Apogee Enterprises, Inc. — FY2018 Form 10-K
Business context and reporting period. Apogee designs and manufactures value-added glass and aluminum building systems, provides facade installation services, and makes coated glass and acrylic for framing and display. This annual report covers the fiscal year ended March 3, 2018 (52 weeks); FY2017 had 53 weeks. Three segments serve commercial construction: Architectural Framing Systems, Architectural Glass, and Architectural Services. Large-Scale Optical Technologies (LSO) serves framing and display markets.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1,326.2 million | $1,114.5 million |
| Gross profit / margin | $333.5 million / 25.1% | $292.0 million / 26.2% |
| Operating income / margin | $114.3 million / 8.6% | $122.2 million / 11.0% |
| Net earnings | $79.5 million | $85.8 million |
| Diluted EPS | $2.76 | $2.97 |
| Operating cash flow | $127.5 million | $124.0 million |
| Capital expenditures | $53.2 million | $68.1 million |
| Long-term debt | $215.9 million | $65.4 million |
Cash and short-term marketable securities totaled $19.8 million at year-end. The company had $116.5 million available under its $335 million revolving credit facility, after borrowings and letters of credit. It reported $511.4 million of shareholders’ equity and $1,022.3 million of total assets.
Segment results
- Architectural Framing Systems: Sales rose 75.4% to $677.2 million, including $203.7 million from EFCO; operating margin fell to 8.7% from 11.6%, largely due to EFCO’s lower margins.
- Architectural Glass: Sales fell 6.7% to $384.1 million and margin declined to 8.5% from 10.8%, reflecting lower volume, pricing and project mix, plus Utah-facility closure charges.
- Architectural Services: Sales fell 21.1% to $213.8 million due to project timing; margin decreased to 4.9% from 6.8% as lower volume reduced leverage on fixed costs.
- LSO: Sales decreased 1.6% to $88.3 million; margin was 24.9%, compared with 25.0%.
Material changes versus FY2017
- Sales increased 19.0%, mainly from the June 2017 EFCO acquisition, a full year of Sotawall results, and pricing and volume gains in existing framing businesses. The prior-year comparison also includes one additional week.
- Despite higher sales, GAAP operating income fell 6.5%, net earnings fell 7.4%, and diluted EPS declined 7.1%. Gross margin contracted 110 basis points; SG&A increased to 16.5% of sales from 15.2%.
- Management’s non-GAAP adjusted operating income was $132.9 million, up 6.8%; adjusted diluted EPS was $3.23, up 6.6%. Adjustments included acquired-intangible amortization, acquisition costs and restructuring costs.
- EFCO was acquired for approximately $192 million in cash, financed primarily through the revolving facility. Net borrowings under the line increased to $195 million from $45 million. EFCO contributed $0.8 million of operating income in the period.
- The effective tax rate declined to 27.7% from 30.1%, including a $4.1 million benefit from revaluing deferred taxes under the U.S. Tax Cuts and Jobs Act. The company had not completed its analysis of certain tax-law provisions.
Outlook, risks and unusual items
- FY2019 outlook: Revenue growth of approximately 10%; operating margin of 8.8%–9.3%; diluted EPS of $3.30–$3.50; adjusted operating margin of 9.1%–9.6%; adjusted diluted EPS of $3.43–$3.63; capital expenditures of $60–$65 million; and an effective tax rate of approximately 24%. Adjusted guidance excludes the after-tax effect of $3.8 million, or $0.13 per diluted share, of specified acquired-intangible amortization.
- Management expected liquidity to be adequate for working capital, planned investment and dividends for at least 12 months. FY2019 defined-benefit pension contributions were expected to be approximately $1.0 million.
- Backlog increased in Framing Systems to $378.4 million from $245.4 million, principally due to EFCO and order activity. Services backlog rose to $426.3 million from $255.1 million; Glass backlog fell to $36.7 million from $66.4 million. Backlog is not a GAAP measure or a standalone revenue forecast.
- Key risks include commercial-construction cyclicality and project timing; competition and imports; aluminum tariffs, input-price volatility and raw-glass supply; fixed-price project execution, warranty and product-liability claims; labor availability; acquisition integration; foreign exchange; and customer concentration in LSO.
- Goodwill impairment was not indicated, but one framing business with $21.8 million of goodwill had limited valuation headroom; a 100-basis-point increase in its discount rate could indicate impairment. An acquired tradename valued at $32.4 million also had limited headroom; a 10-basis-point discount-rate increase could indicate impairment.
- The Utah glass facility closed in March 2018 and was classified as held for sale. Environmental remediation reserves were $1.3 million. The company reported routine construction and other litigation, but did not expect these matters to materially affect its financial position or results. Performance bonds covered $238.6 million of backlog and had a $519.3 million face value; no payments had been required on the company’s current portfolio.
Most important facts for investors to verify
- Whether FY2019 sales and margin guidance is achieved, particularly as the company integrates EFCO and works through lower Glass and Services volumes.
- Whether acquisition-related revenue translates into improved operating profit and cash generation; EFCO added substantial sales but comparatively little operating income in FY2018.
- Debt reduction, covenant headroom and available revolver capacity, including the effect of $23.5 million in outstanding letters of credit.
- Backlog conversion, project profitability and the assumptions underlying percentage-of-completion revenue recognition; approximately 22% of FY2018 sales used this method.
- Goodwill and tradename valuation sensitivities, warranty exposure, and the final tax accounting under the Tax Cuts and Jobs Act.
- EFCO was excluded from management’s internal-control assessment; the auditor’s unqualified control opinion likewise did not cover EFCO. Deloitte issued unqualified opinions on the consolidated financial statements and on internal control for the assessed company.