Apogee Enterprises, Inc. — Q1 Fiscal 2015
Reporting period: Three months ended May 31, 2014, compared with the three months ended June 1, 2013. Apogee supplies architectural glass, services, framing systems, and large-scale optical products. Unaudited results are not necessarily indicative of the full year.
Financial performance
- Revenue: $210.9 million, up 17.6% year over year; organic growth excluding Alumicor was 11.9%.
- Profit: Gross profit was $41.4 million versus $36.4 million; operating income was $7.8 million versus $6.1 million; net earnings were $6.1 million versus $4.2 million. Diluted EPS was $0.21 versus $0.14.
- Margins: Gross margin declined to 19.6% from 20.3%; operating margin improved to 3.7% from 3.4%; net margin increased to 2.9% from 2.3%. The effective tax rate rose to 33.4% from 29.0%.
- Cash flow: Operating cash flow was $1.2 million, compared with cash use of $2.2 million. Capital expenditures were $8.7 million, implying cash use after capital expenditures of approximately $7.5 million. Cash decreased by $11.7 million to $17.1 million.
- Liquidity and debt: Cash plus short-term available-for-sale securities totaled $17.7 million. Debt was $20.7 million; no revolving-facility borrowings were outstanding. Of the $100 million facility, $76.5 million was available after letters of credit. The company reported covenant compliance and an adjusted debt-to-EBITDA ratio of 0.28.
- Backlog: $385.1 million at May 31, up from $301.8 million a year earlier; management expected about 80% to be recognized during the remainder of fiscal 2015.
Material changes and segment results
- Revenue growth reflected higher volumes across the architectural businesses and the contribution from Alumicor, acquired in November 2013 for $52.9 million.
- Architectural Glass revenue increased 6.5%; operating income rose to $2.8 million from $1.4 million, supported by volume and capacity utilization.
- Architectural Services revenue increased 11.1%; the segment moved to $0.2 million operating income from a $1.0 million loss, with improving project margins and execution.
- Architectural Framing Systems revenue increased 44.5% (21.6% organically), but operating income fell 6.4% to $1.9 million. Severe winter weather hurt the segment, including a loss in the Canadian storefront business.
- Large-Scale Optical revenue increased 3.0%, while operating income fell 15.6% to $4.0 million, reflecting higher research, product-development, and capacity investments.
- Consolidated gross margin was pressured by severe winter weather. SG&A rose $3.4 million, primarily due to Alumicor, but declined as a share of sales. Other income included a $1.3 million final distribution from a European business discontinued more than 15 years ago.
Outlook, risks, and contingencies
- Fiscal 2015 guidance: Revenue growth of 15%–20% over fiscal 2014; EPS of $1.40–$1.50; capital expenditures of approximately $40 million.
- Management said cash, operating cash generation, and available credit should fund working capital, planned capital spending, and dividends. First-quarter cash flow remains affected by seasonal payments for incentives, insurance, and taxes.
- Purchase obligations totaled $85.2 million; operating lease commitments totaled $38.4 million. Performance bonds covered $81.6 million of backlog and had a face value of $278.1 million; the company reported no payments on performance bonds for its current portfolio.
- Letters of credit totaled $23.5 million and reduce credit-facility availability. The filing reported $1.5 million of environmental liabilities and approximately $5.4 million of unrecognized tax benefits; about $0.4 million of tax benefits was expected to lapse within 12 months.
- The company reported routine construction, employment, and other claims, but did not expect currently known proceedings to have a material adverse effect. It reported no material changes to the prior annual report’s risk factors. The new revenue-recognition standard was under evaluation and is effective for Apogee beginning in fiscal 2018.
Important facts for investors to verify
- Whether full-year revenue and EPS guidance remains achievable given seasonal first-quarter results, weather-related margin pressure, and project execution.
- Whether backlog converts to revenue and earnings on schedule; backlog is not a measure of contract profitability.
- How quickly framing-system margins recover and whether Large-Scale Optical investments produce expected returns.
- Whether planned $40 million capital spending, purchase commitments, dividends, and other cash needs are covered by operating cash flow and available credit.
- The future settlement or change in tax and environmental liabilities, and any developments in construction claims, bond exposures, or credit-facility covenants.