Apogee Enterprises, Inc. — Q2 FY2024 Form 10-Q
Business and period: The company designs, manufactures and installs architectural glass and metal systems and also serves large-scale optical markets. This quarterly report covers the three and six months ended August 26, 2023; comparisons are with the periods ended August 27, 2022.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | First six months FY2024 | First six months FY2023 |
|---|---|---|---|---|
| Net sales | $353.7 million | $372.1 million | $715.4 million | $728.7 million |
| Gross margin | 27.0% | 22.8% | 26.3% | 23.4% |
| Operating income / margin | $40.6 million / 11.5% | $32.1 million / 8.6% | $74.3 million / 10.4% | $65.3 million / 9.0% |
| Net earnings | $33.3 million | $37.4 million | $56.9 million | $60.1 million |
| Diluted EPS | $1.52 | $1.68 | $2.57 | $2.66 |
| Adjusted diluted EPS (non-GAAP) | $1.36 | $1.06 | $2.41 | $2.06 |
- Q2 sales declined 5.0%, while gross profit rose 12.3% and operating income rose 26.4%. First-half sales declined 1.8%, while operating income increased 13.8%.
- GAAP net earnings and diluted EPS fell year over year, in part because the prior-year comparison included a $13.7 million worthless-stock deduction and related discrete tax benefits. Q2 FY2024 included a $4.7 million pre-tax gain from settling a New Markets Tax Credit transaction. Excluding the specified items, adjusted net earnings rose 25.8% in Q2 and 15.0% for the first half; these are non-GAAP measures.
- For the first six months, operating cash flow was $62.6 million, versus cash used of $2.6 million a year earlier. Capital expenditures were $15.0 million; investing cash outflow was $15.1 million. Financing cash outflow was $50.1 million, including $11.8 million of share repurchases and $10.5 million of dividends.
- At August 26, 2023, cash was $18.4 million and current assets and liabilities were $376.3 million and $224.3 million, respectively. Long-term debt was $145.7 million, down from $169.8 million at fiscal year-end. Total revolving-facility borrowings were $133.7 million; available capacity was $239.8 million on the U.S. facility and $21.3 million on the Canadian facilities. The company reported compliance with debt covenants.
Material changes and operating trends
- Architectural Glass: Q2 sales increased 21.6% and operating income rose to $17.4 million from $6.5 million, reflecting improved pricing, mix and volume, including emphasis on premium, high-performance products.
- Architectural Framing Systems: Q2 sales declined 8.1% on lower volume, while operating margin improved to 13.3% from 11.9% on mix and cost efficiencies.
- Architectural Services: Q2 sales declined 17.5% and operating income fell to $3.5 million from $5.5 million. Management attributed the decline to lower project volume and a higher mix of projects in earlier completion stages.
- Large-Scale Optical: Q2 sales declined 6.0% and operating income declined 22.2%, primarily due to customer inventory destocking and lower volume.
- Architectural Framing Systems backlog was approximately $197 million, down from $286 million a year earlier; Architectural Services backlog was approximately $674 million, down from $785 million. Management cited delayed award activity; Framing Systems’ decline also reflected a strategic shift toward projects with more attractive margins.
- Management cited productivity improvements, especially in Architectural Glass, pricing and mix initiatives, and continued implementation of its Apogee Management System. SG&A increased, mainly due to compensation-related expenses and consulting costs.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management said it expects available operating cash flow and borrowing capacity to meet short- and long-term liquidity and capital needs, and expects to remain within debt covenants over the next fiscal year.
- Key exposures include project execution and installation contingencies, product warranty and rework claims, input-cost and interest-rate fluctuations, and uncertainty around project awards and volumes. The company had $1.3 billion of surety or performance bonds outstanding, including $452.4 million associated with backlog; it reported no history of payments under bonds for its existing businesses.
- A claimant in a sealant-related arbitration was awarded $20 million in December 2022. Apogee appealed and stated it believes, considering available information and potential insurance coverage, the award will not materially adversely affect the company. The company is also involved in ordinary-course litigation.
- Purchase obligations totaled $30.4 million. A supplier financing arrangement had $4.9 million of confirmed obligations outstanding; suppliers participate voluntarily, and the company said the arrangement does not change its payment terms or liquidity.
Most important facts for investors to verify
- Whether Architectural Glass growth and margin gains can offset weaker volumes and backlog trends in Architectural Framing Systems and Architectural Services.
- How backlog converts into revenue and profit, particularly given delays in project awards and changes in project completion mix.
- Whether working-capital cash generation is sustained and how capital spending, dividends, repurchases and debt levels evolve.
- The outcome and potential insured or uninsured exposure from the appealed $20 million arbitration award, along with warranty and project-related claims.
- The reconciliation and continued comparability of the company’s non-GAAP adjusted earnings and EPS measures to GAAP results.