Apogee Enterprises, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2019; comparisons are to the periods ended December 1, 2018. Apogee supplies value-added glass and metal products and services through Architectural Framing Systems, Architectural Glass, Architectural Services, and Large-Scale Optical (LSO).
Financial performance
- Q3 revenue: $337.9 million, down 5.5%. Gross profit was $74.3 million (22.0% margin), operating income $21.6 million (6.4% margin), and net earnings $15.2 million. Diluted EPS was $0.57, versus $0.78.
- Nine-month revenue: $1,050.3 million, down 0.6%. Gross profit was $241.5 million (23.0% margin), operating income $72.2 million (6.9% margin), and net earnings $50.0 million. Diluted EPS was $1.87, versus $2.04.
- Cash flow, first nine months: Operating cash flow was $53.6 million, compared with $70.6 million; capital expenditures were $41.2 million, compared with $33.9 million. Cash, cash equivalents and restricted cash totaled $10.5 million at period-end.
- Debt and liquidity: Total debt was $251.3 million, including $155.4 million classified as current and $95.9 million long-term. The revolving facility had $80.5 million drawn; $24.7 million of letters of credit reduce its capacity. The company reported compliance with debt covenants. Current assets were $396.9 million and current liabilities $399.5 million.
- Other balance-sheet items: Total assets were $1,149.8 million and shareholders’ equity $515.0 million. Operating lease liabilities totaled $57.9 million.
Changes versus prior-year periods
- Q3 revenue fell across Framing Systems, Glass, and Services; LSO revenue increased. Framing Systems sales declined 8.7% and operating income 50.8%; Glass sales declined 9.2% and operating income 30.1%; Services sales declined 5.2% and operating income 24.6%. LSO sales increased 4.4% and operating income 1.9%.
- For the nine-month period, Glass revenue rose 9.6% and operating income 84.9%, while Services revenue fell 11.0% and operating income 29.6%. Framing Systems revenue declined 3.0% and operating income 21.6%; LSO revenue rose 3.0% while operating income fell 1.8%.
- Consolidated gross margin declined 1.5 percentage points in Q3 and 0.6 points year to date. Management cited higher manufacturing costs and operational difficulties in some Framing Systems businesses, lower Services volume and reduced operating leverage, and startup costs for Glass’s small-projects facility. SG&A was nearly unchanged in Q3 in dollars but increased as a share of sales.
- Operating cash flow decreased by $17.0 million, reflecting lower earnings and increased working-capital needs, including those associated with a legacy EFCO project. Capital spending increased. Debt rose modestly from $245.8 million at March 2, 2019, and share repurchases reduced shares outstanding.
Outlook, risks and notable items
- FY2020 outlook: Revenue flat to down 1% versus FY2019; diluted EPS of $2.15–$2.30; capital expenditures of approximately $55 million. Management said an integration and cost-reduction plan and procurement savings are expected to generate savings mainly in FY2021 and beyond.
- Management attributed sales pressure to customer-driven schedule delays in Framing Systems, increased foreign competition in Glass, and project timing in Services. It cited operational difficulties and higher manufacturing costs in certain Framing Systems businesses as key margin pressures.
- A legacy EFCO project liability was $47.6 million, versus $42.8 million at March 2, 2019. The company recorded approximately $14.7 million in Q3 for estimated dispute-resolution and other project costs, and a $15.0 million insurance receivable after insurer coverage was confirmed; the related payment was received after quarter-end.
- Outstanding surety and performance bonds were $833.9 million, including $432.6 million on backlog; the company reported no historical payments on such bonds for its existing businesses. Purchase obligations were $146.0 million. Two shareholder lawsuits relating to alleged statements about the EFCO acquisition and Architectural Glass remained pending; the company said it would vigorously defend them.
- Apogee adopted lease accounting guidance in FY2020, recognizing operating lease assets and liabilities; adoption did not materially affect earnings or cash flows. Management stated that liquidity sources should be adequate for working capital, planned capital expenditures, and dividends for at least 12 months.
Important facts for investors to verify
- Whether Framing Systems operational issues and customer schedule delays improve, and whether cost-reduction initiatives deliver the expected savings.
- Progress and final costs or recoveries on the legacy EFCO project, including whether the recorded liability and insurance receivable prove adequate.
- Services backlog conversion and project timing, and whether Glass’s small-projects initiative can offset startup costs and competitive pressure.
- Debt maturity and refinancing plans, particularly the $155.4 million current portion, covenant headroom, and liquidity after letters of credit.
- Whether FY2020 revenue, EPS, and capital expenditure guidance is achieved, and how working-capital demands affect cash generation.