Apogee Enterprises, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended November 26, 2011; filed January 5, 2012. Amounts below are in U.S. dollars. Apogee operates Architectural Products and Services and Large-Scale Optical Technologies (LSO).
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $174.9 million | $147.2 million | $493.7 million | $434.9 million |
| Gross profit | $34.7 million | $23.1 million | $84.4 million | $59.9 million |
| Gross margin | 19.9% | 15.7% | 17.1% | 13.8% |
| Operating income (loss) | $7.2 million | $(1.8) million | $1.1 million | $(15.3) million |
| Continuing-operations earnings (loss) | $5.5 million | $(2.3) million | $1.7 million | $(10.8) million |
| Net earnings (loss) | $5.5 million | $(2.3) million | $1.7 million | $(5.9) million |
| Diluted EPS | $0.20 | $(0.08) | $0.06 | $(0.21) |
- Q3 sales rose 18.8%; nine-month sales rose 13.5%. Management attributed growth to the GlassecViracon acquisition, market-share gains in window and storefront businesses, improved architectural-glass pricing, and higher LSO sales to independent framers.
- Q3 operating results turned profitable, while nine-month operating income was only slightly positive. Architectural operating loss narrowed to $11.6 million year to date from $27.8 million; Q3 segment operating income was $0.6 million. LSO Q3 operating income was flat at $7.4 million, while nine-month income increased 3.6% to $15.6 million.
- Q3 gross-margin improvement reflected higher architectural-glass pricing and growth in windows and storefronts, partly offset by lower-margin installation work. Prior-year comparisons include a $0.9 million Q3 benefit from recoveries tied to vendor-material quality issues; prior-year nine-month results included $1.1 million of net related costs.
- Nine-month 2011 net earnings include no discontinued-operations income; the prior-year period included a $4.9 million noncash tax-related gain from discontinued operations.
Cash flow, liquidity and debt
- Continuing operating activities used $4.7 million in the first nine months, versus $25.1 million used in the prior-year period. The company reported $10.0 million of operating cash flow in Q3. Receivables and inventory growth were significant cash uses year to date.
- Investing activities provided $21.1 million, including $10.3 million from an equipment sale-leaseback and net releases of restricted investments. Capital expenditures were $6.2 million; management expected FY2012 capital expenditures below $15 million.
- Cash and cash equivalents were $25.9 million; short-term available-for-sale securities were $6.8 million. Management reported $32.8 million of cash and short-term securities available for sale and $66.8 million of remaining credit-facility availability. Restricted investments are not freely available for general use.
- Total debt was approximately $21.2 million, down from $22.4 million at fiscal year-end; no borrowings were outstanding under the $80 million revolver, which expires in January 2014. The company was in covenant compliance; its reported adjusted debt-to-EBITDA ratio was 0.00. Debt-to-total-capital was 6.2%.
- Current assets were $221.4 million and current liabilities $104.1 million. Noncash working capital was $70.9 million, equal to 11.0% of trailing 12-month sales, compared with 6.8% at fiscal year-end.
Changes, outlook and risks
- Architectural backlog was $230.7 million, up from $165.7 million a year earlier, but essentially flat sequentially. Management expected about $96 million to convert to sales in the remainder of FY2012; bid-to-award and contract timing remained slow, and approximately $60 million of awards awaited final signed contracts.
- Management’s FY2012 outlook was revenue growth of approximately 14%, EPS of at least $0.07, positive operating cash flow, and capital expenditures below $15 million. Management characterized the Architectural market as highly uncertain and believed the commercial construction cycle remained near its bottom.
- The company paid $3.0 million to resolve a claim relating to a discontinued foreign operation; the amount had been fully reserved at FY2011 year-end. Remaining discontinued-operation liabilities include construction warranty matters expected to resolve over five years.
- An equipment sale-leaseback generated $10.3 million of proceeds; a $5.9 million deferred gain was recorded, with average annual lease payments of $1.6 million. The company also recorded a $4.2 million acquisition measurement-period adjustment reducing GlassecViracon goodwill and assumed deferred tax liabilities.
- Q3 income tax expense included an approximately $1.1 million benefit from statute expirations. Unrecognized tax benefits were $9.9 million, with an expected $1.1 million reduction over the next 12 months. The company also reported $2.0 million of environmental liabilities whose settlement timing could not be estimated.
- Key exposures include weak and uncertain construction markets, slow project-award timing, lower-margin installation work, construction claims and product warranties. The company self-insures third-party product liability; management warned that a material project rework event could materially affect results. Performance bonds covered $110.7 million of backlog and had a $307.8 million face value; the company reported no payments on bonds for its current businesses.
Important facts for investors to verify
- Whether Architectural pricing, market-share gains and backlog conversion sustain the improvement in segment profitability, particularly given slow contracting and lower-margin installation work.
- Whether FY2012 guidance—especially minimum EPS of $0.07 and positive operating cash flow—was achieved, and how much of the November backlog converted to revenue.
- Working-capital and receivables trends, given year-to-date operating cash use and working capital at 11.0% of trailing sales.
- Warranty and rework exposure, including the $7.7 million warranty accrual, self-insured product liability and outstanding construction contingencies.
- Availability of liquidity after restricted cash, letters of credit and facility covenants; verify the reported $66.8 million revolver availability and $32.8 million of cash and short-term securities.
- The impact of tax benefits, the GlassecViracon measurement adjustment and sale-leaseback accounting on reported earnings and future cash obligations.