Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended May 30, 2020; comparable period ended June 1, 2019. Apogee designs, manufactures and installs glass and metal products for commercial buildings and produces glass and acrylic products for framing and display applications. Its four reporting segments are Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).
Financial performance
| Metric | Quarter ended May 30, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $289.1 million | $355.4 million |
| Gross profit / margin | $60.3 million / 20.8% | $81.0 million / 22.8% |
| Operating income / margin | $6.5 million / 2.2% | $23.0 million / 6.5% |
| Net earnings | $2.9 million | $15.4 million |
| Diluted EPS | $0.11 | $0.58 |
| Operating cash flow | $24.0 million | $(9.7) million |
| Capital expenditures | $8.6 million | $11.2 million |
Sales fell 18.6%. Gross margin contracted 2.0 percentage points, principally because of lower volume and COVID-19-related disruption. SG&A declined to $53.8 million from $57.9 million, but rose as a share of sales to 18.6% from 16.3% because of reduced revenue. The effective tax rate was 28.2%, versus 24.4%, primarily reflecting discrete tax expense relative to quarterly earnings. Other comprehensive loss was $6.7 million, mainly from $6.2 million of foreign-currency translation losses; total comprehensive loss was $3.8 million.
Segment results
- Architectural Framing Systems: Sales of $150.2 million, down 16.8%; operating income of $7.3 million, down 40.6%; margin 4.9%, versus 6.8%. Backlog was approximately $421 million, compared with $430 million the prior quarter.
- Architectural Glass: Sales of $76.9 million, down 23.3%; operating loss of $0.5 million versus $6.4 million income. Project delays and workforce absences disrupted production.
- Architectural Services: Sales of $63.6 million, down 2.4%; operating income of $5.3 million, up 16.8%; margin improved to 8.4% from 7.0%. Backlog was approximately $685 million, versus $660 million the prior quarter.
- LSO: Sales of $6.3 million, down 70.3%; operating loss of $3.1 million versus $4.2 million income. Retail closures led to shutdowns at both factories for most of the quarter.
Cash, debt and liquidity
Cash and cash equivalents were $11.6 million at May 30, 2020, down from $15.0 million at February 29, 2020. Operating cash flow improved by $33.7 million year over year, which management attributed primarily to working-capital management. Receivables declined to $156.3 million from $196.8 million, while inventory increased to $75.3 million from $71.1 million.
Total debt was $210.9 million, compared with $217.9 million at fiscal year-end. The balance included $40.5 million drawn on a $235 million revolving facility and a $150 million term loan due April 2021; the term-loan maturity was extended to April 2021 during April. Current debt was $155.4 million and long-term debt $55.5 million. The company was in compliance with its debt covenants. Letters of credit totaling $24.7 million reduced revolver capacity. Management said liquidity should be adequate for at least 12 months and did not expect COVID-19 to have a significant liquidity effect, while cautioning that the pandemic’s impacts remain uncertain.
Cash used in financing was $17.3 million, including net line-of-credit repayments of $7.0 million, $4.9 million of dividends ($0.1875 per share), and $4.7 million of share repurchases. Repurchases were subsequently temporarily suspended. Purchase obligations were $177.2 million; undiscounted operating lease payments were $55.9 million. The company also had $1.0 billion of surety and performance bonds outstanding, including $582.3 million in backlog; it reported no prior payments under such bonds for its existing businesses.
Material developments, outlook and risks
- COVID-19: Commercial construction delays and slower orders affected the architectural segments; job-site precautions and workforce absences constrained activity. LSO retail customer closures prompted factory shutdowns. Management reported early improvement toward quarter-end and into the second quarter, including retailer reopenings, moderating project delays and fewer absences, but could not estimate the pandemic’s overall financial impact. No specific earnings or sales guidance is provided in the filing.
- Impairment assessments: Interim tests found no goodwill or indefinite-lived intangible impairment. However, EFCO and Sotawall goodwill fair values exceeded carrying values by limited margins; a 100-basis-point increase in discount rates would put their estimated fair values below carrying values. Lower-than-forecast revenue or profitability, or sustained weaker market conditions, could trigger future impairment.
- Project contingencies: Accrued project-related contingencies were $48.1 million. After quarter-end, the company settled claims on a legacy EFCO project for the amount accrued. A replacement bond required a $25.0 million letter of credit issued outside the revolving facility.
- Other items: A $6.3 million goodwill increase and matching deferred-tax-liability increase corrected an immaterial prior-period error. A securities class action and a derivative lawsuit were dismissed, and the company considers both closed. Management reported no other legal matters expected to materially affect results, cash flows or financial condition.
Important facts for investors to verify
- Whether construction activity, customer orders, workforce availability and LSO retail demand recovered after the quarter, and the resulting effect on revenue and margins.
- Whether EFCO and Sotawall meet the forecasts underlying their goodwill valuations, given the disclosed sensitivity to discount rates and operating performance.
- The term-loan repayment or refinancing plan before its April 2021 maturity, available revolver capacity after letters of credit, and continued covenant compliance.
- Whether the recorded project contingency, warranty reserves and outstanding bonds remain adequate as claims and projects resolve.
- How working-capital performance, capital spending, dividends and the temporary suspension of share repurchases affect cash and debt through the remainder of fiscal 2021.