Apogee Enterprises, Inc. — Q3 FY2023 Form 10-Q
Business context and period. Apogee designs and manufactures glass and metal products and provides building-system services through Architectural Framing Systems, Architectural Services, Architectural Glass, and Large-Scale Optical. This unaudited filing covers the third quarter and first nine months of fiscal 2023, ended November 26, 2022; comparisons are with the corresponding fiscal 2022 periods. Dollar amounts below are rounded to millions.
Financial performance and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $367.8 | $334.2 | $1,096.6 | $986.0 |
| Gross profit / margin | $86.6 / 23.5% | $64.7 / 19.4% | $257.2 / 23.5% | $180.4 / 18.3% |
| Operating income / margin | $34.8 / 9.4% | $17.7 / 5.3% | $100.0 / 9.1% | $30.7 / 3.1% |
| Net earnings | $23.8 | $11.1 | $83.9 | $19.8 |
| Diluted EPS | $1.07 | $0.44 | $3.74 | $0.78 |
- Cash flow: Nine-month operating cash flow was $51.1 million, down from $86.3 million, primarily reflecting working capital needs associated with revenue growth and inflation. Capital expenditures were $18.1 million; investing cash outflow was $12.0 million. Financing cash outflow was $51.6 million.
- Balance sheet and debt: At November 26, 2022, cash and cash equivalents were $21.7 million and restricted cash was $3.7 million. Total assets were $918.4 million; shareholders’ equity was $377.6 million. Long-term debt was $203.7 million, versus $162.0 million at fiscal year-end. The company had $188.0 million outstanding on its $385 million revolving facility, which matures in August 2027, and was compliant with its financial covenants. Letters of credit of $12.3 million reduce facility availability.
- Capital returns: The company repurchased 1.57 million shares for $74.3 million and paid $14.4 million in dividends during the first nine months. Remaining repurchase authorization was 1.25 million shares.
Changes and segment results
- Sales rose 10.1% in Q3 and 11.2% year to date, with pricing actions in Architectural Framing Systems and Architectural Glass cited as primary drivers. Gross-margin gains reflected pricing exceeding inflation-related cost increases; prior-year comparisons also benefited from the absence of restructuring charges.
- Architectural Framing Systems: Q3 sales increased 16.6% and operating margin improved to 13.4% from 8.5%. Backlog was approximately $246 million, down from $286 million at the prior quarter-end and $269 million a year earlier.
- Architectural Services: Q3 sales declined 3.2% and operating margin fell to 5.9% from 7.4%, reflecting decreased project activity, lower profitability on legacy Sotawall projects, and growth-support investments. Backlog was approximately $741 million.
- Architectural Glass: Q3 sales increased 9.8%; the segment reported $7.5 million operating income versus a $1.3 million loss a year earlier, reflecting pricing, mix, and productivity gains.
- Large-Scale Optical: Q3 sales declined 2.5%, while operating margin rose to 26.7% from 21.9%. Management attributed much of the lower operating costs to a non-recurring property-tax adjustment.
- From fiscal 2023’s first quarter, Sotawall and Harmon were managed together in Architectural Services, and comparative segment results were recast. The company completed its previously announced restructuring plan during the first quarter.
Outlook, risks, and notable items
- Management narrowed full-year adjusted diluted EPS guidance to $3.90–$4.05 from $3.75–$4.05, expects revenue growth of approximately 10%, primarily driven by Architectural Framing Systems, and continues to expect about $40 million of capital expenditures. The filing does not provide a forward-looking reconciliation of adjusted EPS to GAAP EPS, citing uncertainty about future adjustments.
- A $13.7 million net tax benefit from deductions related to the company’s investment in Sotawall Limited reduced the nine-month effective tax rate to 9.3%, from 19.6% a year earlier. The third-quarter effective rate was 24.8%.
- In December 2022, after quarter-end, an arbitration claimant was awarded $20 million in a commercial-sealant-related matter. The company intends to appeal and believes, considering potential insurance coverage, the award will not materially adversely affect it.
- Outstanding surety and performance bonds totaled $1.4 billion, including $578.7 million in backlog; the company said it had never been required to pay under bonds for its existing businesses. Open purchase obligations were $222.2 million, primarily for materials and capital expenditures. Product warranty, rework, and project-management/installation contingencies are also described.
- Management said liquidity should be adequate for short- and long-term needs and expects continued covenant compliance. It cited working-capital requirements, interest rates, project execution, and litigation among matters relevant to performance; forward-looking statements are subject to risks described in the filing and prior annual report.
Important facts for investors to verify
- Whether pricing and productivity gains continue to offset inflation and support margins, particularly in Architectural Framing Systems and Architectural Glass.
- Architectural Services’ legacy Sotawall project profitability and the conversion, timing, and profitability of its sizable backlog.
- The sustainability of earnings after considering the $13.7 million tax benefit and the non-recurring property-tax contribution to Large-Scale Optical margins.
- Working-capital conversion and operating cash flow, which declined despite substantially higher earnings.
- Debt costs, revolving-facility availability, covenant headroom, and the company’s capital-return plans.
- Developments in the $20 million arbitration award, including appeal and insurance coverage, and potential exposure from bonds, warranty claims, and project contingencies.