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Gibraltar takes its licks, retrenches

This is a rotten time to be in the construction business.

This is a rotten time to be in the auto business.

This is a really rotten time for a company like Gibraltar Industries, which gets most of its business from the construction and auto businesses.

While the Hamburg building products manufacturer and steel processor had been weathering the decline in those markets pretty well for more than two years, the bottom fell out of its markets last November.

The result: Gibraltar posted the biggest quarterly loss in its 16 years as a public company during the fourth quarter, pushing its stock down to an all-time low. In response, the company eliminated its 20-cent per share annual dividend to save $6 million, is cutting capital spending and is seeking even more ways to reduce costs and pay down its $356 million debt load.

The good news is that Gibraltar's management hasn't been sticking their heads in the sand since the housing and auto markets started to weaken in 2006. The company's aggressively been streamlining its business since September 2007, leading to the closing or consolidation of 25 facilities, mainly distribution centers, and a 28 percent reduction in a work force that now numbers around 3,000. That includes closing the company's Military Road steel processing plant and shifting that work between another facility on Walden Avenue in Cheektowaga and one in Cleveland.

"We've got that business on a much better platform than it has ever been on," says Brian J. Lipke, Gibraltar's chairman and chief executive officer.

What happens next largely depends on the economy: when people will start building homes again; when the commercial construction market rebounds, when consumers start buying cars again at anything close to their former pace.

Gibraltar executives don't know when that will happen, but they think their early response to the slowdown will help it ride out the worst of the storm and emerge from the downturn in a position to be more profitable than ever.

"Aggressive actions to streamline our operation . . . are paying off, even in depressed economic conditions," Lipke says. "This sets the stage for marked improvements in our results, when economic and end market conditions begin to improve."

It won't happen this quarter, when Gibraltar expects to lose more money, but the company could become profitable again in the second quarter, when seasonal sales volumes pick up, executives say. They believe the company can withstand a 30 percent drop in sales volume and still comply with its bond and loan covenants.

"It now looks like Gibraltar will backtrack for a while," says Vicki Bryan, an analyst at Gimme Credit, a bond market research firm that downgraded its rating of Gibraltar's bonds to "deteriorating."

Piper Jaffray & Co. analyst Michael Cox has a more upbeat view. He upgraded Gibraltar's stock to a "neutral" rating last week on the belief that "the company's healthy cash flow profile will provide support to weather through this challenging fundamental backdrop."

Cox expects Gibraltar to generate $85 million in cash this year, much of which will go toward paying down debt. That will reduce interest expenses next year, when he believes business conditions will stabilize. With Gibraltar's stock already down 60 percent since mid-December, "we believe the stock is largely pricing in a worst-case fundamental scenario," he wrote in a report.

Lipke says Gibraltar executives are taking the same approach. "We're trying to make assumptions based on very conservative, if not pessimistic outlooks," he says. "Hopefully, it won't be as bad as these projections are, but our thought is that we can't take the chance."


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