Apogee Enterprises, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended August 31, 2019. The company designs and supplies glass and metal products and services for commercial building exteriors, as well as products for framing and display applications. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $357.1 | $362.1 | $712.4 | $698.7 |
| Gross profit / margin | $86.2 / 24.1% | $84.5 / 23.3% | $167.2 / 23.5% | $165.2 / 23.6% |
| Operating income / margin | $27.6 / 7.7% | $28.7 / 7.9% | $50.6 / 7.1% | $50.7 / 7.2% |
| Net earnings | $19.3 | $20.5 | $34.7 | $35.9 |
| Diluted EPS | $0.72 | $0.72 | $1.30 | $1.26 |
Quarterly sales fell 1.4%, while six-month sales rose 2.0%. Quarterly gross margin improved, largely on Architectural Glass volume leverage, but higher SG&A and interest expense contributed to lower operating income and net earnings. Six-month operating income was essentially flat year over year.
- Segments: Architectural Glass sales rose 12.5% in the quarter and operating margin increased to 6.5% from 2.0%, on higher volume, productivity, and improved price and mix. Architectural Services sales declined 19.5% and operating income fell 47.8%, reflecting expected project timing and lower-volume leverage. Architectural Framing Systems operating income declined 15.2%, mainly due to project mix. Large-Scale Optical quarterly operating income increased 9.3%; six-month income declined 4.5%.
- Cash flow: Six-month operating cash flow was $17.8 million, down from $47.9 million, primarily due to working-capital needs associated with legacy EFCO projects and other timing. Capital expenditures were $22.6 million, compared with $24.2 million.
- Liquidity and debt: Cash and cash equivalents were $13.8 million and restricted cash was $5.6 million at August 31. Total debt was $272.8 million, versus $245.8 million at fiscal year-end; $102.0 million was drawn on the revolving facility and $150 million was outstanding on a term loan. The amended revolving facility has $235 million capacity and matures in June 2024; the term loan matures in June 2020. Letters of credit of $24.7 million reduce revolver availability. The company reported compliance with its financial covenants.
- Capital returns: The company repurchased approximately 532,000 shares for $20.0 million during the first half and paid $9.2 million in dividends ($0.35 per share).
Outlook, changes, and notable matters
- Management’s FY2020 outlook was revenue growth of 1%–3% over FY2019, operating margin of 8.2%–8.6%, diluted EPS of $3.00–$3.20, and capital expenditures of $60–$65 million.
- Management said Architectural Services’ sales decline reflected expected project schedules. Architectural Glass growth and margin gains were partly offset by weakness in Services and less favorable Framing Systems project mix.
- Contract assets increased to $110.0 million from $87.5 million, primarily due to costs incurred ahead of billings on a legacy EFCO project. The company recorded a $34.2 million liability for legacy EFCO project exposures, down from $42.8 million at fiscal year-end, and is pursuing cost recoveries.
- Outstanding surety and performance bonds were $695.7 million; the company reported no payments under these bonds for existing businesses. Purchase obligations were $124.2 million. These commitments and project-related exposures merit monitoring.
- A securities class action alleges misleading statements concerning the EFCO acquisition and Architectural Glass; a related derivative suit is stayed pending a motion to dismiss. The company intends to defend both. Management said other pending proceedings were not expected to have a material adverse effect.
- Adoption of lease accounting added operating lease assets and liabilities; the company said adoption did not materially affect earnings or cash flows. Operating lease liabilities totaled $54.1 million at August 31.
- Six-month cash generation was substantially below the prior year, and the company attributed the decline mainly to working capital. Management nevertheless expected liquidity sources to cover working capital, planned capital spending, and dividends for at least the next 12 months.
Important facts for investors to verify
- Progress, cash recovery, and remaining costs on legacy EFCO projects, including the $34.2 million recorded liability and elevated contract assets.
- Whether the FY2020 EPS, margin, revenue-growth, and capital-expenditure outlook remains achievable as project timing and segment mix evolve.
- Near-term refinancing or repayment plans for the $150 million term loan maturing in June 2020, along with covenant headroom and available revolver capacity.
- Working-capital trends and operating cash flow, which declined materially year over year in the first half.
- Developments in the securities class action and derivative litigation, and any changes in related contingencies.