Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended August 27, 2016; year-to-date figures cover the six months ended that date. Comparisons are with the corresponding prior-year periods. Apogee designs, fabricates and installs architectural glass, glazing systems and framing, and produces large-scale optical glass and acrylic products.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $278.5 million, up 15.7% | $526.3 million, up 9.5% |
| Gross profit / margin | $72.5 million / 26.0% (23.6% prior year) | $137.0 million / 26.0% (23.4% prior year) |
| Operating income / margin | $33.0 million / 11.9% (9.4% prior year) | $59.3 million / 11.2% (8.5% prior year) |
| Net earnings | $22.4 million, versus $14.8 million | $40.1 million, versus $26.9 million |
| Diluted EPS | $0.77, versus $0.50 | $1.39, versus $0.91 |
| Operating cash flow | Not stated separately | $41.2 million, versus $62.1 million |
- Management attributed architectural-segment growth to stronger non-residential construction markets, volume, pricing and mix; six-month Services growth also reflected project timing.
- Gross-margin improvement reflected productivity, pricing and mix, and higher volume in the three architectural segments. SG&A increased in dollars but was 14.2% of quarterly sales, unchanged year over year, and 14.8% year to date versus 14.9%.
- The effective tax rate was 32.9% for the quarter and 33.1% year to date, down from 34.2% and 34.1%, respectively, mainly due to timing of the federal research and development tax credit.
Segments
- Architectural Glass: Quarterly sales rose 7.3% and operating margin improved to 9.7% from 7.3%. Six-month sales declined 0.5%; Brazilian weakness and lower export/international sales partly offset domestic gains.
- Architectural Services: Quarterly sales rose 48.9% and six-month sales 30.3%, primarily due to project timing. Margins improved to 8.0% for the quarter and 6.7% year to date, from 2.7% and 2.2%.
- Architectural Framing Systems: Sales rose 14.3% for the quarter and 13.6% year to date; margins improved to 14.1% and 13.4%, respectively, with volume, mix, operating leverage and lower material costs contributing.
- Large-Scale Optical: Sales declined 5.2% for the quarter and 3.2% year to date; margins fell to 23.7% and 23.5%, respectively, due to lower volume and growth investments.
Liquidity, debt and commitments
- At August 27, cash and cash equivalents were $47.0 million; short-term available-for-sale securities were $30.7 million and restricted cash was $16.9 million. The company reported $94.6 million in cash, securities and restricted cash.
- Six-month operating cash flow declined by $20.9 million year over year, which management attributed to increased working-capital investment, partly offset by improved operating results. Capital expenditures were $31.5 million, versus $19.4 million.
- Long-term debt was $20.4 million, consisting of industrial revenue bonds; there were no borrowings under the $125 million revolving facility. The company reported $101.5 million available under that facility and compliance with its financial covenants. Letters of credit of $23.5 million reduce facility availability.
- Fiscal 2017 capital expenditures were expected to be approximately $70 million, primarily for expanded product capabilities and manufacturing productivity. The company paid $7.1 million in dividends during the first half ($0.25 per share).
- Purchase obligations for raw materials and capital expenditures totaled $161.8 million. Operating lease commitments totaled $36.8 million. Performance bonds had a face value of $322.9 million, covering $125.4 million of backlog; the company said it had not made payments on bonds for its current businesses.
Outlook, risks and unusual items
- Fiscal 2017 guidance: revenue growth of approximately 10% over fiscal 2016; gross margin of approximately 26.5%; operating margin of approximately 11.3%; diluted EPS of $2.80–$2.90; and capital expenditures of approximately $70 million.
- Backlog was $447.7 million at quarter-end, down from $508.0 million at fiscal year-end and $511.9 million a year earlier. Management cited inconsistent timing of committed Architectural Services projects and noted that short-lead-time book-and-ship sales are generally excluded. It expected approximately 63% of backlog to be recognized in the remainder of fiscal 2017 and 37% in fiscal 2018.
- Brazilian economic conditions continued to weigh on Architectural Glass. Construction-project disputes, warranty claims and other ordinary-course litigation remain potential exposures; management did not expect current proceedings to materially affect results, cash flows or financial condition. The filing reported no material changes to previously disclosed risk factors.
- In June 2016, the company entered a New Markets Tax Credit transaction tied to an Architectural Glass plant-and-equipment project. It restricted $16.9 million for project investment over the next 12 months. The transaction is subject to 100% tax-credit recapture for seven years; the $6.0 million contribution is recorded in other non-current liabilities, with earnings recognition expected in fiscal 2024 if the tax benefits are delivered without recapture risk and the performance obligation is relieved.
- Warranty reserves were $15.9 million at period-end. Unrecognized tax-benefit liabilities were approximately $5.2 million, with about $0.6 million expected to lapse within 12 months. Management stated that available liquidity should be adequate for working capital, planned capital expenditures and dividends over the next 12 months.
Most important facts for investors to verify
- Whether fiscal 2017 revenue, margin and EPS guidance is achieved, particularly as Services results depend on project timing.
- Whether the Architectural Services backlog stabilizes and converts to revenue as expected, and how much growth comes from book-and-ship work outside backlog.
- Whether working-capital needs and planned capital spending constrain cash generation or facility availability.
- Whether continued Brazilian weakness or LSO volume and investment trends affect consolidated margins.
- Progress on the oversized-glass project and the New Markets Tax Credit transaction, including restricted cash, recapture conditions and future recognition.
- Potential exposure from purchase commitments, performance bonds, letters of credit, warranties and legal claims.