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: May 3, 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--18,774,554 shares as of May 3, 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.

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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.
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.

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NCI BUILDING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 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's amounts have been reclassified to
conform with the current year presentation. Operating results for the fiscal
three month and fiscal six month periods ended May 3, 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 - ADOPTION OF SFAS NO. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE"

Effective February 2, 2003, the Company adopted the disclosure provisions of
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. In accordance with the terms
of APB No. 25, because the exercise price of the Company's employee stock option
equals the market price of the underlying stock on the date of the grant, the
Company records no compensation expense for its stock option awards.

The following table provides pro forma information as if the fair value based
method had been applied in measuring compensation expense (in thousands, except
per share data):

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NOTE 6 - 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 7 - 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.

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NOTE 8 - 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 six months of fiscal
2003, the Company purchased approximately 60% of its steel requirements from
these two suppliers and approximately 9% of its steel requirements from U.S.
Steel, another of the Company's suppliers. Subsequent to the close of the second
quarter of fiscal 2003, U.S. Steel bought substantially all of the integrated
steel-making assets of National Steel, and International Steel Group, Inc.
acquired the assets of Bethlehem Steel. The Company does not maintain an
inventory of steel in excess of its current production requirements. Should any
of these companies cease operations, essential supply of primary raw materials
could be temporarily interrupted. The Company believes that its other steel
suppliers can meet its demand for steel if its supply from any of these sources
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, 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. On March 28, 2003, the United States District Court
entered its order granting in part and denying in part the Motion to Dismiss. In
addition, the court granted leave for the plaintiffs to further amend the
complaint. On April 16, 2003, the plaintiffs filed the Plaintiffs' Second
Amended Consolidated Class Action Complaint. The Company and the individual
defendants deny the allegations in the Second Amended Complaint and intend to
vigorously defend against the allegations contained therein. 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 and contingencies
that are considered to be in the ordinary course of business. While the Company
is not able to predict whether it will incur any liability in excess of
insurance coverages or to accurately estimate the damages, or the range of
damages, if any, that the Company might incur in connection with these
litigations, the Company believes that these legal proceedings will not have a
material adverse effect on its business, consolidated financial condition or
results of operations.

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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, 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.

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* Total assets at May 4, 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.

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NCI BUILDING SYSTEMS, INC.

FISCAL THREE MONTHS ENDED MAY 3, 2003 COMPARED TO FISCAL THREE MONTHS ENDED MAY
4, 2002

Consolidated sales for the three months ended May 3, 2003 decreased by $14.0
million, or 7%, compared to the three months ended May 4, 2002. Sales were down
due to a continued slowdown in nonresidential construction. The metal
construction industry has experienced declines in the past two years and this
trend has continued into fiscal 2003. The Company has outperformed 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 2%, to $67.7 million, for the three
months ended May 3, 2003, compared to sales of $69.3 million in the previous
year's period, due to the industry decline in nonresidential construction. This
compares favorably to the industry sales represented in the Metal Building
Manufacturers Association which reported a sales decline of nearly 5% for the
same period. Incoming orders for engineered building systems are down 10%
compared to the prior year's period, which were higher than normal as customers
submitted orders in advance of an announced industry-wide steel price increase
in April 2002. Engineered building systems accounted for 34% of total
consolidated sales in the three months ended May 3, 2003 compared to 32% in the
three months ended May 4, 2002.

Operating income of the engineered building systems segment declined in the
three months ended May 3, 2003 by 30%, to $4.0 million, compared to $5.7 million
in the prior year's period. This $1.7 million decline resulted from lower sales
volume impact of $0.4 million and lower margins of $0.4 million because of lower
selling prices due to competition. Additionally, higher selling and
administrative expenses accounted for $0.9 million. As a percent of sales,
operating income in the three months ended May 3, 2003 was 6% compared to 8% in
the three months ended May 4, 2002.

Metal Building Components' sales decreased by 9%, to $131.5 million, in the
three months ended May 3, 2003 compared to $144.0 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 to the self-storage industry.
This segment accounted for 66% of consolidated sales in the three months ended
May 3, 2003 compared to 68% in the three months ended May 4, 2002.

Operating income of the metal building components segment decreased in the three
months ended May 3, 2003 by 22%, to $10.6 million, compared to $13.5 million in
the prior year's period. This $2.9 million decrease was due primarily to lower
sales volume impact of $2.0 million and lower margins of $1.2 million and an
increase in administrative expenses of $0.2 million, offset by a decrease in
selling expenses of $0.5 million.

Consolidated selling, general and administrative expenses, consisting of
engineering and drafting, selling and administrative costs, increased 5%, to
$34.1 million in the three months ended May 3, 2003 compared to $32.5 million in
the prior year's period. This increase was mainly attributable to higher
insurance related costs which increased $1.7 million for the period. As a
percent of sales, selling, general and administrative expenses for the three
months ended May 3, 2003 were 17% compared to 15% for the three months ended
May 4, 2002.

Interest expense for the three months ended May 3, 2003 decreased by 17%, to
$4.6 million compared to $5.6 million in the prior year's period. This decline
was primarily due to a decrease in average outstanding debt for the period of
$339.8 million to $291.3 million, offset by a net increase in effective interest
rates as a result of the refinancing in September 2002. See further discussion
of the refinancing in the Liquidity and Capital Resources section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

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NCI BUILDING SYSTEMS, INC.

FISCAL SIX MONTHS ENDED MAY 3, 2003 COMPARED TO FISCAL SIX MONTHS ENDED MAY 4,
2002

Consolidated sales for the six months ended May 3, 2003 decreased by $34.7
million, or 8%, compared to the first six 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 two years and this
trend has continued into fiscal 2003. The Company has outperformed 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 5%, to $138.1 million for the six
months ended May 3, 2003, compared to sales of $145.7 million for the six months
ended May 4, 2002, due to the general decline in nonresidential construction.
Incoming orders for engineered building systems are down 8% compared to the
first six months of fiscal 2002. However, backlog for the six months ended May
3, 2003 is flat compared to the same period in fiscal 2002. 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 six months of fiscal 2003 compared to 33%
in the first six months of fiscal 2002.

Operating income of the engineered building systems segment declined in the
first six months of fiscal 2003 by 28%, to $8.7 million, compared to $12.1
million in the prior year's period. This $3.4 million decline resulted from
lower sales volume impact of $2.0 million and lower margins of $0.9 million
because of lower selling prices due to competition and an increase in selling
expenses of $0.6 million offset by a decrease in administrative expenses of $0.1
million. As a percent of sales, operating income in the first six months of
fiscal 2003 was 6% compared to 8% in the first six months of fiscal 2002.

Metal Building Components' sales decreased by 9%, to $268.9 million, in the
first six months of fiscal 2003 compared to $296.1 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 to the self-storage industry.
This segment accounted for 66% of consolidated sales in the first six months of
fiscal 2003 compared to 67% in the first six months of fiscal 2002.

Operating income of the metal building components segment decreased in the first
six months of fiscal 2003 by 6%, to $23.2 million, compared to $24.7 million in
the prior year's period. This decrease of $1.5 million was due to lower sales
volume impact of $3.8 million offset by an increase in margins of $1.0 million
resulting from improved plant efficiencies and a $1.3 million decrease in
selling and administrative expenses.

Consolidated selling, general and administrative expenses, consisting of
engineering and drafting, selling and administrative costs, remained flat in the
first six months of fiscal 2003 being $66.4 million compared to $66.8 million
for the first six months of fiscal 2002. As a percent of sales, selling, general
and administrative expenses for the first six months of fiscal 2003 were 16%
compared to 15% for the first six months of fiscal 2002.

Interest expense for the first six months of fiscal 2003 decreased by 17%, to
$9.8 million compared to $11.7 million in the prior year's period. This decline
was primarily due to a decrease in average outstanding debt for the period of
$344.6 million to $287.6 million, offset by a net increase in effective interest
rates as a result of the refinancing in September 2002. See further discussion
of the refinancing in the Liquidity and Capital Resources section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

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LIQUIDITY AND CAPITAL RESOURCES

At May 3, 2003, the Company had working capital of $86.1 million compared to
$80.2 million at the end of fiscal 2002. This increase resulted primarily from a
decrease of $14.7 million in accrued compensation and benefits and other accrued
expenses, decrease of $3.1 million in accounts payable, offset by a decrease of
$13.2 million in trade accounts receivable, reflecting the lower sales volume.
During the first six months of fiscal 2003, the Company generated cash flow from
operations of $11.0 million. This cash flow, along with cash from the beginning
of the period, was used to fund capital expenditures of $7.5 million and repay
$5.2 million in debt under the Company's senior credit facilities.

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 current facility includes a $125
million (outstanding balance of $45.2 million at May 3, 2003), five-year
revolving loan maturing on September 15, 2007 and a $125 million (outstanding
balance of $121.9 million at May 3, 2003), 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 million at
maturity.

The 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.

The senior credit facility contains covenants that limit the Company's senior
debt and leverage ratios and require the Company to maintain minimum interest
coverage ratios and net worth, as those terms are defined in the senior credit
facility. The required ratios for the periods indicated are as follows:

(1) Applicable to the first two quarters of fiscal 2004, at which
time the ratio decreases to 3.25 for the last two quarters of
fiscal 2004.

(2) Applicable to the first two quarters of fiscal 2005, at which
time the ratio decreases to 3.00 for the last two quarters of
fiscal 2005.

In addition to these ratios, the Company is required to maintain a minimum net
worth that changes from quarter to quarter depending upon earnings, proceeds of
stock sales, and issuances of stock upon conversions or exchanges of debt or
preferred stock or acquisitions of other companies. The minimum net worth
requirement at May 3, 2003 was $250 million. At that date, the Company's
leverage ratio was 3.15 to 1, its interest coverage ratio was 5.12 to 1, its
senior debt ratio was 1.82 to 1, and its net worth was $311 million, and the
Company was in compliance with all of these requirements. The 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. The Company also was in
compliance with all of these limits at May 3, 2003.

Borrowings under the 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
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 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

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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 1.50% on base rate loans and 2.50% 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 during the third quarter of fiscal
2003.

At May 3, 2003, the Company had approximately $75 million in unused borrowing
capacity (net of letters of credit outstanding of approximately $5 million)
under the senior credit facility, of which a total of $20 million can be
utilized for standby letters of credit.

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.

The most restrictive covenant limiting the Company's ability to pay cash
dividends and repurchase capital stock is in its senior credit facility. Under
the terms of the senior credit facility, the Company had available approximately
$5 million to use for those purposes at May 3, 2003.

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 May 3, 2003, the Company had approximately $75
million (net of outstanding letters of credit of approximately $5 million) in
unused borrowing available under its senior credit facility, subject to
compliance with the terms of these facilities.

Material, primarily steel, constituted approximately 69% of the Company's cost
of sales for both the fiscal three month and six month periods ended May 3,
2003. No assurance can be given that steel will remain available or that prices
will remain stable. The steel industry is highly cyclical in nature, and steel
prices are influenced by numerous factors beyond the Company's control. These
factors include general economic conditions, competition, labor costs, import
duties and other trade restrictions. Furthermore, a prolonged labor strike
against one or more of the company's principal domestic suppliers could have a
material adverse effect on the Company's operations. If the available supply of
steel declines or if one or more of the Company's current suppliers is unable
for financial or any other reason to continue in business or produce steel
sufficient to meet the Company's requirements, the Company could experience
price increases, a deterioration of service from its suppliers or interruptions
or delays that may cause the Company not to meet delivery schedules to its
customers. Any of these problems could adversely affect the Company's financial
condition and results of operations.

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.

-15-

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.

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.

Effective February 2, 2003, the Company adopted the disclosure provisions of
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. Refer to Note 5 of the condensed
consolidated financial statements for additional discussion of the adoption of
SFAS No. 148.

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.

-16-

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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
May 3, 2003, the Company had $167.1 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 $1.7
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.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days before the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in the Company's periodic SEC reports.

Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed or submitted under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the Company's reports filed under the Exchange Act
is accumulated and communicated to management, including the Company's principal
executive officer and principal financial officer as appropriate, to allow
timely decisions regarding required disclosure.

In addition, the Company reviewed its internal controls, and there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of its last
evaluation.

-17-

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, 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. On March 28, 2003, the United States District Court
entered its order granting in part and denying in part the Motion to Dismiss. In
addition, the court granted leave for the plaintiffs to further amend the
complaint. On April 16, 2003, the plaintiffs filed the Plaintiffs' Second
Amended Consolidated Class Action Complaint. The Company and the individual
defendants deny the allegations in the Second Amended Complaint and intend to
vigorously defend against the allegations contained therein. 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 and contingencies
that are considered to be in the ordinary course of business. While the Company
is not able to predict whether it will incur any liability in excess of
insurance coverages or to accurately estimate the damages, or the range of
damages, if any, that the Company might incur in connection with these
litigations, the Company believes that these legal proceedings will not have a
material adverse effect on its business, consolidated financial condition or
results of operations.

-18-

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders (the "Annual Meeting") on
Friday, March 14, 2003. At the Annual Meeting, the stockholders of the Company
elected two Class I directors to serve until the annual meeting of stockholders
to be held in 2006 and one Class II director to replace Sheldon R. Erikson, who
resigned effective as of the Annual Meeting, to serve the remainder of Mr.
Erikson's term, which expires at the annual meeting of stockholders to be held
in 2004. Of the 16,206,175 shares of common stock, $0.01 par value, of the
Company present at the Annual Meeting, in person or by proxy, the following
table shows the votes cast for and withheld from each of the nominees for
director:

In addition to Messrs. Ginn, Martinez and Pieper, the following persons have a
term of office as a director of the Company that continued after the Annual
Meeting: William D. Breedlove, Gary L. Forbes and Johnie Schulte

At the Annual Meeting, the Company submitted a proposal to approve the adoption
of the Company's 2003 Long-Term Stock Incentive Plan (the "Plan"). To be
adopted, the proposal had to be approved by the affirmative vote of the holders
of a majority of the Common Stock present, in person or by proxy, at the Annual
Meeting. Of the 16,206,175 shares of common stock of the Company present at the
Annual Meeting, in person or by proxy, the votes cast for and against the
proposal to approve the adoption of the Plan were 10,585,925 and 2,297,332,
respectively, with 43,608 shares abstaining and 3,279,310 broker non-votes.
Accordingly, the Plan was approved and adopted.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 Certifications pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code (Section 906 of the
Sarbanes-Oxley Act of 2002)

99.2 Certifications pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code (Section 906 of the
Sarbanes-Oxley Act of 2002)

99.3 Certifications pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code (Section 906 of the
Sarbanes-Oxley Act of 2002)

(b) Reports on Form 8-K

None

-19-

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: June 17, 2003 By: /s/ Robert J. Medlock
------------- ------------------------------------
Robert J. Medlock
Executive Vice President and
Chief Financial Officer

-20-

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: June 17, 2003

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

-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;

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: June 17, 2003

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

-22-

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: June 17, 2003

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

-23-

INDEX TO EXHIBITS