Apogee Enterprises, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 2, 2019 (52 weeks). Apogee designs, manufactures and installs glass and aluminum building systems and makes coated glass and acrylic for framing and display. Its four segments are Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical Technologies (LSO).
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,402.6 million | $1,326.2 million |
| Gross profit / margin | $293.6 million / 20.9% | $333.5 million / 25.1% |
| Operating income / margin | $67.3 million / 4.8% | $114.3 million / 8.6% |
| Net earnings | $45.7 million | $79.5 million |
| Diluted EPS | $1.63 | $2.76 |
| Operating cash flow | $96.4 million | $127.5 million |
| Capital expenditures | $60.7 million | $53.2 million |
| Long-term debt | $245.7 million | $215.9 million |
| Total assets / shareholders’ equity | $1,068.2 million / $496.3 million | $1,022.3 million / $511.4 million |
Cash and cash equivalents were $17.1 million, plus $12.2 million of restricted cash; marketable securities were $12.4 million. The company reported $84.9 million available under its $335 million revolving facility after outstanding borrowings and letters of credit. It was in compliance with its debt covenants at year-end. The board declared annual dividends of $0.6475 per share, up from $0.5775.
Changes and segment results
- Sales grew 5.8%, supported by a full year of EFCO in Architectural Framing Systems and strong execution in Architectural Services; Architectural Glass sales declined.
- Reported operating income fell 41%, primarily reflecting $40.9 million of project-related charges on certain EFCO-acquired contracts. Adjusted operating income was $116.3 million, down 13%; the reconciliation reports adjusted diluted EPS of $2.96, down 8%.
- Architectural Framing Systems: sales $720.8 million, up 6.4%; operating margin 6.9%, down from 8.7%, including lower-margin EFCO results and a $3.1 million intangible impairment.
- Architectural Glass: sales $367.2 million, down 4.4%; margin 4.5%, down from 8.5%, amid labor, productivity and quality costs and production ramp-up challenges.
- Architectural Services: sales $286.3 million, up 33.9%; margin 10.7%, up from 4.9%, reflecting volume leverage and strong project performance.
- LSO: sales were essentially flat at $88.5 million; margin improved to 26.0% from 24.9%, including a $1.0 million insurance recovery.
Operating cash flow declined by $31.0 million, reflecting lower earnings and working capital needs associated with the delayed project. The company repurchased 1.26 million shares for $43.3 million and paid $17.9 million in dividends during the year.
Outlook, risks and unusual items
- Management’s FY2020 outlook: revenue growth of 1%–3%; operating margin of 8.2%–8.6%; diluted EPS of $3.00–$3.20; capital expenditures of $60–$65 million; and an effective tax rate of approximately 24.5%.
- Backlog increased year over year in each architectural segment: Framing Systems $399.5 million (from $378.4 million), Architectural Glass $71.3 million (from $36.7 million), and Architectural Services $444.0 million (from $426.3 million). Backlog is not a measure of profitability or a complete indicator of future sales.
- A subsidiary’s large construction project experienced delays and significant additional costs. Project-related contingency liabilities were $42.1 million, compared with $26.4 million a year earlier. Fixed-price project estimating, execution and labor availability remain important risks.
- A purported securities class action and a related derivative action allege misleading disclosures concerning the business, particularly Architectural Glass. The company intends to defend both; it could not estimate potential losses.
- Other risks include construction-cycle exposure, aluminum and glass costs and supply, tariffs and cross-border trade, competition and imports, customer concentration in LSO, self-insured product liability, and possible goodwill or intangible impairment. Goodwill testing found no impairment, but two framing businesses had limited valuation headroom; a 120-basis-point increase in the assumed discount rate could indicate impairment.
- Fiscal 2019 included a $3.1 million impairment of an EFCO tradename and an insurance recovery in LSO. The fourth-quarter net loss included $42.6 million of project-related charges, while the annual non-GAAP reconciliation identifies $40.9 million; the filing does not clearly reconcile these amounts in the summary disclosure.
Key facts for investors to verify
- Track resolution, cost and remaining exposure of the delayed EFCO-acquired project, including the distinction between $42.6 million of fourth-quarter charges and $40.9 million in the annual reconciliation.
- Confirm progress in Architectural Glass productivity, labor availability, quality costs and conversion of its enlarged backlog into profitable sales.
- Reconcile the filing’s adjusted diluted EPS disclosures: the MD&A reconciliation gives $2.96, while the compensation discussion cites adjusted EPS of $3.01.
- Monitor debt, revolver availability, covenant headroom and the cash requirements of capital spending, dividends and repurchases.
- Assess the assumptions and valuation headroom behind the goodwill and tradename impairment tests, and follow developments in the securities and derivative lawsuits.