Apogee Enterprises, Inc. — Q1 Fiscal 2018 10-Q
Business context and reporting period. The filing covers the three months ended June 3, 2017, compared with the three months ended May 28, 2016. Apogee supplies value-added glass products and services through Architectural Glass, Architectural Framing Systems, Architectural Services, and Large-Scale Optical (LSO). The unaudited quarter’s results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $272.3 million | $247.9 million |
| Gross profit / margin | $70.3 million / 25.8% | $64.4 million / 26.0% |
| Operating income / margin | $24.1 million / 8.9% | $26.2 million / 10.6% |
| Net earnings | $16.1 million | $17.7 million |
| Diluted EPS | $0.56 | $0.61 |
| Operating cash flow | $5.9 million | $(0.5) million |
| Capital expenditures | $11.4 million | $17.7 million |
- Sales rose 9.9%, largely from Sotawall, acquired in December 2016, plus growth in parts of Architectural Framing Systems and U.S. mid-size Architectural Glass projects. GAAP net earnings fell about 9% and diluted EPS fell 8%.
- SG&A increased $8.0 million to $46.2 million, or 17.0% of sales versus 15.4%. The increase included $4.6 million of Sotawall expense, a $1.1 million customer-bankruptcy receivable write-off, $0.7 million of acquisition costs, and $1.6 million of other items. Adjusted net earnings were $17.9 million and adjusted diluted EPS was $0.62, excluding acquired-intangible amortization and acquisition costs.
- Segment sales and operating income: Architectural Glass $97.7 million and $9.3 million; Framing Systems $110.5 million and $12.0 million; Architectural Services $50.2 million and $0.8 million; LSO $18.6 million and $4.1 million, before intersegment eliminations and corporate costs.
Balance sheet, liquidity, and capital resources
- At June 3, 2017, cash and cash equivalents were $23.0 million, restricted cash $2.7 million, current assets $297.3 million, and total assets $779.6 million. Shareholders’ equity was $481.8 million.
- Total debt was $71.4 million, including $51.0 million outstanding on the revolving facility and $20.4 million of industrial revenue bonds. The $175 million facility matured in November 2021; $23.5 million of letters of credit reduced availability. The company reported compliance with its financial covenants.
- Operating cash flow improved by $6.4 million year over year, which management attributed primarily to working-capital payment timing. Dividends paid were $4.0 million ($0.14 per share). Management estimated FY2018 capital expenditures of about $60 million.
- Management believed operating cash generation and borrowing capacity would be adequate for working capital, planned capital spending, and dividends for at least the next 12 months.
Material developments, outlook, and risks
- EFCO acquisition: After quarter-end, Apogee acquired all of EFCO on June 12 for $192 million cash, funded through its revolving facility. The company had expanded that facility to $335 million on June 9. EFCO will be included in Architectural Framing Systems from the acquisition date; preliminary purchase accounting remained to be completed.
- FY2018 guidance, including EFCO: Revenue growth of approximately 26%–28% over FY2017; operating margin of 10.5%–11.0%; diluted EPS of $3.31–$3.51; adjusted operating margin of 11.5%–12.0%; adjusted diluted EPS of $3.65–$3.85; and capital expenditures of approximately $60 million. Adjusted guidance excludes specified acquired-intangible amortization and acquisition costs.
- Framing Systems sales grew 36.2%, mainly due to Sotawall, but margin declined to 10.8%, including acquired-intangible amortization, higher raw-material and manufacturing costs, and the customer write-off. Architectural Services sales fell 20.2% due primarily to project timing, and margin fell to 1.6% on lower volume leverage. Architectural Glass margin was affected by planned startup costs for an oversize-glass line; LSO cited weaker custom-framing demand and order timing.
- Backlog was approximately $255 million in Framing Systems and $293 million in Architectural Services, both higher than at fiscal year-end. The filing identifies $115.5 million of purchase obligations, $49.9 million of future operating lease payments, $23.5 million of letters of credit, and performance bonds with a $329.7 million face value. The company reported no material adverse outcome expected from pending litigation based on currently available information.
- Other considerations include the $22.2 million warranty reserve, $4.8 million of unrecognized tax benefits, and $1.4 million of environmental liabilities. Management reported no material changes to annual-report risk factors or market-risk disclosures. Revenue-recognition guidance was still under evaluation; one Framing Systems business representing about 10% of sales was expected to shift from point-in-time to over-time recognition.
Important facts for investors to verify
- EFCO integration, final purchase accounting, acquisition-related costs, and the effect of acquisition funding on debt, interest expense, and covenant headroom.
- Whether FY2018 guidance is achieved, including the assumptions behind revenue growth, margins, adjusted results, and $60 million of capital spending.
- Recovery in Architectural Services and the timing of projects; Framing Systems cost pressures and backlog conversion; and performance of the new oversize-glass production line.
- The impact of the customer bankruptcy write-off, working-capital timing, and the company’s substantial purchase obligations and performance-bond exposure.