HUTTIG BUILDING PRODUCTS INC - Quarter Report: 2003 June (Form 10-Q)

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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, 2003 Commission file number 1-14982

HUTTIG BUILDING PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

(314) 216-2600

(Registrant’s telephone number, including area code)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨     No x

    The number of shares of Common Stock outstanding on June 30, 2003 was 19,450,701 shares.

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PART I. FINANCIAL INFORMATION

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

(In Millions)

see notes to consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

(In Millions, Except Share and Per Share Data)

see notes to consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)

(In Millions, Except Per Share Amounts)

see notes to consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)

(In Millions)

see notes to consolidated financial statements

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HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)

(In Millions)

see notes to consolidated financial statements

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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. The financial information contained herein reflects, in the opinion of management, all adjustments necessary to present fairly, consisting of normal recurring items and 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. STOCK-BASED EMPLOYEE COMPENSATION

The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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3. DEBT

Debt consisted of the following at June 30, 2003 and December 31, 2002 (in millions):

The Company has a $150.0 million Senior Secured Revolving Credit Facility, as amended, (the “Credit Facility”) which expires in August 2005. 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 June 30, 2003, the Company had revolving credit borrowings of $89.6 million with $32.7 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. On May 30, 2003, the Credit Facility was amended to eliminate the $25.0 million month end collateral availability trigger for a minimum fixed charge coverage ratio requirement and replace it with a monthly minimum average collateral availability trigger. As amended, the Credit Facility provides that if, at the end of amy month, the Company’s daily average borrowing base during that month exceeds the Company’s daily average outstanding borrowing and pre-established reserve levels during that month by less than an average monthly amount as specified below, the Company must maintain or meet a minimum fixed charge coverage 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) as specified below. The minimum average collateral availability and minimum fixed charge coverage ratio will adjust over a period of time, as set forth in the table below.

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Also, the Company must not permit its daily revolving availability under the Credit Facility to fall below $10.0 million.

The Company’s borrowing base was in excess of the minimum daily average borrowing base and reserve levels by more than $10.0 million during the second quarter of 2003.

On May 5, 2003, the Company’s three interest rate swap agreements expired. These swap agreements, in conjunction with the Credit Facility, effectively provided for a fixed weighted average annual rate of 7.15% plus the applicable spread over LIBOR on up to $80.0 million of the Company’s outstanding revolving credit borrowings. Prior to the expiration of the swaps, when actual borrowings under the facility were less than the notional amount of the interest rate swaps, the Company incurred 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. The Company does not have any current plans to enter into any further interest rate swap agreements. As of May 6, 2003, all of the Company’s bank debt began accruing interest at a floating rate basis of between 200 and 300 basis points above LIBOR.

At June 30, 2003, the Company had letters of credit outstanding under the Credit Facility totaling $6.6 million, primarily for health and workers compensation insurance.

4. REPURCHASE OF COMMON STOCK

In October 2002, the Company’s Board of Directors authorized a $5.0 million stock repurchase program that expires in October 2003. At June 30, 2003, the Company had $4.2 million remaining under the current stock repurchase program.

5. DERIVATIVES AND INTEREST RATE RISK MANAGEMENT

Until they expired on May 5, 2003, the Company held three interest rate swap agreements with a total notional amount of $80.0 million, that were 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 were economic hedges and mitigated exposure to fluctuations in variable interest rates, did not qualify as hedges for accounting purposes. The remaining interest rate swap, with a notional amount of $37.5 million, was accounted for as a cash flow hedge.

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For the six months ended June 30, 2003, a total unrealized gain on derivatives of $0.7 million was recorded. This includes $0.8 million of an unrealized gain related to the change in fair value on the two interest rate swaps that did not qualify as hedges for accounting purposes which was partially offset by $0.1 million of expense that was amortized from accumulated other comprehensive loss. The interest rate swap that was 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 was 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 January 2003, the Company entered into a sale-leaseback arrangement. The Company sold technology and communications equipment purchased in 2002 with a net current value of $0.9 million and received proceeds of $1.0 million. A deferred gain on the sale was recorded in the amount of $0.1 million and will be recognized over the three-year lease term. The lease is being accounted for as an operating lease in accordance with SFAS No. 13, Accounting for Leases.

In June 2003, the Company entered into a $2.7 million four-year capital lease obligation to re-finance equipment under an operating lease. The equipment consisted of existing rolling stock, forklifts and product equipment. The Company’s fixed assets increased by $2.7 million. The transaction had no impact on cash or our borrowing availability.

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 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 that was used for the manufacture of wood windows. 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. The state agency has issued its final risk assessment of this property and the Company has submitted a work plan for conducting a feasibility study to evaluate alternatives for cleanup. When the DEQ approves the work plan, the Company will conduct the feasibility study, which will evaluate several potential remedies, including continuation or enhancement of remedial measures already in place and operating. 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 excess of those amounts already accrued. Until the DEQ selects a final remedy, however, the Company can give no assurance as to the scope or cost to us of the final remediation order.

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. There have been no contacts with any environmental agency regarding any

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potential site cleanup or remediation related to any current or former properties. The Company’s management currently believes that there are no material environmental liabilities at any of its distribution center locations.

7. GOODWILL AND INTANGIBLE ASSETS

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 of 2002, 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 Company has identified three reporting units, two of which had goodwill. The second step of the impairment test was performed during the third quarter of 2002 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. During the fourth quarter of 2002, the Company performed the annual test for impairment of the Company’s reporting units and there was no additional impairment of goodwill.

Changes to goodwill during 2002, including the pre-tax effect of adopting SFAS No. 142 are as follows (in millions):

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):

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The following table reflects the components of intangible assets that are being amortized, excluding goodwill (in millions):

Amortization expense on intangible assets was $0.2 million for each of the six months ended June 30, 2003 and 2002. The following table sets forth the estimated amortization expense on intangible assets for the years ending December 31, (in millions):

8. NEW ACCOUNTING PRONOUNCEMENTS

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. The Company adopted this statement effective January 1, 2003, and the adoption will impact the timing of exit or disposal activities reported by the Company on an on-going basis. The adoption did not have any effect on the Company’s consolidated financial condition or results of operations for the six months ended June 30, 2003.

In December 2002, the Financial Accounting Standards Board issued No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which is required to be adopted in fiscal years beginning after December 15, 2002. The Company has adopted SFAS No. 148, which provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as required by SFAS No. 123. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Company’s disclosure regarding the effects of stock-based compensation included in Note 2 is in compliance with SFAS No. 148.

Effective November 22, 2002, the Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF Issue No. 02-16, Accounting by a Customer, Including a Reseller, for Cash Consideration Received from a Vendor. This consensus requires that payments from a vendor be classified as a reduction to the price of the vendor’s goods and taken as a reduction to cost of sales unless the payments are (1) reimbursements for costs incurred to sell the product or (2) payments for assets or services provided. The consensus also requires that payments from a vendor be

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recognized as a reduction to cost of sales on a rational and systematic basis. This consensus became effective for the Company on January 1, 2003. The Company already recognizes vendor payments as a reduction to cost of sales, based on related purchase volume, and no change was required by the Company in adopting this consensus, thereby having no material impact on the Company’s consolidated financial position or results of operations.

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):

Stock options to purchase 904,900 shares and 1,332,300 shares for the three months ended June 30, 2003 and 2002, respectively, were not dilutive and therefore, were excluded from the computations of diluted income (loss) per share amounts. Stock options to purchase 1,304,900 shares and 1,332,300 shares for the six months ended June 30, 2003 and 2002, respectively, were not dilutive and therefore, were excluded from the computations of diluted income (loss) per share amounts.

10. MANAGEMENT CHANGES AND TERMS OF SEPARATION

Severance expense of $1.8 million was recorded in the first quarter of 2003 for payments, including future payments, to the Company’s former President and Chief Executive Officer and eleven other employees whose employment terminated during the quarter ended March 31, 2003. During the six months ended June 30, 2003, total severance payments of $0.5 million were paid. The present value of the remaining severance payments totaled $1.3 million at June 30, 2003, and are expected to be fully paid by March 31, 2005.

Michael A. Lupo entered into an employment agreement on May 1, 2003, with the Company pursuant to which he will continue to serve as the Company’s President and Chief Executive Officer and no longer serve on an interim basis. The agreement is for a term of two years and provides for an annual base salary of $500,000, bonus awards under the Company’s EVA Incentive Compensation Plan, living expenses of $50,000 per year, severance benefits in the event of a change of control of the Company and other customary employee benefits. Mr. Lupo also received a grant of options to purchase 400,000 shares of common stock at an exercise price of $2.30 per share, which was the average of the high and low sales prices of the common stock on the New York Stock Exchange on April 28, 2003, the date of grant. These options become exercisable for up to 200,000 shares on April 28, 2004, with the remaining shares on the earlier of (i) April 28, 2005; (ii) the date the contract is terminated by the Company; or (iii) upon the occurrence of a change in control as defined in the Company’s Stock Incentive Plan.

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

Overview

Huttig is one of the largest domestic distributors of building materials 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. Our wholesale distribution centers sell principally to building materials dealers, national buying groups, and home centers, who, in turn, supply the end-user. Our Builder Resource locations sell directly to professional builders and contractors. Our industrial branches primarily sell hardwood, industrial grade plywood and laminate products to industrial and manufactured housing builders. Our American Pine Products manufacturing facility, located in Prineville, Oregon, produces softwood mouldings. Approximately 36% and 35% of American Pine’s sales were to Huttig’s distribution centers in the six months ended June 30, 2003 and 2002, respectively.

The following table sets forth our sales, by product classification as a percentage of total sales, for the three and six months ended June 30, 2003 and 2002: