Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended November 26, 2016; comparisons are with the corresponding prior-year periods. Apogee designs, fabricates and installs glass, framing and building-envelope products, and also serves the picture-framing and display markets.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $274.1 million, up 15.0% | $800.4 million, up 11.3% |
| Gross profit / margin | $72.9 million / 26.6% | $209.8 million / 26.2% |
| Operating income / margin | $33.3 million / 12.1% | $92.6 million / 11.5% |
| Net earnings | $22.6 million | $62.7 million |
| Diluted EPS | $0.78 | $2.17 |
| Operating cash flow | Not separately presented | $70.5 million |
| Capital expenditures | Not separately presented | $44.5 million |
Quarterly net earnings increased from $18.5 million and diluted EPS from $0.63; nine-month net earnings increased from $45.4 million and diluted EPS from $1.54. Gross margin rose from 26.2% and 24.3%, respectively; operating margin rose from 11.7% and 9.5%. The nine-month effective tax rate was 32.8%, versus 33.9%.
At November 26, cash and cash equivalents were $51.6 million, available-for-sale securities totaled $41.6 million, and restricted cash was $14.9 million. Long-term debt was $20.4 million, consisting of industrial revenue bonds; no revolving-credit borrowings were outstanding. The amended revolving facility is $175 million, expandable to $275 million, and had $23.5 million of letters of credit reducing availability. The company reported compliance with its leverage and interest-coverage covenants.
Business trends and changes
- Growth was driven chiefly by volume across the three architectural segments, supported by non-residential construction demand, geographic expansion and new products. Management also cited productivity and operating leverage; foreign currency had no meaningful sales effect.
- Architectural Glass sales rose 25.2% for the quarter and 7.3% year to date; margins improved to 10.9% and 10.3%. Architectural Framing Systems sales rose 18.9% and 15.4%; margins improved to 13.0% and 13.3%.
- Architectural Services sales rose 5.1% for the quarter and 21.2% year to date, with margins of 7.6% and 7.0%; year-to-date growth benefited from project timing and improved execution.
- Large-Scale Optical sales declined 8.8% for the quarter and 5.2% year to date. Its margins fell to 26.8% and 24.6%, reflecting softer custom picture-framing demand and lower volume.
- Nine-month operating cash flow fell from $86.2 million to $70.5 million, mainly because of working-capital and tax-payment timing, partly offset by higher profitability. Investing cash use was $59.2 million; financing cash use was $20.5 million, including $10.8 million of share repurchases and $10.7 million of dividends.
Outlook, transactions and risks
Fiscal 2017 guidance, which excludes the subsequent Sotawall acquisition, was revenue growth of approximately 10% over fiscal 2016, gross margin of approximately 26.7%, operating margin of approximately 11.5%, diluted EPS of $2.85–$2.95, and capital expenditures of approximately $70 million.
On December 14, 2016, Apogee acquired substantially all assets of Toronto-based curtainwall company Sotawall for approximately $135 million: about $70 million from cash and short-term investments and $65 million from its revolving credit line. Sotawall is to be included in Architectural Framing Systems; purchase accounting was pending, and its results were to be consolidated from the acquisition date.
Other notable items include $141.7 million of raw-material and capital-expenditure purchase obligations; $35.1 million of future minimum operating-lease payments; and $327.5 million face value of performance bonds, covering $113.2 million of backlog. The company said it had never paid on performance bonds for its current businesses. Warranty reserves rose to $17.5 million from $14.6 million a year earlier. Litigation is described as ordinary-course, with no currently expected material adverse effect. A New Markets Tax Credit transaction carries a seven-year tax-credit recapture period; the $6.0 million contribution is recorded in other non-current liabilities, and related proceeds are not expected to be recognized as earnings until fiscal 2024 if conditions are met.
Management expected liquidity sources to cover working capital, planned capital spending and dividends for the next 12 months. It also cautioned that forward-looking results are subject to risks identified in its fiscal 2016 Form 10-K; the filing reports no material changes to those risk factors.
Important facts for investors to verify
- Whether full-year revenue, margin and EPS guidance remains achievable, and how the Sotawall acquisition affects results and financing; published guidance excludes the acquisition.
- Whether operating cash generation can support the elevated capital-spending plan and working-capital needs, particularly after the $65 million acquisition-related credit draw.
- Architectural Services project timing and backlog changes, and whether Architectural Framing Systems’ higher backlog converts to revenue and earnings.
- Whether weakness in Large-Scale Optical continues and whether warranty claims or project-related contingencies increase.
- Purchase accounting, integration, and any resulting debt, goodwill or intangible-asset effects from Sotawall; these were not yet reflected in the November 26 balance sheet.