Apogee Enterprises, Inc. — Form 10-Q summary
Business and period: Apogee designs and manufactures architectural glass, framing systems, and related building services, and produces large-scale optical products. This unaudited report covers the third quarter and first nine months of fiscal 2018, ended December 2, 2017; comparisons are with the corresponding periods of fiscal 2017.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $356.5 million | $274.1 million | $972.7 million | $800.4 million |
| Gross profit | $91.6 million | $72.9 million | $247.9 million | $209.8 million |
| Operating income | $34.5 million | $33.3 million | $86.4 million | $92.6 million |
| Net earnings | $23.6 million | $22.6 million | $57.2 million | $62.7 million |
| Diluted EPS | $0.82 | $0.78 | $1.98 | $2.17 |
| Gross margin | 25.7% | 26.6% | 25.5% | 26.2% |
| Operating margin | 9.7% | 12.1% | 8.9% | 11.5% |
For the first nine months, operating cash flow was $66.2 million, versus $72.8 million a year earlier. Capital expenditures were $38.9 million. Cash and cash equivalents were $12.8 million at quarter-end, down from $19.5 million at fiscal year-end; available-for-sale securities totaled $10.2 million.
At December 2, 2017, total assets were $1.04 billion, current assets $374.8 million, and current liabilities $209.5 million. Long-term debt was $231.3 million, up from $65.4 million at March 4, 2017. The company had $209.0 million drawn on its $335 million revolving facility and was in compliance with its financial covenants. Letters of credit of $26.3 million reduce facility availability.
Material changes and operating drivers
- Revenue rose 30.1% in the quarter and 21.5% year to date, primarily from the acquisitions of EFCO in June 2017 and Sotawall in December 2016. EFCO contributed $135.3 million in sales and $6.1 million in operating income since acquisition.
- Despite sales growth, margins narrowed. Management attributed this to EFCO’s lower margins, acquired-intangible amortization and acquisition costs, and weaker volume leverage in Architectural Services. SG&A also rose as a share of sales.
- Architectural Framing Systems’ sales increased 113.7% in the quarter, largely from acquisitions, while its operating margin fell to 9.5% from 13.0%. Architectural Glass sales fell 9.4% in the quarter amid project delays, including hurricane-related delays in Florida. Architectural Services sales fell 23.8% and its nine-month operating income declined 71.4%, primarily due to project timing and lower volume leverage. Large-Scale Optical quarterly sales rose 17.7%, while margins were lower year to date.
- Management reported nine-month adjusted net earnings of $65.5 million, up 4%, and adjusted diluted EPS of $2.27, up 5%. These non-GAAP measures exclude specified acquired-intangible amortization and acquisition-related costs.
Outlook, risks, and unusual items
- Fiscal 2018 guidance, excluding any estimated impact of the Tax Cuts and Jobs Act, was revenue growth of approximately 20%; GAAP operating margin of 8.6%–8.9%; diluted EPS of $2.58–$2.68; adjusted operating margin of 10.1%–10.4%; adjusted diluted EPS of $3.04–$3.14; and capital expenditures of $55–$60 million.
- On January 5, 2018, the company announced closure of its St. George, Utah architectural glass facility in March 2018. Planned fourth-quarter restructuring charges were approximately $4.5 million pretax.
- The Tax Cuts and Jobs Act was signed on December 20, 2017, after quarter-end. The company was still assessing its tax-accounting impact; the reported statements do not reflect that impact.
- After quarter-end, the company repurchased 246,299 shares for $11.1 million. Its repurchase authorization was increased by one million shares in January 2018.
- Contingencies include construction-related disputes and claims, product warranty and rework exposure, environmental liabilities, operating leases, purchase commitments of $120.9 million, and performance bonds. Management stated that available information did not indicate litigation losses that would materially harm results, cash flows, or financial condition. It believed operating cash generation and borrowing capacity would cover needs for at least 12 months.
- Management cautioned that forward-looking results may differ materially; it cited the risk factors in its fiscal 2017 Form 10-K. The filing reported no material changes to those risk factors.
Investor verification priorities
- Separate acquisition-driven growth from organic performance and assess EFCO integration, margins, and the preliminary purchase-price allocation.
- Track Architectural Services recovery, Architectural Glass project timing, and segment backlog conversion.
- Reconcile GAAP results with adjusted guidance and confirm actual restructuring and acquisition-related costs.
- Review debt, revolving-facility availability, covenant headroom, and cash generation following the EFCO acquisition.
- Confirm the eventual tax-reform accounting impact and whether fiscal 2018 guidance was achieved.