NCI BUILDING SYSTEMS INC - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED: August 3, 2002
--------------

COMMISSION FILE NUMBER: 1-14315
-------

NCI BUILDING SYSTEMS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware 76-0127701
- ----------------------------------------- ----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

10943 N. Sam Houston Parkway W.
Houston, TX 77064
- ---------------------------------------- ----------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(281) 897-7788
- --------------------------------------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---

APPLICABLE ONLY TO CORPORATE ISSUERS

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.

Common Stock, $.01 Par Value--18,627,595 shares as of August 3, 2002

================================================================================

FORWARD - LOOKING STATEMENTS

"This Quarterly Report contains forward-looking statements concerning our
business and operations. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, these expectations and the
related statements are subject to risks, uncertainties, and other factors that
could cause the actual results to differ materially from those projected. These
risks, uncertainties, and other factors include, but are not limited to,
industry cyclicality and seasonality, adverse weather conditions, fluctuations
in customer demand and other patterns, raw material pricing, competitive
activity and pricing pressure, the ability to make strategic acquisitions
accretive to earnings, and general economic conditions affecting the
construction industry, as well as other risks detailed in our filings with the
SEC. We expressly disclaim any obligations to release publicly any updates or
revisions to these forward-looking statements to reflect any changes in our
expectations."

================================================================================

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

-i-

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

NCI BUILDING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements.

1

NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to condensed consolidated financial statements.

2

NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to condensed consolidated financial statements.

3

NCI BUILDING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements.

4

NCI BUILDING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 3, 2002

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Certain prior year amounts have been reclassified to conform
with the current year presentation. Operating results for the fiscal three month
and fiscal nine month periods ended August 3, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 2, 2002.

Effective February 2, 2002, the Company adopted a revised accounting calendar
which incorporates a four-four-five week calendar each quarter. For fiscal year
2002 the quarters end on February 2, May 4, August 3, and November 2. The
Company believes that the impact for comparative purposes is not material.

For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 2001, filed with the Securities and Exchange
Commission.

NOTE 2 - INVENTORIES

The components of inventory are as follows:

NOTE 3 - BUSINESS SEGMENTS

The Company has divided its operations into two reportable segments: engineered
building systems and metal building components, based upon similarities in
product lines, manufacturing processes, marketing and management of its
businesses. Products of both segments are similar in basic raw materials used.
The engineered building systems segment includes the manufacturing of structural
framing and supplies and value added engineering and drafting, which are
typically not part of component products or services. The reporting segments
follow the same accounting policies used for the Company's consolidated
financial statements. Management evaluates segment performance based upon
operating income. Intersegment sales are recorded based on weighted average
costs, and consist primarily of products and services provided to the engineered
building systems segment by the metal building components segment, including
painting and coating of hot roll and light gauge material. The Company is not
dependent on any one significant customer or group of customers. Substantially
all of the Company's sales are made within the United States. Information with
respect to segments is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations.

5

NOTE 4 - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"

Effective November 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. SFAS No. 142 requires that these assets be reviewed for impairment
at least annually. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives.

In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the Company historically
evaluated goodwill for impairment by comparing the entity level unamortized
balance of goodwill to projected undiscounted cash flows, which did not result
in an indicated impairment. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level upon adoption and at least annually
thereafter, utilizing a two-step methodology. The initial step requires the
Company to determine the fair value of each reporting unit and compare it to the
carrying value, including goodwill, of such unit. The Company determined the
fair value of each reporting unit by using a combination of present value and
multiple of earnings valuation techniques and compared it to each reporting
unit's carrying value. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount, if any, of the impairment would then be measured in the
second step. The Company completed the first step during the second quarter
which indicated that goodwill recorded in the metal building components segment
was impaired as of November 1, 2001. Due to the potential impairment, the
Company then completed step two of the test to measure the amount of the
impairment. Based on that analysis, a transitional impairment loss of $67.4
million ($65.1 million after tax) was recognized as the cumulative effect of a
change in accounting principle.

6

The following table reflects the Company's comparative income before the
cumulative effect of the change in accounting principle and goodwill
amortization under SFAS No. 142 (in thousands):

The following table displays the changes in the carrying amount of goodwill by
operating segment for the fiscal nine months ended August 3, 2002 (in
thousands):

* Allocation refers to the reallocation of goodwill from the metal buildings
components segment to the engineered building systems segment. SFAS No. 142
requires the review of prior acquisitions to determine reasonableness of the
allocation of goodwill. This adjustment represents the amortized discounted
value of the synergy benefits recognized in the engineered building systems
segment, directly resulting from the Metal Buildings Components, Inc. (MBCI)
acquisition in May 1998. Originally, all goodwill resulting from this
acquisition was viewed on a consolidated basis.

7

NOTE 5 - NET INCOME PER SHARE

Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share considers the effect of common stock equivalents. The computations
are as follows:

8

NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and certain accounting and
reporting provisions of Accounting Principles Board (APB) Opinion No. 30,
Reporting the Results of Operations. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS No. 144 as of November 1, 2001 and the adoption of the
statement did not have a significant impact on the Company's financial position
or results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS No. 145 will generally require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Accordingly, gains or losses
from extinguishments of debt for fiscal years beginning after May 15, 2002 will
not be reported as extraordinary items unless the extinguishment qualifies as an
extraordinary item under the provisions of APB Opinion No. 30. Upon adoption,
any gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the criteria of
APB Opinion No. 30 for such classification will be reclassified to conform with
the provisions of SFAS No. 145. Earlier application of the provisions of SFAS
No. 145 is encouraged. SFAS No. 145 does not have any impact on the Company's
results of operations for the current periods presented. The Company expects to
adopt SFAS No. 145 during the fourth quarter of fiscal 2002.

NOTE 7 - CONTINGENCIES

The Company's primary steel suppliers, Bethlehem Steel Corporation and National
Steel Corporation filed for protection under Federal Bankruptcy laws on October
15, 2001, and March 6, 2002, respectively. During fiscal 2001, the Company
purchased approximately 65% of its steel requirements from these two suppliers.
The Company does not maintain an inventory of steel in excess of its current
production requirements. Should both companies cease operations, essential
supply of primary raw materials could be temporarily interrupted. The Company
believes that its other primary steel supplier, U.S. Steel, can meet its demand
for steel if its supply from Bethlehem Steel and/or National Steel is
interrupted.

9

As a result of the Company's restatement of its financial results for the last
half of fiscal 1999, all of fiscal 2000 and the first quarter of fiscal 2001,
several class action lawsuits were filed against the Company and certain of its
current officers in the United States District Court for the Southern District
of Texas, commencing in April 2001. The plaintiffs in the actions purport to
represent purchasers of NCI common stock during various periods ranging from
August 25, 1999 through April 12, 2001. The lawsuits were consolidated into one
class action lawsuit on August 16, 2001. On January 10, 2002, the court
appointed lead plaintiffs for the consolidated lawsuit. The lead plaintiffs
filed a consolidated amended complaint on February 1, 2002. In the consolidated
complaint the plaintiffs allege, among other things, that during the financial
periods that were restated the Company made materially false and misleading
statements about the status and effectiveness of a management information and
accounting system used by its components division and costs associated with that
system, failed to assure that the system maintained books and records accurately
reflecting inventory levels and costs of goods sold, failed to maintain internal
controls on manual accounting entries made to certain inventory-related accounts
in an effort to correct the data in the system, otherwise engaged in improper
accounting practices that overstated earnings, and issued materially false and
misleading financial statements. The plaintiffs further allege that the
individual defendants traded in the Company's common stock while in possession
of material, non-public information regarding the foregoing. The plaintiffs in
the consolidated complaint assert various claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and seek unspecified amounts of
compensatory damages, interest and costs, including legal fees. On March 15,
2002, the Company filed its Motion to Dismiss Plaintiffs' Amended Consolidated
Class Action Complaint and Memorandum in Support. The Motion to Dismiss is
currently pending before the court. The Company and the individual defendants
deny the allegations in the complaint and intend to defend against them
vigorously. The consolidated lawsuit is at a very early stage. Consequently, at
this time the Company is not able to predict whether it will incur any liability
in excess of insurance coverages or to estimate the damages, or the range of
damages, if any, that the Company might incur in connection with the lawsuit, or
whether an adverse outcome could have a material adverse impact on its business,
consolidated financial condition or results of operations.

The Company is involved in various other legal proceedings that are considered
to be in the ordinary course of business. The Company believes that these legal
proceedings will not have a material adverse effect on its business,
consolidated financial condition or results of operations.

NOTE 8 - SUBSEQUENT EVENT - REFINANCING OF SENIOR CREDIT FACILITY

As of August 3, 2002, the Company had a senior credit facility with a syndicate
of banks, which consisted of (i) a five-year revolving credit facility of up to
$200 million (outstanding balance of $84.8 million at August 3, 2002), (ii) a
five year term loan facility in the original principal amount of $200 million
(outstanding balance of $50 million at August 3, 2002) and (iii) a $40 million
term note (outstanding balance of $34.1 million at August 3, 2002).

On September 16, 2002, the Company completed a $250 million senior secured
credit facility with a group of lenders and used the initial borrowings to repay
in full the existing credit facility. The new facility includes a $125 million,
five year revolving loan maturing on September 15, 2007 and a $125 million, six
year term loan maturing on September 15, 2008. The term loan requires mandatory
prepayments of $1.6 million a quarter beginning in December 2002 with a final
payment of $89.1 million at maturity.

10

The new senior credit facility is secured by security interests in (1) accounts
receivable, inventory and equipment and assets related thereto such as related
software, chattel paper, instruments and contract rights of the Company
(excluding foreign operations) and (2) 100% of the capital stock and other
equity interests in each of the direct and indirect operating domestic
subsidiaries of the Company.

The new senior credit agreement includes covenants which, among other things,
limit the ratio of senior debt and total debt to EBITDA and requires minimum
interest coverage and the maintenance of a minimum net worth. The new senior
credit agreement also limits the amount of permitted spending for capital
additions, the repurchase of stock and payment of dividends, the disposition of
assets and the amount of investments and other indebtedness.

Borrowings under the new senior credit facility may be prepaid and the voluntary
reduction of the unutilized portion of the five-year revolver may be made at any
time, in certain amounts, without premium or penalty but subject to LIBOR
breakage costs. The Company is required to make mandatory prepayments on the new
senior credit facility upon the occurrence of certain events, including the sale
of assets and the issuance and sale of equity securities, in each case subject
to certain limitations. These repayments must first be applied to the term loan
and then to reduction of the revolving commitment. The Company also is required
to reduce the revolving commitment by $25 million if it issues an additional
series of its senior subordinated notes due May 1, 2009, and in any event by
December 31, 2005.

Loans on the new senior credit facility will bear interest, at the Company's
option, as follows: (1) base rate loans at the base rate plus a margin that
fluctuates based on the Company's leverage ratio and ranges from 1% to 1.75% on
the revolving loan and from 2% to 2.25% on the term loan and (2) LIBOR loans at
LIBOR plus a margin that fluctuates based on the Company's leverage ratio and
ranges from 2% to 2.75% on the revolving loan and from 3% to 3.25% on the term
loan. Base rate is defined as the higher of Bank of America, N.A. prime rate or
the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the
applicable London interbank offered rate adjusted for reserves. Based on its
current leverage ratios, the Company will pay a margin of 1.5% on base rate
loans and 2.5% on LIBOR loans under the revolving loan and a margin of 2.25% on
base rate loans and 3.25% on LIBOR loans under the term loan.

On September 16, 2002, the Company borrowed approximately $46 million under the
new revolving loan and $125 million under the new term loan, which was used to
repay the current senior bank indebtedness outstanding, resulting in unused
borrowing capacity of $79 million under the new senior credit facility.

11

NCI BUILDING SYSTEMS, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

The Company's various product lines have been aggregated into two business
segments: engineered building systems and metal building components. These
aggregations are based on the similar nature of the products, distribution of
products, and management and reporting for those products within the Company.

Both segments operate primarily in the nonresidential construction market. Sales
and earnings are influenced by general economic conditions, the level of
nonresidential construction activity, roof repair and retrofit demand and the
availability and terms of financing available for construction. The reporting
segments follow the same accounting policies used for the Company's consolidated
financial statements.

Products of both business segments are similar in basic raw materials used.
Engineered building systems include the manufacturing of structural framing and
value added engineering and drafting, which are typically not part of component
products or services. The Company believes it has one of the broadest product
offerings of metal building products in the industry.

Intersegment sales are based on weighted average costs, and consist primarily of
products and services provided to the engineered buildings segment by the metal
building components segment, including painting and coating of hot rolled and
light gauge material. This provides better customer service, shorter delivery
time and minimizes transportation costs to the customer.

* Goodwill was reclassed from corporate to the metal building components
segment in accordance with the provisions of SFAS No. 142.

13

NCI BUILDING SYSTEMS, INC.

FISCAL THREE MONTHS ENDED AUGUST 3, 2002
COMPARED TO FISCAL THREE MONTHS ENDED JULY 31, 2001

Consolidated sales for the three months ended August 3, 2002 were relatively
flat compared to the three months ended July 31, 2001 due to the continued
softness of the construction industry. Recruitment of new customers continued
from the first quarter with 29 new builders added during the quarter in the
engineered building systems segment.

Engineered Building Systems' sales were down by 2%, to $82.7 million, compared
to $84.8 million, during the three months ended July 31, 2001, due to the
continued softness of the construction industry. Engineered building systems
accounted for 32% of total consolidated sales for the three months ended August
3, 2002 compared to 33% for the prior year's period.

Operating income of the engineered building systems segment declined during the
three months ended August 3, 2002 by 39%, to $7.8 million, compared to $12.9
million in the prior year's period. This decline resulted from lower selling
prices due to competition, less efficient utilization of plant facilities and
higher cost of engineering and drafting due to an increase in the complexity of
orders.

Metal Building Components' sales were relatively flat for the three months ended
August 3, 2002 compared to the prior year's period. This segment accounted for
68% of consolidated sales for the three months ended August 3, 2002 compared to
67% in the prior year's period.

Operating income of the metal building components segment increased by $8.3
million, to $23.3 million, for the three months ended August 3, 2002 compared to
$15.0 million in the prior year's period. This increase was attributable to
higher volumes and margin improvements resulting from plant consolidations that
occurred in the first quarter, lower energy costs, as well as the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, for accounting for goodwill effective November 1, 2001. The
goodwill amortization recorded for the metal building components segment for the
three months ended July 31, 2001 was $2.9 million.

Selling, general and administrative expenses, consisting of engineering and
drafting, selling and administrative costs, increased 6%, to $37.1 million,
during the three months ended August 3, 2002 compared to $34.9 million in the
prior year's period. This increase was mainly attributed to cost increases in
the areas of employee benefits, particularly health care, general insurance,
bonuses and engineering and drafting costs. As a percent of sales, selling,
general and administrative expenses for the three months ended August 3, 2002
were 14% compared to 13% for the three months ended July 31, 2001, excluding
goodwill amortization in the prior years' period.

The restructuring actions and closure of five plants announced in October 2001
resulted in the sale of three facilities and related equipment during the
current quarter. The sale resulted in a gain of $0.8 million ($0.5 million after
tax or $0.03 per diluted share) recorded in other income, net.

Interest expense for the three months ended August 3, 2002 decreased by 33%, to
$5.1 million compared to $7.7 million during the three months ended July 31,
2001. This decline resulted from lower interest rates in fiscal 2002 compared to
fiscal 2001 and a decrease in outstanding debt for the period.

14

NCI BUILDING SYSTEMS, INC.

FISCAL NINE MONTHS ENDED AUGUST 3, 2002
COMPARED TO FISCAL NINE MONTHS ENDED JULY 31, 2001

Consolidated sales for the nine months ended August 3, 2002 were up 2% compared
to the nine months ended July 31, 2001. Recruitment of new customers and a mild
winter contributed to this increase, which enabled the Company to gain market
share and outperform the non-residential construction industry, which reported a
10% decline through the first half of calendar 2002.

Engineered Building Systems' sales were down slightly compared to the nine
months ended July 31, 2001 due to the continued softness of the construction
industry. Incoming orders for engineered building systems were down 6% compared
to the prior year's period. Engineered building systems accounted for 32% of
total consolidated sales in the first nine months of fiscal 2002 compared to 33%
in the first nine months of fiscal 2001.

Operating income of the engineered building systems segment declined in the
first nine months of fiscal 2002 by 38%, to $19.6 million, compared to $31.4
million in the prior year's first nine months. This decline resulted from lower
selling prices due to competition, less efficient utilization of plant
facilities and higher cost of engineering and drafting due to an increase in the
complexity of orders.

Metal Building Components' sales increased by 4%, to $474.1 million, in the
first nine months of fiscal 2002 compared to $455.5 million in the prior year's
period. The majority of this increase was in the rural market, which was aided
by milder weather in the first nine months of fiscal year 2002. This segment
accounted for 68% of consolidated sales in the first nine months of fiscal 2002
compared to 67% in the prior year's period.

Operating income of the metal building components segment increased by $13.7
million, to $47.9 million, in the nine months ended August 3, 2002 compared to
$34.2 million in the prior year's period. This increase was attributable to not
amortizing goodwill of $8.5 million in accordance with the provisions of SFAS
No. 142 and improved gross margins in the third quarter resulting from the plant
closings offset by manufacturing inefficiencies in the first quarter.

Selling, general and administrative expenses, consisting of engineering and
drafting, selling and administrative costs, increased 4%, to $103.9 million, in
the nine month period of fiscal 2002 compared to $99.7 million in fiscal 2001.
This increase was mainly attributed to cost increases in the areas of employee
benefits, particularly health care, general insurance, bonuses and engineering
and drafting costs. As a percent of sales, selling, general and administrative
expenses for the nine months were 15% in both fiscal 2002 and fiscal 2001
excluding goodwill amortization in the prior years' period.

The restructuring actions and closure of five plants announced in October 2001
have been substantially completed, with the exception of the sale of the
associated real estate, which is ongoing.

Interest expense in the first nine months of fiscal 2002 decreased by 36%, to
$16.8 million compared to $26.4 million in the first nine months of fiscal 2001.
This decline resulted from lower interest rates in fiscal 2002 compared to
fiscal 2001 and a decrease in outstanding debt of $73.6 million for the period.

Effective November 1, 2001, the Company adopted SFAS No. 142. In accordance with
this standard, the Company ceased amortization of all goodwill as of the
effective date. This resulted in a favorable impact to consolidated pre-tax
income from operations of $3.1 million and $9.1 million for the three months and
nine months ended August 3, 2002, respectively, and to net income of $2.8
million ($.15 per diluted share) and $8.4 million ($.46 per diluted share) for
the same periods, respectively.

15

During the second quarter of fiscal 2002, the Company also completed the
transitional review for goodwill impairment required under this new accounting
standard. This review indicated that goodwill recorded in the metal building
components segment was impaired as of November 1, 2001. Accordingly, the Company
measured and recognized a transitional impairment loss of $67.4 million ($65.1
million after tax) as a cumulative effect of a change in accounting principle.
See Note 4 of the "Notes to Condensed Consolidated Financial Statements" of this
quarterly report for additional discussion of the impact of this statement on
the Company's consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

As of August 3, 2002, the Company had working capital of $54.3 million compared
to $49.5 million at the end of fiscal year 2001. Net working capital at August
3, 2002 includes a reduction in current maturities of long term debt of $33.8
million related to the debt refinancing discussed below and in Note 8 to the
condensed consolidated financial statements. Excluding this reduction, working
capital would have been $20.5 million at August 3, 2002, a reduction of $29
million from the end of fiscal year 2001. This decline resulted primarily from a
cash reduction of $15.3 million used to reduce debt and an increase of $8.9
million in accrued compensation and benefits related to increased accruals for
employee benefits, particularly health care and bonuses. During the first nine
months of fiscal 2002, the Company generated cash flow from operations of $55.5
million. This cash flow, along with cash from the beginning of the period, was
used to fund capital expenditures of $7.1 million and repay $73.6 million in
debt under the Company's senior credit facility.

As of August 3, 2002, the Company had a senior credit facility with a syndicate
of banks, which consisted of (i) a five-year revolving credit facility of up to
$200 million (outstanding balance of $84.8 million at August 3, 2002), (ii) a
five year term loan facility in the original principal amount of $200 million
(outstanding balance of $50 million at August 3, 2002) and (iii) a $40 million
term note (outstanding balance of $34.1 million at August 3, 2002).

On September 16, 2002, the Company completed a $250 million senior secured
credit facility with a group of lenders and used the initial borrowings to repay
in full the existing credit facility. The new facility includes a $125 million,
five year revolving loan maturing on September 15, 2007 and a $125 million, six
year term loan maturing on September 15, 2008. The term loan requires mandatory
prepayments of $1.6 million a quarter beginning in December 2002 with a final
payment of $89.1 million at maturity.

The new senior credit facility is secured by security interests in (1) accounts
receivable, inventory and equipment and assets related thereto such as related
software, chattel paper, instruments and contract rights of the Company
(excluding foreign operations) and (2) 100% of the capital stock and other
equity interests in each of the direct and indirect operating domestic
subsidiaries of the Company.

The new senior credit agreement includes covenants which, among other things,
limit the ratio of senior debt and total debt to EBITDA and requires minimum
interest coverage and the maintenance of a minimum net worth. The new senior
credit agreement also limits the amount of permitted spending for capital
additions, the repurchase of stock and payment of cash dividends, the
disposition of assets and the amount of investments and other indebtedness.

Borrowings under the new senior credit facility may be prepaid and the voluntary
reduction of the unutilized portion of the five-year revolver may be made at any
time, in certain amounts, without premium or penalty but subject to LIBOR
breakage costs. The Company is required to make mandatory prepayments on the new
senior credit facility upon the occurrence of certain events, including the sale
of

16

assets and the issuance and sale of equity securities, in each case subject to
certain limitations. These repayments must first be applied to the term loan and
then to reduction of the revolving commitment. The Company also is required to
reduce the revolving commitment by $25 million if it issues an additional series
of its senior subordinated notes due May 1, 2009, and in any event by December
31, 2005.

Loans on the new senior credit facility will bear interest, at the Company's
option, as follows: (1) base rate loans at the base rate plus a margin that
fluctuates based on the Company's leverage ratio and ranges from 1% to 1.75% on
the revolving loan and from 2% to 2.25% on the term loan and (2) LIBOR loans at
LIBOR plus a margin that fluctuates based on the Company's leverage ratio and
ranges from 2% to 2.75% on the revolving loan and from 3% to 3.25% on the term
loan. Base rate is defined as the higher of Bank of America, N.A. prime rate or
the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the
applicable London interbank offered rate adjusted for reserves. Based on its
current leverage ratios, the Company will pay a margin of 1.5% on base rate
loans and 2.5% on LIBOR loans under the revolving loan and a margin of 2.25% on
base rate loans and 3.25% on LIBOR loans under the term loan.

On September 16, 2002, the Company borrowed approximately $46 million under the
new revolving loan and $125 million under the new term loan, which was used to
repay the current senior bank indebtedness outstanding, resulting in unused
borrowing capacity of $79 million under the new senior credit facility.

In addition, the Company has $125 million of senior subordinated notes, which
mature on May 1, 2009. The notes bear interest at a rate of 9.25%. The indenture
governing the Company's senior subordinated notes includes covenants which,
among other things, limit the repurchase of stock and the payment of cash
dividends, the disposition of assets and the amount of investments and other
indebtedness.

Under the most restrictive of the covenants limiting the Company's ability to
pay cash dividends and repurchase capital stock, the Company had available
approximately $4.9 million to use for those purposes at August 3, 2002.

Inflation has not significantly affected the Company's financial position or
operations. Metal building components and engineered building systems sales are
affected more by the availability of funds for construction than interest rates.
No assurance can be given that inflation or interest rates will not fluctuate
significantly, either or both of which could have an adverse effect on the
Company's operations.

Liquidity in future periods will be dependent on internally generated cash
flows, the ability to obtain adequate financing for capital expenditures and
expansion when needed, and the amount of increased working capital necessary to
support expected growth. Based on the current capitalization, it is expected
that future cash flows from operations and availability of alternative sources
of external financing should be sufficient to provide adequate liquidity for the
foreseeable future. As of August 3, 2002, the Company had approximately $115.2
million in unused borrowing available under its senior credit facility, subject
to compliance with the terms of these facilities.

MARKET RISK DISCLOSURE

The Company is subject to market risk exposure related to changes in interest
rates on its senior credit facility, which includes revolving credit notes and
term notes. These instruments bear interest at a pre-agreed upon percentage
point spread from either the prime interest rate or LIBOR. Under its senior
credit facility, the Company may, at its option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to six months. At
August 3, 2002, the Company had $168.9 million outstanding under its senior
credit facilities. Based on this balance, an immediate change of 100 basis
points in the interest rate would cause a change in interest expense of
approximately $1.7 million on an annual basis. The Company's objective in

17

maintaining these variable rate borrowings is the flexibility obtained regarding
early repayment without penalties and lower overall cost as compared to
fixed-rate borrowings.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and certain accounting and
reporting provisions of Accounting Principles Board (APB) Opinion No. 30,
Reporting the Results of Operations. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS No. 144 as of November 1, 2001 and the adoption of the
statement did not have a significant impact on the Company's financial position
or results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS No. 145 will generally require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Accordingly, gains or losses
from extinguishments of debt for fiscal years beginning after May 15, 2002 will
not be reported as extraordinary items unless the extinguishment qualifies as an
extraordinary item under the provisions of APB Opinion No. 30. Upon adoption,
any gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the criteria of
APB Opinion No. 30 for such classification will be reclassified to conform with
the provisions of SFAS No. 145. Earlier application of the provisions of SFAS
No. 145 is encouraged. SFAS No. 145 does not have any impact on the Company's
results of operations for the current periods presented. The Company expects to
adopt SFAS No. 145 during the fourth quarter of fiscal 2002.

OTHER MATTERS

Reference is made to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 2001 filed with the Securities and Exchange Commission for a
discussion of critical accounting policies, legal proceedings and risk factors.

18

NCI BUILDING SYSTEMS, INC.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As a result of the Company's restatement of its financial results for the last
half of fiscal 1999, all of fiscal 2000 and the first quarter of fiscal 2001,
several class action lawsuits were filed against the Company and certain of its
current officers in the United States District Court for the Southern District
of Texas, commencing in April 2001. The plaintiffs in the actions purport to
represent purchasers of NCI common stock during various periods ranging from
August 25, 1999 through April 12, 2001. The lawsuits were consolidated into one
class action lawsuit on August 16, 2001. On January 10, 2002, the court
appointed lead plaintiffs for the consolidated lawsuit. The lead plaintiffs
filed a consolidated amended complaint on February 1, 2002. In the consolidated
complaint the plaintiffs allege, among other things, that during the financial
periods that were restated the Company made materially false and misleading
statements about the status and effectiveness of a management information and
accounting system used by its components division and costs associated with that
system, failed to assure that the system maintained books and records accurately
reflecting inventory levels and costs of goods sold, failed to maintain internal
controls on manual accounting entries made to certain inventory-related accounts
in an effort to correct the data in the system, otherwise engaged in improper
accounting practices that overstated earnings, and issued materially false and
misleading financial statements. The plaintiffs further allege that the
individual defendants traded in the Company's common stock while in possession
of material, non-public information regarding the foregoing. The plaintiffs in
the consolidated complaint assert various claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and seek unspecified amounts of
compensatory damages, interest and costs, including legal fees. On March 15,
2002, the Company filed its Motion to Dismiss Plaintiffs' Amended Consolidated
Class Action Complaint and Memorandum in Support. The Motion to Dismiss is
currently pending before the court. The Company and the individual defendants
deny the allegations in the complaint and intend to defend against them
vigorously. The consolidated lawsuit is at a very early stage. Consequently, at
this time the Company is not able to predict whether it will incur any liability
in excess of insurance coverages or to estimate the damages, or the range of
damages, if any, that the Company might incur in connection with the lawsuit, or
whether an adverse outcome could have a material adverse impact on its business,
consolidated financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

The Company's new $250 million senior secured credit facility described in note
8 to the Company's condensed consolidated financial statements included
elsewhere herein, as well as the indenture relating to the Company's senior
subordinated notes, restrict the Company's ability to pay cash dividends and
repurchase capital stock. Under the credit agreement related to the new senior
credit facility, cash dividends are limited to an amount determined by a formula
based on the Company's net income (as defined in the credit agreement), assuming
the Company meets certain financial ratios. Under the indenture relating to the
senior subordinated notes, cash dividends are limited to an amount determined by
a formula based, among other things, on the Company's net income (as defined in
the indenture) and the Company's receipt of certain proceeds. Under the most
restrictive of these covenants, the Company had available approximately $4.9
million at August 3, 2002 for the payment of cash dividends and stock
repurchases.

19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits. The following exhibits are filed herewith:

4.1 Credit Agreement, dated September 13, 2002, by and among the
Company, Bank of America, N.A., as administrative agent
("BOA"), Wachovia Bank, N.A., as syndication agent, and the
several lenders named therein

4.2 Guaranty, dated September 13, 2002, by and among the Company,
BOA, and all of the Company's domestic subsidiaries and
operating limited partnerships named therein

(b) Reports on Form 8-K.

The Company filed a current report on Form 8-K on July 31, 2002
under "Item 5: Other Events" in which it announced that it would
be refinancing its existing senior credit facility. See footnote 8
to the Company's condensed consolidated financial statements for
the quarter ending August 3, 2002 included elsewhere herein for
more information.

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

NCI BUILDING SYSTEMS, INC.
--------------------------
(Registrant)

Date: September 17, 2002 By: /s/ Robert J. Medlock
------------------- --------------------------
Robert J. Medlock
Executive Vice President and
Chief Financial Officer

CERTIFICATION PURSUANT TO RULE 13A-14(b)

I, A. R. Ginn, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NCI Building
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.

Date: September 17, 2002

/s/ A. R.Ginn
-----------------------------------------------------
A. R. Ginn
Chairman of the Board and Chief Operating Officer

21

CERTIFICATION PURSUANT TO RULE 13A-14(b)

I, Johnie Schulte, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of NCI Building
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.

Date: September 17, 2002

/s/ Johnie Schulte, Jr.
-------------------------------------------
Johnie Schulte, Jr.
President and Chief Executive Officer

CERTIFICATION PURSUANT TO RULE 13a-14(b)

I, Robert J. Medlock, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NCI Building
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.

Date: September 17, 2002

/s/ Robert J. Medlock
----------------------------------------------------
Robert J. Medlock
Executive Vice President and Chief Financial Officer

22

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, A. R. Ginn, certify that:

1. I have reviewed this periodic report on Form 10-Q of NCI Building
Systems, Inc.;

2. This quarterly report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

3. The information contained in this quarterly report fairly presents,
in all material respects, the financial condition and results of
operations of NCI Building Systems, Inc.

Date: September 17, 2002

/s/ A. R. Ginn
--------------------------------------------------
A. R. Ginn
Chairman of the Board and Chief Operating Officer

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Johnie Schulte, Jr., certify that:

1. I have reviewed this periodic report on Form 10-Q of NCI Building
Systems, Inc.;

2. This quarterly report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

3. The information contained in this quarterly report fairly presents,
in all material respects, the financial condition and results of
operations of NCI Building Systems, Inc.

Date: September 17, 2002

/s/ Johnie Schulte, Jr.
--------------------------------------------------
Johnie Schulte, Jr.
President and Chief Executive Officer

23

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert J. Medlock, certify that:

1. I have reviewed this periodic report on Form 10-Q of NCI Building
Systems, Inc.;

2. This quarterly report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

3. The information contained in this quarterly report fairly presents,
in all material respects, the financial condition and results of
operations of NCI Building Systems, Inc.

Date: September 17, 2002

/s/ Robert J. Medlock
-----------------------------------------------
Robert J. Medlock
Executive Vice President and
Chief Financial Officer

24

INDEX TO EXHIBITS