Apogee Enterprises, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended March 4, 2017 (53 weeks), compared with fiscal 2016 (52 weeks). The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are unaudited.
Business context
Apogee designs, fabricates and installs value-added glass, aluminum framing and curtainwall systems, and makes specialty glass and acrylic products for framing and display. Its four segments are Architectural Glass, Architectural Framing Systems, Architectural Services and Large-Scale Optical Technologies (LSO). Three segments principally serve commercial construction; LSO serves framing and display markets.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $1,114.5 million | $981.2 million | +13.6% |
| Gross profit / margin | $292.0 million / 26.2% | $243.6 million / 24.8% | Margin +140 bps |
| Operating income / margin | $122.2 million / 11.0% | $97.4 million / 9.9% | Income +25% |
| Net earnings | $85.8 million | $65.3 million | +31% |
| Diluted EPS | $2.97 | $2.22 | +34% |
| Operating cash flow | $124.0 million | $128.9 million | Down $4.9 million |
| Capital expenditures | $68.1 million | $42.0 million | Up $26.0 million |
| Cash dividends per share | $0.515 | $0.455 | +13% |
Year-end cash and cash equivalents were $19.5 million; cash and short-term marketable securities totaled approximately $20.0 million. Debt was $65.4 million, including $45.0 million outstanding on the revolving facility and $20.4 million of industrial revenue bonds. Of the $175 million revolving facility, $106.5 million remained available after borrowings and letters of credit. The company reported compliance with its financial covenants. Shareholders’ equity was $470.6 million and total assets were $784.7 million.
Material changes and segment performance
- Sales growth reflected volume gains across the three architectural segments, supported by U.S. commercial construction, geographic expansion and new products. Fiscal 2017 had one additional week, and the Sotawall acquisition contributed to reported growth.
- Architectural Glass sales were $411.9 million, up 9.0%; operating margin rose to 10.8% from 9.4% on volume, pricing, mix and productivity.
- Architectural Framing Systems sales were $386.0 million, up 25.1%; margin rose to 11.6% from 10.3%. Sotawall contributed $17.8 million of sales, or approximately six percentage points of segment growth.
- Architectural Services sales were $270.9 million, up 10.2%; margin improved to 6.8% from 4.8%, attributed to volume and better project execution and selection.
- LSO sales were $89.7 million, up 1.3%; margin declined to 25.0% from 25.9% due to investment in new market opportunities.
- Fourth-quarter sales were $314.1 million versus $262.1 million; net earnings were $23.1 million versus $19.9 million, and diluted EPS was $0.80 versus $0.69.
Cash, debt and acquisition
Cash from operations declined despite higher earnings, with management citing the timing of working-capital payments. Investing cash outflow was $183.8 million, including $137.9 million for Sotawall and elevated capital spending. Apogee acquired substantially all Sotawall assets on December 14, 2016 for approximately $138 million, funded with approximately $73 million of cash and investments and $65 million of revolving borrowings. The preliminary purchase-price allocation included $91.8 million of intangible assets and $27.4 million of goodwill and remained subject to final adjustments.
Architectural Framing Systems backlog increased to $245.4 million from $123.0 million, including approximately $70 million attributable to Sotawall. Architectural Glass backlog rose to $66.4 million from $62.4 million. Architectural Services backlog fell to $255.1 million from $320.4 million. Backlog is not a measure of profitability or a complete indicator of future revenue.
Outlook, risks and unusual items
- Management’s fiscal 2018 outlook: revenue growth of approximately 10%; gross margin of approximately 28%; operating margin of approximately 12.5%; diluted EPS of $3.35–$3.55; and capital expenditures of $50–$60 million. These are forward-looking estimates, not guarantees.
- Management cited productivity, operating leverage and growth in commercial construction as drivers. It also identified opportunities in renovation and energy-efficient building upgrades.
- Key risks include construction-market cyclicality, project execution and fixed-price contract cost-estimation risk, product quality and warranty claims, labor availability, raw-glass and aluminum supply or pricing, stronger-dollar competition, and dependence on a relatively small number of LSO customers.
- Warranty reserves increased to $21.9 million from $16.3 million. The company retains substantial risk through self-insurance. It also had $1.4 million reserved for historical environmental remediation and $4.0 million of long-term unrecognized tax benefits.
- Fiscal 2017’s effective tax rate was 30.1%, down from 32.9%; management cited tax planning, a foreign tax credit and income mix. Early adoption of share-based-payment accounting guidance reduced fourth-quarter tax expense by $0.9 million.
- Fiscal 2015’s comparison includes a $6.4 million energy-efficient investment tax credit, contributing to that year’s lower 22.3% effective tax rate.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Sotawall from the internal-control assessment because of its recent acquisition; its reported share of consolidated assets was 18%.
Important facts for investors to verify
- How much of FY2017 growth and FY2018 guidance is attributable to the extra fiscal week, Sotawall, and underlying organic demand.
- Whether the enlarged Architectural Framing Systems backlog converts to revenue and acceptable margins, and whether the Architectural Services backlog decline affects future activity.
- Progress on Sotawall integration, realization of expected returns, and final purchase-price allocation; the filing’s pro forma results are unaudited and do not include synergies or integration costs.
- Whether operating cash generation improves relative to earnings as working capital and capital spending remain significant.
- Developments in warranty claims, project cost estimates, environmental remediation and tax exposures, as well as covenant headroom under the credit facility.