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Apogee Shares Up on Improved Q3 Earnings

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Shares of Apogee Enterprises, Inc. (APOG - Free Report) rose 4.4% as the company reported third-quarter fiscal 2014 earnings of 33 cents per share, up 18% from 28 cents earned in the prior-year quarter. Reported earnings were in line with the Zacks Consensus Estimate. The improvement was particularly driven by improved mix and productivity in the Architectural Glass segment as well as increasing margins and good project execution in the Architectural Services segment.

Total revenue increased 4.7% year over year to $199 million in the quarter, falling short of the Zacks Consensus Estimate of $206 million. Improvement in all segments barring Architectural Glass led to the growth.

Operational Update

Cost of goods sold increased 5% to $156 million in the quarter. Gross profit improved 3% to $43.4 million. Gross margin in the quarter contracted 40 basis points to 21.8%. SG&A expenses remained flat at $30.7 million. Operating income was $12.7 million, up 11% from $11.4 million earned in the year-ago quarter. Operating margin expanded 40 basis points to 6.4%.

Segment Performance

Revenues from the Architectural Glass segment decreased 2% year over year to $73.4 million due to project timing. Operating income in the quarter was $1.6 million, more than three times the $0.5 million earned in the year-ago quarter, helped by improved mix and productivity.

Revenues from the Architectural Services segment increased 4% year over year to $51.2 million. The segment reported an operating profit of $0.35 million, an improvement from a loss of $0.2 million in the prior-year quarter.

The Architectural Framing Systems’ revenues increased 14% year over year to $59 million. Almost half of the growth was driven by the inclusion of the Alumicor acquisition, while the balance was driven by the U.S. storefront business. The segment’s operating income increased 4% to $5.8 million from the year-ago quarter. Improved performance in the storefront and finishing businesses was offset by a weaker window business.

Large-Scale Optical Technologies segment’s revenues went up 5% to $22.7 million. Operating income in the reported quarter was $6.1 million, down 8% from $6.5 million in the year-ago quarter. Increased promotional activities as well as manufacturing inefficiencies early in the quarter offset volume growth and positive mix in the segment.

Financial Position

Apogee had cash and short-term investments of $22.5 million at the end of the reported quarter compared with $87.5 million at the end of fiscal 2013. Cash flow from operating activities was $42.7 million during the first nine months of fiscal 2014 compared with $22.9 million in the prior-year comparable period.

Apogee acquired Alumicor Limited, a Canadian non-residential window, storefront, entrance and curtainwall company, for approximately $52 million in cash. Long-term debt amounted to $20.7 million compared with $30.8 million at the end of fiscal 2013.

Consolidated backlog at the end of the third quarter was $300 million, down from $303 million at the end of the prior-year quarter. Approximately 45% of the backlog, or $136 million, is expected to be delivered in fiscal 2014, and the balance 55%, or $164 million, in fiscal 2015.

Fiscal 2014 Guidance

For fiscal 2014, Apogee raised the lower end of its earnings guidance and now expects earnings in the band of 95 cents to $1.00 per share from the previous guidance of 93 cents to $1.00 per share. The lower end was guided up on the back of strong backlog at improving margins and project pipeline. The company guides annual asales growth in the range of 10 to 11%.  Gross margin is anticipated to be at least 22% in fiscal 2014. Capital spending for fiscal 2014 is projected in the range of $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 for the much-awaited recovery, which looks promising for Apogee.

Apogee Enterprises is a leader in technologies for the design and development of value-added glass products, services and systems. Apogee currently carries a Zacks Rank #2 (Buy).  Some other stocks worth considering in the sector include CaesarStone Sdot-Yam Ltd.  (CSTE - Free Report) , Simpson Manufacturing Co., Inc. (SSD - Free Report) and Trex Co. Inc. (TREX - Free Report) . While CaesarStone Sdot-Yam holds a Zacks Rank #1 (Strong Buy), Simpson and Trex have a Zacks Rank #2 (Buy).

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