1
EXHIBIT 13
SELECTED FINANCIAL DATA
(in thousands except per share)
Year ended October 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------------------------------------------------------
Sales . . . . . . . . . . . . . . . . . . . . . $79,008 $134,506 $167,767 $234,215 $332,880
Net Income . . . . . . . . . . . . . . . . . . 3,611 6,333 10,256 17,032 24,814
Net income per share . . . . . . . . . . . . . .67 .96 1.53 2.52 3.03
Working capital . . . . . . . . . . . . . . . . 4,835 15,511 16,885 31,687 51,958
Total assets . . . . . . . . . . . . . . . . . 34,187 46,733 63,373 83,082 158,326
Long-term debt, noncurrent portion . . . . . . 2,185 1,899 326 278 1,730
Shareholders' equity . . . . . . . . . . . . . $21,232 $28,655 $39,682 $57,682 $116,175
Average common shares and equivalents . . . . . 5,432 6,578 6,695 6,765 8,198
OPERATING POLICIES
RETURN ON ASSETS
Return on assets is defined as operating income divided by average assets used
in the business (eliminating primarily cash). NCI's management and directors
are thoroughly convinced that this ratio is the best measure of operating
performance. Tight control over inventory, receivables, and fixed investment
is as important as, and interrelated to, control of the income statement.
Return on assets is a proxy for cash flow, which can reward shareholders with
undiluted growth. In fiscal year 1996, NCI earned a return on assets employed
in the business of 34%.
GROWTH
The company is dedicated to increasing its market share through strong marketing
and low cost, quality manufacturing. Special niches that provide unusual profit
and growth opportunities are sought. Overall profit growth of at least 15% per
year is an intermediate goal of the company with larger increments possible in
the short-term. This growth may be internally generated or it may come from
carefully selected acquisitions.
DIVIDENDS
The company's officers and directors are all large stock or option holders.
Thus, there is much sympathy for dividends. However, it is considered
appropriate, at this stage of the company's development and in view of the
available returns, to invest that money in the growth of the equity of the
company as opposed to paying dividends.
COMPENSATION
The company believes in providing base salaries for its management on the low
side of industry norms with opportunities, based on performance, to obtain very
high bonuses. Specifically, return assets is the criterion for performance
measurement. Bonuses begin when the ratio of operating income divided by assets
used in the business is equal to 20%. Maximum bonuses, at a very high level,
can be earned when 30% returns are achieved. This measure is felt to be most
important because management of both the balance sheet and the income statement
are critical to long-term success, especially in a cyclical industry.
CORPORATE RESPONSIBILITY
The company is committed to the goal of being an exemplary corporate citizen.
Toward that end, we have an intense safety program ongoing in the workplace. We
also provide broad coverage health insurance to all employees. There are not
only employment, but advancement opportunities through our growth. We have
proper awareness and concern for the overall environment. Finally, we employ
high quality engineering professionals to ensure that our products are designed
using sound engineering practices and principles.
Cover: The symbol on our cover embodies our central philosophy that our
suppliers, employees, and our customers are all critical parts of a coordinated
team necessary to produce a product that fulfills an economic need. We all
understand that each team member must work together with the others to provide
the appropriate quality, service, and price, and that commitment to teamwork is
what has made NCI successful.
2
CONSOLIDATED STATEMENTS OF INCOME
NCI BUILDING SYSTEMS, INC.
October 31,
-----------------------------------------------
1994 1995 1996
-----------------------------------------------
Sales ........................................................... $167,766,770 $234,214,508 $332,879,707
Cost of sales ................................................... 124,125,815 169,814,614 241,373,691
-----------------------------------------------
Gross Profit ............................................... 43,640,955 64,399,894 91,506,016
-----------------------------------------------
Engineering ..................................................... 6,870,911 8,934,916 11,078,691
Selling ......................................................... 11,265,957 15,777,253 22,365,791
General and administrative ...................................... 10,064,368 13,399,120 19,650,136
-----------------------------------------------
Total operating expenses ........................................ 28,201,236 38,111,289 53,094,618
-----------------------------------------------
Income from operations ..................................... 15,439,719 26,288,605 38,411,398
Interest expense ................................................ (82,364) (55,871) (108,203)
Other income .................................................... 640,892 821,722 1,585,960
-----------------------------------------------
Income before income taxes ................................. 15,998,247 27,054,456 39,889,155
-----------------------------------------------
Provision (benefit) for income taxes - Note 5 ...................
Current .................................................... 5,983,924 10,493,151 15,898,356
Deferred ................................................... (241,768) (470,495) (822,737)
-----------------------------------------------
Total income tax ................................................ 5,742,156 10,022,656 15,075,619
-----------------------------------------------
Net Income ...................................................... $ 10,256,091 $ 17,031,800 $ 24,813,536
===============================================
Net income per common and
common equivalent share - Note 9 ........................... $ 1.53 $ 2.52 $ 3.03
===============================================
See Independent Auditor's Report and Accompanying Notes to the Consolidated
Financial Statements.
17
3
CONSOLIDATED BALANCE SHEETS
NCI BUILDING SYSTEMS, INC.
October 31,
---------------------------
1995 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents...................... $17,631,409 $ 20,943,664
Accounts receivable - Trade.................... 18,443,034 35,477,296
Other receivables - Note 11.................... 619,891 2,271,674
Inventories - Note 1........................... 16,897,455 28,692,930
Deferred income taxes - Note 5................. 1,681,992 2,925,249
Prepaid expenses............................... 185,063 298,702
----------- ------------
Total current assets........................... 55,458,844 90,609,515
----------- ------------
Property, plant and equipment, net - Note 1...... 25,629,382 42,751,545
----------- ------------
Other assets:
Excess of cost over fair value of acquired net
assets - Note 1.............................. 1,581,945 22,672,916
Other.......................................... 412,129 2,292,322
----------- ------------
Total other assets............................. 1,994,074 24,965,238
----------- ------------
Total assets..................................... $83,082,300 $158,326,298
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............. $ 83,402 $ 47,402
Accounts payable............................... 11,966,447 21,527,027
Accrued compensation and benefits.............. 6,575,656 7,762,288
Other accrued expense.......................... 4,436,488 6,737,346
Accrued income taxes........................... 709,692 2,577,168
----------- ------------
Total current liabilities...................... 23,771,685 38,651,231
----------- ------------
Long-term debt, noncurrent portion - Note 3...... 278,396 1,729,566
----------- ------------
Deferred income taxes - Note 5................... 1,349,734 1,770,255
----------- ------------
Contingencies - Note 6
Shareholders' equity - Note 7
Preferred stock, $1 par value, 1,000,000
shared authorized, none outstanding.......... -- --
Common stock, $.01 par value, 15,000,000 shared
authorized, 6,290,595 and 7,966,777 shares
issued and outstanding, respectively......... 62,906 79,668
Additional paid-in capital..................... 13,696,475 47,358,938
Retained earnings.............................. 43,923,104 68,736,640
----------- ------------
Total shareholders' equity..................... 57,682,485 116,175,246
----------- ------------
Total liabilities and shareholders' equity....... $83,082,300 $158,326,298
=========== ============
See Independent Auditor's Report and Accompanying Notes to the
Consolidated Financial Statements.
18
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NCI BUILDING SYSTEMS, INC.
Additional
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
---------------------------------------------------------
Balance, October 31, 1993............... $61,767 $11,958,205 $16,635,213 $ 28,655,185
Proceeds from exercise of stock options,
including tax benefit thereon......... 112 87,438 -- 87,550
Shares issued for
contribution to 401K plan............. 407 682,438 -- 682,845
Net income.............................. -- -- 10,256,091 10,256,091
--------------------------------------------------------
Balance, October 31, 1994............... 62,286 12,728,081 26,891,304 39,681,671
Proceeds from exercise of stock options,
including tax benefit thereon......... 142 145,474 -- 145,616
Shares issued for
contribution to 401K plan............. 478 822,920 -- 823,398
Net income.............................. -- -- 17,031,800 17,031,800
--------------------------------------------------------
Balance, October 31, 1995............... 62,906 13,696,475 49,923,104 57,682,485
Proceeds from stock offering............ 10,865 24,759,142 -- 24,770,007
Proceeds from exercise of stock options,
including tax benefit thereon......... 2,458 2,722,474 -- 2,724,932
Shares issued for
contribution to 401K plan............. 439 1,008,847 -- 1,009,286
Shares issued in connection with the
purchase of DBCI...................... 3,000 5,172,000 -- 5,175,000
Net income.............................. -- -- 24,813,536 24,813,536
--------------------------------------------------------
Balance, October 31, 1996............... $79,668 $47,358,938 $68,736,640 $116,175,246
========================================================
See Independent Auditor's Report and Accompanying Notes to the Consolidated
Financial Statements.
19
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
NCI BUILDING SYSTEMS, INC.
October 31,
--------------------------------------------
1994 1995 1996
--------------------------------------------
Cash flows from operating activities
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,256,091 $ 17,031,800 $ 24,813,536
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization. . . . . . . . . . . . . . 2,219,558 3,226,384 5,791,493
Loss on sale of fixed assets . . . . . . . . . . . . . . -- 3,701 1,543
Provision for doubtful accounts . . . . . . . . . . . . 651,215 1,101,038 680,633
Deferred income tax benefit. . . . . . . . . . . . . . . (241,768) (470,495) (822,736)
Changes in current assets and liability accounts,
net of effects of acquisitions:
Increase in accounts, notes and other receivable . . . . . . (1,020,612) (3,097,101) (9,856,815)
Increase in inventories . . . . . . . . . . . . . . . . . . (4,975,310) (2,482,505) (4,520,569)
(Increase) decrease in prepaid expenses. . . . . . . . . . . (41,103) 97,467 (35,491)
Increase (decrease) in accounts payable. . . . . . . . . . . 4,768,451 (2,009,477) 3,042,752
Increase in accrued expenses . . . . . . . . . . . . . . . . 1,992,380 4,857,823 1,603,120
Increase (decrease) in income taxes payable. . . . . . . . . 751,249 (244,592) 3,843,170
--------------------------------------------
Net cash provided by operating activities. . . . . . . . 14,360,151 18,014,043 24,540,636
--------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of fixed assets . . . . . . . . . . . -- 7,181 115,071
Acquisition of Ellis Building Components . . . . . . . . . . (4,250,000) -- --
Acquisition of Royal Buildings . . . . . . . . . . . . . . . -- (910,000) --
Acquisition of Mesco Metal Buildings . . . . . . . . . . . . -- -- (20,631,222)
Acquisition of Doors & Building Components, Inc. . . . . . . -- -- (11,000,000)
Acquisition of Carlisle Engineered Metals, Inc . . . . . . . -- -- (2,840,117)
(Increase) decrease in other noncurrent assets . . . . . . . 54,541 7,725 (1,988,127)
Capital expenditures . . . . . . . . . . . . . . . . . . . . (5,935,522) (5,836,820) (10,318,399)
--------------------------------------------
Net cash applied to investing activities . . . . . . . . (10,130,981) (6,731,914) (46,662,794)
--------------------------------------------
Cash flows from financing activities:
Net proceeds from sale of stock. . . . . . . . . . . . . . . -- -- 24,770,007
Exercise of stock options. . . . . . . . . . . . . . . . . . 37,040 71,555 749,240
Borrowings on line of credit and notes . . . . . . . . . . . 1,000,000 -- --
Principal payments on long-term debt, line of
credit and notes payable . . . . . . . . . . . . . . . . (2,812,723) (47,389) (84,834)
--------------------------------------------
Net cash provided by (used in) financing activities . . (1,775,683) 24,166 25,434,413
--------------------------------------------
Net increase in cash . . . . . . . . . . . . . . . . . . 2,453,487 11,306,295 3,312,255
Cash beginning of period . . . . . . . . . . . . . . . . . . . . 3,871,627 6,325,114 17,631,409
--------------------------------------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 6,325,114 $ 17,631,409 $ 20,943,664
============================================
See Independent Auditor's Report and Accompanying Notes to the Consolidated
Financial Statements.
20
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Reporting Entity
These financial statements include the operations and activities of NCI
Building Systems, Inc. and its wholly-owned subsidiaries (Company) after the
elimination of all material intercompany accounts and balances. The Company
designs, manufactures and markets metal building systems and components for
commercial, industrial, agricultural and community service use. The Company
recognizes revenues as jobs are shipped.
(b) Accounts Receivable
The Company reports accounts receivable net of the allowance for doubtful
accounts of $1,339,772 and $1,629,202 at October 31, 1995 and 1996,
respectively. Trade accounts receivable are the result of sales of buildings
and components to customers throughout the United States and affiliated
territories including international builders who resell to end users. Although
the Company's sales historically have been concentrated in Texas and
surrounding states, in recent years it has been expanding its authorized
builder organization and customer base into the midwestern states and, to a
lesser extent, into south central, southeastern and coastal states. All sales
are denominated in United States dollars. Credit sales do not normally require
a pledge of collateral; however, various types of liens may be filed to enhance
the collection process. Company management is not aware of any significant
concentrations of credit or market risks related to receivables or other
financial instruments reported in these financial statements.
(c) Inventories
Inventories are stated at the lower of cost or market value, using specific
identification for steel coils and weighted-average method for other raw
materials. A summary of inventories follows:
October 31,
---------------------------
1995 1996
---------------------------
Raw materials . . . . . . . . . . . . . . $12,255,393 $21,514,510
Work-in-process and
finished goods . . . . . . . . . . . 4,642,062 7,178,420
---------------------------
$16,897,455 $28,692,930
===========================
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives. Depreciation is computed using the straight line method
for financial reporting purposes and both straight line and accelerated methods
for income tax purposes. Depreciation expense for the years ended October 31,
1994, 1995 and 1996 was $2,172,336, $2,995,051 and $4,236,397, respectively.
October 31,
---------------------------
1995 1996
---------------------------
Land. . . . . . . . . . . . . . . . . . . $ 1,458,993 $ 3,174,539
Buildings and improvements . . . . . . . 11,401,480 20,136,496
Machinery, equipment
and furniture . . . . . . . . . . . . 21,292,363 31,865,638
Transportation equipment . . . . . . . . 582,371 910,801
Computer software . . . . . . . . . . . . 169,764 155,876
---------------------------
34,904,971 56,243,350
Less accumulated depreciation . . . . . . (9,275,589) (13,491,805)
---------------------------
$25,629,382 $ 42,751,545
===========================
Estimated useful lives for depreciation are:
Buildings and improvements . . . . . . . . 10-20 years
Machinery, equipment and
furniture. . . . . . . . . . . . . . . 5-10 years
Transportation equipment . . . . . . . . . 3-10 years
Computer software. . . . . . . . . . . . . 5 years
(e) Cash Flows Statement
For purposes of the cash flows statement, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents. Total
21
7
interest paid for the years ended October 31, 1994, 1995 and 1996 was $82,364,
$55,871 and $108,203, respectively. Income taxes paid for the years ended
October 31, 1994, 1995 and 1996 was $5,620,566, $11,032,810 and $12,762,769
respectively. Non-cash investing or financing activities included: $1,009,286
for the 1995 contribution for the 401k plan which was paid in common stock in
1995, $823,398 for the 1994 contribution for the 401k plan which was paid in
common stock in 1994 and $583,000 in additional purchase price related to the
acquisition of Ellis Building Components for the year ended October 31, 1994.
(f) Excess of Cost Over Fair Value of Acquired Net Assets
Excess of cost over fair value of acquired net assets is amortized on a
straight-line basis over fifteen years. Accumulated amortization as of October
31, 1996 was $1,440,785, and $118,056 as of October 31, 1995. The carrying
value of goodwill is reviewed if the facts and circumstances suggest that it
may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value
of the goodwill would be reduced by the estimated shortfall of cash flows.
(g) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(h) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $1,054,951,
$1,196,471 and $1,267,431 in 1994, 1995 and 1996, respectively.
(i) Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operation when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement
121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
(j) Accounting for Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-based
Compensation, which encourages companies to apply a new fair value approach and
to record compensation expense in the income statement measured at the grant
date of the award using an option pricing model. Alternatively, companies are
permitted to continue using current accounting rules for employee stock
options, but will be required to provide pro forma net income and earnings per
share information as if the new fair value approach had been adopted. The
Company presently plans to continue to use the current accounting rules with
the new disclosures required in the year ended October 31, 1997.
22
8
(2) NOTES PAYABLE (SHORT-TERM BORROWINGS)
The Company has a revolving unsecured credit line of $6 million with a
bank bearing interest that fluctuates with prime, (commitment fee 1/4% on
unused portion) all of which was unused at October 31, 1995 and 1996,
respectively.
(3) LONG-TERM DEBT
October 31,
----------------------
1995 1996
----------------------
Six year reducing revolving credit line of
$1 million with a bank bearing interest that
fluctuates with prime, with $72,900 quarterly
reducing borrowing base ............................. $ -- $ --
Notes payable to City of Mattoon bearing interest
at 3% secured by certain equipment, repayable by
certain equipment, repayable in aggregate monthly
installments of $4,828 maturing through
November 2001 ....................................... 325,798 276,968
Note payable to employee bearing interest at 7%
maturing April 1, 2001, with an option to
convert into common stock at $29.925 per share....... -- 1,500,000
Other ............................................... 36,000 --
----------------------
361,798 1,776,968
Current portion of long-term debt ................... (83,402) (47,402)
----------------------
$278,396 $1,729,566
======================
Aggregate required principal reductions are as follows:
Year Ended October 31,
----------------------------------------------------------
1997 ......................................... $ 47,402
1998 ......................................... 51,846
1999 ......................................... 53,423
2000 ......................................... 55,048
2001 ......................................... 1,556,722
Thereafter ................................... 12,527
----------
$1,776,968
==========
The loan agreements related to the revolving line and short-term
borrowings contain, among other things, provisions relative to additional
borrowings and restrictions on the amount of retained earnings available for
the payment of dividends and the repurchase of common stock and provisions
requiring the maintenance of certain net worth and other financial ratios.
Under the most restrictive of these covenants, such dividends or stock
repurchases are limited to 20% of the Company's net income for any 12-month
period, which is further restricted on a quarterly basis, based on the ratio of
cash flow (Net Income plus Depreciation and Amortization) for the previous
12-month period to current maturities of long-term debt plus dividends and
stock repurchases.
The carrying amount of the Company's long-term debt approximates its
fair value.
(4) RELATED PARTY TRANSACTIONS
During 1994, 1995 and 1996, the Company purchased $740,573, $1,052,829
and $1,417,064 respectively, of materials from a related party under an arm's
length transaction.
(5) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
23
9
Taxes on income from continuing operations consist of the following:
Year Ended October 31,
----------------------------------------
1994 1995 1996
----------------------------------------
Current: Federal................... $5,630,366 $ 9,733,381 $14,530,670
State..................... 353,558 759,770 1,367,686
----------------------------------------
Total current..................... 5,983,924 10,493,151 15,898,356
Deferred: Federal................... (233,304) (445,063) (745,472)
State..................... (8,464) (25,432) (77,265)
----------------------------------------
Total deferred.................... (241,768) (470,495) (822,737)
----------------------------------------
Total provision..................... $5,742,156 $10,022,656 $15,075,619
----------------------------------------
The reconciliation of income tax computed at the United States federal
statutory tax rate to the effective income tax rate is as follows:
Year Ended October 31,
----------------------------------------
1994 1995 1996
----------------------------------------
Statutory federal income tax rate... 35.0% 35.0% 35.0%
State income taxes.................. 0.8 1.8 2.4
Other............................... 0.1 0.3 0.4
----------------------------------------
Effective tax rate................ 35.9% 37.1% 37.8%
========================================
Significant components of the Company's deferred tax liabilities and assets are
as follows:
1994 1995 1996
----------------------------------------
Deferred tax assets
Capitalized overhead in inventory.. $ 475,384 $ 819,766 $1,210,913
Bad debt reserve................... 374,698 495,716 602,804
Accrued reserves................... 255,960 240,738 637,293
Other.............................. 194,296 251,982 572,876
----------------------------------------
Total deferred tax assets............ 1,300,338 1,808,202 3,023,886
----------------------------------------
Deferred tax liabilities
Depreciation and amortization...... 1,323,670 1,140,082 1,426,749
Other.............................. 114,905 335,864 442,143
----------------------------------------
Total deferred tax liabilities....... 1,438,575 1,475,946 1,868,892
----------------------------------------
Net deferred tax asset (liability)... $ (138,237) $ 332,256 $1,154,994
========================================
(6) OPERATING LEASE COMMITMENTS
Total rental expense incurred from operating leases for the years ended
October 31, 1994, 1995 and 1996 was $1,142,105, $2,639,201 and $3,989,603
respectively.
Aggregate minimum required annual payments on long-term operating leases at
October 31, 1996 were as follows:
Year Ended October 31,
-------------------------------------------------
1997................................. $1,948,478
1998................................. 1,581,772
1999................................. 995,319
2000................................. 437,756
2001................................. 188,795
----------
$5,152,120
==========
(7) STOCK OPTIONS
The Board of Directors has approved a non-statutory employee stock option
plan. This plan includes the future granting of stock options to purchase up to
1,550,000 shares as an incentive and reward for key management personnel. As of
October 31, 1996, the following tables reflects activity for the year. Options
expire ten years from date of grant. The rights to acquire the option shares is
earned in 25% increments over the first four years of the option period.
24
10
Balance at Option Balance at Exercisable at
Year October 31, 1995 Price Granted Canceled Exercised October 31, 1996 October 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
1989 319,811 $1.60 -- -- (200,000) 119,811 119,811
1990 59,344 2.71 -- -- (16,500) 42,844 42,844
1992 168,093 5.66 to -- -- (5,000) 163,093 163,093
6.33
1993 46,125 12.50 -- (4,500) (13,350) 28,275 17,025
1994 89,000 16.25 to -- -- (7,500) 81,500 33,250
17.00
1995 79,500 17.00 to -- (5,250) (3,500) 70,750 15,625
18.25
1996 -- 23.00 to 315,000 (13,332) -- 301,668 --
28.50
- ----------------------------------------------------------------------------------------------------------------------------
Total 761,873 315,000 (23,082) (245,850) 807,941 391,648
============================================================================================================================
(8) LITIGATION
The Company is involved in certain litigation that the Company
considers to be in the normal course of business. Management of the Company
believes that such litigation will not result in any material losses.
(9) NET INCOME PER SHARE
Net income per common share is computed by dividing net income after
income taxes by the weighted average number of common shares outstanding during
1994, 1995 and 1996 after giving effect for common stock equivalents.
Net income per share is calculated as follows:
Year Ended October 31,
-------------------------------------
1994 1995 1996
-------------------------------------
(in thousands, except per share data)
Net income ................................... $10,256 $17,032 $24,814
Average common shares outstanding............. 6,217 6,272 7,749
Common equivalent shares for:
Stock options ........................... 478 493 449
Average shares and equivalents ............... 6,695 6,765 8,198
Net income per share ......................... $ 1.53 $ 2.52 $ 3.03
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1992, the Company approved implementation of a
401(k) profit sharing plan (the "Savings Plan") which covers all eligible
employees. The Savings Plan requires the Company to match employee
contributions up to a certain percentage of a participant's salary. No other
contributions may be made to the Savings Plan. Contributions accrued for the
Savings Plan for the year ended October 31, 1994, 1995 and 1996 were $629,559,
$775,190 and $1,154,696 respectively.
(11) ACQUISITIONS
In November 1995, the Company acquired substantially all of the assets
and assumed certain liabilities of Doors and Building Components, Inc.
("DBCI"), a manufacturer of roll-up steel overhead doors used primarily in
self-storage and commercial/industrial applications, for approximately $12
million in cash and 300,000 shares of common stock of the Company, valued at
$5.2 million. Based on the final determination of book value of the purchased
assets, the price was
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reduced by approximately $2.5 million of which $1.5 million is due from the
seller and is recorded as a receivable in the October 31, 1996 balance sheet.
This amount was settled in cash in December, 1996. The excess of cost over fair
value of the acquired net assets recorded was $11.4 million.
In April, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Mesco Metal Buildings, a division of
Anderson Industries, Inc. ("Mesco"), a manufacturer of metal building systems
and components, for approximately $20.8 million in cash and a $1.5 million 7%
convertible subordinated debenture due April, 2001. The excess of cost over
fair value of the acquired net assets recorded was $10.9 million.
Accordingly, the consolidated results of operations for 1996 included
DBCI and Mesco since the date of acquisition. Both acquisitions were accounted
for using the purchase method. Assuming the acquisitions of DBCI and Mesco had
been consummated as of November 1, 1994, the pro forma unaudited results of
operations for the years ended October 31 are as follows:
(Unaudited)
-------------------------------------
1995 1996
-------------------------------------
(in thousands, except per share data)
Sales ................................ $305,772 $347,404
Net income ........................... 19,571 26,345
Net income per share ............... $ 2.40 $ 3.21
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
NCI Building Systems, Inc.
Houston, Texas
We have audited the accompanying balance sheets of NCI Building Systems, Inc. as
of October 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of NCI Building Systems, Inc. at October 31, 1996 and 1995 and the consolidated
results of its operations and its cash flow for each of the three years in the
period ended October 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
December 6, 1996
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table presents, as a percentage of sales, certain selected
financial data for the Company for the periods indicated:
Year Ended October 31,
----------------------------
1994 1995 1996
----------------------------
Sales ........................................ 100.0% 100.0% 100.0%
Cost of sales ................................ 74.0 72.5 72.5
----------------------------
Gross profit ................................. 26.0 27.5 27.5
Engineering expense .......................... 4.1 3.8 3.4
Selling, general and administrative expense... 12.7 12.5 12.6
----------------------------
Income from operations ....................... 9.2 11.2 11.5
Interest expense ............................. 0.1 0.0 0.0
Other (income) expense ....................... (0.4) (0.4) (0.5)
----------------------------
Income before income taxes ................... 9.5 11.6 12.0
Provision for income taxes ................... 3.4 4.3 4.5
----------------------------
Net income ................................... 6.1% 7.3% 7.5%
============================
FISCAL 1996 COMPARED TO FISCAL 1995
Sales in fiscal 1996 increased by $98.7 million, or 42%, compared to fiscal
1995. The acquisition of Doors and Buildings Components, Inc. ("DBCI") in
November 1995 and Mesco Metal Buildings, a division of Anderson Industries,
Inc. ("Mesco") in April 1996 accounted for $58.7 million of this increase.
Excluding the 1996 sales of these two acquisitions, sales increased in 1996 by
17% compared to the prior year. This growth resulted from increased market
penetration by the Company in the metal building market, expansion into the
Western United States with the opening of a new plant in California and growth
of the component division of the Company.
Gross profit increased in fiscal 1996 by $27.1 million, or 42%,
compared to fiscal 1995. This was in line with the increase in sales
experienced for the year. Gross profit percent of 27.5% was the same as the
percent achieved in fiscal year 1995. Slight increases in raw material costs
during the year were offset by spreading fixed manufacturing costs over a
higher sales base.
Engineering expenses increased $2.1 million, or 24%, in the current
year compared to fiscal 1995. Engineering expenses increased at a slower rate
than sales due to increased sales of products which require less engineering
effort such as components and DBCI products. Selling, general and
administrative expenses ("SG&A") increased $12.8 million, or 44%, compared to
the prior year. SG&A increased slightly faster than sales due to the
establishment of a west coast sales function to support the new plant location
and additional expenses resulting from the two acquisitions made in the
current year.
Interest expense increased by $52,000 as a result of the issuance of a
$1.5 million subordinated debenture in connection with the acquisition of
Mesco. Other income, which consists primarily of interest income, increased by
$764,000 in the current year compared to fiscal 1995. This increase resulted
primarily from the higher level of cash invested during the year and slightly
higher average rates of returns on invested cash.
Provision for income taxes increased by 50.4% in the current year and
increased as a percent of sales from 4.3% to 4.5%. This increase was due to the
increase in state income taxes in the current year compared to the prior year.
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FISCAL 1995 COMPARED TO FISCAL 1994
Sales in fiscal 1995 increased by $66.4 million, or 40%, compared to fiscal
1994. The acquisition of Ellis Building in Georgia in October 1994 and of Royal
Buildings in New Mexico in March 1995 permitted the Company to continue its
geographic expansion in the southeast and southwest region of the country. This
expansion coupled with the approximately 18% growth in industry sales in 1995
accounted for the majority of the Company's increase in sales.
Gross profit for fiscal 1995 increased by $20.8 million, or 48%,
compared to fiscal year 1994. The improvement in gross profit percent of 1.5%
of sales to 27.5% in 1995 resulted from stable raw material costs, increased
plant capacity from acquired facilities, better plant utilization and spreading
of fixed manufacturing costs over a higher sales volume.
Engineering expenses increased $2.1 million, or 30%, compared to fiscal
year 1994. Engineering expenses increased at a slower rate than sales due
increased sales of products which required less engineering effort and
spreading of fixed costs over the higher sales volume. Selling, general and
administrative expenses increased by $7.8 million, or 37%, compared to fiscal
year 1994. Selling, general and administrative increased at a slower rate than
sales due to spreading of fixed costs.
Interest expense decreased by $26,000 due lower outstanding debt
resulting from normal scheduled repayments. Other income increased by $181,000
due to a higher average balance of invested cash and higher rates of return in
fiscal year 1995 compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations from cash flow from
operations, bank borrowing and the sale of equity in the Company. Internal cash
generation has been aided, in the opinion of the Company, by a compensation
program under which bonuses are earned based on achieving specified return on
assets goals. This program encourages management of the balance sheet as well
as the income statement.
Net cash flow from operations before changes in working capital
components increased to $30.5 million in fiscal 1996 from $20.9 million in
fiscal 1995. At October 31, 1996, working capital was approximately $52.0
million, an increase of $20.3 million from fiscal year 1995.
The Company maintains a revolving credit facility with a bank lender
that currently provides for a maximum credit, subject to borrowing base
requirements, of $6.0 million and a six year reducing term revolver with a
current borrowing base of $1.0 million. The revolving credit facility matures
in February 1997 and bears interest at the prime rate. At October 31, 1996, the
Company had no borrowing outstanding under either revolving credit facility and
had not borrowed during the year.
During the year, the Company invested $10.3 million in capital
additions including a new plant built in Atwater, CA at a cost of approximately
$4.0 million, a new DBCI plant in Houston, Texas at a cost of approximately
$1.0 million, and acquired a plant location in Ennis, Texas for approximately
$1.2 million. The remainder was spent primarily at other plant locations to
increase production capacity. All of these expenditures were paid from
internally generated cash.
In December 1995, the Company sold in a secondary offering 1,086,000
shares of its common stock for approximately $24.8 million. The proceeds from
this offering were used partially to fund the acquisitions of DBCI and Mesco as
described in Note 11 to the Company's consolidated financial statements.
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Inflation has not significantly affected the Company's financial position
or operations. Metal building system sales are affected more by the
availability of funds for financing construction than by the rate of interest
charged by the lender. No assurance can be given that inflation or the prime
rate of interest 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
the amount of increased working capital necessary to support expected growth.
Historically, two-thirds of the Company's total assets are classified as
current assets, which consists primarily of trade receivables from customers
and raw material inventory; and the ratio of "quick assets" (cash plus
receivables) to current liabilities has exceeded a 1 to 1 ratio.
Based on the current capitalization of the Company, it is expected future
cash flow from operations and availability of alternative sources of financing
should be sufficient to provide adequate liquidity in future periods. There can
be no assurance that liquidity would not be impacted by a severe decline in
general economic conditions and higher interest rates which would affect the
Company's ability to obtain external financing.
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UNAUDITED QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------
Fiscal Year 1996
Net sales ............................................ $67,350 $72,171 $91,980 $101,379
Gross profit ......................................... 17,384 19,547 25,476 29,099
Income before income taxes ........................... 6,485 8,132 11,495 13,775
Net income ........................................... 4,020 5,051 7,139 8,602
Net income per common and
common equivalent share(1) ......................... $0.53 $0.60 $0.85 $1.03
Fiscal Year 1995
Net sales ............................................ $52,302 $55,873 $58,941 $ 67,099
Gross profit ......................................... 13,519 15,273 16,566 19,042
Income before income taxes ........................... 5,060 6,316 7,159 8,519
Net income ........................................... 3,194 3,947 4,523 5,368
Net income per common and
common equivalent share ............................ $0.48 $0.58 $0.67 $0.79
(1) The sum of the quarterly income per share amounts do not equal the annual
amount reported, as per share amounts are computed independently for each
quarter and for the full year based on the respective weighted average common
shares outstanding.
PRICE RANGE OF COMMON STOCK
The following table sets forth the quarterly high and low closing sale prices
of the Company's common stock, as reported on NASDAQ/NMS for the prior two
years. The prices quoted represent prices between dealers in securities,
without adjustments for mark-ups, mark-downs, or commissions, and do not
necessarily reflect actual transactions.
Fiscal Year 1996 High Low
- -------------------------------------------------------------------------
January 31 ........................................... $28.63 $21.00
April 30 ............................................. $38.00 $26.50
July 31 .............................................. $38.50 $22.75
October 31 ........................................... $35.13 $21.75
Fiscal Year 1995 High Low
- -------------------------------------------------------------------------
January 31 ........................................... $19.50 $15.88
April 30 ............................................. $19.38 $16.50
July 31 .............................................. $19.50 $16.00
October 31 ........................................... $25.00 $18.50
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