NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In Millions, Except Share and Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Organization
—Huttig Building Products, Inc. and its wholly owned subsidiary (the “Company” or “Huttig”) is a distributor of building materials used principally in new residential construction and in home improvement, remodeling and repair work. Huttig’s products are distributed through 27 distribution centers serving 41 states and are sold primarily to building materials dealers, national buying groups, home centers and industrial users including makers of manufactured homes.
Principles of Consolidation
—The consolidated financial statements include the accounts of Huttig Building Products, Inc. and its wholly owned subsidiary. All inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition
—Revenues are recorded when title passes to the customer, which occurs upon delivery of product, less an allowance for returns, customer rebates and discounts for early payments. Returned products for which the Company assumes responsibility are estimated based on historical returns and are accrued as a reduction of sales at the time of the original sale.
Use of Estimates
—The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes estimates including but not limited to the following financial statement items: allowance for doubtful accounts, slow-moving and obsolete inventory, lower of cost or market provisions for inventory, long-lived asset and goodwill impairments, contingencies including environmental liabilities, accrued expenses and self-insurance accruals, income tax expense and deferred taxes. Actual results may differ from these estimates.
Cash and Equivalents
—The Company considers all highly liquid interest-earning investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The carrying value of cash and equivalents approximates their fair value.
Accounts Receivable
—Trade accounts receivable consist of amounts owed for orders shipped to customers and are stated net of an allowance for doubtful accounts. Huttig’s corporate management establishes an overall credit policy for sales to customers. The allowance for doubtful accounts is determined based on a number of factors including when customer accounts exceed 90 days past due and specific customer account reviews.
Inventory
— Inventories are valued at the lower of cost or market. The Company’s entire inventory is comprised of finished goods. The Company reviews inventories on hand and records a provision for slow-moving and obsolete inventory. The provision for slow-moving and obsolete inventory is based on historical and expected sales. Approximately 91% of inventories were determined by using last-in, first-out (“LIFO”) method of inventory valuation as of December 31, 2016 and December 31, 2015. The balance of all other inventories is determined by the average cost method. The FIFO cost would be higher than the LIFO valuation by $13.4 million at December 31, 2016 and $13.6 million at December 31, 2015.
Supplier Rebates
—The Company enters into agreements with certain vendors providing for inventory purchase based rebates upon purchasing volumes. The Company accrues the receipt of rebates based on purchases and records vendor rebates as a reduction of the cost of inventory purchased.
Property, Plant and Equipment
—Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets and is charged to operating expenses. Buildings and improvements lives range from 3 to 25 years. Machinery and equipment lives range from 3
-31-
to 10 years. The Company recorded depreciation expense of $3.0 million, $2.9 million and $3.0 million in 2016
, 2015 and 2014, respectively.
Goodwill
—Goodwill for each reporting unit is reviewed for impairment annually or more frequently if certain indicators arise. The Company also reassesses useful lives of previously recognized intangible assets. The Company first assesses the qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the two-step quantitative test is deemed necessary, the Company calculates the fair value using multiple assumptions of its future operations to determine future discounted cash flows including but not limited to such factors as sales levels, gross margin rates, capital requirements and discount rates. The carrying value of goodwill is considered impaired when a reporting unit’s fair value is less than its carrying value. In that event, goodwill impairment is recognized to the extent recorded goodwill exceeds the implied fair value of that goodwill. Our assumptions may change significantly in the future resulting in goodwill impairments in future periods. See Note 2, “Goodwill and Other Intangible Assets” for additional information.
Valuation of Long-Lived Assets
—The Company periodically evaluates the carrying value of its long-lived assets, including intangible and other tangible assets, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows from such assets are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.
Shipping and Handling
—Costs associated with shipping and handling products to the Company’s customers are charged to operating expense. Shipping and handling costs were $30.2 million, $28.8 million and $30.3 million in 2016, 2015 and 2014, respectively.
Accounting For Stock-Based Compensation
— The Company has stock-based compensation plans covering the majority of its employee groups and a plan covering the Company’s Board of Directors. The Company accounts for share-based compensation utilizing the fair value recognition provisions. The Company recognizes compensation cost for equity awards on a straight-line basis over the requisite service period for the entire award. See Note 9, “Stock and Incentive Compensation Plans” for additional information.
Income Taxes
—Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and when such amounts are recognized for tax purposes using currently enacted tax rates. A valuation allowance would be established to reduce deferred income tax assets if it is more likely than not that a deferred tax asset will not be realized. See Note 10, “Income Taxes” for additional information.
Net Income Per Share
—Basic net income per share is computed by dividing income available to common stockholders by weighted average shares outstanding. Diluted net income per share reflects the effect of all other potentially dilutive common shares using the treasury stock method. See Note 11, “Basic and Diluted Net Income Per Share” for additional information.
Concentration of Credit Risk
—The Company grants credit to customers, substantially all of whom are dependent upon the construction sector. The Company periodically evaluates its customers’ financial condition but does not generally require collateral. Customers with high credit risk may be required to pay up front. A significant portion of our sales are concentrated with a relatively small number of our customers. Our top ten customers represented 43% of our sales in 2016. The Company had a single customer representing 14% of total sales in 2016, 13% of total sales in 2015 and 12% of total sales in 2014. This customer is a buying group for multiple building material dealers.
Collective Bargaining Agreements
—As of December 31, 2016, 13% of our employees were represented by eight collective bargaining agreements with three of the agreements currently in negotiations or expiring in 2017. With regard to the three expiring agreements, 8% of our employees were covered thereunder.
-32-
Segments
— Segment Reporting, defines o
perating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. At December 31, 2
016 and 2015, under the definition of a segment, each of our branches is considered an operating segment of our business.
O
perating segments may be aggregated if the operating segments have similar economic characteristics and if the nature of the products
, distribution methods, customers and regulatory environments are similar. The Company has aggregated its branches into one reporting segment.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are reviewed for impairment annually or more frequently if certain indicators arise. In addition, the statement requires reassessment of the useful lives of previously recognized intangible assets.
The Company uses a two-step process for impairment testing of goodwill. During the fourth quarter in each of 2016, 2015 and 2014, the Company performed the annual test for impairment of its reporting units and there was no impairment of goodwill. The following table summarizes goodwill activity for the three years in the period ended December 31, 2016 (in millions):
|
|
|
|
|
|
Accumulated
|
|
|
Goodwill,
|
|
|
|
Goodwill
|
|
|
Impairments
|
|
|
Net
|
|
Balance at January 1, 2014
|
|
$
|
18.1
|
|
|
$
|
(11.8
|
)
|
|
$
|
6.3
|
|
No activity in 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2014
|
|
|
18.1
|
|
|
|
(11.8
|
)
|
|
|
6.3
|
|
No activity in 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2015
|
|
|
18.1
|
|
|
|
(11.8
|
)
|
|
|
6.3
|
|
Addition in 2016
|
|
|
3.2
|
|
|
|
—
|
|
|
|
3.2
|
|
Balance at December 31, 2016
|
|
$
|
21.3
|
|
|
$
|
(11.8
|
)
|
|
$
|
9.5
|
|
Information regarding the Company’s other amortizable intangible assets is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
4.9
|
|
|
$
|
1.4
|
|
|
$
|
1.1
|
|
|
$
|
0.9
|
|
Trademarks
|
|
1.6
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Other
|
|
1.6
|
|
|
|
0.0
|
|
|
|
0.4
|
|
|
|
0.0
|
|
Total amortizable intangible assets (1)
|
|
$
|
8.1
|
|
|
$
|
1.4
|
|
|
$
|
1.7
|
|
|
$
|
0.9
|
|
(1)
|
Amortizable intangible assets are included in “Other Assets.”
|
Customer relationships are amortized over 15 to 16 years. Trademarks are amortized over five years and other intangibles are amortized over three years.
-33-
The estimated intangible asset amortization expense, by year and in the aggregate, consisted of the following at December 31, 2016 (in millions):
|
|
Amortization
|
|
2017
|
|
$
|
1.2
|
|
2018
|
|
|
1.2
|
|
2019
|
|
|
0.8
|
|
2020
|
|
|
0.6
|
|
2021
|
|
|
0.3
|
|
Thereafter
|
|
|
2.3
|
|
Total
|
|
$
|
6.4
|
|
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts consisted of the following (in millions):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of year
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Provision charged to expense
|
|
|
—
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Write-offs, less recoveries
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Balance at end of year
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
The Company recorded bad debt expense of less than 0.1% of net sales in each of 2016, 2015 and 2014.
4. DEBT
Debt consisted of the following (in millions):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revolving credit facility
|
|
$
|
52.2
|
|
|
$
|
46.1
|
|
Other obligations
|
|
|
3.3
|
|
|
|
2.5
|
|
Total debt
|
|
|
55.5
|
|
|
|
48.6
|
|
Less current portion
|
|
|
1.0
|
|
|
|
1.2
|
|
Long-term debt
|
|
$
|
54.5
|
|
|
$
|
47.4
|
|
Credit Facility
—The Company has a $160.0 million asset-based senior secured revolving credit facility (“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 are 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 credit facility matures on May 28, 2019 and all amounts borrowed are due and payable on that date.
At December 31, 2016, under the credit facility, the Company had revolving credit borrowings of $52.2 million outstanding at a weighted average interest rate of 2.27% per annum, letters of credit outstanding totaling $3.0 million, primarily for health and workers’ compensation insurance, and $76.5 million of additional committed borrowing capacity. The Company pays an unused commitment fee of 0.25% per annum. In addition, the Company had $3.3 million of capital leases and other obligations outstanding at December 31, 2016.
The sole financial covenant in the credit facility is the minimum fixed charge coverage ratio (“FCCR”) of 1.05:1.00 and must be tested by the Company only if the excess borrowing availability falls below an amount in the
-34-
range o
f $12.5 million to $20.0 million, depending on our borrowing base. FCCR must also be tested on a pro forma basis prior to consummation of certain significant business transactions outside our ordinary course of business, as defined in the agreement.
Maturities
—At December 31, 2016, the aggregate scheduled maturities of debt were as follows (in millions):
2017
|
|
$
|
1.0
|
|
2018
|
|
|
0.9
|
|
2019
|
|
|
52.9
|
|
2020
|
|
|
0.4
|
|
2021
|
|
|
0.3
|
|
Total
|
|
$
|
55.5
|
|
The fair value of long-term debt, as calculated using the aggregate cash flows from principal and interest payments over the life of the debt, was approximately $52.2 million and $46.1 million at December 31, 2016 and 2015, respectively, based upon a discounted cash flow analysis using current market interest rates. The fair value measurement inputs for long-term debt are classified as Level 3 (unobservable inputs) in the valuation hierarchy.
5. PREFERRED SHARES
The Company has authorized 5.0 million shares of $0.01 par value preferred stock, of which 400,000 shares have been designated as Series A Junior Participating Preferred Stock. No such shares have been issued. See Note 13, “Rights Agreement” for information concerning a rights agreement pursuant to which shares of the Series A Junior Participating Preferred Stock may be issued.
6. OTHER ACCRUED LIABILITIES
The Company has other accrued liabilities at December 31, 2016 and December 31, 2015 of $15.1 million and $13.8 million, respectively. Liabilities for self-insurance accruals were $3.8 million and $4.3 million, amounts due for sales incentive programs were $5.3 million and $4.2 million and deferred rent was $0.6 million and $0.8 million at December 31, 2016 and 2015, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its vehicles, equipment and distribution facilities from various third parties with non-cancelable operating leases with various terms. Certain leases contain renewal or purchase options. Future minimum payments, by year, and in the aggregate, under these leases with initial terms of one year or more consisted of the following at December 31, 2016 (in millions):
|
|
Non-cancelable
|
|
|
Minimum
|
|
|
|
|
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
|
|
|
|
Leases
|
|
|
Income
|
|
|
Net
|
|
2017
|
|
$
|
10.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
9.9
|
|
2018
|
|
|
8.9
|
|
|
|
(0.1
|
)
|
|
|
8.8
|
|
2019
|
|
|
7.2
|
|
|
|
(0.1
|
)
|
|
|
7.1
|
|
2020
|
|
|
4.6
|
|
|
|
—
|
|
|
|
4.6
|
|
2021
|
|
|
2.8
|
|
|
|
—
|
|
|
|
2.8
|
|
Thereafter
|
|
|
1.0
|
|
|
|
—
|
|
|
|
1.0
|
|
Total minimum lease payments
|
|
$
|
34.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
34.2
|
|
Operating lease obligations expire in varying amounts through 2022. Rental expense for all operating leases was $13.6 million, $13.3 million and $13.3 million in 2016, 2015 and 2014, respectively. Sublease income was $0.9 million, $0.9 million and $0.8 million in 2016, 2015 and 2014, respectively.
-35-
The Company carries insurance policies with coverage and other terms that it believes to be appropriate. The Company generally 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 for when it is probable that future costs will be incurr
ed and can be reasonably estimated.
The Company is required to remediate a property formerly owned in Montana pursuant to a unilateral administrative order issued by the DEQ. On February 18, 2015, the DEQ issued an amendment to the unilateral administrative order of the DEQ outlining the final remediation of the property in its ROD. Under the ROD, the DEQ estimated the remediation costs of the property to be $8.3 million.
The Company submitted a comprehensive final RAWP in September 2015 that was approved by the DEQ. During the process of finalizing the RAWP in the third quarter of 2015 the Company considered a multitude of factors including, but not limited to, consultation with third party experts, the evaluation of remedial action alternatives, and discussions with DEQ. The culmination of the information, data, and risk analysis resulted in excluding certain potential cost saving remedial action alternatives from the final RAWP that had been previously proposed for inclusion in the RAWP. Eliminating these potential cost savings remedial action alternatives from the final RAWP caused the Company to reassess the total estimated remediation costs of the project. The Company estimates the total remaining cost of implementing the RAWP to be $7.1 million at December 31, 2016 with respect to the contingent liability as compared to $8.0 million at December 31, 2015.
The Company is currently implementing the RAWP and has commenced field work at the Montana site subject to DEQ oversight and approval.
As of December 31, 2016, the Company believes the accrual represents a reasonable best estimate of the total remaining remediation costs, based on facts, circumstances, and information currently available to Huttig. However, there are currently unknown variables relating to the actual levels of contaminants and amounts of soil that will ultimately require treatment or removal and 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 projected outcome required by the DEQ. Potential indemnification or other claims we may be able to assert against third parties and possible insurance coverage have also been considered but any potential recoveries have not been recognized at this time. 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 Huttig with respect to this property could be lower than, or exceed the amount accrued as of December 31, 2016 by a material amount and could have a material adverse effect on our liquidity, financial condition or operating results of any fiscal quarter or year in which estimated costs or additional expenses are, or not incurred.
On June 29, 2015, certain private plaintiffs owning properties adjacent to the Montana site sued the Company, Crane Co., and other defendants in the Montana Fourth Judicial District Court seeking remediation of the property in excess of what is contemplated by the ROD and other damages (the “Montana Lawsuit”). The Company has entered into a settlement agreement which has been recorded in the financial statements at December 31, 2016.
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 currently believes that there are no material environmental liabilities at any of its distribution center locations.
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, product liability and other legal matters. It is possible, however, that actual expenses could, or could not exceed our accrual by a material amount which could have a material adverse effect on the Company’s future liquidity, financial condition or operating results in the period in which any such additional expenses are incurred or recognized.
-36-
8. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
—The Company sponsors a qualified defined contribution plan covering substantially all its employees. The plan provides for Company matching contributions based upon a percentage of the employee’s voluntary contributions. The Company reinstated the matching contributions in July 2016, which had been suspended in January 2009. The Company’s matching contribution in 2016 was $0.6 million.
Defined Benefit Plans
—The Company participates in several multi-employer pension plans that provide benefits to certain employees under collective bargaining agreements. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects: (1) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (3) if the Company chooses to stop participating in some of its multi-employer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The Company’s total contributions to these plans were $0.8 million, $1.0 million, and $0.6 million in the years ended December 31, 2016, 2015, and 2014, respectively. A majority of the contributions were to the Western Conference of Teamsters Pension Plan. The Company does not contribute more than 5% percent of total contributions for any of these multi-employer pension plans. The Company’s participation in the multi-employer pension plans as of December 31, 2016 is outlined in the table below.
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
Pension
|
|
Financial
|
|
|
|
of Collective-
|
|
12/31/2016
|
|
|
|
|
Protection Act
|
|
Improvement
|
|
Surcharge
|
|
Bargaining
|
|
Company
|
Legal Name of Plan
|
|
EIN
-
Plan
Number
|
|
Zone Status
|
|
Plan
|
|
Imposed
|
|
Agreement
|
|
Participants
|
Western Conference of Teamsters Pension Plan
|
|
91-6145047
-
001
|
|
Funded
>
80%
|
|
No
|
|
No
|
|
12/31/2016 to
|
|
92
|
|
|
|
|
|
|
|
|
|
|
4/30/2018
|
|
|
Southern California Lumber Industry Retirement
Fund
|
|
95-6035266 - 001
|
|
Funded > 80%
|
|
No
|
|
No
|
|
6/30/2017
|
|
17
|
Central States, Southeast and Southwest Areas
Pension Plan
|
|
36-6044243 - 001
|
|
Funded < 65%
|
|
Implemented
|
|
No
|
|
12/27/2020
|
|
3
|
During 2015, Huttig completely withdrew employees from an existing multi-employer pension plan with the Central States Pension Fund, or the “Pension Fund,” and entered into a new agreement with the Pension Fund, which adopted an alternative method for determining an employer's unfunded obligation that would limit Huttig’s funding obligations to the Pension Fund in the future. As part of the agreement, Pension Fund participants were moved to a new pension plan sponsored by the Pension Fund. In connection with the complete withdrawal from the Pension Fund, Huttig was subject to a withdrawal liability of approximately $0.4 million which was paid in December 2015.
9. STOCK AND INCENTIVE COMPENSATION PLANS
Incentive Compensation Plan
The Company’s EVA Incentive Compensation Plan was terminated effective upon the stockholders’ approval of the 2015 amendment to the Company’s 2005 Executive Incentive Compensation Plan, which was adopted in 2005 and subsequently amended in 2007, 2009, 2012, and 2015 (“2005 Plan”). Instead, performance-based goals for 2015 annual cash incentive awards were adopted under the new amended plan, and awards issued thereunder subject to the limitations set forth in the plan. The Company recorded $1.4 million, $1.3 million and $1.0 million in expense related to compensation plans in the years ended December 31, 2016, 2015 and 2014, respectively.
In 2016, the Company adopted a long-term performance based plan and defined contribution supplemental retirement plan and incurred $0.3 million in total expense for the year ended December 31, 2016 for these plans.
2005 Executive Incentive Compensation Plan
Under the Company’s 2005 Plan, incentive awards of up to 6,125,000 shares of common stock may be granted. The 2005 Plan allows the Company to grant awards to key employees, including restricted stock awards,
-37-
stock options, other s
tock-based incentive awards and cash based incentive awards subject primarily to the requirement of continued employment. Awards under the 2005 Plan are available for grant over a ten-year period unless terminated earlier by the Board of Directors. No opti
ons were issued in 2016, 2015 or 2014. The Company granted 756,492, 500,468, and 456,253 shares of restricted stock in 2016, 2015, and 2014, respectively. No monetary consideration is paid to the Company by employees who receive restricted stock. The rest
ricted shares vest ratably over three to five years. Restricted stock can be granted with or without performance restrictions.
2005 Non-Employee Directors’ Restricted Stock Plan
Under the Company’s 2005 Non-Employee Directors’ Restricted Stock Plan, which was adopted in 2005 and subsequently amended in 2007, 2009, 2012, and 2015, incentive awards of up to 575,000 shares of common stock may be granted. Awards under this plan are available for grant over a ten-year period expiring March 31, 2025, unless terminated earlier by the Board of Directors. The Company granted 53,274 and 90,820 shares of restricted stock in 2016 and 2015, respectively. The Company granted 20,688 restricted stock units in 2014. These grants vest approximately one year later on the date of the following annual stockholders’ meeting on which they are granted.
Accounting For Stock-Based Compensation
The Company recognized approximately $1.7 million, $1.8 million, and $1.4 million in non-cash stock compensation expense for restricted stock awards in 2016, 2015 and 2014, respectively.
At December 31, 2016, the Company had 1,037,233 shares available for future awards under all of its stock compensation plans. The Company issued 373,595 shares of restricted stock in 2017.
Stock Options
The Company did not grant stock options in 2016, 2015 or 2014. There are no outstanding stock options at December 31, 2016.
Restricted Stock and Restricted Stock Units
Restricted stock grants are recorded as unearned compensation on the date of grant in additional paid in capital at fair market value. The unearned compensation is being amortized to expense over the requisite service periods.
-38-
The following summary presents the information regarding the restricted stock and restricted stock units for the thr
ee years in the period ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
Aggregate
|
|
|
Remaining
|
|
|
Unrecognized
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Intrinsic
|
|
|
Vesting
|
|
|
Compensation
|
|
|
|
Shares
|
|
|
Grant
Date
|
|
|
Contractual
|
|
Value
|
|
|
Period
|
|
|
Expense
|
|
|
|
(000’s)
|
|
|
Fair Value
|
|
|
Term (Years)
|
|
(000’s)
|
|
|
(months)
|
|
|
(000’s)
|
|
Outstanding at January 1, 2014
|
|
|
1,808
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
477
|
|
|
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested
|
|
|
(862
|
)
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19
|
)
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
1,404
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
591
|
|
|
|
3.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested
|
|
|
(781
|
)
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(116
|
)
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,098
|
|
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
810
|
|
|
|
3.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested
|
|
|
(552
|
)
|
|
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,349
|
|
|
$
|
3.64
|
|
|
8.3
|
|
$
|
8,825
|
|
|
|
7.7
|
|
|
$
|
2,973
|
|
Restricted stock and restricted stock units
vested at December 31, 2016
|
|
|
134
|
|
|
$
|
2.56
|
|
|
N/A
|
|
$
|
874
|
|
|
N/A
|
|
|
N/A
|
|
10. INCOME TAXES
The provision for income taxes, relating to continuing operations, is composed of the following as of December 31, 2016, 2015, and 2014 (in millions):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal expense (benefit)
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
State and local tax
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Total current
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal tax
|
|
|
6.9
|
|
|
|
(16.4
|
)
|
|
|
—
|
|
State and local tax
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
—
|
|
Total deferred
|
|
|
6.8
|
|
|
|
(17.2
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
7.2
|
|
|
$
|
(17.2
|
)
|
|
$
|
—
|
|
A reconciliation of income taxes based on the application of the statutory federal income tax rate to income taxes as set forth in the consolidated statements of income follows for the years ended December 31, 2016, 2015 and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
Nondeductible items
|
|
|
0.8
|
|
|
|
1.9
|
|
|
|
4.5
|
|
Other, net
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
(1.7
|
)
|
Change in valuation allowance
|
|
|
(2.4
|
)
|
|
|
(177.9
|
)
|
|
|
(39.5
|
)
|
Effective income tax rate
|
|
|
35.3
|
%
|
|
|
(139.8
|
)%
|
|
|
0.3
|
%
|
-39-
At December 31, 2016, our valuation allowance on deferred tax assets was approximately $6.4 million compared to $7.2 million at December 31, 2015. At December 31, 2016 and 2015, the valuation allowance primarily relates to individual state net operating loss carryforwards that are not more likely than not to be realized in future periods. At December 31, 2014, the Company maintained a full valuation allowance on its net deferred tax asset position. In each reporting period, we assess the available positive and negative evidence to estimate if sufficient future taxable income would be generated to utilize the existing deferred tax assets. Our history of operating losses limits the weight we applied to other subjective evidence such as our projections for future profitability in certain states. Before we change our judgment on the need for a full valuation allowance, a sustained period of operating profitability is required.
In 2016, our net income improvement and future projections allowed us to release and benefit from $0.8 million in reduction in valuation allowance on certain state net operating loss carryforwards. In 2015, our operations were in a position of three year cumulative profits. We concluded that as a result of (i) our cumulative profits, (ii) achieving full year profitability in 2013 and 2014, (iii) the issuance of the DEQ final record of decision on our formerly owned property in Montana and our subsequent completion of the final RAWP approved by DEQ, (iv) our 2015 business results, and (v) our projections of continued profitability for 2016 and beyond, that it is more likely than not that a significant portion of our deferred tax assets will be realized. Accordingly, in 2015, we released a significant portion of our valuation allowance on our net deferred tax assets, resulting in a $22.5 million benefit in our provision for income taxes.
The income tax expense from continuing operations for 2016 was $7.2 million on income before taxes of $20.5 million. The income tax expense from discontinued operations for 2016 was $1.8 million on a net income before taxes of $4.8 million. For 2015, income tax benefit of $17.2 million was recorded on income of $12.2 million. In 2016, the difference between our effective tax rate and the U.S. statutory rate was primarily due to the release of a portion of the valuation allowance on our net deferred tax assets, as discussed above. In 2015, the difference between our effective tax rate and the U.S. statutory rate was primarily due to the release of a significant portion of the valuation allowance on our net deferred tax assets, as discussed above.
At December 31, 2016, the Company had gross deferred tax assets of $25.9 million and a valuation allowance $6.4 million, netting to deferred tax assets of $19.5 million. The Company had deferred tax liabilities of $9.2 million at December 31, 2016. The Company had $10.3 and $19.1 million net deferred tax assets at December 31, 2016 and 2015, respectively. The change in net deferred tax assets related to the continued utilization of net operating loss carryforwards offsetting taxable income in 2016.
Deferred income taxes at December 31, 2016 and 2015 are comprised of the following (in millions):
|
|
2016
|
|
|
2015
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Income tax loss carryforwards
|
|
$
|
15.4
|
|
|
$
|
—
|
|
|
$
|
24.1
|
|
|
$
|
—
|
|
Other accrued liabilities
|
|
|
3.4
|
|
|
|
—
|
|
|
|
3.5
|
|
|
|
—
|
|
Employee benefits related
|
|
|
2.6
|
|
|
|
—
|
|
|
|
2.5
|
|
|
|
—
|
|
Property, plant and equipment
|
|
|
1.3
|
|
|
|
—
|
|
|
|
1.4
|
|
|
|
—
|
|
Insurance related
|
|
|
0.9
|
|
|
|
—
|
|
|
|
1.2
|
|
|
|
—
|
|
Goodwill
|
|
|
0.6
|
|
|
|
—
|
|
|
|
0.7
|
|
|
|
—
|
|
Inventories
|
|
|
1.2
|
|
|
|
—
|
|
|
|
1.0
|
|
|
|
—
|
|
Accounts receivables
|
|
|
0.2
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
LIFO
|
|
|
—
|
|
|
|
8.6
|
|
|
|
—
|
|
|
|
8.0
|
|
Other
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.5
|
|
Gross deferred tax assets and liabilities
|
|
|
25.9
|
|
|
|
9.2
|
|
|
|
34.8
|
|
|
|
8.5
|
|
Valuation allowance
|
|
|
(6.4
|
)
|
|
|
—
|
|
|
|
(7.2
|
)
|
|
|
—
|
|
Total
|
|
$
|
19.5
|
|
|
$
|
9.2
|
|
|
$
|
27.6
|
|
|
$
|
8.5
|
|
-40-
The Company has both federal and state tax loss carryforwards reflected above. The Company’s federal tax loss carryforwards of approximately $30 million will beg
in to expire in 2030. The Company has substantially concluded all U.S. federal income tax matters for years through 2008. The state tax loss carryforwards have expiration dates from 2016 to 2035. The Company has no material uncertain tax positions at Decem
ber 31, 2016.
11. BASIC AND DILUTED NET INCOME PER SHARE
The Company calculates its basic income per share by dividing net income 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 for the years ended December 31, 2016, 2015 and 2014 (in millions):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Earnings allocated to participating shareholders
|
|
$
|
0.5
|
|
|
$
|
1.2
|
|
|
$
|
0.3
|
|
Number of participating securities
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.3
|
|
The diluted earnings per share calculations include the effect of the assumed exercise using the treasury stock method for both stock options and 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 per share from continuing operations for the periods ended December 31, 2016, 2015 and 2014 (in millions):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted-average number of common shares-basic
|
|
|
24.5
|
|
|
|
24.1
|
|
|
|
23.5
|
|
Dilutive potential common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average number of common shares-
dilutive
|
|
|
24.5
|
|
|
|
24.1
|
|
|
|
23.5
|
|
The calculation of diluted earnings per common share for the years ended December 31, 2015 and 2014 excludes the impact of anti-dilutive stock options. The Company had no stock options outstanding at December 31, 2016.
-41-
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table provides selected consolidated financial information from continuing operations on a quarterly basis for each quarter of 2016 and 2015. The Company’s business is seasonal and particularly sensitive to weather conditions. Interim amounts are therefore subject to significant fluctuations (in millions, except per share data).
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
158.8
|
|
|
$
|
197.9
|
|
|
$
|
192.8
|
|
|
$
|
164.4
|
|
|
$
|
713.9
|
|
Gross margin
|
|
|
32.0
|
|
|
|
42.2
|
|
|
|
41.4
|
|
|
|
35.6
|
|
|
|
151.2
|
|
Operating expenses
|
|
|
28.9
|
|
|
|
32.2
|
|
|
|
33.6
|
|
|
|
33.8
|
|
|
|
128.5
|
|
Operating income
|
|
|
3.1
|
|
|
|
10.0
|
|
|
|
7.8
|
|
|
|
1.8
|
|
|
|
22.7
|
|
Net income from continuing operations
|
|
|
1.5
|
|
|
|
5.9
|
|
|
|
4.8
|
|
|
|
1.1
|
|
|
|
13.3
|
|
Net (loss) income from discontinued operations
|
|
|
(0.1
|
)
|
|
|
4.5
|
|
|
|
(0.1
|
)
|
|
|
(1.3
|
)
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
0.06
|
|
|
$
|
0.23
|
|
|
$
|
0.19
|
|
|
$
|
0.04
|
|
|
$
|
0.52
|
|
Net income (loss) from discontinued operations
|
|
|
—
|
|
|
$
|
0.18
|
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.12
|
|
Net income
|
|
|
0.06
|
|
|
$
|
0.41
|
|
|
$
|
0.19
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
147.4
|
|
|
$
|
175.1
|
|
|
$
|
181.7
|
|
|
$
|
155.4
|
|
|
$
|
659.6
|
|
Gross margin
|
|
|
28.5
|
|
|
|
35.6
|
|
|
|
37.2
|
|
|
|
32.0
|
|
|
|
133.3
|
|
Operating expenses
|
|
|
27.9
|
|
|
|
30.0
|
|
|
|
30.8
|
|
|
|
30.5
|
|
|
|
119.2
|
|
Operating income
|
|
|
0.6
|
|
|
|
6.0
|
|
|
|
6.4
|
|
|
|
1.5
|
|
|
|
14.5
|
|
Net income from continuing operations
|
|
|
0.1
|
|
|
|
5.4
|
|
|
|
23.2
|
|
|
|
0.7
|
|
|
|
29.4
|
|
Net loss from discontinued operations
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(2.7
|
)
|
|
|
(0.3
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
—
|
|
|
$
|
0.21
|
|
|
$
|
0.92
|
|
|
$
|
0.03
|
|
|
$
|
1.17
|
|
Net loss from discontinued operations
|
|
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.14
|
)
|
Net income
|
|
|
—
|
|
|
$
|
0.20
|
|
|
$
|
0.82
|
|
|
$
|
0.02
|
|
|
$
|
1.04
|
|
13. RIGHTS AGREEMENT
On May 18, 2016, the Board of Directors (the “Board”) of the Company entered into a rights agreement (the “Rights Agreement”) with Computershare Trust Company, N.A. and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, $0.01 par value per share, of the Company. The dividend was payable upon the close of business on May 31, 2016 to the stockholders of record upon the close of business on that date. The Board adopted the Rights Agreement to protect stockholder value by attempting to reduce the risk that the Company’s ability to use its net operating losses to reduce potential future federal income tax obligations may become substantially limited.
Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (“Preferred Shares”), of the Company at a price of $13.86 per one one-hundredth of a Preferred Share, subject to adjustment. As a result of the Rights Agreement, any person or group that acquires beneficial ownership of 4.99% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group.
In connection with the entry into the Rights Agreement, on May 18, 2016, the Company filed with the Secretary of State of the State of Delaware an Amended and Restated Certificate of Designation of Series A Junior Participating Preferred Stock to create the Preferred Shares.
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14. ACQUISITION
On April 4, 2016 the Company purchased the assets of BenBilt, a distributor and door fabricator in the Mid-Atlantic region for $17.3 million, as a business combination. All transaction costs incurred as part of this acquisition were expensed. The Company recorded property, plant and equipment of $4.5 million, goodwill of $3.2 million and other intangible assets of $6.7 million related to this acquisition.
15. DISCONTINUED OPERATIONS
The discontinued operations of the Company had no sales in 2016, 2015 or 2014. In 2016, income from discontinued operations of $3.0 million was recorded which is primarily as a result of payments received from settlement agreements with insurers, as well as with Crane Co., in connection with the declaratory action filed in the United States court for the Eastern District of Missouri. In 2015, loss from discontinued operations of $3.4 million was recorded which primarily related to changes in estimates associated with the future remediation and monitoring activities at the formerly owned property in Montana. In 2014, loss from discontinued operations of $3.6 million was recorded which primarily related to changes in estimates associated with the future remediation and monitoring activities at the formerly owned property in Montana.
16. RECENT ACCOUNTING STANDARDS OR UPDATES NOT YET EFFECTIVE
In November 2015,
the Financial Accounting Standards Board (“FASB”) issued accounting guidance, "Balance Sheet Classification of Deferred Taxes" which removes the requirement to separate deferred tax liabilities and assets into current and noncurrent amounts and instead requires all such amounts be classified as noncurrent on the Statement of Financial Position. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted, including adoption in an interim period, for financial periods not yet reported. The standard may be adopted on a prospective or retrospective basis. Huttig adopted the standard in the fourth quarter of 2016 on a prospective basis. The December 31, 2015 financial statements were not retrospectively adjusted. The adoption of this guidance resulted in no material changes.
In March 2016, the FASB issued accounting guidance, "Improvements to Employee Share-Based Payment Accounting", which will simplify the income tax consequences, accounting for forfeitures and classification on the Statements of Consolidated Cash Flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. Huttig is required to adopt the standard in the first quarter of 2017. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued accounting guidance, "Revenue from Contracts with Customers" which has been further clarified and amended. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. In August 2015, the FASB amended the guidance to allow for the deferral of the effective date of this standard. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Accordingly, Huttig is required to adopt this standard in the first quarter of fiscal year 2018. One-year early adoption is permitted. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
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In February 2016, the FASB issued ac
counting guidance, "Leases", which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance,
while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018,
with early adoption permitted. This standard will be adopted on a modified retrospective basis. Huttig is required to adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact this guidance will have on the consolidate
d financial statements and related disclosures.
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