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EX-32.2 - EXHIBIT 32.2 - NCI BUILDING SYSTEMS INCq22016exhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - NCI BUILDING SYSTEMS INCq22016exhibit32_1.htm
EX-31.2 - EXHIBIT 31.2 - NCI BUILDING SYSTEMS INCq22016exhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - NCI BUILDING SYSTEMS INCq22016exhibit31_1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 1, 2016
 
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: 1-14315
 
 

  
 
NCI BUILDING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 

 
Delaware
76-0127701
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
10943 North Sam Houston Parkway West
Houston, TX
77064
(Address of principal executive offices)
(Zip Code)
 
(281) 897-7788
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 par value - 73,039,779 shares as of May 25, 2016.
 
 





TABLE OF CONTENTS
 
 
 
PAGE
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 


i



PART I — FINANCIAL INFORMATION
 
Item 1.  Unaudited Consolidated Financial Statements.
 
NCI BUILDING SYSTEMS, INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
May 1,
2016
 
November 1,
2015
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
77,916

 
$
99,662

Restricted cash
731

 
682

Accounts receivable, net
139,603

 
166,800

Inventories, net
151,477

 
157,828

Deferred income taxes
28,254

 
27,390

Income taxes receivable
4,140

 

Prepaid expenses and other
29,229

 
31,834

Investments in debt and equity securities, at market
5,726

 
5,890

Assets held for sale
3,378

 
6,261

Total current assets
440,454

 
496,347

Property, plant and equipment, net
255,972

 
257,892

Goodwill
158,106

 
158,026

Intangible assets, net
151,586

 
156,395

Other assets
10,624

 
11,069

Total assets
$
1,016,742

 
$
1,079,729

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Note payable
$
1,379

 
$
513

Accounts payable
121,284

 
145,917

Accrued compensation and benefits
53,589

 
62,200

Accrued interest
6,515

 
6,389

Accrued income taxes

 
9,296

Other accrued expenses
89,804

 
97,309

Total current liabilities
272,571

 
321,624

Long-term debt, net
424,147

 
444,147

Deferred income taxes
23,573

 
20,807

Other long-term liabilities
20,945

 
21,175

Total long-term liabilities
468,665

 
486,129

Stockholders’ equity:
 

 
 

Common stock, $.01 par value, 100,000,000 shares authorized; 73,252,869 and 74,529,750 shares issued at May 1, 2016 and November 1, 2015, respectively; 72,939,638 and 74,082,324 shares outstanding at May 1, 2016 and November 1, 2015, respectively
732

 
745

Additional paid-in capital
630,951

 
640,767

Accumulated deficit
(345,421
)
 
(353,733
)
Accumulated other comprehensive loss, net
(8,129
)
 
(8,280
)
Treasury stock, at cost (313,231 and 447,426 shares at May 1, 2016 and November 1, 2015, respectively)
(2,627
)
 
(7,523
)
Total stockholders’ equity
275,506

 
271,976

Total liabilities and stockholders’ equity
$
1,016,742

 
$
1,079,729

 
See accompanying notes to consolidated financial statements.

1



NCI BUILDING SYSTEMS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
 
May 1,
2016
 
May 3,
2015
Sales
$
372,247

 
$
360,147

 
$
742,261

 
$
683,073

Cost of sales
283,799

 
284,258

 
564,822

 
535,045

Gain on sale of assets and asset recovery
(927
)
 

 
(1,652
)
 

Gross profit
89,375

 
75,889

 
179,091

 
148,028

Engineering, selling, general and administrative expenses
74,648

 
73,035

 
144,498

 
135,904

Intangible asset amortization
2,405

 
4,375

 
4,821

 
5,868

Strategic development and acquisition related costs
579

 
628

 
1,260

 
2,357

Restructuring and impairment charges
1,149

 
1,468

 
2,659

 
2,945

Income (loss) from operations
10,594

 
(3,617
)
 
25,853

 
954

Interest income
52

 
32

 
74

 
39

Interest expense
(7,844
)
 
(8,312
)
 
(15,713
)
 
(12,299
)
Foreign exchange gain (loss)
576

 
(10
)
 
(166
)
 
(1,411
)
Gain from bargain purchase

 

 
1,864

 

Other income, net
251

 
332

 
62

 
332

Income (loss) before income taxes
3,629

 
(11,575
)
 
11,974

 
(12,385
)
Provision (benefit) from income taxes
1,209

 
(4,087
)
 
3,662

 
(4,577
)
Net income (loss)
$
2,420

 
$
(7,488
)
 
$
8,312

 
$
(7,808
)
Net income allocated to participating securities
(23
)
 

 
(79
)
 

Net income (loss) applicable to common shares
$
2,397

 
$
(7,488
)
 
$
8,233

 
$
(7,808
)
Income (loss) per common share:
 

 
 

 
 

 
 

Basic
$
0.03

 
$
(0.10
)
 
$
0.11

 
$
(0.11
)
Diluted
$
0.03

 
$
(0.10
)
 
$
0.11

 
$
(0.11
)
Weighted average number of common shares outstanding:
 

 
 

 
 

 
 

Basic
72,352

 
73,133

 
72,806

 
73,102

Diluted
72,886

 
73,133

 
73,321

 
73,102

 
See accompanying notes to consolidated financial statements.
 



2



NCI BUILDING SYSTEMS, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
 
May 1,
2016
 
May 3,
2015
Comprehensive income (loss):
 

 
 

 
 

 
 

Net income (loss)
$
2,420

 
$
(7,488
)
 
$
8,312

 
$
(7,808
)
Other comprehensive income, net of tax:
 

 
 

 
 

 
 

Foreign exchange translation gain and other, net of
taxes(1)
492

 
264

 
151

 

Other comprehensive income
492

 
264

 
151

 

Comprehensive income (loss)
$
2,912

 
$
(7,224
)
 
$
8,463

 
$
(7,808
)
 
(1)
Foreign exchange translation gain and other are presented net of taxes of $0 in both the three months ended May 1, 2016 and May 3, 2015, and $0 in both the six months ended May 1, 2016 and May 3, 2015.

See accompanying notes to consolidated financial statements.
 



3



NCI BUILDING SYSTEMS, INC. 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
 
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury Stock
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Shares
 
Amount
 
Equity
Balance, November 1, 2015
74,529,750

 
$
745

 
$
640,767

 
$
(353,733
)
 
$
(8,280
)
 
(447,426
)
 
$
(7,523
)
 
$
271,976

Treasury stock purchases

 

 

 

 

 
(1,217,682
)
 
(12,381
)
 
(12,381
)
Retirement of treasury shares
(1,513,510
)
 
(15
)
 
(17,262
)
 

 

 
1,513,510

 
17,277

 

Issuance of restricted stock
81,295

 

 

 

 

 
(161,633
)
 

 

Stock options exercised
155,334

 
2

 
1,401

 

 

 

 

 
1,403

Excess tax benefits (shortfalls) from share-based compensation arrangements

 

 
(390
)
 

 

 

 

 
(390
)
Foreign exchange translation loss and other, net of taxes

 

 

 

 
151

 

 

 
151

Deferred compensation obligation

 

 
1,385

 

 

 

 

 
1,385

Share-based compensation

 

 
5,050

 

 

 

 

 
5,050

Net income

 

 

 
8,312

 

 

 

 
8,312

Balance, May 1, 2016
73,252,869

 
$
732

 
$
630,951

 
$
(345,421
)
 
$
(8,129
)
 
(313,231
)
 
$
(2,627
)
 
$
275,506

 
See accompanying notes to consolidated financial statements.



4



NCI BUILDING SYSTEMS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
Cash flows from operating activities:
 

 
 

Net income (loss)
$
8,312

 
$
(7,808
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
21,512

 
23,497

Deferred financing cost amortization
954

 
118

Share-based compensation expense
5,050

 
5,134

Gain from bargain purchase
(1,864
)
 

Gain on sale of assets and asset recovery
(1,652
)
 
(26
)
(Recovery of) provision for doubtful accounts
1,898

 
(129
)
Provision for deferred income taxes
1,668

 
5,506

Excess tax (benefits) shortfalls from share-based compensation arrangements
390

 
(384
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
25,299

 
30,268

Inventories
6,555

 
1,660

Income taxes receivable
(4,140
)
 
(6,373
)
Prepaid expenses and other
3,699

 
(176
)
Accounts payable
(24,633
)
 
(25,044
)
Accrued expenses
(22,976
)
 
(28,910
)
Other, net
(59
)
 
(634
)
Net cash provided by (used in) operating activities
20,013

 
(3,301
)
Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(4,343
)
 
(247,123
)
Capital expenditures
(10,280
)
 
(9,307
)
Proceeds from sale of property, plant and equipment
4,663

 
26

Net cash used in investing activities
(9,960
)
 
(256,404
)
Cash flows from financing activities:
 

 
 

Deposit of restricted cash
(49
)
 

Proceeds from stock options exercised
1,401

 
354

Issuance of debt

 
250,000

Payments on term loan
(20,000
)
 
(21,239
)
Payments on note payable
(531
)
 
(417
)
Payment of financing costs

 
(8,879
)
Excess tax benefits (shortfalls) from share-based compensation arrangements
(390
)
 
384

Purchases of treasury stock
(12,381
)
 
(1,539
)
Net cash provided by (used in) financing activities
(31,950
)
 
218,664

Effect of exchange rate changes on cash and cash equivalents
151

 
(334
)
Net decrease in cash and cash equivalents
(21,746
)
 
(41,375
)
Cash and cash equivalents at beginning of period
99,662

 
66,651

Cash and cash equivalents at end of period
$
77,916

 
$
25,276

 
See accompanying notes to consolidated financial statements.

5



NCI BUILDING SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 1, 2016
(Unaudited)
 
NOTE 1 — GENERAL INFORMATION
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements for NCI Building Systems, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “NCI,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present our financial position, results of operations and cash flows for the periods indicated. Operating results for the fiscal three and six month periods ended May 1, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending October 30, 2016. Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects.
 
For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended November 1, 2015 filed with the Securities and Exchange Commission (the “SEC”) on December 22, 2015.
 
Reporting Periods
 
We use a four-four-five week calendar each quarter with our fiscal year end being on the Sunday closest to October 31. The year end for fiscal 2016 is October 30, 2016.
 
Stock Ownership

On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”). In connection with the Investment Agreement, the CD&R Fund VIII and the Clayton, Dubilier & Rice Friends & Family Fund VIII, L.P. (collectively, the “CD&R Funds”) purchased convertible preferred stock, which was later converted to shares of our common stock on May 14, 2013. Also, on October 20, 2009, the Company entered into a Stockholders Agreement with the CD&R Funds. As of May 1, 2016, the CD&R Funds owned 59.2% of the outstanding shares of our common stock. See “Transactions with Related Persons” in our Proxy Statement on Schedule 14A, as filed with the SEC on January 27, 2016, for a description of the rights held by the CD&R Funds under the terms and conditions of the Investment Agreement and the Stockholders Agreement.
 
NOTE 2 — ACQUISITIONS
 
Fiscal 2016 acquisition

On November 3, 2015, we acquired manufacturing operations in Hamilton, Ontario, Canada for cash consideration of $2.2 million, net of post-closing working capital adjustments. This business allows us to service customers more competitively within the Canadian and Northeastern United States insulated metal panel (“IMP”) markets. Because the business was acquired from a seller in connection with a divestment required by a regulatory authority, the fair value of net assets acquired exceeded the purchase consideration by $1.9 million, which was recorded as a non-taxable gain from bargain purchase in the unaudited consolidated statements of operations during the first quarter of fiscal 2016.


6



The fair values of the assets acquired and liabilities assumed as part of this acquisition as of November 3, 2015, as determined in accordance with ASC Topic 805, were as follows (in thousands):
 
 
November 3, 2015
Current assets
 
$
307

Property, plant and equipment
 
4,810

Assets acquired
 
5,117

Current liabilities assumed
 
380

Fair value of net assets acquired
 
4,737

Total cash consideration transferred
 
2,201

Deferred tax liabilities
 
672

Gain from bargain purchase
 
$
(1,864
)

The results of operations for this business are included in our metal components segment. Pro forma financial information and other disclosures for this acquisition have not been presented as it was not material to the Company’s financial position or reported results.

Fiscal 2015 acquisition

On January 16, 2015, NCI Group, Inc., a wholly-owned subsidiary of the Company, and Steelbuilding.com, LLC, a wholly owned subsidiary of NCI Group, Inc., completed the acquisition of CENTRIA (the “CENTRIA Acquisition”), a Pennsylvania general partnership (“CENTRIA”), pursuant to the terms of the Interest Purchase Agreement, dated November 7, 2014 (“Interest Purchase Agreement”) with SMST Management Corp., a Pennsylvania corporation, Riverfront Capital Fund, a Pennsylvania limited partnership, and CENTRIA. NCI acquired all of the general partnership interests of CENTRIA in exchange for $255.8 million in cash, including cash acquired of $8.7 million. The purchase price was subject to a post-closing adjustment to net working capital as provided in the Interest Purchase Agreement, which we settled during the first quarter of fiscal 2016 for additional cash consideration of approximately $2.1 million payable to the seller, which approximated the amount we previously accrued. The purchase price was funded through the issuance of $250.0 million of new indebtedness. See Note 12 — Long-Term Debt and Note Payable. CENTRIA is now an indirect, wholly-owned subsidiary of NCI.
 
Accordingly, the results of CENTRIA’s operations from January 16, 2015 are included in our consolidated financial statements. For the six months ended May 1, 2016 and the period from January 16, 2015 to May 3, 2015, CENTRIA contributed revenue of $109.8 million and $61.9 million and operating income (loss) of $3.6 million and $(3.9) million, respectively. CENTRIA is a leader in the design, engineering and manufacturing of architectural IMP wall and roof systems and a provider of integrated coil coating services for the nonresidential construction industry. CENTRIA operates four production facilities in the United States and a manufacturing facility in China.
 
We report on a fiscal year that ends on the Sunday closest to October 31. CENTRIA previously reported on a calendar year that ended December 31. In accordance with ASC Topic 805, the unaudited pro forma financial information presented below for the six month periods ended May 1, 2016 and May 3, 2015 assumes the acquisition was completed on November 4, 2013, the first day of fiscal year 2014.
 
This unaudited pro forma financial information does not necessarily represent what would have occurred if the transaction had taken place on the dates presented and should not be taken as representative of our future consolidated results of operations. The unaudited pro forma financial information includes adjustments for interest expense to match the new capital structure, amortization expense for identified intangibles, and depreciation expense based on the fair value and estimated lives of acquired property, plant and equipment. In addition, acquisition related costs and $16.1 million of transaction costs incurred by the seller are excluded from the unaudited pro forma financial information. The pro forma information does not reflect any expected synergies or expense reductions that may result from the acquisition.
 

7



The following table shows our unaudited pro forma financial information for the six month periods ended May 1, 2016 and May 3, 2015 (in thousands, except per share amounts): 
 
Unaudited Pro Forma
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
Sales
$
742,261

 
$
727,560

Net income (loss) applicable to common shares
8,233

 
(8,634
)
Income (loss) per common share:
 

 
 

Basic
$
0.11

 
$
(0.12
)
Diluted
$
0.11

 
$
(0.12
)

The following table summarizes the fair values of the assets acquired and liabilities assumed as part of the CENTRIA Acquisition as of January 16, 2015 as determined in accordance with ASC Topic 805. The fair value of all assets acquired and liabilities assumed were finalized during the first quarter of fiscal 2016, including certain contingent assets and liabilities and the post-closing working capital adjustment, which did not result in any material adjustments during the first quarter of fiscal 2016. As we continue to integrate CENTRIA into our existing operations, we may identify integration charges that would be required to be recognized.
(In thousands)
 
January 16,
2015
Cash
 
$
8,718

Current assets, excluding cash
 
74,725

Property, plant and equipment
 
34,127

Intangible assets
 
128,280

Assets acquired
 
245,850

Current liabilities
 
61,869

Other long-term liabilities
 
8,893

Liabilities assumed  
 
70,762

Fair value of net assets acquired
 
175,088

Total cash consideration transferred
 
257,927

Goodwill
 
$
82,839

 
The amount allocated to intangible assets was attributed to the following categories (in thousands): 
 
 

 
Useful Lives
Backlog
$
8,400

 
9 months
Trade names
13,980

 
15 years
Customer lists and relationships
105,900

 
20 years
 
$
128,280

 
 
 
These intangible assets are amortized on a straight-line basis, which is presented in intangible asset amortization in our consolidated statements of operations. The backlog intangible asset was fully amortized during fiscal 2015. We also recorded a step-up in inventory fair value of approximately $2.4 million in fiscal 2015, which was recognized as an expense in fair value adjustment of acquired inventory in our consolidated statements of operations upon the sale of the related inventory.
 
The excess of the purchase price over the fair values of assets acquired and liabilities assumed was allocated to goodwill. The intention of this transaction was to strengthen our position as a fully integrated supplier to the nonresidential building products industry, by enhancing our existing portfolio of cold storage and commercial and industrial solutions, expanding our capabilities into high-end insulated metal panels and contributing specialty continuous metal coil coating capabilities. We believe the transaction will result in revenue synergies to our existing businesses, as well as improvements in supply chain efficiency, including alignment of purchase terms and pricing optimization. We include the results of CENTRIA in the metal components segment. Goodwill of $73.6 million and $9.1 million was recorded in our metal components segment and engineered building systems segment, respectively, based on expected synergies pertaining to these segments from the CENTRIA Acquisition. Additionally, because CENTRIA was treated as a partnership for tax purposes, the tax basis of the acquired assets and liabilities has been adjusted to their fair value and goodwill will be deductible for tax purposes.


8



NOTE 3 — ACCOUNTING PRONOUNCEMENTS
 
Adopted Accounting Pronouncements
 
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the requirement for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity will be required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results when the entity or group of components of an entity meets the criteria to be classified as held for sale or when it is disposed of by sale or other than by sale. The update also requires additional disclosures about discontinued operations, a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, and an entity’s significant continuing involvement with a discontinued operation. We adopted ASU 2014-08 prospectively in our first quarter in fiscal 2016. The adoption of ASU 2014-08 did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has also issued ASUs 2016-08 and 2016-10 to clarify guidance with respect to principal versus agent considerations, the identification of performance obligations, and licensing. These ASUs are effective for our fiscal year ending November 3, 2019, including interim periods within that fiscal year, and will be adopted using either a full or modified retrospective approach. We are currently assessing the potential effects of these changes to our consolidated financial statements.
 
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in FASB Accounting Standards Codification 718, CompensationStock Compensation, as it relates to such awards. ASU 2014-12 is effective for our first quarter in fiscal 2017, with early adoption permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
 
In January 2015, the FASB issued ASU 2015-01, Income StatementExtraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items. The guidance is effective for our fiscal year ending October 29, 2017. A reporting entity may apply the amendments prospectively. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
 
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as a separate asset. In circumstances where the costs are incurred before the debt liability is recorded, the costs will be reported on the balance sheet as an asset until the debt liability is recorded. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and is effective for our fiscal year ending October 29, 2017. In August 2015, FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting), to provide further clarification to ASU 2015-03 as it relates to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. Upon adoption of this guidance, we expect to reclassify approximately $8 million in deferred financing costs as a reduction of the carrying amount of the debt liability.
 
In April 2015, the FASB issued ASU 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the guidance specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. ASU 2015-05 further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. The guidance is effective for our fiscal year ending October 29, 2017. We are currently assessing the impact of this guidance on our consolidated financial statements.

9




In July 2015, the FASB issues ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory that has historically been measured using first-in, first-out (FIFO) or average cost method should now be measured at the lower of cost and net realizable value. The update requires prospective application and is effective for our fiscal year ending October 28, 2018. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires all deferred tax assets and liabilities to be presented on the balance sheet as noncurrent. ASU 2015-17 is effective for our fiscal year ending October 28, 2018. Upon adoption, we will present the net deferred tax assets as noncurrent and reclassify any current deferred tax assets and liabilities in our consolidated financial position on a retrospective basis.
 
In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to record most leases on the balance sheet and modifies the classification criteria and accounting for sales-type leases and direct financing leases for lessors. ASU 2016-02 is effective for our fiscal year ending November 1, 2020, including interim periods within that fiscal year. The guidance requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are evaluating the impact that the adoption of this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify certain aspects of the accounting for share-based payment award transactions, including income tax effects when awards vest or settle, repurchase of employees’ shares to satisfy statutory tax withholding obligations, an option to account for forfeitures as they occur, and classification of certain amounts on the statement of cash flows. ASU 2016-09 is effective for our fiscal year ending October 28, 2018, including interim periods within that fiscal year. We are evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
 
NOTE 4 —RESTRUCTURING AND ASSET IMPAIRMENTS
 
As part of the plans developed in the fourth quarter of fiscal 2015 to improve cost efficiency and optimize our combined manufacturing footprint, given the Company’s recent acquisitions and restructuring efforts, we incurred severance related costs of $1.1 million, including $0.1 million and $0.6 million in the engineered building systems segment and metal components segment, respectively, during the three months ended May 1, 2016. These charges include severance related costs associated with the consolidation and closing of two manufacturing facilities in our metal components segment. For the six months ended May 1, 2016, we incurred severance related costs of $2.7 million, including $0.6 million and $0.9 million in the engineered building systems segment and metal components segment, respectively.

The following table summarizes our restructuring plan costs and charges related to the restructuring plan during the three and six months ended May 1, 2016 (in thousands), which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations: 
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
 
 
 
 
 
 
May 1,
2016
 
May 1,
2016
 
Cost
Incurred
To Date (since inception)
 
Remaining
Anticipated
Cost
 
Total
Anticipated
Cost
General severance
$
1,053

 
$
1,933

 
$
5,820

 
*
 
*
Plant closing severance
96

 
96

 
1,671

 
*
 
*
Asset impairments

 

 
5,844

 
*
 
*
Other restructuring costs

 
630

 
630

 
*
 
*
Total restructuring costs
$
1,149

 
$
2,659

 
$
13,965

 
*
 
*
 
 
*
We expect to fully execute our plans in phases over the next 6 months to 30 months and estimate that we will incur future additional restructuring charges associated with these plans. We are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, associated with future phases of the plans.
 

10



The following table summarizes our severance liability and cash payments made pursuant to the restructuring plan from inception through May 1, 2016 (in thousands): 
 
General
Severance
 
Plant Closing
Severance
 
Total
Balance at November 2, 2014
$

 
$

 
$

Costs incurred
3,887

 
1,575

 
5,462

Cash payments
(2,941
)
 
(1,575
)
 
(4,516
)
Accrued severance(1)
739

 

 
739

Balance at November 1, 2015
$
1,685

 
$

 
$
1,685

Costs incurred(1)
1,485

 
96

 
1,581

Cash payments
(2,277
)
 
(23
)
 
(2,300
)
Balance at May 1, 2016
$
893

 
$
73

 
$
966

 
 
(1)
During the second and fourth quarters of fiscal 2015, we entered into transition and separation agreements with certain executive officers. Each terminated executive officer is entitled to severance benefit payments issuable in two installments. The termination benefits were measured initially at the separation date based on the fair value of the liability as of the termination date and are being recognized ratably over the future service period. Costs incurred during the six months ended May 1, 2016 exclude $0.5 million of amortization expense associated with these termination benefits. Remaining severance costs associated with the executive officers of $0.2 million and $0.1 million will be incurred in the metal components segment and engineered building systems segment, respectively.

NOTE 5 — RESTRICTED CASH
 
We have entered into a cash collateral agreement with PNC Bank to backstop existing CENTRIA letters of credit until they expire. The restricted cash is held in a bank account with PNC Bank as the secured party. As of May 1, 2016, we had restricted cash in the amount of approximately $0.7 million as collateral related to our letters of credit for international projects with CENTRIA, exclusive of letters of credit under our Amended ABL Facility. See Note 12 — Long-Term Debt and Note Payable for more information on the material terms of our Amended ABL Facility. Restricted cash as of May 1, 2016 is classified as current as the underlying letters of credit expire within one year of the respective balance sheet date. Any renewal or replacement of the CENTRIA letters of credit is expected to occur under our Amended ABL Facility.
 
NOTE 6 — INVENTORIES
 
The components of inventory are as follows (in thousands): 
 
May 1,
2016
 
November 1,
2015
Raw materials
$
104,648

 
$
109,455

Work in process and finished goods
46,829

 
48,373

Inventories, net
$
151,477

 
$
157,828

 
NOTE 7 — ASSETS HELD FOR SALE
 
We record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
 
In determining the fair value of the assets less cost to sell, we considered factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. The carrying value of assets held for sale (representing idled facilities) was $3.4 million and $6.3 million as of May 1, 2016 and

11



November 1, 2015, respectively, and these amounts are included in the engineered building systems segment. All of these assets continued to be actively marketed for sale at May 1, 2016.

During the six months ended May 1, 2016, we completed the sale of idled facilities in Lockeford, California and Caryville, Tennessee, along with related equipment, which previously had been classified in assets held for sale. In connection with the sale of these assets, during the three and six months ended May 1, 2016, we received net cash proceeds of $1.6 million and $4.7 million, respectively, and recognized net gains of $0.9 million and $1.7 million, respectively, which are included in gain on sale of assets and asset recovery in the unaudited consolidated statements of operations.
 
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analysis. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate. 

NOTE 8 — SHARE-BASED COMPENSATION
 
Restricted Stock and Performance Awards

Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share units (“PSUs”), phantom stock awards, long-term incentive awards with performance conditions (“Performance Share Awards”) and cash awards. As of May 1, 2016, and for all periods presented, our share-based awards under this plan have consisted of restricted stock grants, PSUs and stock option grants, none of which can be settled through cash payments, and Performance Share Awards. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest in annual increments over one to four years or earlier upon death, disability or a change of control. However, our annual restricted stock awards issued prior to December 15, 2013 also vest upon attainment of age 65 and, only in the case of certain special one-time restricted stock awards, a portion vest on termination without cause or for good reason, as defined by the agreements governing such awards. Restricted stock awards issued after December 15, 2013 do not vest upon attainment of age 65, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.
 
In December 2015, we granted long-term incentive awards, with a three-year performance period, to our senior executives (“2015 Executive Awards”). 40% of the value of the long-term incentive awards consists of time-based restricted stock units and 60% of the value of the award consists of PSUs. The restricted stock units are time-vesting based on continued employment, with one-third of the restricted stock units vesting on each of the first, second and third anniversaries of the grant date. The PSUs vest based on the achievement of performance goals and continued employment at the end of the three-year performance period. The PSU performance goals are based on three metrics: (1) cumulative free cash flow (weighted 40%); (2) cumulative earnings per share (weighted 40%); and (3) total shareholder return (weighted 20%), in each case during the performance period. The number of shares that may be received upon the vesting of the PSUs will depend upon the satisfaction of the performance goals, up to a maximum of 200% of the target number of the PSUs. The PSUs vest pro rata if an executive’s employment terminates prior to the end of the performance period due to death, disability, or termination by NCI without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, will be forfeited and cancelled. If a change in control of NCI occurs prior to the end of the performance period, the PSU payout will be calculated and paid assuming that the maximum benefit had been achieved. If an executive’s employment terminates due to death or disability while any of the restricted stock units are unvested, then all of the executive’s unvested restricted stock units will become vested. If an executive’s employment is terminated for any other reason, the executive’s unvested restricted stock units will be forfeited. If a change in control of NCI occurs prior to the end of the performance period, the restricted stock units fully vest.
 
The fair value of the 2015 Executive Awards is based on the Company’s stock price as of the grant date. A portion of the compensation cost of the 2015 Executive Awards is based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. During the six months ended May 1, 2016 and May 3, 2015, we granted PSUs with a fair value of approximately $5.2 million and $3.7 million, respectively.

The fair value of restricted stock units classified as equity awards is based on the Company’s stock price as of the date of grant. During the six months ended May 1, 2016 and May 3, 2015, we granted time-based restricted stock units with a fair value of $3.9 million, representing 304,064 shares, and $6.5 million, representing 376,955 shares, respectively.
 

12



Also, in December 2015, we granted Performance Cash and Share Awards to certain key employees that will be paid 50% in cash and 50% in stock (“2015 Key Employee Awards”). The amount of cash and number of shares that may be received upon the vesting of these awards will be based on the achievement of free cash flow and earnings per share targets over a three-year performance period. The 2015 Key Employee Awards vest three years from the grant date and will be earned based on the performance against the pre-established targets for the requisite service period. A key employee’s awards also vest in full upon death, disability or a change of control, and a pro-rated portion of the key employee’s awards may vest on termination without cause or after reaching normal retirement age prior to the vesting date, as defined by the agreements governing such awards. The fair value of the 2015 Key Employee Awards is based on the Company’s stock price as of the grant date. Compensation cost is recorded based on the probable outcome of the performance conditions associated with the shares, as determined by management. During the six months ended May 1, 2016 and May 3, 2015, we granted awards to key employees with an equity fair value of $2.4 million and $1.5 million and a cash value of $2.1 million and $1.7 million, respectively.

During the six month periods ended May 1, 2016 and May 3, 2015, we also granted 28,535 and 10,543 stock options, respectively. The grant date fair value of options granted during the six month periods ended May 1, 2016 and May 3, 2015 was $5.38 and $7.91, respectively. The Company received cash proceeds of $1.4 million from exercises of 155,334 stock options during the three month period ended May 1, 2016.

During the six month periods ended May 1, 2016 and May 3, 2015, we recorded share-based compensation expense for all awards of $5.1 million and $5.1 million, respectively.
 
Deferred Compensation

On February 26, 2016, the Company amended its Deferred Compensation Plan (“Plan”), with an effective date of January 31, 2016, to require that amounts deferred into the Company Stock Fund remain invested in the Company Stock Fund until distribution. In accordance with the terms of the Plan, the deferred compensation obligation related to the Company’s stock may only be settled by the delivery of a fixed number of the Company’s common shares held on the participant’s behalf. As a result, we recorded a deferred compensation obligation of $1.4 million related to the Company Stock Fund within equity in additional paid-in capital on the consolidated balance sheet as of May 1, 2016. Additionally, the Company currently holds 144,857 shares in treasury shares, relating to deferred, vested 2012 PSU awards, until participants are eligible to receive benefits under the terms of the plan.

NOTE 9 — EARNINGS (LOSS) PER COMMON SHARE
 
Basic earnings (loss) per common share is computed by dividing net income (loss) allocated to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings (loss) per common share is as follows (in thousands, except per share data): 
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
 
May 1,
2016
 
May 3,
2015
Numerator for Basic and Diluted Income (Loss) Per Common Share
 

 
 

 
 

 
 

Net income (loss)
$
2,420

 
$
(7,488
)
 
$
8,312

 
$
(7,808
)
Less: Net income applicable to participating securities
(23
)
 

 
(79
)
 

Net income (loss) applicable to common shares
$
2,397

 
$
(7,488
)
 
$
8,233

 
$
(7,808
)
Denominator for Basic and Diluted Income (Loss) Per Common Share
 

 
 

 
 

 
 

Weighted average basic number of common shares outstanding
72,352

 
73,133

 
72,806

 
73,102

Common stock equivalents:
 
 
 
 
 
 
 
Employee stock options
534

 

 
515

 

Restricted stock units

 

 

 

Weighted average diluted number of common shares outstanding
72,886

 
73,133

 
73,321

 
73,102

Basic income (loss) per common share
$
0.03

 
$
(0.10
)
 
$
0.11

 
$
(0.11
)
Diluted income (loss) per common share
$
0.03

 
$
(0.10
)
 
$
0.11

 
$
(0.11
)
 

13



We calculate earnings (loss) per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, are treated as a separate class in computing earnings (loss) per share. For the three and six month periods ended May 1, 2016, undistributed earnings attributable to participating securities were approximately $0.1 million and $0.1 million, respectively. There were no amounts attributable to participating securities for the three and six month periods ended May 3, 2015, as the participating securities do not contractually share in net losses.
 
For the three and six month periods ended May 1, 2016, all PSUs and Performance Share Awards that are contingent upon the achievement of performance targets as described in Note 8 were excluded from the diluted income per common share calculation as the performance targets were not met as of May 1, 2016. Additionally, the number of weighted average options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive represented approximately 0.1 million shares. The number of weighted average Performance Share Awards subject to continuing employment representing approximately 0.1 million shares were also determined to be anti-dilutive, and were not included in the diluted income per common share calculation. For the three and six month periods ended May 3, 2015, all outstanding options, PSUs and Performance Share Awards were anti-dilutive and, therefore, not included in the diluted loss per common share calculation.
 
NOTE 10 — WARRANTY
 
We sell weathertightness warranties to our customers for protection from leaks in our roofing systems related to weather. These warranties range from 2 years to 20 years. We sell two types of warranties, standard and Single Source™, and three grades of coverage for each. The type and grade of coverage determines the price to the customer. For standard warranties, our responsibility for leaks in a roofing system begins after 24 consecutive leak-free months. For Single Source™ warranties, the roofing system must pass our inspection before warranty coverage will be issued. Inspections are typically performed at three stages of the roofing project: (i) at the project start-up; (ii) at the project mid-point; and (iii) at the project completion. These inspections are included in the cost of the warranty. If the project requires or the customer requests additional inspections, those inspections are billed to the customer. Upon the sale of a warranty, we record the resulting revenue as deferred revenue, which is included in other accrued expenses on our consolidated balance sheets.

The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for each of the fiscal six months ended (in thousands):
 
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
Beginning balance
$
25,669

 
$
23,685

Warranties sold
1,217

 
1,158

Revenue recognized
(1,421
)
 
(1,432
)
Other(1)

 
2,357

Ending balance
$
25,465

 
$
25,768


(1)
Represents the fair value of accrued warranty obligations in the amount of $2.4 million assumed in the CENTRIA Acquisition. CENTRIA offers weathertightness warranties to certain customers. Weathertightness warranties are offered in various configurations for time periods from 5 to 20 years, prorated or non-prorated and on both a dollar limit or no dollar limit basis, as required by the buyer. These warranties are available only if certain conditions, some of which relate to installation, are met. The preliminary fair value of the accrued warranty obligations of $2.4 million reported in our quarterly report on Form 10-Q for the period ended May 3, 2015 was subsequently adjusted by $0.8 million to $1.6 million during the measurement period for purchase accounting.

NOTE 11 — DEFINED BENEFIT PLANS
 
RCC Pension Plan — With the acquisition of Robertson-Ceco II Corporation (“RCC”) on April 7, 2006, we assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds, fixed income securities and master limited partnerships.
 

14



CENTRIA Benefit Plans — As a result of the CENTRIA Acquisition on January 16, 2015, we assumed noncontributory defined benefit plans covering certain hourly employees (the “CENTRIA Benefit Plans”) and are closed to new participants. Benefits under the CENTRIA Benefit Plans are calculated based on fixed amounts for each year of service rendered, although benefits accruals for one of the plans previously ceased. Plan assets of the CENTRIA Benefit Plans are invested in broadly diversified portfolios of equity mutual funds, international equity mutual funds, bonds, mortgages and other funds. CENTRIA also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”).

The following table sets forth the components of the net periodic benefit cost, before tax, and funding contributions, for the periods indicated (in thousands):

 
Fiscal Three Months Ended 
 May 1, 2016
 
Fiscal Three Months Ended 
 May 3, 2015
 
RCC
Pension
Plan
 
CENTRIA
Benefit
Plans
 
OPEB
Plans
 
Total
 
RCC
Pension
Plan
 
CENTRIA
Benefit
Plans
 
OPEB
Plans
 
Total
Service cost
$

 
$
34

 
$
8

 
$
42

 
$

 
$
42

 
$
8

 
$
50

Interest cost
450

 
139

 
65

 
654

 
483

 
165

 
80

 
728

Expected return on assets
(475
)
 
(270
)
 

 
(745
)
 
(551
)
 
(311
)
 

 
(862
)
Prior service cost amortization
(2
)
 

 

 
(2
)
 
(2
)
 

 

 
(2
)
Unrecognized net loss
292

 

 

 
292

 
361

 

 

 
361

Net periodic pension cost
$
265

 
$
(97
)
 
$
73

 
$
241

 
$
291

 
$
(104
)
 
$
88

 
$
275

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funding contributions
$
234

 
$
160

 
$

 
$
394

 
$
260

 
$
160

 
$

 
$
420


 
Fiscal Six Months Ended 
 May 1, 2016
 
Fiscal Six Months Ended 
 May 3, 2015
 
RCC
Pension
Plan
 
CENTRIA
Benefit
Plans
 
OPEB
Plans
 
Total
 
RCC
Pension
Plan
 
CENTRIA
Benefit
Plans
 
OPEB
Plans
 
Total
Service cost
$

 
$
68

 
$
17

 
$
85

 
$

 
$
42

 
$
8

 
$
50

Interest cost
900

 
278

 
131

 
1,309

 
966

 
165

 
80

 
1,211

Expected return on assets
(950
)
 
(539
)
 

 
(1,489
)
 
(1,102
)
 
(311
)
 

 
(1,413
)
Prior service cost amortization
(5
)
 

 

 
(5
)
 
(5
)
 

 

 
(5
)
Unrecognized net loss
585

 

 

 
585

 
721

 

 

 
721

Net periodic pension cost
$
530

 
$
(193
)
 
$
148

 
$
485

 
$
580

 
$
(104
)
 
$
88

 
$
564

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funding contributions
$
445

 
$
320

 
$

 
$
765

 
$
495

 
$
160

 
$

 
$
655


We expect to contribute an additional $0.6 million and $0.3 million to the RCC Pension Plan and the CENTRIA Benefit Plans, respectively, for the remainder of fiscal 2016. Currently, our policy is to fund the CENTRIA Benefit Plans and OPEB Plans as required by minimum funding standards of the Internal Revenue Code. The contributions to the OPEB Plans by retirees vary from none to 25% of the total premium cost.
 
In addition to the CENTRIA Benefit Plans, CENTRIA contributes to a multi-employer plan, Steelworkers Pension Trust. The minimum required annual contribution to this plan is $0.3 million and the current contract expires on June 1, 2016, and is expected to be renewed. If we were to withdraw our participation from this multi-employer plan, we would have a complete withdrawal liability of approximately $0.7 million.
 
NOTE 12 — LONG-TERM DEBT AND NOTE PAYABLE
 
Debt is comprised of the following (in thousands): 

15



 
May 1,
2016
 
November 1,
2015
Credit Agreement, due June 2019 (variable interest, at 4.25% on May 1, 2016 and November 1, 2015)
$
174,147

 
$
194,147

8.25% senior notes, due January 2023
250,000

 
250,000

Amended Asset-Based lending facility, due June 2019 (interest at 4.25% on May 1, 2016 and 4.00% on November 1, 2015)

 

Current portion of long-term debt

 

Total long-term debt, net
$
424,147

 
$
444,147


8.25% Senior Notes Due January 2023

The Company’s $250.0 million in aggregate principal amount of 8.25% senior notes due 2023 (the “Notes”) bear interest at 8.25% per annum and will mature on January 15, 2023. Interest is payable semi-annually in arrears on January 15 and July 15 of each year.

The Company may redeem the Notes at any time prior to January 15, 2018, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium. On or after January 15, 2018, the Company may redeem all or a part of the Notes at redemption prices (expressed as percentages of principal amount thereof) set forth below, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes, if redeemed during the 12-month period beginning on January 15 of the year as follows:

Year
 
Percentage
2018
 
106.188%
2019
 
104.125%
2020
 
102.063%
2021 and thereafter
 
100.000%

In addition, prior to January 15, 2018, the Company may redeem the Notes in an aggregate principal amount of up to 40.0% of the original aggregate principal amount of the Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of one or more equity offerings, at a redemption price of 108.250%, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes.

Credit Agreement

The Company’s Credit Agreement provided for a term loan credit facility (“Term Loan”) in an original aggregate principal amount of $250.0 million. The Credit Agreement will mature on June 24, 2019. The Term Loan amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum. The Term Loan will bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR not less than 1.00% plus a borrowing margin of 3.25% per annum or (ii) an alternate base rate plus a borrowing margin of 2.25% per annum. At both May 1, 2016 and November 1, 2015, the interest rate on the Term Loan was 4.25%.

During the three and six month periods ended May 1, 2016, the Company made voluntary prepayments of $10.0 million and $20.0 million, respectively, on the outstanding principal amount of the Term Loan.

Amended ABL Facility

The Company’s Asset-Based Lending Facility (“Amended ABL Facility”) provides for revolving loans of up to $150.0 million (subject to a borrowing base) and letters of credit of up to $30.0 million. Borrowing availability under the Amended ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of qualified cash, eligible inventory and eligible accounts receivable, less certain reserves and subject to certain other adjustments. At May 1, 2016 and November 1, 2015, the Company’s excess availability under the Amended ABL Facility was $111.0 million and $131.0 million, respectively. At both May 1, 2016 and November 1, 2015, the Company had no revolving loans outstanding under the Amended ABL Facility. In addition, at May 1, 2016 and November 1, 2015, standby letters of credit related to certain insurance

16



policies totaling approximately $9.2 million and $8.7 million, respectively, were outstanding but undrawn under the Amended ABL Facility. The Amended ABL Facility will mature on June 24, 2019.

The Amended ABL Facility includes a minimum fixed charge coverage ratio of one to one, which will apply if we fail to maintain a specified minimum borrowing capacity. The minimum level of borrowing capacity as of May 1, 2016 and November 1, 2015 was $16.6 million and $19.7 million, respectively. Although the Amended ABL Facility did not require any financial covenant compliance, at May 1, 2016 and November 1, 2015, NCI’s fixed charge coverage ratio as of those dates, which is calculated on a trailing twelve month basis, was 3.59:1.00 and 3.54:1.00, respectively. These ratios include the pro forma impact of the CENTRIA Acquisition.

Loans under the Amended ABL Facility bear interest, at NCI’s option, as follows:

(1)
Base Rate loans at the Base Rate plus a margin. The margin ranges from 0.75% to 1.25% depending on the quarterly average excess availability under such facility, and

(2)
LIBOR loans at LIBOR plus a margin. The margin ranges from 1.75% to 2.25% depending on the quarterly average excess availability under such facility.

An unused commitment fee is paid monthly on the Amended ABL Facility at an annual rate of 0.50% based on the amount by which the maximum credit exceeds the average daily principal balance of outstanding loans and letter of credit obligations. Additional customary fees in connection with the Amended ABL Facility also apply.

For additional information on the Notes, Credit Agreement and the Amended ABL Facility, including guarantees and security, see our Annual Report on Form 10-K for the fiscal year ended November 1, 2015.

Debt Covenants

The Company’s outstanding debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to dispose of assets, make acquisitions and engage in mergers. As of May 1, 2016, the Company was in compliance with all covenants that were in effect on such date. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended November 1, 2015.

Deferred Financing Costs
 
At May 1, 2016 and November 1, 2015, the unamortized balance in deferred financing costs related to the Notes, Credit Agreement and Amended ABL Facility was $10.1 million and $11.1 million, respectively.
 
Insurance Note Payable
 
As of May 1, 2016 and November 1, 2015, the Company had an outstanding note payable in the amount of $1.4 million and $0.5 million, respectively, related to financed insurance premiums. Insurance premium financings are generally secured by the unearned premiums under such policies.
 
NOTE 13 — STOCK REPURCHASE PROGRAM

In January 2016, our Board of Directors authorized a stock repurchase program for up to an aggregate of $50.0 million of the Company’s outstanding common stock, which we expect to fund through existing cash and cash flow generated from operations. Subject to applicable federal securities law, such purchases may occur at times and in amounts that we deem appropriate. During the three and six months ended May 1, 2016, we repurchased 0.7 million shares for $7.4 million and 1.1 million shares for $11.3 million, respectively, under this program.

As of May 1, 2016, approximately $38.7 million remains available for stock repurchases under the plan authorized in January 2016, and approximately 0.1 million shares remain authorized for repurchase under a previous program. The authorized programs have no time limit on their duration, but our Credit Agreement, Amended ABL Facility, and Notes apply certain limitations on our repurchase of shares of our common stock. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time. In addition to the common stock repurchased during the three and six months ended May 1, 2016 under our stock repurchase programs, we also withheld shares of restricted stock to satisfy minimum tax

17



withholding obligations arising in connection with the vesting of restricted stock units, which are included in treasury stock purchases on the consolidated statements of stockholders’ equity.

NOTE 14 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
 
Fair Value of Financial Instruments
 
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of May 1, 2016 and November 1, 2015 because of the relatively short maturity of these instruments. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective fiscal period ends were (in thousands): 
 
May 1, 2016
 
November 1, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Credit Agreement, due June 2019
$
174,147

 
$
172,406

 
$
194,147

 
$
193,662

8.25% senior notes, due January 2023
250,000

 
267,500

 
250,000

 
263,750

 
The fair values of the Credit Agreement and the Notes were based on recent trading activities of comparable market instruments which are level 2 inputs.
 
Fair Value Measurements
 
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
 
Level 1:   Observable inputs such as quoted prices for identical assets or liabilities in active markets.
 
Level 2:   Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
 
Level 3:   Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
 
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at May 1, 2016 and November 1, 2015
 
Money market:   Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
 
Mutual funds:   Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
 
Assets held for sale:   Assets held for sale are valued based on current market conditions, prices of similar assets in similar condition and expected proceeds from the sale of the assets.
 
Deferred compensation plan liability:   Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active market in which the money market or mutual fund is traded.
 
The following table summarizes information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of May 1, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): 

18



 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Short-term investments in deferred compensation plan(1):
 

 
 

 
 

 
 

Money market
$
566

 
$

 
$

 
$
566

Mutual funds – Growth
722

 

 

 
722

Mutual funds – Blend
2,996

 

 

 
2,996

Mutual funds – Foreign blend
698

 

 

 
698

Mutual funds – Fixed income

 
692

 

 
692

Total short-term investments in deferred compensation plan
4,982

 
692

 

 
5,674

Total assets
$
4,982

 
$
692

 
$

 
$
5,674

Liabilities:
 

 
 

 
 

 
 

Deferred compensation plan liability
$

 
$
3,594

 
$

 
$
3,594

Total liabilities
$

 
$
3,594

 
$

 
$
3,594

 
(1)
Unrealized holding gains for the three months ended May 1, 2016 and May 3, 2015 were $0.3 million and $0.3 million, respectively. Unrealized holding gains (losses) for the six months ended May 1, 2016 and May 3, 2015 were $(0.1) million and $0.1 million, respectively. These unrealized holding gains (losses) are primarily offset by changes in the deferred compensation plan liability.

The following table summarizes information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of November 1, 2015, segregated by level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Short-term investments in deferred compensation plan(1):
 

 
 

 
 

 
 

Money market
$
744

 
$

 
$

 
$
744

Mutual funds – Growth
764

 

 

 
764

Mutual funds – Blend
2,984

 

 

 
2,984

Mutual funds – Foreign blend
724

 

 

 
724

Mutual funds – Fixed income

 
673

 

 
673

Total short-term investments in deferred compensation
plan
$
5,216

 
$
673

 
$

 
$
5,889

Total assets
$
5,216

 
$
673

 
$

 
$
5,889

Liabilities:
 

 
 

 
 

 
 

Deferred compensation plan liability
$

 
$
5,164

 
$

 
$
5,164

Total liabilities
$

 
$
5,164

 
$

 
$
5,164

 
 
(1)
Unrealized holding gain for the fiscal year ended November 1, 2015 was insignificant. This unrealized holding gain was primarily offset by changes in the deferred compensation plan liability.

The following table summarizes information regarding our financial assets that are measured at fair value on a nonrecurring basis as of May 1, 2016 and November 1, 2015 (in thousands): 
 
Level 3
 
May 1,
2016
 
November 1, 2015
Assets:
 
 
 
Assets held for sale(1)  
$

 
$
2,280

Total assets
$

 
$
2,280

 
(1)
Certain assets held for sale were valued at fair value and were measured at fair value on a nonrecurring basis. Assets held for sale are reported at fair value, if, on an individual basis, the fair value of the asset is less than cost. The fair value of assets held for sale is estimated using level 3 inputs, such as broker quotes for like-kind assets or other market indications

19



of a potential selling value which approximates fair value. The assets that were previously reported at fair value as of November 1, 2015 were sold in January 2016. See Note 7 for additional information.

NOTE 15 — OPERATING SEGMENTS
 
Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: engineered building systems; metal components; and metal coil coating. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Products of our operating segments use similar basic raw materials. The engineered building systems segment includes the manufacturing of main frames, Long Bay® Systems and value-added engineering and drafting, which are typically not part of metal components or metal coil coating products or services. The metal components segment products include metal roof and wall panels, doors, metal partitions, metal trim, insulated panels and other related accessories. CENTRIA is included in the metal components segment. The metal coil coating segment consists of cleaning, treating, painting and slitting continuous steel coils before the steel is fabricated for use by construction and industrial users. The operating segments follow the same accounting policies used for our consolidated financial statements.
 
We evaluate a segment’s performance based primarily upon operating income before corporate expenses. Intersegment sales are recorded based on standard material costs plus a standard markup to cover labor and overhead and consist of (i) structural framing provided by the engineered building systems segment to the metal components segment; (ii) building components provided by the metal components segment to the engineered building systems segment; and (iii) hot-rolled, light gauge painted and slit material and other services provided by the metal coil coating segment to both the metal components and engineered building systems segments.
 
Corporate assets consist primarily of cash but also include deferred financing costs, deferred taxes and property, plant and equipment associated with our headquarters in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology, purchasing, marketing and corporate travel expenses. Additional unallocated expenses include interest income, interest expense, strategic development and acquisition related costs and other (expense) income.


20



The following table represents sales, operating income and total assets attributable to these operating segments for the periods indicated (in thousands):
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
 
May 1,
2016
 
May 3,
2015
Total sales:
 

 
 

 
 

 
 

Engineered building systems
$
138,023

 
$
143,245

 
$
286,998

 
$
293,045

Metal components
234,637

 
221,118

 
464,303

 
393,907

Metal coil coating
55,178

 
49,998

 
106,383

 
105,608

Intersegment sales
(55,591
)
 
(54,214
)
 
(115,423
)
 
(109,487
)
Total sales
$
372,247

 
$
360,147

 
$
742,261

 
$
683,073

External sales:
 

 
 

 
 

 
 

Engineered building systems
$
134,454

 
$
138,662

 
$
280,405

 
$
283,156

Metal components
211,661

 
198,681

 
414,562

 
352,709

Metal coil coating
26,132

 
22,804

 
47,294

 
47,208

Total sales
$
372,247

 
$
360,147

 
$
742,261

 
$
683,073

Operating income (loss):
 

 
 

 
 

 
 

Engineered building systems
$
7,193

 
$
2,855

 
$
19,655

 
$
11,574

Metal components
17,835

 
6,941

 
33,938

 
15,277

Metal coil coating
4,704

 
2,397

 
9,525

 
6,375

Corporate
(19,138
)
 
(15,810
)
 
(37,265
)
 
(32,272
)
Total operating income (loss)
$
10,594

 
$
(3,617
)
 
$
25,853

 
$
954

Unallocated other expense, net
(6,965
)
 
(7,958
)
 
(13,879
)
 
(13,339
)
Income (loss) before income taxes
$
3,629

 
$
(11,575
)
 
$
11,974

 
$
(12,385
)
 
 
May 1,
2016
 
November 1, 2015
Total assets:
 

 
 

Engineered building systems
$
201,416

 
$
218,646

Metal components
638,158

 
654,762

Metal coil coating
74,489

 
81,456

Corporate
102,679

 
124,865

Total assets
$
1,016,742

 
$
1,079,729

 
NOTE 16 — CONTINGENCIES
 
As a manufacturer of products primarily for use in nonresidential building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims, or potential claims. The Company insures against these risks to the extent deemed prudent by its management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts the Company deems prudent and for which the Company is responsible for payment. In determining the amount of self-insurance, it is the Company’s policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability and general liability. The Company regularly reviews the status of on-going proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance.
 


 

21



NCI BUILDING SYSTEMS, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following information should be read in conjunction with the unaudited consolidated financial statements included herein under “Item 1. Unaudited Consolidated Financial Statements” and the audited consolidated financial statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended November 1, 2015.
 
FORWARD LOOKING STATEMENTS
 
This Quarterly Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking information, including any earnings guidance, if applicable. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties, and other factors that could cause the actual results to differ materially from those projected. These risks, uncertainties, and other factors include, but are not limited to:
 
industry cyclicality and seasonality and adverse weather conditions;
challenging economic conditions affecting the nonresidential construction industry;
volatility in the U.S. economy and abroad, generally, and in the credit markets;
substantial indebtedness and our ability to incur substantially more indebtedness;
our ability to generate significant cash flow required to service or refinance our existing debt, including the 8.25% senior notes due 2023, and obtain future financing;
our ability to comply with the financial tests and covenants in our existing and future debt obligations;
operational limitations or restrictions in connection with our debt;
increases in interest rates;
recognition of asset impairment charges;
commodity price increases and/or limited availability of raw materials, including steel;
our ability to make strategic acquisitions accretive to earnings;
retention and replacement of key personnel;
enforcement and obsolescence of intellectual property rights;
fluctuations in customer demand;
costs related to environmental clean-ups and liabilities;
competitive activity and pricing pressure;
increases in energy prices;
volatility of the Company’s stock price;
dilutive effect on the Company’s common stockholders of potential future sales of the Company’s Common Stock held by our sponsor;
substantial governance and other rights held by our sponsor;
breaches of our information system security measures and damage to our major information management systems;
hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance;
changes in laws or regulations, including the Dodd–Frank Act;
our ability to integrate the acquisition of CENTRIA with our business and to realize the anticipated benefits of such acquisition;
costs and other effects of legal and administrative proceedings, settlements, investigations, claims and other matters;
timing and amount of our stock repurchases; and
other risks detailed under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K as filed with the SEC.
 

22



A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption “Risk Factors” in our most recent Annual Report on Form 10-K as filed with the SEC and other risks described in documents subsequently filed by the Company from time to time with the SEC. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations unless the securities laws require us to do so.
 
OVERVIEW
 
NCI Building Systems, Inc. (together with its subsidiaries, unless the context requires otherwise, the “Company,” “NCI,” “we,” “us” or “our”) is one of North America’s largest integrated manufacturers and marketers of metal products for the nonresidential construction industry. We design, engineer, manufacture and market engineered building systems and metal components primarily for nonresidential construction use. We manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We sell our products for both new construction and repair and retrofit applications. We also provide metal coil coating services for commercial and construction applications, servicing both internal and external customers.
 
Engineered building systems offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Similarly, metal components offer builders, designers, architects and end-users several advantages, including lower long-term costs, longer life, attractive aesthetics and design flexibility.
 
We use a 52/53 week year with our fiscal year end on the Sunday closest to October 31. In fiscal 2016, our year end will be October 30, 2016 which is the Sunday closest to October 31.
 
We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit and operating income, as well as whether each segment has achieved its projected sales goals. In assessing our overall financial performance, we regard return on adjusted operating assets, as well as growth in earnings, as key indicators of shareholder value.
 
Second Fiscal Quarter 
 
Our second quarter results showed meaningful year-over-year improvement in gross margin and Adjusted EBITDA. We continue to focus on growing and integrating insulated panel products into our building and components businesses. We are realizing the benefits of focused and integrated execution across our commercial, manufacturing, and supply chain activities, and our investments to improve our manufacturing productivity and overall cost efficiency. We are also maintaining commercial pricing discipline in an environment of volatile steel prices.

Consolidated revenues increased by approximately 3.4% from the same period in the prior year. The year-over-year improvement was primarily driven by tonnage volume growth, most notably in the metal components and metal coil coating segments. Revenue growth was lower than the underlying increase in volumes due to the pass-through of lower steel costs.

All operating segments achieved underlying gross margin growth through commercial discipline and manufacturing efficiencies. Gross margin in the second quarter increased by 290 basis points to 24.0% of sales from the same period last year. This is the 8th consecutive quarter of meaningful year over year improvement in gross margins. Engineering, selling, general and administrative expenses as a percentage of revenues decreased by 20 basis points to 20.1% compared to the same period last year, as we continue to execute on our strategic initiatives. 

For market context, reported low-rise nonresidential new construction starts, measured in square feet and comprising buildings of up to five stories, as reported by Dodge Data & Analytics, were down as much as 9% in the first half of our fiscal 2016 as compared to the same period in the prior year. While it is common for the reported new construction starts to be subsequently adjusted upwards, we believe the underlying growth we are achieving is outpacing market activity.

Overall, we delivered adjusted EBITDA and adjusted diluted earnings per share in the 2016 second quarter that meaningfully exceed the prior year’s results. Our objective is to continue to execute on our strategic initiatives in order to increase market penetration and deliver top-line growth above nonresidential market growth during fiscal 2016.


23



Industry Conditions
 
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales are normally lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
 
The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. The current five-year recovery of low-rise construction has been choppy and slow. The annual volume of new construction starts is only just now poised to reach previous cyclical trough levels of activity from the last 50 years. Nevertheless, we believe the economy is recovering and will return to mid-cycle levels of activity over the next several years. In addition, the tightening of credit in financial markets from 2008-2010 adversely affected the ability of our customers to obtain financing for construction projects. The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1968, as compiled and reported by Dodge Data & Analytics: 
Source: Dodge

Current market data continues to show uneven activity across the nonresidential construction markets. According to Dodge Data & Analytics, low-rise nonresidential new construction starts, as measured in square feet and comprising buildings of up to five stories, were down as much as 9% for the first half of our fiscal 2016 as compared to the first half of fiscal 2015. However, leading indicators for low-rise, nonresidential construction activity continue to indicate positive momentum for fiscal year 2016.

The leading indicators that typically have the most meaningful correlation to nonresidential low-rise construction starts are the American Institute of Architects’ (“AIA”) Architecture Mixed Use Index, Dodge Residential single family starts and the Conference Board Leading Economic Index (“LEI”). Historically, there has been a very high correlation to the Dodge low-rise nonresidential starts when the three leading indicators are combined and then seasonally adjusted. The combined forward projection of these metrics, based on a 9 to 14 month historical lag for each metric, indicates modest growth of 4%-6% for low-rise new construction starts in fiscal 2016, with the majority of that growth occurring in the second half of our fiscal year.
 
We normally do not maintain an inventory of steel in excess of our current production requirements. However, from time to time, we may purchase steel in advance of announced steel price increases. We can give no assurance that steel will be readily available or that prices will not continue to be volatile. While most of our sales contracts have escalation clauses that allow us, under certain circumstances, to pass along all or a portion of increases in the price of steel after the date of the contract but prior

24



to delivery. However, for competitive or other reasons, we may not be able to pass such price increases along. If the available supply of steel declines, we could experience price increases that we are not able to pass on to the end users, a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our results of operations and financial condition. For additional discussion, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk — Steel Prices.”

Restructuring

We have developed plans to improve cost efficiency and optimize our combined manufacturing plant footprint, given the Company’s recent acquisitions and restructuring efforts. During the second quarter of fiscal 2016, we completed the consolidation and closing of two manufacturing facilities in our metal components segment. During the three month period ended May 1, 2016, we incurred severance related charges of $1.1 million associated with restructuring actions, including $0.1 million and $0.6 million associated with our engineered building systems and metal components segments, respectively.

The Company believes that the successful execution of the plans in phases over the next 6 to 30 months will result in annual cost savings ranging between $15.0 million and $20.0 million when completed. We are currently unable to make a good faith determination of cost estimates, or range of cost estimates, for additional actions associated with the plans. Restructuring charges will be recorded for the plans as they become estimable and probable. See Note 4 in the notes to the unaudited consolidated financial statements for additional information.

RESULTS OF OPERATIONS
 
Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) engineered building systems; (ii) metal components; and (iii) metal coil coating. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Our operating segments are vertically integrated and benefit from similar basic raw materials. The engineered building systems segment includes the manufacturing of main frames, Long-Bay® Systems and value-added engineering and drafting, which are typically not part of metal components or metal coil coating products or services. The metal components segment products include metal roof and wall panels, doors, metal partitions, metal trim, insulated panels and other related accessories. CENTRIA is included in the metal components segment. The metal coil coating segment consists of cleaning, treating, painting and slitting continuous steel coils before the steel is fabricated for use by construction and industrial users. The manufacturing and distribution activities of our segments are effectively coupled through the use of our nationwide hub-and-spoke manufacturing and distribution system, which supports and enhances our vertical integration. The operating segments follow the same accounting policies used for our consolidated financial statements.

We evaluate a segment’s performance based primarily upon operating income before corporate expenses. Intersegment sales are recorded based on standard material costs plus a standard markup to cover labor and overhead and consist of: (i) structural framing provided by the engineered building systems segment to the metal components segment; (ii) building components provided by the metal components segment to the engineered building systems segment; and (iii) hot-rolled, light gauge painted, and slit material and other services provided by the metal coil coating segment to both the metal components and engineered building systems segments.
 
Corporate assets consist primarily of cash but also include deferred financing costs, deferred taxes and property, plant and equipment associated with our headquarters in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology, purchasing, marketing and corporate travel expenses. Additional unallocated expenses include interest income, interest expense, strategic development and acquisition related costs and other (expense) income. See Note 15 — Operating Segments in the notes to the unaudited consolidated financial statements for more information on our segments.
 

25



The following table represents sales and operating income attributable to these operating segments for the periods indicated (in thousands): 
 
Fiscal Three Months Ended
 
Fiscal Six Months Ended
 
May 1,
2016
 
May 3,
2015
 
May 1,
2016
 
May 3,
2015
Total sales:
 

 
 

 
 

 
 

Engineered building systems
$
138,023

 
$
143,245

 
$
286,998

 
$
293,045

Metal components
234,637

 
221,118

 
464,303

 
393,907

Metal coil coating
55,178

 
49,998

 
106,383

 
105,608

Intersegment sales
(55,591
)
 
(54,214
)
 
(115,423
)
 
(109,487
)
Total sales
$
372,247

 
$
360,147

 
$
742,261

 
$
683,073

External sales:
 

 
 

 
 

 
 

Engineered building systems
$
134,454

 
$
138,662

 
$
280,405

 
$
283,156

Metal components
211,661

 
198,681

 
414,562

 
352,709

Metal coil coating
26,132

 
22,804

 
47,294

 
47,208

Total sales
$
372,247

 
$
360,147

 
$
742,261

 
$
683,073

Operating income (loss):
 

 
 

 
 

 
 

Engineered building systems
$
7,193

 
$
2,855

 
$
19,655

 
$
11,574

Metal components
17,835

 
6,941

 
33,938

 
15,277

Metal coil coating
4,704

 
2,397

 
9,525

 
6,375

Corporate
(19,138
)
 
(15,810
)
 
(37,265
)
 
(32,272
)
Total operating income (loss)
$
10,594

 
$
(3,617
)
 
$
25,853

 
$
954

Unallocated other expense
(6,965
)
 
(7,958
)
 
(13,879
)
 
(13,339
)
Income (loss) before income taxes
$
3,629

 
$
(11,575
)
 
$
11,974

 
$
(12,385
)
 
FISCAL THREE MONTHS ENDED MAY 1, 2016 COMPARED TO FISCAL THREE MONTHS ENDED MAY 3, 2015
 
Consolidated sales increased by 3.4%, or $12.1 million for the three months ended May 1, 2016, compared to the three months ended May 3, 2015. All operating segments had higher total tonnage volume during the current period, especially in our metal components and metal coil coating segments. The increase related to higher tonnage volumes was partially offset by the pass-through of lower steel costs.
 
Consolidated cost of sales decreased by 0.2%, or $0.5 million for the three months ended May 1, 2016, compared to the three months ended May 3, 2015. The impact of lower materials costs, primarily from lower steel prices, was partially offset by higher tonnage volume.

Gross margin percentage was 24.0% for the three months ended May 1, 2016, compared to 21.1% for the same period in the prior year. The increase in gross margin was the result of higher tonnage volume, favorable sales mix, and continued focus on value-oriented commercial sales discipline. We also recognized a $0.9 million gain on the sale of the Caryville facility during the current period.
 
Engineered building systems sales decreased to $138.0 million in the three months ended May 1, 2016, compared to $143.2 million in the same period in the prior year. Sales to third parties for the three months ended May 1, 2016 decreased by $4.2 million to $134.5 million from $138.7 million in the same period in the prior year, primarily due to the pass-through of lower steel costs, partially offset by higher tonnage volume. Engineered building systems third-party sales accounted for 36.1% of total consolidated third-party sales in the three months ended May 1, 2016, compared to 38.5% in the three months ended May 3, 2015.
 
Operating income of the engineered building systems segment increased to $7.2 million in the three months ended May 1, 2016