Apogee Reshaping Business Mix To Deliver Stable Results

During second-quarter fiscal 2018 conference call, Apogee Enterprises, Inc.’s (NASDAQ:APOG) Chief Executive Officer, Joe F. Puishys highlighted that the company is in the process of reshaping business mix to deliver more stable performance through any economic cycle. Its recent acquisitions of Sotawall and EFCO are likely to facilitate these efforts. The company is also poised to deliver growth in the next few years driven by robust backlog, order activity and growth in commercial construction.

Apogee is a leader in technologies for design and development of value-added glass products, services and systems and falls under the Zacks Glass Products industry. The company reported earnings per share of 60 cents in second-quarter fiscal 2018, down 22% from 77 cents per share recorded in the prior-year quarter. The company reported total revenues of $344 million, up around 24% year over year, on the back of growth in Architectural Framing Systems revenues.

Segments Poised for Growth

Enabled by the Sotawall and EFCO acquisitions, the Architectural Framing Systems segment delivered a whopping 105% growth in revenues in the reported quarter. It is currently the company’s largest segment, contributing 53% of revenues. It is expected to be Apogee's fastest-growing and highest-margin architectural segment as well as the most stable performer across the economic cycles.

As part of Apogee’s transformation strategy, the Architectural Glass segment, will now deal with large and midsize projects rather than predominantly large projects. The company is witnessing double-digit growth in the midsize project sector, which tends to be more stable than the very large projects in all economic conditions.

Meanwhile, Puishys noted that the Architectural Services segment’s contribution has trickled down to 14% of total revenues in the reported quarter from 25% contribution five years ago. It is a volatile business as it executes a small number of large dollar projects and timing of work is dependent on job site schedules that often fluctuate. Nevertheless, it continues to generate the highest Return in Invested Capital (ROIC) for Apogee. The company plans to deliver segment margin improvement through careful project selection rather than focus on projects with top-line growth at low margins.

Coming to other segment — Large-scale Optical segment will continue to generate the highest margins. The company foresees growth opportunities in engineered optics that value antireflective properties for both glass and acrylic products. The company is receiving initial orders in automotive and signage applications which hold promise.

Growth through Acquisitions

Over the last six months, Apogee acquired two companies — Sotawall and EFCO. Sotawall, will contribute to Apogee’s revenues and margin growth in commercial construction markets that are anticipated to grow through fiscal 2020. The EFCO acquisition will help in expanding Apogee's presence in the midsized commercial buildings, broaden product offerings and enhance geographic presence across the United States. The acquisitions will aid Apogee build a more diversified portfolio, which offers greater long-term growth opportunities.

Promising Guidance for Fiscal 2018, 2019

Apogee projects fiscal 2018 full year revenue growth of between 24% and 26%. This will translate to revenues of $1.4 billion, higher than the milestone of $1 billion in revenues achieved for the first time a year back. Earnings per share are expected to lie between $3.40 and $3.60, reflecting a year-over-year growth of 15%. The guidance factors in lower revenue and margins due to some larger projects with higher costs that EFCO will be delivering in second half fiscal 2018.

The company remains optimistic about backlog, awards and bidding. For fiscal 2019, Apogee anticipates double-digit revenue growth and triple-digit operating margin improvement, backed by order pipeline and backlog already booked for fiscal 2019.

Apogee continues to expect mid-single digit growth in U.S. commercial construction as market activity, the Architecture Billings Index (ABI), office employment and office vacancy rates exhibit a positive momentum. The ABI has been at 50 or better for 21 of the last 24 months, indicating sustainable growth in architectural activity as a score above 50 represents an increase in billings from the previous month. With internal market visibility from backlog, commitments and bidding activity along with external metrics moving in the right direction, the company foresees continued market growth for the next few years.

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