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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 1, 2002
OR
[_] 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
------
APOGEE ENTERPRISES, INC.
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0919654
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
7900 Xerxes Avenue South - Suite 1800
Minneapolis, Minnesota 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 835-1874
________________________
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. YES X NO ____
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at June 30, 2002
- --------------------------------------- ------------------------------------
Common Stock, $.33 1/3 Par Value 28,462,037
1
APOGEE ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 1, 2002
Description Page
----------- ----
PART I
- ------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 1, 2002
and March 2, 2002 3
Consolidated Results of Operations for the
Quarters Ended June 1, 2002 and June 2, 2001 4
Consolidated Statements of Cash Flows for the
Quarters Ended June 1, 2002 and June 2, 2001 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II Other Information
- -------
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit Index 17
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 1, 2002 AND MARCH 2, 2002
June 1,
2002 March 2,
(In thousands, except share and per share data) (unaudited) 2002
- -------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 4,089 $ 15,361
Receivables, net of allowance for doubtful accounts 104,251 115,159
Inventories 36,151 36,022
Deferred tax assets 5,271 4,875
Other current assets 2,999 3,667
- -------------------------------------------------------------------------------------------------------
Total current assets 152,761 175,084
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 124,475 128,515
Marketable securities available for sale 19,354 22,825
Investments in affiliated companies 21,030 22,110
Goodwill 55,614 55,614
Identifiable intangible assets, at cost less accumulated
amortization of $6,456 and $6,261, respectively 1,630 1,024
Other assets 3,746 3,944
- -------------------------------------------------------------------------------------------------------
Total assets $ 378,610 $ 409,116
- -------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 47,113 $ 51,887
Accrued expenses 41,811 57,766
Current liabilities of discontinued operations, net 3,578 3,740
Billings in excess of costs and earnings on uncompleted contracts 3,792 6,127
Accrued income taxes 9,305 7,079
Current installments of long-term debt 540 640
- -------------------------------------------------------------------------------------------------------
Total current liabilities 106,139 127,239
- -------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 56,486 69,098
Other long-term liabilities 25,818 25,867
Liabilities of discontinued operations, net 15,538 15,978
Commitments and contingent liabilities (Note 9)
Shareholders' equity
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares;
issued and outstanding, 28,536,000 and 28,334,000, respectively 9,512 9,445
Additional paid-in capital 54,659 50,521
Retained earnings 114,308 113,382
Unearned compensation (2,887) (1,547)
Accumulated other comprehensive loss (963) (867)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 174,629 170,934
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 378,610 $ 409,116
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED JUNE 1, 2002 AND JUNE 2, 2001
(unaudited)
Quarter-Ended Quarter-Ended
(In thousands, except share and per share data) June 1, 2002 June 2, 2001
- ----------------------------------------------------------------------------------------
Net sales $ 184,709 $ 203,606
Cost of sales 138,757 158,302
- ----------------------------------------------------------------------------------------
Gross profit 45,952 45,304
Selling, general and administrative expenses 36,250 37,332
- ----------------------------------------------------------------------------------------
Operating income 9,702 7,972
Interest expense, net 992 1,921
Equity in (loss) income of affiliated companies (1,118) 2,068
- ----------------------------------------------------------------------------------------
Earnings from operations before income taxes 7,592 8,119
Income taxes 2,354 2,517
- ----------------------------------------------------------------------------------------
Net earnings $ 5,238 $ 5,602
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Earnings per share - basic $ 0.19 $ 0.20
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Earnings per share - diluted $ 0.18 $ 0.20
- ----------------------------------------------------------------------------------------
Weighted average basic shares outstanding 28,060,000 27,674,000
Weighted average diluted shares outstanding 29,090,000 28,319,000
- ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED JUNE 1, 2002 AND JUNE 2, 2001
(unaudited)
Quarter-ended Quarter-ended
(In thousands) June 1, 2002 June 2, 2001
- -------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net earnings $ 5,238 $ 5,602
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 6,089 6,963
Deferred income taxes (328) (1,024)
Results from equity investments 1,118 (2,068)
Investment in equity investments (38) (344)
Gain on disposal of assets (1,380) (291)
Other, net (287) (108)
Changes in operating assets and liabilities, net of effect of acquisitions:
Receivables 10,908 (6,323)
Inventories (129) (362)
Accounts payable and accrued expenses (20,461) (7,368)
Billings in excess of costs and earnings on uncompleted contracts (2,335) 164
Refundable and accrued income taxes 2,226 2,453
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 621 (2,706)
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (3,357) (2,651)
Proceeds from sales of property, plant and equipment 2,386 18
Acquisition of businesses, net of cash acquired -- (247)
Purchases of marketable securities (3,151) --
Sales/maturities of marketable securities 6,451 1,374
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,329 (1,506)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities
Change in net borrowings under revolving credit agreement (13,500) 2,500
Proceeds from issuance of long-term debt 1,000 --
Payments on long-term debt (212) (2,417)
Increase in deferred debt expense (801) (5)
Proceeds from issuance of common stock 4,696 3,577
Repurchase and retirement of common stock (3,230) (284)
Dividends paid (1,573) (1,481)
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (13,620) 1,890
- ------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by discontinued operations (602) 1,495
- ------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (11,272) (827)
Cash and cash equivalents at beginning of period 15,361 4,689
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,089 $ 3,862
========================================================================================================================
See accompanying notes to consolidated financial statements.
5
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of June 1, 2002 and March 2, 2002, and the results of
operations and cash flows for the three-month periods ended June 1, 2002
and June 2, 2001. Certain prior-year amounts have been reclassified to
conform to the current period presentation.
The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's
annual financial statements and notes. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in the
Company's Form 10-K for the year ended March 2, 2002. The results of
operations for the 12-week period ended June 1, 2002 and June 2, 2001
are not necessarily indicative of the results to be expected for the
full year.
The Company's fiscal year ends on the Saturday closest to February 28.
Each interim quarter ends on the Saturday closest to the end of the
months of May, August and November.
2. New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, amortization of goodwill
and indefinite-lived intangible assets will cease and instead the
carrying value of these assets will be evaluated for impairment by
applying a fair-value based test on at least an annual basis. This
statement also requires a reassessment of the useful lives of
identifiable intangible assets other than goodwill.
The Company has adopted SFAS No. 142 effective March 3, 2002 and has
discontinued the amortization of goodwill and has determined that it
does not have intangible assets with indefinite useful lives. The
Company is in the process of performing the required impairment testing
of goodwill as of March 3, 2002. As required, this testing will be
completed by August 31, 2002. In addition, the Company reassessed the
useful lives of its identifiable intangible assets and determined that
the lives were appropriate.
6
If the Company had been accounting for its goodwill and intangible
assets under SFAS No. 142 for all prior periods presented, the Company's
net income and earnings per common share would have been as follows:
Quarter-ended
------------------------
June 1, June 2,
(In thousands, except per share data) 2002 2001
-------- --------
Net income:
Reported net earnings $5,238 $5,602
Add back amortization expense, net of tax -- 319
-------------------
Adjusted net income $5,238 $5,921
===================
Earnings per share - basic
Reported net earnings $ 0.19 $ 0.20
Impact of amortization expense, net of tax -- 0.01
-------------------
Adjusted earnings per share - basic $ 0.19 $ 0.21
===================
Earnings per share - diluted
Reported net earnings $ 0.18 $ 0.20
Impact of amortization expense, net of tax -- 0.01
-------------------
Adjusted earnings per share - diluted $ 0.18 $ 0.21
===================
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived
assets. The Company adopted this standard on March 3, 2002, with no
impact to its consolidated financial statements.
3. Inventories
(In thousands) June 1, 2002 March 2, 2002
-------------------- --------------------
Raw materials $16,226 $16,235
Work in process 5,254 5,807
Finished goods 10,055 9,351
Cost and earnings in excess of billings on
uncompleted contracts 4,616 4,629
-------------------- --------------------
Total inventories $36,151 $36,022
==================== ====================
4. Investments
In July 2000, the Company and PPG Industries, Inc. (PPG) combined their
U.S. automotive replacement glass distribution businesses into a joint
venture, PPG Auto Glass, LLC (PPG Auto Glass), of which the Company has
a 34 percent interest. On June 1, 2002, the Company's investment in PPG
Auto Glass was $20.7 million. At June 1, 2002, the unamortized excess of
the cost of the investment over the value of the underlying net tangible
assets when the joint venture was formed was $7.3 million. This
unamortized excess is reported as goodwill. In connection with the
formation of PPG Auto Glass, the Company agreed to supply the joint
venture, through PPG, with most of the Company's windshield fabrication
capacity on market-based terms and conditions. In addition, the
Company's automobile windshield repair and replacement business agreed
to purchase at least 75% of its windshield needs from PPG Auto Glass on
market-based terms and conditions. Purchases from PPG Auto Glass were
$11.2 million and $13.0 million for the first quarter of fiscal 2003 and
2002, respectively. Amounts owed to PPG Auto Glass were $6.7 million and
$8.5 million at the end of the first quarter of fiscal 2003 and 2002,
respectively.
During the second quarter of fiscal 2002, the Company, PPG and PPG Auto
Glass amended the windshield supply agreements to adjust pricing for the
windshields manufactured and sold to more accurately reflect market
pricing. As a result of these amendments, a portion of earnings that
would have previously been reported in equity in income from affiliated
companies was reported in
7
operating income in the Auto Glass segment for the current year. The impact
on fiscal 2003 first quarter results was an increase to operating income of
$2.1 million, with an offset to income from affiliated companies.
In September 2001, the Company decided to discontinue funding TerraSun,
LLC, its research and development joint venture of which the Company had a
50 percent interest. As a result, TerraSun discontinued its operations and
its tangible assets have been sold, while retaining its intangible assets.
The Company's share of earnings for its affiliated companies is before
income taxes and, in the first quarter of fiscal 2002, included $0.1
million of amortization of the excess cost over the value of the underlying
net tangible assets and expenses retained by the Company.
5. Goodwill and Other Identifiable Intangible Assets
The Company's identifiable intangible assets with finite lives are being
amortized over their estimated useful lives and are detailed below.
As of June 1, 2002 As of March 2, 2002
----------------------- -------------------------
Gross Gross
(In thousands) Carrying Accumulated Carrying Accumulated
Amortized Intangible Assets Amount Amortization Amount Amortization
--------------------------------------------------------- -------------------------
Deferred debt $3,211 $1,670 $2,410 $1,487
Non-compete agreements 4,434 4,345 4,434 4,333
Other 441 441 441 441
----------------------- -------------------------
Total $8,086 $6,456 $7,285 $6,261
======================= =========================
Aggregate amortization expense for the three months ended June 1, 2002 and
June 2, 2001 related to these identifiable intangible assets was $0.2
million for each period. At June 1, 2002, future amortization expense of
identifiable intangible assets is $0.2 million for the remainder of fiscal
2003, $0.4 million for fiscal 2004 through fiscal 2006, and $0.1 million
for fiscal 2007.
The carrying amount of goodwill, net of accumulated amortization,
attributable to each business segment has not changed since March 2, 2002.
Goodwill at June 1, 2002 was as follows:
Corporate
Large-Scale Auto and
(In thousands) Architectural Optical Glass Other Total
------------------------------------------------------------------------------------------
Balance, June 1, 2002 $24,178 $10,307 $12,954 $ 8,175 $55,614
==============================================================
The Company is in the process of performing the required impairment testing
of goodwill as of March 3, 2002. As required, this testing will be
completed by August 31, 2002. The carrying value of these assets will be
evaluated for impairment by applying a fair-value based test on at least an
annual basis.
6. Long-Term Debt
In April 2002, the Company entered into a four-year, unsecured, committed
credit facility in the amount of $125.0 million. The credit facility
requires the Company to maintain minimum levels of net worth and certain
financial ratios. The majority of the borrowings under the credit facility
are made at a rate equal to three-month LIBOR (London Interbank Offered
Rate) plus an applicable margin. The applicable margin is calculated based
upon the Company's financial ratios. At June 1, 2002, the applicable margin
was 1.375%. At June 1, 2002, the Company was in compliance with all of the
financial covenants of the credit facility.
7. Discontinued Operations
In fiscal 2000, the Company completed the sale of 100% of the stock of its
large-scale domestic curtainwall business, Harmon, Ltd. In fiscal 1999, the
Company executed the sale of its detention/security business. Combined with
the fiscal 1998 exit from international curtainwall operations, these
transactions effectively removed the Company from the large-scale
construction
8
business. These businesses are presented as discontinued operations in the
consolidated financial statements and notes.
At June 1, 2002, accruals totaling $19.1 million represented the remaining
estimated future cash outflows associated with the exit from discontinued
operations. The majority of these cash expenditures are expected to be made
within the next two to three years. The primary components of the accrual
relate to the remaining exit costs from the international curtainwall
operations of the large-scale construction business. These long-term
accruals include settlement of the outstanding bonds, of which the precise
degree of liability related to these matters will not be known until they
are settled within the U.K. and French courts. Additionally, the accruals
are established for product liability and legal costs that may be incurred
relating to the Company's warranties and possible rework issues on the
international and domestic construction projects.
8. Earnings Per Share
The following table presents a reconciliation of the denominators used in
the computation of basic and diluted earnings per share.
Three-Months Ended
----------------------------
(In thousands) June 1, 2002 June 2, 2001
-------------- ------------
Basic earnings per share-
weighted common shares outstanding 28,060 27,674
Weighted common shares assumed upon
exercise of stock options 641 334
Unvested shares held in trust for deferred
compensation plans 389 311
----------------------------
Diluted earnings per share-
weighted common shares and common
shares equivalent outstanding 29,090 28,319
============================
9. Commitments and Contingent Liabilities
At June 1, 2002, the Company had ongoing letters of credit related to its
risk management programs, construction contracts and certain industrial
development bonds. The total value of letters of credit under which the
Company is obligated as of June 1, 2002 was approximately $15.4 million.
The Company has entered into a number of noncompete and consulting
agreements, associated with former employees. As of June 1, 2002, future
payments of $0.5 million were committed under such agreements.
The Company has been a party to various legal proceedings incidental to its
normal operating activities. In particular, like others in the construction
supply industry, the Company's construction supply businesses are routinely
involved in various disputes and claims arising out of construction
projects, sometimes involving significant monetary damages or product
replacement. Although it is impossible to predict the outcome of such
proceedings, facts currently available indicate that no such claims will
result in losses that would have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
9
10. Comprehensive Earnings
(In thousands) June 1, 2002 June 2, 2001
------------ ------------
Net earnings $5,238 $5,602
Transition adjustment related to change in
accounting for derivative instruments and
hedging activities, net of $672 tax benefit --- (1,109)
Unrealized gain (loss) on derivatives, net of
$8 and $(43) tax expense (benefit),
respectively 15 (70)
Unrealized gain (loss) on marketable
securities, net of $60 and $(22), tax
expense (benefit), respectively (111) 42
------------ ------------
Comprehensive earnings $5,141 $4,465
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following selected financial data should be read in conjunction with the
Company's Form 10-K for the year ended March 2, 2002 and the consolidated
financial statements, including the notes to consolidated financial statements,
included therein.
Sales and Earnings
The relationship between various components of operations, stated as a percent
of net sales, is illustrated below for the first quarter of the current and past
fiscal year.
Quarter-ended
---------------------
June 1, June 2,
(Percent of Net Sales) 2002 2001
- -------------------------------------------------------------------------
Net sales 100.0% 100.0%
Cost of sales 75.1 77.7
----- -----
Gross profit 24.9 22.3
Selling, general and
administrative expenses 19.6 18.4
----- -----
Operating income 5.3 3.9
Interest expense, net 0.6 0.9
Equity in (loss) income of affiliated companies (0.6) 1.0
----- -----
Earnings from operations
before income taxes 4.1 4.0
Income taxes 1.3 1.2
----- -----
Net earnings 2.8% 2.8%
- -------------------------------------------------------------------------
Effective tax rate 31.0% 31.0%
First Quarter Fiscal 2003 Compared to First Quarter Fiscal 2002
Consolidated net sales for the first quarter ended June 1, 2002 were $184.7
million, a 9% decrease from net sales of $203.6 million reported for the
prior-year quarter. Fiscal 2003 net income was $5.2 million, a 6% decrease from
the prior-year period's net income of $5.6 million. Our operating margin
improved significantly to 5.3% in the first quarter from 3.9% in the prior-year
period.
On a consolidated basis, cost of sales, as a percentage of net sales, fell to
75.1% for fiscal 2003, improving from 77.7% in fiscal 2002. The primary factors
underlying the resulting increase in gross profit percentage were increased
efficiencies in our Architectural segment, which impacted margin by 1.1
percentage points, and the effect of the formation of the PPG Auto Glass joint
venture and pricing amendments to the PPG Auto Glass supply agreements made
during the second quarter of fiscal 2002, which increased margins by 1.2
percentage points.
10
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2003 decreased $1.1 million, or 3% from fiscal 2002, but increased as a
percentage of net sales to 19.6% from 18.4%. The decrease in SG&A expenses
relates primarily to a recorded gain on sale of assets of $1.4 million as well
as decreased depreciation and amortization expense and bad debts, offset by
increased advertising and other marketing expenses.
Net interest expense decreased by 48% to $1.0 million for the first quarter of
fiscal 2003 from $1.9 million in the prior-year quarter, reflecting
significantly lower borrowing levels and a lower weighted average interest rate
under the Company's revolving credit agreement.
Our equity in loss from affiliated companies was $1.1 million in the first
quarter of fiscal 2003 versus an equity in income of $2.1 million in the
prior-year quarter. This decrease was due to the amendments made to the supply
agreements related to the PPG Auto Glass joint venture, as well as a decline in
the performance of the joint venture as a result of the mild winter weather and
a slow auto glass industry. This decline was partially offset by elimination of
funding for the TerraSun joint venture, which was shut down during the third
quarter of fiscal 2002.
The effective income tax rate of 31.0% remained constant from fiscal 2002. The
annual effective tax rate of 31% is primarily due to the reduction of tax
reserves where the statute of limitations from our European operations have
expired.
In the first quarter of fiscal 2003, we made payments of $0.6 million related to
discontinued operations, which caused a decrease in the designated reserves. We
continue to believe that we have adequate reserves for the discontinued
operations.
In the first quarter of fiscal 2003, we reported earnings of $5.2 million, or
$0.18 diluted earnings per share, compared to earnings of $5.6 million, or $0.20
diluted earnings per share, in the first quarter of fiscal 2002.
Segment Analysis
The following table presents sales and operating income data for our three
segments and on a consolidated basis for the first quarter, when compared to the
corresponding period a year ago.
Quarter Ended
-------------------------------
June 1, June 2, Percentage
(In thousands) 2002 2001 Change
============= ============= =============
Net Sales
Architectural $ 107,993 $ 116,225 (7)%
Auto Glass 60,361 66,877 (10)
Large-Scale Optical 16,355 20,507 (20)
Intersegment eliminations --- (3) N/M
---------- -----------
Net sales $ 184,709 $ 203,606 (9)%
========== ===========
Operating Income (Loss)
Architectural $ 6,425 $ 7,020 (8)%
Auto Glass 4,683 1,463 220
Large-Scale Optical (918) (16) N/M
Corporate and other (488) (495) 1
---------- -----------
Operating income $ 9,702 $ 7,972 22%
========== ===========
Architectural Products and Services (Architectural)
Net sales for the Architectural segment decreased 7% to $108.0 million compared
to $116.2 million the same quarter a year ago. As expected, revenues declined
for our largest segment due to the construction industry slowdown. The segment's
operating income decreased 8% to $6.4 million from $7.0 million in the prior
year quarter.
The Architectural segment backlog, at June 1, 2002, was down slightly to $183.4
million, compared to $189.8 million for the first quarter last year and $192.7
million at the end of fiscal 2002. A portion of the
11
backlog decline has resulted from a more than 25 percent improvement in lead
times over the last year by Viracon, our architectural glass fabrication
business. Overall, the backlog continues to reflect the segment's focus on
complex, value-added projects which have longer lead times from project approval
to production and less predictable schedules.
Automotive Replacement Glass and Services (Auto Glass)
Net sales at the Auto Glass segment declined to $60.4 million, compared to $66.9
million in the prior-year period. The unusually mild winter weather and weaker
industry conditions resulting from the soft economy led to lower unit volume.
The segment reported operating income of $4.7 million, compared to $1.5 million
in the same period last year. This improvement was primarily due to the supply
agreement amendments related to the PPG Auto Glass, LLC joint venture and a $1.4
million gain on disposal of assets partially offset by a decline in the
performance of the retail windshield replacement business.
Large-Scale Optical Technologies (LSO)
LSO net sales for the quarter of $16.4 million decreased 20% from fiscal 2002
sales of $20.5 million, which included the results of the San Diego CRT coating
facility that was closed in May 2001. The segment reported an operating loss of
$0.9 million compared to break-even performance in the same period last year.
Although results continued to be impacted by the slowed retail markets, the
segment showed continued improvement during the quarter compared to the fourth
quarter of fiscal 2002.
Consolidated Backlog
At June 1, 2002, Apogee's consolidated backlog was $189.4 million, down 4% from
the $196.5 million reported at March 2, 2002. The backlogs of the Architectural
segment represented 97% of the Company's consolidated backlog.
Liquidity and Capital Resources
June 1, June 2,
(In thousands, except percentages) 2002 2001
- ----------------------------------------------------------------
Cash provided by (used in) operations $ 621 $(2,706)
Capital expenditures 3,357 2,651
Proceeds from dispositions of property 2,386 18
(Decrease) increase in net borrowings (12,712) 83
Debt to total capital 24% 41%
Operating Activities
Net operating activities provided cash of $0.6 million in the first quarter of
fiscal 2003 versus a $2.7 million use of cash in the prior-year quarter. Net
income plus noncash charges were $10.4 million and $8.7 million for the first
quarter fiscal 2003 and first quarter fiscal 2002, respectively. Also
contributing to the change in net operating activities was the working capital
increase of $9.8 million in the current quarter versus $11.4 million in the
prior-year quarter. We do not expect the increase in working capital experienced
in the first quarter to continue for the remainder of fiscal 2003.
Investing Activities
First quarter fiscal 2003 investing activities provided cash of $2.3 million as
compared to a use of cash of $1.5 million in the same period last year,
primarily as a result of proceeds from the sale of property at the Auto Glass
segment. The increase in sales/maturities of marketable securities, offset by
purchases, also contributed to the increase in cash provided by investing
activities. New capital investment in the first quarter of fiscal 2003 totaled
$3.4 million, versus $2.7 million in the prior-year quarter. For fiscal 2003, we
expect to incur capital expenditures as necessary to maintain existing
facilities and safety initiatives. Fiscal 2003 capital expenditures are expected
to be approximately $20 million.
Financing Activities
Total borrowings stood at $57.0 million at June 1, 2002, down 18% from the $69.7
million outstanding at March 2, 2002 as we continued to focus on debt reduction.
The majority of all of our long-term debt, $47.2 million, consisted of bank
borrowings under a syndicated revolving credit facility. The borrowings were
sufficient to finance the period's investing activities and cash dividend
requirements. Our debt-to-
12
total-capital ratio continued to improve and was 24% at June 1, 2002, an
improvement from 41% at the end of last year's first quarter.
In April 2002, $1.0 million of variable rate industrial bonds were issued and
the resulting proceeds were loaned to us to finance a portion of our capital
projects in Wausau, WI.
Other Financing Activities
Future Cash Payments Due by Period
- ---------------------------------------------------------------------
(In thousands) 2003 2004 After 2004
- ---------------------------------------------------------------------
Long-Term Debt $ 428 $ 540 $56,058
Operating Leases (Undiscounted) 11,440 12,046 28,556
Other Obligations 243 183 25
------- ------- -------
Total Cash Obligations $12,111 $12,769 $84,639
======= ======= =======
We anticipate that outstanding borrowings will decline over the remainder of the
fiscal year. We believe that current cash on hand, cash generated from operating
activities, and available funds under our new $125.0 million credit facility
should be adequate to fund our working capital requirements and planned capital
expenditures through fiscal 2003.
In April 2002, we entered into a new, four-year, unsecured, committed credit
facility in the amount of $125.0 million. This credit facility requires us to
maintain levels of net worth and certain financial ratios. These ratios include
maintaining an interest coverage ratio (EBITDA divided by interest expense) of
more than 3.0 and a debt-to-EBITDA ratio of less than 3.0. At June 1, 2002,
these ratios were 10.9 and 0.9, respectively. If we are not in compliance with
these ratios at the end of any quarter (with respect to interest coverage) or at
the end of any day (with respect to debt-to-EBITDA ratio), the lendor may
terminate the commitment and/or declare any loan then outstanding to be due.
This new credit facility replaced the Company's previously existing $125.0
million secured credit facility.
During the quarter, the Board of Directors authorized a share repurchase program
for a total of 1,000,000 shares. During the quarter, we repurchased 107,000
shares under this repurchase program for a total of $1.5 million, and as of the
date of this report, we have purchased an aggregate of 193,400 shares under this
repurchase program for a total of $2.8 million.
Outlook
Overall revenue growth for fiscal 2003 versus fiscal 2002 is anticipated to be
flat to low single digits, with year-on-year growth occurring in the second half
of the year.
- Architectural segment is expected to have flat to low single digit revenue
growth for the year, with second half growth dependent on an improving
construction industry.
- Automotive replacement glass segment revenues are expected to be down 3% to
5% for the year, consistent with industry trends resulting from an
exceptionally mild winter and competitive conditions. This outlook depends
upon the ability of our retail business unit to recapture market share.
- LSO segment revenues are expected to grow in the high single digits, driven
by the timing of improvements in retail consumer electronics and framing
markets and the expected success of new product initiatives. For the
balance of the year, revenue growth is expected to average approximately
25% compared to the prior year, with revenues building as the year
progresses.
Gross margin percentages are expected to improve slightly, with operating
efficiencies achieved largely through Six Sigma initiatives offsetting increases
in wages, health care and insurance costs. At the same time, there is expected
to be increased margin pressure in the Architectural and Auto Glass segments
driven by competitive actions in soft markets. Sales, general and administrative
expenses will grow slightly, as will SG&A as a percent of sales, due to
investments in marketing and information technology initiatives.
A loss from equity in affiliated companies is expected for the year, as the
wholesale auto glass market served by our auto glass distribution joint venture
has been more severely impacted by the increasingly difficult industry
conditions. This expected loss is offset somewhat by the elimination of funding
for the
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TerraSun joint venture closed in fiscal 2002. We continue to expect that
earnings per share will grow, with year-on-year growth anticipated to begin in
the third quarter when the improving economy should positively impact Apogee's
value-added Architectural and LSO businesses.
Critical Accounting Policies
No material changes have occurred in the disclosure with respect to our critical
accounting policies set forth in our Annual Report on Form 10-K for the fiscal
year ended March 2, 2002.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the disclosure of qualitative and
quantitative market risk set forth in our Annual Report on Form 10-K for the
fiscal year ended March 2, 2002.
Cautionary Statement
This discussion contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements reflect the
Company's 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 below.
The Company wishes 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
following factors. There can be no assurances given that Harmon AutoGlass will
recapture market share and increase sales. There can be no assurances that PPG
Auto Glass, Apogee's automotive replacement glass distribution joint venture
with PPG Industries, will achieve favorable long-term operating results. In
addition, there can be no assurances that Apogee's Architectural segment, which
serves high-end markets with value-added products, will not be further impacted
by the slowing economy. There also can be no assurances that there will not be
additional erosion in the LSO segment revenues due to the severe downturn in the
PC industry and a slowdown in retail markets.
A number of other factors should be considered in conjunction with this report's
forward-looking statements, any discussion of operations or results by the
Company or its representatives and any forward-looking discussion, as well as
comments contained in press releases, presentations to securities analysts or
investors, or other communications by the Company. These other factors are set
forth in the cautionary statement filed as Exhibit 99 to the Company's Annual
Report on Form 10-K, and include, without limitation, cautionary statements
regarding changes in economic and market conditions, factors related to
competitive pricing, quality, facility utilization, new product introductions,
seasonal and cyclical conditions and customer dependency. Also included are
other risks related to financial risk, self-insurance, environmental risk and
discontinued operations. New factors emerge from time to time and 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.
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PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 Credit Agreement dated as of April 25, 2002 between Apogee
Enterprises, Inc. and banks party to the agreement, including
related contribution and subsidiary guaranty agreements.
(b) Reports on Form 8-K:
The Company's Current Report on Form 8-K filed April 3, 2002 related to a
request to delete Form 10-KSB Erroneously Submitted on behalf of Wrong
Company.
The Company's Current Report on Form 8-K filed April 18, 2002 related to
Changes in Registrant's Certifying Accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APOGEE ENTERPRISES, INC.
Date: July 10, 2002 /s/ Russell Huffer
--------------
Russell Huffer
Chairman, President and Chief Executive
Officer
Date: July 10, 2002 /s/ Michael B. Clauer
-----------------
Michael B. Clauer
Executive Vice President and
Chief Financial Officer
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EXHIBITS INDEX
Exhibit 10.1 Credit Agreement dated as of April 25, 2002 between Apogee
Enterprises, Inc. and banks party to the agreement, including
related contribution and subsidiary guaranty agreements.
17