Apogee Enterprises, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 1, 2014 (52 weeks); comparison year ended March 2, 2013 (52 weeks). This is an annual report, not a standalone fourth-quarter filing. Dollar amounts are U.S. dollars.
Business context
Apogee supplies customized glass, aluminum framing systems, and installation services for commercial and institutional buildings, and value-added glass and acrylic for picture framing and fine art. Its four reporting segments are Architectural Glass, Architectural Services, Architectural Framing Systems, and Large-Scale Optical Technologies (LSO). Fiscal 2014 sales mix was approximately 35%, 26%, 28%, and 11%, respectively.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $771.4 million | $700.2 million |
| Gross profit / margin | $165.3 million / 21.4% | $145.7 million / 20.8% |
| Operating income / margin | $40.3 million / 5.2% | $27.4 million / 3.9% |
| Net earnings | $28.0 million | $19.1 million |
| Diluted EPS | $0.95 | $0.67 |
| Cash from operating activities | $52.9 million | $40.5 million |
| Capital expenditures | $41.9 million | $34.7 million |
- Sales rose 10.2% (8% excluding Alumicor); operating income increased 47%. Net earnings rose approximately 46%. Management attributed improved margins mainly to product mix and pricing in Architectural Glass, better project margins in Architectural Services, and productivity gains.
- Operating cash flow exceeded capital expenditures by approximately $11.1 million. Cash and cash equivalents were $28.5 million at year-end; total cash and short-term available-for-sale securities were $28.7 million.
- Outstanding debt was $20.7 million, down from $30.8 million; debt was primarily industrial revenue bonds. No revolver borrowings were outstanding, and $76.5 million was available under the $100 million credit facility. The company reported compliance with its covenants, including an adjusted debt-to-EBITDA ratio of 0.25 against a maximum of 3.00.
- Current assets were $242.8 million and current liabilities were $136.8 million. Shareholders’ equity was $352.6 million. The annual dividend was $0.37 per share, versus $0.36.
Material changes and segment results
- Architectural Glass: Sales increased 10.3% to $293.8 million; the segment moved from a $4.4 million operating loss to $3.9 million of operating income. Better mix, pricing, volume, and productivity contributed to the recovery.
- Architectural Services: Sales rose 9.0% to $203.4 million; operating results improved from a $1.0 million loss to $4.5 million of income, reflecting higher volume, improved project margins, and execution.
- Architectural Framing Systems: Sales increased 13.0% to $216.1 million, including Alumicor; operating income was $14.9 million, slightly above prior year, while margin declined to 6.9% from 7.6%. Lower window-business capacity utilization and an acquisition-related loss offset growth elsewhere.
- LSO: Sales were $81.1 million and operating income was $21.3 million, both slightly higher; margin was essentially flat at 26.2%.
- Consolidated backlog was $329.6 million, up about 11%. Management expected 95% ($314.5 million) to convert to revenue in FY2015; backlog is not a measure of contract profitability.
- In the unaudited fourth quarter, sales were $214.4 million versus $179.7 million and net earnings were $8.0 million versus $4.4 million.
Outlook, commentary, and risks
- Management forecast FY2015 revenue growth of 15%–20% over FY2014, diluted EPS of $1.35–$1.50, and capital expenditures of approximately $40 million. These are forward-looking expectations, not guarantees.
- Apogee acquired Alumicor on November 5, 2013 for $52.9 million, including cash acquired. It contributed $15.9 million of post-acquisition sales and incurred an operating loss, including approximately $0.5 million of acquisition-related expenses. Management cited Canadian market expansion and product-line growth as strategic aims.
- Growth initiatives include energy-efficient products, renovation and retrofit opportunities, geographic expansion, and continued productivity improvements. A Utah Architectural Glass facility was temporarily shut down for an expected period of approximately two years to align capacity with demand.
- Key risks include commercial construction cyclicality and project delays; fixed-price installation overruns; pricing and competition, including lower-cost imports; raw-material cost and supply volatility; capacity utilization; customer concentration in LSO; Alumicor integration and foreign-exchange exposure; product quality, warranty and self-insurance claims; and environmental compliance and remediation.
- Environmental remediation reserve was $1.5 million. Warranty and claims accrual was $12.0 million at year-end. The company disclosed routine legal and construction-related claims but said available facts did not indicate a material adverse outcome. Performance bonds covered $98.4 million of backlog, with a face value of $275.7 million; no payments had been required on the current portfolio.
- A New Markets Tax Credit transaction generated $7.8 million of cash proceeds; the arrangement is subject to seven-year recapture provisions, and the proceeds are expected to be recognized as earnings in FY2021 if conditions are met.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The audit of internal controls excluded Alumicor, which represented 10% of assets and 2% of revenue at year-end.
Important facts for investors to verify
- Whether the FY2015 revenue and EPS guidance was achieved, and how much growth came from acquisitions versus organic operations.
- Whether Architectural Glass and Architectural Services sustained their return to profitability, and whether the Framing Systems window-business capacity gap and Alumicor losses improved.
- Backlog conversion, project-level margins, and any changes in construction schedules, cancellations, or contract estimates.
- Cash conversion and working-capital trends, particularly receivables, retentions, inventories, and the ability to fund planned capital spending and dividends.
- Alumicor integration outcomes, covenant headroom, warranty/self-insurance exposure, and progress or cost changes in environmental remediation.