Yesterday, NCI Building Systems Inc. (NCS) posted third-quarter profit of 25 cents per share, which came in well above the Zacks Consensus Estimate of 2 cents. The better-than-expected earnings primarily came from the company’s cost-reduction programs implemented since November 2008.

NCI Building not only downsized 43 manufacturing facilities to 32, but also eliminated overlapping and less efficient operations. Moreover, it started utilizing more automation and lean manufacturing tools. These measures reduced cost of goods sold by 17% sequentially and 49.7% on a year-over-year basis. SG&A expenses were down by 9.2% compared to the previous quarter and 31.9% from the year-ago level.

However, quarterly earnings were significantly lower than year-ago net income of $1.63 per share due to lower sales. Quarterly sales of $238.4 million were off by 50% compared to the comparable period in 2008, driven by significantly lower sales volume in all three segments. Engineered Building Systems sales fell 55.5%, while Metal Components and Metal Coil Coatings segments reported sales declines of 44.2% and 51.2%, respectively.

With the global economic slowdown, commercial projects are either being delayed or cancelled. This is adversely impacting the company’s sales. According to a McGraw Hill report, construction activity in NCI’s primary end markets (commercial and industrial) was down almost 60% in the first seven months of 2009, compared to last year. We do not expect any substantial recovery in these markets for the next couple of quarters.

We are also extremely concerned about NCI’s liquidity position. Recently, Clayton, Dubilier & Rice Fund VIII L.P. agreed to invest $250 million in the company by buying newly issued convertible participating preferred shares. NCI said that the investment is part of a comprehensive solution to address its near-term debt repayment obligations, reduce debt by $323 million and position itself for future growth. However, completion of this transaction is subject to a number of conditions.

S&P downgraded its rating on NCI to non-investment grade of “CC” from “CCC+” as the rating agency saw this exchange as equivalent of a restructuring and default, since failure to complete the exchange on stated terms will likely result in a bankruptcy filing.

Zacks Investment Research
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