Apogee Enterprises F3Q08 (Qtr End 12/01/07) Earnings Call Transcript

Apogee Enterprises Inc.(APOG)

F3Q08 (Qtr End 12/01/07) Earnings Call

December 20, 2007 11:00 am ET

Executives

Russ Huffer - Chairman and CEO

Jim Porter - CFO

Mary Ann Jackson - Director of Investor Relations

Analysts

Michael Cox - Piper Jaffray

Robert Kelly - Sidoti

Steve Denault - Northland Securities

Tyson Bauer - Wealth Monitors

Richard Nelson - Jay Cullen Securities

Stan Westhoff - Walt Hausen & Co

Brian Levison - Private Fund Management

Joseph Rial - Breaker Book Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008, Apogee Enterprises second-quarter Earnings Call. My name is Lisa and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the call over to Mary Ann Jackson. Please proceed, ma'am.

Mary Ann Jackson

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

During the course of this conference call we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment and are of course subject to risks and uncertainties, which are beyond the control of management. These statements are not guarantees of future performance and actual results may differ materially.

Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the Company's annual report on Form 10-K for the fiscal year ended March 3, 2007 and in our earnings release, issued last night and filed this morning on Form 8-K.

The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement as of the date of this call and may continue to be used while this call remains on the Apogee website. Russ will now give you a brief overview of the results and Jim will cover the financials. And after they conclude Russ and Jim will answer your questions. Russ?

Russ Huffer

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

I'm excited that we are seeing faster productivity improvements and mixed changes than expected in our other architectural businesses and in picture framing glass. These high levels of performance should allow us to offset the Harmon installation job write-downs for the full year. I'd like to emphasis that we have great businesses with strong markets, brands, quality and service.

Our backlog is robust, we also have positive cash flow that will continue and you'll see us invest in ongoing expansions and new opportunities to expand our architectural business. At the same time, we remain soundly focus on strategies to grow our core architectural and picture framing businesses.

For the quarter, our earnings from continuing operations were $0.26 per share versus $0.36 per share a year earlier. Three significant items impacted our continuing operations earnings, the write-down of these three isolated installation projects reduced earnings by $0.14 per share.

Net tax benefits added $0.08 per share from current and prior year research and development tax credits. We also have agreed to sell our 34% interest in the non-strategic PPG Auto Glass LLC joint venture to PPG Industries resulting an impairment charge of $0.11 per share.

This is an important strategic step and we expect cash proceeds of approximately $25.5 million when the sale closes. The sale is expected to be completed in our fourth quarter, subject to PPG Industries pending sale of its automotive original equipment manufacturing and automotive replacement glass businesses.

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

Net earnings, including discontinued operations were $0.38 per share versus $0.35 per share in the prior year period.

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

In addition, customer timing of job flow in the installation business impacted growth in the quarter. I can't overstate our disappointment in the significant installation job write-downs. Poor execution early in these isolated projects has resulted in material cost increases required to complete the projects within customer requirements and deadlines. We have taken management actions to better execute on all projects moving forward. This is a people and process business and we've addressed these areas by making management changes and strengthening operational controls.

Specifically, the people involved in the projects with the write-down are no longer with the company. We have also put processes in place to allow earlier identification and corrective actions in similar situations.

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

Third quarter architectural segment backlog grew to $456.7 million from $389.5 million, in the prior year period and $405.4 million at the end of the second quarter. We are pleased to see the increase that I stressed for sometime that sequential improvement is not necessary to meet our growth goals. What is important is maintaining a high level of backlog and that's what we have done.

Backlog grew nicely in all businesses including our premier Viracon architectural glass business. We continue to be sold out in this business as we ramp up capacity expansions. We have visibility into fiscal 2010 and expect this strong demand to continue for our products.

Key drivers are energy efficiency in particular, architectural aesthetics and the move towards more use of glass, larger sizes of glass and more value-added properties, all strengths for Viracon. In addition to our large backlog, we also have high levels of commitments, especially in our Viracon business and bidding activity continues strong.

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

Next, I'll cover our outlook. I want to underscore that we continue to feel very good about our business and its outlook. The strength of our businesses and markets served, allow us to remain optimistic that we are positioned to meet our longer term objectives of 8% annual revenue growth and 20% average earnings growth through fiscal 2010.

Strong operating performance, primarily in our picture framing, architectural glass and window business, is expected to offset the impact of write-downs on the installation projects for the full year.

The outlook for fiscal year 2008 earnings from continuing operations is now a $1.40 to a $1.50 per share, reflecting the $0.03 per share difference between the PPG Auto Glass impairment charge and the research and development net tax benefit. Prior guidance was a $1.43 to a $1.53 per share.

I'd like to repeat that we are seeing faster improvement in our architectural businesses than expected with the obvious exception of the one Harmon market. Viracon and our Wausau Window business have seen margin improvement. Viracon is running on all cylinders and I'm pleased to report that the new St. George factory is ramping up smoothly, slightly ahead of schedule.

Outsourcing of commodity coatings also is progressing well and we're introducing new aesthetic choices in energy efficient coated products. Green is a key driver in today's markets and these new products give our customers more choices to meet their energy efficiency goals for their buildings.

Our architectural businesses, with the exception of the one installation market, have been performing well this year. Despite the execution set back in the third quarter, we expect to have an architectural segment operating margin ranging from 6.4% to 6.8%, slightly below our prior range of 6.7% to 7.1%.

At the same time, our picture framing business continues strong, as demand for its best value added products grows in a slightly declining overall picture framing market. We've raised our operating margin guidance for the current year to approximately 18% from guidance of 16%.

The better product mix this year will be some what offset by higher fourth quarter investments in sales and marketing as well as capacity expansions. We expect this will bring the full year operating margin below the year-to-date level.

I'd like to talk about the commercial construction market for a moment. We received many questions on the state of our markets, given the potential of credit crisis and slowing economy. We are not seeing signs of slowdown in non-residential construction and a number of market metrics support this view.

The latest McGraw-Hill Construction non-residential market forecast showed dollar growth for our current fiscal year and fiscal 2009, with a slight decline for fiscal 2010, down 2% from our high level. Then growth continues for the next four years. Based on this forecast, non-residential construction activity should remain at high levels for several years, which is positive for Apogee's business.

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

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

Apogee remains a leader in value added products with the most energy efficient glass. We continued to experience strong backlog in commitments as well as bidding and request to bid activity. Our solid markets and strong internal indicators give us confidence in our ability to grow revenues and earnings.

We have great businesses, strong markets and backlogs and with the exception of the one installation market our businesses are executing well. I am confident about the future prospects and potential for Apogee and its businesses.

Jim will now comment on the financials. Jim?

Jim Porter

Thanks, Russ. Good morning and welcome to our conference call. Our third quarter has many positives for both performance and strategy, with great operations in most businesses, backlog growth and our continuing strategic alignment with our pending exit of the auto replacement glass industry.

We clearly are disappointed that poor execution in one Harmon installation market can potentially overshadow our ongoing overall progress. We expect to be able to make up the $0.14 per share impact of the poor execution of the Harmon projects culled out through better than expected performance in our other businesses for the full year.

We are also glad to have nearly completed all three pending items that we noted in our second quarter earnings outlook. Filings for the research and development tax credit and sale of our recreational and bus windshield business were completed in the quarter and we recognize the impairment related to the pending sale of our interest in PPG Auto Glass, which we expect to close in our fourth quarter.

We had indicated in the second quarter that our guidance did not include the potential impact of these anticipated significant events, which had a combined impact on continuing operations of $0.03 per share.

The third quarter earnings per share reconciliation between the current earnings of $0.26 per share from continuing operations and the $0.36 per share earned in the prior year period is the architectural segment core operations were up $0.01 per share a very high performance last year.

The installation business write-down negatively impacted the quarter $0.14. The large scale optical segment added $0.04 per share. The joint venture impairment charge negatively impacted the quarter, $0.11. Lower tax rate added $0.09 including $0.08 from the research and development net tax benefit. And finally, lower interest expense from lower average debt improved the earnings by a $0.01.

Discontinued operations had earnings of $0.12 per share versus a loss of $0.01 per share in the prior year period. This brings third quarter's net earnings to $0.38 per share versus $0.35 per share in the prior year period.

Conclusion of the sale of the non-strategic recreational vehicle and bus windshield business resulted in a pre-tax gain of $6 million. With the sale done, we can now complete the final phase of converting the Auto Glass facility to support the architectural glass business to help meet our strong demand for architectural glass products.

I'd also like to comment on the plant sale over a 34% interest in the PPG Auto Glass joint venture to PPG Industries. Of all these results in a charge to earnings, it represents the Apogee's best option to complete our exit from this business.

This is the final step in our strategic repositioning of the company out of Auto Glass to focus on opportunities in a more profitable architectural and picture framing businesses. The sale will be a significant positive cash event when it closes, which is expected to be in our fourth quarter. Cash proceeds from the sale are expected to be approximately $25 million.

Moving to the architectural segment performance for the quarter on 4% revenue growth, operating income was $7.7 million down 43% from a year ago, including the impact of installation project write-downs of $6.5 million. The reported operating margin was 4.1% compared to 7.4% in the prior year period.

When you exclude the installation charges, operating margin for the quarter would have been 7.5% largely consistent with expectations. We're experiencing good productivity and margin improvement in our architectural glass and window businesses.

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

Our Large-Scale Optical segment and picture framing business had another very strong quarter with operating margins of 20.8%. The popularity of our best value added framing glass products continues to grow with product mix to passing our expectations.

Long-term debt declined to $20.6 million from $24.3 million at the end of the second quarter and $35.4 million at year end. Earnings along with payments received from the sale of the RV and bus business contributed to the decline in long-term debt.

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

I'll turn to our outlook for fiscal 2008. We remain optimistic about fiscal 2008 and confident in the longer term growth potential of our businesses. With our strong backlog, it was high commitment in bidding activity, combined with ongoing momentum in the non-residential construction market benefiting from the growing green energy efficiency trend. We remain confident in our ability to achieve our longer-term objectives of 8% annual revenue growth and 20% average earnings growth through fiscal 2010.

For fiscal 2008, we are now expecting earnings from continued operations to range from a $1.40 to $1.50 per share on revenue growth of 11% to 13%. Previous earnings per share guidance range were $1.43 to $1.53 per share.

Our guidance has been adjusted to reflect the $0.03 per share in net difference between the PPG Auto Glass impairment charge and the research and development net tax benefits.

For the full-year, the strength of our businesses and markets should allow us to offset the installation write-downs recognized in the third quarter.

Turning to the segment outlook, our full-year architectural segment operating margin guidance has been reduced slightly to 6.4% to 6.8% due to the installation job write-downs somewhat offset by better performance in the rest of the segment.

Our outlook for the current year includes the negative full-year impact of approximately 0.8 percentage point for the installation project write-downs and 0.3 percentage point for the first quarter one-time startup cost for the new architectural glass facility.

Adjusted for these impacts, our operating margin for the full-year would exceed the prior peak operating margin of 7%. Adjusted for write-downs, we entered the fourth quarter positioned to deliver this.

We ended the quarter with a very strong architectural segment backlog of $456.7 million, up from $389.5 million from prior the year period and $405.4 million at the end of the second quarter.

Maintaining our backlog at high levels will allow us to meet our long-term growth goals, where sequential quarterly growth is not required.

Approximately a $160 million or 35% of backlog is expected to be delivered in fiscal 2008. $228 million or 50% in fiscal 2009 and $69 million or 15% is scheduled for fiscal 2010 providing good visibility into upcoming fiscal years.

It's a positive that backlog remains nicely balanced across the nonresidential segments. 35% to 40% of our backlog is in the office market, which had the most growth in the quarter. Approximately 35% of backlog is in the institutional sector, which includes education, healthcare and government building, 15% to 20% of condominiums and 5% to 10% of entertainment and the hotel projects.

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

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

I'm going to briefly cover cash flow for the full year fiscal 2008. We're estimating the EBITDA earnings before interest, taxes, depreciation and amortization from continuing operations of $84 million to $88 million. We estimate net cash provided by continuing operations of $65 million to $75 million for the year.

Capital expenditures are projected to be approximately $60 million. Fiscal 2008 strategic investments include completing a number of architectural glass expansions currently underway, adding picture framing glass coating capacity and spending on productivity improvements and expansions in our window business.

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

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

Thanks, Russ?

Russ Huffer

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Cox from Piper Jaffray. Please proceed.

Michael Cox - Piper Jaffray

Good morning.

Russ Huffer

Good morning, Mike.

Michael Cox - Piper Jaffray

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

Jim Porter

Yeah, we feel that these were isolated to a Project Manager and a General Manager in that area, it was tied, I think it's important to understand, it's not tied to a geographic event, it's tied to the people that were involved and we do feel that it’s very much isolated and we have worked very hard to make sure that we've looked at the balance of projects that were in this region, we'd look at the balance of projects through out the company, so we do not expect this to be a repeat.

Michael Cox - Piper Jaffray

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

Russ Huffer

Well, I think the condo markets, the condo markets are function of a lot for us, there are few large projects, so that does come and go, so right now it’s down, I think, it’s probably reflecting some of the market but it could be more of just the number of projects that are showing up in our backlog right now. So, I wouldn't, we've always been careful to advise people that condominium work for us is not the same as the sort of the boom and bust work that was going on in the marketplace.

The office side, simply I think what we've seen simply reflects a very positive marketplace, where our absorption is still continuing to exceed certain place, new square footage put in place and the demand for the space is fundamentally there. It's a positive reason for this space being put in place. So that's it, Jim, if you want to add.

Jim Porter

You know, Mike, I will just add a little bit of color to that and just, I mean, compared to where we started the year in terms from a year end perspective on a dollar basis, we basically are pretty much where we were in the high end condo factor. So, I think, we've seen that sustain itself. We have seen faster growth in terms of dollar level in the office sector associated with it.

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

Michael Cox - Piper Jaffray

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

Jim Porter

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

Michael Cox - Piper Jaffray

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

Jim Porter

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

Michael Cox - Piper Jaffray

Okay, great thank you very much.

Operator

Our next question comes from Robert Kelly from Sidoti. Please proceed.

Robert Kelly - Sidoti

Good afternoon. Thanks for taking my call.

Jim Porter

Thank you, Bob.

Robert Kelly - Sidoti

Just maybe a follow-up on the write-down, is it completely written down, is there chance for further write-down or on the foresight further, some sort of recovery for Q4?

Jim Porter

Well basically this reflects, I mean these three projects really the write-down is associated with having to capture our complete estimated cost to complete these projects. So really our view and our analysis, the detail analysis of these projects are that, our estimate is that the write-down that we have taken captured the full costs associated with them.

There is always the opportunity that we have some great success executing them and how it could be done for less than we've estimated, with just belief the visibility that we have in terms of what is just required to complete these projects.

Robert Kelly - Sidoti

And then, just as far as what you've changed, people and process lines to kind of prevent from happening again. I get the people part. What are you doing as far as process, could you give us a little more information on that?

Russ Huffer

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

Robert Kelly - Sidoti

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

Jim Porter

Yeah. I think that majority of the backlog is really growing, kind of, in terms of timeframe. So there is -- probably a third, I think we may have the growth in the backlog actually relates to fiscal '10. So it's really, the growth in that future look of business.

We have seen, I think, Russ mentioned that our St. George facility is operating a little bit ahead of schedule. So we've opened up some slight capacity in this fiscal year, but we haven't changed our outlook of revenue for this fiscal year. And the growth has really come and filling in more, fiscals '09s and '10s.

Russ Huffer

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

Robert Kelly - Sidoti

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

Jim Porter

Very low.

Robert Kelly - Sidoti

Is there any historical number you can give us?

Russ Huffer

It's less than five. It's what we've seen before.

Jim Porter

Yeah. I mean in the last talk when we really saw the market drop rapidly in a short time period, as Russ said, we had less than a handful of cancellations.

Russ Huffer

Right.

Jim Porter

I recall that we've seen about three over the last two quarter and a couple of those were projects that had uncertainty for several months that's as due to the…

Russ Huffer

And they probably -- they would have gone by the wayside no matter what, I mean, we kind of anticipated that in any kind of market people were just trying to do too much without the backing.

Robert Kelly - Sidoti

Okay, thank you. Have a good day.

Operator

Our next question comes from Steve Denault from Northland Securities. Please proceed.

Steve Denault - Northland Securities

Good morning, everybody.

Russ Huffer

Good morning.

Jim Porter

Good morning, Steve.

Steve Denault - Northland Securities

I'm hoping you can elaborate a little bit more in terms of what does the outsourcing mean in terms of filling up internal capacity? What does selling the windshield business mean in terms of incremental capacity or does it relate to Viracon and being in a sold though nature?

Jim Porter

Right. We have completed the sale of the RV and bus windshield business that has now opened up that facility completely. We had partially converted it before, I think, as we previously discussed, it is now being a 100% converted that process would be complete shortly up to the start of the new calendar year and we'll see it continue to ramp up.

So that is a very, that is going to help us leverage the balance, what we've done and so we've added capacities where we had constraints that leverages the balance of the non-constrained equipment in our Utah facility to grow that business significantly, that combined with St. George and other process improvement and now outsourcing.

We've previously stated we thought we could, those three things would give us up to a $100 million in new capacity we think we can now exceed that, so that's what we are focused on it at Viracon.

Russ Huffer

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

Steve Denault - Northland Securities

Okay. There is the phenomenon in terms of inherently energy efficient architectural glass capturing share over that of flat glass has been ongoing with growing awareness of our green initiatives and energy price is where they are at. Has there been any acceleration in that adoption?

Russ Huffer

We can only address that from sort of conversations anecdotally and just doing the activity in the inquiries. There is no question in our mind that its happening, the last firm number, getting firm numbers on that there it takes some time. There is quite a lag on that specifically.

But we know, I mean, we know from activity from what we see, our competitors, what's going on throughout the industry that this conversion is continuing to accelerate and we are also seeing green and certified green buildings starting to permeate the whole marketplace that, and when that happens that drives, that's going to be the bigger driver of the use of these products.

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

And in terms of, in terms of metrics I mean, really the only external metric that there would be --there are some data out there in terms of buildings that are either applying for these certification or actually receiving the certification, which than ties it back to green buildings and we are continuing to see explosive growth in the rate of that happening and you will see some activity with American Institute of Architecture. They have referenced this to surveys they've done in terms of how energy efficiency is influencing the designs that are coming out of the architect.

And so those are the external things and then from an internal perspective, as we've talked -- I mean we just continue to see energy efficiency as something that's an upfront discussion that really worked to our favor.

Jim Porter

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

Steve Denault - Northland Securities

Did you Utah contribute positively or negatively in the quarter?

Jim Porter

I think in the quarter it was pretty much neutral.

Steve Denault - Northland Securities

Okay. Should it be a positive contributor next quarter?

Jim Porter

Yes.

Steve Denault - Northland Securities

Where does that end in terms of capacity?

Russ Huffer

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

Steve Denault - Northland Securities

Okay, thank you.

Operator

Our next question comes from Tyson Bauer from Wealth Monitors. Please proceed.

Tyson Bauer - Wealth Monitors

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

Russ Huffer

We started -- the completion will be in the next -- we think the completions will all be in the next 60 to 90 days. These projects started less than a year ago. We started seeing things at that the end of our first quarter that gave us -- showed up as some adjustments and some slight expansion of timelines to complete, not abnormal but we're concerned. At the end of the second quarter, we saw that again. And then that's when we begin to make the -- manage the reporting and changes and investigations.

And where we are with the projects? What makes them so expensive? It's not that it was bad bidding or project selection. It is all about execution. And where we're at today, the cost to meet the needs and the expectations of the customer is very high to do it in a constrained timeframe.

So we're working very had to make sure that we maintain our reputation of delivering quality to our customers in a timely manner and we're executing to do that. And that's driving the cost. So these clearly were issues associated with the, sort of, the details that go into making a quality building. And so today, we're taking care of those details and it's not carte blanche replacement of materials. It is taking care of those, but it's very costly to do so.

Jim Porter

Right. And two of the projects were office buildings and one is the healthcare facility.

Tyson Bauer - Wealth Monitors

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

Russ Huffer

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

Tyson Bauer - Wealth Monitors

Did any of those regions act autonomously or what is that chain of command for protocols for checks and balances.

Russ Huffer

Sure and we have clearly addressed that as well and we'll continue to do so. Right now, our emphasis is on correcting this situation and we've taken immediate actions in these specific individuals, we will continue to evaluate what we need to do broadly.

Tyson Bauer - Wealth Monitors

Okay, couple of other quick type or topics. One, President signed the energy bill here recently, there was some great language on energy efficient building materials and government and commercial buildings, any specific provisions that you've been able to glean that would directly benefit to your business?

Russ Huffer

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

Tyson Bauer - Wealth Monitors

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

Jim Porter

Yeah. It is in our institutional sector and we have benefited from that substantially. We continued to be a leading provider of glass, metal and installation services to that institutional sector, which is in some instances and some regions led by hospitals. Hospitals in Florida are generally hospitals that are hurricane and they are great projects, we are seeing several projects in the Baltimore, Washington, D.C. area. Clearly the government has some major work it's going on and others. And then, throughout the United States, so, it's not unique, but clearly a robust market. And being driven again by economics, the economics that a newer hospital is simply more cost effective in the delivery of healthcare and with the demographic changes, the baby boomers, the demand for these services just appears to be a sustainable market.

Russ Huffer

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

Tyson Bauer - Wealth Monitors

That sounds wonderful. Thanks a lot, gentlemen.

Russ Huffer

Thank you.

Operator

(Operator instruction) Our next question comes from Richard Nelson from [Jay Cullen Securities]. Please proceed.

Richard Nelson - Jay Cullen Securities

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

Jim Porter

Yeah, it really does and it's a kind of amassed in that is really driven. We are going to see a continued growth of our architectural glass business, and basically we are not anticipating growing our installation business, window business or it'd be pretty nominal, pretty low levels of growth in our picture framing business.

Richard Nelson - Jay Cullen Securities

Okay, thanks a lot.

Operator

Our next question comes from Stan Westhoff from [Walt Hausen & Co]. Please proceed.

Stan Westhoff - Walt Hausen & Co

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

Jim Porter

We'll give that in just a second, maybe if you have any other questions and then we'll come back to it.

Stan Westhoff - Walt Hausen & Co

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

Jim Porter

Well, no effect on the backlog. I mean the timing of the project would have been in the backlog last quarter as well. I think the key point there is that one of the key uncertainties we have in this business is just the timing of activity on a construction project are determined by our customer.

And so, we try to really point out there overtime on any given quarter, it's not uncommon for us to see a range of $5 million to $15 million of revenue that just kind of moves from quarter-to-quarter based on timing of projects.

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

Stan Westhoff - Walt Hausen & Co

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

Jim Porter

Yeah. I think it's about little over $260 million of new orders in the quarter.

Stan Westhoff - Walt Hausen & Co

$260 million?

Jim Porter

Yes.

Stan Westhoff - Walt Hausen & Co

Okay. That's all I have, guys. Thank you very much.

Jim Porter

Okay.

Operator

Our next question comes from Brian Levison from Private Fund Management. Please proceed.

Brian Levison - Private Fund Management

Good morning. Thanks for taking my questions.

Russ Huffer

Good morning.

Brian Levison - Private Fund Management

I am sorry to belabor this and I also apologize if I just missed it in the prepared remarks, but what was the actual breakdown of the $6.5 million of the write-off?

Jim Porter

In terms of components or -- you mean there…

Brian Levison - Private Fund Management

How much for were the breakdowns?

Russ Huffer

Most of the $6.5 million -- most of the cost will be for labor.

Brian Levison - Private Fund Management

It is, okay. So this is your estimate of incremental labor?

Jim Porter

Yes. To complete the projects.

Russ Huffer

Right. To complete this projects within a timeline.

Brian Levison - Private Fund Management

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

Jim Porter

About $2 million.

Russ Huffer

Yeah. It’s estimated to be about $2 million.

Brian Levison - Private Fund Management

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

Russ Huffer

About $2 million.

Brian Levison - Private Fund Management

Okay. So are you going to have roughly $4 million of just AR and retainages. Is any of that potentially subject to a back-charge or some kind of liquidated damages provision in a contract?

Jim Porter

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

Brian Levison - Private Fund Management

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

Russ Huffer

Yeah, it's the growth plus replacement of the sales, I mean, that's basically the number.

Brian Levison - Private Fund Management

Okay. And so was that $69 million in for 2010 were all booked to this quarter?

Jim Porter

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

Brian Levison - Private Fund Management

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

Jim Porter

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

Brian Levison - Private Fund Management

New bookings relative to 2009.

Jim Porter

That's probably right, yeah.

Brian Levison - Private Fund Management

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

Jim Porter

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

Our commitment levels, combined with our backlog are the basis of our projections. So, when you talk about bidding activities and the way we described those bidding activities is sort of the level of activity associated with biddings, which is as high as it's ever been.

So, bidding activity is quite strong and very active, commitments are very strong, just like our backlog and the combination of those gives us the ability to say to you that we can, we are turning orders away today in glass fabrication and we do not expect that to change through the next twelve to fifteen months.

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

Brian Levison - Private Fund Management

And I appreciate that. And I guess, what I am trying to do is attach some numbers to it. When I look back at, you ended your fiscal year of 2007 with almost $316 million of backlog that was indicated to work-off in fiscal 2008. At the end of Q3 of this year we’re at 228, do you anticipate adding say $200 million of work to backlog in the fourth quarter to get you through ’09?

Russ Huffer

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

Jim Porter

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

Brian Levison - Private Fund Management

And I apologize if I’m just being dense about this and appreciate your I guess humor, but it’s -- you are going to work off a $160 million of backlog in the fourth quarter of this year and so I am really focused more on the portion for 2009 that when I look at -- when I look at what you can add to backlog now that will affect 2009. The window is kind of closing no pun intended, but the fourth quarter is a major quarter of ads for your backlog for ’09, just given the timeline or lifecycle of when you did a project to when it actually breaks ground and then you are on size.

Russ Huffer

Let me break it down just a little bit to help you with understanding the numbers. The glass fabrication business backlog generally runs from 10 to 16 weeks. And it's a very significant piece of the overall backlog. So it turns over every quarter, so to speak. It's only the installation and the engineered curtainwall business that has these long tails to it that show up in the backlog.

So I appreciate what you are trying to do, and in fact, I would try to do the same if I were you. It's just a little more complicated because of the way the backlog turns.

Brian Levison - Private Fund Management

Okay. No. I understand that, the Harmon side of the business.

Russ Huffer

Right.

Brian Levison - Private Fund Management

Is longer lead time and that you do have a significant -- it's not really a walk-in business, but short of backlog. The last question I have is just about your billing in excess of cost numbers, I was wondering what that was in the third quarter?

Jim Porter

Well, we don't have to take that one out.

Russ Huffer

Right.

Brian Levison - Private Fund Management

Okay. Did it go up versus the second quarter?

Russ Huffer

Just a moment. We're still…

Jim Porter

Sure. I am trying to find my notes too.

Russ Huffer

Do you have last...

Brian Levison - Private Fund Management

Well just follow-up.

Jim Porter

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

Brian Levison - Private Fund Management

Okay. I think that we're now at a point of where you had roughly a $189 million of architectural sales. I am guessing that the mix of Harmon to the total architectural was roughly consistent with the second quarter, which was what 39% I think.

And if you get that as kind of a day sales number, you're now at 45 days on a billing in excess a cost number relative to your only percentage of completion portion of the business, I’m just wondering when I look back three quarters ago, it was 19.7 million and 24 days, two quarters ago it was 26 million and 32 days and this last quarter it was 30.5 million and 35 days.

Now it's almost 45 days, that's a pretty significant portion of revenue that's now built ahead of when you are going to install it. So, I’m just wondering what accounts for it and what kind of margins implied in that and what kind of effect that's going to have on your profitability if the customer doesn't agree to all of the things that you build ahead for.

Russ Huffer

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

Brian Levison - Private Fund Management

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

And so, I am just wondering, it does increase the cash cycle and I understand that and it's what you want to see but I am just wondering how, when does it stop happening and when and eventually it's going to come around to, say impact the P&L.

Jim Porter

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

Brian Levison - Private Fund Management

Okay. It's just that, you say that you have done X percentage of the job and that the project manager approves. In the field, the project manager will approve it and send it to his or her home office and then the bank will then approve withdrawal request despite material not being installed or material not or labor or material not being completed. Even the withdrawal request is incidental?

Russ Huffer

I can't speak to our customers processes.

Brian Levison - Private Fund Management

Okay. Well, I guess, what is the...

Jim Porter

Well, I can't speak to, it’s that our process is that it has been an approach that has effectively accelerated the cash cycle for our business.

Brian Levison - Private Fund Management

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

Jim Porter

Yeah.

Brian Levison - Private Fund Management

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

Jim Porter

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

Brian Levison - Private Fund Management

And there is no difference in terms of the recognition of that margin through the P&L for a percentage of completion?

Jim Porter

That's correct.

Brian Levison - Private Fund Management

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

Russ Huffer

Okay, you're welcome.

Operator

Our last question comes from [Joseph Rial from Breaker Book Capital]. Please proceed.

Joseph Rial - Breaker Book Capital

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

Russ Huffer

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

Joseph Rial - Breaker Book Capital

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

Russ Huffer

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

Joseph Rial - Breaker Book Capital

Okay. Thanks very much.

Russ Huffer

You're welcome.

Operator

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

Russ Huffer

All right. You know our business has remained strong and despite our third quarter execution setback in the installation business, we are executing on our strategies and our overall business is improving and our key architectural markets are strong as reflected in our sustained high levels of backlog and commitment. We're excited about the opportunities for Apogee in fiscal 2008 and beyond. Thank you.

Operator

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

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