10-Q 1 c73043e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) 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 September 30, 2002 was 19,741,132 shares.
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001........................ 3-4 Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 (unaudited)............................................................. 5 Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2002 and 2001(unaudited).............................................................. 6 Consolidated Statements of Cash Flows for the nine months ended September 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......................... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 22 Item 4. Controls and Procedures....................................................................................... 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................................................................ 24 Item 6. Exhibits and Reports on Form 8-K.............................................................................. 25 Signatures ............................................................................................................ 26 Certifications ........................................................................................................ 26 Exhibit Index ......................................................................................................... 29
-2- HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Millions)
September 30, December 31, 2002 2001 ------------- ------------ (unaudited) ASSETS Current Assets: Cash and equivalents $ 5.6 $ 5.6 Trade accounts receivable, net 93.0 74.0 Inventories, net 94.5 70.1 Other current assets 6.7 9.5 --------- --------- Total current assets 199.8 159.2 --------- --------- Property, Plant and Equipment: Land 6.6 6.7 Building and improvements 34.4 35.0 Machinery and equipment 37.8 36.4 --------- --------- Gross property, plant and equipment 78.8 78.1 Less accumulated depreciation 36.1 36.6 --------- --------- Property, plant and equipment, net 42.7 41.5 --------- --------- Other Assets: Goodwill 13.6 34.3 Other 3.7 4.1 Deferred income taxes 12.2 7.2 --------- --------- Total other assets 29.5 45.6 --------- --------- Total Assets $ 272.0 $ 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)
September 30, December 31, 2002 2001 ------------- ------------ (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of debt $ 0.9 $ 0.9 Trade accounts payable 89.2 64.5 Deferred income taxes 2.2 1.3 Accrued compensation 6.3 7.3 Other accrued liabilities 9.3 13.5 ------- ------- Total current liabilities 107.9 87.5 ------- ------- Non-current Liabilities: Debt 90.5 72.7 Fair value of derivative instruments 2.6 4.5 Other non-current liabilities 2.3 2.5 ------- ------- Total non-current liabilities 95.4 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 September 30, 2002 - 19,741,132 shares issued; at December 31, 2001 - 19,645,893 shares issued) 0.2 0.2 Additional paid-in capital 33.4 33.4 Retained earnings 43.1 54.8 Unearned compensation - restricted stock (0.5) (0.4) Accumulated other comprehensive loss (0.8) (1.7) Less: Treasury shares at cost (1,155,013 shares at September 30, 2002; 1,250,252 shares at December 31, 2001) (6.7) (7.2) ------- ------- Total shareholders' equity 68.7 79.1 ------- ------- Total Liabilities and Shareholders' Equity $ 272.0 $ 246.3 ======= =======
see notes to consolidated financial statements -4- HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (In Millions, Except Per Share Amounts)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ------- ------- ------- ------- Net Sales $ 234.0 $ 256.7 $ 670.3 $ 723.5 Cost of Sales and Operating Expenses: Cost of sales 187.5 204.6 540.8 573.4 Operating expenses 37.1 43.1 116.8 124.5 Reversal of restructuring charges (0.3) -- (0.3) -- Depreciation and amortization 1.5 1.9 4.3 5.8 Gain on disposal of capital assets -- (0.4) (0.4) (0.9) ------- ------- ------- ------- Total cost of sales and operating expenses 225.8 249.2 661.2 702.8 ------- ------- ------- ------- Operating Profit 8.2 7.5 9.1 20.7 ------- ------- ------- ------- Other Income (Expense): Interest expense, net (2.4) (2.4) (7.1) (7.5) Write-off of unamortized loan fees (0.9) -- (0.9) -- Unrealized gain (loss) on derivatives 0.3 (1.3) 0.6 (2.1) ------- ------- ------- ------- Total other expense (3.0) (3.7) (7.4) (9.6) Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 5.2 3.8 1.7 11.1 Provision for Income Taxes 2.0 1.5 0.6 4.2 ------- ------- ------- ------- Net Income Before Cumulative Effect of a Change in Accounting Principle 3.2 2.3 1.1 6.9 Cumulative Effect of a Change in Accounting Principle (Net of $7.9 Million of Taxes) -- -- (12.8) -- ------- ------- ------- ------- Net Income (Loss) $ 3.2 $ 2.3 $ (11.7) $ 6.9 ======= ======= ======= ======= Basic income (loss) per share: Net income before cumulative effect of a change in accounting principle $ 0.16 $ 0.11 $ 0.05 $ 0.33 Cumulative effect of a change in accounting principle (net of taxes) -- -- (0.64) -- ------- ------- ------- ------- Net income (loss) per basic share $ 0.16 $ 0.11 $ (0.59) $ 0.33 ======= ======= ======= ======= Weighted Average Basic Shares Outstanding 19.7 20.4 19.7 20.6 Diluted income (loss) per share: Net income before cumulative effect of a change in accounting principle $ 0.16 $ 0.11 $ 0.05 $ 0.33 Cumulative effect of a change in accounting principle (net of taxes) -- -- (0.64) -- ------- ------- ------- ------- Net income (loss) per diluted share $ 0.16 $ 0.11 $ (0.59) $ 0.33 ======= ======= ======= ======= Weighted Average Diluted Shares Outstanding 19.7 20.6 19.8 20.6
see notes to consolidated financial statements -5- HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 income 6.9 FMV adjustment of derivatives, net of tax ------- Comprehensive income (loss) 6.9 Restricted stock issued, net of amortization expense 0.2 (0.1) Treasury stock purchases ---------- --------- ------- ----------- Balance at September 30, 2001 $ 0.2 $ 33.4 $ 56.0 $ (0.5) ========== ========= ======= =========== Balance at January 1, 2002 $ 0.2 $ 33.4 $ 54.8 $ (0.4) Net loss (11.7) FMV adjustment of derivatives, net of tax ------- Comprehensive (loss) income (11.7) Restricted stock issued, net of amortization expense 0.1 (0.1) Stock options exercised (0.1) Treasury stock purchases ---------- --------- ------- ----------- Balance at September 30, 2002 $ 0.2 $ 33.4 $ 43.1 $ (0.5) ========== ========= ======= =========== Accumulated Other Treasury Total Comprehensive Shares, Shareholders' Loss at Cost Equity ------------- -------- ------------- Balance at January 1, 2001 $ -- $ (1.1) $ 81.0 Net income 6.9 FMV adjustment of derivatives, net of tax (2.1) (2.1) ---------- ----------- Comprehensive income (loss) (2.1) 4.8 Restricted stock issued, net of amortization expense 0.6 0.7 Treasury stock purchases (6.7) (6.7) ---------- -------- ----------- Balance at September 30, 2001 $ (2.1) $ (7.2) $ 79.8 ========== ======== =========== Balance at January 1, 2002 $ (1.7) $ (7.2) $ 79.1 Net loss (11.7) FMV adjustment of derivatives, net of tax 0.9 0.9 ---------- ----------- Comprehensive (loss) income 0.9 (10.8) Restricted stock issued, net of amortization expense 0.2 0.2 Stock options exercised 0.6 0.5 Treasury stock purchases (0.3) (0.3) ---------- -------- ----------- Balance at September 30, 2002 $ (0.8) $ (6.7) $ 68.7 ========== ======== ===========
see notes to consolidated financial statements -6- HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (In Millions)
Nine Months Ended September 30, 2002 2001 ------- ------- Cash Flows From Operating Activities: Net (loss) income $ (11.7) $ 6.9 Cumulative effect of a change in accounting principle (net of tax) 12.8 -- ------- ------- Net income before cumulative effect of a change in accounting principle 1.1 6.9 Gain on disposal of capital assets (0.4) (0.9) Depreciation and amortization 5.3 6.8 Deferred income taxes 3.0 3.1 Unrealized (gain) loss on derivatives, net (0.5) 2.1 Write-off of unamortized loan fees 0.9 -- Accrued postretirement benefits 0.1 (0.4) Changes in operating assets and liabilities (exclusive of acquisitions): Trade accounts receivable (19.0) (22.7) Inventories (24.4) (8.3) Other current assets 2.8 1.2 Trade accounts payable 24.7 21.8 Accrued liabilities (5.2) (3.8) Other (0.2) (1.2) ------- ------- Total cash from operating activities (11.8) 4.6 ------- ------- Cash Flows From Investing Activities: Capital expenditures (6.2) (2.7) Proceeds from disposition of capital assets 1.4 0.9 Cash used for acquisitions -- (1.2) ------- ------- Total cash from investing activities (4.8) (3.0) ------- ------- Cash Flows From Financing Activities: Repayment of long-term debt (0.7) (0.2) (Repayment) borrowing of Former Credit Agreement, net (69.8) 8.3 Borrowing on New Credit Facility, net 88.3 -- Debt issuance costs (1.4) -- Proceeds from exercise of stock options 0.5 -- Purchase of treasury stock (0.3) (6.7) ------- ------- Total cash from financing activities 16.6 1.4 ------- ------- Net Increase in Cash and Equivalents -- 3.0 Cash and Equivalents, Beginning of Period 5.6 3.6 ------- ------- Cash and Equivalents, End of Period $ 5.6 $ 6.6 ======= ======= Supplemental Disclosure of Cash Flow Information: Interest paid $ 6.2 $ 6.9 ======= ======= Income tax refunds $ (0.4) $ (2.6) ======= =======
see notes to consolidated financial statements -7- HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, operating 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 nine months of 2002, approximately $0.5 million was charged against the reserve for inventory losses, $0.6 million for severance, and $0.6 million for facility and other shutdown costs. During the first six months of 2002, the Company completed the closure of three facilities. During the third quarter, management determined not to close two branches which had originally been planned for closure. Consequently, the Company reversed $0.3 million of the restructuring reserve related to these two branches, the components of which are $0.1 million for severance and $0.2 million for facility and other shut-down related costs. As of September 30, 2002 approximately $0.4 million of the restructuring reserve remains, which includes $0.1 million for inventory, $0.1 million for severance and $0.2 million for facility and other shutdown-related costs. The Company expects to finalize the remaining restructuring activities during the fourth quarter 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 September 30, 2002 and December 31, 2001 (in millions):
September 30, December 31, 2002 2001 ------------- ------------ Revolving Credit Agreement $ 88.3 $ 69.8 Capital lease obligations 3.1 3.8 ------ ------ Total debt 91.4 73.6 Less: current portion 0.9 0.9 ------ ------ Long-term debt $ 90.5 $ 72.7 ====== ======
In August 2002, the Company entered into a new, three-year, $150.0 million Senior Secured Revolving Credit Facility (the "Credit Facility") and repaid all outstanding borrowings under and terminated the Company's former revolving credit facility. The Credit Facility consists of a revolving line of credit ("Revolving Credit") that provides financing of up to $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 the Credit Facility. As of September 30, 2002, the Company had revolving credit borrowings of $88.3 million with $37.5 million of excess credit available under the Credit Facility. Provisions of the 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 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 actual outstanding borrowing and pre-established reserve levels by less than $25.0 million, the Company must maintain or meet a 1.25 to 1.0 minimum fixed charge ratio (defined as (a) EBITDA - as defined in the Credit Facility agreement - less capital expenditures less cash taxes plus cash rent expense divided by (b) cash interest expense plus scheduled debt repayments plus cash rent expense). Also, the Company must not permit its revolving availability under the Credit Facility to drop below $10.0 million. As a result of entering into the Credit Facility, the Company capitalized $1.4 million of debt issuance costs that are being amortized over the life of the facility. In addition, $0.9 million of unamortized costs associated with the previous facility were written off and included as a component of other expense on the statement of operations. At September 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 Credit Facility at September 30, 2002, 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 the Company's outstanding revolving credit borrowings. When actual borrowings under the facility 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, multiplied by the difference between the fixed rate on the interest rate swap agreement and the 90-day LIBOR rate. -9- 4. REPURCHASE OF COMMON STOCK In October 2002, the Company's Board of Directors authorized a new $5.0 million stock repurchase program that expires in October 2003. Under the prior repurchase program, which expired by its terms in August 2002, the Company repurchased approximately 1.1 million shares of common stock for an aggregate purchase price of approximately $6.7 million. 5. 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 nine months ended September 30, 2002, a total unrealized gain on derivatives of $0.6 million was recorded. This includes $1.0 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 which was partially offset by $0.4 million of expense that was amortized from accumulated other comprehensive loss. 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. 6. COMMITMENTS AND CONTINGENCIES In March 2002, the Company agreed to settle one of three asbestos-related product liability lawsuits then pending against it and recorded $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, in one of the suits, 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. In September 2002, the Company was dismissed from two of the three remaining lawsuits relating to exposure to asbestos contained in products allegedly distributed by Huttig as successor-in-interest to Rugby Building Products, Inc. In November 2002, plaintiffs' counsel in the remaining asbestos-related lawsuit agreed to dismiss the Company from that suit. In April 2002, the Company 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 breached their contractual obligations to indemnify and defend Huttig against asbestos-related liabilities and claims arising out of the business that was acquired by Rugby Building Products, Inc. in 1994. There can be no assurance at this time that Huttig will recover any of its costs related to past or future asbestos-related 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. The Company is subject to federal, state and local environmental protection laws and regulations. The Company's management believes the Company is in compliance, or is taking action aimed at assuring compliance, with applicable environmental protection laws and regulations. However, there can be no assurance that future -10- environmental liabilities will not have a material adverse effect on the consolidated financial condition or results of operations. The Company has been identified as a potentially responsible party in connection with the clean up of contamination at a formerly owned property in Montana. The Company is voluntarily remediating this property under the oversight of and in cooperation with the Montana Department of Environmental Quality ("DEQ") and is complying with a 1995 unilateral administrative order of the DEQ to complete a remedial investigation and feasibility study. When the state agency issues its final risk assessment of this property, the Company will conduct a feasibility study to evaluate alternatives for cleanup, including continuation of remediation measures already in place. The DEQ then will select a final remedy, publish a record of decision and negotiate with the Company for an administrative order of consent on the implementation of the final remedy. The Company's management currently believes that this process may take several more years to complete and intends to continue monitoring and remediating the site, evaluating cleanup alternatives and reporting regularly to the DEQ during this interim period. Based on experience to date in remediating this site, management of the Company does not believe that the scope of remediation that the DEQ ultimately determines will have a materially adverse effect on its results of operations or financial condition. In addition, some of the Company's current and former distribution centers are located in areas of current or former industrial activity where environmental contamination may have occurred, and for which the Company, among others, could be held responsible. The Company's management currently believes that there are no material environmental liabilities at any of its distribution center locations. 7. GOODWILL 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. SFAS No. 142 prescribes a two-step process for impairment testing of goodwill. In the second quarter, the Company completed the first step of the transitional impairment test and the results indicated a potential impairment in the Company's reporting unit that sells directly to homebuilders. The second step of the impairment test was performed during the third quarter and, based on discounted cash flow models, the carrying value of the reporting unit that sells directly to homebuilders exceeded its business enterprise value. An after-tax impairment charge of $12.8 million was recorded effective January 1, 2002, as a cumulative effect of a change in accounting principle based on the change in criteria for measuring impairment from an undiscounted to discounted cash flow method. Changes to goodwill during the nine months ended September 30, 2002, including the pre-tax effect of adopting SFAS No. 142 are as follows (in millions): Balance at January 1, 2002, net of accumulated amortization $ 34.3 Pre-tax write-off of goodwill recognized in cumulative effect adjustment 20.7 ------ Balance at September 30, 2002, net of accumulated amortization $ 13.6 ======
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill as of January 1, 2002. The following table presents the pro forma quarterly net income of the Company excluding the effects of goodwill amortization (in millions, except per share amounts): -11-
Three Months Ended September 30, Nine Months Ended September 30, 2002 2001 2002 2001 ------- ------- ------- ------- Net income (loss): Net income before cumulative effect of a change in accounting principle $ 3.2 $ 2.3 $ 1.1 $ 6.9 Cumulative effect of a change in accounting principle (net of tax) -- -- (12.8) -- ------- ------- ------- ------- Reported net income (loss) 3.2 2.3 (11.7) 6.9 Goodwill amortization (net of tax) -- 0.4 -- 1.1 ------- ------- ------- ------- Adjusted net income (loss) $ 3.2 $ 2.7 $ (11.7) $ 8.0 ======= ======= ======= ======= Basic income (loss) per share: Net income before cumulative effect of a change in accounting principle $ 0.16 $ 0.11 $ 0.05 $ 0.33 Cumulative effect of a change in accounting principle (net of tax) -- -- (0.64) -- ------- ------- ------- ------- Reported net income (loss) 0.16 0.11 (0.59) 0.33 Goodwill amortization (net of tax) -- 0.02 -- 0.05 ------- ------- ------- ------- Adjusted net income (loss) $ 0.16 $ 0.13 $ (0.59) $ 0.38 ======= ======= ======= ======= Diluted income (loss) per share: Net income before cumulative effect of a change in accounting principle $ 0.16 $ 0.11 $ 0.05 $ 0.33 Cumulative effect of a change in accounting principle (net of tax) -- -- (0.64) -- ------- ------- ------- ------- Reported net income (loss) 0.16 0.11 (0.59) 0.33 Goodwill amortization (net of tax) -- 0.02 -- 0.05 ------- ------- ------- ------- Adjusted net income (loss) $ 0.16 $ 0.13 $ (0.59) $ 0.38 ======= ======= ======= =======
The following table reflects the components of intangible assets that are being amortized, excluding goodwill (in millions):
September 30, 2002 December 31, 2001 ---------------------------- ----------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization -------- ------------ -------- ------------ Amortizable intangible assets: Non-compete agreements $ 3.5 $ 3.1 $ 3.5 $ 2.8 Trademarks 1.4 0.4 1.4 0.4 ------ ------ ------ ------ Total $ 4.9 $ 3.5 $ 4.9 $ 3.2 ====== ====== ====== ======
Amortization expense on intangible assets was $0.3 million and $0.4 million for the nine months ended September 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
-12- 8. NEW ACCOUNTING PRONOUNCEMENTS 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 effective January 1, 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 Company has adopted SFAS No. 145, and therefore separately recorded the write-off of unamortized loan fees associated with its previous credit facility as a component of other income (expense) in the third quarter. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this statement is required for exit or disposal activities initiated after December 31, 2002. Previously issued financials statements will not be restated. This Statement will impact the timing of exit or disposal activities reported by the Company after adoption. 9. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of net income (loss) per basic and diluted share (net income (loss) amounts in millions, share amounts in thousands, per share amounts in dollars):
Three Months Ended September 30, Nine Months Ended September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income (loss) (numerator) $ 3.2 $ 2.3 $ (11.7) $ 6.9 Weighted average number of basic shares outstanding (denominator) 19,741 20,394 19,719 20,566 ---------- ---------- ---------- ---------- Net income (loss) per basic share $ 0.16 $ 0.11 $ (0.59) $ 0.33 ========== ========== ========== ========== Weighted average number of basic shares outstanding 19,741 20,394 19,719 20,566 Common stock equivalents for diluted common shares outstanding -- 174 104 73 ---------- ---------- ---------- ---------- Weighted average number of diluted shares outstanding (denominator) 19,741 20,568 19,823 20,639 ---------- ---------- ---------- ---------- Net income (loss) per diluted share $ 0.16 $ 0.11 $ (0.59) $ 0.33 ========== ========== ========== ==========
-13- 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 56 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 nine months ended September 30, 2002. The following table sets forth our sales, by product classification as a percentage of total sales, for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended September 30, Nine Months Ended September 30, 2002 2001 2002 2001 ------ ------ ------ ------ Doors 36% 33% 36% 35% Millwork(1) 18% 20% 19% 20% Wood Products(2) 18% 20% 19% 19% Weatherization and Metal Products(3) 18% 18% 16% 17% General Building Products(4) 10% 9% 10% 9% ------ ------ ------ ------ Total Net Product Sales 100% 100% 100% 100%
(1) Millwork includes windows, mouldings, frames and stair products. (2) Wood products include panels, lumber and engineered wood products. (3) Weatherization and metal products include roofing, connectors and fasteners, siding, housewrap and insulation. (4) General building products include decking, drywall and other miscellaneous building products. 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 of America, 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 -14- 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. 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 SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 Net sales for the three months ended September 30, 2002 were $234.0 million, an 8.8% decrease from the third quarter of 2001 when sales were $256.7 million. Excluding $6.2 million of sales attributable to branches that were closed, same branch net sales decreased 6.6%, or $16.5 million, over the same period from the prior year. Of this decrease, approximately $15.1 million represents volume decreases and $1.4 million is attributable to deflation in the commodity wood market as lumber prices declined in the third quarter of 2002 compared to the third quarter of 2001. Approximately $7.9 million of the volume decrease is attributable to the impact of a new competitor 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 $4.0 million of the volume decrease 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. Also, international sales decreased $1.5 million compared to the third quarter of 2001 due to the weak economy in the Far East. Other factors that contributed to the decrease in third quarter sales include a continuing weak economy and poor manufactured housing market in the Northwest. The overall net sales volume decrease was offset by having one additional shipping day in 2002 versus 2001, resulting in an increase of approximately $3.7 million. The aforementioned factors contributing to the overall volume decrease include the impact of the additional shipping day. Gross profit decreased $5.6 million to $46.5 million in the third quarter of 2002 from $52.1 million in the same period of 2001. The change in gross profit attributable to branches that were closed was $1.2 million. Same branch gross profit as a percentage of net sales was 19.9% versus 20.3% for the quarters ended September 30, 2002 and 2001, respectively. The decrease in gross profit percentage resulted from a shift in regional product mix, 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 to continue at least into the reasonably foreseeable future. Operating expenses were $37.1 million in the third quarter of 2002 compared to $43.1 million in the third quarter of 2001. The $6.0 million decrease includes $1.6 million of cost reductions from closed branches. The remaining decrease resulted from a $2.3 million decrease in compensation and contract labor costs at ongoing facilities due to lower headcount than the prior year, a $1.2 million decrease in supplies and other non-personnel expenses from expense reduction initiatives, a decrease in the bad debt expense of $0.6 million, and $0.4 million of costs incurred in 2001 for system implementations. The decrease was partially offset by an increase in our vehicle liability insurance reserves of $0.3 million. We reversed $0.3 million of restructuring charges in the third quarter of 2002 for branches originally planned to be closed that will now remain open. See "Restructuring Activities", below, for further discussion. Depreciation and amortization was $1.5 million in the third quarter of 2002, which is $0.4 million lower than the same period in the prior year. The decrease is primarily due to goodwill no longer being amortized, in accordance -15- with SFAS No. 142, Goodwill and Other Intangible Assets. For the three months ended September 30, 2001, we amortized $0.6 million of goodwill. There were no gains on disposal of assets for the quarter ended September 30, 2002. In the third quarter of 2001, gains on disposal of assets were $0.4 million for the sale of previously closed facilities. Net interest expense was $2.4 million in both the third quarter of 2002 and 2001. Our average outstanding total debt decreased $2.8 million compared to the same period of the prior year, which was offset by a slightly higher effective interest rate on our outstanding debt. During the third quarter of 2002, we recorded a charge of $0.9 million to write off the remaining unamortized loan fees related to our previous credit facility, which we replaced in August 2002. Unrealized gain on derivatives of $0.3 million was recorded in the third quarter of 2002 as compared to an unrealized loss of $1.3 million in the third quarter of 2001. The net gain in 2002 related to a $0.3 million gain in the fair value on two interest rate swaps that do not qualify as hedges for accounting purposes. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk." As a result of the foregoing factors, pretax income increased $1.4 million to $5.2 million for the three months ended September 30, 2002 as compared to pretax income of $3.8 million for the same period in 2001. Income taxes were provided at an effective rate of 38% for the quarters ended September 30, 2002 and 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Net sales for the nine months ended September 30, 2002 were $670.3 million, a 7.4% decrease from the first nine months of 2001 when sales were $723.5 million. Excluding $20.4 million of sales attributable to branches that were closed, same branch net sales decreased 4.7% or $32.8 million over the same period from the prior year. Of this decrease, $31.0 million represents volume decreases and $1.8 million is attributable to deflation in the commodity wood market. Approximately $15.9 million of the volume decrease is attributable to the impact of the new competitor in the Kansas City, Missouri area. Approximately $7.8 million is attributable to lower housewrap sales resulting from our transition to a new product. Also, international sales decreased $3.1 million compared to the third quarter of 2001 due to the weak economy in the Far East. Other contributing factors include a continuing weak economy and poor manufactured housing market in the Northwest. Gross profit decreased $20.6 million to $129.5 million in the first nine months of 2002 from $150.1 million in the same period from 2001. The change in gross profit attributable to branches that were closed was $4.5 million. Same branch gross profit as a percentage of net sales was 19.2% versus 20.7% for the nine months ended September 30, 2002 and 2001, respectively. The decrease in gross profit percentage resulted from a shift in regional product mix, pricing pressures in certain regions due to soft market conditions and increased competition in the Kansas City area. Operating expenses were $116.8 million in the first nine months of 2002 compared to $124.5 million in the first nine months of 2001. The decrease represents $5.5 million of cost reductions from closed branches. The remaining decrease is primarily attributable to a $1.7 million decrease in supplies and maintenance costs at ongoing facilities and $1.4 million of lower labor related costs resulting from lower headcount than the prior year. Additionally, we incurred $0.7 million of lower system implementation costs in 2002 as compared to 2001. These decreases were partially offset by an increase of $0.9 million primarily from an increase in our vehicle liability insurance reserve and expenses of $0.9 million for costs relating to the settlement and legal expenses of an asbestos-related product liability lawsuit. We reversed $0.3 million or restructuring charges in the third quarter of 2002 for branches originally planned to be closed that will now remain open. See "Restructuring Activities" for further discussion. Depreciation and amortization was $4.3 million in the first nine months of 2002, which is $1.5 million lower than the same period in the prior year. The decrease is due primarily to goodwill no longer being amortized, in -16- accordance with SFAS No. 142, Goodwill and Other Intangible Assets. For the nine months ended September 30, 2001, we amortized $1.8 million of goodwill. Gains on disposal of assets were $0.4 million for the nine months ended September 30, 2002, for the sale of previously closed facilities. During the first nine months ended September 30, 2001, gains on disposal of assets were $0.9 million for the sale of previously closed facilities. Net interest expense decreased to $7.1 million in the first nine months of 2002 from $7.5 million in the same period of 2001. Our average outstanding total debt decreased $9.0 million compared to the same period of the prior year, reducing our interest expense. The nine months ended September 30, 2002, includes a charge of $0.9 million recorded in the third quarter to write off the remaining unamortized loan fees related to our previous credit facility. Unrealized gain on derivatives of $0.6 million was recorded in the first nine months of 2002 versus a $2.1 million loss a year ago. The gain related to a $1.0 million change in the fair value on two interest rate swaps that do not qualify as hedges for accounting purposes that 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." As a result of the foregoing factors, pretax income before cumulative effect of a change in accounting principle decreased $9.4 million to $1.7 million for the nine months ended September 30, 2002 as compared to pretax income of $11.1 million for the same period in 2001. Cumulative effect of a change in accounting principle was $12.8 million for the nine months ended September 30, 2002. See "New Accounting Pronouncements", below, for further discussion. Income taxes were provided at an effective rate of 38% for the nine months ended September 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. We measure our working capital as the sum of net trade accounts receivable, net FIFO inventories and trade accounts payable. At September 30, 2002 and 2001, and December 31, 2001, our working capital was as follows:
September 30, ------------------------------- December 31, 2002 2001 2001 ------- ------- ------------ Trade accounts receivable, net $ 93.0 $ 99.1 $ 74.0 FIFO inventories, net 102.0 91.4 78.0 Trade accounts payable (89.2) (81.1) (64.5) ------- ------- ------- Working capital, net 105.8 109.4 87.5 Working capital as a % of annualized quarterly net sales 11.3% 10.7% 9.9% Days Sales Outstanding 37.7 38.9 36.4 Average inventory turns 6.4 6.9 6.9
-17- In the first nine months of 2002, changes in operating assets and liabilities used $21.3 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 nine months of 2001 used $13.0 million in cash from operating activities from increases in the same accounts. The increase in inventory for the nine month period ended September 30, 2002 over the same period in 2001 is due primarily to support an anticipated increase in customer demand for doors in the fourth quarter. Cash used in investing activities for the first nine months of 2002 reflects $4.7 million of capital expenditures for normal operating activities and $1.5 million for a warehouse logistics system implementation at selected branches. These expenditures were offset by $1.4 million of proceeds on disposals of assets from previously closed facilities. In 2001, we spent $2.7 million on capital expenditures along with $1.2 million to purchase assets from Monarch Manufacturing, Inc. in Baltimore, Maryland and Hope Lumber and Supply Corporation in Kansas City, Missouri. These expenditures were offset by $0.9 million of proceeds on disposals of assets during the first nine months of 2001. Cash provided from financing activities for both 2002 and 2001 primarily reflect the $18.5 million and $8.3 million in net borrowings, respectively, under our former and current revolving credit facilities. 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. The credit facility consists of a revolving line of credit that provides financing of up to $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 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 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 actual outstanding borrowing and pre-established reserve levels 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 credit 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. -18- As of September 30, 2002, the Company had revolving credit borrowings of $88.3 million with $37.5 million of excess credit available under the new credit facility. At September 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 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. When actual borrowings under the facility 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 believe that cash generated from our operations and funds available under our new credit facility will provide sufficient funds to meet our currently anticipated short-term and long-term liquidity and capital expenditure requirements. STOCK REPURCHASE PROGRAM In October 2002, our board of directors authorized a new $5.0 million stock repurchase program that expires in October 2003. Under our prior repurchase program, which expired by its terms in August 2002, we repurchased approximately 1.1 million shares of our common stock for an aggregate purchase price of approximately $6.7 million. 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 nine months of 2002, approximately $0.5 million was charged against the reserve for inventory losses, $0.6 million for severance, and $0.6 million for facility and other shutdown costs. During the first six months of 2002, we completed the closure of three facilities. During the third quarter, management determined not to close two branches which had originally been planned for closure. Consequently, we reversed $0.3 million of the restructuring reserve related to these two branches, the components of which are $0.1 million for severance and $0.2 million for facility and other shut-down related costs. As of September 30, 2002 approximately $0.4 million of the restructuring reserve remains, which includes $0.1 million for inventory, $0.1 million for severance and $0.2 million for facility and other shutdown-related costs. We expect to finalize the remaining restructuring activities during the fourth quarter of 2002. During the fourth quarter of 2000, we recorded $2.1 million as a restructuring charge related to the termination of our 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. SFAS No. 142 prescribes a two-step process for impairment testing of goodwill. We completed the first step of the transitional impairment test and the results indicated a potential impairment in our reporting unit that sells directly to homebuilders. The second step of the impairment test was performed and based on discounted cash flow models, the carrying value of the reporting unit that sells directly to homebuilders exceeded its business enterprise value. An -19- after tax impairment charge of $12.8 million was recorded effective January 1, 2002 as a cumulative effect of a change in accounting principle based on the change in criteria for measuring impairment from an undiscounted to discounted cash flow method. Goodwill amortization for the nine months ended September 30, 2001 was $1.8 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 effective January 1, 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. We adopted SFAS No. 145, and therefore separately recorded the write-off of unamortized loan fees associated with our previous credit facility as a component of other income (expense) in the third quarter. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required for exit or disposal activities initiated after December 31, 2002. Previously issued financial statements will not be restated. This Statement will impact the timing of exit or disposal activities reported by us after adoption. 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 operating 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 of the 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 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 -20- 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 condition, 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 cyclical and 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 -- interest rates, -- employment levels, -- availability of credit, -- prices of commodity wood products, -- consumer confidence and -- 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 the 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. -21- ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to market risk as it relates to effects of changes in interest rates. We had debt outstanding at September 30, 2002 under our New Credit Facility of $88.3 million. Also at September 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 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. When actual borrowings under the credit facility 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 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 $2.6 million and shareholders' equity includes $0.8 million, net of tax, which is recorded as accumulated other comprehensive loss. Included in income for the nine months ended September 30, 2002, after profit from operations, is $0.6 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 $0.02 in the nine month period ending September 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 nine 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. -22- ITEM 4 -- CONTROLS AND PROCEDURES Within the 90 days prior to the date of filing this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Huttig (including its consolidated subsidiaries) required to be included in our periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies or material weaknesses. -23- 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 Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002 for a description of the following and other legal proceedings. In September 2002, we were dismissed from two of three previously reported, then pending lawsuits relating to exposure to asbestos contained in products allegedly distributed by Huttig as successor-in-interest to Rugby Building Products, Inc. In November 2002, plaintiffs' counsel in our remaining asbestos-related lawsuit agreed to dismiss us from that suit. 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 lawsuit, settle our 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. There can be no assurance at this time that we will recover any costs relating to these past or potential future 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. -24- 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 (Incorporated by reference to Exhibit 3.2 to the Form 10-Q filed with the Commission on August 14, 2002). 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 None. -25- 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: November 13, 2002 /s/ Barry J. Kulpa ----------------------------------------------- Barry J. Kulpa President, Chief Executive Officer And Director (Principal Executive Officer) Date: November 13, 2002 /s/ Thomas S. McHugh ----------------------------------------------- Thomas S. McHugh Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Barry J. Kulpa, President and Chief Executive Officer of Huttig Building Products, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Huttig Building Products, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; -26- 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Barry J. Kulpa ----------------------------------------- Barry J. Kulpa President and Chief Executive Officer HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas S. McHugh, Vice President - Finance and Chief Financial Officer of Huttig Building Products, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Huttig Building Products, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): -27- (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Thomas S. McHugh ----------------------------------------------- Thomas S. McHugh Vice President - Finance and Chief Financial Officer -28- 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 (Incorporated by reference to Exhibit 3.2 to the Form 10-Q filed with the Commission on August 14, 2002). 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.