Apogee Posts 3rd Quarter Loss - Analyst Blog

Apogee Enterprises Inc. (APOG) reported third-quarter fiscal 2011 operating loss of 8 cents per share compared with operating earnings of 39 cents in the year-ago quarter. The operating loss per share in the reported quarter was an improvement over the Zacks Consensus Estimate of a loss of 10 cents.

Total Revenue

Apogee's total operating revenue for second-quarter fiscal 2011 was $147.2 million versus $179.8 million reported in the year-ago period, reflecting a decline of 18%. The decline can be ascribed mainly to the 21% revenue plunge in the Architectural Products and Services segment. The revenue reported by the company fell short of the Zacks Consensus Estimate of $151 million.

Segment Results

Architectural Products and Services: Total segment revenue for third-quarter fiscal 2011 was $125.7 million versus $158.2 million in third-quarter fiscal 2010, reflecting a decline of 21%. The shortfall was due to a decrease in volume and prices across the  board with architectural glass revenues especially affected by lower pricing. The segment reported an operating loss of $8.4 million compared with an operating income of $9.6 million a year ago affected by lower pricing in the architectural glass business aggravated by low volumes.

Large-Scale Optical Technologies: Total segment revenue for third-quarter fiscal 2011 was $21.4 million versus $21.6 million in third-quarter fiscal 2010, reflecting a decline of 1%. The segment's operating income remained flat at $7.4 million.

Costs & Margin Performance

Cost of sales dipped 8% to $124 million in the quarter and, as a percentage of total revenue, was 84.3% versus 75.2% in the year-ago quarter. Consequently, gross profit plunged 48% to $23 million with gross margins contracting 910 basis points to 15.7%.

Selling, general and administrative expenses (SG&A) declined 13% year over year to $24.9 million and, as a percentage of total revenue, increased 100 basis points from the year-ago period. Apogee reported an operating loss of $1.8 million compared with an operating income of $16 million in the year-ago quarter.

Financial Update

Apogee ended the quarter with a cash balance of $46.4 million versus $69.4 million at the end of the second quarter of fiscal 2011. The company generated cash flow from operating activities of $1.7 million in the quarter compared with $40.5 million in the year-earlier quarter.

During the quarter, Apogee acquired Glassec Vidros de Segurança Ltda., the leading architectural glass fabricator in Brazil, for approximately $22 million in cash. Apogee also assumed Glassec's debt amounting to $2 million. The business will be called Glassec Viracon and operate as a part of Apogee's architectural glass business. Its results will be reported in Apogee's Architectural segment.

As of November 27, 2010, long-term debt was $21.6 million, up from $20.4 million as of August 28, 2010. The debt-to-capitalization ratio was 6.1% as of November 27, 2010, compared with 5.7% as of August 28, 2010.

Backlog

Architectural Products and Services ended the third quarter of fiscal 2011 with a backlog of $165.7 million, down from $193.0 million at the end of the second quarter. Of the backlog, approximately $87 million (52%) is expected to be delivered in fiscal 2011 and $68 million (41%) in fiscal 2012.

Guidance

Apogee expects total revenue for fiscal 2011 to decline by 17% from the fiscal 2010 level, a dip from its previous guidance of a drop of 15%. Fourth-quarter revenues are expected to be comparable to the prior-year quarter. However, the company anticipates a loss in the quarter as earnings in the Large-Scale Optical segment will not be sufficient to offset losses in the Architectural segment.

Fourth-quarter cash flow from operations is expected to be flat to slightly positive.

Fiscal 2012 is expected to be a profitable year as architectural glass price increases should begin to flow through early in the year. However, its markets are not expected to show significant improvement until later in calendar 2011, given that Apogee is a very late cycle company that lags commercial construction markets by several months.

The company stated that even though the reported backlog declined in the third quarter, the total backlog along with the value of awarded projects waiting to be signed was steady compared to the sequentially preceding quarter.

Our Take

Apogee implemented a number of cost cutting initiatives and remains focused on productivity improvements in order to counter the ill affects of a downturn in commercial construction. The company maintained its capacity and people to respond to potential growth in fiscal 2012, and continues to emphasize longer-term strategies to expand its energy-efficient architectural glass offerings both domestically and all over the world.

Revenues have declined at the Architectural segment, which continues to be negatively impacted by challenging commercial construction market conditions that have led to lower demand. Even though fiscal 2011 is expected to remain challenging for the Architectural segment, fiscal 2012 looks more positive with a possible market recovery, increased backlog and expectations that the recent architectural glass price increases will allow the company to return to profitability during the year. Apogee currently retains a Zacks #3 Rank (short-term Hold rating).

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

 
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