Huttig Building Products, Inc. Announces Third Quarter 2020 Results and Provides Business Update on COVID-19 Impact

Huttig Building Products, Inc. (“Huttig” or the “Company”), a leading domestic distributor of millwork, building materials and wood products, today reported financial results for the third quarter ended September 30, 2020, and provided a business update on its response to the COVID-19 pandemic.

“As devastating as the impact of the COVID-19 global pandemic has been on our country, economy, and way of life, it was the catalyst for many of the changes we made to our business, contributing to our improved financial performance in the quarter,” said Jon Vrabely, President and CEO of Huttig. “I am very proud of our entire organization and our third quarter results in what remains a very challenging environment. Sales in the quarter approached prior year levels, and if not for the impact of COVID-related supply chain challenges, internal restructuring activities, and our continued product line rationalization initiative, we estimate our sales in the quarter would have exceeded prior year levels. We made meaningful improvements, reducing our expenses and debt, and have adapted to a leaner expense structure that establishes the foundation for a more profitable future.”

Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Although as anticipated, the impact of the COVID-19 pandemic negatively affected our net sales, our COVID-19 readiness and response plan has driven an overall improvement in our operating results relative to our initial pandemic forecasts.

Net sales were $212.7 million in the third quarter of 2020, which were $3.0 million, or 1.4%, lower than the third quarter of 2019. The decline was attributable to a number of factors, including pandemic-induced changes to the operating environment resulting in supply chain disruption, labor shortages, which have increased lead times to our customers for value-add production sales, and the acceleration of planned restructuring activities, including the closure of two branches in the third quarter of 2020. We also commenced a broader product rationalization project in the third quarter designed to strengthen our focus on core and strategic products. This plan, while initially resulting in lower sales as we forgo replenishment or promotion of these items, is expected to ultimately generate higher gross margins and higher sales of focused product categories. While some of our largest markets were significantly impacted early in the pandemic, third quarter activity has recovered to levels approaching prior year sales after posting a 12.1% year-over-year decline in the second quarter of 2020. Demand has improved as construction activity has rebounded.

Due primarily to supply chain disruption and labor shortages, which lengthened lead times to our customers, millwork sales decreased 8.8% to $90.8 million in the third quarter, compared to $99.6 million in the comparable prior year period. Building products sales increased 5.7% in the third quarter of 2020 to $106.1 million, compared to $100.4 million in the third quarter of 2019 as sales benefitted from consistent high levels of demand for certain product lines within the category, including certain strategic product lines. The sales growth in this category was mitigated by product rationalization activities related to our objective of focusing on higher-margin, non-commoditized products. Wood product sales increased 0.6% in the third quarter of 2020 to $15.8 million, compared to $15.7 million in the third quarter of 2019.

Gross margin was $42.7 million in the third quarter of 2020, compared to $44.7 million in the third quarter of 2019. As a percentage of sales, gross margin was 20.1% in the third quarter of 2020, compared to 20.7% in the third quarter of 2019. Gross margins were negatively impacted by product sales mix as higher-margin, value-add categories were affected by supply chain disruption and labor shortages, which extended our lead times. Gross margins were also pressured by sales from branch closures and product rationalization activities as we reduced inventories at less than normal margins. While substantially complete, restructuring activities will continue through the fourth quarter. These initiatives, taken together, are expected to improve our overall margin performance.

Operating expenses decreased $5.6 million to $35.8 million in the third quarter of 2020, compared to $41.4 million in the third quarter of 2019. Personnel costs decreased $3.0 million, or 12.4%, as a result of expense reduction actions taken in response to the COVID-19 pandemic, workforce reductions, wage reductions, suspension of our matching contributions under our employee benefit plan and restructuring activities. These cost reductions were partially offset by higher incentive compensation driven by improved operating results. Non-personnel costs decreased $2.6 million, or 15.1%. Operationally, travel, materials handling and other discretionary spending was curtailed, due in part to the pandemic, and fuel costs were lower due to lower volume and pricing. Additionally, bad debt and insurance charges were lower than the third quarter of 2019. As a percentage of sales, operating expenses were 16.8% in the third quarter of 2020 compared to 19.2% in the third quarter of 2019.

Net interest expense was $0.8 million in the third quarter of 2020 compared to $1.7 million in the third quarter of 2019. The lower expense in the third quarter of 2020 reflects both lower average debt outstanding and lower interest rates.

Income taxes were zero for the quarters ended both September 30, 2020 and 2019.

As a result of the foregoing factors, we reported net income of $6.1 million for the quarter ended September 30, 2020, compared to net income of $1.6 million for the quarter ended September 30, 2019.

Adjusted EBITDA was $8.5 million for the third quarter of 2020, compared to $5.3 million for the third quarter of 2019. Adjusted EBITDA is a non-GAAP measurement. See the below reconciliation of non-GAAP financial measures.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net sales were $607.7 million in the first nine months of 2020, which were $23.9 million, or 3.8%, lower than the first nine months of 2019. The decline was attributable to a number of factors, including pandemic-induced changes to the operating environment, resulting in supply chain disruption, labor shortages, which have increased lead times to our customers for value-add production sales, and the acceleration of planned restructuring activities, including the closure of two branches in the third quarter of 2020. We also commenced a broader product rationalization project in the third quarter designed to strengthen our focus on core and strategic products. This plan, while initially resulting in lower sales as we forgo replenishment or promotion of these items, is expected to ultimately generate higher gross margins and higher sales of focused product categories. While some of our largest markets were significantly impacted early in the pandemic, by the end of the third quarter, activity has recovered to levels approaching prior year sales. Demand has improved as construction activity has rebounded.

Due primarily to supply chain disruption and labor shortages, which lengthened lead times to our customers, millwork sales decreased 8.7% to $268.7 million in the first nine months of 2020, compared to $294.3 million in the comparable prior year period. Building products sales increased 2.2% in the first nine months of 2020 to $296.1 million, compared to $289.7 million in the first nine months of 2019 as sales benefitted from consistent high levels of demand for certain product lines within the category, including certain strategic product lines. The sales growth in this category was mitigated in the third quarter by product rationalization activities related to our objective of focusing on higher-margin, non-commoditized products. Wood product sales decreased 9.9% in the first nine months of 2020 to $42.9 million, compared to $47.6 million in the first nine months of 2019.

Gross margin was $122.3 million in the first nine months of 2020, compared to $126.4 million in the first nine months of 2019. As a percentage of sales, gross margin was 20.1% in the first nine months of 2020, compared to 20.0% in the first nine months of 2019. The gross margin percentage reflects the favorable impact from our focus on higher margin sales opportunities, partially offset by sales product mix as higher margin categories were affected by supply chain disruption and labor shortages, which extended our lead times. Gross margins were impacted in the third quarter by sales from branch closures and product rationalization activities as we reduced inventories at less than normal margins. While substantially complete, restructuring activities will continue through the fourth quarter. These initiatives, taken together, are expected to improve our overall margin performance.

Operating expenses, excluding a restructuring charge of $1.5 million and goodwill impairment charge of $9.5 million, decreased $12.5 million to $109.5 million in the first nine months of 2020, compared to $122.0 million in the first nine months of 2019. Personnel costs decreased $8.9 million as a result of expense reduction actions taken in response to the COVID-19 pandemic, including workforce reductions, wage reductions, suspension of Company matching contributions under an employee benefit plan and reduced medical claims. Non-personnel costs decreased $3.6 million. Operationally, travel, materials handling and other discretionary spending was curtailed, due in part to the pandemic, and fuel costs were lower due to lower volume and price. Additionally, bad debt charges were lower than the first nine months of 2019. These reductions were partially offset by an increase in worker’s compensation charges and other insurance costs. As a percentage of sales, operating expenses, net of restructuring, were 18.0% in the first nine months of 2020 compared to 19.3% in the first nine months of 2019.

During the first quarter of 2020, a decline in the market value of the Company’s public equity concurrent with, and caused in part by, the COVID-19 pandemic triggered an assessment of goodwill. As a result of the interim goodwill impairment test, the Company recognized a goodwill impairment charge of $9.5 million.

During the third quarter of 2020, we substantially completed the closure of our Columbus, Ohio and Selkirk, New York branch locations as part of our restructuring efforts. We expect the full closure to be completed in the fourth quarter of 2020. During the second quarter of 2020, we recorded a restructuring charge of $1.5 million for closure-related expenses for personnel, facility, equipment and working capital related costs.

Net interest expense was $3.0 million in the first nine months of 2020 compared to $5.2 million in the first nine months of 2019. The lower expense in the first nine months of 2020 reflected both lower average borrowing and lower interest rates.

Income taxes were zero for the first nine months of 2020, as compared to income tax expense of $11.1 million for the first nine months of 2019. In the nine months ended September 30, 2019, we recorded a tax charge of $11.8 million for an increase in our deferred tax asset valuation allowance. The increase was required as realization of the net deferred asset was determined to no longer meet the more-likely-than-not criterion under U.S. GAAP. Most of the Company’s net deferred tax asset is comprised of federal tax loss carryforwards which will begin expiring in 2030. The deferred tax valuation allowance is assessed each reporting period and the amount of net deferred tax assets considered realizable could be adjusted in future periods based on the Company’s financial performance. The net operating loss carryforwards remain available to offset future taxable income.

As a result of the foregoing factors, we reported a net loss of $1.2 million and $11.9 million for the nine months ended September 30, 2020 and 2019, respectively. Adjusted for the $9.5 million goodwill impairment charge and the $1.5 million restructuring charge in 2020, and adjusted for the $11.8 million tax charge in 2019, year-to-date net income was $9.8 million in 2020 compared to a net loss of $0.1 million in the first nine months of 2019.

Adjusted EBITDA was $17.7 million for the nine months ended September 30, 2020 compared to $10.1 million for the comparable period of 2019. Adjusted EBITDA is a non-GAAP measurement. See the below reconciliation of non-GAAP financial measures.

Balance Sheet & Liquidity

Cash provided by operating activities was $35.6 million during the first nine months of 2020, compared to cash usage of $10.5 million during the first nine months of 2019. The increase in cash provided by operating activities was primarily attributable to improved operating results combined with a $31.7 million reduction of inventory during the first nine months of 2020 driven by our COVID-19 readiness and response plan, compared to an $8.7 million increase in inventory over the first nine months of 2019. Accounts payable increased $11.1 million and $16.9 million in 2020 and 2019, respectively, primarily as a result of seasonal inventory purchase activity, temporary modifications to terms with key vendors during the first nine months of 2020, and seasonal inventory purchases to support cyclical sales activity during the first nine months of 2019. These decreases in working capital were partially offset by an increase in accounts receivable of $25.3 million during the first nine months of 2020, compared to an increase of $19.5 million in the prior-year corresponding period. The increase in accounts receivable over the first nine months of 2020 was primarily a result of cyclical increases in sales activity.

At September 30, 2020, we had $69.8 million total liquidity, including excess committed borrowing availability of $69.0 million and cash of $0.8 million. Total liquidity was $46.5 million at September 30, 2019, including excess committed borrowing availability of $43.6 million and cash of $2.9 million.

Impact and Company Response 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 the Company’s operations and results for the three and nine months ended September 30, 2020. However, the Company’s 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.

With the exception of closing two branches as a part of the Company’s restructuring efforts, 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 requirements 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. The pandemic has also had an adverse impact to the supply chain, with some of the Company’s vendors putting the Company on allocation as a result of reduced inventory and labor shortages, resulting in longer lead-times for the fulfillment of certain products. The Company adjusted its sales forecast accordingly and previously took 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 closing two of its branches, lay-offs, wage reductions, suspension of matching contributions to its qualified defined contribution plan, and eliminated non-essential spend. Wages were reinstated for a majority of employees in October 2020. However, our higher-salaried employees and senior management team continue to have reduced compensation. Additionally, the compensation paid to our Board of Directors continues at a reduced level. The Company has also delayed or cancelled certain planned, non-essential 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 and to manage the supply chain. The Company has also been proactively communicating with its lenders regarding potential modification to the terms of its credit facility should it be deemed necessary. While the Company believes these actions have mitigated the impact of the pandemic on its operations, it cannot provide any assurance that these actions will be successful if the pandemic continues to have a longer-term impact on the economy. As of September 30, 2020, the Company does not have any material outstanding deferred obligations to suppliers as deferred amounts have been substantially repaid.

Mill Road Capital Management Unsolicited, Non-Binding Expression of Interest

On August 6, 2020, the Company received an unsolicited, non-binding, expression of interest from Mill Road Capital Management LLC (“Mill Road”), a private investment firm, to acquire all of the outstanding common stock of the Company for $2.75 per share, subject to certain contingencies. On October 14, 2020, the Company received a revised expression of interest from Mill Road to acquire all of the outstanding common stock of the Company for $4.00 per share, subject to certain contingencies. The Company’s Board of Directors is reviewing Mill Road’s proposal and will determine the course of action it believes is in the best interests of all its stockholders. The Board is always open to considering strategic opportunities to maximize value and has retained Lincoln International as its financial advisor to assist the Board in its review. The Company does not intend to disclose any updates regarding its review of the proposal until the Board of Directors makes a determination requiring further disclosure. In the meantime, the Company continues to focus on executing on its business plan to drive shareholder value.

For the full third quarter results, click here.

About Huttig

Huttig, currently in its 136th year of business, is one of the largest domestic distributors of millwork, building materials and wood products used principally in new residential construction and in-home improvement, remodeling and repair work. Huttig distributes its products through 25 distribution centers serving 41 states. Huttig’s wholesale distribution centers sell principally to building materials dealers, national buying groups, home centers and industrial users, including makers of manufactured homes.

Source: Huttig Building Products, Inc.