Apogee Enterprises, Inc. — Q3 FY2016 10-Q
Reporting period: Quarter and nine months ended November 28, 2015; comparisons are to the corresponding prior-year periods. Apogee provides glass, architectural framing and installation services for buildings, and value-added glass and acrylic products for framing and fine art.
Financial performance
- Third quarter: Net sales were $238.3 million, down 2.5%. Gross profit was $62.4 million (26.2% margin, versus 23.2%); operating income was $27.9 million (11.7% margin, versus 8.5%); net earnings were $18.5 million versus $13.7 million. Diluted EPS was $0.63 versus $0.47.
- First nine months: Net sales were $719.0 million, up 4.6%; gross profit was $174.7 million (24.3% margin, versus 21.4%); operating income was $68.5 million (9.5% margin, versus 6.3%); net earnings were $45.4 million versus $36.6 million. Diluted EPS was $1.54 versus $1.25.
- Cash flow: Nine-month operating cash flow was $86.2 million, up from $37.1 million. Capital expenditures were $26.8 million. Investing activities used $91.4 million, including $60.8 million of net purchases of marketable securities. Cash and cash equivalents were $30.7 million at period end.
- Liquidity and debt: Cash plus short-term available-for-sale securities totaled $91.4 million. The company reported $101.5 million available under its $125 million revolving credit facility, net of letters of credit. Debt was approximately $20.8 million; no borrowings were outstanding under the committed facility. The company was in compliance with its covenants.
- Other: The nine-month effective tax rate was 33.9%, versus 19.2% a year earlier. The prior-year rate included a $6.4 million energy-efficiency tax credit; excluding it, the prior rate would have been 33.3%. Dividends paid were $9.6 million. The company repurchased $7.3 million of shares during the first nine months and bought another 225,000 shares for $9.9 million after quarter end.
Material changes and management commentary
- Quarterly sales declined amid weak Canadian and Brazilian markets and project timing that shifted some Architectural Glass and Framing revenue into fiscal 2017. Nine-month sales growth reflected stronger U.S. businesses, partly offset by weakness abroad.
- Management attributed improved gross margins to pricing and product mix, productivity and cost management, lower aluminum costs, and reduced health-care costs. Year-to-date SG&A rose due partly to incentive compensation, commissions and IT investment, but declined as a percentage of sales.
- Architectural Glass nine-month sales increased 9.8% and operating income rose to $23.4 million; quarterly sales fell 5.3%. Architectural Services quarterly sales rose 9.0%, with operating income of $3.7 million, compared with $0.3 million a year earlier; the prior period was hurt by project writedowns. Architectural Framing Systems nine-month operating income rose 42.6% to $24.2 million, despite a 5.0% quarterly sales decline. Large-Scale Optical nine-month operating income rose 13.4% to $18.1 million, while quarterly sales fell 5.2% on customer-order timing.
- Backlog was $544.7 million at November 28, up from $493.9 million a year earlier. Management expected about $167 million to be recognized in fiscal 2016 and the remaining $378 million in fiscal 2017 and beyond. Glass backlog was lower as added capacity and productivity shortened customer lead times.
Outlook, risks and contingencies
- Fiscal 2016 outlook: Management expected revenue growth over fiscal 2015 in the mid-single digits, EPS of $2.15–$2.25, and capital expenditures of $40–$45 million.
- Key disclosed operating uncertainties include weak Canadian and Brazilian markets, construction-project timing and execution, and the possibility that forward-looking expectations differ materially from actual results. The filing reported no material changes to the risk factors in the latest Form 10-K.
- Commitments included $216.1 million of purchase obligations, $33.5 million of minimum operating-lease payments, and $23.5 million of letters of credit. Performance bonds covered $112.8 million of backlog and had a face value of $289.6 million; the company said it had not had to make payments on bonds for its current businesses.
- The company reported routine construction, employment, workers’ compensation, general-liability and auto-related claims, but said available facts did not indicate a material adverse effect. It also reported $5.0 million of unrecognized tax benefits and $1.6 million of environmental liabilities; settlement timing for remaining amounts was not reasonably estimable.
Important facts for investors to verify
- Whether the fiscal 2016 revenue, EPS and capital-spending outlook was achieved, and whether project timing continued to defer revenue.
- Whether margin improvement persisted, particularly in Architectural Services, Glass and Framing, and how foreign-market weakness affected results.
- Whether backlog converted to sales on the expected schedule and with acceptable project profitability.
- How cash generation, securities investments, buybacks and capital expenditures affected liquidity and credit-facility availability.
- Whether purchase obligations, letters of credit, performance bonds, tax matters and environmental liabilities changed materially.