NCI BUILDING SYSTEMS INC - 10-Q Quarterly Report

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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: February 1, 2003
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COMMISSION FILE NUMBER: 1-14315
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NCI BUILDING SYSTEMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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

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

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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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--18,731,108 shares as of February 1, 2003

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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."

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

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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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

-3-

NCI BUILDING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 2003
(UNAUDITED)

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
months ended February 1, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ending November 1, 2003.

During fiscal 2002, the Company adopted a revised accounting calendar, which
incorporates a four-four-five week calendar each quarter with year end on the
Saturday closest to October 31.

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 November 2, 2002, 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.

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

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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. 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 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. The Company completed the first step during the second quarter of fiscal
2002, 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 effect of $2.3 million) was recognized as a
cumulative effect of a change in accounting principle. Accordingly, the first
quarter of fiscal 2002 results were restated to reflect the change in accounting
principle in accordance with the transition provisions of SFAS No. 142.

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:

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NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB 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 generally requires 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, Reporting Gains and
Losses from Extinguishment of Debt. Extraordinary treatment is required for
certain extinguishments as provided in Accounting Principles Board ("APB") No.
30, Reporting the Results of Operations. 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 No. 30. The Company adopted SFAS
No. 145 as of November 3, 2002. 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 No. 30 for such classification will be
reclassified to conform with the provisions of SFAS No. 145. Adoption of SFAS
No. 145 did not impact the periods presented in the consolidated statements of
income included in this Form 10-Q.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002 with early application encouraged.
The Company does not expect that the adoption of the statement will have a
significant impact on the Company's financial position and results of
operations.

During November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Multiple-Deliverable Revenue Arrangements, which addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services, and/or rights to use assets. The final consensus will be applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. The Company does not expect that the adoption will
have a significant impact on the Company's financial position and results of
operations.

During November 2002, the EITF reached a consensus on EITF Issue No. 02-16,
Accounting by a Customer (including a Reseller) for Cash Consideration Received
from a Vendor. EITF Issue No. 02-16 discusses how a customer should account for
consideration received from a vendor. The consensus is applicable to all fiscal
periods beginning after December 15, 2002, with early application permitted if
there would be no net income statement impact to prior periods presented. The
Company adopted EITF Issue No. 02-16 effective November 3, 2002, and such
adoption did not have a significant impact on the Company's financial position
and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. While the Statement does not amend SFAS No. 123 to
require companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees.
The Company is currently evaluating the provisions of SFAS No. 148 relating to
the SFAS No. 123 fair value method of accounting for stock-based employee
compensation. The Company will adopt the disclosure provisions of SFAS No. 148
during the second quarter of fiscal 2003.

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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 the first three months of
fiscal 2003, the Company purchased approximately 64% 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, and other suppliers can meet its demand for steel if its supply from
Bethlehem Steel and/or National Steel is interrupted.

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. From a procedural standpoint, the consolidated lawsuit is at a very
early stage. Pending a ruling on the Motion to Dismiss, discovery has not yet
commenced. 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 and contingencies
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.

[THE REMAINDER OF THIS PAGE WAS LEFT INTENTIALLY BLANK]

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NCI BUILDING SYSTEMS, INC.

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

Results of Operations

The Company's various product lines have been aggregated into two business
segments: 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
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.

Financial data for the prior period has been reclassified to conform to the
current presentation.

* Total assets at February 2, 2002 were restated to reflect the goodwill
impairment of $67.4 million recorded in the metal building components
segment and goodwill was reclassified from corporate to the engineered
building systems and metal building components segments in accordance with
the transition provisions of SFAS No. 142.

-8-

NCI BUILDING SYSTEMS, INC.

FISCAL THREE MONTHS ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL THREE MONTHS ENDED
FEBRUARY 2, 2002

Consolidated sales for the three months ended February 1, 2003 decreased by
$20.7 million, or 9%, compared to the first three months of fiscal year 2002.
Sales were down due to a continued slowdown in nonresidential construction. The
metal construction industry has experienced declines in the past years and this
trend has continued into fiscal 2003. The Company has been able to outperform
its competitors in the metal construction industry, in spite of the difficult
environment, due to increased market penetration, a low cost infrastructure, and
a broad product offering including retrofit and repair, which is counter
cyclical in an economic downturn.

Engineered Building Systems' sales were down 8%, to $70.4 million, compared to
sales of $76.5 million in the previous year's first three months, due to the
industry decline in nonresidential construction. There has been an overall
decline in larger, more expensive projects and increased smaller, more complex
projects. Incoming orders for engineered building systems are down 5% compared
to the first three months of fiscal 2002. Although orders are lower, quote
activity is up considerably during the same period. With the current economic
uncertainty, however, projects are not being converted to orders at the same
rate. The Company believes that the metal construction industry generally has
experienced a similar slowdown in order activity. Engineered building systems
accounted for 34% of total consolidated sales in the first three months of
fiscal 2003 compared to 33% in the first three months of fiscal 2002.

Operating income of engineered building systems segment declined in the first
three months of fiscal 2003 by 26%, to $4.8 million, compared to $6.4 million in
the prior year's period. This decline resulted from lower selling prices due to
competition, higher cost of engineering and drafting due to an increase in the
complexity of orders and sales volume impact on fixed costs. As a percent of
sales, operating income in the first three months of fiscal 2003 was 7% compared
to 8% in the first three months of fiscal 2002.

Metal Building Components' sales decreased by 10%, to $137.4 million, in the
first three months of fiscal 2003 compared to $152.1 million in the prior year's
period. The decline in sales was due to the overall decline in the metal
construction industry and a reduction in sales of roll-up doors and self-storage
facilities. This segment accounted for 66% of consolidated sales in the first
three months of fiscal 2003 compared to 67% in the first three months of fiscal
2002.

Operating income of the metal building components segment increased in the first
three months of fiscal 2003 by 14%, to $12.7 million, compared to $11.1 million
in the prior year's period. The increase was due primarily to improved gross
profit margins, lower health care expenses, lower property taxes and reduced bad
debt expense.

Selling, general and administrative expenses, consisting of engineering and
drafting, selling and administrative costs, decreased 6%, to $32.4 million in
the first three months of fiscal 2003 compared to $34.3 million in the prior
year's period. This decrease was mainly attributable to lower health care
expenses and lower property taxes. As a percent of sales, selling, general and
administrative expenses for the first three months of fiscal 2003 were 16%
compared to 15% for the first three months of fiscal 2002.

Interest expense for the first three months of fiscal 2003 decreased by 17%, to
$5.1 million compared to $6.2 million in the prior year's period. This decline
was primarily due to a decrease in outstanding debt for the period offset by a
slight increase in rates due to the higher margin cost included in the
refinancing.

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LIQUIDITY AND CAPITAL RESOURCES

At February 1, 2003, the Company had working capital of $75.6 million compared
to $80.2 million at the end of fiscal 2002. This decline resulted primarily from
a reduction of $14.8 million in trade accounts receivable, reflecting the lower
sales volume, offset by an increase of $4.8 million in inventory and a decrease
of $4.5 million in accrued compensation and benefits. During the first three
months of fiscal 2003, the Company generated cash flow from operations of $11.6
million. This cash flow, along with cash from the beginning of the period, was
used to fund capital expenditures of $3.9 million and repay $11.3 million in
debt under the Company's senior credit facilities.

On September 15, 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 $83.8 million at September 15, 2002), (ii)
a five-year term loan facility in the original principal amount of $200 million
(outstanding balance of $50.0 million at September 15, 2002) and (iii) a $40
million term note (outstanding balance of $34.1 million at September 15, 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 then 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 each 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 related assets such as 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.

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 $5 million to use for those purposes at February 1, 2003.

The new senior credit agreement includes covenants, which, among other things,
limit certain debt ratios and require 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,
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 assets and the issuance and sale of equity securities, in each case subject
to certain limitations and conditions. These prepayments must first be applied
to the term loan and then to the 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 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 1.0% to 1.75% on the
revolving loan and from 2.0% 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 2.0% to 2.75% on the revolving loan and from 3.0% 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 1.25% on base rate
loans and 2.25% on LIBOR loans under the revolving loan and a margin of 2.0% on
base rate loans and 3.0% on LIBOR loans under the term loan during the second
quarter of fiscal 2003.

At February 1, 2003, the Company had approximately $82.6 million in unused
borrowing capacity (net of letters of credit outstanding of $4.8 million) under
the new senior credit facility, of which a total of $20 million can be utilized
for standby letters of credit.

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

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 planned capital expenditures
of approximately $19 million, which include $8 million for the announced new
frame facility in Tennessee, 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. At February 1, 2003, the Company had approximately
$82.6 million (net of outstanding letters of credit of $4.8 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
February 1, 2003, the Company had $161.0 million outstanding under its senior
credit facilities. Based on this balance, an immediate change of one percent in
the interest rate would cause a change in interest expense of approximately $1.6
million on an annual basis. The Company's objective in maintaining these
variable rate borrowings is the flexibility obtained regarding early repayment
without penalties and lower overall cost as compared to fixed-rate borrowings.

RECENT ACCOUNTING PRONOUNCEMENTS

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. Refer to Note 4 of the
condensed consolidated financial statements for additional discussion of the
adoption of SFAS No. 142.

In April 2002, the FASB 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, Reporting Gains and
Losses from Extinguishment of Debt. Extraordinary treatment is required for
certain extinguishments as provided in Accounting Principles Board ("APB") No.
30, Reporting the Results of Operations. 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 No. 30. The Company adopted SFAS
No. 145 as of November 3, 2002. 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 No. 30 for such classification will be
reclassified to conform with the provisions of SFAS No. 145. Adoption of SFAS
No. 145 did not impact the periods presented in the consolidated statements of
income in this Form 10-Q.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002 with early application encouraged.
The Company does not expect that the adoption of the statement will have a
significant impact on the Company's financial position and results of
operations.

During November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Multiple-Deliverable Revenue Arrangements, which addresses how to account for
arrangements that may involve the delivery or performance of multiple products,
services, and/or rights to use assets. The final consensus will be applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. The Company does not expect that the adoption will
have a significant impact on the Company's financial position and results of
operations.

During November 2002, the EITF reached a consensus on EITF Issue No. 02-16,
Accounting by a Customer (including a Reseller) for Cash Consideration Received
from a Vendor. EITF Issue No. 02-16 discusses how a customer should account for
consideration received from a vendor. The consensus is applicable to all fiscal
periods beginning after December 15, 2002, with early application permitted if
there would be no net income statement impact to prior periods presented. The
Company does not expect that the adoption will have a significant impact on the
Company's financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. While the Statement does not amend SFAS No. 123 to
require companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees.
The Company is currently evaluating the provisions of SFAS No. 148 relating to
the SFAS No. 123 fair value method of accounting for stock-based employee
compensation. The Company will adopt the disclosure provisions of SFAS No. 148
during the second quarter of fiscal 2003.

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
November 2, 2002 filed with the Securities and Exchange Commission for a
discussion of critical accounting policies, legal proceedings and risk factors.

[THE REMAINDER OF THIS PAGE WAS LEFT INTENTIALLY BLANK]

-12-

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. From a procedural standpoint, the consolidated lawsuit is at a very
early stage. Pending a ruling on the Motion to Dismiss, discovery has not yet
commenced. 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 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

None

-13-

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: March 18, 2003 By: /s/ Robert J. Medlock
----------------------------------
Robert J. Medlock
Executive Vice President and
Chief Financial Officer

-14-

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;

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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: March 18, 2003

/s/ A.R. Ginn
--------------------------------------------
A. R. Ginn
Chairman of the Board

-15-

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;

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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 18, 2003

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

-16-

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;

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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 18, 2003

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

-17-

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT

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: March 18, 2003

/s/ A.R. Ginn
-----------------------------------------
A. R. Ginn
Chairman of the Board

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT

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: March 18, 2003

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

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT

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: March 18, 2003

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

-18-