APOG

Business Context and Reporting Period

Company: Apogee Enterprises, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 25, 2006
Business Overview: Apogee is a leader in value-added glass products, services, and systems, operating through three segments: Architectural Products and Services (commercial building glass and installation), Large-Scale Optical Technologies (picture framing glass and consumer electronics coatings), and Automotive Replacement Glass and Services (aftermarket windshields and OEM glass for RVs/buses).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 10.8% year-over-year, driven primarily by volume growth in the Architectural segment due to improved commercial construction markets and the acquisition of Architectural Wall Solutions, Inc. (AWallS). The LSO segment also saw growth from a shift to higher value-added picture framing products.
• Profitability: Operating income rose 15% to $30.2 million. Gross margin improved to 18.7% from 18.4%, aided by better pricing and capacity utilization, partially offset by higher material and energy costs.
• Segment Performance:
  • Architectural: Sales up 11.5%; Operating income up to $18.4 million (3.2% margin).
  • LSO: Sales up 13.9%; Operating income surged to $15.1 million (16.9% margin) due to product mix shifts.
  • Auto Glass: Sales declined 6.5% to $31.4 million, resulting in an operating loss of $0.7 million. This decline followed the expiration of a supply agreement with PPG Industries in July 2005.
• Debt and Liquidity: Long-term debt increased by $10 million to fund capital expenditures and working capital. The company maintains a $100 million revolving credit facility with $36.8 million outstanding.

Guidance, Outlook, and Risks

Fiscal 2007 Outlook:

• Revenue: Expected to increase 5% to 9% overall. Architectural segment expected to grow 6-9%; LSO expected to grow 3-5%; Auto Glass expected to be flat.
• Margins: Annual gross margins expected to be higher than the prior year. Operating margins projected at 4.4-4.6% for Architectural, ~14% for LSO, and slightly better than breakeven for Auto Glass.
• Earnings: Diluted EPS from continuing operations expected to range from $0.88 to $0.94 (excluding the $0.05 impact of expensing stock options).
• Capital Expenditures: Targeted at $40 to $45 million, primarily for a new glass fabrication facility in St. George, Utah.

Key Risks and Contingencies:

• Auto Glass Transition: Uncertainty regarding the ability to replace volume lost from the expired PPG supply agreement at acceptable prices.
• Self-Insurance: The company retains significant risk for product liability and general liability through high deductibles; a material claim could adversely affect results.
• Construction Cyclicality: The Architectural segment is highly sensitive to the cyclical nature of the commercial construction industry.
• Discontinued Operations: Ongoing liabilities related to the exit of international curtainwall operations and the sale of Harmon AutoGlass.

Investor Verification Checklist

• PPG Auto Glass Joint Venture: Verify the performance of the 34% owned joint venture, which returned to profitability ($2.6M income in 2006 vs. $1.3M loss in 2005) despite difficult market conditions.
• Auto Glass Segment Recovery: Monitor the transition of the Auto Glass manufacturing business post-PPG supply agreement expiration to ensure it can achieve breakeven or profitability without the guaranteed volume.
• Capital Expenditure Execution: Track the progress and cost of the new $30 million St. George, Utah facility, scheduled to operate in fiscal 2008.
• Stock-Based Compensation: Note the upcoming adoption of SFAS No. 123(R) in fiscal 2007, which is expected to reduce reported earnings by approximately $0.05 per share.
• Backlog Conversion: Assess the conversion rate of the $328.7 million backlog (87% expected to ship in fiscal 2007) into actual revenue and margin.