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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 001-12335
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
BUTLER MANUFACTURING COMPANY
Incorporated in the State of Delaware
1540 Genessee Street
Post Office Box 419917
Kansas City, Missouri 64102
Phone: (816) 968-3000
I.R.S. Employer Identification Number: 44-0188420
Shares of common stock outstanding at
September 30, 2002: 6,310,002
The name, address and fiscal year of the Registrant have not changed since the
last report.
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, and
(2) has been subject to such filing requirements for the past 30 days.
INDEX
Page Number
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PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
(1) Consolidated Financial Statements (unaudited):
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2002 and 2001. 3
Consolidated Statements of Comprehensive Income (Loss) for the Three and
Nine Months Ended September 30, 2002 and 2001. 4
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001. 6
(2) Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk. 15
ITEM 4. Control and Procedures 15
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings 15
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18
Exhibits Index 20
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2001
(unaudited)
($000's omitted except for per share data)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales .................................. $ 238,501 $ 249,676 $ 634,774 $ 658,207
Cost of sales .............................. 206,232 208,770 551,175 558,878
----------- ----------- ----------- -----------
Gross profit ............................. 32,269 40,906 83,599 99,329
Selling, general and administrative expenses 30,414 30,302 86,160 85,620
Restructuring credit, net .................. (631) -- (631) --
----------- ----------- ----------- -----------
Operating income (loss) .................. 2,486 10,604 (1,930) 13,709
Other income, net .......................... 961 861 1,577 1,567
----------- ----------- ----------- -----------
Income (loss) before interest and taxes .. 3,447 11,465 (353) 15,276
Interest expense ........................... 1,942 1,949 5,875 5,022
----------- ----------- ----------- -----------
Pretax income (loss) ..................... 1,505 9,516 (6,228) 10,254
Income tax expense (benefit) ............... (187) 3,588 (2,846) 3,704
----------- ----------- ----------- -----------
Net income (loss) ........................ $ 1,692 $ 5,928 $ (3,382) $ 6,550
=========== =========== =========== ===========
Basic earnings (loss) per common share ..... $ 0.27 $ 0.94 $ (0.54) $ 1.04
=========== =========== =========== ===========
Diluted earnings (loss) per common share ... $ 0.27 $ 0.94 $ (0.54) $ 1.04
=========== =========== =========== ===========
Basic weighted average number of shares .... 6,321,912 6,290,196 6,309,066 6,282,147
Diluted weighted average number of shares .. 6,325,052 6,293,169 6,309,066 6,285,761
See Accompanying Notes to Consolidated Financial Statements.
3
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2002 and 2001
(unaudited)
($000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- ---------
Net income (loss) ...................... $ 1,692 $ 5,928 $(3,382) $ 6,550
------- ------- ------- --------
Other comprehensive income (loss):
Foreign currency translation
and hedging activity (44) (31) 138 (532)
------- ------- ------- -------
Comprehensive income (loss) ............. $ 1,648 $ 5,897 $(3,244) $ 6,018
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
4
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
($000's omitted)
2002 2001
----------- ---------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 56,988 $ 52,569
Receivables, net ................................................ 120,375 109,522
Inventories:
Raw materials ............................................. 27,500 20,132
Work in process ........................................... 7,608 13,692
Finished goods ............................................ 32,595 32,100
LIFO reserve .............................................. (9,369) (8,489)
--------- ---------
Total inventory ....................................... 58,334 57,435
Real estate developments in progress ............................ 9,539 23,966
Net current deferred tax assets ................................. 16,635 16,636
Other current assets ............................................ 8,433 14,939
--------- ---------
Total current assets ...................................... 270,304 275,067
Investments and other assets ........................................ 53,949 48,741
Assets held for sale ................................................ 3,684 3,684
Property, plant and equipment, at cost .............................. 301,409 302,360
Less accumulated depreciation ................................... (162,960) (159,090)
--------- ---------
Net property, plant and equipment ......................... 138,449 143,270
--------- ---------
$ 466,386 $ 470,762
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................... $ 1,839 $ 2,100
Current maturities of long-term debt ............................ 5,528 5,617
Accounts payable ................................................ 73,215 70,362
Dividends payable ............................................... 1,136 1,131
Accrued liabilities ............................................. 101,723 98,237
Taxes on income ................................................. 5,115 8,659
--------- ---------
Total current liabilities ................................. 188,556 186,106
Net noncurrent deferred tax liabilities ......................... 3,683 3,683
Other noncurrent liabilities .................................... 17,715 18,254
Long-term debt, less current maturities ......................... 97,843 98,244
Shareholders' equity:
Common stock, no par value, authorized 20,000,000
shares, issued 9,088,200 shares, at stated value,
outstanding 6,310,002 in 2002 and 6,280,783 in 2001 ........... 12,623 12,623
Foreign currency translation, hedging activity, and minimum
pension liability, net of tax ................................. (6,653) (6,791)
Retained earnings ............................................... 216,897 223,594
--------- ---------
222,867 229,426
Less cost of common stock in treasury, 2,778,198 shares
in 2002 and 2,807,417 shares in 2001 .......................... 64,278 64,951
--------- ---------
Total shareholders' equity ...................................... 158,589 164,475
--------- ---------
$ 466,386 $ 470,762
========= =========
See Accompanying Notes to Consolidated Financial Statements.
5
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(unaudited)
($000's omitted)
2002 2001
-------- --------
Cash flows from operating activities:
Net earnings (loss) ..................................... $ (3,382) $ 6,550
Adjustments to reconcile net earnings (loss) provided by
operating activities:
Depreciation and amortization ....................... 13,219 12,775
Restructuring charge, net ........................... (1,137) --
Equity earnings (loss) of joint ventures ............ 117 (360)
Change in asset and liabilities:
Receivables ......................................... (10,853) (8,604)
Inventories ......................................... (2,474) 3,259
Real estate developments in progress ................ 14,427 23,193
Other current assets and liabilities ................ 10,818 19,191
Other noncurrent operating assets and liabilities ... (1,556) (4,772)
-------- --------
Net cash provided by operating activities ...... 19,179 51,232
Cash flows from investing activities:
Capital expenditures .................................... (7,584) (26,681)
Capital expenditures - software ......................... (6,330) (3,745)
Proceeds from European assets sale ...................... 2,345 --
Assets held for sale .................................... -- 148
-------- --------
Net cash used by investing activities .......... (11,569) (30,278)
Cash flows from financing activities:
Payment of dividends .................................... (3,400) (3,200)
Proceeds from issuance of long-term debt ................ 121 50,661
Repayment of long-term debt ............................. (523) (632)
Net change in short-term debt ........................... (350) (33,248)
Issuance of treasury stock .............................. 698 871
Purchase of treasury stock .............................. (25) (84)
-------- --------
Net cash provided (used) by financing activities (3,479) 14,368
Effect of exchange rate changes .............................. 288 (532)
-------- --------
Net increase in cash and cash equivalents ............... 4,419 34,790
Cash and cash equivalents at beginning of year ............... 52,569 16,855
-------- --------
Cash and cash equivalents at September 30 .................... $ 56,988 $ 51,645
======== ========
See Accompanying Notes to Consolidated Financial Statements
6
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies described in the consolidated
financial statements and related notes included in Butler Manufacturing
Company's 2001 Form 10-K. It is suggested that those consolidated statements be
read in conjunction with this report. The year-end financial statements
presented were derived from the Company's audited financial statements. In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments necessary for a fair presentation of the financial
position of Butler Manufacturing Company and the results of its operations.
NOTE 2 - GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
effective for fiscal years beginning after December 15, 2001. These statements
eliminated the pooling-of-interests method of accounting for business
combinations and the systematic amortization of goodwill. SFAS No. 141 applies
to all business combinations with a closing date after June 30, 2001, of which
the Company had no such activity. At the beginning of fiscal 2002, the Company
adopted SFAS No. 142. Under the new standard, purchased goodwill is no longer
amortized over its useful life, but will be subject to annual impairment tests.
In September 2002, the Company performed the annual impairment test for goodwill
related to its Architectural Products business segment using methodology
required under SFAS No. 142, which requires the Company to evaluate impairment
based on the fair value of assets held in the relevant segment. It was
determined that the fair value of assets related to the Architectural Products
business segment exceeded its carrying value and no impairment was recognized.
Goodwill amortization expense recorded in each of the first, second and third
quarters of 2001 was less than $.1 million, respectively, an after tax effect of
less than $.01 per share.
NOTE 3 - BUSINESS SEGMENTS
The Company groups its operations into five business segments: North American
Building Systems, International Building Systems, Architectural Products,
Construction Services, and Real Estate.
The North American Building Systems segment includes the North American metal
buildings and the wood buildings businesses. These business units supply steel
and wood frame pre-engineered building systems for a wide variety of commercial,
community, industrial, and agricultural applications.
The International Buildings Systems segment includes the Company's Asian metal
buildings business. The European metal buildings business was sold on July 25,
2002. These businesses supply pre-engineered metal buildings for commercial,
community, industrial and agricultural applications primarily for the Chinese
and European markets.
The Architectural Products segment includes the operations of the Vistawall
Group. The group's businesses design, manufacture and market architectural
aluminum systems for nonresidential construction, including curtain wall,
storefront systems, windows, doors, skylights and roof accessories.
The Construction Services segment provides comprehensive design and construction
planning, execution, and management services for major purchasers of
construction. Projects are usually executed in conjunction with the dealer
representatives of other Butler divisions.
The Real Estate segment provides real estate build-to-suit-to-lease development
services in cooperation with Butler dealers.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies as included in the Company's 2001
Form 10-K. Butler Manufacturing Company's reportable segments are strategic
business units that offer products and services for different markets. They are
managed separately because each business requires different technology and
expertise.
7
The Other classification represents unallocated corporate expenses and
unallocated assets, including corporate offices, deferred taxes, pension
accounts, interest expense and intersegment eliminations.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
NET SALES ---------------------------------- ----------------------------------
(Thousands of dollars) 2002 2001 2002 2001
--------- --------- --------- ---------
North American Building Systems $ 119,536 $ 123,461 $ 295,748 $ 325,237
International Building Systems 27,414 21,748 80,986 56,879
Architectural Products ........ 58,618 61,443 166,301 177,442
Construction Services ......... 27,905 35,300 93,042 86,688
Real Estate ................... 10,400 15,888 16,475 31,841
Other ......................... (5,372) (8,164) (17,778) (19,880)
--------- --------- --------- ---------
$ 238,501 $ 249,676 $ 634,774 $ 658,207
========= ========= ========= =========
Net sales represent revenues from sales to affiliated and unaffiliated customers
before elimination of intersegment sales, which is included in Other.
Intersegment eliminations are primarily sales between North American Building
Systems and Architectural Products segments to the International Building
Systems and Construction Services segments.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
PRETAX EARNINGS (LOSSES) --------------------------------- ---------------------------------
(Thousands of dollars) 2002 2001 2002 2001
--------- --------- --------- ---------
North American Building Systems $ (919) $ 6,001 $ (6,760) $ 5,247
International Building Systems 2,472 506 4,400 102
Architectural Products ........ 3,474 4,481 7,405 11,926
Construction Services ......... 876 758 1,964 1,490
Real Estate ................... 1,461 2,881 2,943 5,436
Other ......................... (5,859) (5,111) (16,180) (13,947)
-------- -------- -------- --------
$ 1,505 $ 9,516 $ (6,228) $ 10,254
======== ======== ======== ========
TOTAL ASSETS SEPTEMBER 30, DECEMBER 31,
(Thousands of dollars) 2002 2001
------------ ------------
North American Building Systems $146,683 $138,690
International Building Systems 73,663 67,064
Architectural Products ........ 110,201 112,785
Construction Services ......... 19,738 22,465
Real Estate ................... 29,247 28,406
Other ......................... 86,854 101,352
-------- --------
$466,386 $470,762
======== ========
Total assets represent assets used by each business segment. Other represents
cash and cash equivalents, assets held for sale, corporate equipment, and
miscellaneous other assets which are not related to a specific business segment.
In 2001 the North American Building Systems and International Building Systems
segments were reported as a single segment. Because of reorganization and
management changes, two segments were formed.
8
NOTE 4 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In December 2001, the Company's board of directors approved the disposition of
its European metal buildings business. As a result, the Company recorded a $3.9
million pretax charge in connection with this decision. In addition, the Company
recorded a $4.3 million pretax charge for the impairment of certain assets.
During 2001, $1.7 million of the restructuring reserve was utilized and through
the third quarter of 2002, $1.0 million was utilized.
During the third quarter of 2002, the Company recorded restructuring costs of
$1.0 million for additional severance and employee separation costs and other
costs related to the disposition of the business. These additional restructuring
costs were offset by asset sale proceeds of $1.6 million in excess of original
estimates, resulting in a net restructuring credit of $.6 million. At September
30, 2002, $2.1 million remains in the restructuring reserve.
NOTE 5 - INDEBTEDNESS
In June 2001, the Company entered into a $50 million bank credit facility and
issued $50 million of senior unsecured notes pursuant to a note agreement,
allowing domestic bank borrowings to be reduced to zero.
The bank credit facility contains certain operating covenants, including
restrictions on liens, investments, acquisitions, asset sales and mergers. The
agreement also requires the Company to maintain a capitalization ratio, as
defined, of .5 to 1, a fixed charge coverage ratio, as defined, of 1.7 to 1, and
a leverage ratio, as defined, of 3.0 to 1.
The Company obtained a waiver of the fixed charge coverage ratio covenant under
the credit facility for the quarter ending September 30, 2002. In consideration
of this waiver, the Company agreed that the lenders had no further commitments
to make advances under the credit facility, that any draws under a letter of
credit would result in a reimbursement obligation and that the aggregate amount
of letters of credit that could be issued under the credit facility was $22.1
million, which automatically reduces to $19.1 million upon expiration of the
letter of credit issued for construction of the Company's Tianjin facility. As
of September 30, 2002, there were no borrowings under the bank credit facility.
Because the Company anticipates that it may not be in compliance with certain
credit facility covenants in future periods, the Company is working with its
banks on an amendment to the credit facility to be effective prior to the end of
the fourth quarter.
The senior notes bear interest, payable semi-annually on June 30 and December
30, at the effective rate of 7.91% per annum. Principal of the senior notes is
payable in annual installments of $4.55 million on December 30th of each year,
commencing December 30, 2006, with the final installment due on December 30,
2016. The note agreement contains certain operating covenants, including
restrictions on liens, additional indebtedness and asset sales, and requires the
Company to maintain adjusted consolidated net worth, as defined, of $125 million
plus the cumulative sum of 50% of consolidated net income for each fiscal
quarter after June 30, 2001, and a fixed charge coverage ratio, as defined, of
1.5 to 1.0. At September 30, 2002 Company was in compliance with all covenants
associated with the unsecured note agreements.
NOTE 6 - EARNINGS PER SHARE
Basic and diluted earnings and loss per common share were comparable for the
three and nine month periods respectively, ending September 30, 2002 and 2001.
Under the treasury stock method the diluted weighted average number of shares
outstanding vary from the basic weighted average number of shares outstanding
due to dilutive stock options which are "in the money" at the end of the third
quarter 2002.
NOTE 7 - JURY AWARD
On October 15, 2002, a McLeod County Minnesota District Court Jury awarded
Lester Buildings Systems, the wood buildings business of the Company, a $29.6
million verdict in its suit against Louisiana-Pacific Corporation, a product
supplier. The suit was filed by the Company in McLeod County District Court and
is referenced as "Lester Building Systems, a division of Butler Manufacturing
Company, and Lester's of Minnesota, Inc., Plaintiffs vs. Louisiana-Pacific
Corporation, Defendant". The award compensates the wood buildings business for
damages and other losses resulting from Louisiana-Pacific product purchased by
the Company and sold to its dealers.
9
Because of uncertainty over the amount of the award that must be applied to
correct defective product, the Company is unable to estimate the impact the
award may have on its financial condition or results of operations. However, if
the $29.6 million award is paid, the Company believes it will recognize pretax
income of $14 million for damages and recovery of prior costs in the period in
which the award is paid. Although the Company expects that the trial court will
enter a final order approving the jury verdict, it has not yet done so pending
resolution of post trial motions. Further, the trial court's judgment is subject
to appeal, which could delay payment and result in affirmation, modification or
reversal of the award. In a related class action to which the Company is not a
party filed against Louisiana-Pacific by customers in The United States District
Court, District of Oregon, Louisiana-Pacific has filed a motion seeking to
enjoin the Minnesota State Court from entering judgment on the jury award to the
extent of $14.4 million of damages that Louisiana-Pacific contends are
encompassed by a class action settlement approved by the United States District
Court.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales were $239 million for the third quarter 2002, compared with $250 million a
year ago. The International Building Systems segment's sales increased $5.7
million, or 26%, during the third quarter compared with the prior year, due to
continuing strong sales demand in China. Sales declined at the North American
Building Systems, Architectural Products, Construction Services and Real Estate
segments.
The market for domestic nonresidential construction remains weak, as does the
U.S. economy in general, affecting all domestic business segments of Butler.
Sales in the North American Building Systems segment declined 3% in the third
quarter to $120 million compared with $123 million a year ago. The Architectural
Products segment's sales decreased 5% to $59 million in the third quarter. The
declining office and retail construction markets, of which this segment
participates, continues to unfavorably affect this business. Revenues of the
Construction Services segment decreased 21% to $28 million, while the Real
Estate segment's sales were 35% lower at $10.4 million. The project nature of
these latter two segments' revenues makes their revenue comparisons more erratic
than those of the company's manufacturing businesses.
The Company's sales for the first nine months of the year decreased 4% to $635
million. International Building Systems segment sales were $81 million, an
increase of 42% compared with a year ago, due to increased demand in China.
Construction Services segment sales increased 7% to $93 million due to a strong
backlog at the beginning of the year and good success in focusing its sales
efforts on major strategic customer accounts. The remaining segments reported
sales decreases for the nine month period which more than offset sales increases
in the International Building Systems and Construction Services segments
mentioned above. The North American Building Systems segment's sales for the
nine months ending September 30, 2002 were $296 million, a decrease of 9%
compared with a year ago, while the Architectural Products segment sales were
$166 million, a decrease of 6%.
Gross profit was $32 million in the third quarter, a decline of 21% compared to
a year ago, and $84 million for the nine months ending September 30, 2002, a
decline of 16%. The decline in the domestic nonresidential construction market,
coupled with rising steel costs, higher health care costs, and lower selling
prices due to tough competitive conditions contributed in depressing gross
profit margins.
Sales, general, and administrative expenses of $30 million and $86 million for
the three and nine month periods ending September 30, 2002, were comparable to a
year ago. The positive impact of several cost cutting measures in 2002 was
offset by increased health care, pension, and employee separation costs compared
with a year ago.
During the third quarter the Company concluded its sale of its European building
systems business. Asset values received upon conclusion of the sale were greater
than originally estimated, and more than offset additional severance and other
benefit costs incurred, allowing for a net restructuring recovery of $.6 million
during the quarter. Other income for the quarter and the nine month periods
ending September 30, 2002 were comparable with the prior year. Other income
includes rental income from completed real estate development projects in the
Real Estate segment. Rental income was lower for the quarter and the nine month
periods compared with the prior year, but this shortfall was offset by interest
income related to a long term project receivable within the Construction
Services segment.
Interest expense was $1.9 million and $5.9 million for the three and nine month
periods ending September 30, 2002, comparable with corresponding periods of
2001, but slightly higher year to date, due primarily to greater capitalized
interest on the Company's headquarters project in 2001.
The Company reported pretax earnings for the third quarter of $1.5 million
compared with $9.5 million a year ago, and year-to-date pretax losses of $6.2
million compared with $10.3 million pretax earnings for the same period a year
ago, primarily due to the decline in the U.S. economy generally and in
nonresidential construction specifically. An income tax benefit was recorded for
the third quarter and year to date 2002 due to higher domestic losses and a
lower effective tax rate in China. Net earnings for the third quarter 2002 were
$.27 per share. The Company reported a net loss for the nine month period ending
September 30, 2002 of $.54 per share.
11
LIQUIDITY AND CAPITAL RESOURCES
Since December 2001, cash and cash equivalents increased $4 million to $57
million. During the period, cash was primarily used for investment and financing
activities, specifically for general factory capital expenditures, for the
development of a scalable enterprise system (ERP) in the North American metal
buildings business and the payment of dividends. Cash flow from operations
increased $19.2 million as noncash depreciation and amortization expenses and a
reduction in real estate developments in progress offset seasonal increases in
receivables in the International Building Systems Segment and the North American
Building Systems and Architectural Products segments. Inventory increased at the
end of September due to the North American metal buildings business hedge buy of
inventory in advance of anticipated early October price increases. Other current
assets and liabilities increased due to an increase in accrued pension costs
caused by lower earnings on assets in the plan.
During 2001, the Company entered into a $50 million bank credit facility to fund
future working capital requirements and issued $50 million of senior unsecured
notes pursuant to a note agreement, allowing domestic bank borrowings to be
reduced to zero. The bank credit facility and the note agreement contained
certain operating and financial covenants described under Note 5 of the Notes to
Consolidated Financial Statements in this report. The Company obtained a waiver
of the fixed charge coverage ratio covenant under the credit facility for the
quarter ending September 30, 2002. In consideration of this waiver, the Company
agreed that the lenders had no further commitments to make advances under the
credit facility, that any draws under a letter of credit would result in a
reimbursement obligation, and that the aggregate amount of letters of credit
that could be issued under the credit facility was $22.1 million, which
automatically reduces to $19.1 million upon expiration of the letter of credit
issued for construction of the Company's Tianjin facility. As of September 30,
2002, there were no borrowings under the bank credit facility. Because the
Company anticipates that it may not be in compliance with certain credit
facility covenants in future periods, the Company is working with its banks on
an amendment to the credit facility to be effective prior to the end of the
fourth quarter. At September 30, 2002 the Company was in compliance with the
fixed charge coverage ratio covenant in the note agreement for the senior
unsecured notes issued in 2001. However, the Company anticipates that it may not
be in compliance in future periods and also is negotiating an amendment to the
note agreement with its noteholders. The Company's foreign operations maintain
separate lines of credit with local banks of approximately $3.5 million, with
$1.8 million utilized at current exchange rates at September 30, 2002. The
Company believes that existing cash balances and operating cash flow are
sufficient to meet its current liquidity requirements.
On September 26, 2002, the Company entered into a letter of intent with a real
estate investor to sell and leaseback the Company's headquarter facilities for
approximately $24 million in cash. The Company expects to conclude the sale by
the end of the year. Cash generated from the sale will be used for general
company purposes.
Cash paid for interest was $4.8 million through the third quarter 2002, while
cash paid for taxes was $1.2 million. Tax refunds, due primarily to the
disposition of the European operation, totaled $6.1 million through September
2002. Cash paid for interest was $3.6 million in the third quarter 2002, while
cash paid for taxes was minimal, compared with the previous year.
Treasury stock purchases for 2002 and 2001 were minimal, and dividends paid were
$3.4 million compared with $3.2 million a year ago. On September 18, 2002, the
Company's Board of Directors declared a regular quarterly dividend of $.18 per
share of the Company's common stock payable on October 15, 2002 to shareholders
of record on September 30, 2002.
OUTLOOK.
F.W. Dodge, a source of market analysis and forecast for the construction
sector, reported nonresidential construction orders through September, 2002
declined 11% compared with a year ago. The nonresidential construction economy
continues to trend downward showing no signs of recovery for the remainder of
the year. Against this backdrop, the Company is balancing the near-term
operating environment with careful management of expenses and working capital,
and selective investment in growth strategies.
Pricing conditions are expected to remain very competitive, and that, in
conjunction with higher steel costs, will keep the pressure on gross margins and
operating profitability. Based upon the current outlook for the fourth quarter,
the Company will record a loss for the quarter and for the year. Total backlog
at September 30, 2002 was $284 million, compared with $323 million in prior
year, excluding European operations which were sold in July. Higher margin
product backlog was approximately 3% lower, excluding Europe, while construction
backlog was 42% lower compared to the same period a year ago.
12
MARKET PRICE RISK
The Company's principal exposure to market risk is from changes in commodity
prices, interest rates and currency exchange rates. To limit exposure and to
manage volatility related to these risks, the Company enters into select
commodity and currency hedging transactions, as well as forward purchasing
arrangements. The Company does not use financial instruments for trading
purposes.
Commodity Price Exposure: The Company's primary commodities are steel, aluminum
and wood. Steel is the Company's largest purchased commodity. The Company enters
into forward steel purchase arrangements in its metal buildings business for
periods of less than one year's duration to protect against potential price
increases. To the extent there are increases in the Company's steel costs, they
are generally recaptured in the Company's product sales prices. Steel prices in
2002 have risen sharply and are expected to increase into the fourth quarter
2002, partly due to recent tariffs imposed by the U.S. Government on certain
imported steel products. Recent investments and increased operating efficiencies
in Company operations have helped to dampen the impact of the increase.
Nevertheless, in October, 2002, the Company's U.S. metal buildings business
announced a second price increase on most of its products to partially mitigate
the impact of rising steel prices.
The Company's wood frame building business enters into forward purchase
arrangements for commercial grade lumber for periods of less than one year's
duration. Lumber costs are generally more volatile than steel costs. To offset
increases in lumber costs, the Company adjusts product prices accordingly.
Aluminum hedge contracts of less than one year's duration are purchased to hedge
the engineered products backlog of the Vistawall group against potential losses
caused by increases in aluminum costs. This product line is sensitive to
material cost movements due to the longer lead times from project quoting to
manufacture. Gains or losses recorded on hedge contracts are offset against the
actual aluminum costs charged to cost of sales when the underlying inventory is
sold. At September 30, 2002 the fair value of open aluminum contracts recorded
in cumulative other comprehensive income was less than $.2 million. Mark to
market gains on the Company's Canadian currency exchange contracts were recorded
in earnings and were less than $.1 million at September 30, 2002. At September
30, 2002 a 10% change in both aluminum and Canadian currency contracts would
have been immaterial.
Interest Rates: The majority of the Company's long-term debt carries a fixed
interest rate, which limits the Company's exposure to increases in market rates.
However, interest rate changes impact the fair market value of such debt. As of
September 30, 2002, holding other variables constant, including levels of
indebtedness, a one percentage point increase in interest rates would result in
approximately a $5 million change in the fair value of the Company's fixed rate
debt.
Foreign Currency Fluctuation: The majority of the Company's business is
transacted in U.S. dollars, limiting the Company's exposure to foreign currency
fluctuations. Where the Company has foreign-based operations, the local currency
has been adopted as the functional currency. As such, the Company has both
transaction and translation foreign exchange exposure in those operations. Due
to relative cost and limited availability, the Company does not hedge its
foreign net asset exposure. At September 30, 2002 the Company's net asset
investment in foreign operations was $37 million. The Company does purchase
forward exchange contracts to hedge a portion of its short-term foreign currency
transaction exposures related to metal building sales in Canada.
MANAGEMENTS JUDGMENTS AND ESTIMATES
In preparing the financial statements, a number of assumptions and estimates are
determined, that in the judgment of management, are proper in light of existing
general economic and Company-specific circumstances. Examples of areas in which
judgments and estimates are required include the collectibility of receivables,
the value of inventory, the future useful lives of assets, such as plant,
equipment and internally generated software, the assessment of goodwill
impairment, as well as the value of certain contingent liabilities, including
product warranties and claims arising in the ordinary course of business. While
the Company has taken reasonable care in preparing these estimates and making
these judgments, actual results could and probably will differ from the
estimates. Management believes that any difference in the actual results from
the estimates will not have a material adverse effect upon the Company's
financial position or results of operation.
13
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies include its revenue recognition for
construction contracts, inventory valuation, and estimation of product liability
for third-party claims.
Sales and gross profit recognition for construction contracts are based upon the
percentage of completion method. This method requires the company to estimate
total contract cost at completion for each in-process construction project.
Total contract revenue less total estimated costs generates an estimated gross
profit for each contract. Based upon estimated total costs and estimated gross
profit, the Company recognizes construction sales and gross profit over the life
of the project using a percentage of completion method. The percentage complete
at each period end date is generally determined using costs actually incurred as
of that date compared to the estimate of total contract cost at completion.
Periodic re-evaluation of estimated total costs at completion are made with the
resulting cumulative adjustments recognized in the current period financial
statements. Actual costs for completed projects can and typically will vary from
earlier estimates, with the final adjustment from estimate to actual costs
recognized during the period when the project is considered completed.
The Company has chosen the last-in, first-out (LIFO) accounting method for
valuing inventory in the majority of its manufacturing businesses. In periods of
rising prices and steady or increasing levels of inventory, the effect of the
LIFO method is to charge the current year cost of sales with inventory purchases
that reflect current year costs. This method results in better matching of
current costs with current sales during an accounting period. The LIFO valuation
is a year-end measurement process requiring estimates for the determination of
quarterly gross profit and quarter-end inventory valuation.
The Company is subject to third-party claims associated with its products and
services. The time period from when a claim is asserted to when it is resolved
either by dismissal, negotiation, settlement, or litigation can be several
years. While the Company maintains product liability insurance, these
arrangements include significant self-retention of risk in the form of policy
deductibles. In addition, certain claims are not insured. Actual claim
settlement costs and litigation awards can and probably will vary from the
estimates made by the Company. At the end of the quarter, management believes
that any difference in the actual results from the estimates will not have a
material adverse effect upon the Company's financial position or results of
operations.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which may include statements
concerning projection of revenues, income or loss, capital expenditures, capital
structure or other financial items, statements regarding the plans and
objectives of management for future operations, statements of future economic
performance, statements of the assumptions underlying or relating to any of the
forgoing statements, and other statements which are other than statements of
historical fact. These statements appear in a number of places in this report
and include statements regarding the intent, belief, or current expectations of
the Company and its management with respect to (i) the cost and timing of the
completion of new or expanded facilities, (ii) the Company's competitive
position, (iii) the supply and price of materials used by the Company, (iv) the
demand and price for the Company's products and services, or (v) other trends
affecting the Company's financial condition or results of operations, including
changes in manufacturing capacity utilization and corporate cash flow in both
domestic and international markets. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially as a
result of these various factors.
For additional comments, refer to the October 21, 2002, letter to shareholders,
which is attached as Exhibit 19.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure made in the Annual Report on
Form 10-K for the year ended December 31, 2001 regarding this matter. See
discussion about market risk under Item 2. Management Discussion and Analysis on
page 11 above.
ITEM 4. CONTROL AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) as of a date within 90 days of the filing date of this Form
10-Q Quarterly Report (the "Evaluation Date"), have concluded that as
of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by
others within the Company, particularly during the period in which this
Form 10-Q Quarterly Report was being prepared.
(b) Changes in internal controls.
There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of the most recent evaluation, nor any significant
deficiencies or material weaknesses in such internal controls requiring
corrective actions. As a result, no corrective actions were taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to several pending legal proceedings involving matters
normally incident to its business which, except for the matter referred to
below, do not, taken together, appear to be material.
As reported in the Company's Current Report on Form 8-K filed October 17, 2002,
a McLeod County Minnesota District Court jury on October 15, 2002, awarded the
Lester Buildings unit, the wood buildings business of the Company, a $29.6
million verdict in its suit against Louisiana-Pacific Corporation, a product
supplier. The suit was filed by the Company in McLeod County District Court and
is referenced as "Lester Building Systems, a division of Butler Manufacturing
Company, and Lester's of Minnesota, Inc., Plaintiffs vs. Louisiana-Pacific
Corporation, Defendant" (Case No.43-C6-00-000335). The award compensates the
wood buildings business for damages and other losses resulting from
Louisiana-Pacific product purchased by the Company and sold to its dealers.
Because of uncertainty over the amount of the award that must be applied to
correct defective product, the Company is unable to estimate the impact the
award may have on its financial condition or results of operations. However, if
the $29.6 million award is paid, the Company believes it will recognize pretax
income of $14 million for damages and recovery of prior costs in the period in
which the award is paid. Although the Company expects that the trial court will
enter a final order approving the jury verdict, it has not yet done so pending
resolution of post trial motions. Further, the trial court's judgment is subject
to appeal, which could delay payment and result in affirmation, modification or
reversal of the award. In a related class action to which the Company is not a
party filed against Louisiana-Pacific by customers in The United States District
Court, District of Oregon, Louisiana-Pacific has filed a motion seeking to
enjoin the Minnesota State Court from entering judgment on the jury award to the
extent of $14.4 million of damages that Louisiana-Pacific contends are
encompassed by a class action settlement approved by the United States District
Court.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(4.10) First amendment to the June 21 2001 Bank Credit Agreement
(4.11) Waiver No. 1 to the June 21, 2001 Bank Credit Agreement
(10.7) Amendment to the 1994 Split Dollar Life Insurance Agreement
(10.11) Amendment to the 2000 Split Dollar Life Insurance Agreement
(19) October 21, 2002 Letter to Shareholders.
(99.1) Certification of Periodic Report-CEO
(99.2) Certification of Periodic Report-CFO
(b) Reports on Form 8-K
On October 17, 2002 the Company filed Form 8-K under Item 5 pertaining to a
judgment awarding $29.6 million to its Lester Building Systems business for
damages and losses it sustained from products purchased from a supplier and sold
to its dealers. The judgment was awarded by a McLeod County Minnesota jury. See
Item 1 above.
16
SIGNATURES
Pursuant to the requirement 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.
BUTLER MANUFACTURING COMPANY
November 14, 2002 /s/ Larry C. Miller
- ----------------- --------------------------------------------
Date Larry C. Miller
Vice President - Finance,
and Chief Financial Officer
November 14, 2002 /s/ John W. Huey
- ----------------- ----------------
Date John W. Huey
Vice President, General Counsel
and Secretary
17
CERTIFICATION
I John J. Holland certify that:
1. I have reviewed this quarterly report on Form 10-Q of Butler Manufacturing
Company;
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.
November 14, 2002 /s/ John J. Holland
- ----------------- -----------------------------------
Dated John J. Holland
Chairman and Chief Executive Officer
18
CERTIFICATION
I Larry C. Miller certify that:
1. I have reviewed this quarterly report on Form 10-Q of Butler Manufacturing
Company;
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
November 14, 2002 /s/ Larry C. Miller
- ----------------- -----------------------------------
Dated Larry C. Miller
Vice President - Finance,
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description
4.10 First Amendment to the Bank Credit Agreement
4.11 Waiver No.1 to Bank Credit Agreement
10.7 Amendment to 1994 Split Dollar Life Insurance Agreement
10.11 Amendment to 2000 Split Dollar Life Insurance Agreement
19 October 21, 2002 Letter to Shareholders
99.1 Certification of Periodic Report - CEO
99.2 Certification of Periodic Report - CFO
20