UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-K
_________________________________
x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 27, 2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-6365
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APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Minnesota | 41-0919654 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
4400 West 78th Street – Suite 520, Minneapolis, MN | 55435 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (952) 835-1874
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||
Common Stock, $0.33 1/3 Par Value | The NASDAQ Stock Market LLC | |||
Securities registered pursuant to Section 12(g) of the Act: None
________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of August 29, 2015, the last business day of the registrant's most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $1,486,000,000 (based on the closing price of $50.82 per share as reported on the NASDAQ Stock Market LLC as of that date).
As of April 25, 2016, 28,686,035 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III hereof is incorporated by reference to the Proxy Statement for the registrant's 2016 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
APOGEE ENTERPRISES, INC.
Annual Report on Form 10-K
For the fiscal year ended February 27, 2016
TABLE OF CONTENTS
Page | ||
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PART I
ITEM 1. BUSINESS
The Company
Apogee Enterprises, Inc. (Apogee, the Company or we) was incorporated under the laws of the State of Minnesota in 1949. We are a world leader in certain technologies involving the design and development of value-added glass solutions for enclosing commercial buildings and framing art.
Our Company has four reporting segments:
• | The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings. For fiscal 2016, our Architectural Glass segment accounted for approximately 35 percent of our net sales. |
• | The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings. For fiscal 2016, our Architectural Services segment accounted for approximately 25 percent of our net sales. |
• | The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. For fiscal 2016, our Architectural Framing Systems segment accounted for approximately 31 percent of our net sales. |
• | The Large-Scale Optical Technologies (LSO) segment manufactures value-added glass and acrylic products for the custom picture framing and fine art markets. For fiscal 2016, this segment accounted for approximately 9 percent of our net sales. |
In fiscal 2014, we acquired all of the shares of Alumicor Limited (Alumicor), a storefront, entrance and window systems company in Canada, for $52.9 million. Alumicor's results of operations are included in our Architectural Framing Systems segment.
Strategy
Our overall strategy in the Architectural Glass and Architectural Framing Systems segments is to deliver growth faster than our defined commercial construction markets. We accomplish this through geographic and market segment expansion and new product offerings, while differentiating ourselves through superior service and lead times, remaining focused on distinctive solutions for enclosing commercial buildings. In recent years, we have increased our focus on the window and curtainwall retrofit and renovation of existing commercial buildings. We have seen increased interest from the non-residential and high-end multi-family building sectors in upgrading the façades and improving the energy efficiency of their buildings. We consider this to be a significant opportunity for Apogee in the coming years.
In the Architectural Services segment, our emphasis is on improving margins through focused project selection, while continuing to deliver organic growth in line with our available project management capacity.
Within our LSO segment, our strategy is to grow by continuing to convert the custom picture framing and fine art markets from clear uncoated glass and acrylic products to value-added products that protect art from UV damage and minimize reflection, both within the United States (U.S.) and internationally. Additionally, we have begun identifying new display markets that desire the value-added properties our glass and acrylic products provide.
Each of our segments has the ability to grow organically through geographic expansion and product line extension, and we also regularly evaluate business development opportunities in complementary sectors. These strategies can also be executed by acquisition or strategic alliances.
Finally, we are constantly working to improve the efficiency and productivity of our manufacturing and installation operations by implementing lean manufacturing disciplines and automation throughout our business. We expect this initiative to continue to deliver gross margin expansion into the foreseeable future.
Products and Services
Architectural Glass, Architectural Services and Architectural Framing Systems segments
All of these segments participate in various phases of the value chain to design, engineer, fabricate and install customized aluminum and glass window, curtainwall, and storefront and entrance systems for buildings in the commercial, institutional and high-end multi-family residential construction sectors.
In our Architectural Glass segment, we add ultra-thin, high-performance coatings to uncoated glass to create a variety of aesthetic characteristics, unique designs and energy efficiency, including varying levels of solar energy management, aligned with the
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industry trend of increasingly energy-efficient buildings. We also laminate layers of glass and vinyl to protect against hurricanes and other severe impacts, and temper, or heat strengthen, glass to provide additional strength. Our high-performance glass is custom made-to-order and is typically fabricated into insulating and/or laminated glass units to allow for installation into window, curtainwall, storefront or entrance systems.
By integrating technical capabilities, project management skills and field installation services, we provide design, engineering, fabrication and installation expertise for the building envelope within our Architectural Services segment. The services we provide allow our customers to meet the timing and cost requirements of their jobs by providing efficiently designed and high-quality window and curtainwall systems and effectively managing the installation of the façade on their building projects.
Within our Architectural Framing segment, we design and fabricate window, curtainwall, storefront and entrance systems using our customized aluminum and glass, or glass supplied by others. We also provide finishing services for the metal and plastic components used to frame windows, curtainwall and other products.
Our product offerings allow architects to create distinctive looks for office towers, hotels, education facilities and dormitories, health care facilities, government buildings, retail centers and multi-family residential buildings, while meeting functional requirements such as energy efficiency, hurricane, blast and other impact resistance and/or sound control.
LSO segment
The LSO segment provides coated glass and acrylic primarily for use in custom picture framing and fine art markets. Products vary based on size and coatings applied to provide conservation-grade UV protection, anti-reflective and anti-static properties and/or security features.
Product Demand and Distribution Channels
Architectural Glass, Architectural Services and Architectural Framing Systems Segments
Demand for the products and services offered by our Architectural segments is affected by changes in the North American commercial construction industries, as well as by changes in general economic conditions. As the Architectural Glass segment also has an operation in Brazil, it is also impacted by the commercial construction industry and general economic conditions in that region.
We look at several external indicators to analyze demand for our products and services, such as U.S. job growth, office space vacancy rates, construction starts, credit and interest rates available for commercial construction projects, architectural billing statistics and material costs. We also utilize data on U.S. non-residential construction market activity from Dodge Data & Analytics, a leading independent provider of construction industry analysis, forecasts and trends. We reference this information as independent data points specific to the building types that we typically serve, adjusted to align with our fiscal year and the lag that is required to account for when our products and services typically are initiated in a construction project, which is approximately eight months after project start.
We also rely on our own internal indicators to analyze demand. This includes our sales pipeline, made up of contracts in review, projects awarded or committed, and bidding and quoting activity. Our sales pipeline, together with ongoing feedback, analysis and data from our customers, architects and building owners, provide visibility into near- and medium-term future demand.
Our architectural products and services are used in a subset of the construction industry that is differentiated by building type, level of customization required, customers, geographic location and project size.
Building type - The construction industry is typically segmented into residential construction and non-residential construction, which includes commercial, industrial and institutional construction. Our products and services are primarily used in commercial buildings (office towers, hotels and retail centers) and institutional buildings (education facilities and dormitories, health care facilities and government buildings), as well as in high-end multi-family residential buildings (a subset of residential construction).
Level of customization - The large majority of our projects involve a high degree of customization, as the product or service is based on customer-specified requirements for aesthetics, performance and size, and is designed to satisfy local building codes.
Customers and distribution channels - Our customers are mainly general contractors and glazing subcontractors, with project design being influenced by architects and building owners. Our high-performance architectural glass is primarily sold using a direct sales force and independent sales representatives. Installation services are marketed by a direct sales force, primarily in the metropolitan areas in the U.S. where we have a physical presence. We also have the ability to provide remote project management throughout the U.S. We market our custom and standard windows, curtainwall, storefront and entrance systems using a combination of direct sales forces, independent sales representatives and distributors.
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Geographic location - We primarily supply architectural glass products to customers in the U.S., with some international sales of our high-performance architectural glass. We estimate the U.S. demand for architectural glass fabrication in non-residential buildings is in excess of $1 billion annually. In installation services, we are one of only a few architectural glass installation companies in the U.S. to have a national presence, and we estimate the U.S. demand to be in the range of $8 to $15 billion over a non-residential construction cycle of eight to ten years. Our aluminum framing systems, including windows, curtainwall, storefront and entrances, are marketed in the U.S. and Canada, and we estimate demand to be in excess of $3 billion annually.
Project size - Our Architectural Glass segment primarily serves mid-size to monumental high-profile projects. Architectural Services primarily serves mid-size projects and Architectural Framing Systems primarily targets small and mid-size projects.
LSO Segment
In our LSO segment, we have the largest domestically manufactured brand of value-added glass and acrylic for custom picture framing. Under the Tru Vue brand, products are sold primarily in North America through national and regional retail chains using a direct sales force, as well as through local picture framing shops using an independent distribution network. We also supply products to museums and public and private galleries and collections worldwide through independent distributors. In addition to the U.S., the LSO segment sells its glass and acrylic products in Europe and other international geographies using independent distributors.
Competitive Conditions
Architectural Glass, Architectural Services and Architectural Framing Systems segments
The North American commercial construction market is highly fragmented. Competitive factors include price, product quality, product attributes and performance, reliable service, on-time delivery, lead-time, warranty and the ability to provide technical engineering and design services. To protect and enhance our competitive position, we maintain strong relationships with architects, who influence the selection of products and services on a project, and with general contractors, who initiate projects and develop specifications.
In our Architectural Glass segment, we experience competition from regional glass fabricators who can provide certain products with attributes similar to our products. Within the market sector for large, complex projects, we encounter competition from international companies, which have products equivalent to and larger size capabilities than our own. This international competition has been exacerbated recently by the relative strength of the U.S. dollar.
When providing installation services, our Architectural Services segment primarily competes against regional and local glass installation companies, and periodically against other larger national companies. The commercial window and storefront manufacturing industry is highly fragmented, and our Architectural Framing Systems segment competes against several national, regional and local aluminum window and storefront manufacturers, as well as regional paint and anodizing companies.
LSO Segment
Product attributes, price, quality, marketing and service are the primary competitive factors in the LSO segment. Our competitive strengths include our excellent relationships with customers, innovative marketing programs and the performance of our value-added products. There is competition in North America and Europe from certain European valued-added products for picture framing.
Warranties
We offer product and service warranties that we believe are competitive for the markets in which our products and services are sold. The nature and extent of these warranties depend upon the product or service, the market and, in some cases, the customer being served. Our standard warranties are generally from two to 10 years for our architectural glass, curtainwall and window system products, while we generally offer warranties of two years or less on our other products and installation services.
Sources and Availability of Raw Materials
Raw materials used within the Architectural Glass segment include flat glass, vinyl, silicone sealants and lumber. Within the Architectural Services segment, materials used include fabricated glass, aluminum extrusions and fabricated metal panels. Our Architectural Framing Systems segment's materials include aluminum billet and extrusions, fabricated glass, plastic extrusions, hardware, paint and chemicals. The LSO segment mainly uses glass and acrylics. A majority of our raw materials is readily available from a variety of domestic and international sources.
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Trademarks and Patents
We have several trademarks and trade names that we believe have significant value in the marketing of our products, including APOGEE®. Trademark registrations in the U.S. are generally for a term of 10 years, renewable every 10 years as long as the trademark is used in the regular course of trade.
Within the Architectural Glass segment, VIRACON®, VIRACON VUE-50®, DIGITALDISTINCTIONS®, ROOMSIDE®, EXTREMEDGE®, BUILDING DESIGN®, GLASS IS EVERYTHING®, CLEAR POINT®, CYBERSHIELD®, MORE POSSIBILITIES FROM THE LEADER IN GLASS FABRICATION® and STORMGUARD® are registered trademarks. VIRASPAN™ is an unregistered trademark. In addition, GLASSEC®, INSULATTO® and BLINDATTO® are registered trademarks in Brazil. GLASSECVIRACON™ is an unregistered trademark in Brazil.
Within the Architectural Services segment, HARMON®, HARMON GLASS®, HI-7000® and INNOVATIVE FACADE SOLUTIONS® are registered trademarks. UCW-8000™, HI-8500™, HI-9000™, SMU-6000™ and HPW-250™ are unregistered trademarks.
Within the Architectural Framing Systems segment, LINETEC®, WAUSAU WINDOW AND WALL SYSTEMS®, TUBELITE®, ADVANTAGE BY WAUSAU®, FINISHER OF CHOICE®, THERML=BLOCK®, MAXBLOCK®, DFG®, ECOLUMINUM®, ALUMINATE®, GET THE POINT!® and FORCEFRONT® are registered trademarks. CUSTOM WINDOW™, INVENT™, INVENT.PLUS™, INVENT RETRO™, INVISION™, CLEARSTORY™, EPIC™, HERITAGE™, VISULINE™, SEAL™ and SUPERWALL™ are unregistered trademarks. ALUMICOR™ and BUILDING EXCELLENCETM are unregistered trademarks in Canada.
Within the LSO segment, TRU VUE®, CONSERVATION CLEAR®, CONSERVATION MASTERPIECE ACRYLIC®, CONSERVATION REFLECTION CONTROL®, ULTRAVUE®, MUSEUM GLASS®, OPTIUM®, PREMIUM CLEAN®, REFLECTION CONTROL®, AR REFLECTION-FREE®, TRU VUE AR®, OPTIUM ACRYLIC®, OPTIUM MUSEUM ACRYLIC®, CONSERVATION MASTERPIECE®, STATICSHIELD®, TRULIFE® and VISTA AR® are registered trademarks. TRULIFE INFINITY FRAMETM is an unregistered trademark.
We have several patents pertaining to our glass coating methods and products, including our UV coating and etch processes for anti-reflective glass for the picture framing industry and fine art market. Despite being a point of differentiation from our competitors, no single patent is considered to be material.
Seasonality
We do not experience a significant seasonal effect in our Architectural segments. A bigger impact to net sales is the fact that the construction industry is highly cyclical in nature and can be influenced differently by the effects of local economies.
Within the LSO segment, picture framing glass and acrylic sales tend to increase in the September-to-December timeframe. However, the timing of customer promotional activities may offset some of this seasonal impact.
Working Capital Requirements
Trade accounts receivable is the largest component of working capital for the Company, including receivables relating to contractual retention amounts that can be outstanding throughout the project duration within the Architectural Services segment. Inventory requirements are not significant in any of our Architectural segments, because these businesses make-to-order rather than build-to-stock for the majority of their products.
Since the LSO segment builds to stock for the majority of its products, it requires greater inventory levels to meet the demands of its customers.
Backlog
A discussion of our consolidated backlog is included at page 18 within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference.
Research and Development
The amount spent on research and development activities was $8.0 million, $6.5 million and $7.8 million in fiscal 2016, 2015 and 2014, respectively. Of this amount, $2.4 million, $2.4 million and $2.1 million, respectively, was focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and is included in cost of sales in the accompanying consolidated financial statements.
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Environment
We use hazardous materials in our manufacturing operations, and have air and water emissions that require controls. As a result, we are subject to stringent federal, state and local regulations governing the storage and use of these materials and disposal of wastes. We contract with outside vendors to collect and dispose of waste at our production facilities in compliance with applicable environmental laws. In addition, we have procedures in place that we believe enable us to properly manage the regulated materials used in and wastes created by our manufacturing processes, and we have implemented a program to monitor our compliance with environmental laws and regulations. Although we believe we are currently in material compliance with such laws and regulations, current or future laws and regulations could require us to make substantial expenditures for compliance with chemical storage and use, waste treatment or disposal regulations. Spending to reduce wastewater solids and hazardous air emissions at our facilities is not significant. We expect to incur costs to continue to comply with laws and regulations in the future for our ongoing manufacturing operations but do not expect these to be material to our consolidated financial statements.
In fiscal 2008, we acquired one manufacturing facility that has certain historical environmental conditions. We are working to remediate these conditions, and the remediation activities are being conducted without significant disruption to our operations.
Employees
The Company employed 4,614 and 4,802 persons on February 27, 2016 and February 28, 2015, respectively. At February 27, 2016, 355 of these employees were represented by U.S. labor unions and 256 of these employees were represented by labor unions in Brazil.
International Sales
Information regarding export and international sales is included in Item 8, Financial Statements and Supplementary Data, within Note 15 of our Consolidated Financial Statements.
Available Information
The Company maintains a website at www.apog.com. Through a link to a third-party content provider, this corporate website provides free access to the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after electronic filing such material with, or furnishing it to, the Securities and Exchange Commission. Also available on our website are various corporate governance documents, including our Code of Business Ethics and Conduct, Corporate Governance Guidelines, and charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name | Age | Positions with Apogee Enterprises and Employment History | ||
Joseph F. Puishys | 57 | Chief Executive Officer and President of the Company since 2011. President of Honeywell's Environmental and Combustion Controls division from 2008 through 2011, President of Honeywell's Building Solutions from 2005 through 2008, and President of Honeywell Building Solutions, America from 2004 to 2005. | ||
James S. Porter | 55 | Chief Financial Officer since 2005 and Executive Vice President since 2015. Vice President of Strategy and Planning from 2002 through 2005. Various management positions within the Company since 1997. | ||
Patricia A. Beithon | 62 | General Counsel and Secretary since 1999. | ||
Gary R. Johnson | 54 | Vice President, Treasurer since 2001. Various management positions within the Company since 1995. | ||
John A. Klein | 60 | Senior Vice President, Operations and Supply Chain Management of the Company since 2012. Director of Operations at Cooper Industries' Power Systems Division from 2008 through 2012, and Vice President of Operations at Rexnord Industries' Bearing Division from 2005 through 2007. | ||
Executive officers are elected annually by the Board of Directors to serve for a one-year period. There are no family relationships between any of the executive officers or directors of the Company.
ITEM 1A. RISK FACTORS
Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other filings with the Securities and Exchange Commission, could have a material adverse impact on our business, financial condition or results of operations.
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General global economic and business conditions could negatively affect our results.
Our Architectural Glass, Architectural Services and Architectural Framing Systems segments are dependent on global economic conditions and the cyclical nature of the North American commercial construction industry. The commercial construction industry is impacted by global macroeconomic trends, including, among other things, availability of credit, unemployment rates, consumer confidence, interest rates and commodity prices. To the extent changes in these factors negatively impact the overall commercial construction industry, our revenue and profits could be significantly reduced.
Our Architectural Glass segment's operation located in Brazil is subject to the economic, political and tax conditions prevalent in the region. We cannot predict how changing economic conditions in this region will impact our financial results; however, our Brazilian operation makes up less than five percent of our net sales annually.
Our LSO segment depends on the strength of the retail custom picture framing industry. This industry is highly dependent on consumer confidence and the conditions of the U.S. economy. A decline in consumer confidence, whether as a result of an economic slowdown, uncertainty regarding the future or other factors, could result in a decrease in net sales and operating income of this segment.
Fluctuation in foreign currency exchange rates could negatively impact our results and financial position.
Our subsidiaries in Canada and Brazil report their results of operations and financial position in their relevant functional currencies (local country currency), which are then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements. The strength of the U.S. dollar in comparison to these functional currencies has had and could continue to have a negative impact on our reported results and financial position.
In addition, as the U.S. dollar strengthens against foreign currencies, imports of products into the U.S. produced by international competitors have become more price competitive and exports of our U.S.-fabricated products have become less price competitive. If we are not able to counteract these price pressures through superior quality and service, our net sales and operating income could be negatively impacted.
New competitors or specific actions of our existing competitors could adversely impact our industry position and future results.
All of our operating segments operate in competitive industries where the actions of our existing competitors or new competitors could result in a loss of customers or share of customers' demand. Changes in our competitors' products, prices or services could negatively impact our share of demand, net sales or margins.
Our Architectural Glass and Architectural Framing Systems segments have seen an increase in imports of competitive products into the U.S. from international suppliers due to the relative strength of the U.S. dollar. If imports of competitive products were to occur at increased levels for extended periods of time, our net sales and margins could be negatively impacted.
Our LSO segment competes with several international specialty glass manufacturers that have traditionally been less focused on the U.S. custom picture framing industry. Although these LSO competitors generally have not been able to meet the specification level of our products, upgrades to our competitor's products, and/or their increased interest in U.S. sales could have a negative impact on net sales or margins.
Our ability to effectively utilize our manufacturing capacity could adversely impact future results.
Near-term performance depends, to a significant degree, on our ability to increase and appropriately utilize available production capacity. The failure to successfully maintain existing capacity, utilize capacity expansions, and invest in additional physical capacity could adversely affect our operating results.
Loss of key personnel and inability to source sufficient labor could impact our future results.
Our success depends on the skills and experience of our current management team, construction project managers and other key technical personnel, and our ability to secure sufficient manufacturing labor. Increased activity in residential and commercial construction has caused increased competition for experienced construction project managers. Additionally, some of our manufacturing facilities are located in regions that at times may experience low levels of unemployment. If we are unable to retain existing employees and/or recruit and train additional employees with the requisite skills and experience, our results could be adversely impacted.
Interruptions in glass supply could impact our future operating results.
The supply of raw glass has become tighter due to several years of growth in automotive manufacturing, residential construction and non-residential construction. Although we have secured supply commitments that allow us to reach our near-
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term growth targets, a significant unplanned downtime at one or more of our key suppliers could negatively impact our operating results.
Product quality issues could negatively impact demand for our products and future profitability.
We manufacture and/or install a significant portion of our products based on the specific requirements of each customer. We believe that future orders of our products or services will depend on our ability to maintain the performance, reliability and quality standards required by our customers. If our products have performance, reliability or quality problems, or products are installed using incompatible glazing materials or installed improperly (by us or a customer), we may experience: additional warranty expense; reduced or canceled orders; diminished pricing power; higher manufacturing or installation costs; or delays in the collection of accounts receivable. Additionally, performance, reliability or quality claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages that could negatively impact our financial results.
Project management and installation issues could negatively impact future results.
The Architectural Services segment is typically awarded fixed-price contracts for installation services. Often, bids are required before all aspects of a construction project are known. An underestimate in the amount of labor required and/or cost of materials for a project; a change in the timing of the delivery of product; difficulties or errors in execution; use of incompatible glazing materials; or significant project delays, caused by us or other trades, could result in failure to achieve the expected results. Any one or more of such issues could result in losses on individual contracts that could negatively impact our operating results.
A shift in architectural trends, building codes or consumer preferences could negatively impact the demand for our products.
Any change in commercial construction customer preference, architectural trends or building codes that reduce window-to-wall ratios in non-residential construction would negatively impact net sales and operating income in our architectural-related segments. The LSO segment depends on U.S. consumers framing art and other decorative items. Any shift in customer preference away from framed art to other forms of wall decor could negatively impact future net sales and operating income in the LSO segment.
The loss of a significant customer in the LSO segment could adversely affect our results.
The LSO segment is highly dependent on a relatively small number of customers for its sales, and we expect this to continue in the future. Accordingly, loss of a significant customer, a significant reduction in pricing, or a shift to a less favorable mix of value-added picture framing glass or acrylic products for one of those customers, could materially reduce LSO net sales and operating results.
Our results can differ significantly from our expectations and the expectations of analysts.
Our sales and earnings guidance and external analyst estimates are largely based on our view of our business and the broader commercial construction market. Even though we have significant market intelligence through our contact with real estate developers, building owners and architects, and continually monitor micro- and macro-economic indicators of future performance of the commercial construction market, we are unable to precisely predict events that can significantly change market cycles. Failure to meet our guidance or analyst expectations for net sales and earnings would likely have an adverse impact on the market price of our common stock.
We retain significant risk through self-insurance programs.
We obtain third-party insurance for potential losses from general liability, employment practices, workers' compensation and automobile liability risk. However, a high amount of risk is retained on a self-insured basis through our wholly-owned insurance subsidiary. Therefore, a material architectural product liability event could have a material adverse effect on our operating results.
Dependence on information technology systems and potential security threats could adversely affect our results.
We have many information technology systems that are important to the operation of our business. These systems are used to process, transmit and store electronic information, and to manage or support our manufacturing operations and a variety of other business processes and activities. We could encounter difficulties in developing new systems and maintaining existing systems. Such difficulties could lead to disruption in business operations and/or significant additional expenses that could adversely affect our results.
Additionally, information technology security threats are increasing in frequency and sophistication. These threats pose a risk to the security of our systems and networks, and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromise of confidential information, manipulation and destruction of data and product specifications, production downtimes, disruption in the availability of financial data, or misrepresentation of information via digital media. The occurrence of any of these events could adversely affect our reputation, and could result in litigation, regulatory action, potential liability, project delay claims, and increased costs and operational consequences of implementing further data protection systems.
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We use hazardous chemicals in the production of our products and are thus subjected to changes in environmental legislation.
We use hazardous chemicals in producing some of our products. One of our facilities has certain historical environmental conditions that are in the process of being remediated. Our inability to remediate the historical environmental conditions at the facility at or below the amounts reserved could have an adverse impact on future financial results. Additionally, we are subject to a variety of local, state and federal governmental regulations relating to storage, discharge, handling, emission, generation and disposal of toxic or other hazardous substances used to manufacture our products, compliance with which is expensive. Our failure to comply with current or future environmental regulations could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or increased costs. Our financial results could also be adversely impacted by rising energy and material costs associated with environmental regulations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table lists, by segment, the Company's major properties as of February 27, 2016.
Property Location | Owned/ Leased | Function | ||
Architectural Glass segment | ||||
Owatonna, MN | Owned | Manufacturing/Administrative | ||
Owatonna, MN | Leased | Warehouse | ||
Statesboro, GA | Owned | Manufacturing/Warehouse | ||
St. George, UT | Owned | Manufacturing/Warehouse | ||
Nazaré Paulista, Brazil | Owned(1) | Manufacturing/Administrative | ||
Architectural Services segment | ||||
Minneapolis, MN | Leased | Administrative | ||
West Chester, OH | Leased | Manufacturing | ||
Garland, TX | Leased | Manufacturing | ||
Glen Burnie, MD | Leased | Manufacturing | ||
Orlando, FL | Leased | Manufacturing | ||
Architectural Framing Systems segment | ||||
Wausau, WI | Owned | Manufacturing/Administrative | ||
Stratford, WI | Owned | Manufacturing | ||
Reed City, MI | Owned | Manufacturing | ||
Walker, MI | Leased | Manufacturing/Administrative | ||
Dallas, TX | Leased | Manufacturing | ||
Toronto, ON Canada | Leased | Manufacturing/Warehouse/Administrative | ||
Toronto, ON Canada | Owned | Manufacturing | ||
LSO segment | ||||
McCook, IL | Owned | Manufacturing/Warehouse/Administrative | ||
Faribault, MN | Owned | Manufacturing/Administrative | ||
Other | ||||
Minneapolis, MN | Leased | Administrative | ||
(1) | This is an owned facility; however, the land is leased from the city. |
ITEM 3. LEGAL PROCEEDINGS
The Company has been a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company's construction supply and services businesses are routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company has also been subject to litigation arising out of general liability, employment practices, workers' compensation and automobile claims. Although it is very difficult to accurately predict the outcome of such proceedings, facts
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currently available indicate that no such claims will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Apogee common stock is traded on the NASDAQ Stock Market LLC (Nasdaq) under the ticker symbol APOG.
As of April 7, 2016, there were approximately 1,249 shareholders of record and 9,903 shareholders for whom securities firms acted as nominees.
The following chart shows the quarterly range and year-end closing price for one share of the Company's common stock over the past three fiscal years.
First | Second | Third | Fourth | Year-end | ||||||||||||||||||||||||||||
Low | High | Low | High | Low | High | Low | High | Close | ||||||||||||||||||||||||
2016 | $ | 42.35 | $ | 56.27 | $ | 49.60 | $ | 60.16 | $ | 43.90 | $ | 57.86 | $ | 34.52 | $ | 50.53 | $ | 39.41 | ||||||||||||||
2015 | 28.28 | 35.64 | 29.21 | 36.68 | 35.07 | 47.02 | 37.83 | 48.03 | 45.85 | |||||||||||||||||||||||
2014 | 23.06 | 30.26 | 22.20 | 29.41 | 27.25 | 36.09 | 30.97 | 37.73 | 34.23 | |||||||||||||||||||||||
Dividends
Quarterly, the Board of Directors evaluates declaring dividends based on operating results, available funds and the Company's financial condition. Cash dividends have been paid each quarter since 1974. The chart below shows quarterly and annual cumulative cash dividends per share for the past three fiscal years.
First | Second | Third | Fourth | Total | ||||||||||||||||
2016 | $ | 0.1100 | $ | 0.1100 | $ | 0.1100 | $ | 0.1250 | $ | 0.4550 | ||||||||||
2015 | 0.1000 | 0.1000 | 0.1000 | 0.1100 | 0.4100 | |||||||||||||||
2014 | 0.0900 | 0.0900 | 0.0900 | 0.1000 | 0.3700 | |||||||||||||||
Purchases of Equity Securities by the Company
The following table provides information with respect to purchases made by the Company of its own stock during the fourth quarter of fiscal 2016:
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (b) | ||||||||
November 29, 2015 through December 26, 2015 | 226,225 | $ | 46.28 | 225,000 | 392,368 | |||||||
December 27, 2015 through January 23, 2016 | 201,122 | 38.63 | 200,000 | 1,192,368 | ||||||||
January 24, 2016 through February 27, 2016 | — | — | — | 1,192,368 | ||||||||
Total | 427,347 | $ | 42.45 | 425,000 | 1,192,368 | |||||||
(a) 2,347 of the shares in this column represent shares that were surrendered to us by plan participants in order to satisfy stock-for-stock option exercises or withholding tax obligations related to stock-based compensation.
(b) In fiscal 2004, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock, which was announced on April 10, 2003. Subsequently, the Board of Directors increased the authorization by 750,000 shares, which was announced on January 24, 2008; by 1,000,000 shares, which was announced on October 8, 2008; and by 1,000,000 shares, which was announced on January 13, 2016. The Company's repurchase program does not have an expiration date.
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Comparative Stock Performance
The line graph below compares the cumulative total shareholder return on a $100 investment in our common stock for the last five fiscal years with the cumulative total return on a $100 investment in the Standard & Poor's Small Cap 600 Growth Index and the Russell 2000 Index. The graph assumes an investment at the close of trading on February 26, 2011, and also assumes the reinvestment of all dividends.
Fiscal 2011 | Fiscal 2012 | Fiscal 2013 | Fiscal 2014 | Fiscal 2015 | Fiscal 2016 | |||||||||||||
Apogee | $ | 100.00 | $ | 92.90 | $ | 197.04 | $ | 260.61 | $ | 353.02 | $ | 306.39 | ||||||
S&P Small Cap 600 Growth Index | 100.00 | 104.85 | 119.73 | 157.10 | 168.53 | 154.64 | ||||||||||||
Russell 2000 Index | 100.00 | 99.00 | 114.52 | 150.07 | 158.52 | 135.20 | ||||||||||||
We are not aware of any competitors, public or private, that are similar to us in size and scope of business activities. Most of our direct competitors are either privately owned or divisions of larger, publicly owned companies.
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ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and related notes, included in Item 8 of this Report.
(In thousands, except per share data and percentages) | 2016 | 2015 | 2014(1) | 2013 | 2012(2) | 2011(3) | ||||||||||||
Results of Operations Data | ||||||||||||||||||
Net sales | $ | 981,189 | $ | 933,936 | $ | 771,445 | $ | 700,224 | $ | 662,463 | $ | 582,777 | ||||||
Gross profit | 243,570 | 208,544 | 165,252 | 145,733 | 117,120 | 83,120 | ||||||||||||
Operating income (loss) | 97,393 | 63,585 | 40,285 | 27,419 | 3,816 | (20,972 | ) | |||||||||||
Net earnings (loss) | 65,342 | 50,516 | 27,986 | 19,111 | 4,645 | (10,332 | ) | |||||||||||
Earnings (loss) per share - basic | 2.25 | 1.76 | 0.98 | 0.68 | 0.17 | (0.37 | ) | |||||||||||
Earnings (loss) per share - diluted | 2.22 | 1.72 | 0.95 | 0.67 | 0.17 | (0.37 | ) | |||||||||||
Cash dividends per share | 0.455 | 0.410 | 0.370 | 0.360 | 0.326 | 0.326 | ||||||||||||
Balance Sheet Data | ||||||||||||||||||
Current assets | $ | 336,793 | $ | 298,975 | $ | 247,430 | $ | 256,479 | $ | 234,077 | $ | 213,923 | ||||||
Total assets | 657,440 | 612,057 | 569,995 | 524,779 | 497,742 | 511,098 | ||||||||||||
Current liabilities | 177,381 | 149,028 | 136,834 | 122,167 | 105,771 | 113,946 | ||||||||||||
Long-term debt | 20,400 | 20,587 | 20,659 | 20,756 | 20,916 | 21,442 | ||||||||||||
Shareholders' equity | 406,195 | 382,476 | 356,104 | 336,792 | 324,672 | 327,677 | ||||||||||||
Cash Flow Data | ||||||||||||||||||
Depreciation and amortization | $ | 31,248 | $ | 29,423 | $ | 26,550 | $ | 26,529 | $ | 27,246 | $ | 28,218 | ||||||
Net cash provided by (used in) operating activities | 123,951 | 68,563 | 52,921 | 40,716 | 27,981 | (7,985 | ) | |||||||||||
Net cash used in investing activities | (77,856 | ) | (24,475 | ) | (43,974 | ) | (57,132 | ) | (18,498 | ) | (14,391 | ) | ||||||
Net cash (used in) provided by financing activities | (36,413 | ) | (19,773 | ) | (17,576 | ) | 232 | (13,116 | ) | 209 | ||||||||
Capital expenditures | 42,037 | 27,220 | 41,852 | 34,664 | 9,650 | 9,126 | ||||||||||||
Repurchase and retirement of common stock | 24,911 | 6,894 | — | — | 2,392 | — | ||||||||||||
Dividends | 13,184 | 12,071 | 10,764 | 10,316 | 9,153 | 9,161 | ||||||||||||
Other Data | ||||||||||||||||||
Gross margin - % of sales | 24.8 | % | 22.3 | % | 21.4 | % | 20.8 | % | 17.7 | % | 14.3 | % | ||||||
Operating margin - % of sales | 9.9 | % | 6.8 | % | 5.2 | % | 3.9 | % | 0.6 | % | (3.6 | )% | ||||||
Effective tax rate - % | 32.9 | % | 22.3 | % | 29.6 | % | 29.0 | % | (29.2 | )% | 39.3 | % | ||||||
Non-cash working capital | $ | 68,769 | $ | 97,479 | $ | 81,976 | $ | 58,791 | $ | 49,120 | $ | 39,426 | ||||||
Debt as a % of total capital | 5.0 | % | 5.1 | % | 5.5 | % | 5.9 | % | 6.1 | % | 6.4 | % | ||||||
Return on: | ||||||||||||||||||
Average shareholders' equity - % | 16.6 | % | 13.7 | % | 8.1 | % | 5.8 | % | 1.4 | % | (3.1 | )% | ||||||
Average invested capital(4)- % | 12.7 | % | 8.8 | % | 6.0 | % | 4.3 | % | 0.6 | % | (3.4 | )% | ||||||
Dividend yield at year-end - % | 1.2 | % | 0.9 | % | 1.1 | % | 1.4 | % | 2.6 | % | 2.3 | % | ||||||
Book value per share | 14.16 | 13.17 | 12.30 | 11.81 | 11.57 | 11.66 | ||||||||||||
(1) | Includes the acquisition of Alumicor in November 2013. |
(2) | Fiscal 2012 included 53 weeks. Each of the other periods presented included 52 weeks. |
(3) | Includes the acquisition of Glassec in November 2010. |
(4) | [Operating income x .65]/average invested capital |
ITEM 7. 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 in this Form 10-K. From time to time, we also may 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
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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 in this Form 10-K.
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 world leader in certain technologies involving the design and development of value-added glass solutions for enclosing commercial buildings and framing art. Our four reporting segments are: Architectural Glass, Architectural Services, Architectural Framing Systems and Large-Scale Optical Technologies (LSO).
The following items highlight the results for fiscal 2016:
• | Consolidated net sales increased 5 percent over fiscal 2015, or 7 percent on a constant currency basis, which is a non-GAAP measure. Operating income increased 53 percent over last year. All four segments grew revenue and earnings. |
• | Diluted EPS was $2.22, compared to $1.72 in the prior year, which included a $0.22 per share positive impact from an energy-efficient tax credit. Excluding this tax credit, fiscal 2016 diluted EPS increased 48 percent over the prior year. |
• | Consolidated backlog was $508.0 million at February 27, 2016, up 4 percent over fiscal 2015. |
Results of Operations
Net Sales
(Dollars in thousands) | 2016 | 2015 | 2014 | 2016 vs. 2015 | 2015 vs. 2014 | ||||||||||||
Net sales | $ | 981,189 | $ | 933,936 | $ | 771,445 | 5.1 | % | 21.1 | % | |||||||
Fiscal 2016 Compared to Fiscal 2015
Net sales in fiscal 2016 improved by 5.1 percent, or 7.0 percent on a constant currency basis, mainly due to pricing and volume growth resulting from strong commercial construction activity in the U.S, partially offset by declines in the commercial construction markets in Brazil and Canada. The Architectural Glass segment drove approximately 44 percent of the growth this year, and the Architectural Services segment drove approximately 32 percent of the growth, with nearly all of the remainder coming from the domestic Architectural Framing segment businesses.
Constant currency revenue excludes the impact of fluctuations in foreign currency on our international operations. Constant currency percentages are calculated by converting prior-period local currency results using the average monthly exchange rate and comparing the adjusted amount to current period reported results. We believe constant currency information provides valuable supplemental information regarding our core operating results, consistent with how we evaluate our performance. We also refer to constant currency measures elsewhere in this report. These non-GAAP measures should be viewed in addition to, and not as an alternative to, the reported results prepared in accordance with GAAP.
Fiscal 2015 Compared to Fiscal 2014
Sales increased by 21.1 percent over fiscal 2014 primarily from increased sales volume in our architectural-based segments, due to increased commercial construction activity in the U.S. and the inclusion of our Canadian storefront business acquired late in fiscal 2014. The Architectural Glass segment accounted for approximately 32 percent of the growth, and the domestic Architectural Framing Systems segment provided approximately 29 percent of the growth, with an additional 21 percent attributable to the inclusion of the Canadian storefront business. The remaining growth came from the Architectural Services segment. Currency fluctuation did not have a significant impact on our sales in fiscal 2015.
Performance
The relationship between various components of operations, as a percentage of net sales, is illustrated below for the past three fiscal years.
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(Percentage of net sales) | 2016 | 2015 | 2014 | |||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 75.2 | 77.7 | 78.6 | |||||
Gross profit | 24.8 | 22.3 | 21.4 | |||||
Selling, general and administrative expenses | 14.9 | 15.5 | 16.2 | |||||
Operating income | 9.9 | 6.8 | 5.2 | |||||
Other income (expense), net | — | 0.2 | — | |||||
Earnings before income taxes | 9.9 | 7.0 | 5.2 | |||||
Income tax expense | 3.3 | 1.6 | 1.6 | |||||
Net earnings | 6.7 | % | 5.4 | % | 3.6 | % | ||
Effective income tax rate | 32.9 | % | 22.3 | % | 29.6 | % | ||
Fiscal 2016 Compared to Fiscal 2015
Gross profit was 24.8 percent in fiscal 2016, an improvement of 250 basis points from fiscal 2015, primarily due to improved pricing and mix, as well as productivity and volume leverage across all architectural-based segments.
Selling, general and administrative (SG&A) expense for fiscal 2016 was 14.9 percent, a decrease of 60 basis points despite an increase of $1.2 million from fiscal 2015, as a result of expense discipline relative to sales growth across our segments.
The effective tax rate for fiscal 2016 was 32.9 percent, compared to 22.3 percent in fiscal 2015. After excluding the 990 basis point benefit due to an energy-efficient tax credit earned in fiscal 2015, however, the increase in our tax rate was 70 basis points over the prior year due to changes in state income tax laws combined with a higher percentage of earnings in the U.S., where the tax rate is higher than in foreign jurisdictions.
Fiscal 2015 Compared to Fiscal 2014
Gross profit improved 90 basis points, due to the impact of operating leverage on increased volume and improved pricing within our Architectural Glass and Architectural Framing Systems segments. This was partially offset by manufacturing cost overruns in the Architectural Services segment, increased aluminum costs impacting the Architectural Framing Systems segment, and costs to restart the Utah facility in the Architectural Glass segment, all of which occurred in fiscal 2015.
SG&A expense increased $20 million, but declined by 70 basis points from fiscal 2014. The main contributor to the increased SG&A spend in fiscal 2015 was the addition of our Canadian acquisition. In addition, we had increased incentive compensation and sales commissions on improved results and write-down of certain assets acquired in our window business in fiscal 2014.
Our effective tax rate for fiscal 2015 was 22.3 percent, which includes a $6.4 million tax benefit from an energy-efficient investment credit. Excluding this credit, our effective tax rate would have been 32.2% in fiscal 2015, compared to 29.6% in fiscal 2014, due to a lesser net benefit from tax reserve adjustments in fiscal 2015.
Segment Analysis
Architectural Glass
(In thousands) | 2016 | 2015 | 2014 | ||||||||
Net sales | $ | 377,713 | $ | 346,471 | $ | 293,810 | |||||
Operating income | 35,504 | 16,431 | 3,861 | ||||||||
Operating margin | 9.4 | % | 4.7 | % | 1.3 | % | |||||
Fiscal 2016 Compared to Fiscal 2015. Fiscal 2016 net sales improved 9.0 percent over the prior year, or 12.2 percent on a constant currency basis, primarily due to improved pricing, mix and volume growth in the U.S. as a result of the strong U.S. construction market, partially offset by declines in volume and mix in our Brazilian operation and lower export sales.
Operating margin improved 470 basis points, doubling the fiscal 2015 operating margin, with improvement driven by pricing and mix, as well as strong operational performance and volume leverage in the U.S., partially offset by the impact of ongoing challenging Brazilian economic conditions.
Fiscal 2015 Compared to Fiscal 2014. Fiscal 2015 net sales improved 17.9 percent over fiscal 2014 primarily due to increased volume as a result of commercial construction market strength and some improvement in pricing. Currency fluctuation did not have a significant impact on our results in fiscal 2015.
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Operating margin improved 340 basis points due to operating leverage on volume growth and improved pricing. The segment also demonstrated positive manufacturing productivity that was partially offset by inefficiencies experienced as the segment expanded its workforce to meet demand and also by costs incurred to restart the Utah facility.
Architectural Services
(In thousands) | 2016 | 2015 | 2014 | ||||||||
Net sales | $ | 245,935 | $ | 230,650 | $ | 203,351 | |||||
Operating income | 11,687 | 7,442 | 4,479 | ||||||||
Operating margin | 4.8 | % | 3.2 | % | 2.2 | % | |||||
Fiscal 2016 Compared to Fiscal 2015. Net sales improved 6.6 percent over the prior year, driven by volume growth due to increased commercial construction activity in the U.S. Operating margin improved 160 basis points over the prior year, as a result of continued focus on project selection, driving improved project margins, and good execution.
Fiscal 2015 Compared to Fiscal 2014. Net sales improved 13.4 percent over fiscal 2014 due to volume from project timing and a general increase in project activity on stronger end markets. Operating margin improved 100 basis points as a result of operating leverage on the increased volume and increasing project margins due to our focus on project selection.
Architectural Framing Systems
(In thousands) | 2016 | 2015 | 2014 | ||||||||
Net sales | $ | 308,593 | $ | 298,395 | $ | 216,059 | |||||
Operating income | 31,911 | 21,808 | 14,930 | ||||||||
Operating margin | 10.3 | % | 7.3 | % | 6.9 | % | |||||
Fiscal 2016 Compared to Fiscal 2015. Net sales improved 3.4 percent over fiscal 2015, or 6.0 percent on a constant currency basis, on volume growth from strong U.S. construction markets, and improved pricing and mix in our U.S. businesses, partially offset by volume weakness in our Canadian business.
Operating margin improved 300 basis points over fiscal 2015, driven by improved pricing and mix, lower raw material costs and volume leverage in the U.S., partially offset by the volume weakness in our Canadian business.
Fiscal 2015 Compared to Fiscal 2014. Fiscal 2015 net sales increased 38.1 percent over fiscal 2014. Approximately two-thirds of this growth was attributable to double-digit volume increases at our U.S. businesses, with the remainder coming from the inclusion of our Canadian storefront business acquired late in fiscal 2014. Currency fluctuation did not have a significant impact on our results in fiscal 2015.
Fiscal 2015 operating margin improved 40 basis points due to volume leverage and good execution in our U.S. businesses, slightly offset by the negative effect of higher aluminum costs and the impact of soft Canadian markets on our Canadian storefront business in the first half of the year.
Large-Scale Optical Technologies (LSO)
(In thousands) | 2016 | 2015 | 2014 | ||||||||
Net sales | $ | 88,541 | $ | 87,693 | $ | 81,127 | |||||
Operating income | 22,963 | 21,954 | 21,252 | ||||||||
Operating margin | 25.9 | % | 25.0 | % | 26.2 | % | |||||
Fiscal 2016 Compared to Fiscal 2015. Net sales in our LSO segment increased 1.0 percent over the prior year as a result of an improved mix of value-added products and stable demand. Operating margin improved 90 basis points over the prior year as a result of improved product mix and strong operational performance.
Fiscal 2015 Compared to Fiscal 2014. Fiscal 2015 net sales were up 8.1 percent compared to fiscal 2014 due to a positive mix of higher value-added products on relatively flat volumes. Operating margin declined 120 basis points as the impact of the strong mix of value-added products was offset by increased incentive compensation and investments in new product development.
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Consolidated Backlog
Backlog represents the dollar amount of revenues we expect to recognize in the near-term from firm contracts or orders. We use backlog as one of the metrics to evaluate near-term sales trends in our business. Backlog is not a term defined under generally accepted accounting principles and is not a measure of contract profitability. Backlog should not be used as the sole indicator of our future revenue and earnings.
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 was as follows:
(In thousands) | February 27, 2016 | February 28, 2015 | |||||
Architectural Glass | $ | 71,798 | $ | 137,432 | |||
Architectural Services | 320,351 | 287,473 | |||||
Architectural Framing Systems | 123,027 | 77,666 | |||||
Large-Scale Optical | 2,278 | 2,107 | |||||
Intersegment eliminations | (9,438 | ) | (13,886 | ) | |||
Total backlog | $ | 508,016 | $ | 490,792 | |||
In our Architectural Glass segment, additional capacity and improved productivity have driven shorter lead times for customers, resulting in lower backlog. We have seen, and expect to continue to see, an increased portion of our revenues from shorter lead-time work that we book and ship within the same period. These book-and-ship sales are not included in our backlog within the period.
We expect approximately $407 million, or 80 percent, of our February 27, 2016 backlog to be recognized in fiscal 2017, with the balance to be recognized in fiscal 2018.
Liquidity and Capital Resources
(Cash effect, in thousands) | 2016 | 2015 | 2014 | ||||||||
Operating Activities | |||||||||||
Net cash provided by operating activities | $ | 123,951 | $ | 68,563 | $ | 52,921 | |||||
Investing Activities | |||||||||||
Capital expenditures | (42,037 | ) | (27,220 | ) | (41,852 | ) | |||||
Net (purchases) sales of marketable securities | (31,767 | ) | 804 | 26,458 | |||||||
Change in restricted investments, net | — | 2,532 | 23,915 | ||||||||
Acquisition of businesses and intangibles, net of cash acquired | — | — | (53,301 | ) | |||||||
Financing Activities | |||||||||||
Repurchase and retirement of common stock | (24,911 | ) | (6,894 | ) | — | ||||||
Dividends paid | (13,184 | ) | (12,071 | ) | (10,764 | ) | |||||
Operating Activities. Cash provided by operating activities was $124.0 million in fiscal 2016, an increase of $55.4 million over fiscal 2015. In all years presented, operating cash flows were positively impacted by increased income as compared to the respective prior-year period. In fiscal 2016, we also experienced improved cash from operating activities compared to fiscal 2015 as a result of continued focus on working capital management.
Non-cash working capital (current assets, excluding cash and short-term securities, less current liabilities, excluding current portion of long-term debt) was $68.8 million at February 27, 2016, compared to $97.5 million at February 28, 2015, and $82.0 million at March 1, 2014. The decline in fiscal 2016 is a result of our continued efforts regarding working capital management, and timing of activity. The increase in fiscal 2015, compared to fiscal 2014, was due to our investment in working capital necessary to support sales growth.
Investing Activities. Net cash used in investing activities was $77.9 million in fiscal 2016, $24.5 million in fiscal 2015 and $44.0 million in fiscal 2014. In the current year, we invested excess cash in short-term marketable securities, and made capital expenditures focused primarily on improving manufacturing productivity and on increasing capacity, including adding anodize finishing capacity within our Architectural Framing segment.
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In fiscal 2015, capital investments were made mainly to increase productivity and capacity and improve product capabilities.
In fiscal 2014, we made capital investments for productivity and product capabilities, including a new state-of-the-art coater in our Architectural Glass segment. We reduced our restricted investments by $23.9 million and our investments in marketable securities by $26.5 million to fund acquisitions as part of our strategy to grow through new products and new geographies. To that end, we made acquisitions in fiscal 2014 of the assets of a window fabrication business and of the outstanding shares of Alumicor Limited in Canada. Both acquisitions are included within the Architectural Framing Systems segment.
We estimate fiscal 2017 capital expenditures to be $50 to $60 million, which we expect will be focused on increasing product capabilities, in particular on expanding capabilities in the Architectural Glass segment to fabricate oversized glass. Capital expenditures will also be made to continue to increase manufacturing productivity and capacity.
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 and further invest in, fully divest and/or sell parts of our current businesses.
Financing Activities. We paid dividends totaling $13.2 million in fiscal 2016. Additionally, we repurchased 575,000 shares under our authorized share repurchase program during fiscal 2016, for a total cost of $24.9 million and we repurchased 203,509 shares under the program during fiscal 2015, for a total cost of $6.9 million. We have repurchased a total of 3,057,632 shares, at a total cost of $61.5 million, since the inception of this program. We have remaining authority to repurchase 1,192,368 shares under this program, which has no expiration date.
We maintain a $125.0 million committed revolving credit facility as described in Note 7 of the Notes to Consolidated Financial Statements. No borrowings were outstanding under this credit facility as of February 27, 2016 or February 28, 2015. At February 27, 2016, the Company was in compliance with the financial covenants of the credit facility. Our debt-to-total-capital ratio was 5.0 percent at February 27, 2016 and 5.1 percent at February 28, 2015.
Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of February 27, 2016:
Payments Due by Fiscal Period | |||||||||||||||||||||||||||
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
Long-term debt obligations | $ | — | $ | — | $ | — | $ | — | $ | 5,400 | $ | 15,000 | $ | 20,400 | |||||||||||||
Operating leases (undiscounted) | 8,329 | 7,773 | 7,068 | 5,775 | 3,319 | 2,663 | 34,927 | ||||||||||||||||||||
Purchase obligations | 200,543 | 43,281 | 1,005 | 197 | — | — | 245,026 | ||||||||||||||||||||
Total cash obligations | $ | 208,872 | $ | 51,054 | $ | 8,073 | $ | 5,972 | $ | 8,719 | $ | 17,663 | $ | 300,353 | |||||||||||||
From time to time, we acquire the use of certain assets through operating leases, such as warehouses, vehicles, forklifts, office equipment, hardware, software and some manufacturing equipment. 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.
We expect to make contributions of $1.0 million to our defined-benefit pension plans in fiscal 2017, which will equal or exceed our minimum funding requirements.
As of February 27, 2016, we had reserves of $4.4 million and $1.6 million for long-term unrecognized tax benefits and environmental liabilities, respectively. We expect approximately $0.9 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 February 27, 2016, we had ongoing letters of credit related to industrial revenue bonds and construction contracts that reduce availability of funds under our committed credit facility. The letters of credit by expiration period are as follows:
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Amount of Commitment Expiration Per Fiscal Period | |||||||||||||||||||||||||||
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2020 | 2021 | Total | ||||||||||||||||||||
Standby letters of credit | $ | 20,982 | $ | — | $ | — | $ | — | $ | — | $ | 2,500 | $ | 23,482 | |||||||||||||
In addition to the above standby letters of credit, 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 February 27, 2016, $134.5 million of our backlog was bonded by performance bonds with a face value of $328.6 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.
We had total cash and short-term marketable securities of $90.6 million, and $101.5 million available under our committed revolving credit facility at February 27, 2016. We believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments over the next 12 months.
Off-balance Sheet Arrangements. With the exception of operating leases, we had no off-balance sheet financing arrangements at February 27, 2016 or February 28, 2015.
Outlook
The following statements are based on our current expectations for fiscal 2017 results. These statements are forward-looking, and actual results may differ materially.
• | Revenue growth of approximately 10 percent over fiscal 2016. |
• | Gross margin of at least 26 percent and operating margin of approximately 11 percent. |
• | Earnings per share of $2.65 to $2.80. |
• | Capital expenditures of approximately $50 to $60 million. |
Recently Issued Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements within Item 8 of this Form 10-K for information pertaining to recently issued accounting pronouncements, incorporated herein by reference.
Critical Accounting Policies
Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. In developing these estimates and assumptions, a collaborative effort is undertaken involving management across the organization including finance, sales, project management, quality, legal and tax, as well as outside advisors such as consultants, engineers, lawyers and actuaries. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other assumptions or circumstances.
The following items in our consolidated financial statements require significant estimation or judgment:
Revenue recognition - We recognize revenue when title has transferred, except within our Architectural Services segment, which enters into fixed-price installation contracts. The contracts clearly specify the enforceable rights of the parties, the consideration and the terms of settlement, and both parties can be expected to satisfy all obligations under the contract. These contracts are typically performed over a 12- to 18-month timeframe, and we record revenue for these contracts on a percentage-of-completion basis as we are able to reasonably estimate total contract revenue and total contract costs. We compare the total costs incurred to date to the total estimated costs for the contract, and record that proportion of the total contract revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe utilizing the cost-to-cost method for revenue recognition provides the greatest degree of accuracy in measuring revenue throughout the contract period. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in contract revenue only upon customer approval. Recogizing revenue under the percentage-of-completion method of accounting requires significant estimates, including total costs and the percentage complete on the contract, as well as any potential losses or contract overruns. During fiscal 2016, approximately 25 percent of our consolidated sales were recorded on a percentage-of-completion basis.
20
Goodwill impairment - We evaluate goodwill for impairment annually at our year-end, or more frequently if impairment indicators exist. Step one of the process compares the fair value of each of our reporting units to carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill impairment is not indicated. We have seven business units that each represent a reporting unit for the goodwill impairment analysis. Based on our analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated.
We base our determination of fair value on a discounted cash flow methodology that involves significant judgments about projections of future performance. Assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on the annual operating plan and long-term business plan for each business unit. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. Growth rates for revenues and operating profits vary for each reporting unit. Revenues and operating profit beyond our internal planning period are projected to grow at a perpetual growth rate of 3.0%. The discount rate assumption for each reporting unit takes into consideration our assessment of risks inherent in the future cash flows of our business and our weighted-average cost of capital.
Reserves for disputes and claims regarding product liability and warranties - We are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our architectural products and services. The time period from when a claim is asserted to when it is resolved, either by dismissal, negotiation, settlement or litigation, can be several years. While we maintain product liability insurance, the insurance policies include significant self-retention of risk in the form of policy deductibles. In addition, certain claims could be determined to be uninsured. We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs based on historical product liability claims as a ratio of sales.
Self-insurance reserves - We obtain commercial insurance for potential losses for general liability, employment practices, workers' compensation, automobile liability, architect's and engineer's errors and omissions risk, product rework and other miscellaneous coverages. A substantial portion of this risk is retained on a self-insured basis through our wholly-owned insurance subsidiary. We establish a reserve for estimated ultimate losses on reported claims and those incurred but not yet reported utilizing actuarial projections.
Income taxes - We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to ongoing market risk related to changes in interest rates and foreign currency exchange rates.
A rise in interest rates could negatively affect the fair value of our fixed income holdings, while serving to provide greater return on our equity investments. To manage our direct risk from changes in market interest rates, management actively monitors the interest-sensitive components of our balance sheet, primarily available-for-sale equity investments, fixed income securities and debt obligations, to maintain a diversified portfolio in order to minimize the impact of changes in interest rates on net earnings and cash flow. We do not enter into any financial instruments for trading purposes, and we currently do not use derivative financial instruments to manage interest rate risk. We also diversify and manage our investment portfolio in order to limit impact of potential credit risk.
The primary measure of interest rate risk is the simulation of net income under different interest rate environments. If interest rates were to increase or decrease over the next 12 months by 200 basis points, net earnings would be impacted by approximately $0.5 million. The Company's investments exceeded its debt at February 27, 2016, so as interest rates increase, net earnings increase; as interest rates decrease, net earnings decrease.
In addition to the market risk related to interest rate changes on our financial instruments, the commercial construction markets in which our businesses operate are highly affected by changes in interest rates, and this could significantly impact our operating results.
We are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar.
We currently have operations in Canada and Brazil, which primarily transact business in local currencies. We manage these operating activities locally. Revenues, costs, assets and liabilities of these operations are generally denominated in local currencies, thereby mitigating some of the risk associated with changes in foreign exchange rates. However, our consolidated financial results
21
are reported in U.S. dollars, and thus changes in exchange rates between the Canadian dollar and Brazilian real, on the one hand, and the U.S. dollar, on the other, will impact our results. From time to time, we may enter into minor short duration foreign currency contracts, with an original maturity date of less than one year, to hedge foreign currency risk. Sales from our domestic operations are generally denominated in U.S. dollars.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Annual Report on Internal Control over Financial Reporting
Management of Apogee Enterprises, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of February 27, 2016, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). The Company's management believes that, as of February 27, 2016, the Company's internal control over financial reporting was effective based on those criteria.
Following this report are reports from the Company's independent registered public accounting firm, Deloitte & Touche LLP, on the Company's consolidated financial statements and on the effectiveness of the Company's internal control over financial reporting as of February 27, 2016.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Apogee Enterprises, Inc.
Minneapolis, MN
We have audited the accompanying consolidated balance sheets of Apogee Enterprises, Inc. and subsidiaries (the “Company”) as of February 27, 2016 and February 28, 2015, and the related consolidated results of operations, statements of comprehensive earnings, statements of cash flows, and statements of shareholders’ equity for each of the three years in the period ended February 27, 2016. Our audits also included the financial statement schedule listed in the Table of Contents at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Apogee Enterprises, Inc. and subsidiaries at February 27, 2016 and February 28, 2015, and the results of their operations and their cash flows for each of the three years in the period ended February 27, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 27, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 25, 2016, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 25, 2016
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Apogee Enterprises, Inc.
Minneapolis, MN
We have audited the internal control over financial reporting of Apogee Enterprises, Inc. and subsidiaries (the “Company”) as of February 27, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 27, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Table of Contents at Item 15 as of and for the year ended February 27, 2016, of the Company and our report dated April 25, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 25, 2016
25
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) | February 27, 2016 | February 28, 2015 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 60,470 | $ | 52,185 | ||||
Short-term available for sale securities | 30,173 | 327 | ||||||
Receivables, net of allowance for doubtful accounts | 172,832 | 171,623 | ||||||
Inventories | 63,386 | 61,408 | ||||||
Refundable income taxes | — | 5,115 | ||||||
Deferred tax assets | 1,820 | 1,359 | ||||||
Other current assets | 8,112 | 6,958 | ||||||
Total current assets | 336,793 | 298,975 | ||||||
Property, plant and equipment, net | 202,462 | 193,540 | ||||||
Available for sale securities | 12,519 | 10,655 | ||||||
Goodwill | 73,996 | 75,857 | ||||||
Intangible assets | 19,862 | 23,280 | ||||||
Other non-current assets | 11,808 | 9,750 | ||||||
Total assets | $ | 657,440 | $ | 612,057 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 64,762 | $ | 56,516 | ||||
Accrued payroll and related benefits | 39,946 | 36,620 | ||||||
Accrued self-insurance reserves | 7,818 | 8,058 | ||||||
Other current liabilities | 29,339 | 25,601 | ||||||
Billings in excess of costs and earnings on uncompleted contracts | 31,890 | 22,233 | ||||||
Accrued income taxes | 3,626 | — | ||||||
Total current liabilities | 177,381 | 149,028 | ||||||
Long-term debt | 20,400 | 20,587 | ||||||
Unrecognized tax benefits | 4,441 | 4,477 | ||||||
Long-term self-insurance reserves | 7,137 | 6,185 | ||||||
Deferred tax liabilities | 4,972 | 10,652 | ||||||
Other non-current liabilities | 36,914 | 38,652 | ||||||
Commitments and contingent liabilities (Note 10) | ||||||||
Shareholders’ equity | ||||||||
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 28,683,948 and 29,049,531 shares, respectively | 9,561 | 9,683 | ||||||
Additional paid-in capital | 145,528 | 138,575 | ||||||
Retained earnings | 282,477 | 256,538 | ||||||
Common stock held in trust | (837 | ) | (801 | ) | ||||
Deferred compensation obligations | 837 | 801 | ||||||
Accumulated other comprehensive loss | (31,371 | ) | (22,320 | ) | ||||
Total shareholders’ equity | 406,195 | 382,476 | ||||||
Total liabilities and shareholders’ equity | $ | 657,440 | $ | 612,057 | ||||
See accompanying notes to consolidated financial statements.
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CONSOLIDATED RESULTS OF OPERATIONS
Year-Ended | ||||||||||||
(In thousands, except per share data) | February 27, 2016 | February 28, 2015 | March 1, 2014 | |||||||||
Net sales | $ | 981,189 | $ | 933,936 | $ | 771,445 | ||||||
Cost of sales | 737,619 | 725,392 | 606,193 | |||||||||
Gross profit | 243,570 | 208,544 | 165,252 | |||||||||
Selling, general and administrative expenses | 146,177 | 144,959 | 124,967 | |||||||||
Operating income | 97,393 | 63,585 | 40,285 | |||||||||
Interest income | 981 | 954 | 827 | |||||||||
Interest expense | 593 | 924 | 1,259 | |||||||||
Other (expense) income, net | (457 | ) | 1,384 | (87 | ) | |||||||
Earnings before income taxes | 97,324 | 64,999 | 39,766 | |||||||||
Income tax expense | 31,982 | 14,483 | 11,780 | |||||||||
Net earnings | $ | 65,342 | $ | 50,516 | $ | 27,986 | ||||||
Earnings per share - basic | $ | 2.25 | $ | 1.76 | $ | 0.98 | ||||||
Earnings per share - diluted | $ | 2.22 | $ | 1.72 | $ | 0.95 | ||||||
Weighted average basic shares outstanding | 29,058 | 28,763 | 28,483 | |||||||||
Weighted average diluted shares outstanding | 29,375 | 29,374 | 29,374 | |||||||||
See accompanying notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Year-Ended | ||||||||||||
(In thousands) | February 27, 2016 | February 28, 2015 | March 1, 2014 | |||||||||
Net earnings | $ | 65,342 | $ | 50,516 | $ | 27,986 | ||||||
Other comprehensive (loss) earnings: | ||||||||||||
Unrealized gain (loss) on marketable securities, net of $38, $88 and $(46) of tax expense (benefit), respectively | 73 | 163 | (83 | ) | ||||||||
Unrealized (loss) gain on foreign currency hedge, net of $-, $(36) and $183 of tax (benefit) expense, respectively | — | (62 | ) | 320 | ||||||||
Unrealized gain (loss) on pension obligation, net of $347, $(830) and $10 of tax expense (benefit), respectively | 610 | (1,458 | ) | 19 | ||||||||
Foreign currency translation adjustments | (9,734 | ) | (8,003 | ) | (6,135 | ) | ||||||
Other comprehensive loss | (9,051 | ) | (9,360 | ) | (5,879 | ) | ||||||
Total comprehensive earnings | $ | 56,291 | $ | 41,156 | $ | 22,107 | ||||||
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | ||||||||||||
(In thousands) | February 27, 2016 | February 28, 2015 | March 1, 2014 | |||||||||
Operating Activities | ||||||||||||
Net earnings | $ | 65,342 | $ | 50,516 | $ | 27,986 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 31,248 | 29,423 | 26,550 | |||||||||
Share-based compensation | 4,923 | 4,793 | 4,661 | |||||||||
Deferred income taxes | (6,139 | ) | 4,274 | (5,280 | ) | |||||||
Excess tax benefits from share-based compensation | (4,992 | ) | (3,236 | ) | (2,725 | ) | ||||||
Gain on disposal of assets | (198 | ) | (933 | ) | (1,629 | ) | ||||||
Proceeds from new markets tax credit transaction, net of deferred costs | — | — | 7,471 | |||||||||
Other, net | 1,017 | 229 | 51 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Receivables | (2,918 | ) | (18,588 | ) | (19,229 | ) | ||||||
Inventories | (2,798 | ) | (8,660 | ) | (6,130 | ) | ||||||
Accounts payable and accrued expenses | 17,265 | 12,871 | 18,282 | |||||||||
Billings in excess of costs and earnings on uncompleted contracts | 9,657 | (324 | ) | 1,202 | ||||||||
Refundable and accrued income taxes | 12,589 | (1,091 | ) | 3,449 | ||||||||
Other, net | (1,045 | ) | (711 | ) | (1,738 | ) | ||||||
Net cash provided by operating activities | 123,951 | 68,563 | 52,921 | |||||||||
Investing Activities | ||||||||||||
Capital expenditures | (42,037 | ) | (27,220 | ) | (41,852 | ) | ||||||
Purchases of marketable securities | (35,814 | ) | (6,142 | ) | (14,562 | ) | ||||||
Sales/maturities of marketable securities | 4,047 | 6,946 | 41,020 | |||||||||
Acquisition of businesses and intangibles, net of cash acquired | — | — | (53,301 | ) | ||||||||
Purchases of restricted investments | — | — | (36,200 | ) | ||||||||
Sales/maturities of restricted investments | — | 2,532 | 60,115 | |||||||||
Other, net | (4,052 | ) | (591 | ) | 806 | |||||||
Net cash used in investing activities | (77,856 | ) | (24,475 | ) | (43,974 | ) | ||||||
Financing Activities | ||||||||||||
Payments on debt, net | (56 | ) | (139 | ) | (10,247 | ) | ||||||
Shares withheld for taxes, net of stock issued to employees | (3,254 | ) | (3,905 | ) | 710 | |||||||
Excess tax benefits from share-based compensation | 4,992 | 3,236 | 2,725 | |||||||||
Repurchase and retirement of common stock | (24,911 | ) | (6,894 | ) | — | |||||||
Dividends paid | (13,184 | ) | (12,071 | ) | (10,764 | ) | ||||||
Net cash used in financing activities | (36,413 | ) | (19,773 | ) | (17,576 | ) | ||||||
Increase (decrease) in cash and cash equivalents | 9,682 | 24,315 | (8,629 | ) | ||||||||
Effect of exchange rates on cash | (1,397 | ) | (595 | ) | (673 | ) | ||||||
Cash and cash equivalents at beginning of year | 52,185 | 28,465 | 37,767 | |||||||||
Cash and cash equivalents at end of period | $ | 60,470 | $ | 52,185 | $ | 28,465 | ||||||
Noncash Activity | ||||||||||||
Capital expenditures in accounts payable | $ | 2,737 | $ | 2,656 | $ | 761 | ||||||
See accompanying notes to consolidated financial statements.
29
Consolidated Statements of Shareholders' Equity
(In thousands, except per share data) | Common Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Common Stock Held in Trust | Deferred Compensation Obligation | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||||||||
Balance at March 2, 2013 | 28,514 | $ | 9,505 | $ | 119,759 | $ | 214,609 | $ | (761 | ) | $ | 761 | $ | (7,081 | ) | ||||||||||||
Net earnings | — | — | — | 27,986 | — | — | — | ||||||||||||||||||||
Unrealized loss on marketable securities, net of $46 tax benefit | — | — | — | — | — | — | (83 | ) | |||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $183 tax expense | — | — | — | — | — | — | 320 | ||||||||||||||||||||
Unrealized gain on pension obligation, net of $10 tax expense | — | — | — | — | — | — | 19 | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (6,135 | ) | |||||||||||||||||||
Issuance of stock, net of cancellations | 245 | 82 | (54 | ) | 17 | (30 | ) | 30 | — | ||||||||||||||||||
Share-based compensation | — | — | 4,661 | — | — | — | — | ||||||||||||||||||||
Tax benefit associated with stock plans | — | — | 2,598 | — | — | — | — | ||||||||||||||||||||
Exercise of stock options | 328 | 109 | 4,150 | — | — | — | — | ||||||||||||||||||||
Other share retirements | (129 | ) | (43 | ) | (544 | ) | (3,007 | ) | — | — | — | ||||||||||||||||
Cash dividends ($0.370 per share) | — | — | — | (10,764 | ) | — | — | — | |||||||||||||||||||
Balance at March 1, 2014 | 28,958 | $ | 9,653 | $ | 130,570 | $ | 228,841 | $ | (791 | ) | $ | 791 | $ | (12,960 | ) | ||||||||||||
Net earnings | — | — | — | 50,516 | — | — | — | ||||||||||||||||||||
Unrealized gain on marketable securities, net of $88 tax expense | — | — | — | — | — | — | 163 | ||||||||||||||||||||
Unrealized loss on foreign currency hedge, net of $36 tax benefit | — | — | — | — | — | — | (62 | ) | |||||||||||||||||||
Unrealized loss on pension obligation, net of $830 tax benefit | — | — | — | — | — | — | (1,458 | ) | |||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (8,003 | ) | |||||||||||||||||||
Issuance of stock, net of cancellations | 304 | 101 | (47 | ) | 28 | (10 | ) | 10 | — | ||||||||||||||||||
Share-based compensation | — | — | 4,793 | — | — | — | — | ||||||||||||||||||||
Tax benefit associated with stock plans | — | — | 3,293 | — | — | — | — | ||||||||||||||||||||
Exercise of stock options | 146 | 49 | 1,190 | — | — | — | — | ||||||||||||||||||||
Share repurchases | (203 | ) | (68 | ) | (965 | ) | (5,861 | ) | — | — | — | ||||||||||||||||
Other share retirements | (155 | ) | (52 | ) | (259 | ) | (4,915 | ) | — | — | — | ||||||||||||||||
Cash dividends ($0.410 per share) | — | — | — | (12,071 | ) | — | — | — | |||||||||||||||||||
Balance at February 28, 2015 | 29,050 | $ | 9,683 | $ | 138,575 | $ | 256,538 | $ | (801 | ) | $ | 801 | $ | (22,320 | ) | ||||||||||||
Net earnings | — | — | — | 65,342 | — | — | — | ||||||||||||||||||||
Unrealized gain on marketable securities, net of $38 tax expense | — | — | — | — | — | — | 73 | ||||||||||||||||||||
Unrealized gain on pension obligation, net of $347 tax expense | — | — | — | — | — | — | 610 | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (9,734 | ) | |||||||||||||||||||
Issuance of stock, net of cancellations | 102 | 34 | 114 | — | (36 | ) | 36 | — | |||||||||||||||||||
Share-based compensation | — | — | 4,923 | — | — | — | — | ||||||||||||||||||||
Tax benefit associated with stock plans | — | — | 3,856 | — | — | — | — | ||||||||||||||||||||
Exercise of stock options | 200 | 67 | 1,539 | — | — | — | — | ||||||||||||||||||||
Share repurchases | (575 | ) | (192 | ) | (2,996 | ) | (21,723 | ) | — | — | — | ||||||||||||||||
Other share retirements | (93 | ) | (31 | ) | (483 | ) | (4,496 | ) | — | — | — | ||||||||||||||||
Cash dividends ($0.455 per share) | — | — | — | (13,184 | ) | — | — | — | |||||||||||||||||||
Balance at February 27, 2016 | 28,684 | $ | 9,561 | $ | 145,528 | $ | 282,477 | $ | (837 | ) | $ | 837 | $ | (31,371 | ) | ||||||||||||
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Summary of Significant Accounting Policies and Related Data |
Basis of Consolidation. The consolidated financial statements include the balances of Apogee Enterprises, Inc. and its subsidiaries (Apogee, the Company or we) after elimination of intercompany balances and transactions. We consolidate variable interest entities where it has been determined that the Company is the primary beneficiary of those entities' operations.
Fiscal Year. Our fiscal year ends on the Saturday closest to the last day of February, or as determined by the Board of Directors. Fiscal 2016, 2015 and 2014 each consisted of 52 weeks. Our Brazilian subsidiary follows a calendar year-end and is consolidated on a two-month lag.
Accounting Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.
Cash Equivalents. Highly liquid investments with an original maturity of three months or less are included in cash equivalents and are stated at cost, which approximates fair value.
Inventories. Inventories, which consist primarily of purchased glass and aluminum, are valued at lower of cost or market using the first-in, first-out (FIFO) method. Our manufacturing operations recognize costs of sales using standard costs with full overhead absorption, which generally approximates actual cost.
Property, Plant and Equipment. Property, plant and equipment are recorded at cost. Significant improvements and renewals that extend the useful life of the asset are capitalized. Repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in selling, general and administrative expenses. Depreciation is computed on a straight-line basis, based on the following estimated useful lives:
Years | |
Buildings and improvements | 15 to 25 |
Machinery and equipment | 3 to 15 |
Office equipment and furniture | 3 to 10 |
Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost over the net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually at our year-end, or more frequently if impairment indicators exist. Step one of the process compares the fair value of each of our reporting units to carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill impairment is not indicated. We have seven business units which each represent a reporting unit for the goodwill impairment analysis. Based on our analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated. In all periods presented, we have followed a consistent discounted cash flow methodology in order to evaluate goodwill for impairment.
Intangible assets with defined useful lives are amortized based on estimated useful lives ranging from three to 20 years. The remaining useful lives of all intangible assets are reviewed annually, and we have determined that the remaining lives were appropriate.
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If impairment indicators are present and the estimated undiscounted future cash flows are less than the carrying value of the assets, the carrying values would be reduced to the estimated fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate.
Self-Insurance. We obtain commercial insurance for potential losses for general liability, employment practices, workers' compensation, automobile liability, architect's and engineer's errors and omissions risk, product rework and other miscellaneous coverages. A substantial portion of this risk is retained on a self-insured basis through our wholly-owned insurance subsidiary. We establish a reserve for estimated ultimate losses on reported claims and those incurred but not yet reported utilizing actuarial projections. Reserves are classified within accrued or long-term self-insurance reserves based on expectations of when the estimated loss will be paid.
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Additionally, we maintain a self-insurance reserve for health insurance programs offered to eligible employees, included within accrued self-insurance reserves. The reserve includes an estimate for losses on reported claims as well as for amounts incurred but not yet reported, based on historical trends.
Warranty. We are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our architectural products and services. We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs based on historical product liability claims as a ratio of sales. Our warranty reserves are included in other current and non-current liabilities based on the estimated timing of dispute resolution.
Environmental Liability. We recognize environmental clean-up liabilities on an undiscounted basis when loss is probable and can be reasonably estimated based upon estimates by specialists and applicable law. Such estimates are based primarily upon the estimated cost of investigation and remediation required, and the likelihood that, where applicable, other potentially responsible parties will not be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. The reserve for environmental liabilities is included in other current and non-current liabilities in the consolidated balance sheets.
Foreign Currency. The financial statements of subsidiaries located outside of the U.S. are measured in their functional currency, which is local currency. Assets and liabilities of these subsidiaries are translated at the exchange rates at the balance sheet date. Income and expense items are translated using average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive loss in the consolidated balance sheets.
Revenue Recognition. We recognize revenue when title has transferred, except within our Architectural Services segment, which enters into fixed-price installation contracts. These contracts are typically performed over a 12- to 18-month timeframe, and we record revenue for these contracts on a percentage-of-completion basis as we are able to reasonably estimate total contract revenue and total contract costs. We compare the total costs incurred to date to the total estimated costs for the contract, and record that proportion of the total contract revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe utilizing the cost-to-cost method for revenue recognition provides the greatest degree of accuracy in measuring revenue throughout the contract period. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in contract revenue only upon customer approval. Approximately 25 percent of our consolidated net sales in fiscal 2016 and 2015, and 26 percent in 2014, were recorded on a percentage-of-completion basis.
Revenue excludes sales taxes as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.
Pricing and Sales Incentives. The Company records estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to customers are recorded as a reduction to net sales unless (1) the Company receives an identifiable benefit for goods or services in exchange for the consideration, and (2) the Company can reasonably estimate the fair value of the benefit received.
Shipping and Handling. All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and are reported as revenue. Costs incurred by the Company for shipping and handling are reported as cost of sales.
Research and Development. Research and development costs are expensed as incurred within selling, general and administrative expenses, and were $8.0 million, $6.5 million and $7.8 million for fiscal 2016, 2015 and 2014, respectively. Of these amounts, $2.4 million, $2.4 million and $2.1 million, respectively, were focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and are included in cost of sales.
Advertising. Advertising costs are expensed as incurred and were $1.2 million in fiscal 2016, $1.1 million in fiscal 2015, and $1.2 million in fiscal 2014, and they are included in selling, general and administrative expenses.
Income Taxes. The Company recognizes deferred tax assets and liabilities based upon the future tax consequences of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. See Note 13 for additional information regarding income taxes.
Subsequent Events. We have evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events that required recognition or disclosure in the consolidated financial statements.
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New Accounting Standards. In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which provides for a comprehensive change to lease accounting. The new standard requires that a lessee recognize a lease obligation liability and a right to use asset for virtually all leases of property, plant and equipment, subsequently amortized over the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, with a modified retrospective transition. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the balance sheet. The new standard is effective for fiscal years beginning after December 15, 2016, and may be applied prospectively or retrospectively, with early adoption permitted. We plan to adopt this standard in the first quarter of our fiscal 2017 and do not expect this to have a significant impact on our consolidated balance sheet.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Under the new standard, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017, Apogee's fiscal 2019. We are currently evaluating the impact this standard will have on our consolidated financial statements.
2. | Working Capital |
Receivables
(In thousands) | 2016 | 2015 | |||||
Trade accounts | $ | 102,627 | $ | 111,494 | |||
Construction contracts | 41,631 | ||||||