APOG

Apogee Enterprises, Inc. (APOG)

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Apogee Enterprises, Inc. (APOG)

F3Q10 Earnings Call

December 17, 2009 11:00 am ET

Executives

Mary Ann Jackson - Director of Investor Relations

Russ Huffer - Chairman and Chief Executive Officer

Jim Porter - Chief Financial Officer

Analysts

Tom Hays - Piper Jaffray

Eric Stein – Northland Securities

Brent Tillman - E.A. Davidson

Eric Glover – Canaccord Adams

Robert Kelly - Sidoti

Michael Martin - Small-Cap Report

Tyson Bauer - Wealth Monitors

Frank Bisk - Pilot Advisors

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2010 Apogee Enterprises Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Mary Ann Jackson. Please proceed.

Mary Ann Jackson

Thank you, Veronica. Good morning and welcome to the Apogee Enterprises fiscal 2010 third quarter conference call on Thursday, December 17, 2009. With us on the line today are Russ Huffer, Chairman and CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2010 third quarter results and the outlook for the current year.

During the course of this conference call we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment and are of course, subject to risks and uncertainties which are beyond the control of management. These statements are not guarantees of future performance and actual results may differ materially. Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009 and in our earnings release issued last night and filed on Form 8-K.

Russ will now give you a brief overview of the results and Jim will cover the financials. After they conclude, Russ and Jim will answer your questions. Russ.

Russ Huffer

Thank you, Mary Ann. Good morning and welcome to our conference call. In difficult market conditions, we achieved solid operating performance as we improved productivity and aggressively managed costs. We earned $0.39 per share on revenues of $179.8 million. Both earnings and revenues were down compared to the prior year period as the non-residential construction market continues to be impacted by tight commercial real estate credit and decreasing employment levels.

A number of positive in the quarter were more than offset by low architectural segment capacity utilization and the declining mix of work bid and stronger commercial construction markets. The positives demonstrate our focus on operating well through this challenging cycle and helped us achieve an operating margin of 8.9% compared to 10.3% in the prior year period.

They include we executed well, especially in our installation window and picture framing businesses. We continued to improve productivity and we have managed our costs in anticipation of lower revenues.

In addition, we also generated approximately $40 million of cash flow from continuing operating activities in the third quarter, strengthening our financial position to weather the tougher times still ahead for Apogee.

Turning to the segments, architectural segment revenues declined 28% and operating income decreased 51%. The architectural operating margin was 6.1% compared to 9.0% in last year’s third quarter. Although our markets are down significantly, we believe we are gaining share by winning institutional projects, including stimulus work, capturing most of the large projects that are going forward, winning smaller domestic projects and installation projects in new geographies, as well as growing our international export sales.

The architectural backlog was $246.4 million, down from $295 million in the second quarter and $373 million in the prior year period. We have stated that we didn’t believe we were at the bottom of the cycle for Apogee and with the drop in backlog, we may not be there yet. However, it is important to note that reduced lead times for smaller architectural glass in standard window projects as well as the quick turns required of many of the international jobs are resulting in a higher proportion of book and bill work, which is not reflected in the backlog. As we had expected, our backlog mix shifted even more toward institutional projects in the third quarter. Institutional projects now account for 60% to 65% of our backlog, up from 55% to 60% in the second quarter. Office projects have slipped to 20% to 25% of the backlog from 25% to 30%. The hotel entertainment sector remains at 5% to 10% of the architectural backlog while condos have fallen to the 0% to 5% range from 5% to 10%.

Stimulus projects continued to contribute to the institutional backlog. In the quarter, we were awarded general services administration and department of defense projects on the stimulus list such as a military hospital, federal court house, and a federal building, as well as other state and local education, healthcare and office projects. We are actively bidding on other projects and have already been awarded new institutional projects this month.

We are also seeing an increase in international work, export work for our architectural glass business, and have been quoting more international work now than we have in past years.

Surprisingly, bidding activity remained steady, although average project values have declined. We are also seeing bid to award timing continue to slow as customers evaluate project timing relative to the economy, obtain financing, and pursue cost reduction opportunities before awarding projects.

Moving to the large scale optical segment, our picture framing business performed well in its seasonally strongest quarter, with revenues up slightly and operating income up 14%, as we saw a strong mix of our best value-added picture framing glass and acrylic products in the quarter.

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