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Apogee Enterprises, Inc. (APOG - Analyst Report) delivered second quarter fiscal 2013 earnings of 17 cents per share, in stark contrast to the prior year loss of 6 cents. Earnings comfortably surpassed the Zacks Consensus Estimate of 9 cents per share.
 
Total Revenues improved 6% year over year to $175.9 million, beating the Zacks Consensus Estimate of $170 million. The improvement was driven by the growth in the Architectural as well as Large-Scale Optical Technologies segment.
 
Operational Update
 
Cost of sales remained flat year-over-year to $139.8 million in the quarter. Gross profit improved 39% to $36.1 million. Gross margin in the quarter improved 480 basis points to 20.5%.
 
SG&A expenses remained flat year over year in the quarter to $28.6 million. Operating income was $7.6 million compared to a loss of $2.7 million in the year ago quarter.
 
Segment Performance
 
Revenues in the Architectural Products and Services segment rose 5% year over year to $156.4 million. The growth was attributable to share gains in storefront as well as installation business.
 
Operating income in the quarter was $3 million compared to the year ago loss of $5.1 million. The improvement was driven by higher pricing of architectural glass and volume growth in the storefront and installation businesses along with good operation performance throughout the segment.
 
Backlog in the segment was $299 million compared to $267.3 million in the year ago quarter. The company expects to deliver roughly $166 million or 56% of the backlog in fiscal 2013 and $133 million or 44% in fiscal 2014.
 
Large-Scale Optical Technologies segment’s revenues went up 19% to $19.6 million. Operating income in the reported quarter improved 48.6% to $5.2 million. The improvement stemmed from higher value-added glass and acrylic mix across the picture framing sectors.
 
Financial Position
 
Apogee ended the quarter with cash and short-term investments of $68.3 million, compared to $79.3 million at fiscal 2012 end. Long-term debt amounted to $30.8 million compared to $20.9 million at fiscal 2012 end.
 
Capital expenditure for the first six month of fiscal 2013 was $15.7 million compared to $3.6 million prior year period. Cash provided by operating activities was $10.5 million during the first six months of fiscal 2013 compared to cash used amounting to $14.7 million during year ago comparable period.
 
Looking Ahead
 
For fiscal 2013, Apogee has increased its earnings guidance to the range of 56 cents to 64 cents per share from the previous guidance of 48 cents to 58 cents. It expects revenue growth in the mid-single digits, driven by share gains in the architectural businesses.  
 
Further, the company expects to generate positive free cash flow after spending $25 to $30 million to improve productivity and capacity, besides introducing new products along with maintaining the requirements.
 
Our Take
 
The company has significant exposure to the U.S. market in the installation and storefront businesses and is focusing on further increasing its exposure in that market to gain share. The strategy of increasing its domestic geographical footprint will help revenues grow, moving forward.
 
The architectural segment returned to profitability in the reported quarter. Moreover, the segment’s backlog increased 30% year over year and reached its maximum level in twelve quarters which bodes well for its future performance.
 
However, macroeconomic conditions might be a headwind for Apogee’s performance in fiscal 2013. Moderating global economic growth and uncertainty in the global economic scenario can limit Apogee’s near-term revenue visibility.
 
Apogee retains a short-term Zacks #3 Rank (Hold). We have a long-term Outperform recommendation on the stock.

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