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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to ________.
COMMISSION FILE NUMBER 001-12335
BUTLER MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 44-0188420
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1540 GENESSEE STREET, KANSAS CITY, MISSOURI 64102
(Address of principal executive offices)
(816) 968-3000
(Registrant's telephone number, including area code)
The name, address and fiscal year of the Registrant have not changed
since the last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES X NO .
----- -----
The registrant had 6,327,778 shares of common stock outstanding at September 30,
2003.
INDEX
PART I. - FINANCIAL INFORMATION Page Number
ITEM 1. Financial Statements
(1) Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the Three Months and Nine months
Ended September 30, 2003 and 2002 3
Consolidated Statements of Comprehensive Income (Loss) for the Three Months
and Nine months Ended September 30, 2003 and 2002 4
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 5
Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2003 and 2002 6
(2) Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II. - OTHER INFORMATION
ITEM 1 Legal Proceedings 21
ITEM 2 Change of Securities and Use of Proceeds 21
ITEM 3 Defaults Upon Senior Securities 21
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
Signatures 22
2
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2003 and 2002
(unaudited)
($000's omitted except for per share data)
Three months ended September 30 Nine months ended September 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 220,529 $ 238,501 $ 564,331 $ 634,774
Cost of sales 192,038 206,232 493,436 551,175
----------- ----------- ----------- -----------
Gross profit 28,491 32,269 70,895 83,599
Selling, general and administrative expenses 26,755 30,414 79,705 86,160
Asset impairment charge 814 - 7,048 -
Restructuring charge (credit), net - (631) - (631)
----------- ----------- ----------- -----------
Operating income (loss) 922 2,486 (15,858) (1,930)
Other income (expense), net (175) 961 (1,571) 1,577
Interest expense 2,439 1,942 6,989 5,875
----------- ----------- ----------- -----------
Pretax income (loss) (1,692) 1,505 (24,418) (6,228)
Income tax benefit 1,717 187 11,437 2,846
----------- ----------- ----------- -----------
Net income (loss) $ 25 $ 1,692 $ (12,981) $ (3,382)
=========== =========== =========== ===========
Basic earnings (loss) per common share $ 0.00 $ 0.27 $ (2.05) $ (0.54)
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ 0.00 $ 0.27 $ (2.05) $ (0.54)
=========== =========== =========== ===========
Basic weighted average number of shares 6,347,891 6,321,912 6,343,201 6,309,066
Diluted weighted average number of shares 6,347,891 6,325,052 6,343,201 6,309,066
See Accompanying Notes to Consolidated Financial Statements.
3
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three months and nine months ended September 30, 2003 and 2002
(unaudited)
($000's omitted)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ 25 $ 1,692 $(12,981) $ (3,382)
Other comprehensive income (loss):
Foreign currency translation and
hedging activity 503 (44) (155) 138
-------- -------- -------- --------
Comprehensive income (loss) $ 528 $ 1,648 $(13,136) $ (3,244)
======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
4
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
($000's omitted)
2003 2002
----------- ---------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 46,705 $ 75,778
Receivables, net 122,640 92,651
Inventories:
Raw materials 29,087 23,108
Work in process 8,634 9,959
Finished goods 36,283 36,283
LIFO reserve (9,713) (9,510)
--------- ---------
Total inventory 64,291 59,840
Real estate developments in progress 7,429 13,203
Assets held for sale 7,182 -
Net current deferred tax assets 17,441 25,238
Other current assets 14,973 14,492
--------- ---------
Total current assets 280,661 281,202
Investments and other assets 76,155 50,684
Assets held for sale 3,684 3,684
Property, plant and equipment, at cost 276,684 283,746
Less accumulated depreciation (162,253) (163,482)
--------- ---------
Net property, plant and equipment 114,431 120,264
--------- ---------
$ 474,931 $ 455,834
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 94,072 $ 6,273
Accounts payable 62,443 58,578
Dividends payable - 1,136
Accrued liabilities 105,598 110,110
Taxes on income 11,435 10,665
--------- ---------
Total current liabilities 273,548 186,762
Net noncurrent deferred tax liabilities - 4,442
Other noncurrent liabilities 54,779 19,393
Long-term debt, less current maturities 11,635 96,066
Shareholders' equity:
Common stock, no par value, authorized 20,000,000
shares, issued 9,088,200 shares, at stated value,
outstanding 6,327,778 in 2003 and 6,310,502 in 2002 12,623 12,623
Foreign currency translation, hedging activity, and minimum
pension liability, net of tax (16,648) (16,493)
Retained earnings 202,856 217,307
--------- ---------
198,831 213,437
Less cost of common stock in treasury, 2,760,422 shares
in 2003 and 2,777,698 shares in 2002 (63,862) (64,266)
--------- ---------
Total shareholders' equity 134,969 149,171
--------- ---------
$ 474,931 $ 455,834
========= =========
See Accompanying Notes to Consolidated Financial Statements
5
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2003 and 2002
(unaudited)
($000's omitted)
2003 2002
-------- ----------
Cash flows from operating activities:
Net loss $(12,981) $ (3,382)
Adjustments to reconcile net earnings provided by and (used in)
operating activities:
Depreciation and amortization 14,776 13,219
Asset impairment charge 7,048 -
Restructuring charge, net - (1,137)
Equity earnings of joint ventures 78 117
Change in asset and liabilities:
Receivables (33,247) (10,853)
Inventories (6,973) (2,474)
Real estate developments in progress 5,774 14,427
Other current assets and liabilities 2,685 10,818
Other noncurrent operating assets and liabilities 4,331 (1,556)
-------- --------
Net cash provided by (used in) operating activities (18,509) 19,179
Cash flows from investing activities:
Capital expenditures (9,531) (7,584)
Capital expenditures - software (2,290) (6,330)
Proceeds from European assets sale - 2,345
-------- --------
Net cash used in investing activities (11,821) (11,569)
Cash flows from financing activities:
Payment of dividends (2,528) (3,400)
Proceeds from issuance of long-term debt 1,792 121
Repayment of long-term debt (820) (523)
Net change in short-term debt 2,576 (350)
Issuance of treasury stock 404 698
Purchase of treasury stock - (25)
-------- --------
Net cash provided by (used in) by financing activities 1,424 (3,479)
Effect of exchange rate changes (167) 288
-------- --------
Net increase (decrease) in cash and cash equivalents (29,073) 4,419
Cash and cash equivalents at beginning of year 75,778 52,569
-------- --------
Cash and cash equivalents at September 30 $ 46,705 $ 56,988
======== ========
See Accompanying Notes to Consolidated Financial Statements.
6
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies described in the consolidated
financial statements and related notes included in Butler Manufacturing
Company's 2002 Form 10-K. It is suggested that those consolidated statements be
read in conjunction with this report. The December 31, 2002, consolidated
balance sheet was derived from the company's audited financial statements. In
the opinion of management, the accompanying consolidated financial statements
reflect all adjustments necessary for a fair presentation of the financial
position of Butler Manufacturing Company and the results of its operations and
cash flows.
NOTE 2 - GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
effective for fiscal years beginning after December 15, 2001. These Statements
eliminated the pooling-of-interests method of accounting for business
combinations and the systematic amortization of goodwill. SFAS No. 141 applies
to all business combinations with a closing date after June 30, 2001, of which
the company had no such activity. At the beginning of fiscal 2002, the company
adopted SFAS No. 142. Under the new standard, purchased goodwill is no longer
amortized over its useful life, but will be subject to annual impairment tests.
In 2002, no impairment charges were recorded by the company related to goodwill.
An annual impairment test was performed in the third quarter of 2003 that
resulted in no impairment charge being recorded.
NOTE 3 - BUSINESS SEGMENTS
The company groups its operations into five business segments: North American
Building Systems, International Building Systems, Architectural Products,
Construction Services, and Real Estate.
The North American Building Systems Segment includes the North American metal
buildings and the wood buildings businesses. These business units supply steel
and wood frame pre-engineered building systems for a wide variety of commercial,
community, industrial, and agricultural applications. In May 2003, the company
entered into a letter of intent to sell its Lester wood buildings business to
the Lester management group. The portion of the net assets of the wood buildings
business that is included in the sale transaction was recorded as "Assets held
for sale" in the company's balance sheet. At September 30, 2003 the sale
transaction had not been completed. Accordingly, the results of operations for
Lester wood buildings business are reflected in the results of operations for
the periods ended September 30, 2003 and in segment results for such periods.
The International Buildings Systems Segment presently consists of the company's
Asian metal buildings business. This business supplies pre-engineered metal
buildings for commercial, community, industrial, and agricultural applications,
primarily for Asian markets. The European metal buildings business, which had
been included in this segment, was sold in July of 2002.
The Architectural Products Segment includes the operations of the Vistawall
Group. The group designs, manufactures, and markets architectural aluminum
systems for nonresidential construction, including curtain wall, storefront
systems, windows, doors, skylights, and roof accessories.
The Construction Services Segment provides comprehensive design and construction
planning, execution, and management services for major purchasers of
construction services. Projects are usually executed in conjunction with the
dealer representatives of other Butler divisions.
The Real Estate Segment provides real estate build-to-suit-to-lease development
services in cooperation with Butler dealers.
7
The company announced the planned combination of the North American Buildings
Systems Segment and the Construction Services Segment, thereby forming the
Buildings Group Segment effective January 1, 2004. The purpose of this change is
to effect cost savings, and better alignment of capabilities, enabling more
thorough integration of the construction supply chain and enhanced service to
customers. Restructuring charges or asset impairment charges, if any, related to
the formation of the Buildings Group, are anticipated to be determined as the
combination is finalized in the fourth quarter.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies as included in the company's 2002
Form 10-K. Butler Manufacturing Company's reportable segments are strategic
business units that offer products and services for different markets. They are
managed separately because each business requires different technology and
expertise. The Other category in the segments tables that follow includes
intersegment sales eliminations, corporate expenses and corporate assets not
otherwise allocated to a specific segment.
Three Months Nine Months
NET SALES Ended September 30, Ended September 30,
(Thousands of dollars) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
North American Building Systems $ 104,600 $ 119,536 $ 267,444 $ 295,748
International Building Systems 37,267 27,414 84,778 80,986
Architectural Products 57,349 58,618 164,565 166,301
Construction Services 28,400 27,905 61,720 93,042
Real Estate - 10,400 - 16,475
Intersegment Elimination (7,087) (5,372) (14,176) (17,778)
-------------------------- --------------------------
$ 220,529 $ 238,501 $ 564,331 634,774
========================== ==========================
Net sales represent revenues from sales to affiliated and unaffiliated customers
before elimination of intersegment sales. Segment sales shown in the table
reflect elimination of intersegment sales, which are included in Intersegment
Elimination. Intersegment eliminations are primarily sales between North
American Building Systems and Architectural Products segments to the
International Building Systems and Construction Services segments.
Three Months Nine Months
PRETAX INCOME (PRETAX LOSS) Ended September 30, Ended September 30,
(Thousands of dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
North American Building Systems $ (2,798) $ (919) $(22,602) $ (6,760)
International Building Systems 2,883 2,472 6,882 4,400
Architectural Products 3,668 3,474 8,582 7,405
Construction Services (70) 876 (434) 1,964
Real Estate 252 1,461 (59) 2,943
Other (5,627) (5,859) (16,787) (16,180)
------------------------ ------------------------
$ (1,692) $ 1,505 $(24,418) $ (6,228)
======================== ========================
During the nine months ended September 30, 2003, the company recorded a $7.0
million asset impairment charge plus $.8 million of other expenses related to
the announced sale of the Lester Building Systems business. These charges are
included in the North American Building Systems Segment's amounts. The Other
classification represents unallocated corporate expenses, including the majority
of the company's interest expense.
8
TOTAL ASSETS September 30, December 31,
(Thousands of dollars) 2003 2002
- --------------------------------------------------------------------------------
North American Building Systems $144,060 $132,688
International Building Systems 100,992 77,159
Architectural Products 105,531 104,474
Construction Services 18,162 17,807
Real Estate 33,898 30,379
Other 72,288 93,327
-------- --------
$474,931 $455,834
======== ========
Total assets shows assets used by each business segment, and include $7.2
million of Lester Building System assets held for sale under contract which were
recorded in the North American Building Systems Segment at September 30, 2003.
Other represents cash and cash equivalents, real estate assets held for sale not
included in the Real Estate Segment, corporate equipment and miscellaneous other
assets, which are not related to a specific business segment.
NOTE 4 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In December 2001, the company's board of directors approved the disposition of
its European metal buildings business. As a result, the company recorded a $3.8
million pretax charge in connection with this decision. During 2001, $1.8
million of the charge was utilized. During 2002, $1.9 million of the
restructuring reserve was utilized and an additional $1.4 million was accrued
for severance, termination and legal costs. Through September 30, 2003, $.6
million was utilized for severance and other employee separation costs, of which
$.1 million was utilized in the third quarter. At the end of September 2003, $.9
million remained in the restructuring reserve for legal, severance and other
benefits costs and other closing costs. In addition, the company recorded a $4.3
million pretax charge for the impairment of certain assets in December 2001. In
the third quarter of 2002, it was determined that asset values received upon the
conclusion of the sale were greater than originally estimated allowing for a net
recovery of $.6 million.
During the nine months ended September 30, 2003, the company recorded a $7.8
million pretax charge related to the announced sale of its Lester wood buildings
business included in the North American Building Systems Segment. The charge
included a $7 million impairment charge and $.8 million other expenses for
selling and legal costs related to negotiating the sale. The charge after tax
was $4.7 million, or $.74 per share. The Lester net assets, totaling $7.2
million, were classified in the September 30, 2003 balance sheet as "Assets held
for sale". At the conclusion of the transaction these assets will
be exchanged for approximately $5.6 million of notes receivable payable over
seven years, with such notes to be classified on the company's balance sheet as
long-term assets. During the third quarter of 2003, the company and the buyer
executed definitive agreements, which call for the transaction to be completed
by November 21, 2003. The closing of the transaction is scheduled to occur
during the fourth quarter and is subject to receipt of consent from the
company's senior lenders, which has been delayed pending resolution of
discussions concerning restructuring of the company's debt agreements. If the
company does not receive lender consent prior to November 21, 2003, it is
possible that the transaction will not be consummated. The company will
determine its options related to Lester at that time including the need for any
additional asset impairment or other charges.
The Lester transaction excludes the jury verdict awarded to the company related
to a lawsuit involving Louisiana-Pacific Corporation. The original award of
$29.6 million is currently under appeal.
NOTE 5 - INDEBTEDNESS
In June 2001, the company entered into a $50 million bank credit facility. The
bank credit facility was subsequently amended in December 2002 to a $35 million
facility with sub-limits of up to $30 million for letters of credit and $10
million for cash advances. At September 30, 2003, the company had approximately
$24.4 million of standby letters of credit issued under the bank credit
facility.
9
After giving effect to all amendments, interest on advances under the credit
facility is based on either (a) the banks' base rate, which is the higher of the
Federal Funds rate plus .50% or the prime rate, plus a margin ranging from 1.0%
to 1.25%, or (b) LIBOR plus a margin ranging from 1.75% to 2.5%. Interest on
base rate advances is payable quarterly and is payable on LIBOR advances at the
end of periods ranging from one to six months. During the occurrence of a
default, interest on advances is the otherwise applicable rate plus 2%. The
credit facility provides for a commitment fee on unused advances ranging from
..20% to .30%. Commitments under the credit facility expire on June 20, 2004, at
which time any outstanding advances are payable. The agreement contains certain
operating covenants, including restrictions on guarantees, liens, investments,
acquisitions, asset sales, mergers, dividend payments, capital expenditures, and
additional debt. The agreement also requires the company to maintain a
capitalization ratio, as defined, of 0.45 to 1, and a leverage ratio, as
defined, of 7.0 to 1 at the end of the fiscal quarter ending September 30, 2003
and 4.0 to 1 at the end of any fiscal quarter thereafter. The agreement also
requires the company to maintain minimum domestic cash at all times and as of
the last day of each fiscal quarter. In addition, the agreement requires
domestic earnings before interest, taxes, depreciation, and amortization
(EBITDA) for the trailing four fiscal quarters to be $5 million at the end of
the fiscal quarter ending September 30, 2003, and $15 million thereafter through
March 31, 2004.
In addition to the bank credit facility, the company has three tranches of
private placement notes outstanding.
At September 30, 2003, $50 million principal amount of the company's 2001
private placement senior notes was outstanding. After giving effect to
amendments in the first quarter of 2003, the notes carry a fixed interest rate
of 8.12%, plus an additional 1.25% until certain financial tests are met as
further described below. Interest is payable semi-annually on June 30 and
December 30 and principal is payable in equal annual installments of $4.55
million commencing December 30, 2006, with the final installment due on December
30, 2016.
At September 30, 2003, $35 million principal amount of the company's 1998
private placement senior notes was outstanding. After giving effect to
amendments in the first quarter of 2003, the notes carry a fixed interest rate
of 6.82%, plus an additional 1.25% until certain financial tests are met as
further described below. Interest is payable semi-annually on March 20 and
September 20 and principal is payable in equal annual installments of $3.5
million commencing March 20, 2004, with the final installment due on March 20,
2013.
At September 30, 2003, $5 million principal amount of the company's 1994 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 8.27%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on June 30 and December 30 and
principal is payable in equal annual installments of $5 million, with the final
installment due on December 30, 2003.
Upon a payment default under any of the note agreements, each fixed interest
rate stated above would increase to the greater of such rate plus 2% or that
rate which is 2% greater than the Bank of America's prime rate.
Principal installments on the notes are payable prior to their final maturity.
The following table shows principal installments due with respect to the senior
notes as stipulated in the note agreements during each of the years 2003 through
2016.
2003 $ 5.0 million
2004 $ 3.5 million
2005 $ 3.5 million
2006 $ 8.0 million
2007 $ 8.0 million
2008 and thereafter $62.0 million
In the first quarter of 2003, the company and its note holders amended the 2001,
1998, and 1994 notes, which increased the interest rate for all three notes by
1.5%. Of the increase, .25% is permanent, .5% is applicable until the company
has modified or replaced its bank credit facility on a pari passu basis with the
notes and .75% is applicable until the later of the time that the bank credit
facility is modified or replaced on a pari passu basis with the notes and the
fixed charge ratio as defined in the notes exceeds 2.25 to 1 for two consecutive
trailing four quarter periods. Related to the amendment, the company entered
into a Security Agreement with the note holders and the bank credit facility
lenders whereby the company granted these lenders a security interest in its
domestic accounts receivable, domestic inventory, domestic subsidiary stock,
certain foreign subsidiary stock and certain other personal property. These
lenders also entered into an intercreditor agreement.
10
The amended note agreements contain certain operating covenants, including
restrictions on liens, additional indebtedness, and asset sales, and require the
company to maintain adjusted consolidated tangible net worth, defined as $110
million plus the cumulative sum of 50% of consolidated net income for each
fiscal quarter ending after December 31, 2002. The company is required to
maintain a fixed charge coverage ratio of 1.25 to 1 for the fiscal quarter
ending September 30, 2003, with periodic increases through June 30, 2005 and 2.0
to 1 thereafter. Restricted payments, including dividends and treasury stock
purchases, may not in the aggregate exceed the sum of $10 million, plus 75% of
consolidated net income or less 100% of any deficit for each fiscal quarter
subsequent to March 31, 2003, and may not be made if a default or event of
default exists under the note agreements.
The company's note agreements and credit agreement each have a "most favored
nation" provision that incorporates by reference the financial covenants
contained in the other agreements. Thus, failure to meet a financial covenant in
one agreement is also failure to meet the covenant under the others' agreements.
Although the company was current with all payments under its debt agreements, at
September 30, 2003, it was not in compliance with its financial covenants
related to the minimum domestic EBITDA level of $5 million on a rolling four
quarter basis; the leverage ratio (based generally upon the level of funded debt
less cash and equivalents to EBITDA as defined in the agreements, for the
trailing four quarters) of 7.0 to 1; nor the fixed charge coverage ratio of 1.25
to 1 (based generally upon the ratio of EBITDA plus rents over the trailing four
quarters to the amount of interest and rents during such period). Management
anticipates not to be in compliance with the same covenants at December 31,
2003.
Because the company was not in compliance with the financial covenants, the note
holders and lenders under the bank credit agreement (senior lenders) have the
right to require payment of $90 million of debt recorded on the company's
balance sheet, as well as require funding of the stand-by letters of credit
aggregating approximately $24.4 million. The company's senior lenders have not
accelerated the company's payment obligations and have allowed the company to
remain in breach of these agreements. If the senior lenders were to exercise
this right, the company does not believe it would have the ability to fund these
obligations immediately, and the senior lenders could pursue other remedies. Due
to the noncompliance, the company was required under accounting standards to
reclassify the related long-term portion of this debt, $81.5 million, as a
current liability on the September 30, 2003 consolidated balance sheet.
As reported in the second quarter, the company has been in discussions with the
senior lenders to restructure its debt agreements. These discussions are
continuing, but have taken longer than expected. Pending resolution of these
discussions, the company does not believe it will receive additional funds from
its bank credit agreement. While there is no guarantee the company will be able
to achieve a mutually satisfactory long-term resolution, the company continues
to work closely with the senior lenders to develop an acceptable restructuring
plan.
NOTE 6 - STOCK OPTION PLANS
The company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under
APB 25, no charges are made to earnings in accounting for stock options granted
because all options are granted with an exercise price equal to the fair market
value at the date of grant. If the amounts received when options are exercised
are different than the carrying value of treasury stock issued, the difference
is recorded in retained earnings.
Stock options were granted to key employees under the 1996 Stock Incentive Plan
and to outside directors under 2002 Stock Option Plan for Outside Directors. The
company granted nonqualified stock options to key employees for 6,000 shares in
the second quarter of 2003, 87,500 shares in the first quarter of 2003 and
44,000 shares in the first quarter of 2002. The company granted nonqualified
options to directors totaling 4,000 shares in the first quarter of 2003 and
24,000 shares in the second quarter of 2002 under the 2002 Stock Option Plan for
Outside Directors. There were no options granted under either plan in the third
quarters of 2003 or 2002. Options were granted at a fixed exercise price based
on fair market value on the date of grant. Options granted to employees in 2003
and 2002 vest one year after the date of grant and expire ten years from the
date of grant. Options under the 2002 Stock Option Plan for Outside Directors
vest on the 184th day after grant date, and are fully exercisable thereafter.
In January 2003, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No 148 amended Statement No. 123,
"Accounting for Stock Based Compensation" and provided for alternative methods
of transition for a voluntary change to the fair value method of accounting for
11
stock-based compensation. In addition, it requires more frequent and prominent
financial statement disclosure of the effect of stock based compensation on the
company's net earnings and earnings per share (EPS). The company uses the Black
Scholes option pricing model to calculate the fair value of stock options on
their date of grant. The assumptions used to calculate their fair value are as
follows:
ASSUMPTION 2003 2002
------------------------ ------------- -----------
Dividend yield 4.2% 3.7%
Risk-free interest rate 2.8% 3.8%
Volatility 32% 25%
Life of option 5-10 years 5-10 years
The following table illustrates the effect on net earnings (loss) and per share
data if the company had applied the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation".
YEAR TO DATE
THIRD QUARTER SEPTEMBER 30,
DOLLARS IN MILLIONS 2003 2002 2003 2002
------------------------------------------- --------- --------- --------- ----------
Net earnings (loss) as reported $ .0 $ 1.7 $ (13.0) $ (3.4)
After tax effect of SFAS No. 123 $ (.1) $ -- $ (.2) $ (.2)
-------------------------------------------
Net earnings (loss) after SFAS No. 123 $ (.1) $ 1.7 $ (13.2) $ (3.6)
EPS effect in dollars
---------------------
Diluted EPS as reported $ 0.00 $ .27 $ (2.05) $ (0.54)
EPS effect of SFAS No. 123 $ (.01) $ -- $ (0.03) $ (0.03)
-------------------------------------------
Diluted EPS, net of effect of SFAS 123 $ (0.01) $ .27 $ (2.08) $ (.57)
NOTE 7 -- GUARANTEES AND WARRANTIES
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires a liability to
be recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements.
The company accrues for warranty and claim costs as a percentage of sales based
on historical trends. Actual warranty and claim costs are deducted from the
accrual when incurred. Changes in the product warranty accrual for the nine
months ended September 30, 2003 were as follows (in millions):
Balance, beginning of period $2,810
------
Payments made during the period (943)
------
Increases to accrual during the period 671
------
Adjustments during the period (374)
------
Balance, September 30, 2003 $2,164
======
NOTE 8 - DEFERRED TAX ASSETS
The company had approximately $15.3 million of domestic net deferred tax assets
recorded in the balance sheet as of September 30, 2003. While the company
believes it is more likely than not that it will be able to realize future
taxable income sufficient to realize these assets, it is possible that these
deferred tax assets will not be realized in the future. Realization of net
deferred tax assets is dependent on generating $40.2 million of domestic taxable
income in the future. If in the future the company determines that it is more
likely than not that the full value of the deferred tax assets will not be
realized, the company will establish a valuation reserve for the reduction in
the expected value of the assets.
NOTE 9 -- RESTRICTIONS ON USE OF CASH
On September 30, 2003 the company's cash balance of $47 million included $14
million of cash in its International Building Systems Segment that was not
immediately available for repatriation to the parent company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended September 30, 2003 and September 30, 2002
Net sales were $221 million for the third quarter 2003 compared with $239
million in the third quarter 2002, 8% lower than a year ago. Lower sales were
caused by a continued decline in nonresidential construction project
opportunities in a very competitive domestic construction market. The North
American Building Systems, Architectural Products and Real Estate business
segments reported lower sales for the quarter than a year ago while
International Building Systems and Construction Services business segments
reported higher sales for the quarter than a year ago.
Sales in the North American Building Systems Segment were $105 million, a
decline of 12% compared with the third quarter a year ago. The decline in sales
occurred in the metal buildings business and reflected continued weak demand in
the manufacturing end-use market, which typically represents a significant
percentage of the company's revenues. The commercial and community markets have
been less severely impacted by the decline in the nonresidential construction
market.
The International Building Systems Segment sales were $37 million in the third
quarter, up 36% from the prior year. All the sales reported in the third quarter
2003 in this segment were from China, while the prior year's sales included $1.6
million from the European business, which was sold in 2002. The higher sales
volume in China was related to the company's continued penetration of the market
in China for nonresidential construction, seasonal increases, and a post-SARS
business rebound.
The Construction Services Segment sales were $28 million for the third quarter,
comparable to the same period last year. The company is in the process of
combining the Butler Construction business with the North American Buildings
business, forming the Buildings Group. The combination will be effective January
1, 2004. The purpose of this change is to effect cost savings and better
alignment of capabilities, enabling more thorough integration of the
construction supply chain and enhanced service to customers. Restructuring
charges or asset impairment charges, if any, related to the formation of the
Buildings Group are anticipated to be determined as the combination is finalized
in the fourth quarter.
Sales in the Architectural Products Segment were $57 million in the third
quarter compared with $59 million in the prior year. Sales decreased due to
weaker demand in the commercial construction market primarily served by this
segment.
The Real Estate Segment had no sales in the third quarter compared with $10
million a year ago. The Real Estate Segment's sales are based on individual
projects and it is not unusual for the segment to report no sales in any given
quarter.
Gross profit for the third quarter was $28 million, down $4 million, or 12%,
from the prior year. While each business segment, with the exception of the
International Buildings Systems Segment, experienced a decline in gross profit,
the North American Building Systems and Construction Services segments were more
severely affected due to weak markets and a fiercely competitive pricing
environment, causing reduced standard margins and higher unabsorbed fixed costs.
The International Buildings Systems Segment gross profit increased $2 million,
or 54%, over the third quarter the prior year. The gross profit percentage
increase for the segment in the third quarter exceeded the sales percentage
increase due to the higher volume of business and better management of project
costs.
Selling, general, and administrative expenses declined to $27 million compared
with $30 million a year ago due to lower employment levels and other cost
reduction efforts.
During the three months ended September 30, 2003, the company recorded a $.8
million pre-tax charge related to the announced sale of the Lester wood
buildings business, which is included in the North American Building Systems
Segment. The closing of the transaction is scheduled to occur by November 21,
2003, but is subject to receipt of consent from the company's senior lenders,
which has been delayed pending resolution of discussions concerning
restructuring of company's debt agreements. If the company does not receive
lender consent prior to November 21, 2003, it is possible that the transaction
will not be consummated. The company will determine its options related to
13
Lester at that time, including the need for any additional asset impairment or
other charges. Because the sale transaction has not completed as of September
30, 2003, the results of operations for Lester wood buildings business are
reflected in the segment results for the period.
The company recorded other expense of $.2 million in the third quarter of 2003
compared to $1 million income in the previous year's third quarter. Lower rental
income this year on Real Estate Segment projects and higher interest income in
the previous year were primary reasons for the difference in results.
Interest expense was $2.4 million for the quarter, up $.5 million compared with
the prior year due to higher interest costs charged on the company's credit and
note agreements.
The pretax loss for the quarter ended September 30, 2003 was $1.7 million
compared to pretax income of $1.5 million for the quarter a year ago. The
company recorded a tax benefit of $1.7 million for the quarter due to greater
pretax losses in its North American Building Systems Segment and pretax losses
in the Construction Services Segment. Net income for the third quarter was $.03
million, or $0.00 per share, compared with net earnings of $1.7 million, or $.27
per share, a year ago.
Nine Months ended September 30, 2003 and September 30, 2002
For the nine months ended September 30, 2003, sales were $564 million compared
with $635 million a year ago, a decline of 11%. The decline reflects the
continued weakness in the domestic nonresidential construction market. Lower
sales in all segments of the company, except the International Buildings Systems
Segment, for the first nine months of the year contributed to lower year to date
gross profit compared with a year ago. This trend along with the $7.8 million
charge for the sale of Lester wood buildings business were the primary factors
for greater operating and pretax losses compared with the same nine month period
a year ago. Year to date net losses through September 30, 2003 totaled $13
million compared with $3.4 million a year ago. The amount for 2003 includes $4.7
million in after tax charges ($7.8 million pre-tax) related to the announced
sale of the Lester wood building business.
During the nine months ended September 30, 2003, the company recorded a $7.8
million pre-tax charge related to the announced sale of the Lester wood
buildings business, which is included in the North American Building Systems
Segment. Because the sale transaction has not completed as of September 30,
2003, the results of operations for Lester wood buildings business are reflected
in the segment results for the period.
Initiatives to Reduce Costs and Increase Revenues
Nonresidential construction markets are cyclical by nature. During the current
prolonged downturn the company has taken many actions to reduce costs and
increase revenues from underserved markets. Related to cost reductions, in the
face of continued declining demand, domestic employment levels are approximately
4% lower since the beginning of 2003. This is in addition to employment
reductions in 2001 and 2002. Along with expense reductions related to volume
initiated in most downturns, the company has implemented more permanent cost
cutting measures. In 2002, the company sold its under performing European metal
buildings business, and during the second quarter of 2003, the company announced
the planned sale of another under performing business, the Lester wood buildings
business. The company recently implemented a change in its primary pension plan
benefit which is expected to reduce pension expense by $3.5 million annually,
beginning in September 2003. Also, the company is discontinuing the subsidy for
its retiree health care plan and ending certain retiree group life insurance
programs effective January 1, 2004. The company anticipates the reversal of
approximately $5.5 million of accrued liabilities related to these plans to
pre-tax income during the fourth quarter of 2003. Also, the company expects
these actions to reduce costs by approximately $2.8 million annually beginning
in 2004.
During third quarter of 2003, the company announced the planned combination of
the North American Building Systems and Construction Services segments'
operations, to occur effective January 1, 2004. The purpose of this change is to
effect cost savings and better alignment of capabilities, enabling more thorough
integration of the construction supply chain and enhanced service to customers.
Within the North American Building Systems Segment, realignment of several
functions has created more efficient use of human resources and better alignment
with customer needs. In order to increase efficiencies and generate more
complete and timely information, the company completed implementation of a new
enterprise resource planning computer system during the second quarter.
Offsetting some of these cost reduction actions have been: increased costs for
steel caused primarily by tariffs imposed by the U.S. Government in April, 2002:
higher business insurance costs driven in part by the September 11, 2001
terrorist attacks; added legal costs related to the company's lawsuit against
Louisiana-Pacific; the cost of complying with the Sarbanes-Oxley legislation;
and the cost of restructuring the company's credit agreements.
14
The company continued its efforts to increase revenues and earnings in
previously underserved markets. Within the North American Building Systems
Segment, sales of the company's Liberty Buildings product line, a first price
point building solution, continued to grow. The plant to produce the new R-Steel
panel product line, a one piece insulated curtain wall panel system for
commercial and community applications, began production in the third quarter.
Construction of the company's frame fabrication plant in Mexico continued during
the third quarter and is on schedule for a January, 2004 start-up. Within the
Architectural Products Segment, two new distribution outlets and the
introduction of new product offerings, including hurricane/blast resistant
products, have provided incremental sales growth. Finally, the start-up of the
company's second plant in China for the International Building Systems Segment
has provided needed capacity to support the demand growth in this region.
Deferred Tax Assets
The company had approximately $15.3 million of domestic net deferred tax assets
recorded in the balance sheet as of September 30, 2003. While the company
believes it is more likely than not that it will be able to realize future
taxable income sufficient to realize these assets, it is possible that these
deferred tax assets will not be realized in the future. Realization of net
deferred tax assets is dependent on generating $40.2 million of domestic taxable
income in the future. If in the future the company determines that it is more
likely than not that the full value of the deferred tax assets will not be
realized, the company will establish a valuation reserve for the reduction in
the expected value of the assets.
LIQUIDITY AND CAPITAL RESOURCES
Since December 2002, cash and cash equivalents decreased $29 million to $47
million due to declines in cash flows from operations and investing activities.
Cash flow from operating activities for the first nine months of 2003 was an
approximate $19 million outflow. Receivables increased $33 million, primarily in
the North American Building System Segment due to seasonal demand and timing
delays in billing caused by the implementation of a new computer system and in
the International Building Systems Segment due to increased demand. Inventories
increased primarily due to the expansion of operations in the International
Building Systems Segment. Real estate developments in progress declined
primarily due to fewer development projects and the reclassification of a real
estate project to a long-term asset classification from a current asset due to
its anticipated sale extending beyond one year. Investments and other assets
increased through the first nine months of 2003 due primarily to the real estate
project reclass mentioned above and an increase in noncurrent deferred tax
assets due to losses generated in the first nine months of 2003. Noncurrent tax
assets represent timing differences related to the deductibility of expenses not
expected to be realized in the near term. Net current deferred tax assets
primarily represent the U.S. tax effect of book versus tax timing differences
related to deductibility of expenses, including bad debt provision and product
warranty and claims reserves. Deferred tax assets attributable to the income tax
benefit on the 2003 net operating loss were reclassified from current to
noncurrent assets during the second quarter. Though it is more likely than not
that deferred tax assets will be utilized during periods of future earnings, it
was determined that it would be unlikely for these assets to be realized during
the next 12 months. During the second quarter the company reclassified a $31
million pension liability from current liabilities to long-term liabilities.
Given the company's losses to date, it appeared unlikely that the company would
make excess cash contributions to the pension funds sufficient to extinguish
this liability during the next 12 months.
Cash from investing activities for the first nine months of 2003 was used
primarily to fund $12 million in capital expenditures projects. Capital
expenditures were primarily incurred within the North American Building Systems
Segment for a metal buildings operation, the introduction of a new panel product
line, and for a new enterprise resource planning computer system. Capital
expenditures also included the costs to complete the construction of a second
plant in China for the International Building Systems Segment.
Cash from financing activities was used for payment of dividends and scheduled
long-term debt payments, while cash was provided from the issuance of short-term
debt for the financing of real estate development projects. The company
decreased its quarterly dividend in the second quarter to $.04 per share from
$.18 per share. Dividends paid totaled $2.5 million and $3.4 million in the
first nine months of 2003 and 2002, respectively. Due to the losses incurred to
date and the uncertain course of the economy the company discontinued the
quarterly cash dividend in the third quarter. Because it was in default under
the credit agreements and note agreements as of September 30, 2003, the company
is currently prohibited from paying dividends under the terms of those
agreements.
15
During the second quarter of 2003 a $4 million cash dividend was declared and
paid to the U.S. parent company from the company's Chinese subsidiary to
increase domestic cash resources. During the third quarter of 2003, treasury
stock purchases were immaterial.
Cash paid for interest on debt totaled $1.7 million in the third quarter and
$7.8 million year to date at the end of September 30, 2003. The cash paid for
taxes totaled $.7 million for the quarter and $1.7 million through September 30,
2003, while the tax refunds totaled $.1 million for the quarter and $8.4 million
year to date through nine months of 2003.
Total backlog at September 30, 2003 was $314 million compared with $275 million
a year ago, excluding the Lester Building Systems business. Higher margin
product backlog was approximately 10% higher, while construction backlog
increased 60% when compared to the same period a year ago.
In June 2001, the company entered into a $50 million bank credit facility and
issued $50 million of senior unsecured notes in a private placement. The bank
credit facility was subsequently amended in December 2002 to a $35 million
facility with sub-limits of up to $30 million for letters of credit and $10
million for cash advances. At September 30, 2003, the company had approximately
$24.4 million of standby letters of credit issued under the bank credit
facility. Commitments under the credit facility expire on June 20, 2004, at
which time any outstanding advances are payable.
For the nine months ended September 30, 2003, there were no domestic short-term
borrowings. After giving effect to all amendments, interest on advances under
the credit facility is based on either (a) the banks' base rate, which is the
higher of the Federal Funds rate plus .50% or the prime rate, plus a margin
ranging from 1.0% to 1.25%, or (b) LIBOR plus a margin ranging from 1.75% to
2.5%. During the occurrence of a default, interest on advances is the otherwise
applicable rate plus 2%. Interest on base rate advances is payable quarterly and
is payable on LIBOR advances at the end of periods ranging from one to six
months. The credit facility provides for a commitment fee on unused advances
ranging from .20% to .30%. Commitments under the credit facility expire on June
20, 2004, at which time any outstanding advances are payable.
Per the terms of the company's bank credit and note agreements, and subject to
certain limitations, the company may borrow up to $35 million from other lenders
to fund the Real Estate Segment's project development activities. At September
30, 2003, $2.9 million had been borrowed to fund development projects.
At September 30, 2003 there were outstanding $50 million principal amount of the
company's 2001 senior notes due 2016, $35 million of its 1998 senior notes due
2013 and $5 million of its 1994 senior notes due 2003. Interest on the 2001 and
1994 senior notes is payable semiannually on June 30 and December 30 and
interest on the 1998 senior notes is payable semiannually on March 20 and
September 20. As set forth in Note 5 to the Notes to Consolidated Financial
Statements, principal installments on the notes are payable prior to their final
maturity. The following table shows principal installments due with respect to
the senior notes as stipulated in the note agreements during each of the years
2003 through 2016.
2003 $ 5.0 million
2004 $ 3.5 million
2005 $ 3.5 million
2006 $ 8.0 million
2007 $ 8.0 million
2008 and thereafter $62.0 million
During the first quarter of 2003, the company and its note holders amended the
senior notes to increase the interest rate for each series by 1.5%, of which
increase .25% is permanent, .5% is applicable until the company has modified or
replaced its bank credit facility on a pari passu basis with the note
agreements, and .75% is applicable until the later of the time that the bank
credit facility is modified or replaced on a pari passu basis with the note
agreements and the fixed charge ratio as defined in the notes exceeds 2.25 to 1
for two consecutive four trailing quarters. In connection with this amendment,
the company granted the note holders and lenders under the credit facility a
security interest in its domestic accounts receivable, domestic inventory,
domestic subsidiary stock, certain foreign subsidiary stock and certain other
personal property. Upon a payment default under any of the note agreements, the
interest rate of the related notes would increase to the greater of such rate
plus 2% or that rate which is 2% greater than the Bank of America's prime rate.
Both the credit facility and the senior notes contain financial covenants and
operating covenants, which are summarized in Note 5 to the Notes to Consolidated
Financial Statements contained elsewhere herein.
16
The severe cyclical decline in the nonresidential construction industry during
the past three years has outstripped the savings realized from cost reductions
and capacity closures that the company has implemented over this period. As a
result, although the company was current with all payments under its debt
agreements at September 30, 2003, it was not in compliance with its financial
covenants within the bank credit agreement and the senior notes agreements
related to the minimum EBITDA level, the fixed charge coverage ratio and the
leverage ratio. Also as a result, the company was required under accounting
standards to reclassify the related long-term portion of this debt, $81.5
million, as a current liability on the September 30, 2003 consolidated balance
sheet. The attached financial statements reflect this change. See Note 5 of
Notes to Consolidated Financial Statements.
As reported in the second quarter, the company has been in discussions with the
senior lenders to restructure its debt agreements. These discussions are
continuing, but have taken longer than expected. Because the company was not in
compliance with the financial covenants, the senior lenders have the right to
require payment of $90 million of debt recorded on the company's balance sheet,
as well as require funding of the stand-by letters of credit. The company's
senior lenders have not accelerated the company's payment obligations and have
allowed the company to remain in breach of these agreements, although they have
the right to declare such default at any time. If the senior lenders were to
exercise this right, the company does not believe it would have the ability to
fund these obligations immediately, and the senior lenders could pursue other
remedies. Pending resolution of these discussions, the company does not believe
it will receive additional funds from its bank credit agreement. Although there
is no guarantee the company will be able to achieve a mutually satisfactory
long-term resolution, the company continues to work closely with the senior
lenders to develop an acceptable restructuring plan.
On September 30, 2003 the company's cash balance of $47 million included $14
million of cash in its International Building Systems Segment that was not
immediately available for repatriation to the parent company. Although there can
be no assurance, management believes the company's cash and cash flow from
operations will be sufficient to provide for normal operating needs. To the
extent that actual results or events differ from management's financial
projections or business plans, the company's liquidity may be adversely affected
by one or more of the following factors: weak demand for the company's products,
a loss of customer relationships, elevated raw materials prices, inability to
negotiate amendments to loan covenants, changes in payment terms by the
company's suppliers and vendors, or the requirement by the company's senior
lenders to fund the outstanding debt obligations.
As mentioned previously, discussions are continuing between the company and its
senior lenders to restructure its debt agreements. Along with existing cash
balances these credit arrangements are the company's primary source of
liquidity. Other possible sources of liquidity beyond normal operating cash
flows include additional cash dividends from the company's International
Building Systems Segment; loan transactions utilizing the company's
approximately $30 million of unencumbered operating real estate assets; loans or
the early sale of approximately $21 million of project related assets of the
company's Real Estate Segment; and the proceeds, if any, from the $29.6 million
jury verdict awarded to the company related to a lawsuit involving
Louisiana-Pacific Corporation. There is no assurance that the timing of
availability of these additional possible sources of liquidity would correspond
with future liquidity requirements. In addition, the board of directors has
authorized management to explore strategic options available to the company. The
company has engaged George K. Baum & Company to serve as financial advisor to
assist in this process. Among the options that are under consideration are the
solicitation of private investment capital, asset sales, and the sale of the
company.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, Financial Accounting Standards Board issued Interpretation No.
46, "Consolidation of Variable Interest Entities," an Interpretation of ARB No.
51" (FIN 46). The interpretation provides guidance on the identification of
variable interest entities (VIE) and clarifies when a company is determined to
be a "primary beneficiary" and required to consolidate in its financial
statements the assets, liabilities, and activities of a variable interest
entity. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective immediately for all new variable interest
entities created after January 31, 2003. For variable interest entities created
before February 1, 2003, the consolidation provisions of FIN 46 must be applied
in the first interim or annual reporting period beginning after June 15, 2003.
The disclosure provisions of FIN 46 apply to financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of FIN 46 had no impact on the company's financial
reporting and disclosures.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS 150 requires certain financial instruments
17
that embody obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. Many of these
instruments were previously classified as equity or temporary equity and as
such, SFAS 150 represents a significant change in practice in the accounting for
a number of mandatory redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments for the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 had no impact on
the company's results of operations, liquidity, or financial condition.
MARKET PRICE RISK
The company's principal exposure to market risk is from changes in commodity
prices, interest rates and currency exchange rates. To limit exposure and to
manage volatility related to these risks, the company enters into select
commodity and currency hedging transactions, as well as forward purchasing
arrangements. The company does not use financial instruments for trading
purposes.
Commodity Price Exposure: The company's primary commodities are steel, aluminum
and wood. Steel is the company's largest purchased commodity. Although steel
prices are relatively stable, the company enters into forward steel purchase
arrangements in its metal buildings business for periods of less than one year's
duration to protect against potential price increases. To the extent there are
increases in the company's steel costs, they are generally recaptured in the
company's product sales prices.
During the first nine months of 2003, steel prices stabilized after large
increases during the second half of 2002. Competitive pricing pressures have
prevented the company from recapturing all of the steel price differential in
its selling prices. Investments and increased operating efficiencies in company
operations have helped mitigate the impact of the competitive market conditions.
The company's wood frame building business enters into forward purchase
arrangements for commercial grade lumber for periods of less than one year's
duration. Lumber costs are generally more volatile than steel costs. To offset
increases in lumber costs, the company adjusts product prices accordingly.
Aluminum hedge contracts of less than one year's duration are purchased to hedge
the engineered products backlog of the Vistawall group against potential losses
caused by increases in aluminum costs. This product line is sensitive to
material cost movements due to the longer lead times from project quoting to
manufacture. Gains or losses recorded on hedge contracts are offset against the
actual aluminum costs charged to cost of sales when contracts are settled. At
September 30, 2003, the fair value of open aluminum contracts recorded in
cumulative other comprehensive income was less than $.1 million pretax. A
percentage change in aluminum contracts was immaterial at September 30, 2003.
Interest Rates: The majority of the company's long-term debt carries a fixed
interest rate, which limits the company's exposure to increases in market rates.
However, interest rate changes impact the fair market value of such debt. As of
September 30, 2003, holding other variables constant, including levels of
indebtedness, a one percentage point change in interest rates would result in
approximately a $4.6 million change in the fair value of the company's fixed
rate debt.
Foreign Currency Fluctuation: The majority of the company's business is
transacted in U.S. dollars, therefore limiting the company's exposure to foreign
currency fluctuations. Where the company has foreign-based operations, the local
currency has been adopted as the functional currency. As such, the company has
both transaction and translation foreign exchange exposure in those operations.
Due to relative cost and limited availability, the company does not hedge its
foreign net asset exposure. At September 30, 2003 the company's net asset
investment in foreign operations was $40 million, primarily in China. The
company hedges its short-term foreign currency transaction exposures related to
metal building sales in Canada. Forward exchange contracts are purchased to
cover a portion of the exposure. Mark to market gains on the company's currency
exchange contracts were recorded in earnings and were immaterial.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are both most important
to the portrayal of a company's financial condition and results of operations,
and require management's most difficult, subjective, or complex judgments. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles with no need for the
application of management's judgment. In certain circumstances, however, the
18
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires judgment to make certain
estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. The company's critical accounting
polices include its sales recognition for construction and project contracts,
inventory valuation, estimation of product liability for third-party claims,
estimation of insurance reserves, and accounting for impairment of long-lived
assets. See Note 1 to our consolidated financial statements for additional
discussion of other accounting policies.
Sales Recognition: Sales and gross profit recognition for construction and
project contracts are based upon the percentage of completion method. This
method requires the company to estimate total cost at completion for each
in-process construction project. Total contract revenue less total estimated
costs generates an estimated gross profit for each contract. Based upon
estimated total cost and estimated gross profit, the company recognizes
construction sales and gross profit over the life of the project on a percentage
of completion basis. The percentage complete at each period end date is
determined using costs actually incurred as of that date compared to the
estimate of total contract costs at completion. Periodic re-evaluations of total
cost at completion estimates are made with the resulting cumulative adjustments
recognized in the current period financial statements. Provision is made for
estimated probable losses on projects when it is determined that a loss will be
incurred. Actual costs for completed projects can and typically will vary from
earlier estimates, with the final adjustment from estimate to actual costs
recognized during the period when the project is completed.
Inventory Valuation: The company has chosen the last-in, first-out (LIFO)
accounting method for valuing inventory in the majority of its manufacturing
businesses. In periods of rising prices and steady or increasing levels of
inventory, the effect of the LIFO method is to charge the current year cost of
sales with inventory purchases that reflect current year costs. This method
results in a better matching of current costs with current sales during an
accounting period. Generally it presents a more conservative valuation of the
company's inventory, and the gross profit and net earnings reported for the
period. The LIFO valuation is a year-end measurement process requiring estimates
for the determination of quarterly gross profit and quarter-end inventory
valuation. The cumulative effect of choosing the LIFO method was a reduction in
inventory values of $9.5 million at December 31, 2002 and $9.7 million at
September 30, 2003. For 2002, the use of LIFO inventory accounting decreased
gross margins by $1.0 million, while through September 30, 2003 LIFO inventory
accounting decreased gross margin by $.2 million.
Third-Party Claims: The company is subject to third-party claims associated with
its products and services. The time period from when a claim is asserted to when
it is resolved either by dismissal, negotiation, settlement, or litigation can
be several years. While the company maintains product liability insurance, its
arrangements include significant self-retention of risk in the form of policy
deductibles. In addition, certain claims are not insured. Actual claim
settlement costs and litigation awards can and probably will vary from the
estimates made by the company. Management believes that any difference in the
actual results from the estimates will not have a material adverse effect upon
the company's financial position or results of operations.
Insurance Accruals: Generally, the company is self-insured for workers'
compensation for certain subsidiaries and for all group medical insurance. Under
these plans, liabilities are recognized for claims incurred (including claims
incurred but not reported) and changes in the accruals. At the time a worker's
compensation claim is filed, a liability is estimated to settle the claim. The
liability for workers' compensation claims is determined based on management's
estimates of the nature and severity of the claims using analyses provided by
third party administrators. Since the liability is an estimate, the ultimate
liability may be more or less than reported. If previously established accruals
are required to be adjusted, such amounts are included in cost of sales and
selling, general, and administrative expenses in the period of adjustment. Group
medical accruals are estimated using historical claims experience. The company
maintains excess liability insurance with insurance carriers to minimize its
risks related to catastrophic claims in excess of all self-insured positions.
Any material change in the aforementioned factors could have an adverse impact
on operating results.
Long-Lived Assets: The company accounts for the impairment of long-lived assets
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." When events or circumstances indicate that a long-lived
asset may not be recoverable, the company tests for recoverability of the asset
by comparing undiscounted future cash flows from the asset to the carrying
amount of the asset. If undiscounted future cash flows are less than the asset
carrying amount, an impairment charge is recorded and the asset's carrying value
is reduced to fair value. Management estimates the future cash flows based on
current operating conditions. Changes in estimates of such cash flows could
impact the results of the impairment test.
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TRANSACTION TO SELL ASSETS
On May 15, 2003, the company announced that it had signed a letter of intent to
enter into a transaction to sell substantially all of the assets of the Lester
Building Systems business to a management team headed by the current Lester
division president. The company recorded an after-tax charge of approximately
$4.7 million, or $.74 per share related to the sale. The anticipated pretax
charge is approximately $7.8 million, including charges of approximately $7
million for the write-down of assets to net fair value and $.8 million to accrue
for the costs of the sale. The company will provide significant seller financing
to the new owners. As such the transaction was recorded as a transfer of assets
held for sale.
During the third quarter of 2003, the company and the buyer executed definitive
agreements, which call for the transaction to be completed by November 21, 2003.
The closing is subject to receipt of consent from the company's senior lenders,
which has been delayed pending resolution of discussions concerning
restructuring of the company's debt agreements. If the company does not receive
lender consent prior to the November 21, 2003 deadline, it is possible that the
transaction will not be consummated. The company will determine its options
related to Lester at that time including the need for any added asset impairment
or other charges.
The transaction excludes the jury verdict awarded to the company related to a
lawsuit involving Louisiana-Pacific Corporation. The original award of $29.6
million is currently under appeal. The Lester wood buildings business is part of
the North American Buildings Systems Segment, and designs, manufactures,
markets, and erects pre-engineered wood-frame buildings for a variety of end
uses. Principal offices are located in Lester Prairie, Minnesota, with sales,
engineering and manufacturing facilities in Charleston, Illinois and Clear
Brook, Virginia.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which may include statements
concerning projection of revenues, income or loss, capital expenditures, capital
structure, or other financial items, statements regarding the plans and
objectives of management for future operations, statements of future economic
performance, statements of the assumptions underlying or relating to any of the
forgoing statements, and other statements which are other than statements of
historical fact. These statements appear in a number of places in this report
and include statements regarding the intent, belief, or current expectations of
the company and its management with respect to (i) the cost and timing of the
completion of new or expanded facilities, (ii) the company's competitive
position, (iii) the supply, price and credit terms related to materials used by
the company, (iv) the demand and price for the company's products and services,
(v) the continued forbearance of the company's senior lenders, or (vi) other
trends affecting the company's financial condition or results of operations,
including changes in manufacturing capacity utilization and corporate cash flow
in both domestic and international markets. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially as a
result of these various factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure made in the Annual Report on
Form 10-K for the year ended December 31, 2002 regarding this matter. See
discussion about market risk under Item 2. Management's Discussion and Analysis.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q,
management conducted an evaluation of the effectiveness of the design and
operation of the company's "disclosure controls and procedures" (Disclosure
Controls). The controls evaluation was done under the supervision and with the
participation of management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO).
Based upon the controls evaluation, the CEO and CFO have concluded that, subject
to the limitations noted below, as of the end of the period covered by this
Quarterly Report on Form 10-Q, the company's Disclosure Controls were effective
to provide reasonable assurance that material information relating to Butler
Manufacturing Company and its consolidated subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when the
company's periodic reports are being prepared.
20
There was no change in internal controls over financial reporting that occurred
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, internal controls over financial reporting.
Attached as Exhibits 31.1 and 31.2 to this Quarterly Report are certifications
of the CEO and the CFO, which are required in accord with Rule 13a-14 of the
Securities Exchange Act of 1934 (the Exchange Act). This Controls and Procedures
section includes the information concerning the controls evaluation referred to
in the certifications and it should be read in conjunction with the
certifications.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to ensure that
information required to be disclosed in the company's reports filed under the
Exchange Act is recorded, processed, summarized and reported timely. Disclosure
Controls are also designed to ensure that such information is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure. The company's Disclosure
Controls include certain components of internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of the company's financial reporting and the
preparation of financial statements in accordance with U.S. generally accepted
accounting principles.
Limitations on the Effectiveness of Controls
Although the company's Disclosure Controls have been designed to provide
reasonable assurance of attaining their objectives and the company's CEO and CFO
have concluded that the Disclosure Controls are effective at the reasonable
assurance level, the company's management, including the CEO and CFO, does not
expect that the company's Disclosure Controls or internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3. Legal proceedings in the company's annual report on
Form 10-K for the year ended December 31, 2002 for information on certain
litigation to which it is a part.
ITEM 2. CHANGE OF SECURITIES AND USE OF PROCEEDS
Under the company's note agreements, restricted payments, including dividends
and treasury stock purchases, may not in the aggregate exceed the sum of $10
million, plus 75% of consolidated net income or less 100% of any deficit for
each fiscal quarter subsequent to March 31, 2003 and may not be made if a
default or event of default exists under the note agreements. The company's
credit facility also prohibits dividends while there is an event of default
under the credit facility. Because the company was not in compliance at
September 30, 2003 with certain financial covenants under its note agreements
and credit facility, it may not currently pay cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 2003, the company was not in compliance with certain of its
financial covenants contained within the bank credit agreement and the senior
note agreements relating to its 1994 private placement senior notes, its 1998
private placement senior notes, and its 2001 private placement senior notes.
Specifically, the company was not in compliance with covenants imposing a
21
domestic EBITDA level, a fixed charge coverage ratio and a leverage ratio). See
Note 5 of Notes to Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION
Suspension of Dividend
On September 8, 2003, the Board of Directors suspended the annual dividend on
common stock for an undetermined time. This decision stems from a detailed
analysis of the company's current financial condition, its liquidity forecast
and its earnings prospects for the immediate future. Based on this analysis, the
Board of Directors decided that the most prudent course of action was to suspend
the dividend until the company's financial condition and stability is clarified.
At this time, no prediction can be made when or if the Board of Directors will
reinstate the dividend, or if reinstated, what the annualized dividend rate will
be in the future. As noted elsewhere in this report, because the company was not
in compliance with certain provisions under its credit agreement and note
agreements at September 30, 2003, it is currently contractually prohibited from
paying dividends under the terms of those agreements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO furnished pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The following reports have been filed on Form 8-K during the Quarter Ended
September 30, 2003.
- July 29, 2003 8 K filing under Item 9, Second Quarter Earnings Press
Release
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUTLER MANUFACTURING COMPANY
November 14, 2003 /s/ Larry C. Miller
----------------- -------------------
Date Larry C. Miller
Vice President - Finance,
and Chief Financial Officer
November 14, 2003 /s/ John W. Huey
----------------- ----------------
Date John W. Huey
Vice President, General Counsel
and Secretary
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EXHIBIT INDEX
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO Furnished Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of CFO Furnished Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002