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APOG > SEC Filings for APOG > Form 10-K on 16-May-2013All Recent SEC Filings

Show all filings for APOGEE ENTERPRISES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for APOGEE ENTERPRISES, INC.


16-May-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
This discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "should" and similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this document are "forward-looking statements," and are based on management's current expectations or beliefs of the Company's near-term results, based on current information available pertaining to the Company, including the risk factors noted under Item 1A in this Form 10-K. From time to time, we also may provide oral and written forward-looking statements in other materials we release to the public such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.

Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to, the risks and uncertainties set forth under Item 1A in this Form 10-K.

We wish to caution investors that other factors might in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time; it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview
We are a leader in certain technologies involving the design and development of value-added glass products, services and systems. The Company transitioned to four segments in fiscal 2013, which reflects the separation of the Architectural Products and Services


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segment into the Architectural Glass, Architectural Framing Systems and Architectural Services segments. The Large-Scale Optical Technologies (LSO) segment remains unchanged. All information in this Annual Report on Form 10-K has been recast to conform to this new segment reporting structure.

The Company's four reportable segments are: Architectural Glass, Architectural Framing Systems, Architectural Services and LSO. Our Architectural Glass segment consists of Viracon, a fabricator of coated, high-performance architectural glass for global markets. The Architectural Framing Systems segment companies design, engineer and fabricate the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial and institutional buildings. We have aggregated three operating segments into the Architectural Framing Systems reporting segment based upon their similar products, customers, distribution methods, production processes and economic characteristics: Wausau Window and Wall Systems, a manufacturer of standard and custom aluminum window systems and curtainwall for the North American commercial construction market; Tubelite, a fabricator of aluminum storefront, entrance and curtainwall products for the U.S. commercial construction industry; and Linetec, a paint and anodizing finisher of architectural aluminum and PVC shutters for U.S. markets. The Architectural Services segment consists of Harmon, one of the largest U.S. full-service companies that designs, engineers, fabricates and installs the walls of glass and windows comprising the outside skin of commercial and institutional buildings for new construction and renovation. Our LSO segment consists of Tru Vue, a manufacturer of value-added glass and acrylic for the custom picture framing and fine art market.

The following highlights the results for fiscal 2013:
• The Architectural Glass segment's operating results improved by $15.2 million, primarily due to improved architectural glass pricing, a better mix of business, and improved operating performance and cost management.

• The Architectural Framing Systems segment benefited from market share gains in target markets and from launching new products, driving a net sales increase of 9.3 percent and an operating income improvement of 40.2 percent.

• The Architectural Services segment saw a 24.6 percent improvement in net sales compared to fiscal 2012, largely due to revenue growth related to expansion of our domestic footprint.

• The LSO segment saw operating income increase 7.1 percent on flat revenues due to good manufacturing performance. During fiscal 2013, the LSO segment introduced new glass and acrylic products, and entered new international picture framing markets.

• Consolidated backlog was $298.3 million at March 2, 2013, up 25 percent over fiscal 2012 levels.

Strategy

Architectural Glass, Architectural Framing Systems and Architectural Services Segments
All of these segments serve the commercial construction market, which is highly cyclical. They participate in various phases of the value chain to design, engineer, manufacture and install customized aluminum and glass window, curtainwall, and storefront and entrance systems for commercial buildings - each with nationally recognized brands and leading positions in their target market segments.

The window, curtainwall, and storefront systems manufactured by our Architectural Framing Systems segment, as well as the glass products fabricated by our Architectural Glass segment, are sold to installers who enclose commercial buildings, such as offices, hospitals, educational facilities, government facilities, high-end multi-family buildings and retail centers. We believe building contractors and architects value our ability to deliver quality, customized window and curtainwall solutions. Their customers - building owners and developers - value the distinctive look, energy efficiency, and hurricane and blast protection features of our window and curtainwall systems. These benefits can contribute to higher lease rates, lower operating costs due to the energy efficiency of our value-added glass, a more comfortable environment for building occupants, and protection for buildings and occupants from hurricanes and blasts.

Our Architectural Services segment provides services to fabricate and install glass window and curtainwall systems on newly constructed commercial buildings as well as providing large scale retrofit services for the window and curtainwall systems on existing commercial buildings. We collaborate closely with our customers, the general contractors, to complete installation projects on time and on budget in order to minimize costly job-site labor overruns.

We look at several market indicators, such as office space vacancy rates, architectural billing statistics, employment and other economic indicators, to gain insight into the commercial construction market. One of our primary indicators is U.S. non-residential construction market activity as documented by McGraw-Hill Construction (McGraw-Hill), a leading independent provider of construction industry analysis, forecasts and trends. We utilize the information for the building types that we typically serve (office towers, hotels, retail centers, education facilities and dormitories, health care facilities, government buildings and high-end multi-family buildings) and adjust this information (which is based on construction starts) to align with our fiscal year and the lag that is required to account for when our products and services typically are initiated in a construction project - approximately eight


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months after project start. From the McGraw-Hill data, our U.S. markets had a compound annual growth rate of negative 5 percent over our past three fiscal years, while our combined architectural segments' domestic compound annual growth rate was negative 2 percent over that same period.

Our overall strategy in these segments is to grow faster than our commercial construction markets through new products, new geographies and new markets, while remaining focused on distinctive solutions for enclosing commercial buildings. We draw upon our leading brands, energy-efficient products and reputation for high quality and service in pursuit of our strategies. Each of our operating segments has the ability to grow through geographic or product line expansion, and we regularly evaluate acquisition opportunities in complementary markets. Finally, we aspire to lead our markets in the development of practical, energy-efficient products for "green" buildings for new construction and renovation. We have introduced products and services designed to meet the growing demand for green building materials. These products have included new energy-efficient glass coatings, thermally enhanced aluminum framing systems, and systems with a high percentage of recycled content.

During fiscal 2011, we began to restore pricing of our Architectural Glass segment's products to better reflect the value our products deliver to the marketplace, and have seen the benefits of those price increases during fiscal 2013. In addition, we have been and continue to take measures to keep our cost structure in line with revenue, including continuing to focus on productivity while maintaining and upgrading our capacity to gain market share. We acquired Glassec, a leading architectural glass fabricator in Brazil, in November 2010, establishing an architectural glass footprint in a developing and fast-growing market where we can provide technical and operational excellence. We have been successful in winning and profitably executing installation and storefront work in new domestic metropolitan markets. We are focusing on renovation of window and curtainwall systems where all sectors are increasing their interest in upgrading the façades and improving the energy efficiency of their buildings.

During fiscal 2013, we made capital investments for growth, to improve productivity, and for new products and capabilities. During fiscal 2014, we will make investments for growth, productivity and product development capabilities, including a new state-of-the-art coater in our Architectural Glass segment.

LSO segment
Our basic strategy in this segment is to convert the custom picture framing market from clear uncoated glass and acrylic products to value-added products that protect art from UV damage while minimizing reflection from the glass, so that viewers see the art rather than the glass. We estimate that over 60 percent of the U.S. picture framing market has converted to value-added glass. Although we are finding it more difficult to convert the remaining market, we continue to see conversion in the U.S. market. We offer a variety of products with varying levels of reflection control and promote the benefits to consumers with point-of-purchase displays and other promotional materials.

Over the past four years, we have entered the global fine art market, which includes museums and private art collections. This market appreciates the conservation and anti-reflective properties of our products, primarily our acrylic products. Acrylic is a preferred material in the fine art market because the product is light weight, which allows for art that is much larger and for which weight is an important consideration. We have developed several acrylic products to support this market.

In fiscal 2012, we began selling our custom picture framing glass and acrylic in Europe where, historically, we have had very little presence. We have had success in entering new international markets during fiscal 2013. We believe our products and distribution networks will enable us to grow at a faster pace internationally than in the United States.

Results of Operations
Net Sales
(Dollars in thousands)    2013         2012         2011       2013 vs. 2012     2012 vs. 2011
Net sales              $ 700,224    $ 662,463    $ 582,777           5.7 %             13.7 %

Fiscal 2013 Compared to Fiscal 2012
Sales increased 5.7 percent during fiscal 2013 largely due to share gains through domestic geographic expansion and increased penetration in target markets in the Architectural Services and Architectural Framing Systems segments, representing approximately 4 percentage points of the increase. Improved pricing in the Architectural Glass segment also had a favorable impact on fiscal 2013 revenues, representing another approximately 4 percentage points of the increase over fiscal 2012. Fiscal 2013 included 52 weeks compared to the prior-year 53-week period, which had a negative impact of approximately 2 percentage points on current-year sales.


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Fiscal 2012 Compared to Fiscal 2011
Sales increased 13.7 percent during fiscal 2012, despite flat market conditions, due primarily to market share gains in the Architectural Framing Systems segment, representing approximately 7 percentage points of the increase. Improved pricing in the Architectural Glass segment contributed approximately 4 percentage points of the increase. The GlassecViracon business within our Architectural Glass segment that was acquired in the third quarter of fiscal 2011 accounted for 5 percentage points of the increase in fiscal 2012. In addition, fiscal 2012 included 53 weeks compared to the prior-year 52-week period, which had a 2 percent favorable impact on current-year sales. These items were partially offset by volume declines in the Architectural Glass segment during fiscal 2012 of approximately 4 percentage points.

Performance
The relationship between various components of operations, as a percentage of
net sales, is illustrated below for the past three fiscal years.
(Percentage of net sales)                          2013           2012           2011
Net sales                                           100.0 %       100.0  %       100.0  %
Cost of sales                                        79.2          82.3           85.7
Gross profit                                         20.8          17.7           14.3
Selling, general and administrative expenses         16.9          17.1           17.9
Operating income (loss)                               3.9           0.6           (3.6 )
Interest income                                         -           0.2            0.1
Interest expense                                      0.2           0.2            0.1
Other (expense) income, net                             -             -              -
Earnings (loss) from continuing operations
before income taxes                                   3.8           0.6           (3.6 )
Income tax expense (benefit)                          1.1          (0.1 )         (1.2 )
Earnings (loss) from continuing operations            2.7           0.7           (2.4 )
Earnings (loss) from discontinued operations,
net of income taxes                                   0.1             -            0.6
Net earnings (loss)                                   2.7 %         0.7  %        (1.8 )%
Effective income tax rate for continuing
operations                                           29.3 %       (28.8 )%        32.0  %

Fiscal 2013 Compared to Fiscal 2012
Consolidated gross profit was up 3.1 percentage points due to improved pricing in the Architectural Glass segment, productivity improvements across all segments, and the margin impact from the revenue growth in the Architectural Services and Architectural Framing Systems segments. In addition, we benefited from completing higher margin work and positive project execution in the Architectural Services segment.

Selling, general and administrative (SG&A) expenses decreased as a percent of sales to 16.9 percent in fiscal 2013 from 17.1 percent in fiscal 2012, while spending was up $5.0 million. The increase in spending was primarily due to increased expense for incentive compensation programs, as Company operating performance improved. This was partially offset by a decrease in costs related to the Chief Executive Officer (CEO) transition that were included in fiscal 2012 SG&A expenses.

Fiscal 2013 income tax expense returned to normal levels as compared to fiscal 2012, which included tax benefits from credits and deductions on a low base of earnings and the impact of statute of limitation expirations for prior fiscal years.

Fiscal 2012 Compared to Fiscal 2011
Consolidated gross profit was up 3.4 percentage points in fiscal 2012 due to higher pricing in the Architectural Glass segment and the margin impact from revenue growth in the Architectural Framing Systems segment, partially offset by lower margin work in the Architectural Services segment. Fiscal 2012 also benefited from a reduction in costs incurred to resolve product quality concerns within the Architectural Glass segment.

SG&A expenses decreased as a percent of sales to 17.1 percent in fiscal 2012 from 17.9 percent in fiscal 2011, while spending was up $9.2 million. Approximately half of the increase in spending related to the impact of the addition of the GlassecViracon business. Transition costs related to our retiring CEO and hiring our new CEO, increased commissions as a result of increased sales, and increased promotional costs in our LSO segment also contributed to the increase in spending.

Fiscal 2012 income tax expense on pre-tax income was more than offset by tax benefits from credits and deductions on a low base of earnings and the impact of statute of limitation expirations for prior fiscal years.


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Segment Analysis
Architectural Glass
(In thousands)                           2013           2012           2011
Net sales                            $ 266,456      $ 278,087      $ 233,164
Operating loss                          (4,391 )      (19,595 )      (49,126 )
Operating loss as a percent of sales      (1.6 )%        (7.0 )%       (21.1 )%

Fiscal 2013 Compared to Fiscal 2012. Fiscal 2013 net sales decreased $11.6 million or 4.2 percent from fiscal 2012. Revenues were down 13 percentage points attributable to volume decreases, partially offset by a 9 percentage point increase in net sales from improved pricing. The volume declines were largely due to a planned decline in export sales as we focus on more profitable domestic projects, as well as the impact of exchange rates on our Brazilian business.

For fiscal 2013, the segment incurred an operating loss of $4.4 million, with an operating margin of negative 1.6 percent, compared to an operating loss of $19.6 million and a negative operating margin of 7.0 percent in fiscal 2012. The fiscal 2013 improvement was primarily due to the improved pricing noted above, a better mix of business, and improved operating performance and management of fixed costs.

Fiscal 2012 Compared to Fiscal 2011. Fiscal 2012 net sales increased $44.9 million, or 19.3 percent, from fiscal 2011, primarily due to the addition of GlassecViracon, which accounted for approximately 13 percentage points of the increase. Improved pricing drove another approximately 10 percentage points of the increase, with a partial offset due to a slight decline in volume.

For fiscal 2012, the segment incurred an operating loss of $19.6 million, with an operating margin of negative 7.0 percent, compared to an operating loss of $49.1 million and a negative operating margin of 21.1 percent in fiscal 2011. The improvement was primarily due to improved pricing, a reduction in costs incurred to resolve product quality concerns and other cost reductions.

Architectural Framing Systems
(In thousands)                            2013          2012          2011
Net sales                              $ 191,137     $ 174,930     $ 132,371
Operating income                          14,584        10,402           189
Operating income as a percent of sales       7.6 %         5.9 %         0.1 %

Fiscal 2013 Compared to Fiscal 2012. Fiscal 2013 net sales increased $16.2 million, or 9.3 percent, over fiscal 2012. Volume growth was driven by the storefront and window businesses, including share gains in target markets and domestic geographic expansion.

Fiscal 2013 operating income was $14.6 million, with an operating margin of 7.6 percent, compared to $10.4 million and an operating margin of 5.9 percent in fiscal 2012. The fiscal 2013 improvement was primarily due to leverage on net sales growth in the segment, as well as better operating performance throughout the segment.

Fiscal 2012 Compared to Fiscal 2011. Fiscal 2012 net sales increased $42.6 million, or 32.2 percent, over fiscal 2011. Volume growth and increased market share in the storefront and window businesses drove the year-on-year improvement.

Fiscal 2012 operating income was $10.4 million, with an operating margin of 5.9 percent, compared to $0.2 million and an operating margin of 0.1 percent in fiscal 2011. The improved operating results were primarily due to leverage on net sales growth.

Architectural Services
(In thousands)                                    2013           2012          2011
Net sales                                     $ 186,570      $ 149,779      $ 152,909
Operating (loss) income                          (1,008 )       (2,879 )       11,269
Operating (loss) income as a percent of sales      (0.5 )%        (1.9 )%         7.4 %

Fiscal 2013 Compared to Fiscal 2012. Fiscal 2013 net sales increased $36.8 million, or 24.6 percent, over fiscal 2012. Revenue growth due to expansion of our domestic footprint accounted for the majority of the increase, or approximately 15 percentage


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points. The remaining 9 percentage points of the increase were due to increased volume serviced from our remaining domestic regions.

For fiscal 2013, the segment incurred an operating loss of $1.0 million, with an operating margin of negative 0.5 percent, compared to an operating loss of $2.9 million and a negative operating margin of 1.9 percent in fiscal 2012. The fiscal 2013 improvement was primarily due to the leverage on the net sales growth discussed above and positive project execution. These items were partially offset by costs incurred in the current fiscal year to start the domestic geographic expansion. In fiscal 2013 the segment was still working off projects that were bid at lower margins, but began to see higher-margin projects positively impact its results.

Fiscal 2012 Compared to Fiscal 2011. Fiscal 2012 net sales were down $3.1 million, a 2.0 percent decline from fiscal 2011, due to weak market conditions. In fiscal 2012, the segment incurred an operating loss of $2.9 million, with a negative operating margin of 1.9 percent, compared to operating income of $11.3 million and an operating margin of 7.4 percent in fiscal 2011. The decrease was due to reduced volume and lower margin work in this business, as it was working on projects that were bid at lower margins, while retaining key resources in preparation for market recovery and geographic expansion.

Large-Scale Optical Technologies (LSO)
(In thousands)                            2013         2012         2011
Net sales                              $ 79,947     $ 78,532     $ 75,426
Operating income                         20,993       19,605       20,540
Operating income as a percent of sales     26.3 %       25.0 %       27.2 %

Fiscal 2013 Compared to Fiscal 2012. LSO revenues were relatively flat to fiscal 2012, increasing 1.8 percent in fiscal 2013. Operating income as a percent of sales increased to 26.3 percent in fiscal 2013 from 25.0 percent in fiscal 2012, with an increase of $1.4 million in operating income. A strong mix of value-added picture framing product sales in fiscal 2013 was somewhat offset by lower volume partially due to one less week in the current year. The segment also continued to experience strong operating performance, which contributed to the improved margins in the year.

Fiscal 2012 Compared to Fiscal 2011. LSO revenues increased $3.1 million, or 4.1 percent, in fiscal 2012 to $78.5 million from $75.4 million in fiscal 2011 with an increase in sales to independent framers. The extra week in fiscal 2012 had a positive impact of 2 percentage points on sales. LSO segment operating income as a percent of sales decreased to 25.0 percent in fiscal 2012 from 27.2 percent in fiscal 2011 and operating income was down $0.9 million. Although we maintained a strong mix of value-added picture framing product sales in fiscal 2012, margins were negatively impacted by spending on sales, marketing and new market development initiatives, including international expansion.

Consolidated Backlog
At March 2, 2013, our consolidated backlog was $298.3 million, up 25 percent over the March 3, 2012 levels. We expect 85 percent of our total March 2, 2013 backlog to be recognized in fiscal 2014 revenue. We view backlog as an important statistic in evaluating the level of sales activity and short-term sales trends in our business. However, as backlog is only one indicator, and is not an effective indicator of our ultimate profitability, we do not believe that backlog should be used as the sole indicator of future earnings of the Company.

Discontinued Operations
In several transactions in fiscal years 1998 through 2000, we completed the sale of our large-scale domestic curtainwall business, the sale of our detention/security business and the exit from international curtainwall operations. The remaining estimated cash expenditures related to these discontinued operations are recorded as liabilities of discontinued operations and cover warranty issues relating to domestic and international construction projects that we expect to be resolved over the next five years.

During fiscal 2013, reductions in reserves related to the expiration of warranty periods resulted in non-cash, pre-tax income from discontinued operations of $0.5 million. In the fourth quarter of fiscal 2011, settlement of an outstanding legal claim related to a foreign discontinued operation resulted in a $1.6 million increase in reserves and a pre-tax loss from discontinued operations, which was finalized and paid in March 2011. In the second quarter of fiscal 2011, the favorable resolution of an outstanding tax exposure related to a foreign operation discontinued in 1998 resulted in the release of $4.9 million of uncertain tax positions and non-cash income from discontinued operations. The settlements of these two items represented the last significant remaining items with respect to our international curtainwall business.


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