Apogee Enterprises Inc (APOG) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2014 Apogee Enterprises, Inc. earnings conference call. My name is Kim and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Mary Ann Jackson. Please proceed.

Thank you, Kim. Good morning and welcome to the Apogee Enterprises fiscal 2014 third-quarter conference call on Thursday, December 19, 2013. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2014 third quarter and our outlook for the fiscal 2014 full 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 March 2, 2013 and in our press release issued yesterday afternoon and filed on Form 8-K.

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

Thank you, Mary Ann, and good morning, everyone. Welcome to Apogee's conference call for our third-quarter results.

We recorded another solid quarter with growth in both revenues and earnings per share and we had strong free cash flow in the quarter. Our earnings per share of $0.33 were up 18% in the quarter on net earnings that were up 20% year-over-year. Our year-to-date earnings-per-share of $0.68 is up 31% over the prior year.

Revenues were up 5% in the third quarter compared to the prior-year period and sequentially up 12% from the prior quarter. Year-to-date, all segments have grown and contributed to our revenue growth of 7%.

At Apogee, our backlog held at $300 million, a level we have maintained for six quarters now while growing the top line over 7% in the same period in markets with only slight growth. We have a very strong growing pipeline of project commitments and awards that we expect will soon enter the backlog. In addition, we continue to have a high level of bidding activity.

Our outlook for the full year has improved to a range of $0.95 to $1 in earnings per share on revenue growth of 10% to 11%. That includes the two acquisitions we've completed this year. Without the acquisitions, we maintain our guidance for high-single-digit growth.

Late in the fiscal 2014 third quarter, we used approximately $52 million of our cash on hand to acquire Alumicor, a leader in the Canadian storefront and entrance market with annual revenues of approximately CAD60 million. The acquisition supports our growth strategies which include a focus on geographic expansion, both domestic and international, and new product introductions.

This is a business we understand well, and all of the customers and revenues from Alumicor are incremental to Apogee. We are pleased to be entering the storefront and entrance market in Canada with an extremely well-run business and a great management team.

In addition, we have synergy opportunities with our other architectural framing segment businesses.

In spite of this strategic investment, we ended the third quarter with cash and short-term investments of over $22.5 million. I would like to note that we had strong free cash flow performance in the quarter.

Returning to the results for the quarter, Apogee's operating income growth was driven by improved mix and productivity in the architectural glass segment, our largest business, and increasing margins and good project execution in the architectural services segment which returned to profitability. In addition, the architectural framing systems segment earnings increased slightly as the segment absorbed acquisition integration costs.

Within the segment, I would like to point out the significant revenue and earnings growth in our US storefront and entrance business, which has been our fastest-growing business as markets there begin to recover. In the third quarter, large-scale optical revenues grew in markets that were still somewhat soft.

On the operating income line, good mix was offset by promotional activities and some manufacturing inefficiencies early in the quarter which have since been resolved. In fact, our Q4 will see nice year-over-year margin expansion, and with the holiday timing this year our Q4 versus Q3 profile will have a similar profile this year.

Our year-to-date conversion rate on revenue growth is 19% as we benefitted from improvements in margins, pricing, productivity, and operating leverage. In the third quarter, our conversion rate was 13%. However, excluding the Alumicor acquisition, the conversion rate in the quarter would have been 31%.

Finally, I would like to highlight in the quarter, we continued to make progress against our growth strategies through US geographic expansion and internationally in Brazil in the architectural glass business; in Europe for our picture framing, glass, and acrylic business; and in Canada with the recent acquisition of Alumicor. At the same time, capacity and productivity investment projects in the architectural glass and US storefront entrance business are progressing nicely.

Looking at our outlook for fiscal 2014, we expect a very strong performance in the fourth quarter and, therefore, have narrowed our range to $0.95 to $1, up from $0.93 to $1 that I previously highlighted. We are anticipating 10% to 11% revenue growth, up from single-digit -- high-single-digit growth with the inclusion of our acquisitions which are not contributing to our earnings in fiscal 2014. This outlook includes year-over-year strong double-digit growth at operating margins in the fourth quarter.

We expect to outperform our commercial construction markets by several percentage points this fiscal year. The outlook for US commercial construction markets based on Apogee lag to McGraw-Hill forecast for the segments we serve is for modest market growth in fiscal 2014 and improved growth in what will be our fiscal 2015.

We are now expecting capital expenditures for the year to be approximately $45 million based on investments underway in the current year. Our largest project, the new super-coater at our Minnesota Architectural Glass facility, is on budget and on schedule. We expect to be free cash flow positive after this level of investment.

Our anticipated fiscal 2014 performance in investments are continued steps in achieving our three-year target of revenues over $1 billion and double-digit operating margin. I believe that our focus on operational improvements as well as our strategies to grow through new geographies, new products and new markets will allow Apogee to continue to deliver these improving results that will allow us to reach these projections by the end of fiscal 2016.

Jim Porter now will take you through the details of the financials.

Thanks, Joe. Good morning. We had a solid third-quarter performance in line with our expectation with operating income of $12.7 million, up 11%; and earnings per share of $0.33, up 18% over last year. Revenues of $199.4 million were up 5% compared to the prior-year period and we started to see more balanced growth across our segments.

Gross margin was 21.8% for the quarter compared to 22.2% last year, and up slightly from the second quarter. In the third quarter architectural glass segment revenues were down 2% to $73.4 million, impacted by normal project timing associated with serving construction projects, while the segment revenues have grown 11% year to date.

Operating income grew to $1.6 million, up from $0.5 million in the prior-year period. On a year-to-date basis, the improvement in the architectural glass segment is almost $8 million compared to a nine-month loss last year of $4 million to year-to-date earnings this year of $3.8 million. The architectural glass business results have benefited from an increase in mix of higher value-added projects with good market conditions in both North America and Brazil, as well as from improvements in pricing and productivity.

The architectural services segment revenues were up 4% to $51.2 million, and are also up 4% year to date. The segment returned to profitability in the quarter with operating income of $0.4 million improved from a prior-year period loss of $0.2 million as our project margins continue to increase. This trend is consistent with what we expected and had previously communicated as we continue to work through lower-margin projects and flow better margin work from the backlog. We believe we have now essentially worked through the project margins from the bottom of the cycle.

Architectural framing systems revenues of $59 million were up 14%, with half the growth from the inclusion of the Alumicor acquisition and the balance driven by the US storefront business. Year-to-date growth of 5% was impacted by the gap in more complex window project volume we had coming into the year and had discussed previously. Those headwinds are now behind us.

Architectural framing systems operating income was $5.8 million, up from $5.6 million due to good volume in the US storefront business, somewhat offset by volume declines in the window business and integration costs in the segment. Acquisition and integration costs in the quarter were approximately $0.5 million.

The two acquisitions we made this year are expected to be accretive to earnings in fiscal 2015. We feel good about the operating margin for the architectural framing systems segment at 9.8% given these impacts.

Third-quarter capacity utilization across all architectural manufacturing businesses was up a little at approximately 68%, driven by volume growth at the storefront business compared to approximately 65% in the second quarter and about 64% in the fiscal 2013 third quarter.

Our large-scale optical segment revenues were up 5% to $22.7 million in markets that are still fairly soft. Year-to-date growth is 2%. Operating income was $6.1 million compared to $6.6 million as slight volume growth with positive mix were offset by some increased manufacturing cost from a short-term impact of production yields as well as promotional activities in selected channels. In our seasonally stronger third quarter, we ran some additional promotions to help drive mix of value-added products.

The operating margin was 26.7% compared to 30.3% in the prior-year period with this decline from last year driven by the short-term operational efficiencies and promotions I mentioned. This remains a great business with attractive margins.

The consolidated third-quarter backlog, primarily generated by our architectural businesses, was $299.9 million, down slightly from $302.9 million in the prior-year period. As I do each quarter, I want to again remind you that our business can have lumpy order intake activity, so we don't require or necessarily expect sequential backlog growth each quarter to be consistent with the longer-term trends. This was evident in our third quarter.

As Joe noted, we have visibility of a strong, growing pipeline of project commitments and awards and continue to have considerable bidding activity. We believe we are seeing improving market conditions and leading to a trend of improving backlogs.

Our backlog mix at the end of the third quarter reflects a slight decline in the institutional sector, offset by some growth in the multi-family residential sector. The institutional sector was between 40% and 45% of our backlog with healthcare and education projects continuing to be the majority. The office sector was 35% to 40% of the backlog. Hotel, entertainment and transportation was about 5% to 10% of the backlog, and multi-family residential, including high-end condos and apartments, was almost 10% of the backlog.

Regarding the timing of the backlog, approximately $136 million, or 45% of our backlog, is expected to be delivered in fiscal 2014 and approximately $164 million, or 55% of the backlog, in fiscal 2015 or beyond.

Apogee's tax rate for the second quarter was 24.4%, down from 30.2% last year, as we had resolution of certain tax positions during the quarter.

Our debt was $20.7 million at the end of the third quarter compared to $30.8 million at the end of fiscal 2013. Virtually all our current debt is long-term, low-interest industrial revenue bonds.

Cash and short-term investments totaled $22.5 million compared to $73.7 million in the second quarter after acquiring Alumicor for approximately $52 million in the third quarter, as Joe discussed.

We also entered into a new market tax credit transaction in the quarter to support the coater investment in the architectural glass segment. The transaction provided cash proceeds net of fees of approximately $8 million, which were used in the quarter to pay for a portion of the related capital investment. This had no P&L impact in the quarter due to the seven-year tax credit recapture provisions related to this tax credit program.

We also moved $21 million from short-term cash to long-term restricted cash as part of this transaction to set aside funds to be used for the additional capital to be incurred in the fourth quarter for this project.

Year-to-date, our capital expenditures were $17.3 million, compared to $21.3 million in the prior-year period as the majority of the spending for the strategic investment for growth and new product capabilities will fall in the fourth quarter of the current fiscal year. We had positive free cash flow of approximately $21 million in the third quarter compared to $6.9 million in the prior-year period.

Non-cash working capital was $72.1 million, up from $59.9 million in the prior-year period and $54.1 million at the end of fiscal 2013. Good cash collections in the quarter from existing businesses was more than offset by the addition of working capital from the addition of the Alumicor business.

Our days working capital continues to show solid balance sheet management at 47 days, just up a little bit compared to 43 days in the prior-year period, but this is still excellent performance.

We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Non-cash working capital is defined as current assets excluding cash and short-term available-for-sale securities, short-term restricted investment and current portion of long-term debt less current liabilities; while days working capital is computed looking at our controllable working capital assets and liabilities, accounts receivable, inventory, and payables.

Before I turn into our outlook, I would like to point out that in the third quarter, we extended our credit agreement by one year out to November 2018 at favorable terms. We also maintain the feature for a credit line expansion.

Now I will turn to our outlook. For full-year fiscal 2014, we have narrowed our earnings-per-share range, bringing up the bottom to $0.95 from $0.93 and holding the top at $1. Our revenue outlook has increased to 10% to 11% growth with our acquisitions which are worth a couple of points of the growth. Excluding the impact of the acquisition of Custom Window and Alumicor, we continue to expect to achieve our outlook for high-single-digit top-line growth despite limited help from domestic commercial construction markets this year.

We are pleased with our strong and growing level of project commitments and awards as well as bidding activity. The external metrics we watch, including job growth, Architectural Billings Index, McGraw-Hill Construction Forecast, vacancy rates and consumer confidence point to improving markets for Apogee consistent with what we see with our bidding activity. We expect full-year gross margins of approximately 22% and we anticipate a full-year tax rate of approximately 30%.

We expect to generate positive free cash flow for fiscal 2014 after we spend approximately $45 million for the year on capital that is balanced across investments for growth, productivity and new products as well as for maintenance.

Depreciation and amortization should be about $27 million for the year.

I feel good about our year-to-date performance with growth, expanding margins, and free cash flow generation and look forward to continued year-on-year growth for the balance of fiscal 2014. We are making nice progress on our strategic initiatives, including productivity improvements, geographic expansion and development and introduction of new products. We see significant future opportunities that are going to leverage Apogee's strong financial position, leading products and services, and operational and strategic initiatives that should allow us to achieve our strategic plan goals.

I will turn it back to you Joe.

Thanks, Jim. Kim, if you could open the call up for questions, I would appreciate it.

(Operator Instructions) Samuel Eisner, Goldman Sachs.

Thanks very much, good morning everyone. Can we talk a little bit about the tax rate this quarter? Obviously the 24.4% was a little bit less than what we were expecting. Just curious what kind of items were actually in there; if you can give some actual dollar amounts, that would be great, too.

It was a little bit favorable than I think we had given, but we were expecting some favorable performance and is really about -- kind of in the range of a little more than $0.5 million. It really just has to do with reserves from prior positions that we had taken that got resolved during the quarter.

Understood. And then with the integration of Alumicor as well as the other transaction, can you maybe talk about what the benefit was to both your orders and backlog? You certainly gave the revenue benefit; just curious how much your forward-looking indicators were benefited from the integration of this business.

Backlog picked up a little bit more than $6 million associated with the acquisitions.

This is Joe. The outlook, as we highlight, we're at about 2 points of revenue growth, bringing us up to the 11% we've highlighted for the full year.

And I think, Samuel, we had talked about the Alumicor business has annual revenues of about CAD60 million, and then the assets that we acquired from the Custom Window business, we hope to see $10 million of annual revenues out of that.

Great, that's really helpful. If I can just ask two more. Within LSO, obviously, there were some manufacturing inefficiencies that happened at the beginning of the quarter. If you could just give us a little bit more color. Obviously, there were 400 basis points of year-on-year decline in margins, so was the inefficiencies 300 basis points? Was it 200 basis points? Just trying to understand how much of an impact that really was on the profitability.

Sam, this is Joe. The business -- about half of the deterioration from your expectation was the manufacturing. The rest was promotional activities as we are continuing to grow that business internationally, as well as domestically.

The issue we had was in September. We did have a manufacturing issue; it's behind us. You did highlight the change in operating margin. As I mentioned in my comment, this year will be significantly different in the Q3 to Q4 walk, and I would expect to have similar margin expansion in the fourth quarter year-over-year that you saw in the deterioration this quarter.

So, last year, we had -- from our best quarter to our worst quarter, we had a 10-point movement. This year, it's much flatter, and almost every quarter is in that mid-20s operating margin range. So the business is performing extremely well and the manufacturing issue was addressed, and our October/November manufacturing performance was outstanding.

That's great. I really appreciate that. Just lastly, you gave some color regarding the front log or awards that you have been given, and that might move into the backlog. I'm just trying to understand the timing of when you guys would expect some of those awarded businesses to actually start being moved into the backlog. Obviously this has been something that we've been talking about for a few quarters now, so just curious on that timing mechanism going forward.

Yes, I expect a strong fourth quarter. I expected some orders that are being contracted today, as we speak, literally, to have hit in the third quarter, so I was surprised by the timing myself. I would've expected growth in the quarter. We will see it in the fourth quarter. We do have -- we obviously have visibility to the things we are working on that become contracted commitments. That's when they enter our backlog.

And our largest contributor to backlog, which is our services business, architectural services, we had several orders that are falling into the fourth quarter versus the third quarter. We didn't lose a single order that we had in our original projections for the third quarter, but we did have some timing movement. So, frankly, I am expecting a strong fourth quarter.

I will just add -- this is Jim. We have been talking about seeing just a longer time period between project awards and getting them into the backlog. Frankly, what we are seeing and I think what we're seeing in our industry in general is not only that maintaining, but even a lengthening just in terms of how long it's taking from project to get into backlog. Projects continue to move forward; they just seem to be dragging out a little bit longer.

Great. I will hop back in queue; thanks.

Colin Rusch, Northland Capital Markets.

Thanks so much. So with the backlog flattish year over year and the expectation still for some growth, can you talk a little bit about the sales cycle for the products and what you are seeing in terms of turn time from the time you get an order to the time you actually deliver it?

I think in the last year or two years, frankly, we have seen longer periods between awards and commitments. Nothing is falling out of the queue. We very, very rarely have an award that does not end up in backlog.

So I would say there's nothing significant going on. We did have -- as Jim likes to point out, a quarter-by-quarter measurement can be hard because we have a lot of revenue coming out of the backlog every quarter and we are replenishing it and we are pretty proud that it's still at $300 million. But as I said, our second-largest business is the services business and they are going to be a large contributor to our backlog going forward.

So in the long-term, we will see that backlog continue to grow.

Okay. So I guess thinking about the $300 million number, we have been kind of flattish around that for about six quarters now. Is that something that you are expecting to grow pretty materially? You've talked about these orders as we go forward. Do you need to be booking those orders in advance; or, are we seeing the time from the actual booking to the actual shipment shorten a little bit as we go forward?

The trend, Colin, the trend will increase; and, frankly, I am saying in the short term I expect an increase in the backlog in Q4. I was bullish on that for Q3. We had a little bit of slippage into the fourth quarter, so I am very confident in what I have already seen in the month of December for awards and contracts we have inked. Leads me to be very confident in having double-digit growth in the backlog in the fourth quarter and the trend in fiscal 2015 will continue to reflect growth in that backlog.

And every project is different with a lot of variation, so I would say, on average, we are not seeing a change in the time frame from when the project enters into backlog and when we are delivering products and services against that.

Okay. Perfect. And then, the ESCO offering that you guys have been working on, can you give us an update on where you are at with some of those projects in terms of being able to have third-party financing for window replacement?

This is Jim. We continue to be quite excited about the activity related to the renovation market. As we have talked about, we are pursuing that on a couple of ways, both working through the energy service companies, or ESCOs, as well as working directly with building owners in both the institutional and the private sector.

As we have talked in the past, it is frankly a very long selling cycle, probably longer than we anticipated as we got into it. But I would say the visibility of potential projects that we are working on is growing nicely.

It is going to take a little while before we see it come through. We do have a few million dollars in our backlog and some other projects that we have been granted that we expect to be entering into the backlog in the next couple of quarters. But good momentum in that, and we continue to be very optimistic about that potential.

This is Joe now. I would tell you I am still very bullish as this being a real big deal for Apogee. We've set a modest goal for awards this year, more than $10 million, but modest, and we are on track to do that. Most of that will get into the backlog between now and the first quarter. The headlights going forward are extremely positive. We have got a lot of activity in this initiative.

So I am as bullish as I am as when I started here and I brought this initiative, frankly.

Okay. Perfect. And then just one final question. So, obviously, there is a significant amount of operational efficiency that you are going to get with the build-out in Minnesota on the manufacturing. But, can you talk a little bit about efficiencies or best practices that you are getting from the Alumicor folks and how you see that flowing through that business?

Yes, we continue to mature on our journey to implement lean in our factories. We now have about 14 major factories in Apogee. We are progressing nicely. We are, in fact, achieving the 50 to 100 basis points of improvement on our operating line.

And the Alumicor business is a very well-run business. We had synergies in both directions. Our teams have already been meeting, both within across the architectural framing systems businesses, not just supply-side synergies, but also operating. So we've got two businesses that are very similar, one in the US and one in Canada. I can assure you we are already leveraging best practices from both sides.

Could you put just a little bit of hard numbers around what you think you can achieve with that business in terms of operational efficiencies?

I can tell you, as Jim mentioned, the impact to our bottom line in this fiscal year will be de minimis -- close to breakeven. I am pretty pleased that we can do a deal of this size and have it not be dilutive in the first four months. Our fiscal 2015 will reflect accretion from that deal, and a part of that will come from operational excellence. I'm not sure if we are ready to put a number out there, but, Jim, if you want to comment on the accretion.

Well, when we announced the acquisition, I think we characterized the business as having similar operating margin profiles to our architectural framing systems business, and that's what we anticipate. It will take a little while to get there; I mean, not long. And then, as Joe articulated, longer term, we hope there are some incremental synergy opportunities.

Okay. Perfect. Thanks so much.

Robert Kelly, Sidoti.

A question on the implied fourth quarter guidance. Based on the revenue and EPS you gave us for the full year, a high-teens revenue growth rate to kind of hit the midpoint and almost earning in op income, maybe needing to earn or perhaps exceeding what you did in 3Q just to kind of hit the midpoint in the winter quarter. Could you just put a little color around the benefits of rolling off the low-margin work and getting into some of the higher mix awards that you've seen over the past couple of quarters?

Yes, sure; Bob, you are correct. Even without the Alumicor acquisition, our fourth quarter will grow in the mid-teens. The Alumicor deal brings it back closer to 20, as you mentioned. So it will be a strong quarter for us.

I mentioned one of the reasons is our large-scale optical business is much flatter Q3 to Q4 than it traditionally is. The holiday season this year was quite delayed, so we are having a much stronger December in that business, so that helps.

Our installation business is, in fact, seeing triple-digit operating margin coming out of the backlog. I would tell you that we were talking two years ago and a year ago of low-margin work. I don't think we are talking about low-margin work still in the backlog, but the work that we are putting in the backlog continues to be at improved margins, and it's a reflection of an improving economy. There's no question our end markets are starting to see improvement. We are looking at good growth in our end industries next year.

Last year at this time, the McGraw-Hill forecasts were for stronger growth than actually happened this year -- but we are, no question about it, seeing strength in the end markets. We are getting good mix in our largest business, which is the glass business. If you look at our four segments obviously our LSO margins are very attractive. And as I mentioned, our fourth quarter will be nice year over year.

Our framing systems segment is near our double-digit goal; I expect that to continue to improve. An example is the Alumicor acquisition will be accretive to us. That segment will continue to improve. The two big dogs in the kennel are services and our glass business are continuing on a trajectory that will get them to double-digit margins, and I think as reflected by the roughly 200-basis-point improvement in their bottom line in this most recent quarter.

So not every cylinder fires well at the same time, but all four businesses are performing well. The windows business within the framing system had, as we mentioned earlier in the year, been some headwinds. They turned the corner in the third quarter. So we have got a lot of things going in our direction, and if we continue to get a little help from the end markets, I'm very confident in our F16 projections that we've put out there.

Sure. As far as -- you talked about the 200 to 300 basis points improvement -- is that on a year-over-year basis? I assume that you are referring to the services installation division.

Yes, and the year-over-year, quarter-versus-quarter, we were up approximately 200% in both businesses, one slightly above, one slightly below, in our operating results.

Right, just because architectural services last year did like a 5% operating margin, so should we build in 200 to 300 basis points on that?

Well, I think we have the potential, again, depending on mix and project flow of a couple hundred basis points. That is the reflection of both the continued improvement in the margin coming from backlog. And we have tried to be clear is that it is going to be kind of a trend line of gradual improvement every quarter. We'll continue to see a little bit of improvement. Plus, we see a little bit of a bigger quarter just from the timing of the work which will benefit.

Okay. Thanks. That's helpful. And just -- this is kind of nit-picky -- you had talked in the past about conversion rate being 30% on every incremental dollar of sales. Even if you do your F14 goal -- sorry -- guidance, you are going to be south of that. So what has to change to get that incremental margin up? Is it the productivity initiatives kick in? Is it mix-related? Is it absorbing the coater builds? Any help on that front?

Yes, sure; that is my internal target, Bob. And certainly, when we are coming off of a breakeven-type business, slight loss, growth should come at that kind of conversion. As we are making growth investments, 30% is going to be harder to achieve, but it's still realizable for us, and the fourth quarter will be a better metric on that.

We have had some cross-segment mix headwinds, of course. The timing of our large-scale optical business, which is by far our highest-margin business, has given us year-over-year headwinds. As far as overall Apogee conversion rate, as I mentioned, that will turn into tailwinds for the fourth quarter, so I am pleased with that.

Our windows business is an attractive business. That provided me headwinds in the first two-thirds of the year.

So I have had some mix, but, again, all businesses are growing. My highest margin businesses were not growing as high as the other one. So I think the fourth quarter will see a little bit better conversion. And, as we showed in third quarter, Bob, the conversion was 30% without Alumicor.

Yes, Bob, and I'd just add that because on a full-year basis, there will probably be in the neighborhood of $20 million of revenue with essentially no contribution because of the acquisition. So the way we are managing the business, I think we are in the range of the goals that we've set out for the kind of ongoing operating business.

So the acquisition-integration drags sort of drop off in F15 and the leverage will increase a little bit?

Yes.

Yes.

Okay, fair enough. And then just as far as -- you talked about the bidding and quoting activity improving. I know the data -- the leading indicators have been running positive for some time now, but there seems to be a lack of conviction that the markets are improving. Could you just kind of talk to your experience when you are working through the channels to sell; whether the sentiment is getting better amongst the people, your key customers?

We have good visibility to what's going on in the marketplace. One of the reasons our service margins are going up is, there is more business being booked nowadays. The competitive positions are getting better, frankly, in some regions of the US.

I have been using the words bumping along the bottom, less conviction out there. You have heard my tone today. We are feeling better the second half of this year. We are definitely seeing improved conditions in the marketplace, and I believe -- I feel a lot better about believing McGraw-Hill's forecast for the next calendar year -- our next fiscal year -- than I did at this time last year.

We are starting to feel it, and I would say we have come off the bottom. And I think by the time this year is over, we will be looking at low-single-digit growth in our end markets, and that will only improve next year.

So no question, we are seeing it. It's modest right now. Is it thin ice? Sure. The economy is still pretty jittery. Obviously, with the employment gains in the last few months, people are feeling better. The unemployment rate is dropping. It looks like Washington is not fighting as much as they were. So things are looking up.

But, unfortunately, you are all well aware of the fragile environment in the United States right now, and we are always cognizant of that. So we plan for the worst, and we are prepared to support growth.

Right. You are certainly executing in a tough environment. One final one, just the Alumicor acquisition was a big one relative to what you guys have done historically. Does it change your appetite to do more deals near-term, or do you kind of put any potential M&A on the back burner until that's fully integrated into the overall system?

No. I am proud that we have got a great integration process here and we have got tighter teams working on the integration and the synergies. We certainly have bandwidth to do another deal like that.

As you have heard me say, I'll walk away from 10 bad deals before -- I would rather lose some deals that are -- we have no desire -- our goal, a well-run Company with a good management team in the spaces we know. And they are hard to find. I think Alumicor was an incredibly good find for us, and we have the appetite to do continued work in this arena. I am not ready to put anything on the back burner at this time.

We continue to have strong balance sheet management. We continue to have the 46, 47 days of working capital, which is incredibly positive for a manufacturing company and it allows us to keep delivering strong cash flow, even when we make investments like that. As Jim mentioned, we have a -- we extended our line of credit which we haven't tapped into. We are driving good cash flow, so we certainly can do more strategic deals.

Great. Thanks for taking my questions. Have a wonderful holiday.

Brent Thielman, D.A. Davidson.

You have answered questions on margins pretty extensively here, but I will ask it another way. You have worked through a lot of this legacy lower-margin work. It sounds like the bidding environment is certainly getting better. I guess my question is, I get the point where you are comfortable, all these businesses should be profitable on a go-forward basis. Or is there a part of you that still thinks there might be some lumpiness ahead that could work against you?

I absolutely believe we have turned the corner on profitability in all the businesses. And, obviously, the ones that were not have turned the corner, I project that going forward. So, no, I don't see any lumpiness that would change that statement.

Okay. And then, kind of on the Alumicor acquisition, certainly understand that expansion into new markets; sounds like a good business. Is there something in the Canadian market that's more appealing to you than the core domestic market, or was this sort of simply a way for you guys to kind of expand your geographic focus?

It was done for exactly that -- to expand our geographic focus. There was nothing magical about Canada, but I will tell you, the Canadian market -- our end markets in Canada did not have the significant falloff that happened in 2009 in the US. It was a much flatter depression, so to speak, a recession -- and wouldn't even use that term.

So it has been quite stable, and that business has been -- like the Apogee businesses, it has been outperforming its end markets. It is one of the large players in the Canadian marketplace, so I do like the fact that the recent five years have shown a more stable end market condition versus the V that we are dealing with in the US, the massive drop-off in what will probably be a massive recovery. I like the fact that it was more stable, but that's not why we did the deal.

One other positive about the Canadian market is there seem to be similar opportunities in the retrofit side of the business, as well. Alumicor had a nice position in there, and as we continue to focus on ramping up that initiative, we will be doing that in Canada, as well.

I have to say Jim is right on that. I am very, very pleased with the cooperation and the aggressive nature of which our US team and the Canadian team are working on attacking these kind of opportunities, like retrofit and operational efficiencies.

That's helpful. And then, just lastly, you mentioned $45 million is a good number for CapEx this year. Should we kind of be thinking about that number for next year as you are looking out for some of these growth initiatives in other areas?

It won't be that high next year. This is certainly an anomaly for us. This is a significant investment. Jim obviously highlighted we have made some very wise moves that have long-term benefit for Apogee with the new markets tax credit. But the CapEx this year is clearly higher than it will be next year. But we continue to amp up investments in productivity and new product. So it won't be as low as it was before I came here. So, it will be in the range of probably $30 million to $45 million, but it certainly won't be at the $45 million or above.

Gotcha. Thanks. Happy holidays.

Jon Braatz, Kansas Capital.

Good morning. I think all my questions have been answered, but, Jim, one question on the new market tax credit. You said there was no P&L impact this quarter. Will there be a P&L impact going forward?

Potentially there will be a P&L impact in seven years after the expiration of this. Other than that, there is kind of de minimis P&L flow-through in the interim periods.

Okay. All right. That's all I need to know. Thank you very much.

Mark Rogers, Gagnon Securities.

Hello, all, happy holidays. I had a question on Alumicor; I see they are Toronto-based. If you could get a little granular on the revenues of CAD60 million; what percentage of those were either in Toronto or in the province of Ontario?

There's certain cities in Canada that are growing exponentially with GDP rates north of 5%, approaching 6%; gets me excited about getting you into Canada. What's your exposure to some of these faster-growing cities, such as Regina or Saskatoon?

They have headquarters in Toronto, but they have four operating locations with operations. They basically go from east to west, so they are in Nova Scotia, Winnipeg, Toronto and Quebec, and we service the entire country from those locations. Obviously, you know the Canadian border quite well. Almost everything is within that 50-mile line across the United States. We have that covered quite well.

We have an opportunity to participate in any growth region in the country. So I don't have the breakdown off the top of my head by region, but we are getting our fair share in every one of those regions.

I will say, Mark, their strongest market and share demand is in the Ontario market. They already had their biggest growth opportunities on the two coasts. I think on the East Coast, they are really just under-serving that market. And in the western part of Canada where there is just really significant growth opportunities, we are starting to participate in that, but see a lot of growth potential there.

Are they doing any work on the new Canary District Project in Toronto, just for the Pan-Am games?

I do not know.

Okay. Great. Sounds like a great acquisition. Congrats, guys.

Yes, it is; thanks, Mark.

This concludes our question-and-answer session. I will now turn the call back to Joe Puishys.

All right, Kim, thank you, and I appreciate all of you staying on the call. This was a long call. We appreciate the questions. Hopefully, Jim and I have given you great perspective on our year and we really look forward to talking to you about our fourth quarter as we wrap that up.

So thank you for your attention today, and have a great holiday season. Bye-bye.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.