Apogee Enterprises, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended September 1, 2018. Unaudited results compare with the corresponding periods ended September 2, 2017. Apogee designs, manufactures and installs architectural glass, framing, window and curtainwall systems, and produces value-added glass and acrylic products.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $362.1 million | $343.9 million | $698.7 million | $616.2 million |
| Gross profit / margin | $84.5 million / 23.3% | $86.0 million / 25.0% | $165.2 million / 23.6% | $156.3 million / 25.4% |
| Operating income / margin | $28.7 million / 7.9% | $27.8 million / 8.1% | $50.7 million / 7.2% | $51.9 million / 8.5% |
| Net earnings | $20.5 million | $17.4 million | $35.9 million | $33.5 million |
| Diluted EPS | $0.72 | $0.60 | $1.26 | $1.16 |
For the six-month period, operating cash flow was $47.9 million, versus $40.8 million. Capital expenditures were $24.2 million; management estimated full-year fiscal 2019 spending of $60–$65 million. Cash, cash equivalents and restricted cash totaled $36.0 million at period-end, including $17.9 million of restricted cash. Net cash used in investing activities was $29.8 million; financing activities used $1.3 million.
At September 1, 2018, total assets were $1.074 billion, current assets $361.2 million and current liabilities $209.2 million. Long-term debt was $224.9 million, including $203.5 million drawn on the $335 million revolving facility. The company reported compliance with its financial covenants. Letters of credit of $23.5 million reduce facility availability. The filing states that operating cash generation and borrowing capacity should adequately fund working capital, planned capital expenditures and dividends for at least 12 months.
Material changes and segment trends
- Q2 sales rose 5.3%; first-half sales rose 13.4%. First-half growth reflected EFCO, acquired in June 2017, and growth in Architectural Services; lower Architectural Glass sales partly offset gains.
- Architectural Glass was the main pressure point: Q2 sales fell 9.5% and operating margin declined to 2.0% from 10.5%. Management cited order timing, production challenges, higher labor costs, lower productivity and higher quality costs. First-half sales declined 15.4% and margin was 2.0%, versus 10.0%.
- Architectural Services delivered strong growth and execution: Q2 sales increased 63.4%, with operating margin of 10.0% versus 1.7%. Backlog was approximately $405 million at quarter-end, down from $439 million last quarter.
- Architectural Framing Systems Q2 sales were nearly flat, while operating margin improved to 9.6% from 8.8%. First-half sales grew 23.2%, largely due to EFCO, but first-half margin declined to 8.3% from 9.5%, partly reflecting EFCO’s lower margins and weaker Canadian curtainwall sales. Backlog was approximately $406 million.
- Large-Scale Optical Q2 sales were essentially flat; first-half sales rose 5.8%. First-half operating margin increased to 22.4% from 21.3%.
- Despite higher sales, consolidated gross margin declined in both periods, mainly due to Architectural Glass operating costs. Lower SG&A as a percentage of sales partly reflected prior-year acquisition costs.
Outlook, accounting and notable items
- Fiscal 2019 guidance: revenue growth of 8%–10%; GAAP operating margin of 8.3%–8.8%; diluted EPS of $3.00–$3.20; adjusted operating margin of 8.6%–9.1%; adjusted diluted EPS of $3.13–$3.33. Adjusted measures exclude $3.8 million after-tax, or $0.13 per diluted share, of amortization of short-lived acquired intangibles.
- The effective tax rate fell to 23.8% in Q2 and 23.9% for the first half, versus 33.9% and 33.4%, respectively, primarily due to the Tax Cuts and Jobs Act.
- Apogee adopted ASC 606 using the modified retrospective method. Adoption increased opening retained earnings by $3.0 million. For the first half, reported sales were $11.8 million higher and net earnings $1.8 million higher than they would have been without adoption. Contract assets increased to $76.4 million from $30.5 million at fiscal year-end, primarily due to the revenue-recognition changes.
- Management cited approximately $695.1 million of transaction price for unsatisfied performance obligations, expected to be recognized mainly within two years. Estimates on long-term contracts—including costs, progress, variable consideration and change orders—require judgment and can affect recognized revenue.
- In August, Apogee entered a New Markets Tax Credit transaction: Wells Fargo contributed $6.6 million to a project, subject to potential 100% tax-credit recapture during a seven-year period. The contribution is recorded in other non-current liabilities; related proceeds are expected to be recognized in earnings upon termination of the arrangement in fiscal 2026.
- After quarter-end, Apogee repurchased 200,000 shares for $8.3 million and increased its repurchase authorization by 2 million shares. Fiscal 2019 lease-accounting adoption is expected to add a material right-of-use asset and lease liability; management did not expect a significant impact on results of operations.
Risks, contingencies and investor items to verify
- Management reported no material changes to the risk factors in its fiscal 2018 Form 10-K. Construction-related disputes, product replacement claims, warranty costs and general liability matters remain ordinary-course exposures; management did not expect current litigation to have a material adverse effect.
- At September 1, purchase obligations totaled $183.1 million; operating lease commitments totaled $63.0 million. Surety and performance bonds covered $246.2 million of backlog and had a $538.4 million face value; the company reported no payments under existing-business bonds. No stated bond expiration dates were provided; release generally follows contract completion.
- Verify: whether Architectural Glass production and margin recover; whether Architectural Services backlog converts to revenue as expected; performance and margin contribution from EFCO; progress against fiscal 2019 guidance and capital spending; and the effect of ASC 606 contract-asset growth and long-term project estimates on cash conversion and earnings.
- Verify: revolver headroom after letters of credit, covenant compliance, and debt and interest-cost trends; exposure to warranty, bonded-contract and New Markets Tax Credit recapture obligations; and the impact of post-quarter repurchases on share count and liquidity.