Apogee Enterprises, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended February 25, 2023 (52 weeks). Although the request metadata refers to 2022 Q4, this filing reports the full fiscal year, with comparative results for fiscal 2022 and fiscal 2021.
Business context
Apogee designs, fabricates and installs architectural glass and aluminum building systems, and manufactures specialty glazing products. Its four segments are Architectural Framing Systems, Architectural Services, Architectural Glass and Large-Scale Optical Technologies (LSO). The first three primarily serve commercial construction; LSO serves custom framing, museum and technical-glass markets. In fiscal 2023, segment shares of sales were approximately 45%, 29%, 19% and 7%, respectively.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $1,440.7 million | $1,314.0 million |
| Gross margin | 23.3% | 20.9% |
| Operating income | $125.8 million | $22.0 million |
| Net earnings | $104.1 million | $3.5 million |
| Diluted EPS | $4.64 | $0.14 |
| Cash from operations | $102.7 million | $100.5 million |
| Capital expenditures | $45.2 million | $21.8 million |
Sales increased 9.6%, driven mainly by pricing in Framing Systems, Glass and LSO, and modest volume growth in Services. Operating margin was 8.7%, versus 1.7%; net margin was 7.2%, versus 0.3%. Management reported adjusted operating income of $125.8 million, up 52%, and adjusted diluted EPS of $3.98, up 60%. These are non-GAAP measures. Fiscal 2023 GAAP earnings included a $14.8 million discrete tax benefit related primarily to a worthless-stock deduction and deferred-tax valuation allowance release; adjusted earnings exclude that benefit.
Gross-margin improvement reflected pricing that more than offset inflation in Framing Systems and Glass, along with productivity gains. Services results were affected by higher costs on legacy Sotawall projects. Fiscal 2022 comparisons were weighed down by $49.5 million of intangible impairment and $30.5 million of restructuring costs, partly offset by a $19.5 million gain on sale of a facility. Accordingly, the sharp increase in reported operating income and EPS reflects both improved operating performance and unusual prior-year charges.
By segment, Framing Systems sales rose 18.9% and operating margin improved to 12.6% from 7.0%, despite slightly lower volume and market-share losses. Services sales rose 0.8%; margin recovered to 4.4% from negative 5.4%, but legacy project costs remained a factor. Glass sales rose 2.4% and margin increased to 9.0% from 0.6%, supported by pricing and productivity. LSO sales increased 2.5% and margin reached 24.3% from 23.2%.
Cash and cash equivalents were $19.9 million at year-end. Total debt was $169.8 million, compared with $163.0 million a year earlier; interest expense rose as average borrowing and rates increased. The company had a $385 million revolving facility maturing in August 2027, with $156.0 million drawn, plus $1.8 million drawn on Canadian facilities. It reported $216.7 million of availability under the main facility and compliance with debt covenants. The company repurchased $74.3 million of shares and paid $19.7 million in dividends during FY2023.
Material changes, outlook and risks
Apogee moved the Sotawall and Harmon businesses into Architectural Services at the start of FY2023 to create a unified offering for larger curtainwall projects; prior segment comparisons were recast. The company also advanced a shift toward higher-margin offerings and a more centralized operating model. Fiscal 2023 capital expenditures increased to support the growth strategy.
For FY2024, management expects diluted EPS of $3.90–$4.25, flat to slightly declining revenue despite a 53rd week, principally reflecting expected lower Services volume. Planned capital expenditures are $50–$60 million, and management expects a long-term average tax rate of approximately 24.5%. Longer-term targets, to be achieved by FY2025, are ROIC above 12%, operating margin above 10%, and revenue growth greater than 1.2 times the non-residential construction market.
Key risks include commercial-construction cyclicality, higher interest rates and inflation, volatility or shortages in aluminum and glass, labor availability, and execution risk on fixed-price installation projects. Revenue recognition on long-term contracts depends on estimates of remaining costs and project progress; the auditor identified this as a critical audit matter. The company also flagged impairment sensitivity, particularly the EFCO trade name, whose $23.0 million carrying value had limited fair-value cushion under certain assumptions.
In December 2022, an arbitration claimant was awarded $20 million in a claim involving a former commercial sealant product. Apogee intends to appeal and stated that, considering available information and potential insurance coverage, it does not expect a material adverse effect. Warranty and project-related claims, self-insured exposures and performance bonds are additional contingencies. No goodwill or intangible impairment was recorded in FY2023; fiscal 2022 included $49.5 million of impairment. The company reported effective internal controls and received unqualified audit opinions on its financial statements and internal controls.
Important facts for investors to verify
- Whether FY2024 EPS and revenue guidance are achievable, particularly given expected lower Services volume and the 53-week calendar.
- Whether Services can improve margins as legacy Sotawall projects are completed, and whether the $726.7 million segment backlog converts on schedule; backlog is not a measure of profitability.
- How much of FY2023 earnings improvement is sustainable operating progress versus prior-year impairment and restructuring comparisons and the one-time tax benefit.
- Developments in the $20 million arbitration award, appeal and insurance recovery, along with movements in warranty reserves and project contingencies.
- Debt, interest costs, revolver availability and covenant headroom as borrowing rates and construction-market conditions change.
- Whether the assumptions supporting goodwill and intangible valuations remain sound, especially for the EFCO trade name.