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NCS > SEC Filings for NCS > Form 10-Q on 12-Mar-2014All Recent SEC Filings

Show all filings for NCI BUILDING SYSTEMS INC

Form 10-Q for NCI BUILDING SYSTEMS INC


12-Mar-2014

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 November 3, 2013.

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;
• increases in energy prices;

• the volatility of the Company's stock price;

• the dilutive effect on the Company's common stockholders of potential future sales of the Company's Common Stock held by the selling stockholders;

• substantial governance and other rights held by the selling stockholders;

• breaches of our information system security measures and damage to our major information management systems;

• 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, including the Dodd - Frank Act;

• 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 2014, our year end will be November 2, 2014 which is the Sunday closest to October 31.

We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit, operating income and whether or not each segment has achieved its projected sales goals. 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.

First Fiscal Quarter

Early reports for new low-rise nonresidential construction starts during our first quarter of fiscal 2014 indicate a year over year decline of 5.5%, which we attribute primarily to the severity and extended nature of the winter weather slowing construction site activity. Despite market declines, our revenue in all three of our segments grew as we continue to pursue growth initiatives. Nevertheless, our operating results were lower than the first quarter of fiscal 2013 primarily due to lower gross margins from weather related disruptions and the resulting unfavorable product mix variations, combined with incremental spending for growth initiatives and costs in connection with the completion of the secondary stock offering of our majority shareholder.

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 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 a decrease 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 ("MBMA"), 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 2014, published in January 2014, indicates an expected increase of 12% in square footage and an increase of 9% in dollar value as compared to the prior calendar year. This represented a upward revision of the 2014 forecast published in October, which indicated an expected increase of 11% in square footage and an increase of 8% in dollar value as compared to 2013. 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 January 2014 was above 50 at 50.4 and the commercial and industrial component of the index was at 50.9 for January 2014. This represents a decline over those indices for October 2013, when AIA's ABI was above 50 at 51.6 and the commercial and industrial component of the index was at 51.5 for October 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 three months ended February 2, 2014, steel represented approximately 68% 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. Historically, we have been able to adjust our sales prices in response to increases in steel prices. 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 5.5% from October 2013 to January 2014 and was 6.1% higher in January 2014 compared to January 2013 and represents purchases for forward delivery, according to a lead time, which will vary. For example, the January index would likely approximate our March steel purchase deliveries based on current lead times.

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: metal coil coating; metal components; and 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. Our operating segments are vertically integrated and benefit from 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. 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 manufacturing and distribution activities of our segments are effectively coupled through the use of our nationwide hub-and-spoke manufacturing and distribution system, which supports and enhanced our vertical integration. 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 12 - 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
                                 February 2,      January 27,
                                     2014             2013
Total sales:
Metal coil coating              $       54,267    $     49,271
Metal components                       158,193         153,904
Engineered building systems            152,237         147,566
Intersegment sales                    (54,031)        (53,157)
Total sales                     $      310,666    $    297,584

External sales:
Metal coil coating              $       24,590    $     19,221
Metal components                       139,346         136,528
Engineered building systems            146,730         141,835
Total sales                     $      310,666    $    297,584

Operating income (loss):
Metal coil coating              $        6,495    $      5,542
Metal components                         4,111           6,072
Engineered building systems              1,640           4,041
Corporate                             (15,414)        (15,257)
Total operating income (loss)   $      (3,168)    $        398
Unallocated other expense              (3,596)         (5,850)
Loss before income taxes        $      (6,764)    $    (5,452)

FISCAL THREE MONTHS ENDED FEBRUARY 2, 2014 COMPARED TO FISCAL THREE MONTHS ENDED
JANUARY 27, 2013

Consolidated sales increased by 4.4%, or $13.1 million for the three months ended February 2, 2014, compared to the three months ended January 27, 2013. This increase resulted from higher tonnage volumes in each of our operating segments for the three months ended February 2, 2014 compared to the same period in 2013 which was driven primarily by improved demand in the end use sectors we serve compared to the prior year. These increases were partially offset by unfavorable weather conditions during the current period.

Consolidated cost of sales, excluding gain on insurance recovery increased by 6.6%, or $15.7 million for the three months ended February 2, 2014, compared to the three months ended January 27, 2013.

Consolidated gain on insurance recovery for the three months ended February 2, 2014 was $1.0 million. On August 6, 2013, our metal coil coating segment facility in Jackson, Mississippi experienced a fire caused by an exhaust fan failure that damaged the roof and walls of two curing ovens. During the fourth quarter of fiscal 2013, the ovens were repaired. We received insurance proceeds of approximately $1.0 million during the three months ended February 2, 2014 from claims submitted. These insurance proceeds have been classified as a "gain on insurance recovery" in the consolidated statement of operations. There was no corresponding amount recorded for the three months ended January 27, 2013. See Note 3 -- Gain on Insurance Recovery to the consolidated financial statements for more information.

Gross margins, including the gain on insurance recovery, were 19.1% for the three months ended February 2, 2014 compared to 20.5% for the same period in the prior year. The decrease in gross margins was the result of our product mix and efficiency being significantly impacted by weather related disruptions to our manufacturing processes and our supply chain. In addition, our material costs were impacted by weather related transportation disruptions, causing us to utilize a higher percentage of spot price steel. This decrease was partially offset by the gain on insurance recovery as noted above.

Metal coil coating sales increased by 10.1%, or $5.0 million to $54.3 million in the three months ended February 2, 2014, compared to $49.3 million in the same period in the prior year. Sales to third parties for the three months ended February 2, 2014 increased $5.4 million to $24.6 million from $19.2 million in the same period in the prior year, primarily as a result of a 21.8% increase in external tons shipped due to the continued ramping up of our new facility in Middletown, Ohio and higher package sales mix compared to toll processing sales mix. 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 increase was partially offset by a decrease of $0.4 million in intersegment sales for the three months ended February 2, 2014 compared to the same period in the prior year. Metal coil coating third-party sales accounted for 7.9% of total consolidated third-party sales in the three months ended February 2, 2014 compared to 6.5% in the three months ended January 27, 2013.

Operating income of the metal coil coating segment increased to $6.5 million in the three months ended February 2, 2014, compared to $5.5 million in the same period in the prior year. The $1.0 million increase resulted primarily from the gain on insurance recovery and external volume as noted above, partially offset by the additional cost associated with the ramp up of the new Middletown facility.

Metal components sales increased 2.8%, or $4.3 million to $158.2 million in the three months ended February 2, 2014, compared to $153.9 million in the same period in the prior year. This increase was primarily due to a 0.8% increase in external tons shipped, partially offset by unfavorable product mix. The external volume increase was driven by improved demand in the end use sectors we serve compared to the prior year but was partially offset by unfavorable weather conditions during the period. Sales to third parties for the three months ended February 2, 2014 increased $2.8 million to $139.3 million from $136.5 million in the same period in the prior year. The remaining $1.5 million represents an increase in intersegment sales. Metal components third-party sales accounted for 44.9% of total consolidated third-party sales in the three months ended February 2, 2014 compared to 45.9% in the three months ended January 27, 2013.

Operating income of the metal components segment decreased to $4.1 million in the three months ended February 2, 2014, compared to $6.1 million in the same period in the prior year. The $2.0 million decrease was driven by investments in certain growth initiations, unfavorable weather conditions and unfavorable product mix.

Engineered building systems sales increased 3.2%, or $4.7 million to $152.2 million in the three months ended February 2, 2014, compared to $147.6 million in the same period in the prior year. This increase in the three months ended February 2, 2014 compared to the same period in the prior year resulted from a 1.3% increase in external tons shipped and higher sales prices. Sales to third parties for the three months ended February 2, 2014 increased $4.9 million to $146.7 million from $141.8 million in the same period in the prior year. The increase was partially offset by a decrease of $0.4 million in intersegment sales. Engineered building systems third-party sales accounted for 47.2% of total consolidated third-party sales in the three months ended February 2, 2014 compared to 47.7% in the three months ended January 27, 2013.

Operating income of the engineered building systems segment decreased to $1.6 million in the three months ended February 2, 2014 compared to $4.0 million in the same period in the prior year. This $2.4 million decline resulted from higher transportation and manufacturing costs which was partially due to weather disruptions, as well as supply chain disruptions and the carryover of lower prices in backlog from earlier in fiscal 2013. The decline was partially offset by an increase in external tons shipped as noted above.

Consolidated engineering, selling, general and administrative expenses, consisting of engineering, drafting, selling and administrative costs, increased to $62.4 million in the three months ended February 2, 2014, compared to $60.5 million in the same period in the prior year. As a percentage of sales, engineering, selling, general and administrative expenses were 20.1% for the three months ended February 2, 2014 as compared to 20.3% for the three months ended January 27, 2013. The $1.9 million increase in engineering, selling and administrative expenses was primarily due to an increase in wages, commissions and benefits as a result of higher volumes and certain growth initiatives and investments in our sales force as well as $0.7 million of expenses relating to the secondary offering by the CD&R Funds during the three months ended February 2, 2014.

Consolidated interest expense decreased to $3.1 million for the three months ended February 2, 2014, compared to $6.3 million for the same period of the prior year. Interest rates on the Credit Agreement decreased on June 24, 2013 from 8% to 4.25%.

Consolidated other income (expense), net decreased to $0.5 million expense for the three months ended February 2, 2014, compared to $0.4 million income for the same period of the prior year primarily due to Canadian foreign currency losses in the current period.

Consolidated benefit for income taxes was a $2.5 million benefit for the three months ended February 2, 2014, compared to a $1.8 million benefit for the same period in the prior year. The effective tax rate for the three months ended February 2, 2014 was 37.1% compared to 33.5% for the same period in the prior year. The increase in the income tax benefit was primarily the result of lower utilization of certain Canadian net operating loss carry forwards which have been previously reserved and lower utilization of the domestic production activities deduction and an increase in non-deductible expenses for the three months ended February 2, 2014 compared to the same period in the prior year.

Diluted loss per common share improved to a loss of $(0.06) per diluted common share for the three months ended February 2, 2014, compared to a loss of $(0.19) per diluted common share for the same period in the prior year. The change in the diluted loss per common share was primarily due to the conversion of our Convertible Preferred Stock into shares of our common stock in the third quarter of fiscal 2013, which increased the weighted average number of shares outstanding, partially offset by the $0.6 million increase in net loss applicable to shares of our common stock resulting from the factors described above in this section. The Convertible Preferred Stock prior to its conversion and the unvested restricted common stock related to our Incentive Plan do not have a contractual obligation to share in losses; therefore, no losses were allocated to these shares in the periods presented.

LIQUIDITY AND CAPITAL RESOURCES

General

Our cash and cash equivalents declined from $77.4 million to $16.6 million
during the three months ended February 2, 2014. The following table summarizes
our consolidated cash flows for the three months then ended February 2, 2014 and
January 27, 2013 (dollars in thousands):

                                                                  Fiscal Three Months Ended
. . .
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