Apogee Enterprises, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 3, 2012 (53 weeks), compared with the 52-week fiscal year ended February 26, 2011. The filing is an annual report, not a standalone Q4 filing.
Business context
Apogee designs, fabricates and installs architectural glass, windows and building-envelope systems, and manufactures coated glass and acrylic for picture framing. Architectural Products and Services represented about 88% of FY2012 sales; Large-Scale Optical Technologies (LSO) represented about 12%. The Architectural segment includes GlassecViracon, acquired in November 2010 and operating in Brazil.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $662.5 million | $582.8 million |
| Gross profit / margin | $117.1 million / 17.7% | $83.1 million / 14.3% |
| Operating income (loss) / margin | $3.8 million / 0.6% | $(21.0) million / (3.6)% |
| Net earnings (loss) | $4.6 million | $(10.3) million |
| Diluted EPS | $0.17 | $(0.37) |
| Cash from continuing operations | $28.0 million | $(8.0) million |
- Sales increased 13.7%; management attributed the improvement to market-share gains in window and storefront businesses, better architectural-glass pricing, GlassecViracon, and the extra fiscal week. The extra week contributed an estimated 2% to sales growth.
- Architectural sales rose 15.1% to $583.9 million, but the segment still reported a $12.1 million operating loss, improved from a $37.7 million loss. Installation project margins remained a drag.
- LSO sales grew 4.1% to $78.5 million; operating income fell to $19.6 million from $20.5 million, with margin declining to 25.0% from 27.2%, reflecting sales, marketing and new-market investment.
- At year-end, cash and cash equivalents were $54.0 million; cash plus short-term marketable securities available for sale was $65.7 million. Total assets were $493.1 million, current liabilities $105.8 million and shareholders’ equity $321.2 million.
- Total debt was $21.0 million, with no revolver borrowings. The $80 million revolving facility had $66.8 million of available capacity; the company reported compliance with its covenants and a 0.00 adjusted debt-to-EBITDA ratio.
- Capital expenditures were $9.7 million. Dividends paid were $9.2 million ($0.326 per share); the board had maintained the quarterly dividend at $0.0815 per share.
Changes, outlook and management commentary
- Gross margin improved by 3.4 percentage points year over year, supported by architectural-glass pricing and stronger window/storefront results. FY2011 had included about $3.4 million of costs to address glass-quality issues, including a vendor-supplied material issue.
- Firm backlog was $243.9 million, up from $238.4 million; more than 99% was Architectural. The company expected to produce and ship $183.4 million, or 76%, of year-end backlog in FY2013. Management cautioned that backlog is not a measure of ultimate profitability.
- Management expected FY2013 revenue growth in the mid-single digits, EPS of $0.40–$0.50, and capital expenditures of approximately $25 million. It anticipated continued weak-to-slightly-contracting lag-adjusted U.S. markets, while pursuing pricing, productivity, market-share, renovation and international-growth initiatives.
- FY2012’s continuing-operations tax benefit was $1.0 million despite pretax income of $3.6 million; tax credits and the expiration of prior-year tax statutes materially affected the result. The reported effective tax rate was negative 28.8%.
Risks, contingencies and unusual items
- Commercial construction is cyclical; bid-to-award and project timing were slow, and competition, pricing pressure, financing constraints and project delays could hurt sales and margins. Management cited an approximately eight-month lag from construction starts to domestic Architectural sales.
- Installation work is often fixed-price and can incur losses from labor or material underestimates, execution issues or schedule delays. Product-quality or performance problems could generate warranty, rework, litigation and collection costs; the company self-insures substantial risk.
- The company recorded a $7.2 million warranty accrual, a $2.0 million environmental reserve for historical conditions at a Tubelite facility, and $8.9 million of unrecognized tax benefits. It also disclosed $46.5 million of purchase obligations, primarily raw materials, and $28.3 million of future operating-lease payments.
- FY2012 included $10.3 million of proceeds from equipment sale-and-leaseback transactions. A subsequent event disclosed $10 million of industrial development bonds issued after year-end for future investment in the Michigan storefront and entrance business.
- The annual goodwill impairment test found fair value more than 25% above carrying value; no impairment was recorded. Management and the independent auditor reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether the FY2013 mid-single-digit revenue and $0.40–$0.50 EPS outlook was achieved, and how much growth reflected the extra week or acquisition contribution.
- Whether Architectural operations returned to profitability, particularly installation margins and glass-fabrication pricing and utilization.
- Backlog conversion, cancellations or delays, and the profitability of the projects shipped.
- Cash conversion and working-capital needs as activity grows; management expected non-cash working capital as a share of sales to increase.
- Developments in warranty/rework exposure, the Tubelite environmental remediation, tax reserves, and the remaining discontinued-operation liabilities.
- The status and returns of planned FY2013 capital spending and international expansion, including Brazil and LSO’s European initiative.