Apogee Enterprises, Inc. — Form 10-Q Summary
Business context and period: This unaudited quarterly report covers the third quarter and first nine months of fiscal 2013, ended December 1, 2012. Apogee operates Architectural Products and Services and Large-Scale Optical Technologies (LSO), serving commercial construction and picture-framing markets. Comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Quarter ended Dec. 1, 2012 | Prior-year quarter | Nine months ended Dec. 1, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $190.4 million | $174.9 million | $520.5 million | $493.7 million |
| Gross profit / margin | $42.2 million / 22.2% | $34.7 million / 19.9% | $109.5 million / 21.0% | $84.4 million / 17.1% |
| Operating income / margin | $11.4 million / 6.0% | $7.2 million / 4.1% | $21.3 million / 4.1% | $1.1 million / 0.2% |
| Net earnings | $8.1 million | $5.5 million | $14.7 million | $1.7 million |
| Diluted EPS | $0.28 | $0.20 | $0.52 | $0.06 |
- Quarterly sales rose 8.9%; nine-month sales rose 5.4%. Management attributed growth mainly to installation-business share gains and geographic expansion, better architectural-glass pricing, and storefront growth. Year-to-date LSO sales also benefited from a stronger mix of value-added products.
- Gross-margin improvement reflected better glass pricing, installation and storefront volume and margins, project mix, and operational performance. SG&A increased 11.8% in the quarter to $30.8 million; management cited higher incentive and executive compensation and investment in research and development, sales, and marketing. Nine-month SG&A included a $1.8 million reduction in prior-year CEO-transition costs.
- Nine-month income from continuing operations was $14.5 million; discontinued operations contributed $0.2 million net of tax. Prior-year nine-month income-tax benefit was $0.9 million, versus $6.8 million tax expense in the current period; the current quarter included an approximately $0.6 million state-tax settlement benefit.
- Continuing operating cash flow was $23.0 million, versus cash used of $4.7 million a year earlier. Investing activities used $41.4 million, including $21.3 million of capital expenditures and net purchases of marketable securities. Financing provided $1.7 million; cash and cash equivalents declined to $37.4 million from $54.0 million at fiscal year-end.
- At December 1, cash plus short-term marketable securities totaled $62.6 million. Available capacity under the $100 million revolving credit facility was $76.6 million; there were no facility borrowings outstanding. Total borrowings were $30.9 million, compared with $21.0 million at March 3, 2012. Debt-to-total-capital was 8.5%.
- Total assets were $523.7 million, current assets $253.2 million, current liabilities $118.4 million, and shareholders’ equity $330.1 million. Restricted investments totaled $26.7 million and are not freely available for general use.
Material changes and segment results
- Architectural sales increased 11.0% in the quarter and 5.4% year to date. Segment operating income was $5.8 million for the quarter and $7.0 million year to date, compared with $0.6 million and a $11.6 million loss, respectively, in the prior-year periods. Management cited pricing, installation margins, mix, and operating execution.
- LSO quarterly sales declined 4.9% to $21.6 million and operating income declined 11.5% to $6.6 million, which management attributed to promotion timing and the East Coast hurricane. Nine-month sales increased 5.7% and operating income increased 9.4%.
- Architectural backlog was $300.4 million, up approximately 33% year over year; consolidated backlog was $302.9 million, up approximately 34%. Management expected about $111 million of the architectural backlog to flow through in the remainder of fiscal 2013. The filing cautions that backlog is not a reliable standalone indicator of future profitability.
- The revolving credit facility was increased from $80 million to $100 million and extended to October 2017. The maximum adjusted debt-to-EBITDA covenant was revised from 2.75 to 3.00; the reported ratio was 0.11 and the company was in compliance.
Outlook, risks, and contingencies
- Fiscal 2013 guidance: revenue growth of 5%–6% over fiscal 2012, EPS of $0.62–$0.67, and capital expenditures of approximately $30 million. Management said cash, credit availability, and expected operating cash flow should fund working capital, planned capital spending, and dividends.
- Management cited ongoing weak market conditions while stating that available liquidity supports its growth strategy. Actual results may differ materially from forecasts; the filing refers investors to risk factors in the fiscal 2012 Form 10-K and notes that forward-looking statements are not guarantees.
- Key commitments include $77.8 million of purchase obligations, $30.3 million of operating lease payments, and $35.8 million of letters of credit. Performance bonds had a $373.6 million face value and covered $107.5 million of backlog; the company reported no prior payments on performance bonds for its current businesses.
- The company self-insures third-party product-liability coverage and warned that a material construction-project rework event could materially harm operating results. It also reported $8.2 million of warranty and claim accruals, $7.3 million of unrecognized tax benefits, and $2.0 million of environmental liabilities. Management said pending litigation was not expected to have a material adverse effect based on information then available.
- A $0.4 million noncash, pretax discontinued-operations gain resulted from reducing warranty reserves after warranty periods expired. Approximately $1.1 million of unrecognized tax benefits was expected to lapse within 12 months.
Important facts for investors to verify
- Whether fiscal 2013 revenue and EPS guidance was achieved, and how subsequent results compared with the stated ranges.
- Whether higher architectural margins and backlog converted into sustained sales, earnings, and cash flow.
- How much of cash and securities is restricted or committed, and the continuing impact of working-capital needs and planned capital spending.
- Debt, covenant headroom, and credit-facility availability after letters of credit and other commitments.
- Developments in project claims, self-insured liability exposures, warranty accruals, and environmental liabilities.