NCI Building Systems: Earnings Preview

| About: NCI Building (NCS)

NCI Building Systems Inc. (NYSE:NCS) is slated to release its second-quarter 2010 results on Tuesday, June 8. The current Zacks Consensus Estimate for the second quarter is a loss per share of $1.02, representing an annualized growth of 44.86%.

With respect to earnings surprise, over the trailing four quarters, NCI Building Systems posted a loss higher than the Zacks Consensus Estimate for two quarters and outperformed the same in the other two quarters. The average earnings surprise was a negative 106.99%. This implies that the company has fallen short of the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Previous Quarter Performance
NCI’s first quarter 2010 results were discouraging as its loss per share of 99 cents surpassed the Zacks Consensus Estimate of a loss per share of 89 cents. Results reflected the weak economic environment, which impacted both volume and price in the company’s key businesses, particularly the Engineered Building segment. However, results showed an improvement over the loss per share of $2.42 reported in the year-ago quarter.
Loss per share in the quarter excluded debt extinguishment and refinancing costs, convertible preferred stock beneficial conversion, restructuring charges, asset impairment and gains on embedded derivative charges. Including these items, loss per share was $1.04. Loss per share was adjusted for the 1-for-5 reverse split, which was effective March 5, 2010.
Revenues contracted 29.8%, driven by a market demand slump as well as a decrease in steel prices. All the three segments of the company reported significant declines in sales. Engineered Building Systems sales plummeted 32.7%, Metal Components sales slumped 28.5% and Metal Coil Coatings sales declined 6.0%.
Cost of sales declined 30% due to a decline in material costs and strict cost-control initiatives. Consequently, gross margin improved 30 basis points to 17.9%. Selling, general and administrative costs also declined 18%, driven by significant cost reductions.
Excluding the above mentioned special charges, the company incurred an operating loss of $11.2 million and a net loss of $18.1 million in the quarter.
NCI maintained its expectation to restore annual EBITDA to an excess of $200 million within five years.
In light of the prevailing economic conditions in the industry, the company has limited its capital spending to maintenance activities. It has also identified critical initiatives, on which it expects to expend between $11 million and $12 million in fiscal 2010.
The company plans to incur approximately $1 million in additional restructuring costs in the remainder of 2010. Further, in the second quarter, NCI will recognize the remaining $231 million, non-cash beneficial conversion feature related to the preferred stock placed in 2009 as the completion of reverse stock split on March 5, 2010, resolved the contingency related to the convertibility of the preferred shares.
Estimates Revisions Trend
Estimates have not budged in the last 30 days, implying that the analysts do not see any meaningful catalyst for the time being. The current Zacks Consensus Estimate is a loss of $3.15 for 2010, reflecting a year-over-year decline of 61.54% and a loss of 49 cents for 2011, reflecting a year-over-year growth of 84.44%.
Agreement of Estimate Revisions
There has been no movement in estimates by the analysts regarding their outlook on NCI Building Systems’ earnings over the last 30 days due to the lack of any meaningful catalyst to drive the estimates upward or downward.

Magnitude of Estimate Revisions
Following the first-quarter earnings release, earnings estimates for 2010 improved to a breakeven from the previous estimate of a loss per share of $1.52. The analysts based the upward revision on the expectation that the seasonally weak first quarter is behind the company and with bookings and quote activity showing signs of improvement, NCI should post sequentially improving results for the remainder of the year. However, during the past 30 days, earnings estimate dropped to a loss of $3.15 per share to reflect lower gross margins from an underutilized manufacturing capacity.
Earnings estimate for 2011 improved to a loss of 49 cents from a loss of $2.50 prior to the earnings announcement, driven by expectations of modest improvement in trends, specifically increasing quote activity and generally better pricing. However, there has been no movement in estimates in the past 60 days.

Magnitude - Consensus Estimate Trend

Our Take
Currently, NCI Building Systems has been affected by lackluster non-residential construction activity. Last year, the company completed the recapitalization transaction with Clayton, Dubilier & Rice Inc, a private equity investment firm. This equity investment has prevented a potential bankruptcy and positioned NCI to survive the economic crisis.
NCI Building Systems’ debt is now a manageable $150 million, with a debt-to-capitalization ratio of 36.4%. The company now maintains a healthy cash balance of approximately $78 million and an additional $4.2 million in restricted cash (that will become unrestricted over the next three months). We thus believe the company is now well capitalized even if the economy remains weak.
Looking toward the balance of the year, NCI is seeing some modest improvement in trends, specifically increasing quote activity and generally better pricing. The company’s aggressive restructuring actions should significantly enhance its margins when industry conditions improve.
All said, we believe the key will be the pace of recovery in the economy, particularly in the nonresidential construction industry. However, given that there has been no meaningful improvement in general nonresidential construction building activity, we expect 2010 to be a challenging year for NCI Building Systems.
In the absence of any upward or downward revision to estimates and in light of the above discussion, our long-term recommendation on the stock remains “Neutral.”
Houston-based NCI Building Systems Inc. is one of North America's largest integrated manufacturers of metal products for the nonresidential building industry. NCI Building Systems comprises a family of companies operating manufacturing facilities across the United States and Mexico, with additional sales and distribution offices throughout the United States and Canada.