es

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

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 or organization)

 

(I.R.S. Employer

Identification No.)

555 Maryville University Drive Suite 400

St. Louis, Missouri

 

63141

(Address of principal executive offices)

 

(Zip code)

(314) 216-2600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common, par value $0.01 per share

HBP

The NASDAQ Stock Market LLC

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of Common Stock outstanding on March 31, 2020 was 26,894,681 shares.

 

 

 

 


 

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

  

 

 

 

 

 

 

Item 1.

  

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended  March 31, 2020 and 2019 (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020, December 31, 2019 and March 31, 2019 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

20

 

 

 

 

 

Item 1A.

 

Risk Factors

 

20

 

 

 

 

 

Item 6.

 

Exhibits

 

22

 

 

 

 

 

Signatures

 

23

 

 

 

 

 

 

 

 

 

 

 

2


PART I FINANCIAL INFORMATION

 

ITEM 1 — FINANCIAL STATEMENTS

HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

203.0

 

 

$

197.4

 

Cost of sales

 

 

162.1

 

 

 

160.0

 

Gross margin

 

 

40.9

 

 

 

37.4

 

Operating expenses

 

 

39.0

 

 

 

39.6

 

Goodwill impairment

 

 

9.5

 

 

 

 

Operating loss

 

 

(7.6

)

 

 

(2.2

)

Interest expense, net

 

 

1.3

 

 

 

1.7

 

Loss from operations before income taxes

 

 

(8.9

)

 

 

(3.9

)

Income tax benefit

 

 

 

 

 

(0.7

)

Loss from continuing operations

 

 

(8.9

)

 

 

(3.2

)

Loss from discontinued operations, net of taxes

 

 

 

 

 

 

Net loss

 

$

(8.9

)

 

$

(3.2

)

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Loss from continuing operations per share- basic and diluted

 

$

(0.34

)

 

$

(0.13

)

Loss from discontinued operations per share- basic and diluted

 

 

 

 

 

 

Net loss per share- basic and diluted

 

$

(0.34

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted shares outstanding

 

 

25.9

 

 

 

25.3

 

 

See notes to condensed consolidated financial statements

 

 

3


HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

 

2020

 

 

2019

 

 

2019

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

0.4

 

 

$

2.2

 

 

$

0.9

 

 

Trade accounts receivable, net

 

 

96.7

 

 

 

60.5

 

 

 

89.2

 

 

Inventories, net

 

 

147.3

 

 

 

139.4

 

 

 

149.2

 

 

Other current assets

 

 

10.7

 

 

 

12.8

 

 

 

12.3

 

 

Total current assets

 

 

255.1

 

 

 

214.9

 

 

 

251.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

5.0

 

 

 

5.0

 

 

 

5.0

 

 

Buildings and improvements

 

 

32.6

 

 

 

32.4

 

 

 

32.4

 

 

Machinery and equipment

 

 

58.4

 

 

 

58.2

 

 

 

56.2

 

 

Gross property, plant and equipment

 

 

96.0

 

 

 

95.6

 

 

 

93.6

 

 

Less accumulated depreciation

 

 

65.5

 

 

 

64.4

 

 

 

61.0

 

 

Property, plant and equipment, net

 

 

30.5

 

 

 

31.2

 

 

 

32.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

38.6

 

 

 

40.9

 

 

 

35.2

 

 

Goodwill

 

 

 

 

 

9.5

 

 

 

9.5

 

 

Deferred income taxes

 

 

 

 

 

 

 

 

11.9

 

 

Other

 

 

4.8

 

 

 

5.0

 

 

 

5.4

 

 

Total other assets

 

 

43.4

 

 

 

55.4

 

 

 

62.0

 

 

TOTAL ASSETS

 

$

329.0

 

 

$

301.5

 

 

$

346.2

 

 

See notes to condensed consolidated financial statements

 

 

4


HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions, except share data)

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

 

2020

 

 

2019

 

 

2019

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

1.7

 

 

$

1.7

 

 

$

1.7

 

 

Current maturities of operating lease right-of-use liabilities

 

 

9.2

 

 

 

9.7

 

 

 

9.1

 

 

Trade accounts payable

 

 

85.5

 

 

 

56.8

 

 

 

86.6

 

 

Accrued compensation

 

 

2.9

 

 

 

5.5

 

 

 

2.1

 

 

Other accrued liabilities

 

 

15.1

 

 

 

15.8

 

 

 

14.7

 

 

Total current liabilities

 

 

114.4

 

 

 

89.5

 

 

 

114.2

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

148.2

 

 

 

135.1

 

 

 

143.6

 

 

Operating lease right-of-use liabilities, less current maturities

 

 

29.7

 

 

 

31.6

 

 

 

26.6

 

 

Other non-current liabilities

 

 

2.4

 

 

 

2.4

 

 

 

2.6

 

 

Total non-current liabilities

 

 

180.3

 

 

 

169.1

 

 

 

172.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares: $.01 par (5,000,000 shares authorized)

 

 

 

 

 

 

 

 

 

 

Common shares: $.01 par (75,000,000 shares authorized: 26,894,681;

   26,441,926; and 26,070,616 shares issued at March 31, 2020,

   December 31, 2019 and March 31, 2019, respectively)

 

 

0.3

 

 

 

0.3

 

 

 

0.3

 

 

Additional paid-in capital

 

 

48.5

 

 

 

48.2

 

 

 

46.4

 

 

Retained earnings (accumulated deficit)

 

 

(14.5

)

 

 

(5.6

)

 

 

12.5

 

 

Total shareholders’ equity

 

 

34.3

 

 

 

42.9

 

 

 

59.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

329.0

 

 

$

301.5

 

 

$

346.2

 

 

 

See notes to condensed consolidated financial statements

 

 


5


HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

(in millions)

 

 

Common Shares

 

 

Additional

 

 

Retained Earnings

 

 

Total

 

 

 

Outstanding,

 

 

Paid-In

 

 

(Accumulated

 

 

Shareholders’

 

 

 

at Par Value

 

 

Capital

 

 

Deficit)

 

 

Equity

 

Balance at January 1, 2019

 

$

0.3

 

 

$

46.0

 

 

$

15.7

 

 

$

62.0

 

Net loss

 

 

-

 

 

 

-

 

 

 

(3.2

)

 

 

(3.2

)

Payment for taxes related to share

   settlement of equity awards

 

 

-

 

 

 

(0.1

)

 

 

-

 

 

 

(0.1

)

Stock compensation expense

 

 

-

 

 

 

0.5

 

 

 

-

 

 

 

0.5

 

Balance at March 31, 2019

 

$

0.3

 

 

$

46.4

 

 

$

12.5

 

 

$

59.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

$

0.3

 

 

$

48.2

 

 

$

(5.6

)

 

$

42.9

 

Net loss

 

 

-

 

 

 

-

 

 

 

(8.9

)

 

 

(8.9

)

Stock compensation expense

 

 

-

 

 

 

0.3

 

 

 

-

 

 

 

0.3

 

Balance at March 31, 2020

 

$

0.3

 

 

$

48.5

 

 

$

(14.5

)

 

$

34.3

 

 

6


HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8.9

)

 

$

(3.2

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1.3

 

 

 

1.4

 

Non-cash interest expense

 

 

0.1

 

 

 

0.1

 

Stock-based compensation

 

 

0.3

 

 

 

0.5

 

Deferred income taxes

 

 

 

 

 

(0.8

)

Goodwill impairment

 

 

9.5

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(36.2

)

 

 

(20.2

)

Inventories, net

 

 

(7.9

)

 

 

(15.2

)

Trade accounts payable

 

 

28.7

 

 

 

35.1

 

Other

 

 

(1.3

)

 

 

(3.3

)

Cash used in continuing operating activities

 

 

(14.4

)

 

 

(5.6

)

Cash used in discontinued operating activities

 

 

(0.1

)

 

 

(0.1

)

Total cash used in operating activities

 

 

(14.5

)

 

 

(5.7

)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(0.4

)

 

 

(0.4

)

Total cash used in investing activities

 

 

(0.4

)

 

 

(0.4

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Borrowings of debt, net

 

 

13.1

 

 

 

6.3

 

Repurchase of shares to satisfy employee tax withholdings

 

 

 

 

 

(0.1

)

Total cash provided by financing activities

 

 

13.1

 

 

 

6.2

 

Net increase (decrease) in cash and equivalents

 

 

(1.8

)

 

 

0.1

 

Cash and equivalents, beginning of period

 

 

2.2

 

 

 

0.8

 

Cash and equivalents, end of period

 

$

0.4

 

 

$

0.9

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1.2

 

 

$

1.6

 

Income taxes paid

 

 

0.1

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Assets acquired with debt obligations

 

 

 

 

 

0.1

 

 

See notes to condensed consolidated financial statements

 

 

7


HUTTIG BUILDING PRODUCTS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Huttig Building Products, Inc. and its subsidiary (the “Company” or “Huttig”) were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. Financial statement preparation further requires management to make estimates and assumptions. Management bases these estimates and assumptions on historical results and known trends as well as management forecasts. Actual results could differ from these estimates and assumptions and these differences may be material. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The condensed 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, or any other interim period, which may differ materially due to, among other things, the factors described in Part I, Item 2 of this Quarterly Report on Form 10-Q and those set forth under Part I, Item 1A – “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated by Part II, Item 1A – “Risk Factors” of this Quarterly Report on Form 10-Q. 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. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

On January 1, 2020, the Company adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be assessed for impairment under the current expected credit loss model rather than an incurred loss model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.  The primary financial asset of the Company within the scope of ASU 2016-13 is trade receivables.  The adoption of ASU 2016-13 did not materially impact the Company's consolidated financial statements.

Recent accounting pronouncements pending adoption and not discussed above are either not applicable or will not have, or are not expected to have, a material impact on our consolidated financial condition, results of operations, or cash flows.

 

3. REVENUE

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods.  The Company reports sales revenue, including direct sales, on a net basis, which includes gross revenue adjustments for estimated returns, cash payment discounts based on the satisfaction of outstanding receivables, and volume purchase rebates.  The Company’s customer payment terms vary by customer, location, and the products purchased but are typical for the Company’s industry.

Regarding direct sales, the Company is the principal of these arrangements and is responsible for fulfilling the promise to provide specific goods to its customers, including product specifications, pricing and modifications prior to delivery.  Direct sales as a percentage of net sales were 21.8% and 25.0% in the three month periods ended March 31, 2020 and 2019, respectively.

The following table disaggregates revenue by product classification (in millions):

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Millwork products

 

$

96.2

 

 

$

95.3

 

Building products

 

$

92.6

 

 

 

88.1

 

Wood products

 

$

14.2

 

 

 

14.0

 

Net sales

 

$

203.0

 

 

$

197.4

 

 

4.  LEASES

The Company has operating and financing leases for corporate offices, distribution centers, vehicles, and certain equipment. These leases have remaining lease terms of less than 1 year to 12 years and many of the leases have renewal options.  Because the Company is not

8


reasonably certain to exercise the renewal options, the options are not considered in determining the lease term, and associated potential option payments are excluded from lease payments and right-of-use calculations.  Leases with an initial term of 12 months or less are likewise excluded from right-of-use calculations.

In addition to fixed payments, many of the Company’s lease contracts contain variable payments. Vehicle lease variable payments typically include mileage, and real estate leases include variable charges for taxes and common area maintenance.  Variable lease payments and payments for leases with an initial term of 12 months or less are recognized in the period incurred.

 

 

Three Months Ended

 

 

March 31,

 

(in millions):

2020

 

 

2019

 

Operating Lease Cost

$

3.0

 

 

$

3.2

 

 

 

 

 

 

 

 

 

Finance Lease Cost:

 

 

 

 

 

 

 

Amortization of right-of-use assets

$

0.3

 

 

$

0.5

 

Interest on lease liabilities

 

0.1

 

 

 

0.1

 

Total finance lease cost

$

0.4

 

 

$

0.6

 

The following lease assets and liabilities are included on the condensed consolidated balance sheet (in millions):

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2019

 

 

2019

 

Operating Leases:

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

$

38.6

 

 

$

40.9

 

 

$

35.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of operating lease right-of-use assets

 

9.2

 

 

 

9.7

 

 

 

9.1

 

Operating lease right-of-use liabilities, less current maturities

 

29.7

 

 

 

31.6

 

 

 

26.6

 

Total operating lease liabilities

$

38.9

 

 

$

41.3

 

 

$

35.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

 

 

 

 

 

 

 

Gross property, plant and equipment

$

10.6

 

 

$

10.6

 

 

$

9.7

 

Accumulated depreciation

 

(5.5

)

 

 

(5.2

)

 

 

(4.3

)

Property, plant and equipment, net

$

5.1

 

 

$

5.4

 

 

$

5.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term lease liabilities

$

1.4

 

 

$

1.4

 

 

$

1.4

 

Long-term lease liabilities, less current maturities

 

2.6

 

 

 

2.8

 

 

 

3.1

 

Total finance lease liabilities

$

4.0

 

 

$

4.2

 

 

$

4.5

 

As of March 31, 2020, the weighted average remaining lease term for the Company’s operating leases was 3.2 years and for its financing leases was 5.6 years. These leases have weighted average discount rates of 6.3% and 5.2% for operating leases and financing leases, respectively. The rate implicit in the lease is used to discount leases when known. While the implicit rate is often known for finance leases, the Company is generally unable to calculate the implicit rate in operating leases because it does not have access to the lessor’s residual value estimates nor the amount of the lessor’s deferred initial direct costs.  When the implicit rate is not known, the Company uses the incremental borrowing rate for secured loans of similar term. The Company uses available data for unsecured loans to borrowers of similar credit to the Company and adjusts the rate to reflect the effect of providing collateral equivalent to the outstanding obligation balance.

The following cash flow items are included on the condensed consolidated statement of cash flows (in millions):

 

Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Operating cash used for operating leases

$

(3.1

)

 

$

(3.1

)

Operating cash used for finance leases

 

(0.1

)

 

 

(0.1

)

Financing cash used for finance leases

 

(0.4

)

 

 

(0.4

)

Maturities of lease liabilities are as follows (in millions):

9


 

Finance

leases

 

 

Operating

leases

 

2020 (1)

$

1.2

 

 

$

8.4

 

2021

 

1.5

 

 

 

9.6

 

2022

 

1.1

 

 

 

8.2

 

2023

 

0.6

 

 

 

6.8

 

2024

 

0.1

 

 

 

4.3

 

Thereafter

 

 

 

 

9.0

 

Total lease payments

$

4.5

 

 

$

46.3

 

Less: imputed interest

 

(0.5

)

 

 

(7.4

)

Total future lease obligation

$

4.0

 

 

$

38.9

 

 

 (1)

This amount excludes the three months ended March 31, 2020

5. GOODWILL

Goodwill is reviewed for impairment annually, or more frequently if certain indicators arise. The Company assesses each reporting period whether events and circumstances warrant a revision to the previously established useful lives.

During the first quarter of 2020, a decline in the market value of the Company’s public equity concurrent with the COVID-19 pandemic triggered an assessment of goodwill. The fair value of each reporting unit was determined using a market approach to consider factors such as market capitalization of the Company at March 31, 2020, observed ratios of enterprise value to earnings and the relative sales contribution of each reporting unit. If a reporting unit’s carrying value exceeded its estimated fair value, an impairment was recorded for the amount in excess. As a result of the interim goodwill impairment test, the Company recognized a goodwill impairment charge of $9.5 million.  The following table summarizes goodwill activity for the first quarters ended March 31, 2020 and 2019 (in millions):

 

 

 

 

 

 

 

Accumulated

 

 

Goodwill,

 

 

 

Goodwill

 

 

Impairments

 

 

Net

 

Balance at January 1, 2019

 

$

21.3

 

 

$

(11.8

)

 

$

9.5

 

No activity in 2019

 

 

 

 

 

 

 

 

 

Balance March 31, 2019

 

$

21.3

 

 

$

(11.8

)

 

$

9.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1,2020

 

 

21.3

 

 

 

(11.8

)

 

 

9.5

 

Impairment

 

 

 

 

 

(9.5

)

 

 

(9.5

)

Balance at March 31, 2020

 

$

21.3

 

 

$

(21.3

)

 

$

-

 

 

6. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts consisted of the following (in millions):

 

 

March 31,

 

 

 

2020

 

 

2019

 

Balance at beginning of year

 

$

3.1

 

 

$

2.1

 

Provision charged to expense

 

 

0.1

 

 

 

 

Write-offs, less recoveries

 

 

 

 

 

(0.1

)

Balance at end of period

 

$

3.2

 

 

$

2.0

 

 

7. DEBT

Debt consisted of the following (in millions): 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2019

 

Revolving credit facility

 

$

144.8

 

 

$

131.3

 

 

$

139.3

 

Other obligations

 

 

5.1

 

 

 

5.5

 

 

 

6.0

 

Total debt

 

 

149.9

 

 

 

136.8

 

 

 

145.3

 

Less current maturities of long-term debt

 

 

1.7

 

 

 

1.7

 

 

 

1.7

 

Long-term debt, less current maturities

 

$

148.2

 

 

$

135.1

 

 

$

143.6

 

 

10


Credit Facility The Company has a $250.0 million asset-based senior secured revolving credit facility (the “credit facility”).  Borrowing availability under the credit facility is based on eligible accounts receivable, inventory and real estate. The real estate component of the borrowing base amortizes monthly over 12.5 years on a straight-line basis.  Borrowings under the credit facility are collateralized by substantially all of the Company’s assets, and the Company is subject to certain operating limitations applicable to a loan of this type, which, among other things, place limitations on indebtedness, liens, investments, mergers and acquisitions, dispositions of assets, cash dividends and transactions with affiliates.  The entire unpaid balance under the credit facility is due and payable on July 14, 2022.    

At March 31, 2020, the Company had revolving credit borrowings of $144.8 million outstanding at a weighted average interest rate of 2.50% per annum, letters of credit outstanding totaling $3.2 million, primarily used as collateral for health and workers’ compensation insurance, and $55.0 million of excess committed borrowing availability.  The Company pays an unused commitment fee of 0.25% per annum. In addition, the Company had $1.1 million of other obligations maturing in 2023 at a borrowing rate of 6.11%. The Company also had $4.0 million of financing lease obligations at March 31, 2020.  See Note 4 – “Leases” for more information.  

The sole financial covenant in the credit facility is the minimum fixed charge coverage ratio (“FCCR”) of 1.00:1.00, which must be tested by the Company if the excess borrowing availability falls below an amount in the range of $17.5 million to $31.3 million, depending on the borrowing base. In the first quarter of 2020, the minimum FCCR was not required to be tested as excess borrowing availability was greater than the minimum threshold. However, if the Company’s availability would have fallen below that threshold, the Company would not have met the minimum FCCR. The FCCR must also be tested on a pro forma basis prior to consummation of certain significant business transactions outside the ordinary course of business, as defined in the agreement. 

While the Company believes its cash on hand, borrowing capacity available under the credit facility, and cash flows from operations for the next twelve months will be sufficient to service its liquidity needs, it cannot predict whether future developments associated with the COVID-19 pandemic will materially adversely affect its liquidity position. See Note 13, “Impact and Company Response to the COVID-19 Pandemic” for additional disclosure regarding the potential impact the current pandemic may have on the Company’s future liquidity and financial position.

8. OTHER ACCRUED LIABILITIES

The Company had other accrued liabilities consisting of the following (in millions):

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2019

 

Self insurance

 

$

3.9

 

 

$

3.7

 

 

$

3.9

 

Sales incentive programs

 

 

7.1

 

 

 

7.4

 

 

 

3.1

 

Short term environmental

 

 

1.1

 

 

 

1.1

 

 

 

1.1

 

Other accruals

 

 

3.0

 

 

 

3.6

 

 

 

6.6

 

Other accrued liabilities

 

$

15.1

 

 

$

15.8

 

 

$

14.7

 

 

9. CONTINGENCIES

The Company carries insurance policies on insurable risks with coverage and other terms that it believes to be appropriate. The Company has self-insured retention limits and has obtained fully insured layers of coverage above such self-insured retention limits. Accruals for self-insurance losses are made based on claims experience. Liabilities for existing and unreported claims are accrued when it is probable that future costs will be incurred and can be reasonably estimated.

Environmental and Legal Matters

The Company accrues expenses for contingencies when it is probable that an asset has been impaired or a liability has been incurred and management can reasonably estimate the expense. Contingencies for which the Company has made accruals include environmental and other legal matters. It is possible, however, that actual expenses could exceed the accruals by a material amount, which could have a material adverse effect on the Company’s future liquidity, financial condition, and operating results in the period in which any such additional expenses are incurred or recognized.

Environmental Matters

The Company was previously identified as a potentially responsible party in connection with contamination cleanup at a formerly owned property in Montana. On February 18, 2015, the Montana Department of Environmental Quality (the “DEQ”) issued an amendment to the unilateral administrative order of the DEQ outlining the final remediation of the property in its Record of Decision.  In September 2015, the remedial action work plan (“RAWP”) was approved.

The Company paid $0.1 million in the first three months of 2020 implementing the RAWP.  The Company estimates the total remaining cost of implementing the RAWP to be $2.9 million at March 31, 2020 with $1.1 million in short-term other accrued liabilities and $1.8 million in other non-current liabilities. As of March 31, 2020, the Company believes the accrual represents a reasonable best estimate of the total remaining remediation costs, based on facts, circumstances, and information currently

11


available.  However, there are currently unknown variables relating to the actual levels of contaminants and amounts of soil that will ultimately require treatment or removal. As part of the remediation process, additional soil and groundwater sampling, and bench and pilot testing is required to ensure the remediation will achieve the outcome required by the DEQ.  The ultimate final amount of remediation costs and expenditures are difficult to estimate with certainty and as a result, the amount of actual costs and expenses ultimately incurred by the Company with respect to this property could be lower than, or exceed the amount accrued as of March 31, 2020 by a material amount.  If actual costs are materially higher, the incremental expenses over the amount currently accrued could have a material adverse effect on the Company’s liquidity, financial condition and operating results.  

In addition, some of the Company’s current and former distribution centers are located in areas where environmental contamination may have occurred, and for which the Company, among others, could be held responsible. The Company currently believes that there are no material environmental liabilities at any of its distribution center locations.

The timing of our remediation efforts and expenditures are expected to be impacted by the current pandemic as the company expects to defer cleanup efforts based upon health and safety and other financial considerations.  See Note 13, “Impact and Company Response to the COVID-19 Pandemic”

 

 

10. EARNINGS (LOSS) PER SHARE

The Company calculates its basic income (loss) per share by dividing net income (loss) allocated to common shares outstanding by the weighted average number of common shares outstanding. Unvested shares of restricted stock participate in dividends on the same basis as common shares. As a result, these share-based awards meet the definition of participating securities and the Company applies the two-class method to compute earnings per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. In periods in which the Company has net losses, the losses are not allocated to participating securities because the participating security holders are not obligated to share in such losses.

The following table presents the number of participating securities and earnings allocated to those securities (in millions).

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Earnings allocated to participating shareholders

 

$

 

 

$

 

Number of participating securities

 

 

0.9

 

 

 

1.1

 

 

The diluted earnings per share calculations include the effect of assumed exercise using the treasury stock method for unvested restricted stock units, except when the effect would be anti-dilutive.  The following table presents the number of common shares used in the calculation of net income (loss) per share from continuing operations (in millions):

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2020

 

 

2019

 

 

Weighted-average number of common shares-basic

 

 

25.9

 

 

 

25.3

 

 

Dilutive potential common shares

 

 

 

 

 

 

 

Weighted-average number of common shares-dilutive

 

 

25.9

 

 

 

25.3

 

 

 

11. INCOME TAXES

 

The Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred tax assets.  The cumulative loss incurred by the Company over the three-year period ended March 31, 2020 constitutes a significant piece of objective negative evidence.  Such objective negative evidence limits the ability to consider other subjective evidence, such as our projections for future profitability and growth.  Based on this evaluation, as of March 31, 2020, the Company maintained a valuation allowance of $19.7 million to reduce net deferred tax assets as their realization did not meet the more-likely-than-not criterion.  The amount of deferred tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future profitability and growth.

The Company’s effective tax rate from continuing operations was a benefit of 0% and 18% in the three-month periods ended March 31, 2020 and 2019, respectively. The first quarter 2020 tax rate was impacted by state tax expense and amortization of tax goodwill, which continues to increase the indefinite-lived deferred tax liability.

 

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security

12


taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, alternative minimum tax credit refunds, and the creation of certain refundable employee retention credits. The Company anticipates it may benefit in the future from the temporary five-year net operating loss carryback provisions, the technical correction for qualified leasehold improvements, which changes 39-year property to 15-year property, eligibility for 100% tax bonus depreciation, and potentially other provisions within the CARES Act. Where certain tax provisions of the CARES Act are determined to be applicable following the completion of the Company’s assessment, these may result in tax credits, refunds and income tax or other benefits which would be recorded in the Consolidated Statements of Operations in the period in which the benefit is incurred.

 

12. STOCK-BASED COMPENSATION

The Company recognized $0.3 million and $0.5 million in non-cash, stock-based compensation expense for the first quarter of 2020 and 2019, respectively.  During the first three months of 2020, the Company granted an aggregate of 390,325 shares of restricted stock at a weighted average value of $1.40 per share under its 2005 Executive Incentive Compensation Plan, as amended and restated. Most restricted shares vest in three equal installments on the first, second and third anniversaries of the grant date, or cliff vest in five years. During the first three months of 2020, the Company granted an aggregate of 90,000 shares of restricted stock under its Non-Employee Directors’ Restricted Stock Plan, as amended, at an average fair market value of $1.44 per share. The directors’ restricted shares vest on the first anniversary of the grant date. Unearned compensation expense is amortized into expense on a straight-line basis over the requisite service period for the entire award. As of March 31, 2020 and 2019, the total compensation expense not yet recognized related to all outstanding restricted stock awards was $1.8 million and $3.8 million, respectively.

13. IMPACT AND COMPANY REPONSE TO COVID-19

In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic.  The United States, various other countries and state and local jurisdictions have imposed, among other things, travel and business operation restrictions intended to limit the spread of the COVID-19 virus and have advised or required individuals to adhere to social distancing or limit or forego their time outside of their home.  This pandemic and the governmental response have resulted in significant and widespread economic disruptions to, and uncertainty in, the global and U.S. economies, including in the regions in which the Company operates.  In many jurisdictions, the Company and its customers were deemed “essential businesses” and continued to operate, reducing the impact of these restrictions on its operations and results for the three months ended March 31, 2020.  However, Company management cannot reliably predict the future impact of the pandemic and the governmental response to the pandemic on the Company’s operations and future results.

Currently, all of the Company’s branches remain open and capable of meeting customer needs.  The Company has taken protective measures to guard the health and well-being of its employees and customers, including the implementation of social distancing guidelines and remote work options where possible.  The Company has observed certain of its customers reducing purchases and operations due to the impact of COVID-19 and governmental restrictions.  Accordingly, the Company anticipates a decline in its sales and have taken proactive measures to protect its operating liquidity including communicating with vendors and customers, seeking modification of payment and other terms of rental and procurement agreements and monitoring its accounts receivable.  The Company has also reduced inventory levels to meet an anticipated decrease in demand and has implemented cost containment measures, including lay-offs, wage reductions, suspension of matching contributions to its qualified defined contribution plan, and eliminated non-essential spend.  The Company has also delayed or cancelled certain planned capital expenditures.  The Company has utilized its diverse overseas network to source alternative suppliers of its proprietary products, while simultaneously rationalizing its purchase volume to better align with its current sales projections.  The Company has also been proactively communicating with its senior credit lenders regarding potential modification of terms under its senior credit facility.  While the Company intends for these actions to mitigate the impact of the pandemic on its operations, it cannot provide any assurance that these actions will be successful.

14. BID PRICE NON-COMPLIANCE NOTIFICATION

On April 22, 2020, the Company received a letter (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that the closing bid price for its common stock had been below $1.00 for the last 30 consecutive business days and that the Company therefore is not in compliance with the minimum bid price requirement for continued inclusion on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). Under the Nasdaq Listing Rules, the Company has a period of 180 calendar days from the date of the Notice to regain compliance with the Bid Price Requirement. However, due to recent market conditions, Nasdaq has determined to toll the compliance periods for the Bid Price Requirement through June 30, 2020. As a result, the compliance period for the Bid Price Requirement will be reinstated on July 1, 2020 (the “Reinstatement Date”). Accordingly, the Company has until December 27, 2020 (the “Compliance Date”), which is 180 calendar days from the Reinstatement Date, to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 for a minimum of ten consecutive business days on or before the Compliance Date.

The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Bid Price Requirement. However, there can be no assurance that the Company will be able to regain compliance with the Bid Price Requirement, or will otherwise be in compliance with other Nasdaq Listing Rules. If the Company does not regain compliance by the Compliance Date and has not requested an extension of the time period in which it must comply, Nasdaq

13


will provide notice to the Company that its common stock is subject to delisting. In such event, Nasdaq’s rules permit the Company to appeal any delisting determination. However, there can be no assurance that Nasdaq would grant the Company's request for an extension of the compliance period or that the Company’s appeal of the delisting determination would be favorably determined.

14


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

Cautionary Statement Relevant to Forward-Looking Information for the Purpose of “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “believe,” “estimate,” “project” or similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words.  Statements made in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K looking forward in time, including, but not limited to, statements regarding our current views with respect to financial performance, future growth in the housing market, distribution channels, sales, favorable supplier relationships, inventory levels, the ability to meet customer needs, enhanced competitive posture, strategic initiatives, absence of material financial impact from litigation or contingencies, including environmental proceedings, are included pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

These statements present management’s expectations, beliefs, plans and objectives regarding our future business and financial performance. We cannot guarantee that any forward-looking statements will be realized or achieved.  These forward-looking statements are based on current projections, estimates, assumptions and judgments, and involve known and unknown risks and uncertainties. We disclaim any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

There are a number of factors, some of which are beyond our control that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements.  These factors include, but are not limited to, the following: the impact of global health concerns, including the current COVID-19 pandemic, and governmental responses to such concerns, on our business, results of operations, liquidity and capital resources; the success of our growth initiatives; expansion of the Huttig-Grip product line; the strength of new construction, home improvement and remodeling markets and the recovery of the homebuilding industry to levels consistent with the historical annual average total housing starts from 1959 to 2019 of approximately 1.4 million starts based on statistics tracked by the U.S. Census Bureau (“Historical Average”); the cyclical nature of our industry; our ability to comply with, and the restrictive effect of, the financial covenant applicable under our credit facility; risks of international suppliers; the ability to source alternative suppliers in light of the COVID-19 pandemic; product liability claims and other legal proceedings; commodity prices and demand in light of the COVID-19 pandemic; stock market volatility; failure to meet exchange listing requirements; stockholder activist disruption; current or future litigation; information technology failures, network disruptions, cybersecurity attacks or breaches in data security; termination of key supplier relationships; our failure to attract and retain key personnel; goodwill impairment; deterioration of our customers’ creditworthiness or our inability to forecast such deteriorations particularly in light of the COVID-19 pandemic; the loss of a significant customer; the cost of environmental compliance, including actual expenses we may incur to resolve proceedings we are involved in arising out of a formerly owned facility in Montana; competition with existing or new industry participants; deterioration in our relationship with our unionized employees, including work stoppages or other disputes; funding requirements for multi-employer pension plans for our unionized employees; significant uninsured claims; the integration of any business we acquire and the liabilities of such businesses; the seasonality of our operations; federal and state transportation regulations; fuel cost increases; any limitations on our ability to utilize our deferred tax assets to reduce future taxable income and tax liabilities; risks associated with our private brands; uncertainties resulting from changes to United States and foreign laws, regulations and policies; the potential impact of changes in tariff costs, including tariffs on imported steel and aluminum, and potential anti-dumping or countervailing duties; and those set forth under Part I, Item 1A – “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by Form 8-K filed on April 27, 2020 and Part II, Item 1A – “Risk Factors” of this Quarterly Report on Form 10-Q. These factors may not constitute all factors that could cause actual results to differ from those discussed in any forward-looking statement. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results.

Overview

We are a distributor of a broad array of building material products used principally in new residential construction, home improvement, and remodeling and repair projects.  We distribute our products through 27 distribution centers serving 41 states and sell primarily to building materials dealers, national buying groups, home centers and industrial users, including makers of manufactured homes.

15


The following table sets forth our sales by product classification as a percentage of total sales:

 

 

 

Three Months Ended