Apogee Enterprises, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended November 30, 2013; comparisons are to the periods ended December 1, 2012. Apogee supplies architectural glass, building-envelope services and framing systems, and value-added glass and acrylic products.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $199.4 million, up 4.7% | $557.0 million, up 7.0% |
| Gross profit / gross margin | $43.4 million / 21.8%, versus 22.2% | $118.3 million / 21.2%, versus 21.0% |
| Operating income / margin | $12.7 million / 6.4%, versus $11.4 million / 6.0% | $28.2 million / 5.0%, versus $21.3 million / 4.1% |
| Net earnings | $9.7 million, versus $8.1 million | $19.9 million, versus $14.7 million |
| Diluted EPS | $0.33, versus $0.28 | $0.68, versus $0.52 |
For the nine-month period, operating margin improved primarily on better Architectural Glass pricing, mix, productivity and volume, and improved Architectural Services project margins. In Q3, gross margin declined amid early-quarter Large-Scale Optical manufacturing inefficiencies and lower window-business volume; stronger Services project margins and U.S. storefront volume partly offset those pressures. The effective tax rate fell to 24.4% for Q3 and 28.4% year to date, mainly from releases of tax reserves as statutes expired.
Segments and material changes
- Architectural Glass: Nine-month sales rose 10.6% to $218.1 million, and operating results improved from a $4.0 million loss to $3.8 million income. Q3 sales fell 2.1% on project timing, but operating income increased to $1.6 million.
- Architectural Services: Nine-month sales rose 3.8% to $139.8 million; the operating loss narrowed to $1.4 million from $3.8 million. Management cited improved project margins and execution.
- Architectural Framing Systems: Nine-month sales increased 4.6% to $152.9 million, while operating income fell 11.6% to $13.0 million. Lower window-business capacity utilization weighed on results; storefront and finishing volumes partly offset it.
- Large-Scale Optical: Nine-month sales rose 2.4% to $61.9 million, while operating income declined 5.6% to $16.1 million, reflecting promotional activity and growth investments. Q3 results also reflected short-term operating inefficiencies.
- Acquisitions: Apogee acquired Canadian business Alumicor on November 5 for $52.4 million, including $1.6 million cash acquired. It contributed $4.8 million in sales and break-even results after approximately $0.5 million in acquisition-related expenses. The preliminary allocation includes $31.0 million of goodwill and remains subject to final valuation. A separate window-fabrication business was acquired in Q2; management said the two acquisitions together were break-even after acquisition-related costs.
Cash flow, liquidity and debt
- Operating cash flow was $42.7 million for nine months, versus $22.9 million a year earlier, reflecting higher earnings, working-capital management and net proceeds from a New Markets Tax Credit transaction.
- Investing cash outflow was $42.9 million, including $52.8 million for acquisitions and $17.3 million in capital expenditures. Financing cash outflow was $17.2 million, including $10.1 million of debt repayment and $7.9 million of dividends.
- Cash and cash equivalents were $19.9 million at November 30; cash plus short-term available-for-sale securities totaled $22.5 million. The company reported $76.5 million available under its $100 million revolving facility after letters of credit.
- Total debt was $20.7 million, down from $30.8 million at March 2, 2013. No revolving-facility borrowings were outstanding. The adjusted debt-to-EBITDA covenant ratio was 0.32, and the company reported compliance with its covenants.
- Non-cash working capital was $72.1 million, or 9.8% of trailing 12-month sales, compared with $54.1 million at fiscal year-end. Management attributed the increase to acquisitions, base-business growth and expanded operations.
Outlook, risks and unusual items
- FY2014 outlook: revenue growth of 10%–11%, including acquisitions; diluted EPS of $0.95–$1.00; and capital expenditures of approximately $45 million. Management expected cash on hand, operating cash generation and available credit to fund working capital, capital spending and dividends.
- Backlog was $299.9 million, versus $302.9 million a year earlier. Management expected 46% to be recognized in the remainder of FY2014 and 47% in FY2015; it cautioned that backlog is not a measure of profitability or a stand-alone earnings indicator.
- The company received $7.8 million net cash from a New Markets Tax Credit transaction supporting Architectural Glass investment. The arrangement has a seven-year, 100% tax-credit recapture period; proceeds are expected to be recognized as earnings in FY2021 if the tax benefits are delivered without recapture risk and the performance obligation is relieved.
- Other exposures include $75.4 million of purchase obligations, $41.2 million of operating lease commitments, $23.5 million of letters of credit, and performance bonds with a $240.3 million face value supporting $83.2 million of backlog. Management said routine litigation was not expected to have a material adverse effect.
- Newly identified risks from Alumicor include integration challenges, failure to realize expected efficiencies or savings, and exposure to Canadian-dollar exchange rates and Canadian economic, political and tax conditions. Management also noted the temporary shutdown of the Utah Architectural Glass operation to align capacity with expected demand over the next two years.
Important facts for investors to verify
- Whether FY2014 revenue and EPS guidance remains achievable, particularly given Q3 margin pressure and the integration of Alumicor.
- Final Alumicor purchase-price allocation, including identifiable intangibles and goodwill, and the acquired business’s subsequent contribution to sales and earnings.
- Whether backlog converts to revenue on the stated schedule and at profitable project margins.
- Planned capital spending, including the new Architectural Glass coater, and the cash and tax-credit arrangements supporting it.
- Working-capital needs, credit-facility availability after letters of credit, and compliance with debt covenants.