Apogee Enterprises Inc (APOG) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2008 Apogee Enterprises earnings conference call. My name is Lisa and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Ms. Mary Ann Jackson. Please proceed, ma'am.

Thanks, Lisa. Good morning and welcome to the Apogee Enterprises' fiscal 2008 third-quarter conference call on Thursday, December 20, 2007. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our third-quarter results and the outlook for fiscal 2008.

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 March 3, 2007 and in our earnings release issued last night and filed this morning on Form 8-K. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement as of the date of this call and may continue to be used while this call remains on the Apogee website.

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?

Good morning and welcome to our conference call. We had mixed results in the third quarter. Apogee is a great company delivering top-line growth, profit improvement and strong cash flow. In the third quarter though isolated poor execution within our architectural installation business masked an otherwise strong performance in our other businesses.

I'm excited that we are seeing faster productivity improvements and mix changes than expected in our other architectural businesses and in picture framing glass. These high levels of performance should allow us to offset the Harmon installation job write-downs for the full year.

I want to emphasize that we have great businesses with strong markets, brands, quality and service. Our backlog is robust, we also have positive cash flow that will continue and you will see us invest in ongoing expansions and new opportunities to expand our architectural business. At the same time we remain soundly focused on strategies to grow our core architectural and picture framing businesses.

For the quarter our earnings from continuing operations were $0.26 per share versus $0.36 per share a year earlier. Three significant items impacted our continuing operations earnings. The write-down of these three isolated installation projects reduced earnings by $0.14 per share. Net tax benefits added $0.08 per share from current and prior year research and development tax credits.

We also have agreed to sell our 34% interest in the non-strategic PPG Auto Glass LLC joint venture to PPG Industries resulting in an impairment charge of $0.11 per share. This is an important strategic step and we expect cash proceeds of approximately $25.5 million when the sale closes. The sale is expected to be completed in our fourth quarter subject to PPG Industries' pending sale of its automotive original equipment manufacturing and automotive replacement glass businesses.

Before I turn to the third-quarter operations, I want to finish my discussion of our exit from the non-strategic auto replacement glass industry. In the third quarter we completed the sale of our recreational vehicle and bus windshield business that we had announced earlier in the year. The gain on the sale is reflected in discontinued operations earnings of $0.12 per share. Net earnings including discontinued operations were $0.38 per share versus $0.35 per share in the prior year period.

Architectural segment revenues grew 4% and operating income, including the impact of installation write-downs, decreased 43% versus the prior year period. Slower growth of third-quarter revenues had been expected due to a strong prior year period. In addition, customer timing and job flow in the installation business impacted growth in the quarter.

I can't overstate our disappointment in the significant installation job write-downs. Poor execution early in these isolated projects has resulted in material cost increases required to complete the projects within customer requirements and deadlines. We have taken management actions to better execute on all projects moving forward.

This is a people and process business and we've addressed these areas by making management changes and strengthening operational controls. Specifically the people involved in the projects with the write-downs are no longer with the Company. We have also put processes in place to allow earlier identification and corrective actions in similar situations.

It is important to understand that we have more than 100 active projects being executed properly. I believe this is a good business where we have a strong underlying competitive position and the ability to achieve excellent return on invested capital. In our Harmon installation business our focus is on consistent, profitable execution.

Third-quarter architectural segment backlog grew to $456.7 million from $389.5 million in the prior year period, and $404.5 million at the end of the second quarter. We're pleased to see the increase that I've stressed for some time that sequential improvement is not necessary to meet our growth goals. What is important is maintaining a high level of backlog and that's what we've done.

Backlog grew nicely in all businesses including our premier Viracon architectural glass business. We continue to be sold out in this business as we ramp up capacity expansions. We have visibility into fiscal 2010 and expect this strong demand to continue for our products. Key drivers are energy efficiency in particular, architectural ascetics and the move towards more use of glass, larger sizes of glass and more value added properties all strengths for Viracon. In addition to our large backlog, we also have high levels of commitments, especially in our Viracon business, and bidding activity continues strong.

Turning to our large-scale optical segment, revenues were flat while operating income grew 69%. Earnings again benefited from a higher than expected mix of our best value added framing glass products; in fact the mix of these highest value added products exceeded 50% of the product revenue for the first time, a milestone for Apogee's picture framing business.

Next I'll cover our outlook. I want to underscore that we continue to feel very good about our business and its outlook. The strength of our businesses and markets served allow us to remain optimistic that we are positioned to meet our longer-term objectives of 8% annual revenue growth and 20% average earnings growth through fiscal 2010. Strong operating performance, primarily in our picture framing, architectural glass and window business, is expected to offset the impact of write-downs on the installation projects for the full year.

The outlook for fiscal year 2008 earnings from continuing operations is now $1.40 to $1.50 per share reflecting the $0.03 per share difference between the PPG Auto Glass impairment charge and the research and development net tax benefit. Prior guidance was $1.43 to $1.53 per share. I'd like to repeat that we are seeing faster improvement in our architectural businesses than expected with the obvious exception of the one Harmon market.

Viracon and our Wausau Window business have seen margin improvement. Viracon is running on all cylinders and I'm pleased to report that the new Saint George factory is ramping up smoothly, slightly ahead of schedule. Outsourcing of commodity coatings also is progressing well and we're introducing new esthetic choices in energy efficient coated products.

Green is a key driver to in today's markets and these new products give our customers more choices to meet their energy efficiency goals for their buildings. Our architectural businesses, with the exception of the one installation market have been performing well this year. Despite the execution setback in the third quarter we expect to have an architectural segment operating margin ranging from 6.4 to 6.8%, slightly below our prior range of 6.7 to 7.1%.

At the same time our picture framing business continues strong as demand for its best value added products grows in a slightly declining overall picture framing market. We've raised our operating margin guidance for the current year to approximately 18% from prior guidance of 16%. The better product mix this year will be somewhat offset by higher fourth-quarter investments in sales and marketing as well as capacity expansions. We expect this will bring the full year operating margin below the year-to-date level.

I'd like to talk about the commercial construction market for a moment. We receive many questions on the state of our markets, given the potential of credit crisis and slowing economy. We are not seeing signs of slowdown in nonresidential construction and a number of market metrics support this view. The latest McGraw-Hill Construction nonresidential market forecasts show dollar growth for our current fiscal year and fiscal 2009 with a slight decline for fiscal 2010 down 2% from a high level. Then growth continues for the next four years. Based on this forecast nonresidential construction activity should remain at high levels for several years which is positive for Apogee's business.

This makes American Institute of Architects' Architectural Billing Index Report shows that activity increased again in November following a rebound in October. The AIA's economists noted that credit market anxiety has declined for the time being and that healthy demand for commercial construction is expected well into calendar 2008.

Other market fundamentals remain strong including office vacancy and lease rates, hotel occupancy levels and funding and demographics for the institutional markets of education, healthcare and government. The growing importance of green building and demand for energy efficient products remains an important driver for the increase in value added building materials and continues to bode well for Apogee. Apogee remains a leader in value added products with the most energy efficient glass.

We continue to experience strong backlog and commitments as well as bidding and request to bid activity. Our solid markets and strong internal indicators give us confidence in our ability to grow revenues and earnings. We have great businesses, strong markets and backlogs and with the exception of the one installation market our businesses are executing well. I'm confident about the future prospects and potential for Apogee and its businesses. Jim will now comment on the financials. Jim?

Thanks, Russ. Good morning and welcome to our conference call. Our third quarter has many positives for both performance and strategy with great operations in most businesses, backlog growth and our continuing strategic alignment with our pending exit of the auto replacement glass industry. We clearly are disappointed that poor execution in one Harmon installation market can potentially overshadow our ongoing overall progress.

We expect to be able to make the $0.14 per share impact of the poor execution of the Harmon projects called out through better than expected performance in our other businesses for the full year. We're also glad to have nearly completed all three pending items that we noted in our second-quarter earnings outlook. Filing for the research and development tax credit and sale of our recreational and glass windshield business were completed in the quarter and we recognize the impairment related to the pending sale of our interest in PPG Auto Glass which we expect to close in our fourth-quarter.

We had indicated in the second quarter that our guidance did not include the potential impact of these anticipated significant events which had a combined impact on continuing operations of $0.03 per share. The third-quarter earnings per share reconciliation between the current earnings of $0.26 per share from continuing operations and the $0.36 per share earned in the prior year is -- the architectural segment core operations were up $0.1 per share off very high performance last year; the installation business write-downs negatively impacted the quarter $0.14; the large-scale optical segment added $0.04 per share; The joint venture impairment charge negatively impacted the quarter $0.11. Lower tax rate added $0.09 including $0.08 from the research and development net tax benefit; and finally, lower interest expense from lower average debt improved earnings by $0.01.

Discontinued operations had earnings of $0.12 per share versus a loss of $0.01 per share in the prior year period. This brings third-quarter net earnings to $0.38 per share versus $0.35 per share in the prior year period. Conclusion of the sale of the non-strategic recreational vehicle and bus windshield business resulted in a pre-tax gain of $6 million. With the sale done we can now complete the final phase of converting the auto glass facility to support the architectural glass business to help meet our strong demand for architectural glass products.

I'd also like to comment on the planned sale of our 34% interest in the PPG Auto Glass joint venture to PPG Industries. Although this results in a charge to earnings, it represents Apogee's best option to complete our exit from this business. It's the final step in our strategic repositioning of the Company out of auto glass to focus on opportunities in our more profitable architectural and picture framing businesses. The sale will be a significant positive cash event when it closes which is expected to be in our fourth quarter. Cash proceeds from the sale are expected to be approximately $25 million.

Moving to the architectural segment performance for the quarter on 4% revenue growth, operating income was $7.7 million, down 43% from a year ago including the impact of the installation project write-downs of $6.5 million. The reported operating margin was 4.1% compared to 7.4% in the prior year period. When you exclude the installation charges, operating margin for the quarter would have been 7.5%, largely consistent with expectations. We're experiencing good productivity and margin improvement in our architectural glass and window businesses.

Regarding Harmon and the poor execution on a small number of isolated projects, we continue to feel that Harmon is a good business with the potential for strong returns on invested capital. This business is currently holding down our architectural operating margin, but we're confident that a strong focus on consistent execution will allow us to achieve attractive earnings and returns.

Our large-scale optical segment and picture framing business had another very strong quarter with operating margins of 20.8%. The popularity of our best value added framing glass products continues to grow with product mix surpassing our expectations. Long-term debt declined to $20.6 million from $24.3 million at the end of the second quarter and $35.4 million at year-end. Earnings along with payments received from the sale of the RV and bus business contributed to the decline in long-term debt.

As we've stated, the current quarter earnings from continuing operations also includes an $0.08 per share net tax benefit. Following the conclusion of analysis of current and prior year research and development tax credits included in Apogee's tax filings we filed amended federal return in November.

I'll turn to our outlook for fiscal 2008. We remain optimistic about fiscal 2008 and confident in the longer-term growth potential of our businesses. With our strong backlog as well as high commitments in bidding activity combined with ongoing momentum in the nonresidential construction market benefiting from the growing green energy efficiency trend, we remain confident in our ability to achieve our longer-term objectives of ate% annual revenue growth and 20% average earnings growth through fiscal 2010.

For fiscal 2008 we're now expecting earnings from continuing operations to range from $1.40 to $1.50 per share on revenue growth of 11 to 13%. Previous earnings per share guidance range was $1.43 to $1.53 per share. Our guidance has been adjusted to reflect the $0.03 per share net difference between the PPG Auto Glass impairment charge and the research and development net tax benefit. For the full year the strength of our businesses and markets should allow us to offset the installation write-downs recognized in the third quarter.

Turning to the segment outlook, our full year architectural segment operating margin guidance has been reduced slightly to 6.4 to 6.8% due to the installation job write-downs somewhat offset a better performance in the rest of the segment. Our outlook for the current year includes the negative full year impact of approximately 8/10 of a percentage point for the installation project write-downs and 3/10 of a percentage point for the first-quarter one-time start-up costs for the new architectural glass facility. Adjusted for these impacts our operating margin for the full year would exceed the prior peak operating margin of 7%. Adjusted for write-downs we entered the fourth quarter positioned to deliver this.

We ended the quarter with a very strong architectural segment backlog of $456.7 million, up from $389.5 million in the prior year period and $405.4 million at the end of the second quarter. Maintaining our backlog at high levels will allow us to meet our long-term growth goals, but sequential quarterly growth is not required.

Approximately $160 million or 35% of backlog is expected to be delivered in fiscal 2008; $228 million or 50% in fiscal 2009: and $69 million or 15% is scheduled for fiscal 2010 providing good visibility into upcoming fiscal years. It's a positive that our backlog remains nicely balanced across the nonresidential segment. 35 to 40% of our backlog is in the office market which had the most growth in the quarter. Approximately 35% of the backlog is in the institutional sector which includes education, healthcare and government buildings; 15 to 20% is condominiums and 5 to 10% is entertainment and hotel projects.

Regarding our backlog in some of the recent uncertainties in the financial markets, only three modest projects in our backlog have been canceled over the last two quarters and not all directly tied to these market uncertainties to which we've had visibility for several months of uncertainty.

Turning to our picture framing business, we've raised our operating margin outlook for the large-scale optical segment to approximately 18% on flat revenues due to stronger product mix. Our prior outlook was for a full year operating margin of 16%, fourth-quarter margin will be impacted by investments and expenses, increased capacity and sales and marketing to support and drive continued growth.

I'm going to briefly cover cash flow for the full year fiscal 2008. We're estimating EBITDA, earnings before interest, taxes, depreciation and amortization, from continuing operations of $84 million to $88 million. We estimate net cash provided by continuing operations of 65 to $75 million for the year. Capital expenditures are projected to be approximately $60 million. Fiscal 2008 strategic investments include completing a number of architectural glass expansions currently underway, adding picture framing glass coating capacity and spending on productivity improvements and expansions in our window business.

Excluding the anticipated cash proceeds from the sale of Apogee's interest in PPG Auto Glass, we project year-end debt will range from $15 million to $25 million. The effective tax rate for the full year is anticipated to be slightly higher than 30.0%, down from prior guidance of 34.5%, this reflects the net tax benefit in the third quarter.

We've tried to highlight that getting beyond the number of significant items reported in this quarter we have a very strong business. We're excited at our prospects and potential to deliver a strong performance for fiscal 2008 and are well positioned for fiscal '09 and fiscal 2010 as well to grow the business. Thanks. Russ?

Thanks, Jim. I'd like to go-ahead and open up the call for questions at this time.

(OPERATOR INSTRUCTIONS). Michael Cox, Piper Jaffray.

My first question is just looking for a little bit of additional color around the installation write-downs. I know you discussed it in your prepared comments, but I was wondering if you could comment on whether this has occurred before or if there's a risk of a similar occurrence as you look across your other Harmon businesses? I know it's sort of a regional business for you in each different market. So if you could just comment on that I would appreciate it.

We feel that these were isolated to a project manager and a general manager in that area. It wasn't tied -- I think it's important to understand it's not tied to a geographic event, it's tied to the people that were involved. And we do feel that it's very much isolated and we have worked very hard to make sure that we've looked at the balance of projects that were in this region. We've looked at the balance of projects throughout the Company, so we do not expect this to be a repeat.

Okay, that's very helpful. Turning to the backlog, if my numbers are correct the mix of the backlog has changed somewhat since the beginning of the year, office has moved from about 25% up to about 40%, whereas condo and hotel entertainment segments have dropped. I was wondering if that's a function of faster growth within the office segment or if it's some deterioration that you're seeing in some of the condo type of markets?

I think the condo markets -- the condo markets are a function of a lot for us. There are few large projects so that does come and go. So right now it's down, I think it's probably reflecting some of the market, but it could be more of just the number of projects that are showing up in our backlog right now.

We've always been careful to advise people that condominium work for us is not the same as the boom and bust work that was going on in the marketplace. The office side simply I think -- or what we've seen simply reflects a very positive marketplace where absorption is still continuing to exceed put in place, new square footage put in place and the demand for this space is fundamentally -- it's a positive reason for this space being put in place. So that's mine. Jim, if you want to add --?

I'll just add a little bit of color to that. Compared to where we started the year in terms of from a year end perspective, on a dollar basis we basically are pretty much where we were in the high-end condo sector so I think we have kind of seen that sustain itself. We have seen faster growth in terms of dollar level in the office sector associated with it.

But I'll also point out that while it's important that we see the balance because some of our businesses and markets are at capacity, it's really just picking the best project in that market that's available and sometimes it's kind of not important which segment it's in, it's really the best project that has the best market. But in general we have seen more growth in the office sector relative to the others and the other is really kind of maintaining.

Okay, that's very helpful and actually leads me to my next question. I know that the margin profile of the backlog has been a big piece of the margin expansion story within the architectural segment. I was wondering if you could comment on what the margin profile looks like of the current backlog that you have perhaps relative to what it looked like earlier this year or a year and a half ago.

I think the margin profile that's in our backlog supports the continued margin expansion that's reflected in our outlook for fourth quarter as well as fiscal '09. Our ability to grow earnings 20% is really largely driven by our ability to continue to expand the operating margins in our architectural segment and that's consistent with what we see in our backlog.

Okay, that's great. And my last question here -- you have provided a glimpse into your 2009 growth expectations. I would just like to understand what baseline you're working from as you're talking about 20% earnings growth next year. Would that be off of the $1.40 to $1.50 guidance that you have set forth or would it be some sort of pro forma number that would exclude the onetime items that occurred here in the third quarter?

It would kind of be somewhere in the range of our reported numbers and some adjusted factored to that.

Okay, great. Thank you very much.

Robert Kelly, Sidoti.

Just maybe a follow-up on the write-down. Is it completely written down, is there a chance for a further write-down or, on the flip side, some sort of recovery in 4Q?

Basically what this reflects -- these three projects, really the write-down is associated with having to capture our complete estimate of the cost to complete these projects. So really our view and our analysis -- the detailed analysis of these projects are that -- are estimated that the write-downs that we've taken capture the full cost associated with them. There's always the opportunity that we have some great success executing them and it could be done for less than we've estimated. But this believe the visibility that we have in terms of what's required to complete these projects.

Then just as far as what you have changed people and process-wise to kind of prevent it from happening again, I get the people part. What are you doing as far as process? Can give us a little more information on that?

Certainly we had process, and the people failed to execute in this specific instance. So what we are looking at and have done is to be more active in our reviews and insure those reviews at higher levels within the organization. So it has been reinforced.

And then on the backlog growth, you guys had talked about constrained capacity much throughout the year here. Did something open up, or is it a function of the joint venture getting sold that allows you to grow the backlog? Just a little help there.

I think the majority of the backlog is really growing kind of in terms of time frame. So there is probably a third off the top of my head. The growth in the backlog actually relates to fiscal '10, so is really the growth in that future look of business. We have seen -- I think Russ mentioned that our St. George facility is operating a little bit ahead of schedule.

So yes, we have opened up some slight capacity in this fiscal year, but we haven't changed our outlook of revenue for this fiscal year, and the growth is really filling in more of fiscal '09 and '10.

And the outsourcing we have talked about before is off to a good start, and we look at that as a way to continue to leverage investments and minor new investments to support growth as well, and in existing facilities.

Okay. Then just finally the way I understood it, once something hits your backlog, cancellation rate is usually typically pretty low.

Very low.

Is there any kind of historical number you can give us?

It is less than 5, is what we have seen.

In the last trough when we really saw the market drop rapidly in a short time period, as Russ said, we had less than a handful of cancellations. And -- we've seen about three over the last two quarters and a couple of those were projects that had uncertainty for several months as due to the (multiple speakers).

They probably -- they would have gone by the wayside no matter what. We kind of anticipated that in any kind of market. People were just trying to do too much without the backing.

Thank you. Have a good day.

Steve Denault, Northland Securities.

I was hoping you could elaborate a little bit more in terms of what does the outsourcing mean in terms of freeing up internal capacity, what does selling the windshield business mean in terms of incremental capacity, all as it relates to Viracon and being in a sold out nature?

Right. We have completed the sale of the RV and bus windshield business. That has now opened up that facility completely. We had partially converted it before I think as we just previously discussed. It is now being 100% converted. That process will be complete shortly after the start of the new calendar year and we'll see it continue to ramp up. So that is a very -- that is going to help us leverage the balance.

What we've done is we've added capacity where we had constraints, that leverages the balance of the non-constrained equipment in our Owatonna facility to grow that business significantly. That combined with Saint George and other process improvement and now outsourcing is -- we had previously stated we thought we could -- that those three things would give us up to $100 million in new capacity, we think we can now exceed that. So that's what we're focused on at Viracon.

and Steve, of the primary things -- and Russ kind of quantified $100 million of incremental revenue from activities that we already have underway. As you know, it's a ramp to get to that. We'll probably see in the ballpark of $20 million of revenue recognized this year from the ramp up of those capacity expansions and they'll be reaching their full operating potential middle of next year.

Okay. There is the phenomenon in terms of inherently energy efficient architectural glass, capturing share over that of flat glass has been ongoing. With growing awareness about green initiatives and energy prices where they're at, has there been any acceleration in that adoption?

We can only address that from sort of conversations anecdotally and just viewing the activity and the inquiries. There is no question in our minds that it's happening. Getting firm numbers on that, it takes some time. There's quite a lag on that specifically. But we know, we know from activity, from what we see our competitors -- what's going on throughout the industry that this conversion is continuing to accelerate and we're also seeing green and certified green buildings starting to permeate the whole marketplace.

When that happens that's going to be the bigger driver of the use of these products. So I think the opportunity -- we said before the opportunity is to double the use of these products over the next few years, three to five years, and I think that the marketplace is showing that. We just don't have hard numbers to give you to support that. But every indication is that's taking place.

In terms of metrics, really the only external metrics that there would be would be there's some data out there in terms of buildings that are either applying for LEED certification or actually receiving LEED certification which kind of ties it back to green buildings. And we're continuing to see explosive growth in the rate of that happening. And you'll see some activity with the American Institute of Architects where they have references to surveys they've done in terms of how energy efficiency is influencing the designs that are coming out of the architects and so those are the external things.

And then from an internal perspective, as we've talked, we just continue to see energy efficiency as something that's an up-front discussion that really works to our favor.

In your question I did not -- the last comment was on how is the outsourcing affecting us. And basically the outsourcing is giving us protective capacity as well as additional capacity and to leverage -- and it enables us to make other minor investments to leverage that capability. We're very pleased with the start, it is just in a start up phase, but we're very pleased with it and we do expect it to be material in the future.

Did Utah contribute positively or negatively in the quarter?

I think in the quarter it was pretty much neutral.

Okay. Should it be a positive contributor next quarter?

Yes.

Where is that in terms of capacity?

It's still -- it's probably still about 40 to 50% of its potential.

Okay, thank you.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. A couple quick question for you. Going back to the three projects in the Florida area, can you give us a little more granular description? You keep referring to execution. Was that execution on the bidding of it, procurement of materials, labor? And also, what kind of projects were these, when did they start, when did you recognize the problem and when do these projects get completed?

The completion will be in the next -- we think the completions will all be in the next 60 to 90 days. These projects started less than a year ago. We started seeing things at the end of our first quarter that gave us -- showed up as some adjustments and some slight expansion of timelines to complete, not abnormal but -- at the end of the second quarter we saw that again and that's when we began to make the -- manage the reporting and changes and investigations. And where we are with the projects, what makes them so expensive -- it's not that it was bad bidding or project selection.

It is all about execution and where we're at today, the cost to meet the needs and the expectations of the customer is very high to do it in a constrained time frame. So we're working very hard to make sure that we maintain our reputation of delivering quality to our customers in a timely manner and we're executing to do that and that's driving the cost. So these clearly were issues associated with the details that go into making a quality building. And so today we're taking care of those details and it's not carte blanche replacement of materials, it is taking care of those but it's very costly to do so.

And two of the projects were office buildings and one was a healthcare facility.

Was it a function that you didn't have the correct materials on-site or that you got a compressed timeline that you were not able to operate efficiently in?

No, it was the scheduling of the project in terms of material flow and labor. So is was -- there were some planning issues associated with that, there were some quality issues in materials, but it was all about early identification and mitigation. Some of these things are things that do happen, but in this case we had a project manager and a general manager who simply did not act as a reasonable person would in these cases and we had to -- of course we've taken action.

Do those regions act autonomously or what is that chain of command for protocols for checks and balances?

Sure. And we have clearly addressed that as well and will continue to do so. Right now our emphasis is on correcting the situation and we've taken immediate actions with the specific individuals; we will continue to evaluate what we need to do broadly.

Okay. A couple of other quick topics. One, the president signed an energy bill here recently, there was some vague language on energy efficient building materials in government and commercial buildings. Any specific provisions that you've been able to glean that would directly benefit your business?

We did not see anything more than what we've -- today there are incentives out there and we didn't see any specific enhancement. What those do more than anything else is bring awareness up. Our future is all about the conversion of non-energy efficient materials, glass to energy efficiency. We have been all energy efficiency for 20 years, that conversion and that demand -- what this does is it just keeps pushing that forward, keeps accelerating that conversion. That's the major benefit we'll see from it.

And the last topic, have you been able to participate in the boom building cycle of hospitals or other medical institutions? And where do we see that as far as your backlog or how do you categorize that?

It is in our institutional sector and we have benefited from that substantially. We continue to be a leading provider of glass, metal and installation services to that institutional sector which is in some instances and some regions led by hospitals. Hospitals in Florida are generally hospitals that are hurricane and they're great projects. We're seeing several projects in the Baltimore/Washington D.C. area. Clearly the government has some major work that's going on in others and then throughout the United States.

So it's not unique, but clearly a robust market. And being driven, again, by economics. The economics that a newer hospital is simply more cost-effective in the delivery of healthcare. And with the demographic changes, the baby boomers, the demand for these services, this appears to be a sustainable market.

I would say that the growth in our -- what we call our institutional backlog -- this year has been driven by growth in the healthcare portion of that.

That sounds wonderful. Thanks a lot, gentlemen.

(OPERATOR INSTRUCTIONS). Richard Nelson, [J. Cordon] Securities.

Good morning, gents. Most of my questions have been answered, but I just had a quick one for Jim. You mentioned projections of -- or shooting for 8% annual revenue growth. Does that include the additional revenues that will be generated from the facility expansions?

Yes, it really does. So kind of masked in that is really driven -- we're going to see a continued growth of our architectural glass business and basically we're not anticipating growing our installation business, window business or it would be pretty nominal -- pretty low levels of growth in our picture framing business.

Okay, thanks a lot.

Stan Westhoff, Waldthausen & Co.

Good morning, gentlemen. I just had a couple quick questions to drill down on the backlog a little bit. I'm not sure if I missed it or not, but how much of the backlog was from new orders and bookings?

We'll get that in just a second, maybe if you have another question we'll come back to it.

Okay. It's still related to the backlog as well. I know you mentioned the revenue was down -- you mentioned it was going to be down this quarter a little bit compared to last year as well, too. But you said that there was some timing of job flow in the installation business impacted the growth in the quarter. How much of that contributed to the growth into the backlog as well I guess?

No effect on the backlog. The timing of project flow would have been in the backlog last quarter as well. I think the key point there is that one of the key uncertainties we have in this business is just the timing of activity on the construction projects as determined by our customer. And so we've tried to really point out that over time on any given quarter it's not uncommon for us to see a range of $5 million to $15 million of revenue that just kind of moves from quarter to quarter based on timing of projects.

And so we actually did have in the range of $4 million to $10 million of revenue in our installation business that is unrelated to the projects we talked about, but it has to do with just kind of normal movement of schedule per customer requirements.

Okay. And then did you find that number on the new orders possibly?

Yes, I think there's about a little over $260 million of new orders in the quarter.

$260 million?

Yes.

Wow. Okay, that was all I had, guys. Thank you very much.

[Brian Levisen], Private Fund Management.

Good morning. Thanks for taking my question. I'm sorry to belabor this and I also apologize if I just missed it in the prepared remarks, but what was the actual breakdown of the $6.5 million of the write-off?

In terms of components or (multiple speakers).

Most of the cost will be for labor.

Okay. so this is your estimate of incremental labor?

Yes, to complete the project.

Right, to complete the projects within a timeline.

Okay. How much AR and retainage is there associated with these projects?

And estimate would be about $2 million.

Okay. And how much more revenue is going to be billed for these projects in the next, I think it was 60 to 90 days?

About $2 million.

So you're going to have roughly $4 million of just AR and retainages. Is any of that potentially subject to a back charge of some kind or to liquidate damages of provision in the contract?

The $6.5 million write-down anticipates any exposure we feel we have related to that.

Okay. The next question is -- the next couple of questions I have are just about the backlog and I'm just wondering -- I didn't really understand -- you had $260 million of new bookings in the third quarter?

It's the growth plus replacement of the sales, that's basically the number.

Okay. And so was the $69 million of 2010 were all booked this quarter?

No, roughly about $50 million of that was new this quarter.

Okay. So I guess what I'm trying to get back around to is it looked like in Q3 that you added $83 million of bookings that will be worked off in 2009. Is that accurate?

You mean in terms of new bookings relative to the prior quarter?

New bookings relative to 2009.

That's probably about right, yes.

Okay. And so coming into the fourth quarter how much do you have out in bids that you anticipate that are sort of your late stage negotiations?

Primarily that would be centered around commitments because you're getting to -- when you're talking about negotiations we may not have received a commitment, but between backlog and negotiations there still is a large commitment volume that we do not report. And that commitment volume -- so you're bidding, you're competing, you win, you get a commitment on the job and then it turns into backlog. Our commitment levels combined with our backlog are the basis of our projections.

So when you talk about bidding activities and the way we describe those bidding activities is sort of a level of activity associated with bidding which is as high as it's ever been. So bidding activity is quite strong, they're very active. Commitments are very strong, just like our backlog, and the combination of those gives us the ability to say to you that we are turning orders away today in glass fabrication and we do not expect that to change through the next 12 to 15 months. So we still cannot accommodate, even with all the added capacity coming on, accommodate all the work.

And then on the window and installation side, as we described, the installation is very much booked for the next year in terms of backlog and commitments. And we will not oversell that business, we will not sell more than we can execute. And then on our window side, probably we have short-term window business that turns very quickly and that is a part of the window business that always leaves capacity open, but it fills in -- it's a short turn backlog is why it does that way. I'm just trying to give you a better vision of how this backlog and commitments work.

And I appreciate that. And I guess what I'm trying to do is attach some numbers to it. When I look back at -- you ended your fiscal year of 2007 with almost $360 million of backlog that was indicated to work off in fiscal 2008, at the end of Q3 of this year we're at $228 million. Do you anticipate adding say $200 million of work to backlog in the fourth quarter to get you through '09?

We would anticipate replacing volume, certainly replacing volume that shipped during the quarter and enabling us to grow the 8%, so we would look for a slight increase on that.

Roughly because again, we don't require sequential growth in our backlog and so -- but we do look at how is our backlog at the end of Q3 relative to kind of what the outlook for revenue is next year. And I think the percentage of next year's revenue that we have in backlog today is roughly comparable to what that percentage of backlog was a year ago at this point in time. And I think overall, as Russ stated, that our visibility of backlog as well as projects in process and commitments above that gives us a lot of confidence in our outlook for next year.

I apologize if I'm just being dense about this and appreciate your I guess humoring me. But you're going to work off $160 million of backlog in the fourth quarter of this year, and so I'm really focused more on the portion for 2009 that when I look at what you can add to backlog now that will affect 2009, the window is kind of closing -- no pun intended. But the fourth quarter is a major quarter of adds for your backlog for '09 just given the timeline, the lifecycle of when you bid a project to when it actually breaks ground and then you're on site.

Let me break it down just a little bit to help you with understanding the numbers. The glass fabrication business backlog generally runs from 10 to 16 weeks. So it -- and it's a very significant piece of the overall backlog, so it turns over every quarter so to speak. It's only the installation and the engineered curtain wall business that has these long tails to it that show up in the backlog. So I appreciate what you're trying to do; in fact I would try to do the same if I were you. It's just a little more complicated because of the way the backlog turns.

Okay, I understand that the Harmon side of the business is a longer lead-time. That you do have a significant -- it's not really walk-in business but shorter backlog. The last question I have is just about your billing in excess of cost number, I was wondering what that was in the third quarter?

We're going to have to dig that one out.

Did it go up versus the second quarter?

Just a moment. We're still --

I'm trying to find my notes too.

We'll have to follow-up.

Wait a minute. Wait a minute.

Our billings in excess amount went up about $6 million in the quarter.

Okay. I think that we're now at a point of -- you had roughly $189 million of architectural sales, I'm guessing that the mix of Harmon to the total architectural was roughly consistent with the second quarter which was what -- 39% I think. And if you -- if you get that as kind of a days sales number you're now at -- one second here. You're now at 45 days on a billing in excess of cost number relative to your only percentage of completion portion of the business.

I'm just wondering when I look back, three quarters ago it was $19.7 million and 24 days; two quarters ago it was $26 million and 32 days; and this last quarter it was $30.5 million and 35 days; now it's almost 45 days. That's a pretty significant portion of revenue that's now billed ahead of when you're going to install it. So I'm just wondering what accounts for it and what kind of margin is implied in that and what kind of affect that's going to have on your profitability if the customer doesn't agree to all of the things that you build ahead for?

First of all, your math is accurate and we did actually kind of put some processes in place at the end of last year basically to accelerate the whole cash cycle in this business by doing exactly what you said which is doing more advanced billing. Which as we lapsed that you won't see that differential in terms of the way that you're calculating the DSO, but we actually think that that's a positive thing for the total Company in terms of accelerating the cash cycle of the business. And we think our businesses appropriately recognize collectibility associated with that.

Okay. I guess, and we've talked about this before, but I'm just a little confused as to on a business that is primarily bonded work, and from my understanding of how draw requests work and how the cash cycle at the customer's end works for the GC and the owner, that they really can't pay you before on bonded work, they can't pay you before something is installed because they actually -- it will -- I mean, for lack of a better word, screw up their rights under the performance bond.

And so I'm just wondering -- it does increase the cash cycle and I understand that and it's what you want to see, but I'm just wondering how -- when does it stop happening and eventually it's going to come around to impact the P&L, hence the (multiple speakers)?

Actually every contract is a little bit different, but our general terms really are based on percentage of completion. And actually our customer, the GC, is able to bill their customer. And so it doesn't just accelerate the cash cycle for our business, it generally accelerates it through the supply chain. And so other than retention our contracts are not tied to payment upon final installation.

Okay, it's just that you say that you've done ex percentage of the job and that the project manager approves -- in the field, the project manager will then approve it and send it to his or her home office and then the bank will then approve the draw request despite material not being installed or material not -- or labor or material not being completed even though the draw request has been submitted?

I can't speak to our customers' processes.

I guess --

What I can speak to is that our process is that this has been an approach that has effectively accelerated the cash cycle for our business.

Okay. And you are in fact getting paid on these?

Yes.

Okay. And what is the -- is there some way that you can communicate just what the -- I guess the implied margin on those draw requests on that $36.5 million?

The margin is consistent with the rest of our business. There isn't a differentiation in margin on those versus other aspects of the project phase and billings.

And there's no difference in terms of the recognition of that margin through the P&L per percentage of completion?

That's correct.

Okay. Well, thank you for taking the time to answer my questions.

Joseph [Real], [Breaker Book] Capital.

Thank you very much. I guess my main question is you mentioned that you expect income growth well in excess of revenue growth until 2010. And I was wondering whether you view that as just the fact that you're kind of going through a peak of a cycle and that this is more of a -- it doesn't necessarily imply any permanent change in your margins. Or would you say that because of process improvements and the way you're improving the business that that would almost be like a permanent change so that the margin in 2010 would be kind of like a mid-cycle type of margin?

The thing that you have to watch, that we -- that I watch and I believe is that the demand for the high value added products and services, the energy-efficient products that we produce will continue to grow and become a greater portion of the market served. So in a market that's described like Dodge did, going up slightly and then down very small, downward move and then a sustained -- sort of sustaining itself at these levels provides the back drop for this kind of performance to be sustained for several years. So market conditions like have been described and what is going on the believe we will be able to sustain this. I think that is the best way to answer that.

Okay. And then just a quick related question to that. Do you think your trough type of margins -- as a result of this your trough type of margins would be a little better than in the best?

Yes, absolutely. Again, the demand for high-performance energy-efficient products, increased demand will offset the downward movement of the overall market.

Okay, thanks very much.

I would now like to turn the call over to Mr. Russ Huffer for closing remarks.

Our businesses remain strong and, despite our third-quarter execution setback in the installation business, we are executing on our strategies, our overall business is improving and our key architectural markets are strong as reflected in our sustained high levels of backlog and commitments. We're excited about the opportunities for Apogee in fiscal 2008 and beyond. Thank you.

Thank you for participating in today's conference. You may now disconnect. Have a great day. Thank you.