NCS Announces Reverse Split

NCI Building Systems Inc. (NCS: 2.00 0.00 0.00%) announced a reverse stock split at a 1-for-5 ratio of its outstanding common stock. The reverse stock split, which was expected to be effective on or about Mar 5, 2010, was approved by the stockholders at the company’s annual meeting on Feb 19. The company’s share price went up 4.6% to $2.05 on the day of announcement. 

Every 5 shares of the company’s common stock that are issued and outstanding will be automatically combined into one issued and outstanding share. As of the effective date, the number of shares of NCI common stock outstanding will be approximately 18.09 million. 

A reverse stock split increases the share price while decreasing the number of shares outstanding. This does not change the total share holder value. Companies, in general, resort to reverse stock split when their share prices are at very low levels. The closing price of NCI shares as on Feb 18, 2010 was 81% lower than the prior-year level. 

The company saw a significant deterioration in its share price since the beginning of economic recession. With the global economic slowdown, commercial projects were either delayed or cancelled, thereby adversely impacting the company’s sales. According to a McGraw Hill report, construction activity in NCI’s primary end markets (commercial and industrial) was down 60% in the first ten months of 2009. These markets are expected to remain weak for the next couple of quarters. 

Also, there was a significant dilution in the shareholder value due to an equity investment Clayton, Dubilier & Rice Inc. managed funds in October 2009. This investment was necessary for the company to evade bankruptcy and survive in the current economic conditions. 

The reverse stock split announced by NCI does not in anyway change the fundamental outlook of the company. It just increases the share price while decreasing the number of outstanding shares.