UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
------ -------
COMMISSION FILE NUMBER 001-12335
BUTLER MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 44-0188420
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1540 GENESSEE STREET, KANSAS CITY, MISSOURI 64102
(Address of principal executive offices)
(816) 968-3000
(Registrant's telephone number, including area code)
The name, address and fiscal year of the Registrant have not changed
since the last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES X NO .
--- ---
The registrant had 6,328,051 shares of common stock outstanding at March 31,
2003.
INDEX
PART I. - FINANCIAL INFORMATION Page Number
ITEM 1. Financial Statements
(1) Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 3
Consolidated Statements of Comprehensive Income (Loss) for the Three Months
Ended March 31, 2003 and 2002 4
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 6
(2) Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 16
ITEM 4. Controls and Procedures 16
PART II. - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 17
ITEM 5 Letter of Intent to Sell Lester Division 17
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20
2
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2003 and 2002
(unaudited)
($000's omitted except for per share data)
2003 2002
---------------- -----------------
Net sales $ 169,767 $ 182,852
Cost of sales 148,347 160,733
---------------- -----------------
Gross profit 21,420 22,119
Selling, general and administrative expenses 26,542 27,837
---------------- -----------------
Operating loss (5,122) (5,718)
Other expense, net (996) (70)
---------------- -----------------
Operating loss and other expense (net) (6,118) (5,788)
Interest expense 2,146 1,958
---------------- -----------------
Pretax loss (8,264) (7,746)
Income tax benefit 4,349 2,378
---------------- -----------------
Net loss $(3,915) $ (5,368)
================ =================
Basic loss per common share $ (0.62) $ (0.85)
================ =================
Diluted loss per common share $ (0.62) $ (0.85)
================ =================
Basic weighted average number of shares 6,335,289 6,290,239
Diluted weighted average number of shares 6,335,289 6,290,239
See Accompanying Notes to Consolidated Financial Statements.
3
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2003 and 2002
(unaudited)
($000's omitted)
2003 2002
-------------- --------------
Net loss $ (3,915) $ (5,368)
Other comprehensive income:
Foreign currency translation and hedging activity 175 244
-------------- --------------
Comprehensive loss $ (3,740) $ (5,124)
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
4
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
($000's omitted)
2003 2002
-------------- --------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 62,321 $ 75,778
Receivables, net 88,098 95,002
Inventories:
Raw materials 25,351 23,108
Work in process 9,504 7,608
Finished goods 36,657 36,283
LIFO reserve (9,666) (9,510)
-------------- --------------
Total inventory 61,846 57,489
Real estate developments 5,598 13,203
Net current deferred tax assets 26,783 25,238
Other current assets 17,900 14,492
-------------- --------------
Total current assets 262,546 281,202
Investments and other assets 60,245 50,684
Assets held for sale 3,684 3,684
Property, plant and equipment, at cost 287,482 283,746
Less accumulated depreciation (166,442) (163,482)
-------------- --------------
Net property, plant and equipment 121,040 120,264
-------------- --------------
$ 447,515 $ 455,834
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 12,288 $ 6,273
Accounts payable 54,346 58,578
Dividends payable 1,140 1,136
Accrued liabilities 107,602 110,110
Taxes on income 8,711 10,665
-------------- --------------
Total current liabilities 184,087 186,762
Net noncurrent deferred tax liabilities 4,799 4,442
Other noncurrent liabilities 20,408 19,393
Long-term debt, less current maturities 93,648 96,066
Shareholders' equity:
Common stock, no par value, authorized 20,000,000
shares, issued 9,088,200 shares, at stated value,
outstanding 6,328,051 in 2003 and 6,310,502 in 2002 12,623 12,623
Foreign currency translation, hedging activity, and minimum
pension liability (16,318) (16,493)
Retained earnings 212,134 217,307
-------------- --------------
208,439 213,437
Less cost of common stock in treasury, 2,760,149 shares
in 2003 and 2,777,698 shares in 2002 63,866 64,266
-------------- --------------
Total shareholders' equity 144,573 149,171
$ 447,515 $ 455,834
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
5
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2003 and 2002
(unaudited)
($000's omitted)
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,915) $ (5,368)
Adjustments to reconcile net earnings provided by and used
in operating activities:
Depreciation and amortization 5,538 4,533
Equity in earnings (loss) of joint ventures (17) 15
Change in asset and liabilities:
Receivables 6,904 14,731
Inventories (4,357) 2,887
Real estate developments in progress 7,605 (9)
Net current deferred tax assets (1,188) -
Other current assets and liabilities (12,140) (20,406)
Other noncurrent operating assets and liabilities (8,949) 1,308
-------------- --------------
Net cash used by operating activities (10,519) (2,309)
Cash flows from investing activities:
Capital expenditures - property, plant, & equipment (4,759) (1,602)
Capital expenditures - software (1,254) (2,314)
-------------- --------------
Net cash used by investing activities (6,013) (3,916)
Cash flows from financing activities:
Payment of dividends (1,135) (1,130)
Proceeds from issuance of long-term debt 1,370 -
Repayment of long-term debt (249) (203)
Net change in short-term debt 2,476 (160)
Issuance of treasury stock 400 360
Purchase of treasury stock - (2)
-------------- --------------
Net cash provided (used) by financing activities 2,862 (1,135)
Effect of exchange rate changes 213 54
-------------- --------------
Net decrease in cash and cash equivalents (13,457) (7,306)
Cash and cash equivalents at beginning of year 75,778 52,569
-------------- --------------
Cash and cash equivalents at March 31 $ 62,321 $ 45,263
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
6
BUTLER MANUFACTURING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies described in the consolidated
financial statements and related notes included in Butler Manufacturing
Company's 2002 Form 10-K. It is suggested that those consolidated statements be
read in conjunction with this report. The year-end financial statements
presented were derived from the company's audited financial statements. In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments necessary for a fair presentation of the financial
position of Butler Manufacturing Company and the results of its operations.
NOTE 2 -- GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
effective for fiscal years beginning after December 15, 2001. These Statements
eliminated the pooling-of-interests method of accounting for business
combinations and the systematic amortization of goodwill. SFAS No. 141 applies
to all business combinations with a closing date after June 30, 2001, of which
the Company had no such activity. At the beginning of fiscal 2002, the company
adopted SFAS No. 142. Under the new standard, purchased goodwill is no longer
amortized over its useful life, but will be subject to annual impairment tests.
As of January 1, 2002, and per the results of the annual impairment test
prepared in the third quarter of 2002, no impairment charge was recorded by the
company related to goodwill.
NOTE 3 - BUSINESS SEGMENTS
The company groups its operations into five business segments: North American
Building Systems, International Building Systems, Architectural Products,
Construction Services, and Real Estate.
The North American Building Systems segment includes the North American metal
buildings and the wood buildings businesses. These business units supply steel
and wood frame pre-engineered building systems for a wide variety of commercial,
community, industrial, and agricultural applications.
The International Buildings Systems segment presently consists of the company's
Asian metal buildings business. This business supplies pre-engineered metal
buildings for commercial, community, industrial, and agricultural applications,
primarily for the Asian markets. The European metal buildings business, which
was included in this segment, was sold in second quarter of 2002.
The Architectural Products segment includes the operations of the Vistawall
Group. The group's businesses design, manufacture, and market architectural
aluminum systems for nonresidential construction, including curtain wall,
storefront systems, windows, doors, skylights, and roof accessories.
The Construction Services segment provides comprehensive design and construction
planning, execution, and management services for major purchasers of
construction. Projects are usually executed in conjunction with the dealer
representatives of other Butler divisions.
The Real Estate segment provides real estate build-to-suit-to-lease development
services in cooperation with Butler dealers.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies as included in the company's 2002
form 10-K. Butler Manufacturing Company's reportable segments are strategic
business units that offer products and services for different markets. They are
managed separately because each business requires different technology and
expertise. The Other category in the Segments tables that follow includes
intersegment sales eliminations, corporate expenses, and corporate assets not
otherwise allocated to a specific segment.
7
Three Months
NET SALES Ended March 31,
(Thousands of dollars) 2003 2002
---------------------------------------------------------------------------------------------------------------
North American Building Systems $ 80,481 $ 78,487
International Building Systems 22,160 21,592
Architectural Products 52,866 51,581
Construction Services 18,801 37,750
Real Estate 0 0
Other
(4,541) (6,558)
----------------------------------
$ 169,767 $ 182,852
==================================
Net sales represent revenues from sales to affiliated and unaffiliated customers
before elimination of intersegment sales, which is included in Other.
Intersegment eliminations are primarily sales between North American Building
Systems and Architectural Products segments to the International Building
Systems and Construction Services segments.
Three Months
PRETAX EARNINGS (LOSSES) Ended March 31,
(Thousands of dollars) 2003 2002
---------------------------------------------------------------------------------------------------------------
North American Building Systems $ (6,435) $ (4,252)
International Building Systems 2,111 (29)
Architectural Products 2,065 909
Construction Services 281 777
Real Estate (617) 555
Other (5,669) (5,706)
----------------------------------
$ (8,264) $ (7,746)
==================================
The Other classification represents unallocated corporate expenses.
TOTAL ASSETS March 31, December 31,
(Thousands of dollars) 2003 2002
---------------------------------------------------------------------------------------------------------------
North American Building Systems $ 127,632 $ 132,688
International Building Systems 76,287 77,159
Architectural Products 104,865 104,474
Construction Services 16,632 17,807
Real Estate 32,097 30,379
Other 90,002 93,327
----------------------------------
$ 447,515 $ 455,834
==================================
Total assets represent assets used by each business segment. Other represents
cash and cash equivalents, assets held for sale, corporate equipment, and
miscellaneous other assets which are not related to a specific business segment.
NOTE 4 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In December 2001, the company's board of directors approved the disposition of
its European metal buildings business. As a result, the company recorded a $3.8
million pretax charge in connection with this decision. In addition, the company
recorded a $4.3 million pretax charge for the impairment of certain assets.
During 2002, $1.9 million of the restructuring reserve was utilized and an
additional $1.4 million was accrued for severance, termination and legal costs.
During the first quarter of 2003, $.4 million was utilized for severance and
other employee separation costs. At March 31, 2003, $1.2 million remains in the
restructuring reserve for legal, severance and other benefits costs, and other
closing costs. The sale was completed in the third quarter of 2002.
8
NOTE 5 - INDEBTEDNESS
In June 2001, the company entered into a $50 million bank credit facility and
issued $50 million of senior unsecured notes in a private placement. The bank
credit facility was subsequently amended in December 2002 to a $35 million
facility with sub limits of up to $30 million for letters of credit and $10
million for cash advances.
After giving effect to all amendments, interest on advances under the credit
facility is based on either (a) the banks' base rate, which is the higher of the
federal funds rate plus .50% or the prime rate, plus a margin ranging from 1.0%
to 1.25%, or (b) LIBOR plus a margin ranging from 1.75% to 2.5%. Interest on
base rate advances is payable quarterly and is payable on LIBOR advances at the
end of periods ranging from one to six months. The credit facility provides for
a commitment fee on unused advances ranging from .20% to .30%. Commitments under
the credit facility expire on June 20, 2004, at which time any outstanding
advances are payable. The agreement contains certain operating covenants,
including restrictions on guarantees, liens, investments, acquisitions, asset
sales, mergers, dividend payments, capital expenditures, and additional debt.
The agreement also requires the company to maintain a capitalization ratio, as
defined, of 0.45 to 1, and a leverage ratio, as defined, of 14.0 to 1, through
the fiscal quarter ending June 30, 2003, 7.0 to 1 at the end of the fiscal
quarter ending September 30, 2003, and 4.0 to 1 at the end of any fiscal quarter
thereafter. The agreement also requires the company to maintain minimum domestic
cash at all times and as of the last day of each fiscal quarter. In addition,
the agreement requires domestic earnings before interest, taxes, depreciation,
and amortization (EBITDA) for the trailing four fiscal quarters to be zero
through June 30, 2003, $5 million at the end of the fiscal quarter ending
September 2003, and $15 million thereafter through March 31, 2004. At March 31,
2003 the company was in compliance with all covenants.
At March 31, 2003, $50 million principal amount of the company's 2001 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 8.12%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on June 30 and December 30 and
principal is payable in equal annual installments of $4.55 million commencing
December 30, 2006, with the final installment due on December 30, 2016.
At March 31, 2003, $35 million principal amount of the company's 1998 private
placement senior notes was outstanding, After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 6.82%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on March 20 and September 20 and
principal is payable in equal annual installments of $3.5 million commencing
March 20, 2004, with the final installment due on March 20, 2013.
At March 31, 2003, $5 million principal amount of the company's 1994 private
placement senior notes was outstanding. After giving effect to amendments in the
first quarter of 2003, the notes carry a fixed interest rate of 8.27%, plus an
additional 1.25% until certain financial tests are met as further described
below. Interest is payable semi-annually on June 30 and December 30 and
principal payable in equal annual installments of $5 million, with the final
installment due on December 30, 2003.
In the first quarter of 2003, the company and its note holders amended the 2001,
1998, and 1994 notes, which increased the interest rate for all three notes by
1.5%. Of the increase, .25% is permanent, .5% is applicable until the company
has modified or replaced its bank credit facility on a pari passu basis with the
notes and .75% is applicable until the later of the bank credit facility being
modified or replaced on a pari passu basis and the fixed charge ratio as defined
in the note exceeds 2.25 for two consecutive four trailing quarters. Related to
the amendment, the company entered into a Security Agreement with the Note
Holders and the bank credit facility lenders whereby the company granted these
lenders a security interest in its domestic accounts, domestic inventory,
domestic subsidiary stock and certain other personal property. These lenders
also entered into an Intercreditor Agreement.
The amended note agreements contain certain operating covenants, including
restrictions on liens, additional indebtedness, and asset sales, and require the
company to maintain adjusted consolidated tangible net worth, defined as $110
million plus the cumulative sum of 50% of consolidated net income for each
fiscal quarter ending after December 31, 2002. The company is required to
maintain a fixed charge coverage ratio of 1.0 to 1 for fiscal quarters ending
March 31, 2003 and June 30, 2003, with periodic increases through June 30, 2005
and 2.0 to 1 thereafter,. Restricted payments including dividends and treasury
stock purchases, may not in the aggregate exceed the sum of $10 million, plus
75% of consolidated net income or less 100% of any deficit for each fiscal
quarter subsequent to March 31, 2003. At March 31, 2003 the company was in
compliance with all covenants.
9
Due to the continued soft market demand and competitive pricing for the
company's products, which may continue to adversely impact the company's
earnings and cash flow, the company anticipates that it may not be in compliance
with certain loan covenants in future periods. As a result, the company may need
to obtain amendments to loan agreements with its lenders to reset certain
financial covenants, or enter into new credit facilities with alternative
lenders. If it is required to take such steps, although there is no assurance,
management believes the company will be able to amend its existing agreements or
enter into new agreements with alternative lenders.
NOTE 6 - STOCK OPTION PLANS
The company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under
APB 25, no charges are made to earnings in accounting for stock options granted
because all options are granted with an exercise price equal to the fair market
value at the date of grant. If the amounts received when options are exercised
are different than the carrying value of treasury stock issued, the difference
is recorded in retained earnings.
Stock options were granted to key employees under the 1996 Stock Incentive Plan
and to outside Directors under 2002 Stock Option Plan for Outside Directors. The
company granted nonqualified stock options to key employees totaling 87,500
shares in the first quarter of 2003 and 44,000 shares in the first quarter of
2002. Options totaling 4,000 shares were also granted in the first quarter of
2003 to a Director under the 2002 Stock Option Plan for Outside Directors.
Options were granted at a fixed exercise price based on fair market value on the
date of the grant and expire no more than ten years from the date of grant.
Options granted to employees in 2003 and 2002 vest one year after the date of
grant and expire ten years from the date of grant. Options under the Outside
Directors Plan vest on the 184th day after January 22, 2003, and are fully
exercisable thereafter.
In January 2003, the FAB issued SFAS No. 148 " Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No 148 amended Statement No. 123
and provide for alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-base compensation. In addition it
requires more frequent and prominent financial statement disclosure of the
effect on the company's net earnings and earnings per share (EPS). Using the
Black Scholes option pricing model to calculate the fair value of stock options
on their date of grant, and the assumptions below, the effect on the company's
net losses for the quarters if the options were accounted for under the fair
value method are shown in the table below. The following assumptions were used
to calculate the fair value of options granted:
Assumption 2003 2002
-------------------------------------------------------------
Dividend yield 4.5% 3.7%
Risk-free interest rate 2.8% 3.8%
Volatility 32% 25%
Life of option 5-10 years 5-10 years
First Quarter
Dollars in millions 2003 2002
------------------- -------------------
Net loss as reported $ (3.9) $ (5.4)
After tax effect of SFAS No. 123 (.2) (.1)
Net earnings (loss) after SFAS No. 123 $ (4.1) $ (5.5)
EPS effect in dollars
---------------------
Diluted, EPS as reported $ (0.62) $ (0.85)
EPS effect of SFAS No. 123 $ (0.03) $ (0.02)
10
NOTE 7. -- SUBSEQUENT EVENTS-LESTER BUILDING ASSET SALE
On May 15, 2003, the company announced that it had signed a letter of intent to
sell substantially all of the assets of the Lester Building Systems business to
a management team headed by the current Lester division president.
While the financial terms of the transaction were not disclosed, the company
anticipates it will record an aftertax charge upon sale of approximately $4.3
million, or $.68 per share. The anticipated pretax charge is approximately $7
million, including noncash charges of approximately $6.5 million for the
write-down of assets to net sale value. Per the letter of intent, the company
will provide seller financing to the new owners. The sale is subject to
contingencies common to such transactions, including due diligence reviews,
board approvals, financing, lender consents, and the negotiation of a definitive
agreement.
The company anticipates completing a definitive purchase agreement during the
next several weeks, with the closing of the transaction occurring late in the
second quarter or early in the third quarter of this year.
The transaction excludes the recent jury verdict awarded to the company related
to a lawsuit involving Louisiana-Pacific Corporation. It is expected that the
original award of $29.6 million is currently under appeal. It is expected that
the company and the new owners of the Lester Building Systems business will work
cooperatively during the appeal process to bring this litigation to its
conclusion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $170 million for the first quarter 2003 compared with $183
million in 2002, 7% lower than a year ago. Lower sales were due to a continued
weak domestic nonresidential construction market. The North American Building
Systems and the Architectural Products segments reported higher sales than a
year ago, though not enough to offset the lower sales in the Construction
Services Segment. Sales in the North American Building Systems Segment were
$80.5 million, an increase of 3% compared with the first quarter a year ago,
while the Architectural Products Segment sales were $52.9 million, an increase
of 2.5% from a year ago. The International Building Systems Segment sales
increased 2.6% compared with the prior year, while the Construction Services
Segment reported a decline in sales of $19 million, 50% lower than the first
quarter of a year ago. While 2003 activities have slowed for the Construction
Services Segment due to the general market, the comparable quarter in 2002 was
relatively strong for this business. The Real Estate Segment reported no sales
in the first quarter of 2003 and 2002.
The North American Building Systems Segment sales increase of 3% was due to
higher sales in the domestic pre-engineered metal buildings business, as the
Lester wood frame buildings business reported lower sales for the same period.
The International Building Systems sales increase was all in China, whose
markets remained strong through the first quarter of 2003. European sales of
$2.7 million were reported in this segment in 2002, and none were reported in
2003 due to the sale of this business in July 2002. The revenues of the
Construction Services and Real Estate segments are primarily project related,
and as such, quarterly comparisons of revenue are not as meaningful as in the
company's more manufacturing oriented businesses.
The company's gross profits declined 3.2% to $21.4 million in the first quarter
2003 compared with a year ago, with the majority of the decline occurring in the
North American Building Systems and Construction Services segments. The decline
in gross profits was due to a continued sluggish nonresidential construction
market, along with higher costs for health care insurance, general insurance,
and pension costs. The decline in gross profits in these segments more than
offset increases in gross profit experienced in the International Building
Systems and Architectural Products segments.
Other expenses were higher during the first quarter of 2003 due to lower rental
income and cumulative depreciation expense recorded on a completed project in
the Real Estate Segment whose prospect for sale extended beyond one year.
Selling, general, and administrative expenses of $27 million for the first
quarter 2003 were 5% lower than a year ago. The decline in selling, general, and
administrative expenses was due to lower business activity and tighter controls
over expenses. Interest expense was $2.1 million, about 10% higher than the
comparable period a year ago and due to higher effective interest rates on the
company's long-term debt.
11
The pretax loss for the quarter ended March 31, 2003 was $3.9 million, compared
with a loss of $5.4 million a year ago. The tax benefit for the quarter was
greater in 2003 due to greater domestic losses, the settlement of prior year tax
audits resulting in a $.4 million tax benefit recognized in the current year,
and a lower effective tax rate on foreign earnings. The net loss for the first
quarter 2003 was $3.9 million or $.62 per share compared with a $5.4 million or
$.85 per share loss a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Since December 2002, cash and cash equivalents decreased $13 million to $62
million due to a decline in cash flows from operations and investing activities.
Receivables declined primarily due to lower sales in the Construction Services
Segment. Inventories increased in both the North American and International
Building Systems segment, the latter due to continuing growth. Real estate
developments in progress declined primarily due to the reclass of a real estate
project to a long term asset classification from a current asset due to its
anticipated sale extending beyond one year. Investments and other assets
increased during the first quarter 2003 due primarily to the real estate project
reclass mentioned above. Cash from investing activities was used primarily for
capital expenditures. Capital expenditures were $4.8 million at March 31, 2003,
compared with $1.6 million a year ago. Capital expenditures were incurred
primarily in the North American Building Systems Segment to maintain ongoing
operations and for targeted growth initiatives. Cash from financing activities
was used for payment of dividends, and scheduled long-term debt payments, while
cash was provided from the issuance of short-term debt for the financing of real
estate development projects.
In June 2001, the company entered into a $50 million bank credit facility which
was subsequently amended in December 2002 to a $35 million credit facility with
sub limits of $30 million for letters of credit and $10 million for cash
advances. There were no borrowings under the credit facility for the quarter
ended March 31, 2003. Commitments under the credit facility expire on June 20,
2004, at which time any outstanding advances are payable. The company's foreign
operations maintain separate lines of credit with local banks of approximately
$6 million, with no utilization at March 31, 2003. For the three months ended
March 31, 2002 and 2003, there were no domestic short-term borrowings. After
giving effect to all amendments, interest on advances under the credit facility
is based on either (a) the banks' base rate, which is the higher of the federal
funds rate plus .50% or the prime rate, plus a margin ranging from 1.0% to
1.25%, or (b) LIBOR plus a margin ranging from 1.75% to 2.5%. Interest on base
rate advances is payable quarterly and is payable on LIBOR advances at the end
of periods ranging from one to six months. The credit facility provides for a
commitment fee on unused advances ranging from .20% to .30%. Commitments under
the credit facility expire on June 20, 2004, at which time any outstanding
advances are payable.
At March 31, there were outstanding $50 million principal amount of the
company's 2001 senior notes due 2016, $35 million of its 1998 senior notes due
2013 and $5 million of its 1994 senior notes due 2003. Interest on the 2001 and
1994 senior notes is payable semiannually on June 30 and December 30 and
interest on the 1998 senior notes is payable semiannually on March 20 and
September 20. As set forth in Note 5 to the Notes to Consolidated Financial
Statements, principal installments on the notes are payable prior to their final
maturity. The following table shows principal installments due with respect to
the senior notes during each of the years 2003 through 2016.
2003 $ 5.0 million
2004 $ 3.5 million
2005 $ 3.5 million
2006 $ 8.0 million
2007 $ 8.0 million
2008 and thereafter $ 62.0 million
During the first quarter of 2003, the company and its note holders amended the
senior notes to increase the interest rate for each series by 1.5%, of which
increase .25% is permanent .5% is applicable until the company has modified or
replaced its bank credit facility on a pari passu basis with the notes and .75%
is applicable until the later of the bank credit facility being modified or
replaced on a pari passu basis and the fixed charge ratio as defined in the note
exceeds 2.25 for two consecutive four trailing quarters. In connection with this
amendment, the company granted the note holders and lenders under the credit
facility a security interest in its domestic accounts, domestic inventory,
domestic subsidiary stock and certain other personal property.
12
Both the credit facility and the senior notes contain financial covenants and
operating covenants which are summarized in Note 5 to the Notes to Consolidated
Financial Statements contained elsewhere herein. As of March 31, 2003, the
company was in compliance with all covenants under its credit facility and the
senior notes. Management believes that the company's operating cash flow, cash
balances, along with bank credit lines, are sufficient to meet current liquidity
requirements. Due to the continued soft market demand and competitive pricing
for the company's products, which may continue to adversely impact the company's
earnings and cash flow, the company anticipates that it may not be in compliance
with certain loan covenants in future periods. As a result, the company may need
to obtain amendments to loan agreements with its lenders to reset certain
financial covenants, or enter into new credit facilities with alternative
lenders. If it is required to take such steps, although there is no assurance,
management believes the company will be able to amend its existing agreements or
enter into new agreements with alternative lenders.
Cash paid for interest was $1.2 million in the first quarter 2003, while cash
paid for taxes were minimal due to net losses incurred for the quarter.
During the first quarters of 2003 there were no treasury stock purchases, and
2002 treasury stock purchases were minimal. The company paid dividends of $1.1
million in the first quarter of 2003 and 2002. Total backlog at March 31, 2003
was $277 million down 2% from comparable backlog of a year ago. Higher margin
product backlog was approximately 1% lower, while construction backlog decreased
4% as compared to the same period a year ago.
MARKET PRICE RISK
The company's principal exposure to market risk is from changes in commodity
prices, interest rates, and currency exchange rates. To limit exposure and to
manage volatility related to these risks, the company enters into select
commodity and currency hedging transactions, as well as forward purchasing
arrangements. The company does not use financial instruments for trading
purposes.
Commodity Price Exposure: The company's primary commodities are steel, aluminum,
and wood. Steel is the company's largest purchased commodity. Although steel
prices are relatively stable the company enters into forward steel purchase
arrangements in its metal buildings business for periods of less than one year's
duration to protect against potential price increases. To the extent there are
increases in the company's steel costs, they are generally recaptured in the
company's product sales prices. During periods of falling prices the company
reserves the right to purchase steel from other competitive suppliers. During
the first quarter of 2003 not all of the steel price difference could be
recaptured in the selling prices, steel prices were higher than in the first
quarter of the prior year. Given the price competitiveness of the market not all
of the steel price difference could be recaptured in the selling prices. Recent
investments and increased operating efficiencies in company operations have
helped to mitigate the impact of rising steel prices.
The company's wood frame building business enters into forward purchase
arrangements for commercial grade lumber for periods of less than one year's
duration. Lumber costs are generally more volatile than steel costs. To offset
increases in lumber costs, the company adjusts product prices accordingly.
Aluminum hedge contracts of less than one year's duration are purchased to hedge
the engineered products backlog of the Vistawall group against potential losses
caused by increases in aluminum costs. This product line is sensitive to
material cost movements due to the longer lead times from project quoting to
manufacture. Gains or losses recorded on hedge contracts are offset against the
actual aluminum costs charged to cost of sales when contracts are settled. At
March 31, 2003 the fair value of open aluminum contracts recorded in its
cumulative other comprehensive income was less than $.1 million pretax. A 10%
change in aluminum contracts was immaterial at March 31, 2003.
Interest Rates: The majority of the company's long-term debt carries a fixed
interest rate, which limits the company's exposure to increases in market rates.
However, interest rate changes impacts the fair market value of such debt. As of
March 31, 2003, holding other variables constant, including levels of
indebtedness, a one percentage point increase in interest rates would result in
approximately a $5 million change in the fair value of the company's fixed rate
debt.
13
Foreign Currency Fluctuation: The majority of the company's business is
transacted in U.S. dollars, therefore limiting the company's exposure to foreign
currency fluctuations. Where the company has foreign-based operations, the local
currency has been adopted as the functional currency. As such, the company has
both transaction and translation foreign exchange exposure in those operations.
Due to relative cost and limited availability, the company does not hedge its
foreign net asset exposure. At March 31, 2003 the company's net asset investment
in foreign operations was $35 million. The company does hedge its short-term
foreign currency transaction exposures related to metal building sales in
Canada. Forward exchange contracts are purchased to cover a portion of the
exposure. Mark to market gains on the company's currency exchange contracts were
recorded in earnings and were less than $.1 million pretax at March 31, 2003. At
March 31, 2003, a 10% change in Canadian currency contracts was immaterial.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are both most important
to the portrayal of a company's financial condition and results of operations,
and require management's most difficult, subjective or complex judgments. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles with no need for the
application of management's judgment. In certain circumstances, however, the
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires judgment to make certain
estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. The company's critical accounting
polices include its sales recognition for construction and project contracts,
inventory valuation, estimation of product liability for third-party claims,
estimation of insurance reserves, and accounting for impairment of long-lived
assets. See Note 1 to our consolidated financial statements for additional
discussion other accounting policies.
Sales Recognition: Sales and gross profit recognition for construction and
project contracts are based upon the percentage of completion method. This
method requires the company to estimate total cost at completion for each
in-process construction project. Total contract revenue less total estimated
costs generates an estimated gross profit for each contract. Based upon
estimated total cost and estimated gross profit, the company recognizes
construction sales and gross profit over the life of the project on a percentage
of completion basis. The percentage complete at each period end date is
determined using costs actually incurred as of that date compared to the
estimate of total contract costs at completion. Periodic re-evaluations of total
cost at completion estimates are made with the resulting cumulative adjustments
recognized in the current period financial statements. Provision is made for
estimated probable losses on projects when it is determined that a loss will be
incurred. Actual costs for completed projects can and typically will vary from
earlier estimates, with the final adjustment from estimate to actual costs
recognized during the period when the project is completed.
Inventory Valuation: The company has chosen the last-in, first-out (LIFO)
accounting method for valuing inventory in the majority of its manufacturing
businesses. In periods of rising prices and steady or increasing levels of
inventory, the effect of the LIFO method is to charge the current year cost of
sales with inventory purchases that reflect current year costs. This method
results in a better matching of current costs with current sales during an
accounting period. Generally it presents a more conservative valuation of the
company's inventory, and the gross profit and net earnings reported for the
period. The LIFO valuation is a year-end measurement process requiring estimates
for the determination of quarterly gross profit and quarter-end inventory
valuation. At December 31, 2002, the cumulative effect of choosing the LIFO
method was a reduction in inventory values of $9.5 million. During 2002, the
company reduced inventory levels, which had the effect of charging the current
year cost of sales with prior years' costs. For 2002, the use of LIFO inventory
accounting decreased gross margins by $1.0 million.
Third-Party Claims: The company is subject to third-party claims associated with
its products and services. The time period from when a claim is asserted to when
it is resolved either by dismissal, negotiation, settlement, or litigation can
be several years. While the company maintains product liability insurance, its
arrangements include significant self-retention of risk in the form of policy
deductibles. In addition, certain claims are not insured. Actual claim
settlement costs and litigation awards can and probably will vary from the
estimates made by the company. Management believes that any difference in the
actual results from the estimates will not have a material adverse effect upon
the company's financial position or results of operations.
14
Insurance Accruals: Generally, the company is self-insured for workers'
compensation for certain subsidiaries and for all group medical insurance. Under
these plans, liabilities are recognized for claims incurred (including claims
incurred but not reported) and changes in the accruals. At the time a worker's
compensation claim is filed, a liability is estimated to settle the claim. The
liability for workers' compensation claims is determined based on management's
estimates of the nature and severity of the claims using analyses provided by
third party administrators. Since the liability is an estimate, the ultimate
liability may be more or less than reported. If previously established accruals
are required to be adjusted, such amounts are included in cost of sales and
selling, general, and administrative expenses in the period of adjustment. Group
medical accruals are estimated using historical claims experience. The company
maintains excess liability insurance with insurance carriers to minimize its
risks related to catastrophic claims in excess of all self-insured positions.
Any material change in the aforementioned factors could have an adverse impact
on operating results.
LONG-LIVED ASSETS: The company accounts for the impairment of long-lived assets
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." When events or circumstances indicate that a long-lived
asset may not be recoverable, the company tests for recoverability of the asset
by comparing undiscounted future cash flows to the carrying amount. If
undiscounted future cash flows are less than the asset carrying amount, an
impairment charge is recorded and the asset's carrying value is reduced to fair
value. Management estimates the future cash flows based on current operating
conditions. Changes in estimates of such cash flows could impact the results of
the impairment test.
SUBSEQUENT EVENT - ASSET SALE
On May 15, 2003, the company announced that it had signed a letter of intent to
sell substantially all of the assets of the Lester Building Systems business to
a management team headed by the current Lester division president.
While the financial terms of the transaction were not disclosed, the company
anticipates it will record an aftertax charge upon sale of approximately $4.3
million, or $.68 per share. The anticipated pretax charge is approximately $7
million, including noncash charges of approximately $6.5 million for the
write-down of assets to net sale value. Per the letter of intent, the company
will provide seller financing to the new owners. The sale is subject to
contingencies common to such transactions, including due diligence reviews,
board approvals, financing, lender consents, and the negotiation of a definitive
agreement.
The company anticipates completing a definitive purchase agreement during the
next several weeks, with the closing of the transaction occurring late in the
second quarter or early in the third quarter of this year.
The transaction excludes the recent jury verdict awarded to the company related
to a lawsuit involving Louisiana-Pacific Corporation. The original award of
$29.6 million is currently under appeal. It is expected that the company and the
new owners of the Lester Building Systems business will work cooperatively
during the appeal process to bring this litigation to its conclusion.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which may include statements
concerning projection of revenues, income or loss, capital expenditures, capital
structure, or other financial items, statements regarding the plans and
objectives of management for future operations, statements of future economic
performance, statements of the assumptions underlying or relating to any of the
forgoing statements, and other statements which are other than statements of
historical fact. These statements appear in a number of places in this report
and include statements regarding the intent, belief, or current expectations of
the company and its management with respect to (i) the cost and timing of the
completion of new or expanded facilities, (ii) the company's competitive
position, (iii) the supply and price of materials used by the company, (iv) the
demand and price for the company's products and services, or (v) other trends
affecting the company's financial condition or results of operations, including
changes in manufacturing capacity utilization and corporate cash flow in both
domestic and international markets. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially as a
result of these various factors.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure made in the Annual Report on
Form 10-K for the year ended December 31, 2002 regarding this matter. See
discussion about market risk under Item 2. Management's Discussion and Analysis
on page 11 above.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) as of a date within 90 days of the filing date of this Form
10-Q Quarterly Report (the "Evaluation Date"), have concluded that as
of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by
others within the Company, particularly during the period in which this
Form 10-Q Quarterly Report was being prepared.
(b) Changes in internal controls.
There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of the most recent evaluation, nor any significant
deficiencies or material weaknesses in such internal controls requiring
corrective actions. As a result, no corrective actions were taken.
16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 15, 2003. Three
Class B Directors were elected at the Annual Meeting. In the election of
directors there were 5,529,466 votes cast for Mark A. McCollum and 62,808
withheld; 5,537,991 votes cast for Gary L. Tapella and 54,283 withheld; and
5,536,654 votes cast for William D. Zollars and 55,620 withheld.
ITEM 5. LETTER OF INTENT TO SELL LESTER DIVISION
On May 15, 2003, the company announced that it has signed a letter of intent to
sell substantially all of the assets of the Lester Building Systems business to
a management team headed by John Hill, the current Lester division president.
The parties anticipate completing a definitive purchase agreement during the
next several weeks, with the closing of the transaction occurring late in the
second quarter or early in the third quarter of this year.
The transaction excludes the recent jury verdict awarded to the company related
to a lawsuit involving Louisiana-Pacific Corporation. The original award of
$29.6 million is currently under appeal. The company and the new owners of the
Lester Building Systems business will work cooperatively during the appeal
process to bring this litigation to its conclusion.
While the financial terms of the transaction were not disclosed, the company
anticipates it will record an aftertax charge upon sale of approximately $4.3
million, or $.68 per share. The anticipated pretax charge is approximately $7
million, including noncash charges of approximately $6.5 million for the
write-down of assets to net sale value. Per the letter of intent, the company
will provide seller financing to the new owners. The sale is subject to
contingencies common to such transactions, including due diligence reviews,
board approvals, financing, lender consents, and the completion of final
documentation.
In 2002, the Lester division reported sales of approximately $42 million and
recorded an operating loss slightly over $6 million, including approximately $3
million of repositioning expenses and one-time legal costs associated with the
Louisiana-Pacific Corporation lawsuit noted above.
The Lester division is part of the North American Building Systems Segment, and
designs, manufactures, markets, and erects pre-engineered wood-frame buildings
for a variety of end uses. Principal offices are located in Lester Prairie,
Minnesota, with sales, engineering and manufacturing facilities in Charleston,
Illinois and Clear Brook, Virginia.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Section 906 Certification Letter.
99.2 Section 906 Certification Letter.
(b) Reports on Form 8-K.
The following reports have been filed on Form 8-K since December
31, 2002, and are incorporated by reference to this 10-Q filing:
- January 10, 2003 8-K filed concerning a district judgment on
the jury award in the company's suit against Louisiana-Pacific
Corporation.
- February 3, 2003 8-K filing including the waiver and amendment
to company's credit agreement by it lenders.
- March 13, 2003 8-K filing of certifications of the chief
executive officer and chief financial officer under Section
906 of the Sarbanes-Oxley Act of 2002.
- April 22, 2003 8-K filing announcing the establishment of a
new metal buildings manufacturing plant in Monterrey, Mexico.
- April 25, 2003 8-K filing including the company's First
Quarter 2003 Shareholder's Letter and April 24, 2003 First
Quarter Earnings Press Release.
- May 15, 2003 8-K filing of Letter of Intent to Sell Lester
Division.
18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BUTLER MANUFACTURING COMPANY
May 15, 2003 /s/ Larry C. Miller
-------------- ----------------------------------------
Date Larry C. Miller
Vice President - Finance,
and Chief Financial Officer
May 15, 2003 /s/ John W. Huey
-------------- -------------------------
Date John W. Huey
Vice President, General Counsel
and Secretary
19
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, John J. Holland, certify that:
1. I have reviewed this first quarter report on Form 10-Q of Butler
Manufacturing Company;
2. Based on my knowledge, this quarterly 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 15, 2003 /s/ John J. Holland
------------ --------------------
Dated John J. Holland
Chairman and Chief Executive
Officer
20
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Larry C. Miller, certify that:
1. I have reviewed this first quarter report on Form 10-Q of Butler
Manufacturing Company;
2. Based on my knowledge, this quarterly 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 15, 2003 /s/ Larry C. Miller
------------ ----------------------------
Dated Larry C. Miller
Vice President -Finance,
and Chief Financial Officer
21
Exhibit Index
99.1 Certification of Periodic Report-CEO
99.2 Certification of Periodic Report-CFO
22