================================================================================
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 MARCH 31, 2002 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
INCORPORATION NO.)
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 March 31, 2002 was
19,723,095 shares.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001............................ 3-4
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited).......... 5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended
March 31, 2002 and 2001 (unaudited)..................................................................... 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited).......... 7
Notes to Consolidated Financial Statements (unaudited)........................................................ 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)
March 31, December 31,
2002 2001
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3.3 $ 5.6
Trade accounts receivable, net 95.0 74.0
Inventories, net 86.2 70.1
Other current assets 7.6 9.5
-------- --------
Total current assets 192.1 159.2
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
At cost:
Land 6.7 6.7
Building and improvements 34.2 35.0
Machinery and equipment 36.1 36.4
-------- --------
Gross property, plant and equipment 77.0 78.1
Less accumulated depreciation 36.7 36.6
-------- --------
Property, plant and equipment, net 40.3 41.5
-------- --------
OTHER ASSETS:
Goodwill 34.3 34.3
Other 4.3 4.1
Deferred income taxes 6.4 7.2
-------- --------
Total other assets 45.0 45.6
-------- --------
TOTAL ASSETS $ 277.4 $ 246.3
======== ========
see notes to consolidated financial statements
3
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Per Share Data)
March 31, December 31,
2002 2001
----------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 0.8 $ 0.9
Trade accounts payable 88.7 64.5
Deferred income taxes 2.2 1.3
Accrued compensation 5.6 7.3
Other accrued liabilities 11.3 13.5
-------- --------
Total current liabilities 108.6 87.5
-------- --------
NON-CURRENT LIABILITIES:
Debt 83.8 72.7
Fair value of derivative instruments 3.5 4.5
Other non-current liabilities 2.3 2.5
-------- --------
Total non-current liabilities 89.6 79.7
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares; $.01 par (5,000,000 shares authorized) -- --
Common shares; at March 31, 2002 - $.01 par
(50,000,000 shares authorized - 19,723,095 shares issued);
at December 31, 2001 - $.01 par (50,000,000 shares
authorized - 19,645,893 shares issued) 0.2 0.2
Additional paid-in capital on common stock 33.2 33.4
Retained earnings 54.2 54.8
Unearned compensation - restricted stock (0.5) (0.4)
Accumulated other comprehensive loss (1.2) (1.7)
Less: Treasury shares at cost (1,173,050 shares at March 31, 2002
and 1,250,252 shares at December 31, 2001) (6.7) (7.2)
-------- --------
Total shareholders' equity 79.2 79.1
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 277.4 $ 246.3
======== ========
see notes to consolidated financial statements
4
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(In Millions, Except Per Share Amounts)
Three Months Ended March 31,
2002 2001
--------- ---------
NET SALES $ 215.6 $ 217.6
COST OF SALES AND OPERATING EXPENSES:
Cost of sales 173.4 172.3
Operating expenses 40.2 40.4
Depreciation and amortization 1.4 2.0
Gain on disposal of capital assets (0.2) --
--------- ---------
Total cost of sales and operating expenses 214.8 214.7
--------- ---------
OPERATING PROFIT 0.8 2.9
--------- ---------
OTHER EXPENSE:
Interest expense (2.2) (2.5)
Unrealized gain (loss) on derivatives 0.4 (0.6)
--------- ---------
Total other expense (1.8) (3.1)
LOSS BEFORE TAXES (1.0) (0.2)
PROVISION FOR INCOME TAXES (0.4) (0.1)
========== ==========
NET LOSS $ (0.6) $ (0.1)
========== ==========
NET LOSS PER BASIC SHARE $ (0.03) $ (0.01)
========== =========
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 19.7 20.6
NET LOSS PER DILUTED SHARE $ (0.03) $ (0.01)
========== =========
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 19.7 20.6
see notes to consolidated financial statements
5
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(In Millions)
Common Shares Additional Unearned
Outstanding, Paid-In Retained Compensation-
at Par Value Capital Earnings Restricted Stock
----------------------------------------------------------------------------
Balance at January 1, 2001 $ 0.2 $ 33.2 $ 49.1 $ (0.4)
Net loss (0.1)
FMV adjustment of derivatives, net of tax
---------------
Comprehensive loss (0.1)
Restricted stock issued, net
of amortization expense 0.2 (0.1)
Treasury stock purchases
---------------------------------------------------------------------------
Balance at March 31, 2001 $ 0.2 $ 33.4 $ 49.0 $ (0.5)
===========================================================================
Balance at January 1, 2002 $ 0.2 $ 33.4 $ 54.8 $ (0.4)
Net loss (0.6)
FMV adjustment of derivatives, net of tax
---------------
Comprehensive income (loss) (0.6)
Restricted stock issued, net
of amortization expense (0.1)
Stock options exercised (0.2)
Treasury stock purchases
---------------------------------------------------------------------------
Balance at March 31, 2002 $ 0.2 $ 33.2 $ 54.2 $ (0.5)
===========================================================================
Accumulated
Other Treasury Total
Comprehensive Shares, Shareholders'
Loss at Cost Equity
--------------------------------------------------------
Balance at January 1, 2001 $ - $ (1.1) $ 81.0
Net loss (0.1)
FMV adjustment of derivatives, net of tax (1.9) (1.9)
------------------- ---------------
Comprehensive income (loss) (1.9) (2.0)
Restricted stock issued, net
of amortization expense 0.1
Treasury stock purchases (0.2) (0.2)
--------------------------------------------------------
Balance at March 31, 2001 $ (1.9) $ (1.3) $ 78.9
========================================================
Balance at January 1, 2002 $ (1.7) $ (7.2) $ 79.1
Net loss (0.6)
FMV adjustment of derivatives, net of tax 0.5 0.5
----------------------- -----------
Comprehensive income (loss) 0.5 (0.1)
Restricted stock issued, net
of amortization expense 0.1 -
Stock options exercised 0.7 0.5
Treasury stock purchases (0.3) (0.3)
--------------------------------------------------------
Balance at March 31, 2002 $ (1.2) $ (6.7) $ 79.2
========================================================
see notes to consolidated financial statements
6
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Three Months Ended March 31,
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (0.6) $ (0.1)
Gain on disposal of capital assets (0.2) --
Depreciation and amortization 1.7 2.3
Deferred income taxes 1.3 0.3
Unrealized (gain) loss on derivatives, net (0.2) 0.9
Accrued postretirement benefits (0.1) (0.1)
Changes in operating assets and liabilities
(exclusive of acquisitions):
Trade accounts receivable (21.0) (17.5)
Inventories (16.1) (4.7)
Other current assets 1.9 1.6
Trade accounts payable 24.2 9.6
Accrued liabilities (3.9) (5.9)
Other (0.6) (0.6)
------- -------
Total cash from operating activities (13.6) (14.2)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (0.7) (0.9)
Proceeds from disposition of capital assets 0.7 --
Cash used for acquisitions -- (1.2)
------- -------
Total cash from investing activities -- (2.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (0.1) --
Borrowing of revolving credit agreement 11.2 19.4
Proceeds from exercise of stock options 0.5 --
Purchase of treasury stock (0.3) (0.2)
------- -------
Total cash from financing activities 11.3 19.2
------- -------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (2.3) 2.9
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5.6 3.6
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 3.3 $ 6.5
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1.8 $ 1.8
======= =======
Income taxes (received) paid $ (0.6) $ 0.2
======= =======
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. RESTRUCTURING ACTIVITY
During the fourth quarter of 2001, the Company recorded $3.2 million of
restructuring charges related to the closure of several historically
under-performing branches, of which $1.1 million was included in costs of sales
for the write-down of inventory to realizable value. Other components of the
charge were $0.8 million for severance related costs and $1.3 million for
facility and other shutdown-related costs. Included in amounts charged against
this restructuring reserve in 2001 were $0.5 million for inventory losses and
$0.3 million for facility and other shutdown-related costs.
During the first quarter of 2002, approximately $0.3 million was charged against
the reserve for inventory losses, $0.3 million for severance, and $0.5 million
for facility and other shutdown costs. As of March 31, 2002 approximately $1.3
million of the restructuring reserve remains, the components of which are $0.3
million for inventory, $0.5 million for severance and $0.5 million for facility
and other shutdown-related costs. The Company expects to substantially utilize
the remaining reserve by the end of 2002.
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 and Doors, of which $0.8 million was included in
cost of sales. The charge 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. During the first quarter
of 2001, $0.4 million was charged against this reserve, which included $0.2
million for inventory impairment.
3. DEBT
Debt consisted of the following at March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
------------ ------------
Revolving credit agreement $ 81.0 $ 69.8
Capital lease obligations 3.6 3.8
------------ ------------
Total debt 84.6 73.6
Less: current portion 0.8 0.9
------------ ------------
Long-term debt $ 83.8 $ 72.7
============ ============
8
At March 31, 2002, 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 (generally 30, 60 or 90-day LIBOR rate) plus 175 basis points. When actual
borrowings under the revolving credit agreement are less than the notional
amount of the interest rate swaps, the Company incurs an expense equal to the
difference between $80.0 million and the actual amount borrowed, times the
difference between the fixed rate on the interest rate swap agreement and the
90-day LIBOR rate.
Provisions of the secured revolving credit facility contain various covenants
which, among other things, limit the Company's ability to incur indebtedness,
incur liens, declare or pay dividends or make restricted payments, consolidate,
merge or sell assets. They also contain covenants that require the Company to
attain certain financial ratios in regards to leverage (3 to 1 ratio of net debt
to consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA")) and interest expense coverage (2 to 1 ratio of consolidated EBITDA
less capital expenditures to consolidated cash interest expense) and maintain
minimum consolidated net worth (as defined in the credit agreement).
The Company is currently in full compliance with each of the applicable
financial covenants under its credit facility. The financial results in the near
term may vary from those required by its credit facility as a result of the
risks that Huttig faces in its business. The Company believes that cash
generated from operations and funds available under the credit facility will
provide sufficient funds to meet is currently anticipated liquidity and capital
expenditure requirements. Huttig can give no assurance, however, that it will be
able to achieve sufficient EBITDA or other financial results required by the
financial covenants. If the Company was unable to comply with these financial
covenants, lenders would have the right, but not the obligation, to accelerate
the repayment of the entire amount outstanding under the credit facility.
In the event of any covenant violation under the credit facility, Huttig
believes that, based upon its relationships with its lenders, it would be able
to amend its credit facility, obtain a waiver from its lenders or obtain
alternative financing to meet its requirements; however, Huttig can give no
assurance that it would be able to do so. The credit facility expires in April
2003 and the Company plans to renegotiate the facility prior to year-end.
4. DERIVATIVES AND INTEREST RATE RISK MANAGEMENT
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.
For the three months ended March 31, 2002, a total unrealized gain on
derivatives of $0.4 million was recorded after operating profit. This includes
$0.2 million of expense that was amortized from Other Comprehensive Income
("OCI") and $0.6 million of an unrealized gain 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.
5. COMMITMENTS AND CONTINGENCIES
In March 2002, the Company agreed to settle one of three asbestos-related
product liability lawsuits pending against it and recorded a reserve of $0.9
million for the settlement and related legal costs. The Company has filed a
lawsuit against The Rugby Group Ltd. (its principal stockholder) and Rugby IPD
Corp., a subsidiary of The Rugby Group Ltd., alleging that they have breached
their contractual obligations to indemnify and defend Huttig against liabilities
and claims arising out of a business that was acquired by Rugby Building
Products, Inc. in 1994. While Huttig continues to believe that the factual
allegations and legal claims asserted against Huttig in the remaining complaints
are without merit, there can be no assurance at this time that Huttig will
recover any of its costs relating to these claims from insurance carriers or
from Rugby Group or that such costs will not have a materiel adverse effect on
Huttig's business or financial condition.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized
but is reviewed for impairment annually, or more frequently if certain
indicators arise. In addition, the statement requires reassessment of the useful
lives of previously recognized intangible assets.
The statement prescribes a two-step process for impairment testing of goodwill.
The first step, required to be completed by June 30, 2002, screens for
impairment; while the second step (if necessary) required to be completed by
December 31, 2002, measures the impairment. The Company is in the process of
completing the first step of the impairment analysis and at this time cannot
determine the impact on its consolidated financial statements.
With the adoption of the statement, the Company ceased amortization of goodwill
as of January 1, 2002. The following table presents the quarterly results of the
Company on a comparable basis (in millions, except per share amounts):
Three Months Ended March 31,
----------------------------
2002 2001
------ -------
NET (LOSS) INCOME:
Reported net loss $ (0.6) $ (0.1)
Goodwill amortization (net of tax) - 0.4
------ ------
Adjusted net (loss) income $ (0.6) $ 0.3
====== ======
BASIC (LOSS) INCOME PER SHARE:
Reported net loss $(0.03) $(0.01)
Goodwill amortization (net of tax) - 0.02
------ ------
Adjusted net (loss) income $(0.03) $ 0.01
====== ======
DILUTED (LOSS) INCOME PER SHARE:
Reported net loss $(0.03) $(0.01)
Goodwill amortization (net of tax) - 0.02
------ ------
Adjusted net (loss) income $(0.03) $ 0.01
====== ======
The following table reflects the components of amortized intangible assets,
excluding goodwill (in millions):
March 31, 2002 December 31, 2001
----------------- ------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
-------- ------ -------- ------
Amortized Intangible Assets
Non-compete agreements $3.5 $2.9 $3.5 $2.8
Trademarks 1.4 0.4 1.4 0.4
---- ---- ---- ----
Total $4.9 $3.3 $4.9 $3.2
==== ==== ==== ====
Amortization expense on intangible assets was $0.1 million and $0.1 million for
the quarters ended March 31, 2002 and 2001, respectively. The following table
sets forth the estimated amortization expense on intangible assets for the
fiscal years ending December 31, (in millions):
$0.5
0.3
0.1
0.1
0.1
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment of Disposal of Long-lived Assets. This statement
establishes a single accounting model for the impairment or disposal of
long-lived assets and broadens the presentation of discontinued operations. The
Company adopted this statement in the first quarter of 2002 and the adoption did
not have a material impact on its consolidated financial statements.
9
7. NET LOSS PER SHARE
The following table sets forth the computation of net loss per basic and diluted
share (net loss amounts in millions, share amounts in thousands, per share
amounts in dollars):
Three Months Ended March 31,
2002 2001
------- -------
Net loss (numerator) $ (0.6) $ (0.1)
Weighted average number of basic shares outstanding
(denominator) 19,676 20,598
------- -------
Net loss per basic share $ (0.03) $ (0.01)
======= =======
Weighted average number of basic shares outstanding 19,676 20,598
Common stock equivalents for diluted common shares
outstanding -- --
------- -------
Weighted average number of diluted shares outstanding
(denominator) 19,676 20,598
------- -------
Net loss per diluted share $ (0.03) $ (0.01)
======= =======
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 57 distribution centers serving 46 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
mouldings. Approximately 38% of American Pine's sales were to Huttig's
distribution centers in the three months ended March 31, 2002.
The following table sets forth our net sales, by product classification as a
percentage of total net sales, for the three months ended March 31, 2002 and
2001:
Three Months Ended March 31,
2002 2001
----- -----
Doors 34% 38%
Specialty Building Materials 27% 32%
Lumber & Other Commodity 22% 13%
Moulding 11% 11%
Windows 6% 6%
----- -----
Total Net Product Sales 100% 100%
We strive to increase shareholder value by pursuing the following business
strategies:
- - 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;
- - simplifying our business processes to make it easier for our customers
and vendors to do business with us;
- - 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.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the U.S., which require management to make
estimates and assumptions. Management bases these estimates and assumptions on
historical results and known trends as well as our forecasts as to how these
might change in the future. Actual results could differ from these estimates and
assumptions. In addition to items discussed in our Annual Report on form 10-K in
Part II, Item 7 -- "Critical Accounting Policies", we believe that of our
significant accounting policies, the following accounting policy may involve a
higher degree of judgment and complexity.
Contingencies - We accrue expenses when it is probable that an asset has been
impaired or a liability has been incurred and the amount can be reasonably
estimated. Contingencies for which we have made accruals include environmental,
product liability and other legal matters, none of which are expected to have a
material adverse effect on our financial position or cash flow. It is possible,
however, future results of operations for any particular quarter or annual
period could be materially affected by changes in assumptions related to these
matters. We accrue our best estimate of the cost of resolution of these matters
and make adjustments to the amounts accrued as circumstances change.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2001
Net sales for the three months ended March 31, 2002 were $215.6 million, a 1.0%
decrease from the first quarter of 2001 when sales were $217.6 million.
Excluding sales attributable to branches that were closed, same branch net sales
increased 4.0% or $7.7 million over the same period from the prior year. This
increase is estimated to consist of $5.6 million of volume increases in the
Northeast and Southeast portions of the country and $2.1 million attributable to
inflation in the commodity wood market. The effect of the same-branch sales
increases on total net sales in the first quarter was offset by the loss of $6.4
million of branches that were closed during the first quarter of 2001 and by
having one less shipping day in 2002 versus 2001, which impacted sales by
approximately $3.3 million.
Gross profit decreased $3.1 million to $42.2 million in the first quarter of
2002 from $45.3 million in the same period from 2001 and as a percentage of
sales was 19.6% versus 20.8% for the periods ending March 31, 2002 and 2001,
respectively. The decrease in gross profit percentage resulted from a change in
product sales mix, a shift in regional sales mix, and additional pricing
pressures seen with current market conditions. Net door and specialty building
materials sales decreased as a percentage of total sales while lumber and other
commodity net sales increased as a percentage of sales. Door and specialty
building materials have historically higher margins than lumber.
Operating expenses were $40.2 million in the first quarter of 2002 compared to
$40.4 million in the first quarter of 2001. The decrease is primarily due to
$2.1 million of cost savings from closed branches and $0.2 million lower bad
debt provision. The decrease is partially offset by increased compensation and
contract labor costs at the on-going facilities of $1.2 million and an increase
in reserves of $0.9 million for costs relating to the settlement and legal
expenses of an asbestos-related product liability lawsuit. See Part II, Item 1 -
"Legal Proceedings".
Depreciation and amortization was $1.4 million in the first quarter of 2002,
which is $0.6 million lower than the same period in the prior year. The decrease
is due to goodwill no longer being amortized in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. For the three months ended March 31, 2001,
we amortized $0.6 million of goodwill.
Gains on disposal of assets were $0.2 million for the quarter ended March 31,
2002, for the sale of a previously closed facility. There were no gains or
losses on asset disposals in the first quarter of 2001.
Net interest expense decreased to $2.2 million in the first quarter of 2002 from
$2.5 million in the same period of 2001. Our average outstanding total debt
decreased $8.4 million compared to the same period of the prior year, reducing
our interest expense.
Unrealized gain on derivatives of $0.4 million was recorded in the first quarter
of 2002 versus a $0.6 million loss a year ago. The gain related to a $0.6
million change in the fair value on two interest rate swaps that do not qualify
as hedges for accounting purposes partially offset by $0.2 million of expense
amortized from Other Comprehensive Income established upon the adoption of SFAS
No. 133 in 2001.
As a result of the foregoing factors, pretax loss increased by $0.8 million to
$1.0 million.
Income taxes were provided at an effective rate of 38% for the quarters ended
March 31, 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
We depend on cash flow from operations and funds available under our secured
credit facility to finance seasonal working capital 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 fourth quarter of the year and build working capital during
the first quarter in preparation for our second and third quarters.
We measure our working capital as the sum of net trade accounts receivable, net
FIFO inventories and trade accounts payable. At March 31, 2002 and 2001, and
December 31, 2001, our working capital was as follows:
12
March 31,
------------------- December 31,
2002 2001 2001
------ ------ ------------
Trade accounts receivable, net $ 95.0 $ 94.0 $ 74.0
Inventories, net 94.1 87.8 78.0
Trade accounts payable (88.7) (69.0) (64.5)
------ ------ ------------
Working capital 100.4 112.8 87.5
Working capital as a % of annualized
quarterly sales 11.6% 13.0% 9.9%
Average inventory turns 6.2 6.3 6.9
In the first quarter of 2002, changes in operating assets and liabilities used
$15.5 million in cash from operating activities due primarily to increases in
trade accounts receivable and inventories offset by increases in trade accounts
payable. Changes in operating assets and liabilities in the first quarter of
2001 used $17.5 million in cash from operating activities from increases in the
same accounts.
Cash used in investing activities for the first quarter of 2002 reflects $0.7
million of capital expenditures for normal operating activities. These
expenditures were offset by $0.7 million of proceeds on disposals of assets from
two previously closed facilities. In 2001, $0.9 million was used in capital
expenditures along with $1.2 million to purchase the assets from Monarch
Manufacturing, In. in Baltimore, Maryland and Hope Lumber and Supply Corporation
in Kansas City, Missouri.
Cash provided from financing activities for both 2002 and 2001 primarily
reflects borrowings under our revolving credit facility of $11.2 million and
$19.4 million, respectively.
We have a $200.0 million secured revolving credit facility with Chase Manhattan
Bank as agent. At March 31, 2002, 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.
Provisions of the secured revolving credit facility contain various covenants
which, among other things, limit our ability to incur indebtedness, incur liens,
declare or pay dividends or make restricted payments, consolidate, merge or sell
assets. They also contain covenants that require us to attain certain financial
ratios in regards to leverage (3 to 1 ratio of net debt to consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA")) and interest
expense coverage (2 to 1 ratio of consolidated EBITDA less capital expenditures
to consolidated cash interest expense) and maintain minimum consolidated net
worth (as defined in the credit agreement).
We are currently in full compliance with each of the applicable financial
covenants under our credit facility. Our financial results in the near term may
vary from those required by our credit facility as a result of the risks we face
in our business, including those that may prevent us from achieving the levels
of EBITDA required under our credit facility. We believe that cash generated
from operations and funds available under our credit facility will provide
sufficient funds to meet our currently anticipated liquidity and capital
expenditure requirements. We can give no assurance, however, that we will be
able to achieve sufficient EBITDA or other financial results required by our
financial covenants. If we were unable to comply with these financial covenants,
our lenders would have the right, but not the obligation, to accelerate the
repayment of the entire amount outstanding under the credit facility.
In the event of any covenant violation under our credit facility, we believe
that, based upon our relationships with our lenders, we would be able to amend
our credit facility, obtain a waiver from our lenders or obtain alternative
financing to meet our requirements; however, we can give no assurance that we
would be able to do so. Our credit facility expires in April 2003 and we plan to
renegotiate the facility prior to year-end.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 2001, we recorded $3.2 million of restructuring
charges related to the closure of several historically under-performing
branches, of which $1.1 million was included in costs of sales for the
write-down of inventory to realizable value. Other components of the charge were
$0.8 million for severance related costs and $1.3 million for facility and other
shutdown-related costs. Included in amounts charged against this restructuring
reserve in 2001 were $0.5 million for inventory losses and $0.3 million for
facility and other shutdown-related costs.
During the first quarter of 2002, approximately $0.3 million was charged against
the reserve for inventory losses, $0.3 million for severance, and $0.5 million
for facility and other shutdown costs. As of March 31, 2002 approximately $1.3
million of the restructuring reserve remains, the components of which are $0.3
million for inventory, $0.5 million for severance and $0.5 million for facility
and other shutdown-related costs. We expect to substantially utilize the
remaining reserve by the end of 2002.
During the fourth quarter of 2000, we recorded $2.1 million as a restructuring
charge related to the termination of Huttig's distribution agreement with
Andersen Windows and Doors, of which $0.8 million was included in cost of sales.
The charge 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. During the first quarter of 2001,
$0.4 million was charged against this reserve, which included $0.2 million for
inventory impairment.
NEW ACCOUNTING PRONOUNCEMENTS
We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January
1, 2002. Under SFAS No. 142, goodwill is no longer amortized but is reviewed for
impairment annually, or more frequently if certain indicators arise. In
addition, the statement requires reassessment of the useful lives of previously
recognized intangible assets.
The statement prescribes a two-step process for impairment testing of goodwill.
The first step, required to be completed by June 30, 2002, screens for
impairment; while the second step (if necessary) required to be completed by
December 31, 2002, measures the impairment. We are in the process of completing
the first step of the impairment analysis and at this time cannot determine the
impact on our consolidated financial statements.
Goodwill amortization for the three months ended March 31, 2001 was $0.6
million.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment of Disposal of Long-lived Assets. This statement
establishes a single accounting model for the impairment or disposal of
long-lived assets and broadens the presentation of discontinued operations. We
adopted this statement in the first quarter of 2002 and the adoption did not
have a material impact on our consolidated financial statements.
13
CYCLICALITY AND SEASONALITY
Our 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 or in the economy generally could have a material adverse effect on our
operating results and financial condition. Reduced levels of construction
activity may result in intense price competition among building materials
suppliers, which may adversely affect our gross margins.
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.
ENVIRONMENTAL REGULATION
We are subject to federal, state and local environmental protection laws and
regulations. We can give no assurance that future environmental liabilities will
not have a material adverse effect on our financial condition or results of
operations. We have 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
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
of 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 our
experience to date in remediating this site, we do not believe that the scope of
remediation that the DEQ ultimately determines will have a material adverse
effect on our 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 us of the final remediation order.
In addition, some of our current and former 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, but can give no assurance, that there are no material
environmental liabilities at any of our distribution center locations.
CAUTIONARY STATEMENT
Certain statements in this Form 10-Q contain "forward-looking statements" within
the meaning 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. There are a
number of factors 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 following:
- - 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 and
- adverse weather conditions,
- - the level of competition in our industry,
- - our relationships with suppliers of the products we distribute,
- - costs of complying with environmental laws and regulations and
- - our exposure to product liability claims
- - our ability to comply with financial covenants under the credit facility.
Additional information concerning these and other factors that could materially
affect our results of operations and financial condition are included in our
most recent Annual Report on Form 10-K. We disclaim any obligation to publicly
update or revise any of these forward-looking statements.
14
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 March 31, 2002 under our revolving
credit agreement of $81.0 million. Also at March 31, 2002, 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. When actual borrowings
under the revolving credit agreement are less than the notional amount of the
interest rate swaps, we incur an expense equal to the difference between $80.0
million and the actual amount borrowed, times the difference between the fixed
rate on the interest rate swap agreement and the 90-day LIBOR rate.
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 $3.5 million and shareholders' equity includes $1.2 million, net
of tax, which is recorded as other comprehensive income. Included in income for
the quarter ended March 31, 2002, after profit from operations, is $0.4 million
of an unrealized gain 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 gain resulted in a increase to earnings per share of
$0.01 in the three month period ending March 31, 2002. There is no impact on
cash flow as a result of the accounting treatment required by SFAS No. 133.
Effective January 1, 2002, we entered into a price swap agreement to purchase
specified levels of heating oil on a monthly basis at a fixed price, in an
effort to hedge the cost of our diesel fuel consumption for our delivery fleet.
We have accounted for this contract as a cash flow hedge in accordance with SFAS
No. 133 and there was no material impact to our consolidated financial
statements during the first quarter.
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.
15
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Part I, Item 3, in our Annual Report on Form 10-K for the
year ended December 31, 2001 for a description of the following and other legal
proceedings.
We are one of many defendants in three pending actions filed in California state
court by three separate claimants against manufacturers, building materials
distributors and retailers, and other defendants by individuals alleging that
they have suffered personal injury as a result of exposure to
asbestos-containing products. The plaintiffs in these cases seek unspecified
damages and allege that they were exposed to asbestos contained in products
distributed by a business acquired in 1994 by Rugby Building Products, Inc. In
March 2002, we agreed in principle to the settlement of one of these actions,
for which we increased our reserves by $0.9 million for costs of the settlement
and legal expenses relating to this action. On April 19, 2002, we filed suit in
New York state court seeking damages for breach of contract as well as
declaratory relief against The Rugby Group Limited, our principal stockholder,
and Rugby IPD Corp., its wholly owned subsidiary. In our lawsuit, we seek to
recover sums we have spent to defend and, with respect to one of the lawsuits,
settle these asbestos lawsuits, as well as a declaratory judgment that Rugby
Group and Rugby IPD indemnify and defend us for these lawsuits and any similarly
situated claims that may be asserted against us in the future. We believe we are
entitled to this relief under the terms of the transaction pursuant to which we
acquired the stock of Rugby USA, Inc., the parent of Rugby Building Products,
Inc., in December 1999. Rugby Group has denied any obligation to defend or
indemnify us for any of these cases. In May 2002, the plaintiff in one of the
two remaining cases dismissed us from his action without any payment. While we
believe that the factual allegations and legal claims asserted against us in the
complaints are without merit, there can be no assurance at this time that we
will recover any costs relating to these claims from insurance carriers or from
Rugby Group or Rugby IPD, or that such costs will not have a material adverse
effect on our business or financial condition.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Certificate of Incorporation of the company.
(Incorporated by reference to Exhibit 3.1 to the Form 10 filed
with the Commission on September 21, 1999.)
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 Huttig Building Products, Inc. Amended and Restated 2001 Stock
Incentive Plan.
*10.2 Schedule to Stock Option Agreement under the company's 2001
Stock Incentive Plan. (Incorporated by reference to Exhibit
10.11 to the Form 10-K for the fiscal year ended December 31,
2001 (the "2001 Form 10-K").)
*10.3 Restricted Stock Agreement dated January 29, 2002 between the
company and Barry J. Kulpa. (Incorporated by reference to
Exhibit 10.19 to the 2001 Form 10-K.)
- ----------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
On April 19, 2002, we filed a Current Report on Form 8-K, dated April 19,
2002 reporting our announcement that we had filed suit against The Rugby
Group Ltd.
16
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.
----------------------------------------------
Date: May 15, 2002 /s/ Barry J. Kulpa
----------------------------------------------
Barry J. Kulpa
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: May 15, 2002 /s/ Thomas S. McHugh
----------------------------------------------
Thomas S. McHugh
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Certificate of Incorporation of the company.
(Incorporated by reference to Exhibit 3.1 to the Form 10 filed
with the Commission on September 21, 1999.)
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 Huttig Building Products, Inc. Amended and Restated 2001 Stock
Incentive Plan.
*10.2 Schedule to Stock Option Agreement under the company's 2001
Stock Incentive Plan. (Incorporated by reference to Exhibit
10.11 to the Form 10-K for the fiscal year ended December 31,
2001 (the "2001 Form 10-K").)
*10.3 Restricted Stock Agreement dated January 29, 2002 between the
company and Barry J. Kulpa. (Incorporated by reference to
Exhibit 10.19 to the 2001 Form 10-K.)
- ----------
* Management contract or compensatory plan or arrangement.
18