Apogee Enterprises, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended May 28, 2022; comparable period ended May 29, 2021. Apogee designs and manufactures value-added glass and metal products and provides related services. It reports four segments: Architectural Framing Systems, Architectural Services, Architectural Glass, and Large-Scale Optical. The company moved Sotawall into Architectural Services at the start of FY2023 and recast prior-period segment results.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $356.6 million | $326.0 million |
| Gross profit / margin | $85.6 million / 24.0% | $67.7 million / 20.8% |
| Operating income / margin | $33.2 million / 9.3% | $16.0 million / 4.9% |
| Net earnings | $22.7 million | $10.8 million |
| Diluted EPS | $1.00 | $0.42 |
| Operating cash flow | $(30.5) million | $6.9 million |
| Capital expenditures | $5.1 million | $4.7 million |
Sales grew 9.4%, while net earnings more than doubled. Gross margin improvement primarily reflected inflation-related pricing in Architectural Framing Systems; lower SG&A as a share of sales reflected benefits from prior restructuring. The effective tax rate was 26.0%, versus 25.3%.
Segment results
- Architectural Framing Systems: Sales rose 19.4% to $163.3 million; operating margin increased to 14.5% from 6.1%. Pricing, restructuring benefits and favorable timing of lower-cost aluminum inventory contributed.
- Architectural Services: Sales rose 13.9% to $103.4 million, but operating margin declined to 2.8% from 4.7%, reflecting project write-downs, growth investments and less favorable project mix.
- Architectural Glass: Sales declined 8.1% to $76.3 million; margin improved to 6.8% from 2.6% on productivity, restructuring and pricing gains, partly offset by lower volume.
- Large-Scale Optical: Sales rose 3.9% to $25.2 million and margin improved to 25.8% from 24.1%, supported by pricing, mix and productivity.
Cash, debt and liquidity
Operating cash use was $30.5 million, compared with cash generation of $6.9 million a year earlier. Management attributed the change primarily to working-capital needs associated with revenue growth; receivables and inventory increased during the quarter. Investing cash use was $0.9 million, including $4.1 million of proceeds from asset sales.
At May 28, 2022, cash and cash equivalents were $15.2 million, with an additional $8.7 million of restricted cash. Total debt was $261.0 million, including $99.0 million drawn on the revolving facility, a $150.0 million term loan and $12.0 million of industrial revenue bonds. The $235 million revolver and term loan mature in June 2024; $16.4 million of letters of credit reduce revolver availability. The company reported compliance with its debt covenants. Management believes available liquidity and borrowing capacity will meet its needs.
Share repurchases totaled $74.3 million during the quarter, covering 1.57 million shares under the program; dividends were $4.8 million. The board subsequently authorized an additional 1.0 million shares for repurchase.
Outlook, commentary and notable matters
- Management raised FY2023 adjusted diluted EPS guidance to $3.50–$3.90 from $2.90–$3.30, citing first-quarter results and the lower share count after repurchases. The filing does not provide a forward reconciliation to GAAP EPS, citing uncertainty about future adjustments.
- Full-year capital expenditure expectations remained $35–$40 million.
- Backlog was approximately $310 million in Architectural Framing Systems and $681 million in Architectural Services at quarter-end. Unsatisfied performance obligations totaled approximately $810.6 million, expected to be recognized primarily within two years.
- The quarter included a $0.6 million gain, net of transaction costs, on the sale of remaining Dallas Architectural Glass manufacturing assets. The company also completed an NMTC transaction replacement, involving repayment and re-contribution of approximately $19.5 million.
- Risks include project execution and installation exposure, cost inflation and aluminum-price volatility, construction-market conditions, and legal, warranty and product-liability claims. The company had $1.2 billion of surety/performance bonds outstanding and $196.5 million of purchase obligations. Management said current litigation is not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the improved Framing Systems pricing and margins are sustainable as inventory costs and aluminum prices change.
- Whether Architectural Services can address project write-downs and restore margins while executing its substantial backlog.
- How working-capital requirements affect operating cash flow, and whether cash generation supports planned repurchases, dividends and capital spending.
- Whether the company can meet adjusted EPS guidance, noting that the filing provides no forward GAAP reconciliation.
- Available revolver capacity after outstanding borrowings and letters of credit, covenant headroom, and the June 2024 debt maturities.
- Potential exposure from project contingencies, surety and performance bonds, warranties and ongoing litigation.