Apogee Enterprises, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Second quarter and six months ended August 27, 2011; comparisons are to the periods ended August 28, 2010. Apogee designs, fabricates, installs and maintains architectural glass and building systems, and manufactures value-added glass and acrylic for picture framing. Its segments are Architectural and Large-Scale Optical Technologies (LSO). Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $165.6 | $144.7 | $318.9 | $287.7 |
| Gross profit / margin | $26.0 / 15.7% | $18.0 / 12.4% | $49.6 / 15.6% | $36.8 / 12.8% |
| Operating loss | $(2.7) | $(7.4) | $(6.1) | $(13.5) |
| Continuing-operations loss | $(1.7) | $(5.0) | $(3.9) | $(8.5) |
| Net loss | $(1.7) | $(0.1) | $(3.9) | $(3.6) |
| Basic and diluted EPS | $(0.06) | — | $(0.14) | $(0.13) |
- Cash flow: Continuing operations used $14.7 in cash during the first six months, versus $26.8 used a year earlier. The company reported positive operating cash flow in Q2, but did not provide a clear amount in the filing text. Investing activities provided $24.9, including $10.3 of sale-and-leaseback proceeds; financing activities used $6.6. Cash ended the period at $24.6.
- Balance sheet and debt: Total assets were $502.9 and shareholders’ equity was $321.9. Total debt was approximately $21.3, with no revolver borrowings. The $80.0 revolving facility expires in January 2014; $71.3 was available after letters of credit. The company reported compliance with its covenants and an adjusted debt-to-EBITDA ratio of 0.00.
- Liquidity: Cash plus short-term marketable securities totaled $29.9. An additional $25.0 of investments was restricted, principally for letters of credit and a future Utah facility investment. Non-cash working capital was $68.2, or 11.1% of trailing-12-month sales, versus 6.8% at fiscal year-end.
Material changes and segment trends
- Consolidated sales grew 14.5% in Q2 and 10.9% year to date. The GlassecViracon acquisition contributed 6.5 percentage points to Q2 growth and 5.8 points year to date; market-share gains in windows and storefronts and improved architectural-glass pricing also helped.
- Gross margin improved 3.3 percentage points in Q2 and 2.8 points year to date, principally from better glass pricing and growth/margins in window and storefront businesses. Lower-margin installation work partly offset the improvement. Prior-year results included about $2.0 of architectural-glass quality costs related to vendor-supplied material.
- Architectural: Sales rose 17.1% in Q2 to $149.1 and 12.1% year to date to $284.4. The segment still recorded operating losses of $5.1 in Q2 and $12.2 year to date, though both improved year over year. Backlog was $231.3, up from $193.0 a year earlier but down from $247.0 at the end of Q1. Management cited slow bid-to-award and contract timing; approximately $116 of backlog was expected to flow during the remainder of FY2012.
- LSO: Q2 sales declined 5.6% to $16.4, attributed to the timing of customer promotions; six-month sales rose 1.2% to $34.5. Q2 operating income fell 17.2% to $3.5, while six-month operating income rose 7.2% to $8.1.
Outlook, risks and unusual items
- FY2012 outlook: Management expected revenue growth of more than 10%, slight full-year profitability, positive operating cash flow and capital expenditures below $20. Management said Architectural markets remained highly uncertain and believed the company was near the bottom of the commercial-construction cycle. These are forward-looking expectations, not guarantees.
- Operating and liquidity risks: Management cited weak commercial construction, slow project awards and contract timing, and lower-margin installation projects. The company self-insures third-party product liability; management cautioned that material construction-project rework could materially harm results. Working-capital needs were expected to rise with Architectural growth.
- Contingencies: Performance bonds covered $113.9 of backlog and had a $313.1 face value; the company said it had never paid on bonds for its current businesses. Letters of credit totaled approximately $23.0. The company reported $2.0 of environmental liabilities and $12.3 of unrecognized tax benefits; settlement timing was not reasonably estimable. It said pending litigation was not expected to have a material adverse effect.
- Unusual items: FY2011 Q2 and six-month net results included a $4.9 non-cash gain from resolution of a tax exposure related to a discontinued foreign operation, affecting comparability. In FY2012 Q1, Apogee paid $3.0 to resolve a previously reserved discontinued-operation claim. A $10.3 equipment sale-and-leaseback generated proceeds and a deferred gain of $6.1; average annual lease payments are $1.6. The new CEO received inducement equity awards, including 155,875 restricted shares, options for 450,512 shares and 59,952 unrestricted shares.
Important facts for investors to verify
- Whether revenue growth and backlog convert into profitable, signed Architectural contracts, given slow awards and the segment’s continued operating losses.
- Whether management achieves its full-year targets for slight profitability, positive operating cash flow and capex below $20, particularly as working-capital needs rise.
- The sustainability of improved gross margins and the extent of remaining exposure to vendor quality issues, project rework, warranties and self-insured claims.
- Available liquidity after restricted investments, letters of credit and contractual commitments; also monitor debt covenants and the $71.3 stated revolver availability.
- The timing and cash impact of discontinued-operation obligations, environmental liabilities and unrecognized tax benefits.