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

Show all filings for APOGEE ENTERPRISES, INC.

Form 10-Q for APOGEE ENTERPRISES, INC.


10-Oct-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.

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


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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, windows and other curtainwall products making up 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 and historical renovation markets; 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 markets.

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 and six-month periods of the
current and prior fiscal year.
                                          Three Months Ended              Six Months Ended
                                       August 31,    September 1,     August 31,   September 1,
(Percent of net sales)                    2013           2012            2013          2012
Net sales                                 100.0  %        100.0 %        100.0 %        100.0 %
Cost of sales                              78.4            79.5           79.0           79.6
Gross profit                               21.6            20.5           21.0           20.4
Selling, general and administrative
expenses                                   16.4            16.2           16.6           17.4
Operating income                            5.2             4.3            4.4            3.0
Interest income                             0.1               -            0.1            0.1
Interest expense                              -             0.1            0.2            0.2
Other (expense) income, net                (0.1 )           0.2              -            0.1
Earnings from operations before
income taxes                                5.2             4.4            4.3            3.0
Income tax expense                          1.8             1.5            1.4            1.0
Net earnings                                3.4  %          2.9 %          2.9 %          2.0 %
Effective tax rate                         33.6  %         34.6 %         31.8 %         33.2 %

Highlights of Second Quarter and First Six Months of Fiscal 2014 Compared to Second Quarter and First Six Months of Fiscal 2013 Consolidated net sales increased 1.3 percent, or $2.3 million, for the second quarter ended August 31, 2013, compared to the prior-year period, with growth in the Architectural Glass segment and in the storefront and finishing businesses in the Architectural Framing Systems segment partially offset by project timing in the Architectural Services segment and the Architectural Framing Systems window business, as anticipated. For the six-month period, net sales increased 8.3 percent, or $27.5 million, as compared to the prior-year period. The majority of the year-on-year increase for the six-month period was due to improved price and mix


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in our Architectural Glass Segment, with the remainder largely due to improved volume in our Architectural Framing Systems storefront and finishing businesses. Gross profit as a percent of sales for the quarter ended August 31, 2013 increased to 21.6 percent from 20.5 percent in the prior-year period, and was 21.0 percent for the six-month period compared to 20.4 percent in the prior year. The improvement for both the quarter and year-to-date periods as compared to the prior year was largely due to the favorable margin impact from price and mix, as well as volume growth in core domestic markets in the Architectural Glass segment and volume growth in the Architectural Framing Systems segment's storefront and finishing businesses. The Architectural Services segment also contributed to the increases as we benefited from improving project margins as compared to the prior-year quarter and six-month periods; we believe that we have largely worked through the lower margin projects bid in the market trough. These favorable items were somewhat offset by lower capacity utilization within the Architectural Framing Systems segment's window business, which was related to an anticipated gap in the schedule for more complex projects.
Selling, general and administrative (SG&A) expenses for the second quarter were up $0.6 million over the prior-year period and were 16.4 percent of net sales as compared to 16.2 percent in the prior-year period. For the six-month period, SG&A expenses increased $2.1 million over the prior-year period, while decreasing as a percent of net sales to 16.6 percent from 17.4 percent. The increase in expense, for both the quarter and year-to-date periods, was primarily 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                                      Six Months Ended
                                                                        %                                                      %
(In thousands)            August 31, 2013     September 1, 2012      Change      August 31, 2013     September 1, 2012      Change
Net sales                $        69,974     $        63,277           10.6 %   $       144,777     $       122,342           18.3 %
Operating income (loss)              770              (2,018 )        138.2 %             2,141              (4,424 )        148.4 %
Operating margin                     1.1 %              (3.2 )%                             1.5 %              (3.6 )%

Second-quarter net sales of $70.0 million were up 10.6 percent over prior-year net sales of $63.3 million, and net sales of $144.8 million for the six-month period increased 18.3 percent over the prior-year period. Approximately 50 percent of the increase in net sales for the quarter was due to improved mix, with the remainder coming from improved pricing. For the six-month period, about half of the increase was due to improved volume, with the remainder due to improved mix of value-added products and better pricing.
Operating income was $0.8 million in the current quarter, compared to a loss of $2.0 million in the prior-year quarter, with operating margins of 1.1 percent compared to negative 3.2 percent in the prior-year quarter. For the six-month period, operating income was $2.1 million, compared to a loss of $4.4 million in the prior-year period, with operating margins of 1.5 percent compared to negative 3.6 percent in the prior year. The improvement in margins was due primarily to the improved mix as we benefited from an increase in higher value-added projects, pricing, increased capacity utilization on higher volume and ongoing productivity improvements.

Architectural Services
                                           Three Months Ended                                       Six Months Ended
                                                                         %                                                        %
(In thousands)            August 31, 2013      September 1, 2012       Change      August 31, 2013      September 1, 2012      Change
Net sales                $      42,177        $        46,653           (9.6 )%   $      88,653        $        85,571            3.6 %
Operating loss                    (787 )               (1,019 )         22.8  %          (1,752 )               (3,598 )         51.3 %
Operating margin                  (1.9 )%                (2.2 )%                           (2.0 )%                (4.2 )%

Net sales of $42.2 million for the second quarter were down 9.6 percent from prior-year net sales of $46.7 million, due to the timing of project cost flow. For the year-to-date period, net sales were up 3.6 percent to $88.7 million as compared to $85.6 million in the prior year due to volume growth in expanded geographies.
The segment reported an operating loss of $0.8 million in the current quarter, compared to a loss of $1.0 million in the prior-year quarter, with negative operating margins of 1.9 percent compared to negative 2.2 percent in the prior-year quarter. For the year-to-date period, operating results improved to a loss of $1.8 million compared to the prior-year loss of $3.6 million. Margins also improved to negative 2.0 percent compared to negative 4.2 percent in the prior year-to-date period. The improvements in operating results and margins for both the quarter and year-to-date periods were due to better margins and good job execution on projects flowing through revenue as we have worked through lower margin projects that were bid in the market trough.


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Architectural Framing Systems
                                          Three Months Ended                                      Six Months Ended
                                                                       %                                                      %
(In thousands)            August 31, 2013     September 1, 2012      Change      August 31, 2013     September 1, 2012      Change
Net sales                $        49,450     $          52,170        (5.2 )%   $        93,896     $          94,577        (0.7 )%
Operating income                   5,180                 6,066       (14.6 )%             7,244                 9,162       (20.9 )%
Operating margin                    10.5 %                11.6 %                            7.7 %                 9.7 %

Second-quarter net sales of $49.5 million were down 5.2 percent from prior-year net sales of $52.2 million, and were down slightly in the six-month period to $93.9 million from $94.6 million in the prior-year period. For both the quarter and six-month periods, improved volumes in the storefront and finishing businesses were more than offset by a gap in the schedule for the window business, which we had anticipated.
Operating income of $5.2 million in the current quarter was down 14.6 percent compared to $6.1 million in the prior-year quarter, and operating margins decreased to 10.5 percent from 11.6 percent in the prior-year quarter. For the year-to-date period, operating income was $7.2 million, down 20.9 percent from the prior year of $9.2 million and operating margins declined to 7.7 percent from 9.7 percent in the prior year. The decreased operating income for both the quarter and year-to-date periods was due to the 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 were partially offset by the profit on increased volume in the storefront and finishing businesses.
In the current quarter, we acquired the assets and certain liabilities of a window fabrication business as part of our strategy to grow through new products and new geographies. The acquisition is included in the results of our window business within the Architectural Framing Systems segment; the results from the acquisition completed late in the quarter were immaterial.

Large-Scale Optical (LSO)
                                         Three Months Ended                                      Six Months Ended
                                                                       %                                                     %
(In thousands)            August 31, 2013     September 1, 2012     Change      August 31, 2013     September 1, 2012      Change
Net sales                $        19,745     $          19,571         0.9 %   $        39,218     $          38,829         1.0  %

Operating income 5,316 5,196 2.3 % 10,014 10,464 (4.3 )% Operating margin 26.9 % 26.5 % 25.5 % 26.9 %

Net sales of $19.7 million for the second quarter were up slightly over prior-year net sales of $19.6 million, and net sales for the six-month period were $39.2 million compared to $38.8 million in the prior year. The improvement for both the quarter and six-month periods was mainly driven by a positive mix of higher value-added products.
Operating income of $5.3 million in the quarter was up 2.3 percent from the prior-year period and operating margins were up slightly to 26.9 percent compared to 26.5 percent in the prior-year period. The improvement in the quarter was due to a favorable mix of value-added products and continued strong operating performance. For the six-month period, operating income of $10.0 million was down 4.3 percent and margins declined to 25.5 percent from 26.9 percent. The decreases in operating income and margins for the six-month period were due to increased promotional activities and investments for growth in new geographies and markets, partially offset by the impact of a higher valued-added mix.

Consolidated Backlog
At August 31, 2013, our consolidated backlog was $304.2 million, compared to $298.3 million at the end of fiscal 2013 and $301.3 million in the prior-year period. We expect approximately $201.8 million, or 66 percent, of our August 31, 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.


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Liquidity and Capital Resources
                                                      Six Months Ended
                                                August 31,      September 1,
(Cash effect, in thousands)                        2013             2012
Operating Activities
Net cash provided by operating activities      $    12,262     $     10,433
Investing Activities
Capital expenditures                                (8,236 )        (15,679 )
Acquisition of business, net of cash acquired       (2,155 )              -
Change in restricted investments, net               19,856           (7,920 )
Net sales (purchases) of marketable securities      11,179          (14,593 )
Financing Activities
Proceeds from issuance of debt                           -           10,000
Payments on debt                                   (10,029 )            (86 )
Dividends paid                                      (5,277 )         (5,193 )

Operating activities. Cash provided by operating activities was $12.3 million for the first six months of fiscal 2014, compared to cash provided of $10.4 million in the prior-year period. The improvement over the prior year was due to the higher level of income reported for the six months of fiscal 2014 as compared to the same period of fiscal 2013.

Non-cash working capital (current assets, excluding cash and short-term available for sale securities and short-term restricted investments, less current liabilities) was $70.3 million at August 31, 2013, or 9.7 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 8.5 percent at September 1, 2012. The change comes from growth in the business and extending our footprint in certain businesses.

Investing Activities. Through the first six months of fiscal 2014, investing activities provided cash of $21.1 million, compared to cash used of $39.1 million in the same period last year. The current year included new capital investments of $8.2 million. We released a net $19.9 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 for use in the Company's planned capital investments in the Architectural Glass segment business. We decreased our investments in marketable securities by $11.2 million for the six-month period.

In the current quarter, we acquired the assets and certain liabilities of a window fabrication business as part of our strategy to grow through new products and new geographies. The acquisition is included in the results of our window business reported in the Architectural Framing Systems segment and adds to our historic window renovation product line and extends our presence in the Western United States. Results from the acquisition completed late in the quarter were immaterial.

In fiscal 2013, we made new capital investments of $15.7 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 six-month period of fiscal 2013 resulted in $14.6 million in net purchases. Net purchases of $7.9 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.

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.


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Financing Activities. Total outstanding borrowings at August 31, 2013 were $20.8 million, compared to $30.8 million as of March 2, 2013 and $30.9 million at September 1, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 2013 was $274.2 million, whereas the Company's net worth as defined in the credit facility was $339.0 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 August 31, 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 August 31, 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 six months of either fiscal 2014 or 2013.

Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of August 31, 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                  52           52           52           52           52               93           353
Operating leases
(undiscounted)            4,170        7,891        7,755        5,962        4,553            5,328        35,659
Purchase
obligations              78,907       10,768            -            -            -                -        89,675
Other obligations           205            -            -            -            -                -           205
Total cash
obligations         $    83,334     $ 18,711     $  7,807     $  6,014     $  4,605     $     25,821     $ 146,292

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 August 31, 2013, these obligations totaled $89.7 million.

The other obligations in the table above include a foreign exchange forward contract, which has a U.S. dollar notional value of $18.2 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 $0.2 million at August 31, 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.


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