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APOG > SEC Filings for APOG > Form 10-K on 30-Apr-2014All Recent SEC Filings

Show all filings for APOGEE ENTERPRISES, INC.

Form 10-K for APOGEE ENTERPRISES, INC.


30-Apr-2014

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


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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 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 highlights the results for fiscal 2014:
• Consolidated revenues increased 10 percent over fiscal 2013, or 8 percent excluding the impact of Alumicor, and operating income was up 47 percent over last year. All four segments grew at the top and bottom lines.

• Architectural Glass segment revenues improved by 10 percentage points over fiscal 2013 and operating results improved $8.3 million.

• The Architectural Services segment revenues increased 9 percent over fiscal 2013 and operating income improved by $5.5 million.

• The Architectural Framing Systems segment saw a 13 percent improvement in net sales compared to fiscal 2013, or 5 percent organic growth when adjusting out the impact of Alumicor, and operating results were up 2 percent.

• The LSO segment saw revenues and operating income grow slightly over fiscal 2013 levels.

• Consolidated backlog was $329.6 million at March 1, 2014, up 11 percent over fiscal 2013 levels.

• We acquired Alumicor Limited (Alumicor) for $52.9 million on November 5, 2013. 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. Alumicor contributed $15.9 million of sales to our Architectural Framing Systems segment for the period subsequent to acquisition.

Strategy

Architectural Glass, Architectural Services and Architectural Framing Systems 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 general


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contractors and architects value our ability to reliably 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 attributes 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 macroeconomic 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 months after project start. From the McGraw-Hill data, we believe that our U.S. markets had a compound annual growth rate of 4 percent over our past three fiscal years, while our combined architectural segments' domestic compound annual growth rate was 11 percent over that same period.

Our overall strategy in these segments is to deliver organic growth faster than our commercial construction markets. This organic growth is accomplished through geographic expansion and entry into adjacent 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. We also aspire to lead our markets in the development of practical, energy-efficient products for new construction and renovation. We have introduced products and services designed to meet the growing demand for energy-efficient 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.

While each of our operating segments has the ability to grow through geographic expansion and product line extension, we regularly evaluate business development opportunities in complementary markets. This strategy can take the form of acquisition or strategic alliances. Through our acquisitions completed in fiscal 2014, we have entered the Canadian market for storefront and entrance systems and expanded our product offerings for the historically accurate window renovation market.

In recent years, we have increased our focus on the window and curtainwall retrofit and renovation market. We have seen increased interest from all sectors of the non-residential and high-end multi-family building markets in upgrading the fa็ades and improving the energy efficiency of their buildings. We consider this to be a significant opportunity for Apogee in the coming years.

Additionally, we are constantly working to improve the efficiency and productivity of our manufacturing and installation operations. During fiscal 2014, we completed the initial roll-out of lean manufacturing principles to all of our operating units and expect to continue to see gross margin expansion due to improved manufacturing productivity.

Lastly, we consistently evaluate capital investments to improve productivity and product development capabilities, as well as to provide appropriate manufacturing capacity to support growth.

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 U.S. market, we continue to see conversion in the 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.

We also participate in the global fine art market, which includes demand from 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 its use with art that is much larger and for which weight is an important consideration. We will continue to expand our presence in this market through international expansion and product line extensions.


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Additionally, we have continued to execute our strategy of expanding into custom picture framing markets outside the U.S. Over the past three years, we have focused on the European markets. In fiscal 2012, we opened up a warehouse in the Netherlands and began selling our custom picture framing glass and acrylic in Europe where, historically, we have had very little presence. We developed new products and marketing materials for this market and have distributors in over10 countries. We believe our products and distribution will enable us to grow at a faster pace internationally than in the United States.

Results of Operations
Net Sales
(Dollars in thousands)    2014         2013         2012       2014 vs. 2013     2013 vs. 2012
Net sales              $ 771,445    $ 700,224    $ 662,463           10.2 %            5.7 %

Fiscal 2014 Compared to Fiscal 2013
Sales grew 10.2 percent in fiscal 2014 to $771.4 million compared to $700.2 million in fiscal 2013. The inclusion of Alumicor sales since the date of acquisition accounted for 2 percentage points of this increase. Improved product mix and pricing in the Architectural Glass segment drove approximately 4 percentage points of the increase. Volume growth in the Architectural Services segment favorably impacted the year by about 2 percentage points and the remainder of the increase resulted from improved volume in our Architectural Framing segment's U.S. storefront and finishing businesses.

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 53-weeks in fiscal 2012, which had a negative impact of approximately 2 percentage points on fiscal 2013 sales.

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)                     2014      2013       2012
Net sales                                    100.0 %   100.0 %   100.0  %
Cost of sales                                 78.6      79.2      82.3
Gross profit                                  21.4      20.8      17.7
Selling, general and administrative expenses  16.2      16.9      17.1
Operating income                               5.2       3.9       0.6
Interest income                                0.1       0.1       0.1
Interest expense                               0.1       0.2       0.2
Other (expense) income, net                      -         -         -
Earnings before income taxes                   5.2       3.8       0.5
Income tax expense (benefit)                   1.6       1.1      (0.2 )
Net earnings                                   3.6 %     2.7 %     0.7  %
Effective income tax rate                     29.6 %    29.0 %   (29.2 )%

Fiscal 2014 Compared to Fiscal 2013
Gross profit improved as a percent of sales to 21.4 percent in fiscal 2014 from 20.8 percent in fiscal 2013. The improvement in gross margins was due to the margin impact of improved mix and pricing in the Architectural Glass segment, improved project margins in the Architectural Services segment and overall productivity improvements. These favorable items were partially offset by lower capacity utilization in the Architectural Framing System's window business related to an anticipated gap in the schedule for more complex projects.

Selling, general and administrative (SG&A) spending increased by $6.7 million in fiscal 2014 over fiscal 2013, while SG&A as a percent of sales decreased to 16.2 percent in fiscal 2014 from 16.9 percent in fiscal 2013. The increase in spending was primarily due to increased salaries and related benefits to support sales growth and geographic expansion, as well as other costs related to geographic expansion and acquisitions.


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Fiscal 2013 Compared to Fiscal 2012
Gross profit was up 3.1 percentage points in fiscal 2013 as compared to fiscal 2012 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, fiscal 2013 benefited from completing higher margin work and positive project execution in the Architectural Services segment.

Selling, general and administrative 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 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.

Segment Analysis
Architectural Glass
(In thousands)                                   2014           2013           2012
Net sales                                     $ 293,810     $ 266,456      $ 278,087
Operating income (loss)                           3,861        (4,391 )      (19,595 )
Operating income (loss) as a percent of sales       1.3 %        (1.6 )%        (7.0 )%

Fiscal 2014 Compared to Fiscal 2013. Fiscal 2014 net sales increased $27.4 million to $293.8 million, or 10.3 percent over fiscal 2013. Improved mix and pricing in our U.S. and Brazilian businesses accounted for approximately 8 percentage points of the increase. The remainder was due to volume growth in both our U.S. and Brazilian businesses, partially offset by a decline in our export volume.

Operating income of $3.9 million in fiscal 2014 was an $8.3 million improvement over the fiscal 2013 loss of $4.4 million. Operating margins improved to 1.3 percent in fiscal 2014 compared to negative 1.6 percent in fiscal 2013. The improvement in operating results was largely due to the impact of a better mix of higher value-added projects and improved pricing. The impact of volume growth and productivity improvements also contributed to the year-on-year increase in operating results.

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 focused 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 improved pricing, a better mix of business, and improved operating performance and management of fixed costs.

Architectural Services
(In thousands)                                   2014           2013           2012
Net sales                                     $ 203,351     $ 186,570      $ 149,779
Operating income (loss)                           4,479        (1,008 )       (2,879 )
Operating income (loss) as a percent of sales       2.2 %        (0.5 )%        (1.9 )%

Fiscal 2014 Compared to Fiscal 2013. Fiscal 2014 net sales increased $16.8 million over fiscal 2013, a 9.0 percent increase. Volume growth in existing and expanded geographies was the driver of this growth. Fiscal 2014 operating income increased $5.5 million to $4.5 million compared to a loss of $1.0 million in fiscal 2013. Operating margin of 2.2 percent in fiscal 2014 was an improvement of 2.7 percentage points over fiscal 2013. The improved operating results were a result of better project margins, as we have worked through lower margin projects that were bid in the bottom of the market cycle, as well as strong execution on projects flowing through revenue.


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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 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 fiscal 2013 to start 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.

Architectural Framing Systems
(In thousands)                            2014          2013          2012
Net sales                              $ 216,059     $ 191,137     $ 174,930
Operating income                          14,930        14,584        10,402
Operating income as a percent of sales       6.9 %         7.6 %         5.9 %

Fiscal 2014 Compared to Fiscal 2013. Fiscal 2014 net sales increased $24.9 million, or 13.0 percent, over fiscal 2013.The addition of Alumicor accounted for approximately 8 percentage points of the increase for the year. The remainder of the increase was due to improved volumes in the U.S. storefront and finishing businesses, partially offset by volume declines caused by an anticipated gap in the schedule for the window business.

Fiscal 2014 operating income of $14.9 million was up slightly over the $14.6 million reported in fiscal 2013, while operating margins decreased to 6.9 percent in fiscal 2014 from 7.6 percent in fiscal 2013. The favorable impact of increased volumes in the U.S. storefront and finishing businesses was partially offset by lower sales in the window business related to the anticipated gap in the schedule for more complex projects, resulting in lower capacity utilization. Additionally, the Canadian storefront business that was acquired late in the year delivered an operating loss due to acquisition costs.

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.

Large-Scale Optical Technologies (LSO)
(In thousands)                            2014         2013         2012
Net sales                              $ 81,127     $ 79,947     $ 78,532
Operating income                         21,252       20,993       19,605
Operating income as a percent of sales     26.2 %       26.3 %       25.0 %

Fiscal 2014 Compared to Fiscal 2013. LSO revenues in fiscal 2014 increased slightly over fiscal 2013 to $81.1 million from $79.9 million. The improvement compared to fiscal 2013 was due to a positive mix of higher value-added products. Operating income of $21.3 million was relatively flat to fiscal 2013 levels and operating margins were consistent. The impact of the strong mix of higher value-added products was largely offset by increased promotional activities and investments for growth in new geographies and markets.

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 fiscal 2013. The segment also experienced strong operating performance in fiscal 2013, which contributed to the improved margins in the year.


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Consolidated 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 March 1, 2014 and March 2, 2013 was as follows:
                               March 1, 2014      March 2, 2013
Architectural Glass           $       73,206     $       68,618
Architectural Services               187,471            191,386
Architectural Framing Systems         72,634             39,758
Large-Scale Optical                      870              1,272
Intersegment eliminations             (4,546 )           (2,742 )
Total Backlog                 $      329,635     $      298,292

We expect approximately $314.5 million, or 95 percent, of our March 1, 2014 backlog to be recognized in fiscal 2015, with the balance to be recognized in fiscal 2016 and beyond. 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.

Acquisitions
On November 5, 2013, the Company acquired all of the shares of Alumicor Limited, a privately held business, for $52.9 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 . . .

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