Business context and reporting period
Apogee Enterprises, Inc. designs, fabricates and installs products for commercial building exteriors and makes value-added glass and acrylic for custom framing. This Form 10-Q covers the third quarter and first nine months of fiscal 2015, ended November 29, 2014; comparisons are with the corresponding fiscal 2014 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $244.4m | $199.4m | $687.2m | $557.0m |
| Operating income | $20.6m | $12.7m | $43.9m | $28.2m |
| Net earnings | $13.7m | $9.7m | $36.6m | $19.9m |
| Diluted EPS | $0.47 | $0.33 | $1.25 | $0.68 |
| Gross margin | 23.2% | 21.8% | 21.4% | 21.2% |
| Operating margin | 8.5% | 6.4% | 6.3% | 5.0% |
For the nine months, operating cash flow was $37.1m, versus $42.7m a year earlier; capital expenditures were $18.7m. Cash and cash equivalents were $34.1m at quarter-end. Total assets were $592.1m and shareholders’ equity was $374.2m. Debt totaled $22.6m, including $20.4m of industrial revenue bonds and $1.9m drawn on a Canadian demand facility. No borrowings were outstanding on the committed revolving facility. The debt-to-total-capital ratio was 5.7%.
Apogee reported $34.3m of cash and short-term available-for-sale securities and $76.5m of available capacity under its then-existing credit facility. Its covenant debt-to-EBITDA ratio was 0.26 against a maximum of 2.75, and it was in compliance with its covenants.
Material changes and management commentary
- Q3 sales rose 22.6%; management reported organic growth of 17.3%, excluding Alumicor, acquired in November 2013. Nine-month sales rose 23.4%, with reported organic growth of 17.2%.
- Growth reflected stronger volume and pricing in Architectural Glass, higher U.S. framing-system volumes, increased project activity in Architectural Services, and improved value-added product mix in Large-Scale Optical (LSO). Alumicor also contributed to reported growth.
- Architectural Glass Q3 sales were $90.3m, up 23%, and operating margin improved to 6.5% from 2.2%. Architectural Framing Systems sales rose 36% to $80.4m, but margin declined to 9.4% from 9.8%, mainly due to higher aluminum costs and acquired-asset charges. Architectural Services sales rose 10% to $56.2m; margin was 0.6%, affected by write-downs on a small number of projects. LSO sales rose 13% to $25.5m and margin increased to 30.8%; nine-month operating income was slightly lower year over year.
- Gross margin improvement was driven principally by Architectural Glass volume and pricing, partly offset by project write-downs, aluminum and healthcare costs. SG&A increased in dollars but declined as a share of sales, reflecting scale as well as acquisition-related costs, incentive compensation and commissions.
- Nine-month operating cash flow declined despite higher earnings, as working capital grew to support sales and the prior-year period included proceeds from a New Markets Tax Credit transaction.
Outlook, unusual items and risks
- Management’s fiscal 2015 outlook was revenue growth of at least 20% over fiscal 2014, EPS of $1.64–$1.72 (including a non-recurring $0.22 Q2 benefit from an energy-efficiency tax credit), gross margin of approximately 22%, and capital expenditures of approximately $35m.
- The $6.4m Section 48C tax credit reduced the year-to-date effective tax rate to 19.2%, compared with 28.4% in the prior-year period. The Q3 effective tax rate was 33.0%, versus 24.4% a year earlier, when tax reserves were released.
- Backlog was $493.9m, up from $299.9m a year earlier. Management expected 37% to be recognized in the remainder of fiscal 2015, 52% in fiscal 2016 and 11% in fiscal 2017; it cautioned that backlog is not a measure of profitability or a stand-alone earnings predictor.
- After quarter-end, the revolving credit facility was amended: capacity increased from $100m to $125m, maturity extended to December 2019, and the maximum debt-to-EBITDA covenant increased to 3.00.
- Commitments included $108.8m of purchase obligations, $37.1m of future minimum operating lease payments and $23.5m of letters of credit. The company disclosed routine construction, employment, insurance and other litigation, but stated available facts did not indicate a material adverse effect. Construction project execution, aluminum costs, demand, working-capital needs and foreign currency movements remain relevant risks.
Important facts for investors to verify
- Whether the reported sales and backlog growth converts into profitable revenue, particularly in Architectural Services and the Canadian framing business.
- How much of forecast fiscal 2015 EPS depends on the one-time $0.22 tax credit and whether underlying earnings meet the stated range.
- Working-capital trends, cash generation and execution of the planned $35m capital program and capacity expansions.
- Use and availability of the amended credit facility, covenant headroom, and the demand and refinancing terms of the Canadian borrowing.
- Exposure to project write-downs, aluminum and healthcare costs, and the timing and profitability of backlog conversion.