Apogee Enterprises, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter ended September 1, 2012, and six months then ended. Comparative periods ended August 27, 2011. Apogee supplies architectural glass, window, storefront and installation products and services, and large-scale optical products.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $175.9m | $165.6m | $330.1m | $318.9m |
| Gross profit / margin | $36.1m / 20.5% | $26.0m / 15.7% | $67.2m / 20.4% | $49.6m / 15.6% |
| Operating income (loss) / margin | $7.6m / 4.3% | $(2.7)m / (1.6)% | $9.9m / 3.0% | $(6.1)m / (1.9)% |
| Net earnings (loss) | $5.1m | $(1.7)m | $6.7m | $(3.9)m |
| Diluted EPS | $0.18 | $(0.06) | $0.24 | $(0.14) |
- Q2 sales grew 6.3%; first-half sales grew 3.5%. Management cited share gains and geographic expansion in installation and storefront businesses, plus improved LSO product mix; lower architectural-glass volume partly offset growth.
- Gross margin improved 4.8 percentage points in both periods, reflecting better architectural-glass pricing, storefront and installation volume, improved LSO mix and favorable operating performance. First-half SG&A rose $1.6m, including higher incentive compensation and investment in sales, marketing and R&D; prior-year CEO transition costs partly offset the increase.
- Segments: Architectural Q2 sales rose 4.8% to $156.4m and operating income was $3.0m versus a $5.1m loss; first-half operating income was $1.1m versus a $12.2m loss. LSO Q2 sales rose 19.2% to $19.6m and operating income increased 47.8% to $5.2m; first-half sales rose 12.7% and operating income 28.4%.
Cash flow, balance sheet and liquidity
- First-half continuing operating cash flow was $10.5m, compared with cash use of $14.7m a year earlier. Management attributed the improvement to earnings and increased pre-billing of installation projects.
- Investing activities used $39.1m, including $15.7m of capital expenditures and net purchases of marketable securities. Financing activities provided $4.2m, including $10.0m of bond proceeds; dividends paid were $5.2m. Cash and cash equivalents declined to $29.6m from $54.0m at March 3, 2012.
- At September 1, cash plus short-term marketable securities totaled $54.6m; additional marketable securities were $9.4m. Restricted investments totaled $31.1m and are not generally available for operating use. Total assets were $507.5m and shareholders’ equity $323.1m.
- Debt was $30.9m, up from $21.0m at fiscal year-end, largely reflecting $10.0m of newly issued industrial development bonds. No revolving-credit borrowings were outstanding. The $80.0m facility expires January 2014; $56.6m remained available after letters of credit. The company was in compliance with covenants, including an adjusted debt-to-EBITDA ratio of 0.12 versus a 2.75 maximum.
- Working capital excluding specified cash and investment balances was $57.4m, or 8.5% of last-12-month sales; days sales outstanding improved by seven days year over year.
Outlook, risks and unusual items
- FY2013 guidance: revenue growth in the mid-single digits over FY2012; EPS of $0.56–$0.64; capital expenditures of approximately $25–$30m, excluding strategic investments. Management said cash, credit availability and expected operating cash flow should fund planned needs and dividends.
- Backlog was $301.3m, up approximately 32% year over year and 26% from FY2012 year-end; more than 99% was Architectural. Management expected about $166m of Architectural backlog to flow through during the remainder of FY2013, while cautioning backlog is not a reliable standalone indicator of future earnings or profitability.
- Q2 discontinued-operations earnings included a $0.4m pretax, noncash warranty-reserve release following expiration of warranty periods. Remaining discontinued-operation warranty obligations are expected to be resolved over the next five years.
- Commitments included $46.9m of purchase obligations, $27.9m of operating-lease payments, $35.8m of letters of credit and $369.9m face value of performance bonds supporting $114.3m of bonded backlog. The company reported no material adverse litigation exposure based on currently available facts, but construction claims may involve significant damages or product replacement.
- Apogee self-insures third-party product liability; management warned that a material construction-project rework event could materially harm results. Other risks include weak market conditions, execution of growth investments, and forward-looking estimates differing from actual results. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track whether backlog converts to sales on schedule and at sustainable margins, particularly in Architectural.
- Assess the durability of improved glass pricing, operating performance and LSO mix, and whether architectural-glass volume remains weak.
- Monitor cash conversion, working-capital needs, planned capital spending and the use and availability of restricted funds and credit capacity.
- Review bond and other debt terms, variable-rate exposure, letters of credit, covenant headroom, warranty reserves and self-insured project-liability exposure.
- Compare subsequent results with FY2013 revenue, EPS and capital-expenditure guidance; the filing states interim results are not necessarily indicative of full-year results.