Apogee Enterprises Inc (APOG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Apogee Enterprises, Inc. first quarter fiscal 2010 earnings conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Mary Ann Jackson. Please proceed.

Thank you Mary. Good morning and welcome to the Apogee Enterprises physical 2010 first quarter conference call on Wednesday, June 24th, 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 first 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 28th, 2009 and in our earnings release issued last night and filed on Form 8-K. Russ will give you a brief overview of the results and then Jim will cover the financials. After they conclude, Russ and Jim will answer your questions. Russ?

Thank you, Mary Ann. Good morning and welcome to our conference call. We performed well in tough market conditions as we managed costs and improved productivity to achieve solid gross margin, which was improved from a year ago and also generated cash. As domestic market conditions worsened, our first quarter revenues and earnings declined from the prior year.

Our Architectural markets were impacted by further delays in project financing, which extended already slow bid to award timing including for good leased projects. Continued decreases in employment and corresponding increases in vacancy rates, greater pricing pressures on shorter lead time broader market, international and store front projects, increased installation competition in certain geographic markets leading to lower margins on future work, and the good news is that we continue to see our competitive advantages holding for large complex Architectural glass and highly engineered window projects as well as for installation project bonding capacity.

Markets for our picture framing products were impacted by further erosion in the retail environment. I am encouraged, though, that our Architectural segment backlog remained relatively flat compared to the fourth quarter level and that cancellations were minimal. While it is too soon to call this a trend, I'm hopeful that these are early signs that our backlog is stabilizing. It is also a positive that we continued to convert custom picture framing market customers to our value-added products. For the quarter, we earned $0.27 per share on revenues of $180.9 million. Operating margin was 6.5%, compared to 7% last year.

With the severe slowdown in commercial construction, Architectural segment revenues declined 24% and operating income, 28%. Solid execution by the installation and window businesses of projects bid in stronger markets, along with productivity improvements and ongoing cost cutting efforts, were more than offset by the impact of lower volume. Backlog remained relatively flat at $310 million, compared to $316 million at the end of fiscal 2009. It was down from $491 million in the prior year period.

Institutional continues to be the largest portion of the backlog, followed by office projects, with condo and hotel entertainment a much smaller portion of future work. Large-Scale Optical segment revenues declined by 20% due to the weak custom framing market conditions, while operating income was down 39% as a strong mix of our best value added products was more than offset by the impact of lower volume. Apogee operates primarily in a cyclical industry and we are focused on running our business over a cycle. This focus allowed us to enter the commercial construction downturn in great financial condition, with a strong balance sheet and expectations to continue to generate positive cash flow this year.

We made progress in the quarter, as our cash and short-term investments totaled $30.8 million, compared to $27.1 million the previous quarter, and $4.6 million a year ago. Long-term debt was $8.4 million, equal to the fiscal 2009 year-end level, and down from $73.4 million in the prior year period. We are aggressively managing our costs including headcount and overhead costs, while we continue to emphasize productivity improvements across our operations. We have reduced costs more than $40 million on an annual basis since October and headcount is down more than 25% from the peak a year ago.

Looking forward, we have production capacities in place. Our plants have been upgraded to state-of-the-art. And we are committed to strategies that will allow us to remain profitable. When the markets recover, our Company is positioned to grow, gain share, and deliver significant shareholder value.

Now I'll cover our outlook. This is the third cycle I've experienced in this industry, and today we continue to face an unprecedented level of uncertainty in commercial construction markets. As such, we are still not providing EPS and detailed annual guidance. We expect continued profitability on revenues that will be down at least 15%. I am encouraged that we're seeing early success in pursuing work in underserved, shorter lead time Architectural glass markets including smaller and international projects that our Architectural segment bidding activity remains strong, although already slow bid to award timing extended during the quarter.

We are estimating operating margins in the mid single digits for the year, as lower capacity utilization and competitive pricing are slightly offset by productivity improvements and lower energy costs. At the same time, the Large-Scale Optical segment is expected to continue converting customers to its value-added products. Our balance sheet remains strong and we expect to have positive cash flow in fiscal 2010, as working capital declines and capital expenditures are held to less than $20 million. A level sufficient for maintenance, safety, and some value-adding projects including picture framing business productivity improvements, and increased capacity for energy efficient products.

In addition, given our balance sheet strength, our Architectural segment businesses are well-positioned with the bonding capacity required by some contractors to assure completion of projects. This is a competitive strength in today's markets. We still expect to benefit from the addition of stimulus projects to upgrade government and school buildings that would incorporate our energy-efficient green products and services.

At this time, we have not secured any of these projects. There is more than $5 billion allocated to renovate federal GSA buildings to improve energy efficiency in windows and walls, should be an important contributor to this effort. We remain focused on bringing the green building market products with superior energy-efficient performance at prices comparable to existing competitive products to further enhance our industry leadership.

I am proud of the industry-leading positions of our businesses, and Apogee's financial strength, assets that will serve us well as we work our way through this downturn. Jim will now comment on the financials. Jim?

Thanks, Russ. I'll provide some detail on the first quarter results.

As expected, revenues and earnings were down from the prior year as we felt the full impact of the slow commercial construction market in the first quarter. In these tough market conditions, we delivered $0.27 per share, with a solid gross margin of 22.9% versus 20.5% a year ago, as we reduced costs and drove productivity. Our earnings were impacted by the inability to leverage our fixed cost over lower volumes. Our Architectural segment revenues were down 24%, with revenues from our largest businesses, Architectural glass and installation, declining the most. The prior year period was very strong for both of these businesses.

Our Architectural backlog remained relatively flat from the fourth quarter. Although bidding activity remains strong, bids are slow in converting to orders as commercial real estate financing is still largely frozen and domestic employment levels continued to decline. Our total backlog remains spread across commercial construction sectors. Institutional or education, healthcare and government, is the largest sector in our backlog at 40 to 45%. The office sector makes up 35 to 40% of our backlog. High end condominiums comprise 5 to 10% of the backlog, as do hotel, entertainment and casino projects.

Approximately $254 million or 82% of the backlog is expected to be delivered in fiscal 2010, and approximately $56 million or 18% in fiscal 2011. First quarter capacity utilization in our Architectural segment averaged approximately 60%, compared to 65% in the fourth quarter and approximately 85% a year ago. Our Architectural capacity utilization at the bottom of the last cycle was roughly 60%. We increased our cash position slightly in the first quarter, a period with seasonal working capital growth. We generated just over $2 million in free cash flow, compared to using $18 million of cash in the prior year period. We define free cash flow as net cash from continuing operations, less capital expenditures. Capital expenditures in the quarter were $2.3 million, down from $23.3 million in the prior year period.

Last year, we completed a multi-year program of key strategic capital investments that positioned us for efficient growth when markets improve. The current level of spending adequately funds safety and maintenance requirements as well as some picture framing business automation and expansion of our green product offerings. As Russ noted, we increased our cash and short-term investments to $30.8 million at the end of the first quarter, up from $27.1 million at the end of fiscal 2009 and $4.6 million in the prior year period. And we further reduced our days sales outstanding by one day to 43 days.

I'll turn to our outlook. Our visibility for the remainder of fiscal 2010 is less than normal with lower backlog, extended bid to award timing, the impact of tight credit markets as well as the uncertain potential from the federal stimulus package. As a result, we're still not providing EPS or detailed annual guidance. We expect to deliver a mid single digit operating margin on revenues that will be down at least 15%. We have significantly reduced headcount and costs and continue to improve productivity, in an effort to somewhat offset the impact of declining revenues on earnings. Improving productivity will be an even greater focus during the slowdown.

Having excess capacity has allowed us to accelerate some initiatives. The slowdown in large projects for our Architectural glass business has opened up production capacity and reduced lead times, allowing this business to pursue opportunities to generate revenues by penetrating underserved markets, including lower margin smaller US projects and international projects, where we are seeing some success. At the same time, we continue to focus our sales efforts on markets that demand our value-added energy-efficient aesthetic hurricane and blast products. We're seeing strong bidding activity for projects in the institutional sector for education, healthcare and government projects. This sector traditionally tends to be more stable through the ups and downs of commercial construction cycles and green building is an important trend for institutional work.

We also are continuing product development efforts, particularly related to energy efficiency. I'm encouraged that part of the economic stimulus package is focused on efforts to make public buildings more energy-efficient. We have identified and are pursuing some of these stimulus projects but they have not yet been awarded, and several have not gone out to bid. We hope to win some of this work although it may not benefit us until fiscal 2011. We continue to pursue our longer term strategies to gain share in our markets. Developing new energy-efficient products and systems for the green building trend, expanding our store front and standard window presence, identifying attractive international markets for Architectural glass, potentially with offshore glass fabrication and converting more of the picture framing market to value-added glass and acrylic, while pursuing new markets like our large-scale optical and our reflective acrylic products.

We have good businesses with leading products and services. We continue to aggressively manage costs and drive productivity, expect to generate positive cash flow and are carefully managing working capital and capital expenditures. We are focused on effectively weathering the slowdown and emerging stronger than ever when our markets rebound. Russ?

Thanks, Jim. I want to reiterate that we have a strong balance sheet, continue to generate positive cash flow, and expect to maintain our leading market positions during this challenging time. I would now like to go ahead and open the call to questions.

(Operator Instructions). Our first question comes from the line of Michael Cox of Piper Jaffray.

Good morning. Thanks a lot for taking my questions and nice job on the quarter, guys.

Thanks.

Thanks.

My first question is on the progress you're making in some of these underserved markets, smaller projects and international opportunities. I was hoping you could compare the margin profile of these projects relative to I guess the large projects that you're delivering on currently?

We are being successful and we -- actually, we expect to continue to improve our penetration of these opportunities. We were actually nicely pleased with some international projects that we were able to pick up during the quarter and we're continuing to expand into the broader market and being -- and it's competitive. There is no question that these projects and margins will be more competitive than what we have been doing in the past. And so that's clearly out there in front of us.

But they also are the kind of work that's more standard or more high volume and so productivity improvements that we've been making have a greater impact in these areas than they would in the more complex or better valued. So it's not a complete swap of high for low. There are some opportunities to find some better margins or develop better margins through productivity improvements and factory utilization. So we're very pleased to be getting that work and it will still take -- right now we feel very positive about it but it will take some time for all this to work its way through.

Okay. Okay. That's helpful. And on the Large-Scale Optical side I was hoping you could reconcile the comment that you are converting customers to this higher value glass and but the margins did fall fairly sharply year-over-year and if I just look back at the -- at your fiscal fourth quarter you experienced a 20% decline in sales but margins still were north of 20%. So I would just be curious what happened relative Q1 versus Q4 of last fiscal year?

Mike, this is Jim. And really it is really a function of lower volume and overhead associated with it. We've talked about having our best value add products being over 50% of our mix and we continue to see that in the case. As you might recall, we did bring on new capacity in the second half of last fiscal year. Really just the lower volume and absorbing the overhead cost on the lower volume.

Okay. So I guess if we were to make the assumption that the consumer environment were to remain weak, then margins in the mid-teens is a realistic assumption for this category?

At this level of volume, that would be reasonable. But we're optimistic that we could see it pick up a little bit.

Okay. And then my last question is related to a comment that you made on the last call about government work, potentially coming in the second half of this year. I know you're saying now that it's likely a fiscal 2011 event but I think that the expectation that it might hit in the second half of the year was giving you some optimism that the second half would be better than the first half of this fiscal year. I was just curious what your thoughts were on that now that the government work is likely shifting out?

Yes, in the last call, we actually started to see some visibility of a small number of projects which gave us that perspective and, frankly, we saw that as the opportunity to give us confidence in terms of filling in on the second half of the year. I'm not sure that we expected second half of the year to be stronger as a result of those projects. Frankly, what's changed is that while we do have visibility of the projects, the projects themselves aren't moving forward as quickly as we had thought. I think the way the program worked is there was a real rush to identify which projects were going to have funding but now the actual process of allocating the funding, developing the whole kind of bid process and so forth has just taken a little bit longer so our perspective is even if we are to win a project, we think it's likely that just based on the timing of a normal construction project, that it's probably likely that we wouldn't see revenue from that until fiscal 2011. Potential that we could see some flow in later in this fiscal year, but at least based on the way we're seeing the projects progress, it's probably more likely that it will fall into next year.

Okay. Great. Thank you very much.

Your next question comes from the line of Eric Stine from Northland Securities.

Good morning, everyone.

Good morning.

I was just wondering if you could just talk about revenues and how we should think about kind of the linearity as we progress through the year. I know on the last call you had kind of indicated that just given your working through backlog sign of a different time, that the first half might be stronger. Should we still think of that being the case?

I'd say based on the way we've seen projects flow, it's probably going to be a little bit more even over the year. When we've said for a while, and Eric you're a little bit newer I know in talking to us, is that quarter-to-quarter variation just in the nature of construction projects kind of moves around a lot. And so we have seen a little bit of work, just kind of a normal flow, move from Q1 into Q2. We might see the first half slightly greater than the second half but should be fairly steady through the year.

Okay. That's helpful. And then just a switch to backlog. Could you just comment a little more in depth about minimal cancellations that you experienced, kind of what you think that may be, whether it is a sign or whether it's timing of some improvement or that a bottom has been found.

I think that what we've seen is that sort of the panic that set into the industry has worked its way through the markets and so we're just -- what we're seeing today is very -- almost no cancellations during the quarter, but we still -- what we're seeing now more than ever is projects that are not in backlog and ready to go in backlog but being held up. So the projects that are flowing to backlog it seems to have arrived at somewhat of a steady state, but there's still a lot of projects out there and my discussions through the industry that good projects ready to go, still waiting on funding. So that's sort of the condition of things. Jim, you might have a comment.

Basically, we had one project that we were working on in the quarter that we're aware of that got cancelled and that's -- frankly, I don't have the details behind it but I mean, that's a significant change from what we saw from the prior quarter.

Right.

Okay. That is helpful. Then last, just on margins, I guess on pricing as well, could you just talk about how pricing held up this quarter and how we should think about that going through the year and as you kind of work through backlog, sign of a different time, should we think about margins coming down a little bit?

Yes, I think that margins will come down a little bit. Certainly in our installation business, we're seeing a lot more bidding, more competitive pricing, window business a little bit on the same line. The glass side, we're seeing pricing holding up better than we expected. There's sort of the very competitive products where pricing is tight and margins have come down for part of it. But then there's also a significant part of the business where especially on the sort of superior green products, where the product -- where the pricing has held up better than we thought. So the pricing story by itself is in the direction one would expect but again, I would say to you that our ability and when we're not fully utilizing all of the assets, our ability to optimize production, productivity, move product through more efficiently, develop improved process and capabilities, is very impressive and I think is going to make a difference. So yes, the pricing is more but don't think that we can't move productivity along as well.

Specifically in terms of in Q1, a majority of our revenue would have been from work that we had in backlog and that was bid during stronger market conditions, but we did start to see in our shorter lead time work, our store front work, some of our standard window or broader market glass work, we did start to see some impact of some pricing pressures in Q1. But we were still benefiting from backlog.

Okay. Thanks a lot. I'll jump back into line.

You have a question from the line of Robert Kelly of Sidoti.

Hey, gentlemen. Good morning. Thanks for taking my question.

Good morning.

Good morning.

Just a question on the comment you had earlier, the standard high volume work that you've had success penetrating, how big or how large is the mix of these projects that are using the high efficient glass, the value add glass?

Really, all of the work that we're -- glass fabrication is bidding uses the value-added glass. A major portion of that is fairly competitive, which we've talked about for years, that's the way it's been. But also a major portion of what we supply to the market are products where either the aesthetics are different enough that the architect wants to have that product, or the energy efficiency and product type differentiates us from the competition enough that makes it worthwhile. It is often that we can show that our superior products, the small incremental cost that we might have for them over our standard high performance is usually paid back in less than a year in terms of additional energy efficiency. So it is -- it's a legitimate economic argument and oftentimes these products also provide an aesthetic choice that's very desirable to the architect or owner/developer.

You had said the LSO mix was north of 50%. Is it a similar percent for your Architectural business for value-add?

Architectural business is almost 100%.

What you call standard, got you.

There's a standard high performance product, that's maybe half or slightly less than half of the volume, less than half today. and then there are the more unique kinds of high performance or superior high performance products which are the balance of what we do.

How big is that mix of the superior high performance?

Probably slightly more than half.

That's pretty flat over the last year or so?

It has been and we certainly are trying to take advantage of those increments. As people look to have the greenest -- green sustainably designed buildings and green becomes more important, this is a great way for us to help them make their project be its best, because for very little cost, they can improve the characteristics. I can cite a project that's nearby here in Minneapolis, where we were able to -- they built it with a superior product and we changed the tonnage. The tonnage on the air conditioning system and this is just two high performance products, one that's standard and one just one of the best products we can make, the tonnage on the building went from over 200 tons to about 130 tons of cooling power needed to keep that building cool on a peak day. That is a substantial savings for that project, more than offset the incremental cost of the glass.

In terms of our Architectural glass business also, there's various aspects of the value-added when we talk about it. Russ was just talking about the coatings and basically everything has a coating in there, standard high performance at the higher levels of energy efficiency. But also, as you know, we have multiple process steps where we'll combine the coating with maybe a laminate for hurricane or blast, might combine it with a silk screen or heat treatment or those kinds of things and so one of the characteristics that we'll see maybe with some of the smaller projects is it will still be high performance coated product but it may have fewer of the additional process steps associated with it.

Understood. Is there a way to quantify the savings you're seeing from lower raw material and energy costs in 1Q, fiscal 2010?

We'll take a look at that and see if we can comment later.

Is it material?

I'd say probably energy costs, and to be clear, probably the largest area where we see energy costs is related to glass so it kind of blends with material. We get passed a natural gas surcharge associated with it. But it could be a tenth or a couple tenths of a margin point.

Okay. Great. Just finally, you guys keep referencing the balance sheet and cash flow. Are you seeing projects swinging your way because of your financial position, maybe your customers shying away from suppliers who are a little less well-capitalized.

Yes, we are seeing that but I actually believe that that will be sustained and probably even get a little bit more important as time goes by. I think that as many of these competitors fill up or limit out on their bonding capability, that will decrease the amount of competitors in the marketplace. That will be a positive for us.

Have you seen any net exits in the last six months?

Typically, I -- you would think that you would have seen some exits but honestly, what happens, and we've seen this in past downturns, you don't see the exits until you really reach the bottom and I think that's probably six to nine months away.

Okay. Thanks, Russ and Jim.

Your next question comes from the line of Tyson Bauer, Wealth Monitors, Inc.

Good morning, gentlemen.

Good morning.

Couple of quick questions. One, your depreciation amortization dropped $1 million from Q4 levels to first quarter levels. Any reason for that and what do you expect full year?

The primary driver is amortization on some of the goodwill from our acquisitions.

Okay. So that will be -- what we saw in Q1 should flow through the rest of the year?

Yes.

Backlog, you guys have mentioned that you're losing some visibility which is evident in the backlog. Last year at this time it was $120 million for backlog, 12 months or greater. And two months ago in April you had $79 million for fiscal 2011. That has dropped nearly 30% to $56 million. You mentioned you haven't had cancellations. Did jobs get pushed into this year and when do you -- when do you become concerned that your fiscal 2011 numbers aren't building the way you want them to build? Should we see some incremental increases by the next conference call?

So first of all, in terms of the shift, really that's just kind of a movement of the schedule of the project and really where that came from is projects that were committed or awarded to us were actually the customer hadn't finalized some of the timing so really they had scheduled that way out into the future and then subsequently then kind of moved forward and have rescheduled the project moving some of that into this fiscal year. Relative to second part of your question in terms of fiscal 2011, a majority of our businesses or a majority of the work that we're looking at for our larger projects today are fiscal 2011 and so we would normally be looking -- having a good visibility of fiscal 2011 by the end of our second quarter, under normal time periods but we're obviously doing a bit more work which is shorter lead time associated with it. And as I think we've talked before is the international market is a little bit different in terms of the way projects are scheduled and could even be a large project internationally but they actually award that with a shorter lead time associated with it.

Okay. So your near term backlog should -- I think you guys mentioned should be somewhat stable. It's the -- anything that gets beyond three, six months is where you become a little more fuzzy?

That's fair.

The $40 million annual cost cuts, can you give us a -- kind of a breakdown, where those cost cuts came from and whether that is just a variable cost cut that you're able to do that will come back when the cycle improves or are some of these cost cuts something that will be sustained even in better environments?

A majority of the cost cuts are really variable cost kind of tied to the volume in our facilities. But probably about 15% of those cost cuts actually are what we consider more permanent in nature.

That came from better, what, equipment? Better productivity, shifting things around in the factory? Or you just became more efficient with the people that you have?

It's a combination of reductions in overhead and productivity increases and one of the things that we talked about is that as we had some excess capacity and as we started to downsize a little bit, that frankly gave us an opportunity to really drive for productivity improvements and we've seen significant productivity improvements across our manufacturing facilities that we expect to maintain.

All right. Thank you, gentlemen.

Your next question comes from the line of Eric Prouty with Canaccord. Your line is opened.

Great. Thanks. Good quarter, considering the environment, guys.

Thank you.

Quick question on the Harmon business. Maybe you could talk a little bit about if you're seeing any growth in retrofit type opportunities, if you could quantify that or just give a little commentary about what you're seeing, if you're seeing any growth or opportunities in that market.

Eric, as we've talked before, we really see the retrofit or market as a substantial opportunity. Especially from a green standpoint. As the marketplace values green buildings more, assigns higher values to the buildings, higher occupancy rates, higher lease rates, we believe that that will be the economic driver for renovation and replacement of window and wall systems. We clearly understand and are working hard to promote, whether it's with the government, private industry developers, that without changing the windows in these old buildings, you do not have an opportunity to substantially decrease the energy consumption of these buildings and these buildings quite frankly are energy hogs.

They just are not efficient in their use of electricity, especially peak demand kinds of electricity. So we clearly see that as an opportunity and an opportunity for Harmon. I think we'll see that probably develop from the stimulus money and it's probably going to be later this year, early next fiscal year, that that starts to come through. But I think once the marketplace understands that and sees that value, we'll see more of that happening in the marketplace. There's just a huge opportunity for that out there and we really believe that we can -- that our products can have a real significant impact on that marketplace.

All of our businesses do continue to look at some retrofit opportunities. Haven't seen an increase of that during the quarter itself. But definitely do have visibility of retrofit projects.

Maybe just a few seconds then on what it would take to really go after that market. Is that going to require a different type or an augmented sales organization or are you kind of going into a different client base, et cetera? And then also, is that going to take more, say, from a marketing standpoint, education standpoint, is there going to have to be some extra effort on that end also?

I agree with you. I believe, first of all, when it comes to green and these kinds of things, the marketplace has gotten into somewhat of an announcement mode and that's too bad because there's a lot of people claiming to have green things. So I think that -- and we are actually developing what we believe will be a very strong marketing effort to promote the green products that we produce and what we're doing. I personally have -- making time, my time available to both the industry, industry events, individual customers, developers, architects, and we are pushing our agenda and we have a very clear message. It's just very clear.

We focus on peak demand energy for commercial buildings and the ability to substantially impact that, not only with high performance products, but with our superior products and we believe that that will help us really carry the day and we will continue those efforts. That's a major part of my personal time as well as a significant effort to bring our entire -- all of our sales forces to make them the best they can be, to influence. Our key points are going -- I think will still remain the architects and developer owners that will be looking at these and we need to make sure we provide them things they like, that are also superior in energy efficiency and I think that's what will win the day for us, it's that combination.

The final thing that we really are looking for here is financing. And it's really interesting, we're starting to see some information and banks actually start to concentrate some financing efforts around green. And we plan to take full advantage of that, leverage our own bank group to get into these influencers that are developing lending policies around green and make sure that they understand what the real economics are of these and how much they can affect them. And again, the glass products can influence half of the energy consumption on these buildings and we want to make sure that that understand that, as they develop a green financing program. So that's just in the infancy. We've just seen that start to develop but we're quite encouraged by finding that. That could be a way that we could actually see funds start to break loose for commercial buildings again, could start with green projects.

Great. And then finally, just one last question, just to go back to the revenue and the forecast. At least 15%, if you were to be in and around 15%, that would obviously entail a significantly less of a year-over-year decline than what we saw in this first quarter. I guess is that something that you're -- a message that your purposely trying to give out, that you are looking for a rebound back? Can you categorize this first quarter's revenue number is probably close to the bottom, where we should not be expecting revenue to decline or it might kind of stay at this current level, could even bounce up a bit? Could you just put a little more meat in the bones of that guidance number?

Yes, Eric, this is Jim. I mean, so first of all, kind of the straight answer is our second half comps aren't as tough as our first half comps so that's one of the factors that we have going for us on a full year perspective and then obviously our guidance implicitly has a range associated with it and it is a function of the ability to see this bidding activity start to convert to awards at a faster rate than it is at this point in time.

And I guess just a quick follow-up to that. I mean, you certainly have some visibility into the next quarter. Was there projects that slipped out of this quarter into the second where, again, you might be able to have some visibility that second quarter could be better than first? Or is there not that type of visibility yet?

As I stated earlier, quarter-to-quarter visibility is always difficult for us. I mean, we did have a little bit of revenue that just, again, based on normal construction project timing moved from Q1 into Q2. But we regularly can have frankly five to $15 million that moves quarter-to-quarter, just based on normal timing of projects.

And you really don't have visibility of that until you're very late in the quarter.

Got you. Okay. Fair enough, guys. Thanks a lot.

You have a question from the line of Jon Braatz of Kansas City Capital.

Good morning, gentlemen.

Good morning.

Russ, Jim, you talk about as you look into 2011 maybe more business from quote, unquote, the stimulus bill. From your experience, is this -- will this government business be at a lower margin or how much of a lower margin might you anticipate from that type of business? Or can you really call it at this time?

Yes, it's really too early to call, but this what is we anticipate. We anticipate that everybody will want to bid the business. There will be lots of bidders. Government typically also -- it's just some -- there's some differences in the way it's bid. So I think that it's going to be competitive. I think where we have to do our homework, our work, is to differentiate the ability to, in some cases it will be the ability to match a historic design. In some cases it will be the energy efficiency.

The other thing that we think can happen the longer it takes for this stimulus work to hit, that people are being quite aggressive, trying to -- a lot of these smaller businesses are trying to fill up and take anything and I think there's a chance the longer it goes, that a lot of the competition could find themselves unable to bid work then and so we could actually see some of that coming our way. So we feel good that there's enough things in our favor that we'll be able to win our share. We fully realize it's going to be very competitive, lots of bidders, that will be out there after it.

When you look at the possibilities or the potential of that business, could it make up a fair share of -- I don't know what definition of fair share is, but a meaningful portion of your revenues in 2011, 15% or something?

I'm going to use some really round numbers and just to describe a picture, not to give you complete accuracy.

Okay.

But if the market -- if our marketplace is $12 billion, for example, for glass, metal and installation services, it's down 20%. Again, it's down some big number. I think that the stimulus bill's going to be able to fill a portion of that but not all of it. And whether they can backfill half of what we're down or a third, that's -- that would be my guess at this point in time.

Okay. Thank you very much.

Your next question comes from the line of Brent Thielman, D.A. Davidson.

Good morning, guys and congratulations on the quarter.

Good morning.

Good morning.

I was hoping maybe you could provide just an update on what you're seeing from foreign competition in the US market and secondarily where in particular you're pursuing some of this international work, and which markets internationally are sort of the most attractive right now?

Okay. Foreign competition, we've talked in the past about Chinese product coming into the US, et cetera. That seems to have abated quite a bit. In fact, very -- we see very little foreign competition right now. There are some foreign products or standard kinds of windows that are still being imported, where a building might be using something like that, but those are one-offs. That's not that common, when you look at the whole marketplace.

So is there still some foreign? Yes, there is. But it's much less of a concern to us today than it might have been a couple years ago. So we really are not seeing that. A lot of it, quite frankly, has to do with the capacity to serve the markets domestically and people actually trust and believe that domestic supply is the better economic value because of the ability to keep projects moving along.

Where are we being successful internationally? Pacific Rim, South America, traditional strengths for us. We picked up a few projects in Australia. South Korea remains strong as well as Singapore, other areas in the Pacific Rim. We have a focus on South America. We believe, it looks to us like Brazil market's recovering faster than a lot of other international markets, so we think there's some opportunities there. Probably what slowed down, I would say, would be the Middle East. So that -- if that gives you a picture.

Everything is more competitive, though. People are looking internationally. So I don't want to say it's an answer to everything. But it's certainly an opportunity for us, and one which we think is a positive opportunity.

Okay. And then just maybe a follow-up to that, I mean, obviously you guys have a terrific balance sheet. You talked about some of the opportunities in the store front business, or maybe international expansion. Could you sort of prioritize what you see in terms of acquisitions or expansion?

Yes, we're clearly focused on this and we believe that there will be some expansion opportunities or acquisition opportunities. I would tell you that the word for today is patience. I firmly believe and I mean this sincerely, I think the opportunities will get better with time, not worse. And so a little patience right now I think is the right word. And again, we lag the marketplace. Once we can see things moving in the right direction with the strength of our balance sheet, I think we can then get aggressive and really get this company positioned for the recovery and for great growth.

Okay. Thanks, guys.

You have a question from the line of Neil McConnell, WS Capital.

Good morning, guys. I had a question on AR which you don't break out in the release. Just curious if you are having any collections issues with distressed owners or builders out there?

Actually, at this point in time, we're really in good shape with our receivables. Majority of our work in our Architectural segment we actually maintain lien rights which is a real important mechanism for us, but we haven't seen really anything in terms of increasing our agings at this point. Watching that closely, though.

Do you anticipate that as the cycle gets deeper and longer?

I think my outlook assumes we're probably about as low as we're going to go with our DSOs, given the cycle. Under normal time periods, going through a cycle like this, we would expect to see some challenges in receivables and this isn't even in a normal cycle. We feel good about our position and how aggressively we're watching it.

Okay. And then one more. On capacity utilization, you mentioned you were at 60%. If we looked at your footprint today, what level do you need to target to keep operating margins in the positive level? I know you got to about 1% in the last cycle. How do we kind of look at that going forward?

We certainly see where we are today and we believe that we can have some more deterioration and still be able to maintain that mid single digits margins. It looks like sort of our consensus opinion is that we could probably fall to 50% utilization and do that.

Okay. Great. Thank you.

You have a question from the line of Rod Hinze, Keypoint Capital.

Hi. Most of my questions have been answered. But can you -- you've done a great job in reducing your costs going into the slowdown. How much more can you reduce those costs and still maintain reasonable operating margins?

We have a significant Six Sigma lean effort that we started years ago and fortunately in the last few days I just sat in on all those meetings and reviewed projects and I'm quite encouraged that we will continue to take advantage of the slow times, to realign and improve our processes and improve our competitive nature, both in our factories and with information systems and our execution in the field. So I'm quite encouraged that our efforts to continue to take costs out will just be a continuing effort for forever. But I mean, really slowness gives you a greater opportunity to impact that. It's much easier to manage process improvement when you're not sold out.

Okay. Thank you.

There are no other questions. I would like to hand the call to Mr. Russ Huffer for closing remarks.

All right. Well, thank you. I'm really proud of our people and the efforts that they're making to position this company, keep it strong, and to get us through these times, and to prepare for us for what I think is going to be extraordinary success as these markets recover. So thanks for your calls today.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.