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NCS > SEC Filings for NCS > Form 10-Q on 6-Jun-2013All Recent SEC Filings

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Form 10-Q for NCI BUILDING SYSTEMS INC


6-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with the unaudited consolidated financial statements included herein under "Item 1. Unaudited Consolidated Financial Statements" and the audited consolidated financial statements and the notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended October 28, 2012.

FORWARD LOOKING STATEMENTS

This Quarterly Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective," "plan," "potential," "predict," "projection," "should," "will" or other similar words. We have based our forward-looking statements on our management's beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking information, including any earnings guidance, if applicable. 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 and adverse weather conditions;
challenging economic conditions affecting the nonresidential construction industry;
volatility in the U.S. economy and abroad, generally, and in the credit markets;
ability to service or refinance our debt and obtain future financing;
the Company's ability to comply with the financial tests and covenants in its existing and future debt obligations;
operational limitations or restrictions in connection with our debt;
recognition of asset impairment charges;
commodity price increases and/or limited availability of raw materials, including steel;
the ability to make strategic acquisitions accretive to earnings;
retention and replacement of key personnel;
enforcement and obsolescence of intellectual property rights;
fluctuations in customer demand;
costs related to environmental clean-ups and liabilities;
competitive activity and pricing pressure;
the volatility of the Company's stock price;
the substantial rights, seniority and dilutive effect on our common stockholders of the common stock underlying the Convertible Preferred Stock issued to the investment funds affiliated with Clayton, Dubilier & Rice, LLC (the "CD&R Funds");
breaches of our information security system security measures;
hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance;
changes in laws or regulations;
our ability to integrate Metl-Span LLC with our business and to realize the anticipated benefits of such acquisition (the "Acquisition");
costs and other effects of legal and administrative proceedings, settlements, investigations, claims and other matters; and
other risks detailed under the caption "Risk Factors" in Part II, Item 1A of this report and in our most recent Annual Report on Form 10-K as filed with the SEC.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption "Risk Factors" in our most recent Annual Report on Form 10-K as filed 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 unless the securities laws require us to do so.

OVERVIEW

NCI Building Systems, Inc. (together with its subsidiaries, unless the context requires otherwise, the "Company," "NCI," "we," "us" or "our") is one of North America's largest integrated manufacturers and marketers of metal products for the nonresidential construction industry. We provide metal coil coating services and design, engineer, manufacture and market metal components and engineered building systems primarily for nonresidential construction use. We manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We sell our products for both new construction and repair and retrofit applications.

Metal components offer builders, designers, architects and end-users several advantages, including lower long-term costs, longer life, attractive aesthetics and design flexibility. Similarly, engineered building systems offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs.

We use a 52/53 week year with our fiscal year end on the Sunday closest to October 31. In fiscal 2013, our year end will be November 3, 2013 which is the Sunday closest to October 31. As a result, the fourth quarter of fiscal 2013 will include an additional week of operating activity.

We assess performance across our operating segments by analyzing and evaluating
(i) gross profit, operating income and whether or not each segment has achieved its projected sales goals, and (ii) non-financial efficiency indicators such as gross profit per employee, man hours per ton of steel produced and shipped tons per day. In assessing our overall financial performance, we regard return on adjusted operating assets, as well as growth in earnings, as key indicators of shareholder value.

Second Fiscal Quarter

The metal coil coating segment increased total sales and third party sales by 2% and 12%, respectively, in the second quarter of fiscal 2013 compared to the same period in the prior year. Operating income decreased 3% to $4.8 million in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 primarily as the result of start-up costs for the new plant in Middletown, Ohio. The ramp-up of this new plant is progressing well and the facility remains on track to be incrementally profitable in the fourth quarter of fiscal 2013.

The metal components segment increased total sales by 38% in the second quarter of fiscal 2013 compared to the same period in the prior year and produced a 51% increase in third-party sales over the same period, demonstrating the benefits of the Metl-Span acquisition. Operating income declined to $5.1 million in the second quarter of fiscal 2013, compared to $9.0 million in the same period in the prior year. This decline was as a result of several factors: increased pricing pressure in the seasonally weaker period, an unfavorable comparison to the prior year, which included $2.9 million of benefit from legal and bad debt recoveries, $1.3 million of current year investments in growth initiatives, $1.7 million of integration costs and investments for the Metl-Span acquisition and the ramp-up of the new Mattoon, Illinois panel plant.

The engineered building systems segment's total sales in the second quarter of fiscal 2013 were flat with the second quarter of fiscal 2012, and third party sales were down approximately 2% over the same period. Sales and margins during the second quarter of fiscal 2013 compared to the same period in the prior year were both impacted by pricing pressures associated with the seasonally weak second quarter, and the impact was exacerbated by notably poor weather conditions for construction activity. Operating profit in the second quarter of fiscal 2013 compared to the same period in the prior year declined 38% to $4.2 million due to the aforementioned reasons, as well as investments made in additional manufacturing personnel to support an expected higher level of activity in the second half of fiscal 2013.

Industry Conditions

Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales normally are lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.

The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. One of the primary challenges we face is that the United States economy is slowly recovering from a recession and a period of historically low nonresidential construction activity, which began in the third quarter of 2008 and reduced demand for our products and adversely affected our business. In addition, the tightening of credit in financial markets over the same period adversely affected the ability of our customers to obtain financing for construction projects. As a result, we have experienced decreases in orders and cancellations of orders for our products in previous fiscal quarters, and the ability of our customers to make payments has been adversely affected. Similar factors could cause our suppliers to experience financial distress or bankruptcy, resulting in temporary raw material shortages. While economic growth has either resumed or remains flat, the nonresidential construction industry continues to face significant challenges. The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1967 as compiled and reported by McGraw-Hill:

[[Image Removed]]

Source: McGraw-Hill

When assessing the state of the metal construction market, we review information from various industry associations, third-party research, and various government reports such as industrial production and capacity utilization. One such industry association is the Metal Building Manufacturers Association, which provides summary member sales information and promotes the design and construction of metal buildings and metal roofing systems. Another is McGraw-Hill Construction Information Group ("McGraw-Hill Construction"), which we review for information regarding actual and forecasted growth in various construction related industries, including the overall nonresidential construction market. McGraw-Hill Construction's nonresidential construction forecast for calendar 2013, published in April 2013, indicates an expected increase of 8% in square footage and an increase of 6% in dollar value as compared to the prior calendar year. In calendar 2014, activity is expected to increase compared to calendar 2013, with an expected increase of 16% in square footage and an increase of 14% in dollar value. Additionally, we review the American Institute of Architects' ("AIA") survey for inquiry and billing activity for the industrial, commercial and institutional sectors. The AIA's architecture billings index ("ABI") is a closely watched metric, as billings growth for architecture services generally leads to construction spending growth 9 to 12 months forward. We have historically experienced a shorter lag period of 6 - 9 months when comparing the commercial and industrial ABI trends to our volume trends. An ABI reading above 50 indicates an increase in month-to-month seasonally adjusted billings and a reading below 50 indicates a decrease in month-to-month seasonally adjusted billings. AIA's ABI published for April 2013 was below 50 at 48.6 and the commercial and industrial component of the index was at 49.2 for April 2013.

Another challenge we face both short and long term is the volatility in the price of steel. Our business is heavily dependent on the supply of steel and is significantly impacted by steel prices. For the fiscal six months ended April 28, 2013, steel represented approximately 71% of our cost of goods sold. The steel industry is highly cyclical in nature, and steel prices have been volatile in recent years and may remain volatile in the future. Steel prices are influenced by numerous factors beyond our control, including general economic conditions domestically and internationally, the availability of raw materials, competition, labor costs, freight and transportation costs, production costs, import duties and other trade restrictions. The monthly CRU North American Steel Price Index, published by the CRU Group, has increased 0.1% from October 2012 to April 2013 and was 10.1% lower in April 2013 compared to April 2012.

We normally do not maintain an inventory of steel in excess of our current production requirements. However, from time to time, we may purchase steel in advance of announced steel price increases. We can give no assurance that steel will be readily available or that prices will not continue to be volatile. While most of our sales contracts have escalation clauses that allow us, under certain circumstances, to pass along all or a portion of increases in the price of steel after the date of the contract but prior to delivery, for competitive or other reasons we may not be able to pass such price increases along. If the available supply of steel declines, we could experience price increases that we are not able to pass on to the end users, a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our results of operations and financial condition. For additional discussion please see "Item
3. Quantitative and Qualitative Disclosures About Market Risk-Steel Prices."

RESULTS OF OPERATIONS

Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) metal coil coating; (ii) metal components; and (iii) engineered building systems. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Products of all operating segments use similar basic raw materials. The metal coil coating segment consists of cleaning, treating, painting and slitting continuous steel coils before the steel is fabricated for use by construction and industrial users. The metal components segment products include metal roof and wall panels, doors, metal partitions, metal trim, insulated panels and other related accessories. Metl-Span is included in the metal components segment. The engineered building systems segment includes the manufacturing of main frames, Long Bay Systems and value-added engineering and drafting, which are typically not part of metal components or metal coil coating products or services. The operating segments follow the same accounting policies used for our consolidated financial statements.

We evaluate a segment's performance based primarily upon operating income before corporate expenses. Intersegment sales are recorded based on standard material costs plus a standard markup to cover labor and overhead and consist of:
(i) hot-rolled, light gauge painted, and slit material and other services provided by the metal coil coating segment to both the metal components and engineered building systems segments; (ii) building components provided by the metal components segment to the engineered building systems segment; and
(iii) structural framing provided by the engineered building systems segment to the metal components segment.

Corporate assets consist primarily of cash but also include deferred financing costs, deferred taxes and property, plant and equipment associated with our headquarters in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology, purchasing, marketing and corporate travel expenses. Additional unallocated expenses include interest income, interest expense, debt extinguishment costs and other (expense) income. See Note 13 - Operating Segments to the consolidated financial statements for more information on our segments.

The following table represents sales and operating income attributable to these operating segments for the periods indicated (in thousands, except percentages):

                                           Fiscal Three Months Ended                                              Fiscal Six Months Ended
                        April 28, 2013          %          April 29, 2012          %          April 28, 2013          %          April 29, 2012          %
Total sales:
Metal coil coating     $         49,790            17     $         48,839            20     $         99,061            17     $         97,922            20
Metal components                147,163            50              106,742            43              301,067            51              212,494            43
Engineered building
systems                         148,095            50              148,715            59              295,661            50              289,013            59
Intersegment sales              (51,649 )         (17 )            (54,065 )         (22 )           (104,806 )         (18 )           (105,595 )         (22 )

Total sales            $        293,399           100     $        250,231           100     $        590,983           100     $        493,834           100

Operating income
(loss):
Metal coil coating     $          4,755                   $          4,890                   $         10,297                   $         10,192
Metal components                  5,137                              9,018                             11,209                             14,559
Engineered building
systems                           4,196                              6,740                              8,237                             14,336
Corporate                       (16,033 )                          (15,704 )                          (31,290 )                          (29,858 )

Total operating
income (loss)          $         (1,945 )                 $          4,944                   $         (1,547 )                 $          9,229
Unallocated other
expense                          (5,903 )                           (2,681 )                          (11,753 )                           (5,951 )

Income (loss) before
income taxes           $         (7,848 )                 $          2,263                   $        (13,300 )                 $          3,278

FISCAL THREE MONTHS ENDED APRIL 28, 2013 COMPARED TO FISCAL THREE MONTHS ENDED
APRIL 29, 2012

Consolidated sales increased by 17.3%, or $43.2 million for the three months ended April 28, 2013, compared to the three months ended April 29, 2012. This increase resulted from higher tonnage volumes in our metal coil coating, metal components and engineered building systems segments for the three months ended April 28, 2013 compared to the same period in 2012 which was driven by the inclusion of Metl-Span in the current period and slightly improved demand in the end use sectors we serve compared to the prior year. These increases were partially offset by weather-related shipment delays, lower sales prices related to competitive pricing pressure and lower input costs and less favorable engineered buildings product mix shipped in the current period.

Consolidated cost of sales increased by 21.0%, or $40.3 million for the three months ended April 28, 2013, compared to the three months ended April 29, 2012. Gross margins were 20.7% for the three months ended April 28, 2013 compared to 23.2% for the same period in the prior year. The decrease in gross margins was the result of lower sales prices as a result of competitive pricing pressures and lower steel costs, a less favorable product mix in our engineered building systems segment, the additional costs associated with the ramp-up of the new Middletown facility, integration cost for our Metl-Span acquisition, and our decision to retain and train skilled manufacturing workers in order to capture additional efficiencies in the seasonally stronger second half of our fiscal year. The decrease was partially offset by higher tonnage volumes in our metal coil coating, engineered building systems segments and metal components due to the inclusion of Metl-Span in the current period.

Metal coil coating sales increased by 1.9%, or $1.0 million to $49.8 million in the three months ended April 28, 2013, compared to $48.8 million in the same period in the prior year. Sales to third parties for the three months ended April 28, 2013 increased by 11.8% to $21.9 million from $19.6 million in the same period in the prior year, primarily as a result of continued focus on diversified end markets and higher package sales mix compared to toll processing sales mix and a 1.5% increase in external tons shipped. Package sales include both the toll processing services and the sale of the steel coil while toll processing services include only the toll processing service performed on the steel coil already in the customer's ownership. The remaining $1.4 million represents a decrease in intersegment sales for the three months ended April 28, 2013 compared to the same period in the prior year. Metal coil coating third-party sales accounted for 7.5% of total consolidated third-party sales in the three months ended April 28, 2013 compared to 7.8% in the three months ended April 29, 2012.

Operating income of the metal coil coating segment decreased to $4.8 million in the three months ended April 28, 2013, compared to $4.9 million in the same period in the prior year. The $0.1 million decrease resulted primarily from the additional cost associated with the ramp up of the new Middletown facility, mostly offset by improved intersegment sales.

Metal components sales increased 37.9%, or $40.4 million to $147.2 million in the three months ended April 28, 2013, compared to $106.7 million in the same period in the prior year. This increase was primarily due to a 31.5% increase in external tons shipped, partially offset by lower sales prices driven by competitive pricing pressure and lower steel costs and a 24.6% reduction in internal volume. The volume increase was driven by the inclusion of Metl-Span in the current period and improved demand in the end use sectors we serve in the three months ended April 28, 2013 compared to the same period in the prior year. Metl-Span was acquired on June 22, 2012 and, after completion of certain operational integration activities, contributed $45.5 million of sales in the second quarter of fiscal 2013. Sales to third parties for the three months ended April 28, 2013 increased $43.9 million to $129.2 million from $85.3 million in the same period in the prior year. The remaining $3.4 million represents a decrease in intersegment sales. Metal components third-party sales accounted for 44.0% of total consolidated third-party sales in the three months ended April 28, 2013 compared to 34.1% in the three months ended April 29, 2012.

Operating income of the metal components segment decreased to $5.1 million in the three months ended April 28, 2013, compared to $9.0 million in the same period in the prior year. The $3.9 million decrease resulted from a one-time $1.9 million recovery in the prior year related to an actuarially determined general liability charge, a $1.7 million cost related to the integration and plant start-up costs for insulated metal panels, a $1.3 million cost related to growth initiatives and a $0.6 million increase bad debt expense due to a significant collection of a significantly aged account in the same period of the prior year. The decrease in operating income was partially offset by an increase in external tons shipped as noted above and the inclusion of Metl-Span. Metl-Span, after completion of certain operational integration activities, contributed $3.0 million of operating income during the second quarter of fiscal 2013.

Engineered building systems sales decreased 0.4%, or $0.6 million to $148.1 million in the three months ended April 28, 2013, compared to $148.7 million in the same period in the prior year. This decrease resulted from lower sales prices as a result of competitive pricing pressure, lower steel costs, and less favorable product mix shipped in the three months ended April 28, 2013 compared to the same period in the prior year. This decrease was partially offset by a 2.7% increase in external tons shipped. Sales to third parties for the three months ended April 28, 2013 decreased $3.0 million to $142.3 million from $145.3 million in the same period in the prior year. The remaining $2.4 million represents an increase in intersegment sales. Engineered building systems third-party sales accounted for 48.5% of total consolidated third-party sales in the three months ended April 28, 2013 compared to 58.1% in the three months ended April 29, 2012.

Operating income of the engineered building systems segment decreased to $4.2 million in the three months ended April 28, 2013 compared to $6.7 million in the same period in the prior year. This $2.5 million decline resulted from a $3.5 million decrease in gross profit due to lower sales prices as a result of competitive pricing pressure, lower steel costs, a less favorable product mix and increased labor costs incurred in anticipation of higher volumes in the seasonally stronger second half of our fiscal year, partially offset by a $0.9 million decrease in engineering, selling and administrative expenses primarily due to a $0.5 million decrease in marketing and advertising costs.

Consolidated engineering, selling, general and administrative expenses, consisting of engineering, drafting, selling and administrative costs, increased to $62.8 million in the three months ended April 28, 2013, compared to $51.6 million in the same period in the prior year. The $11.2 million increase in engineering, selling and administrative expenses was primarily due to a $6.4 million increase in operating expenses as a result of the Acquisition, a one-time $1.9 million recovery in the prior year related to an actuarially determined general liability charge, a $1.3 million increase in share-based compensation expense and a $1.3 million cost related to growth initiatives. As a percentage of sales, engineering, selling, general and administrative expenses were 21.4% for the three months ended April 28, 2013 as compared to 20.6% for . . .

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