Business context and reporting period
Apogee Enterprises, Inc. filed this Form 10-Q for the second quarter of fiscal 2015, the three months ended August 30, 2014, and the six months then ended. The company operates in Architectural Glass, Architectural Services, Architectural Framing Systems, and Large-Scale Optical (LSO). Results include Alumicor, acquired in November 2013.
Financial performance and position
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding prior-year periods unless noted.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $231.9; +30.1% | $442.8; +23.8% |
| Gross profit / margin | $49.3 / 21.3% (21.6%) | $90.8 / 20.5% (21.0%) |
| Operating income / margin | $15.5 / 6.7% ($9.4 / 5.2%) | $23.3 / 5.3% ($15.5 / 4.4%) |
| Net earnings | $16.8 ($6.1); diluted EPS $0.57 ($0.21) | $22.9 ($10.3); diluted EPS $0.78 ($0.35) |
| Operating cash flow | Not reported separately | $16.6 ($12.3) |
- Organic sales growth, excluding Alumicor, was 22.5% in the quarter and 17.2% year to date.
- Cash and cash equivalents were $24.6 at August 30, 2014, versus $28.5 at March 1, 2014. Current assets were $261.1 and current liabilities $137.2.
- Capital expenditures were $13.3 for the first half. Cash used in investing was $7.2; financing activities used $13.7, including $6.9 of share repurchases and $6.0 of dividends.
- Total debt was approximately $21.5, including $20.4 of industrial revenue bonds and $0.8 outstanding on a Canadian demand facility. No borrowings were outstanding on the $100 million committed revolving facility; reported availability was $76.5, after letters of credit.
- Backlog was $480.2 at August 30, versus $304.2 a year earlier. Management expected about $285.3, or 59%, to be recognized in the remainder of fiscal 2015.
Material changes and management commentary
- Sales increased across the architectural businesses, reflecting stronger volume and project activity; Alumicor contributed additional sales. Architectural Services returned to operating profit, and Architectural Glass improved on higher volume and pricing.
- Architectural Framing Systems sales rose substantially, including the Alumicor contribution, but margins declined as aluminum costs increased and Canadian markets remained soft. LSO operating income fell 22% in the quarter and 19% year to date, affected by product mix, retailer purchasing timing, and increased research and development investment.
- Consolidated gross margin declined slightly in both comparison periods. Management cited lower relative sales contribution from higher-margin LSO, higher aluminum costs, Canadian softness, health care costs, and ramp-up costs; stronger Architectural Glass pricing and improved Services project margins partly offset these factors.
- Quarter earnings benefited from a $6.4 million Section 48C energy-efficiency tax credit, recognized after startup and commercial production of a qualifying architectural glass coater. The quarter’s effective tax rate was negative 7.1%; excluding the credit, management reported a 34.0% rate. Six-month other income included a $1.5 million final distribution from a long-discontinued European business.
Guidance, risks, and contingencies
- Fiscal 2015 outlook: revenue growth of approximately 20% over fiscal 2014; diluted EPS of $1.62–$1.72, including the $0.22 tax credit; gross margin of 22%–23%; and capital expenditures of approximately $40 million.
- Planned capacity investments include reopening the Utah Architectural Glass facility in the fourth quarter and expanding Architectural Framing Systems finishing capacity, expected to be operational in the second quarter of fiscal 2016.
- After quarter-end, the company released security under its committed credit facility. The covenant changed to a maximum debt-to-EBITDA ratio of 2.75, effective for quarterly testing beginning in fiscal Q3 2015; management said the company would have complied at August 30.
- Liquidity demands include $102.9 million of purchase obligations, $37.0 million of operating lease commitments, and $23.5 million of letters of credit. Performance bonds covered $90.1 million of backlog and had a face value of $293.8 million. The company reported no material expected adverse effect from pending litigation.
- Key operating exposures include construction-project execution and timing, aluminum costs, Canadian market conditions, working-capital needs as sales grow, and the successful ramp-up of planned capacity. The filing says interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether fiscal 2015 sales, EPS, and gross-margin guidance is achieved, and how results compare after excluding the one-time tax credit.
- Whether the sizable backlog converts to revenue on schedule and at profitable project margins.
- Whether Architectural Glass capacity expansion and Framing Systems finishing investment meet timing, cost, and demand assumptions.
- Whether aluminum inflation and weak Canadian conditions continue to pressure Framing Systems margins, and whether LSO profitability stabilizes.
- Cash conversion and working-capital trends, including the impact of growth, capital spending, repurchases, dividends, and credit-facility availability under the revised covenant.