Apogee Enterprises, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended August 29, 2015. Apogee operates four reporting segments: Architectural Glass, Architectural Services, Architectural Framing Systems, and Large-Scale Optical (LSO).
Financial performance
| Metric | Three months ended Aug. 29, 2015 | Year-over-year | Six months ended Aug. 29, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $240.8 million | +3.8% (+5.9% constant currency) | $480.7 million | +8.6% (+10.4% constant currency) |
| Gross margin | 23.6% | 21.3% prior year | 23.4% | 20.5% prior year |
| Operating income | $22.4 million | $15.5 million prior year | $40.6 million | $23.3 million prior year |
| Net earnings | $14.8 million | $16.8 million prior year | $26.9 million | $22.9 million prior year |
| Diluted EPS | $0.50 | $0.57 prior year | $0.91 | $0.78 prior year |
Quarterly operating margin was 9.4%, versus 6.7% a year earlier; six-month operating margin was 8.5%, versus 5.3%. Management attributed improved gross margins to pricing and product mix, higher U.S. volume and operating leverage, improved productivity, and lower healthcare costs. SG&A rose in dollars, mainly from incentive compensation, commissions, and IT investment, but declined as a share of sales.
Quarterly net earnings and EPS declined despite stronger operating results, principally because the prior-year quarter included an approximately $6.4 million Section 48C energy-efficiency investment tax credit. The effective tax rate was 34.2% for the current quarter and 34.1% for the six-month period; prior-year rates were unusually low because of that credit. Six-month other income also fell from $1.5 million, which had reflected a final distribution from a long-discontinued European business.
Segment performance
- Architectural Glass: Second-quarter sales rose 9.7% to $92.4 million and operating income increased to $6.7 million; U.S. pricing, mix, and volume gains were partly offset by weak Brazilian conditions. Six-month sales increased 18.1%.
- Architectural Services: Second-quarter sales fell 12.1% to $52.2 million and operating income declined to $1.4 million, reflecting project timing. Six-month sales were down 2.8%, although operating income improved to $2.4 million, partly due to better project selection and margins.
- Architectural Framing Systems: Second-quarter sales increased 5.1% to $80.7 million and operating income rose 30.2% to $9.7 million, driven by U.S. volume, pricing, mix, and productivity; Canadian weakness was a partial offset.
- LSO: Second-quarter sales rose 15.9% to $22.4 million and operating income increased 36.1% to $5.6 million, supported by value-added product sales, mix, and productivity.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $62.1 million, compared with $16.6 million in the prior-year period. Management cited increased profitability and working-capital management. Capital expenditures were $19.4 million, versus $13.3 million.
- Cash and cash equivalents were $36.2 million at August 29, 2015, down from $52.2 million at fiscal year-end. Short-term available-for-sale securities were $56.1 million; cash plus short-term securities totaled $92.3 million.
- Total debt was approximately $21.5 million, including $20.4 million of industrial revenue bonds and $0.9 million drawn on a Canadian demand facility. No borrowings were outstanding on the $125 million committed U.S. revolver. Reported availability under the facility was $101.5 million, after letters of credit.
- The company reported compliance with credit covenants: debt-to-EBITDA was 0.19 against a maximum of 3.00. The company paid $6.4 million in dividends during the six-month period and made no program repurchases in that period; it subsequently repurchased 150,000 shares for $7.3 million in September.
Backlog, outlook, and risks
Total backlog was $511.9 million at August 29, 2015, up from $490.8 million at fiscal year-end and $480.2 million a year earlier. Management expected approximately half to be recognized in fiscal 2016 and half in fiscal 2017 or later. Architectural Glass backlog declined as added capacity and productivity shortened customer lead times; a substantial portion of Architectural Services backlog related to projects expected to have activity in fiscal 2017 and beyond.
Management’s fiscal 2016 outlook was revenue growth in the high single digits, gross margin of approximately 24%, an effective tax rate of approximately 34%, diluted EPS of $2.10–$2.25, and capital expenditures of approximately $50 million.
Key exposures include project timing in Architectural Services, challenging Brazilian economic conditions, Canadian volume weakness, foreign-currency movements, and execution of planned capacity and productivity investments. Commitments included $134.8 million of purchase obligations and $36.0 million of operating lease payments. Performance bonds had a face value of $322.1 million; the company reported no historical payments on bonds for its current businesses. Management stated that pending legal matters were not expected to have a material adverse effect. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether full-year revenue, margin, tax-rate, and EPS guidance remains achievable, particularly given uneven segment trends and project timing.
- Whether backlog converts on schedule and at expected profitability, especially the large Architectural Services backlog scheduled for fiscal 2017 and later.
- Whether margin gains in U.S. businesses can offset continued weakness in Brazil and Canada and foreign-currency effects.
- How planned capital spending, purchase obligations, dividends, and subsequent share repurchases affect cash, liquidity, and investment returns.
- The effect of tax-credit comparisons and the normalization of the effective tax rate on earnings growth.