Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 2, 2018, the first quarter of fiscal 2019. Comparative period: three months ended June 3, 2017. Apogee designs, manufactures and installs architectural glass, framing, window and curtainwall systems, and manufactures glass and acrylic products.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $336.5 million | $272.3 million | +23.6% |
| Gross profit / margin | $80.7 million / 24.0% | $70.3 million / 25.8% | Margin down 1.8 pts |
| Operating income / margin | $22.0 million / 6.5% | $24.1 million / 8.8% | Income down 8.8% |
| Net earnings | $15.4 million | $16.1 million | Down 4.5% |
| Diluted EPS | $0.54 | $0.56 | Down 3.6% |
| Adjusted diluted EPS (non-GAAP) | $0.62 | $0.62 | Flat |
| Operating cash flow | $25.3 million | $5.9 million | Up $19.4 million |
Higher sales primarily reflected the EFCO acquisition and strong Architectural Services activity, partly offset by lower Architectural Glass sales. EFCO contributed $65.3 million of sales and break-even operating income in the quarter. Growth also included an estimated 3.4% increase from adoption of ASC 606.
Gross margin fell mainly because EFCO had lower margins and Architectural Glass had reduced volume leverage. SG&A rose to 17.5% of sales from 17.0%, partly due to EFCO. Interest expense increased to $1.9 million from $0.4 million. The effective tax rate declined to 24.1% from 32.9%, primarily reflecting the Tax Cuts and Jobs Act.
Segments
- Architectural Framing Systems: Sales rose 62.0% to $179.0 million, largely due to EFCO; operating margin fell to 6.9% from 10.8%. Backlog was about $400 million.
- Architectural Glass: Sales fell 21.3% to $76.9 million due to order timing; operating margin declined to 2.1% from 9.5% on lower volume.
- Architectural Services: Sales rose 41.0% to $70.7 million; operating margin improved to 7.3% from 1.6%, with project timing, volume leverage and strong execution cited. Backlog was about $439 million.
- Large-Scale Optical: Sales rose 11.6% to $20.8 million; operating margin increased to 24.0% from 21.8%, reflecting volume leverage and mix.
Cash, liquidity and debt
Cash and cash equivalents were $21.6 million at June 2, 2018, versus $19.4 million at fiscal year-end. Net cash used in investing was $16.2 million, including $9.3 million of capital expenditures and net purchases of marketable securities. Financing used $7.1 million; the company paid $4.4 million in dividends, or $0.1575 per share.
Long-term debt was $214.5 million, including $193.0 million outstanding on a $335.0 million revolving facility. The facility matures in November 2021; the company reported compliance with its financial covenants. Letters of credit of $23.5 million reduce facility availability. Management said operating cash generation and borrowing capacity should be adequate for working capital, planned capital spending and dividends for at least the next 12 months. Fiscal 2019 capital expenditures were expected to be $60–$65 million.
Accounting, outlook and risks
Apogee adopted ASC 606 using the modified retrospective method, recording a $3.0 million increase to opening retained earnings. The new standard shifted certain businesses from shipment-based recognition to over-time recognition. For the quarter, reported sales were $336.5 million versus $327.3 million without ASC 606, and reported net earnings were $15.4 million versus $14.0 million without it. Prior-year figures were not restated.
Management’s fiscal 2019 outlook was revenue growth of approximately 10%, operating margin of 8.9%–9.4%, diluted EPS of $3.35–$3.55, adjusted operating margin of 9.2%–9.7%, and adjusted diluted EPS of $3.48–$3.68. Adjusted guidance excludes $3.8 million after tax, or $0.13 per diluted share, of amortization of short-lived acquired backlog intangibles.
Key exposures include project timing and estimation on long-term fixed-price contracts, construction claims, warranty and rework costs, and foreign-exchange movements. Contract assets rose to $67.3 million from $30.5 million, partly because of ASC 606 and revenue recognized ahead of billings. Unsatisfied performance obligations were approximately $714.4 million. Purchase obligations totaled $186.4 million; performance bonds had a $535.0 million face value, with $238.7 million of backlog bonded. Management reported no material change to the risk factors in its latest Form 10-K and no litigation expected to materially affect results, cash flows or financial condition.
Important facts for investors to verify
- How much of reported growth and earnings reflects EFCO, ASC 606, and project timing, versus underlying organic performance.
- Whether Architectural Glass volumes and margins recover, and whether Architectural Services’ strong quarter and backlog convert to sustained results.
- Progress toward full-year margin and EPS guidance, given lower year-over-year GAAP margins in Q1.
- Working-capital conversion, particularly the increase in contract assets, and the effect of cash needs, capital spending and debt on liquidity.
- Risks and estimates in fixed-price contracts, warranty reserves, performance bonds and purchase commitments.