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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, 2001 COMMISSION FILE NUMBER 1-14982
HUTTIG BUILDING PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0334550
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
LAKEVIEW CENTER, SUITE 400
14500 SOUTH OUTER FORTY ROAD
CHESTERFIELD, MISSOURI 63017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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 [ X] No [ ]
The number of shares of Common Stock outstanding on September 30, 2001 was
19,638,491 shares.
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.................................... 3-4
Consolidated Statements of Income for the three and nine months ended September 30, 2001 and 2000............. 5
Consolidated Statements of Changes in Shareholders' Equity for the nine months ended
September 30, 2001 and 2000............................................................................. 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000................... 7
Notes to Consolidated Financial Statements.................................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 16
2
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Data)
September 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 6.6 $ 3.6
Trade accounts receivable, net 99.1 76.3
Inventories, net 80.8 71.5
Other current assets 8.7 10.0
------------ ------------
Total current assets 195.2 161.4
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
At cost:
Land 6.7 6.7
Building and improvements 35.0 34.6
Machinery and equipment 32.7 30.9
------------ ------------
Gross property, plant and equipment 74.4 72.2
Less accumulated depreciation 35.7 32.6
------------ ------------
Property, plant and equipment, net 38.7 39.6
------------ ------------
OTHER ASSETS:
Goodwill, net 34.8 36.6
Other 4.9 5.3
Deferred income taxes 6.1 6.3
------------ ------------
Total other assets 45.8 48.2
------------ ------------
TOTAL ASSETS $ 279.7 $ 249.2
============ ============
see notes to consolidated financial statements
3
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Data)
September 30, December 31,
2001 2000
--------------- ---------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 0.1 $ 0.2
Trade accounts payable 83.4 62.2
Deferred income taxes 1.6 -
Accrued payrolls 5.8 9.6
Other accrued liabilities 13.4 13.8
--------------- ---------------
Total current liabilities 104.3 85.8
--------------- ---------------
NON-CURRENT LIABILITIES:
Debt 89.0 80.9
Fair value of derivative instruments 5.5 -
Accrued postretirement benefits 1.1 1.5
--------------- ---------------
Total non-current liabilities 95.6 82.4
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares; $.01 par (5,000,000 shares authorized) - -
Common shares; at September 30, 2001 - $.01 par
(50,000,000 shares authorized - 19,638,491 shares issued and 0.2 0.2
outstanding); at December 31, 2000 - $.01 par (50,000,000 shares
authorized - 20,866,145 shares issued and outstanding)
Additional paid-in capital on common stock 33.4 33.2
Retained earnings 56.0 49.1
Unearned compensation - restricted stock (0.5) (0.4)
Accumulated other comprehensive loss (2.1) -
Less: Treasury shares at cost (1,257,654 shares at September 30, 2001
and 278,433 shares at December 31, 2000) (7.2) (1.1)
--------------- ---------------
Total shareholders' equity 79.8 81.0
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 279.7 $ 249.2
=============== ===============
see notes to consolidated financial statements
4
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(In Millions, Except Per Share Amounts)
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
----------- ---------- ---------- ---------
NET SALES $ 256.7 $ 278.2 $ 723.5 $ 845.8
COST OF SALES AND OPERATING EXPENSES:
Cost of sales 204.4 221.5 572.6 678.7
Operating expenses 43.3 43.8 125.3 135.8
Depreciation and amortization 1.9 1.8 5.8 5.4
Restructuring charges, net - - - 0.3
Gain on disposal of capital assets (0.4) - (0.9) (5.7)
----------- ---------- ---------- ---------
Total operating costs and expenses 249.2 267.1 702.8 814.5
----------- ---------- ---------- ---------
OPERATING PROFIT 7.5 11.1 20.7 31.3
----------- ---------- ---------- ---------
OTHER EXPENSE:
Interest expense (2.4) (3.0) (7.5) (8.4)
Unrealized loss on derivatives (1.3) - (2.1) -
----------- ---------- ---------- ---------
Total other expense (3.7) (3.0) (9.6) (8.4)
INCOME BEFORE TAXES 3.8 8.1 11.1 22.9
PROVISION FOR INCOME TAXES 1.5 3.1 4.2 8.8
----------- ---------- ---------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 2.3 5.0 6.9 14.1
Extraordinary item
(less applicable income taxes of $0.3) - - - 0.5
----------- ---------- ---------- ---------
NET INCOME $ 2.3 $ 5.0 $ 6.9 $ 13.6
=========== ========= ========== =========
NET INCOME PER BASIC SHARE BEFORE
EXTRAORDINARY ITEM $ 0.11 $ 0.24 $ 0.33 $ 0.68
LOSS PER SHARE FROM EXTRAORDINARY ITEM - - - (0.02)
----------- ---------- ---------- ---------
NET INCOME PER BASIC SHARE $ 0.11 $ 0.24 $ 0.33 $ 0.66
=========== ========= ========== =========
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 20.4 20.6 20.6 20.6
NET INCOME PER DILUTED SHARE BEFORE
EXTRAORDINARY ITEM $ 0.11 $ 0.24 $ 0.33 $ 0.68
LOSS PER SHARE FROM EXTRAORDINARY ITEM - - - (0.02)
----------- ---------- ---------- ---------
NET INCOME PER DILUTED SHARE $ 0.11 $ 0.24 $ 0.33 $ 0.66
=========== ========= ========== =========
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 20.6 20.6 20.6 20.6
see notes to consolidated financial statements
5
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(In Millions)
Common Shares Additional Unearned
Outstanding, Paid-In Retained Compensation-
at Par Value Capital Earnings Restricted Stock
------------ ---------- --------- ----------------
Balance at December 31, 1999 $ 0.2 $ 32.9 $ 35.5 $ (0.2)
Net Income 13.6
Restricted stock issued, net
of amortization expense 0.3 (0.3)
------------ ---------- --------- ---------------
Balance at September 30, 2000 $ 0.2 $ 33.2 $ 49.1 $ (0.5)
============ ========== ========= ===============
Balance at December 31, 2000 $ 0.2 $ 33.2 $ 49.1 $ (0.4)
Net Income 6.9
FMV adjustment of derivatives, net of tax
---------
Comprehensive Income (Loss) 6.9
Restricted stock issued, net
of amortization expense 0.2 (0.1)
Treasury stock purchases
------------ ---------- --------- ---------------
Balance at September 30, 2001 $ 0.2 $ 33.4 $ 56.0 $ (0.5)
============ ========== ========= ===============
Accumulated
Treasury Other Total
Shares, Comprehensive Shareholders'
at Cost Loss Equity
----------- ------------ ------------
Balance at December 31, 1999 $ (1.1) $ - $ 67.3
Net Income 13.6
Restricted stock issued, net
of amortization expense -
----------- ------------ ------------
Balance at September 30, 2000 $ (1.1) $ - $ 80.9
=========== ============ ============
Balance at December 31, 2000 $ (1.1) $ - $ 81.0
Net Income 6.9
FMV adjustment of derivatives, net of tax (2.1) (2.1)
------------ ------------
Comprehensive Income (Loss) (2.1) 4.8
Restricted stock issued, net
of amortization expense 0.6 0.7
Treasury stock purchases (6.7) (6.7)
----------- ------------ ------------
Balance at September 30, 2001 $ (7.2) $ (2.1) $ 79.8
=========== ============ ============
see notes to consolidated financial statements
6
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Nine Months Ended September 30,
2001 2000
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6.9 $ 13.6
Gain on disposal of capital assets (0.9) (5.7)
Depreciation and amortization 6.8 6.0
Deferred taxes 3.1 2.7
Unrealized loss on derivatives, net 2.1 -
Accrued postretirement benefits (0.4) (0.2)
Changes in operating assets and liabilities (exclusive of acquisitions):
Trade accounts receivable (22.7) 3.2
Inventories (8.3) (1.7)
Other current assets 1.2 2.9
Trade accounts payable 21.2 11.6
Accrued liabilities (3.5) (11.5)
Other assets (0.9) (2.6)
---------- ------------
Total cash from operating activities 4.6 18.3
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2.7) (4.0)
Proceeds from disposition of capital assets 0.9 8.4
Cash used for acquisitions (1.2) -
---------- ------------
Total cash from investing activities (3.0) 4.4
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (0.2) (0.2)
Borrowing (Repayment) of revolving credit agreement 8.3 (19.7)
Purchase of treasury stock (6.7) -
---------- ------------
Total cash from financing activities 1.4 (19.9)
---------- ------------
NET INCREASE IN CASH AND EQUIVALENTS 3.0 2.8
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3.6 6.8
---------- ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 6.6 $ 9.6
========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 6.9 $ 6.5
========== ============
Income taxes paid (received) $ (2.6) $ 6.4
========== ============
see notes to consolidated financial statements
7
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In Millions)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Huttig Building Products, Inc. (the "Company" or "Huttig") on a consolidated
basis, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company believes that the disclosures
are adequate to make the information presented not misleading. It is recommended
that these consolidated financial statements be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K. This financial information
reflects, in the opinion of management, all adjustments necessary to present
fairly, consisting of normal recurring items, the results for the interim
periods presented. Certain amounts in the prior period consolidated financial
statements have been reclassified to be consistent with the current period's
presentation.
The 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,
profitability is usually lower in the Company's first and fourth quarters than
in the second and third quarters.
2. RESERVE ACTIVITY
In December 1999, the Company recorded restructuring costs to consolidate and
integrate various branch operations and support functions. During fiscal 2000,
approximately $6.2 million was charged against this reserve, which included $2.5
million for inventory impairment, leaving a balance of $0.2 million at December
31, 2000. The remaining balance was fully utilized during the nine months ended
September 30, 2001.
Also in December 1999, the Company established a reserve for asset impairments
and costs expected to be incurred to exit certain activities connected with the
acquisition of Rugby USA, Inc. ("Rugby".) During fiscal 2000, approximately $6.7
million was charged against this reserve, leaving a balance of $0.2 million at
December 31, 2000. The remaining balance was fully utilized in the first quarter
of 2001.
During the fourth quarter of 2000, the Company recorded $2.1 million as a
restructuring charge related to the termination of Huttig's distribution
agreement with Andersen Windows, Inc. ("Andersen"), of which $0.8 million was
included in cost of sales. The charge was primarily for items related to
inventory impairment and downsizing of branch operations that previously
distributed Andersen products. Approximately $1.0 million was charged against
this reserve during the fourth quarter of 2000, leaving a balance of $1.1
million at December 31, 2000. The remaining balance was fully utilized during
the first nine months of 2001.
3. DEBT
Debt consisted of the following at September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
------------ ------------
Revolving credit agreement $ 88.3 $ 80.0
Capital lease obligations 0.8 1.0
Industrial revenue bond - 0.1
------------ ------------
Total debt $ 89.1 $ 81.1
Less: current portion 0.1 0.2
------------ ------------
Long-term debt $ 89.0 $ 80.9
============ ============
At September 30, 2001, the Company had approximately $104.8 million of unused
credit available under its $200.0 million revolving credit facility.
8
At September 30, 2001, the Company had three interest rate swap agreements with
a total notional principal amount of $80.0 million. These swap agreements, in
conjunction with the revolving credit facility, currently provide for a fixed
weighted average rate of 8.9% on $80.0 million of the Company's revolving credit
borrowings. The interest rate on the remainder of the committed outstanding
borrowings under the revolving credit agreement is equal to a floating rate of
LIBOR plus 175 basis points.
4. REPURCHASE OF COMMON STOCK
In August 2001, the Company's Board of Directors authorized a $15 million stock
repurchase program. During the third quarter, the Company repurchased 1.1
million shares of common stock for $6.7 million. Repurchased shares are held as
treasury stock and are available for use in connection with employee benefit
plans and other general corporate purposes.
5. DERIVATIVES AND INTEREST RATE RISK MANAGEMENT
Effective January 1, 2001, Huttig adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities which established
accounting and reporting standards for derivative instruments, including certain
derivative instruments used for hedging activities. All derivative instruments,
whether designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are recognized
in the statement of income when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. If the derivative is not designated as a hedge for accounting
purposes, changes in fair value are immediately recognized in earnings.
The Company holds three interest rate swap agreements, with a total notional
amount of $80.0 million, that are used to hedge interest rate risks related to
its variable rate borrowings. Two of the interest rate swap agreements, with
notional amounts totaling $42.5 million, which management believes are economic
hedges and mitigate exposure to fluctuations in variable interest rates, do not
qualify as hedges for accounting purposes. The remaining interest rate swap,
with a notional amount of $37.5 million, is accounted for as a cash flow hedge.
The adoption of SFAS No. 133 on January 1, 2001 resulted in an increase to
non-current liabilities of $2.8 million and a cumulative pre-tax reduction to
OCI of $2.8 million ($1.8 million after-tax). Of the reduction to OCI at January
1, 2001, $1.4 million is related to the two interest rate swaps that have not
been designated as hedges for accounting purposes. Of this amount, $0.6 million
will be reclassified into earnings during the next twelve months.
For the nine months ended September 30, 2001, a total unrealized loss on
derivatives of $2.1 million was recorded after operating profit. This includes
$0.6 million that was amortized from OCI and $1.5 million related to the change
in fair value on the two interest rate swaps that do not qualify as hedges for
accounting purposes. The interest rate swap that is designated as a cash flow
hedge was determined to be highly effective and substantially all of the change
in the fair value was charged to OCI.
There is no impact on cash flow as a result of the accounting treatment required
by SFAS No. 133 for the three interest rate swap agreements.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is required to be adopted in fiscal
years beginning after December 15, 2001. Under the provisions of this statement,
goodwill is no longer subject to amortization over its estimated useful life.
Alternatively, goodwill will be subject to at least an annual assessment for
impairment by applying a fair value based test. Goodwill existing as of January
1, 2002 will be subject to a transitional assessment of any impairment issues
during 2002. Goodwill amortization for the three and nine months ended September
30, 2001 was $0.6 million and $1.8 million, respectively. The Company is
evaluating the impact of this pronouncement as it relates to the transitional
and annual assessments for impairment of recorded goodwill on the Company's
consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which is
required to be adopted for fiscal years beginning after December 15, 2001. This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets and broadens the presentation of discontinued operations to
include more disposal transactions. The Company believes the adoption of SFAS
No. 144 will not have a material impact on its financial statements.
9
NET INCOME PER SHARE
The following table sets forth the computation of net income per basic and
diluted share (net income amounts in millions, share amounts in thousands, per
share amounts in dollars):
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
----------- ---------- ---------- ----------
Net income (numerator) $ 2.3 $ 5.0 $ 6.9 $ 13.6
Weighted average number of basic shares outstanding
(demoninator) 20,394 20,588 20,566 20,582
----------- ---------- ---------- ----------
Net income per basic share $ 0.11 $ 0.24 $ 0.33 $ 0.66
=========== ========== ========== ==========
Weighted average number of basic shares outstanding 20,394 20,588 20,566 20,582
Common stock equivalents for diluted common shares
outstanding 174 29 73 17
----------- ---------- ---------- ----------
Weighted average number of diluted shares outstanding
(demoninator) 20,568 20,617 20,639 20,599
----------- ---------- ---------- ----------
Net income per diluted share $ 0.11 $ 0.24 $ 0.33 $ 0.66
=========== ========== ========== ==========
10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Huttig Building Products, Inc. is one of the largest domestic distributors of
building materials that are used principally in new residential construction and
in home improvement, remodeling and repair work. We distribute our products
through 61 distribution centers serving 45 states, principally to building
materials dealers (who, in turn, supply the end-user), directly to professional
builders and large contractors, home centers, national buying groups and
industrial and manufactured housing builders. Our American Pine Products
manufacturing facility, located in Prineville, Oregon, produces softwood
moldings. Approximately 38% of American Pine's sales were to Huttig's
distribution centers in the nine months ended September 30, 2001.
The following table sets forth Huttig's net sales, by product classification as
a percentage of total net sales, for the three and nine months ended September
30, 2001 and 2000:
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Doors 34% 32% 36% 32%
Specialty Building Materials 33% 31% 32% 29%
Lumber & Other Commodity 16% 14% 15% 16%
Windows* 6% 14% 6% 13%
Moulding 11% 9% 11% 10%
---------- ---------- ---------- ----------
Total Net Product Sales 100% 100% 100% 100%
* Sales of Andersen products totaled $20.9 million and $ 58.6
million in the three and nine months ended September 30, 2000,
respectively. Excluding Andersen, windows would have accounted
for 7% and 6% of total net sales in the three and nine months
ended September 30, 2000, respectively.
We strive to increase shareholder value by pursuing strategies that include but
are not limited to:
- expanding product lines and adding higher margin products;
- focusing on providing efficient, high quality customer service through
the deployment of information technology and implementation of
industry best practices;
- leveraging our size to negotiate better pricing, delivery and service
terms with our suppliers;
- achieving operating efficiencies by consolidating administrative
systems across the company; and
- pursuing opportunities to expand our product lines, service and
delivery capabilities, and geographic reach through acquisitions.
We believe we have the product offerings, warehouse and builder support
facilities, personnel, systems infrastructure and financial and competitive
resources necessary for continued business success. Our future revenues, costs
and profitability, however, are all influenced by a number of factors, including
those discussed under "Cautionary Statement" below.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales for the three months ended September 30, 2001 were $256.7 million, an
8% decrease from the third quarter of 2000 when sales were $278.2. Same branch
sales decreased 4% over the same period from the prior year. The decrease in
sales is primarily attributable to discontinuing the distribution of Andersen
windows, which accounted for sales of $20.9 million in the third quarter of the
prior year. Other factors contributing to the decrease in sales included lower
industrial product sales and the general downturn in the economy compared to the
prior year quarter. The decrease in net sales also reflects the closing of three
branches, two of which sold Andersen products.
Gross profit, as a percentage of net sales, was 20.4% for the three months ended
September 30, 2001 and 2000.
11
Operating expenses were $43.3 million in the third quarter of 2001 compared to
$43.8 million in the third quarter of 2000. The decrease is partially
attributable to lower sales volume, causing a decrease in selling and delivery
expense of $1.4 million. General and administrative costs were $0.7 million
lower primarily due to lower compensation expense resulting from a reduction in
headcount and lower bonus expense. These decreases were offset by increased
warehouse rent and supply costs at our facilities which were $0.8 million higher
than the prior year, a $0.5 million increase in bad debt expense over the prior
year and $0.4 million in costs of our implementation of a single platform
information system. Included in operating expenses in the third quarter of 2000
were $0.7 million of non-recurring costs related to the restructuring of our
operations and various integration costs associated with the Rugby acquisition.
Gains on disposal of assets were $0.4 million for the quarter ended September
30, 2001 which related to the sale of a previously closed facility. There were
no gains or losses on asset disposals in the third quarter of 2000.
Net interest expense decreased to $2.4 million in the third quarter of 2001 from
$3.0 million in the same period of 2000. Our average outstanding debt decreased
$19.9 million compared to the same period of the prior year, reducing our
interest expense.
As a result of the foregoing factors, pretax income decreased by $4.3 million to
$3.8 million.
Income taxes were provided at an effective rate of 38.0% for the quarters ended
September 30, 2001 and 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Net sales for the nine months ended September 30, 2001 were $723.5 million, a
14% decrease from the nine months ended September 30, 2000 when sales were
$845.8 million. Same branch sales decreased 10% over the same period from the
prior year. The decrease in sales is partially attributable to discontinuing the
distribution of Andersen windows, which accounted for sales of $58.6 million
during the nine month period ending September 30, 2000. Deflation in the
commodity lumber market is estimated to have reduced sales by $10.0 million in
the current year to date period. Other factors contributing to the decrease in
sales included lower industrial product sales, adverse weather conditions,
primarily in the first quarter of 2001, and the general downturn in the economy
compared to the prior year nine month period. The decrease in net sales also
reflects the closing of three branches during the year, two of which sold
Andersen products.
Gross profit as a percentage of net sales, increased to 20.9% for the nine
months ended September 30, 2001 compared to 19.8% for the nine months ended
September 30, 2000, primarily due to improved product mix.
Year to date operating expenses were $125.3 million in 2001 compared to $135.8
million in the comparable period from 2000. The decrease is partially
attributable to lower sales volume, causing a decrease in selling and delivery
expense of $5.7 million. Decreases in general and administrative costs of $1.8
million resulting from a reduction in headcount and lower bonus expense, were
offset by a $1.7 million increase in warehouse rent and supply costs at our
facilities. Decreases in overall operating expenses were offset by $1.2 million
of additional insurance costs in the current nine month period compared to the
prior nine month period. Also included in operating expenses for the nine months
ending September 30, 2001 were $1.2 million of costs related to the
implementation of our single platform information system. Included in operating
expenses in the nine month period ending September 30, 2000 were $6.2 million of
non-recurring costs related to the restructuring of our operations and various
integration costs associated with the Rugby acquisition.
Gains on disposal of assets were $0.9 million for the nine months ended
September 30, 2001 compared to $5.7 million for the nine months ended September
30, 2000. The gains in 2000 resulted primarily from the disposal of duplicate
capital assets in conjunction with our restructuring and branch consolidation
efforts.
Net interest expense decreased to $7.5 million in the first nine months of 2001
from $8.4 million in the same period of 2000. Our average outstanding debt
decreased $23.0 million compared to the same period of the prior year, resulting
in a decrease in interest expense that was partially offset by an increase in
the average interest rate. The higher rates are attributable to the interest
rate swap agreements that we entered into during the second quarter of 2001 and
provide for a fixed rate of interest.
As a result of the foregoing factors, pretax income decreased by $11.8 million
to $11.1 million.
Income taxes were provided at effective tax rates of 38.0% and 38.6% for the
nine month periods ending September 30, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We depend on cash flow from operations and funds available under our secured
credit facility to finance seasonal working capital
12
needs, capital expenditures and acquisitions. Our working capital requirements
are generally greatest in the second and third quarters, which reflects the
seasonal nature of our business. The second and third quarters are typically 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 first and fourth quarters
of the year.
We measure our working capital as accounts receivable, inventory and accounts
payable. At September 30, 2001 and 2000, and December 31, 2000, our working
capital is as follows:
September 30, December 31,
2001 2000 2000
--------- --------- -----------
Trade accounts receivable, net $ 99.1 $ 107.2 $ 76.3
Inventories, net 80.8 78.7 71.5
Trade accounts payable (83.4) (81.7) (62.2)
--------- --------- -----------
Working Capital, net 96.5 104.2 85.6
Working Capital as a % of Sales 10.6% 10.7% 10.6%
Inventory Turns 7.4 7.5 7.1
We have a $200.0 million secured revolving credit facility with Chase Manhattan
Bank as agent. At September 30, 2001, we had three interest rate swap agreements
having a total notional amount of principal of $80.0 million outstanding. These
swap agreements, in combination with the revolving credit agreement, effectively
provide for a fixed weighted average rate of 8.9% on $80.0 million of our
outstanding revolving credit borrowings. The interest rate on the remainder of
the committed outstanding borrowings under the revolving credit agreement is a
floating rate equal to LIBOR plus 175 basis points. As of November 8, 2001, we
had approximately $95.5 million of unused credit available under our revolving
credit facility.
For the nine months ended September 30, 2001, cash and equivalents increased by
$3.0 million, due principally to increased trade accounts payable and borrowings
under our revolving credit facility. Cash provided from operations during the
period was negatively affected by increases in accounts receivable and
inventory, which reflects the seasonal increases in working capital during our
second and third quarters compared to year-end balances. During the comparable
period of 2000, our seasonal increases in accounts receivable and inventories
were offset by the liquidation of accounts receivable and inventories acquired
in December 1999 from Rugby. We expect that cash will be provided through
reductions in accounts receivable and inventory during the fourth quarter of
2001.
Cash used in investing activities reflects $2.7 million of capital expenditures,
primarily relating to our new information system, and our purchase of assets
from Monarch Manufacturing, Inc. in Baltimore, Maryland, and Hope Lumber and
Supply Corporation in Kansas City, Missouri, for an aggregate purchase price of
$1.2 million. These expenditures were offset in part by $.9 million of proceeds
on disposals of assets as part of our restructuring and branch consolidation
efforts.
Cash provided from financing activities reflects $8.3 million in borrowings
under our revolving credit facility, offset by $6.7 million in repurchases of
our common stock.
We believe that cash generated from operations and funds available under our
credit facility will provide sufficient funds to meet our currently anticipated
short-term and long-term liquidity and capital expenditure requirements.
STOCK REPURCHASE PLAN
In August 2001, our Board of Directors authorized a $15 million stock repurchase
program. During the third quarter, we repurchased 1.1 million shares of common
stock for $6.7 million. Repurchased shares are held as treasury stock and are
available for use in connection with employee benefit plans and other general
corporate purposes. At September 30, 2001, we have $8.3 million remaining under
the stock repurchase program.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 2000, we recorded $2.1 million of restructuring
charges related to the termination of our distribution agreement with Andersen,
of which $0.8 million was included in cost of sales. The charge was primarily
for items related to inventory impairment and downsizing of branch operations
that previously distributed Andersen products. We charged approximately $1.0
million against this reserve during the fourth quarter of 2000, leaving a
balance of $1.1 million at December 31, 2000. We fully
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utilized the remaining balance during the first nine months of 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
Goodwill and Other Intangible Assets, which is required to be adopted in fiscal
years beginning after December 15, 2001. Under the provisions of this statement,
goodwill is no longer subject to amortization over its estimated useful life.
Alternatively, goodwill will be subject to at least an annual assessment for
impairment by applying a fair value based test. Goodwill existing as of January
1, 2002 will be subject to a transitional assessment of any impairment issues
during 2002. Goodwill amortization for the three and nine months ended September
30, 2001 was $0.6 million and $1.8 million, respectively. We are currently
evaluating the impact of this pronouncement as it relates to the transitional
and annual assessments for impairment of recorded goodwill on Huttig's financial
statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets, which is
required to be adopted for fiscal years beginning after December 15, 2001. This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets and broadens the presentation of discontinued operations to
include more disposal transactions. We believe the adoption of SFAS No. 144 will
not have a material impact on our financial statements.
CYCLICALITY AND SEASONALITY
Huttig's sales depend heavily on the strength of national and local new
residential construction and home improvement and remodeling markets. The
strength of these markets depends on new housing starts and residential
renovation projects, which are a function of many factors beyond our control.
Some of these factors include interest rates, employment levels, availability of
credit, prices of commodity wood products and consumer confidence. Future
downturns in the markets that we serve could have a material adverse effect on
our operating results or financial condition. In addition, because these markets
are sensitive to cyclical changes in the economy in general, future downturns in
the economy could have a material adverse effect on our financial condition and
results of operations.
Our first quarter revenues and, to a lesser extent, our fourth quarter revenues
are typically adversely affected by winter construction cycles and weather
patterns in colder climates as the level of activity in the new construction and
home improvement markets decreases. Because much of our overhead and expense
remains relatively fixed throughout the year, our profits also tend to be lower
during the first and fourth quarters. These effects of winter construction
cycles and weather patterns on our business are offset partially by the increase
in residential construction activity during the same period in our deep South,
Southwest and Southern California.
ENVIRONMENTAL REGULATION
We are subject to federal, state and local environmental protection laws and
regulations. We believe that we are in compliance, or are taking action aimed
at assuring compliance, with applicable environmental protection laws and
regulations. However, there can be no assurance that future environmental
liabilities will not have a material adverse effect on our consolidated
financial condition or results of operations. Huttig has been identified as a
potentially responsible party in connection with the clean up of contamination
at a formerly owned property in Montana. We are voluntarily remediating this
property under the oversight of the Montana Department of Environmental Quality
("DEQ"). When the state agency issues its final risk assessment of this
property, we will conduct a feasibility study to evaluate alternatives for
cleanup, including continuation of our interim remediation measures already in
place. The DEQ then will select a final remedy, publish a record of decision
and negotiate with us for an administrative order on consent on the
implementation of the final remedy. We currently believe that this process may
take several more years to complete and intend to continue monitoring and
remediating the site, evaluating cleanup alternatives and reporting regularly
to the DEQ during this interim period. Based on its experience to date in
remediating this site, Huttig does not believe that the scope of remediation
that the DEQ will ultimately require will have a material adverse effect on
Huttig's results of operations or financial condition. Until the DEQ selects a
final remedy, however, we can give no assurance as to the scope or cost to
Huttig of the final remediation order.
In addition, some of our distribution centers are located in areas of current or
former industrial activity where environmental contamination may have occurred,
and for which we, among others, could be held responsible. We currently believe
that there are no material environmental liabilities at any of our distribution
center locations.
CAUTIONARY STATEMENT
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements present management's expectations, beliefs, plans, objectives,
projections, estimates, assumptions, and judgements regarding Huttig's future
business and financial performance, and involve known and unknown risks
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and uncertainties. There are a number of factors that could cause Huttig's
actual results or actions to differ materially from those expressed or implied
in the forward-looking statements. These factors include, but are not limited
to, the strength of the national and local new residential construction and home
improvement and remodeling markets, which in turn depend on factors such as
interest rates, employment levels, availability of credit, prices of commodity
wood products, consumer confidence, adverse weather conditions, and competition.
Additional information concerning these factors is included above and in our
other SEC filings, including our Annual Report on Form 10-K. Huttig disclaims
any obligation to publicly update or revise any of these forward-looking
statements.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Huttig has exposure to market risk as it relates to effects of changes in
interest rates. We had debt outstanding at September 30, 2001 under our
revolving credit agreement of $88.3 million. Also at September 30, 2001, we had
three interest rate swap agreements having a total notional principal amount of
$80.0 million. These swap agreements in combination with the terms of our
revolving credit agreement, effectively provide for a fixed weighted average
rate of 8.9% on $80.0 million of our outstanding borrowings. The interest rate
on the remainder of the committed outstanding borrowings under the revolving
credit agreement is a floating rate equal to LIBOR plus 175 basis points.
Included in the financial results is the impact of adopting SFAS No. 133, which
established accounting and reporting standards for derivative and hedging
activities. We have three interest rate swap agreements which provide for fixed
interest rates on $80.0 million of our outstanding borrowings. Under the
accounting treatment prescribed by SFAS No. 133, our liabilities include the
fair value of these swaps of $5.5 million and shareholders' equity includes $2.1
million, net of tax, which is recorded as other comprehensive income. Included
in expense, after profit from operations, is $2.1 million of an unrealized loss
related to the portion of our swap agreements, which do not qualify for hedge
accounting treatment according to the SFAS No. 133 criteria. This unrealized
loss resulted in a decrease to earnings per share of $.06 in the nine month
period ending September 30, 2001. There is no impact on cash flow as a result of
the accounting treatment required by SFAS No. 133.
We are subject to periodic fluctuations in the price of wood commodities.
Profitability is influenced by these changes as prices change between the time
we buy and sell the wood. In addition, to the extent changes in interest rates
affect the housing and remodeling market, we would be affected by such changes.
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PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The legal proceeding described in "Environmental Regulation" in Part I,
Item 2 of this report is incorporated herein by reference.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 10 (File No. 1-14982), filed
with the Commission on September 21, 1999 (the "Form 10"))
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to Amendment No. 4 to the Form 10, filed with the
Commission on December 6, 1999)
10.1 * Schedule (as amended) to Stock Option Agreement under the
Company's Stock Incentive Plan (filed herewith)
- -------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
On August 29, 2001, we filed a Current Report on Form 8-K, dated August 20,
2001, under Items 5 and 7, regarding a press release we issued concerning
our announcement of the authorization of a $15 million stock repurchase
program by our Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUTTIG BUILDING PRODUCTS, INC.
-----------------------------------------------
(Registrant)
Date: November 14, 2001 /s/ Barry J. Kulpa
-----------------------------------------------
Barry J. Kulpa
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: November 14, 2001 /s/ Kenneth E. Thompson
-----------------------------------------------
Kenneth E. Thompson
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2001 /s/ Thomas S. McHugh
------------------------------------------------
Thomas S. McHugh
Corporate Controller and Treasurer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 10 (File No. 1-14982), filed
with the Commission on September 21, 1999 (the "Form 10"))
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to Amendment No. 4 to the Form 10, filed with the
Commission on December 6, 1999)
10.1 * Schedule (as amended) to Stock Option Agreement under the
Company's Stock Incentive Plan (filed herewith)
- -------------
* Management contract or compensatory plan or arrangement.
18