in connection with the declaratory action filed in the United States District court for the Eastern District of Missouri.

Liquidity and Capital Resources

We depend on cash flow from operations and funds available under our revolving credit facility to finance our operations, including seasonal working capital needs, capital expenditures, additional investment in our product lines, including Huttig-Grip, and other capital needs. Ourany acquisitions that we may undertake. Typically, our working capital requirements are generally greatest in the second and third quarters, which reflect the seasonal nature of our business. The second and third quarters are also typicallytend to be our strongest operating quarters, largely due to more favorable weather throughout many of our markets compared to the first and fourth quarters. We typically generate cash from working capital reductions in the fourth quarter of the year and typically use cash as we build working capital during the first quarter in preparation for our second and third quarters. We also maintain significant inventories to meet the rapid delivery requirements of our customers and to enable us to obtain favorable pricing, delivery and service terms with our suppliers. Accounts receivable typically increases during peak periods commensurate withIn the sales increase.first quarter of 2018, our working capital was impacted significantly as we continue to invest in inventory related to our Huttig-Grip product line. Sourcing Huttig-Grip products internationally requires longer lead-times and higher inventory levels to ensure available supply, but it also provides an opportunity for higher margins. At September 30, 2017 and September 30, 2016,March 31, 2018, inventories and accounts receivable constituted approximately 73% and 72%78% of our total assets, respectively.assets.  We also closely monitor operating expenses including variable operating costs, and inventory levels during seasonally affected periods and, to the extent possible, manage variable operating costs to minimize seasonal effects on our profitability.

Operations.  Cash used in operating activities increased by $40.5$19.7 million to $38.4$40.1 million in the first ninethree months of 2017,2018, compared to cash provided byused in operating activities of $2.1$20.4 million in the first ninethree months of 2016.  In the first nine months of 2017, we recorded net income of $2.7 million compared to net income of $16.5 million in the corresponding period in 2016.2017. Accounts receivable increased by $28.2$34.1 million during the first ninethree months of 2017,2018, compared to an increase of $20.9$29.1 million in the prior-year corresponding period. The increase in accounts receivable over the first three months of the year end is due tocommensurate with sales activity including the seasonality of our sales.  Days’ sales outstanding was 40.0 days at September 30, 2017 as compared to 37.2 days at September 30, 2016 based on annualized third quarter sales and quarter-end accounts receivable balances for the respective periods. We believe the days’ sales outstanding will return to more historicalOur inventory levels in the fourth quarter of 2017 as the extended terms given at our special promotional winter buy will have concluded. Inventory increased by $27.1$27.4 million in the first nine monthsquarter of 2017 compared to an increase2018 driven largely by the expansion of $18.0 million in the corresponding period of 2016. The increase in inventories over the first nine months of the year represented normal seasonality and anticipated increased sales activity in 2017, including the expandedour Huttig-Grip product line as compared to year-end 2016.  We expect to continue building Huttig-Grip product inventory inalong with the fourth quarter of 2017. Our inventory turns decreased to 6.2 turns in 2017 from 7.4 turns in 2016 based on annualized third quarter cost of goods sold and average inventory balances for the respective quarters. The decrease in inventory turns is primarily related to the inventory added to support the Huttig-Grip product line. Accounts payable increased by $19.5 million in the first nine months of 2017, compared to a $12.7 million increase in the corresponding prior-year period. The increase was primarily a result of our inventorynormal seasonal build for the respective periods.  Days’ payable outstanding increased to 38.4 days at September 30, 2017 from 34.5 days at September 30, 2016 based on annualized third quarter costs of goods sold and quarter-end accounts payable balances for the respective periods.sales activity.

Investing.  In the first ninethree months of 2017,2018, net cash used in investing activities was $5.7$1.6 million compared to $20.0$1.7 million for the corresponding period in 2016.2017.  The Company invested $5.7$1.6 million in machinery and equipment at various locations in the first ninethree months of 2017.  In2018, compared to $1.7 million for the first nine months of 2016, we invested $17.3 millioncorresponding period in an acquisition and $2.7 million in machinery and equipment.2017.

Financing.  Cash provided by financing activities of $45.0$42.7 million in the first ninethree months of 2018 reflected net borrowings of $43.1 million offset by $0.4 million for the net settlement of withholding taxes on stock-based awards.  Cash provided by financing activities of $22.9 million in the first three months of 2017 reflected net borrowings of $45.9$23.6 million offset by $0.7 million for the Company’s repurchasenet settlement of 0.1 million shares of its common stock for $0.9 million.  Cash provided from financing activities of $20.0 million in the first nine months of 2016 reflected net borrowings of $19.1 million offset by the Company’s repurchase of 0.1 million shares of its common stock for $0.4 million.  Net borrowings in 2016 included amounts borrowed to fund the acquisition. The shares repurchased in both periods were retired.withholding taxes on stock-based awards.

The Company believes that cash generated from its operations and availabilityfunds available under the credit facility will provide sufficient funds to meet the operating needs of the Company for at least the next twelve months. However, if the Company’s availability falls below the required threshold and the Company does not meetAt March 31, 2018 the minimum fixed charge coverage ratio its(“FCCR”) was not required to be tested as excess borrowing availability was greater than the minimum threshold. However, if the Company’s availability would have fallen below that threshold, we would not have met the minimum FCCR. If we are unable to maintain excess borrowing availability of more than the applicable amount in the range of $17.5 million to $31.3 million and we do not meet the minimum FCCR, the lenders would have the right to terminate the loan commitments and accelerate the repayment of the entire amount outstanding under the credit facility. The lenders could also foreclose on the Company’s assets that secure the credit facility. If the credit facility is terminated, the Company would be forced to seek alternative sources of financing, which may not be available on terms acceptable to it, or at all.

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Off-Balance Sheet Arrangements

In addition to funds available from operating cash flows and theour bank credit facility as described above, we use operating leases, as a principalwhich are considered to be off-balance sheet financing technique.arrangements. Operating leases are employed as an alternative to purchasing certain property, plant and equipment. For a discussion of our off-balance sheet arrangements, see our Annual Report on Form 10-K for the year ended December 31, 20162017 in Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Commitments and Contingencies.” During the ninethree months ended September 30, 2017,March 31, 2018, there were no material changes to our off-balance sheet arrangements discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Contingencies

We carry insurance policies on insurable risks with coverage and other terms that we believe to be appropriate. We generally have self-insured retention limits and have obtained fully insured layers of coverage above such self-insured retention limits. Accruals for self-insurance losses are made based on claims experience. Liabilities for existing and unreported claims are accrued for when it is probable that future costs will be incurred and can be reasonably estimated.

See Note 5 – “Contingencies” of the Notes to Condensed Consolidated Financial Statements (unaudited) in Item 1 for information on certain legal proceedings in which the Company is involved.

Cautionary Statement Relevant to Forward-looking Information for the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “believe,” “estimate,” “project” or similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words.  Statements made in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K looking forward in time, including, but not limited to, statements regarding our current views with respect to financial performance, future growth in the housing market, distribution channels, sales, favorable supplier relationships, inventory levels, the ability to meet customer needs, enhanced competitive posture, no material financial impact from litigation or contingencies, including environmental proceedings, are included pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

These statements present management’s expectations, beliefs, plans and objectives regarding our future business and financial performance. These forward-looking statements are based on current projections, estimates, assumptions and judgments, and involve known and unknown risks and uncertainties. We disclaim any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

There are a number of factors, some of which are beyond our control that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. These factors include, but are not limited to: the strength of construction, home improvement and remodeling markets and the recovery of the homebuilding industry to levels consistent with the historical average of total housing starts; the cyclical nature of our industry; the uncertainties resulting from changes to policies and laws following the U.S. election in November 2016; the cost of environmental compliance, including actual expenses we may incur to resolve proceedings we are involved in arising out of the formerly owned facility in Montana; any limitations on our ability to utilize our deferred tax assets to reduce future taxable income and tax liabilities; our ability to comply with, and the restrictive effect of, the financial covenant applicable under our credit facility; the loss of a significant customer; deterioration of our customers’ creditworthiness or our inability to forecast such deteriorations; commodity prices; risks associated with our private brands; termination of key supplier relationships; risks of international suppliers; competition with existing or new industry participants; goodwill impairment;  the seasonality of our operations; significant uninsured claims; federal and state transportation regulations; fuel cost increases; our failure to attract and retain key personnel; deterioration in our relationship with our unionized employees, including work stoppages or other disputes; funding requirements for multi-employer pension plans for our unionized employees; product liability claims and other claims, litigation matters or regulatory proceedings; the integration of any business we acquire and the liabilities of such businesses; and those set forth under Part I, Item 1A-“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and as set forth in Part II, Item 1A-“Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017. These factors may not constitute all factors that could cause actual results to differ from those discussed in any forward-looking statement. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results.

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ITEM 4 — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures – As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), theThe Company, under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and interim Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act)Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officerofficer and interim Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2017.March 31, 2018 in all material respects to (a) causing information required to be disclosed by us in reports that we file or submit under the Exchange Commission’s rules and forms and (b) causing such information to be accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Control systems must reflect resource constraints and be cost-effective, can be undercut by simple errors and misjudgments, and can be circumvented by individuals within an organization. Because of these and other inherent limitations in all control systems, no matter how well they are designed, our disclosure controls and procedures and internal controls can provide reasonable, but not absolute, protection from error and fraud.

Management’s Report on Internal Control Over Financial Reporting – The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Based on our evaluation under the framework in Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of March 31, 2018.

Changes in Internal Control of Financial Reporting – There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017,March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS 

See Note 5 – Contingencies of the Notes to the Condensed Consolidated Financial Statements (unaudited) in Item 1 for information on legal proceedings in which the Company is involved.  See alsoAlso see Note 7 – “Commitments and Contingencies” in the notes to our consolidated financial statements under Part I,II, Item 3-“Legal Proceedings” in8 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

ITEM 1A — RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by the risk factor discussed in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, which could materially affect our business, financial condition, and future results. These described risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 as supplemented by the risk factor in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017.

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ITEM 6 — EXHIBITS