Apogee Enterprises, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended February 27, 2016 (52 weeks). The filing also reports fourth-quarter results; FY2016 Q4 net sales were $262.1 million and net earnings were $19.9 million.
Business context
Apogee designs, fabricates and installs glass and aluminum building-envelope products and makes specialty glass and acrylic for art and picture framing. Its four segments are Architectural Glass, Architectural Services, Architectural Framing Systems and Large-Scale Optical Technologies (LSO). U.S. commercial construction is a key demand driver.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $981.2 million | $933.9 million |
| Gross profit / margin | $243.6 million / 24.8% | $208.5 million / 22.3% |
| Operating income / margin | $97.4 million / 9.9% | $63.6 million / 6.8% |
| Net earnings | $65.3 million | $50.5 million |
| Diluted EPS | $2.22 | $1.72 |
| Operating cash flow | $124.0 million | $68.6 million |
| Capital expenditures | $42.0 million | $27.2 million |
| Cash and short-term marketable securities | $90.6 million | $52.5 million |
| Long-term debt | $20.4 million | $20.6 million |
At year-end, the company had $101.5 million available under its $125 million revolving credit facility and no revolver borrowings. Debt was 5.0% of total capital. The annual dividend was $0.455 per share; share repurchases totaled $24.9 million.
Material changes versus FY2015
- Sales rose 5.1% as reported and 7.0% on a constant-currency basis, primarily from U.S. pricing and volume growth. Operating income increased 53%.
- Gross margin expanded 250 basis points, reflecting improved pricing and mix, productivity and volume leverage. SG&A declined to 14.9% of sales from 15.5%.
- All four segments increased sales and operating income. Architectural Glass sales rose 9.0% and margin increased to 9.4% from 4.7%; Architectural Services sales rose 6.6% and margin to 4.8% from 3.2%; Architectural Framing Systems sales rose 3.4% and margin to 10.3% from 7.3%; LSO sales rose 1.0% and margin to 25.9% from 25.0%.
- Operating cash flow increased by $55.4 million, with management citing higher earnings and continued working-capital discipline. Capital spending also increased, focused on capacity and productivity.
- Backlog was $508.0 million, up 4%. Architectural Glass backlog declined to $71.8 million from $137.4 million, partly because improved capacity shortened lead times and more orders were booked and shipped within the same period.
Outlook, commentary and risks
Management forecast FY2017 revenue growth of approximately 10%, gross margin of at least 26%, operating margin of approximately 11%, diluted EPS of $2.65–$2.80 and capital expenditures of $50–$60 million. Approximately $407 million, or 80%, of year-end backlog was expected to be recognized in FY2017. These are forward-looking estimates, not guarantees.
- Management attributed FY2016 improvement to strong U.S. construction activity, pricing and mix, productivity, and better project selection and execution in Architectural Services. It identified building retrofit and renovation as a growth opportunity.
- FY2015 diluted EPS included a $6.4 million energy-efficient investment tax credit, equal to approximately $0.22 per share. Excluding that credit, management said FY2016 diluted EPS increased 48% year over year. The effective tax rate was 32.9% in FY2016 versus 22.3% reported in FY2015; FY2015’s rate excluding the credit was 32.2%.
- Key risks include the cyclical commercial-construction market, foreign-exchange movements and stronger-dollar import competition, raw-glass supply interruptions, labor availability, fixed-price project execution and cost-estimation risk, product-quality and warranty claims, and customer concentration in LSO.
- The warranty reserve increased to $16.3 million from $11.3 million. Environmental remediation liabilities were $1.6 million. The company reported routine construction-related claims and litigation, but did not expect currently known matters to materially affect its financial condition, results or cash flows.
- About 25% of consolidated sales are recognized using percentage-of-completion accounting for installation contracts, requiring estimates of project costs and completion. Management reported no goodwill impairment; the annual impairment analysis found reporting-unit fair values above carrying values.
Important facts for investors to verify
- Whether FY2017 revenue, margin and EPS guidance was achieved, and how much growth came from underlying volume, pricing and acquisitions or currency effects.
- Whether improved project margins and execution persisted, especially in Architectural Services, and whether the warranty-reserve increase signals higher future claims.
- How U.S. construction conditions, Canadian and Brazilian weakness, foreign exchange and import competition affected subsequent sales and margins.
- Whether backlog converted on schedule and profitably; backlog is not a GAAP measure or a measure of contract profitability.
- Whether planned capital investment generated the expected capacity and productivity benefits, and whether cash generation remained sufficient for investment, dividends and repurchases.
- The filing states that the financial-statement audit opinion was unqualified and internal control over financial reporting was effective as of February 27, 2016.