e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 1, 2010
or
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o |
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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76-0127701
(I.R.S. Employer
Identification No.) |
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10943 N. Sam Houston Parkway W.
Houston, TX
(Address of principal executive offices)
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77064
(Zip Code) |
(281) 897-7788
(Registrants 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. þ Yes o 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).
o Yes o 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.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, $.01 par value19,566,547 shares as of September 3, 2010
PART I FINANCIAL INFORMATION
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Item 1. |
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Unaudited Consolidated Financial Statements. |
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(2009 As Adjusted (Note 2))
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August 1, |
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November 1, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
53,643 |
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$ |
90,419 |
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Restricted cash, current |
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2,838 |
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5,154 |
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Accounts receivable, net |
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81,834 |
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82,889 |
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Inventories, net |
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105,311 |
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71,537 |
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Deferred income taxes |
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19,428 |
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18,787 |
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Income tax receivable |
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13,523 |
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27,622 |
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Investments in debt and equity securities, at market |
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3,500 |
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3,359 |
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Prepaid expenses and other |
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13,550 |
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14,494 |
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Assets held for sale |
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6,304 |
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4,963 |
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Total current assets |
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299,931 |
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319,224 |
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Property, plant and equipment, net |
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219,202 |
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232,510 |
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Goodwill |
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5,200 |
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5,200 |
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Intangible assets, net |
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26,827 |
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28,370 |
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Restricted cash, net of current portion |
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7,825 |
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Other assets |
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17,420 |
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21,389 |
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Total assets |
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$ |
568,580 |
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$ |
614,518 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
14,164 |
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Note payable |
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723 |
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481 |
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Accounts payable |
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71,728 |
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71,252 |
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Accrued compensation and benefits |
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30,917 |
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37,215 |
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Accrued interest |
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1,621 |
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776 |
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Other accrued expenses |
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46,397 |
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54,797 |
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Total current liabilities |
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151,386 |
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178,685 |
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Long-term debt |
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136,301 |
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136,085 |
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Deferred income taxes |
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18,749 |
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18,848 |
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Other long-term liabilities |
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7,077 |
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8,007 |
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Total long-term liabilities |
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162,127 |
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162,940 |
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Series B cumulative convertible participating preferred stock |
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247,993 |
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222,815 |
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Stockholders equity: |
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Common stock, $.01 par value, 100,000,000 shares
authorized; 19,566,547 and 18,082,029 issued and
outstanding |
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909 |
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904 |
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Additional paid-in capital |
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266,326 |
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288,093 |
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Accumulated deficit |
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(251,501 |
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(230,060 |
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Accumulated other comprehensive loss |
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(8,660 |
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(8,859 |
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Total stockholders equity |
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7,074 |
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50,078 |
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Total liabilities and stockholders equity |
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$ |
568,580 |
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$ |
614,518 |
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See accompanying notes to consolidated financial statements.
3
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(2009 As Adjusted (Note 2))
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Fiscal Three Months Ended |
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Fiscal Nine Months Ended |
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August 1, |
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August 2, |
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August 1, |
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August 2, |
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2010 |
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2009 |
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2010 |
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2009 |
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Sales |
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$ |
245,292 |
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$ |
237,860 |
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$ |
629,072 |
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$ |
721,944 |
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Cost of sales, excluding lower of cost or market
adjustment and asset impairments (recovery) |
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194,999 |
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176,565 |
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504,765 |
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566,053 |
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Lower of cost or market adjustment |
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39,986 |
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Asset impairments (recovery) |
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(64 |
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26 |
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849 |
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5,944 |
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Gross profit |
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50,357 |
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61,269 |
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123,458 |
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109,961 |
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Selling, general and administrative expenses |
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48,730 |
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49,829 |
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142,367 |
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159,533 |
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Goodwill and other intangible asset impairment |
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622,564 |
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Restructuring charge |
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551 |
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1,213 |
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1,904 |
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7,488 |
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Income (loss) from operations |
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1,076 |
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10,227 |
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(20,813 |
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(679,624 |
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Interest income |
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32 |
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81 |
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69 |
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360 |
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Interest expense |
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(4,424 |
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(6,568 |
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(13,638 |
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(19,638 |
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Debt extinguishment and refinancing costs |
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(401 |
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(174 |
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(1,030 |
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Other income (expense), net |
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(204 |
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1,093 |
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1,579 |
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1,569 |
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Income (loss) before income taxes |
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(3,520 |
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4,432 |
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(32,977 |
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(698,363 |
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Provision (benefit) for income taxes |
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(221 |
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1,825 |
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(11,536 |
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(49,418 |
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Net income (loss) |
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$ |
(3,299 |
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$ |
2,607 |
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$ |
(21,441 |
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$ |
(648,945 |
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Convertible preferred stock dividends and accretion |
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8,637 |
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25,178 |
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Convertible preferred stock beneficial conversion feature |
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4,583 |
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246,052 |
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Net income (loss) applicable to common shares |
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$ |
(16,519 |
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$ |
2,607 |
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$ |
(292,671 |
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$ |
(648,945 |
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Earnings (loss) per share: |
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Basic |
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$ |
(0.90 |
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$ |
0.65 |
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$ |
(16.10 |
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$ |
(166.67 |
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Diluted |
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$ |
(0.90 |
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$ |
0.65 |
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$ |
(16.10 |
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$ |
(166.67 |
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Weighted average number of common shares outstanding: |
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Basic |
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18,274 |
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3,899 |
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18,184 |
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3,894 |
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Diluted |
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18,274 |
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3,899 |
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18,184 |
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3,894 |
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See accompanying notes to consolidated financial statements.
4
NCI BUILDING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(2009 As Adjusted (Note 2))
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Fiscal Nine Months Ended |
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August 1, |
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August 2, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(21,441 |
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$ |
(648,945 |
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Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
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Depreciation and amortization |
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26,017 |
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25,298 |
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Non-cash interest expense on Convertible Notes |
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6,297 |
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Share-based compensation expense |
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3,578 |
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3,789 |
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Debt extinguishment and refinancing costs |
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174 |
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1,030 |
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Gain on embedded derivative |
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(930 |
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(Gain) loss on sale of property, plant and equipment |
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138 |
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(771 |
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Lower of cost or market reserve |
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39,986 |
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Provision for doubtful accounts |
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131 |
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1,224 |
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Benefit for deferred income taxes |
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(580 |
) |
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(24,576 |
) |
Asset impairments, net |
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849 |
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5,944 |
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Impairment of goodwill and intangible assets |
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622,564 |
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Changes in operating assets and liabilities, net of effect of acquisitions: |
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Accounts receivable |
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924 |
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81,080 |
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Inventories |
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(33,774 |
) |
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75,321 |
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Income tax receivable |
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15,016 |
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(26,590 |
) |
Prepaid expenses and other |
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1,424 |
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(1,662 |
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Accounts payable |
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649 |
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(35,036 |
) |
Accrued expenses |
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(13,868 |
) |
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(48,550 |
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Other, net |
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948 |
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(803 |
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Net cash (used in) provided by operating activities |
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(20,745 |
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75,600 |
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Cash flows from investing activities: |
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Capital expenditures |
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(11,258 |
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(17,877 |
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Proceeds from sale of property, plant and equipment |
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760 |
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537 |
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Net cash used in investing activities |
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(10,498 |
) |
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(17,340 |
) |
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Cash flows from financing activities: |
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Decrease (increase) in restricted cash |
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10,141 |
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(13,224 |
) |
Proceeds from ABL Facility |
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241 |
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Payments on ABL Facility |
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(246 |
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Payment of convertible notes |
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(59 |
) |
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Payments on long-term debt |
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(13,885 |
) |
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(690 |
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Payment of refinancing costs |
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(50 |
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(5,513 |
) |
Payments on note payable |
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(1,289 |
) |
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(1,213 |
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Proceeds from stock options exercised |
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12 |
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Purchase of treasury stock |
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(381 |
) |
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(451 |
) |
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Net cash (used in) provided by financing activities |
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(5,528 |
) |
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(21,079 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(5 |
) |
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(6 |
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Net (decrease) increase in cash and cash equivalents |
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(36,776 |
) |
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37,175 |
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Cash and cash equivalents at beginning of period |
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|
90,419 |
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|
68,201 |
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Cash and cash equivalents at end of period |
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$ |
53,643 |
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$ |
105,376 |
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See accompanying notes to consolidated financial statements.
5
NCI BUILDING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 2010
(Unaudited)
(2009 As Adjusted (Note 2))
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for NCI Building Systems, Inc. and its
subsidiaries (the Company, we, us, and 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, all adjustments, which consist of normal recurring entries except as
otherwise disclosed, necessary for a fair presentation have been made. Operating results for the
fiscal three and nine month periods ended August 1, 2010 are not necessarily indicative of the
results that may be expected for the fiscal year ending October 31, 2010. 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.
On March 5, 2010, the Company effected a reverse stock split in which each five shares of the
Companys common stock, par value $0.01 (the Common Stock and shares thereof, the Common
Shares), was reclassified and combined into one share of Common Stock (the Reverse Stock Split).
As such, we have retrospectively adjusted basic and diluted earnings per share, Common Stock, stock
options, Common Stock equivalents and prices per share information for the Reverse Stock Split in
all periods presented.
We use a four-four-five week calendar each quarter with year end on the Sunday closest to October
31. The year end for fiscal 2010 is October 31, 2010.
Certain reclassifications have been made to prior period amounts in our consolidated balance sheets
and consolidated statements of income to conform to the current presentation. These
reclassifications were the result of further integration of Robertson-Ceco II Corporation (RCC)
and the rationalization of our operations. The net effect of these reclassifications was not
material to our consolidated financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in our Current Report on Form 8-K dated April 23, 2010 for the fiscal year ended November
1, 2009 filed with the Securities and Exchange Commission (the SEC).
NOTE 2 ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Debt with Conversion and Other Options and Earnings per Share Adoption
On November 2, 2009, we adopted ASC Subtopic 470-20, Debt with Conversion and Other Options, which
clarifies the accounting for convertible debt instruments that may be settled entirely or partially
in cash upon conversion. This standard has been applied retrospectively to fiscal years 2005
through 2009 as it relates to our now retired 2.125% Convertible Senior Subordinated Notes (the
Convertible Notes). This standard changed the accounting for certain convertible debt
instruments, including our Convertible Notes. Under the new rules, an entity shall separately
account for the liability and equity components of the instrument in a manner that reflects the
issuers economic interest cost or the issuers nonconvertible debt (unsecured debt) borrowing rate
when interest cost is recognized. This results in the bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting discount on the debt
to be recognized as part of interest expense. Once adopted, this standard requires retrospective
application to the terms of the instrument as it existed for all periods presented.
The effect of this standard for our Convertible Notes is that the equity component has been
included in the paid-in-capital section of stockholders equity on our consolidated balance sheet
and the value of the equity component is treated as an original issue discount for purposes of
accounting for the debt component of the Convertible Notes. Higher interest expense is recorded by
recognizing the
6
accretion of the discounted carrying value of the Convertible Notes to their face amount as
interest expense over the term of the Convertible Notes using an effective interest rate method.
Income taxes have been recorded on the foregoing adjustments. While this accounting pronouncement
does not change the economic substance or cash flow requirements for the Convertible Notes, the
amount reported as interest expense in our historical consolidated statement of operations
increased due to the accretion of the discounted carrying value of the Convertible Notes to their
face amount. The impact of adopting this standard has resulted in the reported interest expense on
our Convertible Notes increasing from 2.125% to 7.5%. See Note 10 Debt and Note Payable.
We capitalize interest on capital invested in projects in accordance with Financial Accounting
Standards Board (FASB) guidance codified under ASC Topic 835, Interest. As a result of adopting
ASC Subtopic 470-20, Debt with Conversion and Other Options, capitalized interest for fiscal 2009
increased by $0.2 million. Upon commencement of the assets operations, capitalized interest, as a
component of the total cost of the asset, is amortized over the estimated useful life of the asset.
In June 2008, the FASB issued guidance that has been codified under ASC Subtopic 260-10, Earnings
per Share. This pronouncement provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating securities and,
therefore, should be included in computing earnings per share using the two-class method. We
adopted this standard on November 2, 2009. All prior period earnings per share data have been
adjusted retrospectively to conform to the provisions of this pronouncement. See Note 8 Earnings
Per Common Share.
The following table sets forth the effect of the retrospective application of the Debt with
Conversion and Other Options guidance and the Earnings per Share guidance on certain line items of
our consolidated financial statements (in thousands, except per share data):
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 2, 2009 |
|
|
August 2, 2009 |
|
|
|
Originally |
|
|
As |
|
|
Originally |
|
|
As |
|
|
|
Reported |
|
|
Adjusted |
|
|
Reported |
|
|
Adjusted |
|
Cost of sales, excluding lower of cost or
market adjustment and asset impairments |
|
$ |
177,333 |
|
|
$ |
176,565 |
|
|
$ |
568,773 |
|
|
$ |
566,053 |
|
Gross profit |
|
|
61,080 |
|
|
|
61,269 |
|
|
|
108,819 |
|
|
|
109,961 |
|
Selling, general and administrative expenses |
|
|
49,603 |
|
|
|
49,829 |
|
|
|
158,564 |
|
|
|
159,533 |
|
Income (loss) from operations |
|
|
10,264 |
|
|
|
10,227 |
|
|
|
(679,797 |
) |
|
|
(679,624 |
) |
Interest expense |
|
|
(4,369 |
) |
|
|
(6,568 |
) |
|
|
(13,029 |
) |
|
|
(19,638 |
) |
Income (loss) before income taxes |
|
|
6,646 |
|
|
|
4,432 |
|
|
|
(691,709 |
) |
|
|
(698,363 |
) |
Provision (benefit) for income taxes |
|
|
2,675 |
|
|
|
1,825 |
|
|
|
(46,863 |
) |
|
|
(49,418 |
) |
Net income (loss) |
|
|
3,971 |
|
|
|
2,607 |
|
|
|
(644,846 |
) |
|
|
(648,945 |
) |
Net income (loss) applicable to common shares |
|
$ |
3,971 |
|
|
$ |
2,607 |
|
|
$ |
(644,846 |
) |
|
$ |
(648,945 |
) |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.02 |
|
|
|
0.65 |
|
|
|
(165.62 |
) |
|
|
(166.67 |
) |
Diluted |
|
|
1.02 |
|
|
|
0.65 |
|
|
|
(165.62 |
) |
|
|
(166.67 |
) |
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,899 |
|
|
|
3,899 |
|
|
|
3,894 |
|
|
|
3,894 |
|
Diluted |
|
|
3,899 |
|
|
|
3,899 |
|
|
|
3,894 |
|
|
|
3,894 |
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
November 1, 2009 |
|
|
|
Originally |
|
|
As |
|
|
|
Reported |
|
|
Adjusted |
|
Property, plant and equipment, net |
|
$ |
231,840 |
|
|
$ |
232,510 |
|
Total assets |
|
|
613,848 |
|
|
|
614,518 |
|
Deferred income tax liability |
|
|
18,591 |
|
|
|
18,848 |
|
Total long-term liabilities |
|
|
162,683 |
|
|
|
162,940 |
|
Additional paid-in capital |
|
|
263,620 |
|
|
|
288,093 |
|
Retained earnings |
|
|
(206,000 |
) |
|
|
(230,060 |
) |
Total stockholders equity |
|
|
49,665 |
|
|
|
50,078 |
|
Total liabilities and stockholders equity |
|
|
613,848 |
|
|
|
614,518 |
|
7
Fair Value Measurements and Disclosures Adoption
In September 2006, the FASB issued guidance that has been codified under ASC Subtopic 820-10, Fair
Value Measurements and Disclosures (ASC 820-10). This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. We
adopted this standard on November 3, 2008 for financial assets and financial liabilities carried at
fair value and non-financial assets and liabilities that are recognized or disclosed at fair value
on a recurring basis. The adoption of this standard did not have a material impact on our
consolidated financial statements. See Note 13 Fair Value of Financial Instruments and Fair
Value Measurements.
In February 2008, the FASB issued additional guidance codified under ASC 820-10. This additional
guidance partially delayed the effective date for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We adopted the additional guidance in this standard on
November 2, 2009 for nonrecurring, non-financial assets and liabilities that are recognized or
disclosed at fair value. The adoption of this standard did not have a material impact on our
consolidated financial statements. See Note 13 Fair Value of Financial Instruments and Fair
Value Measurements.
Multiple-Deliverable Revenue Arrangements Adoption
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,
which provides guidance on whether multiple deliverables exist, how the arrangement should be
separated and the consideration allocated. This update requires an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling price. This update is
effective for the first annual reporting period beginning on or after June 15, 2010 and may be
applied retrospectively for all periods presented or prospectively to arrangements entered into or
materially modified after the adoption date. Early adoption is permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. We early adopted this
update on November 2, 2009. The adoption of this update did not have a material impact on our
consolidated financial statements.
Improving Disclosures about Fair Value Measurements Adoption
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements. This update amends FASB ASU 820-10-50 to require new disclosures concerning (1)
transfers into and out of Levels 1 and 2 of the fair value measurement hierarchy, and (2) activity
in Level 3 measurements. In addition, this update clarifies certain existing disclosure
requirements regarding the level of disaggregation and inputs and valuation techniques. Finally,
this update makes conforming amendments to the guidance on employers disclosures about
postretirement benefit plan assets. We adopted this update on May 2, 2010, except for the
requirement to separately disclose activity in Level 3 measurements which is effective for our
fiscal year ended October 28, 2012. With the exception of additional fair value measurement
disclosures, the adoption of this update did not have a material impact on our consolidated
financial statements. See Note 13 Fair Value of Financial Instruments and Fair Value
Measurements.
Recent Accounting Pronouncements
In December 2008, the FASB issued guidance that has been codified under ASC Subtopic 715-20,
Defined Benefit Plans General. This standard provides guidance on an employers disclosures
about plan assets of a defined benefit pension or other postretirement plan. The disclosures about
plan assets required by this standard are effective for our 2010 fiscal year and are not required
for earlier periods presented for comparative purposes. We will adopt the disclosure provisions
required by this standard in our consolidated financial statements as of and for the period ended
October 31, 2010.
NOTE 3 PLANT RESTRUCTURING AND ASSET IMPAIRMENT
As a result of the market downturn which began in fiscal 2008, we implemented a phased process to
resize and realign our manufacturing operations. The purpose of these activities was to close some
of our least efficient facilities and to retool certain of these facilities to
8
allow us to better utilize our assets and expand into new markets or better provide products to our
customers, such as insulated panel systems.
In November 2008, we approved the Phase I plan to close three of our engineered building systems
manufacturing plants and retool one of these facilities. In addition, as part of the Phase I
restructuring, we implemented a general employee reduction program (General). In a continuing
effort to rationalize our least efficient facilities, in February 2009, we approved the Phase II
plan to close one of our facilities within the engineered building systems segment, and in April
2009, we approved the Phase III plan to close or idle three of our manufacturing facilities within
the engineered building systems segment and two facilities within the metal components segment. In
addition, manufacturing at one of our metal components facilities was temporarily suspended and the
facility currently functions as a distribution and customer service site. As part of the Phase III
plan, we also increased General. As a result of actions taken in our restructuring, certain
facilities are being actively marketed for sale and in the fourth quarter of fiscal 2009 were
classified as held for sale in the Consolidated Balance Sheet. During the first quarter of fiscal 2010,
we recorded an additional $1.0 million impairment for the Lockeford facility which is one of the facilities classified as held for
sale as a result of deteriorating market conditions.
The following table summarizes our restructuring plan costs and charges related to the General,
Phase I, Phase II and Phase III restructuring plans during each of the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
Remaining |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred |
|
|
Anticipated |
|
|
Anticipated |
|
|
|
Fiscal 2008 |
|
|
Fiscal 2009 |
|
|
January 31, 2010 |
|
|
May 2, 2010 |
|
|
August 1, 2010 |
|
|
to Date |
|
|
Cost |
|
|
Cost |
|
General |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
87 |
|
|
$ |
2,987 |
|
|
$ |
2 |
|
|
$ |
16 |
|
|
$ |
|
|
|
$ |
3,092 |
|
|
$ |
|
|
|
$ |
3,092 |
|
Asset Relocation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Cash Costs |
|
|
|
|
|
|
57 |
|
|
|
23 |
|
|
|
50 |
|
|
|
15 |
|
|
|
145 |
|
|
|
|
|
|
|
145 |
|
Asset Impairments (Recovery) |
|
|
|
|
|
|
1,234 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
1,238 |
|
|
|
|
|
|
|
1,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total General Program |
|
|
87 |
|
|
|
4,278 |
|
|
|
25 |
|
|
|
70 |
|
|
|
15 |
|
|
|
4,475 |
|
|
|
|
|
|
|
4,475 |
|
Repurposing and Plant Closing Phase I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
106 |
|
|
$ |
1,016 |
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
44 |
|
|
$ |
1,224 |
|
|
$ |
|
|
|
$ |
1,224 |
|
Asset Relocation |
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
303 |
|
Other Cash Costs |
|
|
|
|
|
|
199 |
|
|
|
122 |
|
|
|
80 |
|
|
|
83 |
|
|
|
484 |
|
|
|
47 |
|
|
|
531 |
|
Asset Impairments (Recovery) |
|
|
157 |
|
|
|
1,634 |
|
|
|
1,029 |
|
|
|
|
|
|
|
(58 |
) |
|
|
2,762 |
|
|
|
|
|
|
|
2,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Repurposing and Plant Closing
Phase I |
|
|
263 |
|
|
|
3,152 |
|
|
|
1,209 |
|
|
|
80 |
|
|
|
69 |
|
|
|
4,773 |
|
|
|
47 |
|
|
|
4,820 |
|
Plant Closing Phase II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
|
|
|
$ |
399 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
399 |
|
|
$ |
|
|
|
$ |
399 |
|
Asset Relocation |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
22 |
|
Other Cash Costs |
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
442 |
|
Asset Impairments (Recovery) |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Plant Closing Phase II |
|
|
|
|
|
|
893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893 |
|
|
|
|
|
|
|
893 |
|
Plant Closing Phase III |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
|
|
|
$ |
2,349 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,359 |
|
|
$ |
|
|
|
$ |
2,359 |
|
Asset Relocation |
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
245 |
|
|
|
122 |
|
|
|
367 |
|
Other Cash Costs |
|
|
|
|
|
|
1,060 |
|
|
|
309 |
|
|
|
662 |
|
|
|
409 |
|
|
|
2,440 |
|
|
|
301 |
|
|
|
2,741 |
|
Asset Impairments (Recovery) |
|
|
|
|
|
|
3,393 |
|
|
|
|
|
|
|
(120 |
) |
|
|
(5 |
) |
|
|
3,268 |
|
|
|
|
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Plant Closing Phase III |
|
|
|
|
|
|
7,021 |
|
|
|
319 |
|
|
|
568 |
|
|
|
404 |
|
|
|
8,312 |
|
|
|
423 |
|
|
|
8,735 |
|
Total All Programs |
|
$ |
350 |
|
|
$ |
15,344 |
|
|
$ |
1,553 |
|
|
$ |
718 |
|
|
$ |
488 |
|
|
$ |
18,453 |
|
|
$ |
470 |
|
|
$ |
18,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring by Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Building Systems |
|
|
61 |
|
|
|
7,522 |
|
|
|
415 |
|
|
|
673 |
|
|
|
401 |
|
|
|
9,072 |
|
|
|
317 |
|
|
|
9,389 |
|
Metal Components |
|
|
106 |
|
|
|
1,216 |
|
|
|
109 |
|
|
|
156 |
|
|
|
150 |
|
|
|
1,737 |
|
|
|
153 |
|
|
|
1,890 |
|
Metal Coil Coating |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
Corporate |
|
|
27 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
194 |
|
|
$ |
9,052 |
|
|
$ |
524 |
|
|
$ |
829 |
|
|
$ |
551 |
|
|
$ |
11,150 |
|
|
$ |
470 |
|
|
$ |
11,620 |
|
Asset Impairments (Recovery) by
Segment(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Building Systems |
|
|
157 |
|
|
|
4,316 |
|
|
|
1,029 |
|
|
|
(120 |
) |
|
|
15 |
|
|
|
5,397 |
|
|
|
|
|
|
|
5,397 |
|
Metal Components |
|
|
|
|
|
|
766 |
|
|
|
|
|
|
|
4 |
|
|
|
(78 |
) |
|
|
692 |
|
|
|
|
|
|
|
692 |
|
Metal Coil Coating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,209 |
|
|
|
|
|
|
|
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
157 |
|
|
$ |
6,291 |
|
|
$ |
1,029 |
|
|
$ |
(116 |
) |
|
$ |
(63 |
) |
|
$ |
7,298 |
|
|
$ |
|
|
|
$ |
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
(1) |
|
The fair value of assets was determined based on prices of similar assets in similar
condition, adjusted for their remaining useful life. |
The following table summarizes our restructuring liability related to the General, Phase I, Phase
II and Phase III restructuring plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee or |
|
|
|
|
|
|
|
|
|
severance |
|
|
|
|
|
|
|
|
|
costs |
|
|
Other costs |
|
|
Total |
|
Balance at November 1, 2009 |
|
$ |
1,387 |
|
|
$ |
|
|
|
$ |
1,387 |
|
Costs incurred |
|
|
130 |
|
|
|
1,774 |
|
|
|
1,904 |
|
Cash payments |
|
|
(1,406 |
) |
|
|
(1,774 |
) |
|
|
(3,180 |
) |
Other adjustments (1) |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Balance at August 1, 2010 |
|
$ |
128 |
|
|
$ |
|
|
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to the foreign currency translation. |
On February 27, 2009, our 401(k) profit sharing plan (Savings Plan) was amended, effective
January 1, 2009, to make the matching contributions fully discretionary and future contributions
temporarily suspended. Additional amounts may be contributed depending upon our annual return on
assets.
NOTE 4 RESTRICTED CASH
On May 21, 2009, we entered into a cash collateral agreement with our agent bank to obtain letters
of credit secured by cash collateral. The restricted cash is invested in a cash bank account
securing our agent bank. As of August 1, 2010, we had restricted cash in the amount of $2.8 million
as collateral related to our $2.7 million of letters of credit. Restricted cash is classified as
current as the underlying letters of credit expire prior to September 2010. The letters of credit
have either automatically renewed or will be renewed upon expiration.
NOTE 5 INVENTORIES
The components of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Raw materials |
|
$ |
74,839 |
|
|
$ |
48,081 |
|
Work in process and finished goods |
|
|
30,472 |
|
|
|
23,456 |
|
|
|
|
|
|
|
|
|
|
$ |
105,311 |
|
|
$ |
71,537 |
|
|
|
|
|
|
|
|
In the nine month period ended August 2, 2009, we recorded a raw material inventory adjustment to
adjust our inventory to the lower of cost or market in the amount of $(40.0) million because our
inventory on hand at that time exceeded our estimated net realizable value less normal profit
margins. All inventory with a lower of cost or market adjustment was fully utilized by July 2009.
NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS
Our goodwill balance and changes in the carrying amount of goodwill by operating segment are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal |
|
|
|
|
|
|
Engineered |
|
|
|
|
|
|
Coil |
|
|
Metal |
|
|
Building |
|
|
|
|
|
|
Coating |
|
|
Components |
|
|
Systems |
|
|
Total |
|
Balance as of November 2, 2008 |
|
$ |
98,959 |
|
|
$ |
147,240 |
|
|
$ |
370,427 |
|
|
$ |
616,626 |
|
Impairments |
|
|
(59,854 |
) |
|
|
(116,132 |
) |
|
|
(332,904 |
) |
|
|
(508,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 1, 2009 |
|
$ |
39,105 |
|
|
$ |
31,108 |
|
|
$ |
37,523 |
|
|
$ |
107,736 |
|
Impairments |
|
|
(39,105 |
) |
|
|
(31,108 |
) |
|
|
(32,323 |
) |
|
|
(102,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 1, 2010,
November 1, 2009 and August 2,
2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,200 |
|
|
$ |
5,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Based on lower than projected sales volumes in the first quarter of fiscal 2009 and due to a
revised lower outlook for nonresidential construction activity in 2009, management reduced the
Companys cash flow projections for fiscal year 2009. We concluded that this reduction was an
impairment indicator requiring us to perform an interim goodwill impairment test for each of our
six reporting units as of February 1, 2009. As a result of this impairment indicator, we updated
the first step of our goodwill impairment test in the first quarter of fiscal 2009. The first step
of our goodwill impairment test determines fair value of the reporting unit based on a blend of
estimated discounted cash flows, publicly traded company multiples and acquisition multiples
reconciled to our recent publicly traded stock price, including a reasonable control premium. The
result from this model was then weighted and combined into a single estimate of fair value. We
determined that our carrying value exceeded our fair value at most of our reporting units in each
of our operating segments, indicating that goodwill was potentially impaired. As a result, we
initiated the second step of the goodwill impairment test, which involves calculating the implied
fair value of our goodwill by allocating the fair value of the reporting unit to all assets and
liabilities other than goodwill and comparing it to the carrying amount of goodwill. The fair value
of each of the reporting units assets and liabilities were determined based on a combination of
prices of comparable businesses and present value techniques.
As of February 1, 2009, we estimated the market implied fair value of our goodwill was less than
its carrying value by approximately $508.9 million, which was recorded as a goodwill impairment
charge in the first quarter of fiscal 2009. This charge was an estimate based on the result of the
preliminary allocation of fair value in the second step of the goodwill impairment test. However,
due to the timing and complexity of the valuation calculations required under the second step of
the test, we were not able to finalize our allocation of the fair value until the second quarter of
fiscal 2009 with regard to property, plant and equipment and intangible assets in which their
respective values are dependent on property, plant and equipment. This finalization was included in
our goodwill impairment charge of $102.5 million that was recorded in the second quarter of fiscal
2009 as discussed further below.
Further declines in cash flow projections and the corresponding implementation of the Phase III
restructuring plan caused management to determine that there was an indicator requiring us to
perform another interim goodwill impairment test for each of our reporting units with goodwill
remaining as of May 3, 2009. As a result of this impairment indicator, we again performed the first
step of our goodwill impairment test in the second quarter of fiscal 2009. The results showed that
our carrying value exceeded our fair value at most of our reporting units with goodwill remaining,
indicating that goodwill was potentially impaired. We therefore initiated the second step of the
goodwill impairment test. As of May 3, 2009, we determined the market implied fair value of our
goodwill was less than the carrying value for certain reporting units by approximately $102.5
million, which was recorded as a goodwill impairment charge in the second quarter of fiscal 2009.
As of August 1, 2010 and November 1, 2009, the remaining goodwill was $5.2 million.
As a result of the aforementioned goodwill impairment indicators and in accordance with ASC
Subtopic 350-20, we performed an impairment analysis on our indefinite lived intangible asset
related to tradenames of our subsidiary, RCC in our engineered building systems segment to
determine the fair value in the first and second quarters of fiscal year 2009. Based on changes to
our projected cash flows in the first quarter of fiscal 2009 and based on the lower projected cash
flows and the related Phase III restructuring plan in the second quarter of fiscal 2009, we
determined the carrying value exceeded the future fair value attributable to the indefinite lived
intangible asset, and therefore we recorded impairment charges of $8.7 million in the first quarter
of fiscal 2009 and $2.4 million in the second quarter of fiscal 2009 related to the indefinite
lived intangible asset.
NOTE 7 SHARE-BASED COMPENSATION
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 awards, phantom stock awards
and cash awards. On December 11, 2009, our board of directors approved the right of employees and
officers to receive grants of 1.5 million shares of restricted stock and the right of officers to
receive grants of 1.8 million stock options, both of which were conditioned upon shareholder
approval. Our majority stockholder, had informed the Company in writing of its intention to vote in
favor of the amendment and restatement of the Incentive Plan. Based on the approval of our board of
directors and our majority stockholder, we determined that the finalization of stockholder vote to
approve the amendment and restatement of the Incentive Plan was perfunctory and we established a
grant date of December 11, 2009 for the restricted stock and stock option awards. As discussed in
Note 11 Series B Cumulative Convertible Participating Preferred Stock, at January 31, 2010, the
Company did not have sufficient common shares available to settle the restricted stock and stock
option awards, and thus, we classified a portion of the awards as liability awards in accordance
with ASC Subtopic 718-10, Compensation-Stock Compensation (ASC 718-10). ASC 718-10 requires that
liability
11
awards be remeasured at fair value at each reporting date with changes in fair value recognized in
earnings. For the nine month period ended August 1, 2010, the changes in fair value were
immaterial. On March 5, 2010, the Company effected a Reverse Stock Split at an exchange ratio of
1-for-5 which caused the shares to become available and resulted in all restricted stock and stock
option awards being classified as equity awards. As such, on March 5, 2010, all liability awards
were reclassified to equity awards and remeasured using a valuation date of March 5, 2010. The
total unrecognized compensation cost related to the share-based compensation arrangements
reclassified from liability awards to equity awards was $9.9 million.
During the first quarter of fiscal 2010, our board of directors unanimously adopted a resolution to
submit to a vote of our stockholders a proposal to approve an amendment and restatement of our
Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the
Incentive Plan by 5.7 million shares of Common Stock (after giving effect to the Reverse Stock
Split). On February 19, 2010, the stockholders approved the amendment and restatement of the
Companys Incentive Plan. The amendment and restatement of the Incentive Plan increased the number
of Common Shares reserved for issuance under the Incentive Plan by 5.7 million to a total of 6.4
million Common Shares (in each case, after giving effect to the Reverse Stock Split), increased the
maximum number of shares that may be granted to an individual in any fiscal year to 0.9 million and
extended the effective date of the Incentive Plan to 10 years after the date the Compensation
Committee of the Companys board of directors approved the amendments.
As of August 1, 2010, and for all periods presented, our share-based awards under this plan have
consisted of restricted stock grants and stock option grants, neither of which can be settled
through cash payments. Both our stock options and restricted stock awards contain only service
condition requirements and typically vest over four years, although from time to time certain
individuals have received special one-time restricted stock awards that vest at retirement, upon a
change of control or on termination without cause or for good reason, as defined by the agreements
governing such awards. In addition, our December 11, 2009 stock option grants contain restrictions
on the employees ability to exercise and sell the options prior to January 1, 2013, or if earlier,
the employees death, disability, or qualifying termination (as defined in the Incentive Plan), or
upon a change in control of the Company.
The fair value of each option award is estimated as of the date of grant or the remeasurement date
using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized
historical volatility of our stock over a preceding period commensurate with the expected term of
the option and adjusted to exclude the increased volatility associated with the refinancing the
Company experienced in fiscal 2009 because this volatility is not relevant to the expected future
volatility of the stock. The risk-free rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not
considered in the option pricing formula since we do not currently pay dividends on our Common
Stock and have no current plans to do so in the future.
The weighted average assumptions for the equity awards granted on December 11, 2009 are noted in
the following table:
|
|
|
|
|
Expected volatility |
|
|
46.05 |
% |
Expected term (in years) |
|
|
5.75 |
|
Risk-free interest rate |
|
|
2.44 |
% |
The weighted average assumptions for the liability awards at the December 11, 2009 grant date and
the subsequent reclassification to equity awards remeasured on March 5, 2010 are noted in the
following table:
|
|
|
|
|
|
|
|
|
|
|
December 11, 2009 |
|
|
March 5, 2010 |
|
Expected volatility |
|
|
46.05 |
% |
|
|
47.01 |
% |
Expected term (in years) |
|
|
5.75 |
|
|
|
5.52 |
|
Risk-free interest rate |
|
|
2.44 |
% |
|
|
2.49 |
% |
The weighted average grant-date fair value of options granted during the nine month period ended
August 1, 2010 was $4.29. There were no options granted during the three month period ended August
1, 2010.
The following is a summary of stock option transactions during the nine months ended August 1, 2010
(in thousands, except weighted average exercise prices and weighted average remaining life):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
Balance November 1, 2009 |
|
|
130 |
|
|
$ |
140.65 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,782 |
|
|
|
8.85 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(10 |
) |
|
|
(113.26 |
) |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 1, 2010 |
|
|
1,902 |
|
|
$ |
17.33 |
|
|
9.0 years |
|
$ |
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 1, 2010 |
|
|
120 |
|
|
$ |
142.96 |
|
|
3.6 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options exercised during the first nine months of fiscal 2010. The following
summarizes additional information concerning outstanding options at August 1, 2010 (in thousands,
except weighted average remaining life and weighted average exercise prices):
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
Number of Options |
|
|
Remaining Life |
|
|
Exercise Price |
|
|
1,803 |
|
|
9.3 years |
|
|
$ |
9.76 |
|
|
43 |
|
|
3.6 years |
|
|
|
136.32 |
|
|
48 |
|
|
4.1 years |
|
|
|
161.68 |
|
|
8 |
|
|
5.4 years |
|
|
|
225.21 |
|
|
|
|
|
|
|
|
|
|
1,902 |
|
|
9.0 years |
|
|
$ |
17.33 |
|
|
|
|
|
|
|
|
|
The following summarizes additional information concerning options exercisable at August 1, 2010
(in thousands, except weighted average exercise prices):
|
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
Weighted Average |
|
Number of Options |
|
|
Exercise Price |
|
|
22 |
|
|
$ |
84.55 |
|
|
43 |
|
|
|
136.32 |
|
|
48 |
|
|
|
161.67 |
|
|
7 |
|
|
|
225.22 |
|
|
|
|
|
|
|
120 |
|
|
$ |
142.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of restricted stock awards classified as equity awards is based on the Companys
stock price as of the date of grant. The fair value of restricted stock awards previously
classified as liability awards on March 5, 2010 is based on the Companys stock price as of March
5, 2010, the date the contingency was resolved. In addition, certain of our December 11, 2009
restricted stock grants contain restrictions on the employees ability to sell their shares prior
to January 1, 2013, or if earlier, the employees death, disability, or qualifying termination (as
defined in the Incentive Plan), or upon a change in control of the Company. Restricted stock
transactions during the nine months ended August 1, 2010 were as follows (in thousands, except
weighted average grant prices):
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Shares |
|
|
Grant Price |
|
Balance November 1, 2009 |
|
|
204 |
|
|
$ |
80.57 |
|
Granted |
|
|
1,499 |
|
|
|
9.10 |
|
Distributed |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4 |
) |
|
|
9.10 |
|
|
|
|
|
|
|
|
Balance August 1, 2010 |
|
|
1,699 |
|
|
$ |
17.69 |
|
|
|
|
|
|
|
|
The total pre-tax share-based compensation cost that has been recognized in results of operations
was $1.4 million and $1.3 million for the three months ended August 1, 2010 and August 2, 2009,
respectively, and $3.6 million and $3.8 million for the nine months ended August 1, 2010 and August
2, 2009, respectively. Of these amounts, $1.4 million and $1.1 million for the three months ended
August 1, 2010 and August 2, 2009, respectively, and $3.5 million and $3.4 million for the nine
months ended August 1, 2010 and August 2, 2009, respectively, were included in selling, general and
administrative expense, with the remaining costs in each period in cost of goods sold.
The total income tax benefit recognized in results of operations for share-based compensation
arrangements was $0.5 million for both the three months ended August 1, 2010 and August 2, 2009,
and $1.4 million and $1.5 million for the nine months ended August 1, 2010
13
and August 2, 2009,
respectively. As of August 1, 2010 and August 2, 2009, there was approximately $19.6 million and
$11.4 million, respectively, of total unrecognized compensation cost related to share-based
compensation arrangements and this cost is expected to be recognized over a weighted-average
remaining period of 3.8 years and 3.6 years, respectively.
There was no cash received from option exercises during the first nine months of fiscal 2010. Cash
received from option exercises was insignificant during the first nine months of fiscal 2009.
NOTE 8 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 (loss)
per common share 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
share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Numerator for Basic and Diluted Earnings
(Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to common shares (1) |
|
$ |
(16,519 |
) |
|
$ |
2,607 |
|
|
$ |
(292,671 |
) |
|
$ |
(648,945 |
) |
Denominator for Diluted Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for
basic earnings (loss) per share |
|
|
18,274 |
|
|
|
3,899 |
|
|
|
18,184 |
|
|
|
3,894 |
|
Common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and assumed
conversions for diluted earnings (loss) per
share assuming dilution |
|
|
18,274 |
|
|
|
3,899 |
|
|
|
18,184 |
|
|
|
3,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.90 |
) |
|
$ |
0.65 |
|
|
$ |
(16.10 |
) |
|
$ |
(166.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.90 |
) |
|
$ |
0.65 |
|
|
$ |
(16.10 |
) |
|
$ |
(166.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Participating securities consist of the holders of the Convertible Preferred Stock, as
defined below, and the unvested restricted Common Stock related to our Incentive Plan.
Participating securities do not have a contractual obligation to share in losses; therefore,
no losses were allocated in both periods presented above. These participating securities will
be allocated earnings when applicable. |
As discussed in Note 2, we adopted guidance that has been codified under ASC Subtopic 260-10,
Earnings Per Share (ASC 260-10) on November 2, 2009. This pronouncement provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
are participating securities and, therefore, should be included in computing earnings per share
using the two-class method. The calculation of earnings per share for Common Stock presented here
has been reclassified to exclude the income, if any, attributable to the unvested restricted stock
awards from the numerator and exclude the dilutive impact of those shares from the denominator.
There was no income amount attributable to unvested restricted stock for the three and nine month
periods ended August 1, 2010 as the restricted stock does not share in the net losses. However, in
periods of net income, a portion of this income will be allocable to the restricted stock. All
prior period earnings per share data have been adjusted retrospectively to conform to the
provisions of this pronouncement.
In connection with an Exchange Offer in October 2009 (the Exchange Offer), we issued 14.0 million
shares of Common Stock. In addition to the Exchange Offer, our 2009 refinancing transaction
included the issuance of $250.0 million in shares of a newly created series of our preferred stock,
par value $1.00 per share, designated the Series B Cumulative Convertible Participating Preferred
Stock (Convertible Preferred Stock, and shares thereof, Preferred Shares) which required the
use of the two-class method in determining diluted earnings per share, but did not increase the
weighted average number of Common Shares outstanding. As of August 1, 2010 and November 1, 2009,
the Preferred Shares were convertible into 43.0 million and 39.2 million shares of Common Stock,
respectively.
For both the three and nine month periods ended August 1, 2010 and August 2, 2009, all options and
unvested restricted shares were anti-dilutive and, therefore, not included in the diluted loss per
share calculation.
14
NOTE 9 WARRANTY
We sell weathertightness warranties to our customers for protection from leaks in our roofing
systems related to weather. These warranties range from two 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 warranty revenue, which is included in other accrued expenses in
our consolidated balance sheets. We recognize deferred warranty revenue over the warranty coverage
period in a manner that matches our estimated expenses relating to the warranty. Additionally, we
maintain an accrued warranty at RCC in which the balance was $3.2 million at August 1, 2010. RCCs
accrued warranty programs have similar terms and characteristics to our other warranty programs
although this warranty is not amortized in the same manner as our other warranty programs.
The following table represents the rollforward of our acquired accrued warranty obligation and
deferred warranty revenue activity for each of the fiscal nine months ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Beginning balance |
|
$ |
16,116 |
|
|
$ |
16,485 |
|
Warranties sold |
|
|
2,028 |
|
|
|
1,894 |
|
Revenue recognized |
|
|
(1,024 |
) |
|
|
(904 |
) |
Costs incurred |
|
|
(313 |
) |
|
|
(233 |
) |
Adjustment (1) |
|
|
|
|
|
|
(1,313 |
) |
Other |
|
|
(119 |
) |
|
|
(117 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
16,688 |
|
|
$ |
15,812 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This adjustment relates to certain of the RCC warranty claims liabilities that were updated
based on a change in our claims processing procedures and revised analysis. This change was
recorded as a reduction of cost of sales in our Consolidated Statement of Operations during
the first quarter of fiscal 2009. |
NOTE 10 DEBT AND NOTE PAYABLE
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Amended and Restated Term Loan Credit Agreement (due April 2014, interest at
8.0% at both August 1, 2010 and November 1, 2009) |
|
$ |
136,301 |
|
|
$ |
150,000 |
|
Asset-Based Lending Facility (due April 2014, interest at 6.75% at August 1, 2010) |
|
|
|
|
|
|
|
|
2.125% Convertible Senior Subordinated Notes, due November 2024 |
|
|
|
|
|
|
59 |
|
Industrial Revenue Bond |
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
136,301 |
|
|
|
150,249 |
|
Current portion of long-term debt |
|
|
|
|
|
|
(14,164 |
) |
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
$ |
136,301 |
|
|
$ |
$136,085 |
|
|
|
|
|
|
|
|
The scheduled maturity of our debt is as follows (in thousands):
|
|
|
|
|
August 2, 2010 to October 31, 2010 |
|
$ |
|
|
Fiscal 2010 |
|
|
|
|
Fiscal 2011 |
|
|
|
|
Fiscal 2012 |
|
|
|
|
Fiscal 2013 and thereafter |
|
|
136,301 |
|
|
|
|
|
|
|
$ |
136,301 |
|
|
|
|
|
15
Amended Credit Agreement
On October 20, 2009, we entered into the Amended Credit Agreement (the Amended Credit Agreement),
pursuant to which we repaid $143.3 million of the $293.3 million in principal amount of term loans
outstanding under such credit agreement and modified the terms and maturity of the remaining $150.0
million balance. The modified terms of the term loan require quarterly principal payments in an
amount equal to 0.25% of the principal amount of the term loan then outstanding as of the last day
of each calendar quarter and a final payment of approximately $136.3 million at maturity on April
20, 2014. We made a mandatory prepayment on the Amended Credit Agreement in May 2010 in connection
with our refund received resulting from the carry back of the 2009 net operating loss. An
additional $13.3 million in principal amount of the term loans under the Amended Credit Agreement
was classified as current portion of long-term debt in our Consolidated Balance Sheet at November
1, 2009 as a result of this expected mandatory prepayment. As a result, we are not required to make
the quarterly principal payments for the remaining term of the term loan, except as required by the
mandatory prepayment provisions. At August 1, 2010 and November 1, 2009, outstanding amounts under
our Amended Credit Agreement were $136.3 million and $150.0 million, respectively.
The Companys obligations under the Amended Credit Agreement and any interest rate protection
agreements or other permitted hedging agreement entered into with any lender under the Amended
Credit Agreement are irrevocably and unconditionally guaranteed on a joint and several basis by
each direct and indirect domestic subsidiary of the Company (other than any domestic subsidiary
that is a foreign subsidiary holding company or a subsidiary of a foreign subsidiary).
The obligations under the Amended Credit Agreement and under any permitted hedging agreement and
the guarantees thereof are secured by (i) all of the capital stock and other equity interests of
all direct domestic subsidiaries owned by the Company and the guarantors, (ii) up to 65% of the
capital stock of certain direct foreign subsidiaries of the Company or any guarantor (it being
understood that a foreign subsidiary holding company or a domestic subsidiary of a foreign
subsidiary will be deemed a foreign subsidiary) and (iii) substantially all other tangible and
intangible assets owned by the Company and each guarantor, including liens on material real
property, in each case to the extent permitted by applicable law and subject to certain exceptions.
The liens securing the obligations under the Amended Credit Agreement, the permitted hedging
agreements and the guarantees thereof are first in priority (as between the Amended Credit
Agreement and the ABL Facility) with respect to stock, material real property and assets other than
accounts receivable, inventory, certain deposit accounts, associated intangibles and certain other
specified assets of the Company and the guarantors, subject to certain exceptions. Such liens are
second in priority (as between the Amended Credit Agreement and the ABL Facility) with respect to
accounts receivable, inventory, associated intangibles and certain other specified assets of the
Company and the guarantors, subject to certain exceptions.
The Amended Credit Agreement contains a number of covenants that, among other things, limit or
restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee
obligations, prepay other indebtedness, make dividends and other restricted payments, create liens,
make investments, make acquisitions, engage in mergers, change the nature of our business and
engage in certain transactions with affiliates.
The Amended Credit Agreement has no financial covenants until October 20, 2011, at which time the
maximum consolidated leverage ratio of net indebtedness to EBITDA is 5 to 1.
Net indebtedness is defined as consolidated debt less the lesser of cash or $50 million. This ratio steps down
by 0.25 each quarter until October 28, 2012 at which time the maximum ratio is 4 to 1. The ratio
continues to step down by 0.125 each quarter until November 3, 2013 to a ratio of 3.5 to 1, which
remains the maximum ratio for each fiscal quarter thereafter. We will, however, not be subject to
this financial covenant with respect to a specified period if certain prepayments or repurchases of
the term loans under the Amended Credit Agreement are made in the specified period. At August 1,
2010 and November 1, 2009, our Amended Credit Agreement did not require any financial covenant
compliance.
Term loans under the Amended Credit Agreement may be repaid at any time, without premium or penalty
but subject to customary LIBOR breakage costs. We also have the ability to repurchase a portion of
the term loans under the Amended Credit Agreement, subject to certain terms and conditions set
forth in the Amended Credit Agreement. In addition, subject to certain exceptions, the Amended
Credit Agreement requires mandatory prepayment and reduction in an amount equal to:
|
|
the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain
insurance recovery and condemnation events; |
16
|
|
50% of annual excess cash flow (as defined in the Amended Credit Agreement) for any fiscal
year ending on or after October 31, 2010, unless a specified leverage ratio target is met; and |
|
|
|
the greater of $10.0 million and 50% of certain tax refunds received by the Company resulting
from the carry back of the 2009 net operating loss received by the Company. |
The Amended Credit Agreement limits our ability to pay cash dividends, except in certain specified
circumstances, on or prior to October 31, 2010 after which time we may pay any dividend in an
amount not to exceed the available amount (as defined in the Amended Credit Agreement). The
available amount is defined in the Amended Credit Agreement as the sum of 50% of the consolidated
net income from August 2, 2009 to the end of the most recent fiscal quarter, less 100% of any
negative consolidated net income amount, plus net proceeds of property or assets received as
capital contributions, less the sum of all dividends, payments or other distributions of such
available amounts, in each case subject to certain adjustments and exceptions as specified in the
Amended Credit Agreement.
The term loan under the Amended Credit Agreement bears interest, at our option, at either LIBOR or
Base Rate plus an applicable margin. We had selected LIBOR interest rates for the period from
November 2, 2009 through August 1, 2010 during which the applicable margin was 6%. Overdue amounts
will bear interest at a rate that is 2% higher than the rate otherwise applicable. Base Rate is
defined as the highest of (i) the Wachovia Bank, National Association prime rate, (ii) the
overnight Federal Funds rate plus 0.5%, and (iii) 3%. LIBOR is defined as the applicable London
interbank offered rate (not to be less than 2%) adjusted for reserves. The applicable margin until
October 30, 2011 will be 5.00% on Base Rate loans and 6.00% on LIBOR loans under the Amended Credit
Agreement.
ABL Facility
On October 20, 2009, the subsidiaries of the Company, NCI Group, Inc. and RCC and the Company
entered into the ABL Facility pursuant to a loan and security agreement that provided for a $125.0
million asset-based loan facility. The ABL Facility allows us an aggregate maximum borrowing of up
to $125.0 million. Borrowing availability under the 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 August 1, 2010 and November 1, 2009, our excess
availability under the ABL Facility was $90.7 million and $70.4 million, respectively. The ABL
Facility has a maturity of April 20, 2014 and includes borrowing capacity of up to $25 million for
letters of credit and up to $10 million for swingline borrowings. There were no amounts outstanding
under the ABL Facility at both August 1, 2010 and November 1, 2009. In addition, at August 1, 2010,
letters of credit totaling approximately $8.1 million were outstanding under the ABL Facility.
There were no letters of credit outstanding under the ABL Facility at November 1, 2009.
An unused commitment fee is paid monthly on the ABL Facility at an annual rate of 1% through May 1,
2010 and thereafter at 1% or, if the average daily balance of the loans and letters of credit
obligations for a given month is higher than 50% of the maximum credit then available, 0.75%. The
calculation is determined 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 ABL Facility also apply.
The ABL Facility limits our ability to pay cash dividends, except in certain specified
circumstances, prior to October 20, 2010. After that time, we may pay dividends in an aggregate
amount not to exceed an amount equal to 50% of the adjusted consolidated net income from August 3,
2009 to the end of the most recent fiscal quarter and subject to there being no event of default
and the satisfaction of either certain excess availability conditions or a fixed charge coverage
ratio.
The obligations of the borrowers under the ABL Facility are guaranteed by us and each direct and
indirect domestic subsidiary of the Company (other than any domestic subsidiary that is a foreign
subsidiary holding company or a subsidiary of a foreign subsidiary) that is not a borrower under
the ABL Facility. Our obligations under certain specified bank products agreements are guaranteed
by each borrower and each other direct and indirect domestic subsidiary of the Company and the
other guarantors. These guarantees are made pursuant to a guarantee agreement, dated as of October
20, 2009, entered into by the Company and each other guarantor with Wells Fargo Foothill, LLC, as
administrative agent.
The obligations under the ABL Facility and the guarantees thereof are secured by a first priority
lien on our accounts receivable, inventory, certain deposit accounts, associated intangibles and
certain other specified assets of the Company, subject to certain exceptions, and a second priority
lien on the assets securing the term loans under the Amended Credit Agreement on a first-lien
basis.
17
The ABL Facility contains a number of covenants that, among other things, limit or restrict our
ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in
sale and leaseback transactions, prepay other indebtedness, modify organizational documents and
certain other agreements, create restrictions affecting subsidiaries, make dividends and other
restricted payments, create liens, make investments, make acquisitions, engage in mergers, change
the nature of their business and engage in certain transactions with affiliates.
Under the ABL Facility, a Dominion Event occurs if either an event of default is continuing or
excess availability falls below certain levels, during which period, and for certain periods
thereafter, the administrative agent may apply all amounts in the Companys, the borrowers and the
other guarantors concentration accounts to the repayment of the loans outstanding under the ABL
Facility, subject to the Intercreditor Agreement and certain specified exceptions. In addition,
during such Dominion Event, we are required to make mandatory payments on our ABL Facility upon
the occurrence of certain events, including the sale of assets and the issuance of debt, in each
case subject to certain limitations and conditions set forth in the ABL Facility.
The ABL Facility includes a minimum fixed charge coverage ratio of one to one, which will apply if
we fail to maintain a specified minimum level of borrowing capacity. The minimum level of borrowing
capacity as of both August 1, 2010 and November 1, 2009 was $15.0 million.
Loans under the ABL Facility bear interest, at our option, as follows:
(1) Base Rate loans at the Base Rate plus a margin. The margin was 3.50% through April 30,
2010 and thereafter ranges from 3.25% to 3.75% depending on the quarterly average excess
availability under such facility, and
(2) LIBOR loans at LIBOR plus a margin. The margin was 4.50% through April 30, 2010 and
thereafter ranges from 4.25% to 4.75% depending on the quarterly average excess availability
under such facility.
During an event of default, loans under the ABL Facility will bear interest at a rate that is 2%
higher than the rate otherwise applicable. Base Rate is defined as the higher of the Wells Fargo
Bank, N.A. prime rate and the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the
applicable London interbank offered rate adjusted for reserves.
Convertible Notes
As discussed in Note 2 Accounting Pronouncements, on November 2, 2009, we adopted ASC 470-20
which clarifies the accounting for convertible debt instruments that may be settled entirely or
partially in cash upon conversion. ASC 470-20 has been applied retrospectively to fiscal years 2005
through 2009 as it relates to our Convertible Notes. The debt and equity components recognized for
our Convertible Notes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Principal amount of Convertible Notes |
|
$ |
|
|
|
$ |
59 |
|
Unamortized discount |
|
|
|
|
|
|
|
|
Net carrying amount |
|
|
|
|
|
|
59 |
|
Additional paid-in capital |
|
|
24,473 |
|
|
|
24,473 |
|
In October 2009, we consummated the Exchange Offer to acquire $180 million aggregate principal
amount of the Convertible Notes, which resulted in the tender offer of $179.9 million in principal
amount of the Convertible Notes in exchange for 14.0 million shares of our Common Stock and $90
million in cash. On December 29, 2009, we redeemed the $58,750 principal amount of the Convertible
Notes that remained outstanding after the closing of the Exchange Offer. The remaining unamortized
discount was reversed upon the consummation of the Exchange Offer.
The amount of interest expense recognized and effective interest rate for the three and nine month
periods ended August 1, 2010 and August 2, 2009 were as follows (in thousands):
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Contractual coupon interest |
|
$ |
|
|
|
$ |
967 |
|
|
$ |
0.2 |
|
|
$ |
3,049 |
|
Amortization of discount on Convertible Notes |
|
|
|
|
|
|
2,099 |
|
|
|
|
|
|
|
6,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
|
|
|
$ |
3,066 |
|
|
$ |
0.2 |
|
|
$ |
9,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
The debt extinguishment costs were determined based on the net of the inducement loss and the
settlement gain. As the Convertible Notes were Instrument C as defined in ASC Subtopic 815-15,
Embedded Derivatives, we applied the guidance in ASC Subtopic 470-20, Debt with Conversion and
Other Options (ASC 470-20), for any inducement to convert, and then applied the guidance in ASC
470-20 on the conversion of an instrument that would normally settle the conversion spread in
shares and the face amount in cash. As a result, we recorded a loss of $85.3 million, which was the
net impact of the loss incurred through the induced conversion offset by the gain recorded for the
extinguishment of the recognized liability under conversion accounting. In accordance with the
original conversion terms of the Convertible Notes, the expected fair value of Common Stock
issuable upon conversion is approximately $11.3 million (based on a $12.55 closing stock price for
Common Stock as of October 19, 2009) as compared to the expected fair value of Common Stock
issuable pursuant to the Exchange Offer of approximately $266.1 million ($176.1 million in Common
Stock plus $90 million in cash paid). This resulted in an induced conversion charge of $254.8
million. Additionally, we also had to consider the original terms of the Convertible Notes, which
required us to satisfy the accreted value of the obligation in cash and allowed us to satisfy the
excess conversion value over the accreted value in either cash or shares. However, as of the date
the Convertible Notes were converted, the stated conversion price of the Convertible Notes was less
than the stock price. Based upon the stated conversion terms of the Convertible Notes and the stock
price on the date the Convertible Notes were converted, the value of the Companys cash settlement
to the holders of the Convertible Notes would have been approximately $11.3 million. Upon
settlement of a security with the characteristics of Instrument C, ASC 470-20-40-12 requires only
the cash payment be considered in the computation of the gain or loss on the extinguishment of the
recognized liability. As of the close of the market on October 19, 2009, each conversion feature
was worth a value of approximately $62.53 ($12.55 closing stock price x conversion rate of 4.9824
shares per $1,000 of principal). Accordingly, the Company recognized a gain of $169.6 million which
included $0.8 million of unamortized debt discount and a gain of $937.47 for each note. The change
in conversion rate based on a $12.55 closing stock price for Common Stock as of October 19, 2009
resulted in a gain on extinguishment of the recognized liability of $169.6 million.
Insurance Note payable
The note payable is related to financed insurance premiums. As of August 1, 2010 and November 1,
2009, we had outstanding a note payable in the amount of $0.7 million and $0.5 million,
respectively. Insurance premium financings are generally secured by the unearned premiums under
such policies.
NOTE 11 SERIES B CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK
The CD&R Equity Investment
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), pursuant to which the Company agreed to issue and sell to CD&R Fund VIII, and CD&R Fund
VIII agreed to purchase from the Company, for an aggregate purchase price of $250 million (less
reimbursement to CD&R Fund VIII or direct payment to its service providers of up to $14.5 million
in the aggregate of transaction expenses and a deal fee, paid to Clayton, Dubilier & Rice, Inc.,
the manager of CD&R Fund VIII, of $8.25 million), 250,000 shares of Convertible Preferred Stock.
Pursuant to the Investment Agreement, on October 20, 2009 (the Closing Date), the Company issued
and sold to CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P. (the CD&R Funds), and the
CD&R Funds purchased from the Company, an aggregate of 250,000 Preferred Shares, representing
approximately 39.2 million shares of Common Stock (after giving effect to the Reverse Stock Split)
or 68.4% of the voting power and Common Stock of the Company on an as-converted basis as of the
Closing Date (such purchase and sale, the CD&R Equity Investment).
Certain Terms of the Convertible Preferred Stock
In connection with the consummation of the CD&R Equity Investment, on October 19, 2009 we filed the
Certificate of Designations, setting forth the terms, rights, powers, and preferences, and the
qualifications, limitations and restrictions thereof, of the Convertible Preferred Stock.
Liquidation Value. Each Preferred Share has an initial liquidation preference of $1,000.
19
Rank. The Convertible Preferred Stock ranks senior as to dividend rights, redemption payments and
rights upon liquidation to the Common Stock and each other class or series of our equity
securities, whether currently issued or to be issued in the future, that by its terms ranks junior
to the Convertible Preferred Stock, and junior to each class or series of equity securities of the
Company, whether currently issued or issued in the future, that by its terms ranks senior to the
Convertible Preferred Stock. We have no outstanding securities ranking senior to the Convertible
Preferred Stock. Pursuant to the Certificate of Designations, the issuance of any senior securities
of the Company requires the approval of the holders of the Convertible Preferred Stock.
Dividends. Dividends on the Convertible Preferred Stock are payable, on a cumulative daily basis,
as and if declared by our board of directors, at a rate per annum of 12% of the sum of the
liquidation preference of $1,000 per Preferred Share plus accrued and unpaid dividends thereon or
at a rate per annum of 8% of the sum of the liquidation preference of $1,000 per Preferred Share
plus any accrued and unpaid dividends thereon if paid in cash on the dividend payment date on which
such dividends would otherwise compound. If dividends are not paid on the dividend payment date,
either in cash or in kind, such dividends compound on the dividend payment date. Members of our
board of directors who are not affiliated with the CD&R Funds have the right to choose whether such
dividends are paid in cash or in-kind, subject to the conditions of the Amended Credit Agreement
and ABL Facility which restrict our ability to pay cash dividends until the first quarter of fiscal
2011 under the Amended Credit Agreement and until October 20, 2010 under the ABL Facility, except
for certain specified purposes.
The dividend rate will increase by 3% per annum above the rates described in the preceding
paragraph upon and during certain defaults specified in the Certificate of Designations of the
Convertible Preferred Stock (the Certificate of Designations) and, after June 30, 2011, will
increase by up to 6% per annum above the rates described in the preceding paragraph upon and during
any such specified default involving the Companys failure to have a number of authorized and
unissued shares of Common Stock reserved and available sufficient for the conversion of all
outstanding Preferred Shares. The Company currently has sufficient authorized, unissued and
reserved shares of Common Stock.
We have the right to choose whether dividends are paid in cash or in-kind. However,
the first dividend payment which was scheduled to be paid on December 15, 2009, was required to be paid in cash
by the Certificate of Designations but could not be paid in cash based on the terms of our Amended Credit Agreement
and Asset-Based Lending Facility (ABL Facility) which restricts our ability to pay cash dividends until the
first quarter of fiscal 2011 under the Amended Credit Agreement and until October 20, 2010 under the ABL Facility. As
a result, the dividend for the period up to the December 15, 2009 dividend payment date compounded at a rate of 12% per annum.
In addition to any dividends declared and paid as described in the preceding paragraphs, holders of
the outstanding Preferred Shares also have the right to participate equally and ratably, on an
as-converted basis, with the holders of shares of Common Stock in all cash dividends and
distributions paid on the Common Stock.
On June 15, 2010, the Dividend Payment Committee of our board of directors declared and paid to the
holders of Convertible Preferred Stock, the CD&R Funds, a dividend of 7,971.8137 shares of
Convertible Preferred Stock for the period from March 16, 2010 through June 15, 2010. On March 17,
2010, the Dividend Payment Committee of our board of directors declared and paid to the holders of
Convertible Preferred Stock, the CD&R Funds, a dividend of 6,361.5815 shares of Convertible
Preferred Stock for the period from December 16, 2009 through March 15, 2010.
If, at any time after the 30-month anniversary of the Closing Date, the trading price of the Common
Stock exceeds 200% of the initial conversion price of the Convertible Preferred Stock (initially
$1.2748 and, subsequent to the Reverse Stock Split, $6.3740, as adjusted for any stock dividends,
splits, combinations or similar events) for each of 20 consecutive trading days (the Dividend Rate
Reduction
Event), the dividend rate (excluding any applicable adjustments as a result of a default) will
become 0.00%. However, this does not preclude the payment of default dividends after the 30-month
anniversary of the Closing Date. As a result of certain restrictions on dividend payments in our
Amended Credit Agreement and ABL Facility, we expect the dividend for each quarter of fiscal 2010
to be paid in-kind, at a pro rata rate of 12% per annum. See Note 10Debt and Note Payable for
more information on our Amended Credit Agreement and ABL Facility.
20
Convertibility and Anti-Dilution Adjustments. To the extent that we have authorized but unissued
shares of Common Stock, holders of Preferred Shares have the right, at any time and from time to
time, at their option, to convert any or all of their Preferred Shares, in whole or in part, into
fully paid and non-assessable shares of our Common Stock at the conversion price set forth in the
Certificate of Designations. The number of shares of Common Stock into which a Preferred Share is
convertible is determined by dividing the sum of the liquidation preference of $1,000 per Preferred
Share and the accrued and unpaid dividends of such share as of the time of conversion by the
conversion price in effect at the time of conversion.
The initial conversion price of the Convertible Preferred Stock was equal to $1.2748, and was
$6.3740 as of August 1, 2010, as adjusted for the Reverse Stock Split. The conversion price is
subject to adjustment as set forth in the Certificate of Designations and is subject to customary
anti-dilution adjustments, including stock dividends, splits, combinations or similar events and
issuance of our Common Stock at a price below the then-current market price and, within the first
three years after the Closing Date, issuances of our Common Stock below the then applicable
conversion price.
Milestone Redemption Right. The Company has the right, at any time on or after the tenth
anniversary of the Closing Date, to redeem in whole, but not in part, all then-issued and
outstanding shares of Convertible Preferred Stock in accordance with the procedures set forth in
the Certificate of Designations. Any holder of Convertible Preferred Stock has the right, at any
time on or after the tenth anniversary of the Closing Date, to require that the Company redeem all,
but not less than all, of its shares of Convertible Preferred Stock in accordance with the
procedures set forth in the Certificate of Designations. In each case, such right (the Milestone
Redemption Right), is exercisable at a redemption price for each Preferred Share equal to the sum
of the liquidation preference of $1,000 per Preferred Share and the accrued and unpaid dividends of
such share as of the time of redemption.
Change of Control Redemption Right. Upon certain change of control events specified in the
Certificate of Designations, including certain business combinations involving the Company and
certain changes to the beneficial ownership of the voting power of the Company, so long as the CD&R
Funds do not own 45% or more of the voting power of the Company and directors designated by the
CD&R Funds are not entitled to cast a majority of the total number of votes that can be cast by the
Companys board of directors or by the directors constituting the quorum approving or recommending
such change of control event, holders of Preferred Shares are able to require redemption by the
Company, in whole but not in part, of the Convertible Preferred Stock (1) if redeemed after the
fourth anniversary of the Closing Date, at a purchase price equal to the sum of the liquidation
value of such Preferred Shares and the accrued and unpaid dividends thereon as of the redemption
date or (2) if redeemed prior to the fourth anniversary of the Closing Date, at a purchase price
equal to the sum of (a) the liquidation value of such Preferred Shares plus the accrued and unpaid
dividends thereon as of the redemption date and (b) a make-whole premium equal to the net present
value of the sum of all dividends that would otherwise be payable on and after the redemption date,
to and including such fourth anniversary date, assuming that such dividends are paid in cash. In
addition, upon change of control events pursuant to the Amended Credit Agreement or the ABL
Facility, holders of Preferred Shares are able to require redemption by the Company, in whole but
not in part, of the Convertible Preferred Stock, at a purchase price equal to 101% of the sum of
the liquidation value of such Preferred Shares and the accrued and unpaid dividends thereon as of
the redemption date.
In the event of a merger or other business combination resulting in a change of control in which
the holders of shares of our Common Stock receive cash or securities of an unaffiliated entity as
consideration for such shares, if the holder of Preferred Shares does not exercise the change of
control redemption right described in the paragraph above or is not entitled to the change of
control redemption right in connection with such event, such holder will be entitled to receive,
pursuant to such merger or business combination, the consideration such holder would have received
for its Preferred Shares had it converted such shares immediately prior to the merger or business
combination transaction. In the event of a merger or other business combination not resulting in a
change of control in which the holders of shares of our Common Stock receive cash or securities of
an unaffiliated entity as consideration for such shares, holders of Convertible Preferred Stock
shall have the option to exchange their Preferred Shares for shares of the surviving entitys
capital stock having terms, preferences, rights, privileges and powers no less favorable than the
terms, preferences, rights, privileges and powers under the Certificate of Designations.
Vote. Holders of Preferred Shares generally are entitled to vote with the holders of the shares of
our Common Stock on all matters submitted for a vote of holders of shares of our Common Stock
(voting together with the holders of shares of our Common Stock as one class) and are entitled to a
number of votes equal to the number of shares of Common Stock issuable upon conversion of such
holders
21
Preferred Shares (without any limitations based on our authorized but unissued shares of
our Common Stock) as of the applicable record date for the determination of stockholders entitled
to vote on such matters.
Certain matters require the approval of the holders of a majority of the outstanding Preferred
Shares, voting as a separate class, including (1) amendments or modifications to the Companys
Certificate of Incorporation, by-laws or the Certificate of Designations, that would adversely
affect the terms or the powers, preferences, rights or privileges of the Convertible Preferred
Stock, (2) authorization, creation, increase in the authorized amount of, or issuance of any class
or series of senior securities or any security convertible into, or exchangeable or exercisable
for, shares of senior securities and (3) any increase or decrease in the authorized number of
Preferred Shares or the issuance of additional Preferred Shares, subject to certain exceptions.
In addition, in the event that the Company fails to fulfill its obligations to redeem the
Convertible Preferred Stock in accordance with the terms of the Certificate of Designations
following the exercise of the Milestone Redemption Right or change of control redemption rights
described above, until such failure is remedied, certain additional actions of the Company shall
require the approval of the holders of a majority of the outstanding Preferred Shares, voting as a
separate class, including the adoption of an annual budget, the hiring and firing, or the changing
of the compensation, of executive officers and the commitment, resolution or agreement to effect
any business combination.
Restriction on Dividends on Junior Securities. The Company is prohibited from (i) paying any
dividend with respect to our Common Stock or other junior securities, except for ordinary cash
dividends in which the Convertible Preferred Stock participates and which are declared, paid or set
aside after the base dividend rate for the Convertible Preferred Stock has been reduced to 0.00% as
described above and dividends payable solely in shares of our Common Stock or other junior
securities, or (ii) repurchasing or redeeming any shares of our Common Stock or other junior
securities, unless, in each case, we have sufficient access to lawful funds immediately following
such action such that we would be legally permitted to redeem in full all Preferred Shares then
outstanding.
Accounting for Convertible Preferred Stock
In accordance with guidance that has been codified under ASC Topic 815, Derivatives and Hedging,
and ASC Topic 480, Distinguishing Liabilities from Equity, we classified the Convertible Preferred
Stock as mezzanine equity because the Convertible Preferred Stock (1) can be settled in cash or
shares of our Common Stock, (2) contains change of control rights allowing for early redemption,
and (3) contains Milestone Redemption Rights which allow the Convertible Preferred Stock to remain
outstanding without a stated maturity date.
In addition, the Certificate of Designations, which is the underlying contract of the Convertible
Preferred Stock, includes features that are required to be bifurcated and recorded at fair value.
We classified the Convertible Preferred Stock as an equity host contract because of (1) the voting
rights, (2) the participating dividends on Common Stock and mandatory, cumulative preferred stock
dividends, and (3) the Milestone Redemption Right which allows the Convertible Preferred Stock to
remain outstanding without a stated maturity date. We then determined that the conditions resulting
in the application of the default dividend rate are not clearly and closely related to this equity
host contract and we bifurcated and separately recorded these features at fair value. See Note
12Derivative Instruments and Hedging Strategy.
The Convertible Preferred Stock, at execution, was recorded with a book value of $221.6 million
which is the $250.0 million initial liquidation preference less $27.7 million of direct transaction
costs and $0.6 million for the fair value, net of income tax, of the bifurcated embedded derivative
liability related to the dividend default rate. The $28.4 million difference between the book value
and the initial liquidation preference is accreted using the effective interest rate method from
the execution of the contract to the Milestone Redemption Right date or 10 years. The accretion
recorded during the three and nine month periods ended August 1, 2010 was $0.7 million and $2.0
million, respectively.
Because the dividends accrue and accumulate on a daily basis and the amount payable upon redemption
of the Convertible Preferred Stock is the liquidation preference plus accrued and unpaid dividends,
accrued dividends are recorded into Convertible Preferred Stock.
Dividends are accrued at the 12% rate and increased the Convertible Preferred Stock by $8.0 million
and $23.2 million during the three and nine month periods ended August 1, 2010, respectively. As a
result, as of August 1, 2010, the book value of our Convertible Preferred Stock was $248.0 million.
22
In accordance with guidance that has been codified under ASC Subtopic 470-20, Debt with Conversion
and Other Options, the Convertible Preferred Stock contains a beneficial conversion feature because
it was issued with an initial conversion price of $1.2748 per Common Share equivalent (or $6.3740
as adjusted for the Reverse Stock Split) and the closing stock price per share of Common Stock just
prior to the execution of the CD&R Equity Investment was $2.51 ($12.55 as adjusted for the Reverse
Stock Split). The intrinsic value of the beneficial conversion feature cannot exceed the issuance
proceeds of the Convertible Preferred Stock less the cash paid to the CD&R Funds, and thus is
$241.4 million. At November 1, 2009, 1.8 million of the potentially 39.2 million shares of Common
Stock issuable upon conversion of the Preferred Shares were authorized and unissued. At August 1,
2010, all of the potentially 43.0 million shares of Common Stock issuable upon conversion of the
Preferred Shares, which includes paid-in-kind dividends, were authorized and unissued.
As of August 1, 2010 and November 1, 2009, the Preferred Shares were convertible into 43.0 million
and 39.2 million shares of Common Stock, respectively, at an initial conversion price of $1.2748
(or $6.3740 as adjusted for the Reverse Stock Split). However, as of November 1, 2009, only
approximately 1.8 million shares of Common Stock were authorized and unissued, and therefore the
CD&R Funds were not able to fully convert the Preferred Shares. To the extent that the CD&R Funds
had opted to convert their Preferred Shares, as of November 1, 2009, their conversion right was
limited to conversion of that portion of their Preferred Shares into the approximately 1.8 million
shares of Common Stock that were currently authorized and unissued. On March 5, 2010, we effected
the Reverse Stock Split at an exchange ratio of 1-for-5. As of that date, the Preferred Shares held
by the CD&R Funds were fully convertible into 40.6 million Common Shares. As a result, we recorded
an additional beneficial conversion feature charge in the amount of $230.7 million in the second
quarter of fiscal 2010 related to the availability of shares of Common Stock into which the CD&R
Funds may convert their Preferred Shares. In addition, we recorded an additional $4.6 million and
$10.6 million beneficial conversion feature charge in the three months ended August 1, 2010 and May
2, 2010, respectively, related to dividends that have accrued and are convertible into shares of
Common Stock. In addition, we expect to recognize additional beneficial conversion feature charges
on paid-in-kind dividends to the extent that the Preferred Shares are accrued. Our policy is to
recognize beneficial conversion feature charges on paid-in-kind dividends based on a daily dividend
recognition and the daily closing stock price of our Common Stock.
At any time prior to the Dividend Rate Reduction Event, if dividends are not paid in cash on the
applicable dividend payment date, the rate at which such dividends are payable will be at least 12%
per annum. Therefore, we accrue dividends daily based on the 12% rate and if and when we determine
the dividends will be paid in cash on the applicable dividend payment date, we will record a
subsequent benefit of the excess 4% accrual upon our boards declaration of such cash dividend and
reverse the beneficial conversion feature charge associated with such accrual.
At August 1, 2010 and November 1, 2009, we had Preferred Shares outstanding of 264,333 and 250,000,
respectively. In addition, at August 1, 2010 and November 1, 2009, we had accrued but unpaid cash
dividends and Preferred Stock dividends with a value of $9.9 million and $1.0 million,
respectively. As of August 1, 2010 and November 1, 2009, the aggregate liquidation preference plus
aggregate accrued dividends of the Convertible Preferred Stock was $274.3 million and $251.0
million, respectively.
NOTE 12 DERIVATIVE INSTRUMENTS AND HEDGING STRATEGY
Interest Rate Risk
We are exposed to interest rate risk associated with fluctuations in the interest rates on our
variable interest rate debt. In order to manage this risk, on June 15, 2006, we entered into a
forward interest rate swap agreement (Swap Agreement) hedging a portion of our then $400 million
Credit Agreement with a notional amount of $65 million on November 1, 2009. The Swap Agreement
expired on June 17, 2010 and, therefore, there was no remaining notional amount outstanding on
August 1, 2010. At inception, we designated the Swap Agreement as a cash flow hedge. The fair value
of the Swap Agreement as of November 1, 2009, was a liability of approximately $2.2 million and was
included in other accrued expenses in the Consolidated Balance Sheet. The fair value of the Swap
Agreement excludes accrued interest and takes into consideration current interest rates and current
creditworthiness of us or the counterparty, as applicable.
During the fourth quarter of fiscal 2009, in connection with our refinancing and Amended Credit
Agreement, we modified the terms of our credit agreement to include a 2% LIBOR minimum market
interest rate. At that time, based on the current expected LIBOR rates over the remaining term of the Swap
Agreement, the forecasted market rate interest payments had effectively converted to fixed rate
interest payments making the Swap Agreement both ineffective and the underlying hedged cash flow no
longer probable. Therefore, during the fourth quarter of fiscal 2009, we reclassified to interest
expense the remaining $3.1 million of deferred losses recorded to accumulated
23
other comprehensive
income (loss) and all subsequent changes in fair market value were recorded directly to earnings.
During the three and nine month periods ended August 1, 2010, we have reduced interest expense by
$0.4 million and $1.2 million, respectively, as a result of the changes in fair value of the hedge.
Embedded Derivative Bifurcated From Convertible Preferred Stock (See Note 11)
The terms of the Convertible Preferred Stock include a default dividend rate of 3% per annum if,
with certain exceptions, we fail to (1) pay holders of Convertible Preferred Stock, in cash on an
as-converted basis, dividends paid on shares of our Common Stock; (2) following the date that there
are no Convertible Notes outstanding, pay, in cash or in kind, any dividend (other than dividends
payable pursuant to the preceding clause (1)) payable to holders of Preferred Shares pursuant to
the Certificate of Designations, on the applicable quarterly dividend payment date; (3) after June
30, 2010, reserve and keep available for issuance the number of shares of our Common Stock equal to
110% of the number of shares of Common Stock issuable upon conversion of all outstanding shares of
Convertible Preferred Stock; (4) maintain the listing of our Common Stock on the New York Stock
Exchange or another U.S. national securities exchange; (5) comply with our obligations to convert
the Convertible Preferred Stock in accordance with our obligations under the Certificate of
Designations; (6) redeem the Convertible Preferred Stock in compliance with the Certificate of
Designations; or (7) comply with any dividend payment restrictions with respect to junior
securities dividends. If, at a time when a 3% per annum default dividend rate is in effect after
June 30, 2011, we fail to reserve and keep available authorized common shares pursuant to the terms
of the Certificate of Designations the default dividend rate shall increase to 6% until such
default is no longer continuing. The default dividend represents an embedded derivative which is
bifurcated from the CD&R Equity Investment host contract (i.e., the Certificate of Designations).
See Note 11Series B Cumulative Convertible Participating Preferred Stock for further discussion
of the Convertible Preferred Stock.
To determine the Level 3 fair value of the embedded derivative, we used a probability-weighted
discounted cash flow model and assigned probabilities for each qualified default event. At November
1, 2009, we recorded the fair value of the embedded derivative of $1.0 million in other accrued
liabilities on the Consolidated Balance Sheet. The majority of the value of the derivative was
derived from the default dividend rate. As discussed further in Note 11, on December 14, 2009, the
CD&R Funds, our majority equity holders expressed their intention to vote in favor of the proposed
Reverse Stock Split, which became effective on March 5, 2010. Based upon these events we
reevaluated the assigned probabilities used previously in the probability-weighted discounted cash
flow model. As a result, we have recorded a $0.9 million decrease in fair value of the embedded
derivative during the nine months ended August 1, 2010 which was recorded in other income and
expense during the nine month period.
At August 1, 2010 and November 1, 2009, the fair value carrying amount of our derivative
instruments were recorded as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
|
|
Balance Sheet Location |
|
|
Fair Value |
|
|
Fair Value |
|
Derivatives not
designated as hedging
instruments under ASC
815: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contract |
|
Other accrued expenses |
|
|
$ |
|
|
|
$ |
2,208 |
|
Embedded derivative |
|
Other accrued expenses |
|
|
|
111 |
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
111 |
|
|
$ |
3,249 |
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on the Consolidated Statement of Operations for the three and
nine month periods ended August 1, 2010 and August 2, 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Loss |
|
|
|
|
|
|
Amount of Loss Reclassified from |
|
|
|
|
|
|
|
Reclassified from Accumulated |
|
|
OCI into Loss (Effective Portion) |
|
Derivative in ASC 815 Cash |
|
OCI into Loss |
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
Flow Hedging Relationship |
|
(Effective Portion) |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Interest rate contract |
|
Interest expense |
|
$ |
|
|
|
$ |
(878 |
) |
|
$ |
|
|
|
$ |
(1,756 |
) |
The effect of derivative instruments not designated as hedging instruments on the Consolidated
Statement of Operations for the three and nine month periods ended August 1, 2010 and August 2,
2009 was as follows (in thousands):
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Income Recognized |
|
|
Amount of Income Recognized |
|
|
|
|
|
|
in Income (Loss) on Derivatives |
|
|
in Income (Loss) on Derivatives |
|
|
Location of Income |
|
Derivatives Not Designated as Hedging |
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
Recognized in Income |
|
Instruments Under ASC 815 |
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
(Loss) on Derivatives |
|
Interest rate contract |
|
$ |
413 |
|
|
$ |
|
|
|
$ |
1,248 |
|
|
$ |
|
|
|
Interest expense |
Embedded derivative |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
930 |
|
|
$ |
|
|
|
Other income, net |
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable
approximate fair value as of August 1, 2010 and November 1, 2009 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
2.125% Convertible Senior Subordinated Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
59 |
|
|
$ |
97 |
|
Amended Credit Agreement |
|
$ |
136,301 |
|
|
$ |
132,898 |
|
|
$ |
150,000 |
|
|
$ |
138,000 |
|
The fair value of the Convertible Notes was determined from the market rates on the redemption date
prior to our fiscal period end. The fair value of the Amended Credit Agreement was based on recent
trading activities of comparable market instruments.
Fair Value Measurements
ASC 820-10 clarifies that fair value is an exit price, representing the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants based on the highest and best use of the asset or liability. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. ASC 820-10 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 table summarizes information regarding our financial assets and liabilities that are
measured at fair value as of August 1, 2010 and November 1, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value as of |
|
|
|
|
|
|
|
August 1, 2010 |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan(1) |
|
$ |
3,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,500 |
|
Assets held for sale |
|
|
|
|
|
|
6,304 |
|
|
|
|
|
|
|
6,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,500 |
|
|
$ |
6,304 |
|
|
$ |
|
|
|
$ |
9,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability |
|
$ |
3,688 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,688 |
|
Interest rate contract |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative |
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
3,688 |
|
|
$ |
|
|
|
$ |
111 |
|
|
$ |
3,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value as |
|
|
|
of November 1, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan(1) |
|
$ |
3,359 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,359 |
|
Assets held for sale |
|
|
|
|
|
|
4,963 |
|
|
|
|
|
|
|
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,359 |
|
|
$ |
4,963 |
|
|
$ |
|
|
|
$ |
8,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability |
|
$ |
(3,480 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,480 |
) |
Interest rate contract |
|
|
|
|
|
|
(2,208 |
) |
|
|
|
|
|
|
(2,208 |
) |
Embedded derivative |
|
|
|
|
|
|
|
|
|
|
(1,041 |
) |
|
|
(1,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
(3,480 |
) |
|
$ |
(2,208 |
) |
|
$ |
(1,041 |
) |
|
$ |
(6,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized holding gains (losses) for the three and nine month periods ended August 1,
2010 were $(0.1) million and $0.2 million, respectively. Unrealized holding gains (losses)
for both the three and nine month periods ended August 2, 2009 was $0.5 million. These
unrealized holding gains (losses) are primarily offset by changes in the deferred
compensation plan liability. |
The following table summarizes the activity in Level 3 financial instruments during the nine months
ended August 1, 2010:
|
|
|
|
|
|
|
August 1, |
|
|
|
2010 |
|
Beginning balance |
|
$ |
(1,041 |
) |
Realized gains (losses) (1) |
|
|
930 |
|
|
|
|
|
Ending balance |
|
$ |
(111 |
) |
|
|
|
|
As of August 1, 2010 and November 1, 2009, the fair value of our Level 3 embedded derivative was
$0.1 million and $1.0 million, respectively. To estimate its fair value, we used an income
approach. The significant inputs for the valuation model include the following:
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Risk-free interest rate |
|
|
1.1% - 3.6 |
% |
|
|
0.3% - 3.6 |
% |
Discount rate |
|
|
6.2% - 9.8 |
% |
|
|
6.1% - 9.8 |
% |
Credit spread |
|
|
5.1% - 6.3 |
% |
|
|
5.1% - 6.2 |
% |
Probability of failure to have common shares authorized by June 30, 2010 |
|
|
|
|
|
|
1.0 |
% |
NOTE 14 INCOME TAXES
The reconciliation of income tax computed at the statutory tax rate to the effective income tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes |
|
|
(35.3 |
)% |
|
|
3.4 |
% |
|
|
(2.0 |
)% |
|
|
3.4 |
% |
Non-deductible goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31.3 |
)% |
Canada valuation allowance |
|
|
3.9 |
% |
|
|
(0.7 |
)% |
|
|
0.4 |
% |
|
|
(0.1 |
)% |
Non-deductible expenses |
|
|
(2.9 |
)% |
|
|
7.0 |
% |
|
|
(1.2 |
)% |
|
|
(0.3 |
)% |
Statutory expiration of FIN
48 liability |
|
|
6.3 |
% |
|
|
|
|
|
|
0.7 |
% |
|
|
|
|
Other |
|
|
(0.7 |
)% |
|
|
(3.5 |
)% |
|
|
2.1 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
6.3 |
% |
|
|
41.2 |
% |
|
|
35.0 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
During the three months ended August 1, 2010, we filed state income tax returns which updated our
estimated tax expense and resulted in a 26.0% and 2.8% reduction in the effective tax rate
during the three and nine month periods ended August 1, 2010, respectively.
The increase in our effective tax rate for the nine months ended August 1, 2010 as
compared to the prior year period was primarily due to the $611.4 million goodwill impairment
charges in the nine months ended August 2, 2009 which is discussed in Note 6, Goodwill and Other
Intangible Assets.
The total amount of unrecognized tax benefit at August 1, 2010 and November 1, 2009 was $0.5
million and $0.7 million, respectively, all of which would impact our
effective tax rate if recognized. We do not anticipate any material change in the total amount of
unrecognized tax benefits to occur within the next twelve months.
NOTE 15 COMPREHENSIVE LOSS
Comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Net income (loss) |
|
$ |
(3,299 |
) |
|
$ |
2,607 |
|
|
$ |
(21,441 |
) |
|
$ |
(648,945 |
) |
Foreign exchange translation gain (loss) and other, net of tax |
|
|
10 |
|
|
|
(3 |
) |
|
|
199 |
|
|
|
(5 |
) |
Loss in fair value of interest rate swap, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(554 |
) |
Reclassification adjustment for losses on derivative
instruments recognized during the period, net of tax |
|
|
|
|
|
|
541 |
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(3,289 |
) |
|
$ |
3,145 |
|
|
$ |
(21,242 |
) |
|
$ |
(648,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Foreign exchange translation adjustments |
|
$ |
590 |
|
|
$ |
391 |
|
Defined benefit pension plan |
|
|
(9,250 |
) |
|
|
(9,250 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(8,660 |
) |
|
$ |
(8,859 |
) |
|
|
|
|
|
|
|
A summary of the components of other comprehensive income (loss) and the related tax effects for
each of the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended August 1, 2010 |
|
|
Fiscal Three Months Ended August 2, 2009 |
|
|
|
Before-Tax |
|
|
Tax (Expense) |
|
|
Net-of-Tax |
|
|
Before-Tax |
|
|
Tax (Expense) |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
or Benefit |
|
|
Amount |
|
|
Amount |
|
|
or Benefit |
|
|
Amount |
|
Foreign exchange translation gain (loss) and other |
|
$ |
15 |
|
|
$ |
(5 |
) |
|
$ |
10 |
|
|
$ |
(5 |
) |
|
$ |
2 |
|
|
$ |
(3 |
) |
Reclassification adjustment for losses on derivative
instruments recognized during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878 |
|
|
|
(337 |
) |
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive income (loss) |
|
$ |
15 |
|
|
$ |
(5 |
) |
|
$ |
10 |
|
|
$ |
873 |
|
|
$ |
(335 |
) |
|
$ |
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended August 1, 2010 |
|
|
Fiscal Nine Months Ended August 2, 2009 |
|
|
|
Before-Tax |
|
|
Tax (Expense) |
|
|
Net-of-Tax |
|
|
Before-Tax |
|
|
Tax (Expense) |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
or Benefit |
|
|
Amount |
|
|
Amount |
|
|
or Benefit |
|
|
Amount |
|
Foreign exchange translation gain (loss) and other |
|
$ |
197 |
|
|
$ |
2 |
|
|
$ |
199 |
|
|
$ |
(6 |
) |
|
$ |
1 |
|
|
$ |
(5 |
) |
Loss in fair value of interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900 |
) |
|
|
346 |
|
|
|
(554 |
) |
Reclassification adjustment for losses on derivative
instruments recognized during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,756 |
|
|
|
(674 |
) |
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive income (loss) |
|
$ |
197 |
|
|
$ |
2 |
|
|
$ |
199 |
|
|
$ |
850 |
|
|
$ |
(327 |
) |
|
$ |
523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
NOTE 16 BUSINESS SEGMENTS
We have aggregated our operations into three reportable segments based upon similarities in product
lines, manufacturing processes, marketing and management of our businesses: metal coil coating;
metal components; and engineered building systems. All business 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
business segments use similar basic raw materials. 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 metal components segment products include metal roof
and wall panels, doors, metal partitions, metal trim, insulated panels and other related
accessories. 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 reporting segments follow the same
accounting policies used for our consolidated financial statements.
We evaluate a segments 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) hot-rolled, light gauge painted and slit material
and other services provided by the metal coil coating segment to both the engineered building
systems and metal components segments; (ii) building components provided by the metal components
segment to the engineered building systems segment; and (iii) structural framing provided by the
engineered building systems segment to the metal components segment.
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 segments.
The following table represents sales, operating income and total assets attributable to these
business segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
Total sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
51,200 |
|
|
$ |
44,256 |
|
|
$ |
134,990 |
|
|
$ |
125,283 |
|
Metal components |
|
|
115,507 |
|
|
|
113,216 |
|
|
|
297,382 |
|
|
|
336,250 |
|
Engineered building systems |
|
|
141,446 |
|
|
|
129,819 |
|
|
|
356,787 |
|
|
|
410,462 |
|
Intersegment sales |
|
|
(62,861 |
) |
|
|
(49,431 |
) |
|
|
(160,087 |
) |
|
|
(150,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
245,292 |
|
|
$ |
237,860 |
|
|
$ |
629,072 |
|
|
$ |
721,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
17,885 |
|
|
$ |
16,060 |
|
|
$ |
47,789 |
|
|
$ |
39,697 |
|
Metal components |
|
|
89,417 |
|
|
|
96,082 |
|
|
|
233,931 |
|
|
|
283,804 |
|
Engineered building systems |
|
|
137,990 |
|
|
|
125,718 |
|
|
|
347,352 |
|
|
|
398,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
245,292 |
|
|
$ |
237,860 |
|
|
$ |
629,072 |
|
|
$ |
721,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
5,201 |
|
|
$ |
1,016 |
|
|
$ |
12,412 |
|
|
$ |
(105,726 |
) |
Metal components |
|
|
10,567 |
|
|
|
13,128 |
|
|
|
17,971 |
|
|
|
(143,596 |
) |
Engineered building systems |
|
|
(3,112 |
) |
|
|
9,042 |
|
|
|
(14,579 |
) |
|
|
(389,522 |
) |
Corporate |
|
|
(11,580 |
) |
|
|
(12,959 |
) |
|
|
(36,617 |
) |
|
|
(40,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
1,076 |
|
|
$ |
10,227 |
|
|
$ |
(20,813 |
) |
|
$ |
(679,624 |
) |
Unallocated other expense |
|
|
(4,596 |
) |
|
|
(5,795 |
) |
|
|
(12,164 |
) |
|
|
(18,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(3,520 |
) |
|
$ |
4,432 |
|
|
$ |
(32,977 |
) |
|
$ |
(698,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 |
|
|
November 1, 2009 |
|
Total assets: |
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
64,924 |
|
|
$ |
57,254 |
|
Metal components |
|
|
180,064 |
|
|
|
160,123 |
|
Engineered building systems |
|
|
220,580 |
|
|
|
241,396 |
|
Corporate |
|
|
103,012 |
|
|
|
155,745 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
568,580 |
|
|
$ |
614,518 |
|
|
|
|
|
|
|
|
28
NOTE 17 CONTINGENCIES
From time to time, we are involved in various legal proceedings and contingencies considered to be
in the ordinary course of business. While we are not able to predict whether we will incur any
liability in excess of insurance coverages or to accurately estimate the damages, or the range of
damages, if any, we might incur in connection with these legal proceedings, we believe these legal
proceedings and claims will not have a material adverse effect on our business, consolidated
financial position or results of operations.
29
NCI BUILDING SYSTEMS, INC.
|
|
|
Item 2. |
|
Managements 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. Financial Statements and the audited consolidated
financial statements and the notes thereto and Item 7. Managements 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, 2009.
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
managements 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. 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; |
|
|
|
|
general economic conditions affecting the construction industry; |
|
|
|
|
the current financial crisis and U.S. recession; |
|
|
|
|
the current challenges in the credit market; |
|
|
|
|
ability to service or refinance our debt and obtain future financing; |
|
|
|
|
the Companys ability to comply with the financial tests and covenants in its existing
and future debt obligations; |
|
|
|
|
operational limitations in connection with our debt; |
|
|
|
|
the current economic and credit conditions severely affecting the Companys operations; |
|
|
|
|
recognition of asset impairment charges; |
|
|
|
|
raw material pricing and supply; |
|
|
|
|
the ability to make strategic acquisitions accretive to earnings; |
|
|
|
|
the fluctuations in customer demand and other patterns; |
|
|
|
|
environmental cleanups, investigations, claims and liabilities; |
|
|
|
|
competitive activity and pricing pressure; |
30
|
|
|
the volatility of the Companys stock price; |
|
|
|
|
the substantial rights, seniority and dilutive effect on our common stockholders of the
Convertible Preferred Stock issued to the CD&R Funds; |
|
|
|
|
increases in energy costs; |
|
|
|
|
breaches of our information security system security measures; |
|
|
|
|
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; |
|
|
|
|
costs and other effects of legal and administrative proceedings, settlements,
investigations, claims and other matters; and |
|
|
|
|
other risks detailed under the caption Risk Factors in Part II, Item 1A of this report
and in our Annual Report on Form 10-K as filed 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.
OVERVIEW
NCI Building Systems, Inc. (together with its subsidiaries, unless the context requires otherwise,
the Company, we, us or our) is one of North Americas largest integrated manufacturers and
marketers of metal products for the nonresidential construction industry. We provide metal coil
coating services and design, engineer, manufacture and market metal components and engineered
building systems 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.
Metal components offer builders, designers, architects and end-users several advantages, including
lower long-term costs, longer life, attractive aesthetics and design flexibility. Similarly,
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.
We assess performance across our business segments by analyzing and evaluating (i) gross profit,
operating income and whether or not each segment has achieved its projected sales goals, and (ii)
non-financial efficiency indicators such as gross profit per employee, man hours per ton of steel
produced and shipped tons per day. 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.
Third Fiscal Quarter
Each of our three business segments operated during the third quarter of fiscal 2010 in a very
challenging business environment characterized by weak demand, pricing pressure and higher steel
costs. Both our metal coil coating and metal components segments reported operating profits while
our engineered building systems segment did not return to operating profitability in the third
quarter of fiscal 2010 as pricing pressure and higher steel costs offset the benefits of higher
volume.
Our metal coil coating segment continued to successfully sell its products to end users outside of
the nonresidential construction industry and posted an 11.4% increase in third-party sales.
Operating income increased more than four-fold compared to the same period in prior year.
31
Our metal components segment sales results benefitted from increased shipments of insulated metal
panels and NuRoof® products, although overall tons shipped declined compared to the
third quarter of fiscal 2009. Through commercial and cost discipline, this segment maintained a
reasonable operating margin despite a 7% decline in third-party sales.
Our engineered building systems segment results continued to reflect a confluence of factors,
including the overall weakness in the nonresidential construction activity and significant margin
compression related to pricing pressure coupled with increasing steel costs. Through technology
investments, this segment has succeeded in meeting or exceeding requests for faster turnaround
times on all project phases, which has become an important competitive advantage.
On March 5, 2010, the Company effected a reverse stock split in which each five shares of the
Companys common stock, par value $0.01 (the Common Stock and shares thereof, the Common
Shares) was reclassified and combined into one share of Common Stock (the Reverse Stock Split).
As of that date, and after giving effect to the Reverse Stock Split, the Preferred Shares held by
Clayton, Dubliier & Rice VIII, L.P. and CD&R Friends & Family Fund VIII, L.P. (the CD&R Funds)
were fully convertible into 40.6 million Common Shares.
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.
One of the primary challenges we face both short and long term is the volatility in the price of
steel. Our business is heavily dependent on the price and supply of steel. For the fiscal nine
months ended August 1, 2010, steel represented approximately 69% of our cost of goods sold. The
steel industry is highly cyclical in nature, and steel prices have been volatile in recent years
and may remain volatile in the future. Steel prices are influenced by numerous factors beyond our
control, including general economic conditions domestically and internationally, competition, labor
costs, production costs, import duties and other trade restrictions.
The monthly CRU North American Steel Price Index, published by the CRU Group, has increased 7.8%
from October 2009 to July 2010 and was 28.5% higher in July 2010 compared to July 2009. Steel
prices increased rapidly and steeply during the first half of calendar 2008, and then began a rapid
and precipitous decline in the fall of calendar 2008. In fiscal 2009, steel prices continued their
decline at a precipitous rate until July 2009 when steel prices began to increase. This unusual
level of volatility has negatively impacted our business. In the first two quarters of
fiscal 2009, we recorded a $40.0 million charge to cost of sales to adjust certain raw material
inventory to the lower of cost or market because this inventory exceeded our estimates of
net realizable value less normal profit margins. Our sales volume was significantly lower than
previously anticipated while raw material prices had declined more rapidly than expected. Second,
some customers delayed projects, waiting to see where steel prices would bottom out. For additional
discussion of steel prices, see Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
In assessing the state of the metal construction market, we rely upon various industry
associations, third-party research, and various government reports such as industrial production
and capacity utilization. One such industry association is the Metal Building Manufacturers
Association (MBMA), which provides summary member sales information and promotes the design and
construction of metal buildings and metal roofing systems. Another is McGraw-Hill Construction
Information Group, which we review for reports of actual and forecasted growth in various
construction related industries, including the overall nonresidential construction market.
McGraw-Hill Constructions nonresidential construction forecast for calendar 2010, published in
July 2010, indicates an expected reduction of 14% in square footage and a decrease of 8% in dollar
value as compared to the prior calendar year. In 2011, the forecast is expected to increase, with
an increase of 7% in dollar value in 2011 compared to 2010. Additionally, we review the American
Institute of Architects (AIA) survey for inquiry and billing activity for the industrial,
commercial and institutional sectors. AIAs Architectural Billing Index published for July 2010
indicated that billings levels were modestly positive but inquiries remained negative compared to
October 2009.
The overall decline in economic conditions beginning in the third quarter of 2008 has reduced
demand for our products and adversely affected our business. In addition, the tightening of credit
in financial markets over the same period has adversely affected the ability of our customers to
obtain financing for construction projects. As a
result, we have experienced decreases in and cancellations of orders for our products, and the
ability of our customers to make payments has been adversely affected. Similar factors could cause
our suppliers to
32
experience financial distress or bankruptcy, resulting in temporary raw material shortages.
The lack of credit also adversely affects nonresidential construction, which is the focus of our
business.
As a result of the market downturn, we implemented a three phase process to resize and realign our
manufacturing operations. The purpose of these activities was to close some of our least efficient
facilities and to retool certain of these facilities to allow us to better utilize our assets and
expand into new markets or better provide products to our customers, such as insulated panel
systems. As a result of the implementation of this three phase restructuring plan, we are realizing
an annualized fixed cost savings compared to fiscal 2008 in the amount of approximately $120
million. We have incurred facility closure costs of $18.5 million through August 1, 2010 related to
the three phase restructuring plan and expect to incur additional facility closure costs of $0.5
million in the remainder of fiscal 2010.
We do not have any long-term contracts for the purchase of steel and 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 remain available or that prices will not continue to be volatile. While most of our
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 to delivery,
we may, for competitive or other reasons, 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
please see Liquidity and Capital Resources Steel Prices and Item 3. Quantitative and
Qualitative Disclosures About Market Risk Steel Prices.
RESULTS OF OPERATIONS
As further discussed in the notes to our consolidated financial statements, our Consolidated
Financial Statements for the three and nine month periods ended August 2, 2009 have been adjusted
for the retrospective application of ASC 470-20, Debt with Conversion and Other Options (ASC
470-20).
We have aggregated our operations into three reportable segments based upon similarities in product
lines, manufacturing processes, marketing and management of our businesses: metal coil coating;
metal components; and engineered building systems. All business 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 all business segments use similar basic raw materials. 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 metal components segment products
include metal roof and wall panels, doors, metal partitions, metal trim, insulated panels and other
related accessories. 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 reporting segments follow the same
accounting policies used for our Consolidated Financial Statements.
We evaluate a segments 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) 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; (ii) building components provided by the metal components
segment to the engineered building systems segment; and (iii) structural framing provided by the
engineered building systems segment to the metal components segment. Segment information is
included in Note 16 of our Consolidated Financial Statements.
The following table represents sales and operating income attributable to these business segments
for the periods indicated (in thousands, except percentages):
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
August 1, 2010 |
|
|
August 2, 2009 |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
51,200 |
|
|
|
21 |
|
|
$ |
44,256 |
|
|
|
19 |
|
|
$ |
134,990 |
|
|
|
21 |
|
|
$ |
125,283 |
|
|
|
17 |
|
Metal components |
|
|
115,507 |
|
|
|
47 |
|
|
|
113,216 |
|
|
|
48 |
|
|
|
297,382 |
|
|
|
47 |
|
|
|
336,250 |
|
|
|
47 |
|
Engineered building systems |
|
|
141,446 |
|
|
|
58 |
|
|
|
129,819 |
|
|
|
54 |
|
|
|
356,787 |
|
|
|
57 |
|
|
|
410,462 |
|
|
|
57 |
|
Intersegment sales |
|
|
(62,861 |
) |
|
|
(26 |
) |
|
|
(49,431 |
) |
|
|
(21 |
) |
|
|
(160,087 |
) |
|
|
(25 |
) |
|
|
(150,051 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
245,292 |
|
|
|
100 |
|
|
$ |
237,860 |
|
|
|
100 |
|
|
$ |
629,072 |
|
|
|
100 |
|
|
$ |
721,944 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal coil coating |
|
$ |
5,201 |
|
|
|
|
|
|
$ |
1,016 |
|
|
|
|
|
|
$ |
12,412 |
|
|
|
|
|
|
$ |
(105,726 |
) |
|
|
|
|
Metal components |
|
|
10,567 |
|
|
|
|
|
|
|
13,128 |
|
|
|
|
|
|
|
17,971 |
|
|
|
|
|
|
|
(143,596 |
) |
|
|
|
|
Engineered building systems |
|
|
(3,112 |
) |
|
|
|
|
|
|
9,042 |
|
|
|
|
|
|
|
(14,579 |
) |
|
|
|
|
|
|
(389,522 |
) |
|
|
|
|
Corporate |
|
|
(11,580 |
) |
|
|
|
|
|
|
(12,959 |
) |
|
|
|
|
|
|
(36,617 |
) |
|
|
|
|
|
|
(40,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
1,076 |
|
|
|
|
|
|
$ |
10,227 |
|
|
|
|
|
|
$ |
(20,813 |
) |
|
|
|
|
|
$ |
(679,624 |
) |
|
|
|
|
Unallocated other expense |
|
|
(4,596 |
) |
|
|
|
|
|
|
(5,795 |
) |
|
|
|
|
|
|
(12,164 |
) |
|
|
|
|
|
|
(18,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(3,520 |
) |
|
|
|
|
|
$ |
4,432 |
|
|
|
|
|
|
$ |
(32,977 |
) |
|
|
|
|
|
$ |
(698,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL THREE MONTHS ENDED AUGUST 1, 2010 COMPARED TO FISCAL THREE MONTHS ENDED AUGUST 2, 2009
Consolidated sales increased by 3.1%, or $7.4 million for the three months ended August 1, 2010,
compared to the three months ended August 2, 2009. This increase resulted from a 1.0% increase in
external tonnage volumes and slightly higher relative sales prices in our metal components and
metal coil coating segments as a result of higher steel prices. Higher tonnage volumes in the
engineered building systems in the third quarter of fiscal 2010 compared to the same period in 2009
were driven by favorable lead times which increased market share for such products compared to the prior years period
notwithstanding a 16.7% decrease in low-rise nonresidential (less than 5 stories) square-footage
starts, as reported by McGraw-Hill, for the third quarter of fiscal 2010 compared to the same
period in the prior year.
Consolidated cost of sales increased by 10.4%, or $18.4 million for the three months ended August
1, 2010, compared to the three months ended August 2, 2009. Gross margins were 20.5% for the three
months ended August 1, 2010 compared to 25.8% for the same period in the prior year. The decline in
gross margins was the result of higher steel prices, reduced demand
and increased competition in the market, which resulted from the
general weakness of nonresidential construction activity in
our engineered building systems segment.
Metal coil coating sales increased by 15.7%, or $6.9 million to $51.2 million in the three months
ended August 1, 2010, compared to $44.3 million in the same period in the prior year. Sales to
third parties for the three months ended August 1, 2010 increased by 11.4% to $17.9 million from
$16.1 million in the same period in the prior year, primarily as a result of a 19.5% increase in
sales prices as a result of higher steel costs and a shift in product mix from tolling revenue for
coating services to package sales of coated steel products, partially offset by a 2.9% decrease in
external volume. Generally, package sales of coated steel products contribute lower margin dollars
per ton compared to toll processing sales, as a percentage of revenue. Package sales include both
the toll processing services and the sale of the steel coil while toll processing services include
only the toll processing service performed on the steel coil already in the customers ownership.
In addition, there was a $5.1 million increase in intersegment sales for the three months ended
August 1, 2010 compared to the same period in the prior year. Metal coil coating third-party sales
accounted for 7.3% of total consolidated third-party sales in the three months ended August 1, 2010
compared to 6.8% in the three months ended August 2, 2009.
Operating income (loss) of the metal coil coating segment increased to income of $5.2 million in
the three months ended August 1, 2010 compared to income of $1.0 million in the same period in the
prior year, primarily due to a $4.3 million increase in gross profit primarily due to higher
relative sales prices as a result of higher steel costs.
Metal components sales increased 2.0%, or $2.3 million to $115.5 million in the three months ended
August 1, 2010, compared to $113.2 million in the same period in the prior year. This increase
compared to the same period in the prior year was primarily due to higher sales prices as a result
of higher steel prices, partially offset by a 17.8% decrease in external tons shipped. Sales to
third parties for the three months ended August 1, 2010 decreased $6.7 million to $89.4 million
from $96.1 million in the same period in the prior year. The remaining $9.0 million represents an
increase in intersegment sales. These results were primarily driven by higher steel prices, reduced
demand and increased competition in the market resulting from the general weakness of
nonresidential construction activity in the three months ended August 1, 2010. Metal components
third-party sales accounted for 36.5% of total consolidated third-party sales in the three months
ended August 1, 2010 compared to 40.4% in the three months ended August 2, 2009.
34
Operating income (loss) of the metal components segment decreased to income of $10.6 million in the
three months ended August 1, 2010, compared to income of $13.1 million in the same period in the
prior year. This $2.6 million decrease resulted from a $2.0 million decrease in gross profit due to
decreased volumes, partially offset by increases in relative sales prices noted above. In addition,
the decrease in operating income (loss) was the result of a $0.6 million increase in selling and
administrative expenses primarily related to a $0.6 million increase in general liability claims.
Engineered building systems sales increased 9.0%, or $11.6 million to $141.4 million in the three
months ended August 1, 2010, compared to $129.8 million in the same period in prior year. This
increase resulted from a 20.6% increase in external tons shipped, partially offset by lower sales prices.
Sales to third parties for the three
months ended August 1, 2010 increased $12.3 million to $138.0 million from $125.7 million in the
same period in the prior year. This remaining $0.6 million represents a decrease in intersegment
sales. These results were primarily driven by higher steel prices, reduced demand and increased
competition in the market, which resulted from the general weakness of nonresidential construction
activity in the three months ended August 1, 2010. Engineered building systems third-party sales
accounted for 56.3% of total consolidated third-party sales in the three months ended August 1,
2010 compared to 52.9% in the three months ended August 2, 2009.
Operating income (loss) of the engineered building systems segment decreased to a loss of $(3.1)
million in the three months ended August 1, 2010 compared to income of $9.0 million in the same
period in the prior year. This $12.1 million decrease resulted from a $13.4 million decrease in
gross profit due to declines in relative sales prices, partially offset by increased volumes noted
above and a $0.7 million decrease in restructuring charges primarily related to $1.1 million of
restructuring charges in the same period in the prior year.
In addition, the decrease in operating income (loss) was the result of a $0.5 million
decrease in selling and administrative expenses primarily due to a $0.7 million decrease in wage
and benefit costs and temporary labor costs due to a reduced workforce and cost reduction programs
implemented during the prior year and a $0.4 million decrease in healthcare costs as a result of a
reduction in claims, partially offset by a $0.6 million increase in bad debt expense.
Consolidated selling, general and administrative expenses, consisting of engineering, drafting,
selling and administrative costs, decreased to $48.7 million in the three months ended August 1,
2010, compared to $49.8 million in the same period in the prior year. The decrease in selling and
administrative expenses was primarily due to a $0.7 million decrease in wage and benefit costs and
temporary labor costs due primarily to a reduced workforce and cost reduction programs implemented
during the prior year. In addition, the decrease was the result of a $0.7 million decrease
as a result of a lower increase in the
underlying investments of the deferred compensation plan and a $0.6 million decrease in
professional services, partially offset by a $0.8 million increase in bad debt expense. As a
percentage of sales, selling, general and administrative expenses were 19.9% for the three months
ended August 1, 2010 as compared to 20.9% for the three months ended August 2, 2009.
Consolidated restructuring charge decreased to $0.6 million in the three months ended August 1,
2010, compared to $1.2 million in the same period in the prior year. This decrease was primarily
related to charges taken in connection with the closing of three of our engineered building systems
manufacturing plants in the same period in the prior year. The purpose of these activities was to
close some of our least efficient facilities and to retool certain of these facilities to allow us
to better utilize our assets and expand into new markets or better provide products to our
customers.
Consolidated interest expense decreased by 32.6% to $4.4 million for the three months ended August
1, 2010, compared to $6.6 million for the same period of the prior year. On November 2, 2009, we
adopted ASC 470-20 which required retrospective application and resulted in an increase in the
reported interest expense on our Convertible Senior Subordinated Notes due 2024 (the Convertible
Notes) from 2.125% to 7.5% (see Note 2 of our Consolidated Financial Statements). In the third
quarter of fiscal 2009, we recorded accretion of the discounted carrying value of the Convertible
Notes to their face amount in the amount of $2.1 million. In addition, interest expense decreased
due to a reduction in our outstanding debt as a result of our refinancing in October 2009. These
decreases were partially offset by higher interest rates associated with the variable portion of
our outstanding debt.
Other income (expense), net decreased by 118.7% to an expense of $0.2 million for the three months
ended August 1, 2010, compared to income of $1.1 million for the same period in the prior year.
This decrease was primarily the result of a $0.5 million decrease in net foreign currency exchange
gains and a $0.7 million decrease in the unrealized holding gains of the deferred compensation
plan.
Consolidated provision (benefit) for income taxes decreased to a benefit of $(0.2) million for the
three months ended August 1, 2010, compared to a provision of $1.8 million for the same period in
the prior year. The decrease was primarily due to an $8.0 million decrease
35
in pre-tax losses. The effective tax rate for the three months ended August 1, 2010 was a benefit
of 6.3% compared to a provision of 41.2% for the same period in the prior year. The decrease in the
effective tax rate was primarily due to a decrease in state income taxes which reduced the
effective tax rate by 35.3% in the current period. We filed state income tax returns during the
current period which updated our estimated tax expense and resulted in a
26.0% reduction in the effective tax rate during the period.
Consolidated Convertible Preferred Stock dividends and accretion for the three months ended August
1, 2010 was $8.6 million compared to no amount in the same period in the prior year and related
primarily to $8.0 million of accrued dividends on the series of our preferred stock, par value
$1.00 per share, designated the Series B Cumulative Convertible Participating Preferred Stock
(Convertible Preferred Stock, and shares thereof, Preferred Shares) which accrues and
accumulates dividends on a daily basis. The dividend rate accrued during such period was 12% per
annum.
Consolidated Convertible Preferred Stock beneficial conversion feature for the three months ended
August 1, 2010 was $4.6 million compared to no amount in the same period in the prior year and
related to the beneficial conversion feature on the Convertible Preferred Stock because it was
issued with an initial conversion price of $1.2748 per Common Share equivalent (or $6.3740 as
adjusted for the Reverse Stock Split) and the closing stock price per Common Share just prior to
the closing of the equity investment by the CD&R Funds (further described in Liquidity and
Capital ResourcesConvertible Preferred Stock) was $2.51 (or $12.55 as adjusted for the Reverse
Stock Split). We recorded a $4.6 million beneficial conversion feature charge in the three months
ended August 1, 2010 related to dividends that have accrued and are convertible into shares of
Common Stock. In addition, we expect to recognize additional beneficial conversion feature charges
on paid-in-kind dividends to the extent that the Preferred Shares are accrued. Our policy is to
recognize beneficial conversion feature charges on paid-in-kind dividends based on a daily dividend
recognition and the daily closing stock price of our Common Stock.
Diluted income ( loss) per share decreased to a loss of $(0.90) per diluted share for the three
months ended August 1, 2010, compared to income of $0.65 per diluted share for the same period in
the prior year. The decrease in the diluted income (loss) per share was primarily due to the
weighted average number of Common Shares outstanding which increased by 14.4 million due primarily
to the completion of an exchange offer of our Convertible Notes in October 2009 (the Exchange
Offer) and by a $19.1 million decrease in net income (loss) applicable to shares of our Common
Stock resulting from the factors described above in this section. In connection with the Exchange
Offer, we issued 14.0 million shares of Common Stock. In addition to the Exchange Offer, our 2009
refinancing transaction included the issuance of $250 million of shares of Convertible Preferred
Stock which required the use of the two-class method in determining diluted earnings per share
for the three months ended August 1, 2010, but did not increase the weighted average number of
Common Shares outstanding. At August 1, 2010, the Preferred Shares were convertible into 43.0
million shares of Common Stock. In addition, the Convertible Preferred Stock and the unvested
restricted Common Stock related to our Incentive Plan do not have a contractual obligation to share
in losses; therefore, no losses were allocated in both periods presented. These participating
securities will be allocated earnings when applicable.
FISCAL NINE MONTHS ENDED AUGUST 1, 2010 COMPARED TO FISCAL NINE MONTHS ENDED AUGUST 2, 2009
Consolidated sales decreased by 12.9%, or $92.9 million for the nine months ended August 1, 2010,
compared to the nine months ended August 2, 2009. This decrease resulted from lower relative sales
prices in our metal components and engineered building systems segments, partially offset by a 2.7%
increase in external tonnage volumes. Higher tonnage volumes in the metal coil coating and
engineered building systems segment in the first nine months of fiscal 2010 compared to the same
period in 2009 were driven by increased market share for such products compared to the prior years
period notwithstanding a 29.3% decrease in low-rise nonresidential (less than 5 stories)
square-footage starts, as reported by McGraw-Hill for the first nine months of fiscal 2010 compared
to the same period in the prior year.
Consolidated cost of sales decreased by 10.8%, or $61.3 million for the nine months ended August 1,
2010, compared to the nine months ended August 2, 2009. Gross margins were 19.6% for the nine
months ended August 1, 2010 compared to 15.2% for the same period in the prior year. During the
first nine months of fiscal 2009, we recorded a $40.0 million inventory adjustment to adjust the
carrying amount on certain raw material inventory to the lower of cost or market because this
inventory exceeded our current estimates of net realizable value less normal profit margins, which
accounted for 8.2% of the reduction in the gross margin percentage in the same period in the prior
year. In addition, asset impairment charges in the first nine months of fiscal 2010 compared to the
same period in the prior year decreased $5.1 million primarily as a result of a $5.9 million asset
impairment charge in the first nine months of fiscal 2009. The
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decrease in asset impairment charges accounted for 0.7% of the improvement in gross margin
percentage in the current period, for certain assets primarily within the engineered building
systems segment and at corporate.
Metal coil coating sales increased by 7.7%, or $9.7 million to $135.0 million in the nine months
ended August 1, 2010, compared to $125.3 million in the same period in the prior year. Sales to
third parties for the nine months ended August 1, 2010 increased by 20.4% to $47.8 million from
$39.7 million in the same period in the prior year, primarily as a result of 10.1% increase in
external volume, a slight shift in product mix from tolling revenue for coating services to package
sales of coated steel products and a 0.6% increase in sales prices. Generally, package sales of
coated steel products contribute lower margin dollars per ton as a percentage of revenue, compared
to toll processing sales. Package sales include both the toll processing services and the sale of
the steel coil while toll processing services include only the toll processing service performed on
the steel coil already owned by the customer. In addition, there was a $1.6 million increase in
intersegment sales for the nine months ended August 1, 2010 compared to the same period in the
prior year. Metal coil coating third-party sales accounted for 7.6% of total consolidated
third-party sales in the nine months ended August 1, 2010 compared to 5.5% in the nine months ended
August 2, 2009.
Operating income (loss) of the metal coil coating segment increased to income of $12.4 million in
the nine months ended August 1, 2010 compared to a loss of $(105.7) million in the same period in
the prior year, primarily due to goodwill and other intangible asset impairments of $99.0 million
in the same period in the prior year and an $8.1 million charge to adjust inventory to lower of
cost or market in the same period in the prior year. In addition, there was a $11.2 million
increase in gross profit in the current period compared to the prior period primarily due to lower
costs as a result of increased material utilization and improved fixed cost absorption with higher
volumes.
Metal components sales decreased 11.6%, or $38.9 million to $297.4 million in the nine months ended
August 1, 2010, compared to $336.3 million in the same period in the prior year. Sales were down
compared to the same period in the prior year due to an 11.5% decrease in external tons shipped and
lower sales prices. Sales to third parties for the nine months ended August 1, 2010 decreased $49.9
million to $233.9 million from $283.8 million in the same period in the prior year. The remaining
$11.0 million represents an increase in intersegment sales. These results were primarily driven by
lower steel prices, reduced demand and increased competition in the market resulting from the
general weakness of nonresidential construction activity in the nine months ended August 1, 2010.
Metal components third-party sales accounted for 37.2% of total consolidated third-party sales in
the nine months ended August 1, 2010 compared to 39.3% in the nine months ended August 2, 2009.
Operating income (loss) of the metal components segment increased to income of $18.0 million in the
nine months ended August 1, 2010, compared to a loss of $(143.6) million in the same period in the
prior year. This $161.6 million increase resulted from charges related to goodwill and other
intangible asset impairment of $147.2 million in the same period in the prior year, a $17.2 million
adjustment to inventory at the lower of cost or market in the same period in the prior year, a $0.8
million decrease in restructuring charges primarily related to $1.2 million of restructuring
charges in the same period in the prior year, $0.8 million in asset impairment charges in the same
period in the prior year, partially offset by an $8.4 million decrease in gross profit due to
decreased volumes and
declines in relative sales prices noted above. In addition, the increase in
operating income (loss) was the result of a $3.9 million decrease in selling and administrative
expenses primarily related to a $1.5 million decrease in wage and benefit costs and temporary labor
costs due primarily to a reduced workforce and cost reduction programs implemented during the prior
year, a $1.4 million decrease in bad debt expense, a $0.7 million decrease in healthcare costs as a
result of a reduction in claims and a $0.7 million decrease in selling expenses in response to the
lower levels of business activity, partially offset by a $0.6 million increase in general liability
claims.
Engineered building systems sales decreased 13.1%, or $53.7 million to $356.8 million in the nine
months ended August 1, 2010, compared to $410.5 million in the same period in the prior year. This
decrease resulted from lower sales prices and a 7.0% increase in external tons shipped. Sales to
third parties for the nine months ended August 1, 2010 decreased $51.1 million to $347.4 million
from $398.4 million in the same period in the prior year. The remaining $2.6 million represents a
similar decrease in intersegment sales. These results were primarily driven by lower steel prices,
reduced demand and increased competition in the market resulting from the general weakness of
nonresidential construction activity in the nine months ended August 1, 2010. Engineered building
systems third-party sales accounted for 55.2% of total consolidated third-party sales in both the
nine months ended August 1, 2010 and August 2, 2009.
Operating loss of the engineered building systems segment decreased to a loss of $(14.6) million in
the nine months ended August 1, 2010 compared to a loss of $(389.5) million in the same period in
the prior year. This $374.9 million improvement resulted from charges related to goodwill and other
intangible asset impairments of $376.4 million in the same period in the prior year, a $14.7
million
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adjustment in inventory at the lower of cost or market in the same period in the prior year, a $4.5
million decrease in restructuring charges primarily related to $6.0 million of restructuring
charges in the same period in the prior year, a $3.1 million decrease in asset impairment charges
primarily related to $4.0 million of asset impairment charges in the same period in the prior year,
partially offset by a $34.2 million decrease in gross profit due to declines in relative sales
prices and volumes noted above. In addition, the decrease in operating loss was the result of a
$10.8 million decrease in selling and administrative expenses primarily due to a $7.0 million
decrease in wage and benefit costs and temporary labor costs due to a reduced workforce and cost
reduction programs implemented during the prior year, a $2.5 million decrease in healthcare costs
as a result of a reduction in claims and a $0.7 million decrease in marketing and advertising
costs.
Consolidated selling, general and administrative expenses, consisting of engineering, drafting,
selling and administrative costs, decreased to $142.4 million in the nine months ended August 1,
2010, compared to $159.5 million in the same period in the prior year. The decrease in selling and
administrative expenses was primarily due to a $9.7 million decrease in wage and benefit costs and
temporary labor costs due primarily to a reduced workforce and cost reduction programs implemented
during the prior year. The remaining decrease was the result of a $3.3 million decrease in
healthcare costs as a result of a reduction in claims, a $1.1 million decrease in bad debt expense,
a $0.8 million decrease in franchise and sales taxes and a $0.8 million decrease in marketing and
advertising costs. As a percentage of sales, selling, general and administrative expenses were
22.6% for the nine months ended August 1, 2010 as compared to 22.1% for the nine months ended
August 2, 2009.
Consolidated goodwill and other intangible asset impairment in the prior years period was $622.6
million. No amounts were recorded in the first nine months ended August 1, 2010. The prior years
impairment impacted all of our reporting segments and was the result of the reduction of our future
cash flow projections in the first quarter of fiscal 2009 due to the outlook of a worsening
condition in the nonresidential construction industry and the result of reconciling our segment
fair values to our publicly traded market capitalization.
Consolidated restructuring charge decreased to $1.9 million in the first nine months ended August
1, 2010, compared to $7.5 million in the same period in the prior year. This decrease was primarily
related to the closing of six of our engineered building systems manufacturing plants in the same
period in the prior year. The purpose of these activities was to close some of our least efficient
facilities and to retool certain of these facilities to allow us to better utilize our assets and
expand into new markets or better provide products to our customers.
Consolidated interest expense decreased by 30.6% to $13.6 million for the nine months ended August
1, 2010, compared to $19.6 million for the same period in the prior year. On November 2, 2009, we
adopted ASC 470-20 which required retrospective application and resulted in the reported interest
expense on our Convertible Notes to increase from 2.125% to 7.5% (see Note 2 of our Consolidated
Financial Statements). In the first nine months of fiscal 2009, we recorded accretion of the
discounted carrying value of the Convertible Notes to their face amount in the amount of $6.3
million. In addition, interest expense decreased due to a reduction of our outstanding debt as a
result of our refinancing in October 2009. These decreases were partially offset by higher interest
rates associated with the variable portion of our outstanding debt.
Consolidated debt extinguishment and refinancing costs decreased to $0.2 million in the first nine
months ended August 1, 2010, compared to $1.0 million in the same period in the prior year. These
costs related to our refinancing which was completed on October 20, 2009.
Consolidated benefit for income taxes decreased to a benefit of $(11.5) million for the nine months
ended August 1, 2010, compared to a benefit of $(49.4) million for the same period in the prior
year. The decrease was primarily due to a $665.4 million decrease in pre-tax losses. The effective
tax rate for the nine months ended August 1, 2010 was a benefit of 35.0% compared to a benefit of
7.1% for the same period in the prior year. The increase in the effective tax rate benefit was
primarily due to non-deductible goodwill impairment costs which reduced the effective tax rate by
31.3% in the same period in the prior year.
Consolidated Convertible Preferred Stock dividends and accretion for the nine months ended August
1, 2010 was $25.2 million compared to no amount in the same period in the prior year and related
primarily to $23.2 million of paid and accrued dividends on the Convertible Preferred Stock which
accrues and accumulates dividends on a daily basis. The dividend rate accrued during such period
was 12% per annum.
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Consolidated Convertible Preferred Stock beneficial conversion feature for the nine months ended
August 1, 2010 was $246.1 million compared to no amount in the same period in the prior year and
related to the beneficial conversion feature on the Convertible Preferred Stock because it was
issued with an initial conversion price of $1.2748 per Common Share equivalent (or $6.3740 as
adjusted for the Reverse Stock Split) and the closing stock price per Common Share just prior to
the closing of the equity investment by the CD&R Funds (further described in Liquidity and
Capital ResourcesConvertible Preferred Stock) was $2.51 (or $12.55 as adjusted for the Reverse
Stock Split). As a result of the Reverse Stock Split on March 5, 2010, the contingencies related to
the 40.6 million shares of Common Stock issuable upon conversion of the Preferred Shares were
resolved. We recorded an additional beneficial conversion feature charge in the amount of $230.7
million in the second quarter of fiscal 2010 related to the availability of shares of Common Stock
into which the CD&R Funds may convert their Preferred Shares. In addition, we recorded an
additional $4.6 million and $10.6 million beneficial conversion feature charge in the three months
ended August 1, 2010 and May 2, 2010, respectively, related to dividends that have accrued and are
convertible into shares of Common Stock. In addition, we expect to recognize additional beneficial
conversion feature charges on paid-in-kind dividends to the extent that the Preferred Shares are
accrued. Our policy is to recognize beneficial conversion feature charges on paid-in-kind dividends
based on a daily dividend recognition and the daily closing stock price of our Common Stock.
Diluted loss per share decreased to a loss of $(16.10) per diluted share for the nine months ended
August 1, 2010, compared to a loss of $(166.67) per diluted share for the same period in the prior
year. The decrease in the diluted loss per share was primarily due to a $356.3 million decrease in
net loss applicable to shares of our Common Stock resulting from the factors described above in
this section. In addition, the weighted average number of Common Shares outstanding increased by
14.3 million due primarily to the Exchange Offer. In connection with the Exchange Offer, we issued
14.0 million shares of Common Stock. In addition to the Exchange Offer, our 2009 refinancing
transaction included the issuance of $250 million of shares of Convertible Preferred Stock which
required the use of the two-class method in determining diluted earnings per share for the nine
months ended August 1, 2010, but did not increase the weighted average number of Common Shares
outstanding. At August 1, 2010, the Preferred Shares were convertible into 43.0 million shares of
Common Stock. In addition, the Convertible Preferred Stock and the unvested restricted Common Stock
related to our Incentive Plan do not have a contractual obligation to share in losses; therefore,
no losses were allocated in both periods presented. These participating securities will be
allocated earnings when applicable.
LIQUIDITY AND CAPITAL RESOURCES
General
On August 1, 2010, we had working capital of $148.5 million compared to $140.5 million at the end
of fiscal 2009, an $8.0 million increase. The increase in working capital during the first nine
months of fiscal 2010 was primarily due to an increase in inventory as a result of historically low
inventories in prior year, the higher underlying cost of steel in the current period and as result
of opportunistic raw material purchases in support of our customers. Our cash and cash equivalents
decreased $36.8 million to $53.6 million compared to $90.4 million at November 1, 2009. The
decrease in cash resulted from $20.7 million of cash used in operating activities, $10.5 million of
cash used in investing activities and $5.5 million of cash used in financing activities. The cash
used in operating activities was impacted by a $28.6 million increase in working capital and
non-current assets and $7.9 million in cash provided by operating activities. The cash used in
investing activities was primarily related to $11.3 million used for capital expenditures
predominantly related to the purchase of an idle facility for our metal coil coating segment, a new
insulated panel system facility and computer software. The cash used in financing activities was
primarily due to $15.2 million of note payable and term loan payments, partially offset by a $10.1
million decrease in restricted cash.
Convertible Preferred Stock
On October 20, 2009, we issued and sold to the CD&R Funds an aggregate of 250,000 Preferred Shares
for an aggregate purchase price of $250.0 million (such purchase and sale, the CD&R Equity
Investment). The Preferred Shares are convertible into shares of our Common Stock, and, as of
October 20, 2009, represented 68.4% of our voting power and Common Stock on an as-converted basis.
As of August 1, 2010 and November 1, 2009, the Preferred Shares were convertible into 43.0 million
and 39.2 million shares of Common Stock, respectively, at an initial conversion price of $1.2748
(or $6.3740 as adjusted for the Reverse Stock Split). However, as of November 1, 2009, only
approximately 1.8 million shares of Common Stock were authorized and unissued, and therefore the
CD&R Funds were not able to fully convert the Preferred Shares. To the extent that the CD&R Funds
had opted to convert their Preferred Shares,
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as of November 1, 2009, their conversion right was limited to conversion of that portion of their
Preferred Shares into the approximately 1.8 million shares of Common Stock that were currently
authorized and unissued. On March 5, 2010, we effected the Reverse Stock Split at an exchange ratio
of 1-for-5. As of that date, the Preferred Shares held by the CD&R Funds were fully convertible
into 40.6 million Common Shares. As a result, we recorded an additional beneficial conversion
feature charge in the amount of $230.7 million in the second quarter of fiscal 2010 related to the
availability of shares of Common Stock into which the CD&R Funds may convert their Preferred
Shares. In addition, we recorded an additional $4.6 million and $10.6 million beneficial conversion
feature charge in the three months ended August 1, 2010 and May 2, 2010, respectively, related to
dividends that have accrued and are convertible into shares of Common Stock. In addition, we expect
to recognize additional beneficial conversion feature charges on paid-in-kind dividends to the
extent that the Preferred Shares are accrued. Our policy is to recognize beneficial conversion
feature charges on paid-in-kind dividends based on a daily dividend recognition and the daily
closing stock price of our Common Stock.
Dividends on the Convertible Preferred Stock are payable, on a cumulative daily basis, as and if
declared by our board of directors, at a rate per annum of 12% of the sum of the liquidation
preference of $1,000 per Preferred Share plus accrued and unpaid dividends thereon or at a rate per
annum of 8% of the sum of the liquidation preference of $1,000 per Preferred Share plus any accrued
and unpaid dividends thereon if paid in cash on the dividend payment date on which such dividends
would otherwise compound. Members of our board of directors who are not affiliated with the CD&R
Funds, have the right to choose whether such dividends are paid in cash or in-kind, subject to the
conditions of the Amended Credit Agreement and Asset-Based Lending (ABL) Facility (described
below) which restrict our ability to pay cash dividends until the first quarter of fiscal 2011
under the Amended Credit Agreement and until October 20, 2010 under the ABL Facility, except for
certain specified purposes.
At August 1, 2010 and November 1, 2009, we had Preferred Shares outstanding of 264,333 and 250,000,
respectively. In addition, at August 1, 2010 and November 1, 2009, we had accrued but unpaid cash
dividends and Preferred Stock dividends with a value of $9.9 million and $1.0 million,
respectively. As of August 1, 2010 and November 1, 2009, the aggregate liquidation preference plus
aggregate accrued dividends of the Convertible Preferred Stock was $274.3 million and $251.0
million, respectively.
On June 15, 2010, the Dividend Payment Committee of our board of directors declared and paid to the
holders of Convertible Preferred Stock, the CD&R Funds, a dividend of 7,971.8137 shares of
Convertible Preferred Stock for the period from March 16, 2010 through June 15, 2010. On March 17,
2010, the Dividend Payment Committee of our board of directors declared and paid to the holders of
Convertible Preferred Stock, the CD&R Funds, a dividend of 6,361.5815 shares of Convertible
Preferred Stock for the period from December 16, 2009 through March 15, 2010.
Debt
On October 20, 2009 (the Closing Date), simultaneously with the closing of the CD&R Equity
Investment,
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we entered into the Amended Credit Agreement (the Amended Credit Agreement), which was
due to mature on June 18, 2010, by repaying approximately $143 million in principal amount
of the approximately $293 million in principal amount of the term loans then outstanding and
amending the terms and extending the maturity of the remaining $150 million balance of the
term loans. The term loan requires quarterly principal payments in an amount equal to 0.25%
of the principal amount of the term loan outstanding as of the last day of each calendar
quarter and a final payment of approximately $136.3 million in principal at maturity on
April 20, 2014. |
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we entered into the ABL Facility pursuant to a loan and security agreement, with a
maximum available amount of up to $125 million which has an additional $50 million
incremental credit facility. The ABL Facility replaces the revolving credit facility and
letters of credit sub-facility under our Credit Agreement, which expired on June 18, 2009.
The ABL Facility has a maturity of April 20, 2014 and includes borrowing capacity of up to
$25 million for letters of credit and up to $10 million for swingline borrowings. |
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we completed the Exchange Offer to acquire the $180 million of our then-outstanding
Convertible Notes for an aggregate combination of $90.0 million
in cash and 14.0 million shares of Common Stock. |
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Amended Credit Agreement. The term loans under the Amended Credit Agreement will mature on April
20, 2014 and, prior to that date, will amortize in nominal quarterly installments equal to 0.25% of
the principal amount of the term loan outstanding as of the last day of each calendar quarter.
The Companys obligations under the Amended Credit Agreement and any interest rate protection
agreements or other permitted hedging agreement entered into with any lender under the Amended
Credit Agreement are irrevocably and unconditionally guaranteed on a joint and several basis by
each direct and indirect domestic subsidiary of the Company (other than any domestic subsidiary
that is a foreign subsidiary holding company or a subsidiary of a foreign subsidiary). Our
obligations under the Amended Credit Agreement and the permitted hedging agreements and the
guarantees thereof are secured pursuant to a guarantee and collateral agreement, dated as of
October 20, 2009, made by the Company and other grantors (as defined therein), in favor of the term
loan administrative agent and term loan collateral agent, by (i) all of the capital stock and other
equity interests of all direct domestic subsidiaries owned by the Company and the guarantors, (ii)
up to 65% of the capital stock of certain direct foreign subsidiaries of the Company or any
guarantor (it being understood that a foreign subsidiary holding company or a domestic subsidiary
of a foreign subsidiary will be deemed a foreign subsidiary) and (iii) substantially all other
tangible and intangible assets owned by the Company and each guarantor, including liens on material
real property, in each case to the extent permitted by applicable law and subject to certain
exceptions. The liens securing the obligations under the Amended Credit Agreement, the permitted
hedging agreements and the guarantees thereof are first in priority (as between the Amended Credit
Agreement and the ABL Facility) with respect to stock, material real property and assets other than
accounts receivable, inventory, associated intangibles and certain other specified assets of the
Company and the guarantors, subject to certain exceptions. Such liens are second in priority (as
between the Amended Credit Agreement and the ABL Facility) with respect to accounts receivable,
inventory, associated intangibles of the Company and certain other specified assets of the
guarantors, subject to certain exceptions.
The Amended Credit Agreement contains a number of covenants that, among other things, limit or
restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee
obligations, prepay other indebtedness, make dividends and other restricted payments, create liens,
make investments, make acquisitions, engage in mergers, change the nature of our business and
engage in certain transactions with affiliates.
The Amended Credit Agreement has no financial covenants until October 20, 2011, at which time the
maximum consolidated leverage ratio of net indebtedness to EBITDA is 5 to 1.
Net indebtedness is defined as consolidated debt less the lesser of cash or $50 million. This ratio steps down
by 0.25 each quarter until October 28, 2012 at which time the maximum ratio is 4 to 1. The ratio
continues to step down by 0.125 each quarter until November 3, 2013, to a ratio of 3.5 to 1, which
remains the maximum ratio for each fiscal quarter thereafter. We will, however, not be subject to
this financial covenant with respect to a specified period if certain prepayments or repurchases of
the term loans under the Amended Credit Agreement are made in the specified period. At August 1,
2010 and November 1, 2009, our consolidated leverage ratio was 3.18 and 2.25, respectively.
Term loans under the Amended Credit Agreement may be repaid at any time, without premium or
penalty but subject to customary LIBOR breakage costs. We also have the ability to repurchase a
portion of the term loans under the Amended Credit Agreement, subject to certain terms and
conditions set forth in the Amended Credit Agreement. In addition, subject to certain exceptions,
the term loans under the Amended Credit Agreement are subject to mandatory prepayment and reduction
in an amount equal to:
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the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3)
certain insurance recovery and condemnation events; |
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50% of annual excess cash flow (as defined in the Amended Credit Agreement) for any
fiscal year ending on or after October 31, 2010, unless a specified leverage ratio target is
met; and |
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the greater of $10.0 million and 50% of certain 2009 tax refunds received by the Company
resulting from the carry back of the 2009 net operating loss received by the Company. |
We made a mandatory prepayment on the Amended Credit Agreement in May 2010 in connection with our
refund received resulting from the carry back of the 2009 net operating loss. An additional $13.3
million in principal amount of the term loans under the Amended Credit Agreement was classified as
current portion of long-term debt in our Consolidated Balance Sheet at November 1, 2009 as a result
of this expected mandatory prepayment. As a result, we are not required to make the quarterly
principal payments for the remaining term of the term loan, except as required by the mandatory
prepayment provisions.
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Term loans under the Amended Credit Agreement bear interest, at our option, as follows:
(1) Base Rate loans at the Base Rate plus a margin, which for term loans is 5% until October 30,
2011. After that date, the margin fluctuates based on our leverage ratio and shall be either 5%
or 3.5%. As of the first fiscal quarter commencing January 30, 2012, the margin in each case
increases by 0.25% per annum on the first day of each fiscal quarter unless the aggregate
principal amount of term loans outstanding under the Amended Credit Agreement in the immediately
preceding fiscal quarter of the Company has been reduced by $3,750,000 (excluding scheduled
principal amortization payments), less any prior reductions not previously applied to prevent an
increase in the applicable margin, and
(2) LIBOR loans at LIBOR (having a minimum rate of 2%) plus a margin, which for term loans is 6%
until October 30, 2011. After that date, the LIBOR-linked margin fluctuates based on our leverage
ratio and shall be either 6% or 4.5%. As of the first fiscal quarter commencing January 30, 2012,
the margin in each case increases by 0.25% per annum on the first day of each fiscal quarter
unless the aggregate principal amount of term loans outstanding under the Amended Credit
Agreement in the immediately preceding fiscal quarter of the Company has been reduced by
$3,750,000 (excluding scheduled principal amortization payments), less any prior reductions not
previously applied to prevent an increase in the applicable margin.
Overdue amounts will bear interest at a rate that is 2% higher than the rate otherwise applicable.
Base Rate is defined as the highest of (i) the Wachovia Bank, National Association prime rate,
(ii) the overnight Federal Funds rate plus 0.5% and (iii) 3.0% and LIBOR is defined as the
applicable London interbank offered rate (not to be less than 2%) adjusted for reserves.
ABL Facility. The ABL Facility provides for an asset-based revolving credit facility which allows
aggregate maximum borrowings by NCI Group, Inc. and Robertson-Ceco II Corporation of up to $125.0
million. Borrowing availability under the 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 August 1, 2010 and November 1, 2009, our excess availability under the ABL
Facility was $90.7 million and $70.4 million, respectively. There were no amounts outstanding under
the ABL Facility at both August 1, 2010 and November 1, 2009. In addition, at August 1, 2010,
letters of credit totaling approximately $8.1 million were outstanding under the ABL Facility.
There were no letters of credit outstanding under the ABL facility at November 1, 2009.
An unused commitment fee is paid monthly on the ABL Facility at an annual rate of 1% through May 1,
2010 and thereafter at 1% or, if the average daily balance of the loans and letters of credit
obligations for a given month is higher than 50% of the maximum credit then available, 0.75%. The
calculation is determined 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 ABL Facility also apply.
The obligations of the borrowers under the ABL Facility are guaranteed by the Company and each
direct and indirect domestic subsidiary of the Company (other than any domestic subsidiary that is
a foreign subsidiary holding company or a subsidiary of a foreign subsidiary) that is not a
borrower under the ABL Facility. The obligations of the Company under certain specified bank
products agreements are guaranteed by each borrower and each other direct and indirect domestic
subsidiary of the Company and the other guarantors. These guarantees are made pursuant to a
guarantee agreement, dated as of October 20, 2009, entered into by the Company and each other
guarantor with Wells Fargo Foothill, LLC, as administrative agent.
The obligations under the ABL Facility and the guarantees thereof are secured by a first priority
lien on our accounts receivable, inventory, certain deposit accounts, associated intangibles and
certain other specified assets of the Company, subject to certain exceptions, and a second priority
lien on the assets securing the term loans under the Amended Credit Agreement on a first-lien
basis.
The ABL Facility contains a number of covenants that, among other things, limit or restrict our
ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in
sale and leaseback transactions, prepay other indebtedness, modify organizational documents and
certain other agreements, create restrictions affecting subsidiaries, make dividends and other
restricted payments, create liens, make investments, make acquisitions, engage in mergers, change
the nature of our business and engage in certain transactions with affiliates.
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Under the ABL Facility, a Dominion Event occurs if either an event of default is continuing or
excess availability falls below certain levels, during which period, and for certain periods
thereafter, the administrative agent may apply all amounts in the Companys, the borrowers and the
other guarantors concentration accounts to the repayment of the loans outstanding under the ABL
Facility, subject to the Intercreditor Agreement and certain specified exceptions. In addition,
during such Dominion Event, we are required to make mandatory payments on our ABL Facility upon the
occurrence of certain events, including the sale of assets and the issuance of debt, in each case
subject to certain limitations and conditions set forth in the ABL Facility. If excess availability
under the ABL Facility falls below certain levels, our ABL Facility also requires us to satisfy set
financial tests relating to our fixed charge coverage ratio.
The ABL Facility includes a minimum fixed charge coverage ratio of one to one, which will apply if
we fail to maintain a specified minimum level of borrowing capacity. At August 1, 2010 and November
1, 2009, our fixed charge coverage ratio was 1.51 and 1.78, respectively.
Loans under the ABL Facility bear interest, at our option, as follows:
(1) Base Rate loans at the Base Rate plus a margin. The margin was 3.50% through April 30,
2010 and thereafter ranges from 3.25% to 3.75% depending on the quarterly average excess
availability under such facility, and
(2) LIBOR loans at LIBOR plus a margin. The margin was 4.50% through April 30, 2010 and
thereafter ranges from 4.25% to 4.75% depending on the quarterly average excess availability
under such facility.
During an event of default, loans under the ABL Facility will bear interest at a rate that is 2%
higher than the rate otherwise applicable. Base Rate is defined as the higher of the Wells Fargo
Bank, N.A. prime rate and the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the
applicable London interbank offered rate adjusted for reserves.
Cash Flow
We periodically evaluate our liquidity requirements, capital needs and availability of resources in
view of inventory levels, expansion plans, debt service requirements and other operating cash
needs. To meet our short- and long-term liquidity requirements, including payment of operating
expenses and repaying debt, we rely primarily on cash from operations. However, we have recently,
as well as in the past, sought to raise additional capital.
We expect that, for the next 12 months, cash generated from operations will be sufficient to
provide us the ability to fund our operations, provide the increased working capital necessary to
support our strategy and fund planned capital expenditures of between $4 million and $6 million for
the remainder of fiscal 2010 and expansion when needed.
We have used available funds to repurchase shares of our Common Stock under our stock repurchase
program. Although we did not purchase any Common Stock during the nine months ended August 1, 2010
under the stock repurchase program, we did withhold shares of restricted stock to satisfy tax
withholding obligations arising in connection with the vesting of awards of restricted stock
related to our 2003 Long-Term Stock Incentive Plan.
Our corporate strategy seeks potential acquisitions which provide additional synergies in our metal
coil coating, metal components and engineered building systems segments. From time to time, we may
enter into letters of intent or agreements to acquire assets or companies in these business lines.
The consummation of these transactions could require cash payments and/or issuance of additional
debt.
The Company may from time to time repurchase or otherwise retire the Companys debt and take other
steps to reduce the Companys debt or otherwise improve the Companys financial position. These
actions may include open market debt repurchases, negotiated repurchases, other retirements of
outstanding debt and opportunistic refinancing of debt. The amount of debt that may be repurchased
or otherwise retired, if any, will depend on market conditions, trading levels of the Companys
debt, the Companys cash position, compliance with debt covenants and other considerations.
Affiliates of the Company may also purchase the Companys debt from time to time, through open
market purchases or other transactions. In such cases, the Companys debt may not be retired, in
which case the Company would continue to pay interest in accordance with the terms of the debt, and
the Company would continue to reflect the debt as outstanding in it is consolidated balance sheet.
43
NON-GAAP MEASURES
Set forth below are certain non-GAAP measures which include adjusted operating income (loss)
(operating income (loss) plus goodwill and other intangible asset impairment, lower of cost or
market charge, asset impairment and restructuring charges), adjusted diluted loss per share (loss
per diluted common share plus goodwill and other intangible asset impairment, debt extinguishment
and refinancing costs, lower of cost or market adjustment, convertible preferred stock beneficial
conversion feature, restructuring charge, asset impairment and gain on embedded derivative) and
adjusted EBITDA (net income (loss) plus depreciation and amortization, interest expense, provision for taxes and adjustments for key items).
Such measurements are not prepared in accordance with U.S. GAAP and should not be construed
as an alternative to reported results determined in accordance with U.S. GAAP. Management believes
the use of such non-GAAP measures on a consolidated and business segment basis assists investors in
understanding the ongoing operating performance by presenting the financial results between periods
on a more comparable basis. In addition, certain financial covenants related to our Amended Credit
Agreement and ABL Facility are based on similar non-GAAP measures. The non-GAAP information
provided is unique to the Company and may not be consistent with the methodologies used by other
companies.
The following tables reconcile adjusted operating income (loss) to operating income (loss) for the
periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended August 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Engineered |
|
|
|
|
|
|
|
|
|
Metal Coil |
|
|
Metal |
|
|
Building |
|
|
|
|
|
|
|
|
|
Coating |
|
|
Components |
|
|
Systems |
|
|
Corporate |
|
|
Consolidated |
|
Operating income (loss), GAAP basis |
|
$ |
5,201 |
|
|
$ |
10,567 |
|
|
$ |
(3,112 |
) |
|
$ |
(11,580 |
) |
|
$ |
1,076 |
|
Goodwill and other intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower of cost or market charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments (recovery) |
|
|
|
|
|
|
(78 |
) |
|
|
14 |
|
|
|
|
|
|
|
(64 |
) |
Restructuring charges |
|
|
|
|
|
|
150 |
|
|
|
401 |
|
|
|
|
|
|
|
551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss) |
|
$ |
5,201 |
|
|
$ |
10,639 |
|
|
$ |
(2,697 |
) |
|
$ |
(11,580 |
) |
|
$ |
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended August 2, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Engineered |
|
|
|
|
|
|
|
|
|
Metal Coil |
|
|
Metal |
|
|
Building |
|
|
|
|
|
|
|
|
|
Coating |
|
|
Components |
|
|
Systems |
|
|
Corporate |
|
|
Consolidated |
|
Operating income (loss), GAAP basis (1) |
|
$ |
1,016 |
|
|
$ |
13,128 |
|
|
$ |
9,042 |
|
|
$ |
(12,959 |
) |
|
$ |
10,227 |
|
Goodwill and other intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower of cost or market charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments (recovery) |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Restructuring charges |
|
|
30 |
|
|
|
70 |
|
|
|
1,109 |
|
|
|
4 |
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss) |
|
$ |
1,046 |
|
|
$ |
13,198 |
|
|
$ |
10,177 |
|
|
$ |
(12,955 |
) |
|
$ |
11,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended August 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Engineered |
|
|
|
|
|
|
|
|
|
Metal Coil |
|
|
Metal |
|
|
Building |
|
|
|
|
|
|
|
|
|
Coating |
|
|
Components |
|
|
Systems |
|
|
Corporate |
|
|
Consolidated |
|
Operating income (loss), GAAP basis |
|
$ |
12,412 |
|
|
$ |
17,971 |
|
|
$ |
(14,579 |
) |
|
$ |
(36,617 |
) |
|
$ |
(20,813 |
) |
Goodwill and other intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower of cost or market charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments (recovery) |
|
|
|
|
|
|
(74 |
) |
|
|
923 |
|
|
|
|
|
|
|
849 |
|
Restructuring charges |
|
|
|
|
|
|
415 |
|
|
|
1,489 |
|
|
|
|
|
|
|
1,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss) |
|
$ |
12,412 |
|
|
$ |
18,312 |
|
|
$ |
(12,167 |
) |
|
$ |
(36,617 |
) |
|
$ |
(18,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended August 2, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Engineered |
|
|
|
|
|
|
|
|
|
Metal Coil |
|
|
Metal |
|
|
Building |
|
|
|
|
|
|
|
|
|
Coating |
|
|
Components |
|
|
Systems |
|
|
Corporate |
|
|
Consolidated |
|
Operating income (loss), GAAP basis (1) |
|
$ |
(105,726 |
) |
|
$ |
(143,596 |
) |
|
$ |
(389,522 |
) |
|
$ |
(40,780 |
) |
|
$ |
(679,624 |
) |
Goodwill and other intangible asset impairment |
|
|
98,959 |
|
|
|
147,239 |
|
|
|
376,366 |
|
|
|
|
|
|
|
622,564 |
|
Lower of cost or market charge |
|
|
8,102 |
|
|
|
17,152 |
|
|
|
14,732 |
|
|
|
|
|
|
|
39,986 |
|
Asset impairments (recovery) |
|
|
|
|
|
|
714 |
|
|
|
4,021 |
|
|
|
1,209 |
|
|
|
5,944 |
|
Restructuring charges |
|
|
103 |
|
|
|
1,232 |
|
|
|
5,971 |
|
|
|
182 |
|
|
|
7,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss) |
|
$ |
1,438 |
|
|
$ |
22,741 |
|
|
$ |
11,568 |
|
|
$ |
(39,389 |
) |
|
$ |
(3,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
(1) |
|
Amounts have been retrospectively adjusted as a result of the adoption, effective November 2,
2009, of ASC Subtopic 470-20, Debt with Conversion and Other Options. |
The following tables reconcile adjusted diluted loss per common share to loss per diluted common
share and adjusted loss applicable to common shares to loss applicable to common shares for the
periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) per diluted common share, GAAP
basis (1) |
|
$ |
(0.90 |
) |
|
$ |
0.65 |
|
|
$ |
(16.10 |
) |
|
$ |
(166.67 |
) |
Goodwill and other intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154.07 |
|
Debt extinguishment and refinancing costs |
|
|
|
|
|
|
0.07 |
|
|
|
0.01 |
|
|
|
0.17 |
|
Lower of cost or market adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.63 |
|
Convertible preferred stock beneficial conversion feature |
|
|
0.25 |
|
|
|
|
|
|
|
13.53 |
|
|
|
|
|
Restructuring charge |
|
|
0.01 |
|
|
|
0.22 |
|
|
|
0.07 |
|
|
|
1.26 |
|
Asset impairments (recovery) |
|
|
|
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.99 |
|
Gain on embedded derivative |
|
|
|
|
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted diluted earnings (loss) per common share |
|
$ |
(0.64 |
) |
|
$ |
0.95 |
|
|
$ |
(2.49 |
) |
|
$ |
(3.55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended |
|
|
Fiscal Nine Months Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) applicable to common shares, GAAP
basis (1) |
|
$ |
(16,519 |
) |
|
$ |
2,607 |
|
|
$ |
(292,671 |
) |
|
$ |
(648,945 |
) |
Goodwill and other intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
599,966 |
|
Debt extinguishment and refinancing costs |
|
|
|
|
|
|
260 |
|
|
|
113 |
|
|
|
669 |
|
Lower of cost or market adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,773 |
|
Convertible preferred stock beneficial conversion feature |
|
|
4,583 |
|
|
|
|
|
|
|
246,052 |
|
|
|
|
|
Restructuring charge |
|
|
358 |
|
|
|
816 |
|
|
|
1,237 |
|
|
|
4,861 |
|
Asset impairments (recovery) |
|
|
(42 |
) |
|
|
26 |
|
|
|
552 |
|
|
|
3,840 |
|
Gain on embedded derivative |
|
|
(5 |
) |
|
|
|
|
|
|
(605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) applicable to common shares |
|
$ |
(11,625 |
) |
|
$ |
3,709 |
|
|
$ |
(45,322 |
) |
|
$ |
(13,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
2009 amounts have been retrospectively adjusted as a result of the adoption, effective
November 2, 2009, of ASC Subtopic 470-20, Debt with Conversion and Other Options, and ASC
Subtopic 260-10, Earnings per Share. |
The following table reconciles adjusted EBITDA to Net income (loss) for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing 12 |
|
|
|
4th Quarter |
|
|
1st Quarter |
|
|
2nd Quarter |
|
|
3rd Quarter |
|
|
Months |
|
|
|
November 1, 2009 |
|
|
January 31, 2010 |
|
|
May 2, 2010 |
|
|
August 1, 2010 |
|
|
August 1, 2010 |
|
Net Income (Loss) (1) |
|
$ |
(101,851 |
) |
|
$ |
(10,486 |
) |
|
$ |
(7,656 |
) |
|
$ |
(3,299 |
) |
|
$ |
(123,292 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,640 |
|
|
|
7,521 |
|
|
|
7,480 |
|
|
|
7,457 |
|
|
|
30,098 |
|
Consolidated interest expense, net |
|
|
9,578 |
|
|
|
4,507 |
|
|
|
4,670 |
|
|
|
4,392 |
|
|
|
23,147 |
|
Provision for taxes |
|
|
(7,495 |
) |
|
|
(5,779 |
) |
|
|
(5,536 |
) |
|
|
(221 |
) |
|
|
(19,031 |
) |
Non-cash charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,045 |
|
|
|
801 |
|
|
|
1,403 |
|
|
|
1,374 |
|
|
|
4,623 |
|
Goodwill and intangible impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments (recovery) |
|
|
347 |
|
|
|
1,029 |
|
|
|
(116 |
) |
|
|
(64 |
) |
|
|
1,196 |
|
Lower of cost or market charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative |
|
|
|
|
|
|
(919 |
) |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(930 |
) |
Cash restructuring charges |
|
|
1,564 |
|
|
|
524 |
|
|
|
829 |
|
|
|
551 |
|
|
|
3,468 |
|
Transaction costs |
|
|
107,718 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
107,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
18,546 |
|
|
$ |
(2,628 |
) |
|
$ |
1,070 |
|
|
$ |
10,183 |
|
|
$ |
27,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing 12 |
|
|
|
4th Quarter |
|
|
1st Quarter |
|
|
2nd Quarter |
|
|
3rd Quarter |
|
|
Months |
|
|
|
November 2, 2008 |
|
|
February 1, 2009 |
|
|
May 3, 2009 |
|
|
August 2, 2009 |
|
|
August 2, 2009 |
|
Net Income (Loss) (1) |
|
$ |
23,218 |
|
|
$ |
(529,981 |
) |
|
$ |
(121,571 |
) |
|
$ |
2,607 |
|
|
$ |
(625,727 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,334 |
|
|
|
8,324 |
|
|
|
8,436 |
|
|
|
7,586 |
|
|
|
32,680 |
|
Consolidated interest expense, net |
|
|
7,761 |
|
|
|
6,623 |
|
|
|
6,168 |
|
|
|
6,487 |
|
|
|
27,039 |
|
Provision for taxes |
|
|
17,092 |
|
|
|
(34,861 |
) |
|
|
(16,382 |
) |
|
|
1,825 |
|
|
|
(32,326 |
) |
Non-cash charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,628 |
|
|
|
1,372 |
|
|
|
1,177 |
|
|
|
1,241 |
|
|
|
5,418 |
|
Goodwill and intangible impairment |
|
|
|
|
|
|
517,628 |
|
|
|
104,936 |
|
|
|
|
|
|
|
622,564 |
|
Asset impairments (recovery) |
|
|
157 |
|
|
|
623 |
|
|
|
5,295 |
|
|
|
26 |
|
|
|
6,101 |
|
Lower of cost or market charges |
|
|
2,739 |
|
|
|
29,378 |
|
|
|
10,608 |
|
|
|
|
|
|
|
42,725 |
|
Embedded derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash restructuring charges |
|
|
150 |
|
|
|
2,479 |
|
|
|
3,796 |
|
|
|
1,213 |
|
|
|
7,638 |
|
Transaction costs |
|
|
|
|
|
|
|
|
|
|
629 |
|
|
|
401 |
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
61,079 |
|
|
$ |
1,585 |
|
|
$ |
3,092 |
|
|
$ |
21,386 |
|
|
$ |
87,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts have been retrospectively adjusted as a result of the adoption, effective November 2,
2009, of ASC Subtopic 470-20, Debt with Conversion and Other Options, and ASC Subtopic 260-10,
Earnings per Share. |
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As of August 1, 2010, we were not involved in any unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
In general, purchase orders issued in the normal course of business can be terminated in whole or
in part for any reason without liability until the product is received.
There have been no material changes in our future contractual obligations since the end of fiscal
2009 other than the normal expiration of existing contractual obligations. See Item 7 of our Annual
Report on Form 10-K for the fiscal year ended November 1, 2009 for more information on contractual
obligations.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most important to the portrayal of our financial
position and results of operations. These policies require our most subjective judgments, often
employing the use of estimates about the effect of matters that are inherently uncertain. Our most
critical accounting policies include those that pertain to revenue recognition, insurance accruals,
share-based compensation, income taxes, accounting for acquisitions, intangible assets and
goodwill, allowance for doubtful accounts, inventory valuation and contingencies, which are
described in Item 7 of our Annual Report on Form 10-K for the year ended November 1, 2009. In
addition, below we have updated our critical accounting policy related to property, plant and
equipment and have added a critical accounting policy related to beneficial conversion features and
dividend policy.
Property, plant and equipment valuation. We assess the recoverability of the carrying amount of
property, plant and equipment at the lowest level asset grouping for which cash flows can be
separately identified, which may be at an individual asset level, plant level or divisional level
depending on the intended use of the related asset, if certain events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable and the undiscounted cash
flows estimated to be generated by those assets are less than the
46
carrying amount of those assets. Events and circumstances which indicate an impairment include (a)
a significant decrease in the market value of the assets; (b) a significant change in the extent or
manner in which an asset is being used or in its physical condition; (c) a significant change in
our business conditions; (d) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of an asset; (e) a current-period operating
or cash flow loss combined with a history of operating or cash flow losses or a projection that
demonstrates continuing losses associated with the use of an asset; or (f) a current expectation
that, more likely than not, an asset will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life. We assess our assets for impairment on a quarterly
basis.
If we determine that the carrying value of an asset is not recoverable based on expected
undiscounted future cash flows, excluding interest charges, we record an impairment loss equal to
the excess of the carrying amount of the asset over its fair value. The fair value of assets is
determined based on prices of similar assets adjusted for their remaining useful life.
Beneficial conversion features and dividend policy. Our Convertible Preferred Stock contains
beneficial conversion features. We recorded a beneficial conversion feature charge in the amount of
$230.7 million in the second quarter of fiscal 2010 related to the availability of shares of Common
Stock into which the CD&R Funds may convert their Preferred Shares. In addition, we recorded an
additional $4.6 million and $10.6 million beneficial conversion feature charge in the three months
ended August 1, 2010 and May 2, 2010, respectively, related to dividends that have accrued and are
convertible into shares of Common Stock. In addition, we expect to recognize additional beneficial
conversion feature charges on paid-in-kind dividends to the extent that the Preferred Shares are
accrued. Our policy is to recognize beneficial conversion feature charges on paid-in-kind dividends
based on a daily dividend recognition and the daily closing stock price of our Common Stock. We
believe this recognition policy is reasonable as our policy matches the legal transfer and
conversion rights of the majority shareholder.
At any time prior to the Dividend Rate Reduction Event, if dividends are not paid in cash on the
applicable dividend payment date, the rate at which the dividends are payable will be at least 12%
per annum. Therefore, we accrue dividends based on the 12% rate and if and when we determine the
dividends will be paid in cash on the applicable dividend payment date, we will record a subsequent
benefit of the excess 4% accrual upon our boards declaration of a cash dividend and reverse the
beneficial conversion feature charge associated with such accrual.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2008, the FASB issued guidance that has been codified under ASC Subtopic 715-20,
Defined Benefit Plans General. This standard provides guidance on an employers disclosures about
plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan
assets required by this standard are effective for our 2010 fiscal year and are not required for
earlier periods presented for comparative purposes. We will adopt the disclosure provisions
required by this standard on October 31, 2010.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Steel Prices
We are subject to market risk exposure related to volatility in the price of steel. For the fiscal
nine months ended August 1, 2010, steel constituted approximately 69% of our cost of sales. Our
business is heavily dependent on the price and supply of steel. Our various products are fabricated
from steel produced by mills to forms including bars, plates, structural shapes, sheets, hot-rolled
coils and galvanized or Galvalume-coated coils. The steel industry is highly cyclical in nature,
and steel prices have been volatile in recent years and may remain volatile in the future. Steel
prices are influenced by numerous factors beyond our control, including general economic
conditions, domestically and internationally, the availability of raw materials, competition, labor
costs, freight and transportation costs, production costs, import duties and other trade
restrictions. Rapidly declining demand for steel due to the effects of the credit crisis and global
economic slowdown on the construction, automotive and industrial markets has resulted in many steel
manufacturers around the world cutting production by closing plants and furloughing workers
throughout 2009. Steel suppliers such as US Steel and Arcelor Mittal are among the manufacturers
who have cut production and some steel suppliers have been cautious to increase capacity in 2010
during the slow economic recovery. Given reduced steel production, higher input costs and low
inventories in the industry, we believe steel prices will be higher, on average, in fiscal 2010 as
compared to the prices we experienced during the second half of fiscal 2009. In addition, we expect
steel prices in fiscal 2011 to be slightly higher, on average, as compared to the prices we
experienced or expect to experience in fiscal 2010.
47
Although we have the ability to purchase steel from a number of suppliers, a production cutback by
one or more of our current suppliers could create challenges in meeting delivery schedules to our
customers. Because we have periodically adjusted our contract prices, particularly in the
engineered building systems segment, we have generally been able to pass increases in our raw
material costs through to our customers. The graph below shows the monthly CRU index data for the
North American Steel Price Index over the historical five-year period. The CRU North American Steel
Price Index has been published by the CRU Group since 1994 and we believe this index appropriately
depicts the volatility of steel prices. The index, based on a CRU survey of industry participants,
is now commonly used in the settlement of physical and financial contracts in the steel industry.
The prices surveyed are purchases for forward delivery, according to lead time, which will vary.
For example, the August index would likely approximate our fiscal September or October steel
purchase deliveries based on current lead-times. The volatility in this steel price index is
comparable to the volatility we experience in
our average cost of steel. Further, due to market conditions described above, the most recent CRU
prices have been based on a lower than normal trading volume.
Source: www.crugroup.com
We do not have any long-term contracts for the purchase of steel and 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 remain available or that prices will not continue to be volatile. While most of our
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 to delivery,
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
may cause us not to meet delivery schedules to our customers. Any of these problems could adversely
affect our results of operations and financial position.
We rely on a few major suppliers for our supply of steel and may be adversely affected by
bankruptcy, change in control, financial condition or other factors affecting those suppliers.
During the first nine months of fiscal 2010, we purchased approximately 28% of our steel
requirements from one vendor. No other vendor accounted for over 10% of our steel requirements
during the first nine months of fiscal 2010. Due to unfavorable market conditions and our inventory
supply requirements, during the first nine months of fiscal 2010, we purchased insignificant
amounts of steel from foreign suppliers. Limiting purchases to domestic suppliers further reduces
our available
48
steel supply base. Therefore, announced production cutbacks, a prolonged labor strike against one
or more of our principal domestic suppliers, or financial or other difficulties of a principal
supplier that affects its ability to produce steel, could have a material adverse effect on our
operations. Furthermore, if one or more of our current suppliers is unable for financial or any
other reason to continue in business or to produce steel sufficient to meet our requirements,
essential supply of our primary raw materials could be temporarily interrupted and our business
could be adversely affected. However, alternative sources, including foreign steel, are currently
believed to be sufficient to maintain required deliveries.
With steel accounting for approximately 69% of our cost of sales for the fiscal nine months ended
August 1, 2010, a one percent change in the cost of steel would have resulted in a pre-tax impact
of approximately $3.5 million for the nine months ended August 1, 2010, if such costs were not
passed on to our customers. The impact to our financial results of operations would be
significantly dependent on the competitive environment and the costs of other alternative building
products, which could impact our ability to pass on these higher costs.
Interest Rates
We are subject to market risk exposure related to changes in interest rates on our Amended Credit
Agreement and ABL Facility. These instruments bear interest at an agreed upon percentage point
spread from either the prime interest rate or LIBOR. Under our Amended Credit Agreement, we may, at
our option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days
to six months. At August 1, 2010, we had $136.3 million outstanding under our senior Amended Credit
Agreement. Based on this balance, an immediate change of one percent in the interest rate would
cause a change in interest expense of approximately $1.4 million on an annual basis. While there
were no Convertible Notes outstanding at August 1, 2010, the fair value of our Convertible Notes at
November 1, 2009 was approximately $0.1 million compared to the face value of $0.1 million. The
fair value of our Amended Credit Agreement at August 1, 2010 and November 1, 2009 was approximately
$132.9 million and $138.0 million, respectively, compared to the face value of $136.3 million and
$150.0 million, respectively.
We may from time to time utilize interest rate swaps to manage overall borrowing costs and reduce
exposure to adverse fluctuations in interest rates. We do not purchase or hold any derivative
financial instruments for trading purposes. As disclosed in Note 12 to the Consolidated Financial
Statements, we effectively converted $160 million of the $400 million term loan under the credit
agreement as in effect prior to October 20, 2009 (subsequently amended and repaid in part) to fixed
rate debt by entering into an interest rate swap agreement (Swap Agreement). The Swap Agreement
expired on June 17, 2010. At November 1, 2009, the notional amount of the Swap Agreement was $65
million. However, in connection with our refinancing, we concluded the Swap Agreement was no longer
an effective hedge, based on the modified terms of the Amended Credit Agreement which includes a 2%
LIBOR floor. The LIBOR rates over the remaining terms of the Swap Agreement did not exceed the
LIBOR floor stated in the Amended Credit Agreement which in effect resulted in fixed rate debt.
See Note 10 Debt and Note Payable to the Consolidated Financial Statements for more information
on the material terms of our long-term debt.
Foreign Currency Exchange Rates
We are exposed to the effect of exchange rate fluctuations on the U.S. dollar value of foreign
currency denominated operating revenue and expenses. The functional currency for our Mexico
operations is the U.S. dollar. Adjustments resulting from the re-measurement of the local currency
financial statements into the U.S. dollar functional currency, which uses a combination of current
and historical exchange rates, are included in net income in the current period. Net foreign
currency exchange (losses) for the three and nine month periods ended August 1, 2010 were $(0.3)
million and $(0.2) million, respectively. Net foreign currency exchange gains (losses) for the
three and nine month periods ended August 2, 2009 were $0.1 million and $(0.1) million,
respectively.
The functional currency for our Canada operations is the Canadian dollar. Translation adjustments
resulting from translating the functional currency financial statements into U.S. dollar
equivalents are reported separately in accumulated other comprehensive income in stockholders
equity. The net foreign currency exchange gains included in net income for the three and nine month
periods ended August 1, 2010 was $0.1 million and $0.4 million, respectively. The net foreign
currency exchange gains included in net income for the three and nine month periods ended August 2,
2009 were $0.2 million and $0.3 million, respectively. The net foreign currency translation
adjustment, net of tax, and included in other comprehensive income was $(0.3) million for the nine
month periods ended
49
August 2, 2009. The net foreign currency translation adjustment, net of tax, and included in other
comprehensive income for the three months ended August 2, 2009 and both the three and nine months
ended August 1, 2010 was insignificant.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures.
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and procedures. Based upon such
evaluation, they have concluded that, as of such date, our disclosure controls and procedures were
effective. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding the required disclosure. Management believes that our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objectives and based on
the evaluation of our disclosure controls and procedures as of August 1, 2010, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at such reasonable assurance level.
Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
50
NCI BUILDING SYSTEMS, INC.
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings. |
See Part I, Item 1, Unaudited Consolidated Financial Statements, Note 17, which is incorporated
herein by reference.
Please refer to Item 1A, Risk Factors included in our Annual Report on Form 10-K for the fiscal
year ended November 1, 2009 filed with the Securities and Exchange Commission (the SEC) and
incorporated herein by reference. There have been no material changes to the risk factors described
either in our most recent Form 10-K or previous Form 10-Q.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table shows our purchases of our Common Stock during the third quarter of fiscal
2010:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total |
|
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
Shares that May |
|
|
|
|
|
|
|
(b) Average |
|
|
of Publicly |
|
|
Yet be Purchased |
|
|
|
(a) Total Number of |
|
|
Price Paid per |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Period |
|
Shares Purchased(1) |
|
|
Share (or Unit) |
|
|
or Programs |
|
|
Programs(2) |
|
May 3, 2010 to May 30, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
129,218 |
|
May 31, 2010 to June 27, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,218 |
|
June 28, 2010 to August 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
129,218 |
|
|
|
|
(1) |
|
These shares were shares of restricted stock that were withheld to satisfy tax-withholding
obligations arising in connection with the vesting of awards of restricted stock. The required
withholding is calculated using the closing sales price reported by the NYSE as of the vesting
date. |
|
(2) |
|
Our board of directors has authorized a stock repurchase program. Subject to applicable
federal securities law, such purchases occur at times and in amounts that we deem appropriate.
Shares repurchased are used primarily for later re-issuance in connection with our equity
incentive and 401(k) profit sharing plans. On February 28, 2007, we publicly announced that
our board of directors authorized the repurchase of an additional 0.2 million shares of our
Common Stock. There is no time limit on the duration of the program. During the first nine
months of fiscal 2010, we did not repurchase any shares of Common Stock. At August 1, 2010,
there were 0.1 million shares of Common Stock remaining authorized for repurchase under the
program. |
Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to
Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated
herein by reference.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
NCI BUILDING SYSTEMS, INC.
(Registrant)
|
|
Date: September 8, 2010 |
By: |
/s/ Mark E. Johnson
|
|
|
|
Mark E. Johnson |
|
|
|
Executive Vice President,
Chief Financial Officer and Treasurer |
|
52
Index to Exhibits
|
|
|
2.2
|
|
Lock-Up and Voting Agreement, dated as of August 31, 2009, by and among NCI Building Systems,
Inc. and the signatories thereto (incorporated by reference to exhibit 2.2 to Form 8-K filed
with the SEC on September 1, 2009) |
|
|
|
2.3
|
|
Amendment No. 1 to Lock-Up and Voting Agreement, dated as of October 8, 2009, by and among
NCI Building Systems, Inc. and the signatories thereto (incorporated by reference to exhibit
2.3 to Form 8-K filed with the SEC on October 8, 2009) |
|
|
|
2.4
|
|
Lock-Up and Voting Agreement, dated as of October 8, 2009, by and among NCI Building Systems,
Inc. and the signatories thereto (incorporated by reference to exhibit 2.2 to Form 8-K filed
with the SEC on October 8, 2009) |
|
|
|
3.1
|
|
Restated Certificate of Incorporation, as amended through September 30, 1998 (filed as
Exhibit 3.1 to NCIs Annual Report on Form 10-K for the fiscal year ended November 2, 2002 and
incorporated by reference herein) |
|
|
|
3.2
|
|
Certificate of Amendment to Restated Certificate of Incorporation, effective as of March 12,
2007 (filed as Exhibit 3.2 to NCIs Quarterly Report on Form 10-Q for the quarter ended April
29, 2007 and incorporated by reference herein) |
|
|
|
3.3
|
|
Second Amended and Restated By-Laws, effective as of October 20, 2009 (filed as Exhibit 3.4
to NCIs Current Report on Form 8-K dated October 26, 2009 and incorporated by reference
herein) |
|
|
|
*31.1
|
|
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
*31.2
|
|
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
**32.1
|
|
Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
(Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
**32.2
|
|
Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
(Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
53