Apogee Enterprises, Inc. — Form 10-Q Summary
Business context and period: Apogee designs, fabricates and installs architectural glass and framing systems, and makes value-added glass and acrylic products for the art market. This report covers the three months ended May 30, 2015 (fiscal 2016 first quarter), compared with the three months ended May 31, 2014.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $240.0 million | $210.9 million |
| Gross profit / margin | $55.6 million / 23.2% | $41.4 million / 19.6% |
| Operating income / margin | $18.2 million / 7.6% | $7.8 million / 3.7% |
| Net earnings | $12.1 million | $6.1 million |
| Diluted EPS | $0.41 | $0.21 |
| Operating cash flow | $20.9 million | $1.2 million |
| Capital expenditures | $8.8 million | $8.7 million |
Sales rose 13.8%. Gross margin improvement reflected volume leverage, better pricing and mix, productivity gains and lower healthcare costs. SG&A increased $3.7 million to $37.4 million, mainly from incentive compensation, commissions and business development, but declined as a share of sales to 15.6% from 15.9%. The effective tax rate was 33.9%, versus 33.4%.
Operating cash flow improved by $19.7 million, reflecting stronger earnings and less incremental working-capital investment. Investing cash outflow was $43.7 million, including $34.1 million of net marketable-security purchases; financing cash outflow was $0.4 million, including $3.2 million of dividends. Cash and cash equivalents were $28.2 million at quarter-end, down from $52.2 million at February 28, 2015, while short-term available-for-sale securities increased to $35.3 million.
Total debt was approximately $21.8 million, including $1.2 million drawn on the Canadian demand facility; no borrowings were outstanding on the $125 million committed U.S. revolving facility. Cash and short-term securities totaled $63.5 million, and reported remaining facility availability was $101.5 million. The company was in compliance with its debt covenants.
Material changes and segment trends
- Architectural Glass: Sales increased 27.1% to $101.2 million; operating income rose to $8.3 million from $2.8 million. Better U.S. volume, pricing and mix were partly offset by weaker Brazilian operations.
- Architectural Services: Sales increased 7.8% to $55.7 million; operating income was $0.9 million versus $0.2 million, with improved project activity and margins.
- Architectural Framing Systems: Sales increased 12.0% to $71.9 million; operating income rose to $5.3 million from $1.9 million, reflecting U.S. volume growth and pricing.
- Large-Scale Optical: Sales were nearly flat at $20.2 million; operating income increased 22.9% to $4.9 million, supported by product mix and productivity.
Prior-year other income included a $1.3 million final distribution related to a European business discontinued more than 15 years earlier; current-quarter other income was insignificant. Other comprehensive loss was $3.1 million, primarily from foreign-currency translation.
Total backlog was $470.8 million, up from $385.1 million a year earlier but below $490.8 million at February 28, 2015. Management attributed lower Architectural Glass backlog to increased capacity and productivity shortening customer lead times. Management expected about 66% of quarter-end backlog to be recognized during the remainder of fiscal 2016.
Outlook, risks and contingencies
Management’s fiscal 2016 expectations are revenue growth of 10%–15% over fiscal 2015, gross margin of approximately 24%, an effective tax rate of approximately 34%, diluted EPS of $2.10–$2.25, and capital expenditures of $45–$50 million. These are forward-looking estimates and actual results may differ.
Key exposures include challenging economic conditions in Brazil; construction-project disputes and claims; warranty and insurance costs; and the execution and profitability of project backlog. The filing states that currently known legal matters are not expected to have a material adverse effect. At quarter-end, purchase obligations were $131.4 million, operating lease commitments were $35.8 million, letters of credit totaled $23.5 million, and performance bonds had a face value of $290.8 million. The company reported no history of payments on performance bonds for its current businesses. It also expected $1.0 million of fiscal 2016 pension contributions.
Important facts for investors to verify
- Whether full-year sales, margin and EPS guidance remains achievable as market conditions and project execution evolve.
- Whether improved segment margins and operating cash flow persist, particularly in Architectural Services and Brazilian glass operations.
- How backlog converts to revenue and profit; backlog is not a measure of contract profitability.
- Whether planned capital spending, working-capital needs and contractual commitments remain supportable from operating cash flow and available liquidity.
- The potential timing and financial impact of construction claims, warranty costs, tax positions and other contingencies; the filing does not provide clear settlement timing for certain remaining tax and environmental liabilities.