Apogee Beats Estimates

The leader in technologies for the design and development of value-added glass products Apogee Enterprises Inc. (APOG - Analyst Report) recently announced fiscal 2012 first quarter results, minimizing its per share loss to 8 cents from 13 cents in the year-earlier quarter, ahead of the Zacks Consensus Estimate of 11 cents.

The company continues to incur losses due to the ongoing weakness in commercial construction market conditions.

Apogee’s total revenue increased 7% to $153.3 million in the reported quarter from $143 million in the year-earlier quarter, striding ahead of the Zacks Consensus Estimate of $150 million. The increase in revenue was supported by the company’s large-scale optical segment.

Costs and Margins

Costs of sales increased 4% year over year to $129.6 million during the quarter, while gross profit improved substantially by 26% year over year to $23.7 million in the quarter. Consequently, gross margins also improved 220 basis points year over year to 15.4% in the reported quarter.

Selling, general and administrative expenses were up 9% year over year to $27.1 million. The company’s operating loss shrank 44% year over year to $3.43 million during the quarter. However, the company’s operating margins declined 210 basis points year over year to 2.2%.

Segmental Performance

Architectural Segment: The segment reported net sales of $135.3 million in the reported quarter versus $126.4 million during the year-ago quarter. Operating loss as reported by the segment decreased to $7.05 million from a loss of $8.64 million during the year-earlier quarter. The addition of the Brazilian architectural glass business contributed a 5% increase to revenue.

The segment’s backlog increased to $247 million at the end of the quarter from $237.2 million at the end of fiscal 2011 and $214.9 million in the prior-year period. Of this 71% is expected to be delivered in fiscal 2012 and approximately 29% in fiscal 2013.

Large-Scale Optical Segment: Net sales as reported by the segment during the first quarter improved substantially to $18.1 million compared with $16.7 million in the prior-year quarter. The segment also reported an operating profit of $4.63 million, which improved 38% from $3.4 million in the year-ago quarter.

The increase in revenue was driven by the increase in the volumes of value-added picture framing products for large and independent framers, and for the fine art/museum market.

Financial Position

Cash and short-term investments amounted to $43 million as of May 28, 2011, versus $60.6 million at the end of fiscal 2011. Long-term debt declined marginally to $21.3 million at the end of the quarter versus $21.4 million at the end of fiscal 2011.

During the quarter, working capital employed totaled $25 million in cash, comprising $15 million for seasonal use to fund incentive and retirement plans, and tax payments, and $10 million to support current and planned growth. Non-cash working capital amounted to $63.3 million at the end of the quarter versus $39.4 million at the end of fiscal 2011.

The debt-to-capitalization ratio of Apogee was 6.2% as of May 28, 2011 versus 6.1% as of February 26, 2011 and November 27, 2010 and 5.7% as of August 28, 2010.

Outlook

For fiscal 2012, the company is expecting a marginal increase in its revenue, with a profit in the second half offsetting losses in the first half. The company is optimistic that increased prices for architectural glass will continue in the second half as well along with stronger volumes for its architectural glass and storefront businesses. The company is also expecting lower margins for its installation business.

For FY12, the company now expects revenue growth to exceed 10% incurring profits for the rest of the year. The company also expects to generate positive cash flow from operations in fiscal 2012.

Moreover, the company believes that the efforts taken including a price increase, productivity improvements, project selection changes, etc. are certainly going to have positive effects on the 2012 results.

Our Take

Management seems confident of its long-term strategies, which have helped the company survive the loss -making environment and maintain its strong balance sheet. The strategy includes a number of cost cutting initiatives, which help the company remain focused on productivity improvements in order to counter the ill-effects of a downturn in commercial construction.

The company maintained its capacity and workforce to respond to potential growth in fiscal 2012, and continues to emphasize longer-term strategies to expand its energy-efficient architectural glass offerings both domestically and all over the world. Apogee currently retains a Zacks #3 Rank (short-term Hold rating).

Apogee Enterprises is a technology leader in the design and development of value-added glass products, services and systems. The company presently has two reportable segments – The Architectural segment and The Large-Scale Optical Technologies. Apogee competes with PPG Industries Inc. (PPG - Analyst Report), privately-held Guardian Industries Corp. and Pilkington Group Limited.