-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CPY9iIVmSoeZhpiFd02i4WSA5mv7K85MPPEymKkLtwWfplP7gKYu65RrzOsCUNxL 5PxWK4moEVvBSLYb2zJxAA== 0000950134-03-012797.txt : 20030916 0000950134-03-012797.hdr.sgml : 20030916 20030916155330 ACCESSION NUMBER: 0000950134-03-012797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030802 FILED AS OF DATE: 20030916 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCI BUILDING SYSTEMS INC CENTRAL INDEX KEY: 0000883902 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED METAL BUILDINGS & COMPONENTS [3448] IRS NUMBER: 760127701 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14315 FILM NUMBER: 03897684 BUSINESS ADDRESS: STREET 1: 10943 NORTH SAM HOUSTON PARKWAY W CITY: HOUSTON TEXAS STATE: TX ZIP: 77041 BUSINESS PHONE: 7134667788 MAIL ADDRESS: STREET 1: 7301 FAIRVIEW STREET 2: P O BOX 40220 CITY: HOUSTON STATE: TX ZIP: 77041 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL COMPONENTS INCORPORATED DATE OF NAME CHANGE: 19600201 10-Q 1 d09078e10vq.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED: August 2, 2003 COMMISSION FILE NUMBER: 1-14315 NCI BUILDING SYSTEMS, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 76-0127701 - ----------------------------------------- ------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10943 N. Sam Houston Parkway W. Houston, TX 77064 - ----------------------------------------- ------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (281) 897-7788 - -------------------------------------------------------------------------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - -------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. 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 PERIODS THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE. Common Stock, $.01 Par Value -- 18,870,690 shares as of August 2, 2003 ================================================================================ FORWARD LOOKING STATEMENTS "This Quarterly Report contains forward-looking statements concerning our business and operations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties, and other factors that could cause the actual results to differ materially from those projected. These risks, uncertainties, and other factors include, but are not limited to, industry cyclicality and seasonality, adverse weather conditions, fluctuations in customer demand and other patterns, raw material pricing, competitive activity and pricing pressure, the ability to make strategic acquisitions accretive to earnings, and general economic conditions affecting the construction industry, as well as other risks detailed in our filings with the SEC. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations." ================================================================================ TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated balance sheets 1 August 2, 2003 and November 2, 2002 Consolidated statements of income 2 Fiscal three months ended August 2, 2003 and August 3, 2002 Consolidated statements of income 3 Fiscal nine months ended August 2, 2003 and August 3, 2002 Condensed consolidated statements of cash flows 4 Fiscal nine months ended August 2, 2003 and August 3, 2002 Notes to condensed consolidated financial statements 5-11 August 2, 2003 Item 2. Management's Discussion and Analysis of Financial 12-18 Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II - OTHER INFORMATION PAGE Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21
-i- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NCI BUILDING SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
August 2, November 2, 2003 2002 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents .................... $ 4,272 $ 9,530 Accounts receivable, net ..................... 90,807 94,956 Inventories .................................. 65,125 68,445 Deferred income taxes ........................ 7,448 7,448 Prepaid expenses ............................. 7,184 6,129 ------------ ------------ Total current assets ......................... 174,836 186,508 Property, plant and equipment, net ........................ 204,193 205,334 Excess of costs over fair value of acquired net assets .... 318,247 318,247 Other assets .............................................. 9,512 11,176 ------------ ------------ Total assets .............................................. $ 706,788 $ 721,265 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............ $ 6,250 $ 6,250 Accounts payable ............................. 49,338 49,012 Accrued compensation and benefits ............ 19,740 22,418 Other accrued expenses ....................... 29,949 28,671 ------------ ------------ Total current liabilities .................... 105,277 106,351 ------------ ------------ Long-term debt, noncurrent portion ........................ 261,463 291,050 Deferred income taxes ..................................... 20,405 20,405 Shareholders' equity: Common stock ................................. 189 187 Additional paid-in capital ................... 101,196 97,903 Retained earnings ............................ 218,376 205,688 Treasury stock ............................... (118) (319) ------------ ------------ Total shareholders' equity ................... 319,643 303,459 ------------ ------------ Total liabilities and shareholders' equity ................ $ 706,788 $ 721,265 ============ ============
See accompanying notes to condensed consolidated financial statements. -1- NCI BUILDING SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Fiscal Three Months Ended August 2, 2003 August 3, 2002 --------------- --------------- Sales ........................................... $ 236,262 $ 257,837 Cost of sales ................................... 182,954 196,422 --------------- --------------- Gross profit .............................. 53,308 61,415 Selling, general and administrative expenses .... 37,107 37,094 --------------- --------------- Income from operations ................... 16,201 24,321 Interest expense ................................ (4,939) (5,137) Other income, net ............................... 36 1,229 --------------- --------------- Income before income taxes ............... 11,298 20,413 Provision for income taxes ...................... 4,470 7,843 --------------- --------------- Net income ...................................... $ 6,828 $ 12,570 =============== =============== Income per share: Basic .................................... $ 0.36 $ 0.68 =============== =============== Diluted .................................. $ 0.36 $ 0.67 =============== ===============
See accompanying notes to condensed consolidated financial statements. -2- NCI BUILDING SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Fiscal Nine Months Ended August 2, 2003 August 3, 2002 --------------- --------------- Sales .................................................. $ 643,324 $ 699,626 Cost of sales .......................................... 504,535 547,147 --------------- --------------- Gross profit ..................................... 138,789 152,479 Selling, general and administrative expenses ........... 103,536 103,943 --------------- --------------- Income from operations .......................... 35,253 48,536 Interest expense ....................................... (14,698) (16,846) Other income, net ...................................... 739 1,665 --------------- --------------- Income before income taxes and cumulative effect of change in accounting principle .................. 21,294 33,355 Provision for income taxes ............................. 8,606 12,878 --------------- --------------- Income before cumulative effect of change in accounting principle ................... 12,688 20,477 Cumulative effect of change in accounting principle, net of tax ............................ -- (65,087) --------------- --------------- Net income (loss) ...................................... $ 12,688 $ (44,610) =============== =============== Income (loss) per share: Basic: Income before cumulative effect of change in accounting principle .......................... $ 0.68 $ 1.11 Cumulative effect of change in accounting principle, net of tax ............................ -- (3.53) --------------- --------------- Net income (loss) ...................................... $ 0.68 $ (2.42) =============== =============== Diluted: Income before cumulative effect of change in accounting principle .......................... $ 0.67 $ 1.10 Cumulative effect of change in accounting principle, net of tax ............................ -- (3.49) --------------- --------------- Net income (loss) ...................................... $ 0.67 $ (2.39) =============== ===============
See accompanying notes to condensed consolidated financial statements. -3- NCI BUILDING SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Fiscal Nine Months Ended August 2, 2003 August 3, 2002 --------------- --------------- Cash flows from operating activities: Net income (loss) .................................................... $ 12,688 $ (44,610) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax ................................................... -- 65,087 Depreciation and amortization ................................ 17,106 17,148 (Gain) loss on sale of fixed assets .......................... 57 (1,241) Provision for doubtful accounts .............................. 3,289 2,361 Deferred income tax benefit .................................. -- (47) Changes in working capital: Current assets ........................................... 4,079 (210) Current liabilities ...................................... (1,076) 15,347 --------------- --------------- Net cash provided by operating activities ............................ 36,143 53,835 --------------- --------------- Cash flows from investing activities: Proceeds from sale of fixed assets ........................... 86 5,779 Purchase of property, plant and equipment .................... (12,518) (7,145) Acquisitions ................................................. (4,310) -- Other ........................................................ 1,664 3,074 --------------- --------------- Net cash provided by (used in) investing activities .................. (15,078) 1,708 --------------- --------------- Cash flows from financing activities: Proceeds from stock options exercised ........................ 3,378 2,904 Net payments on revolving lines of credit .................... (24,900) (39,850) Payments on long-term debt ................................... (4,687) (33,750) Purchase of treasury stock ................................... (114) (175) --------------- --------------- Net cash used in financing activities ................................ (26,323) (70,871) --------------- --------------- Net decrease in cash and cash equivalents .................................... (5,258) (15,328) Cash and cash equivalents at beginning of period ............................. 9,530 21,125 --------------- --------------- Cash and cash equivalents at end of period ................................... $ 4,272 $ 5,797 =============== ===============
See accompanying notes to condensed consolidated financial statements. -4- NCI BUILDING SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 2, 2003 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform with the current year presentation. Operating results for the fiscal three month and fiscal nine month periods ended August 2, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending November 1, 2003. During fiscal 2002, the Company adopted a revised accounting calendar, which incorporates a four-four-five week calendar each quarter with year end on the Saturday closest to October 31. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended November 2, 2002, filed with the Securities and Exchange Commission. NOTE 2 - INVENTORIES The components of inventory are as follows:
August 2, November 2, 2003 2002 --------------- --------------- (in thousands) Raw materials ......................... $ 46,881 $ 49,064 Work in process and finished goods .... 18,244 19,381 --------------- --------------- $ 65,125 $ 68,445 =============== ===============
NOTE 3 - BUSINESS SEGMENTS The Company has divided its operations into two reportable segments; engineered building systems and metal building components, based upon similarities in product lines, manufacturing processes, marketing and management of its businesses. Products of both segments are similar in basic raw materials used. The engineered building systems segment includes the manufacturing of structural framing and supplies and value added engineering and drafting, which are typically not part of component products or services. The reporting segments follow the same accounting policies used for the Company's consolidated financial statements. Management evaluates segment performance based upon operating income. Intersegment sales are recorded based on weighted average costs, and consist primarily of products and services provided to the engineered building systems segment by the metal building components segment, including painting and coating of hot roll and light gauge material. The Company is not dependent on any one significant customer or group of customers. Substantially all of the Company's sales are made within the United States. -5-
FISCAL THREE MONTHS ENDED FISCAL NINE MONTHS ENDED AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002 --------------------- --------------------- --------------------- --------------------- (in thousands, except for percentages) % % % % SALES TO OUTSIDE CUSTOMERS: Engineered building systems ..... $ 74,344 31 $ 83,893 33 $ 212,487 33 $ 229,627 33 Metal building components ....... 161,918 69 173,944 67 430,837 67 469,999 67 Intersegment sales .............. 11,079 5 12,194 5 32,365 5 29,544 4 Corporate/eliminations .......... (11,079) (5) (12,194) (5) (32,365) (5) (29,544) (4) --------- --------- --------- --------- --------- --------- --------- --------- Total sales ............... $ 236,262 100 $ 257,837 100 $ 643,324 100 $ 699,626 100 ========= ========= ========= ========= ========= ========= ========= ========= OPERATING INCOME: Engineered building systems ..... $ 3,608 5 $ 8,244 10 $ 12,343 6 $ 20,343 9 Metal building components ....... 19,466 12 23,279 13 42,699 10 47,939 10 Corporate expenses .............. (6,873) -- (7,202) -- (19,789) -- (19,746) -- --------- --------- --------- --------- --------- --------- --------- --------- Total operating income .... $ 16,201 7 $ 24,321 9 $ 35,253 5 $ 48,536 7 ========= ========= ========= ========= ========= ========= ========= ========= TOTAL ASSETS: Engineered building systems ..... $ 203,859 29 $ 207,638 28 Metal building components ....... 468,385 66 486,878 66 Corporate ....................... 34,544 5 39,636 6 --------- --------- --------- --------- Total assets .............. $ 706,788 100 $ 734,152 100 ========= ========= ========= =========
NOTE 4 - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" Effective November 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company historically evaluated goodwill for impairment by comparing the entity level unamortized balance of goodwill to projected undiscounted cash flows, which did not result in an indicated impairment. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step. The Company determined the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to each reporting unit's carrying value. The Company completed the first step during the second quarter of fiscal 2002, which indicated that goodwill recorded in the metal building components segment was impaired as of November 1, 2001. Due to the potential impairment, the Company then completed step two of the test to measure the amount of the impairment. Based on that analysis, a transitional impairment loss of $67.4 million ($65.1 million, after tax effect of $2.3 million) was recognized as a cumulative effect of a change in accounting principle. Accordingly, the first quarter of fiscal 2002 results were restated to reflect the change in accounting principle in accordance with the transition provisions of SFAS No. 142. -6- NOTE 5 - ADOPTION OF SFAS NO. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE" Effective February 2, 2003, the Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees. The Company is currently evaluating the provisions of SFAS No. 148 relating to the SFAS No. 123 fair value method of accounting for stock-based employee compensation. In accordance with the terms of APB No. 25, because the exercise price of the Company's employee stock option equals the market price of the underlying stock on the date of the grant, the Company records no compensation expense for its stock option awards. The following table provides pro forma information as if the fair value based method had been applied in measuring compensation expense (in thousands, except per share data):
Fiscal Three Months Ended Fiscal Nine Months Ended August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002 --------------- --------------- --------------- --------------- Reported income before cumulative effect of change in accounting principle ......... $ 6,828 $ 12,570 $ 12,688 $ 20,477 Pro forma compensation expense, net of tax .... 609 515 1,763 1,539 --------------- --------------- --------------- --------------- Pro forma income before cumulative effect of change in accounting principle ...... $ 6,219 $ 12,055 $ 10,925 $ 18,938 =============== =============== =============== =============== Pro forma basic income per share .............. $ 0.33 $ 0.65 $ 0.58 $ 1.03 Pro forma diluted income per share ............ $ 0.33 $ 0.64 $ 0.58 $ 1.02
-7- NOTE 6 - NET INCOME PER SHARE Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share consider the effect of common stock equivalents. The computations are as follows:
Fiscal Three Months Ended Fiscal Nine Months Ended August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002 --------------- --------------- --------------- --------------- (in thousands, except per share data) Income before cumulative effect of change in accounting principle .................... $ 6,828 $ 12,570 $ 12,688 $ 20,477 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (65,087) --------------- --------------- --------------- --------------- Net income (loss) .............................. $ 6,828 $ 12,570 $ 12,688 $ (44,610) =============== =============== =============== =============== Weighted average common shares outstanding ..... 18,836 18,603 18,769 18,466 Add: Common stock equivalents Stock options ...................... 115 177 152 185 --------------- --------------- --------------- --------------- Weighted average common shares outstanding, assuming dilution .......... 18,951 18,780 18,921 18,651 =============== =============== =============== =============== Income (loss) per share: Basic: Income before cumulative effect of change in accounting principle .................... $ 0.36 $ 0.68 $ 0.68 $ 1.11 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (3.53) --------------- --------------- --------------- --------------- Net income (loss) .............................. $ 0.36 $ 0.68 $ 0.68 $ (2.42) =============== =============== =============== =============== Diluted: Income before cumulative effect of change in accounting principle .................... $ 0.36 $ 0.67 $ 0.67 $ 1.10 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (3.49) --------------- --------------- --------------- --------------- Net income (loss) .............................. $ 0.36 $ 0.67 $ 0.67 $ (2.39) =============== =============== =============== ===============
-8- NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 generally requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. Extraordinary treatment is required for certain extinguishments as provided in APB No. 30, Reporting the Results of Operations. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 will not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB No. 30. The Company adopted SFAS No. 145 as of November 3, 2002. Any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB No. 30 for such classification will be reclassified to conform with the provisions of SFAS No. 145. Adoption of SFAS No. 145 did not impact the periods presented in the consolidated statements of income included in this Form 10-Q. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company does not expect that the adoption of the statement will have a significant impact on the Company's financial position and results of operations. During November 2002, the EITF reached a consensus on EITF Issue No. 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company does not expect that the adoption of EITF Issue No. 00-21 will have a significant impact on the Company's financial position and results of operations. During November 2002, the EITF reached a consensus on EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF Issue No. 02-16 discusses how a customer should account for consideration received from a vendor. The consensus is applicable to all fiscal periods beginning after December 15, 2002, with early application permitted if there would be no net income statement impact to prior periods presented. The Company adopted EITF Issue No. 02-16 effective November 3, 2002, and such adoption did not have a significant impact on the Company's financial position and results of operations. In January 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires variable interest entities ("VIEs") to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual benefits. FIN No. 46 is currently effective for all VIEs created or modified after January 31, 2003 and is effective for all VIEs, regardless of when created, in quarterly periods beginning after June 15, 2003. The Company is currently reviewing the provisions of FIN No. 46. The Company does not expect that the adoption of FIN No. 46 will have a significant impact on the Company's financial position and results of operations. -9- NOTE 8 - ACQUISITIONS During July 2003, the Company acquired certain operating assets and the business of Able Manufacturing and Wholesale Garage Door Company in a cash transaction of approximately $3.2 million. Able manufactures and distributes a complete line of metal sectional doors for both the commercial and residential markets. In a separate transaction, the Company also acquired a retail store located in Baytown, Texas, which became the fifth NCI Metal Depot. NCI Metal Depots sell a wide range of commercial and residential metal components and accessories, as well as a variety of small metal building packages directly to the public. The purchase price for the assets of the Baytown location was approximately $1.1 million. The combined annual sales of both companies were less than $20 million for the previous calendar year. NOTE 9 - CONTINGENCIES The Company's primary steel suppliers, Bethlehem Steel Corporation and National Steel Corporation, filed for protection under Federal Bankruptcy laws on October 15, 2001, and March 6, 2002, respectively. During the third quarter of fiscal 2003, U.S. Steel bought substantially all of the integrated steel-making assets of National Steel, and International Steel Group, Inc. acquired the assets of Bethlehem Steel. During the first nine months of fiscal 2003, the Company purchased approximately 67% of its steel requirements from U.S. Steel and International Steel Group, Inc. The Company does not maintain an inventory of steel in excess of its current production requirements. Should either of these companies cease operations, essential supply of primary raw materials could be temporarily interrupted. The Company believes that its other steel suppliers can meet its demand for steel if its supply from any of these sources is interrupted. As a result of the Company's restatement of its financial results for the last half of fiscal 1999, all of fiscal 2000 and the first quarter of fiscal 2001, several class action lawsuits were filed against the Company and certain of its current officers in the United States District Court for the Southern District of Texas, commencing in April 2001. The plaintiffs in the actions purport to represent purchasers of NCI common stock during various periods ranging from August 25, 1999 through April 12, 2001. The lawsuits were consolidated into one class action lawsuit on August 16, 2001. On January 10, 2002, the court appointed lead plaintiffs for the consolidated lawsuit. The lead plaintiffs filed a consolidated amended complaint on February 1, 2002. In the consolidated complaint the plaintiffs allege, among other things, that during the financial periods that were restated, the Company made materially false and misleading statements about the status and effectiveness of a management information and accounting system used by its components division, failed to assure that the system maintained books and records accurately reflecting inventory levels and costs of goods sold, failed to maintain internal controls on manual accounting entries made to certain inventory-related accounts in an effort to correct the data in the system, otherwise engaged in improper accounting practices that overstated earnings, and issued materially false and misleading financial statements. The plaintiffs further allege that the individual defendants traded in the Company's common stock while in possession of material, non-public information regarding the foregoing. The plaintiffs in the consolidated complaint assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. On March 15, 2002, the Company filed its Motion to Dismiss Plaintiffs' Amended Consolidated Class Action Complaint and Memorandum in Support. On March 28, 2003, the United States District Court entered its order granting in part and denying in part the Motion to Dismiss. In addition, the court granted leave for the plaintiffs to further amend the complaint. On April 16, 2003, the plaintiffs filed the Plaintiffs' Second Amended Consolidated Class Action Complaint. The Company and the individual defendants deny the allegations in the Second Amended Complaint and intend to vigorously defend against the allegations contained therein. The consolidated lawsuit is at an early procedural stage. Consequently, at this time the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to estimate the damages, or the range of damages, if any, that the Company might incur in connection with the lawsuit, or whether an adverse outcome could have a material adverse impact on its business, consolidated financial condition or results of operations. -10- The Company is involved in various other legal proceedings and contingencies that are considered to be in the ordinary course of business. While the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to accurately estimate the damages, or the range of damages, if any, that the Company might incur in connection with these litigations, the Company believes that these legal proceedings will not have a material adverse effect on its business, consolidated financial condition or results of operations. -11- NCI BUILDING SYSTEMS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's various product lines have been aggregated into two business segments: engineered building systems and metal building components. These aggregations are based on the similar nature of the products, distribution of products, and management and reporting for those products within the Company. Both segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, repair and retrofit demand and the availability and terms of financing available for construction. The reporting segments follow the same accounting policies used for the Company's consolidated financial statements. Products of both business segments are similar in basic raw materials used. Engineered building systems include the manufacturing of structural framing and value added engineering and drafting, which are typically not part of component products or services. The Company believes it has one of the broadest product offerings of metal building products in the industry. Intersegment sales are based on weighted average costs, and consist primarily of products and services provided to the engineered buildings segment by the components segment, including painting and coating of hot rolled and light gauge material. Sales between segments allow the Company to provide better customer service, shorter delivery time and minimizes transportation costs to the customer. Financial data for the prior period has been reclassified to conform to the current presentation.
FISCAL THREE MONTHS ENDED FISCAL NINE MONTHS ENDED AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002 --------------------- --------------------- --------------------- --------------------- (in thousands, except for percentages) % % % % SALES TO OUTSIDE CUSTOMERS: Engineered building systems .... $ 74,344 31 $ 83,893 33 $ 212,487 33 $ 229,627 33 Metal building components ...... 161,918 69 173,944 67 430,837 67 469,999 67 Intersegment sales ............. 11,079 5 12,194 5 32,365 5 29,544 4 Corporate/eliminations ......... (11,079) (5) (12,194) (5) (32,365) (5) (29,544) (4) --------- --------- --------- --------- --------- --------- --------- --------- Total sales .............. $ 236,262 100 $ 257,837 100 $ 643,324 100 $ 699,626 100 ========= ========= ========= ========= ========= ========= ========= ========= OPERATING INCOME: Engineered building systems .... $ 3,608 5 $ 8,244 10 $ 12,343 6 $ 20,343 9 Metal building components ...... 19,466 12 23,279 13 42,699 10 47,939 10 Corporate expenses ............. (6,873) -- (7,202) -- (19,789) -- (19,746) -- --------- --------- --------- --------- --------- --------- --------- --------- Total operating income ... $ 16,201 7 $ 24,321 9 $ 35,253 5 $ 48,536 7 ========= ========= ========= ========= ========= ========= ========= ========= TOTAL ASSETS: Engineered building systems .... $ 203,859 29 $ 207,638 28 Metal building components ...... 468,385 66 486,878 66 Corporate ...................... 34,544 5 39,636 6 --------- --------- --------- --------- Total assets ............. $ 706,788 100 $ 734,152 100 ========= ========= ========= =========
-12- NCI BUILDING SYSTEMS, INC. FISCAL THREE MONTHS ENDED AUGUST 2, 2003 COMPARED TO FISCAL THREE MONTHS ENDED AUGUST 3, 2002 Consolidated sales for the three months ended August 2, 2003 decreased by $21.6 million, or 8%, compared to the three months ended August 3, 2002. Sales were down due to a continued slowdown in nonresidential construction. The metal construction industry has experienced declines in the past two years and this trend has continued throughout fiscal 2003. Based on Metal Building Manufacturers Association reports and public company information, the Company believes it has outperformed its competitors in the metal construction industry, despite the difficult environment, due to increased market penetration, a low cost infrastructure, and a broad product offering including retrofit and repair, which is counter cyclical in an economic downturn. Engineered Building Systems' sales were down 11%, to $74.3 million, for the three months ended August 2, 2003, compared to sales of $83.9 million in the previous year's period, due to the industry decline in nonresidential construction. Although incoming orders for engineered building systems are up 6% compared to the prior year's period, orders for the third quarter of fiscal year 2002 were lower than normal as customers submitted orders in advance of an announced industry-wide steel price increase in April 2002. Year to date orders are 3% below the same period in the prior year. Engineered building systems accounted for 31% of total consolidated sales in the three months ended August 2, 2003 compared to 33% in the three months ended August 3, 2002. Operating income of the engineered building systems segment declined in the three months ended August 2, 2003 by 56%, to $3.6 million, compared to $8.2 million in the prior year's period. Of this $4.6 million decline, $2.7 million resulted from lower sales volume, $0.7 million resulted from lower margins because of unabsorbed overhead and lower selling prices due to competition, and $1.2 million resulted from higher selling, general and administrative expenses primarily due to increases in the provision for doubtful accounts of approximately $1.5 million associated with the Company's operations in Mexico. As a percent of sales, operating income in the three months ended August 2, 2003 was 5% compared to 10% in the three months ended August 3, 2002. Metal Building Components' sales decreased by 7%, to $161.9 million, in the three months ended August 2, 2003 compared to $173.9 million in the prior year's period. The decline in sales was due to the overall decline in the metal construction industry and a reduction in sales to the self-storage industry. This segment accounted for 69% of consolidated sales in the three months ended August 2, 2003 compared to 67% in the three months ended August 3, 2002. Operating income of the metal building components segment decreased in the three months ended August 2, 2003 by 16%, to $19.5 million, compared to $23.3 million in the prior year's period. Of this $3.8 million decline, $2.7 million resulted from lower sales volume, $2.1 million resulted from lower margins because of unabsorbed overhead and lower selling prices due to competition especially in the roll-up doors product line, offset by a decrease in selling, general and administrative expenses of $1.0 million primarily due to lower workers compensation insurance of $0.4 million, telephone and computer expense of $0.2 million and advertising expense of $0.1 million. Consolidated selling, general and administrative expenses, consisting of engineering and drafting, selling and administrative costs, remained flat at $37.1 million for the three months ended August 2, 2003 and August 3, 2002. As a percent of sales, selling, general and administrative expenses for the three months ended August 2, 2003 were 16% compared to 14% for the three months ended August 3, 2002. Interest expense for the three months ended August 2, 2003 decreased by 4%, to $4.9 million compared to $5.1 million in the prior year's period. This decline was primarily due to a decrease in average outstanding debt for the period of $313.4 million to $276.6 million, offset by a net increase in effective interest rates as a result of the refinancing in September 2002. See further discussion of the refinancing in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. -13- NCI BUILDING SYSTEMS, INC. FISCAL NINE MONTHS ENDED AUGUST 2, 2003 COMPARED TO FISCAL NINE MONTHS ENDED AUGUST 3, 2002 Consolidated sales for the nine months ended August 2, 2003 decreased by $56.3 million, or 8%, compared to the first nine months of fiscal year 2002. Sales were down due to a continued slowdown in nonresidential construction. The metal construction industry has experienced declines in the past two years and this trend has continued throughout fiscal 2003. Based on Metal Building Manufacturers Association reports and public company information, the Company believes it has outperformed its competitors in the metal construction industry, despite the difficult environment, due to increased market penetration, a low cost infrastructure, and a broad product offering including retrofit and repair, which is counter cyclical in an economic downturn. Engineered Building Systems' sales were down 7%, to $212.5 million for the nine months ended August 2, 2003, compared to sales of $229.6 million for the nine months ended August 3, 2002, due to the general decline in nonresidential construction especially in the industrial and manufacturing market segments. Engineered building systems accounted for 33% of total consolidated sales in the first nine months of fiscal 2003 and fiscal 2002. Operating income of the engineered building systems segment declined in the first nine months of fiscal 2003 by 39%, to $12.3 million, compared to $20.3 million in the prior year's period. Of this $8.0 million decline, $4.7 million resulted from lower sales volume, $1.6 million resulted from lower margins because of lower selling prices due to competition and $2.3 million resulted from an increase in engineering and selling expenses driven by smaller, more complex jobs, offset by a decrease in administrative expenses of $0.6 million. As a percent of sales, operating income in the first nine months of fiscal 2003 was 6% compared to 9% in the first nine months of fiscal 2002. Metal Building Components' sales decreased by 8%, to $430.8 million, in the first nine months of fiscal 2003 compared to $470.0 million in the prior year's period. The decline in sales was due to the overall decline in the metal construction industry and a reduction in sales to the self-storage industry. This segment accounted for 67% of consolidated sales in the first nine months of fiscal 2003 and fiscal 2002. Operating income of the metal building components segment decreased in the first nine months of fiscal 2003 by 11%, to $42.7 million, compared to $47.9 million in the prior year's period. Of this $5.2 million decrease, $6.5 million was due to lower sales volume, $1.0 million was due to lower margins offset by a $2.3 million decrease in selling and administrative expenses primarily due to decreases in the provision for doubtful accounts of approximately $0.6 million, lower telephone and computer expense of $0.5 million, lower advertising expense of $0.4 million, lower workers compensation insurance of $0.3 million and lower commissions expense of $0.2 million. Consolidated selling, general and administrative expenses, consisting of engineering and drafting, selling and administrative costs, remained flat in the first nine months of fiscal 2003. As a percent of sales, selling, general and administrative expenses for the first nine months of fiscal 2003 were 16% compared to 15% for the first nine months of fiscal 2002. Interest expense for the first nine months of fiscal 2003 decreased by 13%, to $14.7 million compared to $16.8 million in the prior year's period. This decline was primarily due to a decrease in average outstanding debt for the period of $334.2 million to $283.9 million, offset by a net increase in effective interest rates as a result of the refinancing in September 2002. See further discussion of the refinancing in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. -14- LIQUIDITY AND CAPITAL RESOURCES At August 2, 2003, the Company had working capital of $69.6 million compared to $80.2 million at the end of fiscal 2002. This decrease resulted primarily from a decrease of $4.1 million in trade accounts receivable, reflecting the lower sales volume, and a decrease of $3.3 million in inventories. During the first nine months of fiscal 2003, the Company generated cash flow from operations of $36.1 million. This cash flow, along with cash from the beginning of the period, was used to fund capital expenditures of $12.5 million, purchase acquisitions of $4.3 million and repay $29.6 million in debt under the Company's senior credit facilities. On September 16, 2002, the Company completed a $250 million senior secured credit facility with a group of lenders and used the initial borrowings to repay in full the then existing credit facility. The current facility includes a $125 million (outstanding balance of $22.4 million at August 2, 2003), five-year revolving loan maturing on September 15, 2007 and a $125 million (outstanding balance of $120.3 million at August 2, 2003), six-year term loan maturing on September 15, 2008. The term loan requires mandatory prepayments of $1.6 million each quarter beginning in December 2002 with a final payment of $89 million at maturity. The senior credit facility is secured by security interests in (1) accounts receivable, inventory and equipment and related assets such as software, chattel paper, instruments and contract rights of the Company (excluding foreign operations) and (2) 100% of the capital stock and other equity interests in each of the direct and indirect operating domestic subsidiaries of the Company. The senior credit facility contains covenants that limit the Company's senior debt and leverage ratios and require the Company to maintain minimum interest coverage ratios and net worth, as those terms are defined in the senior credit facility. The required ratios for the periods indicated are as follows:
2003 2004 2005 2006 2007 ------ ------ ------ ------ ------ Maximum leverage ratio ............ 4.00 (1) 3.50 (2) 3.25 (3) 3.00 3.00 Minimum interest coverage ratio ... 2.50 3.00 (4) 3.50 3.50 3.50 Maximum senior debt ratio ......... 2.25 (5) 2.00 2.00 2.00 2.00
(1) Decreases to 3.50 on November 1, 2003 (2) Decreases to 3.25 on May 1, 2004 (3) Decreases to 3.00 on April 30, 2005 (4) Increases to 3.50 on October 30, 2004 (5) Decreases to 2.00 on November 1, 2003 In addition to these ratios, the Company is required to maintain a minimum net worth that changes from quarter to quarter depending upon earnings, proceeds of stock sales, and issuances of stock upon conversions or exchanges of debt or preferred stock or acquisitions of other companies. The minimum net worth requirement at August 2, 2003 was $254 million. At that date, the Company's leverage ratio was 3.21 to 1, its interest coverage ratio was 4.6 to 1, its senior debt ratio was 1.74 to 1, and its net worth was $319.6 million, and the Company was in compliance with all of these requirements. The senior credit agreement also limits the amount of permitted spending for capital additions, the repurchase of stock, payment of cash dividends, the disposition of assets and the amount of investments and other indebtedness. The Company also was in compliance with all of these limits at August 2, 2003. Borrowings under the senior credit facility may be prepaid and the voluntary reduction of the unutilized portion of the five-year revolver may be made at any time, in certain amounts, without premium or penalty but subject to LIBOR breakage costs. The Company is required to make mandatory prepayments on the senior credit facility upon the occurrence of certain events, including the sale of assets and the issuance and sale of equity securities, in each case subject to certain limitations and conditions. These prepayments must first be applied to the term loan and then to the reduction of the revolving commitment. The Company also is required to reduce the revolving commitment by $25 million if it issues an additional series of its senior subordinated notes due May 1, 2009, and in any event by December 31, 2005. -15- Loans on the senior credit facility bear interest, at the Company's option, as follows: (1) base rate loans at the base rate plus a margin that fluctuates based on the Company's leverage ratio and ranges from 1.0% to 1.75% on the revolving loan and from 2.0% to 2.25% on the term loan and (2) LIBOR loans at LIBOR plus a margin that fluctuates based on the Company's leverage ratio and ranges from 2.0% to 2.75% on the revolving loan and from 3.0% to 3.25% on the term loan. Base rate is defined as the higher of Bank of America, N.A. prime rate or the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the applicable London interbank offered rate adjusted for reserves. Based on its current leverage ratios, the Company will pay a margin of 1.50% on base rate loans and 2.50% on LIBOR loans under the revolving loan and a margin of 2.25% on base rate loans and 3.25% on LIBOR loans under the term loan during the fourth quarter of fiscal 2003. At August 2, 2003, the Company had approximately $97.8 million in unused borrowing capacity (net of letters of credit outstanding of approximately $5 million) under the senior credit facility, of which a total of $20 million can be utilized for standby letters of credit. In addition, the Company has outstanding $125 million of unsecured senior subordinated notes, which mature on May 1, 2009. The notes bear interest at 9.25%. The indenture governing the Company's senior subordinated notes includes covenants, which, among other things, limit the repurchase of stock, payment of cash dividends, the disposition of assets and the amount of investments and other indebtedness. The most restrictive covenant limiting the Company's ability to pay cash dividends and repurchase capital stock is in its senior credit facility. Under the terms of the senior credit facility, the Company had available approximately $5 million to use for those purposes at August 2, 2003. Inflation has not significantly affected the Company's financial position or operations. Metal building components and engineered building systems sales are affected more by the availability of funds for construction than interest rates. No assurance can be given that inflation or interest rates will not fluctuate significantly, either or both of which could have an adverse effect on the Company's operations. Liquidity in future periods will be dependent on internally generated cash flows, the ability to obtain adequate financing for planned capital expenditures of approximately $21 million, which include $10 million for the announced new frame facility in Tennessee, and the amount of increased working capital necessary to support expected growth. Based on the current capitalization, it is expected that future cash flows from operations and availability of alternative sources of external financing should be sufficient to provide adequate liquidity for the foreseeable future. At August 2, 2003, the Company had approximately $97.8 million (net of outstanding letters of credit of approximately $5 million) in unused borrowing available under its senior credit facility, subject to compliance with the terms of these facilities. Material, primarily steel, constituted approximately 71% and 70% of the Company's cost of sales for the fiscal three month and nine month periods ended August 2, 2003, respectively. No assurance can be given that steel will remain available or that prices will remain stable. The steel industry is highly cyclical in nature, and steel prices are influenced by numerous factors beyond the Company's control. These factors include general economic conditions, competition, labor costs, import duties and other trade restrictions. Furthermore, a prolonged labor strike against one or more of the Company's principal domestic suppliers could have a material adverse effect on the Company's operations. If the available supply of steel declines or if one or more of the Company's current suppliers is unable for financial or any other reason to continue in business or produce steel sufficient to meet the Company's requirements, the Company could experience price increases, a deterioration of service from its suppliers or interruptions or delays that may cause the Company not to meet delivery schedules to its customers. Any of these problems could adversely affect the Company's financial condition and results of operations. -16- RECENT ACCOUNTING PRONOUNCEMENTS Effective November 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Refer to Note 4 of the condensed consolidated financial statements for additional discussion of the adoption of SFAS No. 142. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 will generally require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. Extraordinary treatment is required for certain extinguishments as provided in Accounting Principles Board ("APB") No. 30, Reporting the Results of Operations. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 will not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB No. 30. The Company adopted SFAS No. 145 as of November 3, 2002. Any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB No. 30 for such classification will be reclassified to conform with the provisions of SFAS No. 145. Adoption of SFAS No. 145 did not impact the periods presented in the consolidated statements of income in this Form 10-Q. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company does not expect that the adoption of the statement will have a significant impact on the Company's financial position and results of operations. During November 2002, the EITF reached a consensus on EITF Issue No. 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company does not expect that the adoption of EITF Issue No. 00-21 will have a significant impact on the Company's financial position and results of operations. During November 2002, the EITF reached a consensus on EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF Issue No. 02-16 discusses how a customer should account for consideration received from a vendor. The consensus is applicable to all fiscal periods beginning after December 15, 2002, with early application permitted if there would be no net income statement impact to prior periods presented. The Company adopted EITF Issue No. 02-16 effective November 3, 2002, and such adoption did not have a significant impact on the Company's financial position and results of operations. In January 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires variable interest entities ("VIEs") to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual benefits. FIN No. 46 is currently effective for all VIEs created or modified after January 31, 2003 and is effective for all VIEs, regardless of when created, in quarterly periods beginning after June 15, 2003. The Company is currently reviewing the provisions of FIN No. 46. The Company does not expect that the adoption of FIN No. 46 will have a significant impact on the Company's financial position and results of operations. Effective February 2, 2003, the Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. While the Statement does not amend SFAS No. 123 to -17- require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees. Refer to Note 5 of the condensed consolidated financial statements for additional discussion of the adoption of SFAS No. 148. OTHER MATTERS Reference is made to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended November 2, 2002 filed with the Securities and Exchange Commission for a discussion of critical accounting policies, legal proceedings and risk factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk exposure related to changes in interest rates on its senior credit facility, which includes revolving credit notes and term notes. These instruments bear interest at a pre-agreed upon percentage point spread from either the prime interest rate or LIBOR. Under its senior credit facility, the Company may, at its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to six months. At August 2, 2003, the Company had $142.7 million outstanding under its senior credit facilities. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $1.4 million on an annual basis. The Company's objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared to fixed-rate borrowings. ITEM 4. CONTROLS AND PROCEDURES At the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in alerting management, on a timely basis, of material information required to be included in the Company's periodic reports filed with the Securities and Exchange Commission ("SEC"). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to management, including the Company's principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure. In addition, the Company reviewed its internal controls over financial reporting, and there have been no significant changes in the Company's internal controls over financial reporting during the period covered by this quarterly report which materially affected, or would be reasonably likely to materially affect, the Company's internal controls over financial reporting. -18- NCI BUILDING SYSTEMS, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As a result of the Company's restatement of its financial results for the last half of fiscal 1999, all of fiscal 2000 and the first quarter of fiscal 2001, several class action lawsuits were filed against the Company and certain of its current officers in the United States District Court for the Southern District of Texas, commencing in April 2001. The plaintiffs in the actions purport to represent purchasers of NCI common stock during various periods ranging from August 25, 1999 through April 12, 2001. The lawsuits were consolidated into one class action lawsuit on August 16, 2001. On January 10, 2002, the court appointed lead plaintiffs for the consolidated lawsuit. The lead plaintiffs filed a consolidated amended complaint on February 1, 2002. In the consolidated complaint the plaintiffs allege, among other things, that during the financial periods that were restated, the Company made materially false and misleading statements about the status and effectiveness of a management information and accounting system used by its components division, failed to assure that the system maintained books and records accurately reflecting inventory levels and costs of goods sold, failed to maintain internal controls on manual accounting entries made to certain inventory-related accounts in an effort to correct the data in the system, otherwise engaged in improper accounting practices that overstated earnings, and issued materially false and misleading financial statements. The plaintiffs further allege that the individual defendants traded in the Company's common stock while in possession of material, non-public information regarding the foregoing. The plaintiffs in the consolidated complaint assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. On March 15, 2002, the Company filed its Motion to Dismiss Plaintiffs' Amended Consolidated Class Action Complaint and Memorandum in Support. On March 28, 2003, the United States District Court entered its order granting in part and denying in part the Motion to Dismiss. In addition, the court granted leave for the plaintiffs to further amend the complaint. On April 16, 2003, the plaintiffs filed the Plaintiffs' Second Amended Consolidated Class Action Complaint. The Company and the individual defendants deny the allegations in the Second Amended Complaint and intend to vigorously defend against the allegations contained therein. The consolidated lawsuit is at an early procedural stage. Consequently, at this time the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to estimate the damages, or the range of damages, if any, that the Company might incur in connection with the lawsuit, or whether an adverse outcome could have a material adverse impact on its business, consolidated financial condition or results of operations. The Company is involved in various other legal proceedings and contingencies that are considered to be in the ordinary course of business. While the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to accurately estimate the damages, or the range of damages, if any, that the Company might incur in connection with these litigations, the Company believes that these legal proceedings will not have a material adverse effect on its business, consolidated financial condition or results of operations. -19- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 31.2 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 31.3 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 32.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002) 32.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002) 32.3 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002) (b) Reports on Form 8-K On May 29, 2003, the Company filed a current report on Form 8-K to announce the public dissemination of a press release reporting its financial results for the quarter ended May 3, 2003. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NCI BUILDING SYSTEMS, INC. (Registrant) Date: September 15, 2003 By: /s/ Robert J. Medlock ---------------------------- Robert J. Medlock Executive Vice President and Chief Financial Officer -21- INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 31.1 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 31.2 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 31.3 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) 32.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002) 32.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002) 32.3 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002)
EX-31.1 3 d09078exv31w1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(b) I, A. R. Ginn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NCI Building Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 15, 2003 /s/ A.R. Ginn ----------------------------- A. R. Ginn Chairman of the Board EX-31.2 4 d09078exv31w2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(b) I, Johnie Schulte, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of NCI Building Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 15, 2003 /s/ Johnie Schulte, Jr. ------------------------------------- Johnie Schulte, Jr. President and Chief Executive Officer EX-31.3 5 d09078exv31w3.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS EXHIBIT 31.3 CERTIFICATION PURSUANT TO RULE 13a-14(b) I, Robert J. Medlock, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NCI Building Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 15, 2003 /s/ Robert J. Medlock ---------------------------- Robert J. Medlock Executive Vice President and Chief Financial Officer EX-32.1 6 d09078exv32w1.txt CERTIFICATIONS PURSUANT TO SECTION 1350 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, A. R. Ginn, certify that: 1. I have reviewed this periodic report on Form 10-Q of NCI Building Systems, Inc.; 2. This quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 3. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of NCI Building Systems, Inc. Date: September 15, 2003 /s/ A.R. Ginn ---------------------------------- A. R. Ginn Chairman of the Board A signed original of this written statement required by Section 906 has been provided to NCI Building Systems, Inc. and will be retained by NCI Building Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This Certification shall not be deemed to be "filed" or part of the Report or incorporated by reference into any of the registrant's filings with the Securities and Exchange Commission by implication or by any reference in any such filing to the Report. EX-32.2 7 d09078exv32w2.txt CERTIFICATIONS PURSUANT TO SECTION 1350 EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Johnie Schulte, Jr., certify that: 1. I have reviewed this periodic report on Form 10-Q of NCI Building Systems, Inc.; 2. This quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 3. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of NCI Building Systems, Inc. Date: September 15, 2003 /s/ Johnie Schulte, Jr. ------------------------------------- Johnie Schulte, Jr. President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to NCI Building Systems, Inc. and will be retained by NCI Building Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This Certification shall not be deemed to be "filed" or part of the Report or incorporated by reference into any of the registrant's filings with the Securities and Exchange Commission by implication or by any reference in any such filing to the Report. EX-32.3 8 d09078exv32w3.txt CERTIFICATIONS PURSUANT TO SECTION 1350 EXHIBIT 32.3 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Robert J. Medlock, certify that: 1. I have reviewed this periodic report on Form 10-Q of NCI Building Systems, Inc.; 2. This quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 3 The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of NCI Building Systems, Inc. Date: September 15, 2003 /s/ Robert J. Medlock ------------------------------------- Robert J. Medlock Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to NCI Building Systems, Inc. and will be retained by NCI Building Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This Certification shall not be deemed to be "filed" or part of the Report or incorporated by reference into any of the registrant's filings with the Securities and Exchange Commission by implication or by any reference in any such filing to the Report. -----END PRIVACY-ENHANCED MESSAGE-----