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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 JUNE 30, 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 NO.)
INCORPORATION OR ORGANIZATION)
555 MARYVILLE UNIVERSITY DRIVE
SUITE 240
ST. LOUIS, MISSOURI 63141
(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 June 30, 2002 was
19,741,132 shares.
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001............................. 3-4
Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001 (unaudited)...................................................................... 5
Consolidated Statements of Changes in Shareholders' Equity for the six months ended
June 30, 2002 and 2001(unaudited)....................................................................... 6
Consolidated Statements of Cash Flows for the six months ended June 30, 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......................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders .......................................................... 22
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 23
Signatures ............................................................................................................ 24
Exhibit Index ........................................................................................................ 25
-2-
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5.2 $ 5.6
Trade accounts receivable, net 82.8 74.0
Inventories, net 81.3 70.1
Other current assets 6.4 9.5
--------- ---------
Total current assets 175.7 159.2
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
At cost:
Land 6.6 6.7
Building and improvements 34.1 35.0
Machinery and equipment 36.9 36.4
--------- ---------
Gross property, plant and equipment 77.6 78.1
Less accumulated depreciation 37.1 36.6
--------- ---------
Property, plant and equipment, net 40.5 41.5
--------- ---------
OTHER ASSETS:
Goodwill 34.3 34.3
Other 4.4 4.1
Deferred income taxes 5.6 7.2
--------- ---------
Total other assets 44.3 45.6
--------- ---------
TOTAL ASSETS $ 260.5 $ 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)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 0.8 $ 0.9
Trade accounts payable 101.5 64.5
Deferred income taxes 1.3 1.3
Accrued compensation 5.7 7.3
Other accrued liabilities 10.4 13.5
------- ------
Total current liabilities 119.7 87.5
------- ------
NON-CURRENT LIABILITIES:
Debt 57.4 72.7
Fair value of derivative instruments 3.3 4.5
Other non-current liabilities 2.1 2.5
------- ------
Total non-current liabilities 62.8 79.7
------- ------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares; $.01 par (5,000,000 shares authorized) - -
Common shares; $.01 par (50,000,00 shares authorized;
at June 30, 2002 - 19,741,132 shares issued;
at December 31, 2001 - 19,645,893 shares issued) 0.2 0.2
Additional paid-in capital on common stock 33.4 33.4
Retained earnings 52.6 54.8
Unearned compensation - restricted stock (0.5) (0.4)
Accumulated other comprehensive loss (1.0) (1.7)
Less: Treasury shares at cost (1,155,013 shares at June 30, 2002
and 1,250,252 shares at December 31, 2001) (6.7) (7.2)
------- ------
Total shareholders' equity 78.0 79.1
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 260.5 $ 246.3
======= =======
see notes to consolidated financial statements
-4-
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Millions, Except Per Share Amounts)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------- ------- ------- ------
NET SALES $ 220.8 $ 249.3 $ 436.3 $ 466.8
COST OF SALES AND OPERATING EXPENSES:
Cost of sales 179.9 196.5 353.2 368.8
Operating expenses 39.6 41.0 79.7 81.4
Depreciation and amortization 1.4 2.0 2.9 3.9
Gain on disposal of capital assets (0.2) (0.5) (0.4) (0.5)
------- ------- ------- -------
Total cost of sales and operating expenses 220.7 239.0 435.4 453.6
------- ------- ------- -------
OPERATING PROFIT 0.1 10.3 0.9 13.2
------- ------- ------- -------
OTHER EXPENSE:
Interest expense, net (2.4) (2.6) (4.7) (5.1)
Unrealized gain (loss) on derivatives (0.1) (0.1) 0.3 (0.8)
------- ------- ------- -------
Total other expense (2.5) (2.7) (4.4) (5.9)
(LOSS) INCOME BEFORE TAXES (2.4) 7.6 (3.5) 7.3
PROVISION FOR INCOME TAXES (0.9) 2.9 (1.3) 2.8
------- ------- ------- -------
NET (LOSS) INCOME $ (1.5) $ 4.7 $ (2.2) $ 4.5
======= ======= ======= =======
NET (LOSS) INCOME PER BASIC SHARE $ (0.07) $ 0.23 $ (0.11) $ 0.22
======= ======= ======= =======
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 19.7 20.7 19.7 20.7
NET (LOSS) INCOME PER DILUTED SHARE $ (0.07) $ 0.23 $ (0.11) $ 0.22
======= ======= ======= =======
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 19.7 20.7 19.7 20.7
see notes to consolidated financial statements
-5-
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Millions)
Accumulated
Common Shares Additional Unearned Other Treasury Total
Outstanding, Paid-In Retained Compensation- Comprehensive Shares, Shareholders'
at Par Value Capital Earnings Restricted Stock Loss at Cost Equity
------------ ---------- -------- ----------------- ------------- -------- ------------
Balance at January 1, 2001 $ 0.2 $ 33.2 $ 49.1 $ (0.4) $ - $ (1.1) $81.0
Net income 4.5 4.5
FMV adjustment of derivatives,
net of tax (1.7) (1.7)
------ ------------ -----
Comprehensive income (loss) 4.5 (1.7) 2.8
Restricted stock issued, net
of amortization expense 0.3 (0.1) 0.7 0.9
Treasury stock purchases (0.2) (0.2)
----- ------ ------ ------ ------ ----- -----
Balance at June 30, 2001 $ 0.2 $ 33.5 $ 53.6 $ (0.5) $ (1.7) $(0.6) $84.5
===== ====== ====== ====== ====== ===== =====
Balance at January 1, 2002 $ 0.2 $ 33.4 $ 54.8 $ (0.4) $ (1.7) $(7.2) $ 79.1
Net loss (2.2) (2.2)
FMV adjustment of derivatives,
net of tax 0.7 0.7
------ ------ -----
Comprehensive income (loss) (2.2) 0.7 (1.5)
Restricted stock issued, net
of amortization expense 0.1 (0.1) 0.2 0.2
Stock options exercised (0.1) 0.6 0.5
Treasury stock purchases (0.3) (0.3)
----- ------ ------ ------ ------ ----- -----
Balance at June 30, 2002 $ 0.2 $ 33.4 $ 52.6 $ (0.5) $ (1.0) $(6.7) $78.0
===== ====== ====== ====== ====== ===== =====
see notes to consolidated financial statements
-6-
HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Millions)
Six Months Ended June 30,
2002 2001
------- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2.2) $ 4.5
Gain on disposal of capital assets (0.4) (0.5)
Depreciation and amortization 3.6 4.6
Deferred income taxes 1.2 2.7
Unrealized (gain) loss on derivatives, net (0.2) 0.8
Accrued postretirement benefits (0.1) (0.1)
Changes in operating assets and liabilities
(exclusive of acquisitions):
Trade accounts receivable (8.8) (19.0)
Inventories (11.2) (11.4)
Other current assets 3.1 3.1
Trade accounts payable 37.0 20.1
Accrued liabilities (4.7) (5.2)
Other (1.2) (1.2)
------ ------
Total cash from operating activities 16.1 (1.6)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2.4) (1.6)
Proceeds from disposition of capital assets 1.1 0.5
Cash used for acquisitions - (1.2)
------ ------
Total cash from investing activities (1.3) (2.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (0.5) (0.1)
(Repayment) borrowing of revolving credit agreement (14.9) 7.3
Proceeds from exercise of stock options 0.5 -
Purchase of treasury stock (0.3) (0.2)
------ ------
Total cash from financing activities (15.2) 7.0
------ ------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (0.4) 3.1
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5.6 3.6
------ ------
CASH AND EQUIVALENTS, END OF PERIOD $ 5.2 $ 6.7
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4.1 $ 4.1
======== ======
Income tax refunds $ (0.4) $ (2.7)
======== ======
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 six months of 2002, approximately $0.1 million was charged
against the reserve for inventory losses, $0.5 million for severance, and $0.7
million for facility and other shutdown costs. As of June 30, 2002 approximately
$1.1 million of the restructuring reserve remains, the components of which are
$0.5 million for inventory, $0.3 million for severance and $0.3 million for
facility and other shutdown-related costs. The Company expects to finalize its
restructuring activities during the second half 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. The remaining balance
was fully utilized during 2001.
-8-
3. DEBT
Debt consisted of the following at June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
-------- ------------
Revolving Credit Agreement $ 54.9 $ 69.8
Capital lease obligations 3.3 3.8
------ ------
Total debt 58.2 73.6
Less: current portion 0.8 0.9
------ ------
Long-term debt $ 57.4 $ 72.7
====== ======
At June 30, 2002, the Company had three interest rate swap agreements which
expire in May 2003, with a total notional principal amount of $80.0 million.
These swap agreements, in conjunction with the Company's revolving credit
facility at June 30, 2002, provided for a fixed weighted average rate of 8.9% on
$80.0 million of the Company's revolving credit borrowings. At June 30, 2002,
the interest rate on the remainder of the committed outstanding borrowings under
that facility was equal to a floating rate of LIBOR (generally 30, 60 or 90-day
LIBOR rate) plus 175 basis points. When actual borrowings under the facility
were less than the notional amount of the interest rate swaps, the Company would
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.
Provisions of the secured Revolving Credit Agreement (the "Former Credit
Agreement"), which provided for a credit facility that was refinanced as
discussed below (the "New Credit Facility"), contained various covenants which,
among other things, limited the Company's ability to incur indebtedness, incur
liens, declare or pay dividends or make restricted payments, consolidate, merge
or sell assets. They also contained covenants that required the Company to
attain certain financial ratios regarding 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 Former Credit Agreement).
As of June 30, 2002, the Company was in full compliance with each of the
applicable financial covenants under the Former Credit Agreement, except for the
interest expense coverage ratio covenant. On July 26, 2002, the Company
obtained, from its bank lenders, a limited waiver of the violation of this
covenant that extends to August 31, 2002.
In August 2002, the Company entered into a new, three-year, $150.0 million
Senior Secured Revolving Credit Facility (the "New Credit Facility") and repaid
outstanding borrowing under and terminated the Former Credit Agreement, as well
as paid fees in connection with the new facility. The New Credit Facility
consists of a revolving line of credit ("Revolving Credit") not to exceed $150.0
million, including up to $10.0 million of Letters of Credit, at a floating rate
of either (a) LIBOR plus from 200 to 300 basis points or (b) the prime
commercial lending rate of the agent (or, if greater, the federal funds rate
plus 0.5%) plus from 25 to 125 basis points, in each case depending on the
Company's trailing average collateral availability. The Revolving Credit
borrowing base shall not exceed the sum of (a) up to 85% of eligible domestic
trade receivables and (b) up to the lesser of 65% of the cost of eligible
inventory or 85% of the appraised net liquidation value of eligible inventory.
The Company has agreed to pay a commitment fee in the range of 0.25% to 0.50%
per annum on the average daily unused amount of the Revolving Credit commitment.
All of the Company's assets, except real property, collateralize borrowings
under this facility. The Company continued to report the Former Credit
Agreement, which was due to expire in May 2003, as long-term debt based on the
terms of the New Credit Facility, which expires in August 2005.
The Company's interest rate swap agreements, in combination with the new
revolving credit facility, effectively provide for a fixed weighted average
rate of 7.15% plus the applicable spread over LIBOR as determined by the amount
of collateral availability on $80.0 million of our outstanding revolving credit
borrowings.
Provisions of the New Credit Facility contain various covenants which, among
other things, limit the Company's ability to incur indebtedness, incur liens,
make certain types of acquisitions, declare or pay dividends or make
-9-
restricted payments, consolidate, merge or sell assets. They also contain
financial covenants tied to the Company's borrowing base. If the borrowing base
exceeds the Company's outstanding obligations to its lenders by less than $25.0
million, the Company must maintain or meet a 1.25 to 1.0 minimum fixed charge
ratio (defined as EBITDA - as defined in the New Credit Facility agreement -
less capital expenditures less cash taxes divided by cash interest expense plus
scheduled debt repayments plus cash rent expense). Also, the Company must not
permit its revolving availability under the New Credit Facility to drop below
$10.0 million.
During the third quarter, the Company will recognize a charge of $0.9 million to
write off the remaining unamortized loan fees related to the Former Credit
Agreement.
4. DERIVATIVES AND INTEREST RATE RISK MANAGEMENT
The Company holds three interest rate swap agreements, which expire in May 2003,
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 six months ended June 30, 2002, a total unrealized gain on derivatives
of $0.3 million was recorded after operating profit. This includes $0.4 million
of expense that was amortized from accumulated other comprehensive loss and $0.7
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 accumulated other comprehensive loss.
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, then existing,
asbestos-related product liability lawsuits pending against it and recorded a
reserve of $0.9 million for the settlement and related legal costs.
In May 2002, the Company was dismissed as a defendant from one of its then
pending asbestos-related product liability lawsuits. Also in May 2002 and in
July 2002, the Company was named as a defendant, individually and as
successor-in-interest to Rugby Building Products, Inc. and a predecessor company
acquired by Rugby Building Products, Inc. in 1994, in two separate
asbestos-related product liability lawsuits. As of August 14, 2002, three such
lawsuits are currently pending against the Company.
The Company has filed a lawsuit against The Rugby Group Ltd. (the Company's
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 the
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 related
to these claims from insurance carriers or from The Rugby Group or that such
costs will not have a material adverse effect on Huttig's business or financial
condition.
-10-
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 Company has completed the first step of the transitional impairment test and
the results indicate a potential impairment in the Company's reporting unit that
sells directly to homebuilders. The second step of the impairment test is
currently underway, and any resulting impairment charge will be determined
during the third quarter. Such charge will be recorded as a cumulative effect of
an accounting change as of January 1, 2002.
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 June 30, Six Months Ended June 30,
2002 2001 2002 2001
------- ------- ------- -------
NET (LOSS) INCOME:
Reported net (loss) income $ (1.5) $ 4.7 $ (2.2) $ 4.5
Goodwill amortization (net of tax) - 0.4 - 0.7
------- ------- ------- -----
Adjusted net (loss) income $ (1.5) $ 5.1 $ (2.2) $ 5.2
======= ======= ======= =====
BASIC (LOSS) INCOME PER SHARE:
Reported net (loss) income $ (0.07) $ 0.23 $ (0.11) $ 0.22
Goodwill amortization (net of tax) - 0.02 - 0.04
------- ------- ------- ------
Adjusted net (loss) income $ (0.07) $ 0.25 $ (0.11) $ 0.26
======= ======= ======= ======
DILUTED (LOSS) INCOME PER SHARE:
Reported net (loss) income $ (0.07) $ 0.23 $ (0.11) $ 0.22
Goodwill amortization (net of tax) - 0.02 - 0.04
------- ------- ------- ------
Adjusted net (loss) income $ (0.07) $ 0.25 $ (0.11) $ 0.26
======= ======= ======= ======
The following table reflects the components of intangible assets that are being
amortized, excluding goodwill (in millions):
June 30, 2002 December 31, 2001
-------------------- ------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
-------- ------ -------- ------
Amortized Intangible Assets:
Non-compete agreements $ 3.5 $ 3.0 $ 3.5 $ 2.8
Trademarks 1.4 0.4 1.4 0.4
----- ----- ----- -----
Total $ 4.9 $ 3.4 $ 4.9 $ 3.2
===== ===== ===== =====
-11-
Amortization expense on intangible assets was $0.2 million for the six months
ended June 30, 2002 and 2001, respectively. The following table sets forth the
estimated amortization expense on intangible assets for the years ending
December 31, (in millions):
2002 $ 0.5
2003 0.3
2004 0.1
2005 0.1
2006 0.1
Thereafter 0.6
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or 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.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. This statement rescinds, updates, clarifies and
simplifies existing accounting pronouncements. Among other things, the statement
rescinds SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Under SFAS No. 145, the criteria in Accounting
Principles Board (APB) No. 30 will now be used to classify those gains and
losses. The adoption of SFAS No. 145 is not expected to have a material impact
on the Company's consolidated financial statements.
7. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of net (loss) income per basic
and diluted share (net (loss) income amounts in millions, share amounts in
thousands, per share amounts in dollars):
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------- ------- -------- ------
Net (loss) income (numerator) $ (1.5) $ 4.7 $ (2.2) $ 4.5
Weighted average number of basic shares outstanding
(denominator) 19,740 20,707 19,708 20,653
------- ------- ------- -------
Net (loss) income per basic share $ (0.07) $ 0.23 $ (0.11) $ 0.22
======= ======= ======= =======
Weighted average number of basic shares outstanding 19,740 20,707 19,708 20,653
Common stock equivalents for diluted common shares
outstanding - 29 - 23
------- ------- ------- -------
Weighted average number of diluted shares outstanding
(denominator) 19,740 20,736 19,708 20,676
------- ------- ------- -------
Net (loss) income per diluted share $ (0.07) $ 0.23 $ (0.11) $ 0.22
======= ======= ======= =======
-12-
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 35% of American Pine's sales were to Huttig's
distribution centers in the six months ended June 30, 2002.
The following table sets forth our net sales, by product classification as a
percentage of total net sales, for the three and six months ended June 30, 2002
and 2001:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- -----
Doors 35% 35% 34% 36%
Specialty Building Materials 25% 25% 26% 26%
Lumber & Other Commodity 24% 24% 24% 23%
Moulding 10% 10% 10% 9%
Windows 6% 6% 6% 6%
---- ---- ---- ----
Total Net Product Sales 100% 100% 100% 100%
We strive to increase shareholder value by pursuing the following business
strategies:
o expanding product lines and adding higher margin products;
o focusing on providing efficient, high quality customer service through
the deployment of information technology and implementation of industry
best practices;
o simplifying our business processes to make it easier for our customers
and vendors to do business with us;
o leveraging our size to negotiate better pricing, delivery and service
terms with our suppliers;
o achieving operating efficiencies by consolidating administrative systems
across the company; and
o 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 United States, 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.
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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. Based on management's assessment of
the most recent information available, management currently does not expect any
of these contingencies to have a material adverse effect on our financial
position or cash flow. It is possible, however, that future results of
operations for any particular quarter or annual period and our financial
condition could be materially affected by changes in assumptions or other
circumstances 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2001
Net sales for the three months ended June 30, 2002 were $220.8 million, an 11.4%
decrease from the second quarter of 2001 when sales were $249.3 million.
Excluding $7.9 million of sales attributable to branches that were closed, same
branch net sales decreased 8.5% or $20.6 million over the same period from the
prior year. This decrease is estimated to consist of $18.1 million for volume
decreases and $2.5 million attributable to deflation in the commodity wood
market as lumber prices declined 13% in the second quarter of 2002 compared to
the second quarter of 2001. Approximately $7.7 million of the volume decrease is
attributable to the impact of a new competitor on six branches in the Kansas
City, Missouri area. We expect this new competitor in our Kansas City markets to
have a continuing impact on sales for the reasonably foreseeable future.
Approximately $4.4 million of the volume decrease is attributable to pricing
pressures on exterior and interior doors and approximately $3.2 million is
attributable to lower housewrap sales resulting from the termination of our
distribution of Tyvek(R) and our transition to Typar(R), a competing housewrap
product. As we continue to transition to this new product, we may continue to
realize lower sales of housewrap on a comparative, year-over-year basis. Other
factors that contributed to the decrease in second quarter sales include a
continuing weak economy in the Northwest, where the unemployment rate is
currently the highest in the United States.
Gross profit decreased $11.9 million to $40.9 million in the second quarter of
2002 from $52.8 million in the same period from 2001 and as a percentage of
sales was 18.5% versus 21.2% for the quarters ending June 30, 2002 and 2001,
respectively. The decrease in gross profit percentage resulted from a shift in
product sales mix and in regional product mix, additional pricing pressures in
certain regions due to soft market conditions and increased competition in the
Kansas City area. We currently expect the impact of slower economic activity and
increased competition in the Kansas City area to continue at least into the
third quarter.
Operating expenses were $39.6 million in the second quarter of 2002 compared to
$41.0 million in the second quarter of 2001. The decrease is primarily due to
$1.9 million of cost reductions from closed branches, a $0.3 million decrease in
compensation and contract labor costs at ongoing facilities resulting from lower
headcount than the prior year, and $0.3 million of lower costs incurred for
system implementations. The decrease was partially offset by an increase in the
bad debt provision of $0.6 million and an increase in our auto liability
insurance reserves of $0.5 million.
Depreciation and amortization was $1.4 million in the second 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 June 30, 2001,
we amortized $0.6 million of goodwill.
Gains on disposal of assets were $0.2 million for the quarter ended June 30,
2002, for the sale of a previously closed facility. In the second quarter of
2001, gains on disposal of assets were $0.5 million for the sale of previously
closed facilities.
Net interest expense decreased to $2.4 million in the second quarter of 2002
from $2.6 million in the same period of 2001. Our average outstanding total debt
decreased $15.7 million compared to the same period of the prior year, reducing
our interest expense.
-14-
Unrealized loss on derivatives of $0.1 million was recorded in the second
quarter of 2002 and 2001. The net loss in 2002 related to a $0.1 million gain in
the fair value on two interest rate swaps that do not qualify as hedges for
accounting purposes that was offset by $0.2 million of expense amortized from
accumulated other comprehensive loss established upon the adoption of SFAS No.
133 in 2001. See Item 3, "Quantitative and Qualitative Disclosures About Market
Risk".
As a result of the foregoing factors, pretax loss was $2.4 million compared to
pretax income of $7.6 million in 2001.
Income taxes were provided at an effective rate of 38% for the quarters ended
June 30, 2002 and 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Net sales for the six months ended June 30, 2002 were $436.3 million, a 6.5%
decrease from the first six months of 2001 when sales were $466.8 million.
Excluding $14.3 million of sales attributable to branches that were closed, same
branch net sales decreased 3.6% or $16.2 million over the same period from the
prior year. The net sales decrease was negatively affected by having one less
shipping day in 2002 versus 2001, resulting in a reduction of approximately $3.3
million. Approximately $6.4 million of the volume decrease is attributable to
the impact of the new competitor in the Kansas City, Missouri area.
Approximately $4.2 million is attributable to lower housewrap sales resulting
from our transition to a new product and approximately $4.6 million is
attributable to pricing pressures on exterior and interior doors. Other
contributing factors include a continuing weak economy in the Northwest where
the unemployment rate is currently the highest in the United States. The
aforementioned factors do not exclude the impact of the lower number of shipping
days.
Gross profit decreased $14.9 million to $83.1 million in the first six months of
2002 from $98.0 million in the same period from 2001 and as a percentage of
sales was 19.0% versus 21.0% for the six months ending June 30, 2002 and 2001,
respectively. The decrease in gross profit percentage resulted from a change in
product sales mix, a shift in regional product mix, additional pricing pressures
in certain regions due to soft market conditions and increased competition in
the Kansas City area. Net door sales decreased as a percentage of total sales
while moulding, lumber and other commodity net sales increased as a percentage
of sales. Pricing pressures had a negative impact during the first half of 2002
on door margins, which have had historically higher margins than lumber and
other commodity products.
Operating expenses were $79.7 million in the first six months of 2002 compared
to $81.4 million in the first six months of 2001. The decrease is primarily due
to $3.9 million of cost reductions from closed branches. The decrease was
partially offset by increased compensation and contract labor costs at the
on-going facilities of $0.9 million, an increase of $0.4 million primarily due
to an increase in our auto liability insurance reserve and an increase in
expense 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 $2.9 million in the first six months of 2002,
which is $1.0 million lower than the same period in the prior year. The decrease
is due primarily to goodwill no longer being amortized in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets. For the six months ended June 30,
2001, we amortized $1.2 million of goodwill.
Gains on disposal of assets were $0.4 million for the six months ended June 30,
2002, for the sale of previously closed facilities. During the first six months
ended June 30, 2001, gains on disposal of assets were $0.5 million for the sale
of previously closed facilities.
Net interest expense decreased to $4.7 million in the first six months of 2002
from $5.1 million in the same period of 2001. Our average outstanding total debt
decreased $11.5 million compared to the same period of the prior year, reducing
our interest expense.
Unrealized gain on derivatives of $0.3 million was recorded in the first six
months of 2002 versus a $0.8 million loss a year ago. The gain related to a $0.7
million change in the fair value on two interest rate swaps that do not qualify
as hedges for accounting purposes was partially offset by $0.4 million of
expense amortized from accumulated other comprehensive loss established upon the
adoption of SFAS No. 133 in 2001. See Item 3, "Quantitative and Qualitative
Disclosures About Market Risk".
-15-
As a result of the foregoing factors, pretax loss was $3.5 million compared to
pretax income of $7.3 million in 2001.
Income taxes were provided at an effective rate of 38% for the six months ended
June 30, 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. However,
during the second quarter of 2002, we did not experience our normal increase in
working capital primarily as a result of slower than expected sales during the
quarter and an increase in our trade accounts payable which was offset by the
reduction of outstanding borrowings under our revolving credit facility.
We measure our working capital as the sum of net trade accounts receivable, net
FIFO inventories and trade accounts payable. At June 30, 2002 and 2001, and
December 31, 2001, our working capital was as follows:
June 30,
----------------------- December 31,
2002 2001 2001
------- ------ ------
Trade accounts receivable, net $ 82.8 $ 95.5 $ 74.0
FIFO inventories, net 88.9 94.5 78.0
Trade accounts payable (101.5) (79.5) (64.5)
------- ------- -----
Working capital, net 70.2 110.5 87.5
Working capital as a % of annualized quarterly sales 7.9% 10.8% 9.9%
Average inventory turns 6.4 6.7 6.9
In the first six months of 2002, changes in operating assets and liabilities
generated $14.2 million in cash from operating activities due primarily to
increases in trade accounts payable offset by increases in trade accounts
receivable and inventories. Changes in operating assets and liabilities in the
first six months of 2001 used $13.6 million in cash from operating activities
from increases in the same accounts. Inventory and accounts receivable levels at
the end of the second quarter increased less from year end levels in 2002 versus
2001 reflecting the lower sales volume in the current year. Increases in trade
accounts payable were offset by cash from financing activities and the repayment
of $14.9 million in borrowings outstanding under our revolving credit agreement.
Cash used in investing activities for the first six months of 2002 reflects $2.4
million of capital expenditures for normal operating activities. These
expenditures were offset by $1.1 million of proceeds on disposals of assets from
previously closed facilities. In 2001, we spent $1.6 million on capital
expenditures along with $1.2 million to purchase the assets from Monarch
Manufacturing, Inc. in Baltimore, Maryland and Hope Lumber and Supply
Corporation in Kansas City, Missouri. These expenditures were offset by $0.5
million of proceeds on disposals of assets.
Cash provided from and used in financing activities for both 2002 and 2001
primarily reflects the $14.9 million of repayments and $7.3 million in
borrowings, respectively, under our revolving credit facility.
At June 30, 2002, we had three interest rate swap agreements, which expire in
May 2003, having a total notional amount of principal of $80.0 million
outstanding. These swap agreements, in combination with our former revolving
credit facility, effectively provided for a fixed weighted average rate of 8.9%
on our outstanding revolving credit borrowings of $54.9 million at June 30,
2002.
-16-
In August 2002, we entered into a new, three-year, $150.0 million Senior
Secured Revolving Credit Facility, from which we repaid outstanding borrowings
under and terminated our former revolving credit facility as well as paid fees
in connection with the new facility. The new credit facility consists of a
$150.0 million revolving line of credit, including up to $10.0 million of
letters of credit, at a floating rate of either
(a) LIBOR plus from 200 to 300 basis points or
(b) the prime commercial lending rate of the agent (or, if greater, the
federal funds rate plus 0.5%) plus from 25 to 125 basis points,
in each case depending on our trailing average collateral availability. The
revolving credit borrowing base shall not exceed the sum of (a) up to 85% of
eligible domestic trade receivables and (b) up to the lesser of 65% of the cost
of eligible inventory or 85% of the appraised net liquidation value of eligible
inventory. We have agreed to pay a commitment fee in the range of 0.25% to 0.50%
per annum on the average daily unused amount of the revolving credit commitment.
Huttig and its domestic subsidiaries are co-borrowers under this facility, and
all of the borrowers' assets, except real property, collateralize borrowings
under the facility. Based on the financing of the new credit facility, we will
recognize a charge of $0.9 million to writeoff the remaining unamortized loan
fees related to the former credit facility.
The new credit facility agreement contains various covenants which, among other
things, limit our ability to incur indebtedness, incur liens, make certain types
of acquisitions, declare or pay dividends or make restricted payments,
consolidate, merge or sell assets. It also contains financial covenants tied to
our borrowing base. If the borrowing base exceeds our outstanding obligations to
the facility lenders by less than $25.0 million, we must maintain or meet a 1.25
to 1.0 minimum fixed charge ratio. As defined in the agreement, the ratio is
determined for a rolling 12-month period by dividing EBITDA plus cash rent
expense, less non-facility-financed capital expenditures and cash taxes, by cash
interest expense plus scheduled debt repayments plus cash rent expense for such
period. As defined in the agreement, EBITDA means the sum of
(a) net income,
(b) interest expense,
(c) income tax expense,
(d) depreciation,
(e) amortization,
(f) write-down of goodwill, and
(g) all cash and non-cash extraordinary expenses and losses,
less all cash and non-cash extraordinary income and gains during the period of
measurement. Also, we must not permit our revolving availability under the new
credit facility to fall below $10.0 million.
Our interest rate swap agreements, in combination with the new revolving credit
facility, effectively provide for a fixed weighted average rate of 7.15% plus
the applicable spread over LIBOR as determined by the amount of collateral
availability on $80.0 million of our outstanding revolving credit borrowings
(determined as of August 12, 2002).
As of August 12, 2002, the Company had $27.3 million of excess credit available
under the new credit facility.
We believe that cash generated from our operations and funds available under the
new credit facility will provide sufficient funds to meet our currently
anticipated short-term and long-term liquidity and capital expenditure
requirements.
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 six months of 2002, approximately $0.1 million was charged
against the reserve for inventory losses, $0.5 million for severance, and $0.7
million for facility and other shutdown costs. As of June 30, 2002 approximately
$1.1 million of the restructuring reserve remains, the components of which are
$0.5 million for
-17-
inventory, $0.3 million for severance and $0.3 million for facility and other
shutdown-related costs. We expect to finalize the restructuring activities
during the second half 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. The remaining balance was fully
utilized during 2001.
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.
We have completed the first step of the transitional impairment test. The
results of this first step indicate a potential impairment in our reporting unit
that sells directly to homebuilders. The second step of the impairment test is
currently underway, and any resulting impairment charge will be determined
during the third quarter. Such charge will be recorded as a cumulative effect of
an accounting change as of January 1, 2002.
Goodwill amortization for the six months ended June 30, 2001 was $1.2 million.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or 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.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. This statement rescinds, updates, clarifies and
simplifies existing accounting pronouncements. Among other things, the
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under SFAS No. 145, the
criteria in Accounting Principles Board (APB) No. 30 will now be used to
classify those gains and losses. The adoption of SFAS No. 145 is not expected
to have a material impact on our consolidated financial statements.
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. The impact of changes
in construction activity will vary depending on our market penetration per
housing start in different regions of the country.
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 and
in cooperation with the Montana Department of Environmental Quality ("DEQ"), and
are complying with a 1995 unilateral administrative order by DEQ to complete a
remedial investigation and feasibility study. 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
-18-
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, including
but not limited to statements regarding:
o our business strategy;
o the effect of known contingencies, including risks relating to pending
environmental and legal proceedings, on our financial position, cash
flow and results of operations;
o the future impact of the new competitor in our Kansas City markets,
our transition to a new housewrap product and slower economic activity
on our results of operations;
o our liquidity; and
o seasonal trends.
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:
o the strength of the national and local new residential construction and
home improvement and remodeling markets, which in turn depend on
factors such as
o interest rates,
o employment levels,
o availability of credit,
o prices of commodity wood products,
o consumer confidence and
o weather conditions,
o the level of competition in our industry,
o our relationships with suppliers of the products we distribute,
o costs of complying with environmental laws and regulations,
o our exposure to product liability claims,
o loss of key employees, and
o our ability to comply with availability requirements and financial
covenants under our revolving 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.
-19-
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 June 30, 2002 under our Former Credit
Agreement of $54.9 million. Also at June 30, 2002, we had three interest rate
swap agreements, which expire in May 2003, having a total notional principal
amount of $80.0 million. These swap agreements in combination with the terms of
our Former Credit Agreement, effectively provided a fixed weighted average rate
of 8.9% on $80.0 million of our outstanding borrowings. When actual borrowings
under the Former Credit Agreement were less than the notional amount of the
interest rate swaps, we incurred 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.
Our interest rate swap agreements, in combination with the New Credit Facility,
effectively provides for a fixed weighted average rate of 7.15% plus the
applicable spread over LIBOR as determined by the amount of collateral
availability (See Item 2 - "Liquidity and Capital Resources") on $80.0 million
of our outstanding revolving credit borrowings.
We have three interest rate swap agreements, which expire in May 2003, that
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 $3.3 million and shareholders' equity
includes $1.0 million, net of tax, which is recorded as accumulated other
comprehensive loss. Included in income for the six months ended June 30, 2002,
after profit from operations, is $0.3 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 an increase to earnings per share of $0.01 in the six month period ending
June 30, 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, which expires
in December 2002, 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 six months of 2002.
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.
-20-
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 and Part II, Item 1 of our Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 for a description of the following and
other legal proceedings.
In May 2002, we were named in an action filed in California state court by an
individual alleging that she has suffered personal injury as a result of
exposure to asbestos-containing products distributed by Huttig. Based on the
limited facts alleged and limited discovery to date, we believe that this
lawsuit also relates to products distributed by a business acquired by Rugby
Building Products and expect to seek indemnification for this lawsuit as
described below. In July 2002, we were named as a defendant, individually and as
a successor in interest to Rugby Building Products, Inc. and a business acquired
by Rugby in 1994, in another similar personal injury action. We are now one of
many defendants in three separate, pending actions filed in California state
court against manufacturers, building materials distributors and retailers, and
other defendants by individuals alleging that they have suffered such
asbestos-related personal injury. The plaintiffs in these cases seek unspecified
damages from Huttig.
We continue to pursue our previously reported lawsuit 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. Rugby Group has denied any obligation to defend or
indemnify us for any of these cases. 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.
-21-
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Shareholders on April 22, 2002. At the Annual
Meeting, shareholders elected the following directors for terms of office
expiring in 2005.
Director Votes For Votes Withheld
- -------- ---------- --------------
Alan S. J. Durant 16,344,237 473,742
R. S. Evans 16,542,131 275,848
Barry J. Kulpa 16,405,068 412,911
Pursuant to the terms of the Proxy Statement for the Annual Meeting, proxies
received were voted, unless authority was withheld, in favor of the election of
the three directors named above.
After the Annual Meeting, the term of office as a director of the Company of
each of the following directors continued: Dorsey R. Gardner, Delbert H. Tanner,
James L. L. Tullis, E. Thayer Bigelow, Jr., Richard S. Forte', and Peter L.
Young.
At the Annual Meeting of Shareholders, the following matters were also voted
upon:
o Approval of the Huttig Building Products, Inc. Amended and Restated 2001
Stock Incentive Plan
For 12,324,486
Against 557,486
Abstentions 949,399
Broker Non-Votes 2,986,608
o Approval of the selection of Deloitte & Touche LLP as independent auditors
for 2002
For 16,220,477
Against 548,026
Abstentions 49,476
Broker Non-Votes 0
-22-
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 as amended as of July 22, 2002.
4.1 Credit Agreement dated August 12, 2002 by and among the company, certain of its domestic subsidiaries,
JPMorgan Chase Bank as agent, and the lending institutions named therein.
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
(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.
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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.
------------------------------------------
Date: August 14, 2002 /s/ BARRY J. KULPA
------------------------------------------
Barry J. Kulpa
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: August 14, 2002 /s/ THOMAS S. MCHUGH
------------------------------------------
Thomas S. McHugh
Chief Financial Officer and Treasurer
(Principal Financial and 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 Form 10 filed with the Commission on September 21, 1999.)
3.2 Bylaws of the company as amended as of July 22, 2002.
4.1 Credit Agreement dated August 12, 2002 by and among the company, certain of its domestic
subsidiaries, JPMorgan Chase Bank as agent, and the lending institutions named therein.
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
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