Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
We are one of North America’s 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 use a 52/53 week year with our fiscal year end on the Sunday closest to October 31.
We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit, operating income and whether or not each segment has achieved its projected sales goals. In assessing our overall financial performance, we regard return on adjusted operating assets, as well as growth in earnings, as key indicators of shareholder value.
Fiscal
2017
Overview
Our fiscal
2017
financial performance showed year-over-year improvement in revenue, net income and Adjusted EBITDA, while gross margins declined over the same period. This improved financial performance was achieved despite challenging market conditions, including a series of disruptive hurricanes during the fourth quarter. The lower gross margins were the result of lower volumes in the Engineered Building Systems segment, uneven production flow and increased transportation costs, largely related to hurricane disruptions. We continue to focus on growing and integrating IMP products into our building and components businesses. We realized the benefits of focused and integrated execution across our commercial, manufacturing, and supply chain activities, and our investments to improve our manufacturing productivity and overall cost efficiency. We also maintained commercial pricing discipline in an environment of volatile steel prices.
Consolidated revenues increased by approximately
5.1%
from the prior fiscal year. The year-over-year improvement was primarily driven by commercial discipline in the pass-through of higher costs in a rising steel price environment predominantly in the Engineered Building Systems and Metal Components segments, despite lower tonnage volumes.
Consolidated gross margin in fiscal
2017
decreased by
190
basis points from the prior fiscal year to
23.5%
. Lower margins in the current period were driven primarily by lower tonnage volumes in our Engineered Building Systems segment, leading to lower manufacturing cost leverage, offset by favorable product mix, particularly in IMP products. Engineering, selling, general and administrative expenses as a percentage of revenues decreased by
140
basis points to
16.6%
compared to the prior fiscal year, as we executed on our strategic initiatives.
Net income increased by
$3.7 million
to
$54.7 million
for fiscal
2017
, compared to
$51.0 million
in the prior year. Diluted earnings per share was
$0.77
, while adjusted net income per diluted common share was
$0.80
. Adjusted EBITDA increased to
$167.5 million
, representing an approximately
0.8%
increase over the prior year. Net income was impacted by certain special items including a
$6.0 million
($3.7 million after tax) impairment of goodwill associated with a reporting unit within the Metal Components segment, offset by a
$9.7 million
($5.9 million) gain on insurance recovery.
Due to the strong operating cash flow and focused management of our working capital, we made voluntary prepayments on our existing term loan facility of approximately
$10.0 million
and we used
$43.6 million
to repurchase shares of our Common Stock in fiscal
2017
. Our net debt leverage ratio (net debt/EBITDA) at the end of the fourth quarter was 2.0x, consistent with prior year.
Overall, we delivered net income, Adjusted EBITDA, diluted earnings per share and adjusted diluted earnings per share in fiscal 2017 that exceeded the prior year’s results. We remain focused on increasing our operating leverage and manufacturing efficiency by continuing to pursue our cost and efficiency initiatives. Our objective is to continue to execute on our strategic initiatives in order to increase market penetration and deliver top-line growth above nonresidential market growth during fiscal 2018 in both our legacy businesses and our IMP products through our multiple sales channels.
Industry Conditions
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales normally are lower in the first
half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. Following a significant downturn in 2008 and 2009, the current recovery of low-rise construction has been uneven and slow. The annual volume of new construction starts remains below previous cyclical trough levels of activity from the last 50 years. However, we believe that the economy is recovering and that the nonresidential construction industry will return to mid-cycle levels of activity over the next several years.
The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1968 as compiled and reported by Dodge:
Current market estimates continue to show uneven activity across the nonresidential construction markets. According to Dodge, low-rise nonresidential construction starts, as measured in square feet and comprising buildings of up to five stories, were down as much as approximately
2%
in our fiscal 2017 as compared to our fiscal 2016. However, Dodge typically revises initial reported figures, and we expect this metric will be revised upwards over time. Leading indicators for low-rise, nonresidential construction activity indicate positive momentum into fiscal 2018.
The leading indicators that we follow and that typically have the most meaningful correlation to nonresidential low-rise construction starts are the American Institute of Architects’ (“AIA”) Architecture Mixed Use Index, Dodge Residential single family starts and the Conference Board Leading Economic Index (“LEI”). Historically, there has been a very high correlation to the Dodge low-rise nonresidential starts when the three leading indicators are combined and then seasonally adjusted. The combined forward projection of these metrics, based on a 9 to 14-month historical lag for each metric, indicates low single digit growth for low-rise new construction starts in fiscal 2018.
We normally do not maintain an inventory of steel in excess of our current production requirements. However, from time to time, we may purchase steel in advance of announced steel price increases. We can give no assurance that steel will be readily available or that prices will not continue to be volatile. While most of our sales contracts have escalation clauses that allow us, under certain circumstances, to pass along all or a portion of increases in the price of steel after the date of the contract but prior 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 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 “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Steel Prices.”
RESULTS OF OPERATIONS
The following table presents, as a percentage of sales, certain selected consolidated financial data for the periods indicated:
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|
Fiscal year ended
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|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
76.5
|
|
|
74.7
|
|
|
76.0
|
|
Loss (gain) on sale of assets and asset recovery
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Fair value adjustment of acquired inventory
|
—
|
|
|
—
|
|
|
0.2
|
|
Gross profit
|
23.5
|
|
|
25.4
|
|
|
23.8
|
|
Engineering, selling, general and administrative expenses
|
16.6
|
|
|
18.0
|
|
|
18.3
|
|
Intangible asset amortization
|
0.5
|
|
|
0.6
|
|
|
1.1
|
|
Goodwill impairment
|
0.3
|
|
|
—
|
|
|
—
|
|
Strategic development and acquisition related costs
|
0.1
|
|
|
0.2
|
|
|
0.3
|
|
Restructuring and impairment charges
|
0.3
|
|
|
0.3
|
|
|
0.7
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|
Gain on insurance recovery
|
(0.6
|
)
|
|
—
|
|
|
—
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|
Gain on legal settlements
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Income from operations
|
6.0
|
|
|
6.5
|
|
|
3.6
|
|
Interest income
|
—
|
|
|
—
|
|
|
—
|
|
Interest expense
|
(1.6
|
)
|
|
(1.8
|
)
|
|
(1.8
|
)
|
Foreign exchange gain (loss)
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Gain from bargain purchase
|
—
|
|
|
0.1
|
|
|
—
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|
Other income, net
|
0.1
|
|
|
—
|
|
|
—
|
|
Income before income taxes
|
4.7
|
|
|
4.7
|
|
|
1.7
|
|
Provision for income taxes
|
1.6
|
|
|
1.7
|
|
|
0.6
|
|
Net income
|
3.1
|
%
|
|
3.0
|
%
|
|
1.1
|
%
|
SUPPLEMENTARY OPERATING SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) Engineered Building Systems; (ii) Metal Components; and (iii) Metal Coil Coating. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Our operating segments are vertically integrated and benefit from using 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 manufacturing and distribution activities of our segments are effectively coupled through the use of our nationwide hub-and-spoke manufacturing and distribution system, which supports and enhances our vertical integration. The operating segments follow the same accounting policies used for our consolidated financial statements.
We evaluate a segment’s performance based primarily upon operating income before corporate expenses. Intersegment sales are recorded based on standard material costs plus a standard markup to cover labor and overhead and consist of: (i) structural framing provided by the Engineered Building Systems segment to the Metal Components segment; (ii) building components provided by the Metal Components segment to the Engineered Building Systems segment; and (iii) hot-rolled, light gauge painted, and slit material and other services provided by the Metal Coil Coating segment to both the Engineered Building Systems and Metal Components Segments.
Corporate assets consist primarily of cash but also include deferred taxes and property, plant and equipment associated with our headquarters in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology, purchasing, marketing and corporate travel expenses. Additional unallocated amounts primarily include interest income, interest expense and other income (expense). See Note
20
— Operating Segments in the notes to the consolidated financial statements for more information on our segments.
The following table represents total sales, external sales and operating income (loss) attributable to these operating segments for the periods indicated (in thousands, except percentages):
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|
|
|
|
|
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2015
|
|
%
|
Total sales:
|
|
|
|
|
|
|
|
|
|
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|
Engineered Building Systems
|
$
|
693,980
|
|
|
39.2
|
|
|
$
|
672,235
|
|
|
39.9
|
|
|
$
|
667,166
|
|
|
42.7
|
|
Metal Components
|
1,129,816
|
|
|
63.8
|
|
|
1,044,040
|
|
|
62.0
|
|
|
920,845
|
|
|
58.9
|
|
Metal Coil Coating
|
271,085
|
|
|
15.3
|
|
|
247,736
|
|
|
14.7
|
|
|
231,732
|
|
|
14.8
|
|
Intersegment sales
|
(324,603
|
)
|
|
(18.3
|
)
|
|
(279,083
|
)
|
|
(16.6
|
)
|
|
(256,050
|
)
|
|
(16.4
|
)
|
Total net sales
|
$
|
1,770,278
|
|
|
100.0
|
|
|
$
|
1,684,928
|
|
|
100.0
|
|
|
$
|
1,563,693
|
|
|
100.0
|
|
External sales:
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Engineered Building Systems
|
$
|
659,863
|
|
|
37.3
|
|
|
$
|
652,471
|
|
|
38.7
|
|
|
$
|
647,881
|
|
|
41.4
|
|
Metal Components
|
998,279
|
|
|
56.4
|
|
|
925,863
|
|
|
55.0
|
|
|
815,310
|
|
|
52.1
|
|
Metal Coil Coating
|
112,136
|
|
|
6.3
|
|
|
106,594
|
|
|
6.3
|
|
|
100,502
|
|
|
6.5
|
|
Total net sales
|
$
|
1,770,278
|
|
|
100.0
|
|
|
$
|
1,684,928
|
|
|
100.0
|
|
|
$
|
1,563,693
|
|
|
100.0
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Engineered Building Systems
|
$
|
41,388
|
|
|
|
|
$
|
62,046
|
|
|
|
|
$
|
51,410
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|
|
|
Metal Components
|
124,224
|
|
|
|
|
102,495
|
|
|
|
|
50,541
|
|
|
|
Metal Coil Coating
|
23,935
|
|
|
|
|
25,289
|
|
|
|
|
19,080
|
|
|
|
Corporate
|
(79,767
|
)
|
|
|
|
(81,051
|
)
|
|
|
|
(64,200
|
)
|
|
|
Total operating income
|
$
|
109,780
|
|
|
|
|
$
|
108,779
|
|
|
|
|
$
|
56,831
|
|
|
|
Unallocated other expense
|
(26,642
|
)
|
|
|
|
(29,815
|
)
|
|
|
|
(30,041
|
)
|
|
|
Income before income taxes
|
$
|
83,138
|
|
|
|
|
$
|
78,964
|
|
|
|
|
$
|
26,790
|
|
|
|
RESULTS OF OPERATIONS FOR FISCAL
2017
COMPARED TO FISCAL
2016
Consolidated sales
increased by
5.1%
, or
$85.4 million
for fiscal
2017
, compared to fiscal
2016
. The increase was driven by continued commercial discipline in the pass-through of higher costs in a rising steel price environment predominantly in the Engineered Building Systems and Metal Components segments despite overall tonnage volumes being lower year over year.
Consolidated cost of sales
increased by
7.6%
, or
$95.4 million
for fiscal
2017
, compared to fiscal
2016
. This increase was the result of rising raw materials costs during fiscal
2017
as compared to declining materials costs in fiscal
2016
.
Gross margin
was
23.5%
for fiscal
2017
compared to
25.4%
for fiscal
2016
. The decrease in gross margin was primarily a result of lower volumes in the Engineered Building Systems segment, uneven production flow and increased transportation costs.
Engineered Building Systems sales
increased
3.2%
, or
$21.7 million
to
$694.0 million
in fiscal
2017
, compared to
$672.2 million
in fiscal
2016
. The increase in sales is a result of commercial discipline, partially offset by lower volumes in the fourth quarter of fiscal 2017, primarily driven by hurricane related disruptions. Sales to third parties for fiscal
2017
increased
$7.4 million
to
$659.9 million
from
$652.5 million
in the prior fiscal year.
Operating income of the Engineered Building Systems segment decreased to
$41.4 million
in fiscal
2017
compared to
$62.0 million
in the prior fiscal year. The
$20.7 million
decrease resulted from rapidly rising steel costs during the current year as compared to the prior fiscal year, combined with the disruptive impact of hurricanes during the fourth quarter of fiscal
2017
.
Metal Components sales
increased
8.2%
, or
$85.8 million
to
$1.1 billion
in fiscal
2017
, compared to
$1.0 billion
in fiscal
2016
. The increase was primarily driven by higher tonnage volume and commercial discipline and improved product mix, particularly sales of IMP. Sales to third parties for fiscal
2017
increased
$72.4 million
to
$998.3 million
from
$925.9 million
in the prior fiscal year.
Operating income of the Metal Components segment increased to
$124.2 million
in fiscal
2017
, compared to
$102.5 million
in the prior fiscal year. The
$21.7 million
increase was driven by the increased sales discussed in the immediately preceding paragraph, as well as improved product mix, primarily from our IMP products.
Metal Coil Coating sales
increased by
9.4%
, or
$23.3 million
to
$271.1 million
in fiscal
2017
, compared to
$247.7 million
in the prior year. The increase in sales was primarily the result of pass through of higher steel prices through its coil package products. Metal Coil Coating third party sales increased
$5.5 million
to
$112.1 million
from
$106.6 million
in the prior fiscal year and accounted for
6.3%
of total consolidated third party sales for fiscal 2017.
Operating income of the Metal Coil Coating segment decreased to
$23.9 million
in fiscal
2017
, compared to
$25.3 million
in the prior fiscal year. The
$1.4 million
decrease was driven by lower manufacturing efficiency due to lower volumes and higher material costs in fiscal
2017
.
Consolidated engineering, selling, general and administrative expenses
decreased to
$293.1 million
in fiscal
2017
, compared to
$302.6 million
in the prior fiscal year. As a percentage of sales, engineering, selling, general and administrative expenses were
16.6%
for fiscal
2017
as compared to
18.0%
for fiscal
2016
. The
$9.4 million
decrease in expenses was primarily due to the cost reductions resulting from execution of strategic initiatives.
Consolidated intangible asset amortization
remained consistent at
$9.6 million
during fiscal
2017
and fiscal
2016
.
Goodwill impairment
for fiscal
2017
of
$6.0 million
was related to the coil coating operations of CENTRIA within our Metal Components segment.
Consolidated strategic development and acquisition related costs
decreased to
$2.0 million
during fiscal
2017
, compared to
$2.7 million
in the prior fiscal year. These non-operational costs include external legal, financial and due diligence costs incurred to deliver on our strategic initiatives.
Consolidated restructuring charges
for
fiscal
2017
were
$5.3 million
. These charges relate to our efforts to streamline our management, engineering and drafting and manufacturing structures as well as to optimize our manufacturing footprint. We incurred severance-related charges associated with these activities, including in connection with the closure of three facilities, including one in our Engineered Building Systems segment and two in our Metal Components segment in fiscal 2017.
Consolidated interest expense
decreased to
$28.9 million
for fiscal
2017
, compared to
$31.0 million
for fiscal
2016
. The decrease is primarily a result of voluntary principal prepayments the Company made on its Term Loan during fiscal 2017 and 2016.
Consolidated foreign exchange gain (loss)
was a gain of
$0.5 million
for fiscal
2017
, compared to a loss of
$1.4 million
for the prior year primarily due to the fluctuations in the exchange rate between the Canadian dollar and U.S. dollar in the current period.
Consolidated provision for income taxes
was
$28.4 million
for fiscal
2017
, compared to
$27.9 million
for the prior fiscal year, primarily as a result of higher pre-tax income in fiscal 2017. The effective tax rate for fiscal
2017
was
34.2%
compared to
35.4%
for fiscal
2016
.
Diluted income per common share
improved to
$0.77
per diluted common share for fiscal
2017
, compared to
$0.70
per diluted common share for fiscal
2016
. The improvement in diluted income per common share was primarily due to the
$3.8 million
increase in net income applicable to common shares resulting from the factors described above in this section and share repurchases executed during fiscal
2017
.
RESULTS OF OPERATIONS FOR FISCAL
2016
COMPARED TO FISCAL
2015
Consolidated sales
increased by 7.8%, or $121.2 million for fiscal 2016, compared to fiscal 2015. The increase was driven by higher tonnage volumes in all of our segments, especially in our metal components and metal coil coating segments. Additionally, CENTRIA was included in the full current period and contributed an incremental $51.2 million of external sales during fiscal 2016. These increases were partially offset by the impact of lower steel prices during fiscal 2016 as compared to fiscal 2015.
Consolidated cost of sales,
excluding the gain on sale of assets and asset recovery and the fair value adjustment of acquired inventory,
increased by 5.9%, or $69.7 million for fiscal 2016, compared to fiscal 2015. This increase was the result of the increase in consolidated sales, partially offset by lower materials cost driven in part by the impact of lower steel prices during fiscal 2016 as compared to fiscal 2015.
Fair value adjustment of acquired inventory
for fiscal 2015 was $2.4 million associated with the CENTRIA acquisition completed on January 15, 2015. There was no corresponding amount recorded during fiscal 2016.
Gross margin, including the gain on sale of assets and asset recovery and the fair value adjustment of acquired inventory
was 25.4% for fiscal 2016 compared to 23.8% for fiscal 2015. The increase in gross margin was primarily a result of commercial discipline in all operating segments, lower materials cost, more favorable product mix and the inclusion of CENTRIA in the full current period. Additionally, we recognized a $1.6 million gain (recovery) on the sale of certain idled facilities in our Engineered Building Systems segment in fiscal 2016.
Engineered Building Systems sales
increased 0.8%, or $5.1 million to $672.2 million in fiscal 2016, compared to $667.2 million in fiscal 2015. The increase in sales is a result of higher tonnage volume and commercial discipline, partially offset by the pass-through effect of lower steel prices. Sales to third parties for fiscal 2016 increased $4.6 million to $652.5 million from $647.9 million in the prior fiscal year.
Operating income of the Engineered Building Systems segment increased to $62.0 million in fiscal 2016 compared to $51.4 million in the prior fiscal year. The $10.6 million increase resulted from improvements in commercial discipline, supply chain management and manufacturing efficiencies. We also recognized a $1.6 million gain (recovery) on the sale of certain idled facilities in fiscal 2016.
Metal Components sales
increased 13.4%, or $123.2 million to $1.0 billion in fiscal 2016, compared to $920.8 million in fiscal 2015. The increase was driven in part by the inclusion of CENTRIA in the full current period, which contributed an incremental $51.2 million of external sales during fiscal 2016. The increase was also due to higher tonnage volume and more favorable product mix, primarily from our IMP products. Sales to third parties for fiscal 2016 increased $110.6 million to $925.9 million from $815.3 million in the prior fiscal year.
Operating income of the Metal Components segment increased to $102.5 million in fiscal 2016, compared to $50.5 million in the prior fiscal year. The $52.0 million increase was driven by the increased sales discussed in the immediately preceding paragraph, as well as improved product mix, primarily from our IMP products. CENTRIA was included in the full current period and contributed an incremental $17.1 million in operating income for fiscal 2016.
Metal Coil Coating sales
increased by 6.9%, or $16.0 million to $247.7 million in fiscal 2016, compared to $231.7 million in the same period in the prior year. The increase in sales was primarily the result of higher tonnage volume. Lower steel prices generally have an unfavorable impact on our coating business, primarily in our package sales that are more sensitive to the price of steel. 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 customer’s ownership. Metal Coil Coating third party sales increased $6.1 million to $106.6 million from $100.5 million in the prior fiscal year and accounted for 6.3% of total consolidated third party sales for fiscal 2016.
Operating income of the metal coil coating segment increased to $25.3 million in fiscal 2016, compared to $19.1 million in the prior fiscal year. The $6.2 million increase was driven by the increase in sales discussed above and lower materials cost in fiscal 2016.
Consolidated engineering, selling, general and administrative expenses
increased to $302.6 million in fiscal 2016, compared to $286.8 million in the same period in the prior year. As a percentage of sales, engineering, selling, general and administrative expenses were 18.0% for fiscal 2016 as compared to 18.3% for fiscal 2015. The $15.7 million increase in expenses was primarily due to the higher tonnage volume and to higher incentive compensation costs from overall improvement in operating results in the current period, partially offset by cost reductions resulting from execution of strategic initiatives. The increase was also partially due to the inclusion of CENTRIA in the full current period, which contributed an incremental $5.6 million of selling and general and administrative expenses in fiscal 2016.
Consolidated intangible asset amortization
decreased to $9.6 million during fiscal 2016, compared to $16.9 million in fiscal 2015. The prior fiscal year amount included short-lived intangible assets from the CENTRIA Acquisition that were fully amortized in fiscal 2015.
Consolidated strategic development and acquisition related costs
decreased to $2.7 million during fiscal 2016, compared to $4.2 million in the prior fiscal year. These non-operational costs are related to acquisition-related activities that support our future growth targets and performance goals and generally include external legal, financial and due diligence costs incurred to pursue specific acquisition targets or costs directly associated with integrating previous acquisitions. These costs also included $0.7 million in expenses we incurred in connection with the 2016 Secondary Offering and 2016 Stock Repurchase.
Consolidated restructuring and impairment charges
for
fiscal 2016 were $4.3 million. These charges relate to our efforts to streamline our management, engineering and drafting and manufacturing structures as well as to optimize our manufacturing footprint. We incurred severance-related charges associated with these activities, including in connection with the closure of two facilities in our metal components segment in fiscal 2016. Restructuring and impairment charges in fiscal 2015 of $11.3 million were associated with the closing of a facility in Caryville, Tennessee, severance costs of $3.9 million associated with the streamlining of our commercial and manufacturing cost structure and asset impairment charges of $5.8 million incurred during the fourth quarter of 2015.
Consolidated gain on legal settlements
for
fiscal 2015 was $3.8 million and consisted of proceeds received from the settlement of certain legal cases where the Company was the plaintiff. There was no corresponding amount recorded for fiscal 2016.
Consolidated interest expense
increased to $31.0 million for fiscal 2016, compared to $28.5 million for fiscal 2015. This increase is attributable to the inclusion of a full fiscal year of interest expense associated with the $250.0 million in aggregate principal amount of 8.25% senior notes due 2023 issued in connection with the CENTRIA Acquisition in fiscal 2015.
Consolidated foreign exchange loss
decreased to $1.4 million for fiscal 2016, compared to $2.2 million for the same period of the prior year primarily due to the fluctuations in the exchange rate between the Canadian dollar and U.S. dollar in the current period.
Consolidated provision for income taxes
was $27.9 million for fiscal 2016, compared to $9.0 million for the prior fiscal year, primarily as a result of higher pre-tax income in fiscal 2016. The effective tax rate for fiscal 2016 was 35.4% compared to 33.5% for fiscal 2015.
Diluted income per common share
improved to $0.70 per diluted common share for fiscal 2016, compared to $0.24 per diluted common share for fiscal 2015. The improvement in diluted income per common share was primarily due to the $33.0 million increase in net income applicable to common shares resulting from the factors described above in this section.
LIQUIDITY AND CAPITAL RESOURCES
General
Our cash and cash equivalents
increased
from
$65.4 million
to
$65.7 million
during fiscal
2017
. The following table summarizes our consolidated cash flows for fiscal
2017
and fiscal
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
Net cash provided by operating activities
|
$
|
62,359
|
|
|
$
|
68,768
|
|
Net cash used in investing activities
|
(10,284
|
)
|
|
(9,950
|
)
|
Net cash used in financing activities
|
(52,014
|
)
|
|
(92,752
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
194
|
|
|
(325
|
)
|
Net increase (decrease) in cash and cash equivalents
|
255
|
|
|
(34,259
|
)
|
Cash and cash equivalents at beginning of period
|
65,403
|
|
|
99,662
|
|
Cash and cash equivalents at end of period
|
$
|
65,658
|
|
|
$
|
65,403
|
|
Operating Activities
Our business is both seasonal and cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic conditions. We generally rely on cash as well as short-term borrowings, when needed, to meet cyclical and seasonal increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices due to higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.
Net cash provided by operating activities was
$62.4 million
during fiscal
2017
compared to
$68.8 million
during fiscal
2016
. The change was driven by increased in earnings in the current fiscal year as compared to the prior fiscal year, offset by net cash used for working capital as described below.
Net cash provided by accounts payable was
$4.9 million
for the fiscal year ended
October 29, 2017
, whereas net cash used in accounts payable was
$1.6 million
for the fiscal year ended
October 30, 2016
. Our vendor payments can fluctuate significantly based on the timing of disbursements, inventory purchases and vendor payment terms. Our trailing 90-days payable outstanding (“DPO”) at
October 29, 2017
was
32.5
days compared to
34.0
days at
October 30, 2016
.
The change in cash relating to inventory was
$17.6 million
and resulted primarily from higher inventory purchases to support higher sales, and the movement in steel prices during the current fiscal year as compared to the prior fiscal year. Our trailing 90-days inventory on-hand (“DIO”) was
51.5
days at
October 29, 2017
as compared to
47.7
days at
October 30, 2016
.
Net cash used in accounts receivable was
$19.6 million
for the fiscal year ended
October 29, 2017
, whereas net cash used in accounts receivable was
$18.1 million
for the fiscal year ended
October 30, 2016
. The increase in accounts receivable as of October 29, 2017 as compared to the prior fiscal year was primarily the result of strong revenue growth during the current period. Our trailing 90-days sales outstanding (“DSO”) was approximately
35.1
days at
October 29, 2017
as compared to
33.6
days at
October 30, 2016
.
Investing Activities
Cash used in investing activities of
$10.3 million
during fiscal
2017
was consistent with
$10.0 million
used in the prior fiscal year. The cash used in investing activities in fiscal
2017
included
$22.1 million
for capital expenditures. These were partially offset by
$8.6 million
in cash proceeds from insurance for an involuntary loss on conversion of a facility in our Metal Components segment and
$3.2 million
in cash received for the sale of assets that had been classified as held for sale in our Engineered Building Systems and Metal Components segments. In fiscal
2016
, the
$10.0 million
included $2.1 million for the final payment of the post-close working capital adjustment related to the CENTRIA Acquisition, and $2.2 million for the acquisition of the Hamilton operations.
Financing Activities
Cash used in financing activities was
$52.0 million
in fiscal
2017
and cash used in financing activities was
$92.8 million
in the prior fiscal year. During fiscal
2017
, we used
$43.6 million
primarily to repurchase shares of our Common Stock under our authorized stock repurchase programs and
$10.2 million
to make voluntary principal prepayments on borrowings under our Credit Agreement. We received
$1.7 million
in cash proceeds from exercises of stock options.
The
$92.8 million
used in financing activities during fiscal
2016
was primarily attributable to $62.9 million to repurchase shares of our Common Stock under our authorized stock repurchase programs (including $45.0 million for the 2016 Stock Repurchase from the CD&R Funds), and voluntary prepayments of approximately
$40.0 million
made on our Credit Agreement. In 2016 we received $12.6 million in cash proceeds from exercises of stock options.
We invest our excess cash in various overnight investments which are issued or guaranteed by the federal government.
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”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Stockholders Agreement”), the CD&R Fund VIII and the Clayton, Dubilier & Rice Friends & Family Fund VIII, L.P. (collectively, the “CD&R Funds”) purchased convertible preferred stock, which was later converted to shares of our Common Stock on May 14, 2013.
On January 15, 2014, the CD&R Funds completed a registered underwritten offering, in which the CD&R Funds offered
8.5 million
shares of Common Stock at a price to the public of
$18.00
per share (the “2014 Secondary Offering”). The underwriters also exercised their option to purchase
1.275 million
additional shares of Common Stock. The aggregate offering price for the
9.775 million
shares sold in the 2014 Secondary Offering was approximately
$167.6 million
, net of underwriting discounts and commissions. The CD&R Funds received all of the proceeds from the 2014 Secondary Offering and
no
shares in the 2014 Secondary Offering were sold by NCI or any of its officers or directors (although certain of our directors are affiliated with the CD&R Funds).
On January 6, 2014, the Company entered into an agreement with the CD&R Funds to repurchase
1.15 million
shares of its Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Funds in the underwritten offering (the “2014 Stock Repurchase”). The 2014 Stock Repurchase, which was completed at the same time as the 2014 Secondary Offering, represented a private, non-underwritten transaction between NCI and the CD&R Funds that was approved and recommended by the Affiliate Transactions Committee of our board of directors. Following completion of the 2014 Stock Repurchase, NCI canceled the shares repurchased from the CD&R Funds, resulting in a
$19.7 million
decrease in both additional paid-in capital and treasury stock during the fiscal year ended November 2, 2014.
On July 25, 2016, the CD&R Funds completed a registered underwritten offering, in which the CD&R Funds offered
9.0 million
shares of our Common Stock at a price to the public of
$16.15
per share (the “2016 Secondary Offering”). The underwriters also exercised their option to purchase
1.35 million
additional shares of our Common Stock from the CD&R Funds. The aggregate offering price for the
10.35 million
shares sold in the 2016 Secondary Offering was approximately
$160.1 million
, net of underwriting discounts and commissions. The CD&R Funds received all of the proceeds from the 2016 Secondary Offering and no shares in the 2016 Secondary Offering were sold by the Company or any of its officers or directors (although certain of our directors are affiliated with the CD&R Funds). In connection with the 2016 Secondary Offering and 2016 Stock Repurchase (as defined below), we incurred approximately
$0.7 million
in expenses, which were included in engineering, selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended
October 29, 2017
.
On July 18, 2016, the Company entered into an agreement with the CD&R Funds to repurchase approximately
2.9 million
shares of our Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Funds in the underwritten offering (the “2016 Stock Repurchase”). The 2016 Stock Repurchase, which was completed concurrently with the 2016 Secondary Offering, represented a private, non-underwritten transaction between the Company and the CD&R Funds that was approved and recommended by the Affiliate Transactions Committee of our board of directors. See Note
18
— Stock Repurchase Program.
At
October 29, 2017
and
October 30, 2016
, the CD&R Funds owned approximately
43.8%
and
42.3%
, respectively, of the outstanding shares of our Common Stock.
As a result of the 2016 Secondary Offering and 2016 Stock Repurchase discussed above, and the resulting decrease in the CD&R Funds’ ownership percentage, the Company no longer qualifies as a controlled company within the meaning of the New York Stock Exchange (“NYSE”). Consequently, under the NYSE corporate governance rules, we are required to (i) have a majority of independent directors on our board of directors within one year of the date we no longer qualified as a controlled company, (ii) appoint a majority of independent directors to each of the compensation and nominating and corporate governance committees within 90 days of the date we no longer qualified as a controlled company, which we did in October 2016, and such committees be composed entirely of independent directors within one year of such date, and (iii) have an annual performance evaluation of the nominating and corporate governance and compensation committees.
In addition, pursuant to Section 3.1(b)(i) of the Stockholders Agreement, by and between the Company and the CD&R Funds, the CD&R Funds currently have the right to nominate a number of directors to the Company’s board in proportion to its voting interest, rounded to the nearest whole number. Prior to the 2016 Secondary Offering and 2016 Stock Repurchase, the
CD&R Funds’ approximate 58.4% interest permitted the CD&R Funds to nominate for election 6 of the 11 directors on the Company’s board. As a result of the decrease in CD&R Funds’ ownership percentage to approximately
43.8%
, the CD&R Funds are currently permitted to nominate for election 5 of the 11 directors on the Company’s board.
Debt
8.25% Senior Notes Due January 2023.
The Company’s $250.0 million in aggregate principal amount of 8.25% senior notes due 2023 (the “Notes”) bear interest at 8.25% per annum and will mature on January 15, 2023. Interest is payable semi-annually in arrears on January 15 and July 15. The Notes are guaranteed on a senior unsecured basis by all of the Company’s existing and future domestic subsidiaries that guarantee the Company’s obligations (including by reason of being a borrower under the senior secured asset-based revolving credit facility on a joint and several basis with the Company or a guarantor subsidiary) under the senior secured credit facilities. The Notes are unsecured senior indebtedness and rank equally in right of payment with all of the Company’s existing and future senior indebtedness and senior in right of payment to all of its future subordinated obligations. In addition, the Notes and guarantees are structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.
The Company may redeem the Notes at any time prior to January 15, 2018, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium. On or after January 15, 2018, the Company may redeem all or a part of the Notes at redemption prices (expressed as percentages of principal amount thereof) equal to 106.188% for the twelve-month period beginning on January 15, 2018, 104.125% for the twelve-month period beginning on January 15, 2019, 102.063% for the twelve-month period beginning on January 15, 2020 and 100.000% for the twelve-month period beginning on January 15, 2021 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes. In addition, prior to January 15, 2018, the Company may redeem the Notes in an aggregate principal amount equal to up to 40.0% of the original aggregate principal amount of the Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of one or more equity offerings, at a redemption price of 108.250%, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes.
Credit Agreement.
The Company’s Credit Agreement provided for a term loan credit facility (the “Term Loan”) in an original aggregate principal amount of $250.0 million. The Term Loan amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum.
On May 2, 2017, the Company entered into Amendment No. 2 (the “Amendment”) to its existing Credit Agreement, dated as of June 22, 2012, between NCI Building Systems, Inc., as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and the other financial institutions party thereto from time to time (as previously amended by Amendment No. 1, dated as of June 24, 2013, the “Existing Term Loan Facility” and, as amended, the “Term Loan Facility”), primarily to extend the maturity date and reduce the interest rate applicable to all of the outstanding term loans under the Term Loan Facility. At
October 29, 2017
and
October 30, 2016
, amounts outstanding under the Credit Agreement were
$144.1 million
and
$154.1 million
,
Prior to the Amendment, approximately $144.1 million of term loans (the “Existing Term Loans”) were outstanding under the Existing Term Loan Facility. Pursuant to the Amendment, certain lenders under the Existing Term Loan Facility extended their Existing Term Loans, in an aggregate amount, along with new term loans advanced by certain new lenders of approximately $144.1 million (the “New Term Loans”). The proceeds of the New Term Loans advanced by the new lenders were used to prepay in full all of the Existing Term Loans that were not extended as New Term Loans. Pursuant to the Amendment, the maturity date of the New Term Loans was extended to June 24, 2022.
Pursuant to the Amendment, the New Term Loans bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR not less than 1.00% plus a borrowing margin of 3.00% per annum or (ii) an alternate base rate plus a borrowing margin of 2.00% per annum. At
October 29, 2017
, the interest rate on the term loan under the Credit Agreement was
4.24%
. Overdue amounts will bear interest at a rate that is 2% higher than the rate otherwise applicable.
The New Term Loans are secured by the same collateral and guaranteed by the same guarantors as the Existing Term Loans under the Existing Term Loan Facility. Voluntary prepayments under the New Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first six months. The Amendment also includes certain other changes to the Term Loan Facility.
During fiscal 2017 and 2016, the Company made voluntary prepayments of
$10.0 million
and
$40.0 million
, respectively, on the outstanding principal amount of the Term Loan. As a result of the voluntary prepayments made during the prior two fiscal periods, which were applied to the one percent per annum amortization, we are not required to make any quarterly installment payments until June 24, 2019.
Subject to certain exceptions, the Term Loan will be subject to mandatory prepayment 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; and
|
|
|
•
|
50% of annual excess cash flow (as defined in the Credit Agreement), subject to reduction to 0% if specified leverage ratio targets are met.
|
The Company’s obligations under the Credit Agreement and designated cash management arrangements and hedging agreements, if any, will be irrevocably and unconditionally guaranteed on a joint and several basis by each direct and indirect wholly owned domestic subsidiary of the Company (other than any domestic subsidiary that is a foreign subsidiary holding company or a subsidiary of a foreign subsidiary and certain other excluded subsidiaries).
The obligations under the Credit Agreement and the designated cash management arrangements and hedging agreements, if any, and the guarantees thereof are secured pursuant to a guarantee and collateral agreement, dated as of June 22, 2012 (the “Guarantee and Collateral Agreement”), made by the Company and other Grantors (as defined therein), in favor of the Term Agent, by (i) all of the capital stock 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 owned by 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, in each case to the extent permitted by applicable law and subject to certain exceptions.
The Credit Agreement contains customary events of default, including non-payment of principal, interest or fees, violation of covenants, material inaccuracy of representations or warranties, cross default and cross acceleration to certain other material indebtedness, certain bankruptcy events, certain ERISA events, material invalidity of security interest, material judgments, and change of control.
The Credit Agreement also provides that the Company has the right at any time to request incremental commitments under one or more incremental term loan facilities or incremental revolving loan facilities, subject to compliance with a pro forma consolidated secured net debt to EBITDA leverage ratio. The lenders under the Credit Agreement will not be under any obligation to provide any such incremental commitments, and any such addition of or increase in commitments will be subject to pro forma compliance with customary conditions.
In connection with the execution of the Credit Agreement the Company, certain of the Company’s subsidiaries, Wells Fargo Capital Finance, LLC, as administrative agent (the “ABL Agent”) under the Company’s Amended ABL Facility (as defined below), and the Term Agent entered into an amendment (the “Intercreditor Agreement Amendment”) to the Company’s existing Intercreditor Agreement, dated as of October 20, 2009, providing for, among other things, the obligations under the Credit Agreement to become subject to the provisions of the Intercreditor Agreement.
The Credit Agreement contains a number of covenants that, among other things, will limit or restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, make dividends and other restricted payments, create liens securing indebtedness, engage in mergers and other fundamental transactions, enter into restrictive agreements, amend certain documents in respect of other indebtedness, change the nature of their business and engage in certain transactions with affiliates.
Amended ABL Facility.
The Company’s Asset-Based Lending Facility, as amended, (“Amended ABL Facility”) provides for revolving loans of up to $150 million (subject to a borrowing base), letters of credit of up to $30 million and up to $10 million for swingline borrowings. All borrowings under the Amended ABL Facility mature on June 24, 2019.
Borrowing availability under the Amended ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of qualified cash, eligible inventory and eligible accounts receivable, less certain reserves and subject to certain other adjustments. At
October 29, 2017
and
October 30, 2016
, our excess availability under the Amended ABL Facility was
$140.0 million
and
$140.9 million
, respectively. At both
October 29, 2017
and
October 30, 2016
, we had no revolving loans outstanding under the Amended ABL Facility. In addition, at
October 29, 2017
and
October 30, 2016
, we had standby letters of credit related to certain insurance policies totaling approximately
$10.0 million
and
$9.1 million
, respectively.
An unused commitment fee is paid monthly on the Amended ABL Facility at an annual rate of 0.50% based on the amount by which the maximum credit exceeds the average daily principal balance of outstanding loans and letter of credit obligations. Additional customary fees in connection with the Amended ABL Facility also apply.
The obligations of the borrowers under the Amended 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 insignificant) that is not a borrower under the Amended 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.
The obligations under the Amended 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 and a second priority lien on the assets securing the term loan under the Credit Agreement on a first-lien basis, in each case subject to certain exceptions.
The Amended 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.
Under the Amended 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 Company’s, the borrowers’ and the other guarantors’ concentration accounts to the repayment of the loans outstanding under the Amended 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 Amended 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 Amended ABL Facility.
The Amended ABL Facility includes a minimum fixed charge coverage ratio of one to one, which will apply if we fail to maintain a specified minimum borrowing capacity. The minimum level of borrowing capacity as of
October 29, 2017
and
October 30, 2016
was
$21.0 million
and
$21.1 million
, respectively. Although our Amended ABL Facility did not require any financial covenant compliance, at
October 29, 2017
and
October 30, 2016
, our fixed charge coverage ratio as of those dates, which is calculated on a trailing twelve month basis, was
3.85
:1.00 and
2.86
:1.00, respectively.
Loans under the Amended ABL Facility bear interest, at our option, as follows:
|
|
(1)
|
Base Rate loans at the Base Rate plus a margin. The margin ranges from 0.75% to 1.25% depending on the quarterly average excess availability under such facility; and
|
|
|
(2)
|
LIBOR loans at LIBOR plus a margin. The margin ranges from 1.75% to 2.25% depending on the quarterly average excess availability under such facility.
|
“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.
During an event of default, loans under the Amended ABL Facility will bear interest at a rate that is 2% higher than the rate otherwise applicable.
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. Beyond cash generated from operations, most of our Amended ABL Facility is undrawn with
$140.0 million
available at
October 29, 2017
and
$65.7 million
of cash as of
October 29, 2017
. However, we have in the past sought to raise additional capital.
We expect that, for the next 12 months, cash generated from operations and our Amended ABL Facility 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 between approximately
$45.0 million
and
$55.0 million
for fiscal
2018
and expansion when needed.
We expect to contribute
$2.6 million
to our defined benefit plans in fiscal
2018
.
Our corporate strategy seeks potential acquisitions that would provide additional synergies in our Engineered Building Systems, Metal Components and Metal Coil Coating 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 substantial cash payments and/or issuance of additional debt. On November 3, 2015, we acquired manufacturing operations in Hamilton, Ontario, Canada for
$2.2 million
in cash. This acquisition allows us to service customers more competitively within the Canadian and Northeastern United States IMP markets. We funded the acquisition with cash on hand.
During fiscal 2017, we repurchased an aggregate of
$43.6 million
of our Common Stock under the stock repurchase program authorized in September 2016. At
October 29, 2017
, approximately
$52.2 million
remained available for stock repurchases under the stock repurchase programs authorized in September 2016 and October 2017. We also withheld shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of restricted stock related to our 2003 Long-Term Stock Incentive Plan.
The Company may repurchase or otherwise retire the Company’s debt and take other steps to reduce the Company’s debt or otherwise improve the Company’s financial position. These actions could 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 Company’s debt, the Company’s cash position, compliance with debt covenants and other considerations. Affiliates of the Company may also purchase the Company’s debt from time to time, through open market purchases or other transactions. In such cases, the Company’s 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 its consolidated balance sheets. During fiscal
2017
, we made voluntary principal repayments totaling
$10.0 million
on the Term Loan.
NON-GAAP MEASURES
Set forth below are certain non-GAAP measures which include adjusted operating income (loss), adjusted EBITDA, adjusted net income per diluted common share and adjusted net income applicable to common shares. We define adjusted operating income (loss) as operating income (loss) adjusted for items broadly consisting of selected items which management does not consider representative of our ongoing operations and certain non-cash items of the Company. We define adjusted EBITDA as net income before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for items broadly consisting of selected items which management does not consider representative of our ongoing operations and certain non-cash items of the Company. 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 operating segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating these measures, you should be aware that in the future we may incur expenses that are the same as, or similar to, some of the adjustments in these non-GAAP measures. In addition, certain financial covenants related to our Credit Agreement, Amended ABL Facility, and Notes 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 net income per diluted common share to net income per diluted common share and adjusted net income applicable to common shares to net income applicable to common shares for the periods indicated (in thousands):
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Fiscal Three Months Ended
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
October 29,
2017
|
|
October 30,
2016
|
Net income per diluted common share, GAAP basis
|
$
|
0.25
|
|
|
$
|
0.27
|
|
|
$
|
0.77
|
|
|
$
|
0.70
|
|
Goodwill impairment
|
0.09
|
|
|
—
|
|
|
0.08
|
|
|
—
|
|
Restructuring and impairment charges
|
0.02
|
|
|
0.01
|
|
|
0.07
|
|
|
0.06
|
|
Strategic development and acquisition related costs
|
0.00
|
|
|
0.01
|
|
|
0.03
|
|
|
0.04
|
|
Gain on insurance recovery
|
—
|
|
|
—
|
|
|
(0.14
|
)
|
|
—
|
|
Unreimbursed business interruption costs
|
0.00
|
|
|
—
|
|
|
0.01
|
|
|
—
|
|
Other losses (gains), net
|
—
|
|
|
0.00
|
|
|
0.00
|
|
|
(0.06
|
)
|
Tax effect of applicable non-GAAP adjustments
(1)
|
(0.04
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
Adjusted net income per diluted common share
|
$
|
0.32
|
|
|
$
|
0.28
|
|
|
$
|
0.80
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
October 29,
2017
|
|
October 30,
2016
|
Net income applicable to common shares, GAAP basis
|
$
|
17,412
|
|
|
$
|
18,896
|
|
|
$
|
54,399
|
|
|
$
|
50,638
|
|
Goodwill impairment
|
6,000
|
|
|
—
|
|
|
6,000
|
|
|
—
|
|
Restructuring and impairment charges
|
1,710
|
|
|
815
|
|
|
5,297
|
|
|
4,252
|
|
Strategic development and acquisition related costs
|
193
|
|
|
590
|
|
|
1,971
|
|
|
2,670
|
|
Gain on insurance recovery
|
—
|
|
|
—
|
|
|
(9,749
|
)
|
|
—
|
|
Unreimbursed business interruption costs
|
28
|
|
|
—
|
|
|
454
|
|
|
—
|
|
Other losses (gains), net
|
—
|
|
|
62
|
|
|
137
|
|
|
(3,506
|
)
|
Tax effect of applicable non-GAAP adjustments
(1)
|
(3,093
|
)
|
|
(572
|
)
|
|
(1,603
|
)
|
|
(2,059
|
)
|
Adjusted net income applicable to common shares
|
$
|
22,250
|
|
|
$
|
19,791
|
|
|
$
|
56,906
|
|
|
$
|
51,995
|
|
|
|
(1)
|
The Company calculated the tax effect of non-GAAP adjustments by applying the applicable statutory tax rate for the period to each applicable non-GAAP item.
|
The following tables reconcile adjusted operating income (loss) to operating income (loss) for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended October 29, 2017
|
|
Engineered
Building
Systems
|
|
Metal
Components
|
|
Metal Coil
Coating
|
|
Corporate
|
|
Consolidated
|
Operating income (loss), GAAP basis
|
$
|
13,043
|
|
|
$
|
32,818
|
|
|
$
|
6,615
|
|
|
$
|
(19,150
|
)
|
|
$
|
33,326
|
|
Goodwill impairment
|
—
|
|
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
Restructuring and impairment charges
|
695
|
|
|
753
|
|
|
—
|
|
|
262
|
|
|
1,710
|
|
Strategic development and acquisition related costs
|
—
|
|
|
90
|
|
|
—
|
|
|
103
|
|
|
193
|
|
Unreimbursed business interruption costs
|
—
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Adjusted operating income (loss)
|
$
|
13,738
|
|
|
$
|
39,689
|
|
|
$
|
6,615
|
|
|
$
|
(18,785
|
)
|
|
$
|
41,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended October 30, 2016
|
|
Engineered
Building
Systems
|
|
Metal
Components
|
|
Metal Coil
Coating
|
|
Corporate
|
|
Consolidated
|
Operating income (loss), GAAP basis
|
$
|
22,830
|
|
|
$
|
31,059
|
|
|
$
|
7,018
|
|
|
$
|
(21,515
|
)
|
|
$
|
39,392
|
|
Restructuring and impairment charges
|
211
|
|
|
506
|
|
|
—
|
|
|
98
|
|
|
815
|
|
Strategic development and acquisition related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
590
|
|
|
590
|
|
Loss on sale of assets and asset recovery
|
62
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62
|
|
Adjusted operating income (loss)
|
$
|
23,103
|
|
|
$
|
31,565
|
|
|
$
|
7,018
|
|
|
$
|
(20,827
|
)
|
|
$
|
40,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 29, 2017
|
|
Engineered
Building
Systems
|
|
Metal
Components
|
|
Metal Coil
Coating
|
|
Corporate
|
|
Consolidated
|
Operating income (loss), GAAP basis
|
$
|
41,388
|
|
|
$
|
124,224
|
|
|
$
|
23,935
|
|
|
$
|
(79,767
|
)
|
|
$
|
109,780
|
|
Goodwill impairment
|
—
|
|
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
Restructuring and impairment charges
|
3,732
|
|
|
1,254
|
|
|
—
|
|
|
311
|
|
|
5,297
|
|
Strategic development and acquisition related costs
|
—
|
|
|
90
|
|
|
—
|
|
|
1,881
|
|
|
1,971
|
|
Loss on sale of assets and asset recovery
|
137
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
137
|
|
Gain on insurance recovery
|
—
|
|
|
(9,749
|
)
|
|
—
|
|
|
—
|
|
|
(9,749
|
)
|
Unreimbursed business interruption costs
|
—
|
|
|
454
|
|
|
—
|
|
|
—
|
|
|
454
|
|
Adjusted operating income (loss)
|
$
|
45,257
|
|
|
$
|
122,273
|
|
|
$
|
23,935
|
|
|
$
|
(77,575
|
)
|
|
$
|
113,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 30, 2016
|
|
Engineered
Building
Systems
|
|
Metal
Components
|
|
Metal Coil
Coating
|
|
Corporate
|
|
Consolidated
|
Operating income (loss), GAAP basis
|
$
|
62,046
|
|
|
$
|
102,495
|
|
|
$
|
25,289
|
|
|
$
|
(81,051
|
)
|
|
$
|
108,779
|
|
Restructuring and impairment charges
|
966
|
|
|
1,661
|
|
|
39
|
|
|
1,586
|
|
|
4,252
|
|
Strategic development and acquisition related costs
|
—
|
|
|
403
|
|
|
—
|
|
|
2,267
|
|
|
2,670
|
|
Gain on sale of assets and asset recovery
|
(1,642
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,642
|
)
|
Adjusted operating income (loss)
|
$
|
61,370
|
|
|
$
|
104,559
|
|
|
$
|
25,328
|
|
|
$
|
(77,198
|
)
|
|
$
|
114,059
|
|
The following tables reconcile adjusted EBITDA to net income for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
January 29,
2017
|
|
2nd Quarter
April 30,
2017
|
|
3rd Quarter
July 30,
2017
|
|
4th Quarter
October 29,
2017
|
|
Fiscal Year Ended
October 29,
2017
|
Net income
|
$
|
2,039
|
|
|
$
|
16,974
|
|
|
$
|
18,221
|
|
|
$
|
17,490
|
|
|
$
|
54,724
|
|
Depreciation and amortization
|
10,315
|
|
|
10,062
|
|
|
10,278
|
|
|
10,663
|
|
|
41,318
|
|
Consolidated interest expense, net
|
6,881
|
|
|
7,341
|
|
|
7,353
|
|
|
7,086
|
|
|
28,661
|
|
Provision for income taxes
|
1,275
|
|
|
8,606
|
|
|
9,845
|
|
|
8,688
|
|
|
28,414
|
|
Restructuring and impairment charges
|
2,264
|
|
|
315
|
|
|
1,009
|
|
|
1,709
|
|
|
5,297
|
|
Strategic development and acquisition related costs
|
357
|
|
|
124
|
|
|
1,297
|
|
|
193
|
|
|
1,971
|
|
Share-based compensation
|
3,042
|
|
|
2,820
|
|
|
2,284
|
|
|
2,084
|
|
|
10,230
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
|
6,000
|
|
Loss on sale of assets and asset recovery
|
—
|
|
|
137
|
|
|
—
|
|
|
—
|
|
|
137
|
|
Gain on insurance recovery
|
—
|
|
|
(9,601
|
)
|
|
(148
|
)
|
|
—
|
|
|
(9,749
|
)
|
Unreimbursed business interruption costs
|
—
|
|
|
191
|
|
|
235
|
|
|
28
|
|
|
454
|
|
Adjusted EBITDA
|
$
|
26,173
|
|
|
$
|
36,969
|
|
|
$
|
50,374
|
|
|
$
|
53,941
|
|
|
$
|
167,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
January 31,
2016
|
|
2nd Quarter
May 1,
2016
|
|
3rd Quarter
July 31,
2016
|
|
4th Quarter
October 30,
2016
|
|
Fiscal Year Ended
October 30,
2016
|
Net income
|
$
|
5,892
|
|
|
$
|
2,420
|
|
|
$
|
23,715
|
|
|
$
|
19,001
|
|
|
$
|
51,028
|
|
Depreciation and amortization
|
10,747
|
|
|
10,765
|
|
|
10,595
|
|
|
9,817
|
|
|
41,924
|
|
Consolidated interest expense, net
|
7,847
|
|
|
7,792
|
|
|
7,685
|
|
|
7,548
|
|
|
30,872
|
|
Provision for income taxes
|
2,453
|
|
|
1,209
|
|
|
11,627
|
|
|
12,649
|
|
|
27,938
|
|
Restructuring and impairment charges
|
1,510
|
|
|
1,149
|
|
|
778
|
|
|
815
|
|
|
4,252
|
|
Gain from bargain purchase
|
(1,864
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,864
|
)
|
Strategic development and acquisition related costs
|
681
|
|
|
579
|
|
|
819
|
|
|
590
|
|
|
2,669
|
|
Share-based compensation
|
2,582
|
|
|
2,468
|
|
|
2,661
|
|
|
3,181
|
|
|
10,892
|
|
(Gain) loss on sale of assets and asset recovery
|
(725
|
)
|
|
(927
|
)
|
|
(52
|
)
|
|
62
|
|
|
(1,642
|
)
|
Adjusted EBITDA
|
$
|
29,123
|
|
|
$
|
25,455
|
|
|
$
|
57,828
|
|
|
$
|
53,663
|
|
|
$
|
166,069
|
|
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
October 29, 2017
, we were not involved in any unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
The following table shows our contractual obligations as of
October 29, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligation
|
|
Total
|
|
Less than
1 year
|
|
1 – 3 years
|
|
4 – 5 years
|
|
More than
5 years
|
Total debt
(1)
|
|
$
|
394,147
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
394,147
|
|
|
$
|
—
|
|
Interest payments on debt
(2)
|
|
119,550
|
|
|
26,734
|
|
|
80,202
|
|
|
12,614
|
|
|
—
|
|
Operating leases
|
|
43,920
|
|
|
12,690
|
|
|
17,659
|
|
|
6,049
|
|
|
7,522
|
|
Projected pension obligations
(3)
|
|
19,003
|
|
|
2,076
|
|
|
5,327
|
|
|
4,453
|
|
|
7,147
|
|
Total contractual obligations
|
|
$
|
576,620
|
|
|
$
|
41,500
|
|
|
$
|
103,188
|
|
|
$
|
417,263
|
|
|
$
|
14,669
|
|
|
|
(1)
|
Reflects amounts outstanding under the Credit Agreement, the Amended ABL Facility and the Notes.
|
|
|
(2)
|
Interest payments were calculated based on rates in effect at
October 29, 2017
for variable rate obligations.
|
|
|
(3)
|
Amounts represent our estimate of the minimum funding requirements as determined by government regulations. Amounts are subject to change based on numerous assumptions, including the performance of the assets in the plans and bond rates. Includes obligations with respect to the Company’s Defined Benefit Plans and the other post employment benefit (“OPEB”) Plans.
|
CONTINGENT LIABILITIES AND COMMITMENTS
Our insurance carriers require us to secure standby letters of credit as a collateral requirement for our projected exposure to future period claims growth and loss development which includes IBNR claims. For all insurance carriers, the total standby letters of credit are approximately
$10.0 million
and
$9.1 million
at
October 29, 2017
and
October 30, 2016
, respectively.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial condition and results of operations. Our significant accounting policies are disclosed in Note
2
to our consolidated financial statements. The following discussion of critical accounting policies addresses those policies that are both important to the portrayal of our financial condition and results of operations and require significant judgment and estimates. We base our estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue recognition.
We recognize revenues when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, these criteria are met at the time product is shipped or services are complete. In instances where an order is partially shipped, we recognize revenue based on the relative sales value of the materials shipped. Provisions are made upon the sale for estimated product returns. Costs associated with shipping and handling our products are included in cost of sales.
Insurance accruals.
We have a self-funded Administrative Services Only (“ASO”) arrangement for our employee group health insurance. We purchase individual stop-loss protection to cap our medical claims liability at
$355,000
per claim. Each reporting period, we record the costs of our health insurance plan, including paid claims, an estimate of the change in in IBNR claims, taxes and administrative fees, when applicable, (collectively the “Plan Costs”) as general and administrative expenses and cost of sales in our consolidated statements of operations. The estimated IBNR claims are based upon (i) a recent average level of paid claims under the plan, (ii) an estimated claims lag factor and (iii) an estimated claims growth factor to provide for those claims that have been incurred but not yet paid. We have deductible programs for our Workers Compensation/Employer Liability and Auto Liability insurance policies, and a self-insured retention (“SIR”) arrangement for our General Liability insurance policy. The Workers Compensation deductible is
$250,000
per occurrence. The Property and Auto Liability deductibles are
$500,000
and
$250,000
, respectively, per occurrence. The General Liability has a self-insured retention of
$1,000,000
per occurrence. For workers’ compensation costs, we monitor the number of accidents and the severity of such accidents to develop appropriate estimates for expected costs to provide both medical care and indemnity benefits, when applicable, for the period of time that an employee is incapacitated and unable to work. These accruals are developed using third-party insurance adjuster reserve estimates of the expected cost for medical treatment, and length of time an employee will be unable to work based on industry statistics for the cost of similar disabilities and statutory impairment ratings. For general liability and automobile claims,
accruals are developed based on third-party insurance adjuster reserve estimates of the expected cost to resolve each claim, including damages and defense costs, based on legal and industry trends, and the nature and severity of the claim. Accruals also include estimates for IBNR claims, and taxes and administrative fees, when applicable. This statistical information is trended by a third-party actuary to provide estimates of future expected costs based on loss development factors derived from our period-to-period growth of our claims costs to full maturity (ultimate), versus original estimates.
We believe that the assumptions and information used to develop these accruals provide the best basis for these estimates each quarter because, as a general matter, the accruals historically have proved to be reasonable and accurate. However, significant changes in expected medical and health care costs, negative changes in the severity of previously reported claims or changes in laws that govern the administration of these plans could have an impact on the determination of the amount of these accruals in future periods. Our methodology for determining the amount of health insurance accrual considers claims growth and claims lag, which is the length of time between the incurred date and processing date. For the health insurance accrual, a change of 10% above expected outstanding claims would result in a financial impact of
$0.5 million
.
Share-Based Compensation.
Under FASB Accounting Standards Codification (“ASC”) Topic 718,
Compensation — Stock Compensation
, the fair value and compensation expense of each option award is estimated as of the date of grant using a Black-Scholes-Merton option pricing formula. The fair value and compensation expense of the performance share units (“PSUs”) grant is estimated based on the Company’s stock price as of the date of grant using a Monte Carlo simulation. Expected volatility is based on historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected volatility considers factors such as the volatility of our share price, implied volatility of our share price, length of time our shares have been publicly traded, appropriate and regular intervals for price observations and our corporate and capital structure. For the fiscal years ended
October 29, 2017
and
October 30, 2016
, the forfeiture rate in our calculation of share-based compensation expense is based on historical experience and is estimated at 5.0% for our non-officers and 0% for our officers. 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 historically have not paid dividends on our common shares and have no current plans to do so in the future. We granted an immaterial amount of options during the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
.
Long-term incentive awards granted to our senior executives generally have a three-year performance period. Long-term incentive awards include restricted stock units and PSUs representing
40%
and
60%
of the total value, respectively. The restricted stock units vest upon continued employment. Vesting of the PSUs is contingent upon continued employment and the achievement of targets with respect to the following metrics, as defined by management: (1) cumulative free cash flow (weighted
40%
); (2) cumulative earnings per share (weighted
40%
); and (3) total shareholder return (weighted
20%
), in each case during the performance period. At the end of the performance period, the number of actual shares to be awarded varies between 0% and
200%
of target amounts. The PSUs vest pro rata if an executive’s employment terminates prior to the end of the performance period due to death, disability, or termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, will be forfeited and cancelled. If a change in control occurs prior to the end of the performance period, the PSU payout will be calculated and paid assuming that the maximum benefit had been achieved. If an executive’s employment terminates due to death or disability while any of the restricted stock is unvested, then all of the unvested restricted stock will become vested. If an executive’s employment is terminated by the Company without cause or after reaching normal retirement age, the unvested restricted stock will be forfeited. If a change in control occurs prior to the end of the performance period, the restricted stock will fully vest. The PSUs granted in December 2014 to our senior executives vest one-half on December 15, 2016 and one-half on December 15, 2017. The PSUs granted in December 2016 and 2015 to our senior executives cliff vest at the end of the three-year performance period. The fair value of the awards is based on the Company’s stock price as of the date of grant. During the fiscal years
2017
,
2016
and
2015
, we granted PSUs with fair values of approximately
$4.6 million
,
$4.7 million
and
$3.6 million
, respectively, to the Company’s senior executives.
Performance Share Awards granted to our key employees are paid
50%
in cash and
50%
in stock. Vesting of Performance Share Awards is contingent upon continued employment and the achievement of free cash flow and earnings per share targets, as defined by management, over a three-year period. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 150% of target amounts. However, a minimum of 50% of the awards will vest upon continued employment over the three-year period if the minimum targets are not met. The Performance Share Awards vest earlier upon death, disability or a change of control. A portion of the awards also vests upon termination without cause or after reaching normal retirement age prior to the vesting date, as defined by the agreements governing such awards. The fair value of Performance Share Awards is based on the Company’s stock price as of the date of grant. During the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, we granted Performance Share Awards with an equity fair value of
$2.0 million
,
$2.4 million
and
$1.5 million
, respectively.
We granted
0.3 million
,
0.3 million
and
0.4 million
restricted shares during the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively. The restricted stock units granted in December 2014 to our senior
executives vest two-thirds on December 15, 2016 and one-third on December 15, 2017. For the restricted stock units granted in December 2015 and 2016 to our senior executives, one-third vests annually.
The compensation cost related to share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award. For awards with performance conditions, the amount of share-based compensation expense recognized is based upon the probable outcome of the performance conditions, as defined and determined by management. Our option awards and restricted stock awards are subject to graded vesting over a service period, which is typically three or four years. We generally recognize compensation cost for these awards on a straight-line basis over the requisite service period for the entire award. In addition, certain of our awards provide for accelerated vesting upon qualified retirement. We recognize compensation cost for such awards over the period from grant date to the date the employee first becomes eligible for retirement.
Income taxes.
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, Canadian federal and provincial, Mexican federal, and other jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
As of
October 29, 2017
, the
$3.6 million
net operating loss and tax credit carryforward included
$0.5 million
for U.S. state loss carryforwards and
$3.1 million
for foreign loss carryforward. The state net operating loss carryforwards will expire in
2018
to
2028
years, if unused.
Accounting for acquisitions, intangible assets and goodwill.
Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business. For most assets and liabilities, purchase price allocation is accomplished by recording the asset or liability at its estimated fair value. The most difficult estimations of individual fair values are those involving property, plant and equipment and identifiable intangible assets. We use all available information to make these fair value determinations and, for major business acquisitions, typically engage an outside appraisal firm to assist in the fair value determination of the acquired long-lived assets.
The Company has approximately
$148.3 million
of goodwill as of
October 29, 2017
, of which approximately
$14.3 million
pertains to our Engineered Building Systems segment and
$134.0 million
pertains to our Metal Components segment. The Company also has
$13.5 million
of other intangible assets with indefinite lives as of
October 29, 2017
pertaining to our Engineered Building Systems segment. We perform an annual impairment assessment of goodwill and indefinite-lived intangibles. Additionally, we assess goodwill and indefinite-lived intangibles for impairment whenever events or changes in circumstances indicate that the fair values may be below the carrying values of such assets. Unforeseen events, changes in circumstances and market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in a non-cash impairment charge. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant sustained negative industry or economic trends.
The fair value of our reporting units is based on a blend of estimated discounted cash flows, publicly traded company multiples and transaction multiples. The results from each of these models are then weighted and combined into a single estimate of fair value for our reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisition multiples are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements. During fiscal
2017
, management early adopted the new accounting principle that simplified the test for goodwill impairment by eliminating the second step of the goodwill test. Management does not believe the estimates used in the analysis are reasonably likely to change materially in the future, but we will continue to assess the estimates in the future based on the expectations of the reporting units. Changes in assumptions used in the fair value calculation could result in an estimated reporting unit fair value that is below the carrying value, which may result in an impairment of goodwill.
We completed our annual goodwill impairment test as of July 31, 2017 for each of our reporting units. We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test. We elected to apply the qualitative assessment for the goodwill in certain of our reporting units within the Metal Components segment and the Engineered Building Systems segment as of July 31, 2017. Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and negative categories
based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using relative weightings. Additionally, the Company considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC), publicly traded company multiples and observable and recent transaction multiples between the current and prior years for a reporting unit. Based on our assessment of these tests, we do not believe it is more likely than not that the fair value of these reporting units or the indefinite-lived intangible assets are less than their respective carrying amounts.
We performed a quantitative test for
three
other reporting units within the Metal Components segment as of July 31, 2017. We estimated the fair value of each reporting unit using projected discounted cash flows and publicly traded company multiples. To develop the projected cash flows associated with the reporting unit, we considered key factors that include assumptions regarding sales volume and prices, operating margins, capital expenditures, working capital needs and discount rates. We discounted the projected cash flows using a long-term, risk-adjusted weighted average cost of capital, which was based on our estimate of the investment returns that market participants would require for the reporting unit. We considered publicly traded company multiples for companies with operations similar to the reporting unit. Based on our completion of this test, we determined that the fair value of
two
of the reporting units exceeded their carrying amount and goodwill was not considered to be impaired. Each reporting unit generally had a fair value in excess of 30% of their respective carrying value. Any change in key assumptions, such as the discount rate (+/- 1.0%) or long-term growth rate (+/- 0.5%) would not result in a different conclusion for either of the two reporting units. The July 31, 2017 goodwill impairment test for the third reporting unit indicated impairment as the carrying value of CENTRIA’s coil coating operations, included in our Metal Components segment, exceeded its fair value due to current year declines in volume and margins. As a result, we recorded a non-cash charge of
$6.0 million
in goodwill impairment on our consolidated statements of operations for the year ended October 29, 2017. The remaining balance of goodwill for the CENTRIA coil coating reporting unit of
$5.4 million
is supported by future cash flows and expected synergies with our NCI coil coating operations. Further declines in volume and margins of CENTRIA’s coil coating operations could result in additional goodwill impairments in future periods.
Management performed the annual impairment test of indefinite-lived intangibles as of July 31, 2017 using a quantitative test during the fiscal fourth quarter. We estimated the fair value of each trade name using the relief-from-royalty method, which applies a royalty rate to projected revenue streams attributable to the trade names. To develop the respective revenue projections we considered key factors that include assumptions regarding sales volume and prices. Based on our completion of this test, we determined that the fair value of the Star and Ceco trade names exceeded the carrying amount and the intangible assets were not considered to be impaired.
Allowance for doubtful accounts.
Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible accounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance. While we believe these processes effectively address our exposure for doubtful accounts and credit losses have historically been within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts. In fiscal
2017
,
2016
and
2015
, we established new reserves for doubtful accounts of $
1.9 million
,
$1.3 million
and
$0.1 million
, respectively. In fiscal years
2017
,
2016
and
2015
, we wrote off uncollectible accounts, net of recoveries, of $
1.0 million
,
$1.6 million
and
$0.1 million
, respectively, all of which had been previously reserved.
Inventory valuation.
In determining the valuation of inventory, we record an allowance for obsolete inventory using the specific identification method for steel coils and other raw materials. Management also reviews the carrying value of inventory for lower of cost or market. Our primary raw material is steel coils which have historically shown significant price volatility. We generally manufacture to customers’ orders, and thus maintain raw materials with a variety of ultimate end uses. We record a lower of cost or market charge to cost of sales when the net realizable value (selling price less estimated cost of disposal), based on our intended end usage, is below our estimated product cost at completion. Estimated net realizable value is based upon assumptions of targeted inventory turn rates, future demand, anticipated finished goods sales prices, management strategy and market conditions for steel. If projected end usage or projected sales prices change significantly from management’s current estimates or actual market conditions are less favorable than those projected by management, inventory write-downs may be required.
Property, plant and equipment valuation.
We assess the recoverability of the carrying amount of property, plant and equipment for assets held and used 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 asset groups may not be recoverable and the undiscounted cash flows estimated to be generated by those asset groups are less than the carrying amount of those asset groups. Events and circumstances which indicate an impairment include (a) a significant decrease in the market value of the asset groups; (b) a significant change in the extent or manner in which an asset group 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 group; (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 group; or (f) a current expectation that, more likely than not, an asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We assess our asset groups for any indicators of impairment on at least a quarterly basis.
If we determine that the carrying value of an asset group 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 group over its fair value. The fair value of asset groups is determined based on prices of similar assets adjusted for their remaining useful life.
Contingencies.
We establish reserves for estimated loss contingencies when we believe a loss is probable and the amount of the loss can be reasonably estimated. Our contingent liability reserves are related primarily to litigation and environmental matters. Legal costs for uninsured claims are accrued as part of the ultimate settlement. Revisions to contingent liability reserves are reflected in income in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the probable cost by evaluating historical precedent as well as the specific facts relating to each particular contingency (including the opinion of outside advisors, professionals and experts). Should the outcome differ from our assumptions and estimates or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note
3
— Accounting Pronouncements in the notes to the consolidated financial statements for information on recent accounting pronouncements.
Item 7A.
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 year ended
October 29, 2017
, material costs (predominantly steel costs) constituted approximately
68%
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 (Galvalume® is a registered trademark of BIEC International, Inc.). 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. Based on the cyclical nature of the steel industry, we expect steel prices will continue to be volatile.
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 we have experienced in 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 October index would pertain to our fiscal December steel purchase deliveries based on current lead-times. The volatility in this steel price index is comparable to the volatility we experienced in our average cost of steel.
We normally do not maintain an inventory of steel in excess of our current production requirements. However, from time to time, we may purchase steel in advance of announced steel price increases. In addition, it is our current practice to purchase all steel inventory that has been ordered but is not in our possession. Therefore, our inventory may increase if demand for our products declines. We can give no assurance that steel will remain available or that prices will not continue to be volatile.
With material costs (predominantly steel costs) accounting for approximately
68%
of our cost of sales for fiscal
2017
, a one percent change in the cost of steel could have resulted in a pre-tax impact on cost of sales of approximately
$9.3 million
for our fiscal year ended
October 29, 2017
. 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.
Other Commodity Risks
In addition to market risk exposure related to the volatility in the price of steel, we are subject to market risk exposure related to volatility in the price of natural gas. As a result, we occasionally enter into both index-priced and fixed-price contracts for the purchase of natural gas. We have evaluated these contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the criteria for characterization as a derivative instrument may be exempted from hedge accounting treatment as normal purchases and normal sales and, therefore, these forward contracts are not marked to market. At
October 29, 2017
, all our contracts for the purchase of natural gas met the scope exemption for normal purchases and normal sales.
Interest Rates
We are subject to market risk exposure related to changes in interest rates on our Credit Agreement and Amended ABL Facility. These instruments bear interest at an agreed upon percentage point spread from either the prime interest rate or LIBOR. Under our 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
October 29, 2017
, we had
$144.1 million
outstanding under our 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. The fair value of our Credit Agreement, due June 2022, at
October 29, 2017
and
October 30, 2016
was approximately
$144.1 million
and
$154.1 million
, respectively, compared to the face value of
$144.1 million
and
$154.1 million
, respectively.
See Note
11
— Long-Term Debt and Note Payable in the notes to the consolidated financial statements for more information on the material terms of our long-term debt.
The table below presents scheduled debt maturities and related weighted average interest rates for each of the fiscal years relating to debt obligations as of
October 29, 2017
. Weighted average variable rates are based on LIBOR rates assuming a 1.00% LIBOR floor at
October 29, 2017
, plus applicable margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Maturity Date
(1)
|
|
Fair Value
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
10/29/2017
|
|
(In millions, except interest rate percentages)
|
Total Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250.0
|
|
|
$
|
250.0
|
|
|
$
|
267.5
|
|
(2)
|
Interest Rate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.25
|
%
|
|
8.25
|
%
|
|
|
|
Variable Rate
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144.1
|
|
|
$
|
—
|
|
|
$
|
144.1
|
|
|
$
|
144.1
|
|
(2)
|
Average interest rate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.24
|
%
|
|
—
|
|
|
4.24
|
%
|
|
|
|
|
|
(1)
|
Expected maturity date amounts are based on the face value of debt and do not reflect fair market value of the debt.
|
|
|
(2)
|
Based on recent trading activities of comparable market instruments.
|
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 re-measurement gains (losses) were
$(0.3) million
,
$(0.8) million
and
$(1.8) million
for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively.
The functional currency for our Canadian 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 (losses) included in net income for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
was
$0.8 million
,
$(0.6) million
and
$(0.4) million
, respectively. Net foreign currency translation adjustment, net of tax, and included in other comprehensive income was
$0.2 million
,
$(0.3) million
and
$0.1 million
for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively.
As a result of the CENTRIA Acquisition, we have operations in China and are exposed to fluctuations in the foreign currency exchange rate between the U.S. dollar and Chinese yuan. The functional currency for our China operations is the Chinese yuan. The net foreign currency translation adjustment was insignificant for the fiscal years ended
October 29, 2017
and
October 30, 2016
.
Item 8.
Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of NCI Building Systems, Inc. (the “Company” or “our”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. The design of an internal control system is also based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that an internal control will be effective under all potential future conditions. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to the financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
October 29, 2017
. In making this assessment, management used the criteria for internal control over financial reporting described in
Internal Control — Integrated Framework
by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors. Based on this assessment, management has concluded that, as of
October 29, 2017
, the Company’s internal control over financial reporting was effective.
Ernst & Young LLP, the independent registered public accounting firm that has audited the Company’s consolidated financial statements, has audited the effectiveness of the Company’s internal control over financial reporting as of
October 29, 2017
, as stated in their report included elsewhere herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of NCI Building Systems, Inc.
We have audited the internal control over financial reporting of NCI Building Systems, Inc. (the “Company”) as of October 29, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). NCI Building Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, NCI Building Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 29, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NCI Building Systems, Inc., as of October 29, 2017 and October 30, 2016 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended October 29, 2017 and our report dated December 18, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
December 18, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of NCI Building Systems, Inc.
We have audited the accompanying consolidated balance sheets of NCI Building Systems, Inc. (the “Company”) as of October 29, 2017 and October 30, 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended October 29, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCI Building Systems, Inc. as of October 29, 2017 and October 30, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 29, 2017, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of measuring the goodwill impairment
as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from
Accounting Standards Update No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NCI Building Systems, Inc.’s internal control over financial reporting as of October 29, 2017, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 18, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
December 18, 2017
`CONSOLIDATED STATEMENTS OF OPERATIONS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
|
(In thousands, except per share data)
|
Sales
|
$
|
1,770,278
|
|
|
$
|
1,684,928
|
|
|
$
|
1,563,693
|
|
Cost of sales
|
1,354,077
|
|
|
1,258,680
|
|
|
1,189,019
|
|
Loss (gain) on sale of assets and asset recovery
|
137
|
|
|
(1,642
|
)
|
|
—
|
|
Fair value adjustment of acquired inventory
|
—
|
|
|
—
|
|
|
2,358
|
|
Gross profit
|
416,064
|
|
|
427,890
|
|
|
372,316
|
|
Engineering, selling, general and administrative expenses
|
293,145
|
|
|
302,551
|
|
|
286,840
|
|
Intangible asset amortization
|
9,620
|
|
|
9,638
|
|
|
16,903
|
|
Goodwill impairment
|
6,000
|
|
|
—
|
|
|
—
|
|
Strategic development and acquisition related costs
|
1,971
|
|
|
2,670
|
|
|
4,201
|
|
Restructuring and impairment charges
|
5,297
|
|
|
4,252
|
|
|
11,306
|
|
Gain on insurance recovery
|
(9,749
|
)
|
|
—
|
|
|
—
|
|
Gain on legal settlements
|
—
|
|
|
—
|
|
|
(3,765
|
)
|
Income from operations
|
109,780
|
|
|
108,779
|
|
|
56,831
|
|
Interest income
|
238
|
|
|
146
|
|
|
72
|
|
Interest expense
|
(28,899
|
)
|
|
(31,019
|
)
|
|
(28,460
|
)
|
Foreign exchange gain (loss)
|
547
|
|
|
(1,401
|
)
|
|
(2,152
|
)
|
Gain from bargain purchase
|
—
|
|
|
1,864
|
|
|
—
|
|
Other income, net
|
1,472
|
|
|
595
|
|
|
499
|
|
Income before income taxes
|
83,138
|
|
|
78,964
|
|
|
26,790
|
|
Provision for income taxes
|
28,414
|
|
|
27,937
|
|
|
8,972
|
|
Net income
|
$
|
54,724
|
|
|
$
|
51,027
|
|
|
$
|
17,818
|
|
Net income allocated to participating securities
|
(325
|
)
|
|
(389
|
)
|
|
(172
|
)
|
Net income applicable to common shares
|
$
|
54,399
|
|
|
$
|
50,638
|
|
|
$
|
17,646
|
|
Income per common share:
|
|
|
|
|
|
Basic
|
$
|
0.77
|
|
|
$
|
0.70
|
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.77
|
|
|
$
|
0.70
|
|
|
$
|
0.24
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
70,629
|
|
|
72,411
|
|
|
73,271
|
|
Diluted
|
70,778
|
|
|
72,857
|
|
|
73,923
|
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
|
(In thousands)
|
Comprehensive income:
|
|
|
|
|
|
Net income
|
$
|
54,724
|
|
|
$
|
51,027
|
|
|
$
|
17,818
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign exchange translation gains (losses) and other (net of income tax of $0 in 2017, 2016 and 2015)
|
198
|
|
|
(325
|
)
|
|
80
|
|
Unrecognized actuarial gains (losses) on pension obligation (net of income tax of ($1,805), $1,245, and ($243) in 2017, 2016 and 2015, respectively)
|
2,824
|
|
|
(1,948
|
)
|
|
379
|
|
Other comprehensive income (loss)
|
3,022
|
|
|
(2,273
|
)
|
|
459
|
|
Comprehensive income
|
$
|
57,746
|
|
|
$
|
48,754
|
|
|
$
|
18,277
|
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
(In thousands, except share data)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
65,658
|
|
|
$
|
65,403
|
|
Restricted cash
|
136
|
|
|
310
|
|
Accounts receivable, net
|
199,897
|
|
|
182,258
|
|
Inventories, net
|
198,296
|
|
|
186,824
|
|
Income taxes receivable
|
3,617
|
|
|
982
|
|
Deferred income taxes
|
22,605
|
|
|
29,104
|
|
Investments in debt and equity securities, at market
|
6,481
|
|
|
5,748
|
|
Prepaid expenses and other
|
31,359
|
|
|
29,971
|
|
Assets held for sale
|
5,582
|
|
|
4,256
|
|
Total current assets
|
533,631
|
|
|
504,856
|
|
Property, plant and equipment, net
|
226,995
|
|
|
242,212
|
|
Goodwill
|
148,291
|
|
|
154,271
|
|
Intangible assets, net
|
137,148
|
|
|
146,769
|
|
Other assets, net
|
5,108
|
|
|
2,092
|
|
Total assets
|
$
|
1,051,173
|
|
|
$
|
1,050,200
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Note payable
|
$
|
440
|
|
|
$
|
460
|
|
Accounts payable
|
147,772
|
|
|
142,913
|
|
Accrued compensation and benefits
|
59,189
|
|
|
72,612
|
|
Accrued interest
|
6,414
|
|
|
7,165
|
|
Other accrued expenses
|
102,233
|
|
|
103,384
|
|
Total current liabilities
|
316,048
|
|
|
326,534
|
|
Long-term debt, net of deferred financing costs of $6,857 and $8,096 on October 29, 2017 and October 30, 2016, respectively
|
387,290
|
|
|
396,051
|
|
Deferred income taxes
|
24,358
|
|
|
24,804
|
|
Other long-term liabilities
|
18,230
|
|
|
21,494
|
|
Total long-term liabilities
|
429,878
|
|
|
442,349
|
|
Stockholders’ equity:
|
|
|
|
|
|
Common stock, $.01 par value, 100,000,000 shares authorized; 68,677,684 and 71,581,273 shares issued in 2017 and 2016, respectively; and 68,386,556 and 70,806,202 shares outstanding in 2017 and 2016, respectively
|
687
|
|
|
715
|
|
Additional paid-in capital
|
562,277
|
|
|
603,120
|
|
Accumulated deficit
|
(248,046
|
)
|
|
(302,706
|
)
|
Accumulated other comprehensive loss, net
|
(7,531
|
)
|
|
(10,553
|
)
|
Treasury stock, at cost (291,128 and 775,071 shares in 2017 and 2016, respectively)
|
(2,140
|
)
|
|
(9,259
|
)
|
Total stockholders’ equity
|
305,247
|
|
|
281,317
|
|
Total liabilities and stockholders’ equity
|
$
|
1,051,173
|
|
|
$
|
1,050,200
|
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
54,724
|
|
|
$
|
51,027
|
|
|
$
|
17,818
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
41,318
|
|
|
41,924
|
|
|
51,392
|
|
Amortization of deferred financing costs and debt discount
|
1,819
|
|
|
1,908
|
|
|
1,483
|
|
Share-based compensation expense
|
10,230
|
|
|
10,892
|
|
|
9,379
|
|
Losses (gains) on assets, net
|
1,371
|
|
|
(2,673
|
)
|
|
(15
|
)
|
Asset impairment
|
—
|
|
|
—
|
|
|
5,876
|
|
Goodwill impairment
|
6,000
|
|
|
—
|
|
|
—
|
|
Gain on insurance recovery
|
(9,749
|
)
|
|
—
|
|
|
—
|
|
Provision for doubtful accounts
|
1,948
|
|
|
1,343
|
|
|
110
|
|
Provision for deferred income taxes
|
866
|
|
|
1,318
|
|
|
5,368
|
|
Excess tax (benefits) shortfalls from share-based compensation arrangements
|
(1,515
|
)
|
|
289
|
|
|
(745
|
)
|
Changes in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
(19,582
|
)
|
|
(18,141
|
)
|
|
7,610
|
|
Inventories
|
(11,473
|
)
|
|
(29,054
|
)
|
|
4,604
|
|
Income taxes
|
(2,637
|
)
|
|
(1,953
|
)
|
|
(2,634
|
)
|
Prepaid expenses and other
|
(2,271
|
)
|
|
671
|
|
|
(267
|
)
|
Accounts payable
|
4,858
|
|
|
(1,598
|
)
|
|
11,475
|
|
Accrued expenses
|
(12,320
|
)
|
|
12,656
|
|
|
(6,052
|
)
|
Other, net
|
(1,228
|
)
|
|
159
|
|
|
(362
|
)
|
Net cash provided by operating activities
|
62,359
|
|
|
68,768
|
|
|
105,040
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
—
|
|
|
(4,343
|
)
|
|
(247,123
|
)
|
Capital expenditures
|
(22,074
|
)
|
|
(21,024
|
)
|
|
(20,683
|
)
|
Proceeds from sale of property, plant and equipment
|
3,197
|
|
|
5,417
|
|
|
28
|
|
Proceeds from insurance
|
8,593
|
|
|
10,000
|
|
|
—
|
|
Net cash used in investing activities
|
(10,284
|
)
|
|
(9,950
|
)
|
|
(267,778
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Refund of restricted cash
|
173
|
|
|
370
|
|
|
298
|
|
Proceeds from stock options exercised
|
1,651
|
|
|
12,612
|
|
|
354
|
|
Issuance of debt
|
—
|
|
|
—
|
|
|
250,000
|
|
Excess tax benefits (shortfalls) from share-based compensation arrangements
|
1,515
|
|
|
(289
|
)
|
|
745
|
|
Proceeds from Amended ABL facility
|
35,000
|
|
|
—
|
|
|
—
|
|
Payments on Amended ABL facility
|
(35,000
|
)
|
|
—
|
|
|
—
|
|
Payments on term loan
|
(10,180
|
)
|
|
(40,000
|
)
|
|
(41,240
|
)
|
Payments on note payable
|
(1,570
|
)
|
|
(1,430
|
)
|
|
(1,616
|
)
|
Payment of financing costs
|
—
|
|
|
—
|
|
|
(9,217
|
)
|
Purchases of treasury stock
|
(43,603
|
)
|
|
(64,015
|
)
|
|
(3,320
|
)
|
Net cash (used in) provided by financing activities
|
(52,014
|
)
|
|
(92,752
|
)
|
|
196,004
|
|
Effect of exchange rate changes on cash and cash equivalents
|
194
|
|
|
(325
|
)
|
|
(255
|
)
|
Net increase (decrease) in cash and cash equivalents
|
255
|
|
|
(34,259
|
)
|
|
33,011
|
|
Cash and cash equivalents at beginning of period
|
65,403
|
|
|
99,662
|
|
|
66,651
|
|
Cash and cash equivalents at end of period
|
$
|
65,658
|
|
|
$
|
65,403
|
|
|
$
|
99,662
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
$
|
27,659
|
|
|
$
|
28,063
|
|
|
$
|
22,210
|
|
Taxes paid, net of amounts refunded
|
$
|
28,980
|
|
|
$
|
36,073
|
|
|
$
|
7,462
|
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
(Deficit)
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Treasury Stock
|
|
Stockholders’
Equity
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
(In thousands, except share data)
|
Balance, November 2, 2014
|
73,769,095
|
|
|
$
|
737
|
|
|
$
|
630,297
|
|
|
$
|
(371,551
|
)
|
|
$
|
(8,739
|
)
|
|
(238,800
|
)
|
|
$
|
(4,203
|
)
|
|
$
|
246,541
|
|
Treasury stock purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(208,626
|
)
|
|
(3,320
|
)
|
|
(3,320
|
)
|
Issuance of restricted stock
|
720,655
|
|
|
7
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock options exercised
|
40,000
|
|
|
1
|
|
|
353
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
354
|
|
Excess tax benefits from share-based compensation arrangements
|
—
|
|
|
—
|
|
|
745
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
745
|
|
Foreign exchange translation gains and other, net of taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
Unrecognized actuarial gains on pension obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
379
|
|
|
—
|
|
|
—
|
|
|
379
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
9,379
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,379
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
17,818
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,818
|
|
Balance, November 1, 2015
|
74,529,750
|
|
|
$
|
745
|
|
|
$
|
640,767
|
|
|
$
|
(353,733
|
)
|
|
$
|
(8,280
|
)
|
|
(447,426
|
)
|
|
$
|
(7,523
|
)
|
|
$
|
271,976
|
|
Treasury stock purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,589,576
|
)
|
|
(64,015
|
)
|
|
(64,015
|
)
|
Retirement of treasury shares
|
(4,423,564
|
)
|
|
(44
|
)
|
|
(62,235
|
)
|
|
—
|
|
|
—
|
|
|
4,423,564
|
|
|
62,279
|
|
|
—
|
|
Issuance of restricted stock
|
56,868
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(161,633
|
)
|
|
—
|
|
|
—
|
|
Stock options exercised
|
1,418,219
|
|
|
14
|
|
|
12,598
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,612
|
|
Excess tax shortfall from share-based compensation arrangements
|
—
|
|
|
—
|
|
|
(289
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(289
|
)
|
Foreign exchange translation losses and other, net of taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(325
|
)
|
|
—
|
|
|
—
|
|
|
(325
|
)
|
Deferred compensation obligation
|
—
|
|
|
—
|
|
|
1,387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,387
|
|
Unrecognized actuarial losses on pension obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,948
|
)
|
|
—
|
|
|
—
|
|
|
(1,948
|
)
|
Share-based compensation
|
—
|
|
|
—
|
|
|
10,892
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,892
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
51,027
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,027
|
|
Balance, October 30, 2016
|
71,581,273
|
|
|
$
|
715
|
|
|
$
|
603,120
|
|
|
$
|
(302,706
|
)
|
|
$
|
(10,553
|
)
|
|
(775,071
|
)
|
|
$
|
(9,259
|
)
|
|
$
|
281,317
|
|
Treasury stock purchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,957,838
|
)
|
|
(43,603
|
)
|
|
(43,603
|
)
|
Retirement of treasury shares
|
(3,443,448
|
)
|
|
(34
|
)
|
|
(50,553
|
)
|
|
—
|
|
|
—
|
|
|
3,443,448
|
|
|
50,587
|
|
|
—
|
|
Issuance of restricted stock
|
356,701
|
|
|
4
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(19,806
|
)
|
|
—
|
|
|
—
|
|
Stock options exercised
|
182,923
|
|
|
2
|
|
|
1,651
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,653
|
|
Excess tax (shortfall) benefits from share-based compensation arrangements
|
—
|
|
|
—
|
|
|
1,515
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,515
|
|
Foreign exchange translation losses and other, net of taxes
|
—
|
|
|
—
|
|
|
(3,547
|
)
|
|
(64
|
)
|
|
198
|
|
|
—
|
|
|
—
|
|
|
(3,413
|
)
|
Deferred compensation obligation
|
235
|
|
|
—
|
|
|
(135
|
)
|
|
—
|
|
|
—
|
|
|
18,139
|
|
|
135
|
|
|
—
|
|
Unrecognized actuarial losses on pension obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,824
|
|
|
—
|
|
|
—
|
|
|
2,824
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
10,230
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,230
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
54,724
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,724
|
|
Balance, October 29, 2017
|
68,677,684
|
|
|
$
|
687
|
|
|
$
|
562,277
|
|
|
$
|
(248,046
|
)
|
|
$
|
(7,531
|
)
|
|
(291,128
|
)
|
|
$
|
(2,140
|
)
|
|
$
|
305,247
|
|
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
NCI Building Systems, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “we,” “us” or “our”) is one of North America’s 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 used in nonresidential construction. We manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a broad network of manufacturing facilities and distribution centers. We sell our products primarily for use in new construction activities and also in repair and retrofit activities, mostly in North America.
We have
three
operating segments: Engineered Building Systems, Metal Components and Metal Coil Coating. Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We market the products in each of our operating segments nationwide primarily through a direct sales force and, in the case of our Engineered Building Systems segment, through authorized builder networks.
Basis of Presentation
Our consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany accounts, transactions and profits arising from consolidated entities have been eliminated in consolidation.
Fiscal Year
We use a 52/53 week fiscal year ending on the Sunday closest to October 31. The year end for fiscal
2017
is
October 29, 2017
. Fiscal years 2017, 2016, and 2015 were 52-week fiscal years.
2
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts and inventory reserves, accounting for business combinations, valuation of reporting units for purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, valuation of asset groups for impairment testing, accruals for employee benefits, general liability insurance, warranties and certain contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and may consist of time deposits with a number of commercial banks with high credit ratings, money market instruments, certificates of deposit and commercial paper. Our policy allows us to also invest excess funds in no-load, open-end, management investment trusts (“mutual funds”). The mutual funds invest exclusively in high quality money market instruments. As of
October 29, 2017
, our cash and cash equivalents were only invested in cash.
(c) Accounts Receivable and Related Allowance
. We report accounts receivable net of the allowance for doubtful accounts. Trade accounts receivable are the result of sales of building systems, components and coating services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process.
We establish reserves for doubtful accounts on a customer by customer basis when we believe the required payment of specific amounts owed is unlikely to occur. In establishing these reserves, we consider changes in the financial position of a customer, availability of security, lien rights and bond rights as well as disputes, if any, with our customers. Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. We determine past due status as of the contractual payment date. Interest on delinquent accounts receivable is included in the trade
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance or we have exhausted all collection efforts. The following table represents the rollforward of our uncollectible accounts for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Beginning balance
|
$
|
7,413
|
|
|
$
|
7,695
|
|
|
$
|
6,076
|
|
Provision for bad debts
|
1,948
|
|
|
1,343
|
|
|
110
|
|
Amounts charged against allowance for bad debts, net of recoveries
|
(1,036
|
)
|
|
(1,625
|
)
|
|
(114
|
)
|
Allowance for bad debts of acquired company at date of acquisition
|
—
|
|
|
—
|
|
|
1,623
|
|
Ending balance
|
$
|
8,325
|
|
|
$
|
7,413
|
|
|
$
|
7,695
|
|
(d) Inventories
. Inventories are stated at the lower of cost or market value less allowance for inventory obsolescence, using First-In, First-Out Method (FIFO) for steel coils and other raw materials.
The components of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Raw materials
|
$
|
150,919
|
|
|
$
|
145,060
|
|
Work in process and finished goods
|
47,377
|
|
|
41,764
|
|
|
$
|
198,296
|
|
|
$
|
186,824
|
|
The following table represents the rollforward of reserve for obsolete materials and supplies activity for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Beginning balance
|
$
|
3,984
|
|
|
$
|
3,749
|
|
|
$
|
1,743
|
|
Provisions
|
1,923
|
|
|
1,463
|
|
|
943
|
|
Dispositions
|
(702
|
)
|
|
(1,228
|
)
|
|
(552
|
)
|
Reserve of acquired company at date of acquisition
|
—
|
|
|
—
|
|
|
1,615
|
|
Ending balance
|
$
|
5,205
|
|
|
$
|
3,984
|
|
|
$
|
3,749
|
|
The principal raw material used in the manufacturing of our Metal Components and Engineered Building Systems segments is steel which we purchase from multiple steel producers.
(e) Assets Held for Sale
. We record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less cost to sell, we consider factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. During fiscal 2017 and 2016, we reclassified
$4.7 million
and $
2.9 million
from property, plant and equipment to assets held for sale for idled facilities in our Metal Components and Engineering Building Systems segments, respectively, that met the held for sale criteria. The total carrying value of assets held for sale (primarily representing idled facilities in our Engineered Building Systems segment) is
$5.6 million
and
$4.3 million
at
October 29, 2017
and
October 30, 2016
, respectively. All of these assets continue to be actively marketed for sale or are under contract at
October 29, 2017
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
During fiscal
2017
and
2016
, we sold certain idled facilities in our Engineered Building Systems segment, along with related equipment, which previously had been classified as held for sale. In connection with the sales of these assets, during fiscal
2017
and
2016
, we received net cash proceeds of
$3.2 million
and
$5.4 million
, respectively, and recognized a net (loss) gain of
$(0.2) million
and
$1.6 million
, respectively, which is included in (loss) gain on sale of assets and asset recovery in the consolidated statements of operations. Certain assets held for sale are valued at fair value and are measured at fair value on a nonrecurring basis. Assets held for sale are reported at fair value, if, on an individual basis, the fair value of the asset is less than cost. The fair value of assets held for sale is estimated using Level 3 inputs, such as broker quotes for like-kind assets or other market indications of a potential selling value that approximates fair value. Assets held for sale, reported at fair value less cost to sell totaled
$0.5 million
as of
October 29, 2017
.
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analysis. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We determined the estimated fair values of assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate.
(f) Property, Plant and Equipment and Leases
. Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of their estimated useful lives or the term of the underlying lease. Computer software developed or purchased for internal use is depreciated using the straight-line method over its estimated useful life. Depreciation and amortization are recognized in cost of sales and engineering, selling, general and administrative expenses based on the nature and use of the underlying asset(s). Operating leases are expensed using the straight-line method over the term of the underlying lease.
Depreciation expense for fiscal
2017
,
2016
and
2015
was
$31.7 million
,
$32.3 million
and
$34.5 million
, respectively. Of this depreciation expense,
$5.8 million
,
$6.4 million
and
$7.5 million
was related to computer software and equipment depreciation for fiscal
2017
,
2016
and
2015
.
Property, plant and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Land
|
$
|
18,473
|
|
|
$
|
19,707
|
|
Buildings and improvements
|
178,019
|
|
|
187,173
|
|
Machinery, equipment and furniture
|
336,163
|
|
|
314,477
|
|
Transportation equipment
|
4,599
|
|
|
4,635
|
|
Computer software and equipment
|
117,515
|
|
|
114,191
|
|
Construction in progress
|
15,092
|
|
|
21,673
|
|
|
669,861
|
|
|
661,856
|
|
Less: accumulated depreciation
|
(442,866
|
)
|
|
(419,644
|
)
|
|
$
|
226,995
|
|
|
$
|
242,212
|
|
Estimated useful lives for depreciation are:
|
|
|
|
|
Buildings and improvements
|
15
|
–
|
39 years
|
Machinery, equipment and furniture
|
3
|
–
|
15 years
|
Transportation equipment
|
4
|
–
|
10 years
|
Computer software and equipment
|
3
|
–
|
7 years
|
We capitalize interest on capital invested in projects in accordance with ASC Topic 835,
Interest
. For fiscal
2017
,
2016
and
2015
, the total amount of interest capitalized was
$0.2 million
,
$0.2 million
and
$0.3 million
, respectively. Upon commencement of operations, capitalized interest, as a component of the total cost of the asset, is amortized over the estimated useful life of the asset.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Involuntary conversions result from the loss of an asset because of an unforeseen event (e.g., destruction due to fire). Some of these events are insurable and result in property damage insurance recovery. Amounts the Company receives from insurance carriers are net of any deductibles related to the covered event. The Company records a receivable from insurance to the extent it recognizes a loss from an involuntary conversion event and the likelihood of recovering such loss is deemed probable at the balance sheet date. To the extent that any of the Company’s insurance claim receivables are later determined not probable of recovery (e.g., due to new information), such amounts are expensed. The Company recognizes gains on involuntary conversions when the amount received from insurers exceeds the net book value of the impaired asset(s). In addition, the Company does not recognize a gain related to insurance recoveries until the contingency related to such proceeds has been resolved, through either receipt of a non-refundable cash payment from the insurers or by execution of a binding settlement agreement with the insurers that clearly states that a non-refundable payment will be made. To the extent that an asset is rebuilt or new assets are acquired, the associated expenditures are capitalized, as appropriate, in the consolidated balance sheets and presented as capital expenditures in the Company’s consolidated statements of cash flows. With respect to business interruption insurance claims, the Company recognizes income only when non-refundable cash proceeds are received from insurers, which are presented in the Company’s consolidated statements of operations as a component of gross profit or operating income and in the consolidated statements of cash flows as an operating activity.
In June 2016, the Company experienced a fire at a facility in the Metal Components segment. We estimated that fixed assets with a net book value of approximately
$6.7 million
were impaired as a result of the fire. During the second quarter of fiscal 2017, the Company settled the property damage claims with the insurers for actual cash value of
$18.0 million
. Of this amount, the Company received proceeds of
$10.0 million
from our insurers during the fourth quarter of fiscal 2016. The remaining
$8.0 million
was received in May 2017.
Approximately
$8.8 million
was previously recognized to offset the loss on involuntary conversion and other amounts incurred related to the incident. The remaining
$9.2 million
was recognized as a gain on insurance recovery in the consolidated statement of operations during the quarter ended April 30, 2017 as all contingencies were resolved.
(g) Internally Developed Software
. Internally developed software is stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life ranging from
3
to
7
years. Software assets are reviewed for impairment when events or circumstances indicate the carrying value may not be recoverable over the remaining lives of the assets. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses and internal payroll and payroll related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred.
(h) Goodwill and Other Intangible Assets
. We review the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350,
Intangibles — Goodwill and Other
. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. Prior to July 31, 2017, the test for impairment was a two-step process that involved comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, the goodwill of the reporting unit was not considered impaired; therefore the second step of the impairment test would not be deemed necessary. If the carrying amount of the reporting unit exceeded its fair value, we would then perform the second step to the goodwill impairment test, which involved the determination of the fair value of a reporting unit’s assets and liabilities as if those assets and liabilities had been acquired/assumed in a business combination at the impairment testing date, to measure the amount of goodwill impairment loss to be recorded. However, with the adoption of FASB Accounting Standards Update No. 2017-04, we prospectively adopted a new accounting principle that eliminated the second step of the goodwill impairment test. Therefore, beginning with the annual goodwill impairment tests occurring on the first day of the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Unforeseen events, changes in circumstances, market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in a non-cash impairment charge. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
use of acquired assets or the strategy for our overall business and significant negative industry or economic trends. We recorded a non-cash loss on goodwill impairment of
$6.0 million
in fiscal 2017, which is included in goodwill impairment in the consolidated statements of operations. See Note
6
— Goodwill and Other Intangible Assets.
(i) Revenue Recognition
. We recognize revenues when the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, these criteria are met at the time product is shipped or services are complete. A portion of our revenue, exclusively within our Engineered Building Systems segment, includes multiple-element revenue arrangements due to multiple deliverables. Each deliverable is generally determined based on customer-specific manufacturing and delivery requirements.
Because the separate deliverables have value to the customer on a stand-alone basis, they are typically considered separate units of accounting. A portion of the entire job order value is allocated to each unit of accounting. Revenue allocated to each deliverable is recognized upon shipment. We use estimated selling price (“ESP”) based on underlying cost plus a reasonable margin to determine how to separate multiple-element revenue arrangements into separate units of accounting, and how to allocate the arrangement consideration among those separate units of accounting. We determine ESP based on our normal pricing and discounting practices.
Our sales arrangements do not include a general right of return of the delivered product(s). In certain cases, the cancellation terms of a job order provide us with the opportunity to bill for certain incurred costs. In those instances, revenue is not recognized until all revenue recognition criteria are met, including reasonable assurance of collectability.
In our Metal Coil Coating segment, our revenue activities broadly consist of cleaning, treating, painting and packaging various flat rolled metals as well as slitting and/or embossing the metal. We enter into two types of sales arrangements with our customers: toll processing sales and package sales. The primary distinction between these two arrangements relates to ownership of the underlying metal coil during treatment. In toll processing arrangements, we do not maintain ownership of the underlying metal coil during treatment and only recognize revenue for the toll processing activities, typically, cleaning, painting, slitting, embossing and packaging. In package sales arrangements, we have ownership of the metal coil during treatment and recognize revenue on both the toll processing activities and the sale of the underlying metal coil. Under either arrangement, revenue and the related direct and indirect costs are recognized when all of the recognition criteria are met, which is generally when the products are shipped to the customer.
(j) Equity Raising and Deferred Financing Costs
. Equity raising costs are recorded as a reduction to additional paid in capital upon the execution of an equity transaction. Deferred financing costs are capitalized as incurred and amortized using the straight-line method, which approximates the effective interest method, over the expected life of the associated debt. See Note
11
— Long-Term Debt and Note Payable.
(k) Cost of Sales
. Cost of sales includes the cost of inventory sold during the period, including costs for manufacturing, inbound freight, receiving, inspection, warehousing, and internal transfers less vendor rebates. Costs associated with shipping and handling our products are included in cost of sales. Cost of sales is exclusive of fair value adjustment of acquired inventory, gain on sale of assets and asset recovery, net and gain on insurance recovery because these items are shown below cost of sales on our consolidated statement of operations. Purchasing costs and engineering and drafting costs are included in engineering, selling, general and administrative expense. Purchasing costs were
$3.9 million
,
$5.3 million
and
$4.6 million
and engineering and drafting costs were
$43.1 million
,
$44.2 million
and
$46.9 million
in each of fiscal
2017
,
2016
and
2015
, respectively. Approximately
$2.6 million
and
$2.6 million
of these engineering, selling, general and administrative costs were capitalized and remained in inventory at the end of fiscal
2017
and
2016
, respectively.
(l) 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
twenty
years. We sell
two
types of warranties, standard and Single Source
™
, and
three
grades of coverage for each. The type and grade of coverage determines the price to the customer. For standard warranties, our responsibility for leaks in a roofing system begins after
24
consecutive leak-free months. For Single Source
™
warranties, the roofing system must pass our inspection before warranty coverage will be issued. Inspections are typically performed at three stages of the roofing project: (i) at the project start-up; (ii) at the project mid-point; and (iii) at the project completion. These inspections are included in the cost of the warranty. If the project requires or the customer requests additional inspections, those inspections are billed to the customer. Upon the sale of a warranty, we record the resulting revenue as deferred revenue, which is included in other accrued expenses in our consolidated balance sheets. See Note
10
— Warranty.
(m) Insurance
. Group medical insurance is purchased through Blue Cross Blue Shield (“BCBS”). The plans include a Preferred Provider Organization Plan (“PPO”) and a Consumer Driven Health Plan (“CDHP”). These plans are managed-care
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
plans utilizing networks to achieve discounts through negotiated rates with the providers within these networks. The claims incurred under these plans are self-funded for the first
$355,000
of each claim. We purchase individual stop loss reinsurance to limit our claims liability to
$355,000
per claim. BCBS administers all claims, including claims processing, utilization review and network access charges.
Insurance is purchased for workers compensation and employer liability, general liability, property and auto liability/auto physical damage. We utilize either deductibles or self-insurance retentions (“SIR”) to limit our exposure to catastrophic loss. The workers compensation insurance has a
$250,000
per-occurrence deductible. The property and auto liability insurances have per-occurrence deductibles of
$500,000
and
$250,000
, respectively. The general liability insurance has a
$1,000,000
SIR. Umbrella insurance coverage is purchased to protect us against claims that exceed our per-occurrence or aggregate limits set forth in our respective policies. All claims are adjusted utilizing a third-party claims administrator and insurance carrier claims adjusters.
Each reporting period, we record the costs of our health insurance plan, including paid claims, an estimate of the change in incurred but not reported (“IBNR”) claims, taxes and administrative fees, when applicable, (collectively the “Plan Costs”) as general and administrative expenses on our consolidated statements of operations. The estimated IBNR claims are based upon (i) a recent average level of paid claims under the plan, (ii) an estimated lag factor and (iii) an estimated growth factor to provide for those claims that have been incurred but not yet reported and paid. We use an actuary to determine the claims lag and estimated liability for IBNR claims.
For workers’ compensation costs, we monitor the number of accidents and the severity of such accidents to develop appropriate estimates for expected costs to provide both medical care and indemnity benefits, when applicable, for the period of time that an employee is incapacitated and unable to work. These accruals are developed using independent third-party actuarial estimates of the expected cost for medical treatment, and length of time an employee will be unable to work based on industry statistics for the cost of similar disabilities, to include statutory impairment ratings. For general liability and automobile claims, accruals are developed based on independent third-party actuarial estimates of the expected cost to resolve each claim, including damages and defense costs, based on legal and industry trends and the nature and severity of the claim. Accruals also include estimates for IBNR claims, and taxes and administrative fees, when applicable. Each reporting period, we record the costs of our workers’ compensation, general liability and automobile claims, including paid claims, an estimate of the change in IBNR claims, taxes and administrative fees as general and administrative expenses on our consolidated statements of operations.
(n) Advertising Costs
. Advertising costs are expensed as incurred. Advertising expense was
$7.1 million
,
$7.1 million
and
$8.6 million
in fiscal
2017
,
2016
and
2015
, respectively.
(o) Impairment of Long-Lived Assets
. We assess impairment of property, plant and equipment at an asset group level in accordance with the provisions of ASC Topic 360,
Property, Plant and Equipment.
We assess the recoverability of the carrying amount of property, plant and equipment if certain events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable, such as a significant decrease in market value of the asset groups or a significant change in our business conditions. If we determine that the carrying value of an asset group 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 group over its fair value. The fair value of an asset group is determined based on prices of similar assets adjusted for their remaining useful life. We recorded asset impairment charges of
$5.8 million
in fiscal 2015, which is included in restructuring and impairment charges in the consolidated statements of operations. See Note
5
— Restructuring.
(p) Share-Based Compensation
. Compensation expense is recorded for restricted stock awards under the fair value method. Compensation expense for performance stock units (“PSUs”) granted to our senior executives and Performance Share Awards granted to our key employees is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. We recorded pre-tax compensation expense relating to restricted stock awards, Performance Share Awards, stock options and performance share unit awards of
$10.2 million
,
$10.9 million
and
$9.4 million
for fiscal
2017
,
2016
and
2015
, respectively. See Note 7 — Share-Based Compensation.
(q) Foreign Currency Re-measurement and Translation
. 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 other income in the current period. Net foreign currency re-measurement gains (losses) were
$(0.3) million
,
$(0.8) million
and
$(1.8) million
for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively.
The functional currency for our Canadian 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
comprehensive income in stockholders’ equity. The net foreign currency gains (losses) included in other income for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
were
$0.8 million
,
$(0.6) million
and
$(0.4) million
, respectively. Net foreign currency translation adjustments, net of tax, and included in other comprehensive income were
$0.2 million
,
$(0.3) million
and
$0.1 million
for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively.
(r) Contingencies
. We establish reserves for estimated loss contingencies and unasserted claims when we believe a loss is probable and the amount of the loss can be reasonably estimated. Our contingent liability reserves are related primarily to litigation and environmental matters. Revisions to contingent liability reserves are reflected in income in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the probable cost by evaluating historical precedent as well as the specific facts relating to each particular contingency (including the opinion of outside advisors, professionals and experts). Should the outcome differ from our assumptions and estimates or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known.
(s) Income taxes
. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, Canadian federal and provincial, Mexican federal and other jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.
(t) Reclassifications
. Certain reclassifications have been made to the prior period amounts in our consolidated balance sheets, consolidated cash flows and notes to the consolidated financial statements to conform to the current presentation. The net effect of these reclassifications was not material to our consolidated financial statements.
3
. ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In June 2014, the FASB issued ASU 2014-12,
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
. ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic 718,
Compensation
-
Stock Compensation
, as it relates to such awards. We adopted this guidance in our first quarter in fiscal 2017 on a prospective basis. The adoption of this guidance did not have any impact on our financial position or results of operations.
In April 2015, the FASB issued ASU 2015-04,
Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
. This ASU provides a practical expedient option to entities that have defined benefit plans and have a fiscal year end that does not coincide with a calendar month end. This ASU allows an entity to elect to measure defined benefit plan assets and obligations using the calendar month-end that is closest to its fiscal year end. We adopted ASU 2015-04 prospectively in our first quarter in fiscal 2017. The adoption of this standard did not have any impact on our consolidated financial statements as presented; however, the future impact of ASU 2015-04 will be dependent upon the nature of future significant events, if any, impacting the Company’s pension plans.
In April 2015, the FASB issued ASU 2015-05,
Intangibles
—
Goodwill and Other
—
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the guidance specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. ASU 2015-05 further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. We adopted ASU 2015-05
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
in our first quarter in fiscal 2017 on a prospective basis and, the adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as a separate asset. The retrospective adoption of this guidance in the first quarter of our fiscal 2017 resulted in a reclassification of approximately
$8.1 million
in deferred financing costs as of October 30, 2016 associated with our Notes and Credit Agreement (as defined in Note
11
—Long-Term Debt and Note Payable) from other assets to long-term debt on our consolidated balance sheets.
In August 2015, FASB issued ASU 2015-15,
Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
(Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting), to provide further clarification to ASU 2015-03 as it relates to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. Under this guidance, these costs may be presented as an asset and amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. We adopted this guidance in our first quarter in fiscal 2017 on a retrospective basis. The adoption of this guidance did not have any impact on our financial position as the deferred financing costs associated with our Amended ABL Facility (as defined herein) remain classified in other assets on the consolidated balance sheets.
In January 2017, the FASB issued ASU 2017-04,
Intangibles
—
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates Step 2 from the goodwill impairment test and requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Under this guidance, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We early adopted this guidance in the fourth quarter of fiscal 2017, as permitted. See Note 6 - Goodwill and Other Intangible Assets for discussion of our annual goodwill impairment test.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During 2016, the FASB also issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
; ASU 2016-11,
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
; and ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients;
and ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
all of which were issued to improve and clarify the guidance in ASU 2014-09. These ASUs are effective for our fiscal year ending November 3, 2019, including interim periods within that fiscal year, and will be adopted using either a full or modified retrospective approach. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In July 2015, the FASB issues ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
ASU 2015-11 requires that inventory that has historically been measured using first-in, first-out (FIFO) or average cost method should now be measured at the lower of cost and net realizable value. The update requires prospective application and is effective for our fiscal year ending October 28, 2018, including interim periods within that fiscal year. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires all deferred tax assets and liabilities to be presented on the balance sheet as noncurrent. ASU 2015-17 is effective for our fiscal year ending October 28, 2018, including interim periods within that fiscal year. Upon adoption, we will present the net deferred tax assets as noncurrent and reclassify any current deferred tax assets and liabilities in our consolidated balance sheet on a retrospective basis.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will require lessees to record most leases on the balance sheet and modifies the classification criteria and accounting for sales-type leases and direct financing leases for lessors. ASU 2016-02 is effective for our fiscal year ending November 1, 2020, including interim periods within that fiscal year. The guidance
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
requires entities to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are evaluating the impact that the adoption of this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify certain aspects of the accounting for share-based payment award transactions, including income tax effects when awards vest or settle, repurchase of employees’ shares to satisfy statutory tax withholding obligations, an option to account for forfeitures as they occur, and classification of certain amounts on the statement of cash flows. ASU 2016-09 is effective for our fiscal year ending October 28, 2018, including interim periods within that fiscal year. We are evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU requires an entity to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now incorporate forward-looking information based on expected losses to estimate credit losses. ASU 2016-13 is effective for our fiscal year ending October 31, 2021, including interim periods within that fiscal year. We are evaluating the impact that the adoption of this ASU will have on our consolidated financial position, result of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. We will be required to adopt the amendments in this ASU in annual and interim periods for our fiscal year ending November 3, 2019, with early adoption permitted. Adoption is required to be on a retrospective basis, unless impracticable for any of the amendments, in which case a prospective application is permitted. We are evaluating the impact that ASU 2016-15 will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We will be required to adopt the amendments in this ASU in the annual and interim periods for our fiscal year ending November 3, 2019, with early adoption permitted. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are evaluating the standard and the impact it will have on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. We will be required to adopt this guidance on a retrospective basis in the annual and interim periods for our fiscal year ending November 3, 2019, with early adoption permitted. We are evaluating the impact ASU 2016-18 will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. This ASU adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, if a single asset or group of similar identifiable assets comprise substantially all of the fair value of the gross assets acquired (or disposed of) in a transaction, the assets and related activities are not a business. Also, a minimum of an input process and a substantive process must be present and significantly contribute to the ability to create outputs in order to be considered a business. We will be required to adopt this guidance on a prospective basis in the annual and interim periods for our fiscal year ending November 3, 2019, with early adoption permitted. We are evaluating the impact ASU 2017-01 will have on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation
—
Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line items that include the service cost. We will
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
be required to adopt this guidance on a prospective basis in the annual and interim periods for our fiscal year ending November 3, 2019, with early adoption permitted. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. We are evaluating the impact of adopting this guidance.
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides clarity on the accounting for modifications of stock-based awards. We will be required to adopt this guidance on a prospective basis in the annual and interim periods for our fiscal year ending November 3, 2019 for share-based payment awards modified on or after the adoption date. We are evaluating the impact ASU 2017-09 will have on our consolidated financial statements.
4
. ACQUISITIONS
Fiscal 2016 acquisition
On November 3, 2015, we acquired manufacturing operations in Hamilton, Ontario, Canada for cash consideration of
$2.2 million
, net of post-closing working capital adjustments. This business allows us to service customers more competitively within the Canadian and Northeastern United States insulated metal panel (“IMP”) markets. Because the business was acquired from a seller in connection with a divestment required by a regulatory authority, the fair value of the net assets acquired exceeded the purchase consideration by
$1.9 million
, which was recorded as a non-taxable gain from bargain purchase in the consolidated statements of operations during the first quarter of fiscal 2016.
The fair values of the assets acquired and liabilities assumed as part of this acquisition as of November 3, 2015, as determined in accordance with ASC Topic 805, were as follows (in thousands):
|
|
|
|
|
|
|
|
November 3,
2015
|
Current assets
|
|
$
|
307
|
|
Property, plant and equipment
|
|
4,810
|
|
Assets acquired
|
|
5,117
|
|
Current liabilities assumed
|
|
380
|
|
Fair value of net assets acquired
|
|
4,737
|
|
Total cash consideration transferred
|
|
2,201
|
|
Deferred tax liabilities
|
|
672
|
|
Gain from bargain purchase
|
|
$
|
(1,864
|
)
|
The results of operations for this business are included in our Metal Components segment. Pro forma financial information and other disclosures for this acquisition have not been presented as such is not material to the Company’s financial position or operating results.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
5
. RESTRUCTURING
As part of the plans developed in the fourth quarter of fiscal 2015 to improve engineering, selling, general and administrative (“ESG&A”) and manufacturing cost efficiency and optimize our combined manufacturing footprint, we incurred restructuring charges, primarily consisting of severance related costs of
$4.7 million
, including
$3.2 million
,
$1.2 million
and
$0.3 million
in the Engineered Building Systems segment, Metal Components segment and Corporate, respectively, for the fiscal year ended
October 29, 2017
.
For the fiscal year ended October 30, 2016, we incurred restructuring charges, primarily consisting of severance related costs of
$3.6 million
, including
$1.0 million
and
$1.7 million
in the Engineered Building Systems segment and Metal Components segment, respectively, and the remaining amount of
$0.9 million
at Corporate. These charges include severance related costs associated with the consolidation and closing of
two
manufacturing facilities in our Metal Components segment during fiscal 2016. We also incurred approximately
$0.6 million
of other costs associated with the restructuring actions during fiscal 2016.
For the fiscal year ended November 1, 2015, we incurred severance and facility closure costs of
$1.6 million
in connection with the closing of a facility and other severance related costs of
$1.2 million
in our Engineered Building Systems segment. We recorded asset impairment charges of
$5.8 million
for asset groups for which the fair values were below their carrying amounts in our Metal Components segment. These charges are presented in restructuring and impairment charges in our consolidated statements of operations. We measured the fair value of the asset groups using Level 3 inputs, including values of like-kind assets or other market indications of a potential selling value which approximates fair value. We also incurred severance related costs of
$2.0 million
and
$0.3 million
within the Metal Components segment and Metal Coil Coating segment, respectively, primarily in an effort to streamline our management and manufacturing structure to better serve our customers. The remaining amount of costs in fiscal 2015 were incurred at corporate.
The following table summarizes our restructuring plan costs and charges related to the restructuring plans during the fiscal year ended
October 29, 2017
and since inception, which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Costs
Incurred
To Date
(since
inception)
|
|
October 29,
2017
|
|
General severance
|
$
|
2,350
|
|
|
$
|
9,694
|
|
Plant closing severance
|
1,539
|
|
|
3,279
|
|
Asset impairments
|
125
|
|
|
5,969
|
|
Other restructuring costs
|
683
|
|
|
1,313
|
|
Total restructuring costs
|
$
|
4,697
|
|
|
$
|
20,255
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The following table summarizes our severance liability and cash payments made pursuant to the restructuring plans from inception through
October 29, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Severance
|
|
Plant Closing
Severance
|
|
Total
|
Balance, November 2, 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs incurred
|
3,887
|
|
|
1,575
|
|
|
5,462
|
|
Cash payments
|
(2,941
|
)
|
|
(1,575
|
)
|
|
(4,516
|
)
|
Accrued severance
(1)
|
739
|
|
|
—
|
|
|
739
|
|
Balance, November 1, 2015
|
$
|
1,685
|
|
|
$
|
—
|
|
|
$
|
1,685
|
|
Costs incurred
(1)
|
2,725
|
|
|
165
|
|
|
2,890
|
|
Cash payments
|
(3,928
|
)
|
|
(165
|
)
|
|
(4,093
|
)
|
Balance, October 30, 2016
|
$
|
482
|
|
|
$
|
—
|
|
|
$
|
482
|
|
Costs incurred
|
2,350
|
|
|
1,539
|
|
|
3,889
|
|
Cash payments
|
(2,549
|
)
|
|
(1,539
|
)
|
|
(4,088
|
)
|
Balance, October 29, 2017
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
|
(1)
|
During the second and fourth quarters of fiscal 2015, we entered into transition and separation agreements with certain executive officers. Each terminated executive officer was entitled to severance benefit payments issuable in two installments. The termination benefits were measured initially at the separation dates based on the fair value of the liability as of the termination date and were recognized ratably over the future service period. Costs incurred during fiscal 2016 exclude
$0.7 million
of amortization expense associated with these termination benefits.
|
We expect to fully execute our plans in phases over the next
18 months
and estimate that we will incur future additional restructuring charges associated with these plans. We are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, associated with future phases of the plans or the total costs we may incur in connection with these plans.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
Building
Systems
|
|
Metal
Components
|
|
Metal Coil
Coating
|
|
Total
|
Balance, November 1, 2015
|
$
|
14,310
|
|
|
$
|
143,716
|
|
|
$
|
—
|
|
|
$
|
158,026
|
|
Purchase accounting adjustments
(1)
|
—
|
|
|
(3,755
|
)
|
|
—
|
|
|
(3,755
|
)
|
Balance, October 30, 2016
|
$
|
14,310
|
|
|
$
|
139,961
|
|
|
—
|
|
|
$
|
154,271
|
|
Impairment
|
—
|
|
|
(6,000
|
)
|
|
—
|
|
|
(6,000
|
)
|
Other, net
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Balance, October 29, 2017
|
$
|
14,310
|
|
|
$
|
133,981
|
|
|
$
|
—
|
|
|
$
|
148,291
|
|
|
|
(1)
|
Includes immaterial error corrections related to the balance sheet and statement of operations as of and for the year ended November 1, 2015. These corrections related to the fair value of liabilities assumed in the acquisition of CENTRIA and resulted in a decrease in goodwill and current liabilities of
$3.8 million
and
$3.0 million
, respectively. The impact of these error corrections on net income for the fiscal year ended October 30, 2016 was a decrease of
$0.5 million
(
$0.8 million
, before tax). Management has assessed both quantitative and qualitative factors discussed in ASC Topic 250,
Accounting Changes and Error Corrections
, and Staff Accounting Bulletin 1.M,
Materiality (SAB Topic 1.M)
to determine that the correction of these misstatements qualifies as an immaterial error correction.
|
In accordance with ASC Topic 350,
Intangibles — Goodwill and Other
, goodwill is tested for impairment at least annually at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. Management has determined that we have
six
reporting units for the purpose of allocating goodwill and the subsequent testing of goodwill for impairment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Our Metal Components segment has
five
reporting units and our Engineered Building Systems segment has
one
reporting unit with goodwill.
At the beginning of the fourth quarter of each fiscal year, we perform an annual impairment assessment of goodwill and indefinite-lived intangible assets. Additionally, we assess goodwill and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the fair value may be below the carrying value. We completed our annual impairment assessment of goodwill and indefinite-lived intangible assets as of July 31, 2017 and we elected to apply the qualitative assessment for the goodwill in certain of our reporting units within the Metal Components segment and the Engineered Building Systems segment as of July 31, 2017. Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and negative categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using relative weightings. Additionally, the Company considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC), publicly traded company multiples and observable and recent transaction multiples between the current and prior years for a reporting unit. Based on our assessment of these tests, we do not believe it is more likely than not that the fair value of these reporting units or the indefinite-lived intangible assets are less than their respective carrying amounts.
We performed a quantitative test for
three
reporting units within the Metal Components segment as of July 31, 2017. We estimated the fair value of each reporting unit using projected discounted cash flows and publicly traded company multiples. To develop the projected cash flows associated with the reporting unit, we considered key factors that include assumptions regarding sales volume and prices, operating margins, capital expenditures, working capital needs and discount rates. We discounted the projected cash flows using a long-term, risk-adjusted weighted average cost of capital, which was based on our estimate of the investment returns that market participants would require for the reporting unit. We considered publicly traded company multiples for companies with operations similar to the reporting unit. Based on our completion of this test, we determined that the fair value of
two
of the reporting units exceeded the carrying amount and goodwill was not considered to be impaired. The July 31, 2017 goodwill impairment test indicated impairment as the carrying value of CENTRIA’s coil coating operations, included in our Metal Components segment, exceeded its fair value. As a result we recorded a non-cash charge of
$6.0 million
in goodwill impairment on our consolidated statements of operations for the year ended October 29, 2017. The remaining balance of goodwill on the CENTRIA coil coating reporting unit of
$5.4 million
is supported by future cash flows and expected synergies with our NCI coil coating operations. Further declines in estimated volume and margins of CENTRIA’s coil coating operations could result in additional goodwill impairments in future periods. The fair value of the reporting unit is a “Level 3” measurement as defined in Note 14.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The following table represents all our intangible assets activity for the fiscal years ended
October 29, 2017
and
October 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life
(Years)
|
|
October 29,
2017
|
|
October 30,
2016
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
Trade names
|
|
15
|
|
|
$
|
29,167
|
|
|
$
|
29,167
|
|
Customer lists and relationships
|
12
|
–
|
20
|
|
136,210
|
|
|
136,210
|
|
Non-competition agreements
|
5
|
–
|
10
|
|
8,132
|
|
|
8,132
|
|
Supplier relationships
|
|
3
|
|
|
150
|
|
|
150
|
|
|
|
|
|
|
$
|
173,659
|
|
|
$
|
173,659
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
$
|
(10,713
|
)
|
|
$
|
(8,768
|
)
|
Customer lists and relationships
|
|
|
|
|
(30,971
|
)
|
|
(23,295
|
)
|
Non-competition agreements
|
|
|
|
|
(8,132
|
)
|
|
(8,132
|
)
|
Supplier relationships
|
|
|
|
|
(150
|
)
|
|
(150
|
)
|
|
|
|
|
|
$
|
(49,966
|
)
|
|
$
|
(40,345
|
)
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
$
|
123,693
|
|
|
$
|
133,314
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
13,455
|
|
|
13,455
|
|
Total intangible assets at net book value
|
|
|
|
|
$
|
137,148
|
|
|
$
|
146,769
|
|
The Star and Ceco trade name assets within the Engineered Building Systems segment have an indefinite life and are not amortized, but are reviewed annually and tested for impairment. These trade names were determined to have indefinite lives due to the length of time the trade names have been in place, with some having been in place for decades. Our intention is to maintain these trade names indefinitely. We performed a quantitative assessment for the Star and Ceco trade names as of July 31, 2017. We estimated the fair value of each trade name using the relief-from-royalty method, which applies a royalty rate to projected revenue streams attributable to the trade names. To develop the respective revenue projections we considered key factors that include assumptions regarding sales volume and prices. Based on our completion of this test, we determined that the fair value of the Star and Ceco trade names exceeded the carrying amount and the intangible assets were not considered to be impaired.
All other intangible assets are amortized on a straight-line basis or a basis consistent with the expected future cash flows over their expected useful lives. As of
October 29, 2017
and
October 30, 2016
, the weighted average amortization period for all our intangible assets was
15.0
years. Amortization expense of intangibles was
$9.6 million
,
$9.6 million
and
$16.9 million
for
2017
,
2016
and
2015
, respectively. We expect to recognize amortization expense over the next five fiscal years as follows (in thousands):
|
|
|
|
|
2018
|
$
|
9,620
|
|
2019
|
9,620
|
|
2020
|
9,327
|
|
2021
|
9,064
|
|
2022
|
8,721
|
|
In accordance with ASC Topic 350,
Intangibles — Goodwill and Other
, we evaluate the remaining useful life of intangible assets on an annual basis. We also review finite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying values may not be recoverable in accordance with ASC Topic 360,
Property, Plant and Equipment
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
7. SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows for the grant of a variety of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share units (“PSUs”), phantom stock awards, long-term incentive awards with performance conditions (“Performance Share Awards”) and cash awards. Awards are generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). As a general rule, option awards terminate on the earlier of (i)
10 years
from the date of grant, (ii)
30
days after termination of employment or service for a reason other than death, disability or retirement, (iii)
one
year after death or (iv)
one
year for incentive stock options or
five
years for other awards after disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the the Committee may approve. Awards may be paid in cash, shares of our Common Stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Committee.
As of
October 29, 2017
, and for all periods presented, our share-based awards under this plan have consisted of restricted stock grants, PSUs and stock option grants, none of which can be settled through cash payments, and Performance Share Awards. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest over
three
to
four
years or earlier upon death, disability or a change in control. However, our annual restricted stock awards issued prior to December 15, 2013 also vest upon attainment of age 65 and, only in the case of certain special one-time restricted stock awards, a portion vest on termination without cause or for good reason, as defined by the agreements governing such awards. Restricted stock awards issued after December 15, 2013 do not vest upon attainment of age 65, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.
A total of approximately
2,287,000
and
3,000,000
shares were available at
October 29, 2017
and
October 30, 2016
, respectively, under the Incentive Plan for the further grants of awards.
Our option awards and time-based restricted stock awards are typically subject to graded vesting over a service period, which is typically
three
or
four
years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically
three
years. We recognize compensation cost for these awards on a straight-line basis over the requisite service period for each annual award grant. In addition, certain of our awards provide for accelerated vesting upon qualified retirement, after a change of control or upon termination without cause or for good reason. We recognize compensation cost for such awards over the period from grant date to the date the employee first becomes eligible for retirement.
Stock Option Awards
The fair value of each option award is estimated as of the date of grant 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. 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.
There were
182,923
,
1,418,219
and
40,000
options exercised during fiscal
2017
,
2016
and
2015
, respectively. Cash received from the option exercises was
$1.7 million
,
$12.6 million
and
$0.4 million
during fiscal
2017
,
2016
and
2015
, respectively. The total intrinsic value of options exercised in fiscal 2017 and 2016 was
$1.4 million
and
$9.9 million
, respectively, and was insignificant for fiscal
2015
.
The weighted average assumptions for the option awards granted on December 15, 2016, December 15, 2015 and December 15, 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 15,
2016
|
|
December 15,
2015
|
|
December 15,
2014
|
Expected volatility
|
42.63
|
%
|
|
43.71
|
%
|
|
49.65
|
%
|
Expected term (in years)
|
5.50
|
|
|
5.50
|
|
|
5.50
|
|
Risk-free interest rate
|
2.15
|
%
|
|
1.77
|
%
|
|
1.63
|
%
|
During fiscal
2017
,
2016
and
2015
, we granted
10,424
,
28,535
and
10,543
stock options, respectively, and the weighted average grant-date fair value of options granted during fiscal
2017
,
2016
and
2015
was
$6.59
,
$5.38
and
$7.91
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The following is a summary of stock option transactions during fiscal
2017
,
2016
and
2015
(in thousands, except weighted average exercise prices and weighted average remaining life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
Balance, November 2, 2014
|
1,948
|
|
|
$
|
11.05
|
|
|
|
|
|
Granted
|
10
|
|
|
17.07
|
|
|
|
|
|
Exercised
|
(40
|
)
|
|
(8.85
|
)
|
|
|
|
|
Cancelled
|
(14
|
)
|
|
(175.08
|
)
|
|
|
|
|
Balance, November 1, 2015
|
1,904
|
|
|
9.85
|
|
|
|
|
|
Granted
|
29
|
|
|
12.76
|
|
|
|
|
|
Exercised
|
(1,418
|
)
|
|
(8.89
|
)
|
|
|
|
|
Cancelled
|
(7
|
)
|
|
(227.21
|
)
|
|
|
|
|
Balance, October 30, 2016
|
508
|
|
|
10.24
|
|
|
|
|
|
Granted
|
11
|
|
|
15.70
|
|
|
|
|
|
Exercised
|
(183
|
)
|
|
(9.03
|
)
|
|
|
|
|
Balance, October 29, 2017
|
336
|
|
|
$
|
11.06
|
|
|
3.7
|
|
$
|
1,534
|
|
Exercisable at October 29, 2017
|
319
|
|
|
$
|
10.79
|
|
|
3.5
|
|
$
|
1,534
|
|
The following summarizes additional information concerning outstanding options at
October 29, 2017
(in thousands, except weighted average remaining life and weighted average exercise prices):
|
|
|
|
|
|
|
|
|
Options Outstanding
|
Number of
Options
|
|
Weighted Average
Remaining Life
|
|
Weighted Average
Exercise Price
|
310
|
|
|
3.4 years
|
|
$
|
10.59
|
|
26
|
|
|
7.8 years
|
|
16.66
|
|
336
|
|
|
3.7 years
|
|
$
|
11.06
|
|
The following summarizes additional information concerning options exercisable at
October 29, 2017
(in thousands, except weighted average exercise prices):
|
|
|
|
|
|
|
Options Exercisable
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
310
|
|
|
$
|
10.59
|
|
9
|
|
|
17.37
|
|
319
|
|
|
$
|
10.79
|
|
Restricted stock and performance awards
Long-term incentive awards granted to our senior executives generally have a
three
-year performance period. Long-term incentive awards include restricted stock units and PSUs representing
40%
and
60%
of the total value, respectively. The restricted stock units vest upon continued employment. Vesting of the PSUs is contingent upon continued employment and the achievement of targets with respect to the following metrics, as defined by management: (1) cumulative free cash flow (weighted
40%
); (2) cumulative earnings per share (weighted
40%
); and (3) total shareholder return (weighted
20%
), in each case during the performance period. At the end of the performance period, the number of actual shares to be awarded varies between
0%
and
200%
of target amounts. The PSUs vest pro rata if an executive’s employment terminates prior to the end of the performance period due to death, disability, or termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, will be forfeited and cancelled. If a change in control occurs prior to the end of the performance period, the PSU payout will be calculated and paid assuming that the maximum benefit had been achieved. If an executive’s employment terminates due to death or disability while any of the restricted stock is unvested, then all of the unvested restricted stock will
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
become vested. If an executive’s employment is terminated by the Company without cause or after reaching normal retirement age, the unvested restricted stock will be forfeited. If a change in control occurs prior to the end of the performance period, the restricted stock will fully vest. The fair value of the awards is based on the Company’s stock price as of the date of grant. During the fiscal years
2017
,
2016
and
2015
, we granted PSUs with fair values of approximately
$4.6 million
,
$4.7 million
and
$3.6 million
, respectively, to the Company’s senior executives.
The restricted stock units granted in December 2016 and 2015 to our senior executives vest one-third annually. For the restricted stock units granted in December 2014 to our senior executives, two-thirds vested on December 15, 2016 and one-third vested on December 15, 2017. The PSUs granted in December 2016 and 2015 to our senior executives cliff vest at the end of the three-year performance period. For the PSUs granted in December 2014 to our senior executives, one-half vested on December 15, 2016 and one-half vested on December 15, 2017.
Performance Share Awards granted to our key employees are paid
50%
in cash and
50%
in stock. Vesting of Performance Share Awards is contingent upon continued employment and the achievement of free cash flow and earnings per share targets, as defined by management, over a
three
-year period. At the end of the performance period, the number of actual shares to be awarded varies between
0%
and
150%
of target amounts. However, a minimum of
50%
of the awards will vest upon continued employment over the
three
-year period if the minimum targets are not met. The Performance Share Awards vest earlier upon death, disability or a change of control. A portion of the awards also vests upon termination without cause or after reaching normal retirement age prior to the vesting date, as defined by the agreements governing such awards. The fair value of Performance Share Awards is based on the Company’s stock price as of the date of grant. The fair value and cash value of Performance Share Awards granted in fiscal
2017
,
2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Equity fair value
|
$
|
2.0
|
|
|
$
|
2.4
|
|
|
$
|
1.5
|
|
Cash value
|
$
|
2.0
|
|
|
$
|
2.1
|
|
|
$
|
1.7
|
|
On December 15, 2016, the performance period ended for certain PSUs granted to senior executives in December 2014 and the Performance Share Awards granted to key employees in December 2013. The PSUs vested at
149.3%
, and resulted in the issuance of
0.1 million
shares, net of shares withheld for taxes. The Performance Share Awards vested at
50.0%
, and resulted in the issuance of less than
0.1 million
shares, net of shares withheld for taxes.
During fiscal
2017
,
2016
and
2015
, we granted time-based restricted stock awards with a fair value of
$4.5 million
,
$4.2 million
and
$6.8 million
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Restricted stock and performance award transactions during fiscal
2017
,
2016
and
2015
were as follows (in thousands, except weighted average grant prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Performance Awards
|
|
Time-Based
|
|
Performance-Based
|
|
Market-Based
|
|
Number of
Shares
|
|
Weighted
Average
Grant Price
|
|
Number of
Shares
(1)
|
|
Weighted
Average
Grant Price
|
|
Number of
Shares
(1)
|
|
Weighted
Average
Grant Price
|
Balance, November 2, 2014
|
855
|
|
|
$
|
15.22
|
|
|
117
|
|
|
$
|
17.47
|
|
|
1,028
|
|
|
$
|
11.71
|
|
Granted
|
410
|
|
|
16.60
|
|
|
270
|
|
|
17.04
|
|
|
45
|
|
|
12.76
|
|
Vested
|
(352
|
)
|
|
13.11
|
|
|
—
|
|
|
—
|
|
|
(541
|
)
|
|
11.71
|
|
Forfeited
|
(85
|
)
|
|
23.71
|
|
|
(44
|
)
|
|
16.22
|
|
|
(492
|
)
|
|
11.72
|
|
Balance, November 1, 2015
|
828
|
|
|
$
|
15.87
|
|
|
343
|
|
|
$
|
17.19
|
|
|
40
|
|
|
$
|
11.78
|
|
Granted
|
329
|
|
|
12.64
|
|
|
516
|
|
|
12.76
|
|
|
71
|
|
|
14.60
|
|
Vested
|
(335
|
)
|
|
15.09
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(60
|
)
|
|
14.33
|
|
|
(60
|
)
|
|
15.22
|
|
|
(4
|
)
|
|
13.81
|
|
Balance, October 30, 2016
|
762
|
|
|
$
|
14.91
|
|
|
799
|
|
|
$
|
14.82
|
|
|
107
|
|
|
$
|
14.02
|
|
Granted
|
285
|
|
|
15.84
|
|
|
362
|
|
|
15.70
|
|
|
58
|
|
|
16.03
|
|
Vested
|
(392
|
)
|
|
15.14
|
|
|
(165
|
)
|
|
16.07
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(27
|
)
|
|
14.41
|
|
|
(124
|
)
|
|
15.88
|
|
|
(21
|
)
|
|
11.51
|
|
Balance, October 29, 2017
|
628
|
|
|
$
|
15.21
|
|
|
872
|
|
|
$
|
14.76
|
|
|
144
|
|
|
$
|
15.15
|
|
|
|
(1)
|
The number of restricted stock shown reflects the shares that would be granted if the target level of performance is achieved. The number of shares actually issued may vary.
|
Share-Based Compensation Expense
Share-based compensation expense is recorded over the requisite service or performance period. For awards with performance conditions, the amount of share-based compensation expense recognized is based upon the probable outcome of the performance conditions, as defined and determined by management. We estimated a forfeiture rate of
5.0%
for our non-officers and
0%
for our officers in our calculation of share-based compensation expense for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
. These estimates are based on historical forfeiture behavior exhibited by our employees.
Share-based compensation expense as well as the unrecognized share-based compensation expense and weighted average period over which expense attributable to unvested awards will be recognized are as follows (in millions, except weighted average remaining years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Cost of goods sold
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Engineering, selling, general and administrative
|
9.2
|
|
|
9.8
|
|
|
8.3
|
|
Total recognized share-based compensation expense
|
$
|
10.2
|
|
|
$
|
10.9
|
|
|
$
|
9.4
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 29, 2017
|
|
Unrecognized Share-Based Compensation Expense
|
|
Weighted Average Remaining Years
|
Stock options
|
0.0
|
|
0.8
|
Time-based restricted stock
|
4.8
|
|
|
1.8
|
Performance- and market-based restricted stock
|
6.7
|
|
|
1.7
|
Total unrecognized share-based compensation expense
|
$
|
11.5
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
As of
October 29, 2017
, we do not have any amounts capitalized for share-based compensation cost in inventory or similar assets. The total income tax benefit recognized in results of operations for share-based compensation arrangements was
$4.0 million
,
$4.2 million
and
$3.7 million
for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
, respectively.
8
. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted income per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted income per common share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Numerator for Basic and Diluted Earnings Per Common Share:
|
|
|
|
|
|
Net income applicable to common shares
|
$
|
54,399
|
|
|
$
|
50,638
|
|
|
$
|
17,646
|
|
Denominator for Basic and Diluted Earnings Per Common Share:
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
70,629
|
|
|
72,411
|
|
|
73,271
|
|
Common stock equivalents:
|
|
|
|
|
|
Employee stock options
|
124
|
|
|
446
|
|
|
652
|
|
PSUs and Performance Share Awards
|
25
|
|
|
—
|
|
|
—
|
|
Weighted average diluted number of common shares outstanding
|
70,778
|
|
|
72,857
|
|
|
73,923
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.77
|
|
|
$
|
0.70
|
|
|
$
|
0.24
|
|
Diluted earnings per common share
|
$
|
0.77
|
|
|
$
|
0.70
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
Incentive Plan securities excluded from dilution
(1)
|
0
|
|
|
195
|
|
|
289
|
|
|
|
(1)
|
Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
|
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units related to our Incentive Plan from the numerator and excludes the dilutive impact of those shares from the denominator.
9. OTHER ACCRUED EXPENSES
Other accrued expenses are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Accrued warranty obligation and deferred warranty revenue
|
$
|
27,016
|
|
|
$
|
27,200
|
|
Deferred revenue
|
28,295
|
|
|
28,472
|
|
Other accrued expenses
|
46,922
|
|
|
47,712
|
|
Total other accrued expenses
|
$
|
102,233
|
|
|
$
|
103,384
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
10
. WARRANTY
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the fiscal years ended
October 29, 2017
and
October 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Beginning balance
|
$
|
27,200
|
|
|
$
|
25,162
|
|
Warranties sold
|
2,149
|
|
|
3,853
|
|
Revenue recognized
|
(2,323
|
)
|
|
(3,269
|
)
|
Cost incurred and other
|
(10
|
)
|
|
1,454
|
|
Ending balance
|
$
|
27,016
|
|
|
$
|
27,200
|
|
11
. LONG-TERM DEBT AND NOTE PAYABLE
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Credit Agreement, due June 2022, as amended
(variable interest, at 4.24% and 4.25% on October 29, 2017 and October 30, 2016, respectively)
|
$
|
144,147
|
|
|
$
|
154,147
|
|
8.25% senior notes, due January 2023
|
250,000
|
|
|
250,000
|
|
Amended Asset-Based lending facility, due June 2019
(variable interest, at our option as described below)
|
—
|
|
|
—
|
|
Less: unamortized deferred financing costs
(1)
|
6,857
|
|
|
8,096
|
|
Total long-term debt
|
$
|
387,290
|
|
|
$
|
396,051
|
|
|
|
(1)
|
Includes the unamortized deferred financing costs associated with the Notes and Credit Agreement. The unamortized deferred financing costs associated with the Amended ABL Facility of
$0.7 million
and
$1.1 million
as of
October 29, 2017
and
October 30, 2016
, respectively, are classified in other assets on the consolidated balance sheets.
|
The scheduled maturity of our debt is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
|
—
|
|
2022 and thereafter
|
394,147
|
|
|
$
|
394,147
|
|
8.25% Senior Notes Due January 2023
The Company’s
$250.0 million
in aggregate principal amount of
8.25%
senior notes due 2023 (the “Notes”) bear interest at
8.25%
per annum and will mature on
January 15, 2023
. Interest is payable semi-annually in arrears on January 15 and July 15.
The Notes are guaranteed on a senior unsecured basis by all of the Company’s existing and future domestic subsidiaries that guarantee the Company’s obligations (including by reason of being a borrower under the senior secured asset-based revolving credit facility on a joint and several basis with the Company or a guarantor subsidiary) under the senior secured credit facilities. The Notes are unsecured senior indebtedness and rank equally in right of payment with all of the Company’s existing and future senior indebtedness and senior in right of payment to all of its future subordinated obligations. In addition, the Notes and guarantees are structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.
The Company may redeem the Notes at any time prior to January 15, 2018, at a price equal to
100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium. In addition,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
prior to January 15, 2018, the Company may redeem the Notes in an aggregate principal amount of up to
40.0%
of the original aggregate principal amount of the Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of one or more equity offerings, at a redemption price of
108.250%
, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes.
On or after January 15, 2018, the Company may redeem all or a part of the Notes at redemption prices (expressed as percentages of principal amount thereof) set forth below, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes, if redeemed during the 12-month period beginning on January 15 of the year as follows:
|
|
|
|
Year
|
|
Percentage
|
2018
|
|
106.188%
|
2019
|
|
104.125%
|
2020
|
|
102.063%
|
2021 and thereafter
|
|
100.000%
|
Credit Agreement
The Company’s Credit Agreement provided for a term loan credit facility (“Term Loan”) in an original aggregate principal amount of
$250.0 million
. The Term Loan amortizes in nominal quarterly installments equal to
one
percent of the aggregate initial principal amount thereof per annum.
On May 2, 2017, the Company entered into Amendment No. 2 (the “Amendment”) to its existing Credit Agreement, dated as of June 22, 2012, between NCI Building Systems, Inc., as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and the other financial institutions party thereto from time to time (as previously amended by Amendment No. 1, dated as of June 24, 2013, the “Existing Term Loan Facility” and, as amended, the “Term Loan Facility”), primarily to extend the maturity date and reduce the interest rate applicable to all of the outstanding term loans under the Term Loan Facility.
Prior to the Amendment, approximately
$144.1 million
of term loans (the “Existing Term Loans”) were outstanding under the Existing Term Loan Facility. Pursuant to the Amendment, certain lenders under the Existing Term Loan Facility extended their Existing Term Loans, in an aggregate amount, along with new term loans advanced by certain new lenders of approximately
$144.1 million
(the “New Term Loans”). The proceeds of the New Term Loans advanced by the new lenders were used to prepay in full all of the Existing Term Loans that were not extended as New Term Loans. Pursuant to the Amendment, the maturity date of the New Term Loans was extended to
June 24, 2022
.
Pursuant to the Amendment, the New Term Loans bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR not less than
1.00%
plus a borrowing margin of
3.00%
per annum or (ii) an alternate base rate plus a borrowing margin of
2.00%
per annum. At
October 29, 2017
, the interest rate on the term loan under the Credit Agreement was
4.24%
. Overdue amounts will bear interest at a rate that is
2%
higher than the rate otherwise applicable.
The New Term Loans are secured by the same collateral and guaranteed by the same guarantors as the Existing Term Loans under the Existing Term Loan Facility. Voluntary prepayments under the New Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a
1.00%
premium payable in connection with certain repricing transactions within the first six months. The Amendment also includes certain other changes to the Term Loan Facility.
During fiscal 2017 and 2016, the Company made voluntary prepayments of
$10.0 million
and
$40.0 million
, respectively, on the outstanding principal amount of the Term Loan. As a result of the voluntary prepayments made during the prior two fiscal periods, which were applied to the
one
percent per annum amortization, we are not required to make any quarterly installment payments until June 24, 2019.
Subject to certain exceptions, the Term Loan will be subject to mandatory prepayment 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; and
|
|
|
•
|
50%
of annual excess cash flow (as defined in the Credit Agreement), subject to reduction to
0%
if specified leverage ratio targets are met.
|
The Credit Agreement contains a number of covenants that, among other things, will limit or restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, make dividends and other restricted payments,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
create liens securing indebtedness, engage in mergers and other fundamental transactions, enter into restrictive agreements, amend certain documents in respect of other indebtedness, change the nature of their business and engage in certain transactions with affiliates.
Amended ABL Facility
The Company’s Asset-Based Lending Facility, as amended, (“Amended ABL Facility”) provides for revolving loans of up to
$150 million
(subject to a borrowing base), letters of credit of up to
$30 million
and up to
$10 million
for swingline borrowings. All borrowings under the Amended ABL Facility mature on
June 24, 2019
.
Borrowing availability under the Amended ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of qualified cash, eligible inventory and eligible accounts receivable, less certain reserves and subject to certain other adjustments. At
October 29, 2017
and
October 30, 2016
, the Company’s excess availability under the Amended ABL Facility was
$140.0 million
and
$140.9 million
, respectively. At
October 29, 2017
and
October 30, 2016
, the Company had no revolving loans outstanding under the Amended ABL Facility. In addition, at
October 29, 2017
and
October 30, 2016
, standby letters of credit related to certain insurance policies totaling approximately
$10.0 million
and
$9.1 million
, respectively.
The Amended ABL Facility contains a number of covenants that, among other things, limit or restrict the Company’s 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.
The Amended ABL Facility includes a minimum fixed charge coverage ratio of
one
to one, which will apply if the Company fails to maintain a specified minimum borrowing capacity. The minimum level of borrowing capacity as of
October 29, 2017
and
October 30, 2016
was
$21.0 million
and
$21.1 million
, respectively. Although the Amended ABL Facility did not require any financial covenant compliance, at
October 29, 2017
and
October 30, 2016
, the Company’s fixed charge coverage ratio as of those dates, which is calculated on a trailing twelve month basis, was
3.85
:1.00 and
2.86
:1.00, respectively.
Loans under the Amended ABL Facility bear interest, at our option, as follows:
|
|
(1)
|
Base Rate loans at the Base Rate plus a margin. The margin ranges from
0.75%
to
1.25%
depending on the quarterly average excess availability under such facility, and
|
|
|
(2)
|
LIBOR loans at LIBOR plus a margin. The margin ranges from
1.75%
to
2.25%
depending on the quarterly average excess availability under such facility.
|
“Base rate” is defined as the higher of the Wells Fargo Bank, N.A. prime rate or the overnight Federal Funds rate plus
0.5%
and “LIBOR” is defined as the applicable London interbank offered rate adjusted for reserves.
During an event of default, loans under the Amended ABL Facility will bear interest at a rate that is
2%
higher than the rate otherwise applicable.
Insurance Note Payable
As of
October 29, 2017
and
October 30, 2016
, the Company had an outstanding note payable in the amount of
$0.4 million
and
$0.5 million
, respectively, related to financed insurance premiums. Insurance premium financings are generally secured by the unearned premiums under such policies.
12
. CD&R FUNDS
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII L.P. (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Stockholders Agreement”), the CD&R Fund VIII and the Clayton, Dubilier & Rice Friends & Family Fund VIII, L.P. (collectively, the “CD&R Funds”) purchased convertible preferred stock, which was later converted to shares of our Common Stock on May 14, 2013.
On January 15, 2014, the CD&R Funds completed a registered underwritten offering, in which the CD&R Funds offered
8.5 million
shares of Common Stock at a price to the public of
$18.00
per share (the “2014 Secondary Offering”). The underwriters also exercised their option to purchase
1.275 million
additional shares of Common Stock. The aggregate offering price for the
9.775 million
shares sold in the 2014 Secondary Offering was approximately
$167.6 million
, net of underwriting discounts and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
commissions. The CD&R Funds received all of the proceeds from the 2014 Secondary Offering and
no
shares in the 2014 Secondary Offering were sold by NCI or any of its officers or directors (although certain of our directors are affiliated with the CD&R Funds).
On January 6, 2014, the Company entered into an agreement with the CD&R Funds to repurchase
1.15 million
shares of its Common Stock at a price per share equal to the price per share paid by the underwriters to the CD&R Funds in the underwritten offering (the “2014 Stock Repurchase”). The 2014 Stock Repurchase, which was completed at the same time as the 2014 Secondary Offering, represented a private, non-underwritten transaction between NCI and the CD&R Funds that was approved and recommended by the Affiliate Transactions Committee of our board of directors. Following completion of the 2014 Stock Repurchase, NCI canceled the shares repurchased from the CD&R Funds, resulting in a
$19.7 million
decrease in both additional paid-in capital and treasury stock during the fiscal year ended November 2, 2014.
On July 25, 2016, the CD&R Funds completed a registered underwritten offering, in which the CD&R Funds offered
9.0 million
shares of our Common Stock at a price to the public of
$16.15
per share (the “2016 Secondary Offering”). The underwriters also exercised their option to purchase
1.35 million
additional shares of our Common Stock from the CD&R Funds. The aggregate offering price for the
10.35 million
shares sold in the 2016 Secondary Offering was approximately
$160.1 million
, net of underwriting discounts and commissions. The CD&R Funds received all of the proceeds from the 2016 Secondary Offering and no shares in the 2016 Secondary Offering were sold by the Company or any of its officers or directors (although certain of our directors are affiliated with the CD&R Funds). In connection with the 2016 Secondary Offering and the 2016 Stock Repurchase (as defined below), we incurred approximately
$0.7 million
in expenses, which were included in engineering, selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended October 30, 2016.
On July 18, 2016, the Company entered into an agreement with the CD&R Funds to repurchase approximately
2.9 million
shares of our Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Funds in the underwritten offering (the “2016 Stock Repurchase”). The 2016 Stock Repurchase, which was completed concurrently with the 2016 Secondary Offering, represented a private, non-underwritten transaction between the Company and the CD&R Funds that was approved and recommended by the Affiliate Transactions Committee of our board of directors. See Note
18
— Stock Repurchase Program.
At
October 29, 2017
and
October 30, 2016
, the CD&R Funds owned approximately
43.8%
and
42.3%
, respectively, of the outstanding shares of our Common Stock.
13. RELATED PARTIES
Pursuant to the Investment Agreement and the Stockholders Agreement, the CD&R Funds have the right to designate a number of directors to NCI’s board of directors that is equivalent to the CD&R Funds’ percentage interest in the Company. Among other directors appointed by the CD&R Funds, our board of directors appointed to the board of directors James G. Berges, Nathan K. Sleeper and Jonathan L. Zrebiec. Messrs. Berges, Sleeper and Zrebiec are partners of Clayton, Dubilier & Rice, LLC, (“CD&R, LLC”), an affiliate of the CD&R Funds.
As a result of their respective positions with CD&R, LLC and its affiliates, one or more of Messrs. Berges, Sleeper and Zrebiec may be deemed to have an indirect material interest in certain agreements executed in connection with the Equity Investment. Messrs. Berges, Sleeper and Zrebiec may be deemed to have an indirect material interest in the following agreements:
|
|
•
|
the Investment Agreement, pursuant to which the CD&R Funds acquired a
68.4%
interest in the Company, CD&R Fund VIII’s transaction expenses were reimbursed and a deal fee of
$8.25 million
was paid to CD&R, Inc., the predecessor to the investment management business of CD&R, LLC, on October 20, 2009;
|
|
|
•
|
the Stockholders Agreement, which sets forth certain terms and conditions regarding the Equity Investment and on certain actions of the CD&R Funds and their controlled affiliates with respect to the Company, and to provide for, among other things, subscription rights, corporate governance rights and consent rights as well as other obligations and rights;
|
|
|
•
|
a Registration Rights Agreement, dated as of October 20, 2009 (the “Registration Rights Agreement”), between the Company and the CD&R Funds, pursuant to which the Company granted to the CD&R Funds, together with any other stockholder of the Company that may become a party to the Registration Rights Agreement in accordance with its terms, certain customary registration rights with respect to the shares of our Common Stock held by the CD&R Funds; and
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
|
|
•
|
an Indemnification Agreement, dated as of October 20, 2009 between the Company, NCI Group, Inc., a wholly owned subsidiary of the Company, Robertson-Ceco II Corporation, a wholly owned subsidiary of the Company, the CD&R Funds and CD&R, Inc., pursuant to which the Company, NCI Group, Inc. and Robertson-Ceco II Corporation agreed to indemnify CD&R, Inc., the CD&R Funds and their general partners, the special limited partner of CD&R Fund VIII and any other investment vehicle that is a stockholder of the Company and is managed by CD&R, Inc. or any of its affiliates, their respective affiliates and successors and assigns and the respective directors, officers, partners, members, employees, agents, representatives and controlling persons of each of them, or of their respective partners, members and controlling persons, against certain liabilities arising out of the Equity Investment and transactions in connection with the Equity Investment, including, but not limited to, the Credit Agreement, the Amended ABL Facility, the Exchange Offer, and certain other liabilities and claims.
|
14
. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of
October 29, 2017
and
October 30, 2016
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 year ends were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Credit agreement, due June 2022
|
$
|
144,147
|
|
|
$
|
144,147
|
|
|
$
|
154,147
|
|
|
$
|
154,147
|
|
8.25% senior notes, due January 2023
|
$
|
250,000
|
|
|
$
|
267,500
|
|
|
$
|
250,000
|
|
|
$
|
272,500
|
|
The fair values of the Credit Agreement and the Notes were based on recent trading activities of comparable market instruments, which are level 2 inputs.
Fair Value Measurements
ASC Subtopic 820-10,
Fair Value Measurements and Disclosures
, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3:
Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at
October 29, 2017
and
October 30, 2016
.
Money market:
Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds:
Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
Assets held for sale:
Assets held for sale are valued based on current market conditions, prices of similar assets in similar condition and expected proceeds from the sale of the assets.
Deferred compensation plan liability
: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of
October 29, 2017
and
October 30, 2016
, segregated by level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
October 29, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan
(1)
:
|
|
|
|
|
|
|
|
Money market
|
$
|
1,114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,114
|
|
Mutual funds – Growth
|
958
|
|
|
—
|
|
|
—
|
|
|
958
|
|
Mutual funds – Blend
|
1,948
|
|
|
—
|
|
|
—
|
|
|
1,948
|
|
Mutual funds – Foreign blend
|
915
|
|
|
—
|
|
|
—
|
|
|
915
|
|
Mutual funds – Fixed income
|
—
|
|
|
1,546
|
|
|
—
|
|
|
1,546
|
|
Total short-term investments in deferred compensation plan
|
4,935
|
|
|
1,546
|
|
|
—
|
|
|
6,481
|
|
Total assets
|
$
|
4,935
|
|
|
$
|
1,546
|
|
|
$
|
—
|
|
|
$
|
6,481
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liability
|
$
|
—
|
|
|
$
|
4,923
|
|
|
$
|
—
|
|
|
$
|
4,923
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
4,923
|
|
|
$
|
—
|
|
|
$
|
4,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
October 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan
(1)
:
|
|
|
|
|
|
|
|
Money market
|
$
|
422
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
422
|
|
Mutual funds – Growth
|
773
|
|
|
—
|
|
|
—
|
|
|
773
|
|
Mutual funds – Blend
|
3,118
|
|
|
—
|
|
|
—
|
|
|
3,118
|
|
Mutual funds – Foreign blend
|
730
|
|
|
—
|
|
|
—
|
|
|
730
|
|
Mutual funds – Fixed income
|
—
|
|
|
705
|
|
|
—
|
|
|
705
|
|
Total short-term investments in deferred compensation plan
|
5,043
|
|
|
705
|
|
|
—
|
|
|
5,748
|
|
Total assets
|
$
|
5,043
|
|
|
$
|
705
|
|
|
$
|
—
|
|
|
$
|
5,748
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liability
|
$
|
—
|
|
|
$
|
3,847
|
|
|
$
|
—
|
|
|
$
|
3,847
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3,847
|
|
|
$
|
—
|
|
|
$
|
3,847
|
|
|
|
(1)
|
The unrealized holding gain (loss) was insignificant for fiscal years ended
October 29, 2017
and
October 30, 2016
.
|
15. INCOME TAXES
Income tax expense is based on pretax financial accounting income. Deferred income taxes are recognized for the temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts for income tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The income tax provision for the fiscal years ended
2017
,
2016
and
2015
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
23,885
|
|
|
$
|
22,602
|
|
|
$
|
12,366
|
|
State
|
3,218
|
|
|
3,179
|
|
|
336
|
|
Foreign
|
445
|
|
|
838
|
|
|
1,638
|
|
Total current
|
27,548
|
|
|
26,619
|
|
|
14,340
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(358
|
)
|
|
105
|
|
|
(5,193
|
)
|
State
|
769
|
|
|
1,380
|
|
|
91
|
|
Foreign
|
455
|
|
|
(167
|
)
|
|
(266
|
)
|
Total deferred
|
866
|
|
|
1,318
|
|
|
(5,368
|
)
|
Total provision
|
$
|
28,414
|
|
|
$
|
27,937
|
|
|
$
|
8,972
|
|
The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes
|
3.2
|
%
|
|
3.8
|
%
|
|
1.6
|
%
|
Production activities deduction
|
(3.1
|
)%
|
|
(3.4
|
)%
|
|
(6.4
|
)%
|
Non-deductible expenses
|
0.9
|
%
|
|
1.3
|
%
|
|
4.1
|
%
|
Other
|
(1.8
|
)%
|
|
(1.3
|
)%
|
|
(0.8
|
)%
|
Effective tax rate
|
34.2
|
%
|
|
35.4
|
%
|
|
33.5
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Deferred income taxes reflect the net impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of the temporary differences for fiscal
2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Deferred tax assets:
|
|
|
|
Inventory obsolescence
|
$
|
2,680
|
|
|
$
|
2,195
|
|
Bad debt reserve
|
1,686
|
|
|
1,094
|
|
Accrued and deferred compensation
|
16,003
|
|
|
22,339
|
|
Accrued insurance reserves
|
1,816
|
|
|
2,054
|
|
Deferred revenue
|
10,260
|
|
|
10,440
|
|
Net operating loss and tax credit carryover
|
3,686
|
|
|
4,301
|
|
Depreciation and amortization
|
434
|
|
|
473
|
|
Pension
|
6,510
|
|
|
6,568
|
|
Other reserves
|
716
|
|
|
502
|
|
Total deferred tax assets
|
43,791
|
|
|
49,966
|
|
Less valuation allowance
|
—
|
|
|
(210
|
)
|
Net deferred tax assets
|
43,791
|
|
|
49,756
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
(42,632
|
)
|
|
(44,292
|
)
|
U.S. tax on unremitted foreign earnings
|
(1,107
|
)
|
|
(1,107
|
)
|
Other
|
(1,805
|
)
|
|
(58
|
)
|
Total deferred tax liabilities
|
(45,544
|
)
|
|
(45,457
|
)
|
Total deferred tax (liability) asset, net
|
$
|
(1,753
|
)
|
|
$
|
4,299
|
|
We carry out our business operations through legal entities in the U.S., Canada, Mexico and China. These operations require that we file corporate income tax returns that are subject to U.S., state and foreign tax laws. We are subject to income tax audits in these multiple jurisdictions.
As of
October 29, 2017
, the
$3.6 million
net operating loss and tax credit carryforward included
$0.5 million
for U.S. state loss carryforwards. The state net operating loss carryforwards will expire in
2018
to
2028
, if unused. As of
October 29, 2017
, our foreign operations have a net operating loss carryforward of approximately
$11.6 million
, representing
$3.1 million
of the
$3.6 million
deferred tax asset related to net operating loss and tax credit carryovers, that will start to expire in fiscal
2026
, if unused.
The following table represents the rollforward of the valuation allowance on deferred taxes activity for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Beginning balance
|
$
|
210
|
|
|
$
|
115
|
|
|
$
|
—
|
|
(Reductions) additions
|
(210
|
)
|
|
95
|
|
|
115
|
|
Ending balance
|
$
|
—
|
|
|
$
|
210
|
|
|
$
|
115
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Uncertain tax positions
There were
no
unrecognized tax benefits at
October 29, 2017
and
October 30, 2016
. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
The following table summarizes the activity related to the Company’s unrecognized tax benefits during fiscal
2016
(in thousands):
|
|
|
|
|
|
|
|
October 30,
2016
|
Unrecognized tax benefits at beginning of year
|
|
$
|
143
|
|
Reductions resulting from expiration of statute of limitations
|
|
(143
|
)
|
Unrecognized tax benefits at end of year
|
|
$
|
—
|
|
We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We did not have any accrued interest and penalties related to uncertain tax positions as of
October 29, 2017
.
We file income tax returns in the U.S. federal jurisdiction and multiple state and foreign jurisdictions. Our tax years are closed with the IRS through the year ended October 28, 2013, as the statute of limitations related to these tax years has closed. In addition, open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material.
16. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Foreign exchange translation adjustments
|
$
|
3
|
|
|
$
|
(195
|
)
|
Defined benefit pension plan actuarial losses, net of tax
|
(7,534
|
)
|
|
(10,358
|
)
|
Accumulated other comprehensive loss
|
$
|
(7,531
|
)
|
|
$
|
(10,553
|
)
|
17. OPERATING LEASE COMMITMENTS
We have operating lease commitments expiring at various dates, principally for real estate, office space, office equipment and transportation equipment. Certain of these operating leases have purchase options that entitle us to purchase the respective equipment at fair value at the end of the lease. In addition, many of our leases contain renewal options at rates similar to the current arrangements. As of
October 29, 2017
, future minimum rental payments related to noncancellable operating leases are as follows (in thousands):
|
|
|
|
|
2018
|
$
|
12,690
|
|
2019
|
7,653
|
|
2020
|
5,794
|
|
2021
|
4,212
|
|
2022
|
3,241
|
|
Thereafter
|
10,330
|
|
Rental expense incurred from operating leases, including leases with terms of less than one year, for
2017
,
2016
and
2015
was
$19.4 million
,
$17.8 million
and
$15.2 million
, respectively.
18
. STOCK REPURCHASE PROGRAM
Our board of directors authorized
two
stock repurchase programs during the fiscal year ended October 30, 2016, which were publicly announced on January 20, 2016 and September 8, 2016. Together, these stock repurchase programs authorized for up to an aggregate of
$106.3 million
of the Company’s Common Stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
On July 18, 2016, the Company entered into an agreement with the CD&R Funds to repurchase approximately
2.9 million
shares of our Common Stock for
$45.0 million
based on the price per share paid by the underwriters to the CD&R Funds in the 2016 Secondary Offering. The 2016 Stock Repurchase (as defined in Item 1.
Business)
represented a private, non-underwritten transaction between the Company and the CD&R Funds that was approved and recommended by the Affiliate Transactions Committee of our board of directors. The closing of the 2016 Stock Repurchase occurred on July 25, 2016 concurrently with the closing of the 2016 Secondary Offering. The 2016 Stock Repurchase was funded by the Company’s cash on hand.
On October 10, 2017, the Company announced that that its board of directors authorized a new stock repurchase program for up to an aggregate of
$50.0 million
of the Company’s Common Stock.
In addition to the 2016 Stock Repurchase, the Company repurchased
1.6 million
shares of its Common Stock for
$17.9 million
during fiscal 2016 and
2.8 million
shares of its Common Stock for
$41.2 million
during fiscal 2017 through open-market purchases under the authorized stock repurchase programs. As of October 29, 2017, approximately
$52.2 million
remains available for stock repurchases under the programs authorized in September 2016 and October 2017. The authorized programs have no time limit on their duration, but our Credit Agreement, Amended ABL Facility, and Notes apply certain limitations on our repurchase of shares of our Common Stock. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
In addition to the Common Stock repurchases, the Company also withheld shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock units, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
The Company canceled
4.0 million
of the total shares repurchased during fiscal 2016 as well as
0.4 million
shares repurchased in prior fiscal years that had been held in treasury stock, resulting in a
$62.3 million
decrease in both additional paid in capital and treasury stock during the fiscal year ended October 30, 2016. During the fiscal year ended October 29, 2017, the Company canceled
3.0 million
of the total shares repurchased during fiscal 2017 as well as
0.4 million
shares repurchased in the prior fiscal year that had been held in treasury stock, resulting in a
$50.6 million
decrease in both additional paid in capital and treasury stock. Changes in treasury stock, at cost, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Amount
|
Balance, November 2, 2014
|
239
|
|
|
$
|
4,203
|
|
Purchases
|
208
|
|
|
3,320
|
|
Balance, November 1, 2015
|
447
|
|
|
$
|
7,523
|
|
Purchases
|
4,590
|
|
|
64,015
|
|
Issuance of restricted stock
|
162
|
|
|
—
|
|
Retirements
|
(4,424
|
)
|
|
(62,279
|
)
|
Balance, October 30, 2016
|
775
|
|
|
$
|
9,259
|
|
Purchases
|
2,958
|
|
|
43,603
|
|
Issuance of restricted stock
|
20
|
|
|
—
|
|
Retirements
|
(3,444
|
)
|
|
(50,587
|
)
|
Deferred compensation obligation
|
(18
|
)
|
|
(135
|
)
|
Balance, October 29, 2017
|
291
|
|
|
$
|
2,140
|
|
19. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
— We have a 401(k) profit sharing plan (the “Savings Plan”) that allows participation for all eligible employees. The Savings Plan allows us to match between
50%
and
100%
of the participant’s contributions up to
6%
of a participant’s pre-tax deferrals, based on a calculation of the Company’s annual return-on-assets. Contributions expense for the fiscal years ended
October 29, 2017
,
October 30, 2016
and
November 1, 2015
was
$6.1 million
,
$5.7 million
and
$5.1 million
, respectively, for matching contributions to the Savings Plan.
Deferred Compensation Plan
— We have an Amended and Restated Deferred Compensation Plan (as amended and restated, the “Deferred Compensation Plan”) that allows our officers and key employees to defer up to
80%
of their annual salary and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
up to
90%
of their bonus on a pre-tax basis until a specified date in the future, including at or after retirement. Additionally, the Deferred Compensation Plan allows our directors to defer up to
100%
of their annual fees and meeting attendance fees until a specified date in the future, including at or after retirement. The Deferred Compensation Plan also permits us to make contributions on behalf of our key employees who are impacted by the federal tax compensation limits under the NCI 401(k) plan, and to receive a restoration matching amount which, under the current NCI 401(k) terms, mirrors our 401(k) profit sharing plan matching levels based on our Company’s performance. The Deferred Compensation Plan provides for us to make discretionary contributions to employees who have elected to defer compensation under the plan. Deferred Compensation Plan participants will vest in our discretionary contributions ratably over
three
years from the date of each of our discretionary contributions.
On February 26, 2016, the Company amended its Deferred Compensation Plan, with an effective date of January 31, 2016, to require that amounts deferred into the Company Stock Fund remain invested in the Company Stock Fund until distribution. In accordance with the terms of the Deferred Compensation Plan, the deferred compensation obligation related to the Company’s stock may only be settled by the delivery of a fixed number of the Company’s common shares held on the participant’s behalf. The deferred compensation obligation related to the Company Stock Fund recorded within equity in additional paid-in capital on the consolidated balance sheet was
$1.3 million
and
$1.4 million
as of
October 29, 2017
and
October 30, 2016
, respectively. Subsequent changes in the fair value of the deferred compensation obligation classified within equity are not recognized. Additionally, the Company currently holds
291,128
shares in treasury shares, relating to deferred, vested awards, until participants are eligible to receive benefits under the terms of the Deferred Compensation Plan.
As of
October 29, 2017
and
October 30, 2016
, the liability balance of the Deferred Compensation Plan was
$4.9 million
and
$3.8 million
, respectively, and was included in accrued compensation and benefits on the consolidated balance sheets. We have not made any discretionary contributions to the Deferred Compensation Plan.
A rabbi trust is used to fund the Deferred Compensation Plan and an administrative committee manages the Deferred Compensation Plan and its assets. The investments in the rabbi trust were
$6.5 million
and
$5.7 million
as of
October 29, 2017
and
October 30, 2016
, respectively. The rabbi trust investments include debt and equity securities as well as cash equivalents and are accounted for as trading securities.
Defined Benefit Plans
— With the acquisition of RCC on April 7, 2006, we assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds, fixed income securities, master limited partnerships and hedge funds. In accordance with ASC Topic 805, we quantified the projected benefit obligation and fair value of the plan assets of the RCC Pension Plan and recorded the difference between these two amounts as an assumed liability.
As a result of the CENTRIA Acquisition on January 16, 2015, we assumed noncontributory defined benefit plans covering certain hourly employees (the “CENTRIA Benefit Plans”). Benefits under the CENTRIA Benefit Plans are calculated based on fixed amounts for each year of service rendered. CENTRIA also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”). The contributions to the OPEB Plans by retirees vary from
none
to
25%
of the total premiums paid. Plan assets of the CENTRIA Benefit Plans are invested in broadly diversified portfolios of equity mutual funds, international equity mutual funds, bonds, mortgages and other funds. Currently, our policy is to fund the CENTRIA Benefit Plans as required by minimum funding standards of the Internal Revenue Code. In accordance with ASC Topic 805, we remeasured the projected benefit obligation and fair value of the plan assets of the CENTRIA Benefits Plans and OPEB Plans. The difference between the two amounts was recorded as an assumed liability.
In addition to the CENTRIA Benefit Plans, CENTRIA contributes to a multi-employer plan, the Steelworkers Pension Trust. The minimum required annual contribution to this plan is
$0.3 million
. The current contract expires on June 1, 2019. If we were to withdraw our participation from this multi-employer plan, CENTRIA may be required to pay a withdrawal liability representing an amount based on the underfunded status of the plan. The plan is not significant to the Company’s consolidated financial statements.
We refer to the RCC Pension Plan and the CENTRIA Benefit Plans collectively as the “Defined Benefit Plans” in this Note.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Assumptions
—Weighted average actuarial assumptions used to determine benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
Discount rate
|
3.64
|
%
|
|
3.40
|
%
|
|
3.64
|
%
|
|
3.25
|
%
|
Weighted average actuarial assumptions used to determine net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
Discount rate
|
3.64
|
%
|
|
3.25
|
%
|
|
4.18
|
%
|
|
3.75
|
%
|
Expected return on plan assets
|
6.18
|
%
|
|
n/a
|
|
|
6.16
|
%
|
|
n/a
|
|
Health care cost trend rate-initial
|
n/a
|
|
|
7.00
|
%
|
|
n/a
|
|
|
9.00
|
%
|
Health care cost trend rate-ultimate
|
n/a
|
|
|
5.00
|
%
|
|
n/a
|
|
|
5.00
|
%
|
The basis used to determine the overall expected long-term asset return assumption for the Defined Benefit Plans for fiscal 2016 was a 10-year forecast of expected return based on the target asset allocation for the plans. The weighted average expected return for the portfolio over the forecast period is
6.18%
, net of investment related expenses, and taking into consideration historical experience, anticipated asset allocations, investment strategies and the views of various investment professionals.
The health care cost trend rate for the OPEB Plans was assumed at
6.5%
beginning in fiscal
2018
,
6.0%
for years 2019 to 2024,
5.5%
for years 2025 to 2035,
5.0%
for years 2036 to 2051 and approximately
4.0%
per year thereafter.
Funded status
—The changes in the projected benefit obligation, plan assets and funded status, and the amounts recognized on our consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Change in projected benefit obligation
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
Accumulated benefit obligation
|
$
|
56,378
|
|
|
$
|
7,698
|
|
|
$
|
64,076
|
|
|
$
|
58,551
|
|
|
$
|
8,347
|
|
|
$
|
66,898
|
|
Projected benefit obligation – beginning of fiscal year
|
$
|
58,551
|
|
|
$
|
8,347
|
|
|
$
|
66,898
|
|
|
$
|
58,403
|
|
|
$
|
7,590
|
|
|
$
|
65,993
|
|
Interest cost
|
2,055
|
|
|
257
|
|
|
2,312
|
|
|
2,354
|
|
|
261
|
|
|
2,615
|
|
Service cost
|
97
|
|
|
36
|
|
|
133
|
|
|
137
|
|
|
34
|
|
|
171
|
|
Benefit payments
|
(3,681
|
)
|
|
(546
|
)
|
|
(4,227
|
)
|
|
(3,708
|
)
|
|
(450
|
)
|
|
(4,158
|
)
|
Plan amendments
|
275
|
|
|
—
|
|
|
275
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial (gains) losses
|
(919
|
)
|
|
(396
|
)
|
|
(1,315
|
)
|
|
1,365
|
|
|
912
|
|
|
2,277
|
|
Projected benefit obligation – end of fiscal year
|
$
|
56,378
|
|
|
$
|
7,698
|
|
|
$
|
64,076
|
|
|
$
|
58,551
|
|
|
$
|
8,347
|
|
|
$
|
66,898
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Change in plan assets
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
Fair value of assets – beginning of fiscal year
|
$
|
46,160
|
|
|
$
|
—
|
|
|
$
|
46,160
|
|
|
$
|
47,295
|
|
|
$
|
—
|
|
|
$
|
47,295
|
|
Actual return on plan assets
|
5,022
|
|
|
—
|
|
|
5,022
|
|
|
883
|
|
|
—
|
|
|
883
|
|
Company contributions
|
2,044
|
|
|
546
|
|
|
2,590
|
|
|
1,690
|
|
|
450
|
|
|
2,140
|
|
Benefit payments
|
(3,681
|
)
|
|
(546
|
)
|
|
(4,227
|
)
|
|
(3,708
|
)
|
|
(450
|
)
|
|
(4,158
|
)
|
Fair value of assets – end of fiscal year
|
$
|
49,545
|
|
|
$
|
—
|
|
|
$
|
49,545
|
|
|
$
|
46,160
|
|
|
$
|
—
|
|
|
$
|
46,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Funded status
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
Fair value of assets
|
$
|
49,545
|
|
|
$
|
—
|
|
|
$
|
49,545
|
|
|
$
|
46,160
|
|
|
$
|
—
|
|
|
$
|
46,160
|
|
Benefit obligation
|
56,378
|
|
|
7,698
|
|
|
64,076
|
|
|
58,551
|
|
|
8,347
|
|
|
66,898
|
|
Funded status
|
$
|
(6,833
|
)
|
|
$
|
(7,698
|
)
|
|
$
|
(14,531
|
)
|
|
$
|
(12,391
|
)
|
|
$
|
(8,347
|
)
|
|
$
|
(20,738
|
)
|
Benefit obligations in excess of fair value of assets of
$14.5 million
and
$20.7 million
as of
October 29, 2017
and
October 30, 2016
, respectively, are included in other long-term liabilities on the consolidated balance sheets.
Plan assets
—The investment policy is to maximize the expected return for an acceptable level of risk. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels.
As of
October 29, 2017
and
October 30, 2016
, the weighted average asset allocations by asset category for the Defined Benefit Plans were as follows (in thousands):
|
|
|
|
|
|
|
Investment type
|
October 29,
2017
|
|
October 30,
2016
|
Equity securities
|
58
|
%
|
|
45
|
%
|
Debt securities
|
35
|
%
|
|
37
|
%
|
Master limited partnerships
|
3
|
%
|
|
4
|
%
|
Cash and cash equivalents
|
1
|
%
|
|
5
|
%
|
Real estate
|
2
|
%
|
|
5
|
%
|
Other
|
1
|
%
|
|
4
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
The principal investment objectives are to ensure the availability of funds to pay pension and postretirement benefits as they become due under a broad range of future economic scenarios, to maximize long-term investment return with an acceptable level of risk based on our pension and postretirement obligations, and to be sufficiently diversified across and within the capital markets to mitigate the risk of adverse or unexpected results from one security class will not have an unduly detrimental. Each asset class has broadly diversified characteristics. Decisions regarding investment policy are made with an understanding of the effect of asset allocation on funded status, future contributions and projected expenses.
The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. We regularly review our actual asset allocation and the investments are periodically rebalanced to our target allocation when considered appropriate. We have set the target asset allocation for the RCC Pension Plan as follows:
45%
US bonds,
17%
large cap US equities,
13%
foreign equity,
5%
master limited partnerships,
2%
commodity futures,
4%
real estate investment trusts,
8%
emerging markets and
6%
small cap US equities. The CENTRIA Benefit Plans have a target asset allocation of approximately
50%
-
80%
equities and
20%
-
50%
fixed income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The fair values of the assets of the Defined Benefit Plans at
October 29, 2017
and
October 30, 2016
, by asset category and by levels of fair value, as further defined in Note
14
— Fair Value of Financial Instruments and Fair Value Measurements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Asset category
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash
|
$
|
463
|
|
|
$
|
—
|
|
|
$
|
463
|
|
|
$
|
2,186
|
|
|
$
|
—
|
|
|
$
|
2,186
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Growth funds
|
7,262
|
|
|
—
|
|
|
7,262
|
|
|
5,705
|
|
|
—
|
|
|
5,705
|
|
Real estate funds
|
1,236
|
|
|
—
|
|
|
1,236
|
|
|
2,245
|
|
|
—
|
|
|
2,245
|
|
Commodity linked funds
|
544
|
|
|
—
|
|
|
544
|
|
|
1,780
|
|
|
—
|
|
|
1,780
|
|
Equity income funds
|
4,767
|
|
|
—
|
|
|
4,767
|
|
|
3,700
|
|
|
—
|
|
|
3,700
|
|
Index funds
|
2,763
|
|
|
110
|
|
|
2,873
|
|
|
2,156
|
|
|
54
|
|
|
2,210
|
|
International equity funds
|
260
|
|
|
1,726
|
|
|
1,986
|
|
|
225
|
|
|
1,271
|
|
|
1,496
|
|
Fixed income funds
|
1,723
|
|
|
1,739
|
|
|
3,462
|
|
|
1,577
|
|
|
2,095
|
|
|
3,672
|
|
Master limited partnerships
|
1,506
|
|
|
—
|
|
|
1,506
|
|
|
2,033
|
|
|
—
|
|
|
2,033
|
|
Government securities
|
—
|
|
|
6,400
|
|
|
6,400
|
|
|
—
|
|
|
5,955
|
|
|
5,955
|
|
Corporate bonds
|
—
|
|
|
7,301
|
|
|
7,301
|
|
|
—
|
|
|
7,315
|
|
|
7,315
|
|
Common/collective trusts
|
—
|
|
|
11,745
|
|
|
11,745
|
|
|
—
|
|
|
7,863
|
|
|
7,863
|
|
Total
|
$
|
20,524
|
|
|
$
|
29,021
|
|
|
$
|
49,545
|
|
|
$
|
21,607
|
|
|
$
|
24,553
|
|
|
$
|
46,160
|
|
Net periodic benefit cost (income)
—The components of the net periodic benefit cost (income) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
Interest cost
|
$
|
2,055
|
|
|
$
|
257
|
|
|
$
|
2,354
|
|
|
$
|
261
|
|
|
$
|
2,382
|
|
|
$
|
218
|
|
Service cost
|
97
|
|
|
36
|
|
|
137
|
|
|
34
|
|
|
115
|
|
|
22
|
|
Expected return on assets
|
(2,798
|
)
|
|
—
|
|
|
(2,979
|
)
|
|
—
|
|
|
(3,045
|
)
|
|
—
|
|
Amortization of prior service credit
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
Amortization of net actuarial loss
|
1,374
|
|
|
—
|
|
|
1,170
|
|
|
—
|
|
|
1,443
|
|
|
—
|
|
Net periodic benefit cost (income)
|
$
|
719
|
|
|
$
|
293
|
|
|
$
|
673
|
|
|
$
|
295
|
|
|
$
|
886
|
|
|
$
|
240
|
|
The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
Unrecognized net actuarial loss (gain)
|
$
|
11,468
|
|
|
$
|
375
|
|
|
$
|
11,843
|
|
|
$
|
15,985
|
|
|
$
|
771
|
|
|
$
|
16,756
|
|
Unrecognized prior service credit
|
252
|
|
|
—
|
|
|
252
|
|
|
(33
|
)
|
|
—
|
|
|
(33
|
)
|
Total
|
$
|
11,720
|
|
|
$
|
375
|
|
|
$
|
12,095
|
|
|
$
|
15,952
|
|
|
$
|
771
|
|
|
$
|
16,723
|
|
Unrecognized actuarial losses (gains), net of income tax, of
$(2.8) million
and
$1.9 million
during fiscal
2017
and
2016
, respectively, are included in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The changes in plan assets and benefit obligation recognized in other comprehensive income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
Net actuarial gain (loss)
|
$
|
3,144
|
|
|
$
|
396
|
|
|
$
|
(3,443
|
)
|
|
$
|
(911
|
)
|
|
$
|
(834
|
)
|
|
$
|
140
|
|
Amortization of net actuarial loss
|
1,374
|
|
|
—
|
|
|
1,170
|
|
|
—
|
|
|
1,443
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
New prior service cost
|
(276
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive income (loss)
|
$
|
4,233
|
|
|
$
|
396
|
|
|
$
|
(2,282
|
)
|
|
$
|
(911
|
)
|
|
$
|
600
|
|
|
$
|
140
|
|
The estimated amortization for the next fiscal year for amounts reclassified from accumulated other comprehensive income into the consolidated income statement is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
Amortization of prior service credit
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
123
|
|
Amortization of net actuarial loss
|
991
|
|
|
—
|
|
|
991
|
|
Total estimated amortization
|
$
|
1,114
|
|
|
$
|
—
|
|
|
$
|
1,114
|
|
Actuarial gains and losses are amortized using the corridor method based on
10%
of the greater of the projected benefit obligation or the market related value of assets over the average remaining service period of active employees.
We expect to contribute
$2.6 million
to the Defined Benefit Plans in fiscal
2018
. We expect the following benefit payments to be made (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ending
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Total
|
2018
|
$
|
4,136
|
|
|
$
|
784
|
|
|
$
|
4,920
|
|
2019
|
4,124
|
|
|
785
|
|
|
4,909
|
|
2020
|
4,022
|
|
|
730
|
|
|
4,752
|
|
2021
|
3,991
|
|
|
652
|
|
|
4,643
|
|
2022
|
3,934
|
|
|
540
|
|
|
4,474
|
|
2023 - 2027
|
18,607
|
|
|
2,031
|
|
|
20,638
|
|
20
. OPERATING SEGMENTS
Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have
three
operating segments: engineered building systems; metal components; and metal coil coating. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Products of our operating segments use similar basic raw materials. The 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 metal 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
coating products or services. The operating segments follow the same accounting policies used for our consolidated financial statements.
We evaluate a segment’s performance based primarily upon operating income before corporate expenses. Intersegment sales are recorded based on standard material costs plus a standard markup to cover labor and overhead and consist of (i) 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.
Corporate assets consist primarily of cash but also include deferred financing costs, deferred taxes and property, plant and equipment associated with our headquarters in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology, purchasing, marketing and corporate travel expenses. Additional unallocated amounts include interest income, interest expense and other (expense) income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The following table represents summary financial data attributable to these operating segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Total sales:
|
|
|
|
|
|
Engineered Building Systems
|
$
|
693,980
|
|
|
$
|
672,235
|
|
|
$
|
667,166
|
|
Metal Components
|
1,129,816
|
|
|
1,044,040
|
|
|
920,845
|
|
Metal Coil Coating
|
271,085
|
|
|
247,736
|
|
|
231,732
|
|
Intersegment sales
|
(324,603
|
)
|
|
(279,083
|
)
|
|
(256,050
|
)
|
Total net sales
|
$
|
1,770,278
|
|
|
$
|
1,684,928
|
|
|
$
|
1,563,693
|
|
External sales:
|
|
|
|
|
|
|
|
|
Engineered Building Systems
|
$
|
659,863
|
|
|
$
|
652,471
|
|
|
$
|
647,881
|
|
Metal Components
|
998,279
|
|
|
925,863
|
|
|
815,310
|
|
Metal Coil Coating
|
112,136
|
|
|
106,594
|
|
|
100,502
|
|
Total net sales
|
$
|
1,770,278
|
|
|
$
|
1,684,928
|
|
|
$
|
1,563,693
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Engineered Building Systems
|
$
|
41,388
|
|
|
$
|
62,046
|
|
|
$
|
51,410
|
|
Metal Components
|
124,224
|
|
|
102,495
|
|
|
50,541
|
|
Metal Coil Coating
|
23,935
|
|
|
25,289
|
|
|
19,080
|
|
Corporate
|
(79,767
|
)
|
|
(81,051
|
)
|
|
(64,200
|
)
|
Total operating income
|
$
|
109,780
|
|
|
$
|
108,779
|
|
|
$
|
56,831
|
|
Unallocated other expense
|
(26,642
|
)
|
|
(29,815
|
)
|
|
(30,041
|
)
|
Income before income taxes
|
$
|
83,138
|
|
|
$
|
78,964
|
|
|
$
|
26,790
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Engineered Building Systems
|
$
|
9,014
|
|
|
$
|
9,767
|
|
|
$
|
10,224
|
|
Metal Components
|
26,717
|
|
|
26,416
|
|
|
35,713
|
|
Metal Coil Coating
|
4,757
|
|
|
4,674
|
|
|
4,401
|
|
Corporate
|
830
|
|
|
1,067
|
|
|
1,054
|
|
Total depreciation and amortization expense
|
$
|
41,318
|
|
|
$
|
41,924
|
|
|
$
|
51,392
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Capital expenditures:
|
|
|
|
|
|
Engineered Building Systems
|
$
|
5,533
|
|
|
$
|
7,571
|
|
|
$
|
6,053
|
|
Metal Components
|
11,978
|
|
|
9,133
|
|
|
9,145
|
|
Metal Coil Coating
|
2,837
|
|
|
1,805
|
|
|
3,279
|
|
Corporate
|
1,726
|
|
|
2,515
|
|
|
2,206
|
|
Total capital expenditures
|
$
|
22,074
|
|
|
$
|
21,024
|
|
|
$
|
20,683
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
Engineered Building Systems
|
$
|
46,620
|
|
|
$
|
50,862
|
|
|
$
|
51,196
|
|
Metal Components
|
132,985
|
|
|
141,282
|
|
|
152,346
|
|
Metal Coil Coating
|
37,739
|
|
|
39,678
|
|
|
42,558
|
|
Corporate
|
9,651
|
|
|
10,390
|
|
|
11,792
|
|
Total property, plant and equipment, net
|
$
|
226,995
|
|
|
$
|
242,212
|
|
|
$
|
257,892
|
|
Total assets:
|
|
|
|
|
|
Engineered Building Systems
|
$
|
232,089
|
|
|
$
|
229,422
|
|
|
$
|
218,646
|
|
Metal Components
|
657,729
|
|
|
654,534
|
|
|
654,762
|
|
Metal Coil Coating
|
82,897
|
|
|
87,194
|
|
|
81,456
|
|
Corporate
|
78,458
|
|
|
79,050
|
|
|
115,260
|
|
|
$
|
1,051,173
|
|
|
$
|
1,050,200
|
|
|
$
|
1,070,124
|
|
The following table represents summary financial data attributable to various geographic regions for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
|
November 1,
2015
|
Total sales:
|
|
|
|
|
|
United States of America
|
$
|
1,666,645
|
|
|
$
|
1,589,479
|
|
|
$
|
1,469,495
|
|
Canada
|
73,090
|
|
|
61,781
|
|
|
72,567
|
|
China
|
8,923
|
|
|
6,733
|
|
|
2,734
|
|
Mexico
|
4,910
|
|
|
4,060
|
|
|
5,686
|
|
All other
|
16,710
|
|
|
22,875
|
|
|
13,211
|
|
Total net sales
|
$
|
1,770,278
|
|
|
$
|
1,684,928
|
|
|
$
|
1,563,693
|
|
Long-lived assets:
|
|
|
|
|
|
United States of America
|
$
|
493,203
|
|
|
$
|
523,134
|
|
|
$
|
562,443
|
|
Canada
|
8,180
|
|
|
9,247
|
|
|
90
|
|
China
|
448
|
|
|
170
|
|
|
309
|
|
Mexico
|
10,603
|
|
|
10,701
|
|
|
9,471
|
|
Total long-lived assets
|
$
|
512,434
|
|
|
$
|
543,252
|
|
|
$
|
572,313
|
|
Sales are determined based on customers’ requested shipment location.
21. CONTINGENCIES
As a manufacturer of products primarily for use in nonresidential building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims, or potential claims. The Company insures against these risks to the extent deemed prudent by its management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
Company deems prudent and for which the Company is responsible for payment. In determining the amount of self-insurance, it is the Company’s policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability and general liability. The Company regularly reviews the status of on-going proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance.
22. QUARTERLY RESULTS (Unaudited)
Shown below are selected unaudited quarterly data (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
FISCAL YEAR 2017
|
|
|
|
|
|
|
|
|
Sales
|
$
|
391,703
|
|
|
$
|
420,464
|
|
|
$
|
469,385
|
|
|
$
|
488,726
|
|
|
Gross profit
|
$
|
83,951
|
|
|
$
|
100,839
|
|
|
$
|
114,969
|
|
|
$
|
116,305
|
|
|
Net income
|
$
|
2,039
|
|
|
$
|
16,974
|
|
|
$
|
18,221
|
|
|
$
|
17,490
|
|
|
Net income allocated to participating securities
|
$
|
(8
|
)
|
|
$
|
(115
|
)
|
|
$
|
(102
|
)
|
|
$
|
(78
|
)
|
|
Net income applicable to common shares
|
$
|
2,031
|
|
|
$
|
16,859
|
|
(4)
|
$
|
18,119
|
|
|
$
|
17,412
|
|
(5)
|
Income per common share:
(1)(2)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
|
$
|
0.24
|
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
Diluted
|
$
|
0.03
|
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR 2016
|
|
|
|
|
|
|
|
|
Sales
|
$
|
370,014
|
|
|
$
|
372,247
|
|
|
$
|
462,353
|
|
|
$
|
480,314
|
|
|
Gross profit
|
$
|
89,716
|
|
|
$
|
89,375
|
|
|
$
|
127,951
|
|
|
$
|
120,849
|
|
|
Net income
|
$
|
5,892
|
|
|
$
|
2,420
|
|
|
$
|
23,715
|
|
|
$
|
19,001
|
|
|
Net income allocated to participating securities
|
$
|
(57
|
)
|
|
$
|
(23
|
)
|
|
$
|
(165
|
)
|
|
$
|
(105
|
)
|
|
Net income applicable to common shares
|
$
|
5,835
|
|
|
$
|
2,397
|
|
|
$
|
23,550
|
|
|
$
|
18,896
|
|
(3)
|
Income per common share:
(1)(2)
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
Diluted
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
|
|
(1)
|
The sum of the quarterly income per share amounts may not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year based on the respective weighted average common shares outstanding.
|
|
|
(2)
|
Excludes net income allocated to participating securities. The participating securities are treated as a separate class in computing earnings per share (see Note
8
— Earnings per Common Share).
|
|
|
(3)
|
The fourth quarter of fiscal 2016 includes the correction of a prior period accounting error of
$0.5 million
(
$0.8 million
, before tax). See Note
6
— Goodwill and Other Intangible Assets.
|
|
|
(4)
|
The second quarter of fiscal 2017 includes the gain on insurance recovery of
$5.9 million
(
$9.6 million
before tax). See Note 2 — Summary of Significant Accounting Policies.
|
|
|
(5)
|
The fourth quarter of fiscal 2017 includes a non-cash goodwill impairment charge of
$3.7 million
(
$6.0 million
before tax). See Note
6
— Goodwill and Other Intangible Assets.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NCI BUILDING SYSTEMS, INC.
The quarterly income before income taxes were impacted by the following special income (expense) items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
FISCAL YEAR 2017
|
|
|
|
|
|
|
|
Goodwill impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,000
|
)
|
Restructuring charges
|
(2,264
|
)
|
|
(315
|
)
|
|
(1,009
|
)
|
|
(1,710
|
)
|
Strategic development and acquisition related costs
|
(357
|
)
|
|
(124
|
)
|
|
(1,297
|
)
|
|
(193
|
)
|
(Loss) on sale of assets and asset recovery
|
—
|
|
|
(137
|
)
|
|
—
|
|
|
—
|
|
Gain on insurance recovery
|
—
|
|
|
9,601
|
|
|
148
|
|
|
—
|
|
Unreimbursed business interruption costs
|
—
|
|
|
(191
|
)
|
|
(235
|
)
|
|
(28
|
)
|
Total special charges in income before income taxes
|
$
|
(2,621
|
)
|
|
$
|
8,834
|
|
|
$
|
(2,393
|
)
|
|
$
|
(7,931
|
)
|
|
|
|
|
|
|
|
|
FISCAL YEAR 2016
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
$
|
(1,510
|
)
|
|
$
|
(1,149
|
)
|
|
$
|
(778
|
)
|
|
$
|
(815
|
)
|
Strategic development and acquisition related costs
|
(681
|
)
|
|
(579
|
)
|
|
(819
|
)
|
|
(590
|
)
|
Gain (loss) on sale of assets and asset recovery
|
725
|
|
|
927
|
|
|
52
|
|
|
(62
|
)
|
Gain from bargain purchase
|
1,864
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total special charges in income before income taxes
|
$
|
398
|
|
|
$
|
(801
|
)
|
|
$
|
(1,545
|
)
|
|
$
|
(1,467
|
)
|
23. SUBSEQUENT EVENTS
On December 11, 2017, the CD&R funds completed a registered underwritten offering of
7,150,000.00
shares of the Company’s Common Stock at a price to the public of
$19.36
per share (the “2017 Secondary Offering”). Pursuant to the underwriting agreement, at the CD&R Funds request, the Company purchased
1.15 million
of the
7.15 million
shares of the Common Stock from the underwriters in the 2017 Secondary Offering at a price per share equal to the price at which the underwriters purchased the shares from the CD&R Funds. The total amount the Company spent on these repurchases was
$22.3 million
. Following the closing of the 2017 Stock Repurchase, the CD&R Funds own approximately
34.7%
.
In addition to the shares the Company purchased in connection with the 2017 Secondary Offering, during fiscal 2018 through December 18, 2017, the Company has repurchased
1.5 million
shares of its Common Stock for
$24.4 million
through open-market purchases under the authorized stock repurchase program. As of December 18, 2017, approximately
$5.6 million
remains available for stock repurchases under the program authorized in October 2017.