UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 30, 2017
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to    
 
Commission file number: 1-14315
 
 

   NCSLOGOA24.JPG
 
NCI BUILDING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 

 
Delaware
76-0127701
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
10943 North Sam Houston Parkway West
Houston, TX
77064
(Address of principal executive offices)
(Zip Code)
 
(281) 897-7788
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock, $.01 par value - 70,919,195 shares as of August 31, 2017 .
 
 




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


i


PART I — FINANCIAL INFORMATION  
Item 1.  Unaudited Consolidated Financial Statements. 
NCI BUILDING SYSTEMS, INC. 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
July 30,
2017
 
October 30,
2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
45,923

 
$
65,403

Restricted cash
213

 
310

Accounts receivable, net
189,677

 
182,258

Inventories, net
212,733

 
186,824

Income taxes receivable
2,266

 
982

Deferred income taxes
25,942

 
29,104

Investments in debt and equity securities, at market
6,423

 
5,748

Prepaid expenses and other
29,734

 
29,971

Assets held for sale
6,145

 
4,256

Total current assets
519,056

 
504,856

Property, plant and equipment, net
230,042

 
242,212

Goodwill
154,291

 
154,271

Intangible assets, net
139,553

 
146,769

Other assets, net
1,920

 
2,092

Total assets
$
1,044,862

 
$
1,050,200

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Note payable
$
880

 
$
460

Accounts payable
120,702

 
142,913

Accrued compensation and benefits
62,488

 
72,612

Accrued interest
1,401

 
7,165

Other accrued expenses
104,280

 
103,384

Total current liabilities
289,751

 
326,534

Long-term debt, net of deferred financing costs of $7,178 and $8,096 on July 30, 2017 and October 30, 2016, respectively
386,969

 
396,051

Deferred income taxes
23,116

 
24,804

Other long-term liabilities
21,251

 
21,494

Total long-term liabilities
431,336

 
442,349

Stockholders’ equity:
 

 
 

Common stock, $.01 par value, 100,000,000 shares authorized; 71,186,909 and 71,581,273 shares issued at July 30, 2017 and October 30, 2016, respectively; 70,895,781 and 70,806,202 shares outstanding at July 30, 2017 and October 30, 2016, respectively
712

 
715

Additional paid-in capital
600,954

 
603,120

Accumulated deficit
(265,535
)
 
(302,706
)
Accumulated other comprehensive loss, net
(10,216
)
 
(10,553
)
Treasury stock, at cost (291,128 and 775,071 shares at July 30, 2017 and October 30, 2016, respectively)
(2,140
)
 
(9,259
)
Total stockholders’ equity
323,775

 
281,317

Total liabilities and stockholders’ equity
$
1,044,862

 
$
1,050,200

 
See accompanying notes to consolidated financial statements.

1


NCI BUILDING SYSTEMS, INC.
  CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Sales
$
469,385

 
$
462,353

 
$
1,281,552

 
$
1,204,614

Cost of sales
354,416

 
334,454

 
981,656

 
899,277

(Gain) loss on sale of assets and asset recovery
—

 
(52
)
 
137

 
(1,704
)
Gross profit
114,969

 
127,951

 
299,759

 
307,041

Engineering, selling, general and administrative expenses
76,309

 
80,414

 
220,473

 
224,912

Intangible asset amortization
2,405

 
2,405

 
7,215

 
7,226

Strategic development and acquisition related costs
1,297

 
819

 
1,778

 
2,080

Restructuring and impairment charges
1,009

 
778

 
3,587

 
3,437

Gain on insurance recovery
(148
)
 
—

 
(9,749
)
 
—

Income from operations
34,097

 
43,535

 
76,455

 
69,386

Interest income
20

 
62

 
164

 
136

Interest expense
(7,373
)
 
(7,747
)
 
(21,738
)
 
(23,460
)
Foreign exchange gain (loss)
985

 
(922
)
 
1,035

 
(1,088
)
Gain from bargain purchase
—

 
—

 
—

 
1,864

Other income, net
337

 
414

 
1,045

 
476

Income before income taxes
28,066

 
35,342

 
56,961

 
47,314

Provision for income taxes
9,845

 
11,627

 
19,727

 
15,288

Net income
$
18,221

 
$
23,715

 
$
37,234

 
$
32,026

Net income allocated to participating securities
(102
)
 
(165
)
 
(240
)
 
(265
)
Net income applicable to common shares
$
18,119

 
$
23,550

 
$
36,994

 
$
31,761

Income per common share:
 

 
 

 
 
 
 
Basic
$
0.26

 
$
0.32

 
$
0.52

 
$
0.44

Diluted
$
0.25

 
$
0.32

 
$
0.52

 
$
0.43

Weighted average number of common shares outstanding:
 

 
 

 
 
 
 
Basic
71,047

 
73,104

 
70,973

 
72,932

Diluted
71,183

 
73,552

 
71,134

 
73,460

 
See accompanying notes to consolidated financial statements.
 



2


NCI BUILDING SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Comprehensive income (loss):
 

 
 

 
 

 
 

Net income
$
18,221

 
$
23,715

 
$
37,234

 
$
32,026

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Foreign exchange translation gains (losses) and other (1)
395

 
(201
)
 
337

 
(50
)
Other comprehensive income (loss)
395

 
(201
)
 
337

 
(50
)
Comprehensive income
$
18,616

 
$
23,514

 
$
37,571

 
$
31,976

(1)
Foreign exchange translation gains (losses) and other are presented net of taxes of $0 in both the three months ended July 30, 2017 and July 31, 2016 , and $0 in both the nine months ended July 30, 2017 and July 31, 2016 .

See accompanying notes to consolidated financial statements.
 



3


NCI BUILDING SYSTEMS, INC. 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
 
 
 
 
 
 
Additional
 
Retained
 
Accumulated
Other
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Earnings
 
Comprehensive
 
Treasury Stock
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
(Deficit)
 
(Loss) Income
 
Shares
 
Amount
 
Equity
Balance, October 30, 2016
71,581,273

 
$
715

 
$
603,120

 
$
(302,706
)
 
$
(10,553
)
 
(775,071
)
 
$
(9,259
)
 
$
281,317

Treasury stock purchases
—

 
—

 
—

 
—

 
—

 
(402,825
)
 
(5,922
)
 
(5,922
)
Retirement of treasury shares
(888,435
)
 
(8
)
 
(12,898
)
 
—

 
—

 
888,435

 
12,906

 
—

Issuance of restricted stock
358,809

 
4

 
(4
)
 
—

 
—

 
(19,806
)
 
—

 
—

Stock options exercised
135,027

 
1

 
1,195

 
—

 
—

 
—

 
—

 
1,196

Excess tax benefits from share-based compensation arrangements
—

 
—

 
1,515

 
—

 
—

 
—

 
—

 
1,515

Foreign exchange translation gain and other, net of taxes
—

 
—

 
15

 
(63
)
 
337

 
—

 
—

 
289

Deferred compensation obligation
235

 
—

 
(135
)
 
—

 
—

 
18,139

 
135

 
—

Share-based compensation
—

 
—

 
8,146

 
—

 
—

 
—

 
—

 
8,146

Net income
—

 
—

 
—

 
37,234

 
—

 
—

 
—

 
37,234

Balance, July 30, 2017
71,186,909

 
$
712

 
$
600,954

 
$
(265,535
)
 
$
(10,216
)
 
(291,128
)
 
$
(2,140
)
 
$
323,775

 
See accompanying notes to consolidated financial statements.



4


NCI BUILDING SYSTEMS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
Cash flows from operating activities:
 

 
 

Net income
$
37,234

 
$
32,026

Adjustments to reconcile net income to net cash from operating activities:
 

 
 

Depreciation and amortization
30,656

 
32,107

Amortization of deferred financing costs
1,398

 
1,431

Share-based compensation expense
8,146

 
7,711

Gain on insurance recovery
(9,749
)
 
—

Loss (gains) on assets, net
438

 
(3,568
)
Provision for doubtful accounts
1,145

 
1,515

Provision for deferred income taxes
70

 
1,573

Excess tax (benefits) from share-based compensation arrangements
(1,515
)
 
(867
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
(8,559
)
 
(10,102
)
Inventories
(25,909
)
 
(25,309
)
Income taxes
(1,284
)
 
—

Prepaid expenses and other
1,069

 
1,150

Accounts payable
(22,212
)
 
499

Accrued expenses
(10,499
)
 
2,550

Other, net
(1,347
)
 
(117
)
   Net cash (used in) provided by operating activities
(918
)
 
40,599

Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
—

 
(4,343
)
Capital expenditures
(15,629
)
 
(15,140
)
Proceeds from sale of property, plant and equipment
2,533

 
5,479

Proceeds from insurance
8,593

 
—

Net cash used in investing activities
(4,503
)
 
(14,004
)
Cash flows from financing activities:
 

 
 

Refund (deposit) of restricted cash
96

 
(44
)
Proceeds from stock options exercised
1,195

 
12,055

Excess tax benefits from share-based compensation arrangements
1,515

 
867

Proceeds from Amended ABL facility
35,000

 
—

Payments on Amended ABL facility
(35,000
)
 
—

Payments on term loan
(10,180
)
 
(30,000
)
Payments on note payable
(1,096
)
 
(974
)
Purchases of treasury stock
(5,922
)
 
(57,401
)
Net cash used in financing activities
(14,392
)
 
(75,497
)
Effect of exchange rate changes on cash and cash equivalents
333

 
(50
)
Net decrease in cash and cash equivalents
(19,480
)
 
(48,952
)
Cash and cash equivalents at beginning of period
65,403

 
99,662

Cash and cash equivalents at end of period
$
45,923

 
$
50,710

 
See accompanying notes to consolidated financial statements.

5


NCI BUILDING SYSTEMS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 30, 2017
(Unaudited)
 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements for NCI Building Systems, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “NCI,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present our financial position, results of operations and cash flows for the periods indicated. Operating results for the fiscal three and nine month periods ended July 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending October 29, 2017 . Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects.
For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 filed with the Securities and Exchange Commission (the “SEC”) on January 10, 2017.
Reporting Periods
We use a four-four-five week calendar each quarter with our fiscal year end being on the Sunday closest to October 31. The year end for fiscal 2017 is October 29, 2017 .
Gain on Insurance Recovery
In June 2016, the Company experienced a fire at a facility in the Metal Components segment. 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 in the consolidated statement of operations 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.
The Company’s property insurance policy is a replacement cost policy such that the Company will be reimbursed an additional amount of up to $4.7 million for the difference between the actual cash value and the replacement cost if and when the property is replaced and/or new assets are acquired. Such amount will only be recognized in the Company’s financial statements upon resolution of the associated contingency. Additionally, the Company anticipates additional insurance recoveries may be received for business interruption claims related to the fire.
NOTE 2 — ACQUISITION
Fiscal 2016 acquisition
On November 3, 2015, we acquired manufacturing operations in Hamilton, Ontario, Canada for cash consideration of $2.2 million , net of post-closing working capital adjustments. This business allows us to service customers more competitively within the Canadian and Northeastern United States insulated metal panel (“IMP”) markets. Because the business was acquired from a seller in connection with a divestment required by a regulatory authority, the fair value of net assets acquired exceeded the purchase consideration by $1.9 million , which was recorded as a non-taxable gain from bargain purchase in the unaudited consolidated statements of operations during the first quarter of fiscal 2016.


6


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

Property, plant and equipment
 
4,810

Assets acquired
 
5,117

Current liabilities assumed
 
380

Fair value of net assets acquired
 
4,737

Total cash consideration transferred
 
2,201

Deferred tax liabilities
 
672

Gain from bargain purchase
 
$
(1,864
)
The results of operations for this business are included in our Metal Components segment. Pro forma financial information and other disclosures for this acquisition have not been presented as it is not material to the Company’s financial position or operating results.
NOTE 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 January 2015, the FASB issued ASU 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items . ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items. We adopted ASU 2015-01 prospectively in our first quarter in fiscal 2017. 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 in our first quarter in fiscal 2017 on a prospective basis and, accordingly, 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.

7


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.
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 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.

8


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 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 will be required to adopt the amendments in this ASU on a prospective basis in the annual and interim periods for our fiscal year ending October 31, 2021, with early adoption permitted. We are evaluating the impact ASU 2017-04 will have on our consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets , which clarifies the scope of guidance on nonfinancial asset derecognition in Accounting Standards Codification 610-20 and the accounting for partial sales of nonfinancial assets. The new guidance also conforms the derecognition guidance for nonfinancial assets with the model in the new revenue standard (ASU 2014-09). 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, and the Company is required to apply the amendments at the same time that it applies the amendments in ASU 2014-09. We are evaluating the impact of adopting this guidance.
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 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.

9


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.
NOTE 4 —RESTRUCTURING AND ASSET IMPAIRMENTS
As part of the plans developed in the fourth quarter of fiscal 2015 primarily to improve ESG&A and manufacturing cost efficiency and to optimize our combined manufacturing footprint given the Company’s acquisitions and restructuring efforts, we incurred restructuring charges of $1.0 million , including $0.9 million and $0.1 million in the Engineered Building Systems segment and Metal Components segment, respectively, during the three months ended July 30, 2017 . During the three months ended July 31, 2016 , we incurred restructuring charges, primarily consisting of severance related costs of $0.8 million , including $0.1 million and $0.3 million in the Engineered Building Systems segment and Metal Components segment, respectively, and $0.4 million at corporate.
For the nine months ended July 30, 2017 , we incurred restructuring charges, primarily consisting of severance related costs of $3.6 million , including approximately $3.0 million and $0.6 million in the Engineered Building Systems segment and Metal Components segment, respectively. For the nine months ended July 31, 2016 , we incurred restructuring charges, primarily consisting of severance related costs of $3.4 million , including $0.8 million and $1.2 million in the Engineered Building Systems segment and Metal Components segment, respectively, and $1.4 million at corporate.
The following table summarizes the costs and charges associated with the restructuring plans during the three and nine months ended July 30, 2017 , which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations (in thousands): 
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
 
 
July 30,
2017
 
July 30,
2017
 
Cost
Incurred
To Date (since inception)
General severance
$
284

 
$
1,327

 
$
8,671

Plant closing severance
106

 
1,436

 
3,176

Asset impairments
—

 
125

 
5,969

Other restructuring costs
619

 
699

 
1,330

Total restructuring costs
$
1,009

 
$
3,587

 
$
19,146

We expect to fully execute our plans in phases over the next 21 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 these plans.
The following table summarizes our severance liability and cash payments made pursuant to the restructuring plans from inception through July 30, 2017 (in thousands): 
 
General
Severance
 
Plant Closing
Severance
 
Total
Balance at November 2, 2014
$
—

 
$
—

 
$
—

Costs incurred
3,887

 
1,575

 
5,462

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

 
—

 
739

Balance at November 1, 2015
$
1,685

 
$
—

 
$
1,685

Costs incurred (1)
2,725

 
165

 
2,890

Cash payments
(3,928
)
 
(165
)
 
(4,093
)
Balance at October 30, 2016
$
482

 
$
—

 
$
482

Costs incurred and other
1,327

 
1,436

 
2,763

Cash payments
(1,505
)
 
(1,436
)
 
(2,941
)
Balance at July 30, 2017
$
304

 
$
—

 
$
304


10


(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.
NOTE 5 — INVENTORIES
The components of inventory are as follows (in thousands): 
 
July 30,
2017
 
October 30,
2016
Raw materials
$
162,807

 
$
145,060

Work in process and finished goods
49,926

 
41,764

 
$
212,733

 
$
186,824

 
NOTE 6 — 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 the three months ended July 30, 2017, we reclassified $1.1 million from property, plant and equipment to assets held for sale for idled facilities in our Metal Components segment 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) was $6.1 million and $4.3 million as of July 30, 2017 and October 30, 2016 , respectively. All of these assets continued to be actively marketed for sale or are under contract as of July 30, 2017 .
During the nine months ended July 30, 2017 , we completed the sale of an idle facility in the Engineered Building Systems segment, along with related equipment, which had previously been classified in assets held for sale. In connection with the sale of these assets, we received net cash proceeds of $2.5 million , and recognized a net loss of $0.1 million , which is included in (gain) loss on sale of assets and asset recovery in the consolidated statements of operations.
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analysis. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We 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. 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 totaled $0.5 million as of July 30, 2017.
NOTE 7 — SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share 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 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.

11


As of July 30, 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 in annual increments over three to four years or earlier upon death, disability or a change of control. However, our annual restricted stock awards issued prior to December 15, 2013 also vest upon attainment of age 65 and, only in the case of certain special one-time restricted stock awards, a portion vest on termination without cause or for good reason, as defined by the agreements governing such awards. Restricted stock awards issued after December 15, 2013 do not vest upon attainment of age 65, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.
Our 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 the case of performance-based awards, expense is recognized based upon management’s assessment of the probability that such performance conditions will be achieved. 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
During the nine month periods ended July 30, 2017 and July 31, 2016 , we granted 10,424 and 28,535 stock options, respectively. The grant date fair value of options granted during the nine month periods ended July 30, 2017 and July 31, 2016 was $6.59 and $5.38 per share, respectively. There were 0.1 million options with an intrinsic value of $1.1 million exercised during the nine month period ended July 30, 2017 . Cash received from options exercised was $1.2 million .
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 of 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 of 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 nine month periods ended July 30, 2017 and July 31, 2016 , we granted PSUs with a total fair value of approximately $4.6 million and $5.2 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 performance 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 nine month periods ended July 30, 2017 and July 31, 2016 , we granted awards to key employees with equity fair values of $2.0 million and $2.4 million and cash values of $2.0 million and $2.1 million , respectively.
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.

12


For the restricted stock units granted in December 2016 and 2015 to our senior executives, one-third vests annually. The restricted stock units granted in December 2014 to our senior executives vested two-thirds on December 15, 2016 and the remaining one-third vests on December 15, 2017. The PSUs granted in December 2016 and 2015 to our senior executives cliff vest at the end of the respective three-year performance period. The PSUs granted in December 2014 to our senior executives vested one-half on December 15, 2016 and the remaining one-half vests on December 15, 2017. During the nine month periods ended July 30, 2017 and July 31, 2016 , we granted time-based restricted stock units with a fair value of $4.5 million , representing 0.3 million shares, and $4.2 million , representing 0.3 million shares, respectively.
During the nine month periods ended July 30, 2017 and July 31, 2016 , we recorded share-based compensation expense for all awards of $8.1 million and $7.7 million , respectively.
Deferred Compensation
In accordance with the Company’s Deferred Compensation Plan, amounts deferred into the Company Stock Fund must remain invested in the Company Stock Fund until distribution. The deferred compensation obligation related to the Company’s stock may only be settled by the delivery of a fixed number of the Company’s common shares held on the participant’s behalf. As a result, we have a deferred compensation obligation of $1.2 million related to the Company Stock Fund that is recorded within equity in additional paid-in capital on the consolidated balance sheet as of July 30, 2017 . Subsequent changes in the fair value of the deferred compensation obligation classified within equity are not recognized. Additionally, the Company currently holds 164,663 shares in treasury shares, relating to deferred, vested PSU awards, until participants are eligible to receive benefits under the terms of the Deferred Compensation Plan.
NOTE 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 earnings per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per common share is as follows (in thousands, except per share data): 
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Numerator for Basic and Diluted Earnings Per Common Share:
 

 
 

 
 
 
 
Net income applicable to common shares
$
18,119

 
$
23,550

 
$
36,994

 
$
31,761

Denominator for Basic and Diluted Earnings Per Common Share:
 

 
 

 
 
 
 
Weighted average basic number of common shares outstanding
71,047

 
73,104

 
70,973

 
72,932

Common stock equivalents:
 
 
 
 
 
 
 
Employee stock options
127

 
441

 
130

 
528

PSUs and Performance Share Awards
9

 
7

 
32

 
—

Weighted average diluted number of common shares outstanding
71,183

 
73,552

 
71,134

 
73,460

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.26

 
$
0.32

 
$
0.52

 
$
0.44

Diluted earnings per common share
$
0.25

 
$
0.32

 
$
0.52

 
$
0.43

 
 
 
 
 
 
 
 
Incentive Plan securities excluded from dilution (1)
—

 
3

 
1

 
21

(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. Awards subject to the achievement of performance conditions or market conditions

13


for which such conditions had been met at the end of any of the fiscal periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
NOTE 9 — WARRANTY
We sell weathertightness warranties to our customers for protection from leaks in our roofing systems related to weather. These warranties generally range from 2 years to 20 years. We sell two types of warranties, standard and Single Source™, and three grades of coverage for each. The type and grade of coverage determines the price to the customer. For standard warranties, our responsibility for leaks in a roofing system begins after 24 consecutive leak-free months. For Single Source™ warranties, the roofing system must pass our inspection before warranty coverage will be issued. Inspections are typically performed at three stages of the roofing project: (i) at the project start-up; (ii) at the project mid-point; and (iii) at the project completion. These inspections are included in the cost of the warranty. If the project requires or the customer requests additional inspections, those inspections are billed to the customer. Upon the sale of a warranty, we record the resulting revenue as deferred revenue, which is included in other accrued expenses on our consolidated balance sheets.
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the fiscal nine months ended July 30, 2017 and July 31, 2016 (in thousands):
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
Beginning balance
$
27,200

 
$
25,669

Warranties sold
1,654

 
2,606

Revenue recognized
(1,585
)
 
(2,415
)
Ending balance
$
27,269

 
$
25,860

NOTE 10 — DEFINED BENEFIT PLANS
RCC Pension Plan — With the acquisition of Robertson-Ceco II Corporation (“RCC”) on April 7, 2006, we assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds, fixed income securities and master limited partnerships.
CENTRIA Benefit Plans — As a result of the CENTRIA Acquisition on January 16, 2015, we assumed noncontributory defined benefit plans covering certain hourly employees (the “CENTRIA Benefit Plans”) and are closed to new participants. Benefits under the CENTRIA Benefit Plans are calculated based on fixed amounts for each year of service rendered, although benefits accruals for one of the plans previously ceased. Plan assets of the CENTRIA Benefit Plans are invested in broadly diversified portfolios of domestic and international equity mutual funds, bonds, mortgages and other funds. CENTRIA also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”).
In addition to the CENTRIA Benefit Plans, CENTRIA contributes to a multi-employer plan, Steelworkers Pension Trust. The minimum required annual contribution to this plan is $0.3 million . 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.

14


The following table sets forth the components of the net periodic benefit cost, before tax, and funding contributions, for the periods indicated (in thousands):
 
Fiscal Three Months Ended 
 July 30, 2017
 
Fiscal Three Months Ended 
 July 31, 2016
 
Defined
Benefit
Plans
 
OPEB
Plans
 
Total
 
Defined
Benefit
Plans
 
OPEB
Plans
 
Total
Service cost
$
24

 
$
9

 
$
33

 
$
34

 
$
8

 
$
42

Interest cost
513

 
64

 
577

 
589

 
65

 
654

Expected return on assets
(700
)
 
—

 
(700
)
 
(745
)
 
—

 
(745
)
Amortization of prior service credit
(2
)
 
—

 
(2
)
 
(2
)
 
—

 
(2
)
Amortization of net actuarial loss
344

 
—

 
344

 
292

 
—

 
292

Net periodic benefit cost
$
179

 
$
73

 
$
252

 
$
168

 
$
73

 
$
241

 
 
 
 
 
 
 
 
 
 
 
 
Funding contributions
$
591

 
$
—

 
$
591

 
$
394

 
$
—

 
$
394

 
Fiscal Nine Months Ended 
 July 30, 2017
 
Fiscal Nine Months Ended 
 July 31, 2016
 
Defined
Benefit
Plans
 
OPEB
Plans
 
Total
 
Defined
Benefit
Plans
 
OPEB
Plans
 
Total
Service cost
$
73

 
$
27

 
$
100

 
$
103

 
$
25

 
$
128

Interest cost
1,541

 
193

 
1,734

 
1,766

 
196

 
1,962

Expected return on assets
(2,099
)
 
—

 
(2,099
)
 
(2,235
)
 
—

 
(2,235
)
Amortization of prior service credit
(7
)
 
—

 
(7
)
 
(7
)
 
—

 
(7
)
Amortization of net actuarial loss
1,031

 
—

 
1,031

 
877

 
—

 
877

Net periodic benefit cost
$
539

 
$
220

 
$
759

 
$
504

 
$
221

 
$
725

 
 
 
 
 
 
 
 
 
 
 
 
Funding contributions
$
1,416

 
$
—

 
$
1,416

 
$
1,159

 
$
—

 
$
1,159

We expect to contribute an additional $0.6 million to the Defined Benefit Plans for the remainder of fiscal 2017. Our policy is to fund the CENTRIA Benefit Plans as required by minimum funding standards of the Internal Revenue Code. The contributions to the OPEB Plans by retirees vary from none to 25% of the total premiums paid.
NOTE 11 — LONG-TERM DEBT AND NOTE PAYABLE  
Debt is comprised of the following (in thousands): 
 
July 30,
2017
 
October 30,
2016
Credit Agreement, due June 2022, as amended (variable interest, at 4.02% and 4.25% on July 30, 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)
7,178

 
8,096

Total long-term debt, net of deferred financing costs
$
386,969

 
$
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 $0.8 million and $1.1 million as of July 30, 2017 and October 30, 2016, respectively, are classified in other assets on the consolidated balance sheets.

15


8.25% Senior Notes Due January 2023
The Company’s $250.0 million in aggregate principal amount of 8.25% senior notes due 2023 (the “Notes”) bear interest at 8.25% per annum and will mature on January 15, 2023. Interest is payable semi-annually in arrears on January 15 and July 15 of each year.
The Company may redeem the Notes at any time prior to January 15, 2018, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, plus the applicable make-whole premium. On or after January 15, 2018, the Company may redeem all or a part of the Notes at redemption prices (expressed as percentages of principal amount thereof) set forth below, plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes, if redeemed during the 12-month period beginning on January 15 of the year as follows:
Year
 
Percentage
2018
 
106.188%
2019
 
104.125%
2020
 
102.063%
2021 and thereafter
 
100.000%
In addition, prior to January 15, 2018, the Company may redeem the Notes in an aggregate principal amount of up to 40.0% of the original aggregate principal amount of the Notes with funds in an equal aggregate amount not exceeding the aggregate proceeds of one or more equity offerings, at a redemption price of 108.250% , plus accrued and unpaid interest, if any, to the applicable redemption date of the Notes.
Credit Agreement
The Company’s Credit Agreement provided for a term loan credit facility (“Term Loan”) in an original aggregate principal amount of $250.0 million . The 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 alternative base rate plus a borrowing margin of 2.00% per annum. At July 30, 2017 , the interest rate on the Term Loans was 4.02% .
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 of 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 the nine month periods ended July 30, 2017 and July 31, 2016 , the Company made voluntary prepayments of $10.2 million and $30.0 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.
Amended ABL Facility
The Company’s Asset-Based Lending Facility, dated as of May 2, 2012, (“Amended ABL Facility”) provides for revolving loans of up to $150.0 million (subject to a borrowing base) and letters of credit of up to $30.0 million . Borrowing availability under the Amended ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of qualified cash, eligible inventory and eligible accounts receivable, less certain reserves and subject to

16


certain other adjustments. At July 30, 2017 and October 30, 2016 , the Company’s excess availability under the Amended ABL Facility was $139.9 million and $140.9 million , respectively. The Company had no revolving loans outstanding under the Amended ABL Facility as of July 30, 2017 and October 30, 2016 . In addition, at July 30, 2017 and October 30, 2016 , standby letters of credit related to certain insurance policies totaling approximately $10.0 million and $9.1 million , respectively, were outstanding but undrawn under the Amended ABL Facility. The Amended ABL Facility will mature on June 24, 2019.
The Amended ABL Facility includes a minimum fixed charge coverage ratio of 1.00 :1.00, which will apply if we fail to maintain a specified minimum borrowing capacity. The minimum level of borrowing capacity as of July 30, 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 July 30, 2017 and October 30, 2016 , NCI’s fixed charge coverage ratio, which is calculated on a trailing twelve month basis, was 4.69 :1.00 and 2.86 :1.00, respectively.
Loans under the Amended ABL Facility bear interest, at NCI’s option, as follows:
(1)
Base Rate loans at the Base Rate plus a margin. The margin ranges from 0.75% to 1.25% depending on the quarterly average excess availability under such facility; and
(2)
LIBOR loans at LIBOR plus a margin. The margin ranges from 1.75% to 2.25% depending on the quarterly average excess availability under such facility.
An unused commitment fee is paid monthly on the Amended ABL Facility at an annual rate of 0.50% based on the amount by which the maximum credit exceeds the average daily principal balance of outstanding loans and letter of credit obligations. Additional customary fees in connection with the Amended ABL Facility also apply.
For additional information on the Notes, Credit Agreement and the Amended ABL Facility, including guarantees and security, see our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 .
Debt Covenants
The Company’s outstanding debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness, dispose of assets, make acquisitions and engage in mergers. As of July 30, 2017 , the Company was in compliance with all covenants that were in effect on such date.
Insurance Note Payable  
As of July 30, 2017 , and October 30, 2016 , the Company had an outstanding note payable in the amount of $0.9 million and $0.5 million , respectively, related to financed insurance premiums. Insurance premium financings are generally secured by the unearned premiums under such policies.
NOTE 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 converted into shares of our common stock on May 14, 2013. Among other provisions, the Stockholders Agreement entitles the CD&R Funds to certain nomination or designation rights with respect to our board of directors; subscription rights with respect to future issuances of common stock by us; corporate governance rights; and consent rights with respect to certain types of transactions we may enter into in the future.
As of July 30, 2017 , and October 30, 2016 , the CD&R Funds owned approximately 42.4% and 42.3% , respectively, of the outstanding shares of our common stock.
NOTE 13 — STOCK REPURCHASE PROGRAM
On September 8, 2016, the Company’s Board of Directors authorized a stock repurchase program for the repurchase of up to an aggregate of $50.0 million of the Company’s outstanding common stock. Under this repurchase program, the Company is authorized to repurchase shares, if at all, at times and in amounts that it deems appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program.
During the nine months ended July 30, 2017 , the Company repurchased approximately 0.2 million shares for $3.5 million under the stock repurchase program. As of July 30, 2017 , approximately $39.9 million remained available for stock repurchases under the program. 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.

17


In addition to the common stock repurchased during the nine months ended July 30, 2017 , the Company also withheld shares of stock to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
NOTE 14 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS  
Fair Value of Financial Instruments  
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable, accounts payable and notes payable approximate fair value as of July 30, 2017 and October 30, 2016 because of their relatively short maturities. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective fiscal period ends were (in thousands): 
 
July 30, 2017
 
October 30, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Credit Agreement, due June 2022
$
144,147

 
$
144,868

 
$
154,147

 
$
154,147

8.25% senior notes, due January 2023
250,000

 
270,000

 
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 as of July 30, 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, representative of Level 3 inputs.
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 July 30, 2017 and October 30, 2016 , segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): 

18


 
July 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Money market
$
1,246

 
$
—

 
$
—

 
$
1,246

Mutual funds – Growth
907

 
—

 
—

 
907

Mutual funds – Blend
1,857

 
—

 
—

 
1,857

Mutual funds – Foreign blend
872

 
—

 
—

 
872

Mutual funds – Fixed income
—

 
1,541

 
—

 
1,541

Total short-term investments in deferred compensation plan
4,882

 
1,541

 
—

 
6,423

Total assets
$
4,882

 
$
1,541

 
$
—

 
$
6,423

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Deferred compensation plan liability
$
—

 
$
4,716

 
$
—

 
$
4,716

Total liabilities
$
—

 
$
4,716

 
$
—

 
$
4,716

 
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)
Unrealized holding gain (loss) for the three months ended July 30, 2017 and July 31, 2016 was $0.2 million and $0.3 million , respectively. Unrealized holding gain (loss) for the nine months ended July 30, 2017 and July 31, 2016 was $(0.2) million and $0.1 million , respectively. These unrealized holding gains (losses) were substantially offset by changes in the deferred compensation plan liability.
NOTE 15 — INCOME TAXES
The effective tax rate for the three months ended July 30, 2017 was 35.1% , compared to 32.9% for the same period in the prior year. The change in effective tax rate was primarily driven by the reversal of reserve for uncertain tax positions in the three month period ended July 30, 2016. There was no corresponding benefit in the three months ended July 30, 2017. 

The effective tax rate for the nine months ended July 30, 2017 was 34.6% , compared to 32.3% for the same period in the prior year. The change in the effective tax rate was primarily driven by an adjustment in the first quarter of fiscal 2016 related to the research and development credit for fiscal year 2015 that was permanently extended in the Protecting Americans from Tax Hikes Act of 2015 and was signed into law in fiscal year 2016 as well as the nontaxable gain on bargain purchase from the Hamilton acquisition. There were no corresponding items in the nine months ended July 30, 2017.
NOTE 16 — 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

19


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 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 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 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 (expense) income.
The following table represents summary financial data attributable to these operating segments for the periods indicated (in thousands):
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Total sales:
 

 
 

 
 
 
 
Engineered Building Systems
$
191,910

 
$
181,029

 
$
505,797

 
$
468,028

Metal Components
297,006

 
287,307

 
813,100

 
751,610

Metal Coil Coating
70,559

 
72,069

 
198,078

 
178,452

Intersegment sales
(90,090
)
 
(78,052
)
 
(235,423
)
 
(193,476
)
Total sales
$
469,385

 
$
462,353

 
$
1,281,552

 
$
1,204,614

External sales:
 

 
 

 
 
 
 
Engineered Building Systems
$
182,164

 
$
175,471

 
$
481,641

 
$
455,876

Metal Components
258,486

 
256,195

 
717,021

 
670,757

Metal Coil Coating
28,735

 
30,687

 
82,890

 
77,981

Total sales
$
469,385

 
$
462,353

 
$
1,281,552

 
$
1,204,614

Operating income (loss):
 

 
 

 
 
 
 
Engineered Building Systems
$
14,948

 
$
19,561

 
$
28,346

 
$
39,216

Metal Components
35,289

 
37,497

 
91,406

 
71,436

Metal Coil Coating
6,562

 
8,748

 
17,320

 
18,272

Corporate
(22,702
)
 
(22,271
)
 
(60,617
)
 
(59,538
)
Total operating income
$
34,097

 
$
43,535

 
$
76,455

 
$
69,386

Unallocated other expense, net
(6,031
)
 
(8,193
)
 
(19,494
)
 
(22,072
)
Income before income taxes
$
28,066

 
$
35,342

 
$
56,961

 
$
47,314

 
 
July 30,
2017
 
October 30,
2016
Total assets:
 

 
 

Engineered Building Systems
$
236,444

 
$
229,422

Metal Components
663,075

 
654,534

Metal Coil Coating
89,133

 
87,194

Corporate
56,210

 
79,050

Total assets
$
1,044,862

 
$
1,050,200


20


 
NOTE 17 — CONTINGENCIES  
As a manufacturer of products primarily for use in nonresidential building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims, or potential claims. The Company insures against these risks to the extent deemed prudent by its management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts the Company deems prudent and for which the Company is responsible for payment. In determining the amount of self-insurance, it is the Company’s policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability and general liability. The Company regularly reviews the status of ongoing proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance.

21



NCI BUILDING SYSTEMS, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following information should be read in conjunction with the unaudited consolidated financial statements included herein under “Item 1. Unaudited Consolidated Financial Statements” and the audited consolidated financial statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 .
 
FORWARD LOOKING STATEMENTS  
This Quarterly Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking information, including any earnings guidance, if applicable. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties, and other factors that could cause the actual results to differ materially from those projected. These risks, uncertainties, and other factors include, but are not limited to: 
•
industry cyclicality and seasonality and adverse weather conditions;
•
challenging economic conditions affecting the nonresidential construction industry;
•
volatility in the United States (“U.S.”) economy and abroad, generally, and in the credit markets;
•
substantial indebtedness and our ability to incur substantially more indebtedness;
•
our ability to generate significant cash flow required to service or refinance our existing debt, including the 8.25% senior notes due 2023, and obtain future financing;
•
our ability to comply with the financial tests and covenants in our existing and future debt obligations;
•
operational limitations or restrictions in connection with our debt;
•
increases in interest rates;
•
recognition of asset impairment charges;
•
commodity price increases and/or limited availability of raw materials, including steel;
•
our ability to make strategic acquisitions accretive to earnings;
•
retention and replacement of key personnel;
•
our ability to carry out our restructuring plans and to fully realize the expected cost savings;
•
enforcement and obsolescence of intellectual property rights;
•
fluctuations in customer demand;
•
costs related to environmental clean-ups and liabilities;
•
competitive activity and pricing pressure;
•
increases in energy prices;
•
volatility of the Company’s stock price;
•
dilutive effect on the Company’s common stockholders of potential future sales of the Company’s Common Stock held by our sponsor;
•
substantial governance and other rights held by our sponsor;

22


•
breaches of our information system security measures and damage to our major information management systems;
•
hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance;
•
changes in laws or regulations, including the Dodd–Frank Act;
•
costs and other effects of legal and administrative proceedings, settlements, investigations, claims and other matters;
•
timing and amount of any stock repurchases; and
•
other risks detailed under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K as filed with the SEC and Item 1A of Part II of this quarterly report. 
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption “Risk Factors” in our most recent Annual Report on Form 10-K as filed with the SEC and other risks described in documents subsequently filed by the Company from time to time with the SEC. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations unless the securities laws require us to do so. 
OVERVIEW  
NCI Building Systems, Inc. (together with its subsidiaries, unless the context requires otherwise, the “Company,” “NCI,” “we,” “us” or “our”) is one of North America’s largest integrated manufacturers and marketers of metal products for the nonresidential construction industry. We design, engineer, manufacture and market Engineered Building Systems and Metal Components primarily for nonresidential construction use. We manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We sell our products for both new construction and repair and retrofit applications. We also provide Metal Coil Coating services for commercial and construction applications, servicing both internal and external customers. 
Engineered Building Systems offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Similarly, Metal Components offer builders, designers, architects and end-users several advantages, including lower long-term costs, longer life, attractive aesthetics and design flexibility.  
We use a 52/53 week year with our fiscal year end on the Sunday closest to October 31. In fiscal 2017 , our year end will be October 29, 2017 . 
We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit and operating income, as well as whether each segment has achieved its projected sales goals. In assessing our overall financial performance, we regard return on adjusted operating assets, as well as growth in earnings, as key indicators of shareholder value. 
Third Fiscal Quarter   
During the third quarter of fiscal 2017, the Company has continued to realize the benefits of focused and integrated execution across our commercial, manufacturing, and supply chain activities, and our investments to improve our manufacturing productivity and overall cost efficiency. We are also maintaining commercial pricing discipline in an environment of volatile steel prices. We remain focused on growing and integrating insulated metal panel products (“IMP”) into our building and components businesses, which had a favorable impact on our operating results for the third quarter of fiscal 2017. Overall, year-over-year comparisons in most of our financial metrics reflect the abnormal seasonal pattern in 2016, where the third quarter financial performance was stronger than the fourth quarter. The third quarter of 2016 benefited from the pull forward of work, particularly in the legacy Components segment and a declining steel price environment.
Consolidated revenues increased by approximately 2% from the same period in the prior year. The year-over-year improvement was primarily driven by continued commercial discipline in the pass-through of higher costs in a rising steel price environment predominantly in the Buildings and Components segments, despite lower tonnage volumes.
The Company’s gross margin in the current period was 24.5% as compared to 27.7% in the third quarter of 2016. Lower margins in the current period were driven primarily by lower tonnage volumes in our components and metal coaters 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 110 basis points to 16.3% of sales compared to the same period last year, as we continue to execute on our strategic initiatives and restructuring activities.

23


We believe we have established a business platform that should enable us to continue to outperform the nonresidential construction market and to achieve above market growth in fiscal 2017. Our objective is to continue to execute on our strategic initiatives in order to increase market penetration and deliver growth above nonresidential market growth during fiscal 2017 in our legacy businesses and also in IMP through our multiple sales channels. We expect to have a stronger second half than the first half in fiscal 2017, which is in line with the normal seasonality of our business.
Industry Conditions  
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales are normally lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction. 
The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. Following a significant downturn in 2008 and 2009, the current recovery of low-rise construction has been uneven and slow, but is now showing some signs of steady growth. 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 Data & Analytics:
DODGEQ32017A02.JPG
Current market data continues to show uneven activity across the nonresidential construction markets. According to Dodge Data & Analytics, low-rise nonresidential new construction starts, as measured in square feet and comprising buildings of up to five stories, were up approximately 2% during fiscal 2016 as compared to fiscal 2015. Even though this measure tends to be revised upward in succeeding periods, we believe the underlying growth we are achieving is outpacing market activity. Leading indicators for low-rise, nonresidential construction activity indicate continued positive momentum in fiscal 2017.
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 2017.

24


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, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk — Steel Prices.”
Restructuring
We continue to execute on our plans to improve cost efficiency through the optimization of our combined manufacturing plant footprint and the elimination of certain fixed and indirect ESG&A costs. During the three months ended July 30, 2017 , we incurred charges of $1.0 million associated with restructuring actions, including $0.9 million and $0.1 million associated with our Engineered Building Systems and Metal Components segments, respectively.
The Company believes that the successful execution of these plans in phases over the next 21 months will result in annual cost savings ranging between $30.0 million and $40.0 million when completed, of which between approximately $18.0 million and $28.0 million represents the aggregate expected incremental cost savings to be realized in fiscal years 2017 and 2018. We are currently unable to make a good faith determination of cost estimates, or range of cost estimates, for actions associated with the plans. Restructuring charges will be recorded for the plans as they become estimable and probable. See Note 4 — Restructuring and Asset Impairments in the notes to the unaudited consolidated financial statements for additional information.
RESULTS OF OPERATIONS  
Operating segments are defined as components of an enterprise that engage in business activities and by which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) Engineered Building Systems; (ii) Metal Components; and (iii) Metal Coil Coating. All operating segments operate primarily in the nonresidential construction market. Sales and earnings are influenced by general economic conditions, the level of nonresidential construction activity, metal roof repair and retrofit demand and the availability and terms of financing available for construction. Our operating segments are vertically integrated and benefit from similar basic raw materials. The 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 Metal Components and Engineered Building Systems 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 (expense) income. See Note 16 — Operating Segments in the notes to the unaudited consolidated financial statements for more information on our segments. 
The following table represents sales and operating income (loss) attributable to these operating segments for the periods indicated (in thousands): 

25


 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Total sales:
 

 
 

 
 
 
 
Engineered Building Systems
$
191,910

 
$
181,029

 
$
505,797

 
$
468,028

Metal Components
297,006

 
287,307

 
813,100

 
751,610

Metal Coil Coating
70,559

 
72,069

 
198,078

 
178,452

Intersegment sales
(90,090
)
 
(78,052
)
 
(235,423
)
 
(193,476
)
Total sales
$
469,385

 
$
462,353

 
$
1,281,552

 
$
1,204,614

External sales:
 

 
 

 
 
 
 
Engineered Building Systems
$
182,164

 
$
175,471

 
$
481,641

 
$
455,876

Metal Components
258,486

 
256,195

 
717,021

 
670,757

Metal Coil Coating
28,735

 
30,687

 
82,890

 
77,981

Total sales
$
469,385

 
$
462,353

 
$
1,281,552

 
$
1,204,614

Operating income (loss):
 

 
 

 
 
 
 
Engineered Building Systems
$
14,948

 
$
19,561

 
$
28,346

 
$
39,216

Metal Components
35,289

 
37,497

 
91,406

 
71,436

Metal Coil Coating
6,562

 
8,748

 
17,320

 
18,272

Corporate
(22,702
)
 
(22,271
)
 
(60,617
)
 
(59,538
)
Total operating income
$
34,097

 
$
43,535

 
$
76,455

 
$
69,386

Unallocated other expense
(6,031
)
 
(8,193
)
 
(19,494
)
 
(22,072
)
Income before income taxes
$
28,066

 
$
35,342

 
$
56,961

 
$
47,314

FISCAL THREE MONTHS ENDED JULY 30, 2017 COMPARED TO FISCAL THREE MONTHS ENDED JULY 31, 2016  
Consolidated sales increased by 1.5% , or $7.0 million , for the three months ended July 30, 2017 , compared to the three months ended July 31, 2016 . The increase in revenue resulted from 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 lower overall tonnage volumes. The increase was also related to commercial sales discipline across our segments and improved product mix, particularly sales of IMP.
Consolidated cost of sales increased by 6.0% , or $20.0 million , for the three months ended July 30, 2017 , compared to the three months ended July 31, 2016 . The increase in cost of sales resulted primarily from higher material costs.
Gross margin percentage was 24.5% for the three months ended July 30, 2017 , compared to 27.7% for the same period in the prior year. Gross margin for the third quarter of fiscal 2017 was impacted by lower tonnage volumes in our Metal Components and Metal Coaters segments, leading to lower manufacturing cost leverage, offset by favorable product mix, particularly in IMP products.
Engineered Building Systems sales increased by 6.0% , or $10.9 million , to $191.9 million in the three months ended July 30, 2017 , from $181.0 million in the same period in the prior year. Sales to third parties for the three months ended July 30, 2017 increased by $6.7 million to $182.2 million from $175.5 million in the same period in the prior year, primarily due to the result of the pass-through of higher costs and improved commercial discipline. Engineered Building Systems third-party sales accounted for 38.8% of total consolidated third-party sales in the three months ended July 30, 2017 , compared to 38.0% in the three months ended July 31, 2016 . 
Operating income of the Engineered Building Systems segment decreased to $14.9 million in the three months ended July 30, 2017 , from $19.6 million in the same period in the prior year. The $4.6 million , or 23.6% , decrease resulted primarily from lower volumes and rapidly rising steel costs during the current period as compared to the same period in the prior fiscal year when steel prices were declining.
Metal Components sales increased by 3.4% , or $9.7 million , to $297.0 million in the three months ended July 30, 2017 , from $287.3 million in the same period in the prior year. The increase in sales was primarily driven by the pass-through of higher costs in a rising steel price environment, increased sales growth in the IMP product lines, as well as commercial pricing discipline across the segment, offset by lower overall tonnage volume. Sales to third parties for the three months ended July 30, 2017 increased by $2.3 million to $258.5 million from $256.2 million in the same period in the prior year. Metal Components third-party sales

26


accounted for 55.1% of total consolidated third-party sales in the three months ended July 30, 2017 , compared to 55.4% in the three months ended July 31, 2016 . 
Operating income of the Metal Components segment decreased to $35.3 million in the three months ended July 30, 2017 , compared to $ 37.5 million in the same period in the prior year. The $2.2 million , or 5.9% , decrease was driven primarily by lower volumes and capacity utilization across the legacy single skin product lines offset by improved IMP sales.
Metal Coil Coating sales decreased by 2.1% , or $1.5 million , to $70.6 million in the three months ended July 30, 2017 , compared to $72.1 million in the same period in the prior year. Sales to third parties for the three months ended July 30, 2017 decreased by $2.0 million to $28.7 million from $30.7 million in the same period in the prior year, primarily as a result of lower tonnage volume. Metal Coil Coating third-party sales accounted for 6.1% of total consolidated third-party sales in the three months ended July 30, 2017 , compared to 6.6% in the three months ended July 31, 2016 . 
Operating income of the Metal Coil Coating segment decreased to $6.6 million in the three months ended July 30, 2017 , from $8.7 million in the same period in the prior year. The $2.2 million , or 25.0% , decrease was primarily due to lower manufacturing leverage due to lower volumes and higher material costs.
Consolidated engineering, selling, general and administrative expenses decreased to $76.3 million in the three months ended July 30, 2017 , compared to $80.4 million in the same period in the prior year. As a percentage of sales, engineering, selling, general and administrative expenses were 16.3% for the three months ended July 30, 2017 , as compared to 17.4% for the three months ended July 31, 2016 . The $4.1 million decrease was primarily due to continued execution of our strategic initiatives.
Consolidated intangible amortization remained consistent period over period at $2.4 million in the three months ended July 30, 2017 , compared to $2.4 million in the same period in the prior year.
Consolidated strategic development and acquisition related costs for the three months ended July 30, 2017 were $1.3 million , compared to $0.8 million for the three months ended July 31, 2016 . These non-operational costs include external legal, financial and due diligence costs incurred to deliver on our strategic initiatives.  
Consolidated restructuring and impairment charges for the three months ended July 30, 2017 and July 31, 2016 were $1.0 million and $0.8 million , respectively. These charges, primarily consisting of severance related costs, relate to our actions taken to streamline our management and engineering and drafting activities, and also to optimize our overall manufacturing structure and footprint.
Consolidated gain on insurance recovery for the three months ended July 30, 2017 was $0.1 million , which related to a settlement with the Company’s insurers for property damage to a facility in the Metal Components segment. There was no corresponding gain in the three months ended July 31, 2016 .
Consolidated interest expense decreased to $7.4 million for the three months ended July 30, 2017 , compared to $7.7 million for the same period of the prior year. The 4.8% decrease in interest expense is a primarily a result of voluntary principal prepayments we made on our Existing Term Loans during fiscal years 2017 and 2016.
Consolidated foreign exchange gain (loss) for the three months ended July 30, 2017 was a $1.0 million gain, compared to a loss of $0.9 million for the same period of the prior year, due to exchange rate fluctuations in the Mexican peso and Canadian dollar relative to the U.S. dollar.
Consolidated provision for income taxes was $9.8 million for the three months ended July 30, 2017 , compared to $11.6 million for the same period in the prior year. The effective tax rate for the three months ended July 30, 2017 was 35.1% , compared to 32.9% for the same period in the prior year.  The provision for income taxes for the three months ended July 30, 2016 included a benefit related to the reversal of reserve for uncertain tax positions. There was no corresponding benefit in the current period.
FISCAL NINE MONTHS ENDED JULY 30, 2017 COMPARED TO FISCAL NINE MONTHS ENDED JULY 31, 2016
Consolidated sales increased by 6.4% , or $76.9 million , for the nine months ended July 30, 2017 , compared to the nine months ended July 31, 2016 . The increase in revenue resulted from 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 remaining flat year over year. The increase was also related to commercial sales discipline across our segments and improved product mix, particularly sales of IMP.
Consolidated cost of sales increased by 9.2% , or $82.4 million , for the nine months ended July 30, 2017 , compared to the nine months ended July 31, 2016 . The increase in cost of sales resulted primarily from rising raw materials costs during the current period as compared to declining materials costs in the prior year.
Gross margin percentage was 23.4% for the nine months ended July 30, 2017 , compared to 25.5% for the same period in the prior year. The decrease in gross margin primarily resulted from the impact of higher steel prices, which may significantly impact a period in isolation, but does not typically significantly impact gross margin over a longer time horizon because the cost is

27


ultimately passed through to customers. This decrease was further impacted by lower tonnage volumes offset by a continued focus on value-oriented commercial sales discipline.  
Engineered Building Systems sales increased by 8.1% , or $37.8 million , to $505.8 million in the nine months ended July 30, 2017 , from $468.0 million in the same period in the prior year. Sales to third parties for the nine months ended July 30, 2017 increased by $25.8 million to $481.6 million from $455.9 million in the same period in the prior year, primarily due to higher tonnage volume along with commercial discipline. Engineered Building Systems third-party sales accounted for 37.6% of total consolidated third-party sales in the nine months ended July 30, 2017 , compared to 37.8% in the nine months ended July 31, 2016 . 
Operating income of the Engineered Building Systems segment decreased to $28.3 million in the nine months ended July 30, 2017 , from $39.2 million in the same period in the prior year. The $10.9 million , or 27.7% , decrease resulted primarily from rapidly rising steel costs during the current period as compared to the same period in the prior fiscal year.
Metal Components sales increased by 8.2% , or $61.5 million , to $813.1 million in the nine months ended July 30, 2017 , from $751.6 million in the same period in the prior year. The increase in sales was primarily driven by higher tonnage volume and commercial discipline and improved product mix, particularly sales of IMP. Sales to third parties for the nine months ended July 30, 2017 increased by $46.3 million to $717.0 million from $670.8 million in the same period in the prior year. Metal Components third-party sales accounted for 55.9% of total consolidated third-party sales in the nine months ended July 30, 2017 , compared to 55.7% in the nine months ended July 31, 2016 . 
Operating income of the Metal Components segment increased to $91.4 million in the nine months ended July 30, 2017 , compared to $71.4 million in the same period in the prior year. The $20.0 million , or 28.0% , increase was driven primarily by more favorable product sales mix and the combined benefit of higher sales, effective supply chain management and commercial discipline. Operating income also includes $9.7 million of gain on insurance recovery for settlements on damaged or destroyed plant and equipment in the current period. There was no corresponding gain in the nine months ended July 31, 2016 .
Metal Coil Coating sales increased by 11.0% , or $19.6 million , to $198.1 million in the nine months ended July 30, 2017 , compared to $178.5 million in the same period in the prior year. Sales to third parties for the nine months ended July 30, 2017 increased by $4.9 million to $82.9 million from $78.0 million in the same period in the prior year, primarily as a result of an increase in tonnage volume. Metal Coil Coating third-party sales remained consistent and accounted for 6.5% of total consolidated third-party sales both in the nine months ended July 30, 2017 and the nine months ended July 31, 2016 . 
Operating income of the Metal Coil Coating segment decreased to $17.3 million in the nine months ended July 30, 2017 , from $18.3 million in the same period in the prior year. The $1.0 million , or 5.2% , decrease was primarily due to lower manufacturing efficiency due to lower volumes and higher material costs.
Consolidated engineering, selling, general and administrative expenses decreased $4.4 million , or 2.0%, to $220.5 million in the nine months ended July 30, 2017 , compared to $224.9 million in the same period in the prior year. As a percentage of sales, engineering, selling, general and administrative expenses were 17.2% for the nine months ended July 30, 2017 , as compared to 18.7% for the nine months ended July 31, 2016 . The $4.4 million decrease was primarily due to continued execution of our strategic initiatives.
Consolidated intangible amortization remained consistent period over period at $7.2 million in the nine months ended July 30, 2017 , compared to $7.2 million in the nine months ended July 31, 2016 .
Consolidated strategic development and acquisition related costs for the nine months ended July 30, 2017 were $1.8 million , compared to $2.1 million for the nine months ended July 31, 2016 . These non-operational costs include external legal, financial and due diligence costs incurred to pursue specific acquisition targets or costs directly associated with integrating previous acquisitions.  
Consolidated restructuring and impairment charges for the nine months ended July 30, 2017 and July 31, 2016 were $3.6 million and $3.4 million , respectively. These charges relate to our actions taken to streamline our management and engineering and drafting activities, and also to optimize our overall manufacturing structure and footprint. We closed three facilities during the nine months ended July 30, 2017 , including one in our Engineered Building Systems segment and two in our Metal Components segment, and incurred primarily severance-related costs in connection with these closures.
Consolidated gain on insurance recovery for the nine months ended July 30, 2017 was $9.7 million , which related to settlements with the Company’s insurers for property damage to two facilities in the Metal Components segment. There was no corresponding gain in the nine months ended July 31, 2016 .
Consolidated interest expense decreased to $21.7 million for the nine months ended July 30, 2017 , compared to $23.5 million for the same period of the prior year. The 7.3% decrease in interest expense is primarily a result of voluntary principal prepayments the Company made on its Term Loan during fiscal 2017 and 2016.

28


Consolidated foreign exchange gain (loss) for the nine months ended July 30, 2017 was a $1.0 million gain, compared to $1.1 million loss for the same period of the prior year, due to exchange rate fluctuations in the Mexican peso and Canadian dollar relative to the U.S. dollar.
Consolidated provision for income taxes was $19.7 million for the nine months ended July 30, 2017 , compared to $15.3 million for the same period in the prior year. The effective tax rate for the nine months ended July 30, 2017 was 34.6% , compared to 32.3% for the same period in the prior year. The change in the effective tax rate was primarily driven by a one-time adjustment in the first quarter of fiscal 2016 related to the research and development credit for fiscal 2015 that was permanently extended in the Protecting Americans from Tax Hikes Act of 2015 and was signed into law in fiscal 2016, the nontaxable gain on bargain purchase from the Hamilton acquisition and a benefit related to the reversal of reserve for uncertain tax positions. There were no corresponding items in the nine months ended July 30, 2017.
LIQUIDITY AND CAPITAL RESOURCES  
General  
Our cash and cash equivalents decreased from $65.4 million as of October 30, 2016 to $45.9 million as of July 30, 2017 . The following table summarizes our consolidated cash flows for the nine months ended July 30, 2017 and July 31, 2016 (in thousands): 
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
Net cash (used in) provided by operating activities
$
(918
)
 
$
40,599

Net cash used in investing activities
(4,503
)
 
(14,004
)
Net cash used in financing activities
(14,392
)
 
(75,497
)
Effect of exchange rate changes on cash and cash equivalents
333

 
(50
)
Net decrease in cash and cash equivalents
(19,480
)
 
(48,952
)
Cash and cash equivalents at beginning of period
65,403

 
99,662

Cash and cash equivalents at end of period
$
45,923

 
$
50,710

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 rely on cash and 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 used in operating activities was $0.9 million during the nine months ended July 30, 2017 compared to net cash provided by operating activities of $40.6 million in the nine months ended July 31, 2016 . The decrease in the current period was primarily due to significant investment in working capital by the Company in the first quarter of fiscal 2017, and timing of working capital turns in the third quarter of fiscal 2017.
Net cash used in accounts receivable was $8.6 million for the nine months ended July 30, 2017 , compared to $10.1 million for the nine months ended July 31, 2016 . Our days sales outstanding as of July 30, 2017 and July 31, 2016 were 35.5 days and 33.4 days, respectively. The decrease in our accounts receivable balance from the prior period was primarily the result of timing of collections toward the end of the current period.
For the nine months ended July 30, 2017 , the change in cash flows relating to inventory was $0.6 million and resulted partially from higher inventory purchases to support higher sales, and also due to purchases in advance of steel price increases. Our days inventory on-hand increased to 54.3 days as of July 30, 2017 from  46.5 days as of July 31, 2016 .
Net cash used in accounts payable for the nine months ended July 30, 2017 was $22.2 million , whereas net cash provided by accounts payable was $0.5 million in the nine months ended July 31, 2016 . Our vendor payments can significantly fluctuate based on the timing of disbursements, inventory purchases and vendor payment terms. Our days payable outstanding as of July 30, 2017 decreased to 33.0 days from 35.7 days as of July 31, 2016 .

29


Investing Activities  
Net cash used in investing activities decreased to $ 4.5 million during the nine months ended July 30, 2017 compared to $ 14.0 million in the nine months ended July 31, 2016 . We used $15.6 million for capital expenditures in the nine months ended July 30, 2017 and sold assets that had been classified as held for sale for $2.5 million during the nine months ended July 30, 2017 . These cash outflows were partially offset by $8.6 million of insurance proceeds received in connection with involuntary conversions at two of our facilities.
In the nine months ended July 31, 2016 , $15.1 million in cash was used for capital expenditures and $4.3 million was used for the acquisitions of CENTRIA and the Hamilton operations. Additionally, we sold assets that had been classified as held for sale for $5.5 million during the fiscal nine months ended July 31, 2016 .
Financing Activities  
Net cash used in financing activities was $ 14.4 million during the nine months ended July 30, 2017 compared to $ 75.5 million in the comparable prior year period. During the nine months ended July 30, 2017 , we made a $10.2 million voluntary principal prepayment on borrowings under our Credit Agreement, borrowed $35.0 million under our Amended ABL Facility and fully repaid that amount as of the end of the period, used $3.5 million to repurchase shares of our outstanding common stock under the program approved by the Board of Directors in September 2016 and used $2.4 million for purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units. We received $1.2 million in cash proceeds from the exercises of stock options.
During the nine months ended July 31, 2016 , we used $57.4 million to repurchase shares of our outstanding common stock under the program approved by the Board of Directors in January 2016, as well as shares of restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of restricted stock, and $30.0 million to make a voluntary principal prepayment on borrowings under our Credit Agreement. We received $12.1 million in cash proceeds from the exercises of stock options.
We invest our excess cash in various overnight investments which are issued or guaranteed by the U.S. federal government. 
Debt
As of July 30, 2017 , we had an aggregate principal amount of $394.1 million of outstanding indebtedness, comprising $144.1 million of borrowings under our Credit Agreement and $250.0 million in aggregate principal amount of 8.25% senior notes due 2023. Our excess availability under the Amended ABL Facility was $139.9 million as of July 30, 2017 . In addition, standby letters of credit related to certain insurance policies totaling approximately $10.0 million were outstanding but undrawn under the Amended ABL Facility. At July 30, 2017 , we had no revolving loans outstanding under the Amended ABL Facility.
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 alternative base rate plus a borrowing margin of 2.00% per annum.
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 of 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.

30


During the nine month periods ended July 30, 2017 and July 31, 2016 , the Company made voluntary prepayments of $10.2 million and $30.0 million , respectively, on the outstanding principal amount of the Term Loan. NCI is not restricted from making any further prepayments; however, for the six month period following the effective date of the New Term Loans, or prior to November 2, 2017, NCI would incur a 1% prepayment penalty for any voluntary prepayments. We are not required to make any quarterly installment payments until June 24, 2019.
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 converted into shares of our Common Stock on May 14, 2013.
At July 30, 2017 and October 30, 2016 , the CD&R Funds owned approximately 42.4% and 42.3% , respectively, of the outstanding shares of our common stock.
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-term 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, our Amended ABL Facility is undrawn with $139.9 million available at July 30, 2017 and we have a cash balance of $45.9 million as of July 30, 2017 .
We expect to contribute $0.6 million to our defined benefit plans during the remainder of fiscal 2017. 
We expect that, for the next 12 months, cash generated from operations and our availability under the Amended ABL Facility will be sufficient to provide us the ability to fund our operations and to provide the increased working capital necessary to support our strategy and fund planned capital expenditures of between approximately $25 million and $30 million for fiscal 2017 and expansion when needed.
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. 
From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase programs. On September 8, 2016, our Board of Directors authorized a stock repurchase program for the repurchase of up to an aggregate of $50.0 million of the Company’s outstanding Common Stock. Under this repurchase program, the Company is authorized to repurchase shares, if at all, at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program. At July 30, 2017 , approximately $39.9 million remained available for stock repurchases under the program. In addition to the common stock repurchased during the nine months ended July 30, 2017 under our stock repurchase programs, 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, redeem 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 redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital. 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 on its consolidated balance sheets.
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 (loss) 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

31


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 operating income (loss) to operating income (loss) for the periods indicated below (in thousands):
 
Three Months Ended July 30, 2017
 
Engineered Building Systems
 
Metal Components
 
Metal Coil Coating
 
Corporate
 
Consolidated
Operating income (loss), GAAP basis
$
14,948

 
$
35,289

 
$
6,562

 
$
(22,702
)
 
$
34,097

Restructuring and impairment charges
941

 
68

 
—

 
—

 
1,009

Strategic development and acquisition related costs
—

 
—

 
—

 
1,297

 
1,297

(Gain) on insurance recovery
—

 
(148
)
 
—

 
—

 
(148
)
Unreimbursed business interruption costs
—

 
235

 
—

 
—

 
235

Adjusted operating income (loss)
$
15,889

 
$
35,444

 
$
6,562

 
$
(21,405
)
 
$
36,490

 
Three Months Ended July 31, 2016
 
Engineered Building Systems
 
Metal
Components
 
Metal Coil Coating
 
Corporate
 
Consolidated
Operating income (loss), GAAP basis
$
19,561

 
$
37,497

 
$
8,748

 
$
(22,271
)
 
$
43,535

Restructuring and impairment charges
106

 
261

 
—

 
411

 
778

Strategic development and acquisition related costs
—

 
9

 
—

 
810

 
819

(Gain) on sale of assets and asset recovery
(52
)
 
—

 
—

 
—

 
(52
)
Adjusted operating income (loss)
$
19,615

 
$
37,767

 
$
8,748

 
$
(21,050
)
 
$
45,080

 
Nine Months Ended July 30, 2017
 
Engineered Building Systems
 
Metal Components
 
Metal Coil Coating
 
Corporate
 
Consolidated
Operating income (loss), GAAP basis
$
28,346

 
$
91,406

 
$
17,320

 
$
(60,617
)
 
$
76,455

Restructuring and impairment charges
3,037

 
501

 
—

 
49

 
3,587

Strategic development and acquisition related costs
—

 
—

 
—

 
1,778

 
1,778

Loss on sale of assets
137

 
—

 
—

 
—

 
137

(Gain) on insurance recovery
—

 
(9,749
)
 
—

 
—

 
(9,749
)
Unreimbursed business interruption costs
—

 
426

 
—

 
—

 
426

Adjusted operating income (loss)
$
31,520

 
$
82,584

 
$
17,320

 
$
(58,790
)
 
$
72,634


32


 
Nine Months Ended July 31, 2016
 
Engineered Building Systems
 
Metal Components
 
Metal Coil Coating
 
Corporate
 
Consolidated
Operating income (loss), GAAP basis
$
39,216

 
$
71,436

 
$
18,272

 
$
(59,538
)
 
$
69,386

Restructuring and impairment charges
755

 
1,155

 
39

 
1,488

 
3,437

Strategic development and acquisition related costs
—

 
403

 
—

 
1,677

 
2,080

(Gain) on sale of assets and asset recovery
(1,704
)
 
—

 
—

 
—

 
(1,704
)
Adjusted operating income (loss)
$
38,267

 
$
72,994

 
$
18,311

 
$
(56,373
)
 
$
73,199

The following tables reconcile adjusted EBITDA to net income for the periods indicated below (in thousands): 
 
4th Quarter 
October 30,
2016
 
1st Quarter 
January 29,
2017
 
2nd Quarter 
April 30,
2017
 
3rd Quarter 
July 30,
2017
 
Trailing 
12 Months 
July 30, 
2017
Net income
$
19,001

 
$
2,039

 
$
16,974

 
$
18,221

 
$
56,235

Add:
 
 
 

 
 

 
 
 
 
Depreciation and amortization
9,817

 
10,315

 
10,062

 
10,278

 
40,472

Consolidated interest expense, net
7,548

 
6,881

 
7,341

 
7,353

 
29,123

Provision for income taxes
12,649

 
1,275

 
8,606

 
9,845

 
32,375

Restructuring and impairment charges
815

 
2,264

 
315

 
1,009

 
4,403

Strategic development and acquisition related costs
590

 
357

 
124

 
1,297

 
2,368

Share-based compensation
3,181

 
3,042

 
2,820

 
2,284

 
11,327

Loss on sale of assets and asset recovery
62

 
—

 
137

 
—

 
199

(Gain) on insurance recovery
—

 
—

 
(9,601
)
 
(148
)
 
(9,749
)
Unreimbursed business interruption costs
—

 
—

 
191

 
235

 
426

Adjusted EBITDA
$
53,663

 
$
26,173

 
$
36,969

 
$
50,374

 
$
167,179

 
4th Quarter 
November 1,
2015
 
1st Quarter 
January 31,
2016
 
2nd Quarter
May 1,
2016
 
3rd Quarter
July 31,
2016
 
Trailing
12 Months
July 31,
2016
Net income
$
18,407

 
$
5,892

 
$
2,420

 
$
23,715

 
$
50,434

Add:
 

 
 

 
 

 
 

 
 
Depreciation and amortization
13,354

 
10,747

 
10,765

 
10,595

 
45,461

Consolidated interest expense, net
7,993

 
7,847

 
7,792

 
7,685

 
31,317

Provision for income taxes
10,029

 
2,453

 
1,209

 
11,627

 
25,318

Restructuring and impairment charges
7,611

 
1,510

 
1,149

 
778

 
11,048

(Gain) from bargain purchase
—

 
(1,864
)
 
—

 
—

 
(1,864
)
Strategic development and acquisition related costs
1,143

 
681

 
579

 
819

 
3,222

(Gain) on legal settlements
(3,765
)
 
—

 
—

 
—

 
(3,765
)
Share-based compensation
1,677

 
2,582

 
2,468

 
2,661

 
9,388

(Gain) on sale of assets and asset recovery
—

 
(725
)
 
(927
)
 
(52
)
 
(1,704
)
Adjusted EBITDA
$
56,449

 
$
29,123

 
$
25,455

 
$
57,828

 
$
168,855


33


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):
 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Net income per diluted common share, GAAP basis
$
0.25

 
$
0.32

 
$
0.52

 
$
0.43

Restructuring and impairment charges
0.01

 
0.01

 
0.05

 
0.05

Strategic development and acquisition related costs
0.02

 
0.01

 
0.02

 
0.03

(Gain) on insurance recovery
0.00

 
—

 
(0.14
)
 
—

Unreimbursed business interruption costs
0.00

 
—

 
0.01

 
—

Other losses (gains), net
—

 
0.00

 
0.00

 
(0.05
)
Tax effect of applicable non-GAAP adjustments (1)
(0.01
)
 
(0.01
)
 
0.02

 
(0.02
)
Adjusted net income per diluted common share
$
0.27

 
$
0.33

 
$
0.48

 
$
0.44

 
Fiscal Three Months Ended
 
Fiscal Nine Months Ended
 
July 30,
2017
 
July 31,
2016
 
July 30,
2017
 
July 31,
2016
Net income applicable to common shares, GAAP basis
$
18,119

 
$
23,550

 
$
36,994

 
$
31,761

Restructuring and impairment charges
1,009

 
778

 
3,587

 
3,437

Strategic development and acquisition related costs
1,297

 
819

 
1,778

 
2,080

(Gain) on insurance recovery
(148
)
 
—

 
(9,749
)
 
—

Unreimbursed business interruption costs
235

 
—

 
426

 
—

Other losses (gains), net
—

 
(52
)
 
137

 
(3,568
)
Tax effect of applicable non-GAAP adjustments (1)
(933
)
 
(603
)
 
1,490

 
(1,487
)
Adjusted net income applicable to common shares
$
19,579

 
$
24,492

 
$
34,663

 
$
32,223

(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.
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 July 30, 2017 , we were not involved in any material unconsolidated SPE transactions. 
CONTRACTUAL OBLIGATIONS  
In general, purchase orders issued in the normal course of business can be terminated in whole or in part for any reason without liability until the product is received. 
Other than the Amendment to the Credit Agreement that extended the maturity date of the New Term Loans to June 24, 2022, there have been no material changes in our future contractual obligations since the end of fiscal 2016. See Part 2, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 for more information on our contractual obligations. See Note 11 — Long-Term Debt and Note Payable in the notes to the unaudited consolidated financial statements for more information on the material terms of our Notes, Credit Agreement and Amended ABL Facility.
CRITICAL ACCOUNTING POLICIES  
Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies include those that pertain to revenue recognition, insurance accruals, share-based compensation, income taxes, accounting for acquisitions, intangible assets and goodwill, allowance for doubtful accounts, inventory valuation, property, plant and equipment valuation and contingencies, which are described in Item 7 of our Annual Report on Form 10-K for the year ended October 30, 2016 . 

34


RECENT ACCOUNTING PRONOUNCEMENTS  
See Note 3 — Accounting Pronouncements in the notes to the unaudited consolidated financial statements for information on recent accounting pronouncements.

35


Item 3. Quantitative and Qualitative Disclosures About Market Risk.  
Steel Prices  
We are subject to market risk exposure related to volatility in the price of steel. For the fiscal nine months ended July 30, 2017 , material costs (predominantly steel costs) constituted approximately 69% of our cost of sales. Our business is heavily dependent on the price and supply of steel. Our various products are fabricated from steel produced by mills to forms including bars, plates, structural shapes, sheets, hot-rolled coils and galvanized or Galvalume ® — coated coils (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 a historical eight-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 January index would likely approximate our fiscal March steel purchase deliveries based on current lead-times. The volatility in this steel price index is comparable to the volatility we experience in our average cost of steel.
CRUINDEXQ32017A02.JPG
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 pri ces will not continue to be volatile. 
With material costs (predominantly steel costs) accounting for approximately 69% of our cost of sales for the nine months ended July 30, 2017 , a one percent change in the cost of steel would have resulted in a pre-tax impact on cost of sales of approximately $6.8 million for the nine months ended July 30, 2017 . The impact to our financial results of operations of such an increase would

36


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 July 30, 2017 , all of 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 the 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 6 months. At July 30, 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 at July 30, 2017 and October 30, 2016 was approximately $144.9 million and $154.1 million , respectively, compared to a face value of approximately $144.1 million and $154.1 million , respectively.
See Note 11 — Long-Term Debt and Note Payable in the notes to the unaudited consolidated financial statements for information on the material terms of our long-term debt. 
Foreign Currency Exchange Rates  
We are exposed to the effect of exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenue and expenses. The functional currency for our Mexico operations is the U.S. dollar. Adjustments resulting from the re-measurement of the local currency financial statements into the U.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income in the current period. Net foreign currency re-measurement gain (loss) was $0.3 million and $(0.5) million , for the three month periods ended July 30, 2017 and July 31, 2016 , respectively. The net foreign currency re-measurement gain (loss) for the nine month periods ended July 30, 2017 and July 31, 2016 was $0.2 million and $(0.7) million , respectively.
The functional currency for our Canada operations is the Canadian dollar. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in accumulated other comprehensive income in stockholders’ equity. The net foreign currency exchange gain (loss) included in net income for the three month periods ended July 30, 2017 and July 31, 2016 was $0.7 million and $(0.4) million , respectively. The net foreign currency exchange gain (loss) included in net income for the nine month periods ended July 30, 2017 and July 31, 2016 was $0.8 million and $(0.4) million , respectively. Net foreign currency translation adjustment, net of tax, and included in other comprehensive income (loss) for the three month periods ended July 30, 2017 and July 31, 2016 was $0.4 million and $(0.2) million , respectively. Net foreign currency translation adjustment, net of tax, and included in other comprehensive income (loss) for the nine month periods ended July 30, 2017 and July 31, 2016 was $0.3 million and $(0.1) million , respectively.
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 three and nine month periods ended July 30, 2017 and July 31, 2016 . 

37


Item 4. Controls and Procedures.  
Disclosure Controls and Procedures  
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of July 30, 2017 . The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management believes that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and based on the evaluation of our disclosure controls and procedures as of July 30, 2017 , our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were ineffective because the material weaknesses described in Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 continued to exist as of July 30, 2017 , as discussed below.  
Material Weaknesses Previously Disclosed
We disclosed in Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended October 30, 2016 that we had identified material weaknesses in our internal controls over financial reporting relating to (1) the control environment of the CENTRIA subsidiary, which the Company acquired in January 2015, and (2) the design of controls over the allocation of total contract consideration in multiple element revenue arrangements within the Company’s Engineered Building Systems segment. In light of the material weaknesses, management performed additional review and other procedures prior to the filing of this Quarterly Report on Form 10-Q, which did not result in any adjustments to the consolidated financial statements. These material weaknesses did not result in any material misstatements to our consolidated financial statements in any prior periods or for the three and nine months ended July 30, 2017 .
Status of Remediation Efforts to Address Material Weaknesses
We are committed to the remediation of the material weaknesses in a timely manner. We have developed a remediation plan that will address the material weaknesses in internal control over financial reporting and we have implemented certain aspects of our plan as of July 30, 2017 , including:
•
Hired a Director of Controls and Compliance, an accounting manager at the CENTRIA subsidiary and made several other personnel changes to bolster the oversight of the Company’s internal control over financial reporting
•
Formalized and modified certain existing critical accounting procedures for the affected areas of internal control over financial reporting
•
Established interim compensating or mitigating controls programs
•
Conducted supplemental training regarding the performance of key controls, including the retention of adequate supporting documentation for such controls
•
Enhanced the corporate finance management review controls that are relied upon to review multiple element revenue arrangements
We plan to continue to implement changes to the design of the controls over the affected processes and to ensure such controls function at an appropriate level as follows:
•
Implement system enhancements to provide timely and complete information in support of periodic control requirements and to reduce the reliance on manual processes
•
Provide continued and enhanced oversight until the material weaknesses are remediated
As we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses, we continue to perform additional procedures, including the use of manual mitigating control procedures where necessary, and have employed additional resources to provide assurance that our financial statements continue to be fairly stated in all material respects. As we continue to evaluate and improve our disclosure controls and procedures and internal control over financial reporting, we may determine that additional measures are necessary to address these control deficiencies or that a modification of certain of the remediation measures described above is appropriate. The identified material weaknesses in internal

38


controls will not be considered fully addressed until the internal controls over these areas have been in operation for a sufficient period of time for management to conclude that the material weaknesses have been fully remediated.
Internal Control over Financial Reporting  
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

39


NCI BUILDING SYSTEMS, INC.

PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings.  
See Part I, Item 1, “Unaudited Consolidated Financial Statements”, Note 17 , which is incorporated herein by reference.  
Item 1A. Risk Factors.  
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended October 30, 2016. The risks disclosed in our previous Annual Report on Form 10-K and information provided elsewhere in this report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known or we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations. We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended October 30, 2016. Except for such additional information, we believe there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 30, 2016.
Changes in legislation, regulation and government policy as a result of the 2016 U.S. presidential and congressional elections may have a material effect on the Company’s business in the future.
The recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could significantly impact the Company’s business. For example, the Company’s business activity levels are heavily influenced by the U.S. domestic economy and changes in administration policies may result in changes in tax rates and/or prevailing interest rates, which could either stimulate or contract activity levels in the domestic economy. More specifically, the Company has had a production facility in Mexico for approximately 20 years and purchases a material amount of manufactured products from this subsidiary. For example, in fiscal 2016, the Company imported approximately $53 million of metal building products from the Company’s Mexican subsidiary. Specific legislative and regulatory proposals discussed during and after the election that could have a material impact on us include, but are not limited to, reform of the U.S. federal tax code, including possible elimination of interest deduction and imposition of taxes on imports, and modifications to international trade policy.  Any such changes, if unmitigated by changes in our supply chain or tax organization structures, may make it more difficult and/or more expensive for us and, thus, could have a material adverse effect on the Company’s results of operations and limit its growth.
We rely on third-party suppliers for materials in addition to steel, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our business and results of operations could be adversely affected.
In addition to steel, our operations require other raw materials from third-party suppliers. We generally have multiple sources of supply for our raw materials, however, in some cases, materials are provided by a single supplier. The loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of a key supplier, could adversely impact our financial condition and results of operations. In addition, supply interruptions could arise from shortages of raw materials, labor disputes or weather conditions affecting products or shipments or other factors beyond our control. Short- and long-term disruptions in our supply chain would result in a need to maintain higher inventory levels as we replace similar product, a higher cost of product and ultimately a decrease in our revenues and profitability. To the extent our suppliers experience disruptions, there is a risk for delivery delays, production delays, production issues or delivery of non-conforming products by our suppliers. Even where these risks do not materialize, we may incur costs as we prepare contingency plans to address such risks. In addition, disruptions in transportation lines could delay our receipt of raw materials. If our supply of raw materials is disrupted or our delivery times extended, our results of operations and financial condition could be materially adversely affected. Furthermore, some of our third-party suppliers may not be able to handle commodity cost volatility or changing volumes while still performing up to our specifications. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes, but not always passed on to our customers. Our inability to pass on material price increases to our customers could adversely impact our financial condition, operating results and cash flows.


40


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  
On September 8, 2016, our board of directors authorized a stock repurchase program for the repurchase of up to an aggregate of $50.0 million of the Company’s outstanding common stock. Under this repurchase program, the Company is authorized to repurchase shares, if at all, at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program.
During the third quarter of fiscal 2017, the Company did not have any stock repurchase activity. At July 30, 2017 , approximately $39.9 million remains available for stock repurchases under the program.
Item 6. Exhibits.  
Exhibits  
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference.


41


SIGNATURE
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
NCI BUILDING SYSTEMS, INC.
 
 
 
Date: September 7, 2017
By:
/s/ Mark E. Johnson
 
 
Mark E. Johnson
 
 
Executive Vice President, Chief Financial Officer
 
 
and Treasurer
 



Index to Exhibits  
10.1
 
*†10.2
 
 
 
 
*31.1 
 
 
 
 
*31.2 
 
 
 
 
**32.1
 
 
 
 
**32.2
 
 
 
 
*101.INS
 
XBRL Instance Document
 
 
 
*101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
*101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
*101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
 
 
*101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
*101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
*
Filed herewith
 
**
Furnished herewith
 
†
Management contracts or compensatory plans or arrangements






Exhibit 10.2

AMENDED AND RESTATED AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT (this “ Agreement ”) is entered into as of July 1, 2017 (the “ Effective Date ”), between NCI Building Systems, Inc., a Delaware corporation (the “ Company ”), and its wholly-owned subsidiary, NCI Group, Inc., a Nevada corporation (“ Employer ”), and Donald R. Riley, a resident of the State of Texas (“ Employee ”). The Company, Employer and Employee are sometimes hereinafter collectively referred to as the “ Parties .”

BACKGROUND

Employer hires and retains in its employment such personnel as are required by the Company and its other Affiliates, and makes its employees so retained available to provide services to the Company and its Affiliates.

Employer, the Company and Employee had previously entered into an Employment Agreement, as of June 1, 2016 (the “ Prior Agreement ”), setting forth the terms and conditions of the employment of Employee by Employer, and the duties and responsibilities of Employee, on the one hand, and of Employer and the Company, on the other hand, to each other, in Employee’s capacity as President of the Company.

Effective as of the Effective Date, Employee shall be appointed as Chief Executive Officer of the Company and shall also retain his position as President of the Company, and as such, the Company, Employer and Employee have agreed to amend and restate the Prior Agreement to reflect certain changes in the terms and conditions of the employment of Employee by Employer, and the duties and responsibilities of Employee, on the one hand, and of Employer and the Company, on the other hand, to each other.

Capitalized terms not defined in the body of this Agreement have the meanings set forth on the attached Appendix “A.”

AGREEMENT AMONG PARTIES

In consideration of the foregoing and of the mutual covenants and agreements set forth in this Agreement, and subject to the terms and conditions set forth herein, the Parties agree as follows:

1.      Employment. During the term of this Agreement, Employer hereby agrees to continue Employee in its employ, and Employee hereby agrees to remain in the employ of Employer, pursuant to the terms and conditions set forth herein.

2.      Duties and Authority. During the term of this Agreement, Employee shall serve as the Chief Executive Officer and President of the Company or such other more senior position or title to which Employee is promoted, with those authorities, duties and



responsibilities customary to that position and such other authorities, duties and responsibilities as the Board of Directors of the Company (the “ Board ”) may reasonably assign Employee from time to time commensurate with Employee’s position as Chief Executive Officer and President of the Company. Employee shall use Employee’s best efforts, including the highest standards of professional competence and integrity, and shall devote substantially all of Employee’s business time and effort in and to Employee’s employment hereunder, and shall not engage in any other business activity which would conflict with the rendition of Employee’s services hereunder, except that Employee may hold directorships or related positions in charitable, educational or not-for-profit organizations, or directorships in business organizations if expressly approved by the Board, and make passive investments, which do not unreasonably interfere with Employee’s day-to-day performance of Employee’s responsibilities to the Company. By no later than August 31, 2017, the Company shall cause Employee to be elected to the Board. During the remaining term of this Agreement, the Company shall nominate Employee for election to the Board each time Employee’s term as a member of the Board is scheduled to expire.

3.      Term. This Agreement shall be effective as of the Effective Date, and shall remain in effect until June 30, 2020 subject to earlier termination or extension as described below. The period from the Effective Date until this Agreement shall have expired in accordance with this Section 3 or been terminated in accordance with Section 5 is hereafter referred to as “the term hereof” or “the term of this Agreement.” The term hereof shall be extended automatically for an additional year as of June 30, 2020 and as of each subsequent annual anniversary of such date (each such extension date is referred to herein as a “ Renewal Date ”) unless at least one (1) year prior to any such Renewal Date either Party shall have given notice to the other Party that the term of this Agreement shall not be so extended. Notwithstanding any provision of this Agreement to the contrary, if a Change in Control occurs, the term of this Agreement shall be extended for a period of two (2) years after the date of the occurrence of the Change in Control or Potential Change in Control, and, if this Agreement does not terminate during such period, the last day of such extended term shall become the applicable Renewal Date.

4.      Compensation.

a.      Base Salary. Employer shall pay Employee a base salary in the amount of not less than $750,000.00 per year during the term hereof, payable in accordance with Employer’s normal payroll procedures. The salary of Employee will be reviewed for increase at least once annually by the Company and/or, to the extent required, the Compensation Committee of the Board (the “ Compensation Committee ”). In the event that any increase to Employee’s salary is required to be approved by the Compensation Committee, such review shall be conducted by the Compensation Committee at the same time as it reviews the salaries of other senior executives of the Company, and any adjustment shall be solely within the discretion of the Compensation Committee.




b.      Annual Bonus. During the term of this Agreement, Employee shall have a target annual bonus opportunity equal to 100% of his base salary at the highest annualized rate in effect during the year preceeding payment of such bonus. During the term of this Agreement, Employee shall participate under the currently existing cash annual incentive plan of NCI Building Systems, Inc., as amended and restated from time to time (the “ Bonus Plan ”) or, if the Bonus Plan is amended, replaced or superseded, under any amended, replacement or successor bonus program adopted for senior executives of the Company and its Affiliates. Bonuses, if any, paid to Employee pursuant to the Bonus Plan shall be paid after the end of each fiscal year of the Company at the same time as bonuses are paid to other participants, but no later than March 15 of the following calendar year. Employee understands that bonuses cannot be earned under the Bonus Plan except as specifically set forth therein based on the level of participation specified by the Compensation Committee in its discretion, but acknowledging the target annual bonus opportunity set forth herein, and, if the employment of a participant terminates for any reason prior to certain dates specified in the Bonus Plan, no bonus shall be payable thereunder except as expressly provided in this Section 4 and in Section 5 of this Agreement. In the event that Employee’s employment terminates for any reason other than by the Company for Cause, after the end of the fiscal year but before payment of the bonus for that fiscal year, Employee shall be entitled to receive the amount of the bonus that would have otherwise been payable under the Bonus Plan, as determined by the Compensation Committee, on the date bonuses are paid to other participants. Employee also understands that the Bonus Plan may be amended, replaced, superseded or terminated at any time and from time to time by the Board in its sole discretion, but in such event, Employee will still have the opportunity to earn a bonus subject to the achievement of performance goals established by the Compensation Committee at the target annual bonus level set forth herein.

c.      Long-Term Incentives. No later than December 15, 2017, subject to Employee’s continued employment with the Company through such date, Employee shall be awarded restricted share units and performance share units pursuant to the Company’s 2003 Long-Term Stock Incentive Plan, as amended, on terms and conditions consistent with those provided to the Company’s senior executive officers (“ LTIP ”) with a grant date fair value of $2,000,000.00. Employee shall be eligible to receive long-term incentive awards at a level commensurate with his position, as determined by the Compensation Committee in its sole discretion, provided that Employee is employed by the Company on the date of grant of any such award. Any such long-term incentive awards shall be granted pursuant to, and subject to the terms and conditions of, NCI’s Amended and Restated 2003 Long-Term Incentive Plan, as amended, or any successor plan thereto, and such other terms and conditions set forth in the applicable award agreement, which award agreement shall be consistent with the



terms and conditions provided to the Company’s senior executive officers.

d.      Promotion Restricted Share Unit Award. As of the Effective Date, Employee shall be awarded restricted share units pursuant to the LTIP with a grant date fair value of $385,000.00 (the “ Promotion Incentive ”). The Promotion Incentive shall vest in three equal installments on each of July 2, 2018, July 1, 2019 and July 1, 2020, and be granted with terms and conditions consistent with those provided to the Company’s senior executive officers.

e.      Promotion Bonus. On the first payroll date following the Effective Date, the Company shall pay Employee a cash payment equal to $250,000. Employee will be required to repay the portion of the promotion bonus that Employee retained after payment of taxes in respect thereof to the Company if (a) Employee’s employment with the Company terminates prior to August 31, 2018, unless such termination is (i) by the Company other than for Cause, (ii) by Employee for Good Reason, or (iii) due to Employee’s death or disability or (b) if Employee fails to relocate to the Houston, Texas metropolitan area (“ Houston ”) by August 31, 2018. Such repayment will be required to be paid to the Company within thirty (30) days of the earliest to occur of (x) Employee’s last day as an employee of the Company under circumstances requiring such repayment as specified above, (y) the date on which Employee provides the Chairperson of the Board written notice that Employee has determined that Employee shall not relocate his family’s primary residence to Houston (the “ Commuting Notice ”) and (z) August 31, 2018, as applicable.

f.      Retirement, Health and Welfare Benefits.

(i)      Employee shall be entitled to participate in and receive the health, hospitalization, medical, dental, life insurance, accidental death, disability and other insurance plans and benefits provided by Employer and the Company, and to participate in the 401(k) and other qualified profit-sharing, deferred compensation, pension, savings and other similar plans of Employer and the Company, as and to the extent Employer and the Company provide such benefits generally to other employees of Employer and the Company or to executive employees of the Company. It is understood and agreed that such benefits may be changed or discontinued from time to time in the sole discretion of Employer and the Company. During the term of this Agreement, Employee shall be entitled to five (5) weeks of vacation per year.

(ii)      In addition to the foregoing, Employee shall be entitled to: on an annual basis: a Company-provided executive physical; financial planning and tax services (the cost of which shall not exceed $15,000 annually); and such other perquisites as may otherwise be provided to the named executive officers of the Company from time to time. To the extent that the Company institutes new perquisites relating to these matters which are generally applicable for senior executives of the Company, Employee shall receive such new perquisites on terms and conditions consistent



with those provided to such other senior executives of the Company. Further, in connection with the negotiation and execution of this Agreement and any equity awards related thereto, the Company shall pay Employee’s attorneys’ fees in an amount not to exceed $20,000.

g. Relocation Benefits. In connection with any relocation, at any time, of Employee’s family’s primary residence to Houston, Employee shall receive relocation benefits under the Company’s relocation policy for Tier I employees. In addition, the Company agrees to extend the temporary housing benefits to which Employee will otherwise be entitled under such policy beginning on July 1, 2017, on the terms and conditions consistent with those in the Company’s relocation policy, through December 31, 2017; provided , however , that if Employee provides the Commuting Notice prior to such date, such temporary housing benefits shall cease at the end of the calendar month in which such Commuting Notice is provided.

5.      Termination Payments.

a.      Minimum Termination Compensation. Employee shall serve in an at-will capacity and Employee, the Company and/or Employer may terminate the employment of Employee at any time with or without Cause. Upon any termination of employment of Employee for any reason other than as set forth in Section 5.b or Section 5.c, whether on, before or after the expiration of the term of this Agreement (including any extension of the term hereof pursuant to the provisions of this Agreement), Employee shall be entitled to receive (i) that portion of Employee’s annual base salary, at the rate then in effect, earned by Employee or accrued for Employee’s account through the date of the termination of Employee’s employment hereunder or for which Employee is entitled to payment for events or circumstances occurring on or through the date of termination of Employee’s employment, (ii) any bonus to which Employee is entitled under the Bonus Plan pursuant to Section 4.b for the fiscal year ending prior to the date of termination, (iii) reimbursement of business expenses properly incurred in accordance with applicable Company policy prior to the date of termination and (iv) subject to Section 5.e, any generally applicable vested benefits to which Employee is entitled as a former employee under the employee benefit plans of the Company and its Affiliates (collectively, the “ Minimum Termination Compensation ”).

b.      Payment Other than Following a Change in Control and Other than During a Potential Change in Control Period.

(i)      If Employee’s employment is terminated by the Company without Cause, or by Employee for Good Reason, in either case other than within twenty-four (24) months after a Change in Control and other than during a Potential Change in Control Period, then, in addition to the Minimum Termination Compensation, Employee shall be entitled to receive (A) two (2) times Employee’s annual base salary at the highest annualized rate in effect during the one (1) year period



immediately preceding the date of termination (the “ Base Severance Payment ”), (B) two (2) times Employee’s average annual bonus paid in respect of the three most recently completed fiscal years of the Company prior to Employee’s date of termination (provided that any partial-year bonus payments shall be annualized) (the “ Average Bonus Payment ”), (C) a prorated annual bonus under the Bonus Plan for the fiscal year in which the date of termination occurs based upon the elapsed number of days in such fiscal year through the date of termination applied to the bonus, if any, that would have been earned by Employee for such fiscal year if Employee had remained employed on the normal payment date of such bonus, based on actual performance under applicable financial metrics and applying any discretionary factors in substantially the same manner as such factors are applied to the senior executive officers of the Company whose employment has not terminated (the “ Pro Rata Bonus ”) and (D) a lump sum payment equal to Employee’s family premiums for medical and dental coverage, at the active employee rate, that would otherwise be payable for the period of coverage applicable to Employee (i.e., eighteen (18) months) under the Consolidated Omnibus Budget Reconciliation Act of 1985, currently embodied in Section 4980B of the Internal Revenue Code of 1986, as amended (the “ Code ”) (the “ COBRA Premium Payment ”).

(ii)      The Base Severance Payment and Average Bonus Payment shall be payable in substantially equal installments on regular payroll dates over the two (2) year period following the date of termination, except as otherwise set forth in Section 25 hereof and subject to the next following sentence; provided that any installments that would be paid if the Release Effective Date (as defined below) were the date of termination shall be paid on the first payroll date after the Release Effective Date, unless the Release Period (as defined below) begins in one calendar year and ends in the subsequent calendar year, in which case such installments shall be paid on the first payroll date in the subsequent calendar year. Employee’s right to receive the Base Severance Payment, the Average Bonus Payment, the Pro Rata Bonus, and the COBRA Premium Payment shall be conditioned on Employee’s execution, delivery and non-revocation of a general release of any and all claims against the Company and its Affiliates within thirty (30) days following the date of termination (such release of claims, the “ Release ”; such thirty (30) day period, the “ Release Period ”, and the effective date of the Release, the “ Release Effective Date ”), which Release shall include the release of claims attached hereto as Appendix B and such other terms and conditions as may be mutually agreed by the Parties. The Pro Rata Bonus and COBRA Premium Payment shall be paid in a lump sum not later than March 15 th of the year following the year in which the date of termination occurs.

c.      Payment Following a Change in Control or During a Potential Change in Control Period.

(i)      If Employee’s employment is terminated by the Company without



Cause, or by Employee for Good Reason within twenty-four (24) months after a Change in Control, then, in addition to the Minimum Termination Compensation, Employee shall be entitled to receive (A) the Base Severance Payment, (B) three (3) times the target annual bonus of Employee for the year in which the date of termination occurs (the “ CIC Severance Payment ”), (C) the Pro Rata Bonus, and (D) the COBRA Premium Payment.

(ii)      The CIC Severance Payment shall be payable on the same schedule as the Average Bonus Payment would have been paid, as described in Section 5.b. Employee’s right to receive the Base Severance Payment, the CIC Severance Payment, the Pro Rata Bonus and the COBRA Premium Payment shall be conditioned on Employee’s execution, delivery and non-revocation of the Release during the Release Period. The Pro Rata Bonus and COBRA Premium Payment shall be paid in a lump sum not later than March 15 th of the year following the year in which the date of termination occurs. Notwithstanding the payment provisions under 5.b(ii) and this 5.c(ii) above, if Employee is entitled to payment of the Base Severance Payment and the CIC Severance Payment pursuant to Section 5.c(i), then, to the maximum extent permissible under Section 409A (including, but not limited to, the application of Treas. Reg. §1.409A-1(b)(4), Treas. Reg. §1.409A-1(b)(9)(iii) and Treas. Reg. §1.409A-3(c) (clause (1) (in each case as and to the extent applicable)), the Base Severance Payment and the CIC Severance Payment shall be paid in a lump sum on the first payroll date following the Release Effective Date, except as otherwise set forth in Section 25 hereof (and any portion of the Base Severance Payment and CIC Severance Payment that is not capable of being paid at such time shall be paid as provided in Section 5.b and Section 5.c as aforesaid, and subject to Section 25).

(iii)      In addition, if Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason during a Potential Change in Control Period, then Employee will be entitled to the severance payments and termination benefits set forth in Section 5.b, subject to the terms and conditions of such Section (including payment schedules), and, if and when the Change in Control related to such Potential Change in Control Period subsequently occurs, Employee will only be entitled to receive the excess, if any, of (x) the CIC Severance Payment over (y) the Average Bonus Payment, with such portion of the CIC Severance Payment to be paid subject to the terms and conditions (including payment provisions) of Section 5.c.ii above.

d.      Parachute Tax Limitation. Notwithstanding anything in this Agreement to the contrary, if any amounts due to Employee under this Agreement and any other plan or program or award of Employer, the Company or any Affiliate (collectively, the “Payments”) constitute a “parachute payment” (as such term is defined in Section 280G(b)(2) of the Code) that would be subject to the excise tax imposed pursuant to Section 4999 of the Code (the “Excise Tax”), the Payments shall be reduced to the amount equal to (x) three times Employee’s “base amount,”



as defined in Section 280G(b)(3) of the Code, minus (y) one dollar, to the extent such a reduction would result in Employee retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the Excise Tax), than if Employee retained all of the Payments. The calculations to be made with respect to this subsection shall be made by an accounting firm jointly selected by the Company and Employee and paid by the Company, and in order to avoid the imputation of any tax, penalty or interest under Section 409A of the Code, the Payments shall be reduced or eliminated by first reducing or eliminating the Base Severance Payment (in reverse order beginning with the payments to be paid the farthest in time from the date Release Effective Date, then each other lump sum cash severance or other payment due under this Agreement, then by reducing or eliminating those payments or benefits which are not payable in cash, in each case in reverse order beginning with the payments to be paid the farthest in time from the date of the Change in Control).

e.      No Duty to Mitigate Nor Offsets; No Other Severance; No Reduction for Deferred Compensation. Notwithstanding anything in this Agreement to the contrary, if Employee’s employment is terminated (whether or not following a Change in Control of the Company), Employee shall have no duty to seek other employment nor shall any payments made or to be made to Employee pursuant to this Agreement be offset by any amount earned from other employment or for any other reason. The payments and benefits to be provided to Employee pursuant to this Section 5 upon termination of Employee’s employment shall constitute the exclusive payments and benefits in the nature of severance or termination pay or salary continuation and termination benefits which shall be due to Employee upon a termination of employment and shall be in lieu of any other such payments under any plan, program, policy or other arrangement which has heretofore been or shall hereafter be established by the Company or any of its Affiliates. The calculations of the Minimum Termination Compensation, Base Severance Payment, Average Bonus Payment, Pro Rata Bonus, COBRA Premium Payment, and the CIC Severance Payment shall be made without reduction for any voluntary deferral of compensation made by Employee.

f.      Full Satisfaction of Obligations. Payment by Employer or the Company of the amounts owed to Employee pursuant to this Section 5 shall fully satisfy all obligations of Employer and the Company to Employee under this Agreement if the employment of Employee is terminated hereunder prior to the expiration of the term of this Agreement, and all obligations of Employer and Employee to each other set forth in Sections 1 through 4 of this Agreement shall terminate and be of no further force or effect as of the date of termination. No termination of employment hereunder, whether by Employer or Employee and whether with or without Cause or Good Reason, shall terminate the provisions of Sections 6 or 7 or any subsequent sections of this Agreement and each of such sections shall remain in full force and effect as binding obligations of the Parties in accordance with their express terms.




6.      Business Disclosures. Employee acknowledges that Employee has had and will have access to and has or will become familiar with all or substantially all of the Confidential Information of the Company and its Affiliates. As a material inducement to the Company and Employer to enter into this Agreement and to pay to Employee the compensation stated herein, Employee covenants and agrees that Employee will not, at any time during or following the termination of Employee’s employment with the Company, directly or indirectly divulge or disclose for any purpose whatsoever any Confidential Information that has been obtained by or disclosed to Employee in connection with Employee’s employment with the Company or any of its Affiliates. If Employee is required in or pursuant to any legal, judicial or administrative proceeding (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, Employee shall notify, as promptly as practicable, the Company of such request or requirement so that the Company, at its expense, may seek an appropriate protective order or waive compliance with the provisions of this Agreement, and/or take any other action deemed appropriate by the Company. If, in the absence of a protective order or the receipt of a waiver hereunder, Employee is compelled or required by law or the order of any governmental, regulatory or self-regulatory body to disclose the Confidential Information, Employee may disclose only that portion of the requested Confidential Information which Employee is compelled or required to disclose, and Employee will exercise Employee’s reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Confidential Information.

7.      Non-Competition; Non-Solicitation; Non-Disparagement and Non-Interference.

a.      Employee shall not, directly or indirectly and whether on Employee’s own behalf or on behalf of any other person, partnership, association, corporation or other entity, engage in or be an owner, director, officer, employee, agent, consultant or other representative of or for, or lend money or equipment to or otherwise support, any business that manufactures, engineers, markets, sells or provides, within a 250-mile radius of any then-existing manufacturing facility of the Company and its subsidiaries and Affiliates, metal building systems or components (including, without limitation, primary and secondary framing systems, roofing systems, end or side wall panels, insulated metal panels, sectional or roll-up doors, windows, or other metal components of a building structure), coated or painted steel or metal coils, coil coating or coil painting services, or any other products or services that are the same as or similar to those manufactured, engineered, marketed, sold or provided by the Company or its subsidiaries and such Affiliates during the period of employment of Employee. Ownership by Employee of equity securities of the Company, or of equity securities in other public or privately-owned companies that compete with the Company constituting less than 1% of the voting securities in such companies, shall be deemed not to be a breach of this covenant. Employee agrees and stipulates that in any action or claim brought by Employee or in any action or claim brought against Employee involving the provisions of this Section 7, Employee



hereby waives any claim or defense that the above non-competition covenants are unenforceable, void or voidable, for any reason, including, but not limited to, fraud, misrepresentation, illegality, unenforceable restraint of trade, failure of consideration, illusory contract, mistake, or any other substantive legal defense.

b.      Employee shall not, directly or indirectly and whether on Employee’s own behalf or on behalf of any other person, partnership, association, corporation or other entity, either (i) seek to hire or solicit the employment or service of any employee, agent or consultant of the Company or its Affiliates in a commercial capacity; (ii) in any manner attempt to influence or induce any employee, agent or consultant of the Company or its Affiliates to leave the employment or service of the Company or its Affiliates; (iii) use or disclose to any person, partnership, association, corporation or other entity any information concerning the names and addresses of any employees, agents or consultants of the Company or its Affiliates unless such use or disclosure is of a personal nature, is requested by the Company or is required by due process of law; or (iv) call upon, solicit, divert or attempt to call upon, solicit or divert the business of any customer, vendor or acquisition prospect of the Company or any of its Affiliates with whom Employee dealt, directly or indirectly, during Employee’s engagement with the Company or its Affiliates. Employee shall not be prohibited from hiring or soliciting the employment or service of an agent or consultant of the Company or its Affiliates for purposes which do not violate Section 7 of this Agreement. Employee agrees and stipulates that in any action or claim brought by Employee or in any action or claim brought against Employee involving the provisions of this Section 7, Employee hereby waives any claim or defense that the above non-solicitation covenants are unenforceable, void or voidable, for any reason, including, but not limited to, fraud, misrepresentation, illegality, unenforceable restraint of trade, failure of consideration, illusory contract, mistake, or any other substantive legal defense.

c.      To the extent permitted by the law, Employee agrees to refrain from any criticisms or disparaging comments about the Company or any Affiliates (including any current officer, director or employee of the Company), and Employee agrees not to take any action, or assist any person in taking any other action, that is adverse to the interests of the Company or any Affiliate or inconsistent with fostering the goodwill of the Company and its Affiliates; provided , however , that nothing in this Agreement shall apply to or restrict in any way the communication of information by the Company or Employee to any state or federal law enforcement, regulatory or judicial agency or official or to the Board or senior management of the Company or require notice to the Company thereof, and Employee will not be in breach of the covenant contained above solely by reason of testimony which is compelled by process of law. To the extent permitted by the law, the Company and any Affiliates agree to (i) refrain from making or endorsing any public criticisms or public disparaging comments about Employee and (ii) direct its current officers not to make or endorse any disparaging or negative remarks or statements (whether



oral, written, or otherwise) about Employee; provided , however , that nothing in this Agreement shall apply to or restrict in any way the communication of information by the Company or Employee to any state or federal law enforcement, regulatory, Congressional or judicial agency, body or official or to the Board or senior management of the Company or require notice to the Company thereof, and the Company will not be in breach of the covenant contained above by reason of testimony which is compelled by process of law. Nothing in this paragraph restricts, or is intended to restrict, any rights of Employee that cannot be lawfully restricted. Nothing in this Agreement shall be interpreted in a manner that limits or restricts Employee from exercising any legally protected whistleblower rights (including pursuant to Rule 21F promulgated under the Securities Exchange Act of 1934, as amended).

The foregoing covenants in this Section 7 shall remain in effect (i) during the period of employment of Employee by the Company and Employer, and (ii) for a period of two (2) years following Employee’s termination of employment (whether initiated by Employee or by the Company or Employer) for any reason. The foregoing covenants in Section 6 and this Section 7 shall not apply to Employee’s good faith performance of his duties during the term of this Agreement for the benefit of the Company or its Affiliates.

8.      Consideration for Covenants; Reasonableness. Employee acknowledges and agrees as follows:

a.      The Confidential Information of the Company and its Affiliates is unique and was developed or acquired by them through the expenditure of valuable time and resources; that Employer, the Company and their Affiliates derive independent economic value from this Confidential Information not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; that Employer, the Company and their Affiliates have taken all prudent and necessary measures to preserve the proprietary and confidential nature of its Confidential Information, and that the covenants set forth in Sections 6 and 7 are the most reasonable, efficient and practical means to protect the Confidential Information.

b.      The covenants set forth in Sections 6 and 7 are necessary to protect the goodwill of the Company and its Affiliates during the employment of Employee hereunder, and to ensure that such goodwill will be preserved and continued for the benefit of the Company and its Affiliates after Employee’s employment terminates.

c.      Due to the nature of the business as heretofore conducted by the Company and its Affiliates and as contemplated to be continued and conducted by the Company and its Affiliates, the scope and the duration of the covenants set forth in Sections 6 and 7 of this Agreement are in all respects reasonable.




d.      The covenants set forth in Sections 6 and 7 each constitute a separate agreement independently supported by good and adequate consideration and that each such agreement shall be severable from the other provisions of this Agreement and shall survive this Agreement. The existence of any claim or cause of action of Employee against Employer or the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer and the Company of the covenants and agreements of Employee set forth in Sections 6 and 7.

9.      Surrender of Books and Records. Employee shall on the termination of Employee’s employment in any manner immediately surrender to the Company all lists, books, and records and other documents incident to the business of the Company and its Affiliates, and all other property belonging to any of them, it being understood that all such lists, books, records and other documents are the property of the Company and its Affiliates; provided , however , that Employee shall be permitted to retain a copy of his contacts and calendar as well as a copy of all publicly filed plans and agreements, benefit plans in which Employee participates, employee handbooks applicable to Employee and statements of Employee’s compensation and benefits that have been provided to Employee by the Company, its Affiliates or any of their designated plan service providers.

10.      Waiver of Breach. The failure of the Company, Employer or Employee at any time to require performance by the other of any provision hereof shall in no way affect any of their respective rights thereafter to enforce the same, nor shall the waiver by the Company, Employer or Employee of any breach of any provision hereof be taken or held to be a waiver of any succeeding breach of any provision or as a waiver of the provision itself.

11.      Remedies. In the event of Employee’s breach, or threatened breach, of any term or provision contained in Sections 6 or 7 of this Agreement, Employee agrees that the Company and its Affiliates shall suffer irreparable harm not compensable by damages or other legal remedies, and that accordingly the Company and/or Employer shall be entitled to both temporary and permanent injunctive relief without the necessity of independent proof by it as to the inadequacy of legal remedies or the nature or extent of the irreparable harm suffered by it. The right of the Company and/or Employer to such relief shall not be construed to prevent it from pursuing, either consecutively or concurrently, any and all other legal or equitable remedies available to it for such breach or threatened breach, specifically including, without limitation, the recovery of monetary damages. Without limiting the generality of the relief that may be sought by the Company and/or Employer pursuant to this Section 11, if Employee intentionally and materially violates any provision of Section 6 or 7, the Company may, after (a) giving written notice to Employee of the Board’s reasonable, good faith belief that Employee has or is intentionally and materially violating any of the covenants contained in Section 6 or 7, upon delivery to Employee of a certified copy of a resolution of the Board adopted by the affirmative vote of a majority of the entire membership of the Board following a meeting at which Employee was given an opportunity to be heard on at least five (5) business days’ advance written notice finding



that Employee was guilty of such conduct and specifying the particulars thereof, and (b) thereafter giving Employee 15 business days in which to cease and cure such violation, and Employee fails to cease and desist from such violation and/or does not, in the Board’s reasonable and good faith determination, cure such violation, immediately cease all payments that it may be providing to Employee pursuant to this Agreement and, at the reasonable and good faith demand of the Company and/or Employer, Employee shall be required to repay the severance payments that have been paid to Employee after such breach pursuant to Section 5 to the extent that the Company and/or Employer reasonably and in good faith determines that such repayment does not exceed the damages caused thereby; provided , however , that the foregoing shall be in addition to such other remedies as may be available to the Company and shall not be deemed to permit Employee to forego or waive such payments in order to avoid his obligations under Section 6 or 7; provided , further , that any Release previously executed by Employee shall continue in effect except that any such Release shall not preclude Employee from challenging, defending against, or asserting any claim, fact or circumstance related Company’s and/or Employer’ breach of this provision.

12.      Severability. It is the desire and intent of the Parties that the provisions of Sections 6 and 7 be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. If any provision of Sections 6 or 7 relating to the time period, scope of activities or geographic area of restrictions is declared by a court of competent jurisdiction to exceed the maximum permissible time period, scope of activities or geographic area, the same shall be reduced to the maximum which such court deems enforceable. If any provisions of Sections 6 and 7 other than those described in the preceding sentence are adjudicated to be invalid or unenforceable, the invalid or unenforceable provisions shall be deemed amended (with respect only to the jurisdiction in which such adjudication is made) in such manner as to render them enforceable and to effectuate as nearly as possible the intentions and agreement of the Parties. Furthermore, if any other provision contained in this Agreement should be held illegal, invalid or unenforceable in whole or in part by a court of competent jurisdiction, then it is the intent of the Parties hereto that the balance of this Agreement be enforced to the fullest extent permitted by applicable law and, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such invalid provision as may be possible and be legal, valid, and enforceable.

13.       Attorneys’ Fees. In the event of any suit or judicial proceeding (other than an arbitration proceeding) between the Parties hereto with respect to this Agreement, the court in which such suit is decided may award reasonable attorneys’ fees and costs, as actually incurred and including, without limitation, attorneys’ fees and costs incurred in appellate proceedings to the party that prevails in such dispute; provided, however, that in respect of a suit that arises in respect of matters occurring during a Potential Change in Control Period or following a Change in Control, only Employee will be entitled to recover the attorneys’ fees and costs under the circumstances described in this Section.




14.      Survival. Notwithstanding anything to the contrary contained herein, the provisions of this Agreement that contemplate performance by the Parties following termination of this Agreement (including without limitation Sections 5-7 and 28 hereof) shall survive the termination of this Agreement.

15.      Notice. All notices hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or overnight mail, postage prepaid. Such notices shall be deemed to have been duly given upon receipt, if personally delivered, upon telephonic confirmation of receipt if sent by facsimile transmission, and if mailed, five (5) days after the date of mailing (two (2) days in the case of overnight mail), in each case addressed to the Parties at the following addresses or at such other addresses as shall be specified in writing and in accordance with this Section:
 
 
 
If to Employee:
 
Address shown on the employment records of the Company
 
 
 
If to the Company or Employer:
 
NCI Building Systems, Inc.
10943 North Sam Houston Parkway West
Houston, Texas 77064
Telecopier: (281) 477-9670
Attention: Executive Vice President, General Counsel & Corporate Secretary

16.      Entire Agreement. This Agreement, together with the execution copies of the agreements attached as exhibits hereto and any rights to indemnification or advancement (including pursuant to the Indemnification Agreement (as defined in Section 28 below)), supersedes any and all other agreements, either oral or written, between the Parties hereto with respect to the subject matter hereof, including without limitation the Prior Agreement, and contains all of the covenants and agreements between the Parties with respect thereto. Except as expressly provided herein, the specific arrangements referred to herein are not intended to exclude or limit Employee’s participation in other benefits available to Employee or personnel of the Company generally, or to preclude or limit other compensation or benefits as may be authorized by the Board at any time, or to limit or reduce any compensation or benefits to which Employee would be entitled but for the Agreement.

17.      Modification. No change or modification of this Agreement shall be valid or binding upon the Parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the Parties hereto.

18.       Governing Law and Venue. This Agreement, and the rights and obligations of the Parties hereunder, shall be governed by and construed in accordance with the laws of the State of Texas and venue for any action pursuant hereto shall be in the appropriate state or federal court in Harris County, Texas.




19.      Acknowledgment Regarding Counsel. Each of the Parties to this Agreement acknowledges that each of them has had the opportunity to seek and has sought counsel to review this Agreement and to obtain and has obtained the advice of such counsel relating thereto.

20.      Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one and the same document.

21.      Assignment. Subject to compliance with the provisions of this Agreement, each of the Company and Employer shall have the right to assign this Agreement and its obligations hereunder to any of their Affiliates. No such assignment shall operate to relieve Employer, the Company or any successor assignor from liability hereunder, and this Agreement shall remain an enforceable obligation of Employer, the Company and each such successor. The rights, duties and benefits to Employee hereunder are personal to him, and no such right or benefit may be assigned by him. For purposes of this Agreement, all references herein to Employer and the Company is deemed to be also a reference to any Affiliate of Employer or the Company that either has or is required to assume the obligations of the Company pursuant to this section.

22.      Tax Withholding. The Company and/or Employer, as appropriate, may withhold from any payments or benefits payable under this Agreement all federal, state, city or other taxes required to be withheld pursuant to any law or governmental regulation or ruling.

23.       Joint and Several Obligations. The duties and obligations of Employer and the Company set forth herein shall be the joint and several obligations of each of them.

24.      Payment to Estate. If Employee dies prior to full satisfaction of the obligations owed to Employee under this Agreement, any monies that may be due Employee under this Agreement as of the date of Employee’s death will be paid to Employee’s estate.

25.       Section 409A.

a.      If Employee is a “specified employee,” as such term is defined in Section 409A and determined as described below in this Section 25(a), and if any portion of the Base Severance Payment, Average Bonus Payment or CIC Severance Payment is subject to Section 409A, the character and timing of the payment thereof shall be as determined in this Section 25(a). It is hereby specified that as much of the Base Severance Payment, Average Bonus Payment or CIC Severance Payment as can be paid without the application of Section 409A(a)(2)(B)(i) and Treas. Reg. §1.409A-1(i) shall be paid at times consistent with Section 5.b or Section 5.c as applicable and without application of this Section 25. The remaining portion of the



Base Severance Payment, Average Bonus Payment or CIC Severance Payment shall not be payable before the earlier of (i) the date that is six (6) months after Employee’s termination, (ii) the date of Employee’s death, or (iii)  one or more dates that otherwise comply with the requirements of Section 409A. Employee shall be a “specified employee” for the twelve-month period beginning on April 1st of a year if Employee is a “key employee” as defined in Section 416(i) of the Code (without regard to Section 416(i)(5)) as of December 31 of the preceding year or using such dates as designated by the Compensation Committee in accordance with Section 409A and in a manner that is consistent with respect to all of the Company’s nonqualified deferred compensation plans. For purposes of determining the identity of specified employees, the Compensation Committee may establish such procedures as it deems appropriate in accordance with Section 409A.

b.      Employee and the Company agree that this Agreement is intended to comply with or be exempt from Section 409A and that any ambiguous provisions will be construed in a manner that is compliant with or exempt from the application of Section 409A. Without limiting the generality of the immediately preceding sentence, it is intended that the CIC Severance Payment and the Pro Rata Bonus shall be “short-term deferrals” within the meaning of Treas. Reg. §1.409A-1(b)(4) that are exempt from Section 409A. For purposes of Section 409A, each installment in a series of installment payments is intended to be a separate payment.

26.      Captions. The captions, headings, and arrangements used in this Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof.

27.      Binding Effect. This Agreement shall be binding upon the Parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns.

28.      Indemnification. The Company will continue to indemnify Employee in accordance with the terms of that certain Indemnification Agreement entered into by and between the Company and Employee dated as of November 24, 2014 (which the Company represents was executed by Company and agrees to re-execute if an executed copy is not located), as the same may be amended from time to time by the parties thereto, and will also indemnify Employee in accordance with the terms of that certain indemnification agreement to be entered into by and between the Company and Employee in connection with Employee’s appointment to the Board on the Effective Date in the form executed by all other members of the Board as publicly filed (together, the “ Indemnification Agreements ”). The indemnification provided by this Section 28 does not limit, and is not exclusive of, any other rights to which Employee may be entitled under the articles of incorporation, charter, bylaws, or the regulations of the Company or any Affiliate, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action



in Employee’s official capacity and as to action in another capacity while holding such office (including as a director, trustee, agent or fiduciary of the Company or any subsidiary or benefit plan thereof), and will continue as to Employee after Employee has ceased to be a director, trustee, officer, employee or agent and will inure to the benefit of Employee’s heirs, executors, and administrators. In particular, and without limiting Employee’s rights under this Section 28, Employee will additionally be entitled to the full benefit of any indemnification agreement provided by the Company or its Affiliates to its officers and directors and Employee shall participate in any director or officer insurance maintained by the Company and its Affiliates.
[ Signature Page Follows ]




IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of the date set forth herein.


EMPLOYEE
 
 
 
 
 
 
/s/ Donald R. Riley
 
Donald R. Riley
 


NCI BUILDING SYSTEMS, INC.
 
 
 
 
 
 
By:
 
/s/ Todd R. Moore
 
 
 
Todd R. Moore
 
 
 
Executive Vice President
 
 
 
 
and General Counsel
 


NCI GROUP, INC.
 
 
 
 
 
 
By:
 
/s/ Todd R. Moore
 
 
 
Todd R. Moore
 
 
 
Executive Vice President
 
 
 
 
and General Counsel
 












[Signature Page to Don Riley Amended and Restated Employment Agreement]



APPENDIX A
DEFINITIONS
The following terms have the indicated meanings for purposes of this Agreement:

(a)      “Affiliate” means any entity controlled by, controlling or under common control with a person or entity.

(b)      “Bonus Plan” has the meaning set forth in Section 4.b.

(c)      “Cause” shall mean any of the following occurring after the Effective Date: (i) Employee’s willful and continued failure to substantially perform Employee’s duties and other obligations under this Agreement, if such failure continues for a period of thirty (30) days after written notice by the Company of the existence of such failure; provided however, that only one such notice by the Company need be sent and, if such failure re-occurs thereafter, no further notice and opportunity to cure such failure shall be required; (ii) the willful engaging by Employee in gross misconduct materially and demonstrably injurious to the Company, as determined by the Company; or (iii) Employee’s conviction for committing an act of fraud, embezzlement, theft or other act constituting a felony (which shall not include any act or offense involving the operation of a motor vehicle); provided, however , that the Board or the then current Chairman of the Board must first provide to Employee written notice clearly and fully describing the particular acts or omissions which the Board or the then current Chairman of the Board reasonably believes in good faith constitutes Cause hereunder, and providing an opportunity, within thirty (30) days following the receipt of such notice, to meet in person with the Board or the then current Chairman of the Board to explain the alleged acts or omissions relied upon by the Board and, to the extent practicable, to cure such acts or omissions. For purposes of this Agreement, any termination of Employee’s employment for Cause shall be effective only upon delivery to Employee of a certified copy of a resolution of the Board, adopted by the affirmative vote of a majority of the entire membership of the Board following a meeting at which Employee was given an opportunity to be heard on at least five (5) business days’ advance written notice, finding that Employee was guilty of the conduct constituting Cause, and specifying the particulars thereof. Further, for the purposes of this Agreement, no act or failure to act on Employee’s part shall be considered willful unless done, or omitted from being done, by Employee not in good faith and without reasonable belief that Employee’s action or omission was in the best interest of the Company.
(d)      “Change in Control” of the Company means the first occurrence of any of the following events following the Effective Date:

(i)      any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25 percent or more of the combined voting power of the Company’s then outstanding securities,



excluding (x) any such acquisition by any person that owns such percentage of the Company’s then outstanding securities as of the Effective Date (a “ Controlling Person ”) and (y) any acquisition of the Company’s then outstanding securities following the Effective Date by a person which is inadvertent and/or otherwise not entered into for the purpose of, and does not have the effect of, changing or influencing the control of, the Company (including, but not limited to, the sale of securities by a Controlling Person in the public market) (clause (x) or (y), a “ Non-Control Transaction ”);

(ii)      as a result of, or in connection with, any tender offer or exchange offer, merger, or other business combination (a “ Transaction ”), the persons who were directors of the Company immediately before the Transaction (each, an “ Incumbent Director ”) shall cease to constitute a majority of the Board or the board of directors or any successor to the Company (or, if applicable, the parent thereof resulting from the Transaction); provided that any director elected or nominated for election to the Board (or such board) by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this clause (ii), except that any member of the Board whose initial assumption of office occurs as a result of (including by reason of the settlement of) an actual or threatened proxy contest, election contest or other contested election of directors shall in no event be considered an Incumbent Director;

(iii)      the Company is merged or consolidated with another person, or transfers substantially all of its assets to another person, and immediately following the merger, consolidation or transfer either (x)(I) less than 50 percent of the outstanding voting securities of the acquiring, surviving or resulting person (as applicable) shall then be owned in the aggregate by the former stockholders of the Company or (II) 50 percent or more of the outstanding voting securities of the acquiring, surviving or resulting person (as applicable) shall then be owned in the aggregate by the former stockholders of the Company but other than in substantially the same relative proportions as immediately prior to such transaction, and in each case excluding a Non-Control Transaction or (y) the individuals who were members of the Incumbent Board immediately prior to the agreement providing for such transaction constitute less than a majority of the members of the board of directors of the acquiring, surviving or resulting person (as applicable), or, if applicable the ultimate parent entity of such person, and in each case excluding a Non-Control Transaction; or

(iv)      a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 25 percent or more of the combined voting power of the Company’s then outstanding voting securities (excluding a Non-Control Transaction).




In addition, and for avoidance of doubt, in no event shall a Change in Control be deemed to have occurred solely as a result of investment funds affiliated with Clayton, Dubilier & Rice, LLC selling in the public market equity securities held by them as of the Effective Date.

Employee agrees that the foregoing definition of “Change in Control” shall apply for all purposes under the compensation plans and benefit arrangements of the Company and Employer to which Employee is a party (including equity awards) such that, if a transaction or other event would not be a Change in Control under the foregoing definition but would be a Change in Control under another such plan or arrangement, such transaction or other event shall also not be a Change in Control under such other plan or arrangement.

(e)      “Confidential Information” means all information, whether oral or written, previously or hereafter developed, that relates to the business as heretofore conducted by the Company, or which is hereafter otherwise acquired or used by the Company or its subsidiaries and Affiliates, that is not generally known to others in the Company’s area of business or, if known, was obtained wrongfully by such other person or entity or with knowledge that it was proprietary or confidential information of or relating to the business as heretofore conducted by the Company or of or relating to the business of the Company or its subsidiaries and Affiliates. Confidential Information shall include, without limitation, trade secrets, methods or practices, financial results or plans, customer or client lists, personnel information, information relating to negotiations with clients or prospective clients, proprietary software, databases, programming or data transmission methods, or copyrighted materials (including without limitation, brochures, layouts, letters, art work, copy, photographs or illustrations). It is expressly understood that the foregoing list shall be illustrative only and is not intended to be an exclusive or exhaustive list of Confidential Information.

(f)      “Director Cause” means (i) for any breach of Employee’s duty of loyalty to the Company or such subsidiary or the stockholders thereof; (ii) an acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; or (iii) for any transaction from which Employee derived an improper personal benefit. For purposes of this Agreement, the existence of Director Cause shall be effective only upon delivery to Employee of a certified copy of a resolution of the Board, adopted by the affirmative vote of a majority of the entire membership of the Board following a meeting at which Employee was given an opportunity to be heard on at least five (5) business days’ advance written notice, finding that Employee was guilty of the conduct constituting Director Cause, and specifying the particulars thereof.

(g)      “Good Reason” means any of the following events that occurs without Employee’s prior written consent after the Effective Date:

(i)      any material reduction in the amount of Employee’s then



current base salary or target bonus opportunity, in either case other than as part of a reduction of less than ten percent (10%) applied generally across-the-board to all of the senior executive officers of the Company;

(ii)      (A) a material reduction in Employee’s title; or (B) a material, adverse reduction in the duties or responsibilities of Employee relative to Employee’s duties or responsibilities as described in Section 2 hereof; (which for the avoidance of doubt shall be deemed to have occurred upon a Change in Control pursuant to which the Company becomes a wholly owned division, unit or subsidiary of the acquiring company);


(iii)      the breach or failure by the Company or Employer to perform any of its material covenants contained in this Agreement (including the failure to appoint Employee to the Board or the removal of Employee from the Board other than for Director Cause);
 
(iv)      any relocation of Employee’s principal place of employment by more than fifty (50) miles, as long as such relocation increases Employee’s normal daily commute excluding, for the avoidance of doubt, the expected relocation referenced in Section 4(c)(ii) of this Agreement); or

(v)      the Company’s failure to cause any successor to all or substantially all of the business or assets of the Company and/or the Employer to expressly agree to assume the obligations of the Company and/or the Employer under this Agreement, unless such assumption occurs automatically by operation of law.

In order for a termination of Employee to constitute a termination for Good Reason, Employee must notify the Company of the circumstances claimed to constitute Good Reason in writing not later than the ninetieth (90th) day after such circumstances have arisen or occurred and must provide the Company with at least thirty (30) days within which to cure such circumstances before terminating employment, and, failing a cure, Employee must terminate Employee’s employment within thirty (30) days following the expiration of such cure period.

(h)      “Potential Change in Control” of the Company shall be deemed to have occurred, if:

(i)      the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control of the Company;

(ii)      any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Company; or




(iii)      the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.
 
(i)      “Potential Change in Control Period” means the period beginning on the date the Potential Change in Control occurs and ending as of the earlier of (i) the date on which a Change in Control occurs or (ii) the date the Board makes a good faith determination that the risk of a Change in Control has terminated. In addition, Employee’s employment shall be deemed to have been terminated during a Potential Change in Control Period if such termination occurs prior to a Change in Control and such termination is by the Company other than for Cause and is (x) at the request of the counterparty in such Change in Control or (y) otherwise reasonably in anticipation of such Change in Control, provided that such Change in Control actually occurs.

(j)      “Section 409A” means Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.




Appendix B
General Release

Release and Waiver of Claims . In consideration of the payments and benefits to which you are entitled under that certain Agreement, effective as of July 1, 2017 to which you, NCI Building Systems, Inc., and NCI Group, Inc. (the “ Companies ”) are parties (the “ Agreement ”), you hereby waive and release and forever discharge each of the Companies and their respective parent entities, subsidiaries, divisions, limited partnerships, affiliated corporations, successors and assigns and their respective past and present directors, managers, officers, stockholders, partners, agents, employees, insurers, attorneys, and servants each in his, her or its capacity as such, and each of them, separately and collectively (collectively, “ Releasees ”), from any and all existing claims, charges, complaints, liens, demands, causes of action, obligations, damages and liabilities, known or unknown, suspected or unsuspected, whether or not mature or ripe, that you ever had and now have against any Releasee arising out of or in any way related to your employment with or separation from the Companies, to any services performed for the Companies, to any status, term or condition in such employment, or to any physical or mental harm or distress from such employment or non-employment or claim to any hire, rehire or future employment of any kind by the Companies, all to the extent allowed by applicable law. This release of claims includes, but is not limited to, claims based on express or implied contract, compensation plans, covenants of good faith and fair dealing, wrongful discharge, claims for discrimination, harassment and retaliation, violation of public policy, tort or common law, whistleblower or retaliation claims; and claims for additional compensation or damages or attorneys’ fees or claims under federal, state, and local laws, regulations and ordinances, including but not limited to Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Worker Adjustment and Retraining Notification Act (“ WARN ”), or equivalent state WARN act, the Employee Retirement Income Security Act, and the Sarbanes-Oxley Act of 2002. You understand that this release of claims includes a release of all known and unknown claims through the date on which this release of claims becomes irrevocable.
Limitation of Release : Notwithstanding the foregoing, this release of claims will not prohibit you from filing a charge of discrimination with the National Labor Relations Board, the Equal Employment Opportunity Commission or an equivalent state civil rights agency, but you agree and understand that you are waiving your right to monetary compensation thereby if any such agency elects to pursue a claim on your behalf. Further, nothing in this release of claims shall be construed to waive any right that is not subject to waiver by private agreement under federal, state or local employment or other laws, such as claims for workers’ compensation or unemployment benefits or any claims that may arise after the date on which this release of claims becomes irrevocable. In addition, nothing in this release of claims will be construed to affect any of the following claims, all rights in respect of which are reserved:



(a) Any payment or benefit set forth in the Agreement;
(b) Any rights as a shareholder of NCI Building Systems, Inc.;
(c) Reimbursement of unreimbursed business expenses properly incurred prior to the termination date in accordance with policy of the Companies;
(d) Claims in respect of equity compensation owned by you or rights to LTIP or other equity awards;
(e) Vested benefits under the general employee benefit plans (other than severance pay or termination benefits under general policy of the Companies, all rights to which are hereby waived and released);
(f) Any claim for unemployment compensation or workers’ compensation administered by a state government to which you are presently or may become entitled;
(g) Any claim that either of the Companies has breached this release of claims; and

(h) Indemnification as a current or former director or officer of either of the Companies or any of its subsidiaries (including as a fiduciary of any employee benefit plan), or inclusion as a beneficiary of any insurance policy related to your service in such capacity.


Exhibit 31.1
 
CERTIFICATION PURSUANT TO RULE 13a-14(b)/15d-14(a)
 
I, Donald R. Riley, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of NCI Building Systems, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: September 7, 2017
 
 
/s/ Donald R. Riley
 
Donald R. Riley
 
Chief Executive Officer and President
 
(Principal Executive Officer)
  

Exhibit 31.2
 
CERTIFICATION PURSUANT TO RULE 13a-14(b)/15d-14(a)
 
I, Mark E. Johnson, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of NCI Building Systems, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: September 7, 2017
 
 
/s/ Mark E. Johnson
 
Mark E. Johnson
 
Executive Vice President,
 
Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 

Exhibit 32.1
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
 
In connection with the quarterly report of NCI Building Systems, Inc. (the “Company”) for the quarter ended July 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald R. Riley, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
1.
I have reviewed this Report of the Company;
 
 
2.
This Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
3.
The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: September 7, 2017
 
 
/s/ Donald R. Riley
 
Donald R. Riley
 
Chief Executive Officer and President
 
(Principal Executive Officer)
 
A signed original of this written statement required by Section 906 has been provided to NCI Building Systems, Inc. and will be retained by NCI Building Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
This Certification shall not be deemed to be “filed” or part of the Report or incorporated by reference into any of the registrant’s filings with the Securities and Exchange Commission by implication or by any reference in any such filing to the Report.
 

 

Exhibit 32.2
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
 
In connection with the quarterly report of NCI Building Systems, Inc. (the “Company”) for the quarter ended July 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark E. Johnson, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
1.
I have reviewed this Report of the Company;
 
 
2.
This Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
3.
The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: September 7, 2017
 
 
/s/ Mark E. Johnson
 
Mark E. Johnson
 
Executive Vice President,
 
Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 
A signed original of this written statement required by Section 906 has been provided to NCI Building Systems, Inc. and will be retained by NCI Building Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
This Certification shall not be deemed to be “filed” or part of the Report or incorporated by reference into any of the registrant’s filings with the Securities and Exchange Commission by implication or by any reference in any such filing to the Report.