Apogee disappoints, gets punished

Traders and investors hammered Minneapolis-based Apogee Enterprises (NASD:APOG) after the company reported a disappointing fourth quarter and warned investors that 2011 would likely be even worse, with losses in the first half of the year. Apogee stock posted the largest percentage decline among small cap stocks Thursday dropping 13.4 percent, or $2.22 to close at $14.35 a share, on more than six times the average daily volume.

Battered by the severe falloff in commercial real estate construction, the architectural glass manufacturer reported a revenue decline of 26 percent from $201.7 million a year ago to $148.6 million in the fourth quarter, ending Feb. 27. The company posted an operating loss of $179,000 including discontinued operations, compared with operating income of $17.4 million a year ago. Interest income and a tax benefit on the loss pushed net income into the black for the quarter, just barely, at $0.02 per share. Backing out discontinued operations, the company eked out a penny per share profit in the quarter compared with $0.40 per share a year ago.

For the full year, revenue dropped 25 percent from $925.5 million in 2009 to $696.7 million and operating income fell 41 percent from $77.7 million to $45.4 million. EPS for the full year fell from $1.84 to $1.16, down 37 percent.

Big decline for big projects

“Our markets are worse than the last [market] trough,” CEO Russ Huffer told analysts on a conference call Thursday morning. Saying the slump in commercial construction “appears to be deeper and longer than I’ve ever seen before,” he described a breathtaking 50 to 60 percent drop in large construction projects for buildings 10 stories and higher, twice the rate of decline in the overall commercial construction market. 

For 2011 Huffer said “we are estimating companywide revenues… will be down 10 to 15 percent, and we believe we have the potential for positive earnings per share.” But he warned analysts that they would likely post losses in the first half.

Adding to the sobering outlook, the company warned that its backlog declined from $316.2 million a year ago to $227.5 million at the end of fiscal 2010. Eighty percent of the existing backlog has been booked more recently, in a much tougher and price competitive climate, further pressuring profit margins. And the makeup of its backlog has shifted significantly over the past year to smaller projects and more “book and build” than in the past, limiting the company’s future visibility as well.

Orders for projects in education, health care and government buildings has jumped from 40 to 45 percent of backlog a year ago to 65 to 70 percent today. While the company attributed much of that increase in backlog to construction projects funded with federal stimulus spending, a spokesperson was unable to quantify how much resulted from such projects. Office construction, which made up 35 to 40 percent of backlog a year ago, fell to 20 to 25 percent.  Condominium construction, which was 10 to 15 percent a year ago, now makes up less than five percent of the company’s backlog, while hotel construction maintained a 5 to 10 percent share.

Huffer said he did not expect the architectural glass segment to pick up until unemployment improves and tight credit markets for commercial real estate open up.  Huffer pointed out that smaller projects and international exports grew, but not enough to offset the commercial declines in their core U.S. market. In addition, the company’s picture frame glass and acrylic business, which makes up less than 10 percent of sales, remained relatively flat in both revenue and profit for the year.

Over the past 18 months, the company has taken approximately $57 million of annualized cost out. Total headcount has declined by about one-third to the current 3,600 with 1,300 employees in Minnesota. Chief Financial Officer Jim Porter said the company is committed to maintaining the current level of employment and manufacturing capacity in anticipation of an upturn in 2012 which will cost an estimated $4 million to $6 million.

Apogee, with manufacturing sites in seven states, is banking on growing demand for energy efficient architectural glass once construction spending resumes. They have taken advantage of federal stimulus funding that provides a 30 percent tax incentive to invest $39 million in increased capacity for coated glass manufacturing at their plant in Owatonna and a plant in St. George, Utah.

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