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APOG > SEC Filings for APOG > Form 10-Q on 10-Jul-2014All Recent SEC Filings

Show all filings for APOGEE ENTERPRISES, INC.

Form 10-Q for APOGEE ENTERPRISES, INC.


10-Jul-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 1, 2014. 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 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 1, 2014.


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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 1, 2014 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 years:
                                               Three Months Ended
                                               May 31,    June 1,
(Percent of net sales)                          2014        2013
Net sales                                       100.0 %     100.0 %
Cost of sales                                    80.4        79.7
Gross profit                                     19.6        20.3
Selling, general and administrative expenses     15.9        16.9
Operating income                                  3.7         3.4
Interest income                                   0.1         0.1
Interest expense                                  0.1         0.2
Other income, net                                 0.6           -
Earnings before income taxes                      4.3         3.3
Income tax expense                                1.4         1.0
Net earnings                                      2.9 %       2.3 %
Effective tax rate                               33.4 %      29.0 %

Highlights of First Quarter of Fiscal 2015 Compared to First Quarter of Fiscal 2014
Consolidated net sales increased 17.6 percent, or $31.6 million, for the first quarter ended May 31, 2014, compared to the prior-year period. Organic growth was 11.9 percent, or $21.4 million, when excluding the sales growth attributable to the acquisition of Alumicor. This increase was due to volume growth in the U.S. window, storefront and finishing businesses in the Architectural Framing Systems segment accounting for approximately 6 percentage points of the increase; growth in the Architectural Services segment represented approximately 3 percentage points of the increase; and the remainder was driven by increased volume in the Architectural Glass segment.


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Gross profit as a percent of sales for the quarter ended May 31, 2014 decreased to 19.6 percent from 20.3 percent in the prior-year period. The current quarter decrease as compared to the prior-year quarter was due to the impact of severe winter weather early in the first quarter that negatively impacted the entire Architectural Framing Systems segment.
Selling, general and administrative expenses for the first quarter were up $3.4 million to $33.6 million compared to $30.3 million in the prior-year period, while decreasing to 15.9 percent of net sales as compared to 16.9 percent in the prior-year period. The increase in spending was primarily due to the addition of the Alumicor business acquired in the third quarter of fiscal 2014. Other income was $1.3 million in the first quarter of fiscal 2015 compared to $0.1 million in the prior-year period due to the receipt of the final distribution for a European business that was discontinued over 15 years ago. In the first quarter of fiscal 2015, our effective tax rate was 33.4 percent, compared to 29.0 percent in the prior-year period. The increase in the effective tax rate was due to the expiration of tax credit programs.

Segment Analysis
Architectural Glass
                            Three Months Ended
                                                      %
(In thousands)    May 31, 2014     June 1, 2013    Change
Net sales        $     79,634     $     74,803       6.5 %
Operating income        2,800            1,371     104.2 %
Operating margin          3.5 %            1.8 %

First-quarter net sales of $79.6 million increased 6.5 percent over prior-year net sales of $74.8 million due to increased volume in U.S. and international market sectors. Operating income improved to $2.8 million in the current quarter, compared to $1.4 million in the prior-year quarter, with operating margins of 3.5 percent, compared to 1.8 percent in the prior-year quarter. The improvement in operating income and margins for the three-month period was due to the increased volume and improved capacity utilization.

Architectural Services
                                   Three Months Ended
                                                             %
(In thousands)           May 31, 2014     June 1, 2013    Change
Net sales               $     51,616     $    46,476       11.1 %
Operating income (loss)          184            (965 )    119.1 %
Operating margin                 0.4 %          (2.1 )%

Net sales of $51.6 million for the first quarter were up 11.1 percent over prior-year net sales of $46.5 million due to increasing project activity. The segment reported operating income of $0.2 million in the current quarter, compared to a loss of $1.0 million in the prior-year period, with operating margins of 0.4 percent, compared to negative 2.1 percent in the prior-year quarter. The improvement in operating results was a result of improving project margins, as well as good project execution.

Architectural Framing Systems

                            Three Months Ended
                                                      %
(In thousands)    May 31, 2014     June 1, 2013    Change
Net sales        $     64,222     $     44,446     44.5  %

Operating income 1,931 2,064 (6.4 )% Operating margin 3.0 % 4.6 %

First-quarter net sales of $64.2 million increased 44.5 percent over prior-year net sales of $44.4 million. Organic growth was $9.6 million, or 21.6%, when excluding sales growth from the acquired Alumicor business. The organic growth was due to double-digit volume increases at all three U.S. businesses in the segment, with the window business recovering from a gap in the schedule for complex projects and the U.S. storefront and finishing businesses increasing penetration within their target market sectors and geographies.


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Operating income of $1.9 million in the current quarter was down 6.4 percent, compared to $2.1 million in the prior-year quarter, and operating margins decreased to 3.0 percent, from 4.6 percent in the prior-year quarter. Income growth in the U.S businesses on increased sales was more than offset by a loss in the Canadian storefront business due to the impact of severe winter weather early in the quarter.

Large-Scale Optical (LSO)

                             Three Months Ended
                                                      %
(In thousands)    May 31, 2014     June 1, 2013     Change
Net sales        $     20,061     $     19,473       3.0  %

Operating income 3,964 4,698 (15.6 )% Operating margin 19.8 % 24.1 %

Net sales of $20.1 million for the first quarter were up 3.0 percent over prior-year net sales of $19.5 million on increased volume. Operating income of $4.0 million in the quarter decreased 15.6 percent from the prior-year period, and operating margins decreased to 19.8 percent, compared to 24.1 percent in the prior-year period. The decreased operating results were due to increased investments in research and development for new products and new market sectors, as well as in manufacturing capacity.

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 May 31, 2014 and June 1, 2013 was as follows:
(In thousands)                 May 31, 2014      March 1, 2014      June 1, 2013
Architectural Glass           $      98,204             73,206     $      65,200
Architectural Services              209,155            187,471           192,805
Architectural Framing Systems        85,646             72,634            45,519
Large-Scale Optical                   1,073                870             1,462
Intersegment eliminations            (8,966 )           (4,546 )          (3,151 )
Total Backlog                 $     385,112     $      329,635     $     301,835

We expect approximately $307.6 million, or 80 percent, of our May 31, 2014 backlog to be recognized during the remainder of fiscal 2015, and approximately $77.5 million, or 20 percent, 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.

Acquisition
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 statements and within the Architectural Framing Systems segment since the date of acquisition.


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Liquidity and Capital Resources
                                                       Three Months Ended
                                                      May 31,      June 1,
(Cash effect, in thousands)                            2014          2013
Operating Activities
Net cash provided by (used in) operating activities $   1,196     $ (2,167 )
Investing Activities
Capital expenditures                                   (8,738 )     (1,512 )
Change in restricted investments, net                     798       19,253
Net sales (purchases) of marketable securities            384       (3,569 )
Financing Activities
Payments on debt                                          (12 )    (10,015 )
Repurchase and retirement of common stock                (863 )          -
Dividends paid                                         (3,078 )     (2,687 )

Operating activities. Cash provided by operating activities was $1.2 million for the first three months of fiscal 2015, compared to cash used of $2.2 million in the prior-year period. Both fiscal 2015 and 2014 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, insurance and taxes.

Non-cash working capital (current assets, excluding cash and short-term available for sale securities and short-term restricted investments, less current liabilities, excluding current portion of long-term debt) was $87.0 million at May 31, 2014, or 10.8 percent of last 12-month net sales, a metric for measuring working capital efficiency. This compares to $77.3 million at March 1, 2014, or 10.0 percent of fiscal 2014 net sales, and 9.4 percent at June 1, 2013. 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 2015, cash used by investing activities was $7.4 million, compared to cash provided of $14.3 million in the same period last year. The current year included capital investments of $8.7 million. The net position of our investments resulted in net sales of $0.8 million for restricted investments and net sales of $0.4 million for marketable securities.

In fiscal 2014, capital investments were $1.5 million. In the first quarter of fiscal 2014, 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 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.

We expect fiscal 2015 capital expenditures to be approximately $40 million for investments for growth, product development capabilities and productivity, as well as maintenance capital.

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 facility in Utah to align overall capacity with the demand we are expecting over the next two years.

Financing Activities. Total outstanding borrowings at May 31, 2014 were $20.7 million, consistent with March 1, 2014 levels, and were $20.8 million at June 1, 2013. Debt at May 31, 2014 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 2015 through 2021. Our debt-to-total-capital ratio was 5.5 percent at both May 31, 2014 and March 1, 2014.

We maintain a $100.0 million revolving credit facility, which expires in November 2018. No borrowings were outstanding under the facility as of May 31, 2014 or March 1, 2014.

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


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May 31, 2014 was $292.7 million, whereas the Company's net worth as defined in the credit facility was $356.7 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 0.28 at May 31, 2014. 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 May 31, 2014, 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 purchased 27,665 shares under the program during the first three months of fiscal 2015 for a total cost of $0.9 million; there were no share repurchases during fiscal 2014. We have purchased a total of 2,306,788 shares, at a total cost of $30.5 million, since the inception of this program. We have remaining authority to repurchase 943,212 shares under this program, which has no expiration date.

Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of May 31, 2014:

                                               Future Cash Payments Due by Fiscal Period
                        2015
(In thousands)        Remaining        2016         2017         2018         2019        Thereafter        Total
Continuing
operations
Industrial revenue
bonds               $         -     $      -     $      -     $      -     $      -     $     20,400     $  20,400
Other debt
obligations                  52           52           52           52           52               51           311
Operating leases
(undiscounted)            7,166        8,822        7,041        5,492        6,983            2,933        38,437
Purchase
obligations              77,934        7,049          171            -            -                -        85,154
Total cash
obligations         $    85,152     $ 15,923     $  7,264     $  5,544     $  7,035     $     23,384     $ 144,302

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 May 31, 2014, these obligations totaled $85.2 million.

We expect to make contributions of $0.8 million to our defined-benefit pension plans in fiscal 2015, which will equal or exceed our minimum funding requirements.

As of May 31, 2014, we had $5.4 million and $1.5 million of unrecognized tax benefits and environmental liabilities, respectively. We expect approximately $0.4 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 May 31, 2014, 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 May 31, 2014:

                                             Amount of Commitment Expiration Per Fiscal Period
                         2015
(In thousands)        Remaining         2016         2017          2018          2019         Thereafter       Total
Standby letters of
credit              $          -     $ 20,982     $       -     $       -     $       -     $      2,500     $ 23,482

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 May 31, 2014, $81.6 million of our backlog was bonded by performance bonds with a face value


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of $278.1 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.

For fiscal 2015, 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 $17.7 million, and $76.5 million available under our credit facility at May 31, 2014. We believe that this will provide us with the financial strength to continue our growth strategy as our end markets continue to improve.

Outlook
The following statements are based on our current expectations for full-year fiscal 2015 results. These statements are forward-looking, and actual results may differ materially.
Revenue growth of 15 to 20 percent over fiscal 2014.

We anticipate earnings per share of $1.40 to $1.50.

Capital expenditures are projected to be approximately $40 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 1, 2014.

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 1, 2014.

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