Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2023 second quarter and first six months, ended August 27, 2022; comparisons are to the periods ended August 28, 2021. The filing was signed September 29, 2022. The company designs, manufactures, and installs glass and aluminum products and services through four reporting segments.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $372.1 million, up 14.2% | $728.7 million, up 11.8% |
| Gross profit / margin | $84.9 million / 22.8% | $170.6 million / 23.4% |
| Operating income / margin | $32.1 million / 8.6% | $65.3 million / 9.0% |
| Net earnings | $37.4 million; diluted EPS $1.68 | $60.1 million; diluted EPS $2.66 |
| Operating cash flow | Not separately provided | $(2.6) million |
| Capital expenditures | Not separately provided | $9.3 million |
Quarterly results compare with prior-year sales of $325.8 million, gross margin of 14.7%, operating loss of $3.1 million, net loss of $2.1 million, and diluted loss per share of $0.08. First-half comparisons were sales of $651.8 million, gross margin of 17.8%, operating income of $13.0 million, and net earnings of $8.7 million.
At August 27, cash and cash equivalents were $22.1 million, with an additional $8.7 million of restricted cash. Current assets were $424.2 million and current liabilities $233.4 million. Long-term debt was $250.8 million; total shareholders’ equity was $356.7 million. The company had $235.0 million outstanding on its amended revolving credit facility and $3.8 million on Canadian revolving facilities. It was in compliance with its debt covenants.
Material changes and segment results
- Sales growth primarily reflected pricing actions to offset inflation in Architectural Framing Systems and volume growth in Architectural Services. Margin improvement also reflected prior-year restructuring benefits; prior-year second-quarter cost of sales included $18.5 million of restructuring charges.
- Architectural Framing Systems: Quarterly sales rose 26.2% to $172.9 million; operating income increased to $20.5 million from $8.4 million. Pricing, mix, and restructuring benefits supported margins.
- Architectural Services: Quarterly sales rose 10.8% to $106.7 million, but operating income fell 23.1% to $5.5 million. Management cited growth-support investments and performance write-downs on several projects. Backlog was approximately $785 million, up from $681 million at the prior quarter-end.
- Architectural Glass: Quarterly sales declined 2.5% to $77.4 million; operating income was $6.5 million versus a prior-year operating loss of $17.0 million, which included significant restructuring charges.
- Large-Scale Optical: Quarterly sales rose 6.9% to $25.2 million and operating income rose 9.3% to $6.0 million.
- The company moved Sotawall into Architectural Services to combine it with Harmon for larger curtainwall projects; comparative segment results were recast. Fiscal 2022 included $49.5 million of Sotawall intangible-asset impairment charges, recognized in that prior year.
Cash flow, outlook, and risks
First-half operating cash flow declined from $54.9 million provided in the prior-year period to $2.6 million used, which management attributed mainly to working-capital needs associated with revenue growth and inflation. Receivables and inventory increased. Financing included net debt borrowings of $87.9 million and $74.3 million of share repurchases; dividends paid were $9.6 million.
Management raised full-year adjusted diluted EPS guidance to $3.75–$4.05 from $3.50–$3.90, expects revenue growth of 8%–10%, primarily driven by Architectural Framing Systems, and continues to expect approximately $40 million of capital expenditures. Adjusted EPS is a non-GAAP measure; the company said it could not reconcile forward guidance to GAAP without unreasonable effort.
Quarterly net earnings benefited from a $13.7 million tax benefit related to deductions, including a worthless-stock loss deduction, associated with the company’s investment in Sotawall. Management expects liquidity to be adequate and anticipates continued covenant compliance. Key exposures include inflation, project execution and write-downs, construction-related claims, warranty and product-liability matters, and performance under fixed-price contracts. Outstanding surety and performance bonds totaled $1.1 billion, including $361.1 million in backlog; the company reported no prior payments on bonds for its existing businesses. Management said pending litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported earnings and EPS growth is attributable to the $13.7 million tax benefit, and how does that compare with the adjusted EPS outlook?
- Whether working-capital investment and negative operating cash flow moderate as growth continues.
- Whether Architectural Services project write-downs persist and whether its growing backlog converts to profitable revenue.
- How pricing, inflation, and restructuring benefits affect margins, particularly in Architectural Framing Systems and Architectural Glass.
- Debt levels, interest costs, covenant headroom, and capacity remaining under the $385 million revolver after borrowings and letters of credit.
- Whether the $1.1 billion of outstanding bonds, purchase commitments, warranty reserves, and project-related contingencies create material cash or earnings exposure.