Apogee Enterprises, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended February 28, 2015 (52 weeks). Apogee supplies architectural glass, building-envelope installation services and aluminum framing systems, as well as value-added glass and acrylic for picture framing. Its four reporting segments are Architectural Glass, Architectural Services, Architectural Framing Systems and Large-Scale Optical Technologies (LSO).
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
| Net sales | $933.9 million | $771.4 million |
| Gross profit / margin | $208.5 million / 22.3% | $165.3 million / 21.4% |
| Operating income / margin | $63.6 million / 6.8% | $40.3 million / 5.2% |
| Net earnings | $50.5 million | $28.0 million |
| Diluted EPS | $1.72 | $0.95 |
| Cash from operations | $68.6 million | $52.9 million |
| Capital expenditures | $27.2 million | $41.9 million |
- Revenue grew 21.1%; organic growth was 16.9%, excluding the acquired Canadian storefront and entrance business. Management attributed growth principally to stronger U.S. commercial construction activity, higher volumes and improved pricing.
- Cash and cash equivalents were $52.2 million; current assets were $299.0 million and current liabilities $149.0 million at year-end. Management reported $101.5 million available under its revolving credit facility.
- Total borrowings were $20.6 million, primarily industrial revenue bonds; no borrowings were outstanding under the committed revolving facility. Debt was 5.1% of total capital. The amended facility is $125 million, expires in December 2019, and the company was in compliance with its covenants.
- Annual dividends were $0.41 per share. The company repurchased 203,509 shares for $6.9 million under its repurchase program.
Segments and changes versus FY2014
| Segment | FY2015 sales | FY2015 operating income | Reported change and context |
| Architectural Glass | $346.5 million | $16.4 million | Sales +17.9%; income rose from $3.9 million. Higher volumes and pricing helped; Utah facility restart costs and workforce expansion inefficiencies were offsets. |
| Architectural Services | $230.7 million | $7.4 million | Sales +13.4%; income rose from $4.5 million. Volume and project selection/margins improved, while manufacturing cost overruns weighed on consolidated gross margin. |
| Architectural Framing Systems | $298.4 million | $21.8 million | Sales +38.1%, or +23.7% organically excluding Alumicor; income rose from $14.9 million. Higher volume was partly offset by aluminum costs and softer Canadian markets early in the year. |
| LSO | $87.7 million | $22.0 million | Sales +8.1%; income increased slightly. Higher-value product mix helped, offset by incentive compensation and product-development investment. |
- Consolidated operating income increased 58% year over year. Gross margin expanded 0.9 percentage points, supported by volume leverage, glass pricing and productivity; SG&A declined to 15.5% of sales from 16.2%.
- FY2015 diluted EPS included an approximately $0.22-per-share benefit from a $6.4 million Section 48C energy-efficiency tax credit. Management reported adjusted EPS of $1.50 excluding the credit, up 58% from the prior year.
- Other income was $1.4 million, mainly reflecting a final distribution related to a European business discontinued more than 15 years earlier. The effective tax rate was 22.3%; excluding the 48C credit, management said it would have been 32.2%.
- Backlog was $490.8 million at year-end, up 49% from $329.6 million a year earlier. Management expected about $393.4 million, or 80%, to be recognized in FY2016; backlog is not a measure of contract profitability.
Outlook, risks and notable items
- FY2016 outlook: Revenue growth of 10%–15% over FY2015; diluted EPS of $2.05–$2.20; gross margin of approximately 24%; capital expenditures of $45–$50 million. These are forward-looking estimates, not guarantees.
- Management cited commercial construction recovery, lean-manufacturing initiatives, geographic expansion and building-facade renovation as growth opportunities. It also emphasized project selection and improved project margins in Architectural Services.
- Key risks include construction-market cyclicality and project delays; fixed-price installation contracts that can incur cost overruns; competition and pricing pressure; aluminum and other input-cost volatility; foreign-exchange exposure in Canada and Brazil; and reliance on manufacturing capacity, labor availability and product quality.
- The company retains material self-insured risk, including potential product rework and warranty claims. The year-end warranty and claims accrual was $11.3 million. A Tubelite facility has historical environmental conditions with a $1.8 million reserve.
- Other obligations and contingencies include $158.9 million of purchase obligations, $37.6 million of undiscounted operating lease payments and performance bonds supporting $76.9 million of backlog (face value $274.0 million). Management said routine legal matters were not expected to have a material adverse effect.
- The company changed inventory accounting from LIFO to FIFO in FY2015 and applied the change retrospectively; the filing says the impact on prior-period operating results and cash flows was immaterial. Goodwill impairment testing found no impairment.
Important facts for investors to verify
- Whether FY2016 revenue, EPS and gross-margin guidance was achieved, and how much of FY2015 growth was organic versus acquisition-related.
- Whether the sizable backlog converted to revenue on schedule and with acceptable margins, particularly in fixed-price Architectural Services projects.
- Whether the $6.4 million tax credit and other unusual income items affect comparability, and whether underlying earnings growth persisted without them.
- How input-cost inflation, capacity expansion, Utah restart costs and Canadian market conditions affected segment margins after year-end.
- Whether warranty, self-insurance, environmental and pension exposures remained within reserves, and whether liquidity and credit-covenant headroom remained adequate.