APOG

Apogee Enterprises, Inc. (APOG)

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Apogee Enterprises (APOG)

Q2 2014 Earnings Call

September 19, 2013 11:00 am ET

Executives

Mary Ann Jackson

Joseph F. Puishys - Chief Executive Officer, President, Director and Member of Strategy & Enterprise Risk Committee

James S. Porter - Chief Financial Officer and Principal Accounting Officer

Analysts

Robert J. Kelly - Sidoti & Company, LLC

Colin W. Rusch - Northland Capital Markets, Research Division

Jonathan P. Braatz - Kansas City Capital Associates

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal 2014 Apogee Enterprises Inc. Earnings Conference Call. My name is Brea, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Mary Ann Jackson. Please proceed.

Mary Ann Jackson

Thanks, Brea. Good morning, and welcome to the Apogee Enterprises Fiscal 2014 Second Quarter Conference Call on Thursday, September 19, 2013. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2014 second quarter and our outlook for fiscal 2014.

During the course of this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment and are, of course, subject to risks and uncertainties, which are beyond the control of management.

These statements are not guarantees of future performance, and actual results may differ materially. Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the company's annual report on Form 10-K for the fiscal year ended March 2, 2013, and in our press release issued yesterday afternoon and filed on Form 8-K.

Joe will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Joe and Jim will answer questions. Joe?

Joseph F. Puishys

Thank you, Mary Ann, and good morning, everyone. Welcome to Apogee's second quarter conference call. We've recorded another solid quarter with results. In spite of modest revenue growth, we saw a nice increase in operating income and earnings per share. In addition, we grew our cash and short-term investments and did it in a quarter where we made an acquisition.

Our second quarter operating income grew 24%, to $9.4 million, and we earned $0.21 a share. Four of our 6 businesses grew nicely in the quarter on top line. This growth, though, was offset by declines in our Architectural Services segment and our Architectural Framing Systems window business. This was due to project timing, which we had anticipated.

A couple of comments on these 2 businesses. First, we expect that the services and window business, both have a stronger second half and will contribute to backlog growth in the third quarter. In fact, our services segment expects to move several million dollars of committed projects into backlog in the upcoming weeks, and I expect our highest level of orders in that business since the recession 5 years ago.

I am pleased with our year-to-date revenue growth of 8%, which exceeds our growth in our end markets, which are improving slowly. We had strong operating income of 24%, as I mentioned, in the quarter. Our operating margin increased 100 basis points to 5.2%, while our gross margins grew 110 basis points to 21.6% in the quarter. Our conversion rate to income on incremental revenue was more than 75% this quarter. The margin improvement results from better mix, pricing, productivity and operating leverage. The biggest contributor to our strong operating income growth was our Architectural Glass segment, which saw a nearly $3 million improvement, as it moved from a loss in the prior period to operating income of $800,000.

Our Large-Scale Optical segment again turned in solid performance, with operating margin of almost 27%. Our Architectural Services business reduced its operating losses from over $1 million last year to $800,000 this quarter on -- at a time where we had a 10% revenue drop, reflecting the improved margin on projects going into backlog and now being revenue that Jim and I talk about frequently. This improvement reflects those higher margins we're seeing in the business, which we have been highlighting. Our operating income for the Architectural Framing Systems segment declined as improved earnings for 2 of our businesses, storefront and finishing, were offset by the aforementioned window business results, where there was an anticipated gap in the schedule of more complex projects. Despite the expected decline in operating income, this segment turned in a healthy operating margin of 10.5% for the quarter, and our backlog in the aforementioned window business has grown this year by 27%.

In the second quarter, we completed an acquisition in this segment, which adds to our historic window renovation product line and extends our presence in the Western United States, in line with our strategies to grow through new products and new geographies. Results from the acquisition completed late in the quarter were immaterial. Even after this acquisition, our cash and short-term investments grew 8% from the prior year period to almost $74 million. Our consolidated backlog grew to $304 million, up from $302 million in the first quarter and $298 million at the beginning of the year -- fiscal year, that is.

With the volume of projects awaiting final contracts before moving into backlog, we expect to see a nice backlog growth in the third quarter. And we are continuing to see improved margins in our backlog, as evidenced by our operating margin improvement in our services business this quarter.

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