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APOG > SEC Filings for APOG > Form 10-Q on 9-Jan-2014All 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.


9-Jan-2014

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 four 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; Alumicor, a fabricator of aluminum storefront, entrance, curtainwall and window products for the Canadian 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 nine-month periods of the
current and prior fiscal years:
                                         Three Months Ended           Nine Months Ended
                                     November 30,  December 1,    November 30,  December 1,
(Percent of net sales)                   2013          2012           2013          2012
Net sales                                 100.0 %       100.0 %        100.0 %       100.0 %
Cost of sales                              78.2          77.8           78.8          79.0
Gross profit                               21.8          22.2           21.2          21.0
Selling, general and administrative
expenses                                   15.4          16.2           16.2          16.9
Operating income                            6.4           6.0            5.0           4.1
Interest income                             0.1           0.1            0.1           0.1
Interest expense                            0.1           0.1            0.1           0.2
Other income, net                             -           0.1              -           0.1
Earnings from operations before
income taxes                                6.4           6.1            5.0           4.1
Income tax expense                          1.6           1.9            1.4           1.3
Net earnings                                4.8 %         4.2 %          3.6 %         2.8 %
Effective tax rate                         24.4 %        30.2 %         28.4 %        31.6 %

Highlights of Third Quarter and First Nine Months of Fiscal 2014 Compared to Third Quarter and First Nine Months of Fiscal 2013 Consolidated net sales increased 4.7 percent, or $9.0 million, for the third quarter ended November 30, 2013, compared to the prior-year period. The inclusion of Alumicor sales since the date of acquisition accounted for approximately half of the increase for the quarter, with the remainder driven by the storefront and finishing businesses in the Architectural Framing Systems segment and growth in the Architectural Services segment. For the nine-month period, net sales increased 7.0 percent, or $36.5 million, as compared to the prior-year period. The majority of the year-on-year increase for the nine-month period was due to improved mix


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and price in our Architectural Glass segment, with the remainder largely due to improved volume in our Architectural Framing Systems segment's U.S. storefront and finishing businesses and growth in our Architectural Services segment. Gross profit as a percent of sales for the quarter ended November 30, 2013 decreased to 21.8 percent from 22.2 percent in the prior-year period, and was 21.2 percent for the nine-month period compared to 21.0 percent in the prior year. The current quarter decrease as compared to the prior-year quarter was due to some manufacturing inefficiencies experienced early in the quarter in our LSO segment and the impact of volume declines in the Architectural Framing Systems segment's window business. These items were partially offset by the impact of increased volume in the Architectural Framing Systems segment's U.S. storefront business and stronger project margins in the Architectural Services segment. The gross margin improvement for the nine-month period as compared to the prior year was largely due to the favorable margin impact from price, project mix, productivity and volume growth in core domestic markets in the Architectural Glass segment and improved project margins in the Architectural Services segment, as 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 third quarter were relatively flat at $30.7 million compared to the prior-year period of $30.8, while decreasing to 15.4 percent of net sales as compared to 16.2 percent in the prior-year period. For the nine-month period, SG&A expenses increased $2.0 million over the prior-year period, while decreasing as a percent of net sales to 16.2 percent from 16.9 percent. The increase in expense for the year-to-date period was primarily due to increased salaries and related benefits to support sales growth and geographic expansion, as well as transaction costs related to acquisitions.
In the third quarter, our effective tax rate was 24.4 percent, compared to 30.2 percent in the prior-year period, and was 28.4 percent for the nine-month period, compared to 31.6 percent in the prior year. The decrease in the effective tax rate for both the quarter and year-to-date periods was due to the release of tax reserves upon expiration of the IRS statute extension for fiscal year 2009, as well as the lapsing of the federal statute for fiscal year 2010.

Segment Analysis
Architectural Glass
                                          Three Months Ended                                      Nine Months Ended
                                                                        %                                                       %
(In thousands)            November 30, 2013     December 1, 2012      Change      November 30, 2013     December 1, 2012     Change
Net sales                $          73,365     $        74,921         (2.1 )%   $         218,142     $       197,264         10.6 %
Operating income (loss)              1,641                 461        256.0  %               3,782              (3,963 )      195.4 %
Operating margin                       2.2 %               0.6 %                               1.7 %              (2.0 )%

Third-quarter net sales of $73.4 million decreased 2.1 percent from prior-year net sales of $74.9 million due to normal project timing. For the nine-month period, net sales of $218.1 million increased 10.6 percent over the prior-year period with an improved mix, better pricing and increased volume. Operating income was $1.6 million in the current quarter, compared to $0.5 million in the prior-year quarter, with operating margins of 2.2 percent, compared to 0.6 percent in the prior-year quarter. For the nine-month period, operating income was $3.8 million, compared to a loss of $4.0 million in the prior-year period, with operating margins of 1.7 percent, compared to negative 2.0 percent in the prior year. The improved margins for both the three and nine-month periods was due primarily to improved pricing, as well as improved mix, as we benefited from an increase in higher value-added projects, productivity and volume.

Architectural Services
                                          Three Months Ended                                       Nine Months Ended
                                                                         %                                                       %
(In thousands)            November 30, 2013     December 1, 2012      Change      November 30, 2013      December 1, 2012     Change
Net sales                $          51,167     $       49,125            4.2 %   $       139,820        $       134,696          3.8 %
Operating income (loss)                351               (196 )        279.1 %            (1,401 )               (3,794 )       63.1 %
Operating margin                       0.7 %             (0.4 )%                            (1.0 )%                (2.8 )%

Net sales of $51.2 million for the third quarter were up 4.2 percent over prior-year net sales of $49.1 million, due to volume growth in line with year-to-date growth. For the year-to-date period, net sales grew by 3.8 percent to $139.8 million, as compared to $134.7 million in the prior year, due to volume growth in existing and expanded geographies.


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The segment reported operating income of $0.4 million in the current quarter, compared to a loss of $0.2 million in the prior-year period, with operating margins of 0.7 percent, compared to negative 0.4 percent in the prior-year quarter. For the year-to-date period, operating results improved to a loss of $1.4 million, compared to the prior-year loss of $3.8 million. Margins also improved to negative 1.0 percent, compared to negative 2.8 percent in the prior year-to-date period. The improvement in operating results and margins for both the quarter and year-to-date periods was due to continued increases in project margins, as we have worked through lower margin projects that were bid in the bottom of the market cycle, as well as good execution on projects flowing through revenue.

Architectural Framing Systems
                                          Three Months Ended                                      Nine Months Ended
                                                                        %                                                      %
(In thousands)            November 30, 2013     December 1, 2012     Change      November 30, 2013     December 1, 2012      Change
Net sales                $          58,981     $        51,605         14.3 %   $         152,877     $        146,182         4.6  %

Operating income 5,782 5,573 3.8 % 13,026 14,735 (11.6 )% Operating margin 9.8 % 10.8 % 8.5 % 10.1 %

Third-quarter net sales of $59.0 million increased 14.3 percent over prior-year net sales of $51.6 million, and were up 4.6 percent in the nine-month period to $152.9 million from $146.2 million in the prior-year period. The addition of Alumicor late in the current quarter accounted for approximately nine percentage points of the third quarter growth and approximately three percentage points of the year-to-date growth. The remaining increases for both the quarter and nine-month periods were due to improved volumes in the U.S. storefront and finishing businesses, partially offset by volume declines caused by a gap in the schedule for the window business, which we had anticipated.
Operating income of $5.8 million in the current quarter was up 3.8 percent, compared to $5.6 million in the prior-year quarter, and operating margins decreased to 9.8 percent, from 10.8 percent in the prior-year quarter. The increased operating income for the quarter was due to good volume in the U.S. storefront business somewhat offset by volume declines in the window business and acquisition-related costs in the segment. For the year-to-date period, operating income was $13.0 million, down 11.6 percent from $14.7 million in the prior-year period, and operating margins declined to 8.5 percent from 10.1 percent in the prior year. The decreased operating income for the year-to-date period 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 U.S. storefront and finishing businesses.
In the current year, we have completed two acquisitions as part of our strategy to grow through new products and new geographies. In the second quarter, we acquired certain assets and liabilities of a window fabrication business, which is included in the results of our window business within the Architectural Framing Systems segment. During the third quarter, we acquired the outstanding shares of Alumicor Limited (Alumicor); the results of operations have been included in the consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition. Third quarter and year-to-date earnings from the two acquisitions were break-even after the taking into consideration the impact of acquisition-related costs.

Large-Scale Optical (LSO)
                                          Three Months Ended                                       Nine Months Ended
                                                                        %                                                       %
(In thousands)            November 30, 2013     December 1, 2012      Change      November 30, 2013     December 1, 2012      Change
Net sales                $          22,699     $        21,648          4.9  %   $          61,917     $        60,477          2.4  %

Operating income 6,058 6,557 (7.6 )% 16,072 17,021 (5.6 )% Operating margin 26.7 % 30.3 % 26.0 % 28.1 %

Net sales of $22.7 million for the third quarter were up 4.9 percent over prior-year net sales of $21.6 million, and net sales for the nine-month period were $61.9 million, compared to $60.5 million in the prior year, an increase of 2.4 percent. The improvements for both the quarter and nine-month periods were mainly driven by a positive mix of higher value-added products, as well as increased volume.
Operating income of $6.1 million in the quarter decreased 7.6 percent from the prior-year period, and operating margins decreased to 26.7 percent, compared to 30.3 percent in the prior-year period. The decreased operating results were due to the impact of some short-term operational inefficiencies early in the quarter and increased promotional activities in the quarter, slightly offset by volume growth and a favorable mix. For the nine-month period, operating income of $16.1 million was down 5.6 percent and margins declined to 26.0 percent from 28.1 percent. The decreases in operating income and margins for the nine-month period


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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 and slight volume growth.

Backlog
Backlog represents the dollar amount of revenues we expect to recognize in the
future from firm contracts or orders received, as well as those that are in
progress. Backlog is not a term defined under generally accepted accounting
principles and is not a measure of contract profitability. We include a project
within our backlog at the time a signed contract or a firm purchase order is
received, generally as a result of a competitive bidding process. Backlog by
reporting segment at November 30, 2013 and December 1, 2012 was as follows:
                               November 30, 2013     December 1, 2012
Architectural Glass           $          66,334     $         66,905
Architectural Services                  161,374              197,830
Architectural Framing Systems            74,939               42,007
Large-Scale Optical                       2,050                2,478
Intersegment eliminations                (4,806 )             (6,313 )
Total Backlog                 $         299,891     $        302,907

We expect approximately $136.5 million, or 46 percent, of our November 30, 2013 backlog to be recognized during the remainder of fiscal 2014, approximately $139.6 million, or 47 percent, to be recognized in fiscal 2015 and the balance to be recognized in fiscal 2016. 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.

Acquisition
On November 5, 2013, the Company acquired all of the shares of Alumicor Limited (Alumicor), a privately held business, for $52.4 million, including cash acquired of $1.6 million. Alumicor is a window, storefront, entrance and curtainwall company primarily serving the Canadian commercial construction market. Alumicor's results of operations have been included in the consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition, including $4.8 million of sales and break-even results after approximately $0.5 million of acquisition-related expenses, which are included in selling, general and administrative expenses in the Company's consolidated results of operations.

The assets and liabilities of Alumicor were recorded in the consolidated balance sheet within the Architectural Framing Systems segment as of the acquisition date, at their respective fair values. The preliminary purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed and included total assets of $56.4 million, including estimated goodwill and intangibles of $31.0 million, and total liabilities of $5.6 million. Because the acquisition was completed near quarter-end, all balances recorded are estimated amounts; the purchase price allocation is expected to be finalized in the fourth quarter, as the valuation of identifiable assets and liabilities is completed.

Liquidity and Capital Resources
                                                      Nine Months Ended
                                                November 30,     December 1,
(Cash effect, in thousands)                         2013             2012
Operating Activities
Net cash provided by operating activities      $     42,706     $     22,921
Investing Activities
Capital expenditures                                (17,255 )        (21,265 )
Acquisition of business, net of cash acquired       (52,806 )            (15 )
Change in restricted investments, net                 2,768           (4,752 )
Net sales (purchases) of marketable securities       23,617          (13,915 )
Financing Activities
Proceeds from issuance of debt                            -           10,000
Payments on debt                                    (10,068 )           (125 )
Dividends paid                                       (7,868 )         (7,751 )


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Operating activities. Cash provided by operating activities was $42.7 million for the first nine months of fiscal 2014, compared to cash provided of $22.9 million in the prior-year period. The improvement over the prior year was due to the higher level of income reported and improved working capital management for the nine months of fiscal 2014, as compared to the same period of fiscal 2013. Additionally, we received proceeds from the New Market Tax Credit transaction, net of deferred costs, to support the investment in the new Architectural Glass coater.

Non-cash working capital (current assets, excluding cash and short-term available for sale securities and short-term restricted investments, less current liabilities) was $72.1 million at November 30, 2013, or 9.8 percent of last 12-month net sales, a 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 8.7 percent at December 1, 2012. The change comes from acquisitions, growth in the base business and extending our footprint in certain businesses.

Investing Activities. Through the first nine months of fiscal 2014, cash used by investing activities was $42.9 million, compared to cash used of $41.4 million in the same period last year. The current year included new capital investments of $17.3 million. We reduced our restricted investments by $2.8 million, as we released $10.0 million of cash held in escrow for the recovery zone facility bonds that was used to redeem the bonds and also released $12.0 million of cash collateral to unrestricted cash related to the letter of credit supporting these bonds. These items were offset as we set aside $21.1 million of cash during the third quarter for the investment in a new Architectural Glass coater. We decreased our investments in marketable securities by $23.6 million for the nine-month period to fund the acquisition of Alumicor.

In the current year, we have completed two acquisitions as part of our strategy to grow through new products and new geographies. In the second quarter, we acquired the assets and certain liabilities of a window fabrication business, which is included in the results of our window business within the Architectural Framing Systems segment. During the third quarter, we acquired the outstanding shares of Alumicor Limited (Alumicor); the results of operations have been included in the consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

In fiscal 2013, we made new capital investments of $21.3 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 nine-month period of fiscal 2013 resulted in $13.9 million in net purchases. Net purchases of $4.8 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 approximately $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 November 30, 2013 were $20.7 million, compared to $30.8 million as of March 2, 2013, and $30.9 million at December 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 November 30, 2013 consisted of $20.4 million of industrial revenue bonds, and $0.3 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 5.6 percent at November 30, 2013, and 8.5 percent at March 2, 2013.

During the third quarter of fiscal 2014, the Company entered into an amendment to its existing $100.0 million revolving credit facility. The expiration date . . .

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