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APOG > SEC Filings for APOG > Form 10-Q on 11-Jul-2013All Recent SEC Filings

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

Form 10-Q for APOGEE ENTERPRISES, INC.


11-Jul-2013

Quarterly Report


Item 2. 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 of the Company's Annual Report on Form 10-K for the fiscal year ended March 2, 2013. From time to time, we may also 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.


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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 of the Company's Annual Report on Form 10-K for the fiscal year ended March 2, 2013.

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 and distinctive solutions for enclosing commercial buildings and framing art. The Company's four reportable segments are: Architectural Glass, Architectural Services, Architectural Framing Systems and Large-Scale Optical (LSO). Our Architectural Glass segment consists of Viracon, a fabricator of coated, high-performance architectural glass for global markets. The Architectural Services segment consists of Harmon, one of the largest U.S. full-service building glass installation and renovation companies, which designs, engineers, fabricates and installs the walls of glass and windows comprising the outside skin of commercial and institutional buildings. The Architectural Framing Systems segment companies design, engineer, fabricate and finish 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 anodize finisher of architectural aluminum and PVC shutters for U.S. markets. 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 selected financial data should be read in conjunction with the Company's Form 10-K for the year ended March 2, 2013 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.

Sales and Earnings
The relationship between various components of operations, stated as a percent
of net sales, is illustrated below for the three-month periods of the current
and prior fiscal year.
                                               Three Months Ended
                                               June 1,    June 2,
(Percent of net sales)                          2013        2012
Net sales                                       100.0 %     100.0 %
Cost of sales                                    79.7        79.8
Gross profit                                     20.3        20.2
Selling, general and administrative expenses     16.9        18.7
Operating income                                  3.4         1.5
Interest income                                   0.1         0.2
Interest expense                                  0.2         0.2
Other income, net                                   -           -
Earnings from operations before income taxes      3.3         1.5
Income tax expense                                1.0         0.5
Net earnings                                      2.3 %       1.0 %
Effective tax rate                               29.0 %      28.4 %

Highlights of First Quarter of Fiscal 2014 Compared to First Quarter of Fiscal 2013
Consolidated net sales increased 16.3 percent, or $25.2 million, for the first quarter ended June 1, 2013, compared to the prior-year period. Approximately 63 percent of the year-on-year increase was due to improved volume and mix in our Architectural Glass Segment, with the remainder largely due to improved volume in our Architectural Services segment.
Gross profit as a percent of sales for the quarter ended June 1, 2013 was up slightly at 20.3 percent compared to 20.2 percent in the prior-year period. The change in gross margins was due to the favorable margin impact from volume growth and the resulting increase in capacity utilization in the Architectural Glass and Architectural Services segments. These favorable items were largely


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offset by lower capacity utilization within the Architectural Framing System segment's window business related to an anticipated gap in the schedule for more complex projects and our LSO segment increased promotional activities and investments for growth in new geographies and markets.
Selling, general and administrative expenses for the first quarter were up $1.5 million over the prior year, while decreasing as a percent of net sales to 16.9 percent from 18.7 percent in the prior-year period. The increased expense was due to increased salaries and related benefits to support sales growth and cost increases related to geographic expansion.

Segment Analysis
Architectural Glass
                                Three Months Ended
                         June 1,       June 2,        %
(In thousands)             2013         2012       Change
Net sales               $ 74,803     $ 59,066       26.6 %
Operating income (loss)    1,371       (2,406 )    157.0 %
Operating margin             1.8 %       (4.1 )%

First-quarter net sales of $74.8 million were up 26.6 percent over prior-year net sales of $59.1 million. The increase in sales was due to improved volume accounting for approximately 20 percentage points, with the remainder due to improved mix of value-added products. Operating income was $1.4 million in the current quarter, compared to a loss of $2.4 million in the prior-year quarter, with operating margins of 1.8 percent compared to negative 4.1 percent in the prior-year quarter. The improvement in margins was due primarily to the improved volume and mix, as well as the impact of better pricing and good operational performance.

Architectural Services

                         Three Months Ended
                   June 1,       June 2,        %
(In thousands)      2013          2012       Change
Net sales        $ 46,476      $ 38,918       19.4 %
Operating loss       (965 )      (2,579 )     62.6 %
Operating margin     (2.1 )%       (6.6 )%

First-quarter net sales of $46.5 million improved 19.4 percent over prior-year net sales of $38.9 million, most of which was due to volume growth in expanded geographies and timing of project cost flow. The segment reported an operating loss of $1.0 million in the current quarter, compared to a loss of $2.6 million in the prior-year quarter, with negative operating margins of 2.1 percent compared to negative 6.6 percent in the prior-year quarter. The improvement in operating results and margins was due to increased volume and better margins on projects flowing through revenue, partially offset by costs incurred in the current quarter to support geographic expansion.

Architectural Framing Systems

                         Three Months Ended
                  June 1,      June 2,        %
(In thousands)      2013         2012       Change
Net sales        $ 44,446     $ 42,407       4.8  %

Operating income 2,064 3,096 (33.3 )% Operating margin 4.6 % 7.3 %

First-quarter net sales of $44.4 million were up 4.8 percent over prior-year net sales of $42.4 million, due to improved volume in the storefront and finishing businesses representing an increase of approximately 9 percentage points. This improvement was somewhat offset by lower volume in the window business of approximately 4 percentage points. Operating income of $2.1 million in the current quarter was down 33.3 percent compared to $3.1 million in the prior-year quarter, and operating margins decreased to 4.6 percent compared to 7.3 percent in the prior-year quarter. The decrease in operating income was due to lower sales in the window business related to an anticipated gap in the schedule for more complex projects, resulting in lower capacity utilization. The decreases in the window business profitability was partially offset by the profit on increased volume in the storefront and finishing businesses.


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Large-Scale Optical (LSO)

                         Three Months Ended
                  June 1,      June 2,        %
(In thousands)      2013         2012       Change
Net sales        $ 19,473     $ 19,258       1.1  %

Operating income 4,698 5,268 (10.8 )% Operating margin 24.1 % 27.4 %

Net sales of $19.5 million for the first quarter were up slightly over prior-year net sales of $19.3 million, driven by increased volume and a positive mix of higher value-added products. Operating income of $4.7 million in the quarter was down 10.8 percent from the prior-year period and operating margins were down 3.3 percentage points to 24.1 percent, compared to 27.4 percent in the prior-year period. The decrease in operating income and margins was due to increased promotional activities and investments for growth in new geographies and markets.

Consolidated Backlog
At June 1, 2013, our consolidated backlog was $301.8 million, compared to $298.3 million at the end of fiscal 2013 and $269.1 million in the prior-year period. We expect approximately $238.3 million, or 79 percent, of our June 1, 2013 backlog to be recognized in fiscal 2014, with the remainder to be recognized in fiscal 2015.
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.

Liquidity and Capital Resources
                                          Three Months Ended
                                         June 1,      June 2,
(Cash effect, in thousands)               2013          2012
Operating Activities
Net cash used in operating activities  $  (2,167 )   $ (7,657 )
Investing Activities
Capital expenditures                      (1,512 )     (9,509 )
Change in restricted investments, net     19,253       (8,260 )
Net purchases of marketable securities    (3,569 )    (11,125 )
Financing Activities
Proceeds from issuance of debt                 -       10,000
Payments on debt                         (10,015 )        (45 )
Dividends paid                            (2,687 )     (2,643 )

Operating activities. Cash used in operating activities was $2.2 million for the first three months of fiscal 2014, compared to cash used of $7.7 million in the prior-year period. Both fiscal 2014 and 2013 results were negatively impacted by normal seasonal cash outflow in the first quarter as a result of payments made to fund annual incentive compensation plans.

Non-cash working capital (current assets, excluding cash and short-term available for sale securities and short-term restricted investments, less current liabilities) was $68.2 million at June 1, 2013, or 9.4 percent of last 12-month net sales, our key metric for measuring working capital efficiency. This compares to $54.1 million at March 2, 2013, or 7.7 percent of fiscal 2013 net sales, and 9.2 percent at June 2, 2012. The dollar change from year-end was due to working capital outflows for the current quarter as noted above.

Investing Activities. Through the first three months of fiscal 2014, investing activities provided cash of $14.3 million, compared to cash used of $29.8 million in the same period last year. The current year included new capital investments of $1.5 million. We released a net $19.3 million of restricted investments as a result of releasing the $10.0 million of cash held in escrow for the recovery zone facility bonds that was used to redeem the bonds and also releasing $12.0 million of cash collateral to unrestricted cash related to the letter of credit supporting these bonds. These items were slightly offset by $2.8 million of funds held in escrow


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for use in the Company's planned capital investments in the Architectural Glass segment business. We increased our investments in marketable securities by $3.6 million for the three-month period.

In fiscal 2013, new capital investments were $9.5 million for growth and productivity improvements, as well as equipment to support new product introductions and maintenance capital. The net position of our investments for the three-month period of fiscal 2013 resulted in $11.1 million in net purchases. Net purchases of $8.3 million for restricted investments during the period were the result of $10.0 million of industrial development bonds (reflected in financing activities) that were made available for current and future investment in our storefront and entrance business in Michigan, the proceeds of which are reported as restricted investments until disbursed.

We expect fiscal 2014 capital expenditures to be $40 to $45 million for investments for growth, productivity and product development capabilities, including a new state-of-the-art coater in our Architectural Glass segment.

We continue to review our portfolio of businesses and their assets in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses, pursue geographic expansion, take actions to manage capacity, further invest in, fully divest and/or sell parts of our current businesses. In the first quarter of fiscal 2014, we completed the temporary shutdown of our Architectural Glass segment business in Utah to align overall capacity with the demand we are expecting over the next two years.

Financing Activities. Total outstanding borrowings at June 1, 2013 were $20.8 million, compared to $30.8 million as of March 2, 2013 and $31.0 million at June 2, 2012. During the first quarter of fiscal 2014, $10.0 million of recovery zone facility bonds that had previously been issued for future investment in the Company's Architectural Glass fabrication facility in Utah were redeemed at par.

Debt at June 1, 2013 consists of $20.4 million of industrial revenue bonds, and $0.4 million of other debt. The industrial revenue bonds mature in fiscal years 2021 through 2043, and the other debt matures in fiscal years 2014 through 2021. Our debt-to-total-capital ratio was 5.8 percent at June 1, 2013, and 8.5 percent at March 2, 2013.

The company maintains a $100.0 million revolving credit facility that expires in October 2017. No borrowings were outstanding under the facility as of June 1, 2013 or March 2, 2013. The credit facility requires the Company to maintain a minimum level of net worth as defined in the credit facility based on certain quarterly financial calculations. The minimum required net worth computed in accordance with the credit agreement at June 1, 2013 was $268.1 million, whereas the Company's net worth as defined in the credit facility was $335.8 million. The credit facility also requires that the Company maintain an adjusted debt-to-EBITDA ratio of not more than 3.00. This ratio is computed quarterly, with EBITDA computed on a rolling four-quarter basis. For purposes of calculating the adjusted debt in the adjusted debt-to-EBITDA ratio, the Company reduces non-credit facility debt for up to $25 million to the extent of unrestricted cash balances, cash equivalents and short-term marketable securities available for sale in excess of $15 million. The Company's ratio was 0.00 at June 1, 2013. If the Company is not in compliance with either of these covenants, the lenders may terminate the commitment and/or declare any loan then outstanding to be immediately due and payable. At June 1, 2013, the Company was in compliance with the financial covenants of the credit facility.

During fiscal 2004, the Board of Directors authorized a share repurchase program of 1,500,000 shares of common stock. The Board of Directors increased this authorization by 750,000 shares in January 2008 and by 1,000,000 in October 2008. We have purchased a total of 2,279,123 shares, at a total cost of $29.7 million, since the inception of this program. We have remaining authority to repurchase 970,877 shares under this program, which has no expiration date. There were no share repurchases during the first three months of either fiscal 2014 or 2013.


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Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of June 1, 2013:

                                               Future Cash Payments Due by Fiscal Period
                        2014
(In thousands)       Remaining        2015         2016         2017         2018        Thereafter        Total
Continuing
operations
Industrial revenue
bonds               $        -     $      -     $      -     $      -     $      -     $     20,400     $  20,400
Other debt
obligations                 58           58           58           58           58              114           404
Operating leases
(undiscounted)           6,106        7,240        7,097        5,287        3,943            5,493        35,166
Purchase
obligations            110,384        3,204            -            -            -                -       113,588
Other obligations          574            -            -            -            -                -           574
Total cash
obligations         $  117,122     $ 10,502     $  7,155     $  5,345     $  4,001     $     26,007     $ 170,132

From time to time, we acquire the use of certain assets, such as warehouses, automobiles, forklifts, vehicles, office equipment, hardware, software and some manufacturing equipment through operating leases. Many of these operating leases have termination penalties. However, because the assets are used in the conduct of our business operations, it is unlikely that any significant portion of these operating leases would be terminated prior to the normal expiration of their lease terms. Therefore, we consider the risk related to termination penalties to be minimal.

We have purchase obligations for raw material commitments and capital expenditures. As of June 1, 2013, these obligations totaled $113.6 million.

The other obligations in the table above include a foreign exchange forward contract and also include non-competes and consulting agreements with former employees. The foreign exchange forward contract has a U.S. dollar notional value of $24.3 million with the objective of reducing the exposure to fluctuations in the euro related to a planned capital equipment purchase. The fair value of this contract was a liability of $0.5 million at June 1, 2013 and is included in the balance sheet caption as other current liabilities. We report the effective portion of the gain or loss on a cash flow hedge as a component of other comprehensive income, and any gain or loss is included in the value of the capital asset and will be recognized in earnings over the life of the asset.

We expect to make contributions of $0.8 million to our defined-benefit pension plans in fiscal 2014, which will equal or exceed our minimum funding requirements.

As of June 1, 2013, we had $6.5 million and $1.9 million of unrecognized tax benefits and environmental liabilities, respectively. We expect approximately $1.0 million of the unrecognized tax benefits to lapse during the next 12 months. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits and environmental liabilities will ultimately be settled.

At June 1, 2013, we had ongoing letters of credit related to construction contracts and certain industrial revenue bonds. The Company's $20.4 million of industrial revenue bonds are supported by $21.0 million of letters of credit that reduce availability of funds under our $100.0 million credit facility. The letters of credit by expiration period were as follows at June 1, 2013:

                                            Amount of Commitment Expiration Per Fiscal Period
                         2014
(In thousands)        Remaining         2015         2016          2017          2018        Thereafter       Total
Standby letters of
credit              $          -     $ 20,982     $       -     $       -     $  2,000     $      2,500     $ 25,482

In addition to the above standby letters of credit, which were predominantly issued for our industrial revenue bonds, we are required, in the ordinary course of business, to provide surety or performance bonds that commit payments to our customers for any non-performance by us. At June 1, 2013, $117.1 million of our backlog was bonded by performance bonds with a face value of $313.3 million. Performance bonds do not have stated expiration dates, as we are released from the bonds upon completion of the contract. We have never been required to make any payments related to these performance bonds with respect to any of our current portfolio of businesses.


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For fiscal 2014, we believe that current cash on hand and available capacity under our committed revolving credit facility, as well as the expected cash to be generated from future operating activities, will be adequate to fund our working capital requirements, planned capital expenditures and dividend payments. We have total cash and short-term available for sale securities of $66.9 million, and $74.5 million available under our credit facility at June 1, 2013. We believe that this will provide us with the financial strength to continue our growth strategy as our end markets continue to strengthen.

Outlook
The following statements are based on our current expectations for full-year fiscal 2014 results. These statements are forward-looking, and actual results may differ materially.
Revenue growth in the high single digits over fiscal 2013.

We anticipate earnings per share of $0.90 to $1.00.

Capital expenditures are projected to be $40 to $45 million.

Related Party Transactions
No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year ended March 2, 2013.

Critical Accounting Policies
No material changes have occurred in the disclosure of our critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 2, 2013.

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