Apogee Enterprises, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended June 2, 2012; comparison period ended May 28, 2011. Amounts are in U.S. dollars. Apogee designs, manufactures, installs and services architectural glass and building systems, and produces value-added glass and acrylic products for the picture-framing market.
Financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $154.1 million | $153.3 million |
| Gross profit / margin | $31.1 million / 20.2% | $23.7 million / 15.4% |
| Operating income (loss) | $2.3 million | $(3.4) million |
| Net earnings (loss) | $1.6 million | $(2.2) million |
| Diluted earnings (loss) per share | $0.06 | $(0.08) |
| Continuing operating cash flow | $(7.6) million | $(20.5) million |
| Capital expenditures | $9.5 million | $1.6 million |
Gross margin improved by 4.8 percentage points. Selling, general and administrative expenses rose to $28.8 million from $27.1 million; management attributed the increase to higher incentive and long-term compensation expense and LSO promotional spending.
Architectural sales were $134.9 million, down 0.3%, and the segment recorded a $1.9 million operating loss, improved from a $7.1 million loss. LSO sales increased 6.7% to $19.3 million; operating income rose 13.7% to $5.3 million, with a 27.4% operating margin.
Financial position and liquidity
- Cash and cash equivalents were $23.0 million at June 2, down from $54.0 million at March 3, 2012. Cash declined by $31.1 million during the quarter.
- Cash plus short-term marketable securities available for sale totaled $43.9 million. Management reported $67.7 million available under the $80 million revolving credit facility; there were no revolver borrowings.
- Total debt was approximately $31.0 million, up from $21.0 million at fiscal year-end, including $10 million of newly issued industrial development bonds. The debt-to-total-capital ratio was 8.8%.
- Total assets were $495.6 million; shareholders’ equity was $320.9 million. Current assets were $218.2 million and current liabilities were $99.4 million.
- Investing activities used $29.8 million, including $9.5 million of capital expenditures and net purchases of marketable and restricted investments. Financing activities provided $6.3 million, including $10 million of bond proceeds; dividends paid were $2.6 million.
Changes, outlook and management commentary
- Sales were nearly flat year over year, as growth in installation, storefront and LSO products was offset by the anticipated timing gap in architectural-glass projects. Better architectural-glass pricing and product mix supported the margin recovery.
- Consolidated backlog was $269.1 million, approximately 13% above both the prior-year period and fiscal year-end. Management expected about $188 million of Architectural backlog to convert to sales during the remainder of fiscal 2013, while cautioning that backlog alone does not predict profitability.
- Fiscal 2013 guidance: overall revenue growth in the mid-single digits over fiscal 2012; earnings per share of $0.48–$0.58; capital expenditures of approximately $25 million.
- Management said current cash, revolver capacity and expected operating cash generation should fund working capital, planned capital expenditures and dividends. It expected non-cash working capital to increase in fiscal 2013 as business activity grows.
- Cash flow remained negative in the quarter, though less negative than in the prior-year quarter. Management cited seasonal incentive, insurance and tax payments, and greater pre-billing of installation projects as factors affecting the comparison.
Risks, contingencies and unusual items
- The $80 million revolving facility expires in January 2014. The company reported compliance with its covenants; its adjusted debt-to-EBITDA ratio was 0.16 versus a maximum of 2.75. Letters of credit reduce facility availability.
- Outstanding letters of credit totaled approximately $35.8 million. Performance bonds had a face value of $340.7 million, covering $101.1 million of backlog; the company reported no payments on performance bonds for its current businesses.
- Purchase obligations were $50.6 million; operating-lease commitments totaled $28.5 million. Warranty and claim accruals were $7.2 million.
- The company self-insures third-party product-liability coverage and noted that a material construction-project rework event could materially affect operating results. Construction-related disputes and other litigation were described as not expected to have a material adverse effect based on currently available facts.
- Income tax expense included an approximately $0.3 million benefit from releasing reserves following an IRS settlement for certain fiscal 2009–2011 issues. Unrecognized tax benefits were $8.6 million; environmental liabilities were $2.0 million, with settlement timing not reasonably estimable.
- The company reported no material changes to its previously disclosed risk factors and no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether the sharp gross-margin improvement is sustainable, particularly given installation work’s lower project margins and architectural-glass project timing.
- Progress converting the $269.1 million backlog into revenue and earnings, including the timing and profitability of contracted work.
- Cash generation and working-capital requirements as activity increases, alongside planned capital spending of approximately $25 million.
- Revolver availability after letters of credit, covenant headroom, and funding needs for restricted investments and debt obligations.
- Whether the fiscal 2013 revenue and EPS outlook remains achievable; the filing cautions that quarterly results are not necessarily indicative of full-year results.
- Potential changes in warranty, self-insured claims, litigation, tax reserves and environmental liabilities.