Apogee Enterprises, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended August 31, 2013; comparisons are with the quarter and six months ended September 1, 2012. Amounts below are in U.S. dollars.
Business context and financial performance
Apogee supplies products and services for commercial building enclosures and framing art through Architectural Glass, Architectural Services, Architectural Framing Systems, and Large-Scale Optical (LSO).
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $178.3m | $175.9m | $357.6m | $330.1m |
| Gross profit / margin | $38.5m / 21.6% | $36.1m / 20.5% | $74.9m / 21.0% | $67.2m / 20.4% |
| Operating income / margin | $9.4m / 5.2% | $7.6m / 4.3% | $15.5m / 4.4% | $9.9m / 3.0% |
| Net earnings | $6.1m | $5.1m | $10.3m | $6.7m |
| Diluted EPS | $0.21 | $0.18 | $0.35 | $0.24 |
Six-month operating cash flow was $12.3m, versus $10.4m a year earlier. Capital expenditures were $8.2m, and dividends paid were $5.3m. Cash and cash equivalents were $55.6m at August 31; cash plus short-term available-for-sale securities totaled $70.9m. Total debt was $20.8m, down from $30.8m at fiscal year-end. No revolver borrowings were outstanding; reported availability under the $100m facility was $76.5m. The company reported a 5.8% debt-to-total-capital ratio and compliance with its credit covenants.
Material changes and segment results
- Q2 sales rose 1.3%; first-half sales rose 8.3%. First-half growth was driven mainly by improved Architectural Glass price and mix, alongside volume gains in Architectural Framing Systems storefront and finishing businesses.
- Architectural Glass sales increased 10.6% in Q2 and 18.3% year to date; the segment returned to operating profit of $0.8m for Q2 and $2.1m for the first half, compared with losses in both prior-year periods.
- Architectural Services Q2 sales fell 9.6% due to project timing, but first-half sales increased 3.6%. Operating losses narrowed to $0.8m for Q2 and $1.8m year to date; management cited better project margins and progress working through lower-margin projects.
- Architectural Framing Systems Q2 sales declined 5.2% and operating income fell 14.6%; first-half operating income declined 20.9%. An anticipated schedule gap in the window business reduced capacity utilization, partly offset by storefront and finishing growth.
- LSO Q2 sales and operating income increased slightly. First-half operating income declined 4.3%, partly due to promotional activity and growth investments.
- Backlog was $304.2m, versus $298.3m at fiscal year-end and $301.3m a year earlier; the company expected about 66% to be recognized in fiscal 2014.
Non-cash working capital was $70.3m, or 9.7% of last-twelve-month sales, versus $54.1m and 7.7% at fiscal year-end. Management attributed the increase to business growth and geographic expansion.
Outlook, commentary, and risks
- Management forecast fiscal 2014 revenue growth in the high single digits, EPS of $0.93–$1.00, and capital expenditures of $40m–$45m, including a new Architectural Glass coater.
- The company completed a temporary shutdown of its Utah Architectural Glass operation to align capacity with expected demand over the next two years. It also acquired a window fabrication business to add products and expand in the Western U.S.; the late-quarter acquisition’s reported results were immaterial.
- Management said cash, revolver availability, and expected operating cash generation should cover working capital, planned capital spending, and dividends. Restricted investments include funds designated for planned capital investments.
- Commitments included $89.7m of purchase obligations, $35.7m of operating lease payments, and $23.5m of letters of credit. Performance bonds covered $97.9m of backlog and had a $286.6m face value; the company said it had not made payments on bonds for its current businesses.
- Warranty and claims accruals rose to $9.4m from $7.6m a year earlier. The company reported $6.6m of unrecognized tax benefits and $1.7m of environmental liabilities; about $1.0m of tax benefits was expected to lapse within 12 months.
- Routine construction, employment, workers’ compensation, general liability, and auto-related proceedings were disclosed; management did not expect currently known claims to have a material adverse effect. The filing reported no material changes to annual-report risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether fiscal 2014 growth and EPS guidance remain achievable, particularly given project timing and segment-level margin differences.
- Execution and returns on the $40m–$45m capital program, the Utah capacity decision, and the acquired window business.
- Whether Architectural Services continues to improve project profitability and Architectural Framing Systems recovers utilization and margins.
- Working-capital requirements, purchase commitments, and actual availability under the revolver after letters of credit.
- Backlog conversion, warranty claims, and potential developments in legal, tax, and environmental matters.