1
FORM 10-Q
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: July 31, 2001
COMMISSION FILE NUMBER: 1-14315
NCI BUILDING SYSTEMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
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)
</Table>
(281) 897-7788
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
7301 Fairview, Houston, TX 77041
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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--18,236,446 shares as of August 31, 2001
2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
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ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets 1
July 31, 2001 and October 31, 2000
Consolidated statements of income 2
Three months ended July 31, 2001 and 2000
Consolidated statements of income 3
Nine months ended July 31, 2001 and 2000
Condensed consolidated statements of cash flows 4
Nine months ended July 31, 2001 and 2000
Notes to condensed consolidated financial statements 5-7
July 31, 2001
ITEM 2. Management's Discussion and Analysis of Financial 8-13
Condition and Results of Operations
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 6. Exhibits and Reports on Form 8-K 14
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
July 31, October 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 5,641 $ 2,999
Accounts receivable, net ................................... 124,306 119,368
Inventories ................................................ 71,655 87,613
Deferred income taxes ...................................... 4,986 4,986
Prepaid expenses ........................................... 6,405 7,482
--------------- ---------------
Total current assets ....................................... 212,993 222,448
Property, plant and equipment, net ................................... 227,636 231,042
Excess of costs over fair value of acquired net assets ............... 390,017 395,073
Other assets, primarily investment in joint ventures ................. 18,522 20,358
--------------- ---------------
Total assets ......................................................... $ 849,168 $ 868,921
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 45,000 $ 42,806
Accounts payable ........................................... 68,153 77,638
Accrued compensation and benefits .......................... 8,396 21,383
Other accrued expenses ..................................... 21,797 23,792
--------------- ---------------
Total current liabilities .................................. 143,346 165,619
--------------- ---------------
Long-term debt, noncurrent portion ................................... 357,710 374,448
Deferred income taxes ................................................ 23,529 23,574
Shareholders' equity:
Common stock ............................................... 186 186
Additional paid-in capital ................................. 95,885 97,224
Retained earnings .......................................... 234,122 222,926
Treasury stock ............................................. (5,610) (15,056)
--------------- ---------------
Total shareholders' equity ................................. 324,583 305,280
--------------- ---------------
Total liabilities and shareholders' equity ........................... $ 849,168 $ 868,921
=============== ===============
</Table>
See accompanying notes to condensed consolidated financial statements.
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NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Three Months Ended July 31,
2001 2000
--------------- ---------------
Sales ................................................................ $ 259,114 $ 272,749
Cost of sales ........................................................ 199,693 205,026
--------------- ---------------
Gross profit ................................................... 59,421 67,723
Operating expenses ................................................... 37,963 37,492
--------------- ---------------
Income from operations ......................................... 21,458 30,231
Interest expense ..................................................... 7,681 10,220
Other (income) expense, net .......................................... (306) (482)
--------------- ---------------
Income before income taxes ..................................... 14,083 20,493
Provision for income taxes ........................................... 6,975 8,541
--------------- ---------------
Net income ........................................................... $ 7,108 $ 11,952
=============== ===============
Income per common and common equivalent share:
Basic .......................................................... $ .39 $ .67
=============== ===============
Diluted ........................................................ $ .39 $ .66
=============== ===============
</Table>
See accompanying notes to condensed consolidated financial statements.
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NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Nine Months Ended July 31,
2001 2000
--------------- ---------------
Sales ................................................................ $ 683,860 $ 737,567
Cost of sales ........................................................ 528,181 553,057
--------------- ---------------
Gross profit ................................................... 155,679 184,510
Operating expenses ................................................... 108,792 108,195
--------------- ---------------
Income from operations ......................................... 46,887 76,315
Interest expense ..................................................... 26,351 28,974
Other (income) expense, net .......................................... (752) (2,523)
--------------- ---------------
Income before income taxes ..................................... 21,288 49,864
Provision for income taxes ........................................... 10,092 21,335
--------------- ---------------
Net income ........................................................... $ 11,196 $ 28,529
=============== ===============
Income per common and common equivalent share:
Basic .......................................................... $ .62 $ 1.59
=============== ===============
Diluted ........................................................ $ .62 $ 1.56
=============== ===============
</Table>
See accompanying notes to condensed consolidated financial statements.
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NCI BUILDING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
Nine Months Ended July 31,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net income .................................................... $ 11,196 $ 28,529
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 26,961 24,940
(Gain) loss on sale of fixed assets ..................... 64 (203)
Provision for doubtful accounts ......................... 1,908 1,850
Deferred income tax benefit ............................. (45) (40)
Changes in working capital:
Current assets ....................................... 11,093 (32,750)
Current liabilities .................................. (20,196) 5,432
--------------- ---------------
Net cash provided by operating activities ..................... 30,981 27,758
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment ............... (12,029) (21,849)
Acquisition of DOUBLECOTE, L.L.C. ....................... -- (22,623)
Acquisition of Midland Metals, Inc. ..................... (5,521) --
Other investing activities, net ......................... 857 2,875
--------------- ---------------
Net cash used in investing activities ......................... (16,693) (41,597)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised ................... 3,005 594
Net borrowings on revolving lines of credit ............. 17,008 49,209
Payments on long-term debt .............................. (31,178) (26,250)
Purchase of treasury stock .............................. (481) (16,713)
--------------- ---------------
Net cash provided by (used in) financing activities ........... (11,646) 6,840
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ................. $ 2,642 $ (6,999)
=============== ===============
</Table>
See accompanying notes to condensed consolidated financial statements.
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NCI BUILDING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2001
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 three-month and
nine-month periods ended July 31, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ended October 31, 2001.
Financial data for the fiscal 2000 periods and the quarter ended January 31,
2001 have been restated to adjust net income relating to accounting and
management information systems errors that impacted certain inventories and
related liabilities. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended October 31, 2000 and the
Company's Quarterly Report on Form 10-Q/A for the quarter ended January 31, 2001
filed with the Securities and Exchange Commission ("SEC").
NOTE 2 -- INVENTORIES
The components of inventory are as follows:
<Table>
<Caption>
July 31, October 31,
2001 2000
--------------- ---------------
(in thousands)
Raw materials $ 56,283 $ 66,696
Work in process and finished goods 15,372 20,917
--------------- ---------------
$ 71,655 $ 87,613
=============== ===============
</Table>
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
business. Products of both segments are similar in basic raw materials used and
manufacturing. The engineered building systems segment includes the
manufacturing of structural framing and includes value added engineering and
drafting, which are typically not part of metal building component products or
services. The reporting segments follow the same accounting policies used for
the Company's consolidated financial statements. Management evaluates a
segment's performance based upon operating income. Intersegment sales are
recorded based on prevailing market prices, and consist primarily of hot roll
and light gauge metal coil coating and painting services and products.
Information with respect to the segments is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
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NOTE 4 -- 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 considers the effect of common stock equivalents. The computations
are as follows:
<Table>
<Caption>
Three Months Ended July 31, Nine Months Ended July 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income ............................................ $ 7,108 $ 11,952 $ 11,196 $ 28,529
Add: Interest, net of tax on convertible
debenture assumed converted .................. -- 17 27 50
------------ ------------ ------------ ------------
Adjusted net income ............................. $ 7,108 $ 11,969 $ 11,223 $ 28,579
============ ============ ============ ============
Weighted average common shares outstanding ............ 18,198 17,769 18,021 17,982
Add: Common stock equivalents
Stock option plan ........................ 53 336 142 291
Convertible debentures ................... -- 100 -- 100
------------ ------------ ------------ ------------
Weighted average common shares outstanding,
assuming dilution ............................ 18,251 18,205 18,163 18,373
============ ============ ============ ============
Income per common and common equivalent share:
Basic ........................................... $ .39 $ .67 $ .62 $ 1.59
============ ============ ============ ============
Diluted ......................................... $ .39 $ .66 $ .62 $ 1.56
============ ============ ============ ============
</Table>
NOTE 5 - ACQUISITIONS
On March 31, 2000, the Company acquired its partner's 50% share of DOUBLECOTE,
L.L.C., a metal coil coating business that it developed and previously owned
jointly with Consolidated Systems, Inc., a privately held company. The
transaction was valued at approximately $24.4 million, and accounted for using
the purchase method. The excess of cost over the fair value of the acquired
assets was approximately $10 million.
NOTE 6 - CONTINGENCIES
Commencing in April 2001, several class action lawsuits were filed against the
Company and certain of its present officers in the United States District Court
for the Southern District of Texas. The plaintiffs in the actions purport to
represent purchasers of common stock of the Company during various periods
ranging from August 25, 1999 through April 12, 2001. The complaints assert
various claims under Section 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. The lawsuits were consolidated into one class action
lawsuit on August 16, 2001, but the Court has yet to approve a lead plaintiff
for the consolidated lawsuit. The Company denies the allegations in the
complaints and intends to defend them vigorously. The lawsuits are at a very
early stage. Consequently, it is not possible at this time to predict whether
the Company will incur any liability or to estimate the damages, or the range of
damages, if any, that the Company might incur in connection with such actions,
or whether an adverse
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outcome could have a material adverse impact on the business, consolidated
financial condition or results of operations of the Company.
The Company is involved in various other legal proceedings that it considers to
be in the normal course of business. The Company believes that these proceedings
will not have a material adverse effect on its business, consolidated financial
condition or results of operations.
NOTE 7 - OTHER ITEMS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective November 1,
2002, with the option of early adoption effective November 1, 2001. The Company
intends to adopt FAS 142 on November 1, 2001. As of July 31, 2001, the Company
has $390.0 million in goodwill on its Consolidated Balance Sheet. Goodwill
amortization for fiscal 2001 is expected to be $12.2 million, of which $9.5
million is non-deductible for tax purposes. The Company continues to evaluate
the effect that adoption of the provisions of FAS 142 will have on its results
of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. In June 2000, the SEC issued
Staff Accounting Bulletin No. 101B ("SAB 101B"), Amendment: Revenue Recognition
in Financial Statements. SAB 101B delays the implementation date of SAB 101 to
the fourth fiscal quarter for registrants with fiscal years that begin after
December 15, 1999. The Company will adopt SAB 101 as required in the fourth
fiscal quarter of 2001, and such adoption is not expected to have a material
effect on the Company's consolidated results of operations or financial
position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. FAS 133, as amended, is effective for all
fiscal years beginning after June 15, 2000. FAS 133 requires that all
derivatives be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are required to be recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedged transaction and the type of hedge transaction. The
ineffective portion of all hedges is required to be recognized in earnings. The
Company adopted FAS 133 effective November 1, 2000, and such adoption did not
have a material effect on consolidated results of operations or financial
position.
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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: metal building components and engineered building systems. These
aggregations are based on the similar nature of the products, distribution of
products and management and reporting of 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, roof repair and retrofit demand and the
availability and terms of financing available for construction.
Products of both business segments are similar in basic raw materials used and
manufacturing. 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 consist primarily of products and services provided to the
engineered buildings segment by the components segment, including hot roll and
light gauge metal coil coating and painting services and products. This provides
better customer service, shorter delivery time and minimizes transportation
costs to the customer.
During the quarter ended January 31, 2001, the Company reclassified
administrative expenses incurred by corporate headquarters from identified
reportable segments to corporate expenses to conform with management reporting.
Financial data for prior periods has been restated to conform to the current
presentation.
As described in Note 1 to the Condensed Consolidated Financial Statements, the
Company has restated financial data for the fiscal 2000 periods and the quarter
ended January 31, 2001.
<Table>
<Caption>
THREE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2001 JULY 31, 2000
---------------------------- ----------------------------
% %
------------ ------------ ------------ ------------
SALES TO OUTSIDE CUSTOMERS:
Engineered building systems ...................... $ 84,847 33 $ 89,525 33
Metal building components ........................ 174,267 67 183,224 67
Intersegment sales ............................... 9,043 3 13,080 5
Corporate/eliminations ........................... (9,043) (3) (13,080) (5)
------------ ------------ ------------ ------------
Total net sales ............................. $ 259,114 100 $ 272,749 100
------------ ------------ ------------ ------------
OPERATING INCOME:
Engineered building systems ...................... $ 12,857 15 $ 12,278 14
Metal building components ........................ 14,949 9 24,020 13
Corporate/eliminations ........................... (6,348) -- (6,067) --
------------ ------------ ------------ ------------
Total operating income ...................... $ 21,458 8 $ 30,231 11
------------ ------------ ------------ ------------
</Table>
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NCI BUILDING SYSTEMS, INC.
<Table>
<Caption>
NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2001 JULY 31, 2000
---------------------------- ----------------------------
% %
------------ ------------ ------------ ------------
SALES TO OUTSIDE CUSTOMERS:
Engineered building systems ...................... $ 228,380 33 $ 240,682 33
Metal building components ........................ 455,480 67 496,885 67
Intersegment sales ............................... 28,909 4 34,772 5
Corporate/eliminations ........................... (28,909) (4) (34,772) (5)
------------ ------------ ------------ ------------
Total net sales ............................. $ 683,860 100 $ 737,567 100
------------ ------------ ------------ ------------
OPERATING INCOME:
Engineered building systems ...................... $ 31,424 14 $ 32,230 13
Metal building components ........................ 34,221 8 62,130 13
Corporate/eliminations ........................... (18,758) -- (18,045) --
------------ ------------ ------------ ------------
Total operating income ...................... $ 46,887 7 $ 76,315 10
------------ ------------ ------------ ------------
</Table>
<Table>
<Caption>
AS OF AS OF
JULY 31, 2001 JULY 31, 2000
--------------------------- ---------------------------
% %
------------ ------------ ------------ ------------
TOTAL ASSETS:
Engineered building systems ...................... $ 89,544 11 $ 108,970 12
Metal building components ........................ 364,886 43 392,991 44
Corporate/eliminations ........................... 394,738 46 398,571 44
------------ ------------ ------------ ------------
Total assets ................................ $ 849,168 100 $ 900,532 100
------------ ------------ ------------ ------------
</Table>
THREE MONTHS ENDED JULY 31, 2001 COMPARED TO THREE MONTHS ENDED JULY 31, 2000
Consolidated sales for the third quarter of fiscal 2001 decreased by $13.6
million, or 5%, compared to the third quarter of fiscal 2000 but were up $50.9
million, or 24%, from the second quarter of fiscal 2001. This year-to-year
decrease resulted from the general decline in construction activity and
increased pricing competition.
ENGINEERED BUILDING SYSTEMS
For the quarter, engineered building systems sales decreased by $4.7 million, or
5%, compared to the same period in fiscal 2000. This decrease resulted from a
general decline in construction activity and increased pricing competition.
Industry sales for the same period were down approximately 20%, which increased
competition for existing business and resulted in a more competitive pricing
environment. This segment accounted for 33% of consolidated sales in both
three-month periods ending July 31, 2001 and 2000.
Operating income of this segment increased in the current quarter by $.6
million, or 5%, compared to the same quarter a year ago. As a percent of sales,
operating income increased to 15% in the current quarter from 14% in
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the prior year's second quarter. The majority of the improvement in operating
income is attributed to favorable raw material costs for plate, flat bar and
structural materials which are unique to this segment.
METAL BUILDING COMPONENTS
For the quarter, metal building component sales decreased by $9.0 million, or
5%, compared to the same period in fiscal 2000. This decrease was the result of
lower levels of construction activity and increased pricing competition during
the quarter. This segment accounted for 67% of consolidated sales in both
three-month periods ending July 31, 2001 and 2000.
Operating income decreased in the third quarter of fiscal 2001 by $9.1 million,
or 38%, compared to the third quarter of fiscal 2000. Declines in market
pricing, higher manufacturing costs due to lower production volume, higher
energy costs and fixed portion of operating expenses accounted for the decrease.
Utility costs in the coating operations of the component segment increased by
$.6 million, or 45%, in the current quarter compared to the same period in
fiscal 2000. As a percent of sales, operating income for the current quarter was
9% compared to 13% in the third quarter of fiscal 2000.
CONSOLIDATED OPERATING EXPENSES, consisting of engineering, drafting, selling
and administrative costs, were flat in the current quarter compared to the same
period of 2000. As a percent of sales, operating expenses were 15% in the
current quarter compared to 14% in the same period of 2000. Increases in
operating expenses such as health insurance costs, liability insurance costs,
and property taxes resulted in a higher percentage of operating expenses to
sales in the current quarter compared to the same period in fiscal 2000.
INTEREST EXPENSE decreased by $2.5 million, or 25%, in the third quarter of
fiscal 2001 compared to the third quarter of fiscal 2000. Lower borrowing levels
and the general decrease in floating interest rates during the third quarter of
fiscal 2001 accounted for this decrease.
NINE MONTHS ENDED JULY 31, 2001 COMPARED TO NINE MONTHS ENDED JULY 31, 2000
Consolidated sales for the nine months ended July 31, 2001 decreased by $53.7
million, or 7%, compared to the nine months ended July 31, 2000. This decline
resulted from the general decline in construction activity, increased pricing
competition and reduction in shipments caused by inclement weather during the
first half of fiscal 2001.
ENGINEERED BUILDING SYSTEMS
For the nine months, sales decreased by $12.3 million, or 5%, compared to the
same period in fiscal 2000. Engineered building systems accounted for 33% of
consolidated sales in both nine-month periods ending July 31, 2001 and 2000.
This decrease was the result of competitive market conditions as well as the
general decline in construction activity and reduction in shipments caused by
inclement weather during the first half of fiscal 2001.
Operating income declined in the current nine months by $ .8 million, or 3%,
compared to the same period in fiscal 2000. As a percent of sales, operating
income was 14% in the nine months ending July 31, 2001 compared to 13% to the
same period in fiscal 2000. Operating income declined at a smaller rate than
sales due to favorable raw material costs for plate, flat bar and structural
materials that are unique to this segment.
METAL BUILDING COMPONENTS
For the nine months, sales decreased by $41.4 million, or 8%, compared to the
same period in fiscal 2000. This segment accounted for 67% of consolidated sales
in both nine-month periods ending July 31, 2001 and 2000. The decrease in sales
is attributed to the general decrease in construction activity, increased
pricing competition and reduction in shipments caused by inclement weather
during the first half of fiscal 2001.
Operating income decreased by $27.9 million, or 45%, compared to the same period
in fiscal 2000. As a percent of sales, operating income decreased to 8% in
fiscal 2001 compared to 13% in fiscal 2000. Lower market pricing, higher
manufacturing costs due to lower production volume, and higher energy costs
accounted for this decrease.
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Utility costs in the coating operations of the component segment increased by
$3.3 million, or 106%, in the current year compared to the same period in fiscal
2000.
CONSOLIDATED OPERATING EXPENSES increased by $.6 million, or 1%, in the current
nine months compared to the same period of 2000. As a percent of sales,
operating expenses were 16% in fiscal 2001 compared to 15% in the same period in
fiscal 2000. Increases in health insurance costs, liability insurance costs, and
property taxes were partially offset by lower performance incentive costs,
resulting in a higher percentage of operating expenses to sales in the current
quarter compared to the same period in fiscal 2000.
INTEREST EXPENSE for the nine month period decreased by $2.6 million, or 9%,
compared to the prior year's nine month period. Lower borrowing levels and the
general decrease in floating interest rates during fiscal 2001 accounted for
this decrease.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2001, the Company had working capital of $69.6 million compared
to $56.8 million at the end of fiscal 2000. This represented an increase of
$12.8 million, or 23%. The majority of this increase came from a reduction in
current liabilities related to timing of trade accounts payable payments and
payments of fiscal 2000 bonuses and 401(k) costs coupled with lower related
accruals required in fiscal 2001. The Company generated cash flow from
operations before changes in working capital components of $40.1 million during
the first nine months of fiscal 2001. Significant cash outflows included the
increase in working capital, the $5.5 million acquisition of Midland Metals in
December 2000, capital expenditures of $12.0 million, and reduction of debt by
$14.2 million. Because of the seasonal nature of the Company's operations,
working capital needs are generally funded by debt borrowings early in the year
with the majority of debt reduction occurring in the second half of the fiscal
year as sales and income increase.
The Company has a $240 million senior credit facility from a syndicate of banks.
At July 31, 2001, this facility consisted of (i) a revolving credit facility of
up to $200 million, (ii) a five-year term loan facility in the original
principal amount of $200 million, and (iii) a $40 million term note.
Following restatement of its financial results for its 1999 and 2000 fiscal
years and the first quarter of fiscal 2001, the Company determined that it was
not in compliance with the minimum fixed charge coverage ratio required by its
senior credit facility at October 31, 2000, and with certain covenants and
representations in its credit facility documents during the periods restated.
This noncompliance caused the Company to be in default under its senior credit
facility. On May 22, 2001, the Company's bank lenders executed a waiver of all
defaults, violations and noncompliance of the Company under the senior credit
facility that relate to the restatement of its financial results and agreed not
to exercise any rights available to them as a result of those defaults,
violations and noncompliance. In connection with this waiver and at the request
of the Company, the $40 million aggregate principal amount outstanding at May
22, 2001 under the Company's 364-day senior revolving credit facility was
converted to a term note maturing on July 1, 2003. At July 31, 2001, the Company
was in compliance with all senior credit facility covenants.
At July 31, 2001, the Company had $142.7 million outstanding under its revolving
credit facility and $40 million under the term note, both of which mature on
July 1, 2003. In addition, the Company had $95 million outstanding on the
five-year term loan. This term loan matures on July 1, 2003.
Loans bear interest, at the Company's option, as follows: (1) base rate loans at
the base rate plus a margin that ranges from 0% to 0.5% and (2) LIBOR loans at
LIBOR plus a margin that ranges from 0.75% to 2.0%. 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 ratios, the Company is paying a
margin of 1.375% on LIBOR loans and 0% on base rate loans.
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Borrowings under the senior credit facility may be prepaid at any time without
penalty. In addition, the Company may voluntarily reduce the unutilized portion
of the revolver at any time, in certain agreed minimum amounts, without premium
or penalty but subject to LIBOR breakage costs. Borrowings under the term loan
are payable in successive quarterly installments, currently $11.25 million and
gradually increasing to $12.5 million at maturity. Repayments on the term loan
facilities may not be reborrowed by the Company.
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. Further, under the senior credit facility the Company is subject to
certain restrictions, including a restriction from paying cash dividends or
making other cash distributions with respect to its common stock, other than
repurchases of no more than $50 million of its common stock.
The Company has $125 million of senior subordinated notes that mature on May 1,
2009. The notes bear interest at a rate of 9.25%.
During the first nine months of fiscal 2001, the Company spent $12.0 million for
capital additions for plant expansions, capital replacements and betterments. In
addition, the Company spent $5.5 million to acquire the assets and business of
Midland Metals, Inc. The Company plans to spend approximately $4 million in
capital additions during the fourth quarter of fiscal 2001. Delays, changes or
cancellations of planned projects could increase or decrease capital spending
from the amounts anticipated at the current time.
Inflation has not significantly affected the Company's financial position or
operations. Metal 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 capital expenditures and
expansion when needed, and the amount of increased working capital necessary to
support expected growth. Based on current capitalization, it is expected that
future cash flows from operations and the availability of alternative sources of
external financing should be sufficient to provide adequate liquidity for the
foreseeable future.
MARKET RISK DISCLOSURE
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 carry 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
July 31, 2001, the Company had $277.7 million outstanding under its senior
credit facility. Based on this balance, an immediate change of one percent in
the interest rate would cause a change in interest expense of approximately $2.8
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.
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FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements concerning the
business and operations of the Company. Although the Company believes that the
expectations reflected in these 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 factors include, but are not
limited to, industry cyclicality and seasonality, adverse weather conditions,
fluctuations in customer demand and order 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 the Company's
filings with the Securities and Exchange Commission. The Company expressly
disclaims any obligation to release publicly any updates or revisions to these
forward-looking statements to reflect any change in its expectations.
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NCI BUILDING SYSTEMS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Commencing in April 2001, several class action lawsuits were filed against the
Company and certain of its present officers in the United States District Court
for the Southern District of Texas. The plaintiffs in the actions purport to
represent purchasers of common stock of the Company during various periods
ranging from August 25, 1999 through April 12, 2001. The complaints assert
various claims under Section 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. The lawsuits were consolidated into one class action
lawsuit on August 16, 2001, but the Court has yet to approve a lead plaintiff
for the consolidated lawsuit. The Company denies the allegations in the
complaints and intends to defend them vigorously. The lawsuits are at a very
early stage. Consequently, it is not possible at this time to predict whether
the Company will incur any liability or to estimate the damages, or the range of
damages, if any, that the Company might incur in connection with such actions,
or whether an adverse outcome could have a material adverse impact on the
business, consolidated financial condition or results of operations of the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
After completion of the restatement of its financial results for its 1999 and
2000 fiscal years and the first quarter of fiscal 2001, the Company determined
that it was not in compliance with the minimum fixed charge coverage ratio
required by its senior credit facility at October 31, 2000, and with certain
covenants and representations in its credit facility documents during the
periods restated. This noncompliance caused the Company to be in default under
its senior credit facility. On May 22, 2001, the Company's bank lenders executed
a waiver of all defaults, violations and noncompliance of the Company under the
senior credit facility that relate to the restatement of its financial results
and agreed not to exercise any rights available to them as a result of those
defaults, violations and noncompliance. In connection with this waiver and at
the request of the Company, the $40 million aggregate principal amount
outstanding at May 22, 2001 under the Company's 364-day senior revolving credit
facility was converted to a term note maturing July 1, 2003. At July 31, 2001,
the Company was in compliance with all required financial covenants under its
senior and subordinated loan agreements. See "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on June 8, 2001
under "Item 5. Other Events." which contains a letter to its
shareholders explaining the restatement of its financial
statements for the fiscal years ended October 31, 1999 and
October 31, 2000 and for the first quarter of fiscal 2001 and
providing the shareholders with tabular information showing
the effects of the restatement on net income and earnings per
share for the restated periods.
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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 14, 2001 By: /s/ Robert J. Medlock
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Robert J. Medlock
Executive Vice President and
Chief Financial Officer
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