NCI BUILDING SYSTEMS INC - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FOR THE QUARTER ENDED: August 2, 2003

COMMISSION FILE NUMBER: 1-14315

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

Common Stock, $.01 Par Value -- 18,870,690 shares as of August 2, 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

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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.

-2-

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

See accompanying notes to condensed consolidated financial statements.

-3-

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
AUGUST 2, 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 month
and fiscal nine month periods ended August 2, 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.

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

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

In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the Company historically
evaluated goodwill for impairment by comparing the entity level unamortized
balance of goodwill to projected undiscounted cash flows, which did not result
in an indicated impairment. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level upon adoption and at least annually
thereafter, utilizing a two-step methodology. The initial step requires the
Company to determine the fair value of each reporting unit and compare it to the
carrying value, including goodwill, of such unit. 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.

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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 Accounting
Principles Board (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 consider 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 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 is 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 of
EITF Issue No. 00-21 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 January 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 requires variable interest entities
("VIEs") to be consolidated by their primary beneficiaries. A primary
beneficiary is the party that absorbs a majority of the entity's expected losses
or residual benefits. FIN No. 46 is currently effective for all VIEs created or
modified after January 31, 2003 and is effective for all VIEs, regardless of
when created, in quarterly periods beginning after June 15, 2003. The Company is
currently reviewing the provisions of FIN No. 46. The Company does not expect
that the adoption of FIN No. 46 will have a significant impact on the Company's
financial position and results of operations.

-9-

NOTE 8 - ACQUISITIONS

During July 2003, the Company acquired certain operating assets and the business
of Able Manufacturing and Wholesale Garage Door Company in a cash transaction of
approximately $3.2 million. Able manufactures and distributes a complete line of
metal sectional doors for both the commercial and residential markets. In a
separate transaction, the Company also acquired a retail store located in
Baytown, Texas, which became the fifth NCI Metal Depot. NCI Metal Depots sell a
wide range of commercial and residential metal components and accessories, as
well as a variety of small metal building packages directly to the public. The
purchase price for the assets of the Baytown location was approximately $1.1
million. The combined annual sales of both companies were less than $20 million
for the previous calendar year.

NOTE 9 - 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 third 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. During the first nine months of fiscal 2003, the Company
purchased approximately 67% of its steel requirements from U.S. Steel and
International Steel Group, Inc. The Company does not maintain an inventory of
steel in excess of its current production requirements. Should either 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 an early procedural 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.

-10-

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.

-11-

NCI BUILDING SYSTEMS, INC.

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

Results of Operations

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

Both segments operate primarily in the nonresidential construction market. Sales
and earnings are influenced by general economic conditions, the level of
nonresidential construction activity, 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. Sales between segments allow the Company to provide 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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NCI BUILDING SYSTEMS, INC.

FISCAL THREE MONTHS ENDED AUGUST 2, 2003 COMPARED TO FISCAL THREE MONTHS ENDED
AUGUST 3, 2002

Consolidated sales for the three months ended August 2, 2003 decreased by $21.6
million, or 8%, compared to the three months ended August 3, 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 throughout fiscal 2003. Based on Metal Building
Manufacturers Association reports and public company information, the Company
believes it has outperformed its competitors in the metal construction industry,
despite 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 11%, to $74.3 million, for the
three months ended August 2, 2003, compared to sales of $83.9 million in the
previous year's period, due to the industry decline in nonresidential
construction. Although incoming orders for engineered building systems are up 6%
compared to the prior year's period, orders for the third quarter of fiscal year
2002 were lower than normal as customers submitted orders in advance of an
announced industry-wide steel price increase in April 2002. Year to date orders
are 3% below the same period in the prior year. Engineered building systems
accounted for 31% of total consolidated sales in the three months ended August
2, 2003 compared to 33% in the three months ended August 3, 2002.

Operating income of the engineered building systems segment declined in the
three months ended August 2, 2003 by 56%, to $3.6 million, compared to $8.2
million in the prior year's period. Of this $4.6 million decline, $2.7 million
resulted from lower sales volume, $0.7 million resulted from lower margins
because of unabsorbed overhead and lower selling prices due to competition, and
$1.2 million resulted from higher selling, general and administrative expenses
primarily due to increases in the provision for doubtful accounts of
approximately $1.5 million associated with the Company's operations in Mexico.
As a percent of sales, operating income in the three months ended August 2, 2003
was 5% compared to 10% in the three months ended August 3, 2002.

Metal Building Components' sales decreased by 7%, to $161.9 million, in the
three months ended August 2, 2003 compared to $173.9 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 69% of consolidated sales in the three months ended
August 2, 2003 compared to 67% in the three months ended August 3, 2002.

Operating income of the metal building components segment decreased in the three
months ended August 2, 2003 by 16%, to $19.5 million, compared to $23.3 million
in the prior year's period. Of this $3.8 million decline, $2.7 million resulted
from lower sales volume, $2.1 million resulted from lower margins because of
unabsorbed overhead and lower selling prices due to competition especially in
the roll-up doors product line, offset by a decrease in selling, general and
administrative expenses of $1.0 million primarily due to lower workers
compensation insurance of $0.4 million, telephone and computer expense of $0.2
million and advertising expense of $0.1 million.

Consolidated selling, general and administrative expenses, consisting of
engineering and drafting, selling and administrative costs, remained flat at
$37.1 million for the three months ended August 2, 2003 and August 3, 2002. As a
percent of sales, selling, general and administrative expenses for the three
months ended August 2, 2003 were 16% compared to 14% for the three months ended
August 3, 2002.

Interest expense for the three months ended August 2, 2003 decreased by 4%, to
$4.9 million compared to $5.1 million in the prior year's period. This decline
was primarily due to a decrease in average outstanding debt for the period of
$313.4 million to $276.6 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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NCI BUILDING SYSTEMS, INC.

FISCAL NINE MONTHS ENDED AUGUST 2, 2003 COMPARED TO FISCAL NINE MONTHS ENDED
AUGUST 3, 2002

Consolidated sales for the nine months ended August 2, 2003 decreased by $56.3
million, or 8%, compared to the first nine 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 throughout fiscal 2003. Based on Metal Building
Manufacturers Association reports and public company information, the Company
believes it has outperformed its competitors in the metal construction industry,
despite 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 7%, to $212.5 million for the nine
months ended August 2, 2003, compared to sales of $229.6 million for the nine
months ended August 3, 2002, due to the general decline in nonresidential
construction especially in the industrial and manufacturing market segments.
Engineered building systems accounted for 33% of total consolidated sales in the
first nine months of fiscal 2003 and fiscal 2002.

Operating income of the engineered building systems segment declined in the
first nine months of fiscal 2003 by 39%, to $12.3 million, compared to $20.3
million in the prior year's period. Of this $8.0 million decline, $4.7 million
resulted from lower sales volume, $1.6 million resulted from lower margins
because of lower selling prices due to competition and $2.3 million resulted
from an increase in engineering and selling expenses driven by smaller, more
complex jobs, offset by a decrease in administrative expenses of $0.6 million.
As a percent of sales, operating income in the first nine months of fiscal 2003
was 6% compared to 9% in the first nine months of fiscal 2002.

Metal Building Components' sales decreased by 8%, to $430.8 million, in the
first nine months of fiscal 2003 compared to $470.0 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 67% of consolidated sales in the first nine months of
fiscal 2003 and fiscal 2002.

Operating income of the metal building components segment decreased in the first
nine months of fiscal 2003 by 11%, to $42.7 million, compared to $47.9 million
in the prior year's period. Of this $5.2 million decrease, $6.5 million was due
to lower sales volume, $1.0 million was due to lower margins offset by a $2.3
million decrease in selling and administrative expenses primarily due to
decreases in the provision for doubtful accounts of approximately $0.6 million,
lower telephone and computer expense of $0.5 million, lower advertising expense
of $0.4 million, lower workers compensation insurance of $0.3 million and lower
commissions expense of $0.2 million.

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

Interest expense for the first nine months of fiscal 2003 decreased by 13%, to
$14.7 million compared to $16.8 million in the prior year's period. This decline
was primarily due to a decrease in average outstanding debt for the period of
$334.2 million to $283.9 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 August 2, 2003, the Company had working capital of $69.6 million compared to
$80.2 million at the end of fiscal 2002. This decrease resulted primarily from a
decrease of $4.1 million in trade accounts receivable, reflecting the lower
sales volume, and a decrease of $3.3 million in inventories. During the first
nine months of fiscal 2003, the Company generated cash flow from operations of
$36.1 million. This cash flow, along with cash from the beginning of the period,
was used to fund capital expenditures of $12.5 million, purchase acquisitions of
$4.3 million and repay $29.6 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 $22.4 million at August 2, 2003), five-year
revolving loan maturing on September 15, 2007 and a $125 million (outstanding
balance of $120.3 million at August 2, 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) Decreases to 3.50 on November 1, 2003

(2) Decreases to 3.25 on May 1, 2004

(3) Decreases to 3.00 on April 30, 2005

(4) Increases to 3.50 on October 30, 2004

(5) Decreases to 2.00 on November 1, 2003

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 August 2, 2003 was $254 million. At that date, the Company's
leverage ratio was 3.21 to 1, its interest coverage ratio was 4.6 to 1, its
senior debt ratio was 1.74 to 1, and its net worth was $319.6 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 August 2, 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.

-15-

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 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 fourth
quarter of fiscal 2003.

At August 2, 2003, the Company had approximately $97.8 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 August 2, 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 $21 million, which include $10 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 August 2, 2003, the Company had approximately
$97.8 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 71% and 70% of the
Company's cost of sales for the fiscal three month and nine month periods ended
August 2, 2003, respectively. 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.

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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.

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 is 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 of EITF
Issue No. 00-21 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 January 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 requires variable interest entities
("VIEs") to be consolidated by their primary beneficiaries. A primary
beneficiary is the party that absorbs a majority of the entity's expected losses
or residual benefits. FIN No. 46 is currently effective for all VIEs created or
modified after January 31, 2003 and is effective for all VIEs, regardless of
when created, in quarterly periods beginning after June 15, 2003. The Company is
currently reviewing the provisions of FIN No. 46. The Company does not expect
that the adoption of FIN No. 46 will 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

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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.

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
August 2, 2003, the Company had $142.7 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 $1.4
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

At the end of the period covered by this quarterly 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 alerting management, on a timely basis,
of material information required to be included in the Company's periodic
reports filed with the Securities and Exchange Commission ("SEC").

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 over financial
reporting, and there have been no significant changes in the Company's internal
controls over financial reporting during the period covered by this quarterly
report which materially affected, or would be reasonably likely to materially
affect, the Company's internal controls over financial reporting.

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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 an early procedural 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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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Rule 13a-14(a)/15d-14(a) Certifications (Section 302
of the Sarbanes-Oxley Act of 2002)

31.2 Rule 13a-14(a)/15d-14(a) Certifications (Section 302
of the Sarbanes-Oxley Act of 2002)

31.3 Rule 13a-14(a)/15d-14(a) Certifications (Section 302
of the Sarbanes-Oxley Act of 2002)

32.1 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)

32.2 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)

32.3 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

On May 29, 2003, the Company filed a current report on Form 8-K
to announce the public dissemination of a press release
reporting its financial results for the quarter ended May 3,
2003.

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SIGNATURES

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

NCI BUILDING SYSTEMS, INC.
(Registrant)

Date: September 15, 2003 By: /s/ Robert J. Medlock
----------------------------
Robert J. Medlock
Executive Vice President and
Chief Financial Officer

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INDEX TO EXHIBITS