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Apogee Q2 Earnings At Par, Revenues Miss

Zacks Equity Research

Apogee Enterprises, Inc. (APOG) delivered second-quarter fiscal 2014 earnings of 21 cents per share, up almost 17% from 18 cents earned in the prior-year quarter. Reported earnings were in line with the Zacks Consensus Estimate. The year-over-year rise was driven by improved volume, mix, productivity and pricing in Architectural Glass, and improved margins in The Large-Scale Optical segment.

Total revenue edged up 1.3% year over year to $178.3 million in the quarter, falling short of the Zacks Consensus Estimate of $186 million. Growth in Architectural Glass and Large-scale Optical segments was offset by decline in Architectural Services and Architectural Framing Systems.

Operational Update

Cost of goods sold remained flat at $139.7 million in the quarter. Gross profit improved 7% to $38.5 million. Gross margin in the quarter expanded 110 basis points to 21.6%. SG&A expenses went up 2% to $29 million. Operating income was $9.3 million, up 24% from $7.5 million earned in the year-ago quarter. Operating margin expanded 90 basis points to 5.2%, driven by strong growth in the Architectural Glass and Large-Scale Optical segments.

Segment Performance

Revenues from the Architectural Glass segment increased 11% year over year to $70 million. Operating income in the quarter was $0.8 million, a stellar improvement from a loss of $2 million in the year-ago quarter. The segment benefited from improved mix, and productivity and pricing.

Revenues from the Architectural Services segment declined 10% year over year to $42 million due to timing of project flow. The segment reported an operating loss of $0.8 million, an improvement from a loss of $1 million in the prior-year quarter.

The Architectural Framing Systems’ revenues dipped 5% year over year to $49 million. The segment’s operating income declined 15% to $5.2 million from the year-ago quarter. Improved performance in the storefront and finishing businesses was offset by a weaker window business, where revenues and operating income were affected by an anticipated gap in the schedule for more complex projects.

Large-Scale Optical Technologies segment’s revenues inched up 1% to $19.7 million. Operating income in the reported quarter was $5.3 million, up 2% from $5.2 million in the year-ago quarter.

Financial Position

Apogee had cash and short-term investments of $73.7 million at the end of the reported quarter compared with $85.6 million at the end of fiscal 2013. Long-term debt amounted to $20.8 million compared with $30.8 million at the end of fiscal 2013. Cash flow from operating activities was $12.3 million during the first half of fiscal 2014 compared with $10.4 million in the prior-year comparable period.

Consolidated backlog at the end of the second quarter was $304.2 million, up from $301.8 million at the end of the first quarter of fiscal 2014 and $301.3 million in the prior-year quarter. Approximately 66% of the backlog, or $202 million, is expected to be delivered in fiscal 2014, and the balance 34%, or $102 million, in fiscal 2015.

Looking Ahead

For fiscal 2014, Apogee increased its earnings guidance range to 93 cents to $1.00 per share from the prior guidance of 90 cents to $1.00 per share on the back of strong backlog, project pipeline and operating performance. The company however maintained its revenue growth guidance in the high-single digit. Gross margin is anticipated to be at least 22% in fiscal 2014. Capital spending for fiscal 2014 is projected in the range of $40 to $45 million as Apogee continues to invest in growth, productivity and product development capabilities.

Apogee targets $1 billion in revenues by the end of fiscal 2016. Apogee also expects to achieve 10% operating margins on the back of its focus on productivity and operational improvements.

Our Take

Apogee’s backlog remains strong, which bodes well for its future performance. The company intends to add new capacities and fund acquisitions. Focus on operational improvements, expansion in new geographies and markets, and new product launches will fuel Apogee’s revenue growth going forward.

Apogee has faced challenging commercial construction market conditions so far. However, the U.S. construction is finally stabilizing and is on track to the much-awaited recovery, which looks promising for Apogee.

However, macroeconomic conditions might continue to be a headwind for Apogee. Moderating global economic growth and uncertainty in the global economic scenario can limit Apogee’s near-term revenue visibility.

Apogee Enterprises is a leader in technologies for the design and development of value-added glass products, services and systems. Apogee retains a Zacks Rank #3 (Hold). Other companies in the industrial products space with favorable Zacks rank are NSK Ltd. (NPSKY), NN Inc. (NNBR) and Northwest Pipe Co. (NWPX). All of them hold a Zacks Rank #1 (Strong Buy).

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