BUTLER MANUFACTURING CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to .
------- -------

COMMISSION FILE NUMBER 001-12335

BUTLER MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 44-0188420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

1540 GENESSEE STREET, KANSAS CITY, MISSOURI 64102
(Address of principal executive offices)

(816) 968-3000
(Registrant's telephone number, including area code)

The name, address and fiscal year of the Registrant
have not changed since the 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 period 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
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES X NO
--- ---

The registrant had 6,327,778 shares of common stock outstanding at June 30,
2003.

INDEX

2

BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended June 30, 2003 and 2002

(unaudited)
($000's omitted except for per share data)

See Accompanying Notes to Consolidated Financial Statements.

3

BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the three months and six months ended June 30, 2003 and 2002

(unaudited)
($000's omitted)

See Accompanying Notes to Consolidated Financial Statements.

4

BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

June 30, 2003 and December 31, 2002
($000's omitted)

See Accompanying Notes to Consolidated Financial Statements.

5

BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2003 and 2002

(unaudited)
($000's omitted)

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 2002 Form 10-K. It is suggested that those consolidated statements be
read in conjunction with this report. The December 31, 2002, consolidated
balance sheet was 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 July 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 2002 no impairment charges were recorded by the company related to goodwill.
An annual impairment test will be performed in the third quarter of 2003.

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. In May 2003, the company
entered into a letter of intent to sell its Lester wood buildings business. The
company anticipates closing on this transaction in the third quarter of 2003.
The company will provide a portion of the financing in connection with the
transaction. The assets of the wood buildings business have been recorded as
"Assets held for sale under contract" in the company's balance sheet.

The International Buildings Systems Segment presently consists of the company's
Asian metal buildings business. This business supplies pre-engineered metal
buildings for commercial, community, industrial, and agricultural applications,
primarily for Asian markets. The European metal buildings business, which had
been included in this segment, was sold in July of 2002.

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 services. 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 2002
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. The Other category in the Segments tables that follow includes
intersegment sales eliminations, corporate expenses, and corporate assets not
otherwise allocated to a specific segment.

7

Net sales represent revenues from sales to affiliated and unaffiliated customers
before elimination of intersegment sales, which are 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.

During the second quarter of 2003 the company recorded a $7 million asset
impairment charge and other expenses related to the announced sale of the Lester
Building Systems business. These charges are included in the North American
Building Systems Segment's amounts. The Other classification represents
unallocated corporate expenses.

Total assets represent assets used by each business segment, and include $7.6
million of Lester Building System assets held for sale under contract. These
assets were recorded in the North American Building Systems Segment at June 30,
2003. Other represents cash and cash equivalents, real estate assets held for
sale not included in the Real Estate Segment, corporate equipment, and
miscellaneous other assets which are not related to a specific business segment.

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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 $3.8
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 2002, $1.9 million of the restructuring reserve was utilized and an
additional $1.4 million was accrued for severance, termination and legal costs.
Through June 30, 2003, $.5 million was utilized for severance and other employee
separation costs, of which $.1 million was utilized in the second quarter. At
the end of June 2003, $1.1 million remained in the restructuring reserve for
legal, severance and other benefits costs, and other closing costs. The company
completed the sale of the business in 2002.

In the second quarter of 2003 the company recorded a $7 million pretax charge
related to the announced sale of its Lester wood buildings business included in
the North American Building Systems Segment. The charge includes a $6.2 million
impairment charge and $.8 million other expenses for selling and legal costs
related to negotiating the sale. The charge after tax was $4.2 million, or $.66
per share. In accordance with the letter of intent, the company will provide
significant seller financing to the new owners. The Lester's assets, totaling
$7.6 million, were classified in the June 30, 2003 balance sheet as "Assets held
for sale under contract". At the conclusion of the transaction these assets will
be exchanged for notes receivable and reclassified to a long-term asset account.
The sale is subject to contingencies common to such transactions, including due
diligence reviews, lender consents, and the negotiation of a definitive
agreement.

The company anticipates completing a definitive purchase agreement and closing
the transaction early in the third quarter of 2003.

The transaction excludes the jury verdict awarded to the company related
to a lawsuit involving Louisiana-Pacific Corporation. The original award of
$29.6 million is currently under appeal. It is expected that the company and the
new owners of the Lester Building Systems business will work cooperatively
during the appeal process to bring this litigation to its conclusion.

NOTE 5 - INDEBTEDNESS

In June 2001, the company entered into a $50 million bank credit facility and
issued $50 million of senior unsecured notes in a private placement. The bank
credit facility was subsequently amended in December 2002 to a $35 million
facility with sub-limits of up to $30 million for letters of credit and $10
million for cash advances.

After giving effect to all amendments, interest on advances under the credit
facility is based on either (a) the banks' base rate, which is the higher of the
Federal Funds rate plus .50% or the prime rate, plus a margin ranging from 1.0%
to 1.25%, or (b) LIBOR plus a margin ranging from 1.75% to 2.5%. Interest on
base rate advances is payable quarterly and is payable on LIBOR advances at the
end of periods ranging from one to six months. The credit facility provides for
a commitment fee on unused advances ranging from .20% to .30%. Commitments under
the credit facility expire on June 20, 2004, at which time any outstanding
advances are payable. The agreement contains certain operating covenants,
including restrictions on guarantees, liens, investments, acquisitions, asset
sales, mergers, dividend payments, capital expenditures, and additional debt.
The agreement also requires the company to maintain a capitalization ratio, as
defined, of 0.45 to 1, and a leverage ratio, as defined, of 14.0 to 1, through
the fiscal quarter ending June 30, 2003, 7.0 to 1 at the end of the fiscal
quarter ending September 30, 2003, and 4.0 to 1 at the end of any fiscal quarter
thereafter. The agreement also requires the company to maintain minimum domestic
cash at all times and as of the last day of each fiscal quarter. In addition,
the agreement requires domestic earnings before interest, taxes, depreciation,
and amortization (EBITDA) for the trailing four fiscal quarters to be zero
through June 30, 2003, $5 million at the end of the fiscal quarter ending
September 2003, and $15 million thereafter through March 31, 2004. At June 30,
2003 the company was in compliance with all covenants.

At June 30, 2003, $50 million principal amount of the company's 2001 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 8.12%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on June 30 and December 30 and
principal is payable in equal annual installments of $4.55 million commencing
December 30, 2006, with the final installment due on December 30, 2016.

At June 30, 2003, $35 million principal amount of the company's 1998 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 6.82%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on March 20 and September 20 and
principal is payable in equal annual installments of $3.5 million commencing
March 20, 2004, with the final installment due on March 20, 2013.

9

At June 30, 2003, $5 million principal amount of the company's 1994 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 8.27%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on June 30 and December 30 and
principal payable in equal annual installments of $5 million, with the final
installment due on December 30, 2003.

In the first quarter of 2003, the company and its note holders amended the 2001,
1998, and 1994 notes, which increased the interest rate for all three notes by
1.5%. Of the increase, .25% is permanent, .5% is applicable until the company
has modified or replaced its bank credit facility on a pari passu basis with the
notes and .75% is applicable until the later of the time that the bank credit
facility is modified or replaced on a pari passu basis with the notes and the
fixed charge ratio as defined in the notes exceeds 2.25 to 1 for two consecutive
trailing four quarter periods. Related to the amendment, the company entered
into a Security Agreement with the note holders and the bank credit facility
lenders whereby the company granted these lenders a security interest in its
domestic accounts, domestic inventory, domestic subsidiary stock and certain
other personal property. These lenders also entered into an intercreditor
agreement.

The amended note agreements contain certain operating covenants, including
restrictions on liens, additional indebtedness, and asset sales, and require the
company to maintain adjusted consolidated tangible net worth, defined as $110
million plus the cumulative sum of 50% of consolidated net income for each
fiscal quarter ending after December 31, 2002. The company is required to
maintain a fixed charge coverage ratio of 1.0 to 1 for fiscal quarters ending
March 31, 2003 and June 30, 2003, with periodic increases through June 30, 2005
and 2.0 to 1 thereafter. Restricted payments, including dividends and treasury
stock purchases, may not in the aggregate exceed the sum of $10 million, plus
75% of consolidated net income or less 100% of any deficit for each fiscal
quarter subsequent to March 31, 2003. At June 30, 2003 the company was in
compliance with all covenants.

Due to the poor financial results for the first half of the year and generally
weak outlook for the remainder of the year, the company's ability to comply in
the future with the existing financial covenants of its agreements is uncertain.
Therefore, the company is working to restructure its bank credit and note
agreements to provide more financial and operating flexibility, and to protect
against any potential default scenarios during this prolonged downturn in the
nonresidential construction market. Although there is no assurance, management
believes the company will be able to amend its existing agreements and/or enter
into new agreements with alternative lenders.

NOTE 6 - STOCK OPTION PLANS

The company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under
APB 25, no charges are made to earnings in accounting for stock options granted
because all options are granted with an exercise price equal to the fair market
value at the date of grant. If the amounts received when options are exercised
are different than the carrying value of treasury stock issued, the difference
is recorded in retained earnings.

Stock options were granted to key employees under the 1996 Stock Incentive Plan
and to outside directors under 2002 Stock Option Plan for Outside Directors. The
company granted nonqualified stock options to key employees for 6,000 shares in
the second quarter 2003, 87,500 shares in the first quarter of 2003 and 44,000
shares in the first quarter of 2002. Options totaling 4,000 shares were also
granted in the first quarter of 2003 to a director under the 2002 Stock Option
Plan for Outside Directors. There were no options granted in the second quarter
2002. Options were granted at a fixed exercise price based on fair market value
on the date of grant. Options granted to employees in 2003 and 2002 vest one
year after the date of grant and expire ten years from the date of grant.
Options under the 2002 Stock Option Plan for Outside Directors vest on the 184th
day after January 22, 2003, and are fully exercisable thereafter.

In January 2003, the FASB issued SFAS No. 148 " Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No 148 amended Statement No. 123
and provided for alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based compensation. In addition, it
requires more frequent and prominent financial statement disclosure of the
effect on the company's net earnings and earnings per share (EPS). The company
uses the Black Scholes option pricing model to calculate the fair value of stock
options on their date of grant. The assumptions used to calculate their fair
value are as follows:

10

The following table illustrates the effect on net earnings (loss) and per share
data if the company had applied the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation."

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

RESULTS OF OPERATIONS

Net sales were $174 million for the second quarter 2003 compared with $213
million in the second quarter 2002, 18% lower than a year ago. Lower sales were
caused by a continued steep decline in nonresidential construction project
opportunity in a very competitive domestic construction market. All of the
company's business segments reported lower sales for the quarter than a year
ago. Sales in the North American Building Systems Segment were $82 million, a
decline of 16% compared with the second quarter a year ago. The majority of the
decline in sales occurred in the metal buildings business and reflected weak
demand in the manufacturing end-use market, which typically represents a
significant percentage of the company's revenues. The commercial and community
markets have been less severely impacted by the decline in the nonresidential
construction market. The Lester wood buildings business also reported lower
sales for the quarter.

The International Building Systems Segment sales were $25 million in the second
quarter, down 21% from the prior year. All the sales reported in the second
quarter 2003 in this segment were from China, while the prior year's sales
included $6 million from the European business which was sold in 2002. The lower
sales volume in China was related to overall economic slowdown primarily caused
by the SARS virus.

Sales in the Architectural Products Segment were $54 million in the second
quarter compared with $56 million in the prior year. Sales decreased due to
weaker demand in the commercial construction market primarily served by this
segment.

The Construction Services and Real Estate segments, the company's project
related businesses, accounted for approximately half of the decline in the
company's second quarter revenues. The Construction Services Segment sales were
$15 million for the second quarter compared with $27 million a year ago, a
decline of 47% due primarily to lower demand caused by fewer large building
projects. The Real Estate segment had no sales in the second quarter compared
with $6 million a year ago.

Gross profit for the second quarter was $21 million, down $8 million or 28%
from the prior year. While each business segment experienced a decline in gross
profit, the North American Building Systems and Construction Services segments
were more severely affected by lower demand due to weak markets and a fiercely
competitive pricing environment which caused reduced standard margins and higher
unabsorbed fixed costs.

Selling, general, and administrative expenses declined to $26 million compared
with $28 million a year ago due to lower employment levels and other cost
reduction efforts.

11

In the second quarter 2003 the company recorded a $7 million charge related to
the announced sale of the Lester wood buildings business which is included in
the North American Building Systems Segment. The company expects to close this
transaction during the third quarter.

Interest expense was $2.4 million for the quarter up $.4 million compared with
the prior year due to higher interest costs charged on the company's credit and
note agreements.

The pretax loss for the quarter ended June 30, 2003 was $14.5 million while the
company was at breakeven levels a year ago. The company recorded a tax benefit
of $5.4 million for the quarter due to greater pretax losses in its North
American Building Systems Segment, including the $7 million Lester wood
buildings charge, and pretax losses in the Construction Services Segment. The
net loss for the second quarter was $9.1 million, or $1.43 per share, compared
with net earnings of $.3 million, or $.05 per share, a year ago.

For the six months ended June 30, 2003, sales were $344 million compared with
$396 million a year ago, a decline of 13%. The decline reflects the continued
weakness in the domestic nonresidential construction market. Lower sales in all
segments of the company for the first six months of the year have contributed to
lower year to date gross profit compared with a year ago. This trend along with
the $7 million charge for the sale of Lester wood buildings business were the
primary factors for greater operating and pretax losses compared with the same
six month period of a year ago. Year to date net losses through June 30, 2003
totaled $13 million compared with $5.1 million a year ago. The amount for 2003
includes $4.2 million in after tax charges related to the announce sale of the
Lester wood building business.

Nonresidential construction markets are cyclical by nature. During the current
prolonged downturn the company has taken many actions to reduce costs and
increase revenues from underserved markets. Related to cost reductions, in the
face of continued declining demand, domestic core employment levels are
approximately 7% lower since the beginning of 2003. This is in addition to
employment reductions in 2001 and 2002. Along with expense reductions related to
volume initiated in most downturns, the company has implemented more permanent
cost cutting measures. In 2002, the company sold its underperforming European
metal buildings business, and during the second quarter of 2003, the company
announced the planned sale of another underperforming business, the Lester wood
buildings business. The company recently implemented a change in its primary
pension plan benefit which is expected to reduce pension expense by $3.5 million
annually, beginning in September, 2003. Offsetting some of these cost reduction
actions have been increased costs for steel caused primarily by tariffs imposed
by the U.S. Government in April, 2002, higher business insurance costs driven in
part by the September 11, 2001 terrorist attacks, added legal costs related to
the company's lawsuit against Louisiana-Pacific, and the cost of complying with
the Sarbanes-Oxley legislation.

The company continued its efforts to increase revenues and earnings in
previously underserved markets. Within the North American Building Systems
Segment, sales of the company's Liberty Buildings product line, a first price
point building solution, continued to grow. The plant to produce the new R-Steel
panel product line, a one piece insulated curtain wall panel system for
commercial and community applications, neared completion in the second quarter
and is expected to produce product beginning in the third quarter. Within the
Architectural Products Segment, two new distribution outlets, and the
introduction of new product offerings including hurricane/blast resistant
products, have provided incremental sales growth. Finally, the start-up of the
company's second plant in China for the International Building Systems business
has provided needed capacity to support the demand growth in this region.

LIQUIDITY AND CAPITAL RESOURCES

Since December 2002, cash and cash equivalents decreased $19 million to $57
million due to declines in cash flows from operations and investing activities.

Cash flow from operating activities for the first half of 2003 was an
approximate $12 million outflow. Receivables increased slightly primarily in the
North American Building System and International Building Systems segments, the
former due primarily to timing and delays in billing caused by the
implementation of the new computer system, while the latter was in line with
demand. Inventories increased primarily due to the expansion of operations in
the International Building Systems Segment. Real estate developments in progress
declined primarily due to fewer development projects and the reclassification of
a real estate project to a long-term asset classification from a current asset
due to its anticipated sale extending beyond one year. Investments and other
assets increased through the first six month of 2003 due primarily to the real
estate project reclass mentioned above. Noncurrent taxes receivable and deferred
tax assets increased due to losses generated in the first six months of 2003.
Noncurrent tax assets represent timing differences related to the deductibility
of expenses not expected to be realized in the near term. Deferred tax assets
primarily represent the U.S. tax effect of book versus tax timing differences
related to deductibility of expenses, including bad debt provision and product
warranty and claims reserves. Taxes receivable and

12

deferred tax assets were reclassified from current to noncurrent assets during
the quarter. Though it is more likely than not that deferred tax assets will be
utilized during periods of future earnings, it was determined that it would be
unlikely for these assets to be realized during the next 12 months. During the
second quarter the company reclassified a $31 million pension liability from
current liabilities to long-term liabilities. Given the company's losses to
date, it appears unlikely the company will make excess cash contributions to the
pension funds sufficient to extinguish this liability during the next 12 months.

Cash from investing activities for the first six months of 2003 was used
primarily to fund $8 million in capital expenditures projects. Capital
expenditures were primarily incurred within the North American Building Systems
Segment for a metal buildings operation, the introduction of a new panel product
line, and for a new enterprise resource planning computer system. Capital
expenditures also included the costs to complete the construction of a second
plant in China for the International Building Systems Segment.

Cash from financing activities was used for payment of dividends, and scheduled
long-term debt payments, while cash was provided from the issuance of short-term
debt for the financing of real estate development projects. Dividends totaled
$2.3 million through the first six months of the year. During the second quarter
of 2003 the company reduced its quarterly cash dividend to $.04 per share from
$.18 per share due primarily to continuing poor market conditions and the
uncertainty prevalent in the general economy. At June 30, 2003, $4.4 million was
available for dividend payments under the credit agreement. Also, during the
second quarter of 2003 a $4 million cash dividend was declared and paid to the
U.S. parent company from the company's Chinese subsidiary to increase domestic
cash resources.

In June 2001, the company entered into a $50 million bank credit facility which
was subsequently amended in December 2002 to a $35 million credit facility with
sub-limits of $30 million for letters of credit and $10 million for cash
advances. There were no cash borrowings under the credit facility through June
30, 2003. There were approximately $19.7 million of letters of credit issued
under the line as of June 30, 2003. Commitments under the credit facility expire
on June 20, 2004, at which time any outstanding advances are payable.

Per the terms of the company's bank credit and note agreements, and subject to
certain limitations, the company may borrow up to $35 million, from other
lenders to fund the Real Estate Segment's project development activities. At
June 30, 2003, $2.4 million had been borrowed to fund a development project. The
company's foreign operations maintain separate lines of credit with local banks
of approximately $6 million with no utilization at June 30, 2003. For the six
months ended June 30, 2003, there were no domestic short-term borrowings. After
giving effect to all amendments, interest on advances under the credit facility
is based on either (a) the banks' base rate, which is the higher of the Federal
Funds rate plus .50% or the prime rate, plus a margin ranging from 1.0% to
1.25%, or (b) LIBOR plus a margin ranging from 1.75% to 2.5%. Interest on base
rate advances is payable quarterly and is payable on LIBOR advances at the end
of periods ranging from one to six months. The credit facility provides for a
commitment fee on unused advances ranging from .20% to .30%. Commitments under
the credit facility expire on June 20, 2004, at which time any outstanding
advances are payable.

At June 30, there were outstanding $50 million principal amount of the company's
2001 senior notes due 2016, $35 million of its 1998 senior notes due 2013 and $5
million of its 1994 senior notes due 2003. Interest on the 2001 and 1994 senior
notes is payable semiannually on June 30 and December 30 and interest on the
1998 senior notes is payable semiannually on March 20 and September 20. As set
forth in Note 5 to the Notes to Consolidated Financial Statements, principal
installments on the notes are payable prior to their final maturity. The
following table shows principal installments due with respect to the senior
notes during each of the years 2003 through 2016.

2003 $ 5.0 million
2004 $ 3.5 million
2005 $ 3.5 million
2006 $ 8.0 million
2007 $ 8.0 million
2008 and thereafter $ 62.0 million

During the first quarter of 2003, the company and its note holders amended the
senior notes to increase the interest rate for each series by 1.5%, of which
increase .25% is permanent .5% is applicable until the company has modified or
replaced its bank credit facility on a pari passu basis with the note agreements
and .75% is applicable until the later of the bank credit facility being
modified or replaced on a pari passu basis and the fixed charge ratio as defined
in the note exceeds 2.25 to 1 for two consecutive four trailing quarters. In
connection with this amendment, the company granted the note holders and lenders
under the credit facility a security interest in its domestic accounts, domestic
inventory, domestic subsidiary stock, and certain other personal property.

Both the credit facility and the senior notes contain financial covenants and
operating covenants which are summarized in Note 5 to the Notes to Consolidated
Financial Statements contained elsewhere herein. As of June 30, 2003, the
company was in compliance with all covenants under its credit facility and the
senior notes. Management believes that the company's operating cash flow, cash
balances, along with bank credit lines, are sufficient to meet current liquidity
requirements. Due to the poor financial results for the first half of the year
and generally weak outlook for the remainder of the year, the company's ability
to comply in the future with the existing financial covenants of its agreements
is uncertain. Therefore, the company is working to restructure its bank credit
and note agreements to provide more financial and operating flexibility, and to
protect against any potential default scenarios during this prolonged downturn
in the nonresidential construction market. Although there is no assurance,
management believes the company will be able to amend its existing agreements
and/or enter into new agreements with alternative lenders.

Cash paid for interest on debt totaled $2.5 million in the second quarter and
$3.8 million year to date at the end of June 2003, while cash paid for taxes
were minimal due to net losses incurred over the same periods.

During the second quarter of 2003, treasury stock purchases were immaterial. The
company decreased its dividend in the second quarter to $.04 per share from $.18
per share, and paid dividends of $.3 million and $1.1 million in the second
quarter of 2003 and 2002, respectively. Total backlog at June 30, 2003 was $295
million compared with $310 million a year ago, excluding the Lester Building
Systems and European Building System businesses. Higher margin product backlog
was approximately 6% lower, while construction backlog decreased 3% when
compared to the same period a year ago.

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NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, Financial Accounting Standards Board issued Interpretation No.
46, "Consolidation of Variable Interest Entities," an Interpretation of ARB No.
51" (FIN 46). The interpretation provides guidance on the identification of
variable interest entities (VIE) and clarifies when a company is determined to
be a "primary beneficiary" and required to consolidate in its financial
statements the assets, liabilities, and activities of a variable interest
entity. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective immediately for all new variable interest
entities created after January 31, 2003. For variable interest entities created
before February 1, 2003, the consolidation provisions of FIN 46 must be applied
in the first interim or annual reporting period beginning after June 15, 2003.
The disclosure provisions of FIN 46 apply to financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of FIN 46 had no impact on the company's financial
reporting and disclosures.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS 150 requires certain financial instruments
that embody obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. Many of these
instruments were previously classified as equity or temporary equity and as
such, SFAS 150 represents a significant change in practice in the accounting for
a number of mandatory redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments for the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 had no impact on
the Company's results of operations, liquidity, or financial condition.

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. Although steel
prices are relatively stable, 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.

During the first half of 2003, steel prices stabilized after large increases
during the second half of 2002. Competitive pricing pressures have prevented the
company from recapturing all of the steel price differential in its selling
prices. Investments and increased operating efficiencies in company operations
have helped mitigate the impact of the competitive market conditions.

14

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 contracts are settled. At
June 30, 2003 the fair value of open aluminum contracts recorded in cumulative
other comprehensive income was less than $.1 million pretax. A 10% change in
aluminum contracts was immaterial at June 30, 2003.

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
June 30, 2003, holding other variables constant, including levels of
indebtedness, a one percentage point increase in interest rates would result in
approximately a $4 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, therefore 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 June 30, 2003 the company's net asset investment
in foreign operations was $32 million. The company hedges its short-term foreign
currency transaction exposures related to metal building sales in Canada.
Forward exchange contracts are purchased to cover a portion of the exposure.
Mark to market gains on the company's currency exchange contracts were recorded
in earnings and were less than $.1 million pretax at June 30, 2003. At June 30,
2003, a 10% change in Canadian currency contracts was immaterial.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are both most important
to the portrayal of a company's financial condition and results of operations,
and require management's most difficult, subjective, or complex judgments. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles with no need for the
application of management's judgment. In certain circumstances, however, the
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires judgment to make certain
estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. The company's critical accounting
polices include its sales recognition for construction and project contracts,
inventory valuation, estimation of product liability for third-party claims,
estimation of insurance reserves, and accounting for impairment of long-lived
assets. See Note 1 to our consolidated financial statements for additional
discussion other accounting policies.

Sales Recognition: Sales and gross profit recognition for construction and
project contracts are based upon the percentage of completion method. This
method requires the company to estimate total 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 cost and estimated gross profit, the company recognizes
construction sales and gross profit over the life of the project on a percentage
of completion basis. The percentage complete at each period end date is
determined using costs actually incurred as of that date compared to the
estimate of total contract costs at completion. Periodic re-evaluations of total
cost at completion estimates are made with the resulting cumulative adjustments
recognized in the current period financial statements. Provision is made for
estimated probable losses on projects when it is determined that a loss will be
incurred. 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 completed.

Inventory Valuation: 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 a better matching of current costs with current sales during an
accounting period. Generally it presents a more conservative valuation of the
company's inventory, and the gross profit and net earnings reported for the
period. The LIFO valuation is a year-end measurement process requiring estimates
for the determination of quarterly gross profit and quarter-end inventory
valuation. At December 31, 2002, the cumulative effect of choosing the LIFO
method was a reduction in inventory values of $9.5 million. During 2002, the
company reduced inventory levels, which had the effect of charging the current
year cost of sales with prior years' costs. For 2002, the use of LIFO inventory
accounting decreased gross margins by $1.0 million, while through June 30, 2003
LIFO inventory accounting increased gross margin by $.1 million.

15

Third-Party Claims: 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, its
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. 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.

Insurance Accruals: Generally, the company is self-insured for workers'
compensation for certain subsidiaries and for all group medical insurance. Under
these plans, liabilities are recognized for claims incurred (including claims
incurred but not reported) and changes in the accruals. At the time a worker's
compensation claim is filed, a liability is estimated to settle the claim. The
liability for workers' compensation claims is determined based on management's
estimates of the nature and severity of the claims using analyses provided by
third party administrators. Since the liability is an estimate, the ultimate
liability may be more or less than reported. If previously established accruals
are required to be adjusted, such amounts are included in cost of sales and
selling, general, and administrative expenses in the period of adjustment. Group
medical accruals are estimated using historical claims experience. The company
maintains excess liability insurance with insurance carriers to minimize its
risks related to catastrophic claims in excess of all self-insured positions.
Any material change in the aforementioned factors could have an adverse impact
on operating results.

Long-Lived Assets: The company accounts for the impairment of long-lived assets
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." When events or circumstances indicate that a long-lived
asset may not be recoverable, the company tests for recoverability of the asset
by comparing undiscounted future cash flows to the carrying amount. If
undiscounted future cash flows are less than the asset carrying amount, an
impairment charge is recorded and the asset's carrying value is reduced to fair
value. Management estimates the future cash flows based on current operating
conditions. Changes in estimates of such cash flows could impact the results of
the impairment test.

TRANSACTION TO SELL ASSETS

On May 15, 2003, the company announced that it had signed a letter of intent to
enter into a transaction to sell substantially all of the assets of the Lester
Building Systems business to a management team headed by the current Lester
division president.

The company recorded an after-tax charge of approximately $4.2 million, or $.66
per share related to the sale. The anticipated pretax charge is approximately $7
million, including non-cash charges of approximately $6.2 million for the
write-down of assets to net fair value and $.8 million to accrue for the costs
of the sale. The company will provide significant seller financing to the new
owners. As such the transaction was recorded as a transfer of assets held for
sale under contract. The transaction is subject to contingencies common to such
transactions, including due diligence reviews, lender consents, and the
negotiation of a definitive agreement. The company anticipates completing a
definitive purchase agreement and closing of the transaction in the third
quarter of this year.

The transaction excludes the jury verdict awarded to the company related to a
lawsuit involving Louisiana-Pacific Corporation. The original award of $29.6
million is currently under appeal. It is expected that the company and the new
owners of the Lester Building Systems business will work cooperatively during
the appeal process to bring this litigation to its conclusion.

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.

16

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, 2002 regarding this matter. See
discussion about market risk under Item 2. Management's Discussion and Analysis
on page 11 above.

ITEM 4. CONTROLS 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 the end of the period covered by 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 Second Quarter
Report was being prepared.

(b) Changes in internal controls.

There were no significant changes in internal controls over financial
reporting that have materially affected or are reasonably likely to
materially affect internal controls over financial reporting 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 2. CHANGE OF SECURITIES AND USE OF PROCEEDS.

Reference is made to the second and seventh paragraph of "Note 5 --
Indebtedness" in the company's notes to consolidated financial statements in
Part I of this report for summaries of financial covenants under recently
amended loan agreements that may effect the company's ability to pay dividends
in future periods which summaries are incorporated herein by reference. As a
result of the second quarter losses, under these covenants, which is contained
in note agreements respecting the company's private placement senior notes, as
of June 30, 2003 the company could pay $4.4 in dividends.

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

The Company held its Annual Meeting of Shareholders on April 15, 2003. Three
Class B Directors were elected at the Annual Meeting. In the election of
directors there were 5,529,466 votes cast for Mark A. McCollum and 62,808
withheld; 5,537,991 votes cast for Gary L. Tapella and 54,283 withheld; and
5,536,654 votes cast for William D. Zollars and 55,620 withheld.

ITEM 5. OTHER INFORMATION

On May 15, 2003, Butler Manufacturing Company announced that it has signed a
letter of intent to enter into a transaction to sell substantially all of the
assets of the Lester Building Systems to members of Lester's current management
team.

The company presently anticipates completing a definitive purchase agreement
during the next several weeks, with the closing of the transaction occurring in
the third quarter of this year.

17

The transaction excludes the jury verdict awarded to Butler Manufacturing
Company related to a lawsuit involving Louisiana-Pacific Corporation. The
original award of $29.6 million is currently under appeal. The company and the
new owners of the Lester Buildings Systems business will work cooperatively
during the appeal process to bring this litigation to its conclusion.

The company recorded an after-tax charge of approximately $4.2 million, or $.66
per share, or a pretax charge of approximately $7 million, including noncash
charges of approximately $6.2 million, for the write-down of Lester wood
buildings assets to net sale value. In accordance with the letter of intent, the
company will provide seller financing to the new owners. The assets have been
reclassified as assets held for sale under contract. The transaction is subject
to certain contingencies common to such transactions, including due diligence
reviews, lender consents, and the negotiation of a definitive agreement.

The Lester wood buildings business is part of the North American Building
Systems Segment, and designs, manufactures, markets, and erects pre-engineered
wood-frame buildings for a variety of end uses. Principal offices are located in
Lester Prairie, Minnesota, with sales, engineering and manufacturing facilities
in Charleston, Illinois and Clear Brook, Virginia.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

32.1 Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

The following reports have been filed on Form 8-K during the Quarter
Ended June 30, 2003.

- April 23, 2003 8-K filing under item 5, announcing the establishment of
a new metal buildings manufacturing plant in Monterrey, Mexico.

- April 28, 2003 8-K filing under item 9, First Quarter Earnings Press
Release.

- May 15, 2003 8-K filing under item 5, of the Letter of Intent to Sell
the Lester Division.

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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

August 14, 2003 /s/ Larry C. Miller
- --------------- -------------------------------
Date Larry C. Miller
Vice President - Finance,
and Chief Financial Officer

August 14, 2003 /s/ John W. Huey
- --------------- -------------------------------
Date John W. Huey
Vice President, General Counsel
and Secretary

19

EXHIBIT INDEX