Apogee Enterprises, Inc. — Form 10-Q Summary
Business context and period: Apogee designs, manufactures, and installs glass and metal products and services through Architectural Framing Systems, Architectural Glass, Architectural Services, and Large-Scale Optical. This filing covers the third quarter and first nine months of fiscal 2024, ended November 25, 2023; comparisons are with the corresponding fiscal 2023 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $339.7, down 7.6% | $1,055.1, down 3.8% |
| Gross profit / margin | $90.3 / 26.6%, versus $86.6 / 23.5% | $278.7 / 26.4%, versus $257.2 / 23.5% |
| Operating income / margin | $37.6 / 11.1%, versus $34.8 / 9.4% | $112.0 / 10.6%, versus $100.0 / 9.1% |
| Net earnings | $27.0, up 13.5% | $83.9, essentially unchanged |
| Diluted EPS | $1.23, versus $1.07 | $3.80, versus $3.74 |
| Operating cash flow | Not reported separately for the quarter | $129.3, versus $51.1 provided |
Quarterly gross margin improvement reflected pricing, mix, lower incentive compensation, and lower insurance-related expense; lower volume and weaker project mix in Architectural Services partly offset the gains. Nine-month earnings included a $4.7 pre-tax New Markets Tax Credit settlement gain. The prior-year nine-month period included a $13.7 tax deduction and related discrete tax benefits. Excluding these items, adjusted net earnings were $80.3 versus $70.2 and adjusted diluted EPS was $3.64 versus $3.13.
Segments and business trends
- Architectural Glass: Nine-month sales rose 20.0% to $282.3 and operating income rose to $49.1 from $19.1, led by improved pricing and product mix and higher volume. This was the principal source of consolidated margin growth.
- Architectural Framing Systems: Nine-month sales fell 7.7% to $462.5 and operating income fell 12.5% to $58.0, primarily due to lower volume. Management cited slowing short-cycle demand and delays in longer-cycle project awards. Backlog was $183.9, down from $246.2 a year earlier.
- Architectural Services: Nine-month sales declined 12.8% to $272.1 and operating income declined to $8.2 from $14.4, reflecting lower project volume and less favorable project mix. Backlog was $776.5, up from $740.9 a year earlier and from $674.4 at the prior quarter-end, following several large awards.
- Large-Scale Optical: Nine-month sales declined 6.3% to $72.1 and operating income declined 11.8% to $17.3, reflecting customer destocking and slower retail demand, partly offset by mix and pricing.
Cash, debt, and liquidity
- Operating cash flow for the first nine months was $129.3, versus $51.1 in the prior-year period, primarily due to more favorable working-capital changes. Investing used $26.3, including $27.0 of capital expenditures; financing used $100.4.
- Cash and cash equivalents were $23.4 at November 25, 2023, versus $19.9 at fiscal year-end. Long-term debt was $100.7, down from $169.8. Revolver borrowings were $85.0 under the U.S. facility and $3.7 under Canadian facilities; the balance also included $12.0 of industrial revenue bonds.
- The company reported $285.0 available under the U.S. revolver and $21.3 under the Canadian facilities. It was compliant with its debt covenants. The facilities require debt-to-EBITDA below 3.25 and EBITDA-to-interest expense of at least 3.00.
- Dividends paid were $15.7 ($0.72 per share). The company repurchased $11.8 of shares in the nine-month period, compared with $74.3 in the prior year; no shares were bought under the public repurchase program during the quarter.
- Management said operating cash generation and revolving-credit capacity should meet short- and long-term liquidity and capital expenditure needs, and expected continued covenant compliance over the next fiscal year.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described continued emphasis on premium and differentiated offerings, pricing, productivity, cost improvement, and its Apogee Management System.
- Demand and project timing remain uneven: short-cycle demand slowed, longer-cycle Framing Systems awards were delayed, and Architectural Services results were affected by project completion stages and mix. Management noted that backlog is not a GAAP measure or a measure of contract profitability; shorter-lead-time work is not included.
- Outstanding surety and performance bonds totaled $1.3 billion, including $398.4 million associated with backlog. The company said it had never made payments on such bonds for its existing businesses. Purchase obligations were $45.0 million, primarily for materials and capital expenditures.
- A claimant received a $20 million arbitration award in a product-related matter in December 2022. Apogee appealed and believes, considering available information and potential insurance coverage, the award will not materially adversely affect the company. Other construction, warranty, product-liability, employment, workers’ compensation, and general-liability matters are also disclosed.
- At quarter-end, $7.8 million of supplier-finance program obligations were included in accounts payable. Management said supplier participation is voluntary and does not change Apogee’s payment terms or liquidity.
- Management reported no material changes to the risk factors in its latest Form 10-K and no material changes in market risk. Forward-looking statements remain subject to uncertainties.
Important facts for investors to verify
- Whether Architectural Glass pricing and premium-product mix can sustain the margin gains as volumes and costs evolve.
- Whether Framing Systems demand and backlog stabilize, and whether Architectural Services backlog converts to revenue and profit at expected margins.
- How much of the nine-month cash-flow improvement reflects durable operating performance versus working-capital timing.
- Debt, borrowing availability, interest-rate exposure, and covenant headroom, particularly given floating-rate borrowings.
- Developments in the appealed $20 million arbitration and the company’s warranty, project, surety-bond, and other contingent exposures.
- The effect of the prior-year tax benefit and current-year NMTC gain when assessing comparable earnings.