Apogee Enterprises, Inc. — Q1 Fiscal 2020 10-Q
Reporting period: Three months ended June 1, 2019; comparisons are with the three months ended June 2, 2018, unless noted. Apogee designs and supplies glass and metal products and services for commercial buildings, with four reporting segments.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $355.4 million | $336.5 million |
| Gross profit / gross margin | $81.0 million / 22.8% | $80.7 million / 24.0% |
| Operating income / operating margin | $23.0 million / 6.5% | $22.0 million / 6.5% |
| Net earnings | $15.4 million | $15.4 million |
| Diluted EPS | $0.58 | $0.54 |
| Operating cash flow | $(9.7) million | $25.3 million |
| Capital expenditures | $11.2 million | $9.3 million |
Revenue grew 5.6%. Gross margin fell 1.2 percentage points, principally from less favorable project mix in Architectural Framing Systems; improved volume leverage in Architectural Glass partly offset the decline. SG&A fell to 16.3% of sales from 17.5%, primarily reflecting lower amortization of short-lived intangibles. Higher interest and other expense partly offset operating income growth. The effective tax rate was 24.4%, versus 24.1%.
Operating cash flow turned negative, mainly because of working-capital needs associated with legacy EFCO projects and typical seasonality. Financing cash flow included $47.5 million of net line-of-credit borrowings, $20.0 million of share repurchases, and $4.6 million of dividends. Cash, cash equivalents and restricted cash totaled $29.0 million at quarter-end, including $8.3 million of restricted cash.
Balance sheet, debt and liquidity
At June 1, 2019, total assets were $1.132 billion and shareholders’ equity was $485.0 million. Current assets were $392.8 million and current liabilities were $214.9 million. Long-term debt was $293.3 million; revolving-credit borrowings were $272.5 million, alongside $20.4 million of industrial revenue bonds and $0.4 million of Canadian debt. The $335.0 million revolving facility also supported $25.1 million of letters of credit. The company reported compliance with its financial covenants.
After quarter-end, Apogee amended and extended its financing: a $235 million revolving facility maturing in June 2024 and a $150 million term loan maturing in June 2020. Management stated that operating cash generation and borrowing capacity should be adequate for working capital, planned capital expenditures and dividends for at least the next 12 months.
Segments and material changes
- Architectural Framing Systems: Sales rose 0.8% to $180.5 million; operating income was $12.3 million and margin was 6.8%, down from 6.9%. Management cited less favorable project mix, partly offset by lower amortization. Backlog was approximately $402 million.
- Architectural Glass: Sales increased 30.4% to $100.3 million; operating income rose to $6.4 million from $1.6 million, and margin improved to 6.4% from 2.1%. Higher volume, price and mix drove results; the quarter included a 60-basis-point impact from new-initiative start-up costs.
- Architectural Services: Sales declined 7.9% to $65.1 million and operating income fell 11.3% to $4.6 million, reflecting project timing and lower volume leverage. Backlog was approximately $483 million.
- Large-Scale Optical: Sales increased 2.4% to $21.3 million, but operating income fell 16.1% to $4.2 million and margin declined to 19.6% from 24.0%, due to reduced cost leverage from production-schedule changes.
Shares outstanding declined, with 531,997 shares repurchased under the authorized program for $20.0 million. The company adopted ASC 842 lease accounting, recording operating lease assets and liabilities; adoption did not materially affect net earnings or cash flows.
Outlook, risks and contingencies
Fiscal 2020 guidance was revenue growth of 1%–3% over fiscal 2019, operating margin of 8.2%–8.6%, diluted EPS of $3.00–$3.20, and capital expenditures of $60–$65 million. These are forward-looking estimates and results may differ.
Notable exposures include a $38.0 million estimated liability for legacy EFCO project matters; $132.7 million of purchase obligations; and surety/performance bonds with a $638.9 million face value, supporting $306.3 million of bonded backlog. The company reported a securities class action alleging misleading statements concerning the EFCO acquisition and Architectural Glass, and a related derivative action that was stayed pending a motion to dismiss; Apogee said it intends to defend both. Management reported no material changes to the risk factors in its latest annual report and said other proceedings were not expected to materially affect results, cash flows or financial condition.
Important facts for investors to verify
- Whether Architectural Glass’s strong growth and margin improvement continue, and whether its new initiative’s start-up costs change.
- Whether working capital tied to legacy EFCO projects improves and operating cash flow recovers from the quarterly outflow.
- Execution of the new credit agreement, including the term-loan maturity, covenant compliance and available borrowing capacity.
- Progress and potential financial effects of the EFCO-related legal cases and the $38.0 million project liability.
- Performance against fiscal 2020 guidance, especially the gap between Q1 operating margin of 6.5% and the full-year target of 8.2%–8.6%.