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NCI Building Systems Inc. (NCS - Analyst Report) reported adjusted earnings per share of 2 cents in the third quarter ended July 28, 2013. Even though the company rebounded from the 28 cents loss incurred in the prior quarter, its earnings declined 60% year on year and was way behind the Zacks Consensus Estimate of 12 cents per share.

Including on time items, NCI Building reported GAAP net loss per share of 19 cents in the reported quarter, compared with a loss per share of $2.74 in the year-ago quarter.

Operational Update

Sales increased 6% year over year and 8% sequentially to $317 million in the quarter, missing the Zacks Consensus Estimate of $348 million. The year-over-year growth was mainly driven by contribution from the Metl-Span acquisition.

Cost of sales during the quarter increased 7% to $250 million. Gross profit increased 2% to $67 million. However, gross margin contracted 90 basis points to 21.1% in the quarter. This was due to the pricing pressure, and increased manufacturing costs due to ongoing investments in strategic initiatives as well as ramp-up costs at its Middletown, Ohio coating and Mattoon, Ill., insulated metal panel facilities.

Engineering, selling, general and administrative expenses increased 13% to $62.8 million, mainly due to the additional cost related to the acquisition of Metl-Span and investments in strategic initiatives. Operating profit dropped to $4.3 million in the third quarter from an adjusted operating profit of $9.98 million in the prior-year quarter. The decline was due to lower-than-anticipated volumes, competitive pricing and the incremental costs associated with strategic initiatives.

Segment Performance

Revenues at Engineered Building Systems dipped 4% year over year to $158 million. The segment reported an operating income of $6.1 million in the quarter, down 33% from the year-ago quarter’s income of $9.1 million, mainly due to continued pricing pressures in the low-demand environment as well as lower leverage on fixed costs.  

Revenues from the Metal Coil Coating segment increased 4% year over year to $56.5 million led by HVAC, lighting fixtures, and appliance sales and strong shipments of heavy gauge packages to construction markets. Operating profit was $5.5 million in the quarter, up 8% from the prior-year quarter.

The Metal Component segment generated revenues of $161 million, up 13% year over year. The segment benefited from the recent Metl-Span acquisition. Operating profit for the segment decreased 14% to $8 million in the quarter due to increase  in costs associated with the integration of Metl-Span, the ramp up of the recently renovated Mattoon, Ill.,  plant, and increased costs for sales and marketing. However, increased volume in insulated metal panels as a result of the Metl-Span acquisition was a minor deterrent.

Financial Update

As of Jul 28, 2013, NCI Building Systems had cash and cash equivalents of $16.1 million, down from $55 million as of Oct 28, 2012. Long-term debt increased to $241 million as of Jul 28, 2013 from $234 million as of Oct 28, 2012. Cash used in operating activities was $9.1 million in the first nine months of 2013 compared with cash provided by operating activities of $20.2 million in the prior-year comparable period.

Outlook

Management did not provide any specific guidance for fiscal 2013. The company noted that low-rise non-residential construction starts have declined in the first nine months of fiscal 2013; suggesting that the market is unlikely to recover sufficiently to deliver annual growth in volumes.  However, NCI Building remains positive that the industry will return to the 40-year trend of 1.3 billion square feet of new construction starts during the next few years.

The company expects to benefit from strong backlog in the fourth quarter of 2013. Furthermore, the Coatings group continues to benefit from higher volumes and expanding margin and the Middletown, Ohio, light gauge paint line has ramped up production and remains on track to become profitable in the fourth quarter of 2013. Revenues will also benefit from the announced price increase for several of its product lines.

Our Take

NCI Building Systems’ acquisition of Metl-Span LLC will position NCI Building as a leader in the insulated metal panel business by diversifying and expanding its existing product range. In addition, NCI Building will also be benefited by a growing customer base as well as a distribution network in North America.

The American Institute of Architect's Architectural Billing Index in Jul 2013 was at 52.7, up from 51.6 in June and projects inquiry index increased to 66.4 in July from 62.6 in June. The non-residential construction is showing signs of a turnaround, which will benefit NCI Building Systems.

Based in Texas, NCI Building Systems is one of the largest integrated manufacturers of metal products for the North American non-residential construction industry. Currently, the shares of NCI Building Systems retain a Zacks Rank #3 (Hold). Other companies in the building and construction industry with favorable Zacks Ranks are CaesarStone Sdot-Yam Ltd. (CSTE - Snapshot Report), with a Zacks Rank #1 (Strong Buy), while Drew Industries Inc. () and PGT, Inc. (PGTI - Snapshot Report) both carry a Zacks Rank #2 (Buy).

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